Full Nomad Instead of Just 3 Nomad Properties

We have just gone over 4 scenarios. Two scenarios where you stopped doing the Nomad investing strategy after you acquired a single rental property (plus a property for you to live in). One model where you got inflation based raises and saved money from your paycheck each month and one where you did not. Then, we showed you what it looked like if you did Nomad just one more time and acquired two rental properties (and a property for you to live in). Again, we compared starting with $40,000 with no inflation based raises where you did not save any money monthly to starting with $10,000 but where you got inflation based raises to your paycheck and saved money each month from your paycheck.

Now, we are going to remind you what probably excited you about the Nomad investing model to begin with: doing a full Nomad model where you acquire 10 rental properties (plus one to live in).

In this model, we will assume you are starting with just $10,000 in your stock market brokerage account and that you are earning 8% per year from your stock investments. For the first 3 houses, it will look just like our last scenario where we stopped at 3 Nomad properties. But, in this scenario we will continue to purchase properties as an owner-occupant, move in, live there for a year and then convert the property to a rental when we buy our next Nomad property to move into.

Financing Full Nomad

For the first 3 properties you buy as a Nomad you can usually purchase them with 3% down payment. After your third property, you will need to start putting 5% down as your down payment for additional properties that you are moving into as an owner-occupant.

Here is a chart showing the percent down payment required for each purchase (and when the purchase happens).

Speed of Acquisition

Starting with $10,000 you have enough to purchase your first property and move into it the very first month. After that, we are assuming you need to save up enough for the down payment (whether that’s 3% or 5% of the purchase price) plus, in addition to the down payment, we also assume that you want to have $5,000 in cash reserves before you buy your next property. We will also adjust that $5,000 in cash reserves for inflation. So, the cash reserve threshold will increase over time and we will need to have larger amounts saved in the stock market to be able to buy additional properties.

Based on these acquisition rules, the following chart shows when we acquire each of the properties.

We end up buying our last property, our 11th Nomad property that we will ultimately stay in for the rest of the time, in month 275.

I will point out that it takes some time to buy the second and third Nomad properties, but with each additional purchase our rate of saving increases until eventually we are just waiting the 12 months required by the lender to live in the property as an owner-occupant before we purchase the next one.

If you want to see the previous 4 scenarios and how our acquisitions for full Nomad compare, here is a chart showing the number and speed of acquisition for those all on the same chart.

Stock Market Account Balance

Our stock market account balance looks like saw teeth… we save money for the next down payment (and cash reserves) and the account balance rises. We buy another house and the balance drops. We repeat for each of the 11 Nomad properties.

Here’s a chart showing the first 300 months of this scenario and this saw teeth looking chart.

After our last purchase the stock market account balance continues to grow as we deposit money saved from our paycheck, cash flow and the returns from the money invested in that account from the stock market. Here’s the same chart above except now I am showing you the full 40 years, 480 months.

You can barely see the saw teeth anymore since the total stock market account balance grows from the tens of thousands to the millions.

If we compare the two scenarios where we started with $40,000 and are not getting inflation based raises or saving money from your paycheck, you can see that those two scenarios rely on you withdrawing money from your account balances to support your properties. Here’s a chart showing the first 300 months of the total account balances for those 3 scenarios.

If we compare the two scenarios most like this scenario where we start with $10,000 but you do get inflation based raises and save money from your paycheck, you can see that your stock market account balance starts to grow earlier if you stop buying additional Nomad properties. Here’s a chart showing the total account balances of the first 300 months of those 3 related scenarios.

But that’s not the whole story. If we look at the full 480 months, you can see that the full Nomad scenario’s account balances are growing faster and overtakes the 2 Nomad property scenario before 480 months and will overtake the 3 Nomad property scenario shortly after month 480. Here’s the same chart as above except showing the full 480 months.

Want to compare all 5 scenarios on the same chart for the full 480 months? Here’s that chart.

And here’s the chart summarizing the account balances just in month 480 for all 5 scenarios.

Cash Flow

With 10 rental properties you might expect significantly improved cash flow and you would be right. Even though we have negative cash flow for each property when we acquire it, over time the rent goes up and our mortgage on the property does not. That means that our cash flow improves even though the property taxes and property insurance are going up. Here’s a chart showing the True Cash Flow™ which includes cash flow from the tax benefit of depreciation and capital expenses for your rental portfolio for the first 180 months.

We do have negative cash flow, on and off, for the first 100 or so months. Eventually, we have enough positive cash flow from the rentals we’ve owned to even prevent us from having negative overall cash flow with new acquisitions. In other words, the properties with positive cash flow will support the new acquisitions with negative cash flow until they too have positive cash flow.

Over time the cash flow improves. By the time you get to month 480, you are seeing cash flow of about $23,000 per month as shown in the chart below.

How does this compare to the cash flow from the other scenarios? Let’s compare them all on the same chart.

As you can see in the chart above, the cash flows from the 2 scenarios where we have 2 Nomad properties (1 rental) are grouped together as are the 2 scenarios where we have 3 Nomad properties (2 rentals). The outlier, and clear winner, is the full Nomad scenario with 11 Nomad properties (10 rentals). This makes sense… the more rentals you have the more cash flow you’d expect to have.

Here’s a quick comparison of monthly cash flow in month 480 for all 5 scenarios.

Net Worth

Net worth considers total account balances and equity in properties. So, we’d expect to see the full Nomad scenario with 11 properties have a very high net worth compared to the other scenarios and you’d be right. Here’s a comparison showing the net worth of all 5 scenarios over the entire 40 year period.

And here is the net worth summary for month 480 for all 5 scenarios.

Stop Moving In

The biggest complaint I get with the Nomad model is having to move into the properties. Instead of moving in you could opt to save a full 20% down payment and not move into the properties. By putting 20% down payments into each property you eliminate the built-in 12 month delay you’d get from buying a house as an owner occupant, but many investors will not be able to save a full 20% down payment faster than a year.

If you’d like to see how these and other scenarios would play out, consider using the Nomad Calculator 3™ on the LearnToBeRich.com website to run your own what-if scenarios.

Buying Three Nomad Properties with Inflation Adjusted Wages and Expenses

In the previous scenario we bought 3 Nomad properties by starting with $40,000 in our stock market brokerage account. In that scenario we assumed we were earning $5,000 per month, but that we did not receive inflation based raises and our personal expenses (except for housing) did not increase with inflation.

In this scenario, like in the scenario were we bought two Nomad properties with inflation adjusted wages and expenses, we are not going to start with $40,000 in our stock market brokerage account. Instead, we are going to start with just $10,000 in our stock market account.

However, in this scenario we will receive raises in our monthly paycheck at a rate of 3% per year. Three percent per year is what we are assuming inflation is for the entire scenario. Plus, our personal expenses are increasing with inflation at the same 3% per year.

Speed of Acquisition

Starting with just $10,000 in our stock market account, instead of being able to buy our properties in months 1, 13 and 25… we will need to wait until we have saved up enough money for down payments. This will slow down our speed of acquisition of the three Nomad properties. Here’s a chart comparing how quickly we acquired the three properties in the last scenario to this scenario where we have to save money for our down payments.

As you can see in the chart above, we are still able to buy our first Nomad property to move into in month 1. But, it takes us until month 47 to save enough to buy our second Nomad property to move into and convert the previous one we were living in to a rental property.

Then, with 2 Nomad properties, it takes until month 90 for us to save enough money to buy our third Nomad property to live in and convert the second Nomad property to a rental.

Difference In Savings

In the last scenario where we were not receiving any inflation based raises, we had to tap into our stock market account savings to cover the increasing expenses. So the amount we were saving each month was actually negative… meaning our expenses are greater than our income. However, in this scenario, we have a wage that does increase with inflation and we are assuming that we are saving $160 per month just after we bought our first Nomad property. With an increasing wage and starting with $160, we see the amount we’re saving going up each month even though our personal living expenses are also increasing.

Here’s a chart comparing how much we were saving in the previous scenario to how much we are saving in this scenario.

You can see in the first 100 months we purchase the 3 Nomad properties for each scenario. Later, you can see when we are able to pay off the third Nomad property that we are living in. At that point our cost to live goes way down and the amount we can save goes way up. It is much later in our current scenario because we are waiting longer to purchase that property to begin with.

Cash Flow

Since we are buying 3 Nomad properties in this scenario, we will be living in one and renting out the other two. With two rental properties, how much cash flow are we seeing?

In the chart below, you can see the total true cash flow™ for this scenario.

For the first 46 months we don’t have any cash flow since we are living in the first Nomad property. It takes until month 47 for us to save enough down payment to be able to purchase the second Nomad property, put 3% down as a down payment and move into that property. At that point, we convert the first property we were living in to a rental and start to receive some cash flow. In this particular case though, as we have discussed elsewhere, we have negative cash flow of approximately -$150 per month even taking into account the tax benefits of depreciation.

As rents increase our cash flow becomes less negative. Cash flow continues to become less negative and even becomes slightly positive until we have saved enough money to purchase our third Nomad property and convert the second Nomad property we had been living in to a second rental. At that point, we see an increase in negative cash flow from the new property. Even combined with the positive cash flow we are receiving from the first rental, it is still negative overall about $115 per month around month 90.

Over time, as rent increases on both rental properties, we see cash flow become less negative and ultimately positive.

How does this cash flow compare to the cash flow from the last scenario when we were able to acquire the 3 Nomad properties quicker? Let’s look at a chart showing the same 120 month time period with both this scenario and the previous scenario on the same chart.

As you can see in this chart, we see negative cash flow earlier since we are able to convert our first property to a rental earlier in the previous scenario. Cash flow is also more negative early on since not enough time has passed for rents to increase on that property.

In month 25 of the previous scenario, we acquired our third Nomad property and converted the second Nomad property to a second rental. This causeed more negative cash flow. Over time, the cash flow in both scenarios appears to become very similar. This remains true until about month 360 as shown in the chart below.

Once we have had a rental property for 27.5 years, we lose the cash flow created from the tax benefits of depreciation and so cash flow gets a little worse. This happens sooner in the previous scenario since we converted the property to a rental sooner, so you can start to see the slight decline in cash flow from losing this depreciation benefit in that scenario.

Eventually, we also pay off the loan on the properties which improves cash flow. Since we purchased the properties earlier and therefore got loans earlier in the previous scenario, 360 months happens earlier on the chart and therefore we pay off those loans earlier. Here’s a chart showing cash flow from months 348 to 480 so you can see how the cash flow changes as we pay off some loans and lose depreciation benefits.

In both scenarios, we bought our first property in month 1, so we pay off the mortgage on that first rental property in month 360. That’s why both see a jump in cash flow in month 361, the first month neither have that mortgage payment anymore.

However, the previous scenario bought the second property just 12 months later in month 13. That means the mortgage on that scenario’s second property is paid off in month 372 and cash flow increase substantially in month 373. That is not true with this scenario since we delayed buying our second property. Remember, we had to save enough for a down payment in this scenario and that’s why it is delayed. Eventually, we do pay off the mortgage on that second Nomad property as well in this scenario and cash flows become similar between the two scenarios.

In case you were wondering, here is a chart comparing the cash flows over the entire 480 month time period.

One Rental Versus Two

In this scenario and the previous scenario, we had two rentals that we converted from properties we once lived in as a Nomad. Earlier, we showed what having just 1 rental property looked like. Here’s a chart comparing the cash flow on all four scenarios.

As you’d expect you have more cash flow with two rentals than you do with just 1 rental property. In month 480, here’s the relative differences in cash flow for all 4 of the scenarios.

So, doing just one more Nomad and going from 1 rental to 2 rentals can add about $4,000 per month to your monthly cash flow in year 40. That’s significant.

Net Worth

So, you can see that cash flow improves, but how about net worth which also takes into account your stock market account balance and equity in properties? You might expect starting with $40,000 in your stock market account versus $10,000 would make a big difference. And, early on, you are correct. Being able to buy houses earlier does improve your net worth faster, but, it turns out that your ability to earn money from you job, get inflation based raises, and save more money each money from your income and invest that money in the stock market has an even larger impact than starting with more money.

Here’s a chart comparing the net worth of this scenario and the previous.

In month 480, here’s the difference between the two scenarios.

The difference of saving extra money from you paycheck and investing it in the stock market at 8% per year is about $2.3 million dollars.

How do these two 3 Nomad property scenarios compare to the similar scenarios where we only purchased 2 Nomad properties? Let’s look at a summary of net worth for all 4 scenarios on one chart.

As you might have guessed buying 3 Nomad properties with 2 rentals and investing extra from your paycheck in the stock market shows the largest net worth. The following shows your net worth at month 480 for the 4 scenarios.

Keep The Dream Alive?

I assume that at one point, likely when you first learned about the Nomad strategy, that you considered doing the full 10 Nomad property model. What if you kept the dream alive and continued on the Nomad path and bought 10 Nomad properties? That’s what we will discover in the next scenario.

Buying a Third Nomad Property

In the previous two scenarios we discussion what owning just two Nomad properties looked like. Now, in the next two scenarios we will discuss how buying a third Nomad property will ultimately impact your cash flow and net worth.

In our first scenario with two Nomad properties, we started with $40,000 in our stock market account and were not earning any inflation based raises from our $5,000 per month job income for our entire family. We’re back to those same assumptions now for buying our third Nomad property.

Buying 3 Nomad Properties

So, how quickly can we buy 3 Nomad properties? Well, like in previous scenarios, we buy the first property in the very first month. We move in and live there for a year. Since we are starting with $40,000 in our stock brokerage account, we have enough for that initial 3% down payment. And, even at month 13, we still have enough in our stock brokerage account for a second 3% down payment.

That allows us to buy our second Nomad property to move into in month 13. We keep the first Nomad property we purchased and convert it to our first rental.

After living in our second Nomad property for a year, we still have enough in our stock brokerage account to buy our third Nomad property with a 3% down payment. Again, we will convert the property we are moving out of into a rental property.

By month 25, we have acquired three Nomad properties: two rentals that we once lived in and a new owner occupant property that we will live in for the rest of the scenario.

Here’s a chart showing the number of homes that we owned and when we acquired them.

Stock Account Balance

The following chart summarizes our stock market account balance showing the immediate 3% down payment decline from $40,000 to purchase the first Nomad property in month 1, and the 3% down payment in months 13 and 25. You can also see that from the decline in account balance after month 25 that we are hitting our savings to help support our properties.

If we look over the first 11 years of owning the properties, you can see that with these particular properties we actually would need to either start with more than $40,000 in the stock market or add additional money from outside the model to be able to support them.

Assumptions Causing The Need for More Capital

The need for more and/or extra capital for your third Nomad property is based on several assumptions.

We are using a 3% down payment for all three purchases. If we had used a full 20% down payment, we would not have negative True Cash Flow™ and therefore we would not need to start with more than $40,000 and/or add more money to the scenario from external sources.

We are using a property with mediocre rental economics. While this is a brand new property in Severance, Colorado and I believe it would be a good long-term rental, it does not have amazing cash flow characteristics. If you insisted on finding a property with better price-to-rent ratios, you can reduce, or in some cases completely eliminate, negative cash flow. We are using a nicer property in a nicer neighborhood because you need to live in the property for at least a year as a requirement of getting owner-occupant 3% down payment loans before converting it to a rental.

We are assuming you are not getting an inflation-based raises from your job. That means that as your property taxes, property insurance, and other living expenses increase over time from inflation, your income is not enough to keep up with these increases and you’re not able to pay some or all of these increased expenses from your paycheck. This is an artificial construct of our scenario assumptions and, I do not believe, to be a true reflection of what is likely to happen. You’re not going to earn $15 per hour for 40 years; you’re very likely to take higher paying job opportunities and/or get, at least, cost-of-living pay raises. These raises will help offset how much you need to dip into your savings which reduces how much you will need to start investing and/or how much you will need to add to the scenario from external sources.

We assume you purchased the three properties as quickly as possible. Buying the properties as quickly as possible does have the benefit of getting you on the right side of having appreciating assets as soon as possible and starting to pay off your mortgages with the help of your tenants. However, it also means you’re front loading your negative cash flow with these particular properties. If you had waited until your first Nomad property that you converted to a rental had positive cash flow before acquiring your third Nomad property, you would not be feeding two negative cash flowing properties at the same time. You’d just be feeding your third Nomad property. This would also reduce the need to start with more than $40,000 in your stock market account and/or to add additional money to the scenario.

We assume you’re not saving any money from your paycheck. In this scenario, we also assume that you are spending every penny of your income on your personal expenses at the very beginning. In fact, as some of your expenses increase like property taxes and home owner’s insurance you end up have expenses that exceed your income. Since we have assumed you are not getting raises, you need to dip into savings in your stock market brokerage account to be able to pay for these.

With those assumptions, however, you will need more than the $40,000 you started with in the stock market and/or to add more to the scenario from external sources. When we do the next scenario, we will reduce the amount you start with from $40,000 to $10,000, give you inflation-based raises to help offset rising personal expenses, save some money from each paycheck, and delay buying properties until we’ve saved enough for a down payment plus a small cash buffer. In other words, I will show you to acquire 3 Nomad properties starting with just $10,000 and without adding thousands of dollars more to the scenario.

Let’s get back to this scenario now.

Cash Flow

How does the cash flow from buying 3 Nomad properties with 2 of them as rentals look from a cash flow perspective?

I mentioned above that these are not exceptionally good rental properties economics, but even with these two rental properties you can see in the chart below that we only need to feed the two properties from month 13 when we convert the first Nomad property to a rental until month 97.

If we had put a full 20% down payment down on each of these properties instead of the 3% down payment we would not have this negative cash flow. In other words, if put down about $60,000 on each of the two rentals, that’s over $120,000 total, we would not have the negative cash flow. Instead, we put down 3% on each, about $10,000 each or $20,000 total between the two of them. So, we put down $100,000 less and instead of putting down $100,000 we needed to cover some negative cash flow between month 13 and month 97. Doing some really rough math, instead of coming up with an extra $100,000 for down payments (20% on both instead of 3% on both), we had to put out about $30,000 in negative cash flow over 7 years. While this is a personal decision to make, I think many investors—even those with the extra $100,000 sitting in a bank account—would opt to put out the $30,000 in negative cash flow instead of putting $100,000 into the investments.

This, in effect, allows you to internally finance part of your down payment over time. Instead of putting in an additional $100,000 you’re financing that $100,000 by paying $30,000 over 7 years.

If we look past the first 10 years, you can see the cash flow improves and becomes more positive through the very end in year 40. I am showing a chart of what True Cash Flow™ from buying 3 Nomad properties (2 of them rentals) looks like because in a moment I will compare it to the cash flow from the previous two scenarios so you can see the difference. Here’s just the cash flow from this scenario.

I covered the negative cash flow that happens in the early years, but I did want to mention what is going on with the cash flow around month 330 through month 372. There are separate phenomena happening on the charts during those times for both of your rentals: the end of the tax benefits of depreciation and paying off mortgages.

When we have a rental property we get to depreciate the cost of the building (not the land) over 27.5 years. After the 27.5 year point, we can no longer depreciate the building and we lose the tax benefits of depreciation. So, if you look at month 330 in the chart above, you will notice that we lose depreciation on the first rental property and cash flow gets a little worse for that property in that month and beyond. We lose the tax benefits of depreciation on our second rental property 12 months later; cash flow for that second rental property gets a little more for that property in that month and beyond.

If you are no longer making a mortgage payment on a property cash flow improves. That’s what happens in month 361 for the first property. Do you know what the amazing thing about 30 year mortgages are? They go away after 30 years! So, after we have made payments for 360 months, that’s 30 years, you end up with a rental property that no longer has a mortgage at all and your cash flow on that property improves starting in month 361. The same thing happens for the second rental property; your mortgage is paid off 360 months after you purchase it with a 30 year mortgage so that one gets paid off in month 372 and you have significantly improved cash flow in month 373.

Comparing Cash Flow To 2 Nomad Properties

How does cash flow when buying 3 Nomad properties (2 as rentals) compare to cash flow when buying 2 Nomad properties (1 as rental)? Let’s look at a chart showing the two previous scenarios we ran with two Nomad properties and see how it compares to this scenario.

Looking at just the first 10 years, cash flow is less negative when you’re only buying 2 Nomad properties with 1 of them as a rental. And, you’d expect this to be true. However, as time passes and you have two rentals with growing positive cash flows, you’d expect that buying 3 Nomad properties with 2 of them as rentals would have more overall cash flow than just buying 2 Nomad properties and having 1 as a rental. And, you would be correct assuming that as shown in the chart below.

Stock Market Account Balances

How does the stock market account balance compare to previous scenarios? Great question. First, let’s look at the stock market account balance for just this scenario of buying 3 Nomad properties and then we will add in the stock market account balances for the previous 2 scenarios where we just bought 2 Nomad properties.

Now, adding in the previous two scenarios of buying just two Nomad properties.

The chart shows the scenario where we had you contributing savings from your income to your stock market account as you receive inflation-based raises has you finish with the highest account balance. And that makes sense: the other two scenarios have you not contributing anything additional to the stock market account at all. In the other two scenarios you don’t get raises and so you’re not contributing anything more than positive cash flow from the properties to the stock market account.

I will point out that there is a weird comparison going on with this chart since with the current scenario of buying 3 Nomad properties we actually had to come up with an additional $20,000 or so for negative cash flow from outside the scenario. That makes it hard to fairly compare it to the other scenarios so far that did not require an additional $20,000 influx of capital. In the next scenario that does not require an additional investment to cover negative cash flow, it is a better apples-to-apples comparison of the previous scenarios.

Back to comparing total account balances, here is a chart showing the account balances for the 3 scenarios at month 480.

Net Worth

Cash flow is one thing, stock market account balances are another thing, but overall net worth is a third thing entirely. How does your overall net worth look for this scenario alone and then how does it compare to your overall net worth for the previous two scenarios we ran when only buying 2 Nomad properties? First, here’s a chart of net worth for this scenario of buying 3 Nomad properties only.

Just over $5 million dollars. Not bad; not bad at all.

How does it compare to the previous scenarios where we just bought 2 Nomad properties (1 as rental and 1 we lived in)?

Overall having an extra property definitely helps your net worth (and cash flow), but saving that extra income from your paychecks has a very big impact as you can see in the chart below showing the relative balances in month 480.

Buying 3 Nomad Properties Starting with $10,000

Next let’s look at a fourth scenario where we buy 3 Nomad properties with 2 as rentals but this time let’s save money from our paychecks instead of starting with $40,000 in our stock market account.