If you recall, there are five types of Nomads. In this relatively short (and by relatively short I mean short compared to *Harry Potter and the Order of the Phoenix*) overview, we will be focusing on what I consider to be the largest group of Nomads: the Catch Up for Retirement Nomads.

# Catch Up Nomads

BAM! You wake up one morning and realize, “HOLY CRAP! I’m 40 and behind on saving for retirement. What do I do?”

The Catch Up Nomad is typically middle aged with a good to great job and wants to save more for retirement than they have in the past. Or, maybe they’re recovering from some financial setback and need to catch up from that setback.

While they’re typically comfortable, if it makes sense financially they’re willing to move 10 times in the next 10 years. Often they can rationalize this by buying brand new properties each year. They will convert each property they buy to a rental after living in it for a year until they have 10 rental properties. They’ll probably buy an 11th property to live in after they get 10 rentals.

Below, I’ll show you some of the math behind working the Catch Up Nomad model and specifically how it is far better than investing in stocks or more traditional retirement models if you’re willing to move 10 times.

# Catch Up Nomad Model Assumptions

In order to model the Catch Up Nomad strategy, I had to make some assumptions. I’ll share with you these assumptions so you can see if you beleive them to be as reasonable as I do. I do also change these assumptions to run a variety of “What If” scenarios which I gladly share in the classes I do.

I sincerely believe that the assumptions are very conservative but let me know if you’d like me to run it with a different set of assumptions.

## Houses

In our Catch Up Nomad model we will be buying 10 houses over 10 years. Catch Up Nomads may be tempted to buy new construction which might have slightly different assumptions that we can discuss. I did NOT model that here.

Is this a real property? Yes. This is a real property for sale at the time of this writing in Northern Colorado.

Our first property is for sale such that you could buy it for $238,875 and get enough in Seller Concessions to cover about 2% in closing costs/fees.

In our model, I do assume that we are buying more expensive properties each year as property values go up. How much are we assuming property values are going up each year? How about 3.0% per year? Seem fair?

That means that the house we bought in the first year would be worth $246,041 in year two. It also means that the second house we buy would be purchased for that same $246,041.

Here’s a chart that shows the values of the properties as we buy them over the first 5 years.

## Financing

Why are we moving into each of the properties instead of just buying rental properties? One of the main reasons we are moving into the properties is the benefit of owner occupant financing. Financing varies depending on whether you’re buying the property to live in or buying it as an investment.

The benefits include a lower down payment and lower interest rate than you could get when buying as an investment. In this case I’ve assumed 5.0% down payments on each house that we buy instead of the 20% down typically required for buying investment properties.

Getting owner occupant financing does require that we actually move into the property and stay there for a year. Since the lender requires you live in the property for a year if you’re getting owner occupant financing, you can see why the strategy is to buy 10 properties over 10 years, one property a year for ten years.

I will tell you that it may be beneficial to put more than 5.0% down from both a cash flow and risk reduction perspective, but minimizing your down payment maximizes your return on investment. I will be modeling it with the 5.0% down here, but we can talk about the numbers with using larger down payments at another time.

## Negative Cash Flow: A Result of Deferred Down Payment

If we had put 20% down, instead of only 5.0% down, we probably would have had immediate positive cash flow. You could consider the negative cash flow really just financing the down payment over a period of time. Instead of coming up with a full 20% down, you could put the 5.0% down and make monthly payments (in the form of negative cash flow) for the first few years (see below for actual time) to make up for the difference in down payment.

If we had put a full 20% down, we would not have had negative cash flow at all.

In the chart below, you can see the down payment required for buying the first house is $11,944 with just 5.0% down.

As I mentioned, we are getting owner occupant loans and putting less than 20% down. So, what about PMI (private mortgage insurance)?

You can effectively get rid of PMI by increasing your interest rate. In my modeling we got a quote from a lender for a higher interest rate that would allow us to not have PMI. The higher interest rate we selected gave us a credit that we could use to pre-pay for the PMI up front. So, the interest rate for our loans would be 4.500%. That’s why it might seem a bit higher than you’d expect for an owner occupant loan.

Despite us trying to catch up, we are still looking at a 30 year loan with monthly payments. If you are willing and able to do a 15 year loan, you’ll pay off the loan sooner and and get much better cash flow earlier. However, we’ve modeled it at 30 years. That means that the loan would be completely paid off after 30 years and we’d then own this property free and clear of all mortgages.

## Rental Income and Expenses

Remember, we’re going to be living in each property for the first year. That means we’re not renting each new property we buy in the first year.

However, if we were to rent the first home in the first year, it would rent for $1,500. We assume that rents are going up at a rate of 2.0% per year.

What does a 2.0% per year rent increase mean? It means that when we are ready to rent the first property we bought at the beginning of year 2, the monthly rent on it will be $1,530 per month.

But what about the expenses on the property? We do increase those as well. Instead of basing the expenses on a percent increase like we do with rent, many of the expenses on the property we calculate as a percent of the value of the property. For example, proeperty taxes will be 0.60% of the value of the property. As the property value goes up, the amount for property taxes goes up as well.

I will point out one of my thoughts on being conservative: we are increasing rent at a rate of 2.0% per year but property values are going up at a rate of 3.0% per year. So, our income on the property is going up slower than the expenses on the property. That’s conservative by design and I don’t actually believe that to be true. I think we will see them increase closer to the same rate which makes the numbers even better than what I am about to share with you. OK, back to the assumptions.

Return to property taxes: as the property values go up, so do property taxes in our Catch Up Nomad model. The first year, property taxes will be about $1,433 in year 2 they would be about $1,476.

We handle insurance on the properties in a similar way. Insurance on the property is assumed to be about 0.50% of the value of the property. As property values go up, so does the cost to insure the property. Year 1 insurance: about $1,194 with year 2: $1,230

You could buy a property that does not have a homeowner’s association (HOA), but in our model this one does. HOA runs about $250 per year and it increases at a rate of 3.00% per year. Again, I believe a number that is conservative for our model.

What about electric, gas, water and sewer? When we live in the property (for the first year), we pay it as part of our normal living expenses, but in the second year and beyond when the property is rented, the tenants take care of those expenses.

## Maintenance

Rental properties need to be maintained. You’ll need to budget and save for paint and carpet, carpentry, plumbing and electrical repairs and more. That’s why we set aside 12.00% of the rent each and every month for this type of maintenance. What does that mean? We will be saviing about $2,095 per year (per property) to cover maintenance expenses and this amount will increase every year since it is based on the rent we’re getting.

## Property Management

In this version of the Catch Up Nomad model, we will not be hiring a property manager to manage the property for us. I will be sharing what that looks like in our model at another time, but for now we assume that you’re willing to do a little extra work and manage the property yourself so that you can catch up for retirement. A little property management never hurt anyone, right?

In an ideal world, your tenant would move in and stay there until they completely paid off your property and beyond. Unfortunately, that rarely happens. So, we do assume that you’ll need to replace tenants. I am a strong believer in good, systems-based property management though and we will minimize vacancies in our property by starting to look for a replacement tenant 60-90 days prior to the current tenant moving out. Combine this with some other property management systems and we should have minimum vacancy on the property.

Even with essentially no turn over, let’s be conversative and budget for about a month of vacancy every 3 years. That works out to be about 97.00% occupied.

I am tempted to skip the next chart as it can be confusing, but for engineer types that like seeing a visual relationship between the numbers, it is a pretty cool chart to look at. If you’re not a visual engineer type then feel free to skip the next chart. Otherwise, the following interactive chart shows you the expenses on the property and the income on the property. Try clicking on and off various expenses and rent to see their relative sizes.

## Benefits of Rental Real Estate

When we talk about owning rental real estate we typically discuss the following four benefits.

When talking about the Catch Up Nomad model, I’m largely going to skip the tax benefits (depreciation) and instead just talk about the other three (in alphabetical order):

- Appreciation
- Cash Flow
- Debt Pay Down

## Benefits of Rental Real Estate for the Catch Up For Retirement Nomad

How does doing the Catch Up Nomad model help you if you’re behind on where you want to be for retirement? Let’s take a closer look at what happens with one property and then expand out the model to include all 10 properties.

### House 1, Year 1

The following shows the benefits from the first house for the first year only.

Let’s talk about appreciation first. Appreciation is the tendency for properties to go up in value over time. Some argue that this is primarily inflation: the property would cost more to build each year as the cost of stuff in general goes up. We can discuss that another day. For now, let’s just say that the property goes up in value $7,166 in year one. Remember, that’s 3.0%.

Now, let’s talk about Debt Pay Down. How much of the loan do you end up paying down in the first year if you just make your normal monthly payment on a 30 year loan at an interest rate of 4.500%? The answer: you end up paying down about $3,661 on your loan in that first year.

You’re living in the property for the first year, so you’re not renting it out. Therefore, you don’t have any cash flow on the property in the first year.

There are other variations of the Catch Up Nomad model where you might consider alternatives that do include some rent in year one, but I won’t be talking about them right now.

Yes, I really did show you a chart with nothing on it. But, moving on…

Again, in the first year you’re living in the property and so you don’t actually get any of the tax benefits of depreciation since it is not a rental property yet. Here comes another blank chart showing you that you get no depreciation benefit in the first year.

So, how much did we get for each area that we get a benefit from? Glad you asked; the following chart summarizes the benefits in the first year.

It shows a stacked column on the left and then a single column that has summed the entire left column into one number. This is intended to make it easier for you to see and read.

### House 1, Years 1-2

Above, I showed you the first year. That’s the year you bought it and lived in it. What happens when you convert that single property into a rental in year 2? That’s what I’ll cover next.

IMPORTANT NOTE: for now, I’ll be ignoring the second property you bought when you moved out of your first one. I’ll be covering that right after I cover what happens to the first property in year 2.

Appreciation: Your first property rises in value $7,166 in the first year and $7,381 in year two.

Notice it is going up in value slightly more each year. That’s because we are going up in value the same 3.0% per year on a slightly more expensive house each year. This is the compounding effect of appreciation.

Here’s the chart showing appreciation for the first house only over the first two years:

Debt pay down: In the first year, we’d pay down about $3,661 on the balance of the loan. The second year we end up paying down an additional $3,829.

Similar to appreciation, the amount we pay off on the loan actually goes up with each payment we make. Why? As we pay down the balance of the loan, we end up paying less interest each month. If we are making the same monthly payment with less of it going toward interest, we end up paying back more of the principal that we borrowed. So, we expect the amount we pay off each month (and therefore each year) to keep going up through the last payment in year 30.

So, here is a chart showing how much we pay off each year on the single property in the first two years:

Cash flow: In the first year, you live in the property and don’t rent it. So, no cash flow for you in year 1. However, in year 2, you do rent it.

In the second year (the first year that you rent it to a tenant), you rent it for about $1,530 per month.

After all your expenses like mortgage payment, vacancy, taxes, insurance, setting aside a maintenance reserve, you end up netting negative cash flow of about -$1,090.

Do you recall me mentioning negative cash flow above and why? Remember me mentioning what would have happened if you put a larger amount down?

So, this negative cash flow is really you just financing part of your down payment over time. It shows up as negative cash flow.

IMPORTANT NOTE: I often find myself wanting to talk about how the tax benefit of depreciation might help you offset this negative cash flow. I won’t and my tax friends will probably applaud that. The tax situation is often more complicated then the simplified version I present (because I’m not a tax guy and the tax stuff varies for different people’s financial situations). So, just realize cash flow might be better than I’m presenting here when considered with depreciation as well.

And now, the cash flow chart for the first house over the first two years. It shows no cash flow in year 1 and a negative number for the total for the second year:

Depreciation: When you’re living in the property, you get no depreciation. Year 2 when you rent it out, things change. You can depreciate the value of the house (not the land) over 27.5 years. That means you get to depreciate about $7,818 in year 2.

IMPORTANT NOTE: I’ve assumed that the value of the land is about 5% of the value of the property. Some people would argue that is low. I would probably agree with them. I won’t be using the depreciation benefit when comparing how the Catch Up Nomad model compares to investing in the stock market so it really is an academic point, but one that I’d be happy to adjust as I model it more in the future.

Here’s the chart showing depreciation for one property over two years with nothing in the first year:

Depreciation is weird. It is a very different kind of return than appreciation or cash flow or debt pay down. Talk to your tax advisor to see how it actually plays out for your unique tax situation. I have drastically over-simplified it.

Recap: Let’s summarize what we’ve seen so far with just one property over the first two years so we can explain what happens as we add more propeties and more years.

In the chart below I show two columns per year. They’re saying the same thing, but the one on the left shows the individual benefits (appreciation, cash flow, debt pay down and depreciation) as seperate colors and the column on the right just adds all that together and shows you one combined total.

Again, that was intended to make it easier for you to read, but sometimes people wonder why the two columns. Here it is:

### 2 Houses, 3 Years

Now that we’ve seen how 1 house looks over 2 years, let’s keep building. I’m now going to show you (with far less verbosity) what happens when we:

- Buy a property in year 1, move in and live there for a year
- Buy a second property in year 2, move in and live there for a year
- Convert the first property to a rental after you move into the second property
- Convert the second property to a rental after you move into your third property (not shown in this example… we’ll do that in a moment)

The following chart shows you how much each house went up in value from appreciation.

The next chart shows how much you’ve paid down on each loan each year for each house.

The negative cash flow continues. New homes we buy, in this particular model, have slightly more negative cash flow to start. However, the amount of negative cash flow is reduced the longer we own the houses.

Here is a chart showing you the depreciation benefits of the first 2 houses over 3 years.

And finally, here’s a summary. The orange bars show the sum of all the benefits of all the houses combined.

### 5 Houses over the First 6 Years

Now that you’ve got the hang of it, I am going to show you 5 houses over the first 6 years.

## Total Invested for Catch Up Nomad

So, how much money will you need to do Catch Up Nomad? Glad you asked.

The investment is really made up of two major parts: down payments to buy houses and negative cash flow for the first several years you rent a property. If you put more down, you can usually get rid of the negative cash flow.

Even though depreciation might help offset the negative cash flow on properties, I’m going to include the negative cash in the chart below as if you don’t get the depreciation benefit to be conservative in the Catch Up Nomad model for you. I’d rather be conservative and have you be pleasantly surprised when it is not as bad as I said.

So, here is a chart showing you the total amount invested in 10 down payments at 5.0% of the purchase price (1 for each house in the first 10 years). And, the sum of all the negative cash flows of all the properties for that year.

By year 23, all the cash flows are positive so you no longer have negative cash flows. If we’re assuming you’re starting your Catch Up Nomad model at age 40, that means by age 63 all the properties are positively cash flowing. Just when you need it.

And, the following chart shows you the total cumulative amount of down payments and negative cash flow to do the entire program.

## The Results

Are you wondering if all of this work is worth it? Great question. Let’s take a peek at the results and you can make that decision for yourself, but I know that my answer is: yes, it is worth it.

Quick recap:

- You bought 10 properties over 10 years
- You moved into each one then converted it to a rental property after living there for a year
- You held on to each of the 10 as a rental property until year 25 (age 65 if you started Catch Up Nomad at age 40)
- You end up with 10 rental homes with $3,628,885 in equity in year 25 (age 65)

See the following chart to see this visually.

Your equity in your retirement continues to go up. The following chart shows year 25 (when you’re 65 if you started Catch Up Nomad when you’re 40) through year 40 when you’re 80 years old when it grows to be $7,565,236.

Cash flow is a little more complicated because over the first 15 years or so (when you’re still heavily investing in your catch up), your net cash flow is negative. You’d be investing in your plan during this time as we’ve discussed all along to this point. The following chart shows the net cash flow per year when you add up all the cash flows for the properties.

For years 11 through 20 (age 51 through 60 if you started when you were 40 years old), you finally can see the negative cash flow goes away and you get completely positive in your cash flow as shown in the chart below.

And cash flow grows significantly as time goes on from there.

Remember, in year 20 below you’d be about 60 years old if you started implementing the Catch Up Nomad when you’re 40. By year 25, when you’re 65, you’d have a net cash flow of $30,459 per year. Year 40 is about age 80 if you started Catch Up Nomad when you’re 40.

If you’re thinking that $30,459 is not enough cash flow (by itself) for you to retire on, you’re probably right. But, there’s good news because you do have some options.

First, you could tap into some of your equity by refinancing a property and pulling cash out to make up the difference. Remember, you have $3,628,885 equity at year 25 (age 65) that you can be flexible with.

Second, you could sell a property or two and use the proceeds to supplement the cash flow you’re getting with a lump sum of cash.

And finally third, you could sell a property or two and use the proceeds to pay off the loans on properties you are keeping to improve the overall cash flow.

I’ll be discussing these strategies in detail at a later time, but a note on not tapping into your equity and waiting: waiting will mean you will have significantly more cash flow later as shown above, but if you need it, there is additional money available to you early.

Now, back to the cash flow… in summary, here is the entire cash flow picture for all 10 houses over all 40 years in one chart. You can zoom in on any time period of the chart below as well to see more detail.

Since the start of your retirement is a critical period, let’s zoom in and look at the charts for both total equity and then yearly cash flow that we’re seeing in the years around your retirement. These are the years 21 through 30 which, if you started Catch Up Nomad at age 40, you’d be age 61 through 70.

First, let’s look at your total equity:

Second, let’s look at your yearly spendable cash flow after all expenses:

You may be wondering what the total picture is with cash flow and equity from doing the Catch Up Nomad model over a 40 year period. This covers you starting at age 40 through age 80. Here is a chart showing the entire 40 year period.

Sounds like a lot of work, why not just invest in stocks? Let’s take a look and see.

## Would I Do Better With Stocks Than Nomad?

If, instead of investing the down payments and negative cash flow into doing the Catch Up Nomad model, you instead bought stocks and were able to get a full 10.00% return per year over the same 25 year period from age 40 to 65, how well would you have done?

The total investment of $237,775 would have grown to be $1,443,876 by year 25 with stocks. If you started at age 40, you’d be age 65 for that number. Compare that to the equity in the 10 houses for the Catch Up Nomad model of $3,628,885 and the Nomad model is a clear winner.

It may be best if I show you a table comparing these models side by side. So, here is my table with a description of each column below the table.

Year (Age) | Amount Invested | Stocks @ 10.00% | Nomad Equity | Nomad Cash Flow | How Much Better Doing Nomad |
---|---|---|---|---|---|

10 (50) | $184,430 | $303,378 | $768,194 | -$45,216 | $419,600 |

15 (55) | $225,791 | $546,117 | $1,558,330 | -$66,728 | $945,484 |

20 (60) | $237,337 | $896,102 | $2,501,488 | -$19,494 | $1,585,892 |

25 (65) | $237,775 | $1,443,876 | $3,628,885 | $101,834 | $2,286,843 |

30 (70) | $237,775 | $2,325,377 | $4,978,430 | $302,878 | $2,955,931 |

**Year (Age):**shows you the year number for doing the plan (whether that’s stocks or Catch Up Nomad). I assumed you started at age 40, so I put the age you are in parenthesis right after the year of the plan.**Amount Invested:**the amount you invested in the stock market or the amount you invested in Catch Up Nomad including down payment and all negative cash flow.**Stocks @ 10.00%:**the value of your stock portfolio in that year including your initial investment and all the returns you’ve earned through that year assuming a rate of return of 10.00% per year.**Nomad Equity:**the total amount of equity for all houses at that point. It includes the down payments you’ve made because we calculate it by looking at the house’s current value minus the current loan balance.**Nomad Cash Flow:**this is the sum of all the cash flows to that year. When we are negative, we are double handicaping Catch Up Nomad for the column “How Much Better Doing Nomad” because we count it as both an “Amount Invested” and also a negative return on that investment. It doesn’t matter though, Catch Up Nomad is still better.**How Much Better Doing Nomad:**Add up the “Nomad Equity” and “Nomad Cash Flow” and subtract the “Stocks @ 10.00%” to see how much better it is to do Nomad through that year.

## Another Reason Nomad is Better Than Stocks

One thing we have not commented on yet is the practical difference between equity and cash flow and why that makes Catch Up Nomad much better than stocks.

What happens when you’re 65 and you need money for retirement? With stocks you need to start tapping into the principal amount you have and that lowers the amount you have earning for next year. If you spend more than you earned that year as your return on your stock investments, you’re going to start a downward spiral as you eat into your principal each year earning less and less.

Catch Up Nomad is different. You can leave your assets (the properties) alone and just spend the net spendable cash flow they’re throwing off. The properties will continue to go up in value, cash flow will continue to increase and your financial position will continue to improve each year.

The following is a chart showing you the difference between stocks and Catch Up Nomad over a full 40 year period. Feel free to zoom in to see the difference for any time period you’d like.

## Catch Up Nomad Summary

In summary, the Catch Up Nomad model is a very interesting alternative for those that wake up at 40 and realize I need to do something to catch up on saving for retirement.

It would require that you buy 10 houses over 10 years and move into each one.

For some, the moving each year is a real inconvenience. However, would you be willing to move 10 times to have $2,286,843 more than investing in stocks at age 65? What if I threw in an extra $30,459 per year in cash flow that increases to $46,864 per year just 5 years later ($137,717 per year in 10 years)?

Also, there are even additional ways to speed up and improve cash flow from Catch Up Nomad.

So, unless you’re willing to invest significantly more than $237,775 in the stock market over the next 25 years (averaging about $9,511/year) or somehow, maybe magically, get higher than a 10.00% return on your money consistently each year, your best plan to catch up may be doing Catch Up Nomad.

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Dear James,

One thing I am not sure about the model. For a regular salaried person, the income may be enough for max 2-3 houses of mortgage payments that the lender is willing to lend; how can we move on to the 3th property and beyond, as the lender will look at your income level after deducing current mortgage payment?

Hi Eric…

> One thing I am not sure about the model. For a regular salaried person, the income may be enough for max 2-3 houses of mortgage payments that the lender is willing to lend; how can we move on to the 3th property and beyond, as the lender will look at your income level after deducing current mortgage payment?

Yes… part of the rent you have on the previous properties can be used as income to cover this. When I model it I use 75% of the rent you’re getting can be used to qualify for the new loan. If you need to chat with a lender about this, let me know and I can recommend one or two especially if you’re in Northern Colorado. Thanks!

So the key to buying with minimum 5% down on all the properties would be to buy well below the max DTI ratio allowed by the lenders starting with the first property. Correct? Considering the real life probability of neg cash flow due to the minimum 5% down (even more neg cash flow from the lender’s perspective when using 75% of rent) then, buying the second prop, as well as most subsequent properties in the early stages, would require for only the buyer’s salaried income to cover the DTI ratios of each newly-applied-for loan. Therefore, buying well below the max DTI is the key to doing this buy/ move/ repeat.

Thanks! Actually, that would depend on your market and the types and characteristics of properties you’re buying. You could buy at the very peak of your DTI but be buying properties that have amazing cash flow characteristics making it easier to buy your next one every time you buy another one. In many markets though you’re right.

Thank you James. Also, how about having the first purchase be a 3 or 4 unit prop using FHA financing with 3 1/2% down. The buyer would occupy 1 of the units and the lender would allow up to 85% of the rents of the other units as qualifying income, per FHA guidelines. Other subsequent owner occupied purchases would be SFR’s following your formula using non-FHA financing. This would not only give positive cash flow immediately going forward but would also more easily justify the owner occupancy intent- going from 4 units to SFR is a lot easier to justify than doing a lateral move from SFR to SFR. I usually advise my borrowers (I’ve been a loan officer for some 20 yrs or so) to take a home ownership counseling class for new landlord provided by HUD approved instructors. Underwriters really appreciate it, especially when new borrower is going from being a renter to new multi-unit landlord with no prior landlord experience

Thanks for the comment again. We go into a ton of detail on variations of that strategy especially in the Financing Nomad 101 class. The short, totally incomplete answer is we recommend VA for the first 1 or 2 with multi-family if you can get VA, then FHA, then conventional. If you can’t do VA or find a multi-family, then straight to conventional 1% down for the first purchase, then 3% for the next 2 then 5% through #10. I do discuss it in the video above too.