There are 5 types of Nomads, but the one that I personally resonate the most with (for my family) is the Legacy Nomad model.
Legacy Nomads
The Legacy Nomads are usually middle age through retirement age and they are thinking very strategicly about leaving a legacy for their kids and grandkids.
At this stage, they’re not thinking as much about accumulating more wealth as they are thinking about wisely planning to pass wealth on to leave a legacy for the ones they love.
I am going to talk about my personal situation as the prototypical example. You can discuss with me other variations on the model that are more in line with your specific situation.
In my example, I have two kids, both boys. One is about to graduate from high school and one is a sophomore in college. I will be putting this plan into effect as my sons enter the workforce and can afford to qualify for a mortgage on a home.
My wife and I will be providing my kids with gift money each to pay for the down payment on a house that they will move into. They will live in each house for a year then convert it to a rental property and I will gift them another down payment to buy their next home.
Over the course of about 10 years, my wife and I will transfer approximately $237,775 (combined between the two of us) to my kids to cover both down payments and help with some negative cash flow for each of my two sons.
For each of them, this is approximately how much we will be gifting them each year shown in a chart:
Here is another chart that shows you the total $237,775 invested over time for 1 kid (this would double for 2 kids):
The IRS allows us each to gift up to $14,000 per year for each parent ($28,000 total between the two of us) to each child according to the IRS website. We’d be averaging gifting about $11,889 per year. If we needed to provide additional money, tax would need to be paid on it so we’ll try to avoid doing that.
We could (and probably will) provide them with additional gift money over the minimum to help reduce negative cash flow but I will not model it that way to show you an example that minimizes the out of pocket cost and maximizes the leverage your kids have.
Since my wife and I have two kids, we will be gifting the following amounts per year for the first 20 years or so:
| Year | Gift to Kid #1 | Gift to Kid #2 | Total Gifted |
|---|---|---|---|
| 1 | $11,944 | $11,944 | $23,888 |
| 2 | $13,392 | $13,392 | $26,784 |
| 3 | $14,816 | $14,816 | $29,631 |
| 4 | $16,217 | $16,217 | $32,434 |
| 5 | $17,598 | $17,598 | $35,196 |
| 6 | $18,961 | $18,961 | $37,922 |
| 7 | $20,378 | $20,378 | $40,756 |
| 8 | $21,956 | $21,956 | $43,912 |
| 9 | $23,674 | $23,674 | $47,347 |
| 10 | $25,495 | $25,495 | $50,989 |
| 11 | $11,493 | $11,493 | $22,987 |
| 12 | $9,727 | $9,727 | $19,454 |
| 13 | $8,151 | $8,151 | $16,303 |
| 14 | $6,672 | $6,672 | $13,344 |
| 15 | $5,318 | $5,318 | $10,637 |
| 16 | $4,144 | $4,144 | $8,288 |
| 17 | $3,028 | $3,028 | $6,055 |
| 18 | $2,177 | $2,177 | $4,354 |
| 19 | $1,390 | $1,390 | $2,781 |
| 20 | $807 | $807 | $1,613 |
| Totals: | $237,337 | $237,337 | $474,675 |
Why Do Legacy Nomad?
First, it allows me to get money out of my estate early to ultimately reduce my overall estate taxes when I die.
Second, it allows me to start teaching my kids how to be great stewards of money. They’d be starting small, with one house with very little equity and very little cash flow, and they’d learn to nurture and manage that asset and others over time. I can work with them to show them how taking care of one rental property and adding them over time grows into a torrent of passive cash flow from rental income and a massive amount of equity in real property with some great tax benefits.
Third, my kids get to live in each property to learn about it and how to manage that property as well as the pros and cons of living there.
Fourth, the money I give to my kids grows very aggressively (far more aggressively than I could grow it in my estate). Since my kids are living in each property, they can get 5% down financing. If I were to take the same money and invest it in rental real estate, I’d have to put 20% down and maybe even have a higher interest rate. Living in the property for a year gives you significant financing advantages.
Warren Buffet says,
A very rich person should leave his kids enough to do anything, but not enough to do nothing.
With the Legacy Nomad model, my kids can do whatever they want knowing that I will help with a down payment for a house and to plan for their retirement, but they must contribute and add value to society and make enough money to provide for basic expenses.
Maybe your family is different, but I’ve got one kid that I suspect will get a great, high earning job and have no money worries at all. My other son is a different story. He’s an artist and may do extremely well financially or he may struggle. It is not clear yet. The Legacy Nomad gives their kids some help, is willing to educate and help their kids learn to manage assets well and sets them up to succeed long term. Your kids need to contribute to society but over time your contribution as a Legacy Nomad has much greater value.
Let’s say you start Legacy Nomad with each kid at age 22. By the time they’re 40 (18 years into Legacy Nomad), we estimate they’ll have about $2,104,000 in equity. Not a bad place to be. Enough that they don’t have to stay stuck in a horrible job, but not enough (yet) where they cannot work at all, right?
What’s great about equity in houses? It is accessible, but not easy to access. Sure, they could borrow against it, refinance the house or sell the house to get at it, but it is not super easy to do (and there are some things we can do to limit this if we really want to). Because it is hard to get at, it has the feel of a long term investment that is hard to touch.
Here’s a chart showing equity in the 10 houses for each kid from year 10 through year 20:
What about cash flow though?
During the first 20 years, we’re helping our kids with negative cash flow. Because we only put 5% down, we’re really financing our down payment over time. The negative cash flow is the payment we should have made earlier (as a larger down payment). If we would have put more down, we could have avoided this negative cash flow completely.
Here is a chart showing that negative cash flow through year 18 (when your kids are 40) and cash flow is starting to grow rapidly:
After year 18, as you start to have more mature, fiscally responsible kids, cash flow really starts to improve. At age 40, yearly cash flow (after all expenses) will be about $9,404. By age 50, that has grown to be $40,162 per year. Here is year 18 through year 28 (age 40 through 50):
From age 50 (that’s year 28) through the end of our model at age 62 (year 40) cash flow grows from $40,162 to $241,474 per year after all expenses.
Plus, they’ll have $7,565,236 in equity at age 62. Even more interesting is that’s money NOT in my estate that I’d need to pay taxes on.
So, each of my boys would have $241,474 per year in net spendable cash flow after all expenses and $7,565,236 in equity on 10 rental proeprties at age 62.
It sounds like a lot of work, why not just gift it to your kids and have them invest in stocks? Let’s take a look and see.
Would I Do Better With Stocks Than Legacy Nomad?
What if we invested the down payments and negative cash flow into stocks rather than doing the Legacy Nomad model? What if we were able to get a full 10% return per year on those stocks? After 40 years, how well would you have done?
The total investment of $237,775 would have grown to be $6,031,428 by year 40 with stocks performing at a pretty aggressive 10% per year. Compare that to the equity in the 10 houses for the Legacy Nomad model of $7,565,236 and the Legacy Nomad model is a clear winner.
It may be best if I show you a table that compares the two side by side. So, here is my table with a description of each column below the table.
| Year | Amount Invested | Stocks @ 10% | Nomad Equity | Nomad Cash Flow | How Much Better Doing Nomad |
|---|---|---|---|---|---|
| 10 | $184,430 | $303,378 | $768,194 | -$45,216 | $419,600 |
| 20 | $237,337 | $896,102 | $2,501,488 | -$19,494 | $1,585,892 |
| 30 | $237,775 | $2,325,377 | $4,978,430 | $302,878 | $2,955,931 |
| 40 | $237,775 | $6,031,428 | $7,565,236 | $1,799,278 | $3,333,086 |
- Year: shows you the year number for doing the plan (whether that’s stocks or Legacy Nomad).
- Amount Invested: the amount you invested in the stock market or the amount you invested in Legacy Nomad including down payment and all negative cash flow.
- Stocks @ 10%: 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% per year.
- Nomad Equity: the total amount of equity for all houses you’ve earned 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 then 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 Legacy Nomad for the “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, Legacy Nomad is still better.
- How Much Better Doing Nomad: Add up the “Nomad Equity” and “Nomad Cash Flow” and subtract the “Stocks @ 10%” to see how much better it is to do Nomad through that year.
Legacy Nomad Summary
To summarize, the Legacy Nomad model could be a great way to get money out of your estate early and allow it to grow and compound at very aggressive rates of return for your kids. It is the model I plan to use for my kids as they get jobs.
It would require that we gift our kids 5% down payments (and probably some negative cash flow) so that each kid could buy 10 houses over 10 years and move into each one to minimize the amount invested while maximizing growth.
It allows us to educate our kids with small amounts of money early and increase their responsibility as they continue to demonstrate maturity and accountability for that stewardship. Beyond significant tax benefits, it allows us to pass $3,333,086 more to our kids if we had invested the same money in stocks for them.
When our kids are ready to retire, they’ll have $241,474 per year in cash flow and $7,565,236 in equity. The cash flow and equity you create for your kids could be used by them to easily pay for college for your grandkids changing the finances of your entire family tree and leaving a true legacy.
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