Conclusion for Your Third Nomad Property

Wasn’t that a great little ride?

Started With Two Nomad Properties in Scenario 1

We began by talking about what happens if you bought two Nomad properties—one rental and one to live in.

In that first scenario, I explained our assumptions about your paycheck and living expenses and how we modeled it that you earned $5,000 per month total for your household. I make an implausible—if not impossible—assumption; I assumed you never got a raise over 40 years. You and your spouse started off earning $15 per hour working 40 hours per week or $10 per hour working two jobs for a total of 60 hours a week and that for the entire 40 years of the model, you continued to earn that same amount.

I also assumed that in that first scenario your personal expenses remained the same for the entire 40 years. Your cost for food, clothing, etc remained fixed for the entire 40 year period. Again, this is not likely but so is not getting a raise. I did assume that you spent every dime you earned from your fixed paycheck (after paying income taxes) on your personal expenses so you were not saving anything at all.

What did change during the 40 year period though is your housing expenses. Property taxes and property insurance on the properties you owned did go up as the property value increased. This caused you to dip into savings to pay this increase in housing expenses because you were not making enough from your fixed paycheck to be able to afford these increases.

I had you start with $40,000 in savings. It turns out this was more than enough in the first scenario for the down payment on your first purchase with 3% down payment as well as the down payment of 3% for your second property when you converted the first to a rental.

Plus, since your first rental had negative cash flow, you had enough in savings to handle negative cash flow until rents increased and your cash flow improved and became positive. Eventually, after several years, your rental property started to replenish your savings and make it grow rather than draw it down.

We further assumed that you kept your savings in the stock market and could, somehow magically, get a consistent 8% per year from your stock market investments. I think this is optimistic based on historical data, but we used it on all 5 scenarios. I plan to write new content in the future that will show how assuming different interest rates for the stock market return in similar scenarios impacts the actual results. So, if you’re interested in that look for that new content.

Gave You Raises in Scenario 2

In our second scenario, I kept many things the same, but changed a few things to show how those changes made a difference in our model.

What stayed the same? We still purchased only two Nomad properties: one rental and one to live in. Same properties, same down payment, same loans, same rents and tenants. We also started with the same $40,000 in savings earning 8% in the stock market.

What changed in this scenario though is related to our paycheck and saving money. In the second scenario, instead of assuming you did not receive raises for 40 years, I assumed instead, that you earned a 3% per year raise to your paycheck. However, I also assumed that your personal expenses like the money for food, utilities, and clothing increased by 3% each year as well. Another assumption that changed for this scenario is that I assumed you were saving $160 per month from your paycheck in month 2. As your income goes up by 3% and your personal expenses go up by 3%, the amount you end up saving increases by 3% as well.

Saving that money monthly and investing it in the stock market makes a huge difference in your numbers, so it is very likely worth doing.

One other thing that changed in scenario 2 is the amount of money we started with. Instead of starting with $40,000 we started with $10,000. We did not have enough money for a 3% down payment to buy the second property in month 13. We had to wait until we saved enough money for a 3% down payment plus a little more than $5,000 in cash reserves. I say a little more than $5,000 because we want to save $5,000 in today’s dollars in cash reserves, but we figure out what $5,000 is adjusting for inflation and use that number.

Added a Third Nomad Property In Scenarios 3 and 4

For scenarios 3 and 4, I essentially copied what I did for scenarios 1 and 2 except instead of just buying two Nomad properties we bought 3 Nomad properties. That means two rental properties and the property we lived in.

In scenario 3 we discovered that the $40,000 we started with wasn’t quite enough to deal with the increase in expenses, negative cash flow and down payments we required if we were not getting raises. That meant we needed to add additional money to the model to do it.

However, in scenario 4 I showed you how to do the entire model starting with $10,000 by just delaying purchases of new properties until you have enough money to handle those increased expenses.

As you probably expected, buying three Nomad properties tends to be better than buying two Nomad properties. However, it appears as though saving money from your paycheck makes a huge difference as well as we could see in the results from scenarios 2 and 4 where we did save money from our paycheck and invest them in the stock market at the optimistic 8%.

We Unleashed the Full, Unbridled Power of Nomad in Scenario 5

Fabulous secret powers were revealed to us the day we held aloft our magic sword and said… by the power of Greyskull… sorry, wrong story… the secret powers were revealed when we showed what doing the full Nomad model of buying 11 Nomad properties looked like in scenario 5.

In that scenario, we started with $10,000 and as we saved enough from our paycheck to buy another property plus about $5,000 in cash reserves, we bought another Nomad property. Our first few required 3% down payment. Additional properties required 5% down payment.

Turns out, that’s a pretty darn good model for acquiring 10 rentals.

Checklists for Tenant Turn-Over and Emergencies

To round out the book, I did share with you some of the resources we have when you need to move a tenant out of your property and, additionally, how to not be a jerk and leave your loved ones the info and tools they need to handle your business should something unexpected happen to you.

We have both checklists and classes on those topics for you to assist you.

Speaking of checklists and classes… you might have guessed (and you’d be correct in guessing such things) that these are not the only classes, checklists, or scenarios we’ve ever created.

In fact, since 2003 I’ve been teaching real estate investing classes for my local real estate brokerage clients in Fort Collins, CO. If you are in Northern Colorado and looking for a real estate broker to help you buy or sell a home, I’d encourage you to attend a few of our real estate investor classes and see if you think I’d be an amazing real estate broker that could help you buy or sell a home. If you happen to live in another city and want me to recommend a real estate broker near you to assist you, you can reach out to me about that as well.

In the last couple years we started to record the real estate investor classes and publish them on both the LearnToBeRich.com website and my brokerage website, JamesOrr.com. Here are links to the pages that have the classes published… all but a few exceptions are free and available to the public. We do keep a small number locked down for paying clients only.

I tend to publish some of the results from scenarios where I test a very large range of real estate investing models and variables on the LearnToBeRich.com blog and also in books you can purchase on Amazon. However, the chance of me modeling your exact, unique, specific situation as a scenario using the Nomad Calculator 3 is extremely unlikely, but I have good news for you.

You can enter in your own properties and run what-if scenarios on your own exact, unique, specific situation yourself using the Nomad Calculator 3 here:

And finally, in a previous life, my wife Tammy and I operated nuclear reactors in the United States Navy. When you operate a nuclear reactor you don’t do anything without a checklist. So, when we came to the real estate world, we looked around for the checklists for doing this business. I was shocked when I could not find them, so we started to create our own. The latest result of my checklists are in the form of the Ultimate Nomad Checklists which you can access on the LearnToBeRich.com website here:

To stay abreast of the newest downloads and goodies I release, I’d encourage you to subscribe to our mailing list and the 100+ episode and growing podcast:

Well… that’s all I got for you for now… I hope you’ve enjoyed our little journey together discussing Your Third Nomad Property.

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.