In the previous two scenarios we discussion what owning just two Nomad properties looked like. Now, in the next two scenarios we will discuss how buying a third Nomad property will ultimately impact your cash flow and net worth.
In our first scenario with two Nomad properties, we started with $40,000 in our stock market account and were not earning any inflation based raises from our $5,000 per month job income for our entire family. We’re back to those same assumptions now for buying our third Nomad property.
Buying 3 Nomad Properties
So, how quickly can we buy 3 Nomad properties? Well, like in previous scenarios, we buy the first property in the very first month. We move in and live there for a year. Since we are starting with $40,000 in our stock brokerage account, we have enough for that initial 3% down payment. And, even at month 13, we still have enough in our stock brokerage account for a second 3% down payment.
That allows us to buy our second Nomad property to move into in month 13. We keep the first Nomad property we purchased and convert it to our first rental.
After living in our second Nomad property for a year, we still have enough in our stock brokerage account to buy our third Nomad property with a 3% down payment. Again, we will convert the property we are moving out of into a rental property.
By month 25, we have acquired three Nomad properties: two rentals that we once lived in and a new owner occupant property that we will live in for the rest of the scenario.
Here’s a chart showing the number of homes that we owned and when we acquired them.
Stock Account Balance
The following chart summarizes our stock market account balance showing the immediate 3% down payment decline from $40,000 to purchase the first Nomad property in month 1, and the 3% down payment in months 13 and 25. You can also see that from the decline in account balance after month 25 that we are hitting our savings to help support our properties.
If we look over the first 11 years of owning the properties, you can see that with these particular properties we actually would need to either start with more than $40,000 in the stock market or add additional money from outside the model to be able to support them.
Assumptions Causing The Need for More Capital
The need for more and/or extra capital for your third Nomad property is based on several assumptions.
We are using a 3% down payment for all three purchases. If we had used a full 20% down payment, we would not have negative True Cash Flow™ and therefore we would not need to start with more than $40,000 and/or add more money to the scenario from external sources.
We are using a property with mediocre rental economics. While this is a brand new property in Severance, Colorado and I believe it would be a good long-term rental, it does not have amazing cash flow characteristics. If you insisted on finding a property with better price-to-rent ratios, you can reduce, or in some cases completely eliminate, negative cash flow. We are using a nicer property in a nicer neighborhood because you need to live in the property for at least a year as a requirement of getting owner-occupant 3% down payment loans before converting it to a rental.
We are assuming you are not getting an inflation-based raises from your job. That means that as your property taxes, property insurance, and other living expenses increase over time from inflation, your income is not enough to keep up with these increases and you’re not able to pay some or all of these increased expenses from your paycheck. This is an artificial construct of our scenario assumptions and, I do not believe, to be a true reflection of what is likely to happen. You’re not going to earn $15 per hour for 40 years; you’re very likely to take higher paying job opportunities and/or get, at least, cost-of-living pay raises. These raises will help offset how much you need to dip into your savings which reduces how much you will need to start investing and/or how much you will need to add to the scenario from external sources.
We assume you purchased the three properties as quickly as possible. Buying the properties as quickly as possible does have the benefit of getting you on the right side of having appreciating assets as soon as possible and starting to pay off your mortgages with the help of your tenants. However, it also means you’re front loading your negative cash flow with these particular properties. If you had waited until your first Nomad property that you converted to a rental had positive cash flow before acquiring your third Nomad property, you would not be feeding two negative cash flowing properties at the same time. You’d just be feeding your third Nomad property. This would also reduce the need to start with more than $40,000 in your stock market account and/or to add additional money to the scenario.
We assume you’re not saving any money from your paycheck. In this scenario, we also assume that you are spending every penny of your income on your personal expenses at the very beginning. In fact, as some of your expenses increase like property taxes and home owner’s insurance you end up have expenses that exceed your income. Since we have assumed you are not getting raises, you need to dip into savings in your stock market brokerage account to be able to pay for these.
With those assumptions, however, you will need more than the $40,000 you started with in the stock market and/or to add more to the scenario from external sources. When we do the next scenario, we will reduce the amount you start with from $40,000 to $10,000, give you inflation-based raises to help offset rising personal expenses, save some money from each paycheck, and delay buying properties until we’ve saved enough for a down payment plus a small cash buffer. In other words, I will show you to acquire 3 Nomad properties starting with just $10,000 and without adding thousands of dollars more to the scenario.
Let’s get back to this scenario now.
How does the cash flow from buying 3 Nomad properties with 2 of them as rentals look from a cash flow perspective?
I mentioned above that these are not exceptionally good rental properties economics, but even with these two rental properties you can see in the chart below that we only need to feed the two properties from month 13 when we convert the first Nomad property to a rental until month 97.
If we had put a full 20% down payment down on each of these properties instead of the 3% down payment we would not have this negative cash flow. In other words, if put down about $60,000 on each of the two rentals, that’s over $120,000 total, we would not have the negative cash flow. Instead, we put down 3% on each, about $10,000 each or $20,000 total between the two of them. So, we put down $100,000 less and instead of putting down $100,000 we needed to cover some negative cash flow between month 13 and month 97. Doing some really rough math, instead of coming up with an extra $100,000 for down payments (20% on both instead of 3% on both), we had to put out about $30,000 in negative cash flow over 7 years. While this is a personal decision to make, I think many investors—even those with the extra $100,000 sitting in a bank account—would opt to put out the $30,000 in negative cash flow instead of putting $100,000 into the investments.
This, in effect, allows you to internally finance part of your down payment over time. Instead of putting in an additional $100,000 you’re financing that $100,000 by paying $30,000 over 7 years.
If we look past the first 10 years, you can see the cash flow improves and becomes more positive through the very end in year 40. I am showing a chart of what True Cash Flow™ from buying 3 Nomad properties (2 of them rentals) looks like because in a moment I will compare it to the cash flow from the previous two scenarios so you can see the difference. Here’s just the cash flow from this scenario.
I covered the negative cash flow that happens in the early years, but I did want to mention what is going on with the cash flow around month 330 through month 372. There are separate phenomena happening on the charts during those times for both of your rentals: the end of the tax benefits of depreciation and paying off mortgages.
When we have a rental property we get to depreciate the cost of the building (not the land) over 27.5 years. After the 27.5 year point, we can no longer depreciate the building and we lose the tax benefits of depreciation. So, if you look at month 330 in the chart above, you will notice that we lose depreciation on the first rental property and cash flow gets a little worse for that property in that month and beyond. We lose the tax benefits of depreciation on our second rental property 12 months later; cash flow for that second rental property gets a little more for that property in that month and beyond.
If you are no longer making a mortgage payment on a property cash flow improves. That’s what happens in month 361 for the first property. Do you know what the amazing thing about 30 year mortgages are? They go away after 30 years! So, after we have made payments for 360 months, that’s 30 years, you end up with a rental property that no longer has a mortgage at all and your cash flow on that property improves starting in month 361. The same thing happens for the second rental property; your mortgage is paid off 360 months after you purchase it with a 30 year mortgage so that one gets paid off in month 372 and you have significantly improved cash flow in month 373.
Comparing Cash Flow To 2 Nomad Properties
How does cash flow when buying 3 Nomad properties (2 as rentals) compare to cash flow when buying 2 Nomad properties (1 as rental)? Let’s look at a chart showing the two previous scenarios we ran with two Nomad properties and see how it compares to this scenario.
Looking at just the first 10 years, cash flow is less negative when you’re only buying 2 Nomad properties with 1 of them as a rental. And, you’d expect this to be true. However, as time passes and you have two rentals with growing positive cash flows, you’d expect that buying 3 Nomad properties with 2 of them as rentals would have more overall cash flow than just buying 2 Nomad properties and having 1 as a rental. And, you would be correct assuming that as shown in the chart below.
Stock Market Account Balances
How does the stock market account balance compare to previous scenarios? Great question. First, let’s look at the stock market account balance for just this scenario of buying 3 Nomad properties and then we will add in the stock market account balances for the previous 2 scenarios where we just bought 2 Nomad properties.
Now, adding in the previous two scenarios of buying just two Nomad properties.
The chart shows the scenario where we had you contributing savings from your income to your stock market account as you receive inflation-based raises has you finish with the highest account balance. And that makes sense: the other two scenarios have you not contributing anything additional to the stock market account at all. In the other two scenarios you don’t get raises and so you’re not contributing anything more than positive cash flow from the properties to the stock market account.
I will point out that there is a weird comparison going on with this chart since with the current scenario of buying 3 Nomad properties we actually had to come up with an additional $20,000 or so for negative cash flow from outside the scenario. That makes it hard to fairly compare it to the other scenarios so far that did not require an additional $20,000 influx of capital. In the next scenario that does not require an additional investment to cover negative cash flow, it is a better apples-to-apples comparison of the previous scenarios.
Back to comparing total account balances, here is a chart showing the account balances for the 3 scenarios at month 480.
Cash flow is one thing, stock market account balances are another thing, but overall net worth is a third thing entirely. How does your overall net worth look for this scenario alone and then how does it compare to your overall net worth for the previous two scenarios we ran when only buying 2 Nomad properties? First, here’s a chart of net worth for this scenario of buying 3 Nomad properties only.
Just over $5 million dollars. Not bad; not bad at all.
How does it compare to the previous scenarios where we just bought 2 Nomad properties (1 as rental and 1 we lived in)?
Overall having an extra property definitely helps your net worth (and cash flow), but saving that extra income from your paychecks has a very big impact as you can see in the chart below showing the relative balances in month 480.
Buying 3 Nomad Properties Starting with $10,000
Next let’s look at a fourth scenario where we buy 3 Nomad properties with 2 as rentals but this time let’s save money from our paychecks instead of starting with $40,000 in our stock market account.
- Your Third Nomad Property
- Just Keeping Two Nomad Properties
- Just Two Nomad Properties with Inflation Adjusted Wages and Expenses
- Buying Three Nomad Properties with Inflation Adjusted Wages and Expenses
- Full Nomad Instead of Just 3 Nomad Properties
- Preparing For Tenant Turn-Over
- Preparing For Emergencies
- Conclusion for Your Third Nomad Property