The following are the 5th and 6th of 12 Scenarios of common strategies to achieve financial independence and retire early that I’m covering with Jassen for a new book we are writing.
Copy the fifth Scenario Three 5% Down Payment Owner-Occupant with 60%/40% Stocks and Bonds into your Real Estate Financial Planner™:Copy Scenario into my Real Estate Financial Planner™ Software
Or, copy the sixth Scenario 5% Down Payment Owner-Occupant with Stocks into your Real Estate Financial Planner™:Copy Scenario into my Real Estate Financial Planner™ Software
Check out the other parts of this series:
- Part 1: FIRE with Jassen Bowman - Scenarios 1 and 2
- Part 2: FIRE with Jassen Bowman - Scenarios 3 and 4
- Part 4: FIRE with Jassen Bowman - Scenarios 7, 8 and 9
- Part 5: FIRE with Jassen Bowman - Scenarios 10, 11 and 12
Or, check out the transcript of the video below.
Transcript of Video
Jassen: Hello, my name is Jassen Bowman, and on today’s episode of The Real Estate Financial Planner™ Scenarios, I once again have the extreme pleasure of being joined by the creator of The Real Estate Financial Planner™ software, Mr. James Orr, how are you doing James?
James: Doing Great. So it’s not just your pleasure, it’s your extreme, pleasure.
James: Oh, that’s hilarious. I’m doing really good. I’m excited about doing these, uh, these Scenarios. I’m kind of getting them out there. I was reminded of this last night. We did one yesterday as well. We’re doing another one this morning. I was reminded last night that I like to think about explaining these so that my kids, I’ve got two children they are 22 and 19. Uh maybe it’s 22 and 20? Yeah, it depends on when their birthdays happen and like when it, when it really is anyway, they’re like, you know, college age, one of them is just out of college. Um, and you know, you never know when your mortality will set in and you won’t be around. So I like leaving this as kind of like a guide for my college age kids to be able to, you know, FIRE, financial independence, retire early stuff, and it kind of gives them the insight that we wish we had if somebody were doing this before us. So I just happened to have some, some software that helps us model this stuff pretty well. So that’s kind of why we’re, we’re able to do that. So yeah, I’ve just reminded, you know, doing this for my kids.
Jassen: No, I totally hear you. I, I wish that, you know, when I, like when I first went into the Navy, I wish that there had been something, you know, somebody that was telling me this kind of stuff. Um, and, you know, and maybe I wouldn’t have been in chapter seven bankruptcy by the age of 30, you know, uh, and made some better financial decisions in life.
James: You know, we get wisdom though from making mistakes and I think.
James: You know, you, you are in a very good place right now and uh, you know, you’ve definitely come back strong. I think even stronger than you were way stronger than you were before the bankruptcy. Um, you know, having learned those lessons and, and, you know, maybe over time we can talk about what those lessons are as we kind of explained the Scenarios, not necessarily today, but, um, I, I still think that um, yeah, your experience has kind of made you where you are today and where you are today is great,
Jassen: But I do think that we could all agree that it is better to learn from other people’s mistakes instead of committing your own.
James: That is probably true. That’s probably true.
Jassen: And what Scenarios are we talking about today?
James: I was just going to kind of transition to that myself. I think we covered yesterday. We went over renting and investing 100 percent in stocks and then we’re, we also went over renting a with 100 percent stocks except as soon as we get enough to buy one single, 20 percent down payment rental Property, we do that.
James: And uh, so this is actually going to be Scenario number five in the series if I’m doing my counting right. And today is oddly enough, it’s kind of just a weird mix of numbers, which I’m sure you’ll comment on here in a second. Three, 5% down payment owner occupied Properties with then 60/40 in stocks and bonds. Jassen, just out of curiosity, why did we pick three a and then 60/40 stocks to bonds splits for this particular Scenario? Do you want to comment on it?
Jassen: Um, if I recall correctly, I think it had something to do with, you know, people that are doing the nomad model where you buy a house with owner occupant financing to get a better rate, but then you have to live in it for a year and then you move, buy another house, turn the previous one into a rental. I think that what we were talking about was that after doing that three times, a lot of people get tired of moving.
James: Yes. I think that is definitely true. Yeah. Yeah, that’s, that’s, that’s definitely one of the reasons why I thought it was. And maybe I’m wrong about this because now that I think about it, I think you have more Properties than this already, but I thought this was us trying to model you at first, but maybe it’s not because uh, I think you have, you have more than this already don’t you?
Jassen: Well probably when we first had the conversation. I was still at three because I just closed on number four.
James: Okay. So this was in my mind when I was at least building it. I was thinking, oh, so this is sort of like, you know, Jassen’s model, if I stop here, what does this look like?
Jassen: Sure, sure.
James: And your income obviously is greater than the $5,500 that we’re talking about in this particular model. And I think your savings rate is a lot better than the 20 percent that we’re talking about here. But it was sort of like a, if this was your model, if you, your income suddenly dropped to $5,500 and you only are able to save 20 percent and you kept three Properties. That’s sort of what I was thinking in my mind. But maybe it wasn’t.
Jassen: Well, well I, I think it has more to do with the moving factor because you also know that there’s no way I would ever have be in 60 40 stocks, bonds. I would never have that high of a stock allocation.
James: So most people are like, I would never have that high of a bond allocation at your age. You’re saying you would never have that high of a stock allocation at this age.
Jassen: Correct. I’m, I’m 40 years old as we record this and my stock bond allocation is 30 70. I like to say I have the, I have the securities portfolio of a 90 year old.
James: Oh that’s actually pretty funny.
Jassen: Well, it’s because it’s in my own head. It’s, it’s a way of balancing out the risk of um, I, I want to hold my risk in real estate, not hold my risk in the stock market. That’s my decision. But that has nothing to do with what we’re actually talking about today.
James: Fair enough. We probably should revisit that, you know, kind of like asset allocation balances and what that might look like. And in fact, we probably could write a whole nother book about it, which,
Jassen: Geez that’s a whole other book
James: Yeah if you decide to do 100 percent real estate, 100 percent stocks or a hundred percent bonds or no 30, 30, 30, or, uh, you know, the kind of like 50 and then 25, 25 or maybe we’ll do like all those and kind of try to make them balance out. So I know that’s definitely a book we can write later on. Anyway, let’s get into today’s kind of the two Scenarios we’re doing today and that we can discuss this at another point lest we go two hours with our call today. So I’m going to jump into the first one. Um, and remember if you listened to the previous two and you should have all of the base assumptions are the same, you know, this is someone making $66,000 a year, which is $5,500 a month. They’re saving 20 percent of their monthly paycheck and investing in something. Um, and whether that’s, you know, down payments on rental Properties or the bonds or stocks or whatever it is, the model is that they’re saving 20 percent and that is increasing with inflation.
Jassen: So biggest thing with what you’re about to explain is in this one, I assume you’re going to introduce the nomad concept.
James: I think so. I think we’re going to go and show how we model nomad and what nomad is.
James: So actually to kind of a throwback to previous calls we’ve done together, what is the nomad, concept. Can you explain that to everybody? And the only reason we do this because I’ve explained it so many times myself, anytime I have an opportunity where someone else can go and explain what nomad is. I welcome the opportunity for someone else to do that.
Jassen: Well, James Nomad is a real estate investing model wherein you buy a Property as a owner occupant. You live in it for a year, which is the minimum required by your mortgage contract. Then you convert that Property into a rental and you go out and buy another house to live in for another year. And you repeat this process until you reach your financial Goals.
James: Yeah. So that’s basically the idea, the minimum being it’s a year. You could do longer than a year, but the idea is you buy a Property, you move in, you live there for a year, you go start shopping for your next Property. When you find your next Property, you convert the previous one to a rental instead of selling it, you don’t sell the Property, you keep it. Um, and then you buy the next one and a lot of times you’re buying these Properties with five percent down, they’re owner occupant down payments, they’re owner occupant interest rates because you’re buying the Properties and moving in and we’re complying with all the lender’s requirements of staying there for at least a year because you will sign a piece of paper at closing stating that as an owner occupant, you intend to live for the Property for at least a year. And so when you sign that paper, we, we agree to comply with that. We do comply with it. We definitely want to kind of honor the agreement we have with our lender. And then after that we basically can convert them to rentals and do whatever we want with them. So,
Jassen: And, and I want to say to, you know, the, the, the old joke was that I would always at NCREIG meetings, I would, I would, I would ask you, but James, how do I find the money to start investing in real estate? The nice thing about the nomad model is that there are really, really, really low down payment programs. And I actually bought my first two houses a with 100 percent VA financing. Yes, you can have more than one VA loan out at a time. I still have the VA financing on both those Properties. And so you can actually get started with no money, almost no money.
James: Yeah. And you basically bought both of your first Properties with nothing down.
Jassen: Correct. Um, and, and I could have rolled the, the closing costs in as well. That’s one of the perks of a VA loan. But I chose to pay those out of pocket. But still it was only a few thousand dollars each time.
James: So what’d you do on your third one? How much did you put down.
Jassen: On the third one? I put five percent exactly like what you’re about to talk about.
James: Okay, good. Yeah. So let’s go through these together and I’ll just show you how this works. But when I tend to model nomad, um, you know, we tend to use five percent down payments for all of these and there are advanced strategies that we have a whole series of classes on Nomad and you can go listen to those, but there are strategies where you could actually, um, get your next down payment for your next house from the previous Property.
James: Um, and we’re not going to cover that tonight or today because it’s not relevant for what we’re doing, but there are strategies to be able to, to be very aggressive in my opinion. And use the previous Property to generate the down payment for the next one. So you can really do this starting with essentially zero money. Um, I’d like to explain it where you start with $3,000, but it really can be zero if you use like USDA or VA on your first Property. So all right, so let’s get into today’s Scenario. Um, so today’s Scenario, we have the default cash Account, which I don’t think we’re going to use it all. Um, but it’s, it’s a default. It shows up in every single Scenario. We do, uh, the stock market Account, we’re starting with $30,000 in the Account to begin with and it’s earning eight percent. The bonds which is earning three percent are initially starts with zero, but we’re going to do a 60 40 balance every month, which I’ll show you here in a second. And then the Properties. So we’re using basically the same Property. We’re using a template Property which we call Dynamic Properties because you can buy more than one of them. And so we’re using that for this particular Scenario. And this is very, very similar to the one that we went over yesterday where we bought with 20 percent down. The only difference is that we’re putting five percent down on this Property instead of 20 percent. The rent amount is the same and it turns out that because we’re using the same rent about, but we’re only putting five percent down in this particular case, that cash flow is break even a at the very first month when you buy it, so we’re assuming you have break even cash flow, not positive cash flow, not negative cash flow.
James: If you have negative cash flow, it’s going to make this a little bit slower. If you have positive cash flow it’s going to make this a little bit better and so depending on what market you’re in, go ahead and just make a copy of the Scenario into your own The Real Estate Financial Planner™ software and you’ll be able to go ahead and modify what the rent is or what the purchase price is to model your specific situation and you can see the impact of positive or negative cash flow from where you are. Does that make sense?
Jassen: Yeah, and when we post this video, there will be a link on the blog post where they can click a link and copy the Scenario into their Account, correct?
James: That’s correct. Yep. So we’ve been doing that. In fact, I’ll show you like an example of, of one that we did. Oh I guess I can’t do that. I tried to look there. Oh yeah, yes. So this one right here, you’ll see this says copy Scenario into my planner. So, um, when we’re talking about that Scenario, if you click on that, it’ll actually say, hey, copy the Scenario. This is what it has. Go ahead and confirm you want to copy it. So that’s what it looks like there. All right so getting back to this, um, go into this particular one. So we’re just looking at this particular Property and uh, you know, just recap very briefly, we went into a lot of detail yesterday about all the different fields here, but this is a $200,000 Property, five percent interest rate, a 30 year loan. We’re doing five percent down. Uh, so we’re basically borrowing $190,000 the payment on that is $1,019.96 per month.
James: There’s some closing costs which we’re accounting for no seller concessions. We are going to eventually get some depreciation. So we are doing depreciation based on an 85 percent of the purchase price is the value of the building, um, and we’re using the stock market Account to look for the money. We’re assuming that the Property is going up three percent and rent is going up three percent as well. The rent on it is $1539.90 per month and that is to make it break even. And I’ll show you that here. So cash flow monthly cash flow is zero per month at the start. So that’s what that’s showing you. And so it went over, you know, there’s maintenance on the Property, you’re setting aside 10 percent for maintenance, 10 percent for Property management and no HOA Property taxes and insurance are included as well. And a three percent vacancy.
James: And again, we discussed all this yesterday, I’m not going to go over it again, but go, go watch yesterday’s video or load it into your own The Real Estate Financial Planner™ Account and you can go ahead and play around with the numbers yourself. So that is what the Property looks like. Any questions on that, Jassen?
Jassen: And just because we’re doing nomad here, you’re buying three of essentially the same type of Property, but when you buy each of the next houses you’re buying the same house, but whatever it’s at at it’s appreciated price point.
James: That’s right. Yeah. Basically we are modeling the house going up in value a, whether you own it or not. And so when you go buy a next copy of that, the House has already gone up, you know, three percent or four percent or five or six or seven or 10 depending on when you end up buying it. It’s going up three percent a year. But we calculate that monthly. So if you buy it in year in month 16 or something like that. It’s a little bit more than a year’s worth of appreciation in both the Property value and the rent. So you end up doing, you know, slightly higher down payments because the purchase price a little bit higher and you end up getting slightly higher rents. And your mortgage payment’s slightly higher. So it does all the calculations for you correctly depending on when you buy it. So yes. So same Rule as yesterday. About paychecks, basically you are earning $5,500 per month. Your personal expenses, not including the real estate that you own is a $1988.28 and you have an 18.54 percent tax rate. So basically what happens is your savings for the first Property is about $1,100 per month, which is that 20 percent of 5,500.
James: Um, and so that’s how this paycheck Rule works. We’ve covered in previous Scenarios multiple times. So I’m not going to go into detail on that one today. I am going to go into detail on this one cause this is a modified Rule than what, when, what we have been seeing in the past. So this is a Rule that says buy a Property when a certain Account has enough for the down payment. And this Rule runs for the entire Scenario. That’s what the run date start date with being blank means, we’re going to apply it only to this particular Scenario. So you select which Scenario applies to, in this case we’re doing the one we’re working on and then which Property. So we’re buying the five percent, DP stands for down payment, five percent down payment, typical family home, and we’ve asterisked that this is a nomad Property and the nomad Property is a very specific type of Property in our software.
James: And what it means is when you buy the Property, we are assuming you are not renting it out, you were living in that Property when you buy your next nomad Property, the next Property that is designated as a nomad, the previous one then gets rented and the new one becomes your new owner occupant Property where you do not have rent. So by making it a special quote nomad Property in our system, um, it basically says, live there for a year, don’t collect or live there for however long it is until you buy your next nomad one. Um, and we have a hard coded year limit on that. So you can’t buy another nomad Property unless it’s been a full year. And there are exceptions to that Jassen, which you’ve actually accomplished, but for most people, you’re not able to do, um, buy another, Nomad Property for a year. And so it’s hard coded in there that you can’t do it and our software does take that into Account.
James: So basically we’re going to buy this one Property and we’re going to look at the Accounts of the stock market Account at eight percent for the down payment. If the stock market Account at eight percent does not have enough for the down payment, then we’re not going to trigger the Rule and buy the Property. And so basically it’s going to look in this Account and say, Hey, do we have five percent down plus closing costs plus whatever balance we have here, which in this case is zero. So we’re basically saying we don’t need to have a, another buffer. And one of the reasons why we don’t have a buffer here is because you have money in your bonds Accounts so you’re going to have some money set aside in bonds as your cash reserves. And so I’m fine with doing it that way. So it’s going to look in this Account and look for at least $0.
James: Which if you had money here and look for at least that plus your closing costs a plus your down payment. And then it’s telling you a only do this until we have three Properties. Now, Jassen, I want to walk you through how this works, right? Because some people might think so you’re buying three rentals and that’s not really what’s happening. You’re buying three Properties total. So when you buy the first Property, you’re owner occupying you’re living there, when you go to buy the next one, you convert the first one to a rental and you’re living in the second one. So you have two Properties now, one of them’s a rental, one of them you live in when you buy the third Property, you now convert the first two to rentals. One of them was already rental, you’re converting the second one to rental and you’re living in the third. So really this model, what we’re describing in this Scenario is you having a Property that you live in and two rental Properties. Does that make sense?
James: Okay, good. So that’s what this Rule does it basically says, only do this for three Properties. And uh, and this is stuff for cash out refinances, which we’re not going to talk about. I talked about it a little bit yesterday, but we are not using that Rule. You have to have the cash on hand in order to be able to buy these. Okay? So
James: that is the Rule for it. Oops. Let’s go back to this particular Scenario. So we talked about the Account. We talked about the Property. We talked about the two different Rules, the paycheck and personal expenses. We’ve talked about buying a Property when the Account has enough for a down payment. Basically it shows you this, the summary of it all here. Um, and then we’re re-balancing the portfolio such that we have 60 percent stocks and 40 percent in bonds and we’re re-balancing that every single month, just like we did in the previous Scenario where we had 60/40 split.
Jassen: And that’s a real quick recap from, from an earlier recording, you’re, you’re, you’re doing this on the assumption of a, just to keep all the Scenarios, you know, apples to apples comparison. You’re doing a flat rate, eight percent compound annual growth rate on stocks, three percent on bonds.
James: That’s correct. Yep. And appreciation on all the houses is fixed at three percent for the value of the Property going up. Basically it’s keeping pace with the three percent inflation rate, um, and the rent is also going up three percent. And the way to think about the real estate ones, that kind of rent appreciation and the house appreciation is a $200,000 house today. Forty years from now is going to be the equivalent of having a $200,000 house. Then I’m basically, your house is not growing in value any more than inflation is. So even if the house is worth $800,000 at some point in the future, if you divide through by what the inflation rate has been for that period of time, it’s the equivalent of $200,000 in today’s dollars. Does that make sense?
James: And rent’s the same thing. Even though rent may be $2000 or $3000 or $5,000 at some point in the future, if you adjust back for inflation, it will be the equivalent of having, you know, whatever we said it was $1,539 or whatever it was per month in rent on that Property. Okay. Uh, so basically let’s take a look at some Charts and what I will do is let’s add in some of the previous Scenarios so we can kind of compare them all right with you and editors, you want to drill down into just this one?
Jassen: Go for it.
James: Yeah. Let’s kind of add some additional ones. So, um, I think we’ve already covered renting with stocks. We already covered a renting and buying one 20 percent down rental. We’ve already covered renting with 60 40 stocks and bonds and we’ve already covered buy one Property as an owner occupant and 60 40 stocks and bonds, I believe. Is that correct? We do that one as well?
James: Okay. So I’ll get to go ahead and just put all those on there. And the one we’re doing right now is this three, five percent down owner occupants. So if we kinda turn all the other ones off, this is the net worth Chart showing you what the net worth is. Uh, you know, we start off with about $30,000 in net worth and it grows to be about $28.5 million dollars in inflated dollars, uh, over the course of 60 years. So 720 months, 60 years to do that. If you kind of add in some of the other ones, you can see that it is not the greatest as far as net worth goes. Looks like the, um, renting with stocks, just doing 100 percent in stocks, ended up with a greater net worth in this one as does renting with stocks. But buy one 20 percent down payment ends up being a higher net worth number then the ones that we’re doing. Does that surprise you, Jassen? This is not the Scenario where you buy three, five percent down payment Properties and you have 60, 40 stocks and bonds does not give you the highest net worth. Did I lose you?
Jassen: I think philosophically, I wish it wasn’t that way, um, but I, I wouldn’t say I’m surprised, especially when you’re comparing it to a hundred percent stock portfolio and a 20 percent down Property purchased pretty early on.
James: Yeah, I think the difference is the two ones that are beating it are ones that are 100 percent invested in stocks. So you’re not being your return. Your overall return is not being dragged down by something at three percent, you know, 40 percent of your, of your kind of like net worth of between stocks and bonds is in a three percent return thing. And so because of that it is actually doing significantly worse than the ones that are 100 percent invested in stocks.
James: So that’s kind of what we’re seeing as far as net worth goes. So that’s what’s happening there. One thing I’m going to show you is number of Properties owned. So before we kind of talked about the number of Properties and how this works. So basically in the one that we’re doing today, the, the three, five percent down ones we start off buying a Property immediately, so month one we own one Property and basically 12 months later we have enough to buy our next Property.
James: So we buy a second Property um basically in month 13 or whatever this is. And so we basically get another Property there. Then we wait another year and we buy our next Property and then we basically stay at three Properties for the rest of the Scenario. So it takes us a little while to get there. We’ll zoom in a little bit. Uh, it takes us a little while to get there. But in month 13 we buy one and then in month 25 we buy our next Property. So we live in the Property for a year. Then we buy another one live in a Property for a year. Then we buy another one if we add in the other ones, basically the one where we were renting and we bought a 20 percent down payment Property. It took us, oh, 17 months till basically month 18 before we have enough to buy a single 20 percent down payment Property.
James: So what’s interesting about this, Jassen, is we were able to buy two Properties in the same amount of time. It would have taken us a save up to buy a single 20 percent down payment Property. You know why this is right?
Jassen: Well, it’s 20 percent down versus five, right?
James: That’s exactly right. We’re buying two, five percent down Properties in the same period of time that we were able to buy one 20 percent that Property. And remember for the 20 percent down, we basically only bought one and so it’s still one for that whole time. Does that make sense?
James: And since we’re renting in this other one, basically we own zero Properties we’re uh, we’re buying one owner occupant Property with this one. That’s why it shows up and stays at one this whole time. And then this last one we’re renting. So it’s at zero as well on the bottom.
James: So this now shows you how many Properties you own comparing the, the four or five different Scenarios, a five Scenarios or so that were looked at so far. Does that make sense?
James: Okay, cool. Um, and then this other one, all the paychecks and stuff like that, they should all be identical because we’re not modifying any of that stuff. Um, we can look at personal expenses including and excluding real estate, the personal expenses where you are excluding real estate. Either you are renting and your personal expenses are higher, which includes rents or it’s lower because we’re assuming that your, your living expenses for the real estate is coming out somewhere else. When we add in the personal expenses, including real estate, you can see that they’re here. Now, there is a couple of interesting things that are happening on this Chart when you have loans being paid off. Um, and you’ll see if we turn off the ones that are renting.
James: Oops. And we’ll leave these two on here.
James: So in one Scenario where we bought just the single five percent down payment Property and we were living there for that whole time. That’s this one here. We basically have the Property our expenses, we get the first month of mortgage payment free. We’ve talked about that in previous webinars. So go listen to that as to why you get the first month where you do not have a mortgage payment and we’ll uh, we’ll skip that for today. But then your mortgage payment increases its normal until the point where you pay off your mortgage here and it drops down. But why is the one where you have three, five percent down payments? Why is that farther out than the one where you did the other one, even though you bought the Property in month one? Jassen, do you know why that happens?
Jassen: The month how many months differences?
James: Well, it’s probably about 25 months. Twenty four months.
Jassen: Well it’s because you have a staggered start.
James: Yeah. So in this case, because you’re, you’re living in the third Property, the expenses for your personal living expenses actually stays longer than it does when you’re living in the first Property you bought. So because you actually bought two, we bought three Properties total two of them you converted to rentals by the time your third one pays off it’s mortgage. It’s about two years later than the original kind of plan. And that’s what this is showing. It’s those two differences there. In both cases though, you basically had a month free of mortgage payment because we pay a mortgage payments in arrears. Right?
James: So that’s what’s going on there. Um, this is interesting. Total cash out refinance equity. I’m going to do a just Total Equity instead of the cash out or the sell with agent one. And we can see some interesting things. So when we’re renting Properties, we don’t have any equity because we don’t own any Properties, but there are two Scenarios where we have equity in Properties and you can see where you buy one Property. The red line on the bottom shows you how much equity you have in a single Property. The line on top where you’re buying three, five percent down Properties shows you the sum of all the equity you have in the three Properties. And so the difference between a, and you know, year 60 is a with one of them, you have $1.175 million and when you have three of them, you have $3.5 million.
James: So over $2.4 million dollars more in equity by just owning those additional two Properties.
James: Yeah, it’s pretty significant.
Jassen: That. Well, that’s the power of have leveraged a compounding.
James: That’s right. Yep, that’s right. Let’s take a look at total monthly rents. So when we’re renting, we’re not going to have rents that were collecting this one. We do. So you have a 20 percent down payment Property. Uh, this one, we’re not going to have any because we, uh, we are only own one Property that we’re living in. What, where you have a one slash 20 percent down payment, rental Property. Here’s the rents we’re getting. Uh, the yellow line is a rental we’re getting on that Property. You can see that over time. But because we have two rentals with the three, five percent down payment Scenario that we’re talking about, you start off with rent here for the first one, then rent increases again when you buy your second one, and then it grows when the second one, a kind of over time such that at the end of the Scenario in year 60, your rent per month that you’re collecting on all your rentals is a $17,000 when you have two rentals or $8,917 when you only have one.
James: So this kind of contributes towards your retirement because the rents you’re getting in here, the cash flow you’re getting from your rents, contributes toward hitting that target monthly retirement number.
James: Does that make sense?
James: Okay. So let’s take a look at these Goals. Is there anything else you want to look at what these Properties you want to look at? Cash flow?
Uh, I always like looking at true cash flow. I think it’s one of the better metrics you have on here personally.
James: So let’s take a look at that. So when we’re renting with stocks, we don’t have anything there when we’re renting with stocks we don’t have anything there. Uh, we’ll have rent for that one. We won’t have rent for this one. So here are the two ones where we actually have cash flow coming in for Properties. Now I want to point out a couple of things. Number one is I want to draw your attention that this is the zero line right here. Kind of like on this thing. So you’ll notice when we’re buying these other Properties with five percent down, we actually have negative cash flow.
James: Okay. So you have negative cash flow on your Properties here where you have this other one, you have positive cash flow. When you put 20 percent down you’re at positive cash flow from, from the very beginning, you, you don’t become positive with your cash flow until I don’t know what month is this? Sixty or so. So five years in. It takes you about five years to actually get positive cash flow with your rental Properties because you’re buying these Properties, putting five percent down, buying another one, putting five percent down buying another one putting 5 percent you actually don’t have positive cash flow on these until very later on.
Jassen: So you need to be in a position where you can absorb the negative cash flow. And I think this is also an important place to talk about the uh, uh, you talk about it as financing your 20 percent down payment.
James: Yeah. So I was just going to comment on that. So we’ve talked about this model. We’re saying we are saving 20 percent of our monthly paycheck in this case, $1,100 a month. And you know, when we’re investing in stocks and bonds, we’re basically putting it in there. But when you’re doing real estate, you could say I am setting aside part of the amount that I’m saving to invest in what I would otherwise have put down on a down payment. So you can kind of like finance your down payment over time. We can see it here. If we’d put 20 percent down, we’d have positive cash flow, the yellow line on top shows that we have positive from the very beginning, but since we only put down five percent moved into the Property and we have some slight negative cash flow on this Property, we’re really saying we’re financing this negative cash flow for a period of time and you could see that you finance it, you find that you finance it until finally you’re not really financing anymore.
James: It’s actually broken zero and you’re starting to get a return on it. So you could go and look at this period of time, basically months 60 through month 12, this negative cash flow period as the amount you needed to finance instead of having to come up with an additional $15,000 down.
James: Actually it’s more than that. It’s more because it’s two of them. So instead of coming up with $15,000 down, it’s coming up with a $30,000. Then you’re coming up with. Well, let me think about this. Let’s see, five percent of 200,000 is $10,000 and so it’s $30,000 times two, so it’s $60,000. So instead of having to come up with $60,000 as additional down payment in order to have a full 20 percent down, instead of the five percent down on two rental Properties, basically you would need $60,000 more. 30,000 on each, um, in order to do down payments. So instead of having to come up with 60 grand, we’re basically saying I’m going to pay $100 a month, negative for about 12 months and about $150 negative for about 12 months and then about 113 negative for 12 months and then about $60 negative for 12 months and then it’s positive. So just doing some really rough math in our head, Jassen. So about 12 months of negative 100, that’s about $1,200. And then another $1,800. What’s that? 3,000. And then another 1200. So that’s 4,200 and then another 600. What is that, 4,800? So let’s call it all told about $5,000 negative. So let me ask you this question, Jassen, would you rather put up $60,000 today or would you rather put up $5,000 paid monthly over the next five years in order to acquire two rental Properties?
Jassen: I think I’d rather finance it.
James: Yeah. And they’re,
Jassen: Especially with rates these days.
James: I mean, there is no wrong answer, you know, some people will be like, I would never voluntarily take on buying a Property that has negative cash flow and that makes sense to me. Uh, but there are other people that are like, I’d rather actually pay a negative $100 a month for the next or negative 100 to 150 depending on what it is for the next five years until rents kind of catch up. And uh, you know, I’m at the point where it’s positive and then I’m willing to do that for five years or more in order to have $5,000 negative over that time period instead of having to wait to come up with $60,000 more.
James: And so it’s just a personal choice.
Jassen: There’s something to be said about time in the market and, and you know, Properties typically just go up in value. I mean, they do go down occasionally, but, um, you know, in order to capture the return, you got to be in the market.
James: Yeah. And so the cash flow part of the return is one of four areas of return. You have appreciation, the tendency for Property values to go up over time, you have depreciation, the tax benefits. And this total true cash flow does take into Account the cash flow from depreciation. So that is already included in this one. And then you have cash flow, which we talked about, and then you have debt pay down. So you’re paying down on the loan each month that you’re doing this. So when you combine all those returns, um, you know, the negative cash flow portion of it is very small compared to everything else,
James: In this case, there are some cases where if your negative, cash flow is really severe and that could be a significant part of it, but in this case it’s really small. Okay. So we talked about cash flow. Let’s talk about, uh, let’s see here. Let’s talk about that. Let’s jump right to the Goals. You okay with that?
Jassen: That works. That’s, that’s, that’s the, that’s the gold.
James: That is gold right there. So I’m going to go ahead and show you the Goals and I will reveal them over time so you can kind of see them. So basically this is when the first Scenario we did a couple days ago renting where you have 60, 40 stocks and bonds and it takes you a while in order to get to your return. It’s like month 600, which is a 50 years in or something like that. When we add in the next one, it’s a little bit shorter. That’s basically buying a home owner occupant and doing 60/40 with your stocks and bonds than we did renting and doing 100 percent stocks. That’s a bit faster than it’s a looks like, I don’t know, month 457 or so that we’re able to retire. Then renting with stocks and buy one 20 percent down payment Property that’s even faster. That looks like month 393 or something. And then here it is, if you do nomad three times, two rental Properties, one where you’re living in it and you do 60/40 in stocks and bonds, you end up being even faster than previously with a about Oh, 372. And here’s the table showing you those numbers. So basically anywhere from 50 years, nine months for the worst case Scenario in order to get to the point where you’re able to retire, where the income you have coming in from your rentals and the safe withdrawal rate on your stocks and bonds investments, you’re able to support $4,400 a month, inflation adjusted and be able to retire. So 50 years for the worst case to 31 years, where if you do nomad three times and you’re in 60 40 stocks and bonds.
Jassen: That’s crazy.
James: What do you think about that. Yeah. So basically you’re able to retire. Yeah. You’re able to retire almost 20 years earlier if you basically moved twice. You know, you live in the first Property, you move into the second one, you live in the second one, you move into the third one and you convert the first two to write those. You keep the rentals and then your what I would consider to be pretty conservative. Sixty percent stocks, 40 percent in bonds for the rest of your life. Basically. You can retire at 31 years later on that model.
Jassen: It’s amazing.
James: Yeah. So if you started at age, I don’t know, 22, then you’re retiring at, what does that 53?
James: Fifty three. Yeah. So that’s where we are. So uh, Jassen, how are we doing on time?
Jassen: We’ve got about 20 minutes.
James: Okay, good. Let’s jump right into the next Scenario, which is a five percent down payment owner occupant, but just doing stocks. Okay. So this one is really similar in my, in my opinion, to a five percent down owner occupant, but 60/ 40 stocks and bonds. So what we’re really asking here is what difference does actually investing in the one five percent down owner occupant Property where we do 100 percent stocks versus doing 60/40 in stocks and bonds. So really these are the two that we’re comparing, right? Buying the owner occupied Property, or then do in 60, 40 stocks and bonds or just 100 percent stocks. So what I’m going to do, I’m going to jump right into because you know how we set this one up, right? Basically it has the same Accounts as the other ones, except we’re not re-balancing them to be 60/40 stocks and bonds. We’re doing everything in stocks.
Jassen: I just want to point out this is, this is the classic, uh, real estate or I’m sure the, the classic, uh, asset allocation problem for the typical person that does buy a home and they’re, they’re looking at asset allocation models for their, their 401k stock portfolio, et cetera. Um, and the, the, I don’t want to call it risk, but the, what happens when you go too conservative?
James: Yeah. If you just 60/40 stocks, bonds.
James: Yeah. I think that’s true. So let’s see what happens if you do, you know, I’m being as aggressive as I can and investing in stocks, getting an eight percent return on average, uh, with the stock market compared to doing the other one where we’re doing 60/40. So what I’m going to go do is, I’m just going to add the 60/40, so five percent down payment owner occupant with 60/40 stocks to bonds. I’m just going to look at, excuse me, at those two Charts side by side so that we can see them. So this is the difference in net worth between those two. In both cases, you’re buying a owner occupant Property, the same exact owner occupant Property I should point out with five percent down in the very first month. The only difference is where you invest your savings, your 20 percent savings, um, after that, one of them is 60/40 stocks, bonds, the other one’s 100 percent stocks.
James: And here’s the difference. Basically in year 60, month 720, the difference is $20,000,000, $20,000,000. Now that’s in inflated dollars. What is it in inflation adjusted inflation adjusted dollars. It is about $3.3 million dollars.
Jassen: It’s almost double.
James: Yeah. So almost double. I agree with you. Yeah. So it’s almost double doing that instead of having to have, you know, part of your return getting three percent, the bond portion. Now you’re saying, hey, my entire return is going to be eight percent. That’s what the difference is. You’d expect it to be almost double. Yeah. Okay. So those are the differences. Um, I’m not going to show you the other kind of Charts because they are what you’d expect, right? Basically you could see the difference there. I am going to go to the Goals though and show you the difference in Goals on these. And then we’ll add in the additional ones to show you this though, but just looking at these two, how much faster can you retire if you’re much more aggressive in investing a hundred percent stocks versus doing the 60, 40 split. So it turns out in the original model it was 43 years, the 60/40 split, one buying just an owner occupied Property. So if you’re 43 years in two months to be able to retire in the model where you do all stocks, it’s 35 years, which is crazy.
Jassen: It’s about what you would expect though. I mean that’s, that’s,
James: You mean it’s probably to expect it would set you up to be at like a retirement age.
James: So this is like if you start this at, you know, 22 or something like that, you’re at 57 or so when you’re ready to retire. Not unreasonable.
James: Let’s show some of the other ones though. So renting with 60/40 stocks and bonds, we add that one in there. What was the other ones we had renting with stocks? We do that one. Let’s do the buy the 20 percent down Property. And what was the last one we did? We did three, five percent down 60/40 stocks and bonds. So of these, which is the best one, turns out the lowest number on here is buying the three, five percent down payment owner occupants and investing 60, 40 in stocks and bonds. That is the shortest path toward your financial independence, retire early plan of the ones we’ve covered so far, and we will see that, you know, as we do the remaining, I don’t know six or so Scenarios that we may see these get better, that we can retire earlier if we’re a little bit more aggressive.
Jassen: Go back up to the net worth or. Just scroll back up to the Chart.
James: The Goal Chart?
Jassen: Yeah. Because here’s, here’s what’s interesting about this, is that note that over the long haul, the one that gets you to your safe withdrawal rate number, the fastest, the one that gets you to that $4,400 a month, a target retirement income the fastest is not the one that results in the highest long-term net worth.
That’s true. Yeah. This one right here. Yeah. The one that gets you the highest long term looks like the five percent down payment and then doing everything in stocks.
Jassen: Right. Um, the, the, the one that yields the highest overall long-term net worth is actually in third place among the sixth in terms of getting you to your, uh, the monthly nut that you need in order to support yourself in retirement.
Jassen: That’s the, that’s the most interesting thing to me about how you have plotted this particular Chart.
Yeah. You know, that’s interesting. I’m trying to think about this. I think one of the reasons why that’s true. Let me think before I say this. Here’s my suspicion. One of the reasons why I think that’s true is early on, when you own the real estate, this is over a 60 year time period early on when you own real estate though, the return you’re getting on the money you invested in real estate is incredible. Partially because you’re putting five percent down on these Properties. So they’re, they’re highly leveraged. They, your debt pay down portion of your return alone is over 10 percent. And the stock market return is only eight percent. Okay? Um, so like the, when I say the debt pay down portion, the amount that goes toward paying down your principal from your mortgage payment gives you a return of over 10 percent per year. So that’s that by itself, not including appreciation of the Property value going up, uh, the, the, uh, tax benefits from depreciation or the cash flow, all three of those are not even included in that which give you well in excess of 30 percent return on your money.
James: So early on, that’s true, but as soon as that loan gets paid off, you basically have a much lower return on that, that equity, uh, where the equity, if you had taken that money and moved it into the stock market, you would have been getting an eight percent on it. Now it may only be getting you a six percent cap rate. There’s no debt pay down return, there’s some appreciation return. But the appreciation return doesn’t really come into play on this Goal Chart because we don’t actually count your net worth in your real estate as a safe withdrawal percentage. Nor does it generate cash flow.
James: So those two things don’t count for the appreciation part of return, so you’re not seeing that anymore, so really that makes it a lower return, but the other ones, the stock market one is an eight percent return and that’s actually doing better.
Jassen: But what really matters in achieving financial independence and being able to retire early is your monthly cash available to pay living expenses.
James: That’s right. That’s where the cash flow cash flow from your rentals and the amount that you’re willing to do a safe withdrawal rate from your stocks and your bonds Accounts basically is what we’re using and we’re using that 3.25 percent per year number. When you add up both of those, those are contributing to whether or not you achieve this particular Goal.
Jassen: Yeah. So I’m not surprised at all just given the fact that that cash flow is more important than net worth. I’m not surprised at all that the two Scenarios that beat renting 100 percent stocks, um, uh, and, and the other Scenarios is the two where you’ve got rental Properties. That’s not a surprise to me at all.
James: Yeah. Yeah. I think that’s right, so it’s, it’s interesting to see this, that you pointed it our, right, that these are growing faster because they have stocks, they’re 100 percent in stocks. Um, and uh, the other one gets there first but doesn’t grow as fast later on. Now if you see these are, this is where running new Scenarios become super interesting to me. What we should do is we should run lots of variations on these Scenarios where we, Number One, really leverage the Properties at some point in the future. Don’t let them get paid off, but maybe go and put, you know, 50 percent loans on the Properties later and take that 50 percent out and put it in the stock market and evaluate what that looks like and whether or not we’re willing to do it. Um, and, and kind of see how those things play out for getting to things or you know, another alternative is going the other direction and say, hey, listen, instead of investing this money in the stock market, what if I aggressively pay off the Properties so that they become free and clear earlier? And I have all of the cash flow coming in from those things earlier. Does that actually improve our retirement or not?
James: Does that get us to our retirement Goal. Um, and so you can look at,
Jassen: I’d love, I’d love to compare a rapid accelerated payoff versus maximizing stock market. Allocation, uh, which one works works out for the better.
James: Yeah. I think we could definitely go and model those and we have a bunch of these things kind of scheduled to model. But uh, it’s just kind of gives you some interesting places to start from with this. And the calculator can do all these calculations. You could basically, you know, aggressively you can add a Rule to aggressively pay off mortgages, either the highest interest rate or the highest balance or the lowest balance or the lowest interest rate. First. You can kinda set up which ones to pay off and in which order you can go ahead and do, you know, instead of doing stock market stuff by another couple houses or you know, you can do all sorts of crazy stuff to model this. And, and so we’re, we’re starting with 12 Scenarios that we’ve kind of picked arbitrarily of common situations for people and we’re modeling those and explaining those to you, but really the power is in you being able to copy it to your own Account, play with your own assumptions and say, hey, listen, this is really similar to what I’m doing. I own two rental Properties. Should I buy a third? Or should I invest in stocks or should I pay off the two I have, or what should I do? And being able to see the results and model that.
Jassen: Absolutely. I also think it’s a, we’ve talked about this a couple times already, but I do think it’s important to remind everybody that we’re, we’re keeping a set static, a pile of assumptions here in order to make apples to apples comparisons. Uh, so for example, the eight percent and the three percent for stocks and bonds, uh, the software is fully capable of modeling in, um, stock market corrections. Over certain intervals that you can preset or kind of a random interval and run Monte Carlo calculations showing you the spectrum of particular endpoints and ability to retire early, um, based on variable variability of the assumptions, but in order to directly real reasonably compare 12 different financial planning Scenarios, we’ve kept things like that. We’re not modeling for market corrections and things like that.
James: Yeah. Yeah. And I think that we will at some point now that may be two or three or four or five down the road or maybe even book ten down the road, but there’s so much stuff that we can share with you that we’re trying to share basics first and then we will become increasingly more complicated and increasingly more nuanced as we grow.
Jassen: And I think, I think the next step, and this just kind of thinking off the cuff, but we take, you know, a two or four of these 12 Scenarios. And then we also, um, and, and the variable that we throw in is we’ve, we do a variable safe withdrawal rate to illustrate the impact of SWR. On the numbers, uh, and then also run those same two or four Scenarios, but show a back, tested a volatility within the stock market and just show the, the impact of, of market corrections, uh, and, and uh, you know, the bull and bear market cycles and how that affects the overall portfolio, especially in comparison to real estate.
James: I definitely agree we should do those tests. I’m not sure that’s the next step. I almost think we should like add in a single market correction at a fixed period in time for all of the Scenarios and rerun them and show like, hey, how big of an impact just having. Yeah, having an impact does have, does having the market drop 20 percent 10 years in the future on every single one of these Scenarios. So the, they’re all exactly the same market correction. How does each one change? Is it better to have been in stocks? Is it better to have been in real estate and we can have the real estate correction to. I mean, you could have a, you know, 10 to 20 percent decline in real estate values and in rents and which ones still works out better for you? Um, I, I think we could do like lots of intermediate steps to show this and then of course we could go to freaky town and have it be, you know, variable rate returns on appreciation, a rent appreciation on stock market, return on bonds, return with random market corrections at random intervals and run Monte Carlos and show kind of like what the range of values might be on all these different things. So we can go to total freaky town. But I think before we get too crazy, I think like walking before we start sprinting might be a good idea for other folks, other. Otherwise they’ll be like, what are you talking about?
Jassen: It’s just interesting to think about what we can do with this because I know, uh, the viewers don’t, but you and I know that there’s so much more that, you know, we can model here that the possibilities just get insane.
James: Yes, I agree. Yeah.
Jassen: So anything else on this, on these two Scenarios that we should cover?
James: I was just going to say, so we’ve covered those two. Tomorrow. Um, I think we’re going to cover buying two five percent down nomad Properties and investing in stocks and then we’re going to go to freaky town tomorrow. We’re going to do, excuse me, 10, five percent down, nomad Properties, but not doing any stocks or bonds. So this is the person that says, I don’t believe in the stock market. I don’t believe in investing in bonds. I’m just going to buy nine rental Properties and live in one, five percent down payment Property and I’m not going to invest anything in stock and bonds. And how quickly does that get you to retirement? So that’s going to be a super interesting one tomorrow?
Jassen: And you don’t know any. You absolutely don’t know a single person that has that mentality, right?
James: I know a lot of people that have that mentality. I’m a real estate broker here in northern Colorado. There’s a lot of people that are like no stocks for me. I hate the stocks things.
p>Jassen: So I have some, but I am very, very, very stock averse. Um, and it’s not a uh, I’m, I’m not alone in that. There’s quite a few people.
Jassen: So very interesting comparison. Uh, let’s go ahead and wrap up here. James. Um really appreciate you taking the time out of your morning to do this and look forward to the next one.
James: Yeah, I look forward to it as well. And if anybody wants to kind of like play along with their own Account and mess around with the numbers on any of these Scenarios that we’ve covered, feel free to go create a free Account on The Real Estate Financial Planner™.com. And then, um, if you go to the blog post for any of these particular Scenarios, you can click on the link to copy that into your Account where you can then modify the assumptions and play around with it yourself and rerun it to see what the, what the new numbers look like.
Jassen: And how, how many, how many Scenarios can have free Account have?
James: I honestly don’t know. It’s not that it’s not that large. So the free Accounts, I think they can either do one or two, um, but the, but you can, you can go and delete the old Account and then add, delete the old Scenario and add a new one so it’s not like you’re limited and you can only do it once and then you’re done. It’s just we don’t allow you to save, you know, 30 or 50 or 100 of these things in your The Real Estate Financial Planner™ all at the same time. That’s going to be a Premium feature at some point.
Jassen: Awesome. Okay. Sounds good.
James: Awesome. Well, I do appreciate it. Let’s plan on doing the next two tomorrow and, uh, I appreciate everybody for coming on. Thanks so much.