Previously in Just Keeping Two Nomad Properties we looked at what buying just two Nomad properties looked like.
For that scenario we started with $40,000 in our stock brokerage account that was earning us 8% per year. We further assumed that we were earning $5,000 per month but that our income did not increase with raises based on inflation over time. In other words, we earned $5,000 per month at the start and we were still earning the same $5,000 per month even 40 years later.
In this scenario, we’re changing that. Instead of starting with $40,000… we’re going to start with $10,000 in our stock market account earning 8% per year. We will still buy a house right away in month one and use up most of the $10,000 for our 3% down payment to purchase our first home to live in. We will still get a month where we do not need to make a mortgage payment since mortgages are paid in arrears which will look like a small rebate on part of our down payment.
Previously, starting with $40,000 in our stock market brokerage account, we had enough money to buy our second property with 3% down payment in month 13. Since we started this scenario with just $10,000 in our account, we don’t quite have enough in our account for that down payment in month 13. Instead, we will use the raises we get from our job to save more money for the next down payment.
Saving Money For Down Payment
Starting in the second month, we save $160 per month. This amount increases at a rate of 3% per year (from inflation based raises to our income). Our income and personal expenses are increasing at 3% per year, but the amount we save is also increasing. The following is a chart showing how much we are saving each month.
In month 48, you can see that we buy our second Nomad property and the amount we’re saving each month goes down.
Comparing Houses Owned
Previously we bought our second house in month 13, but in this scenario it takes us until month 48 to buy our second property. Here is a chart showing when we acquired each property for both scenarios.
Stock Market Account Balances
In the previous scenario we started with $40,000 in the stock market and so we had enough to buy our second property in month 13. In this scenario, we started with $10,000 but we are saving money each month from our paychecks. The following is a chart comparing both scenarios during the first five years.
If we look at a longer time period, for example ten years, you can see that the scenario where our income is not growing with inflation we dip into our savings to fund the expenses on the properties. In the scenario where we have an income—and therefore a monthly amount saved—that are both going up with inflation, we have enough income to cover the expenses on the two Nomad properties plus some additional to keep a growing stock market account.
Eventually, the cash flow on the first Nomad property that has since become a rental, becomes positive enough to add to the stock market account such that both scenarios have an increasing stock market account balance. Here’s a chart showing the first 20 years of stock market account balances comparing both scenarios.
Over 40 years, having your income, savings, and personal expenses increase by a 3% inflation factor has a significant impact on your stock market account balance. Here’s a chart showing the entire story for all 40 years.
Looking just at month 480, here’s how the two accounts compare.
Essentially, you are talking about a difference of one million dollars in the previous scenario and four million dollars in this scenario.
Do we see a significant difference in cash flow between the two scenarios? Not really. While it is true that we buy a property earlier in the previous scenario. The cash flow difference is only about $50 per month between the two of them early in the scenario and, even at month 480, the difference is about $130 per month.
How about equity in the two properties? The interesting thing about equity when you’re comparing buying essentially the same property is that once the property is paid off you own that property free and clear of all mortgages and so the equity is the same. Sure, you have a little bit more equity early on in the previous scenario since you bought it earlier. However, once the property is paid off in both scenarios, your equity is exactly the same.
Your net worth consists of your stock market account balance and the total equity you have in your properties. So, you do have a larger net worth in this scenario compared to the previous scenario. This is due to the significant difference in your stock market brokerage account balance.
The following is a chart showing net worth over the full 40 year time frame.
If you just look at month 480, you can see the difference clearly: almost $3 million dollars.
Buying Your Third Nomad Property
In the next installment of our story, we will go back to previous scenario where we started with $40,000 but we did not receive any paycheck raises from inflation or personal expenses increased from inflation. But, this time, we will buy a third Nomad property. How will that do? Let us find out together.