How to Become Debt-Free 20 Years Faster Than You Thought

Mindy:
Welcome to the BiggerPockets Money podcast, show number 338, finance Friday edition, where we interview James and Bianca and talk about large student loan debts, early retirement and real estate investing like always.

James:
One thing is, I’m fearful of creating just a new job for us. Right now we’re doing all the maintenance, we’re doing all the property management, everything, it’s all us. And so it feels like time is tight already. And so I always have this fear of growing and figuring out systems to make sure that we’re not just creating a new job on top of our jobs we already have.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is my thoughtful co-host Scott Trench.

Scott:
Thank you, Mindy. Great to be here.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business, or pay off hundreds of thousands of dollars in student loan debt, we’ll help you reach your financial goals and get money out of the way. So you can launch yourself towards those dreams.

Mindy:
Okay, Scott, this is actually one of my favorite episodes ever, and it didn’t start off that way. We have a guest, we have two guests actually, who have quite a bit of student loan debt. When I was first reviewing their numbers, I thought this is a really big problem. As we started talking to them I realized that they have an income based repayment plan, but they make a lot of money. And at first I was like, this is interesting. And then we started talking to them and the whole situation changes, the direction we were going to go in actually gets changed quite a bit. I can hear people saying, I don’t want to listen to income based repayment programs. This is an awesome episode. We went in a completely different direction than what our guests were expecting and really opened their eyes to different opportunities.

Scott:
I think the elephant in the room when it comes to James and Bianca’s financial situation is Bianca’s student loan debt. Now, because she took on so much student loan debt and has a relatively modest income, relative to the size of that debt burden, they actually separate their finances, they feel trapped in their current location and they’re waiting 19 to 24 years for the repayment programs to come in. And they’re worried about an income based problem from a forgiveness perspective after 19 years, some of those loans may be forgiven and because they’re not federal programs, that repayment program may actually count as income for Bianca.
So major long term problems, I think we were able to avoid those entirely based on their financial situation. I hope that this is eye-opening for folks that are in similar situations or who may find themselves in similar situations in a few years.

Mindy:
Scott, I just love this episode, because very soon in the beginning of this show, we change tunes. It’s just a lot of fun. Now from my attorney, the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott nor I, nor bigger pockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax financial implications of any financial decision you contemplate. All right. Let’s bring in Bianca and James. James and Bianca have a fairly good financial situation until you look at the debt.
Bianca was a human chiropractor and took some additional coursework to become an animal chiropractor. She’s sitting on about $278,000 in student loan debt, which has been in forbearance for the last few years, but will go back to about 6.8% interest once the repayment pause is lifted. But back to the good, they have 10 cash flowing rental units across four properties. They spend significantly less than they earn, and their only debt is mortgages and that pesky little student loan thing we talked about. Bianca and James, welcome to the BiggerPockets Money podcast.

Bianca:
Thank you. Thank you for having us.

James:
Thank you for having us.

Mindy:
I’m super excited to talk to you today. Before we jump into that, let’s look at your numbers. You make a whopping $17,310 a month, and this is across both salaries, bonuses, and rental property cash flow. That is a great.

James:
That’s after deductions. Yes.

Mindy:
That’s net income. Their expenses are $7,300. So approximately saving $10,000 a month, which is fabulous. I do see some room for improvement on those expenses. We have a car at 765 a month. That includes gas, insurance, maintenance, registration, all of those things, but it’s still 765 a month. And if we’re going to round up, that’s almost $1,000. Clothing at 250, dogs at $360. Entertainment at 825, gifts 500, groceries 845, healthcare 265, miscellaneous needs 300, personal care 570, travel 2415. I think I see a place we can cut. Utilities 260, for a grant total of $7,300, 7355. Again you’re making $17,000 a month, not a year, a month. So spending $7,000 isn’t such a big deal until we go back to the beginning where we have that $278,000 student loan. I’m not done. I’ve got more things to talk about.
We have that’s 9,955 leftover, which is not really leftover. I think that number can be a bit misleading because you’ve been using it lately to cash flow one of the rehabs on your properties. Investments, we have 401(k) for James at 120,000, HSA at 4,000 traditional IRA at 298,000 Roth IRA at 59,000 after tax brokerage at 368,000, cash savings at 105,000, which normally I would be like, wow, that’s a lot of money in cash, but you do have 10 units over four rental properties. I think that that’s maybe a smidge high instead of grossly high. Subtotal on that is $954,000, which I think is really great allocated, very, very diverse.
Four rental properties total 1.5 million. Hooray for you. Bianca has $7,000 in her Roth IRA, $14,000 in her brokerage account, $5,000 in cash, for a total of $26,000 in total investments. But you put those all together and you have $2.5 million. It seems like you’re doing fairly well. We go back over to the debt side and we have $847,000 in debts, for a grand total of 1.6 million in net worth. So again, it seems like you’re doing fairly well once we don’t look at those student loans. Why is healthcare so expensive? We have a shortage of healthcare and then it’s so expensive to become a healthcare provider. It seems like that’s a self-fulfilling prophecy. Hey, it’s so expensive. We’re not going to allow you to get in there and learn this.
So of course the challenges that I see are the student loans. Clearly if you are allocating so much to that travel fund, you probably like to travel. Bianca and James, what can we help you with today?

James:
Well, I think there’s a couple things and you hit the nail on the head. Obviously the student loans are a big part of what’s out there and and has been weighing on us and how to handle it. We’ve got some ideas based on the program that Bianca’s on for repayment, but also I think that we’re looking at three to four years to try to find a little more flexibility in what we’re doing. I don’t dislike my job, but it’s not something that lights me up every day. It’s not something that I go to work and I just can’t wait to do. And I know that if we look to do something else, it’s going to mean a big step back in salary, right?
Because I’d be leaving the industry that I’m in completely to look for something new, and to be able to do that I want to make sure that we’re in a solid position. I don’t think either of us has a dramatic urge to retire in the next couple years. I don’t think that’s what we’re looking for, but understanding that our income could potentially dramatically decrease if I were to explore something else, we want to make sure we’re in a good position going forward.

Mindy:
Sure. Okay. Let’s talk about this student loan repayment plan.

Bianca:
I’m on an income driven repayment plan. We spoke to some-

James:
Some consultants.

Bianca:
Some consultants, to kind of figure out the best path forward with that. Because obviously it’s quite a lot of debt. Currently on an income driven repayment plan. Started working with them during the pandemic. But basically my income driven repayment plan allows me to pay as little as possible. I’m paying after forbearance ends here, I’ll be paying close to $0 a month or very low. And then after 25 years my debt will be forgiven, but I’ll have to pay income tax on the amount that was forgiven. I’ve been saving for that, putting money away each month and just prepping for that giant tax bill at the end, but still there’s a lot of fear and anxiety around, is that plan going to work? Is this the best plan forward? What should we be doing?

Scott:
How far away is the 25 year forgiveness event?

James:
The loans are split technically between two loans. The first one is about 19 years away and that’s really going to be, I think that one’s the bigger, the bulk of it, it’s the most of it. It’s over 200. There’s about 70 with the interest left for the other one. And that one is additional five years. So looking at it like 24 years.

Scott:
Just to frame what I understand here, the goal here is for James to have flexibility with in a general sense specifically to pursue an entrepreneurial venture, it sounds like in the next couple of years. Is that really the high level goal here? And to deal with the student loans and the context of that?

James:
I think so. I think that that level of flexibility, while also hopefully not taking a huge hit to our lifestyle. We’re looking for whatever that path is to be at least semi location independent too. Because we have family and friends across the country, wouldn’t mind living by for bits of times. We’re also trying to keep that in mind with whatever path we go forward with.

Scott:
Great. And let’s call it some good here. If I were to frame your situation at a high level, let’s pretend that the student loans are just part of your rental property portfolio for a second, right? If you include them in that you’ve got 847 grand in debts against a 1.5 million rental portfolio, that’s not so bad. And your blended interest rate on that is usually 3% for the mortgages and on the 6.8% on the student loans, is that right?

James:
That’s right in exact terms, but there is some caveats to that percentage on the student loans. The program that she’s on, the government offers forgiveness, the negative that occurs each year. So the fact that she’s not paying really anything, and then we have the interest at the end of the year, they actually forgive 50% of that. So really it’s a 3.4% equivalent interest rate, which changes the picture as to what do we do, because we get start getting that interest at low. Is it worth aggressively paying versus possibly saving for the end?

Scott:
Well, even better then in that situation. Bianca, what do you want to do over the next couple of years? Do you have any specific goals around flexibility or outcomes for you?

Bianca:
I would also like some flexibility. I enjoy my work currently, but it is very location dependent and that’s the thing I don’t enjoy about it I guess, because James and I do like to travel a lot. My work does not allow me to just up and leave for extended periods of time unless I really want to impact my business.

Scott:
Awesome. And what happens if you do up and leave from that job, is there any impact on the student loan program?

Bianca:
Yes and no, I guess, because it’s income based. So my income would change drastically. It would drop to zero technically. I’m not sure what would happen if I were just unemployed, what that would do to my income driven repayment plan. But I don’t really want to be unemployed. I like working, even if I wasn’t doing this, I’m a busy body and would want to be doing something.

James:
I think it’d be a lot harder for us to certify that she does not have access to my income or my saved money if she is completely unemployed as well.

Bianca:
And that’s part of what allows my income based repayments to be as low as they are. Is that we’re keeping our finances so separate.

Scott:
That makes sense. I’m calling this out because I think that when I look at your position at a very high level, the student loans are really, they probably feel like a big, the big, I think the story here, but I don’t think are. The story is that you guys are worth 1.6 million, have a cash flowing rental portfolio and save $10,000 a month and have a very responsible debt to equity position across your overall portfolio in a general sense. I think what I’d hope to do at a first point is to free you from this mindset that the student loans are really this crutch that are holding back your financial position.
Here’s several ways to frame it. One is, yes, there are advantages you currently have with this. But in the worst case scenario you have a 6.8% student loan debt that you need to pay off. You can crush that in about two years with your current cash flow situation. So you have a two year debt here from that, and you could also cash out, refinance your rental properties, probably at a similar debt at this point, that level at this point, to pay that off at any point as well. I just want to call those things out because the trade off there of spending 19 years with this as a boogeyman in your financial profile may be fairly steep. Yes, that’s advantageous, but you may not need to do that and you may find that there’s freedom from just being rid of this thing in an earlier time period.
Not to say that’s what we’re going to end up on, I just want to paint that perspective because it’s really not that big of a deal in the context of your financial position. It would be a huge deal to someone else, but when we combine your finances for the purpose of this show, you got a really strong position. What’s your reaction to just that observation?

James:
It comes back, I think for me, the math versus the personal finance side of it, right? Because it’s a weight off your shoulders to think about having it paid off and having it gone, not having it sitting there and worrying about it for the next 19 years to see what happens. But then I sit down and do the math based on what the interest rate is and what we could do with that money and what the opportunity cost is, and I feel like, well, if I could just somehow ignore it and pretend it isn’t there, we may end up in a much better position down the line.

Mindy:
But down the line isn’t five miles down the line, it’s 19 years down the line. How much of your current job do you want to deal with so that you don’t have to pay this off? I was looking at this and I saw $278,000, as a first glance I’m like, that’s a lot of money. And then I’m like, wait a second, you have 10,000 extra dollars every month. And there’s no such thing as extra dollars, but you have 10,000 currently unallocated dollars every month. What is 200,000 divided by 10,000? Because I think that’s not that much. And I did the math on the calculator just to double check myself. That’s 20 months. That’s less than two years. Then you’ve got 17 years to build up the biggest pile of cash you can and you still come out so far ahead without the stress.
You don’t have to do it for 19 years if you don’t want to. Whereas if you go with the income driven repayment plan, you have to do it for 19 years and 24 years for the additional $50,000, which you could then just knock out whatever. But I really would encourage you to sit down with the spreadsheets and talk about your goals. This isn’t a decision you have to make in the next 27 minutes while we’re recording this show. It’s just something to think about. Why do you want to spend 19 years at a job very location dependent, and even though we’re not sharing publicly where you live, I know where you live and sometimes it’s not the most delightful to be outside where you live.
So you would have to be there for 19 years or take some time off, which will further, I think that’s something that’s really worth sitting down with a calculator and a spreadsheet and a lot of different scenarios and just look at it. How could we make this happen? Could we buy another house that solely pays off these loads? Could we buy another house that helps us figure this out a little bit more? I just think that that’s really worth pursuing.

Scott:
Another way to think about this is, let’s look it this way, you spend about 7,300 bucks a month, that’s a little over 80 grand a year. I’m probably doing that wrong. Someone will correct me. I’m going to do it real quick. That’s 87 grand a year. Right? You crush these student loans in the next two years and you just pay them off with your cash flow, you’re at $2 million in net worth because you’ve reduced your student loan balanced by that much. You’re now FI at the 4% rule. Right? So boom, there it is. That’s one way to think about it from a simplistic standpoint, to potentially reframe that. So yes, there’s optimization in the student loan program and we can definitely go there and talk with that.
But my instinctive read on your situation, if just a few minutes in, is that this is the boogeyman that we need to tackle. And if you had knocked this thing out, then all of a sudden you can combine finances. You can think, okay, in three years I could be sitting on a beach for six months out of the year in this beautiful location and the other six months fixing animal backs, those types of things, doing what I love in this area. And we’re done. That’s a freeing thing and that’s the power of personal finance and the privilege that you guys have built because of the incredibly strong financial situation that you have this item aside.
So with that, would you like to talk about that angle or do you want to talk about how to optimize this student loan debt paid off or both, next step here?

James:
I don’t know. You’ve thrown a little bit of a wrench in things in terms of, I guess I was coming the mindset of how are we going to do this most efficiently, but there’s something that I can’t quantify in the idea of it being gone.

Bianca:
Right. I agree.

James:
You can’t see it in a spreadsheet. You tell me to look at the spreadsheets, but I can’t see that in a spreadsheet, the feeling of just not having it there.

Mindy:
I wonder if there’s a way to set up some sort of, some spreadsheet genius that’ll do this in a minute. It’s not me. But you have your 250 and your interest payment. And I think it would be a lot like a mortgage calculator where it shows you, I’m paying 10,000 a month or 8,000, give yourself some buffer. I’m paying 8,000 or 5,000 a month towards this debt. Watch this debt just go away. It’s not 200,000 for a super long time. It’s 200,000 and then all of a sudden it’s only 185. And that is like, wow, I paid off a lot. And then it’s 175 and then it’s 150 and then it’s 100. And you’re like, holy cow, I just paid off so much debt. And my time horizon now isn’t 19 years, it’s another year and I can be debt free.

James:
You mentioned in the intro that maybe we’re sitting at a little more cash than is necessary or that maybe we div. Part of the question comes to, is it worthwhile dipping into that a bit and running a little thinner on cash? Because that would make a big dent. We could make a pretty big dent right away if that’s the route we went.

Mindy:
Yeah, like a 50% dent. Look, now you’re one year away from combining finances and quitting your job and living on a beach. To go from 105 cash to zero cash might give you a little bit of heebie-jeebies, although you make $17,000 a month and you spend $7,000 a month, you actually only spend $5,000 a month unless you’re traveling all over the place. Look at what you could knock out. Gosh, I know that this is not where you were thinking this was going to go, but I like that a whole lot more. Is it awesome to pay $200,000 when you could just spend 19 short years of your prime life working in a place that isn’t always awesome weather-wise, when you could just have it for free? But no. What kind of stress is going to go through? What kind of life changes have happened in the last 19 years that you didn’t account for, that you didn’t plan for, that just kind of happened?
You can’t predict what’s going to happen in the next 19 years. Get it over with, pay it off and then go nuts. You look at your position.

Scott:
I’m becoming more and more convinced that this is the way I view the situation here, because it’s just like, this is your boss. This is your bad boss that you have to deal with on a regular basis, that’s just always there with this. I said, two and a half years earlier, we have $110,000 in cash. So 100%, that’s a great option right there. You also have 401(k)s and those types of things you can borrow against to do that, if you want to arbitrage the interest rates a little bit with that. That could free up a lot of this. And then all of a sudden now you’re combining. I think that a good exercise here for this would be, where do you like to travel? What’s your favorite place to travel to?

James:
I don’t know that we have favorites.

Bianca:
We haven’t picked a favorite yet.

James:
We try to do different things all the time.

Mindy:
How would you like to go to so many different places that you could finally pick a favorite?

Scott:
What’s one of your favorites, the beach, mountains, what’s your go to?

James:
I’m beach, she’s mountains.

Bianca:
I like the beach too though. We can say beach.

Scott:
Okay, great. I’ve now done this a few times, so I probably sound like a broken record on a couple of the recent shows. But go to the beach. When’s your next beach trip?

Bianca:
I guess we have to plan one because-

James:
We don’t have one planned right now.

Mindy:
Permission to plan one.

Scott:
Go plan a beach trip and spend a few grand, and go there and sit there and have your coffee in the morning or whatever. 10 o’clock you’re on the beach, someone’s bringing you a coffee, maybe your first drink of the day or whatever. And then write down where do I want to be in two years, three years from now? Right? Put three years. This is where we want to be. And just write a half page. If you want to use a planner, you can bring a draft, call it draft on there and encourage the other one to manage that and say, what do I want to be in three years? I think that that exercise will be really powerful here, because you’re thinking, where do I want to be in 19 years? Right? 19 years, life’s going to be a whole lot different. There’s going to be a whole different capability set that you’re going to have physically going to all these places.
I think if you think about it in a three year picture, a lot of this will become crystal clear and I’ll be pretty surprised if you don’t find a way to it. I don’t know if you pay off this student loan, but to free yourself from it as a constraint in your situation, it could be paying it off as the easiest way. But I think combined finances where we don’t have to do this, Bianca doesn’t have to work all year round for or most of the year in order to keep qualifying for that to be a factor in constraint. I think that without that without the student loan debt, you’ll have a position that’s two million and or two and a half million in equities between real estate and stocks and in cash and 500,000 in mortgage debt, super conservative position.
That’s a position that’s really strong from which to start a business for example, without student loans over hanging. One income is probably going to come pretty darn close to covering all of your expenses, from Bianca. And I think your rental properties will easily cover the remainder with that. I think that will be a really helpful exercise to come through and say three years from now, this is where I want to be. Maybe those are some starter thoughts, but only you guys can decide that. But I would not do it from where I want to be in 20 years. That’s way too far out. You’re going to be way wrong on that. No one knows what they want 20 years from now, right? Mindy’s laughing at me because I went too far again.

James:
One question I have though as we look at that, if that was a route we were to try to aggressively tackle these and pay them off, is then it comes back to allocating where the money is going right now. Right now I max out my 401(k) every year. There’s slight details on mine. I have a 3% dollar for dollar match. And then at the end of the year if I’m still employed, my company adds an additional 3%, regardless of my contribution. Given what our cashflow is, is it worth backing off on those contributions, if we were to go this route or do I still want to take those tax advantages to put that money away?

Scott:
I think math is math, but I don’t think we have a math problem here. I think we have a boogeyman problem with the student loan. Sorry I’m using that word, I think it’s funny. But I think that’s the real issue here, is that this student loan has too much power in your life from that. But I think that that’s a balancing act. Right? There’s an art to that. One school of thought is if you chose to pay off the student loan debt to just go all in and stop everything else and crush that, and that’s effective. For a lot of people that’s better than a math approach. For you guys it may be I like my match, I’m going to take the match. There’s a couple other things here.
If I have a great rental property deal, I’m going to pounce on it in the meantime, maybe one or whatever, because that’s our portfolio. We’re obviously very proficient at generating income and building wealth through real estate. Maybe there’s a balance there. That comes down to this exercise of just figuring out, where do I want to be in three years? Do I want that so badly that I’m willing to just accelerate it and forget math? Or am I willing to take a more balanced approach to get there, that’s right for us? I don’t think there’s a right answer to that, there will be a mathematically right answer to that. But again, I don’t think you have a math problem here.

Mindy:
James, how old are you?

James:
I’m 41.

Mindy:
And Bianca, how old are you?

Bianca:
35.

Mindy:
Okay. At that age you still have several years before traditional retirement. I would absolutely contribute as much to get the full match as possible. I think you’re in such a great position. Let’s look at, you’ve got the 110K, you throw that at your debt and now you’ve cut your debt essentially in half, I’m just looking at the 200. I should also consider the 50. So 250. Now you’ve got 140 left over. That is now 14 months of your super crazy payments. I’m sure that Bianca might be able to work more hours. Maybe you could pick up, only if it’s worth it, don’t do side hustles that are going to pay you an extra $5, that’s not worth it. But if you can find ways to generate more income to get this paid off, I think you could do it in 14 months. Now we’re talking one year of not making 401(k) contributions.
The market’s been all crazy. I don’t know how frequently you can change your contributions if you see that the market has just been going down, down, down, maybe you do want to jump in and buy when it’s on sale, maybe you want to stick with it and say, you know what, for this next year I’m just doing my 3% to get my total match from them. And that’s all I’m going to do. And every single dollar’s going to go to the debt. And then now in one year, at the end of 2023, you are debt free and you can do whatever you want. Instead of 19 years and 24 years for the 50,000, you now have to reevaluate what you’re going to do in one year. And that is just, I know that’s not the way you thought the show was going to go. It’s not the way I thought it was going to go either, but I’m so excited for the possibility of you being from $278,000 in debt to $0 in debt, because I don’t count mortgages, in one year.

Scott:
I think if you came in and you said we’re making $80,000 a year combined, and we’re saving $400 a month on that, we’d be like, okay, we need to cut the spending a little bit and move things forward there. And then we’re going to figure out how to optimize around this student loan situation. It’s not your reality. Your reality is that this is not 10 times multiple times your income, this is one and a half times your income, maybe two times your after tax.

James:
Framing it in terms of one year changes a lot in my mentality, in terms of every time we’ve talked about it, and every time we’ve looked at it, even the thought of aggressively paying it down, it’s always been, boy, it’s going to be five years. It’s going to be eight years. We’re going to have to skimp by and completely back off in any lifestyle inflation we’ve allowed to happen. That’s been something that’s been really difficult to swallow for me. Framing in terms of well in 12 to 16 months starts to change that picture.

Scott:
Great. That’s our job, right? Hopefully that’s helpful. I think that’s honestly how I feel here. Again, it’s probably going to cost you money in the sense that you could optimize your finances more by doing the plan you came in with, around how we’re going to keep our finances separate. But I think you’re going to miss out on the point of personal finance, which is flexibility with this hanging over you. Life is going to be much better without it.

Mindy:
You said it’s going to cost them money, it’s going to cost them so much less time. They’re going to get so much time back. Here, let’s place some more financial monkey business, just throwing it out there. Scott suggested you have a 401(k) you can take a loan from, I believe you can borrow up to $50,000. So now you have 110 plus 50, that’s $160,000. So now you’re left with, what? $120,000 in debt, 160,000. You pay off right now. And now you are, what is it? 220, 250, 160, now you’re $90,000. Now you are paying off your loan in nine months.

Bianca:
That’s wild.

Mindy:
What if you could do it before next June? What if you were debt free before next June? And is that something that you’re comfortable with? Maybe, maybe not. That’s a conversation that you guys have to have outside of this phone call. How huge is that? Next June you have no more student loan debt. And then of course you would have to replenish your cash reserve. There may be some things that come up, and like Scott said, if you made $80,000 a year, I wouldn’t be telling you all of this, but you make a lot more. Let’s say, let’s go nuclear and say, okay, all four properties, the HVAC system all blew and the roof’s all blew off and now you need to put stuff back on there. You have places you can go to borrow.
Maybe you don’t borrow from your 401(k), and now you’re back up to the end of 2023 and all of that happens, and now you can borrow from your 401(k) to cover that expense. Or you take 75 of this, 105, 110 that you have and put it towards that, and you keep a little bit more of a buffer.

Scott:
Is the reverse true here? Are there sources of income that could be bonuses, like an annual bonus, or these things that could come in above plan or is the cash flow in your rental properties conservatively calculated and could be better in the next year?

James:
The bonus is accounted for in those numbers that we provided. It’s paid pretty well the last couple years and maybe a little less next year based on how we’re trending, but it turns out it’s not going to be as significant less as I thought it was going to be. That’s already accounted for. I think that the properties it’s reasonably conservative on that cash flow. I think we have a little room for rank growth that we haven’t completely taken advantage of. We’ve jumped up because we’ve taken on some new properties in the last two years and we’ve been working on getting rents fully to market. I think we were a little too conservative on this rehab and where we came in on rents. It turns out we have one unit left and when that’s done, I think we’ll get more for it than we expected. There’s some opportunity there as well.

Scott:
I’m not surprised with that. When your financial position looks like this, it seems very likely that you’re conservatively estimating general things when you’ve built this much cash and have this much monthly cash flow and this much wealth. James, what do you for work?

James:
I am in an administrative role for healthcare. Operations role where I have a P&L responsibility for several locations that roll up to me. It’s healthcare as well as it’s been stressed for the last couple years, which is part of the reason where again, thinking about, is there something else that maybe is fun that I could do instead of dealing with healthcare? I don’t know, it’s tough to think about rotating out of that because it’s what I’ve done for so many years, but I think I’ve done my best here.

Scott:
What would you do instead? What’s your inkling?

James:
That’s the problem, is I feel like I invest so much of my time into this job that I haven’t even explored the possibilities or the hobbies to really know what that looks like, which is why we talk about the position I want to be in, and I want to be in a position where we have a lot of flexibility, knowing that likely there’ll be almost no income for me for a little while, till I figure out what that looks like.

Scott:
That sounds like a good exercise for your vacation that you’re going to schedule after this call. It’s to figure out what that looks like and start noodling on that. I think it’s a hard problem, right? Because your head is down, it sounds like you’re fairly successful at that role and it’s got a lot of responsibility and it’s heads down and that’s where your mind share goes. But you’re like, I don’t know if I want to do that for long term. Again, I think that coming back to beating a dead horse here and painting the picture, in two, three years, this debt is paid is off, you’ve rebuilt your cash position to 50 to $100,000. That’s super reasonable with a $2 million net worth. The greenfield from there is going to look pretty open to you at that point in time.

Mindy:
I have a comment, it’s more of a homework assignment for you, James. I was at Camp Moustache and somebody was giving a presentation and she said she was talking to a counselor and she wasn’t sure what she wanted to do. And they said, okay, write down the list of 100 ways to make money. I want to say that this came from the Sheryl Sandberg book, but I think I spaced out when she said that particular part. I don’t want to not give credit, but I don’t know where it came from. But anyway, so I want to give you the same assignment, 100 things that you want to do. And you’re not going to put down 100 things because you’ll put it down like five and you’re like, I can’t write fast enough. And then you get to number 14 and you’re like, I can’t think of anything else, but just what are things you like? Do you want to go teach horseback riding or you’re allergic to horses or do you want to go be an animal chiropractor with your wife? Or do you want to-

Bianca:
Don’t do it. You’ll be in a lot of debt.

Mindy:
Yeah. Don’t go to school.

Scott:
If you want to take off another 300 grand to do that. Yeah.

Mindy:
I’m definitely not recommending that, but you could go work for her. Maybe that would help generate a lot of income that you’re not paying somebody else. Maybe you want to learn how to knit or go skydiving, there’s all sorts of ways that you can generate income when you can think about it. Take a huge vacation, take a whole week. Not a huge vacation a whole week. But really think about this. What are some ways I can generate income or what are some ways that I want to spend my time when I no longer have this job? I don’t think you’ve even given yourself permission to think about that yet, because you’ve got 19 years to pay off this debt. But now we’re paying off your debt in nine months, now you can think about it a little bit more. I do think that nine months is super aggressive.
I don’t know that nine months is actually the right choice for you. Now you’ve got two things to start with. Here’s nine months and here’s 19 years. Now you can figure out where your comfortable repayment plan fits, because I like two years, three years, way more than 19 years. I love this so much. I’m so excited. I’m sending notes to our producer. I’m like, this is going to be the best show ever.

Scott:
We had the Lifeonaire guys on recently and that might be a good read for you as well. That’s a good book. It’s a short, quick read and it has a short little quick perspective changing of get rid of the math problem and start introduced to life problem with that. Go ahead. Mindy.

Mindy:
Do you own one property free and clear?

James:
Yes. Yes. We own one property free and clear.

Mindy:
Oh my goodness. Could you get a mortgage on that property?

James:
Yes. This has been part of the conversation where I thought we were going. Would’ve been something like that or realizing, we’re really conservative as far as our loan to value position in general, overall with real estate. I think we’d actually like to do is dump that property and leverage into something larger. But I understand where you’re going. We could leverage that and just use that to pay off and then have our tenants pay off that loan.

Mindy:
Have your tenants pay off your student loan debt. That’s another thing, what are the crazy things we can do to pay off this student loan debt? Because then your freedom is so tangible. It’s right there. We’re not celebrating enough the fact that you have a fantastic financial position, the fact that you are so conservative in your numbers, I really get the heebie-jeebies when people come on the show and they’re like, I’m going to make $1,000 a month in this property, even though everybody else is only renting theirs for 750. I’m like, you’re not going to make $1,000 a month on that property. I love that you’re conservative.

Scott:
Do you have any properties that you don’t like?

James:
I wouldn’t say that I don’t like, but the property that is fully paid off would be the property that we like the least.

Bianca:
It’s a nice property. It’s just [inaudible 00:40:48].

James:
Out of all the four properties, it’s probably in the least favorable area. Not that it’s in battery, it’s just in the least favorable area and we probably would dump that one before any of the others.

Scott:
That’s another angle, is you dump that one, buy another property that you’d like a lot and then use some of the proceeds for that down payment. Some of the proceeds for the student loan debt as well. Just repositioning some of your assets. It’s the same, is no different than the other things that we just discussed around using your cash flow for the next couple of years. Although it’s a lot harder to be comfortable with that concept intellectually or in practice with that, but that would be yet another angle here to be potentially arrive at that outcome soon.

James:
I think our original plan, not for student loans debt actually, but original plan was to refinance the units we’re currently working on once they are finished, but that was going to also be part of my questions to you. Is it worthwhile at this point, given where mortgage rates currently sit and knowing that one is, I forgot what it’s like, four foreign change right now, would it be worth pulling that equity out at the end?

Scott:
What do you think the mortgage rate would be when you pull it out?

James:
Probably mid to upper fives, 5.5, 7.5, somewhere in there.

Scott:
And so the interest rate and the student loan debt is 6.8, but effectively 3%, with the way you have that. So you’re arbitraging 200 basis points.

Mindy:
It’s only effectively 3% if you do the student loan repayment, right?

James:
Yes. As long as we stay on that program.

Mindy:
The student plan, the income based repayment plan.

Scott:
What would be the cash flow of the property after you do that?

James:
I have to do the math on that. I haven’t done that yet.

Mindy:
Homework assignment.

Scott:
I think it’s really hard because you technically have a 3% interest rate, but you really have a 6.8% interest rate just with the game that you’re playing around the finances there. I think from your life freedom perspective, I’m already mentally bucketing it as a 6.8% interest rate. So that’s positive arbitrage in my opinion, because you then immediately after doing that can merge your finances and do whatever the heck you want. Almost whatever the heck you want. You’re like almostfy once that’s completed. You still have probably another two to three years to finish the play with your current run rate on things. But I think that there’s advantages in that. I don’t know, I think you have a two or three year play to fully finish the game here with your current situation. I don’t know. That’s interesting.

Mindy:
Would that be an owner occupied?

James:
No, no. We are owner occupying one of the properties. That’s the one that’s sitting at the lowest rate that you see there.

Mindy:
Okay. I would say, I’m not sure that you can get a 5, 7.5 rate on a non-owner occupied property unless you’ve gotten a quote really recently, the quotes that I’m getting are high 6s, low 7s. I’m not in the same state, but they are preventing me from getting a loan on my property.

Scott:
I think that’s really hard right now. I think you’re going to get a better interest rate as a source of debt from your IRA. And I think you might have a better one from your personal residence.

Mindy:
Could he borrow from his IRA? He has a 401(k) and an IRA. But can he borrow from his IRA as well? Because then you’ve got your 110 now, 50 from your 401(k), 50 from your IRA, that’s 210. You’re practically debt free by September.

Scott:
Well, you still have the debt against the IRA.

Mindy:
But you’re paying that back to yourself. That’s a way different debt than paying student loan debt for 19 years or working for 19 years. Just more options to think about.

Scott:
What are your thoughts here? What’s are some other things that we can help you out with today?

Bianca:
I know before we went this direction, we were also talking a little bit about looking into bigger investment properties at some point. We don’t really have experience with anything larger than a four unit, but we would like to, and just any thoughts that you might have on that.

James:
One thing is I’m fearful of creating just a new job for us. Right now we’re doing all the maintenance, we’re doing all the property management, everything, it’s all us. And so it feels like time is tight already. And so I always have this fear of growing and figuring out systems to make sure that we’re not just creating a new job on top of our jobs we already have.

Scott:
Well, I think that property management is a great one to start. One of the issues here is, what was your financial position like when you bought your first property?

James:
I was not far out of school at that time, so it wasn’t great. It wasn’t bad by any means. I was fortunate enough to pretty much have no student loan debts myself. When I saved up the down payment, I bought the duplex that we currently live in. That was the first property, the only property that I owned for probably 15 years. And then we just happened in the other ones really in recent history.

Scott:
Here’s going on right now, you earn, I would imagine 25K a month before taxes.

James:
Might be a little aggressive, but close.

Scott:
Okay. Let’s call it 250.

James:
Little less, but yeah, close to that. Yeah. We can call it 250.

Scott:
Okay. Then we have another 100K at least in wealth accumulation from your portfolio on average, that’s going to completely depend on the market conditions and other things. But on average we can at least expect 100K. The value of your time, if you were emerging as an individual, that’s $350,000 per year in wealth accumulation, and you divide that by 2000 hours, what is that? That’s going to be $175 an hour. When you started your journey, you were not earning $175 an hour. You were earning substantially less than that, probably 20 or $25 an hour. And so it made perfect sense to do all of these things yourself, right? Property management, managing contractors, those types of things. But you have at some point in the last five, 10 years, clearly crossed a hurdle where you’re probably doing too much of the work yourself and negatively arbitraging the value of your time, at least as it’s currently valued for some of these activities.
And so I think that would be a really good exercise to say, what am I doing right now? Let’s cut you in half because you’re two people. But what are you doing right now that’s less than $100 an hour in terms of value of time? And how do you make sure that that gets outsourced? You start hiring that out. You can maybe take a tax discount and say it’s 80 bucks an hour. Okay, I’m going to hire all those items out. And when I have items that are above $100 an hour, I’m going to make sure I’m doing those personally. I think that will be a good mental model for you on that. And you should start underwriting your properties to that. Putting that management cost, for example, into the property analysis, especially when you underwrite the next larger property.
Otherwise, you’re right, you’re going to continue compounding this problem of more and more income and less and less time. Which again, I think is a solution that you can solve for with your nice vacation, coming up and saying, here’s exactly what I would like my life to look like on a day-to-day basis in two or three years. I think that framework will be helpful.

James:
I think so. I think that she has opportunity with her business too, on a dollar per hour average, we should probably be looking at that too.

Scott:
That’s true as well. Bianca, do you own this business or do you have control over the income generation?

Bianca:
Yeah, I own the business.

Scott:
Awesome. That’s perfect. Right? That’s a great framework for that, to think about how to do exactly that same activity set. I think it’s a common problem that entrepreneurs have, Bianca, where folks are continuing to do work that is not very high value when they could be outsourcing that and doing the things that are high value. Constant struggle that everybody faces when they go into business for themselves.

Bianca:
I struggle to give up that control too, which is, I think part of why you want to be an entrepreneur, but then it’s hard to give up control when the time comes to take advantage of that.

Scott:
And the first time you do it, or the first couple of times, you’re taking a big risk and you may very well have it be more expensive than if you’re doing it yourself, but over the long run it’ll be cheaper. What else can we help you with? Did that answer your question about real estate?

James:
I think so. I think that part of what we were struggling with is time management and trying to understand when is it appropriate for us to start allowing somebody else to do some of this, right? I think that we have an exercise look through and try to figure out when we could start, or maybe now we start hiring some of that out instead of doing it all ourselves.

Scott:
You’re in an interesting sweet spot. You’re not in an area where you can outsource everything, you’re in an area where you should outsource some things and do other things yourself. Still that hurdle where it’s obvious you should outsource everything, you’ve have not crossed that yet, but you’re not too far away.

James:
I realize this might not make the podcast, but can I take a minute to celebrate my wife and what she’s contributed? Because if you look at just the numbers, you’re looking at, she’s only got $20,000 at about $278,000 of debt that she’s brought into the relationship. I want to be very clear about how she’s also contributed in other ways. In two aspects really. For me personally, my job, I was at crossroads probably about three or four years ago, and I could have either stayed with the company I was at and advanced or jumped to a different company. And for me, level of comfort, I’m like I’m just going to stay at med, even though I know that that company was not long for this world. She encouraged me to leave, which led to multiple relationships and changes that led me to where I’m at now.
And probably in the last three years I’ve seen a 35% increase in my income based on those changes. That was a huge contribution alone. But also then somehow with real estate, she convinced me to buy duplex a couple years ago, that was well beyond my comfort level.

Bianca:
It was a real dump. It was a real dump.

James:
Well beyond my level of expertise to fix it up. And somehow she convinced me to buy it and with her help and with some very generous family members we did fix that one up. We ended up selling it last year, 1031 into the 40 unit that we just bought, which she also identified that property through a client. Through both of those things, I just want to make sure I give her props for everything she’s brought financially. Honestly we’ve probably turned about 200,000 in equity to about 400,000 in equity in those two moves of real estate.

Bianca:
Trying to make up for all the money that cost you. Thank you.

Scott:
I love it. And for what it’s worth, I don’t think Mindy or I, hopefully no one listening to this has had any doubt about the fact that this is a partnership that has contributed to the wonderful situation that you have right now and you are a great couple and great team on this journey. The only reason we’re looking at the finances separate is for the-

James:
Absolutely.

Scott:
… because of the boogeyman that we’ve identified, that we’re going to try to conquer soon, hopefully.

Mindy:
I knew the only reason you were successful is because of Bianca That’s absolutely going into the show. That’s awesome. That’s lovely. But yes, I think that it can sometimes seem a little impersonal with the show where, hey, we’re really only looking at the numbers. I could make this a 19 hour show and talk about lots of different things. I love that you celebrated her and I love that you shared this, that’s very, very important, and that says a lot about your relationship. It’s not just, wow, I think of her as this burden. She’s so great, here’s all the things she’s doing. I don’t think of this as a financial issue at all. So, yay. I love this. I am making notes all over the place. I love this show. I am so excited for this show.
It definitely went in a different direction and I’m so happy for the opportunities that you have. I think that it would be a lot of fun to just sit down. I am very visual, so I would want to sit down with the big opportunities, that, okay, we can pull 50,000 from this account and 100 from this account and 20 from this account, and we can mix and match and be out of debt tomorrow. Or we can do it a little bit slower and be out of debt in two years. All these different ways we can do it and just think, how would that free up all this time? How would that free up all this mental head space? I really think it would be fairly easy to be out of debt conservatively in two years without making a ton of changes, but you could be out of debt like tomorrow if you really wanted to pull the nuclear option, without really changing a whole lot of your future trajectory.
Because you’ve got $4,000 in monthly income from your rentals and you’ve got the almost, and that’s, let’s see, that’s more than half of what you would need for your spending. And then you’ve got the other half in your brokerage accounts.

Scott:
I completely agree with Mindy. And I would just say that the three year picture is probably the easiest one to start with, because it’s so believable to have it all paid off and have a strong cash position and have your 4,000 in rental income. And if Bianca wants to keep running her business, between the 4,000 in rental income and the income from her business, and easily a 50 to $100,000 cash position if you choose to maintain that or rebuild that. You have complete freedom from there to consider doing something entrepreneurial with an infinite runway and a nice cash reserve. And that could be in real estate, it could be whatever else your exploration of your passions takes you over the next couple of years.
I think that’s a really realistic position. And then you can just say, how do I accelerate that bit by bit? Is there acceleration that I’m comfortable with that I would be willing to make that happen faster? Because you just let the current run rate happen, and that will happen to you if you just allocate it towards those outcomes.

Mindy:
This was so much fun. I’m so excited for all of the options you have. Thank you so much for your time today. I really appreciate you taking the time to chat with us because this is a really, really fun show.

Bianca:
Thank you for having us. This was really eye opening and helpful, and it gave us both a lot of peace of mind I think, to look at it that way.

Mindy:
Awesome. Well, send us a postcard from your beach vacation, where you’re going to talk about all of these things.

Bianca:
We’ll do.

Mindy:
Okay. Well, talk to you soon. Scott, that was such an awesome episode. I loved how we started down one path and then we’re like, wait a second, you could just pay this off now, in the next couple of years, and then you get 17 years of your life back to do whatever you want. And yes, you only can spend a dollar once, so you are going to pay off the student loan instead of buying a house, but you’re only, they have potentially the ability to repay all of these loans in one year with all the financial monkey business that I suggested. And yes, that would put them in a slightly less than super, super secure position by using up all their current cash savings. But they make so much income, I don’t really have a problem with that.
There are other options I would’ve given people in different situations if they had three years left on their repayment plan, if they were making $80,000 a year or $50,000 a year, if they were in all sorts of other debt, but they’re not. For this particular situation I think aggressively paying off these loans is the best choice for them, so that they can get this huge amount of time back in their lives.

Scott:
I think that the ultimate goal here, and it probably comes after around two million plus in net worth. Mr. Money Mustache has a great analogy. He says, the way you feel about money should be like how you feel about tap water, right? You’re not going to turn on the faucet and waste it and all that kind of stuff, but it’s just the utility that you’re going to access here. And these guys, James and Bianca are so close or should be, they’re just on the cusp of being able to view money through that lens. They just need a little bit more work. They’re almost there with their current spending. In a couple more years they’re going to easily crest that threshold just by paying down the student loan, for example.
You get to that point, and instead coming into today’s show, they were thinking I’ve got this monkey on my back for 19 more years or 24 more years for the second part of the student loan debt. It’s like, no, we can so easily just zoom out, take your whole portfolio. Say, where do I want to get to? What’s holding me back? And reallocate, right? And think through, reallocate both your existing portfolio or reallocate where you’re sending the cash that you accumulate on a monthly basis.

Mindy:
Okay, Scott, that is great. I can’t argue with that at all. Should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 338 of the BiggerPockets Money podcast, he is Scott Trench and I am Mindy Jensen saying, take the money and run.