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Ep 07 Norm and Norma - Buy 1 Owner-Occupant Property, All Stocks

This is Episode 7 of Real Estate Financial Planner™ podcast.

Buy 1 owner-occupant property and otherwise invest in stocks.

  • Both are 21 years old
  • Recently graduated from college and working in a technology department of a large health care business
  • Married to each other
  • Have a combined $10K saved up
  • Earns $72,000 combined (they each earn $18 per hour * 2,000 hours = $36,000/year each)
  • Saving about $1,000 per month
  • Obsessed about achieving Financial Independence so they can retire early (FIRE)
  • Want to find their best path to financial independence together
  • Both taking social security at age 67
  • Social security estimated based on them working until age 67

The  Scenario you want to copy into your Real Estate Financial Planner™ software has the following:

  • 2  Accounts (including  Default Cash Account)
  • 1  Properties
  • 6  Rules

Please register for a Forever Free Account or Login to your existing Real Estate Financial Planner™ software to copy this  Scenario into your account.

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Once it is in your account, you can view detailed  Charts for dozens of variables and edit any of the assumptions for  Accounts,  Properties, and  Rules to run your own what-if  Scenarios.

You can change things like:

  • Adjust how much money you start with in any  Account
  • Model variable stock, bond and real estate rates of returns
  • Change how many  Properties you buy and when you buy them
  • Set your own personalized target monhtly income in retirement to indicate when you reach financial independence
  • Model receiving social security payments when you reach a certain age
  • See what happens if there is a market crash or correction for your stocks, bonds and/or your real estate
  • Tweak price and rent appreciation rates for individual  Properties or all your  Properties
  • Find out what happens if you pay off your mortgages early... with cash flow each month or only when you have enough to pay off the  Property in full
  • Use equity in  Properties you own to cash-out refinance and buy more  Properties or invest it elsewhere
  • Model buying more  Properties than you need then selling off any extras to pay off the remaining  Properties to achieve your own user-defined financial independence number
  • Evaluate your own safe withdrawal rate and see how it impacts your investment plan
  • And much, much more...

Scenario

  • Modeled for 720 months (60 years)
  • 17.85% effective income tax rate
  • 3% inflation rate
  • 5.5% mortgage interest rate
  • 4% yearly safe withdrawal rate (SWR)
  • $5,000 minimum target monthly income in retirement (MTMIR) in today's dollars
  • $10,000 ideal target monthly income in retirement (ITMIR) in today's dollars

Accounts

Summary of assumptions for the Account in this Scenario.

  • Account Name:  All-In-One Account
  • $10,000 starting account balance
  • 8% yearly rate of return (at start)
  • Asset Type: Stocks

Properties

Summary of assumptions for the Property in this scenario (at the start of the Scenario).

Property Address/Description: Typical Nomad™ Rental Property

  • This  Property is a Dynamic resuable template of a property that we can buy multiple copies of using  Rules.
  • This  Property is a Nomad™ property that you live in until you buy your next owner-occupant property. When you buy your next Nomad™ property, this one becomes a rental.
  • This  Property uses dynamic  Rules to determine when we buy/sell it in the  Scenario.
  • Account for down payment, income and expenses for this  Property:  All-In-One Account
  • $375,000 property value and purchase price and it goes up at a rate of 3% per year.
  • 5% of purchase price for down payment.
  • 1% of purchase price in closing costs at time of purchase.
  • No seller concessions.
  • 5.5% is the mortgage interest rate with a term of 360 month mortgage term.
  • Private Mortgage Insurance (PMI) at a rate of 0.4% of the initial loan balance until the loan-to-value drops below 80%.
  • $2,600 per month in rent but rent increases at a rate of 3% per year.
  • 3% of the monthly income is the assumed vacancy rate.
  • 10% of the monthly income is the assumed maintenance rate.
  • 0.75% of the value of the property each year is the assumed property taxes rate. Based on the initial value of $375,000 that's about $2,812.50 per year in property taxes at the start and it changes as the property value changes.
  • 0.4% of the value of the property each year is the assumed property insurance rate. Based on the initial value of $375,000 that's about $1,500 per year in insurance costs at the start and it changes as the property value changes.
  • This is a residential property and 15% of purchase price is considered the value of the land (when doing our depreciation calculation).

Return in Dollars Quadrant™

The following is the estimated Return in Dollars Quadrant™ for this property based on its original assumptions for the first year.

Return On Investment Quadrant™

The following are the estimated Return on Investment Quadrant™ for this property for year 1. We take the returns for each component and divide by the "Total Cost to Close" (down payment, rent ready costs, closing costs - seller concessions). This first one ignores reserves.

ROIQ+R6™

Return on Investment Quadrant™ with 6 months of reserves at 1%.

ROIQ+R12™

Return on Investment Quadrant™ with 12 months of reserves at 8%.

How to Calculate

See the steps walking you through how to calculate various metrics for this property.

Walkthrough how to calculate...

Rules

These are the Rules included with this Scenario.

Paycheck and Personal Expenses - Norm's Job Income

  • This  Rule runs for the entire  Scenario.
  • Depositing paycheck into  All-In-One Account but no personal expenses with this  Rule.
  • Personal expenses will be Inflation Adjusted.
  • Gross paycheck is $3,000 Inflation Adjusted.
  • Assuming a tax rate of 17.85% on your paycheck.
  • Net paycheck (after taxes) is $2,464.50 Inflation Adjusted per month.
  • The paycheck will stop when they reach "Financial Independence" (goal of Minimum Target Monthly Income in Retirement achieved).

Paycheck and Personal Expenses - Norma's Job Income

  • This  Rule runs for the entire  Scenario.
  • Depositing paycheck into  All-In-One Account but no personal expenses with this  Rule.
  • Personal expenses will be Inflation Adjusted.
  • Gross paycheck is $3,000 Inflation Adjusted.
  • Assuming a tax rate of 17.85% on your paycheck.
  • Net paycheck (after taxes) is $2,464.50 Inflation Adjusted per month.
  • The paycheck will stop when they reach "Financial Independence" (goal of Minimum Target Monthly Income in Retirement achieved).

Paycheck and Personal Expenses - Personal Living Expenses

  • This  Rule runs for the entire  Scenario.
  • No paycheck, but pulling expenses out of  All-In-One Account.
  • Paycheck will be Inflation Adjusted.
  • Assuming no taxes on this paycheck. It is possible this is already an "after-tax" amount.
  • This paycheck will not stop at retirement.
  • Personal expenses are $3,930 Inflation Adjusted per month.

Buy Property When Account Has Down Payment - Buy 1 Owner-Occupant Property

  • This  Rule runs for the entire  Scenario.
  • This  Rule will buy another copy of the Dynamic (template property) Typical Nomad™ Rental Property whenever  All-In-One Account has enough for down payment and closing costs...
    • Plus at least 6 months of reserves for the property we're buying
  • This  Rule requires that with the purchase of the property with this  Rule that Debt-To-Income ratio remains below 45%.
  • This  Rule will only buy 1  Properties maximum. But if you sell any, it will try to buy more to replace them.

Passive Income - Norm's Social Security at Age 67

  • This  Rule starts on month 552 and runs for the rest of the  Scenario.
  •  Passive Income is typically used for things like social security, pensions, or annuities. Unlike  Paycheck and Personal Expenses they count toward whether you qualify for financial independence.
  • $1,553 Inflation Adjusted in gross passive income per month.
  • Assuming a tax rate of 18.06% on this passive income.
  • Net (after taxes) deposited to  All-In-One Account is $1,272.53 Inflation Adjusted per month.

Passive Income - Norma's Social Security at Age 67

  • This  Rule starts on month 552 and runs for the rest of the  Scenario.
  •  Passive Income is typically used for things like social security, pensions, or annuities. Unlike  Paycheck and Personal Expenses they count toward whether you qualify for financial independence.
  • $1,553 Inflation Adjusted in gross passive income per month.
  • Assuming a tax rate of 18.06% on this passive income.
  • Net (after taxes) deposited to  All-In-One Account is $1,272.53 Inflation Adjusted per month.

Significant Events

These are the  Significant Events for this Scenario.

  • Month 26  Bought New Dynamic Property Based On Rule Buy Property When Account Has Down Payment
  • Month 386  Paid Off Mortgage
  • Month 395  Achieved Financial Independence Goal
  • Month 652  Achieved Ideal Financial Independence Goal