Part 2: FIRE with Jassen Bowman – Scenarios 3 and 4

In the following video and transcription, Jassen and I discuss the second two of the 12 Scenarios which cover common strategies for achieving financial independence in order to retire early.

Copy the third Scenario Renting with Stocks into your Real Estate Financial Planner™:

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Or, copy the second Scenario Renting with Stocks, Buy 1 20% Down Payment Property into your Real Estate Financial Planner™:

Copy Scenario into my Real Estate Financial Planner™ Software

Check out the other parts of this series:

Or, check out the transcript of the video below.

Transcript of Video

Jassen: Hello, Jassen Bowman, here, joined by James Orr creator of The Real Estate Financial Planner™ software. How you doing today, James?

James: I’m doing amazing. I, uh, I like the sound of that creator of The Real Estate Financial Planner™ software. Yeah, that’s pretty good.

Jassen: I’m playing with different intros.

James: I’m playing with accepting different intros. So, uh, I appreciate that.

Jassen: Well, no, it’s, you know, it’s a, it’s an apt description. You, it is truthful. You’re the creator of it, uh, and today you’re going to show us another set of children from your creation.

James: Haha children. That is true. These are my love child’s.

Jassen: Um, so today we’re gonna be talking about two different Scenarios from The Real Estate Financial Planner™ software. Specifically we’re gonna be talking about doing a two different types of portfolio building for building out your, your retirement portfolio while you are renting your own primary residence the entire time. But one Scenario, you’re putting all your money 100 percent into the stock market. The other Scenario where you’re going to rent your own primary residence, you’re going to buy one rental Property with investor financing, which requires a 20 percent down payment. And the rest of your portfolio will be constructed of stocks.

James: Nice. I was listening intently because I wasn’t sure which ones we were doing, but now that I know I’m ready to go.

Jassen: So, so take it away. I mean, that’s the gist of the Scenario. Is there any other differences that are, uh, between the two Scenarios and how they’re run, how they’re set up in the software that are, that are worth mentioning?

James: No, I’ll go through them kind of in detail here in a second. But, um, I do want to point out this is sort of part two of a kind of continuation of the presentation we started yesterday because yesterday we talked about two Scenarios. One was renting with investing 60 percent stocks and 40 percent bonds, so you weren’t buying a Property. And then the second Scenario we covered yesterday was buying a Property to live in with five percent down and then still doing the same 60 40 stocks, bonds, split investing. And we went over the difference between those two Scenarios. So today we’re going to add in two additional ones, both of them, where you’re renting one of them, where you’re doing 100 percent in stocks and you’re not doing anything in bonds and the other one where you’re buying a rental Property and you’re doing the rest in stocks.

Jassen: So what also might be interesting at the, at the very end of this is you toggle on the expected value, the long term net worth Chart for all four.

James: Yeah, the net worth sure. Yeah. And, and the expected value comes into play. We won’t have a detailed discussion about this, but in a future call we definitely will. The expected value really comes into play when you’re doing Monte Carlos and in these Scenarios we’re only doing a single run. We’re not doing multiple runs with a lot of variation. We’re doing, you know, stocks are getting a fixed eight percent return. We’re taking out any sequence of return risk, um, where, you know, the bonds are getting three percent return. We’re not doing that. The real estate’s going up at three percent a year. The rents are going up at three percent a year. So we’re not doing a lot of variation in these kind of like simplistic runs, but the software does allow us to do some really crazy modeling where we say you know stocks are averaging around eight percent, but they could be up 24 and down, you know 15 in any given month.

James: And so we can do that stuff later and then run Monte Carlo simulations. But today we’re not doing that.

Jassen: But even with one set of assumptions, uh, it’ll be very interesting to compare and contrast where all four of these Scenarios end up under the same set of fixed assumptions.

James: Totally. Yeah. And we’ll do some work. Yeah, we could probably do some different Goals like, um, uh, we can look at net worth, we can look at, you know, how quickly they get to be worth net worth of a million dollars and then we can look at how, how long it’s gonna take them to achieve the Goal of being able to retire. We’ll gamble safe withdrawal rate and rental income because rental income does contribute to that kind of like amount. You need to fund your retirement as well. And so we’ll look at that a little bit. Yeah.

James: So why don’t we jump right into it. And the first one with stocks. It’s relatively simple. It’s really not that complicated at all. So if you don’t mind, I’ll run through some things. I’ll comment where were the same as we were yesterday and I’ll talk about what’s a little bit different. And then when we do the second one, the second one gets a little bit more complicated because it includes the rental Property and maybe provided we have time. We can look at the, uh, assumptions we used for the rental Property as well. So, so let’s start off with renting and investing 100 percent of your savings in stocks. Um, we’re running this one for 720 months, which is 60 years. If my math is right, we’re not naming the individual people though you could input their birthdays in. Look at ages, where effective income tax rates, not going to be applicable here.

James: We would use that when we get to the rental. Uh, because this is the amount of assumes your income tax rate is to calculate what the cash flow from depreciation is. So that’s where we would use this number, which is slightly different than what we use for the actual income. Um, but, but we’re not going to use it in this Scenario at all. Inflation rates the same as we use before three percent. We’re going to individually input a mortgage rate for the Property in the next Scenario. But right now we’re not going to use this number. It’s set at 4.875. It doesn’t matter all of the Scenarios we’re doing. This is kind of a part of a series. I don’t know if people remember we’re talking about we’re running 12 different of 12 different kinds of investing strategies that you and I are probably going to joint venture and do a book for.

James: Um, and so this one, again, our target monthly income in retirement is $4,400. So if you remember from yesterday we said that the person doing this model was making $5,500 a month and they were saving 20 percent of that toward their retirement. So they’re putting away $1100 per month at the beginning and the increases over time with inflation, but that’s how much they’re saving per month. So in retirement they don’t really need to have $5,500 in retirement because they’ve been living their lifestyle, their standard of living is a standard of living based on $4,400. And so for retirement they need to hit that $4,400 per month, whatever it is, inflation adjusted for when they actually end up retiring. Does that make sense?

Jassen: Absolutely.

James: Yeah. And we’re still using the same yearly safe withdrawal rate of their whole portfolio of 3.25 percent. Um, and we’re doing that on a monthly basis. So it’s 3.25 divided by 12. Um, so that’s really where we are with the kind of inputs for the Scenarios. We’re only doing one instead of doing Monte Carlo.

Jassen: Go back up real quick. Um, on the, on the safe withdrawal rate, um, you know, just just in case for, for folks that didn’t listen to the, you know, because people are probably listen to these out of order perhaps or what not. But explain a little bit more about the 3.25. Like what, what is that representing within the overall Scenario?

James: Yeah. So let’s say you at some point in the future have saved a million dollars. Your stock market brokerage Account a 3.25 percent safe withdrawal rate basically says if you take a million dollars and you multiply it by 3.25 percent.

James: If my math is right, that works out to be $32,500. If you take $32,500 and you divided it by 12, that’s how much you can safely withdraw from your investments and live on and have it actually maintain that money, uh, going into the future. So you shouldn’t end up with a negative balance on your, on your assets over time, although you totally can. But this is like modeling that, it says that this is considered safe for you. And your assumption here is really important as to whether or not you will end up with money at the end or you’ll be eatin’ you know dog food.

Jassen: So one of the questions that running this Scenario can answer for myself or for you or for a client or something like that, is at what point in time in the future will a 3.25 percent withdrawal rate equal the $4,400 a month?

James: That’s exactly right. That’s what we’re ultimately looking at when we look at that Goal of, you know, uh, what percentage are we toward achieving our retirement number? That’s the calculation we’re looking at. If you only own stocks, is when does 3.25 five percent of whatever amount you have invested equal $4,400 a month.

Jassen: Got it. So my potential FIRE date, if you will.

James: That’s right. For financial independence, retire early, that’s what FIRE stands for. It’s an acronym for when you can actually FIRE and that we kind of used it as a verb to say, uh, you know, you’re going to start your retirement.

Jassen: Love it. Okay.

James: Okay. Yeah. Good question. I’m glad you clarified that. So um going down here, we’re basically have the stock market Account, we start off with $30,000 in it. It’s earning eight percent per year, it’s fixed rate of return. It doesn’t vary at all, even though we know that the stock market really does vary. So you’re really saying it’s a fixed eight percent return, a $30,000 is what you’re starting with and we’re not doing any bonds with this one. There’s going to be some bonds, there were some bonds yesterday, um, but I don’t think it’s going to be bonds today. And then, uh, in this case we’re not doing any Properties we’re renting, so there’s no Properties included so you don’t have any Properties in the Scenario. Um, and then these are the ones that were not included that we can use kind of as like a building blocks for other Scenarios which we’re not doing today. And then Rules. This one’s a really simple one. The only Rule we have is a paycheck. So we have a paycheck coming in. Um, it basically says we’re earning $5,500 a month.

James: We have $3380.30 in monthly expenses and our tax rate is 18.54 percent. So basically take $5,500, subtract out 18.54%, and then you subtract out your monthly expenses and what’s remaining turns out to be about $1,100 per month. That remaining amount is how much we are saving and investing in the stock market.

Jassen: Another way of putting it is we have a 20 percent savings rate.

James: We have a 20 percent savings rate. That is correct. Okay. So those are what we have there. And let’s just jump right into some Charts if you’re okay with that. Um, so I’ll go back to the Scenarios page and I’ll load up the Charts. So we’re doing the renting with stocks. I click on the Chart icon and it shows you our net worth here for this particular Scenario. So we start off with about $30,000 in the initial stock market Account balance.

Net-Worth-Raw

James: And at the end of the month we add $1,100 from our paycheck to it. So our net worth at the end of month one is $31,100. That makes sense. Yup. And then over time you basically get eight percent return. The stock market end, you’re adding an extra $1,100 plus inflation to your Account balance every month. And so it continues to grow such that by the time you are at a 60 years, 720 months, you have a net worth of $29.4 almost $29.5 million. Now that’s in inflated dollars as we discussed yesterday.

Jassen: right.

James: You have a guess as to what it’s going to be if you adjust for inflation. Jassen?

Jassen: Oh, seven or 8 million.

James: Let’s take a look. So if we adjust for inflation, we click on the inflation adjusted number and it turns out it is $5 million.

Net-Worth-IA

Jassen: Oh, I was overzealous.

James: Yep. So basically $5,000,000 versus the $29 or so in inflation adjusted dollars. Okay. So that’s that number. Um, and if you want to, I can either run through all these things or we can kind of jump to comparing to the other one. What would you prefer to do?

Jassen: Uh, it might be helpful to take a look at some of the, skip all real estate Charts obviously because there’s nothing there. But scroll down or no, I’m sorry, the Account Charts. Some of the Account Charts, might be,

James: Well this one’s, this one’s super simple because the only Account that we have is the stock market Account and so it’s going to look exactly like the net worth Account because basically you only have your entire net worth is made up of your stock market Account. You have no money going into your cash Account, you have no real estate. And so the only thing that’s gonna appear on here is this stock market Account at eight percent. And so your net worth and your stock market balance for that Account should be identical and they are $29.4 million and change. So that’s what this says.

Jassen: So what about the Goal Chart?

James: Yeah. So we can take a look at Goals. Do you want to compare some of these numbers to the previous Scenarios or do you want to jump to Goals and then add in the other Goals and come back to this?

Jassen: Uh, let’s, uh, let’s, uh, look at the, uh, um, compared to other Goals later because that’s like the big reveal, right?

James: Yeah. So let’s look at this Goal. So basically right here, if you decide you want to be a renter and you’re going to take 20 percent of your income and you’re going to invest it in stocks and you’re able to get an eight percent return on stocks. And by the way, this, this happens to be pretty much exactly the same no matter what your income is, if you’re doing 80 percent of, if your expenses are about 80 percent of your income and you’re saving 20 percent, this number holds true whether you’re making a thousand dollars a month, $10,000 a month, $100,000 a month.

Jassen: Right.

James: Because they’re all relative numbers. Okay? So in this particular case, you can see your percentage towards your ability to retire. This is basically until you’re safe withdrawal rate. And any cash flow you have, which is zero in this case, applies towards your target monthly income in retirement. And it is inflation adjusted. So $4,400 in the future is not, is this basically the same as a 4,400 lifestyle today even though the dollar amount is much higher, but it takes you until about. Oh, right around here a month 460 or so in order to hit your number. So I have a table below it shows you that the number is actually 462 and it takes you 38 years and six months in order to be able to retire. If you save 20 percent of your income in 100 percent socks at eight percent.

Goal-Safe-Withdrawal

Jassen: So I mean that’s, that’s the, the 40 year standard plan.

James: Forty year standard plan. Yep. So if you like start this at 22 at 60 years old or so, you should be able to retire based on this model. If you’re able to average eight percent with the stock market over that time period. And you want to live the same standard of living.

Jassen: Yup.

James: Renting. So let’s do this. Let’s go back through and now let’s do, um, the one where we invest in a single rental Property. Uh, we’re still renting ourselves, but we buy a rental Property and we invest in stocks. What difference does that make? So let’s take a look at that difference in Rules and then we’ll kind of compare those on the same Chart and then we’ll add back in the ones from the previous day. Does that seem reasonable?

Jassen: Yeah before you even delve into this. I was thinking about it as I drifted off to sleep last night of the question that came to mind was I wonder where at what point in the Scenario is he going to buy the house and how does he handle that in the Scenario?

James: That’s a really good question. I will cover that in detail.

Jassen: Awesome.

James: Okay. So let’s do this. So, um, this is just the title of the Scenario. We’re running it for 60 years, 720 months. We’re not naming the people, uh, the effect of income tax. This will apply when we calculate depreciation. So we’re going to estimate what the cash flow from depreciation is and say that that’s at the 15 percent effective income tax rate. The inflation rate, we’re using the same three percent that we’re using in all the other Scenarios, the mortgage interest rate, this one doesn’t apply because we’re going to have a specific interest rate for the Property. Um, but if you want to keep track of what the interest rate is for the system, this is where you’d enter it here.

Jassen: Okay.

James: Same monthly target retirement. So just like last time you’re making $5,500 a month and we’re saying in order to retire you need to exceed $4,400 between the cash flow from your Property and the safe withdrawal rate.

James: So in this Scenario, I should say it this way. Previously we didn’t have any rentals, so the only way we could reach our target retirement income was to use that 3.25 percent safe withdrawal rate on our total stock market portfolio. That was the only way we could get the income required in order to retire.

Jassen: Right.

James: Now we have two things contributing. We have both the rent, any positive cash flow have in the Property and also any stock market returns you have at that 3.25 percent. So you add both those together and when the sum of both of those equals $4,400 per month adjusted for inflation, then we can achieve retirement and actually retire. Does that makes sense?

Jassen: Excellent. Love it.

James: Okay. Uh, the, here’s the description and Monte Carlo kind of do there again. This one only has the stock market Account. We started off with $30,000 initially and that’s earning eight percent. Okay.

Jassen: Uh, you are using the cash Account in this one though because you have the rental, right?

James: We are not.

Jassen: Oh, you’re not. Okay.

James: Well, we have a cash Account and if we happen to go negative we would use it. But I haven’t looked at the numbers. By the way, this, we’re doing this live without a net. I have not seen the results of these things, but my expectation having written the software is, uh, the, the Rule we’re going to use in order to buy this Property is we’re going to say don’t buy this Property until we have enough for the down payment so we will not dip into the cash Account. Because the cash Account’s a special Account that says if ever we’re short, if ever an Account would otherwise go to zero, then we’re going to pull it from the cash Account and that would tell us how much money we need to add to the system.

James: And so we’re not gonna do that. We’re going to basically use a Rule here in a second in order to buy a Property. This Rule buy a Property when the Account has the down payment. And so if we don’t have the down payment, it’s not going to buy it.

Jassen: Okay.

James: Okay. So I’ll show you that in a second. Okay. So, so you have a stock count. We don’t have any of these other Accounts. Let’s take a look and drill down into what the Property looks like. If you don’t mind, let’s take some time to go through each one of the variables and talk about that. And then in the future when we’re talking about the Property we can sort of say go watch this video and you’ll be able to go and get the information. Does that seem like a reasonable way to do it?

Jassen: Yeah. That that’s necessary to walk through to really understand the Scenario I think.

James: Okay, let’s do that then. So let’s drill down and look at the Property that we’re going to buy. So this is a dynamic Property and,

Jassen: By the way, some of the assumptions you might want, especially for folks that you know, you and I kind of take for take for granted some of the assumptions about where these numbers come from. So for, you know, please explain those for folks that you know, like why are we doing 20 percent, you know, a lot of folks might not understand why we needed 20 percent down payment, for example.

James: That sounds really good. If I don’t do it, please be the voice of the audience and kind of do it that way. So. Alright, so this is what we call a dynamic Property and it’s just special code word for us to say that it’s a template that you can buy more than one copy of this.

James: So it’s sort of like a, a prototypical Property that you can buy more than one with as opposed to a very specific Property. You know 1234 Main Street that you’re only buying one of. So when we have something triggered as a dynamic Property, it’s sort of like a, Oh, you can buy more than one of these. That’s how we look at it.

Jassen: Okay.

James: Ah, this is not a nomad Property and it’s not a Property we already owned. So I’m going to not talk about those today, but you can actually set these up if you’re going to do a nomad Property where you’re moving in, living there for a year and then you convert it to a rental when you buy your next Property. That’s this special type of Property and already owned is a Property that you already happen to own. So we’re not going to talk about this today.

James: This is going to be, um, there’s no date purchased or dates sold because dynamic Properties, you need to use Rules in order to buy them. And Rules are basically things you use to manipulate Properties and Accounts. So we’ll use a Rule of that later on. We’ll say, buy this Property when this a certain amount of money in the bank Account. Here’s the description and the description is arbitrary. It doesn’t get used anywhere except it’s used to label things on Charts. You can call it whatever you want. I’ve decided to call it 20 percent DP, which stands for damp down payment, a typical family home. So I’m saying this is a pretty standard bread and butter house in the middle of a neighborhood somewhere. Okay? Uh, no specific city, no specific state, no specific zip code. You could put ones in there if you wanted to kind of organize it that way. In this case it doesn’t matter. It’s really Anytown USA.

Jassen: And explain why you’re doing 20 percent down.

James: Yeah, 20 percent down is the amount you need in order to get a investor loan without having PMI, private mortgage insurance. So, uh, you can get a 15 percent down investor loan, but you’ll have private mortgage insurance on that. Um, and we’re not owner occupying the Property, so you have to put 20 percent down in order to do that.

Jassen: Perfect.

James: Okay. So we’re saying that the after repaired value, the value of the Property right now is worth $200,000 and we just picked that number out of the air. It’s um, it’s based on the approximate average price of homes in the United States being 200,000. If you’re in California, you’re like, yeah, this must be a shack. No, if you’re in Alabama or you know, New Orleans or something like that. So, you know, depending on what neighborhood here. And I went to Tulane and you know, there are some neighborhoods down, there were $200,000 in certain neighborhoods is like a mansion. Um, but yeah, it’s like just, we’ve just picked it out of the air. It’s a $200,000 if you want to. What’s great about the calculator is you can go in and say, James, your assumptions are crazy Properties are $500,000 or James your assumptions are crazy Properties are $100,000. You can go in here and modify the numbers and rerun it and see how it performs for you.

Jassen: Right? What, while you’re here, could you also explain why you’re specifically calling this quote unquote, after repair value?

James: Yeah, so imagine you’re in a market where you can buy a Property that needs work, that once you put the work in is worth a lot more than what you buy it for. So we actually have two prices in here. We have the purchase price and we have the after repaired value. In this example, what we’re paying for the Property is what it’s worth. You’re paying full retail 100 percent of the value of the Property, but in some markets you may be able to come in and say, Hey, I’m able to buy a $200,000 Property and I’m able to get a discount and buy it for $150,000. That’s great. You can do that. You can model it and you could say, hey, purchase price is $150,000 here and after repaired value is 200,000.

Jassen: Okay.

James: That makes sense?

Jassen: Yup.

James: For today, basically we’re saying we’re paying $200,000 for a $200,000 Property. So we’re starting off with no equity except for what we put down as down payment. Okay, so the mortgage interest rate, right now we’re using five percent. Um, I think that’s about what the mortgage interest rate is. If you are going to go get a investor loan right now in our, in our current mortgage rate climate, if you are listening to this later and interest rates have gone up, feel free to copy this to your The Real Estate Financial Planner™, accountant, change the interest rate and rerun the numbers. If interest rates go down, you can do the same thing but lower the rate, but I think this is a reasonable interest rate to use for this Property. And that’s why we’re using that. Now. We’re using 360 months as the term for the mortgage. That’s a 30 year loan. This is going to be a 30 year fixed rate loan, a conventional loan you’d get from a mortgage broker or your local bank.

James: Um, for down payment we’re going to put 20 percent down. You can choose either to do a percentage or a fixed dollar amount. So you could say, hey listen, I got $100,000 to put down. I’m going to use $100,000 no matter what the purchase price of the Property, you can choose to do that. Or you can choose to do a percentage. In this case we’re using a percentage.

Jassen: Okay.

James: That means that you’re getting a loan amount of $160,000 and that your monthly mortgage payment on this particular Property is going to be $858.91 that is $160,000 borrowed for 30 years at a five percent payment.

James: That’s what it works out to be. And then what your closing costs are going to be. We’re saying it’s going to be one percent of the purchase price, which means that $200,000 is a $200,000 purchase price. Means your closing costs are going to be $2,000. Some people may argue that that’s a little bit low depending on what market you’re in. Some people would argue that that’s a little bit high. Part of it depends on what interest rate you get, because some interest rates are going to charge you a point plus closing costs in order to get that rate, or you can choose to take a slightly higher interest rate and have less points paid upfront so you can have no points or even get a credit for getting that rate and so I arbitrarily said it’s going to be one percent for closing costs. If you think that that’s low, feel free to copy to your Account and make those changes. We could choose percentage or we could choose dollar. I chose percentage in this case.

James: Rent ready costs. If you were going to buy a Property like remember, we used that example before Jassen, where I told you you could buy a Property that’s worth 200,000, but you could buy it for one fifty, but it needs repairs.

Jassen: Right.

James: You could actually take into Account what the costs of repairs are by putting it into rent ready costs, rent ready costs are how much money you need to add to the Property to make it ready to rent. And so let’s say you bought a Property, you’re able to get a $50,000 discount, but it needs $15,000 of repairs to get it ready to rent. You could add $15,000 here as a ready cost and it will actually include that in the calculations for you. This case,

Jassen: I didn’t realize you can use REFP to model the BRRR Scenario.

James: Absolutely.

Jassen: That a lot of people use.

James: Absolutely. You could buy a Property, you know, do the refi, do the Rehab, do the refinance, rent it out, and then repeat the process. Absolutely. Yup. So this totally can model that. In fact, we should do a model of that in the future call.

Jassen: Yeah, let me write that down. That’s a good idea.

James: Yeah. Okay. So basically in this case, no rent ready costs because we’re assuming we’re buying the Property that’s totally fixed up. Totally done. We’re paying full retail for it, so we expect it to be ready to go, uh, in this case you can get in some situations, get the seller to pay part of your closing costs to give you seller concessions for this particular Scenario. We’re assuming that they are not contributing to your closing costs. So the seller concessions percentage is zero and they are contributing $0. For depreciation. So whenever you have a rental Property, and Jassen, you know this more than I do because you’re a tax guy and you kind of work with a lot of tax professionals, but I understand this from the real estate side, not from the tax side, but the government allows you to depreciate the value of the house, not the value of the land, but they allow you to depreciate the value of the house when you are renting a Property, not when you’re living in it, but only when you’re renting.

James: And there are two different depreciation schedules, one for residential Property. The other one for commercial Property. This Property we’re assuming is a residential single family home. So we go ahead and say residential here and that means that it’s going to be depreciated over 27 and a half years, but only the value of the building, not the value of the land. So we need to define what the percentage of the purchase price was in land. And so we said, hey listen, land around here is worth about 15 percent of the purchase price. So if I do my math right, that’s about $30,000, so $30,000 for the lot and then the rest of $170,000 that’s remaining is the value of the Property. Okay? And so I described that here a little bit and then I talked to you about how we do the calculation for depreciation over 27 and a half years in order to do that.

James: So you enter in what the Property is commercial or residential and then what percentage it is for the land and it will do those calculations for you, um, as part of the calculator.

Jassen: Okay.

James: Okay. This is asking you which Accounts you’re going to use for your down payment and the other purchase expenses. And which Account you’re going to use for the income and expenses on the Property for both. So we’re going to look to the stock market Account stock market brokerage Account we have, which we’re starting with $30,000. We’re going to look into that Account for our down payment and our purchase expenses and we’re going to look at that same Account when we deposit rent checks. And when we take out mortgage payments, it’s the same one, uh, for this case we’re saying the Property value you know the $200,000 for the Property.

James: It’s going to go up at a rate of about three percent per year. It calculates it monthly, but it’s at a rate of three percent per year. So at the end of the year, the Property a $200,000 Property is going to be worth about $206,000. That continues to compound over time. Now that’s based on, it’s purely a guess, but it’s based on historical data that says over a very long period of time. 100 plus years Case-Shiller suggests that Properties have appreciated about three percent year.

Jassen: Right.

James: Okay. Uh, starting rent after zero months, let’s say you’re, you know, it’s going to take you two months or so in order to do the repairs you need in order to get the Property ready for rent. You could go ahead and put in a delay to start collecting rents. In this case, we’re buying a Property that’s ready to go. There’s no delay. So start rent after zero months

James: Monthly rent on the Property. So we’re assuming we’re able to get $1,539.90 per month id rent on this Property. And I think we picked that rent number because it seemed reasonable. And if you actually do that rent with this price Property at five percent, it’s break even. So we, we arbitrarily pick this rent amount so that when you buy a Property as a nomad, you’re not getting any positive cash flow. You’re basically break even cash flow doing the Property and that’s just an assumption we made for this model. You could go ahead and change this rent number if you think it’s supposed to be higher or if you think it’s supposed to be lower, but that’s the number we picked.

Jassen: Okay.

James: And then we use a rent appreciation of three percent here, so the rent is going up three percent per year, but it’s calculated monthly. Now in some cases, Jassen, you can use this calculator, The Real Estate Financial Planner™ in order to buy Properties like apartments or commercial buildings or something like that, and it’s sometimes when you’re dealing with these apartment buildings or something else, you might have other monthly income. One of the biggest examples is, let’s say you bought an eight-plex, an eight unit apartment building, and it had a laundry facility on site and you were able to collect a certain amount of money from laundry every month. You could go ahead and put in other monthly income and let’s say you were able to collect, I don’t know, $100 a month in laundry feeds. You can go ahead and put $100 in here and then you have its own appreciation rate for this laundry fee. So let’s say you think, hey listen, laundry is not going to keep pace with inflation.

James: It’s only gonna increase at one percent a year. You can go ahead and put $100 a month, this monthly income and then they have the mother monthly income appreciation rate be one percent per year. That’s how you can model that. So it just does a quick little mini check for you and tells you your monthly gross potential income is equal to your monthly rent, plus your mother, other, your monthly other income. I don’t know why I can’t say those words together. And if you, if you add those up, basically monthly rent is 15, 39 90 and $0 from other mother. What other income is 1,539.90 per month. Okay, so that tells you if you didn’t have any vacancy, this is the most you could possibly get from that Property. That’s the way to think about that.

Jassen: Okay. And, and, and boy I think, I don’t know if. I don’t know if you mentioned this, but I think it’s important to reiterate that you’ve, you’ve set both the rate of appreciation, the rate of have a rent increase the HOA, everything is all appreciating at the rate of inflation.

James: That’s right. And so this $200, another way to about this as a $200,000 Property today is going to be worth the equivalent of $200,000 60 years from now.

Jassen: Right.

James: The Property is not worth more. It’s just a dollar is inflated. Right? So if you actually go and you look in the future, this Property may be worth $700,000, but if you actually adjust it for what it is in inflated dollars, it’s still worth the equivalent of $200,000. Then

Jassen: I, I think my point was more along the lines of, by, assuming that everything is going up, I’m at the roughly historical rate of inflation. Yup. You’re not, you’re not throwing into this Scenario any like crazy non-conservative, you know, um, assumptions. Everything you’re doing here is fairly conservative assumptions about how things are going to go.

James: Yes. I think that’s true. I believe these to be conservative now, just like we’ve been saying all along, if you’re like, James is crazy Property values where I live, don’t go up at three percent a year. They go up at negative 10 percent a year or two percent a year or whatever it is that you want to run in your numbers. Feel free to go copy, you know, make a copy of this Scenario into your own The Real Estate Financial Planner Account. Just come in here and edit those numbers and rerun it and it will redo all the math for you. That’s what’s great about this. Okay, so vacancy rate. Basically you’re not going to be able to have your Property occupied 100 percent of the time. You’re going to have tenants move out unexpectedly. A lot of times we’re able to make, um, you know, to actually make money on that where they’re paying their due on their rents and you know, they’re paying for a month of vacancy while we’re trying to find the next tenant.

James: But sometimes you do have some vacancy. Um, you know, they are unable to collect on or something like that. So we’re using a vacancy rate of three percent. Now I will tell you, some people will argue that this vacancy rate is low. They’ll say three percent vacancy rate. I mean we see five, six, seven, eight percent vacancy rate where I’m from. And I think that’s partly a function of your rent and how you’re managing your Properties. So around here we teach classes and we do a lot of Property management. We teach classes on how to manage your Properties and one of the things we tell landlords is you need to start looking for your next tenant, 60 days prior to your lease expiring with your current tenant.

Jassen: Amen. Brother learned that the hard way.

James: Yeah. And so you, you don’t want to have, you know, you don’t wait for your tenant to move out or wait for them to tell you the day before their lease is up, that they’re not going to sign a renewal.

James: You have it in your lease originally, that they have to tell you 60 days ahead of time whether they are renewing or not. And they have to give you permission to market the Property and have people show the Property while the Property while they’re living there. And so you basically have a tenant move out and that later that afternoon you’re doing the turnover and having the new tenant move in. So you really want to have your tenant in there and if your rent is so high that you’re not getting applicants. Then you have a chance to lower your rent. So you start off your rents and 60 days prior to the expiration of the lease, if you’re not getting calls, you lower it by 25 bucks or 50 bucks. And then you, you keep lowering it each week until you get calls and you can fill your vacancy.

James: And that’s how you deal it. Keep your vacancy low. So if you feel you want to use six, seven, eight percent, feel free to go ahead and log in and change that. I’m using three percent for that reason.

Jassen: I’m just going to say, you know, based on my experience, if you don’t do the 60 day process that James just described, that three percent does become eight.

James: Yeah, no doubt. It hurts a lot. And so that’s why we want to do much more proactive Property management, um, and doing it that way. And so that’s how we do it. Use whatever number you feel comfortable with. We’re using three percent for that reason. Um, so that’s why we’re doing it. Okay. So monthly gross operating income, is that monthly gross potential income we calculated above minus the vacancy dollar. So $1530.90 minus $46.20 equals $1493.70.

James: It’s just doing some math for you so you don’t have to go do it in your head.

Jassen: Okay.

James: The next two numbers are what percent of the then current Property value are taxes and insurance. So taxes are calculated based on Property values and insurance is calculated based on Property values. And Jassen, I think if I remember correctly when I told you this, you were like that’s not right. I don’t like the way that works. And, and I, I kind of explained to you why we do it this way. So basically if a Property value goes up, taxes are gonna go up on the Property. If your Property value goes up, your insurance is going to cost more on the Property.

Jassen: Right.

James: And so we basically make the percentage of the Property value be that Property be for Property taxes and insurance. And so in this case, we’ve used 0.65 percent for Property taxes.

James: Now, if you’re from New York or Illinois or any of those other states where Property taxes are ridiculously high, you’re going to say, Whoa, basically a $200,000 Property, the Property tax is only $1,300 a year, James, you are crazy. That’s like a months Property taxes or 6 months of Property taxes. But go ahead and adjust your numbers. Here in Colorado, we have pretty reasonable Property taxes and so we go ahead and put in those numbers there for that. But feel free to modify it to be whatever you want it to be. Okay? Um, and so really 0.65 percent of the Property value, we’re estimating the Property taxes to be $1300 a year or $108.33 a month is what it calculates to. Uh Property insurance 0.4 percent, that’s $800 per year. I will tell you one of the most variable things, is Property insurance, because it depends on so many factors.

James: For example, your credit score impacts Property insurance, how big of a deductible you want. If you basically say, hey, listen, I only want a $500 deductible, your insurance is going to be much higher than if you say I want a $2,000 deductible or, or a 2,500 or $5,000 deductible. Um, how far away you are from the fire station, how far you are. Are you away from a fire hydrant? What your roof is made of? Is it a wood shake shingle or know asphalt shingles? Is it a brick exterior is it a, you know, where like all these factors come into play for Property insurance. So it’s really hard for me to give you an estimate for Property insurance. But if you call up your insurance company and you say, I’m thinking about buying this particular Property from the MLS, you know, how much would insurance beyond that for me?

James: Um, and you know, what, what’s my deductible look like? They’ll give you a quote and then you can kind of figure out what percentage that is of a Property value and use a rough rule of thumb to do your modeling. That make sense?

Jassen: Yup.

James: HOA, we’re assuming this Property doesn’t have an HOA and that if you did have one, this is what the HOA would be appreciating at a how much are your monthly utilities? So in some Properties, let’s say you own a four-plex that has a common area where you have to pay for the lights for the common area, you know, think of it as like a door that leads to a lobby and there’s four doors off the lobby and you as the owner end up paying the light bill, the utility bill for the lobby. Um, so if you have a utility bill that you’re paying something, then you put that number in here.

James: And then here’s your utility appreciation rate. This is a single family home. The tenant pays for all the utilities.

Jassen: Right.

James: So that’s why we’re doing zero now. We have two other spots here for extra monthly expenses, so if you happen to have a Property where you know it’s a four-plex and you’re paying for snow removal or lawn care or anything like that and you have a monthly expense, you can go ahead and put up to two different ones in here and they can have their own independent appreciation rates and someone said to me once, they’re like, James, what if I have three expenses? What do you think, Jassen, what do you do if you have three other monthly expenses? What do you, what do you think you did here?

Jassen: Well, I’m pretty sure you can add a couple of them together.

James: That’s exactly what you do. So let’s add two together put it in here and just say that that has that same appreciation rate. You don’t have to separate them out. So anyway, that’s the solution to that problem. That’s why we just arbitrarily put two and it really is arbitrary, but I mean you could have one where you don’t think it’s going to appreciate it all or it’s gonna appreciate much more quickly and have another one that’s more reasonable and that’s why I wanted to put a little variety there, but yeah, we didn’t get crazy and put five spots.

Jassen: Since you’re, since you’re taking the time to explain all the components that are built into a Property here. Yeah. What are some examples of some actual, other monthly expenses?

James: Yeah, I gave a couple, but like let’s say you have a fourplex and you’re paying for snow removal. That’s one example. Let’s say you’re paying to have the lawn mowed or the landscaping cared for in a fourplex or an eight plex or 32 plex. That’s another example. Um, you know, maybe you provide, um, Wifi, like you know, a router and pay for the cable bill for somebody in like a duplex where you live in part and giving them the ability to use that. So you kind of want to put your monthly expense for that and here. Um, so things like that you can do mother other monthly expenses on.

Jassen: Excellent.

James: Yeah. So maintenance, we’re basically saying you’re going to have, you know, the plumber come out, you’re going to have to fix the sink every once in awhile or replace a window because something breaks or something like that. So we’re setting aside 10 percent of the rents that come in every month, uh, in order to cover these kind of nuisance maintenance type things.

James: And now we’re basically saying that’s almost $150 a month that we’re setting aside for maintenance. Now we may have three or four or five or six or 10 months where we have zero maintenance and then we may have a big bill for something that’s definitely possible, but we’re setting it aside every month. We’re withdrawing it, we’re not storing it in an Account in the calculator. We’re just saying it’s spent. Okay. So you, you might technically have a bigger reserve as you save up stuff, but really it gets spent. Um, and then we’re doing it.

Jassen: And, for, for anybody that’s going to say like, I used to think, oh I don’t need to set that aside for one water heater. And yesterday my Property manager, Property manager emailed me, he said, hey, the washing machine went out, so there’s 500 to a thousand dollars. The little stuff like that adds up. So you need to Account for it. You really do.

James: Yeah. And even like sending a maintenance guy out to do like a small fix up job, you know, between travel costs and, you know, run into home depot to get a piece, a part for something, you know, something that is, is like a five minute fix could cost you two hours in time.

Jassen: Right.

James: So, you know, that’s like a hundred bucks plus.

Jassen: Right.

James: So that’s maintenance. We also are saying that we’re paying a Property manager, um, and you know, your Property manager fee is what you negotiate with them. But in our marketplace, you know, it’s pretty close to being 10 percent of the gross rents collected. Um, is what it works out to be sometimes a little bit more. Sometimes a little bit less depending on how many Properties and what they’re doing for you.

James: So that’s another 10 percent off the top for Property management each month. So once we add up operating expenses, that’s Property taxes, Property insurance, HOA, Utilities, the other expenses, maintenance and Property management. So it shows you all the different numbers for those that equals $473.74 a month. Okay. And then net operating income is that gross operating income minus operating expenses. So $1,493.70 minus four $473.74 and we’re left with $1,019.96 per month. Capitalization rate net operating income divided by the purchase price. So our cap rate for this Property, it’s at a 6.12 cap.

Jassen: That’s pretty good.

James: Our, yeah, our net operating income minus the mortgage payments. We basically are cash flowing, $161.05 cents per month. On this Property we’re seeing $161 in positive cash flow on this Property after all, expenses after taxes, after insurance, after utilities, after HOA, other expenses, maintenance and Property management.

James: That’s what we’re seeing as our net cash flow. If we were looking at what break even rent would be, we’d have to make $1332.36 per month in order to be break even. We’re making more than that and it shows you what the cash flow numbers would be if you add that plus 25 a month or minus 25 a month and it’s just there to show you a case. You want to use some Scenario modeling based on that.

Jassen: This is a nice math. That’s, that’s, it’s kind of an aside from the entire Scenario process, but these are some nice numbers to know.

James: Yeah. It just shows you what the calculations are as a snapshot starting out.

Jassen: And those dynamically update as you adjust fields in the, uh, in the Property here, right?

James: They dynamically update after you hit save. So if you change this to be 11 and then you hit save again, it would update them all, but it doesn’t do it when you just make the number change.

Jassen: Got It. Okay.

James: Yep. But if you hit save it does them all again, recalculates them all. And then monthly capital expenditure. So at some point in the future you’re going to have a new furnace, you need a new roof, you’re going to need to remodel the kitchen or something like that. And so we’re setting aside $200 a month for cap x and that cap x number is increasing by three percent per year.

James: Okay. So we’re, we’re basically setting aside money for roofs and furnaces and all that other stuff. That’s in addition to the maintenance number. Maintenance is like your small stuff. This is capital improvements. Okay. So those are the assumptions for the Property.

James: Now when did we buy this Property?

Jassen: Yeah,

James: So we just went over what the Property are. Now we have two Rules. This Rule is the same Rule we had in the other Scenario. We’re basically renting, um, or we have an income of $5,500. Our expenses are $3,380.30, which includes our rent. We have 18.54 percent tax rate. This is the same as we had in the last Scenario we discussed. So that Rule is already in place. This is a new Rule though. So let’s go over what this Rule does. And so this Rule basically says I’m going to run it for the entire Scenario, although because I have some limitations later on, it’s only going to run until I buy one Property. But you can limit when this starts, you could say, you know, five years from now, then go ahead and buy a rental Property and you can use that by changing the start date either with dates or months on here.

James: But right now we’re saying we’ll run it for the whole Scenario and let it go there. Okay. And we’re going to apply this Rule just to this particular Scenario. That’s the name of it. Could select any of them were all to have it run. This is a shortcut leading to the Scenario itself and this is to run this Scenario. Again, once you make changes here and save them, you can go in and say, okay, rerun it. Now that I’ve made changes to this Rule, it’s just kind of a shortcut to do that. Now it’s asking you which Property you want to buy. The name of this Rule is buy a Property when the Account as a down payment, so it’s saying to you, okay, which Property do you want to buy? And we pick out which Property it is. This one is the 20 percent down payment typical family home that we just went over, so it’s doing that one and then it says which Account you want to look for for the down payment because we’re saying when the Account has a down payment, it saying to you which Account do you want to look at it to make sure we have enough down payment and we’re doing the stock market Account. That’s the Account where we’re depositing our paychecks and saving our money in investing.

Jassen: Okay.

James: Now what it says is this, here’s how the Rule gets a little bit more complicated. It basically says once I have a certain amount of money in that Account plus the amount I need for the down payment and the closing costs, then go ahead and buy a Property. And so what I say is in order to be able to buy this Property, the Account has to have $10,000 plus the down payment amount plus any closing costs, I’m going to need to buy the Property. Otherwise this Rule will not be triggered.

James: That makes sense, Jassen.

Jassen: Say that again?

James: Yup. So in order for this Rule to be triggered, I need to have $10,000 plus the down payment plus the closing costs. And then if it has that then it will trigger this Rule and buy the Property.

Jassen: So what you’re saying is, is you want a minimum $10,000 buffer?

James: Yes.

Jassen: To purchase the Property just in case what?

James: Cash Reserves. Let’s say you have a vacancy. Let’s say you have some maintenance. Let’s say you need money elsewhere for something else. So we want to have a cash reserve buffer and we’ve arbitrarily said $10,000 seems like a reasonable dollar amount to have as a cash reserve buffer before I go by this particular rental Property. And so we just picked that and I said, let’s go ahead and make it 10,000 plus the down payment plus the closing costs.

James: Otherwise I’m not buying the Property.

Jassen: I like that because you know, you read a lot of horror stories on some of the popular internet forums of people that buy their first Property, not really knowing what they’re doing and they underestimate certain things and they don’t have that cash reserve to, to absorb it.

James: That’s right.

Jassen: So this is a great way to avoid becoming a statistic. I like that.

James: That’s right. And now to make this even a little bit more complicated, it’s not actually $10,000, it’s the equivalent of $10,000 in today’s dollars because I checked off this box that says inflation adjusted. So it might actually be, if it’s a year or two or three out, it might be $12,000 or $14,000, $15,000 that I have to have as my balance. Because when you think about that in terms of what it is in today’s dollars, it’s $10,000 in today’s dollars.

Jassen: Right.

James: That’s what the inflation adjusted one is, and then I further limit the Rule and I say, only use this to buy one Property. If I already own one of these Properties, don’t even bother with this Rule.

James: Okay? And so I limited it to one right here. I say only buy one of this Property. Now this stuff down here is advanced. We’re not using it here, but you could say, hey, if I have equity where I could do a cash out refinance on other Properties and that if I did that, I would be able to have enough money in that Account in order to buy new Properties than I want to do that. So you can choose to say allow cash out refinances in order to use that new money from cash out Refi’s to buy Properties. Okay, we’re not doing that here. So do not consider cash out refinances. But if we did, we’d say I want the max loan to value to be 75 percent and it costs me one point on my new loan in order to get that loan.

James: So this allows you to be very aggressive if you want to use cash out refinances in order to refi Properties in order to buy new Properties with it. Pretty crazy, right?

Jassen: Love it.

James: Yeah.

Jassen: It just illustrates the flexibility and power of the software.

James: That’s right, but you’re not using it. Basically we’re saying ignore this section for now. We’re only going to use this to buy a Property when we have at least $10,000 in reserves adjusted for inflation plus the down payment plus the closing costs and we’re only going to use the buy one Property. So going back to the Scenario, we already went over Accounts, we went over the Property. We went over the Rules, including the Rule as to when to buy the Property. When we run this. Let’s take a look now at some of the difference results. Okay. You’re going to go into the Chart section and this shows you the net worth of running the Scenario.

James: Do you happen to remember what the net worth was for the last one?

Jassen: I believe $29 million?

James: Yeah, I think it was 29 million as well. So this one is $34.6 million and what I’ll do to make it easier to compare, I’m going to go add back in that last one we did so that there are charted on the same Chart and we can look at them together.

Jassen: Yeah. It comes together real fast. This is the fun part right here.

Net-Worth-Comparison-Raw

James: Yeah. This is the fun part. So basically it shows you in in the year 60, month 720. If we don’t buy a rental Property, our net worth is 29.4. If we do buy a rental Property or net worth at 34.6, now that’s in inflated dollars. What is it in inflation adjusted dollars?

Net-Worth-Comparison-IA

James: $5 million to 5.8 million. So buying the rental Property gives us an $800,000, almost $900,000 honestly, um head start. Like additional gain on Net Worth.

Jassen: Nice.

James: Yeah. So it’s a pretty significant increase. You could think of it this way. It’s almost a 20 percent better situation than you were before. Same income, same savings rate. Everything else is identical except in one we bought one rental Property and the other one we did not.

Jassen: Right.

James: Okay. Um, so all this is the same.

Jassen: I think you’re downplaying the, uh, the significance of that spread.

James: Yeah, I think that is a pretty big spread. You know, I’m not going to go crazy over it, but yeah, I mean that’s, that’s a 20 percent difference and I think when we go look at the Goal later as to how much quickly, how much more quickly we can retire, you’re going to see that that’s pretty profound too.

Jassen: Right.

James: Now, this Chart shows you when you bought the Property and, I know it’s really simple right now because we only bought one Property, but when you are buying multiple Properties over time, when you buy them becomes important. Right now you can see that with renting, with stocks, we didn’t buy any Property, so that’s a zero. But when you buy the one Property, it looks like you’re doing that in month 18. So you started off with $30,000 in savings in the stock market. You’re saving $1,100 a month and you’re investing in the stock market. How long does it take you to get enough money to have a $40,000 down payment? Plus $10,000 in cash reserves, plus your closing costs. Turns out it’s about 18 months, so you need to save up for 18 months before you have enough to buy that rental Property. That makes sense?

Jassen: That’s not too shabby.

James: Yeah, it’s not shabby at all.

Jassen: Most people can do that.

James: Yeah, I think that’s true. So let’s take a look at, here’s an interesting Chart. Actually, let’s just do total equity. So when you’re doing just stocks, sorry, let’s do raw dollars. When you’re doing just stocks, you have no equity in your Property because you don’t own a Property. You’re basically renting, right? But when you actually are renting, but you own a rental Property, this shows you how much equity you have in your Property. So for the first 18 months we don’t have any because we don’t own a Property. And then as soon as we buy one, we basically have the equity for our down payment. So it’s about $41,710 is what we have in equity when we buy this Property and that equity grows over time as both the Property goes up in value and as you pay down on the loan. So you have two things that are adding to your equity by moving things in different directions.

James: One of them has the increasing Property value, the other one is reducing what you owe.

Jassen: And the real beauty there is this is it’s your tenant that is paying down the mortgage.

James: That’s right. Your tenant is paying down your mortgage and so you could see your equity in your Property grows until finally in year 60, you have about $1.175 million in equity in your Property.

Jassen: Nice.

James: Okay. So that shows you that. Let’s look at total monthly rents.

Total-Monthly-Rents

James: So this shows you your rents over time, how much the rent on the Properties are. And so when you were renting and you were just investing in stocks, you have no Properties for rents. Now here you have Properties that rents the rent on that Property. When you do get it, you start renting it out at month 18 is $1605.74. and it increase over time.

James: So finally in the year 60, it’s a $8,917.27. Now this is in inflated dollars. What is that in inflation adjusted dollars. Look at it. It’s basically the same. Yep. So basically is that $1,500 or so that we were talking about from the very beginning when you adjust for inflation.

Jassen: So when you retire you have that $1,500 coming in as positive cash flow. That can help go towards that $4,400 a month target retirement income.

James: That is exactly right. So basically a third of what you need, you know, if it was 4,500 and 1500 in rent basically a third of what you need to retire is coming from one rental. Now you only need to get the other $3,000 from whatever your stock portfolio is.

Jassen: Right.

James: That’s exactly how to think about it.

Jassen: Yeah. It’s a nice little hedge against, against stock market performance is the way I look at it.

James: Yeah, now here’s an interesting thing. Um, maybe it’s not interesting. I thought it was going to be interesting.

Jassen: I always think that the, the various true cash flow Charts are usually pretty interesting to look at.

James: Yeah. So let’s take a look at this one. So true cash flow, true cash flow is a cash flow on the Property and that includes cash flow, a depreciation, the cash flow you’d get from the depreciation and any capital expenses you have on the Property. So what’s happening here, Jassen, why is there this big bump up as to why you’re getting a massive amount of cash flow that very first month that you own the Property. Why is that happening?

Total-True-Cash-Flow

Jassen: That was the, that’s when you bought the Property and you are, um, that’s your first rent, check, I’m assuming.

James: Yeah, you have a rent check coming in, but you don’t have a mortgage payment the first month that you own the Property. So you collected,

Jassen: We talked about that at the, uh, yesterday, a little bit.

James: That’s exactly right. And so if you go listen to that recording, you’ll understand a lot more, but that’s why there’s this big bump here. It’s not a mistake, it’s actually that you get a massive amount of cash flow that first month because you didn’t have a mortgage payment on your Property.

Jassen: Right.

James: So yeah, that’s what’s cool about it. And then you could see that your cash flow goes down to a more normal thing and then it increases and kind of bumps up and keeps bumping up as cash flow continues to increase. Now there’s a couple of things going on here. This is, um, you know, month. Oh boy. Where is this here? This is around 340 or so.

Jassen: I was going to say around month 378 is where it should get really interesting.

James: Oh yeah, yeah. When you pay it off, that’s right here. So when you, when you ended up paying off the mortgage, that’s why you see a big bump in cash flow here because you no longer have a mortgage payment and you’re getting all cash flow, but there’s something else that happens. You see this little dip here that it actually goes down. Do you know what that is?

Jassen: I do not.

James: As a tax guy, you should know.

Jassen: Oh, that’s the, that’s the end of your 27 and a half year residential depreciation.

James: That’s exactly right. Is you lose your depreciation benefit so you no longer get that extra cash flow from the depreciation in here. So basically it goes down for a little bit.

Jassen: Zoom in on it. How much is it on this model around this?

James: It’s hard to tell exactly when it starts because it happened in month 18, but if you figure out what 18 plus 27.5 times 12 is, you figure out where exactly it starts to see where to look at it, but it does go down a little bit right here, which is unusual.

James: And then it kind of comes back up because their rent rent is increasing. But like right here is really where it ends.

Jassen: Yeah.

James: So what is that difference, it’s like a hundred dollars uh $95 something like that.

Jassen: It’s not, it’s not inconsequential.

James: In fact, you know something. You’re concerned about how much depreciation you have. Let’s go do this. Let’s go look at what the depreciation benefit is on this Property. We can tell, so we’ll go into owned Properties and let’s look at depreciation.

Jassen: By the way, just so you know, we’re at about the hour mark.

James: Okay. Yeah, we’ll kind of wrap up. It’s not that much longer. We’re going to just look at the Goals and how they compare, but you could see that depreciation was um, oh, that’s the actual depreciation dollar amount $631.98 and then it goes to zero after that. Uh cash flow from depreciation.

James: This shows you at times the tax rate, so it was $94.80 is what the cash flow from depreciation is, but you can drill down and see this on any of the Properties if you wanted to by going through this owned Property Charts and looking at those will probably cover that in another day because uh, we’re kind of running close on time, but I do want to show you the Goals.

Jassen: Oh yeah.

James: So these are the two Goals that we have. One of them is the renting with 100 percent in stocks and the other one is renting with stocks, but also by one 20 percent down Property. Can you guess which one is which?

Jassen: I think that the red one is with a Property.

James: Yeah, and you can tell from two different things, right? The little bump on the red one when you had that really good monthly cash flow and then you have this one where the loan pays off.

James: You can see a bump in that too, so we know that it’s at least when the Property pays off that you’re able to retire because that’s where the dotted lines 100 percent Goal mark, but the other one takes a lot longer to get there, so I’m going to cheat and look down at the table and say, look, renting with stocks took us 462 months to get to our retirement number. That’s 38 years, six months. If we do the exact same thing, but we buy a rental Property. We basically save ourselves 62 months or five years in order to retire so we we could ever retire five years earlier by buying a rental Property.

Jassen: On the same income, the same lifestyle, the same. A savings rate. No other absolutely no other changes between those two Scenarios except in one you stay in stocks, the other one you take when your stock portfolio gets to the point where you can you sell some of the stock and buy a rental Property instead.

James: That is exactly true. Yep. Now let’s go ahead and add in the other ones that we did yesterday. So I think yesterday we did renting with 60 40 stocks and bonds.

Jassen: Right.

James: And I think we also did, um, five percent down owner occupant with 60 40 stocks and bonds. Isn’t that right?

Jassen: Yep.

James: Okay, so I’ll add that.

Jassen: This is really interesting.

James: Yeah. So we’re gonna add those two in there. So now we have four different Goal lines. Kinda showing there. Now I’ll give you a hint. They’re getting progressively better as we move.

Jassen: Yeah.

Goals-Comparison

James: So, it’s because we’re sorting by I think, I think net worth and we’ll look at net worth through numbers here, but, but basically it shows you kind of like your, your number down here, your number down here, your number down here. Let’s jump down to the Chart. So the worst one is renting and doing 60 percent stocks, 40 percent bonds, that’s 609 months or 50 years and nine months. If you buy a Property as an owner occupant and you still invest 60 percent in stocks and 40 percent in bonds, you end up doing 518 months, 43 years and 2 months. So you’re. So you’re saving yourself almost seven years versus renting with stocks. That’s the first one we covered today. It’s 462 months. So you end up saving yourself another five years or so going that way. And then renting with stocks and buying a rental, you end up saving yourself another five years by doing it that way.

James: So you can see that we’re getting progressively better where you can retire early by doing just different strategies.

Jassen: We’re doing a 17 year difference.

James: Between the worst case in the best case.

Jassen: Yup.

James: Yeah. Yeah. So it’s, it’s pretty profound.

Jassen: Seventeen years.

James: And you know, people are probably asking, so. So what if you do the buy two rentals and you do 100 percent, we’re getting there, we’re slowly going to there. Yeah, I mean we’re, we’re going to go ahead and add a whole bunch of different models. We’ve got 12 different kinds of case studies to run through and do it. We just covered two more today and we’re kind of comparing back and we’re going over a little over an hour, but we’ll add another two or three or whatever we think we can cover tomorrow or whenever we do the next recording. Um, and add it to here. So the idea is that we’re going to get through 12 and then I think Jassen and I, fingers crossed we’re going to joint venture and create a book of this content so that financial planners and advisors and CPAS and real estate agents can use this in their marketplace in order to help teach people about the differences in these plans and how they impact that.

Jassen: Absolutely. You know, the, the, the FIRE movement, financial independence, retire early is, is growing in momentum. There’s more and more media coverage. There are a lot, or there are several of the kind of mainstream financial groups like Suzy Orman and Dave Ramsey and people like that, that are, uh, you know, dipping their toe into this, this movement. Um, the, the FIRE subreddit on Reddit has a, you know, almost half a million people. There are podcasts and blogs, etcetera etcetera. And so because this movement is becoming like really in your face, there is an opportunity for, like you mentioned, financial advisors, CPAs, other tax professionals, real estate agents, to kind of tap into this interest in this movement, uh, in order to provide valuable services to, to their local market.

James: Yeah, assist them with what they need because they need professionals that understand what they’re trying to do. And I think that we can educate you and them and, and provide tools and resources and then you can actually help them by providing valuable services to them in the end.

Jassen: Absolutely.

James: One last Chart to go over it. Because you had asked about net worth.

Jassen: Indeed.

James: So, so this is the net worth Chart. It shows you what you’d expect. Progressively more net worth for each of them, and I’ll compare them here in a second. I’ll go ahead and zoom in on month 720, see what it looks like at the very end and so it shows you that the net worth at the very beginning was a $13 million for renting and 60 40 stocks and bonds, a $19.8 million for a buying an owner occupant Property with five percent down and then 60 40 stocks and bonds, $29.4 million for renting with stocks 100 percent. And then renting, buying a rental Property and stocks, the rest it is $34 million. And if we do inflation adjusted, kind of get a feel a. basically it’s 2.2, 3.3, $5 million and 5.8.

Net-Worth-Comparison-720

Jassen: Yeah. And, and you mentioned this at the beginning but beginning, but it is important to remind everybody that we’re. We’re using a fixed set of assumptions for purposes of comparison only. If you were running more advanced client Scenarios, you’d want to run Monte Carlo simulations to, um, uh, you know, that include market corrections and things like that, which this software can do.

James: Yeah. We’re just trying to give you a very simple, big picture overview of 12 different Scenarios and how they might perform if all of the returns are standardized between them. So we’re taking out the variability of the stock market return and the bond market returns and everything else. And we’re saying, hey, let’s assume it just gets eight percent. How do these look like relative to each other? How do they compare?

Jassen: Exactly, exactly. This is good stuff.

James: Yeah, well I think that’s it. You want to end it up here?

Jassen: Yeah, yeah. We’re, we’re, we’re a few minutes over, but that’s fine. Uh, James, this is really good stuff. You’ve created a very valuable tool for, for anybody watching this, uh, what would be their next steps? What would you recommend for folks to, to is, is there a next action step they want to learn more?

James: if they haven’t created a free Account on the The Real Estate Financial Planner™.com website? Um, I would do that, that way they can copy any of these Scenarios into their own Accounts, um, modify the assumptions, kind of play around with it. They could do their own model, they can create new Scenarios from scratch if they want to as well. But I would do that and then check out some of the videos and tutorials and blog posts that we are going to be adding that go through all these different Scenarios. There’s so many different things we want to test and share with you and describe for you and, and kind of show you and then give you the ability to modify them to say, well, what if my situation is a little bit different? I want to tweak it. So I would say for them to go to The Real Estate Financial Planner™.com, create a free Account and then look for some of the content that we’re putting out and um, if they’re interested in or got questions, you can reach out to us.

Jassen: Absolutely. And if they go what is it, if they go to the blog post for the particular Scenario that we’re talking about, there’s a isn’t there a link on there that they can copy the Scenario into their own Account to play with it?

James: So when we post this video up, we will post the big button that says copy into your own a The Real Estate Financial Planner™ software, and it will allow you to go ahead and just make a copy. It’ll just make a copy into your own Account and you could start with what we have and modify it.

Jassen: Excellent. Excellent. That, that way if somebody wants to change the assumptions to their own local market conditions or their own beliefs about the future of the market, whatever, they can do that.

James: Totally. And then they can compare them to themselves and see how their assumptions vary.

Jassen: Absolutely. I love it.

James: Yeah.

Jassen: Well thanks a lot James. This has been really good and I will look forward to seeing you on the next one.

James: That sounds perfect. We’ll do the next ones probably a next couple days.

Jassen: Awesome. Thanks.

James: Thanks Jassen. Bye. Bye.

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