0% Down Homeowner Saves $160/mo in Stocks and a Single 20% Down Payment Rental

In our last couple scenarios, we discussed buying a single home to live in while saving about $160 per month (growing with inflation) in the stock market. In this scenario, we're going to add to the model by purchasing a single 20% down payment rental property once we've saved enough money in our stock portfolio.

All the previous assumptions are exactly the same:

  • Same $5,000 per month income that increases each month with inflation
  • Same personal expenses that also increase with inflation
  • You are buying the same house with 0% down payment to live in
  • You are investing in the same stocks that give you an 8% return each year

However, with this scenario, once we get enough money in our account to have $5,000 in reserves (inflation adjusted back to today's dollars) plus enough for the total cost to close on a property with a 20% down payment, we will buy a rental property.

For the Nomad Calculator 3, the total cost to close consists of 4 things:

  1. Your down payment - in this case 20% of the purchase price
  2. Any rent ready costs - we don't have any in this particular scenario
  3. Closing costs - which we assume is 1.5% of the purchase price for this scenario
  4. And minus any seller concessions - which we assume we don't have in this case

In this scenario, when we have an inflation-adjusted $5,000 in reserves, plus the 20% down payment, plus rent ready costs and closing costs, minus any seller concessions in our stock market account, then we buy a 20% down payment rental property. So, when does that happen exactly in our scenario? I'm so glad you asked. Here's a chart showing our account balance for the first 11 years, 132 months.

As you can see in the chart above, we finally have enough, based on our rule in the Nomad Calculator 3, to buy a 20% down payment rental property in month 127. We needed to have over $100,000 in our account to meet our criteria of $5,000 inflation-adjusted dollars, which covers the down payment and closing costs.

Buy a 20% Down Payment Rental Property

So, when we buy the 20% down payment rental property, what do the numbers look like for it? Let's look at those together almost as if we were using the deal analysis spreadsheet we teach classes on. By the way, you can download a copy of the deal analysis spreadsheet here:

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1% Down Homeowner Saves $160/mo in Stocks but No Rental Real Estate

In the last scenario we had you buy a house with nothing down and invest the rest of your savings in the stock market at 8%. It was much better than the first two scenarios where you rented. In this scenario we ask the question: how much difference does a 1% down payment make over buying a home with nothing down?

All of the previous assumptions for the last scenario are still true:

  • Same $5,000 per month that increases each month with inflation
  • Same personal expenses that also increase with inflation
  • You are buying the same house
  • You're investing in the same stocks that give you an 8% return each year

The differences between this scenario and last scenario have to do with the financing of the purchase of the house you live in. Specifically, you're getting a special loan program that requires only 1% down payment from you. This loan program allows you to buy a home using a 3% down payment loan program, but the lender gifts you 2% of the down payment making your share of the down payment just 1%. You get 2% instant equity from the lender's gift.

So, for this scenario, you buy the property for $325,000 (again $5,000 above the asking price of $320,000) but your net purchase price is really about 2% less than that since the lender is gifting you 2% toward your down payment and your monthly payment is as if you utilized a full 3% down payment. So, we use a purchase price of $319,000 (about 2%... in this case $6,000) below your offer price.

Since we start you with $5,000 in your bank account, you have enough for a 1% down payment to purchase a home to live in in month 1.

Also, since you're putting a little bit more down with a different loan program, your interest rate is the slightest amount lower than you could get with nothing down. When we did the nothing down loan we assumed your interest rate was 4.875%; with the 1% down payment loan program we are assuming it is 4.750% or 1/8 of a percent lower.

Everything else remains the same.


Using your crystal ball, you might expect what I am about to say next. If you remember from the last scenario, you bought a property for $5,000 above asking price so you could finance your closing costs. If you recall from that scenario, I showed you that you have negative equity early on as your appreciation and debt paydown caught up with your $5,000 overpayment. That did not happen with the 1% down payment loan program. In fact, you're gifted 2% of the purchase price from the lender so you actually start off with a little bit of instant equity.

Here's a chart showing the comparative equity in your houses between this scenario and the last.

You might think that this will have long reaching impact, but it is not as significant as you might imagine. Why? As it turns out, since it is the same property worth $320,000 at the start and at the 30 year point you pay off both loans, you end up in the exact same position. You end up, at year 30, with the exact same property with no loan... so you have the exact same amount of equity in year 30 and beyond as shown in the chart below.

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Nothing Down Homeowner Saves $160/mo in Stocks but No Rental Real Estate

In the last 2 scenarios, we assumed you were renting the property, enriching your landlord. For the first time, we're going to assume you buy a home to live in. This changes many of our assumptions that we've made before so I will cover what stayed the same and what has changed.

First, you still earn $5,000 per month from your paycheck and pay taxes on that at a rate of 17.9%. Your paycheck increases at a rate of 3% per year from inflation but we show the increase monthly as I already explained.

Your expenses are different than we've discussed before though, for a few really, really good reasons.

Before, we estimated your expenses to be $3,945 per month and that included rent to your landlord. In this scenario, you are not renting so your expenses should not include rent. Instead, you should have the expenses of owning a property including mortgages payments, property taxes, insurance, and homeowner's association (HOA) on your property. So, to model this, we reduced your personal expenses to be equal to $1,945.00 and we are going to add your housing expenses separately. Here's a chart showing the first year of your personal expenses that does NOT include your real estate expenses.

So, you can see that your personal expenses start at $1,945.00 and grow over time at a rate of 3% with inflation.

Your House

I will loop back to your personal expenses to add in the cost of your house in a moment after I walk you through the house you're buying and my assumptions for that.

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