Peter Considers 20% Down Payments Amidst Variable Stock Market, Price, Rent and Mortgage Interest Rates

In last week's Real Estate Investor Story, we met Peter from Denver.

Peter was contemplating whether to save up for 20% down payments or 25% down payments when buying rental properties. He also considered utilizing the Nomad™ strategy and putting 5% down.

This week we revisit Peter and address some of our overly-simplistic assumptions from last week.

Last week, we had the following assumptions (which we all know just aren't true):

  • The stock market always went up 8% per year. False.
  • Property values always went up 2% per year. False.
  • Rents always went up 2% per year. False.
  • Mortgage interest rates were always at all-time lows (like they are at the time I am writing this). False.

This week, we added 4 new  Rules to add some more realistic variability to the assumptions we had last week.

  • The stock market now varies between -44.33% and 65.47% per year with a standard deviation of 18.30 from the mean. This was based on historical stock market performance data of VTSMX from Simba's spreadsheet on the Bogleheads website.
  • Property appreciation rates vary from -10% per year to 14% year with a standard deviation from the mean of 4 and an average of about 2% per year.
  • Rent appreciation rates are independent of property appreciation rates, but use the same range of values.
  • Mortgage interest rates can increase or decrease by as much as .5%. Of course, we cap the lowest interest rates for buying a 20% down payment property to be 2.5% (which I think is really low). We set a cap at 18%… which might seem high until you realize we have actually seen interest rates at that level.

By adding in this variability to the stock market rate of return, property appreciation, rent appreciation and mortgage interest rates we can more realistically model what might happen if Peter starts down the path of saving up to invest in rental properties.

Since these returns are variable though, we shouldn't just run it once. We will want to run this  Scenario a number of times and see what the best cases and worst cases are.

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During the recording above, I also showed the summarized results of running this  Scenario 100 times using  Monte Carlo.

Here are two charts showing Peter's ability to achieve his goal of financial independence.

And, here's a small sampling of other charts (some more interesting than others).

Use the button below to copy the  Scenario to your own Real Estate Financial Planner™ software account to modify any of the assumptions or to drill down into any of the 100+  Charts.

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10 20% Down Payment Rentals - Variable with 2  Accounts, 1 Property, 7 Rules, 2 Goals
Or, read the detailed, computer-generated, narrated  Blueprint.

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