Real Estate Appreciation Rate Using Percent Change from Normal Distribution Curve

Good morning and good news! I woke up this morning and started working on adding in some additional ways to randomize variables in the Nomad Calculator 3.

Earlier this month, I added the ability to set a House Variable to a random number between a high and low. With the way I previously coded it, for example, I could say the house price appreciation is somewhere between -5% per year and 5% per year (calculated monthly). This meant that each month you decided to run this Rule, the real estate portfolio modeling software, would pick a random number between -5% and 5% and set the appreciation rate equal to that.

As some of you might imagine, that meant that the results were erratic. You could have a month where your property went up in value at a rate of -5% per year (since we calculate it monthly though… it means it went up 1/12 of that for that month) but the very next month we could, if the random number gods made it so, have it go up 5%. For modeling reality, I found this highly unlikely when talking about appreciation. For things like modeling maintenance costs on a property, a truly random number between a range might be an acceptable way to model it. Of course, you can choose the range of random numbers, but still, it was completely random.

Back to appreciation rate though… when we are modeling appreciation rates, I think appreciate rates tend to trend. For example, if a property has been going up at about 3% per year, it will tend to continue to go up about 3% per year the next month. Maybe it is going up 2.9% or maybe 3.1% but it is not likely to be -5% the next month. To model this, I decided to add an additional way to model these which will be especially helpful when we do Monte Carlo modeling of real estate investing portfolios.

Now, with the new code, I pick a percentage change for appreciation rate based on a normal distribution curve. So, I might say the appreciation rate can change anywhere from -25% to 25% in any given month with the average being that it does not change at all. So, if it was at 4% and it changed -25%, that means the next month it could be as low as 3%. But, that is not super likely. It could also go up 25% so that the yearly appreciation rate was 5%. Again, that’s not super likely either. It is most likely to remain at 4% (a change of 0%). It is also relatively likely it will drop to something like 3.9% or go up to 4.1%.

I ran it on a Scenario I had been playing around with for modeling Nomad and here’s what the appreciation rates for a number of houses ended up being.

As you may be able to see in the chart above, this shows appreciation rates that trend. Again, this is because we are adjusting the appreciation rate a percentage of what it was the previous month based on a normal distribution curve.

Nomad Calculator 3

The Nomad Calculator 3™ is both a powerful real estate deal analysis tool plus the world’s greatest portfolio analysis and modeling software.

It can replace what I consider to the be the world’s greatest real estate deal analysis spreadsheet that my best friend, Brian Williams, created. In fact, I borrowed heavily and often from Brian’s spreadsheet when I was building the Nomad Calculator 3™.

But, the Nomad Calculator 3™ is far more than just a deal analysis application. Nomad Calculator 3™ allows you to model your entire real estate portfolio to see how the properties you currently own will perform over time and interact with each other.

For example, it will allow you to see if the positive cash flow from some of your properties will offset the negative cash flow on other properties.

Of course, the Nomad Calculator 3™ allows you enter in the properties you currently own. But, it also allows you to model future real estate purchases.

For example, you could use it to forecast how the Nomad investing model of buying 1 house per year would perform. Or, model buying a property every 6 months. It also allows you to model buying properties at irregular intervals like two houses the first year, then one more 14 months later, then three more the next year… well, you get the idea.

The Nomad Calculator 3™ doesn’t just track your Houses though. It also allows you to track Accounts like the balance of your LLC bank accounts, your investment accounts and retirement accounts.

It allows you to see how not investing in real estate at all will perform. That way you can compare investing in real estate to investing in various other investing strategies like stocks, bonds, mutual funds, commodities or even bitcoin.

But keeping track of Accounts adds new interesting dynamics to modeling your real estate investing.

For example, we can buy additional Houses when Accounts have enough for another down payment. Or, we can choose to maintain a certain balance in an Account but use any surplus to pay down on a mortgage or invest in stocks.

We do this, and even more advanced modeling, by using Rules. Rules manipulate Houses and Accounts.

When we have a group of Accounts, Houses and Rules we call that a Scenario.

You may have a Scenario where you buy 1 house a year, every year for 10 years. You may have another Scenario where you buy 1 house every other year for 20 years.

The Nomad Calculator 3™ allows you to compare these two Scenarios to see how they compare in their performance.

You can look at things like overall net worth and bank account balances, but you can also see how they cash flow comparatively. Or, see how the debt paydown on each compares or how your overall return on investment or cash on cash return on investment compares.

You can compare any number of different Scenarios to see which plan will achieve your desired investing goals.

Nomad Calculator 3™ can answer questions that no other deal analysis application can answer. Questions like:

  • What impact will saving more money have on my real estate investing and overall investing plan?
  • What impact will rising interest rates have on my real estate investing and overall investing plan?
  • How sensitive is my portfolio and plan to interest rate changes, rent changes, property value changes or changes to dozens of variables?
  • How will buying a new property (or two or three) impact my overall investing plan and goals?
  • Should I invest more in stocks or real estate? What percentage should I invest in each?
  • Should I pay off my properties as soon as possible using positive cash flow?
  • Should I pay do cash out refinances to buy more properties?
  • What strategy will get me the most cash flow for retirement in X years?
  • What strategy will get me cash flow fastest?
  • Can I use cash out refinances to simulate cash flow in retirement?

And this is just the start… there are easily thousands of other questions that can be answered with the Nomad Calculator 3™; it is, by far, the most sophisticated portfolio analysis software available on the market.

The Nomad Calculator 3™ allows you to model almost an unlimited number of Scenarios. Basic Scenarios are easy to setup, interpret and compare to other Scenarios. However, the Nomad Calculator 3™ can model extremely complex and nuanced Scenarios that be challenging to setup.

We are also planning to add monte carlo modeling to the Nomad Calculator 3™ to allow us to do multi-variate testing of very complicated Scenarios to show probabilities of expected results.