In the previous scenario we bought 3 Nomad properties by starting with $40,000 in our stock market brokerage account. In that scenario we assumed we were earning $5,000 per month, but that we did not receive inflation based raises and our personal expenses (except for housing) did not increase with inflation.
In this scenario, like in the scenario were we bought two Nomad properties with inflation adjusted wages and expenses, we are not going to start with $40,000 in our stock market brokerage account. Instead, we are going to start with just $10,000 in our stock market account.
However, in this scenario we will receive raises in our monthly paycheck at a rate of 3% per year. Three percent per year is what we are assuming inflation is for the entire scenario. Plus, our personal expenses are increasing with inflation at the same 3% per year.
Speed of Acquisition
Starting with just $10,000 in our stock market account, instead of being able to buy our properties in months 1, 13 and 25… we will need to wait until we have saved up enough money for down payments. This will slow down our speed of acquisition of the three Nomad properties. Here’s a chart comparing how quickly we acquired the three properties in the last scenario to this scenario where we have to save money for our down payments.
As you can see in the chart above, we are still able to buy our first Nomad property to move into in month 1. But, it takes us until month 47 to save enough to buy our second Nomad property to move into and convert the previous one we were living in to a rental property.
Then, with 2 Nomad properties, it takes until month 90 for us to save enough money to buy our third Nomad property to live in and convert the second Nomad property to a rental.
Difference In Savings
In the last scenario where we were not receiving any inflation based raises, we had to tap into our stock market account savings to cover the increasing expenses. So the amount we were saving each month was actually negative… meaning our expenses are greater than our income. However, in this scenario, we have a wage that does increase with inflation and we are assuming that we are saving $160 per month just after we bought our first Nomad property. With an increasing wage and starting with $160, we see the amount we’re saving going up each month even though our personal living expenses are also increasing.
Here’s a chart comparing how much we were saving in the previous scenario to how much we are saving in this scenario.
You can see in the first 100 months we purchase the 3 Nomad properties for each scenario. Later, you can see when we are able to pay off the third Nomad property that we are living in. At that point our cost to live goes way down and the amount we can save goes way up. It is much later in our current scenario because we are waiting longer to purchase that property to begin with.
Since we are buying 3 Nomad properties in this scenario, we will be living in one and renting out the other two. With two rental properties, how much cash flow are we seeing?
In the chart below, you can see the total true cash flow™ for this scenario.
For the first 46 months we don’t have any cash flow since we are living in the first Nomad property. It takes until month 47 for us to save enough down payment to be able to purchase the second Nomad property, put 3% down as a down payment and move into that property. At that point, we convert the first property we were living in to a rental and start to receive some cash flow. In this particular case though, as we have discussed elsewhere, we have negative cash flow of approximately -$150 per month even taking into account the tax benefits of depreciation.
As rents increase our cash flow becomes less negative. Cash flow continues to become less negative and even becomes slightly positive until we have saved enough money to purchase our third Nomad property and convert the second Nomad property we had been living in to a second rental. At that point, we see an increase in negative cash flow from the new property. Even combined with the positive cash flow we are receiving from the first rental, it is still negative overall about $115 per month around month 90.
Over time, as rent increases on both rental properties, we see cash flow become less negative and ultimately positive.
How does this cash flow compare to the cash flow from the last scenario when we were able to acquire the 3 Nomad properties quicker? Let’s look at a chart showing the same 120 month time period with both this scenario and the previous scenario on the same chart.
As you can see in this chart, we see negative cash flow earlier since we are able to convert our first property to a rental earlier in the previous scenario. Cash flow is also more negative early on since not enough time has passed for rents to increase on that property.
In month 25 of the previous scenario, we acquired our third Nomad property and converted the second Nomad property to a second rental. This causeed more negative cash flow. Over time, the cash flow in both scenarios appears to become very similar. This remains true until about month 360 as shown in the chart below.
Once we have had a rental property for 27.5 years, we lose the cash flow created from the tax benefits of depreciation and so cash flow gets a little worse. This happens sooner in the previous scenario since we converted the property to a rental sooner, so you can start to see the slight decline in cash flow from losing this depreciation benefit in that scenario.
Eventually, we also pay off the loan on the properties which improves cash flow. Since we purchased the properties earlier and therefore got loans earlier in the previous scenario, 360 months happens earlier on the chart and therefore we pay off those loans earlier. Here’s a chart showing cash flow from months 348 to 480 so you can see how the cash flow changes as we pay off some loans and lose depreciation benefits.
In both scenarios, we bought our first property in month 1, so we pay off the mortgage on that first rental property in month 360. That’s why both see a jump in cash flow in month 361, the first month neither have that mortgage payment anymore.
However, the previous scenario bought the second property just 12 months later in month 13. That means the mortgage on that scenario’s second property is paid off in month 372 and cash flow increase substantially in month 373. That is not true with this scenario since we delayed buying our second property. Remember, we had to save enough for a down payment in this scenario and that’s why it is delayed. Eventually, we do pay off the mortgage on that second Nomad property as well in this scenario and cash flows become similar between the two scenarios.
In case you were wondering, here is a chart comparing the cash flows over the entire 480 month time period.
One Rental Versus Two
In this scenario and the previous scenario, we had two rentals that we converted from properties we once lived in as a Nomad. Earlier, we showed what having just 1 rental property looked like. Here’s a chart comparing the cash flow on all four scenarios.
As you’d expect you have more cash flow with two rentals than you do with just 1 rental property. In month 480, here’s the relative differences in cash flow for all 4 of the scenarios.
So, doing just one more Nomad and going from 1 rental to 2 rentals can add about $4,000 per month to your monthly cash flow in year 40. That’s significant.
So, you can see that cash flow improves, but how about net worth which also takes into account your stock market account balance and equity in properties? You might expect starting with $40,000 in your stock market account versus $10,000 would make a big difference. And, early on, you are correct. Being able to buy houses earlier does improve your net worth faster, but, it turns out that your ability to earn money from you job, get inflation based raises, and save more money each money from your income and invest that money in the stock market has an even larger impact than starting with more money.
Here’s a chart comparing the net worth of this scenario and the previous.
In month 480, here’s the difference between the two scenarios.
The difference of saving extra money from you paycheck and investing it in the stock market at 8% per year is about $2.3 million dollars.
How do these two 3 Nomad property scenarios compare to the similar scenarios where we only purchased 2 Nomad properties? Let’s look at a summary of net worth for all 4 scenarios on one chart.
As you might have guessed buying 3 Nomad properties with 2 rentals and investing extra from your paycheck in the stock market shows the largest net worth. The following shows your net worth at month 480 for the 4 scenarios.
Keep The Dream Alive?
I assume that at one point, likely when you first learned about the Nomad strategy, that you considered doing the full 10 Nomad property model. What if you kept the dream alive and continued on the Nomad path and bought 10 Nomad properties? That’s what we will discover in the next scenario.