This process will show you on how to run a Rent-to-Retirement scenarios or RP Capital Leads. This will help our client to reach their goals quicker by learning how to invest in income producing assets (Real Estate).
Before running the scenarios, There are couple of things to remember as per Fannie Mae and Freddie Mac's guidelines; an individual can only have 10 rental properties mortgages aside from their primary mortgage. Some people, however, get around that by having the spouse buy 10 rental as well. Mainly, conventional loans can only allow up to 10 rental property mortgages.
If it is a non-conventional loans or you go with some other kind of financing, you might be able to get more. But, usually when that happens, the interest rate is high and that limits the cashflow.
Aside from the CMF, you also need to check the pro-forma
Step by Step process:
Scenario: Withdrawal goal of $10k + 7 more properties
On creating an ISC, you have to make sure that the scenarios are appropriate with the client's goal.
For example, the client (Bradley Miller's goal is to withdraw $10k per month in passive income and add rental properties in the next 10 years.) In this scenario, we will do a cash flow only scenario with $10k withdrawal goal and eventually add a rental properties.
1. Assuming that ISC is created, what you need to do next is to put the client's cash flow as their income.
(the cash flow was breakdown in this sample but the total is $10k cash flow)
2. No need to put any expenses in this calculation. Then, run the data and see the client's FFD with $10k withdrawal goal.
The ISC gave us Jan 2028 as the FFD with $10k per month in passive income.
3. Now, we will try to add rental properties and see if it will speed up the FFD even quicker.
You need to check the Line of Credit Schedule and assess when they can start investing property.
In this sample, we will try next year (Jan 2023)
You need to get the pro-forma to add rental properties and use their LOC as a downpayment.
Pro-forma will give you the client's Rental Property amount(Purchase Property amount), Return of Invesment amount, Down-payment amount, cap rate, Loan interest rate - It will be easier to calculate if those pieces of information are available.
In this example, assuming that the client is used to buying $167,000 property, we will calculate it manually to get the information needed.
To get how much downpayment they need to get a property, you need to get the 20% of the Purchase Property amount.
$167,000 x .20 = $33,400 (downpayment amount of each property)
To get the expected rate of return, you need to multiply the monthly gross rental amount of the property by 12 months.
$3200 x 12 = $38,400
Now, divide the annual rental property amount to the purchased property amount.
$38,400 / $167,000 = 0.229 or round it off to .23 (23%)
23% is te expected rate of return.
4. Go to Scenarios tab and click the Withdrawal goal Scenario so we can add investments.
To check when they can do the switch date, check the Line of credit schedule. Check the date when their income is $4,000 to $5000 more than the downpayment.
If the downpayment is $38,400, then check when they can have at least $43,000 or up income. In this case, we've tried to make it sooner (Jan 2023) - however, it took a year and a half to take one flip.
Add Switch and Choose the Investments (with leverage)
and add the information you gathered earlier.
SL rate and terms should be the same as the above.
Enter the information gathered on the fields (just like the image below)
Also, make sure to add a Minimum FFD under the Information's tab.
5. Ran the scenario and see the result.
The FFD is now Jul 2024.
It speeds up quicker by adding the rental properties.
You also need to check the Line of Credit Schedule to see if it take a year to a year and a half to take a flip and if the cash flow isn't too tight. If so, you need to change the switch date to a later date.
See the sample image below, you'll see that every 2 months they are investing a new property and in 2 years time, they will have 10 rental properties.
The calculation was able to speed up the FFD. Their goal is to accomplish it in 10 years time. We did it way more faster.