December 2022

Andy Walden, Black Knight VP of enterprise research, joins ‘The Exchange’ to discuss the health of the housing market and headwinds the sector still faces.

David:
This is the BiggerPockets Podcast, show 706.

Rob:
In my opinion, real estate should… It’s fun making money, but real estate should never be fun because you should never be making that money and using it. You should be reinvesting it. And that’s not fun, that’s actually discipline. It’s like, “Yes, I like making the money, but it really hurt.” I’m like, “Oh, I felt like I could just use that $5,000 I made this month on this tiny house.” That would be really fun, but I have to force myself to say, “Well, sorry, Rob. Got to put it into the next property or into reinvesting in that property.” And it’s fun.

David:
What’s going on, everyone? This is David Greene with my co-host, Rob Abasolo who you just saw trying to match me with the 706, which is harder to do than you would think. And one of the reasons I’m the host of the show because nobody could get the hand gestures right. That’s right. You’re here at the best, the biggest, the baddest real estate podcast in the world for a pretty cool show. It’s going to be Rob and I solo today talking about what we would do if we lost everything and had to start over with no money and no houses in 2023.
Today’s show is very fun, very insightful, and very thought provoking, if you will, and hopefully very inspirational for you. Rob, how are you today?

Rob:
Good. As you were saying all that, it made me think of a show idea. You know how you do the Seeing Greene? What if I did my own version of it called the Robert Abasolo solo show? The solo-solo BiggerPockets show. Solo two.

David:
So you’re trying to get rid of me is what you’re saying?

Rob:
No, no, I’m just saying you do Seeing Greene. I think it’s time for the solo-solo show, the solo two.

David:
Abasolo show?

Rob:
The Abasolo solo show. But maybe you can still be a part of it. I just really like the name.

David:
Yeah, I just want to hear you talking solo that I don’t have to hear you and we’re going to be good. Right?

Rob:
Okay. Let me do this.

David:
Make sure I don’t like…

Rob:
The solo, solo, solo show where I have to talk like this the entire time.

David:
That would be really good. It would only be like a four-minute show because your voice couldn’t handle anything longer than that. That’s good.

Rob:
Not really, no.

David:
All right. Before we get into today’s show, a quick dip. What if I had to do a whole show in the Batman voice? That’d be something else. You’d really think about your words a lot more if it took that much effort to say all of them.

Rob:
Welcome. Welcome to the BiggerPockets show 710.

David:
And had to wear a mask the whole time as if you didn’t know who it was. Quick tip for today, what are your challenges? Write them down and think through solutions for them. You’ll quickly see avenues that you didn’t think about. I want everybody here to actually stress test their own life. What would I do if I lost my job? What would I do if I lost my spouse? What would I do if I lost my money? What would I do if the investments went bad? What would I do if we didn’t have food I could go get at the grocery store? This stuff is scary and cause some anxiety, but that’s okay because coming up with solutions will help build your confidence and help you be prepared for situations that we don’t know could be coming.
We’ve been lucky and blessed in this country to have a long run of a very, very healthy economy, but nothing’s guaranteed. If we learned anything from COVID, it was that. So take some time to stress test your life, your portfolio, and your goals and make sure that you feel good about them if everything doesn’t go perfectly. With that, let’s get into the show.

Rob:
All right. Welcome back to part two of the demise of Rob and Dave. Episode one. That’s right. Hey, you’re doing the mirror thing on the… Okay. I like it. You’re pulling a Rob. I like that. So in the last episode, just to recap everybody and level set and get everyone on the same page… Don’t make my hands…

David:
Kind of fun.

Rob:
Don’t take away my thunder here. So to quickly recap. Last episode, we talked about how our portfolios could basically crumble into oblivion. We talked about the ability to triage, which is a very fancy word of saying, could we sell off part of our portfolio if needed, or how liquid are we in our portfolio if we really needed to exit that? And then also how to actually assemble the architecture of our portfolio and how to strike a good balance between things like cash flow, debt, scalability. Dang it. I already messed up your-

David:
Ease of ownership?

Rob:
Ease of ownership. And then is there anything else?

David:
And liquidity.

Rob:
And liquidity. See, I knew that. I just wanted to throw you a softball. So today, we’re going to be picking up that conversation and talking about part two. What if we lost it all? What if we went down to zero? How could we actually rebuild our entire portfolio? We’re going to set some ground rules here. We still have our mind. We have our current knowledge. We’re still ourselves, but if we lost everything and it was just stripped away from our empires, how could we get back? How could we go from zero to Rob built and David Greene hero? So I’m excited, Dave.

David:
Yeah. This is one of my favorite things to do. I’ve often asked myself the question… You know that show Naked and Afraid? You’re dropped off in the middle of a jungle or something. You have no idea what you’re going to do. I’ve asked myself, what would I do if I had all the knowledge I have now, but none of my resources and you just dropped me into the middle of some city that I’ve never been before. I’m homeless, I don’t have any friends there. Would I be able to build wealth or would I just become addicted to drugs? So these exercises are kind of fun. And so now we’re going to do it with our portfolios.

Rob:
Yeah, man. So let’s get into just the first aspect of this and we’ll build to it. But I wanted to just start today’s show with just asking what are the biggest challenges that you’re facing right now, both emotionally, but specifically from a real estate standpoint, and is there any pitfalls that you’re currently encountering that that might lead to something like this?

David:
Well, this could easily turn into a therapy session for me if we’re not careful, so you’ll have to cut me off. But as far as the pitfalls that I’m going through, we have the market changing incredibly quickly. So pretty much almost all of the sources of income that I have come from some form of real estate. So my real estate sales team not selling nearly as many houses because the market has turned around. Rates are super high. A lot of buyers are wanting to wait to buy and a lot of the investors can’t make deals work because with the rates being high.
Even if you could get in contract, you can’t make a cash flow. Then you got the mortgage company, that’s the same thing. You can only qualify to buy a house off the debt to income ratio. So as rates are going up, it becomes harder to get people to be approved to buy the level of house that they have to get a seller to sell it. So income is going to be down there too. Well, all my employees are now making less money, and as you can imagine, people are not super happy about working harder and making less money.
So a lot of the character flaws that are present and all of us tend to not get exposed until times get hard. That’s one of the quotes that Warren Buffett has. When the tide goes out, you see who’s been swimming naked. So you’ve got all the personnel issues that you’re dealing with as the tide has gone down, the market is not doing good. Then I’ve talked about the 1031 that I was kind of forced into in a very quick timeframe. So I bought almost 20 properties. Maybe there was 20.
At the end of the day, almost all short-term or mid-term rentals across the country, massive problems with the rehabs employees that I had to let go of that quit that were managing these things that weren’t. I had to switch my CPA in the middle of all of this and my bookkeeper. So I’m every single week having to meet with bookkeepers to try to figure out what properties are profitable and what are not. Getting my taxes ready for the next year, and creating equities to hold all these properties in. Those mortgage payments still have to be made over and over and over. Then you throw in neighbors that are complaining about the construction that’s going on or that don’t want a short-term rental next to them. So they keep on calling the city to complain about nothing, which just means we have to now deal with more and more headaches.
And there’s more than that that’s going on as well. There’s a lot of things that are tough in life right now. So this is the perfect time for us to get into the fact that making money, especially making money in real estate is not always fun. In fact, it’s not often fun. It’s not glamorous all the time. You will hear the glamorous side of it when you’ve got a slick marketer trying to convince you to follow them on social media.
They want your attention. They want your subscribes. They want your follows. They’re going to tell you about the part of real estate that’s great. And then people get into it assuming that’s always the way that it works. And then when it doesn’t work that way, they think there’s something wrong with them or they think they weren’t meant for this and they get discouraged. But that is not the case. Even the people that are the best in the world are constantly sloughing through problem after problem to get to that cherry at the top of the sundae.

Rob:
Yeah. I mean, like you said, in my opinion, real estate should… It’s fun making money, but real estate should never be fun because you should never be making that money and using it. You should be reinvesting it. And that’s not fun. That’s actually discipline. It’s like, “Yes, I like making the money, but it really hurt.” I’m like, “Oh, I felt I could just use that $5,000 I made this month on this tiny house.” That would be really fun. But I have to force myself to say, “Well, sorry Rob. Got to put it into the next property or into reinvesting in that property.” And it’s not fun. It isn’t. But in 65 or when I’m 65, I should be having fun on my jet ski and realize my life dream of owning a jet ski on the beach, David.

David:
That’s exactly right. We talk about money being energy or really a store of energy. Energy that you’ve already accumulated from work that you did or previous investments that you made. The more of that energy that you can keep in your portfolio, the faster it will grow. The more of it that you pull out to fund your lifestyle, the slower that wealth will build. Now in your world, Rob, tell me about some of the pitfalls that you’re having with your real estate business.

Rob:
Yes, okay. A lot. I would say right now, this is being solved for thankfully, but a big pitfall that I’ve had is just not having cohesive bookkeeping in accounting. Now we had Matt Bontrager from TrueBooks on. He is my accountant and they are now doing my bookkeeper. That is solved. They’re doing really great. But actually last year for 2022, I had three… Oh, sorry, for 2021, I had three separate CPAs filing all of my taxes. I actually had four technically because I had all these different business partnerships and all of the partners were the ones that handled the taxes.
So my main tax accounting firm needed the taxes from everybody and they needed the tax. Oh, it was a big mess. But I have now fired all of them and Matt is now my sole CPA at TrueBooks. Now, they’re doing all my bookkeeping. So that’s going to solve a lot of the questions that I have day to day on what’s the true profitability? Because the way some bookkeepers track your accounting is just different than others. So that’s a big one. Another one is, this is probably the biggest problem that I face in my entire portfolio and it’s that I don’t have enough people on my team.
I’ve been very, very, very conservative and very slow to hire and that’s probably a good and a bad thing. But it’s been a bad thing for me because it really does slow down how quickly I acquire things. I’ve got a lot of plans to acquire properties and I see properties come across my desk all the time, but I honestly turned them down almost automatically whenever I think about the logistics involved with actually setting them up, just because I’m so busy with all the other miniature empires that I’m working with.
So on the real estate side, we’re a very slim team. On the content side, I’m a very, very, very scrappy team. It’s me and my editor. All the content that you’ve ever seen me post is just two people. It’s me and my editor for the most part. I write my own captions. I make my own Instagram reels. I do all my own posting. I respond to all my DMs. And some people at home might say, “Hey, how is this relevant to real estate?”
Well, my YouTube content, all my content fuel a lot of my real estate because that is my funnel for working with investors that approach me to invest half a million dollars. They find me off of YouTube. So that is a big fuel source for the acquisition part. But then I run into, “Okay. Well who’s my team?” I’m just now finally realizing that the thing that I’ve really needed to come to grips with is I need to force myself to make less money in the way of hiring more people.
Because hiring people are going to… It’s going to cost me a lot of money to hire them, but by that costing me money, it will actually make me a lot more money because I can scale up much, much, much faster. And so the big problem with my empire right now is that if I have a sick day, everything shuts down. If I were to die, it all crumbles. And this is actually a big stress point for me because if I were to not be around, not to get too morbid here, but we should probably talk about it a little bit. My wife doesn’t really know the inner workings of my portfolio and there aren’t that many people to run it.
My wife does not want to run my real estate portfolio where things to go that way. And so I’m having to now really focus and restructure my company to place more, I don’t know, more generals if you will, to run it for me so that if I’m sick I can actually take a sick day. Because right now if I’m sick, I don’t take a sick day. It’s even so bad now that when my wife is sick and I have to take care of the kids, for example, because she watches them on Tuesdays and Thursdays. That’s really tough for me in the business because then there’s no one to answer all the… It’s just a whole thing.
So I’m staffing up. I’m actually hiring a five-person content team. I’m going to have two full-time editors. My full-time editor now I’m promoting him to content director. I’m hiring a social media manager and a content writer. I’m doing that. And then I’m going to have acquisitions people on the real estate side. I’m launching a fund where I’m basically going to have seven to 10 people running the empire for me. It’s a whole thing. I feel like I just rambled here for five minutes, but it is a very real pitfall that I’m facing right now is just scaling and being able to hire and having the confidence to do so.

David:
Okay. So if this is your plan, tell me about some of the ways that this could go wrong and could all crumble around you.

Rob:
Well, I think for me, the reason I’ve been so nervous about hiring is I’m always… I have this very prideful and stubborn thought that I cannot hire someone to do a job that that will be better than me. Right? Because I’ve really good at the things that I do. And so it’s hard for me to hire someone even though I know that there are millions of people out there that are way smarter and more capable of doing the job than I am.
So I think my big fear of something going wrong is hiring someone that will not be able to pick up the slack and carry the torch forward and then that will effectively just cause structural issues within the business, if that makes sense.

David:
Okay. So what about the properties that are going to be buying for you? What are some areas where you think your acquisition team could make some mistakes or the operation side could let things slip to the point that you lose money?

Rob:
Okay. So I will say that for 2023 I am going to be more aggressively purchasing properties. I know a lot of people right now want to take the conservative route on that and that’s totally fine and commendable for those people. I see things a little differently right now. I think that we’re about to see some really huge discounts. I was very busy this year and I did buy properties, but not as much as I wanted to. And now it works out because now I’m seeing all these discounted properties and I’m going to go in and snap them.
So I think probably the pitfalls of this are going to be that I need my team and the acquisitions team that are running this for me. I need them to be really good at comping conservatively. I’m actually comping out all of my properties in an incredibly conservative manner that leaves a lot of room for error basically. I didn’t used to do that. I’ve always been very aggressive with my analysis. Most of the time I’ve been actually relatively correct, but now we’re sort of switching it over. So I’m just more right now weary of trusting the acquisitions team to be as conservative as I want them to because I think we’re actually in a time where we have to be the most conservative we’ve been in probably the last 10 years is my guess.

David:
Yeah, that makes sense. I mean, I wasn’t as upset with people that were riding aggressive offers the last six to seven years as others were because it was pretty clear to see that prices and rents were going to continue to rise. I think that you probably lost out on more gain than you protected yourself from loss if you were riding very aggressive offers when there was this much inflation happening. If you go back five or six years ago, someone would write an offer that a conservative guru could call a fool who made $200,000 and 80 grand a year on that property because they wrote aggressively.
But it’s difficult to see that trend continuing from this point forward with how concerned the government is with trying to slow down inflation. So as long as rates keep going up or stay high, they’re trying to push the cost of assets down versus where they were trying to create to print more money, which makes the cost of those assets go up.
So I do think you got to be able to pivot. You got to be able to be understanding that you need to stay high volume, you need to stay aggressive, but a conservative approach makes sense in this market. You’re not leaving money on the table anymore, being conservative. So I think that’s wise. Do you have any concerns about turning things over to other people in your business as far as who’s going to be doing the acquisitions?
Are you still going to be looking at every single deal before it’s bought and reviewing what they put together? Are they going to have some authority to make moves without running it by you?

Rob:
Yeah, that’s the hard part, honestly. I think I’m probably going to still be relatively involved because like I said, I’m launching Robuilt Capital, my big goal, my stake in the ground or the line that I’m drawing in the sand, I want to raise a hundred million dollars in the next five years. I’m dead set on that. I want to do that. I’m going to do that. And what I plan to do with that $100 million is I want to go and acquire campsite, RV resorts and basically remodel them and juice them up, if you will, to be like high-end glamp sites and unique stays.
So I just don’t think I can turn that over quite yet because I’m still not the RV park glamping assassin that I’m going to be. I’m very good at it, but I’m not good at good enough at it to just hand it over and direct. I think I still need to be in the weeds of this a little bit. But with that said, now that I’m hiring an acquisition person, possibly launching a property management company, I’m going to have the actual, I don’t know, the project manager, the investor relations person, the COO of the operation.
I’m going to have seven to 10 and most of these are already filled, but I’m going to have seven to 10 people that I’m having to actively train. It’s already hard to hire one person and train them for the role. I hired my first COO two or three months ago to run host camp for me and I’m involved. We talk every day. I have not been like, “Oh, here you go.” And I haven’t disappeared.
I’m in the trenches with him to train him to do that. So doing that with five to seven to 10 people at once, that’s going to be a real adventure that I’m a little nervous about, but also really excited about. So I’m looking to basically take an old school traditional approach to funds where you go and deploy them in multi-family or mobile home parks and put the Robuilt spin on it where it’s a little bit more of a glamorous, upscale experience.
I’m really excited to pioneer that. Because my intent is to pioneer that and be the number one fund that does that, then I’m sort of assigning myself sort of the trench digger, if you will. I’m going to be in the weeds of that, but I don’t know if that’s the healthiest approach, but that’s the approach that I’m going to take for now.

David:
I like you going big on something that’s unique. So you’re not saying, “I’m going to go buy a bunch of multi-family apartments that everyone else is buying.” You’re really banking on uniqueness. I’m going to do something other people aren’t doing. If I’m going to scale, if I’m going to be aggressive, I’m going to go big. I’m going to do it in a way where I don’t have as much competition as a form of risk mitigation. I think that that’s pretty wise.

Rob:
I mean, ultimately that’s my dream. I want to go heavy into unique. I think there’s the conservative layer that I’m placing on how I model all these things out. But then there’s also the extremely conservative layer that I’m now going to be working with investor money. So as a fiduciary, I don’t know, intermediary for my investors, I have to be even more conservative than how conservative I am now.
So a lot of is changing about how I’m investing and I’m curious, what about on your end? Is there any change in your risk versus your conservative approach to actually getting into properties now that you’re sort of in the trenches of all these remodels and all these short-term rentals that you’re about to launch?

David:
What I don’t like about the path that my choices took me is there’s a very long period of time from the point where I bought the house to the point where I’m going to get data back to see how the investment worked out. Takes a long time to do the remodels. The cities and the neighbors are causing a lot of problems. Then you get the property up and you don’t know when it’s going to start booking. You got to tweak with it like the different pictures or different design ideas.
It takes a little while for a short-term rental to pick up at speed. So it could easily turn into 12 to 24 months before I have solid data that I can say this strategy worked. And that’s a long time to go without actually having some input to be able to say, where should I pivot? So I’m kind of flying blind for a while.
I don’t love that. So during the period of flying blind, I really just focus on things other than acquiring more real estate. I’m either going to go back to an asset class that I already understand very well that’s much more predictable. This could be a long term rental, an apartment complex, putting money in with somebody else, flipping a house, something like that.
Or I put that energy into business. So it’s very difficult when things change this fast for people who are doing new stuff to figure out if they should scale or if they should go slowly. And I can definitely recognize that’s a challenge a lot of people are having. What are you doing to pivot right now?

Rob:
Oh, man. A lot. I’m a relatively diversified investor in the short-term rental space, but I actually want to do a lot of things in real estate. I have big aspirations. BiggerPockets has always been the golden handcuffs of investing because I’m really good at this one thing and I want to double down and niche down, but I see how many people in the world are crushing it in real estate and I’m just like, “I got to try all these different things.” So that was just me as a listener.
I’m like, “I want to try it all.” And then we interview so many people on the podcast that are amazingly talented and brilliant people that it inspires me to try new things. So I’m actually going to be doing quite a few things. I am going to probably not do so much short term rentals the way I have been where I was buying the one-off homes. But I’m actually going to be doing, like I said, the fund where I’m acquiring a lot more short-term rentals at mass.
I’m going to be doing a lot more medium term rentals. That’s my big push right now. I have two medium term rentals now. I have three and I love them. They’re super easy. I just locked in my biggest reservation ever on Airbnb for 33 grand for a six-month rental on my house in LA. I haven’t even heard from the guests since they checked in. It’s amazing. I absolutely love it.
So I am going to be focusing on getting more medium term rentals and focusing on developing contracts with medical agencies and different people like that. Because I know a lot of people that are crushing it in that space. Oh man, this is a really big pivot for me, but I’m actually going to be doing a little bit more rental arbitrage. I have a few reasons for it. We don’t have to get into it now, but I’m going to be doing a little bit more of that from an exploration and education side of it.
I want to be able to teach people how to get into it like zero money down. And then I want to actually get into reverse arbitrage, which is a new thing that I just thought of two nights ago. [inaudible 00:24:10]

David:
Where You would buy a house and let somebody else do the arbitrage so you don’t have to deal with all the headaches.

Rob:
Dude, you got this instantly. Everyone that I’ve talked to about this, they’re all, “I don’t get it.”

David:
Yeah. You’re getting rid of the worst part of being a short-term rental person. All the emotional ups and downs, the spikes, the headaches, the bad reviews, and you’re getting to own the actual asset, which is where most of the money comes from.

Rob:
Yes. And you get to charge a markup. So if I buy a place that’s 2,500 bucks market rent, I can tell an aspiring host, “Hey, I’ll let you rent it out on Airbnb, but you got to pay me $3,000 a month.” So not only am I ditching the low long-term rental returns, but I’m actually getting a premium on it. I don’t need a property manager. I can just rent it to an aspiring host and let them run their Airbnb journey and I get all the tax benefits.
I was in bed so excited about this two nights ago ’cause I was like, “Why isn’t this talked about more?” Long-term investors should be renting out their places to Airbnb hosts at a premium and you could double your returns.

David:
Yeah. That’s a way that when we talked about in the part one of this episode, how you can diversify risk and how portfolio architecture can help. Having a couple properties like this where you get to own a highly appreciating asset, that’s the market will work best in and it’s going to have to have a lot of meat on the bone for someone to make it worth their while. You’re not going to pull this off in Wichita, Kansas or Toledo, Ohio where the stuff is renting for $80 a night or something. It’s going to have to be a decent amount.
And the operator, it has to be worth their time to do it. But dude, if they’re going to absorb all of the worst parts of the business and pay you higher than market rent and you can own the property without having any of the headache, this is a great way to add some safety and some equity to your property without taking on the ease of ownership issues of a whole bunch of short-term rentals, which is kind of trying to babysit 25 toddlers all at the same time.

Rob:
Yeah. So to sum it up, I’m going to basically be doing long-term rentals, medium-term rentals, short-term rentals. So I’m going to diversify there and then acquiring large 50 to a hundred door properties that will eventually become glance site. So I wouldn’t say I’m necessarily… I guess it’s all pivots. They’re all small pivots, but they’re all pivots in my wheelhouse. That way I can at least still be in my element in some capacity.

David:
I asked you previously about your concerns with some of the mistakes you could be making, but now you have a little bit more clarity on the direction you’re going to pivot to. So do you have any more clarity on the types of mistakes you want to avoid going forward?

Rob:
Yeah. I’m trying to mistake proof myself right now like the way I am with recession proofing myself. All right. So I think the big mistake is the shiny object syndrome of trying to approach everything. I think that becomes a problem whenever you try to approach everything out of your wheelhouse. But everything I just talked about, the reverse arbitrage, medium-term rentals, short-term rentals and glamping, all of those are just different forms of short-term rentals in my mind. Things that I’m actually good at.
And so while I am spreading myself thin on the execution of how I’m doing it, it’s all within my expertise and knowledge. So I’m not super worried about the mistakes of the actual execution of those models. I’m just more nervous about, like I mentioned, not having the team to be able to execute them because I have three… I guess I’m more nervous about the mistakes at scale.
I’ve got three mid-term rentals right now. I don’t know what it’s like to have 30. That’s a lot different. I have 35 doors right now that are effectively all short-term rentals. It’s very different to manage 35 than it was to manage two. So right now, the only mistakes I’m nervous about encountering are going to be the scaling mistakes that I make with scaling like purchasing reverse arbitrage units at scale or medium term rental stuff.
But because I’m already doing most of this, I’m not super worried other than… I think, “Oh, you know what? Personal mistake, I think.” I think I’m going to make the big mistake of putting everything I have into this and that will bleed into family life, dad life and husband life. If I’m just going to lay it out there, I could see that being a big mistake that I make is not prioritizing what actually matters over this thing we call real estate.

David:
That’s very easy to do and it’s very wise of you to be planning for that ahead of time. And even if someone doesn’t have a family like me, sometimes those issues bleed over into just your… I don’t want to say your personal life, but your emotional wellbeing. When you’re up at night worrying about what’s going to happen or you borrowed money from investors and it’s not going as well as you thought, it can have a very big toll on how you’re feeling, the confidence levels you have.
Your mind can easily start to look for an escape and it can tell you crazy, terrible things to do to get out of those scenarios. So I think it’s wise to be considering what could go wrong so you can prepare mentally for how you’re going to handle those types of situations when they come up.

Rob:
Yeah, for sure. Well, what I’d like to do now is assume that we made all the mistakes and everything crumbled, we lost it all, and we went to zero. I want to talk about now how we would go from having $0 a net worth back to where we are today. You cool to jump into that idea?

David:
That’s a great idea. Let’s do it. The broken afraid version at BiggerPockets.

Rob:
All right, Dave, let’s fast forward. Okay. Let’s just say you make some crazy mistake. You’ve lost it all. You’re back to zero. David Greene is no longer green at all. He’s David eed.

David:
Yeah, the red.

Rob:
You’re in the red. Now you got to rebuild and start from square one. How are you going to get started? What’s your first step?

David:
First step? All right. I am probably going to do more than just investing in real estate. I’m going to look to diversify the way that my income is coming in because I’m at lost at all. I probably had too many eggs in one basket. I probably quit my job. I probably got super into investing, maybe one asset class like short-term rentals or something a little bit more risky. And then I had a bad couple months and boom, it was all gone.
So the first thing I wanted to do is to establish a much more solid base. So I want to scale horizontally before vertically. So I’m going to look for an industry where I can make money, where I’m still involved in real estate, which could be being an agent, being a loan officer, working for a construction company, being a contractor, consulting, working for a 1031 company, being a CPA. Anything I could do where I could help other people in real estate while helping myself.
Second thing, when I’m looking for properties to buy, I’m going to look for this stuff with the highest days on market in the best areas, especially if it’s more expensive real estate. Now, I realize this may come as a counterintuitive statement. You’re thinking, “Hey, the market is slowing down. Buy the cheapest properties you can find.” But that’s not what you want to do. That’s actually increasing your likelihood of losing them. I want to go for the stuff that used to sell for a million when the market was at its peak, and now that rates have doubled, it’s going to sell for maybe 650,000.
And it has the potential to go back to the million when the market does turn around and rates come back down. So I’m going to play the long game, not the short, fast game, which is probably what I did that caused me to lose that money in the first place. Is that making sense?

Rob:
It does. I want to ask you how would you choose your market? Is there a strategy for the market entry point that you want to get into?

David:
I want high days on market and I want an area that I believe in the next five to 10 years, more people with higher net worth are going to be moving into. Okay? So I don’t want to go invest in the part of town or the city where newlywed couples that have no money are going to go buy their house. You want to be where, all right, the wealthy people in California, in New York, in the northwest, in New Jersey, in these areas that were traditionally where wealth was gathered, where are they going to move to?
When they want to get out of there for whatever reason they have, high crime, bad weather, whatever it is, where are they going to go? That’s the place that I want to be investing in. Right now a lot of people are moving into Texas. That’s one market I’d look into. A lot of people are moving into Florida. They really liked how things worked out after COVID in Florida and the weather is better than where it is in Maine. That’s where I’m going to be looking into.
You and I bought a property in Arizona in the nicest city in all of Arizona where the wealth goes. You’re probably not going to crush it right off the bat investing in a market like that. You’re going to be like the tortoise coming out the gates. The hair is going to pass you up. The hair of cash flow, they’re going to go buy in Wichita, Kansas or Birmingham, Alabama. Some of these markets where the price points are lower, the price and rent ratios are more solid.
But wealthy people aren’t going to be moving into those spots. I’m going to be playing the long game because there’s opportunity there that I didn’t have when the market was hot. Now that the market’s cooled down, I’m not competing with as many other investors to get into these markets. They’re all doing the opposite. They’re all going after the cheapest property with the highest cash flow possible, not thinking about the future.

Rob:
All right. So if I understand this correctly, you’re going for the highest day on market. That’s going to be a strategy for acquiring good properties at a discount. You’re going to be looking for areas where a lot of people are moving to because of the tax savings, but also people are just moving out of California and going to certain areas. You want to pick up that incoming traffic basically, right?

David:
Before everyone else does. That’s exactly right. I don’t think other people are looking for opportunities there because they’re thinking, “Oh, that’s an expensive property. I want to buy a cheap one at this time. I’m going to be looking at the weather. I think that really matters.” Most people live where they live because that’s where their job is. But as work becomes more and more remote, you don’t have to live in North Dakota. People are going to start to figure that out.
Why am I in Fargo? I could be living in Miami. I could be living in Tampa. I could be living somewhere like Corpus Christi where it’s beautiful outside and I can still make money. So I’m going to go invest in those locations. The other thing I’m going to do is I’m going to utilize all the tools at my disposal when it comes to funding.
So I’m definitely going to use FHA loans. I’m going to house hack a house at least once a year. I’m going to try to do it more if I could get away with it. If I could convince a bank to give me a loan, I’m going to get a primary residence, live in it for nine months, rent that out and move into another one for whatever reason. Maybe my job moved or I had a sick family member, I had to go somewhere else. But I’m going to try to get away with as much 5% down properties as I possibly can in the best areas that I can justify so I can keep more money in reserves because I’m less likely to lose my portfolio again like I did hypothetically last time if I keep more money in the bank. So I don’t want to put 20 or 25% down if I have to.

Rob:
Okay. All right. Al good answers. Last one. How are you going to go about rebuilding your team? Because theoretically, all your current team, they’re gone. They’re out the window, they’re bitter that you lost everything, they lost their job. Now, you got to build a new team. How are you going to assemble those Avengers?

David:
I’m going to look for a property manager in the area that I want to buy the houses first because I don’t like managing property. And to me, that’s the hardest piece in the whole puzzle. This is why so many people manage their own properties. It’s very difficult to find a good property manager. It’s easier to find a good contractor or a good handyman than it is to find your own property manager that’s good.
So that’s the hardest piece. I want to get that first. When I find that property manager, I know they’re going to have contacts around town. They know the good handyman. They know the good contractors. They know the pieces that I’m going to need because all their other clients are sharing that information with them.
I frequently would say, “Hey, talk to my property manager. I don’t want to deal with it.” And then I would find that the property manager is now in cahoots with the rockstar realtor that I was using because when they met them, they realized they’re better.
Or I’d have a property manager that wasn’t that great and they would get me a bid and I didn’t like it, so I found my own person. And I was like, All right. Talk to the property manager. They’ll let you in the house.” So now the property manager is like, “Oh, this person is great.” We’re getting them as our referral person. So the better that you are, the more exposure you have to other people, the higher quality of referrals you start to develop.
From there, I’m going to ask about the top rated agents in town. I’m going to go and I’m going to find the people that either own real estate there themselves or sell a lot of houses. They’re going to help me find the deals. Those two people are going to help me find the loan officer, which is one of the easier spots to find. And then from there, I just need the contractor and I’ve got my core four and I can start buying in that market.

Rob:
All right. Now I want to fire around what you would do with certain amounts of money.

David:
Okay. This is interesting.

Rob:
You ready for this? Okay. So what would you do with a thousand dollars? You lost it all. You got a thousand dollars to your name.

David:
With a thousand dollars, I would probably host a meetup for as cheap as I possibly could. I would definitely cater it with Chipotle because there’s nothing that’s going to get more people to show up for a meetup than having Chipotle. It also shows that you’re a classy person and you can be trusted. Those are all qualities that Chipotle lovers enjoy. I’m going to have as many people come and I’m going to make as many contacts as I can and make as good of an impression as I can. I can probably stretch that thousand dollars into several of these and I’m going to have emails and phone numbers and names of all the people that came. That’s my new database.
I’m going to start off by just pouring into those people, building relationships, finding how I can help them and earning their trust, which I’m then going to turn into revenue through whatever real estate business I developed. If I became a loan officer, an agent, a contractor, a handyman, even, those are people that’s going to fuel my business by saying, “Hey, this guy David over here is a handyman. My buddy needs a new door hang at his house. My buddy needs a leaky pipe fix.”
I’m going to start creating revenue off of those relationships. And now every time I go meet somebody to fix something in their house, I’m going to let them know, “Hey, I’m looking to buy real estate. Let me know if you know anybody who’s looking to sell it?” I’m going to try to get some owner finance deals, some creative financing going on because I don’t have a ton of money, which means I need a ton of people in the network.

Rob:
Okay. How about $10,000?

David:
$10,000 is getting better. Now, I’m in a position I can probably get an FHA loan and I’m going to look for something right around $300,000 where the seller is going to pay the closing costs on that. I’m going to tell my agent they need to write the offers that way. I’m going to try to get the biggest and the best house in the best neighborhood possible that’s as ugly as I could possibly find.
If it’s ugly and it’s big and it’s in a great location, I’m going to want it and I’m going to just house hack that sucker with a grassroots campaign. I’m going to rent the rooms out if I have to rent the rooms out., I’m going to turn rooms into rooms that can be rented out. I’m going to have a person who’s got a trailer that they’re not using parking on my property and I’m going to rent that out to somebody else.
I’m going to scrape and claw to figure out a way to build up some cash flow from that first property that will keep my mortgage as low as possible or maybe even put some money in my pocket to help buy the next house.

Rob:
Perfect. How about $50,000?

David:
50,000, I’m starting to feel really good. I’m still going to house hack and do everything I said, but I’m going to have 30 to $40,000 left over after that to be able to buy another property. So maybe I take some of that extra 30 or 40 and I use that to improve the property I bought. Now, I can house hack a real fixer upper. I can get something that needs a lot of work and I can make it worth more which increases the equity. And then 12 months later I can refinance and hopefully pull out more and turn that initial 50 into more like 80, 90, maybe $100,000 after the refi.
So I’m not going to be able to buy something turnkey. I’m going to have to be very, very clever and put a lot of work into finding the property that needs a lot of work but has the highest upside. Okay? It’s a 2,800 square foot house in a neighborhood with other houses that are also big. But this is the one with the green carpet and the ugly wallpaper and it smells bad. Everybody walks into it and just turns around and says no, because they want something turnkey in that neighborhood and they can afford it. That’s the house that I want to go buy and.
I’m playing the long game. So 12 months later after I fixed it up and I put a little bit of money and some sweat and some tears into it, its values increase the most because the comps were much higher than the price I pay. There’s a bigger spread in the high to the low than some of the other neighborhoods with cheaper homes where the spread just is not that significant. You don’t have as much meat on the bone.
After that refinance, I’ll be able to repeat the same thing again, and at the same time I’ll be able to house hack. So if you do this right, you’ll have one house hack every year and then one fixer upper property like this, and you work those at the same time for several years in a row.

Rob:
No further questions, your Honor.

David:
Thank you very much. All right. If you don’t mind, I’d like to cross-examine the witness.

Rob:
Allowed.

David:
I’ll allow it.

Rob:
I’ll allow it.

David:
Sustained.

Rob:
There you go.

David:
You were going with court language, but you went with The Office’s Michael Scott. That’s what was so funny about that. All right, the year is 2023. You have lost your entire short term rental portfolio, yet you have not lost your fighting spirit. What is the first step that you’re going to take in rebuilding your empire?

Rob:
Well, there’s one thing that I’m really good at and it is marketing, sales and content. So I am going to be rebuilding my content system and ecosystem and platform to just make myself an authority again and really talk about the demise and the mistakes that I made and how those mistakes are going to make me wealthier and richer as a result. So I’m going to get out in front of the bad press of all the mistakes that I made with losing everything. I’m going to own them and I’m going to make really inspiring content that shows anybody that you can build from zero to hero all over again. Okay?
So I’m going to use my content as an opportunity to raise money. There’s no reason for me to scale slowly and build back from zero if I already have my knowledge. I think when you’re starting out in real estate, you have to go very slow because you just don’t know anything. I still retain my skills and knowledge. Right? So theoretically, if I lean on the mistakes that I made, I can go and I can raise money from an investor and use that to get into properties that are going to cash flow.
Now, I want to make money as quickly as possible. I need to be cash flowing. I actually need to make money. So I want to figure out how to get into different properties that make me money right out the get-go. And on top of that, I want to prove a little bit of credibility and reestablish a new track record. So I would probably actually start a property management company and I would manage Airbnbs for other people.
I would help them make a lot of money and I would try to get to 20 as quickly as possible so that I could go to an investor and say, “Hey, look at these 20 properties that I manage. I make all this amount of money for these 20 owners. I can make you that amount of money.” I’m going to do the sweat equity in exchange for equity in that property.
Now, probably what I’m going to do is put in no money, have the investor fund it, have the investor finance it, and I’m going to do everything. I’m going to source the deal. I’m going to work with realtors. I am going to furnish the place. I’m going to manage it. I’m going to do everything. I’m going to work my tail off so that this investor knows that I’m putting everything I have into this house.
Hopefully a strategic investor that will reinvest with me 2, 3, 4, 5, 6, 7 times. That’s going to get me some cash flow, but I also want to be working on appreciation at the same time. So through my different content, through everything that I’m doing, I’m going to do my best to join other syndications and other funds as a general partner, as a small role, whatever I have to do to get into a syndication so that I can have a small little piece of a pie of something that will eventually be a lot bigger.

David:
What role do you see yourself playing in that syndication? How are you going to bring value to them if you don’t have a ton of money?

Rob:
Probably the actual investor relations. I’m going to be the one meeting with the investors, walking them through everything. Not necessarily the number crunching. I’ll let the financial modeler do that, but I’m going to be in charge of the marketing. I’m really good at funnels. I know that I can create a funnel system that effectively reaches a large audience, and then from that funnel, that audience starts going down the funnel and eventually gets to the fund.
So between fundraising and actual marketing, I will be in charge of lead generation effectively for a fund and that will take care of my appreciation. So I want to try to get back appreciation and cash flow as quickly as possible. Equity and cash flow fuel, because those are the two components that are needed for hopefully a relatively sustainable lifestyle in real estate.

David:
Yeah. What I like about this is you’re not just relying on investing, you’re relying on your skills as a human being that you developed over time to give you that little push, that boost to help your building wealth. A lot of the people listening to this have skills they’re not even thinking about. They’re in marketing and they don’t realize that they could be helping a syndication with raising money or putting out better content. Right?
They analyze things for a living as maybe an insurance adjuster or something like that, and they’re not thinking about how they can help analyzing properties for a fund. So that’s very, very clever. Now it sounds like you’re not picking a market to rebuild, right? Because you’re going to link up with someone else who’s already done that.

Rob:
I’m trying to join other ecosystems and build it that way. I mean, if you think about Elon Musk, for example, when he wants to start a company, he’s not the one that’s actually doing it, right? He knows his skillset. His skillset is finding the right team, delegating it, providing the vision and kind of assembling it that way. But he’s never the one that’s in the trenches actually building that company from the ground up from a day-to-day tactical side.
So I don’t want to do that. I don’t want to be the person that’s doing a live-in BRRR and starting that process. I think marketing can solve a lot of those problems for me and get me back to where I was within a year if I really put a lot of time and effort into it. So from a market standpoint, I’m a big fan of national parks. So a lot of what I’m going to be proposing to investors into the people that I’m working with are to heavy up into some of these more recession resistant areas.
National parks are mother nature’s Disneyland, as I always say. So anything that falls within the Grand Canyon, Smokey Mountains, Yosemite, Yellowstone, I know that those are always going to be really rock solid properties and that that’s where I would probably heavy up is if I was going to start somewhere.

David:
All right. Now, if you’re going to source a team here as far as who you’re going to link up with, what are some things that you’d look for in the syndicators or the partners or however this is being structured that would make you think that’s the person I want to hitch my wagon to?

Rob:
So it kind of depends. If we’re just talking about me partnering up with an investor, I want a silent investor to just let me do my thing. I want a silent partner like, “Hey, I know you’re good at this. You’ve wined and dined me. I don’t want anything to do with this. I just need time to work that money, do my thing, embrace my mistakes, and go all in. So from an investor standpoint, I’m always looking for a silent partner. From the team standpoint, that’s a good question. I knew this was coming and I probably should have prepared for it.

David:
Well, you probably haven’t done this before, right? You haven’t found a syndication to throw yourself into?

Rob:
No, it’s just my syndicate. I started it. I started my own fund. I did that today. So I’m probably going to be working. I know what I’m going to do. I’m going to find a project manager type of person. Someone that’s very analytical, someone that’s very driven by logistics and details. That’s probably going to be the first hire on my team because I’m terrible at that. That is not my gig. I’m not good at that. I’m a visionary. I’m not good at detail oriented things.
So I need a counterpart that’s going to keep me on task, keep me on the path to where I want to go. So probably somewhat of a project manager or like a COO who’s willing to start from the ground, from the foundation and build up. Someone that’s like, “Hey, I’m down to be broke with you for the next couple of years. Let’s do this thing.” Someone that’s not focused on the cash flow benefit immediately.

David:
Wonderful. Okay. Let’s say you have a thousand dollars. What are you going to do with it?

Rob:
I’m going to invest that in some kind of course or some kind of education that is going to make me smarter, that’s going to make me money. I’m going to invest in that, or I’m going to change my personality type and I’m going to invest in $1,000 worth of books and read them. I’m going to use that thousand dollars to make myself smarter in some capacity, because you can’t do much with a thousand bucks in real estate. That’s always the advice. “All right. If you have a thousand dollars…”

David:
A thousand dollars gets you a lot of knowledge and wisdom through books.

Rob:
Yes, I agree.

David:
Brandon Turner had a point about this. He talked about how someone could have 10 or 20 years of life’s wisdom condensed into a $10 book and we just dismissed that like it’s not a big deal, but how valuable that actually is.

Rob:
Yeah. I mean, you can infinitely become smarter with one book, right?

David:
Yeah.

Rob:
So whether it’s that or some kind of little curriculum, something that teaches me. I just got to figure out how to make myself know something that I don’t already know.

David:
You also got to figure out how to make yourself spend more than four seconds doing one thing without having something else pop up that you have to go do. Because it’s going to be tough to read these books in your current state. I like that.

Rob:
Yep. Well, theoretically I won’t have a lot to do.

David:
Well, that’s a good point. Yeah. Maybe some of the money can be spent hiring virtual assistant to read you the books or you buy them on Audible. I suppose someone’s already taken that.

Rob:
Audible. Right.

David:
Yeah. All right. Same question with $10,000.

Rob:
$10,000. Like I said, I want to get cash loan as soon as possible. So I’m probably going to do a rental arbitrage deal or some kind of rag tag glamping operation, get into an apartment, pitch a landlord, beg them to let me release it on Airbnb. If they say no, I will say, “Hey, how about this? Let’s rent your apartment on Airbnb and we’ll split the profits that way they get some of the upside as well.
So I’m going to use $10,000 to go out and basically pay my deposit, my first month’s rent. About, let’s call it six to $8,000 on furniture and get it listed on Airbnb as soon as possible. Make some money. That’s option one. Option two would be like buy a $3,000 tent. Go find a property owner that has 50 acres, say, “Hey, can I put my tent on your property? Give you 25% of the cash flow that I make, and basically listed on hip camp Airbnb. I know that this is possible because my $3,000 tent grossed me $142,000 over the three and a half years that it was running.” So 10,000 bucks and get a couple of those, I hope.

David:
Glam pack. I like it. Okay, last question. Now you have $50,000. What are you going to do with that?

Rob:
That’s a really good question. I think I’m going to just go… You said the house hack. So I’m not going to do that because that would be a lame answer, but that was a good answer and I’m jealous that you said it first. I am probably going to try to get a second home loan and rent that property out on Airbnb. So I’ll try to get a 250K, $300,000 property in one of those national parks that we talked about. Probably not the Smokies. I’m going to be pushed out of there, but probably somewhere like Hawking Hills, Ohio.
I’m going to buy a property there and I’m going to get it set up so that I can make some cash flow. Because I lost everything, so I need to pay the bills. I got a family, they’re hungry. I want to make sure that everybody is okay. Equilibrium can be met as soon as possible.

David:
There you have it folks. That’s wonderful. Rob, this is our plan. If you dropped us into the middle of nowhere, broken afraid, without our portfolio, but with the knowledge we have now, what we would do to start over. Rob, anything that you thought of when you were hearing me talk that you wouldn’t have thought of or heard yourself say ’cause you had no idea what you were going to say when I asked you this question that you thought like, “Ooh, that’s really good. I want to hammer that point home”?

Rob:
Yeah. All of it really. But I’ll say this because my immediate thought was, “Oh, I’m going to make content and I’m, I’m just going to raise money that way. I’m going to do the thing that I’m good at and just get people to believe in me via social media. Because I’ve done it before. I do it every day now, right?” However, the thing I hadn’t considered is you’re doing the grassroots approach and you’re going to use your a thousand dollars to hold different meetups and get people there, get their emails, get their contacts, connect with them, network with them, see if you can partner with them, see if they’ll invest in your first deal. They’re exactly the same thing. They’re just different versions of each other and I like that.

David:
Well, I don’t have your rugged good looks so it’s harder for me to create as much attention and content on social media, but if you get me in front of somebody in person, I can work my magic. So I wish I could do what you were doing. You’re going to be holding a meetup in front of like 90,000 people because that’s all the views you get. If I made a video, it’d probably get 14 views.

Rob:
No, you just hit 10,000 subscribers. You’re moving on up in the world, my friend.

David:
How many do you have?

Rob:
550.

David:
That’s the same thing Brandon does. Brandon is like, “Good job. You got to a hundred thousand followers on Instagram and he’s at like 300,000. All right. So if people want to see, if people want to become one of those 200 something thousand subscribers that you have on YouTube, where can they find you?

Rob:
Look, they can find me on the Robuilt YouTube channel, R-O-B-U-I-L-T. I also recently did two videos for the BiggerPockets YouTube channel. So go check out the BiggerPockets YouTube channel. There’s some of the best videos I’ve ever made. I’m really excited about them and I want to make more. What about you?

David:
You can find me @davidgreene24 everywhere, even on YouTube. So if you want to be one of those 10,000 people, which is actually, if you think about it, they’re getting a bigger share of my attention than yours because you’re already so big.

Rob:
That’s true, that’s true.

David:
I’m just this little tiny guy in the space. So you want to go get some individual attention, check me out at youtube.com, @davidgreene24 or whatever your favorite social media is. You can follow me there. You can also check out my website at davidgreene24.com. That kind of shows all the stuff that I can offer you, ways that I can help you. There’s a lot of different things we do, so it’s good to kind of follow us there. And then Friday nights I go live on YouTube where people can come and they can ask questions and they can learn. This is just the best time ever in the world to learn stuff.
If you don’t like learning, this is a crappy time to be alive because there’s no benefit to it. But if you enjoy learning, you could just be learning almost the entire day every single day. Can you imagine living 1400 years ago and just being in the middle of the woods with you and your closest neighbor was God knows how far away and all you had was maybe your spouse to be there with you and you had to learn by doing versus now like the wisest philosophers in the world, the smartest people, the people that have spent years dedicated to just studying one tiny element of life like psychology and then one tiny element within psychology, like cognitive psychology, you can get all of that information basically for free if you just put the time into.
It’s kind of crazy how much information we have access to. I want to encourage everybody to take advantage of that because your life really does change as you learn more stuff.

Rob:
Well, I will say this, the thing that always trips me up about people 1,400 years ago, really up to 100 years ago, they didn’t have AC David. They didn’t have AC. They were just hot all the time. No, thank you. I like 2023. And with that, let me just say if you guys like this episode, if it was a nice twist, if you like the parallel universe of me and David losing it all and we proved ourselves to you on how we could rebuild our economical status, do us a favor, leave us a five star review on the Apple Podcast app or wherever you’d listen to your podcast. It helps us quite a bit. It helps us reach the top of charts. When we are at the top of charts, then that gets served up to new people that maybe wanting to get into real estate.
And if we’ve ever said anything that may have changed the trajectory of your life in a good way, we can do that for other people. If you help us with a little tiny five star review.

David:
We also get better guests for the shows if we’re at the top of the rankings and so we can make better content for you. Thank you very much, Rob. I appreciate you sharing everything you did. Your insight is brilliant as always. I’m going to get us out of here. This is David Greene for Rob “no AC8 for me” Abasolo signing off.

Sheryl Palmer, Taylor Morrison CEO, joins ‘Squawk on the Street’ to discuss housing data projections for forward demand in 2023, the mortgage transparency available to consumers, and takeaways from homebuilder sentiment numbers.

Mindy:
Welcome to the BiggerPockets Money Podcast where we catch up with The FI Couple.

Josh:
So we’re really excited because the things that we started doing four years ago are really starting to pay some pretty large dividends so that in July of next year when we welcome our daughter to this world, we will have the thing that we set out to have, and that was the power of choice and control over our time. And that will be the biggest investment that we’ve ever made.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and joining me today is the She-Wolfe of Wall Street, Amanda Wolfe. What’s up Amanda?

Amanda:
Hey, how you doing? Excited to be here.

Mindy:
I am doing great. I’m so excited you’re here. It has been a minute since we’ve talked. Anything new and exciting in Amanda world?

Amanda:
Just traveling the world, trying to see all of it.

Mindy:
So where are you headed to next?

Amanda:
I’m actually going on my honeymoon, so I’m-

Mindy:
Yay.

Amanda:
Yeah, so we are going on a safari in South Africa. So really excited to get away from the cold and see all the animals and all the adventuring.

Mindy:
That sounds super awesome. I’m jealous. Okay. We should finish up this intro. I didn’t even start with the Amanda and I are here to make financial independence less scary part, so we should do that. But I’m just super jealous of your warm weather Southern Hemisphere trip.

Amanda:
I’m very excited. It’s a bucket list item for sure.

Mindy:
Ah, super jealous. Okay, well, Amanda 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’re started or what kind of fun trips you have on your bucket list.

Amanda:
Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate or start your own business. We’ll help you reach your financial goals and get money out of the way so you can launch yourself toward your dreams.

Mindy:
Amanda, I am super excited to bring Ali and Josh back on the podcast. We haven’t talked to them in a while and their lives have changed a lot in the last two years. They are living the FI dream, having quit full-time employment and generating income in different ways so that they can live their best life.

Amanda:
Yeah, I’m so excited to see them thrive because I remember when they joined social media, it’s kind of a tight-knit community and they had all of the student loan debt and they were working toward financial freedom and now just seeing all of that play out, all their hard work play out for two really good people has just been really fun.

Mindy:
They’re a great example of the FI journey. You can do this. It is possible to become financially independent even if you have massive student loan debt, even if you have seemingly insurmountable odds. They’re not insurmountable, you can do it. And what are the ways that they did it? They lowered their expenses, they increased their income, they put their nose to the grindstone, and they ground it out. That’s how you do it. There’s no secret sauce. There’s no easy button. I have an easy button.

Amanda:
There is an easy button.

Speaker 4:
That was easy.

Amanda:
It’s not easy. It’s work, but you can do it. Anybody can do it. You just have to actually put in the work. So before we bring in Ali and Josh, let’s take a quick break. We want to welcome back Ali and Josh. When we last spoke with The FI Couple on episode 167, almost two years ago, they were both working full-time, had $30,000 in student loan debt and owned two rental properties. Fast forward and things look a little different or a lot different. Ali and Josh, welcome back to the BiggerPockets Money Podcast.

Ali:
Hey, Mindy and Amanda, thank you so much for having us back. We’re really excited to be here.

Josh:
Yeah, this is the best.

Mindy:
So we’ve got a lot to talk about. Things look way different than the last time we talked. Can you give us a high level overview of what has changed for you guys?

Josh:
Yeah. So when we were last on the show, we were both working full-time still. We still had a lot of student loans. We had just recently purchased our second rental property, which was also a house hack. And since then, we acquired another off-market property. We both left our full-time jobs and now work part-time. We have, what started off as kind of a passion project that has turned now into a really nice online business.

Ali:
We also officially paid off our a hundred thousand dollars of student loans and I am pregnant.

Mindy:
Woo. Yay, babies.

Ali:
Yeah.

Mindy:
And I mean, yay, student loan debt too. I mean, yay, no student loan debt. Yay, babies. Well, congratulations. Wow. Okay, so well let’s talk about the baby first and get that out of the way because that’s the most exciting one. Congratulations. When are you due?

Ali:
We are due in July. We’re going through IVF. We actually have been trying to get pregnant since May of 2020. So this is 30 months in the making. We were very fortunate that our first embryo transfer stuck and we are having a little girl and her name is Zoe and we are very, very excited to be parents.

Mindy:
That is so awesome. We just did an episode about having a baby, planning for a baby episode 357 with Jen Narciso from Investor Mama. All the things you need to know about babies and also Costco baby wipes are the best.

Ali:
Well, we’re going to have to listen to it to get all the tips because we are really a little overwhelmed with all of that. But know that we’ll plan and develop systems like we do for everything else. Between having The FI Couple and our rental portfolio, I’m like, “We’ve had multiple businesses together.” A baby is just the next group project that we have to tackle. So we’re going to be just fine.

Mindy:
Okay. Well let’s hit up on that rental property. You said it was off market. When did you purchase it? Because the market has been a little nuts this whole year.

Josh:
Year. No, it’s been crazy. We actually combined two strategies on this. This was our first year ever using private money to acquire real estate and it was a BRRRR property that we acquired back in April before interest rates really took off.

Ali:
We found the deal in February when interest rates were still relatively low, but then we ended up closing as Josh said in April.

Josh:
Yup. And then we’re not overly handy people. So the property was actually in pretty good condition. We’re big problem solvers and we found an owner who really needed to sell quickly so that they could go on to a new phase of life.

Ali:
It was an owner occupant triplex, so it was in really great condition.

Josh:
Yep. So we had found a private money lender two years ago, stayed in touch with them. They saw everything that we were doing online. And so when the time came to buy the property, they walked it with us and they were happy to be the private lenders. We bought it in April. We did some paint, we changed out the locks and then we steadily leased out the property. At that time interest rates really started going up quickly. And so instead of waiting maybe five or six months after closing to refinance, we decided to do it in July and we completed our first successful BRRRR.

Mindy:
So you refinanced in July? That’s right when rates started going up, up, up. What rate did you get?

Josh:
Yeah, so we ended up locking in a 7% 30-year-rate and when we began the refinance process, we were closer to about a 5.5. We thought we had a little bit more time and then everything started going up quick. So we refinance a little bit sooner than we had originally planned.

Mindy:
So you’re locked in at 7% now?

Josh:
Correct, for a 30-year loan.

Mindy:
Okay. You said you found this off market? How did you find it? So everything that we own so far has been off market. We live in a relatively small city and once you get to know maybe six or seven people in this market who do a lot of the real estate, it makes finding off market deals a little bit easier. So we’ve never been people who had a lot of money or a lot of experience and so we’ve always had to be problem solvers. And so I am constantly networking with small business owners and local investors finding ways to maybe solve problems for other people. And that’s how we both found this deal and the private money to buy it.

Ali:
I think for us it’s always just telling people who we are and what we do. So “Hey, we’re Josh and Ali, we invest in this city. We’re small potato landlords. If you know of anyone selling a property, please keep us in mind. And actually a local landscaping company that we met years ago just messaged Josh on Facebook and was like, “Hey, I know someone that’s selling a triplex, would you be interested?” And we’re like, “Yeah, we’re interested.” We met the guy. It was actually really funny because we’d been featured in our local newspaper about The FI Couple and he’s like, “Oh, I know you guys.” And that name recognition was really helpful too because I think it just solidified credibility because we already had that rapport with the person.

Mindy:
Is this another house hack?

Josh:
No. So this is actually our first time not house hacking, which felt kind of foreign, but it was also relieving to not have to move in the middle of winter.

Mindy:
Yeah. That is quite nice. I’ve done that many times.

Ali:
We house hacked the first one, we house hacked the second one, and then it got to the point like, “Are we just going to keep house hacking here? What’s going on?” We knew we wanted to scale our rental portfolio and house hacking felt really safe because you need a place to live. You move into a property and there you go. But we decided that we really needed to advance our strategy and level up a little bit in order to consistently scale the way we wanted to.
So it was definitely a little overwhelming to not only buy an investment property by using private money, but I think it taught us so much really, really good lessons throughout this. So now it will definitely feel less daunting the next time we do it.

Mindy:
So rates are still really high. Are you looking for your next property or are you pulling back?

Josh:
Yeah. We’re always looking. There’s a little bit of the be greedy when others are fearful kind of approach. So we actually have found technically, or I should say tentatively our next two deals. They’re both duplexes side by side. And this time we’re actually making use of seller financing, which we’re really excited about. And again, it’s a retired couple who has a relatively large portfolio.

Ali:
That they own free and clear.

Josh:
And they really want to start enjoying retirement a little bit more and not managing rentals. And so that’s a problem that we’re happy to help them solve early 2023.

Ali:
Yeah.

Amanda:
I love that. Can you talk us through the seller financing?

Josh:
Yeah. We’re very familiar with the properties. We’re very familiar with the people. They also happen to be our private money lenders. And so kind of finding different ways to work with people. So we are going to be setting up terms. So maybe what people are accustomed to is going to a bank and then having a 30-year loan. The bank basically determines the interest rate. With seller financing, you can get pretty creative. And so we’re in the process now of actually negotiating the terms.
What’s nice too is maybe traditionally you go to a bank and you have to put down say 25% down. On our most recent property, we’ve put down 5%. And right now it’s looking like we’re probably going to put down about 10% on a seller financed four unit.

Ali:
So we’ll put down very little on this property. And the cool part is that the seller is the bank. So we’ll be making monthly payments to the seller until we get to the point where we eventually refinance it on a bank loan. But it benefits in two ways. It benefits us because we’re able to get a rental property with very little money down in a creative way where we don’t have a lot of competition like you would on the regular MLS.
But in addition, it really benefits the seller because they have all of this real estate that they own free and clear and if they were to sell it tomorrow, that would be a really big tax bill. So by doing seller financing on their part, they’re lowering that tax obligation, which helps them as well.

Josh:
And it gives them a nice monthly fixed income so that they can-

Ali:
Without having to manage tenants and toilets.

Josh:
They can enjoy their retirement.

Ali:
Right.

Mindy:
You quit full-time work, which is awesome. Congratulations on your unemployment for part-time employment. What do you do all day long? Because part-time, take that much time. How many hours a week are you working?

Ali:
That’s a great question. I mean last November, November of 2021, I quit my full-time work as an elementary school social worker and I actually dropped down to part-time as an elementary school social worker. We made this move not necessarily for the income, but really for the health insurance benefits, especially going through fertility treatments which are very expensive. I was able to find a part-time job where I work Mondays and Tuesdays school week, school year hours, but it covered three full cycles of IVF, which was incredible. So we have amazing benefits through that job.

Josh:
And then I was a full-time consultant the last time we spoke and since then I have been whittling down my clientele quite a bit. So right now we both work about two days a week, anywhere between 12 to 14 hours. When we’re not doing that, we are very busy with our online brand, The FI Couple with managing rentals and planning to onboard for more units so that we’ll be even busier with that. But admittedly, instead of just trying to fill our time with more work, which almost defeats a little bit of the purpose of why we were so aggressive with paying off debt and achieving financial freedom, we also spend a lot more time, at least when it’s warm out, hiking, traveling, visiting family, kind of all the things that we wanted to do more of back when we had a ton of debt and worked full-time.

Ali:
I think when we first quit our jobs, the expectation was we worked 40 plus hours a week. We’re just going to fill that with 40 hours of new work. I think it took a real mindset shift of real realizing we’re building a lifestyle here and we’re building a lifestyle business. And that doesn’t mean 40 hours of work. It doesn’t translate to just replacing what we already did.
So for us it’s like, “Yeah, let’s go get lunch at 2:00 on a Thursday and hang out and let’s go visit family and help friends when they need help with different things.” So it’s really been powerful for us because we’ve been grinding for so many years. Just grinding it out, busting our butts, and we’re finally, especially with the debt payoff, increasing our incomes, getting rid of full-time work. We’re starting to see those lifestyle benefits of having the real flexibility and time freedom.

Amanda:
So what are some of the benefits of still working part-time? Obviously, you guys have found lots of ways to fill your time, but why work part-time still?

Josh:
Yeah. So I think both of us really enjoy the work that we do. It’s both in the human services profession, Ali being a school social worker and me being the consulting work I do is actually career counseling for workers with disabilities. So we both enjoy it. We just didn’t like doing it as much as we once did it. And then admittedly for me, my job involves going to different locations in the city that we live and inevitably in between appointments, I’m looking at real estate. I am walking neighborhoods and it just helps me get out and about too. So those are some of the benefits.

Mindy:
Does working part-time allow you to qualify for bank loans as well?

Ali:
Yes. Although that number is getting smaller and smaller in terms of the income that we bring home. And it was very interesting to qualify for this most recent bank loan because I’m working part-time. Josh’s Hours were reduced and we had The FI Couple but it wasn’t a two-year old business yet, so we couldn’t count it towards our income. So I think moving forward, it will be a little easier because our business is now two years old, but continuing to work at a W2 is really, really a huge strength and asset for people as they work to scale their real estate portfolio ’cause it’s just much easier to vet that income.

Mindy:
I will say too is originally I think we thought we’re both just going to quit our jobs. We’re just going to do entrepreneurship and real estate. And then we started exploring not only health insurance but health insurance for expecting parents. And the numbers were a lot higher admittedly than we had initially planned for. So by Ali working part-time, not only does it help in terms of qualifying for bank loans, it’s also a more affordable healthcare for us and our growing family.

Amanda:
I love that. So did your student loan final payments, the big hurrah play any part in going part-time?

Ali:
So actually yes and no, but I quit my job a few months before we paid off our student loans. And our initial plan, we have all the plans in the world. We have dozens of whiteboards. We have Excel sheets. We have all of these plans. And the plan was very simple, pay off the debt, buy a certain number of rental properties, then quit the job. But it didn’t transpire like that. 2020 and the entire pandemic was really brutal for a lot of industries and I was feeling really burnt out physically and mentally in my role.
We were going through fertility treatments and I was in situations with students that were not safe. I was getting punched in the stomach as we were going through fertility treatments and it was really to the point where it was my mental wellness and my health or my job and our financial goals. It felt really scary to have to pick, but luckily we didn’t have to because we had set ourselves up in such a position with all of the work that we did to bring our cost of living down to live really frugally and aggressively pay off the debt. So we were able to quit ahead of schedule and then we paid off our loans three months later, which was really cool.

Josh:
I think sometimes when people think of financial freedom, they think of it as a singular thing or some mile marker that you run through, but there’s a lot of checks along the way and there’s a lot of opportunities and benefits along the way. And so while we weren’t financially free at the time that Ali quit her job, we had far more financial freedom than when she started. And so we kind of got back the power of choice. So she was able to step away with confidence.

Ali:
It was a massive privilege to be able to quit my full-time job. It’s not something that most people can do and it’s a direct byproduct of all of the crazy choices we made and all of the sacrifice we made to be able to do that without the real worry of what’s going to happen. We knew we would be okay.

Amanda:
Yeah. I mean, thank you so much for sharing that and congratulations on paying the $100,000, being able to do what was right for you. I mean that’s huge. One of the things that I really like about you guys is that you’re always able to just figure it out. You didn’t have backgrounds in real estate or how to pay off debt and do all of this. So another thing that you’ve been able to just figure out is how to build a business. So how did you grow your online social media from 10,000 to 150,000 followers so quickly?

Josh:
Yeah. So we started The FI Couple in 2020 and it was at that point in time… So I am a voracious reader of books, all things BiggerPockets. If there’s a podcast from BiggerPockets, I’ve listened to it probably twice. And the more and more that we were listening to podcasts and reading books, we were hearing all of these awesome success stories from people who had reached the mountaintop, if you will, of financial freedom. But sometimes you were hearing their story when they had already gotten there, which is really, really inspiring. But for us, it was kind of like we wanted to hear stories of people who were maybe 50% of the way or there, if you will.

Ali:
People that we could relate to. People that were still struggling and maybe making some mistakes along the way.

Josh:
And we weren’t really hearing it as much. And then so Ali had the idea. She’s like, “Well, why don’t we start sharing our story?” And I was like, “Ali, we don’t know social media. We’re not very active on social media. So I don’t know if that’s necessarily a good idea.” I was wrong.

Ali:
Do you want to say that again louder for the audience?

Josh:
So we started sharing our story and admittedly we didn’t really know what we were doing. We just figured you know what we’re going to tell people some of the stuff that we’re up to and maybe our moms will follow and stuff like that.

Ali:
I wish I could say we were tech savvy and had this whole business model planned and knew exactly what we were doing, but we were flying by the seat of our pants. We had zero clue how to do everything. We felt really silly making videos and putting ourselves out there. We got really ridiculed from friends and family, “What are you guys doing? This is stupid.” But we just continued and I think in the beginning, it was not a business, we weren’t making income, but the community that we built of meeting other people that thought like us and made choices that we did, it helped us in our personal life beyond belief because we said, “We’re not the weird ones. We can rely on other people and connect with other people and make real friendships with people that get what we get.”

Josh:
And we didn’t really understand real estate, but that wasn’t going to be an excuse for us to not understand real estate. So we found ways to bring value to people who knew a lot more than us and we took the next step forward and we learned real estate. And social media was no different. So what’s awesome has been a lot of the people whose stories we’ve heard over the years who now also have blogs or Instagram pages or different websites, we’ve now been able to connect with sometimes in real life and then sometimes just on Zoom calls.
They’ve been more than happy to just talk to us about how to actually turn something that starts off as a passion project online into something that’s a viable business. So that has been huge, both in terms of being able to make a living, doing something that we love, but then also creating actionable content, growing our brand and now having, gosh, 150,000 followers is just a really crazy number to say out loud.

Amanda:
It is crazy. But I think to your point, just the relatability, the vulnerability that you brought to your page brought together that community. Right? So I think that’s awesome. So let me also ask though, how is leveraging social media a catalyst to help you quit your jobs or go part-time?

Ali:
Absolutely, yes. So I think that again, when we started social media, we knew that people made income on social media, but I genuinely feel like a social media business is the wild west. There’s no paid transparency. People have no idea how you generate income. People ask us all the time, “Do you make income from just having a page or making videos?” No one knows. So we certainly didn’t know when we first started. So we figured out along the way the different ways that you can generate income from having a social media business.
I remember in the spring, we had made a little ebook. It was a 53-page book about how to start learning about real estate beginners in real estate. I remember before my school year was about to start, we were selling the ebook and we had made more from that ebook sale than I made it a full month of work.
That was the lightning bolt of like, “Wow, we can generate money online that could have the potential to replace my full-time income that is really stressful and challenging and not really filling me up anymore.”

Josh:
And so we kept learning and kept growing and connecting with other people who were doing incredible things. It got to the point where we had a couple months where The FI Couple had made more than what Ali’s job, but without a fraction of the physical and emotional stress. And so even though, again, we still had debt and it was still very early on, we were like, “You know what? I think we have something here and I know how unhappy you are. We’ve done all of these things over the years to give ourselves some flexibility to take a chance on something that we really like doing.

Ali:
It was an unexpected decision for me to quit my job and do all of that before the loans were paid off. But it was very calculated because, again, we had several months under our belt of consistently outearning my job and that told us, “We’re going to be okay. We’re going to figure it out.”

Amanda:
I love that. So you guys have so many different streams of revenue coming in right now, which has allow you to reach financial freedom so much sooner. So do you have any tips for our audience on how they could grow their own social media or grow their own business? Are you just on Instagram? Are you on TikTok too? What platforms are you using?

Ali:
I think in terms of ways to grow and develop revenue, one of the biggest takeaways, I remember someone said it to us, “Don’t start a social media page just with the immediate goal of trying to make money.” Because if it’s really simply for that and you’re not looking to add any value or contribute, I don’t think you’ll have success. So for us it was always like what are the things that we wish we knew that we want to share with other people to help them? So for a really, really long time, it was just like, “What value can we bring? What connections can we make? How can we partner with people on similar shared goals and tasks?”
I think by doing that we developed really organic relationships and a lot of trust within our community. I think that that really helped us with our success. And then once our business started growing and we had more followers and we had more connections, then it shifted of, “Let’s continue to provide educational content, but is there a way that we can get paid for all of the time we’re investing in this?” And then from there it was developing those different streams of income.

Josh:
I always tell people is just figure out what your circle of competence is. There’s a lot of things out there that Ali and I just have no understanding of. And so we stay in our lane. We talk about the basics, fundamentals because I think-

Ali:
Of what we know.

Josh:
Exactly. And they’ll never go out of style and they’re always something that people need to learn more and more every year. So it doesn’t have to be overly complicated. You don’t have to talk about things that you don’t understand.

Ali:
We shouldn’t.

Josh:
We just basically said, “What did we need to know more of two to three years ago before we started this journey?” We started creating content for those people because we figured if Ali and Josh needed to know that maybe 100 people or 1,000 people or 100,000 people would be interested as well.

Ali:
We started our social media journey using one platform. We started with Instagram. We learned the ins and outs of that and felt more mastery level experience at that before we transitioned to other platforms. So that was the strategy that was most effective for us. We have Instagram and Twitter. We have TikTok, which we still don’t know what’s happening there, but we post the videos on it and that’s kind of it.

Amanda:
I love that. So then let me ask you one more question. How do you get over the vulnerability of just putting yourself out there on social media? Because so many people have the vision and the drive to do something like this, but it can be uncomfortable. So how did you get over that?

Josh:
I could tell you. Honestly, it is scary sometimes being vulnerable, sharing all the areas that we’ve made mistakes and there’s just so too many to count. But I’ll tell you sometimes the power of community is incredible because some of the best performing content we’ve done is when we’ve made mistakes. And then we will see in the comment section people being appreciative of being vulnerable and being transparent and not just showing all of the highlight reels and the wins and stuff like that. Because for all of the wins, if you will, we’ve had, there’s probably 10 times as many times as we flat out failed and just said, “What the heck were we thinking?”

Ali:
I will also say, and this is pretty raw, but I feel like there were many times where it’s like, “Oh, this is so stressful. The thing that we have to do.” We have to make a lot of content, or I have to put myself in front of a camera and I feel really embarrassed or were public speaking right now. And then I think, “Do you remember yourself, Ali, when you were a school social worker and the things you were doing then?”
Yeah, that was really hard. And this isn’t. You’re really privileged to be in this position where you can make money from your phone at your home in your sweatpants every day. I never want to take that for granted. I think that we didn’t know the income that we were capable of generating, but we knew that we really desperately didn’t want to be in our full-time jobs.
So we were willing to get so uncomfortable and give it our damnedest even if we failed. It was like, I’m going to try so hard that if I fail, it’s embarrassing. And that was the biggest thing. We had so much to lose. We were trying to build a family. We were trying to build a rental portfolio, all of these things. We had so much to lose that I didn’t care how embarrassing or vulnerable it had to get to be able to find success.

Josh:
I guess the last thing I’ll say too is that we started thrusting ourself into hard situations back in 2018 when we were just completely broke. I had been fired and we had a ton of debt. We saw the decisions we made to get us there. So we said we have to live radically different. And it’s kind of working that muscle. And day after day, week after week, year after year, we choose to lean into hard things because so often on the other side of those hard choices have been some of the best life experiences we’ve had so far.

Ali:
For sure.

Mindy:
One of the things that really helped me was I really like to talk, which is super, super helpful, but also I looked at what other people were saying and I’m like, “What’s the worst that could happen?” I come out here and I talk about real estate because in my real life at the time when I first started here, in my real life, nobody else wanted to talk about real estate. Now everybody wants to talk about real estate and it’s great, but seven years ago I didn’t know anybody who wanted to talk about real estate and I really did.
I thought to myself, “What is the worst that can happen?” Nobody is going to drive up to my house and throw rocks at me because I flubbed a line or I said something wrong. People will either be okay with it or not be okay with it. And if you want to make online content, don’t read the comments. That’s my biggest tip for you. Never ever, ever, ever read the comments because they’re either going to be nice and that’s going to make your day or they’re going to be mean and that’s going to ruin your week. So just assume everybody’s nice and everybody wants to keep watching and don’t read the comments ever.

Ali:
Yeah. I have a folder on my phone of some of the historically meanest comments that people save. I read them, I laugh, I smile.

Josh:
We’ve actually-

Ali:
It’s been very hard to see some of those comments, but ultimately mental health, someone that wants to be mean through the internet, it is what it is.

Josh:
We’ve actually made content out of the meanest comments.

Ali:
Yeah. But ultimately I agree with you, Mindy. What’s the worst that can happen? We have to go back to full-time work. That’s it. And you know what? I’m really not keen to do that. So I’m going to do everything I can to build our portfolio, continue to live, lean, and continue to build our business.

Mindy:
Yeah. What’s the worst case scenario? I go back to work. Your worst case scenario is everybody else’s everyday life. Joel from FI 180, that’s not me. That’s Joel. Give credit where credit is due.

Ali:
Absolutely.

Mindy:
Okay. So you talked about living on 20% of your income. Is that your current part-time income and you’re living on 20% of that?

Ali:
Yeah. So right now between The FI Couple, between our part-time work and between… We have some profit from our rental portfolio, but because we house hack it kind of limits the profitability of it. So we save about 80% of the income that across all of those income streams and we spend about 20% of it.

Mindy:
So what tips do you have for listeners for saving and budgeting?

Josh:
I know for us, when we began this journey four years ago, we were thinking… So we started off kind of on the Dave Ramsey path and teach their own nothing wrong, so on and so forth. But we started off cutting out Netflix and the coffees.

Mindy:
The small things.

Josh:
The small things. We would never go out to dinner and so on and so forth. And that was the year we got married. So that wasn’t too fun. We gave that, the old college try for about three months. But then actually, conveniently we found the book, Set for Life and that’s actually where we discovered the whole concept of house hacking. When we read the book and then we read the book again, we said, “Well, if 65 or so percent of our money is going towards rent, the car payment, which we used to have and then dining out and stuff like that, if we just focus on the big things instead of nickel and diming our way to try to be financially free, we might move a lot faster.”
And so for us, we reference using spoons to get out of debt or save money versus shovels. And for us, finding creative ways to reduce our rent and eliminate car payments, that gave us the shovels. And then from there, oh my gosh, at one point I think we had four or five side hustles between the two of us as well as full-time jobs. And so it’s all well and good to reduce your spending, but you can only save so much. There’s really no limit to how much you can earn.
So we started finding creative ways to make money. We were doing life coaching, driving for Uber, catering weddings. And so that grew the gap and it was that gap that steadily grew and that’s what allowed us to pay off student loans and buy more real estate.

Ali:
I would just say though, for everyday people that are looking to improve their finances, so a lot of the things that you often hear is reduce your expenses, increase your income, grow that gap in between. I would add to that, know your numbers. We were floating around having no idea how much we were spending, how much debt we had. And there’s real power in understanding the numbers of your situation because we talk to people all the time.
Oh yeah, I spend $50 a month on dining out. Actually, track it and tell me if that’s true ’cause I think you’re a liar. I think that our brains have a funny way of rationalizing and compensating things. So it’s like the numbers do not lie, they never lie. So know the numbers and keep track of them and really learn to identify needs versus wants. Because I think we live in a society of I see it, I want it, I like it, I got it. That’s Ariana Grande, right? And you see it, you want it, let’s get it. We have Afterpay. We have credit cards. You can get a personal loan.
I think that that instant gratification society is very, very, the total opposite of budgeting and eating your cereal before the marshmallows. So I think it’s really, really important to say, “Yeah, I want to have a cleaner in my house. That would be a really nice luxury or I want to get my nails done every three weeks, or I really want that fancy car.” But do you know what does your financial situation say that you can have those things? Not always. For us, it meant cutting out a lot of the wants to get us to the point where we were able to integrate them back in a way that didn’t totally screw us.

Amanda:
Yeah. Having an understanding of what’s coming in and what’s going out and just facing the numbers is definitely going to help you get ahead. But you guys had a hundred thousand dollars worth of debt. What would you say to somebody who just feels like they’re drowning in debt so bad that they’re just paralyzed with fear to even look at their numbers? Do you have any tips for those types of people?

Ali:
Absolutely. I think that that was us. We were like the ostrich in the sand. We knew we were living paycheck to paycheck. We knew our finances were good. We knew we had a ridiculous amount of debt, but we didn’t want to acknowledge it. ‘Cause if I don’t check my bank account balance, I don’t know if I’m overdrafting. So I think the thing to really recognize though is that you’re hurting yourself.
It’s shortsighted and it’s a temporary choice to alleviate the anxiety, but the long-term anxiety and just making your life not an easy one, it’s better to make your life a little harder and face the music than to ignore it for a decade. So for us, that’s exactly what we had to do.

Josh:
And then there’s an expression that I’ve always really liked and resonated with and it’s eat the elephant one bite at a time. When we sat and we thought about $100,000 of student loan debt, not including car loans and personal loans, things of that nature, it was overwhelming and it left us feeling paralyzed. What direction do we go in? So it was when we took 100,000, we don’t have 100,000 of debt, we have $500. We have 1,000. And we lived in increments of 500 and 1,000. It felt really slow, but psychologically it was actually really powerful.
It started giving us momentum and so suddenly we started living in $1,500 increments and $2,000 increments. So it was just taking something that felt really big and daunting and zooming in a little bit and saying, “Okay, how can we chunk this out a little bit and still make progress?”

Ali:
If you have that big goal, but then you reduce it and chunk it out, whether it’s paying off debt or saving for a house or wanting to buy your first investment, if you put it into manageable steps and then you celebrate every time you hit that step or that accomplishment, it just really boosts morale and keeps you motivated. That was huge for us.

Amanda:
I love that. Thanks for sharing. So right now you’re living on 20% of your income and then you’re saving 80% of your income. So what are you doing with that 80%? You’re not just sticking it in a savings account, are you putting it toward house hacking or the stock market or what does that breakout look like?

Josh:
Yeah. So it’s a little-

Ali:
Gutters.

Josh:
Yeah, it’s a little bit of everything.

Ali:
Home repairs. We have a 130-year-old homes, so we have had some updated renovations, but I’m being silly. We definitely have a really healthy spread of allocating between different financial goals that we have.

Josh:
So we use a variety of buckets. As long as our personal checking and our personal emergency fund, our rental emergency fund, we have a small account now for our business in case for something happens in our business. As long as all of those buckets are checked, everything else we are putting into. We have a Roth IRA, we also have a taxable brokerage account, which is just filled with index funds and exchange trade funds or ATFs. And then we also saved up for the upcoming real estate acquisition.
So it’s kind of like the surplus that we have every month. We check all of our boxes and as long as our bases are covered and that we’re protected, anything above that, we first prioritize buying more real estate. And then once that account is where we want it to be, which it is now, pretty much everything just funnels then into the taxable brokerage. And then anything beyond that is just kind of like, “Hey, if we want to take a trip or something like that, then we plan for that accordingly.”

Ali:
This comes back to knowing your numbers though, and I really want to emphasize this because we have our buckets. We have our personal, our business and our real estate bucket. We know the number that needs to be in order to be full. So as soon as those buckets are full, we don’t let ourselves have money floating around because that’s how people get into trouble.
So if those buckets are full, the money is immediately invested or it’s in our investment savings account for our next deal. And sure if we have an upcoming trip, as Josh said, we’ll allocate for that and we’ll make that happen. But I think when you start to see more money in your bank account, it’s like, “Oh, that’s free money. I can buy this or do that.” I think that we’re so focused on our goals that, that mindset is eliminated when you just have the systems in place for your buckets.

Amanda:
It seems like you guys are so intentional about every single dollar that comes into your life. Right? So let me ask you then, as far as real estate goes, do you have a goal for a number of doors or total properties?

Josh:
Yeah. So right now it’s 15 units and it kind of goes a little bit against traditional real estate advice if you will. But we’re actually probably, once we get there, we’re probably going to pay off our first rental property pretty aggressively. It will give us about 10,000 to $11,000 a year of more cash flow. And while the math says well that money may otherwise better be utilized in the stock market where you can get say, I mean not 2022, but long term you can get eight to nine, maybe 10%. We’re going to be paying off a property with only a 4.8% mortgage. But for us that’s going to be an extra 10 or $11,000 that we’ll be able to use to cover our expenses, especially when we have a family.
So 15 units, one, maybe two properties paid off, but at least the first one paid off. And then at that point, I don’t know if we have any visions of having this big portfolio where really the small mighty landlords. From there we might explore things like syndications or other avenues because we do really like real estate.

Ali:
We’ll have our stock portfolio.

Josh:
I’m just not sure we want to have some big portfolio per se.

Ali:
People often ask us, why not go bigger? Why not have a big portfolio? And there’s definitely nothing wrong with that. But I think our biggest thing is we want to have just enough to support what we need because we don’t want another job, right? We have a lot of jobs. Our lives are really busy. I don’t need to feel cool by having hundreds of units. That’s not that exciting to me personally. I don’t think that that’s why people do it. But I think that for us, it’s like what fits our life? What fills our budget? What gets our needs met? And then that’s it. That’s all we need.

Josh:
We have a lot of mentors who have a lot more experience from us and we’re learning from this every step of the way. A lot of them have shared with us that they got to a certain point and it became this Frankenstein portfolio that they weren’t really sure of why they built. And so that they’ve spent the last five or 10 years kind of deconstructing it, if you will, to get it to a place that was conducive to the freedom that they started in real estate in the first place to get.

Mindy:
Okay. I didn’t want to interrupt but I wanted to interrupt. Yes, yes, yes, yes, yes. I talk to a lot of people about real estate now and I hear this, “I want to just keep buying forever.” Why? You know that’s a job. Even if you’re managing the manager, you still have to manage the manager. It just seems like there’s this score keeping. It is score keeping. It’s absolutely I want to more and more and more and there’s no rhyme or reason for it. It’s like it comes to a point where you have enough. What is your enough number? Figure out your enough number and then be happy with that. I love that you won 15 units. That’s great. That’s enough. That’s enough. To live off of, that’s enough to give yourself a whole lot of freedom.

Ali:
I think for us too, I think often when you hear about real estate or you see it on social media, it’s like, “The rent checks and I just did this really sexy flip.” It’s just very glamorized and I think, “Okay, but have you turned over an apartment? Because that can be a real process and I don’t want to be doing that all the time. Have you had a tenant call you in the middle of the night because their ceiling is leaking? That’s a process. Well, we love real estate and it’s an amazing wealth generator and it’s going to help us the rest of our lives.” It’s work and sometimes it’s no work and I really don’t think about it unless we’re getting a rent check. But sometimes it’s like there’s stuff going on and you’re solving the problem.
So I think more units, more problems and yes, you can get a property manager, you can outsource. But you’re right, Mindy, you’re always managing something. And I think for us, I want to clear up as much mental bandwidth so that I can spend my life with this person and our aging parents and the people that we love and I’m not constantly spinning a to-do list of things I need. That’s our life now. We’re busy, but we’re slowly trying to distance from that lifestyle.

Josh:
We didn’t know how long it would take, but four years ago we knew one day we wanted to be parents and we wanted to have the flexibility and freedom to be as present for that child or children.

Ali:
No, one and done.

Josh:
when it happened.

Ali:
It’s a hard no for me.

Josh:
And so for us real estate or stocks, they’re not the end. They’re a bridge towards a greater cause, our why if you will. And so we’re really excited because the things that we started doing four years ago are really starting to pay some pretty large dividends so that in July of next year when we welcome our daughter to this world, we will have the thing that we set out to have, and that was the power of choice and control over our time. And that will be the biggest investment that we’ve ever made.

Mindy:
Ali and Josh, this has been a lot of fun and I really appreciate the time that you shared with us today. Do you have any last tips for our listeners before we go?

Josh:
Yeah. I would just say whatever the thing is that you are afraid of starting or seems really scary, just understand that there’s probably hundreds or thousands or even maybe millions of people who are doing it, have done it. I’m so grateful that we live in the time that we do because 50 years ago, Ali and Josh want to learn real estate. That’s going to be really hard. Whereas now, biggerPockets.com is free real estate knowledge.
I’m just really grateful for the internet. So if there’s something that feels really daunting, one, go to Google or go to BiggerPockets, but two, build a community. I mean, I’m so honored and excited to see Amanda there because Amanda has been someone we met two years ago and she is a huge part of our community of people who we’ve met and learned through social media. And so find your community. It makes things a lot easier, especially when times get tough.

Ali:
I would say too, I never think it’s too late. If you’re not happy with your life or the trajectory that you’re on or there’s an area that’s really stressful for you, it’s never too late to make changes. I think we often see pieces of people’s lives. You’re hearing from us today and you’re like, “Wow. Look at what they’ve accomplished. Yeah, it’s five years in the making and we’re still working towards it.”
So I think it’s important to give yourself grace and know that small steps can make really profound changes over the time. We did nothing fancy. We did nothing sexy. We just stayed consistent and dedicated to our goals. So if it’s just remembering I want something to be different, it’s not, “If we did it, you can do it too.” But you do have power to make changes and if you don’t have a circle that supports you with that, grow your circle. As Josh said, “We’re very fortunate to be in the time that we are and there’s so many resources at your disposal.”

Amanda:
I love those last tips and this has been so fun. This has been so fun. So where can people find you?

Ali:
Yes, absolutely. On the internet. With all of these resources at your disposal. We’re on social media. Our handles are The FI Couple everywhere. So we have Instagram, Facebook. People can email us if they have specific questions. The email is [email protected] and we’d love to connect with folks. I mean, BiggerPockets was the catalyst to our journey and we feel forever just grateful and indebted to you guys because it literally transformed and changed our lives in so many ways. So if you’re listening, you’re doing the right thing by tuning into BiggerPockets Money. It’s one of our favorite podcasts and we’re just really grateful to connect with you guys today.

Mindy:
Thank you, Ali and Josh. This has been a lot of fun and we will talk to you soon.

Ali:
Thank you.

Josh:
Thank you.

Mindy:
That was Ali and Josh. Amanda, I really love their story. Like I said in the beginning of the show, there is no easy button. There is no secret sauce to this. It is simply putting in the work. And Ali and Josh I think are a shining example of when you put in the work, you will see the results.

Amanda:
I absolutely agree. When you put in the work, you see the results and then when you work together as a team, to me they are just a shining example of teamwork, really, really working, and really coming through.

Mindy:
Having your partner on the same page financially is a superpower. I wish everybody listening to this to have that same superpower. It is the number one thing couples fight about is money. And when you can remove that from the situation, your life just improves so much. So talk to your spouse about money, get on the same page and put your nose to the grindstone, get all the work done and you will have the same results that Ali and Josh do. Should we get out of here?

Amanda:
Yeah, let’s do it.

Mindy:
That wraps up this episode of the BiggerPocket’s Money Podcast. She is the She-Wolfe of Wall Street, Amanda Wolfe and I am Mindy Jensen saying, see you later, alligator.

Dave:
Hey everyone. Welcome to On the Market. I’m your host, Dave Meyer, joined by Henry Washington.

Henry:
What’s up buddy? Good to be here. Good to see your smiling face.

Dave:
Oh yeah. It’s all fake right now. I’m sick as I told you before, but I’m faking it as much as I can.

Henry:
Hey, well you’re doing a fantastic job, Dave Meyer.

Dave:
Oh, thank you. Well, no one’s going to hear the times during the interview with Amanda where my brain just melted down and I couldn’t speak. Thankfully they’ll edit all that out and it’ll maybe sound good during this episode.

Henry:
Absolutely.

Dave:
Well, it was a fun episode. This is a really cool episode because tax is not always the most fun, but I feel like this was actually a very entertaining, enjoyable conversation where I learned a lot.

Henry:
I totally agree with you and you’re right. The fact that it’s typically not a fun topic is the exact same reason why most people don’t think about it until they have to. And we talk exactly about why you should not do that in this episode, and it was really both and helpful for me.

Dave:
Yeah. I think most people, we talk about this a little bit during the interview, start to pay attention to their taxes on April 11th or whatever, a couple days before. But I think one of the main points that Amanda brought up is that tax planning is perhaps most beneficial around this time of year. You should be doing it year round, but there are a couple tips she gives that you can do even before the end of the year. I know this episode is airing with five days left in the year, but there’s still some things you can do to improve your tax situation by the end of the year.
And starting in the beginning of the year, starting 2023 off right is the best way to maximize your tax position because you have a full year to think of new ideas and implement those ideas to improve your tax situation. This is a really good timing and really important for you to start thinking about these tax strategies that Amanda shares either for this year and going into next year.
We are going to take a quick break and then we’ll be back with Amanda Han. All right. Well, let’s welcome Amanda Han, who is … I don’t know. CEO, Founder of Keystone CPA? What’s your title there?

Amanda:
I don’t really know. I kind of do everything here. I’m technically one of the managing directors.

Dave:
Okay. Managing Director of Keystone CPA, and author of two excellent textbooks, which I’m holding up here, which are books I have been reading over the last couple of weeks, perusing as we get into tax planning season. Amanda, thank you so much for being here.

Amanda:
Yeah, I’m so excited to be here. This is my first time on this show.

Dave:
Well, thank you for joining us. We know that we don’t have the same cachet as The Real Estate Show, but we’re glad that we were able to book you finally.

Amanda:
Oh, I hear this is the show to be on actually. I’m really starstruck to be here with you guys.

Dave:
Oh, well hopefully we live up to that, Henry. I don’t know.

Henry:
It’s definitely you. It’s not me, Dave.

Dave:
I don’t know. Well, hopefully we’ll ask some intelligent questions and impress you, Amanda. Well, thank you again for being here. Realistically, you are one of the most prominent experts on real estate tax in the entire industry. As we come to the end of the year, we thought it would be helpful to help our audience understand if just any, first and foremost, what they should be thinking about as real estate investors right now. Then we’re going to talk about some of the changes that did and wound up not happening in the tax world in 2022. Amanda, I’m going to just ask you a couple rapid fire questions so that everyone who’s dreading doing their taxes next year has some inspiration for actually doing this properly. When do you recommend real estate investors start their yearly planning for taxes?

Amanda:
Oh, that’s a great question. Tax planning really should be happening all year round. The earlier you do planning, the more options you have. Before the end of the year definitely is kind of the last point in time when you can do planning. My husband, Matt, and I like to joke that tax planning is sort of watching sports. When you’re playing a basketball game, one team might be up in the scores, the other one might be up at different times during the quarter, but what really matters, the winner of the game is determined by where the score is at the end of the game. And that works exactly the same way for tax planning and numbers. Where your income and expenses are on December 31st is going to determine how much or how little taxes you pay. All year long is good for tax planning, but year end is a huge … You want to end up on a high note.

Dave:
All right. Well, this show is coming out with five days less than the year. Everyone who’s listening to this. Cancel all of your holiday plans-

Henry:
Go, go, go, go.

Dave:
… and just spend the next five days doing everything Amanda says for the next 45 minutes.

Amanda:
Yeah, look me up on social media, YouTube, watch all that, do everything in a couple days. But I think even knowing that, right? If you don’t have enough time for strategies in the next couple days, it’s still a good idea to take some time to plan ahead, right? Because if you didn’t do things right already this year, we still have all of next year to plan, especially as you do more real estate, make more income. I mean, we’ll continue to have taxes and pay taxes, that’s not going away. The planning is always going to be beneficial. Still do it for next year if you haven’t done it already this year.

Henry:
I mean, at year end, is it really tax planning or is it more tax damage control?

Dave:
Tax scrambling?

Amanda:
Yeah. Yeah, I like the way you put it. I just put it a little bit more nicely, I guess. But yes, I mean, there’s still things that could be done before the end of the year. I mean, not for every single investor, but certainly for some investors there are things, and I mean, there are also things you can do after the end of the year to save on taxes, but those are just a lot more limited. When we start planning in January, there’s maybe like 101 ways you can reduce your taxes. Halfway through the year there might be 30, 40 ways to do it. In the next couple days before year end, there might be, I don’t know, five, six things you could consider. But even then those might be very powerful too.

Henry:
Well, it’s kind of like you’re a savant because that’s exactly what we were going to ask you for the next question, is what are the things investors can be doing to minimize their tax burden for 2022 with 10 seconds left on the clock?

Amanda:
Yeah. I mean, I think a couple major things for investors, major ones for year end planning. We’re looking at how do we shift income so that we pay the least amount of tax? If you’re having a big taxable event, and we’re talking with real estate investors, so if you’re potentially selling a property or getting a large amount of income from tenants and things like that, if you can defer it by even just one day from December 31st of this year to January 1st of next year, that could significantly defer your taxes for one whole year. Whatever income you make now, you’re going to pay taxes on it possibly in April, but if you delay it into January now you don’t have to pay the tax until January … I mean, April, 2024. You have a whole year to be happy and invest your money, more time with your money, but also just a lot more time for you to strategize.

Henry:
Give it a little hug.

Amanda:
But just a lot more time to strategize, right? Because we’re talking about okay, so this year if I’m going to sell a property, I’m going to have a huge gain of, I don’t know, a hundred thousand dollars. I have four days on how am I going to offset it? But if I just waited until January to sell, then I have all of next year to think about 101 ways I can defer taxes on the sale of that particular property. That’s one thing. Then I think on the flip side, we look at accelerating expenses.
That’s looking ahead at what are some of the recurring expenses that you have as a real estate investor and can I prepay for some of those before the end of the year to get a tax deduction? Whether it’s marketing or software, computers, any of those things that, or even repair costs, appliances for your properties, things that you know will have to spend in early next year, why not prepay for that before year end so you can get a tax deduction? And I think what people don’t know too is you don’t actually have to pay cash for a lot of those things. If you charge it on your credit card, a lot of times those are deductible this year as well.

Dave:
Oh wow. Well, I think this was strategic of us. We didn’t want to overwhelm you with advice for taxes in this year, so we gave you just five to do in 2022. But for those of us who are going to try and be more diligent next year, what are a couple of the strategies that people should be considering? Like we’re at the turn of the year starting in 2023, how do you get off on the right foot into the next year?

Amanda:
I think the way I look at tax planning, it sort of follows what your investment plan is. I think if as an investor, well hopefully you’re doing some goal setting, right? 2023, here’s what I want to accomplish. I’m going to buy X number of long-term rentals, or short-term or midterm or whatever, subject two deals. Then from there is having that conversation with your tax advisor and looking at what types of strategies would make sense in those scenarios. For example, if you are a short-term rental investor or you plan to buy a lot of short-term rentals, then looking at where are the properties that will give you the best maybe depreciation? Obviously we want cash flow and depreciation, but which properties will give you the best tax depreciation and what do you need to do to get enough hours so that you can actually use all those tax benefits to offset not just your rental income, but maybe income from your W-2 job or some other business you might be running. I think that the tax planning should follow whatever your investment goals are going to be for next year.

Henry:
That’s super cool. People have a general understanding of writing off helps me save on taxes. But I think when people think of tax write-offs, everybody thinks of the same things, right? What are some of those tax write-offs that real estate investors can do that maybe aren’t so common, or things that investors just forget about or miss completely that they’re not typically writing off that you see as a big miss?

Amanda:
Gosh, that’s such an interesting question. I’ve never been asked that before. It’s funny because I feel like people know what they can write off, but then it’s a little bit different when it comes to actually writing things off or actually tracking it. I always tell people like, “Hey, when you go to these real estate conferences or meetups,” right? You can write off all those expenses, your travel costs and hotel and meals. Then what happens is when I’m actually talking to the investors at tax time, I don’t see those things. I don’t see it on their financial stuff. And I’m like, “I know I saw you at BPCON. Where is all that stuff?”
I think it’s more important than just understanding what you write off, but also tracking it and making sure you give it to your tax person when they’re doing tax returns. But yeah, it’s all those things that are like we all know we can write off property specific things like repairs and insurance and property tax, but it’s all those kind of what I consider overhead, things that I got some personal enjoyment out of doing it. It’s not really for my property on Main Street, those are also deductible too, as long as it’s related to your real estate activities. There’s like a hundred different write-offs that fall into that category. Like cars and home office and travel, education, all that good stuff.

Henry:
No, you’re 100% right, because it really comes down to being diligent in the moment when you are thinking about your taxes. I think we as normal people, I think we want to think about taxes only one time a year, right? But to truly get the most benefit, you have to be thinking about it and be taking action on it throughout the year. I’m 100% guilty of that, of knowing that, “Hey, I can write this trip off” and then not being diligent about keeping track of expenses or receipts and things and then come tax time, I’m trying to dig back through emails and receipts to make sure that I can get that write-off. And I probably don’t realize the full potential of what I could have written off by not being diligent. That’s a great point. Thanks for sharing that.

Amanda:
I feel like I struck a chord with you when I said that too. Your reaction.

Henry:
I feel like you were talking to me, so thank you.

Dave:
That’s so true though. And it really is a mindset to start thinking in each interaction, everything that you do as an investor about how to create tax advantages for yourself. And it does seem like it’s the last piece of the puzzle for a lot of investors. You try and learn how to analyze deals, you get your deal flow, you work on operations, and then once you start having checks to the IRS that are big enough to start hurting, then you’re like, “Okay, now it’s time for me to start adopting the proper mindset.”

Amanda:
Yeah. I think I have two things to add to that. Henry, for you, one simple thing you can do is if you have a credit card or a bank account that’s dedicated to your real estate stuff, again, it doesn’t have to be for a property, but having that one bank account, one credit card, and you use that, it’s always in your wallet, you’re using it every time anything is business related, that will help a lot. And because then you know, you download all those transactions, those are just your business stuff, and you don’t have to go through your emails and calendar and try to figure out what this was.
And I think the other thing you guys said, taxes, the last on our mind, Henry only wants to think about it one time a year. But really what you want to do is just have it in the back of your mind every day. Whenever you’re spending money on something, ask yourself, is this reasonable that it would be a business expense? Am I doing it to better my real estate? And if so, charge it on that card. Not that you have to become a CPA or anything, but just always ask yourself that little question when you spend money. I think that’s going to go a long way. If you’re in a 30, 40, 50% tax bracket, a hundred dollars in expenses, it’s going to save you 30 to 50 bucks of cash.

Henry:
You know Amanda, I thought we agreed in the pre-planning for this that we were going to say I was asking for a friend. I feel like you just [inaudible 00:14:42] me out. But it’s cool. I appreciate it.

Dave:
You were talking about Henry and Amanda, about people who forget about this. Amanda, I’ve been wanting to ask a CPA this question for a long time. Does anyone actually keep track of their mileage when they’re driving around? I just feel like that’s a myth that people are able to do that. Because who has the discipline to keep track of everywhere they drive?

Amanda:
Yeah, I guess-

Dave:
You do it, don’t you, Amanda?

Amanda:
I have to say yes [inaudible 00:15:11] I tell people to do that. There’s great technology now, right? In the olden days, you have to write it down in a little notebook, which my father-in-law does. But no, there’s so many apps now that you can track it where you just turn it on and then it’ll do all the tracking for you. Just say, “Okay, this is business, this is personal.” MileIQ, there’s a lot of different ones out there that people use. But to answer your question, I mean, I hope people are tracking it. At least my clients tell me they are, but yeah.

Henry:
I cannot confirm nor deny. I use Everlance, which is a similar tool to what she talked about. It kind of tracks it in the background using the accelerometer on your phone and then you can just swipe whether it’s for business or personal.

Amanda:
Yeah. Yep, that’s exactly what I was saying. It’s just easy. You’re swiping on your phone all day anyways, guys, I’m sure you’re doing that. You just do it now for tax purposes.

Dave:
Okay. All right. Well, I just have one more tax 101 question for you. Then let’s move into some of the changes and updates about the tax code. What is one or two sort of more advanced strategies that most real estate investors overlook that you think they should be considering?

Amanda:
Gosh, advanced strategies. It’s hard for me to kind of determine what’s advanced for one person might not be advanced for another person.

Dave:
Well, one that’s from your book on advanced tax strategies and not from your one just for regular tax strategies.

Amanda:
Oh, thank you. Thank you for the plug of the books. Advanced strategies, one that we’ve been kind of talking a lot more about and hear a lot more about on social media recently is the concept of home home/rental. For newer investors, right? Where you have a primary home and then you are house hacking. Whether that’s turning later living there and then turning it to a rental, or you have a duplex where when you live in one and you sell the other one, that’s a rental. One of the strategies, there’s two separate things. One, we all know that if you live in a primary home for at least two out of the last five years, you can exclude up to $500,000 tax free. And as investors, we also know that when you sell a piece of rental property, you can 1031 exchange and defer the capital gains taxes.
Those two are somewhat simple strategies. But what I love about house hacking, if you’re doing it correctly, is that you can actually combine the two strategies. What that means is you can possibly sell, so if you have a home, you turn it into a rental and then later sell it, it’s possible for you to get up to $500,000 of gain tax free. And if your gain is beyond that, you can use a 1031 exchange to defer the rest of that gain too. I really like that because we’re seeing a lot of investors doing house hacking, whether it’s … I think a lot of people think house hacking is for newbie investors, but I have a lot of clients that are very experienced and they do house hacking because it’s one of the few ways that you can get tax free money, just a rehab and move every couple years. But that’s a really great one that you can combine two different strategies into one to get a really significant tax savings.

Dave:
Good idea.

Amanda:
You want me to do another one, right? Because you asked for two advanced.

Dave:
Take whatever you got. I’m writing notes right now.

Henry:
We’re going to let you talk about tax strategies as long as you want to.

Amanda:
As long as I want.

Henry:
Go on.

Amanda:
I’ll just share a client example, okay? This is a good one because we’re talking about year end and we’re talking about more advanced strategy. I have a client who is going to come across a big windfall. This happens to be a dentist who’s going to sell his dental practice. We’re working with them to try to delay the closing of that sale. Everything’s moving forward, all the due diligence, everything’s moving forward, but we are trying to help him to delay the sale until January of next year. This is a couple million dollars worth of gain and taxes that they’re looking at. By delaying it to next year, the two benefits. One, we’re delaying the taxes, but two, it’s going to give him all of next year to help plan for ways to offset that couple million dollars of gain from taxes.
The significance for this particular person is that this year they’re still working full-time, right? They have their dental practice, there’s no way for them to use rental losses to offset all that huge gain, but next year they’re going to be out of the dental practice, they’re going all in real estate. They’re going to have a bunch of properties, active real estate, passive syndications, and we’ll be able to use that to offset all this significant amount of capital gains tax. Just the power of how proactive planning across multiple years can really make a huge tax difference.

Henry:
That’s super awesome because again, selfishly, I’m getting so much value out of this and I think people should really be taking notes on some of these advanced strategies because you’re right, you want to be as proactive as possible. And one thing we do know about taxes and tax laws and rules is that they change. Can you give us some insight as to what’s changing for the upcoming tax year so that we can start to be proactive about how we plan for those changes?

Amanda:
Yeah. Well, I think for real estate investors, there’s two major things. The one is the good news that I wanted to share, which is in the last couple years we heard a lot about Washington DC trying to punish real estate investors. The landlords are big bad wolf and we have all these unfair tax advantages. Really trying to take away some of the benefits of investors, whether that’s depreciation or writing off interest or 1031 exchange, that was something that was always on the chopping block. The good news coming into this next year is that a lot of those things that we had been monitoring are kind of at a standstill. Right now as a stands, we’ll be able to do 1031 exchanges going forward with no limitations. You can sell millions of dollars of real estate and pay no taxes if you’re doing the 1031 exchange correctly.
Those are all the good things about real estate. I think the one change that is not as good specifically for when we talk about real estate investors is the change in depreciation that’s coming up. Right now for this year, we have what’s called bonus depreciation where we can write off certain things at a hundred percent. Before the show we were joking about cars and things like that, right? If you did buy a large truck or SUV over 6,000 pounds this year, you can write off up to a hundred percent of that purchase price. If it’s used, primarily used for your real estate business of course. And also other things within real estate like the furniture, fixture, things you’re putting into your short term rentals. A lot of those right now, we can get a hundred percent bonus depreciation. The change that’s coming up for next year in 2023 is that 100% immediate write off a little bit to 80%.
The example will be if I spent a thousand dollars buying some furniture from my short-term rentals, instead of writing off a thousand immediately, I’ll be able to write off 800 bucks of it immediately. The other 200 bucks I’ll get to write off still over the next five, seven, or 15 years. It’s not like we’re losing out on the benefit, we’re just getting it a little bit delayed. That’s kind of the major change coming up and a reason why you’re seeing a lot of investors aggressively trying to close, buy assets and put properties into service before the end of the year.

Dave:
Amanda, could you tell us a little bit more about what bonus depreciation is? Because this is a relatively new thing, right? And how is it different from regular depreciation?

Amanda:
Yeah, so regular depreciation, so the way depreciation works in the tax world is you have a specific asset and let’s say it’s furniture for your rental properties or appliances. The IRS says, “Okay, you can write that off,” let’s say for over five years. Whatever the cost of that appliance was you, you’re deducting it over the next five years. Bonus depreciation basically says you don’t have to wait five years to write it off. I’m going to let you write off all of that first in the first year or in the current year that you’re putting into service. It’s not creating new deductions. It’s just saying, “I’m going to let you write off more of it upfront.” And obviously the significance of it is, as a real estate investor, if I can write off a bunch of things this year and save on taxes or get a refund, then that’s great because I have more money to invest rather than having to wait on that tax benefit over the next couple years

Dave:
With regular depreciation, right? It’s not actually you’re not paying taxes, it’s a deferral of tax, right? Is that the same with bonus depreciation? You still have to do a depreciation recapture when you go to sell?

Amanda:
Yes, yes, that’s correct. The way it works and recapture basically is just saying, “Hey, you bought something,” let’s say you bought something for a thousand dollars and then you wrote it off, right? And then later on down the road you’re going to sell it for 1200 bucks. Well, you already wrote off that thousand dollars, so the whole $1,200 is going to be taxable gain. You don’t get to get a benefit again for what you already wrote off. And yes, you’re right, that is the same whether it’s regular depreciation or bonus appreciation because you can’t write off the same thing or you can’t benefit from the same thing twice.

Dave:
Yeah. I think this is super important and something very misguided people ask me because as Amanda knows, I know nothing about taxes. We’re learning a little bit right now, but people are always sort of the same question comes up, which is like, why do I care about depreciation or deferring taxes if I just have to pay it anyway? And that’s true, but if you think about it as an investor, so much of how you generate returns is by having as much money invested into an interest bearing or return generating asset as possible, right? It’s like this compound interest machine. And what Amanda’s saying is that basically you’re going to be able to keep more money earning you money for a much longer period of time. You’re still going to have to pay taxes for it eventually, but it means that your principal, the amount of money that you have in your investments that are earning you money can be higher for longer. Is that a good way of describing it?

Amanda:
Yeah, I mean, I always say if-

Dave:
No?

Amanda:
No, that’s the perfect way to say it. If I give you the choice, right, Dave? If I said, “Hey, you’re going to have to owe the IRS a hundred thousand dollars, do you want to pay for that now? Or do you want to pay for that five years from now or 10 years from now?” Right? Of course, I want to pay it later. Like we were saying earlier, right? I want time with my money, want time with my money so I can grow it, I can nurture it. When I pay it in taxes today, my ROI is zero, right? I mean, my ROI. Of course, I know the government is doing wonderful things with it, but my ROI on that money is zero. Because I gave it to the government.

Dave:
Absolutely. You pay it in deflated in money as well, and you get to invest it. There’s all sorts of benefits to it.

Amanda:
Yeah, and I say too, also, I know you mentioned people are concerned like, “Hey, I’m going to take all this tax benefit on depreciation, I’m just going to have to pay it back later anyways.” But that’s not always the case, or it doesn’t always have to be the case. Let’s say you have a property, you do depreciation, you sell it in a couple years. If you 1031 exchange it by buying more real estate, which most investors, that’s what they’re doing. They’re growing their portfolio. If you’re doing that, then you might not have to worry about depreciation recapture because you can still defer the taxes down the road over and over and over again. Then ultimately when we’re all super old, you pass away with the property and that property goes to the next generation, to your beneficiaries. And it might be possible that nobody pays taxes on any of that appreciation.

Henry:
Awesome. One question that I … Well, I’m sorry, asking for a friend.

Amanda:
A friend.

Dave:
Yeah. Your friend. He’s got a lot of questions.

Henry:
Hypothetically speaking, let’s say you’re a real estate investor and you have heard of this concept of depreciation, right? And you just talked about accelerated depreciation, but as real estate investors, we can also leverage what’s called cost segregation studies in order to help save on some taxes. But I think there’s a lot of either misinformation or people are a little bit confused about what exactly that is and what it means. Would you mind shedding some light on the cost segregation and how it benefits real estate investors?

Amanda:
Yeah, yeah. Cost segregation is basically a way to accelerate depreciation even more. Earlier we were talking about buy this appliance, I write it off over five years. Cost segregation does the same thing except on a larger scale. It’s not looking at appliances, it’s looking at the building that you just purchased. If you spend $1.2 million on a acquisition and it’s a million dollars worth of building, normally what’s going to happen is your tax repair is going to say, “Oh, there’s a million dollar building. I’m going to write it off over 27 and a half years,” right?
It’s a very small and slow depreciation. But what you can do is you can get a cost segregation study done. And what happens is that the cost segregation firm will look at the building and break out that million dollar building into different components like flooring, appliances, specialty plumbing and all that. The goal in breaking out those appliances and the various components is then you can get faster depreciation. Instead of maybe a small depreciation, you might get $300,000 depreciation in that first year. That’s the reason people utilize that as a strategy.

Henry:
Awesome. Thank you so much.

Dave:
All right, Amanda. I would like to ask you a little bit about something you mentioned earlier, which is that some of the proposed changes to tax law that were rumored in 2022 didn’t happen. Do you think there’s a chance that anything big is going to change in 2023? I know you’re not a politician, but from what you’re hearing, do you think there’s anything coming down the pipe we should be aware of?

Amanda:
Not really. I mean, not at this time for real estate investors, but like you say, yeah, anything could change. But right now there’s not a whole lot of talks about continuing forward with some of those things. Yeah, I think we’re probably in a good spot for now.

Dave:
Oh, great. Thank you. That made me feel a lot better. Good. I feel like sometimes I start to get a grasp on tax stuff and then everything changes and I’m like, “I just give up. I don’t know anything.” At least for one year now maybe I’ll have some understanding of what’s going on with the tax code.

Amanda:
It’s funny because I think a lot of investors or just people in general hate taxes or hate tax or fear taxes, hate taxes. This is so boring and complicated. But actually I think a lot of my clients who have really benefited from tax planning, I find that they’re always talking about taxes. Sometimes I have to stop them. I’ll find my clients on social media or other people’s podcasts and just talking about like, “Oh, I saved so much in taxes doing this and this.” I mean, it’s definitely a good place to be where it’s like once you see the benefit, it becomes such an exciting thing to plan for and a good asset to help you grow your wealth rather than something to be really fearful of.

Dave:
That’s a very good way to put it. I do want to ask you a little bit about how to find good tax advice, but before we do, I have one more strategic question for you. Something you taught me about. Can you tell me a little bit more about short-term rentals and how they have this special position in being able to help you write off some of your taxes?

Amanda:
Yeah, yeah. Oh, I’m so glad you were candid. You didn’t say it was a friend, a question for a friend, like somebody.

Dave:
It was a friend and it was you who told me that.

Amanda:
Okay. Yes. For short term rentals, we refer, myself and a lot of other CPA colleagues, we refer to as the short term rental tax loophole. The reason we call it have tax loophole is that it’s a loophole for people who are still working full-time maybe at a W-2 job and have a high W-2 income. The reason it’s a loophole is because if you are investing in long-term rentals and you have all these losses, and assuming your income is high income, so over $150,000, your losses from your real estate can only offset taxes from your rental income. It’s not really able to offset taxes from your W-2 income.
That’s a little bit of a limitation for people who are still working full-time and have high income. Short-term rental loophole is treated completely differently. The way it works is even if you’re working full-time at a job, if you have short-term rental properties and you’re using all these other strategies like writing off your car or your depreciation, all that good stuff, if you create a loss, you might be able to use it to offset taxes, not just from the short-term rentals, but also your W-2 and your other business income as well.
The reason for that is because short-term rentals, just the IRS treats it differently. They don’t care that you’re spending more time in that than your job. You just have to meet a couple hours requirements. And once you meet those hours requirements, what we call material participation, so if you meet one of the material participation hours requirements, then you can use those short-term rental losses to offset all types of income. We really see that as a huge benefit for high income people who are doing real estate on the side, not being a full-time investor yet.

Dave:
And how much can you offset if you use that strategy?

Amanda:
It depends on the type of income you have. Let’s say you are a business owner, you have a corporation that you’re flipping or wholesaling or whatever, there’s no limit in terms of how much those short-term rental losses can offset income from your other businesses that you’re involved in. But if we’re talking strictly about W-2 income, there is a limitation. It’s around 540 for this year. Meaning if you even a million dollars of W-2 income, you had a million dollars of short-term rental losses, you can only offset up to about 540,000 as a married couple.

Dave:
It’s pretty good.

Amanda:
Yeah, that’s still really, really good, right?

Dave:
Not earning a million dollars a year, but I would love to have that problem where it was too much. Amanda, this has been super helpful. Before we get out of here, for people who are new to tax planning and want to get started in some of these strategies in 2023, what are some things that they should be looking for in a tax strategist or a CPA and if they’re trying to find some outside help to assist them with their tax?

Amanda:
Well, I think it’s really important to find a tax advisor who specializes in real estate. Preferably they also invest in real estate because real estate people, we probably don’t even feel it because we’re always around real estate, but there’s like a whole different language and lingo and the way that we kind of talk that not everybody understands all that. Definitely someone who understands real estate and invests in real estate. I think a mistake that I see people make all the time is they’ll contact a CPA and say, “Do you work with real estate investors?” The answer is always going to be, “Yes, I work with real estate investors,” right? Because maybe I have one client who invests in real estate. That’s not really a good question, it’s not very powerful because that’s kind of a canned question with a canned answer.
I think a better question might be like if they say they work with real estate investors, kind of probe a little bit more, “What type of real estate are your clients doing? Are they doing subject two deals? Are they doing wholesale?” See how in depth they can go with you on that conversation. Or also, what are some of your successful clients doing in real estate to save on taxes? Just very open-ended questions. Are they talking about cost segregation? Are they talking about what kind of things are they sharing with you? I think those will help you figure out if that’s someone who understands. And of course, Bigger Pockets forum is a great one. There are a lot of other CPAs on there who specialize in working with real estate people, too.

Dave:
Henry, I was just wondering if your friend had any other questions for Amanda?

Henry:
No, no, no. But I did want to highlight that that was a phenomenal tip. You guys should write that down. Being able to ask open-ended questions so you can gauge what they truly know. Because you’re right, we speak a different language. We do things that a lot of people in other businesses think are crazy. Having that, asking those open-ended questions, seeing if they speak your lingo and truly understand what it is that you do is a phenomenal tip. Because I’m sure when I got started, I was guilty of the exact same thing. I asked if you work with real estate investors, and I 100% got a yes answer, and then we worked with somebody that probably wasn’t the best for our business right away. Thank you for sharing that.

Amanda:
And Henry, your friend can always contact me anytime if they have more tax questions.

Henry:
I will be sure to let them know.

Dave:
All right. Well, thank you Amanda, so much for joining us. We really appreciate your time. Where if people want to connect with you, should they do that? Or Henry’s friend, where should he connect with you?

Amanda:
Yes. Yeah, I mean, if you guys, for any of you who want to know more about ways to save on taxes on my website, my firm’s website, we have a free downloadable tax savings toolkit where we talk more in depth about how do you pay your kids to get a tax write off? What’s the best legal entity for your real estate? All those things that we didn’t get to talk about today. You can download those at KeystoneCPA.com, and on social media, I can most frequently be found on Instagram. I am AmandaHanCPA on Instagram.

Dave:
All right, awesome. Thanks again, Amanda, who is the Managing Director of Keystone CPA and the author of two Bigger Pockets books. The Book on Tax Strategies for Savvy Real Estate Investors and The Book on Advanced Tax Strategies, Cracking The Code for Savvy Real Estate Investors. Amanda, it’s always a pleasure. Thanks again for coming on.

Amanda:
Yeah, thanks for having me.

Dave:
Man, your friend really knows nothing about taxes.

Henry:
Absolutely. But hey, we’re in a better place now because it was a mindset shift for me. And it’s just like anything else, right? With investing or getting into investing, you’ve got to change your mindset before you can truly find success. And I never even thought about having a tax mindset, and it will just help you make sure you stay prepared throughout the year because man, there’s definitely things I’ve dropped the ball on that when I heard her talk about it, I was like, “Oh yeah, I should be better at that.”

Dave:
Yeah, I feel like the path to being good at taxes is blazed with terrible mistakes and regrets. You just have to learn sometimes the hard way that there’s better ways to do it. Honestly, I was working at Bigger Pockets when Amanda’s first book came out and I was like, “Tax strategies, what does that even mean? You just pay the amount that your CPA tells you. What strategy is there? You just pay it.” But she has taught me a lot. Not just now, but she is super smart and a very generous with her time and knowledge, so very grateful to have her on. All right. Well, thank you so much for being here, Henry, as always. Appreciate your insights and help, and where should people connect with you if they want to learn more from you or your friend?

Henry:
Yeah, I’m @TheHenryWashington on Instagram. That is absolutely the best place to reach out to me and my friend Harry, he doesn’t have an Instagram yet. Just message me and I’ll make sure he gets it.

Dave:
Yeah, you got to be the intermediary. You can find me either on Bigger Pockets or on Instagram where I’m @TheDataDeli. If you have any questions about this, you can also reach out to Amanda. But for that, thank you all so much for listening. We’ll see you next time for On The Market. On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire Bigger Pockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Audio:
Come on.

David:
This is the BiggerPockets Podcast, show 705.

Rob:
Because that’s what real estate should be. It’s like you should always feel like you’re broke if you are investing correctly. And that’s a whole ‘nother probably episode of, I always call it the broke millionaire conundrum, where you actually are a millionaire on paper, but you’re deploying all of your cash to your investments. And so you’re always like, “Dang it, where do all my money go?” And it’s just tied up in equity, which is a good thing.

David:
What’s up everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, here today with my co-host, Rob Abasolo who you just heard popping off with excitement about one of our biggest bookings to date, not just in the amount of money, but in the short period of time. And I hope you’re just as excited as we are. But today’s show’s not going to be about a bunch of wins, actually. You are going to hear about a lot of things that are going wrong in our portfolios, things that we didn’t anticipate that actually became hurdles for us, mistakes that we’re trying to work our way through, changes in the economy, just a bunch of stuff that isn’t going right because a lot of people are dealing with this. And how you handle mistakes is even more important than not making them.
Today’s show is a fantastic episode where Rob and I are going to go deep into our own portfolios, lives and businesses and share what we’re doing to handle the chaos and destruction that often comes for being a real estate investor. And I think you’re going to love it. Rob, what were some of your favorite parts?

Rob:
Oh, man. Oh, this is just filled with goodies because we talk about the multiverse, right? We may not be able to get you to get into Interstellar, but we can at least get you to talk about the concepts of the parallel universes, of the demise of our portfolios. And we even get to go toe to toe on metaphors and analogies. You talk about energy storage. I bring it with a battery analogy and I’m like, “Wow, the student has become the teacher.” And then lastly, we give a lot of just good thought about portfolio architecture, and how to structure your portfolio in a way that can help you weather any economic storm that we may or may not face.

David:
That’s exactly right, and that’s what I think is personally important. I’m talking a lot about how you build a financial fortress, not a flimsy shack that you could just throw together really quick, which frankly a lot of people did the last five or six years with the economy, there was people throwing things together that they never should have been, and they’re not doing very well. But there’s a way to construct your portfolio in a way that will stand the test of time, and that’s what we at BiggerPockets believe in.
Before we get to today’s show, a quick tip for the audience. Today’s quick tip is consider how your portfolio can be perfectly balanced, as all things should be. Consider yourself Thanos, and ask, “How could this all fall apart? And how can I create the amount of balance that I would need to prevent that from happening?” It could be seasonality with short-term rentals. It could be having a lot of money in the bank and then spending it all on a deal. Rob’s still trying to work out the balance. It’s harder than it looks, isn’t it over there?

Rob:
You got to see it on YouTube.

David:
Poke holes in your own portfolio. Make it a poke-folio, and look at ways this could fall apart and then be proactive about trying to prevent that as opposed to just living in fear, anxiety, and worry about what could happen, not having a plan for what you’ll do if it does.
With that being said, we are going to pull back the curtain and show you guys what’s been going on in our portfolios, how we’re handling those challenges, and what we’re doing to lock in and keep it tight.

Rob:
All right, David, I know you’re not a fan of Interstellar because you still haven’t finished it and you’re not really into the whole parallel universe thing, but I wanted to throw a couple of parallel universe scenarios at you and talk about it on today’s episode of BiggerPockets. Is that cool?

David:
I can probably get into the parallel universe thing. It’s kind of being forced on us all, if you like Marvel movies. You just have to accept it. Yes, exactly right. So we could bring the multiverse into the podcast.

Rob:
Okay, well let’s do it. So today what I wanted to talk about was we are relatively successful real estate investors. We’re in different journeys, different parts of our journeys, if you will, and we’ve done really, really, really well for ourselves. And I think we have enough systems in place and protections in place to really kind of weather any storm that’s approaching or that we’re currently in. But I wanted to flip the script a little bit today and talk about a world where our entire empire falls apart and talk about the scenarios that would cause the demise of David Greene and Rob Abasolo.

David:
I think that’s healthy. I think constantly planning for a paranoid worst case scenario can only make your portfolio stronger. So this would just be a multiverse scenario where Thanos is king and Iron Man has lost his armor and Captain America can’t find his shield and the Hulk has become anorexic. And how are the earth’s mightiest heroes going to manage these challenges without their superpowers?

Rob:
Okay. So yeah, I mean I’m curious, have you ever given thought to a world where your entire portfolio crumbles?

David:
Yes, I do think about it a lot. I think the challenge is that when things are going really well, you have the thought in your head of, it won’t always be this way or you got to prepare for whatever. But the emotional environment that you’re operating out of is very different. And the same is true on the other side, when things are very difficult, you have the thought in your head, I know I can make money through real estate, it can work, but your emotional state is just so negative and fear-based, it’s very hard to operate. So these exercises are good, because it forces you out of the emotional state you’re in right now based on temporary factors like the market, how your last deal went, or what you ate for breakfast this morning and into the mental side of it where it’s much more stable and beneficial to be approaching financial aspects from that perspective.

Rob:
But deep down, I know that you’re probably always comforted knowing that you have 10 million credit card points, right? Isn’t that your apocalyptic scenario, if everything is gone?

David:
Yes. That’s my one backup plan. So yeah, we were joking about how I have a lot of credit card points because having them there, it makes me feel better in case everything gets wiped away. If Thanos snaps his finger and half of my wealth disappears, I’ve still got these credit card points that I can live off of for six months without having to worry about going hungry.

Rob:
Yeah, David hasn’t really disclosed how many he has. That’s my guess. I will say that is the one thing, I’m more protective about my credit card points than I am my real estate portfolio. I’ve got like $12,000 worth of credit card points, I think. I don’t know. What’s 1.2 million credit card points, like 12,000 bucks? And I’m like, “I am never going to touch this.”

David:
That’s so funny, that and my Beanie Baby collection that I keep in various safety deposit boxes throughout the Midwest.

Rob:
I’ve seen that thing, man. That’s extensive.

David:
Yeah.

Rob:
Well let’s do it, man. Let’s talk about it. Let me just give my point of view before we get into it. I think, like you said, it is healthy to talk about the good and the bad and hey, what scenario, this and that. We have this mindset when things are going well that, “Hey, we’re crushing it, blah, blah, blah.” Honestly, I don’t care one way or another, this is probably a hot take, how the real estate portfolio does on a day-to-day. Like the cash flow is always nice, but I kind of stash it all in the bank account anyways and I really rely on appreciation anyways. So I have really good months. I have so-so months. Most of the time, they’re good months.
But honestly, at the end of the day, it’s a long game. And so I’m just like every day pushing that stone a foot forward, if you will. That’s not how it goes, but you know what I mean.

David:
Yeah. So from your perspective, when you’re… one of the ways you’re playing defense here is that you’re not going to spend the money from the cash flow. So you project the cash flow that you want to get, but you don’t rely on it. So there’s never an emotional connection you’re saying to your safety being relied to the cash flow.

Rob:
Yeah. Yeah. I’m a big advocate of having your real estate work for you and build wealth and everything, but to have a bunch of other streams of income that you can actually live off of… So I have probably 10 to 15 streams of income. That’s really what I live off of, so that I can always propel the real estate portfolio forward.

David:
I think that’s healthy. And the reason I think it’s good for us to bring this up, is most people don’t acknowledge that fact. The majority of the time, if you’re getting free information about real estate investing, if you’re paying someone, this could be different if you’re paying for coaching or a course or something, but if you’re getting the information for free, the person giving it to you has to make money somehow. So they’re usually going to be making money by trying to get you to… like for advertising, or to get views, to get attention to get followers. The quickest way to do that is to tell someone that they can make more money easier than what they’re currently doing. This has just been around forever.
So if there’s a girl that you like and she’s got a boyfriend, the first thing every guy wants to do is tell her all the reasons that her boyfriend sucks and how he would be better, right? The same thing comes true for if you want someone’s money, you got to tell them that the place they’re currently getting their money from could be better. “And if you come over to this world, girl, I’ll show you how to make some passive cash flow. Wouldn’t that be better than having to go to work every day?”
And so you’re frequently seeing TikTok and Instagram and social media scripts with little emojis in them that says, “Do you want to make $6,000 a month? Do you want to know how I make $300,000 a year without working?” And inevitably, this is some form of cash flow from real estate, and it’s true that in principle, you can make money passively from real estate. It’s also true that it is inherently less reliable than that W2 income that everybody is trashing.
So the new guy’s always going to tell you how he’s better than your boyfriend in all these ways. But then if you jump ship and you hook up with the new guy, you realize, “Oh, there’s a lot of stuff my boyfriend was doing that this guy doesn’t do that I maybe took for granted.” And for a lot of people, their W2 job is not the best thing they need to get out of it. But for others, you forget that when you’re having a bad week or you’re feeling down or you’re distracted or your kid’s sick and you’re not sleeping, man, that paycheck just keeps on coming. It doesn’t matter if you don’t perform.
You get into the world of real estate or entrepreneurialism and you’re not on your A game, that money might actually stop. And so it is worth acknowledging that income coming from a secure source has a value that income coming from an insecure source like cash flow doesn’t have. And it’s also worth acknowledging that this is never talked about in the real estate space because most people sharing the information don’t want to tell you that cash flow is unreliable. Because then you’re not going to follow them. You’re not going to subscribe to their channel, you’re not going to give them the like, you’re not going to give them the currency that they need to justify the free content they’re putting out.

Rob:
Oh yeah. It’s so funny because I’m always like, well on YouTube, in my content, or just my students, I’m like, “All right, let’s get you to $10,000 a month. I’m going to teach you how to do that.” And they’re like, “Oh my God, let’s do it.” I’m like, “All right. And here’s what’s going to happen when you make $10,000 a month, you’re not going to spend it.” And they’re like, “Wait, what?” I’m like, “Gotcha. I made you wealthy and I’m not letting you spend it,” because that’s what real estate should be. It’s like you should always feel like you’re broke if you are investing correctly.
And that’s a whole nother probably episode of, I always call it the broke millionaire conundrum, where you actually are a millionaire on paper, but you’re deploying all of your cash to your investments. And so you’re always like, “Dang it, where did all my money go?” And it’s just tied up in equity, which is a good thing.

David:
And that’s one of the reasons I’ve started referring to money as a store of energy and work as energy. I’m trying to move our thought off of the US Dollar, which has a value that’s constantly fluctuating with inflation. It’s very hard to know what a dollar’s worth, into an understanding of energy to where you can make a bunch of money, which was just you converting work into energy and then taking it in the form of money. And then you go trade that money for fancy clothes and fancy shoes and fancy cars and fancy vacations, and you’re just wearing your energy on the outside.
That’s all that it is. You’re not wealthier than other people. You’re just putting energy into things like cars and clothes, versus with real estate, we are constantly putting our energy back into the asset, back into the portfolio. We’re putting it into the future where it’s going to grow and replicate and create more energy, and we can pull energy out of the portfolio through cash flow, through cash out refinances. There’s these vehicles that we use to access that energy. But you’re right, the better way to grow your wealth is to keep as little of the energy as possible for yourself, and keep as much of it inside the vehicles where it’s going to grow more, which often leads to people wearing t-shirts just like you.

Rob:
That’s right. My one, my single shirt, I only own one. Actually, I think to use your analogy here, I actually think it’s better to think of your… Oh, this is really good. Okay. I got to work through it with you on the air here. But your money and your wealth is sort of a battery, battery storage, all right? And so you can store all your batteries for a storm, and when that storm comes, you can use it to weather the storm.
However, if you use your batteries for dumb things, I don’t know, RC remotes or RC cars or whatever, as soon as that energy is gone, it’s gone. You’re not getting it back. It’s a depleting source. And then on the flip side of this, batteries don’t last forever. If you just keep your batteries in the closet for 20 years, they lose power over time, which is inflation. So you have to be able to consistently move your energy to something that is going to produce more energy. I did it.

David:
I love it. Yes. And there’s so many people that think, “Oh, my laptop is charged. I’m at a hundred percent. I don’t need to plug it in.” Terrible attitude. You shouldn’t be like, “I’m rich, I’m at a hundred percent battery.” Plug it in. Keep the energy in the power source and have new energy coming in from the electricity to restore it, which would be new ways of making income through real estate, new ways of making income through entrepreneurialism.
Yes, you have a bunch of wealth stored inside of your real estate. Don’t just pull it out because you never know when you’re going to need it. You don’t know. What happens if the power goes out? Like you said, you can’t recharge that battery and you’re only at 4%, you’re only at 12% because you were too lazy to plug it in.
So in today’s show, we’re literally talking about how we prepare for that storm that’s going to stop you from being able to replace that energy, how you prepare for the storm that’s going to cut your battery life in half. How when everything is great and you think it’s always going to be great, we plan for when it’s not going to be great because those storms tend to not be the case all the time. We don’t have 20-year storms. They tend to be wicked, nasty hurricanes that come through in a couple years of devastation and then the economy’s better.
So overall, this is why we’re always doing well, collecting energy and collecting electricity in our portfolio when we’re investing it. But you’d be a fool to not plan for the fact that you’re going to have downturns, and the goal is just survival. How are we going to survive those short periods of time where the storms hit and we got to batten down the hatches, get in the basement, wait for it to pass, and then once it’s done, come out of there and go start planting our flag and scooping up all the real estate we can.

Rob:
Well, we just really, really masterfully put together a good analogy here over the last 13 minutes. I hope it actually makes it into the final episode. If you only heard one minute of this, just know there was a lot of good stuff that we just talked about.
But yeah, let’s talk about it, man. Let’s actually get into the structural weaknesses of our portfolios and what some of those scenarios are that could cause them to crumble. Obviously, they’re not likely, but we should consider what could happen to take us down.

David:
Yeah. So where do you want to start?

Rob:
Well I mean, the general question here is how could the whole empire fall apart? And I think that there’s a few ways that we could do that. So we could start with the question, like what are areas of possible weaknesses in your current strategy? Do you have anything to speak on on that kind of first bullet point?

David:
And I was just thinking before we recorded, I was having a conversation with somebody and we were talking about where business is going good and where business is going bad. And in general for me, the actual decisions I’m making are close to a hundred percent solid. I rarely make a bad decision when it comes to what to buy or how to manage it or how to manage the energy flow.
And so I will talk about that in the show, how I look at it so that I rarely make bad decisions, but I still have significant stress and problems and things that go wrong. So I was trying to figure out how is that happening if I’m making good decisions in all my investments? And what I realize is it comes down to two things and there are things that I cannot control. They are other people and they are things like regulations.
So I could look at a deal, analyze it from every single situation, walk into it with a really good plan, buy the property, and the neighbor complains about the construction and the city gets involved and they slow you down and it turns into a six-month project instead of a 30-day project and you lose 10 grand a month before you even get the property out and you’re $60,000 in the hole.
So then you don’t realize you need a second kind of permit. Well, that’s going to take another three months before you can get it, right? And then you go down this rabbit trail of just your construction, or your jump off part took nine months and you didn’t have $90,000 set aside, and the next thing you know, you went from being extra liquid to barely liquid at all. And then if you have another problem going wrong somewhere else in your portfolio, boom, you’re at that point where you’re not going to weather the storm.
So regulation is one thing that is very difficult for investors to navigate right now. And that is especially true with short-term rentals. You don’t know about what the neighbor’s complaining to city council and they come in and say, “This is no longer allowed.” Or an associate of mine recently had to sell three properties of his in Virginia because out of nowhere, the HOA just decided we’re not going to allow short-term rentals anymore. So what’s he going to do? He had to put the houses on the market and sell them. He wasn’t able to sell for a profit. Most of the money that they had been crushing it making over the nine months before that from all the work they put in, went to cover the closing costs and the realtor fees. And then after he and his partner split up the money, there was barely any profit that was made for nine months of hard work and success. Nothing that they could control.
So things like regulation can absolutely screw me up. And the other one is people. I was thinking about all the problems that I’m having. There are always problems from deals I did with other people. A partner in a deal got greedy or got lazy, or didn’t have the same value system as me and they made decisions that I wasn’t looking at that were very poor. So even though the plan and the property was perfect, the person was not perfect.
Or a business partner that you go into business with and you find out that the friendship you have with someone is not the same relationship you have once money gets involved. So I’ve had situations where we started an enterprise and they did really well really quick, and they completely changed. They don’t have the same values, they’re acting much differently. Their ego is more important to them than the success of the business. They’ve never experienced that much affluence that quickly, and it hit them in a way that I couldn’t have anticipated.
So those are typically the things that will cause stress in my life. And so trying to learn to limit how dependent I am on other people in these enterprises is the biggest threat to my portfolio. And most of the issues that I’m having right now come from that.

Rob:
Is that why you shut down your pink Volkswagen beetle rental service? I’ve always wondered why that went under.

David:
We had a ton of demand, and it was really good for my image. But yeah, the partner that I had decided, they didn’t want it to be pink anymore, they wanted to move into purple and I just couldn’t live with that.

Rob:
Creative differences. No, man, that makes a lot of sense. I think there are definitely… I mean regulations even go past, I think laws and short-term rental laws and everything like that. I mean we know that I am a short-term rental host. Obviously, we talk about it all the time, but there are other regulations that can really throw you for a loop. And I’ll give you one example of where someone’s empire might have crumbled. Mine did not, thankfully. I guess for the purpose of this podcast, we’ll say it was my empire.
I had a relatively successful Airbnb operation and a little glamp side operation that was cash flowing, a lot of money, things were going good, I was flying hot… Icarus, if you will, flying close to the sun. And then we got this little thing called COVID-19 pandemic across the world. And guess what? Airbnb canceled all of the reservations that we had for three months straight, and then the city shut down and they wouldn’t let you do Airbnb.
And so we actually had to refund 40 to $50,000 worth of reservations overnight. Now, I think for most people that are overzealous and very levered and don’t have a lot of reserves or anything like that, that would’ve eaten up most businesses. But my standpoint has always been to just keep all of our money in the bank account, don’t spend it. As I said, I try not to spend real estate money. So it was really no big deal. It was not a big deal for us to refund it. Obviously, I didn’t like refunding like 50 grand, but it was like, okay, we have the money, we’re just not going to make it. It’s not a big deal.
And then guess what? We ended up, because we were able to weather that, we were actually the most profitable we had ever been for the rest of the year. Whereas there were a lot of people in rental arbitrage, like master lease contracts where they had a hundred units, a lot of them went under during that time specifically because they couldn’t get tenants to rent their Airbnbs.
So even more of a global regulation could really cause your empire to crumble. Did you have any issues during that time with any of the rest of your portfolio, or were you okay? Did you have anything at all during your time when COVID-19 first hit that caused any structural cracks in your system or were you okay because you were mostly in long-term rentals?

David:
Well, the rental properties were more or less… Okay. I had a handful of tenants that didn’t pay, and I had one where the tenant didn’t pay for over a year. The problem with that was that I wasn’t watching the portfolio super close because of all the other businesses I have. So I don’t even know that a year went by or more than a year without this person paying. The property manager didn’t push it to the front of my attention.
That was the biggest problem with the rentals. The bigger problem was with the real estate team. Real estate agents were considered to be not essential. So we literally could not show homes anymore. Not just holding open houses. You can’t even get into a house to even go show it. Nobody was going to be buying homes. So this entire income stream was basically just shut down. You weren’t going to be able to sell anybody’s home and you weren’t going to be able to help buyers with buying it.
And it’s very easy from an emotional standpoint to see the money keeps rolling in. I can keep buying, I can keep spending, I can keep doing whatever I’m doing. And then COVID hits, which was a black swan event, no one would’ve ever thought, boom. They actually had a couple week period where loans wouldn’t fund. Fannie Mae and Freddie Mac loans, the government’s like, “We’re just not funding anything.” The only way you could buy houses with cash and the only way you could buy houses is not seeing it.
So no one’s going to be buying houses at that time. And so your portfolio as a whole is not just the assets that you own, it is your life, right? Like you mentioned saying you were over… you could be over levered. Everyone assumes that means taking out a loan on the property that’s too much of an LTV. No, you could be at 50% LTV really low, but what if your life is over levered? You’ve got massive car payments, you’ve got a huge house payment that you can’t afford. You’ve got a ton of debt you never paid off. You’ve got a lifestyle that other people are spending your money and you’re not paying attention to it. You can have prudent investments but run your lifestyle in a way that isn’t very disciplined and you can easily lose the assets because of what was going on on the other side.

Rob:
Yeah, for sure. I mean, I think speaking of the loan thing right now, another thing that probably a sticking point for a lot of people are bridge loans, or people that are flipping right now based on ARVs from six months ago that now that we’re taking maybe a… I don’t know what the correction is right now, but let’s just say it’s a 20 to 30% in the next six to 12 months if that’s what it is. I don’t know off the top of my head. But if that’s what it is, then it’s going to be a very tough to cash out and actually get your money back. Or if you’re even just selling, if you already had razor thin margins and you were only going to pull 10 to $30,000 of profit on a really light remodel, the correction of prices and then the increase in interest rates might cause buyers to not want to buy your flip and thus you are in this hard money loan or bridge loan that you can’t get out of.

David:
That’s actually happening to me right now on several properties. So I went on a buying spree right before rates went up, and then they’ve just continued to go up. So I’ve got a couple properties, like pretty big rehabs on million dollar or several million properties in the Bay Area where I locked in a bridge loan for 12 months at something like nine, 10% interest. At the time, rates were four and a half, maybe five, but probably less. And rates have gone up so quickly that to refinance out of my bridge loan, which is a form of a hard money loan, my 30-year fixed loan will be higher than what the hard money loan was.
And I can’t sell it because the values have gone down. They haven’t like crashed, but they’ve gone down less than where it was when I paid it because the rates have gone up so high.
So it is these perfect storms that we’re talking about. I had a lot of exit plans, okay, buy the property, fix it up, the ARV should be here, I’m going to get more than a hundred percent of my capital back out and I’m going to have this great asset. Well now, the cash flow is significantly less because rates were at five and then they jumped up to 10 and a half for this particular property I’ve got. And I can’t exit it by selling when the market was just climbing, climbing, climbing because the prices have gone down and they’re also in the middle of being newly renovated. So I have to finish the renovation.
And then of course, you get issues with the renovation, how long it takes, and then when you get permit issues that get popped up, new stuff just keeps starting to add on and you’re not able to collect any revenue for the property. You’re not able to sell the property and you got to keep putting money into it, until it’s finished so that you can actually have something that could be rented out.
And then when it is rented out, you’re not going to be making nearly as much as you planned because rates have gone up so much higher and you’re not going to get all your money back, or as much money back because the value went down. This does happen in real estate.
And the thing that you got to understand is it could not have been predicted. We didn’t know when rates were going to go up like this. We didn’t know when COVID was going to happen. You can’t know what’s going to happen. And the flip side of it is when you let the fear of something going wrong create analysis paralysis and you do nothing, and you watch everyone around you making money.
So you’re in a position where there is no risk-free move. You’re either going to lose out by not taking action or you’re going to take action like I did and you’re not going to get the result that you wanted. The only way that you mitigate that is that you don’t look at what’s happening in the immediate future. You look at what’s happening in the long term. I did certain things well, I bought them in locations that are guaranteed to appreciate much more than everything else around them, grade A locations, right.
I created additional units in these properties, so my cash flow will be more than a comparable property would be worth. At some point, rates will go down, I’ll be able to refinance and I’ll be able to get back to the numbers that I originally thought. It’s really just time that I lost. I thought I was going to be making a certain amount of money in six months, maybe it’s going to be two and a half, three, four years, hopefully less, but it could be that long before I end up making that money. So I just lost time.
But there’s still like, what if I’d have bought these in terrible locations? Oh, there’d be nothing I could do right now. You’d just be screwed, right? So the principles of real estate, this is where they come from, is we are planning for the worst case scenario. Did I think rates were going to go from five to 10 and a half for me? No. Did I ever think I’d refinance into a 30-year fix that was more than the hard money loan that I used to start the rehab? No. Did I think that the ARV would drop that significantly because the rates went up so high. On a $2 million house, if rates double, it hurts the value a whole lot more than a $200,000 house. No, I didn’t think any of those things. But what you do with your money and how you can struct your portfolio will allow you to survive those times.

Rob:
Well let me ask you this, just out of curiosity. When you go to refi those homes, you were saying you may not get the full… you may not get all your cash back, you’ll just leave cash in the deal in the house/

David:
Yeah.

Rob:
So it’s just energy that’s staying in the house, right, if you will. Yeah. I hate to use this against you, but in the Burr Bible you do talk about this a lot where people go and they rehab the house and for them, they want to get all their money back, but they may only be able to get 80% of their money back and they have to leave 20% in the deal and it’s like, “Oh, too bad.” Now you just have locked net worth into a home or whatever.
So I think at the end of the day, as long as you’re looking at it from a long-term perspective, you aren’t really losing… It’s hard to lose in real estate on a 20 to 30-year cycle, if you’re actually holding onto your assets.

David:
Almost impossible.

Rob:
Yeah.

David:
That’s exactly right. And that’s what we’re pointing out, is what I lost was time. I thought I was going to be at a certain point in my timeline sooner, and I didn’t. But I gained a bunch of time on the stuff I bought in the last eight years because inflation was so wild and rent increases were so crazy, that I got to where I should have been in 20 to 25 years in five.
I have some properties that I bought in 2013 that the rents have more than doubled. So a property, a fourplex is the one I use a lot. I bought it at rents for 700. Now rents are at like 1750, 1850 depending on which unit. That shouldn’t have happened for 20 or 30 years. That happened to me in eight or nine years. So I gained a lot of time on those deals. And on these ones where the market turned on around on me quickly, I’ve lost some time.
But yes, as long as you hold it for long enough, you’ll be okay if you’re following the right principles. But it’s not fun. Part of why we want to make this episode is so other people hear it. You’re not the only ones going through this. When the market shifts that rapidly and that unexpectedly, the rug is pulled out from underneath you, you don’t know which way you’re going to fall.

Rob:
For sure. Well, I guess on that note, I sort of wanted to talk about how liquid you can be with your portfolio to triage any major changes in the economy. Do you have liquidity in your overall portfolio to be able to exit? Because I know that this is something that probably a lot of people are going to have to face in the next year. They could be in the middle of loans, they could be in the middle of refinances, they can have a bunch of homes, they may have lost their job and they’re going to need money.
So through triage, what level of priority can you basically assign different homes? Can you get rid of them? What’s your flexibility right now with your overall portfolio?

David:
That’s good. My problems are based off of acquiring too many properties too quickly. Everything I’m doing is from the acquisition problems, the rehabs, the permitting issues. All the properties already owned are fine. So that’s just one thing I want to… I don’t want everyone hearing this to get scared and say, “Oh, David can’t even make it in this market.” Well if you bought 20 short-term rentals in a four-month period, anybody’s going to have some problems if everything doesn’t go perfect. So I just bought a lot of properties and hit the perfect storm at the same time that’s a problem.
As far as the properties that you already own, the question of, well how much liquidity do you want to, or equity do you want to keep in those properties? It depends on how much energy you’re keeping in your bank account. There’s a balance there.
So some people don’t keep very much energy in the property itself, so they don’t have a lot of equity, but that’s okay because they keep a whole bunch of energy in their bank accounts through the form of cash liquidity. So they’re fine. They don’t have to ever sell a property. If you’re somebody who’s thinking, “I don’t want to have a lot of cash on the bank, I want to just put it all in the properties,” maybe you’re the kind of person that likes to pay stuff off, so you feel good knowing, “Oh, my loan to value is only at 30%. I’m safe, I can sell.” Well that’s a person that can sell the property. But in order to access that energy, you have to sell. And I don’t ever like to sell in a buyer’s market. I don’t want to ever sell a property unless it benefits me to sell it.
The reason I don’t like the strategy of keeping your energy in the house instead of in the bank is the only way to access it is either to refinance it or to sell it or to get a HELOC, some form of that. And if values are down, meaning I don’t want to sell, rates are probably up, meaning I don’t want to refinance. There isn’t really a great scenario there, which is why I’m frequently confronting this belief that having your house paid down or paid off is not as safe as you think. I prefer to keep that money in the bank where I can use it for other things, or I can just make payments for longer.
So some people will have 300 grand in the bank and say, “David, I want to put 250 grand of this to pay down my $500,000 loan to a $250,000 loan.” I’m like, “Okay, so if you somehow lost the tenant and you couldn’t make the payment, wouldn’t you rather have $250,000 in the bank to make payments for nine years if you had to, than dumping it all into the house and cutting yourself really thin when it comes to your ability to make your note payments?

Rob:
Yes. Dude, I struggle with this one a lot. I’ll be honest. I know that the rule of thumb is always leverage and use other people’s money and all that kind of stuff. I am very much for that. Hey, let’s leverage, let’s use that to scale, use the bank’s money, right? But I am starting to feel a little bit more towards at least having your… if you could work towards having your primary paid off, that’s always going to be a… it’s a savings account that you have in case if you lose everything, you don’t have to pay a mortgage and you can stay in your house.
I kind of don’t hate that. You know what I mean? And if you really need to, eventually you can take a HELOC out. So I just think it’s personal preference there. I don’t say do that with your investment properties, but with your primary, I think there’s a little bit of comfort knowing I’m sitting on a half a million dollars of equity that if I ever really need to, I can take it.

David:
But you wouldn’t feel that same comfort having a half a million dollars in the bank?

Rob:
Not really, no. It’s actually pretty stressful.

David:
Is that because you’d be tempted to spend it?

Rob:
Not even that, dude. I mean I have cash in my accounts right now and I don’t like it. Because I just see it withering away, the value of it. And also I’m always… I don’t know, it’s inconvenient to move it around and to wire it to other bank, then the FDIC insurance, all that kind of stuff. I don’t know. I’m just like, yeah, it’s nice to have it. It almost feels good. But then it also is a reminder of all the employees that I have to pay to. I don’t know, this isn’t really real. This is more [inaudible 00:34:25]-

David:
No, but that’s how human beings… this is our relationship with money and energy that we’re talking about right now. It’s very real. It doesn’t make logical sense why you feel that way, but who cares, because that’s how you’re going to make your decisions. You’re going to see it. It’s going to cause you to have some stress.
And so I think this is part of the reason that you and I always want to feel like we’re broke. Because, the minute you feel like you’re rich, you start making decisions like money isn’t valuable, you start to lose respect for it. You’re just start spending it on things easily or letting people stay on the payroll that aren’t doing a good job or paying more than you had to for the house because you have the money.
When you always feel some form of broke or at least disciplined or a little financially stressed in a small way, you value the money a lot more. You treat it with more respect because you don’t have as much. I think that’s probably what you’re getting at.

Rob:
Definitely. So with that, how much money do you have in your bank account? No, I’m just kidding. All right. So I actually wanted to talk about the liquidity of my portfolio. Theoretically, a lot of my portfolio is actually pretty liquid. I have so much equity because I’ve purchased over the past five years and I’ve never really sold.
So I bought a house in Sevierville, Gatlinburg, Tennessee a year and a half, two years ago. I think I bought it for 500, thing gets in the 808 and 850 range. Lot of equity there. I bought a house for 300 that’s worth 550, 600. I’ve got all these houses that have six figures of equity. Almost every single one of the houses that I own have either six figures or multiple six figures of equity. And that’s not because I’m a genius, it’s just because I’ve purchased consistently.
And so if I really needed to sell, I could sell right now in a buyer’s market. Would I lose money for my equity? Maybe. But I still have the equity so it doesn’t… In my mind I’m like, all right, my tiny house in Joshua Tree, I built it for 165K. Whether I sell it for 300 or 350 doesn’t really matter to me, because the amount of equity that I’ve built, it’s obviously I want as much money as possible, but if I had to lose it 50K because of the market, that’s fine. The money is all play… like Monopoly money anyways. I’ve never realized it and so it’s not even mine. That’s how I kind of think about it.
So I would say the majority of my portfolio is like that, other than some of the more recent purchases, like our Scottsdale house. We bought that for 3.25 million. We have 20% equity in it from the down payment that we put on it. But if we try to sell it right now, well, I don’t know, maybe it would do okay, but with the, I mean the 6% in realtor fees would really cut into really a lot of that money for us. So overall, I feel pretty safe being able to sell my portfolio if I had to, but I don’t really want to.

David:
And you don’t ever want to be in a position where you do have to. You always want to be selling because it makes sense for you to sell. The leverage is on your side, if you’re going to sell.
And then selling is a complicated event in itself because you’re probably going to have taxes on that money you made and you’re going to want to do a 1031. So if you sell this house, do you have a place you can put the money or that you want to put the money? Is it going to create more stress in your life than it wouldn’t if you had just kept the property?
But constructing your portfolio itself so that you’re in a place where you never have to sell, I feel like is more than half the battle. The actual properties that you choose and the way that they work with each other is a pretty important component to making sure that you’re never in a position that you have to sell when you don’t want to. So what are some of the things that you’ve done, Rob, up to this point to maybe diversify what that portfolio looks like or buy different types of assets that will cover for you, so you don’t get in that position where, “Oh man, business didn’t go as well as I wanted the last couple months. I have to sell something.”

Rob:
So I am a big fan in diversification, even just with… I’m obviously mostly, if not all short… Well, yeah, short-term rentals are midterm rentals right now. But I’m a big fan of diversification. I’ve got 35 doors across the country, all right. I’ve got a couple in California. I’ve got one in… Well, I got a couple in Arizona, a couple in Tennessee, a couple in Texas, one in Wisconsin, several in West Virginia, 20 in New York.
So I’m all over the map. And people are always like, “Why would you do that to yourself? Isn’t it hard to hire your Avengers?” But for me, what I’ve found is I like to diversify across the country to combat seasonality. And this is something you talk about quite a bit too with portfolio architecture, which I want to get into here in a second. But for me, I have sort of staggered so many of my short-term rentals at different personalities that I’m never really hurting in one specific month.
I’ll give you a good example. If you buy a beach house and you close in May, you’re going to feel like a genius because you’re going to crush it from May to August. You’re going to be like, “Oh my god, I’m the smartest real estate investor that’s ever lived. I’m going to make half a million dollars on this house.” And then September rolls around and you’re like, “Oh, I am broke and I didn’t save any of my money,” right?
So to combat this, you have to understand that beach markets, for example, are highly seasonal and they only crush it for three months out of the year. Meaning that if you were going to pick up another property, you probably don’t want to do another beach property or else you’re only ever going to make money for three months out of the year. So what you would want to do is find another property that maybe for nine months out of the year, staggering it with the other three months, is actually making cash flow so that you always have money coming in.
And so this is something that I actually specifically experienced with, in a good way… or I’ve learned it really in a good way, like our Scottsdale property. We bought a 6,000 square foot mansion in the desert, enclosed in June when nobody goes to Scottsdale. And basically from June to November, I wouldn’t say it was crickets, but October was okay, November was a little slow. And it’s like, oh man, if anybody else that was not prepared for this stepped into a $17,500 mortgage payment, they would be hurting. They’d be like, “Oh my god, I’m going to go bankrupt.” But because the rest of my 35 units basically crush it, they’re all staggered throughout the year, it was no big deal.
And now we’re getting into December, we’re halfway booked, and then we just got a $7,000 reservation yesterday for January for five days, a $7,000 reservation. And that’s just one of the ones that came in. And now in January, we’re charging like 1500 to $2,200 a night. And now it’s like, “Oh, okay. Yeah, great. Note to self, buy a luxury property in peak season so that you’re not eating that mortgage payment for six months out of the year.” However, you and I were able to weather that storm because we have relatively diversified portfolios.

David:
That’s a very good example of portfolio architecture. You’ve got seasonality in short-term rentals. And it’s important because of the mental game. And like you mentioned, a lot of people spend the money that comes from their rentals because they replace their W2 income and you spend W2 income. So why wouldn’t you spend your passive income from real estate?
The problem is with traditional rentals, they lined up very, very closely, very well with the way that you manage your personal finances. So you get paid every month or every two weeks. And so you say, “I make X amount of money a month.’ Then your bills are all set up on a monthly thing. “I pay every month this many bills so I can put a budget together based on a month.” Well, if the tenant pays the same rent every single month, that fits in really nicely because you’re making a mortgage payment every single month.
Well, short-term rentals, screw this whole thing up because you can’t look at what you make in a month. We look at what they make in a year, because not every month’s the same. And so if you spend your money, oh, it’s so easy to get caught off guard, like you said, thinking that you’re crashing it, you’re doing amazing, now you’re dumping money into the property, maybe you shouldn’t be, or you’re spending more money than you should be. You’re justifying expensive trips to the property for stuff that don’t really have to happen because the money’s rolling in, and then you hit those winter months and it gets really bad, you’re losing money and now you’re feeling really bad. Your emotions are tanking versus, like you said, if you can get one that offsets the other, you never really have those huge spike, climbs up and the huge spikes down.
Another way that I think that the Scottsdale mansion worked out in a sense of portfolio architecture was that we knew we were not going to make a lot of money when we first bought it. I think we planned to more or less try to break even the first 18 to 24 months. And part of that was because we had to dump so much money into the property to get it ready. And also, we knew we weren’t going to know what goes wrong. We got to figure out a new market.
You can do that when your existing portfolio is cash flow solid. You can’t do that if this is the only property that you’re buying, this is the only one coming into your portfolio, you don’t have a ton of money, you would lose the property. We also bought this house with a long-term horizon.
We’re like, “We’re buying this whole thing for less than what the land itself would cost if we just bought land.” Okay, but we’re probably not going to realize that value for five to 10 years down the road. This was an area that we know we really like Scottsdale long-term, the type of people moving there, the way the economy is set up. We think that market’s going to do incredibly well, but you don’t have the luxury of cashing in 10 years down the line if you’re barely making it right now. If you’re like, “I want to quit my W2 job, this would’ve been a terrible house to buy.” So the reason we were even been able to-

Rob:
At the time that we bought it, at the month that we bought it, yeah.

David:
But even if we had bought it during a time when people visit Scottsdale, we still… Like the pool heater, we have to go replace and the water heater break in and the sport court that needs to be done. You can still step into this a couple hundred thousand dollars in the hole that you weren’t planning on when you’re buying a house this big in a new area. We were able to, because the stuff we had bought previous to this was performing so well that it bought us the ability to basically give ourself a huge windfall in the future. This is like you put a hundred dollars in your coat pocket and then 10 years later, you come back and you’re going to find out that it’s a hundred thousand dollars. It’s a kind of situation like that. But if you don’t have money to live on, you can’t put a hundred dollars in that coat pocket.

Rob:
Yeah, yeah, for sure. Yeah. And when I say the time that we bought it in, I meant more like we bought it in June versus January. So now I’m starting to get to that point where I’m like, “Oh, hey, we’re smart. Look at us. Look at this $7,000 reservation or this $10,000 one,” and now people are contacting us for events and all that kind of stuff. It’s just a little bit of a slow trickle. But like you said, we sort of planned our portfolios accordingly. I would never tell anybody to go and buy a $3 million property unless they had the ability to actually endure any kind of road bumps. But also just the financial aspect of having a portfolio that can be pick up the slack for you.

David:
You also would never tell anybody to just keep on buying $40,000 houses in the Midwest till you have 700 of them. That doesn’t work either, right? So there is a progression of how real estate investing should change. You started with training wheels or a tricycle, then you get into training wheels, then you get into a bike and you kind of move through asset classes as you’re learning. Keeping that in mind as you’re building your portfolio will help you to weather the storms of life that come.

Rob:
It’s true. And just let me just say, you did ruin real estate… How do I say this? You did ruin this for me in that when I wanted to go and buy 10, $300,000 houses, you were like, “Why would you do that? That’s a job. Go buy a $3 million house.” And I was like, “Ugh.” And then we bought it and I’m like, “Oh yeah, I shouldn’t buy these $300,000 houses anymore.” And so now I don’t.
So now it’s like I see these deals come across my desk all the time and they’re good deals, but as I’ve learned from you, it’s just not scalable to keep buying these onesies. And so now I’m very selective about the swings that I take in a bigger scenario. Right now, I’m trying to do 50 doors at a time or trying to do luxury properties, or trying to do things that are a lot more meaningful to my time. So I guess thank you on both ends of that. Thank you for ruining it for me, and thank you for transforming me.

David:
You were a cat and you were hunting mice and you were getting all of your caloric needs met from those mice. But my friend, you have grown into a lion and now mice are unbefitting of a lion of your stature and you are now chasing gazelles, as you should be.

Rob:
So David, when it comes to portfolio architecture, can you give us some of the, I don’t know, some of the pillars or some of the criteria that goes into actually assembling your real estate portfolio?

David:
Yeah. So when you’re looking at your portfolio as a whole, there’s five things that I like to try to create some kind of balance because these are all ways that you build sustainable wealth that you’ll actually enjoy. It’s a form of building like a financial fortress that will stand no matter what gets thrown at it versus a 3D printed home that you can just throw up really quick and scale fast, but when the first storm hits, it’s going to fall.
The first is equity. You want to have a lot of energy in that portfolio. Like you said, Rob, if you come on hard times, you can pull it out. This is where the big upside is in your portfolio. You’re going to build your biggest wealth through the equity that you create holding real estate long term. So that’s one of the first things that you want to think about.
The next is cash flow. You need cash flow, not just to replace your income, but also to make sure you can keep the property for a long time. Because cash flows are how you make sure you can make that payment, which allows equity to even take place, unless you stepped into equity right off the bat.
The next is liquidity. That’s not just in the portfolio but in your life. You need to have reserves. That’s a form of liquidity, money that you can tap into. Can you borrow out of a retirement plan? Do you have HELOC set up on property? If you’re in a pinch, if you get a good opportunity, do you have money that you can turn to right off the bat to go acquire a new property, fix something that went wrong, improve a property, whatever the case may be, that’s in the best health of your portfolio as a whole?
The next would be ease of ownership. You’re never going to build a big portfolio that does well if you hate owning it. If you’ve got 40 short-term rentals and you manage all of them yourself, you don’t have ease of ownership. That’s not something that you’re going to enjoy. If you’re buying properties in terrible neighborhoods, even if you’re getting great deals, you end up hating owning it and you’re not going to grow up big. You’re not going to get that equity or that cash flow. So you can have a handful of problem children in your portfolio. Sometimes they’re worth it, but it can’t be something where the majority of your portfolio is something you don’t like owning.
And you do have to consider that when you’re building. And the last would be scalability. Are you doing this in a way that you can keep scaling and you can keep going? Are you buying 10, $300,000 houses over and over and over? Well that sounds great on a podcast when we say, “Oh, you can borrow money from investors.” And we kind of construct the entire organizational chart of where every piece goes and it sounds great to an engineer, they’re like, “That works.” But then when you actually try to execute the play that you just drew up, you realize you don’t have the skills to do it or it doesn’t work in practice, like it did in theory.
So scalability is a super important part of your portfolio as a whole. And oftentimes, that will mean thinning out some properties that are too difficult to scale and replacing them with properties that are easier or moving from one asset class to another as long as your other four requirements are being met.

Rob:
Yeah, yeah, yeah. So it sounds like really what we’re looking for is a balance of a bunch of different things versus really going into one aspect and that makes sense. You asked me how I’m diversifying and I said, “Well hey, I diversify in location,” but that’s actually not just the only way I diversify when I’m like building my portfolio. I’m actually diversifying the types of units that I’m listing on short-term rental platforms as well.
So yeah, I’ve got them across Arizona, Texas, California, and New York. But I also have really cool units that I just like to have fun with. And sometimes I’ll buy a unit just because it’s a cool looking property. So I’ve got tiny homes, I’ve got yurts, I’ve got Airstreams, I’ve got chalets, I’ve got cabins, I’ve got mid-century modern cabins, I’ve got condos, I’ve got a little bit of everything.
And it’s really because I like to appeal to all the different types of audiences out there. That way, I know if something is trendy or if it’s just not as hot, which like a tiny house for example, people always love those. People don’t want to stay at tiny houses in a year or two, as much as they did this year. Well then I have all these other types of properties to meet all of that. So for me, I’m always looking for balance in my portfolio in the actual types of listings that I’m creating and the experiences that I’m serving up to people.

David:
That’s it. You got to be thinking like that. And when everything’s going great in the market, we don’t think about diversification. We don’t think about what if something goes wrong. We just think what’s the easiest, fastest and funnest way to scale what we’re doing. And that’s how you can build yourself a treehouse. You could build those really quick. In a couple hours, you can have yourself a treehouse set up, but it’s not how you build a fortress that’s going to withstand the test of time.

Rob:
Well I’ve been working on my treehouse village in Gatlinburg, Tennessee for about a year and a half now, but I just got the update on that today. And I actually think we’re breaking ground in like a month and it’s going to be four dome treehouses that are in the air, as I guess pretty standard for a treehouse, and then a tiny home, a tiny a-frame treehouse too. And so that also goes into how I’m diversifying. I want to go more into unique stays. But yeah, just so that I understand kind of your parameters for portfolio architecture, I just wanted to recap it for the audience. We’ve got equity, cash flow, liquidity, ease of ownership and scalability. Did I miss any? And with those five things, we want a good balance.

David:
That’s it. And you want that… so each of those things should be making up for the weaknesses in the others.

Rob:
Okay, awesome. Well this has been really good. I regret to inform everybody that we rift so much on the first half of this that we’re going to give you another… I guess, I don’t regret, I am excited.

David:
No. Two shows.

Rob:
Yeah, we’re giving you a part two of this where we get into some much juicier, maybe even profound questions. What are the actual challenges that we’re going through in our businesses, some of the pitfalls? If we were to actually lose it all tomorrow, how would we rebuild our portfolio starting from scratch with $0? That will be on the next episode of BiggerPockets. I’m really excited about it because I don’t know if I have the answers yet, but we are going to find out what they are soon.

David:
It should be very fun. These what would you do if you started over questions are always some of my favorites, because it forces you to pull things out of yourself that you normally wouldn’t have.

Rob:
That’s what it’s like every single time that you have your profound genius systems. And I’m like, “Uh-oh. I know my answer is nothing like that.” That’s good. [inaudible 00:52:49]…

David:
That’s why I would [inaudible 00:52:50] second because I’m a jerk.

Rob:
I know, I know.

David:
All right. Well, thank you, Rob. I appreciate some of the insights that you shared here and you also asked some really good questions, so thank you for that. I wouldn’t be able to give good answers if I didn’t get good questions.
And to you listeners, we hope you enjoyed this episode about all the things that can and do go wrong in real estate and what we do to mitigate that risk. In the next show, we are going to get into what we would do if we started over to help prepare for things going wrong, because wise investors don’t prepare for everything to go right. They make plans for what they’re going to do if things go wrong, and they prepare accordingly.
If you like this show, please do us a favor, give us a five-star review wherever you’re listening to the actual podcast, whether that’s Apple Podcast, Spotify, Stitcher, whatever’s your favorite. Just take a quick second, and please give us that review so we can stay the top real estate podcast in the world. And if you’ve got some time, listen to another one of our episodes. This is David Greene for Rob, has one t-shirt, Abasolo.

Mindy:
Welcome to the BiggerPockets Money Podcast, Finance Friday edition, where we interview Remy and talk about becoming real estate ready.

Remy:
I would love to invest in real estate. The area that I live in is a high cost of living area, so property tends to be relatively high. With most investment loans being 25% down, that’s a significant chunk of money that I would have to save up. Mostly looking at this as eight and a 15- to 20-year return basis. How do I get from here to there? I think I’m in a relatively good position to be a millionaire by the time I’m 35.
I’m not keen on making a move on my home, my current primary residence, but considering it could have a big financial impact on my positioning, is that something I should consider?

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

Scott:
3.14159, mathletes do it all the time. Thank you, Mindy.

Mindy:
Please tell me you had that on a T-shirt.

Scott:
No. Unfortunately, not yet, not yet.

Mindy:
Not yet. Not yet is right. Christmas is coming, Scott.

Scott:
Trench’s Tees, yes. That was one of my first business ventures that lost a large amount of money. Every once in a while, somebody views the Trench’s Tees Facebook site or something like that. I don’t think there’s anything for sale though.

Mindy:
Oh, you should make them. We should talk afterwards, Scott, because instead of buying inventory, you can just have it ready for somebody to order. We’re going to do that. I’ll make you a millionaire.

Scott:
All right.

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’re 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 or start your own T-shirt business. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Start your own T-shirt business. That is a story for a different day. Today we’re talking to Remy, and Remy would like to start investing in real estate. So, we are going to get him real estate ready. But before we do, my attorney makes me say the contents of this podcast are informational in nature and are not legal or tax advice and neither Scott nor I, nor BiggerPockets, 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, and financial implications of any financial decision you contemplate.
We want to welcome Remy to the show. Remy is 26, and January 2023 is going to be a big month for him. His PMI drops off his mortgage and his car payments end freeing up about $700 a month, which is good because right now his biggest pain point is cash flow. Basically, he doesn’t have any due, in large part, to living in a high cost of living area. Remy, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you today.

Remy:
I’m excited to talk to you as well. Thanks for having me.

Mindy:
Well, let’s jump into your numbers. I see a salary of about $5600 a month. Additional income, $650 in rent from your girlfriend, a hundred dollars a month from fitness coaching and a bonus that is generally 20% of your salary paid in a lump sum at the end of the year, which is where we are right now. Monthly expenses are about $5500 a month. That’s where that cash crunch is coming from. A mortgage of 2076 including property taxes and $192 in PMI, which we just said is going to be leaving in January. HOA of $269 a month, utilities 200, homeowners insurance 276 a year, gas $180 a month, restaurants 250, subscriptions $6. Nice job on keeping that low. Gym $120, shopping 150, car 500 a month, again ending in January. Car insurance 1149 a year, bars $120 a month, phone 45, miscellaneous 500-ish with a question mark, so I’m going to come back to that. Groceries $400 a month.
Average monthly spending this year is $5500 a month and, like you said earlier, you have some big CapEx numbers this year, which should go away next year. $7000 for a furnace. You don’t get a furnace every year, hopefully, fingers crossed. Some house renovations, dog vet bills. Overall, I don’t see anything remarkable in your expenses. Investments, we have $15,000 in an after tax brokerage, 4,400 in a Roth IRA, $60,000 in a 401(k) split between a traditional and a Roth. $4,000 in a retirement health plan. $30,000 in a cash position that you said was an emergency fund, 55 to 100 in an HSA, 3000 in crypto, which I believe is about 3000 too much, 320,000 in a mortgage at 3.125% interest, which is an awesome interest rate, a $1,500 car loan at 4%, which will be paid off in January.
So Remy, what does your money story look like and what are your biggest pain points and how can we help?

Remy:
My money story really starts probably when I was pretty young. My parents always did pretty well until my father lost his job in the financial crisis of ’08, kind of struck a chord with our family led to not a big financial rift, but significant enough where it caused some pain points in our life. When I got to college, I started to study finance, took a financial planning course, realized a lot of the things that most people get in trouble with were pretty easily avoidable. So I started doing that. I now work for a relatively large financial institution where I try and help a lot of people with that or we try and help a lot of people with that. So, that’s really where my money story lands.

Scott:
Awesome. What are the prospects for your current career? Your situation strikes me as one where you’ve got great money fundamentals. There are no glaring issues here, but you are treading water is my initial reaction. You’re not accumulating a large amount of cash and that seems to be jump out at me as the primary issue we need to discuss today is how do we ignite that engine of cash accumulation so that you can begin investing?
One component of that is your job. You may be at this financial institution doing a role that is likely to translate into significant income growth in the next three to five years as you advance through the ranks there or you may not be clear on that. So that has a major impact, I think, on the remaining part of the discussion. That’s why I’m asking that question.

Remy:
Sure. My career prospects, as they sit right now, I’m in a great position to advance in my career currently looking at positions within my company to move around, probably not necessitating a huge increase in salary or increase in pay in general over the next year or two, but the prospects are good for probably 25% earnings growth over the next 10 years or so. So, a really good position to start to accumulate more salary income, more bonus income over the next few years. Especially as the pay grades start to get higher, my company tends to do more bonus-based compensation, so the salaries grow relatively steadily, but the bonuses increase significantly. That’s really where a lot of folks in my company start to make very good money as they advance.

Scott:
And where do you want to be in the next couple of years? What’s the best way we can help you? I guess there are a couple of things there, so tell me if I’m wrong.

Remy:
Yeah, the best way that I’m thinking you can help me today is positioning myself to where I can get real estate-ready. I would love to invest in real estate. The area that I live in is a high cost of living area, so property tends to be relatively high with most investment loans being 25% down, that’s a significant chunk of money that I would have to save up. Mostly looking at this as a 10- to 15- to 20-year return basis. How do I get from here to there? I think I’m in a relatively good position to be a millionaire by the time I’m 35, but is there positions that I could take to accelerate that sort of thing?
I have a high-equity position in my home for only having it for two years, so I’m looking at. Is that something that I want to make a move on? I’m not keen on making a move on my home, my current primary residence but considering it could have a big financial impact on my positioning, is that something I should consider? That sort of thing.

Scott:
Well, great. I think what I would love to do is start with the basics and look at how much cash are you going to accumulate on an annual basis given your current income and your current expenses? And go through that because that I think is important here. I’d love to look at the prospects for growth in your job within the next 12 months as well. And then, yeah, I think that’s right. Let’s take a look at the housing situation, and there’s some ideas there. So, that sounds great. Do you want to start with expenses? And Mindy, do you have anything that jumps out to you?

Mindy:
I have a couple of things that jump out at me, and they are insurance. Your homeowner’s insurance feels low at 276 a year, so typically a mortgage will be principal interest, taxes, and insurance. I want to make sure that you’re not double paying insurance and if you aren’t double paying insurance, I think mine is $600 a year and I go for a super high deductible. So, my house is a little bit more expensive than yours, but I don’t think that what really generates the cost of the homeowner’s insurance. And I asked for a $25,000 deductible, and my insurance company… or my mortgage company made me drop it down to 10,000, but I think yours is really, really low, so I would just double-check that your homeowner’s insurance is actually 276 a month.
Your car insurance on the other hand seems high. You are younger than me and you’re male, but at 26 your car insurance should drop significantly. Also, if you get married, your car insurance should drop again. I would have that re-quoted, especially if you’ve been with the same company for a while. Now, that you are “older” and more mature and responsible, you should see a reduction in your annual cost. What kind of car do you have? Do you have a fancy car, a sports car, or do you have a boring car?

Remy:
I have a Jeep Grand Cherokee.

Mindy:
Okay. That might be big on the theft list, which would increase your car insurance, but also I think that you should just get it re-quoted because that seems high. And different areas of the country have different costs, but overall I would wonder what that 500 in miscellaneous is. I don’t see a lot of really crazy expenses.

Scott:
Could you give us information about what the homeowner’s insurance is?

Remy:
Sure, exactly. That’s where I was going next is, the two insurance pieces. The homeowner’s insurance at $276 a year. I’m sorry if I said a month, a year is the quote or the payment that I make. That is for the interior of my condo. My HOA covers a master insurance policy for the building. In the event of fires, floods, that sort of thing, it protects my property value, my home insurance or my home value. The property on the inside, which is couches, furniture, TVs, toys that are inside that kind of stuff, is covered on the home insurance. That’s $276 per year, and I believe I have $50,000 in coverage.

Mindy:
That, being a condo, explains a lot. Okay.

Scott:
Do you have $50,000 worth of stuff?

Mindy:
That’s the minimum.

Remy:
Yeah, I believe that’s the minimum. Yeah.

Mindy:
I argued with my condo insurance company as well. I’m like, “I have a thousand dollars worth of stuff in here.” They’re like, “Well, it would cost more to get it back.

Remy:
So here’s where… And this is going to probably get some people fired up, but at 26, I didn’t have $50,000 worth of stuff in there. The most valuable thing I owned was my suit at that point and my computer. So if this is not required, maybe you don’t have it, I don’t think it’s something that I would’ve done at that point, I don’t think I… I guess I do have renter’s insurance now, I’m a renter, which covers some of the same things, but something to consider.

Mindy:
Interesting. Okay. Scott, I think we should applaud him for having approximately $120,000 in investments.

Scott:
Oh, yeah.

Mindy:
Even though 3000 of that is crypto.

Scott:
Sorry, we should take a moment and say you’re doing great. There’s a lot of fundamentals that are going on really wonderfully here. I just jumped immediately with my brain too. Okay, problem here not having enough cash flow, let’s go ahead and tackle it. But yes, we should take a moment and say, “You’re doing fantastic. You clearly out of path to become a millionaire by 35,” like you said, assuming the market gives us reasonable historical tailwinds. I think a lot of things going right. Hope you can forgive us for going straight into the issues here.

Remy:
Sure, yeah. And if I can just clarify a little bit on the cash flow. You listed the income as 5,600 a month. Most of that is dictated by the fact that I, over the maybe up until about four or five months ago, had been stocking a lot of my income away into retirement accounts. Thus, the relatively high income…. or I’m sorry, investment balances. My gross income for a month is right around $9,100 a month and after backing out things like health insurance, 401(k), Roth, HSA balances, it comes back down to about 56.
So, I intentionally do that as sort of a forced scarcity metric. I have since re-allocated some of that to try and accumulate more of a cash position and especially now that some of these big payments are going away like the car and the PMI, I’m really considering how much of that I’m putting into Roth, especially if I’m considering financial independence at say 35 or 40 versus the traditional 60.

Scott:
Love it. We should talk about that. That’s a great situation or challenge there. Right in this frustrating spot of having a good income and having pretty reasonable expenses associated with that, but being forced to make trade-offs that are hard for a mathematically oriented person who works at a large financial institution to consider there. You either can put it all into your tax advantaged accounts or you can put it into cash.
Cash has less obvious, more subtle, but very, very powerful advantages in enabling future real estate opportunities, flexibility, and those types of things. And the tax advantaged accounts have very clear quantifiable value that you can put into your spreadsheet very nicely. It all depends on where you want to end up in that 15 years, in 10, 15 years, and what you want that portfolio to look like.
So let’s start with that question. What do you want that portfolio to look like? You have a million and a half dollars at age 37, let’s call it, what’s the dream portfolio?

Remy:
Let’s say the dream portfolio is probably about two or three investment properties. Generating somewhere in the order of a few thousand dollars in monthly cash flow, I think, is pretty reasonable to say, maybe $3,000 or $4,000 in monthly cash flow.

Scott:
That’s reasonable if the properties are very lightly leveraged, so you have a very high-equity position in those properties. Otherwise, you’re going to get much less than that.

Remy:
Okay. And then, alongside that, a relatively healthy ETF stock investment portfolio, maybe somewhere in the order of half a million, 600,000, something like that where a million dollars worth of my net worth is in real estate and cash flowing positions and then the rest of it is in investments that I can either draw from or just let ride.

Scott:
That’s awesome. Most people can’t answer that question.

Mindy:
Yeah, I love that you’ve thought about that. As you were telling your story and specifically with regards to your income, you said that income salary steadily increases, but bonuses have a much higher opportunity for increase. Have you talked to your boss about how to position yourself for a larger bonus? How does the company evaluate bonus compensation? What can you do to make sure you’re getting the most bonus that you could possibly get every single year? Because salary doesn’t sound like there’s a lot of opportunity for growth.

Remy:
The answer to the bonus question is essentially ascend in pay grade. So, when you ascend in pay levels, we have very clear rubrics for what pay levels look like and the bonuses associated with them. There’s always a pay range for each level and an assigned bonuses that go with them. I won’t disclose the percentages of those just as a matter of keeping it private for my employer, but those things ascend pretty significantly as you go into more of the vice president role types, you get into very significant compensation where potentially half of your yearly income can come from something like a bonus.

Mindy:
Okay. So, is there anything that you can do to accelerate that if you plan on staying at this specific company?

Remy:
Essentially, for my company, a lot of career advancement is based around breadth of experience rather than depth of experience. This is just my personal viewpoint of how I see the firm folks that move around a lot within the firm and have a wide breadth of experience tend to move up because you can jump from side to side and do the career twister, as I call it, or you just move from spot to spot. Whereas if you try and be super deep at, say, software engineer, the career path is very linear, which is great, but it doesn’t ascend as high as potentially something on the business side where you can go back and forth between what you’re doing, do something in investments, do something in risk, do something in product development, that sort of thing.

Mindy:
Okay, so it sounds like you’re aware of what you need to do to qualify for those extra bonuses? You mentioned two years in your house and potentially moving to a different state. When did you purchase the house?

Remy:
I purchased the house in August of 2020.

Mindy:
August of 2020. Oh, so you have actually been in there for two whole years. Just to reiterate, that is the magic number for paying no capital gains taxes when you go to sell. What did you purchase the house for?

Remy:
350.

Mindy:
And what do you think it’s worth now?

Remy:
It’s about, I would conservatively say like 460. A few months back, there was one or two units in my development that sold for 500 but with interest rates coming down, the last one I saw I think was like 475, so let’s just say 460 for sake of argument.

Mindy:
Okay, so that’s still a nice chunk of change. One thing to consider moving to another state that has no income tax is that they recuperate that with sales tax, property tax, a lot of other ways to tax. Do some research before you pull up and move to a different state simply to save on income tax. You could find yourself not saving anything over time, and I hear people listening right now saying, “He’s got a 3.125% interest rate on his house. Don’t sell it.” It might be worth it to sell it and move to a different place because you don’t make a lot of purchases. Your property tax would be lower or you don’t buy a house, you simply rent and then you’re not paying property tax at all.
What do rents go for in the area that you’re thinking about moving? If you are paying $2,000 a month for your condo, and then you would move to a place where you’re paying $2,000 a month in rent, maybe it doesn’t really make sense to move, maybe it does. You sound like your way around a spreadsheet. I would throw some of these numbers into a spreadsheet and really dive into that. Moving. How far away would this move be? I’m not familiar with the north.

Remy:
I could go as close as New Hampshire, so 20 miles from me or I could go as far as somewhere like Florida or Texas. I think no sales tax and places where my company has satellite offices. All three of those are potential spots.

Scott:
What would you want to do with your current house? Is your instinct to keep it or to sell it when you move?

Remy:
My instinct when I bought this place was to, as I moved on, I would keep this and rent it. But with the current payment and HOA, I’m not sure that that sort of thing with cash flow, it would be close. I would have to really look into things like how my utilities work out, what insurance on a rental property like umbrella insurance and things like that would work out too in order to figure out if it would cash flow. I would say it’s very close, but my instinct was to keep it unless I just found an opportunity where my girlfriend, who someday hopefully will become my wife, just happened to find our dream home, and the only way to make it happen is that we need the equity from the home in order to make that happen.
Now, of course, there is cash-out refi, but I’m not banking on that in the near term based on the fact that interest rates are high, and it doesn’t seem like the best financial decision to make, given the interest rate that I have.

Scott:
Cash-out refinancing is placed for several years, any meaningful effect at least. That makes sense. You’re thinking about moving. I learned about this today, this morning, from an expert on the subject. This concept of assumable mortgages. If you have an FHA mortgage or a VA or a USDA loan, these are eligible for assumption. So, someone buying your property because you purchased it with an FHA loan could simply assume your mortgage. If you wanted to sell it to somebody, they would’ve to come up with the cash difference there, but assuming that they qualified and met the qualifications of the loan, they could just simply take over the payments for you and assign that, and that would be an option available to you as well. That could be a powerful tool to lead into or learn about when you make this move.
The issue, on your end as well, will be if you want to buy a $400,000 property and the FHA loan, let’s make this up, is 300 grand on that property, you need to come up with a hundred thousand dollars to pay the difference. You can do that with your own cash, you can do it with debt, but you can’t get another mortgage from like Fannie-Mae to bridge that gap. Because of that and because you don’t want to keep this property, that makes me lean towards selling this property soon whenever you move, taking that cash and then potentially exploring something like this.
I think it’s a really powerful way to house hack right now, and this would be where I’d be looking if I was looking to build to start my portfolio from scratch in a new state. I would probably be looking, “Okay. Are there duplexes in particular? Are there single families? Are there multifamily properties that have an FHA or VA loan where I can maybe assume that mortgage that’s got a low interest rate?” That’s a dramatic change in purchasing power or cash flow on that property as long as you can come up with the cash to cover the spread. What’s your reaction to that?

Remy:
I really like that. It’s something that I’ve also heard that you can do is through an assumable mortgage, let’s say they have 50% equity in the place and you can’t come up with 250,000. There is potentially options out there where you can get a second to cover the difference mortgage where you still have 25% equity. So I’d be putting a hundred thousand down. But as a way to bridge the gap between what the assumed mortgage would be and the shortfall would be you can do essentially a bridge loan without the balloon payment. Traditionally, that accompanies a bridge loan.

Scott:
That will come with a very high interest rate, easily 10 plus percent interest, which will make your decisions very easy, right? So, you buy the property, and then you don’t have to worry about investing for a year or two while you pay off the bridge debt.

Remy:
Exactly, exactly right. I have considered something like that. Unfortunately, I really just don’t have enough knowledge in that sort of area, which is one of my homework assignments over the next six months. Scott, I really like one of the things that you talked about in a recent podcast around four times a year, take three months figure something out where you really want to dive deep on it. And that’s one of the things that I want to do is dive into assumable mortgages, duplexes, multi-families and figure out where is the cash flow? At what equity rate is their cash flow? And then, start to target that as a cash position that I can essentially try and reach in order to put myself in a position to be ready to pull the trigger when the moment strikes.

Scott:
A quick aside about assumable mortgages, based on what I learned today, is my understanding is that, again, they only apply to VA, FHA, and USDA loans, and you must occupy the property in order to do that. So I imagine, again I’m still new to this, but I imagine that that has a one-year requirement of living in the property when you do that. So, it’s not a tool available to investors. There are other tools like subject to that an investor who’s not going to occupy the property could use, but that makes it powerful.
Now, with the VA loan, if you are not a veteran and you assume a VA loan, then that veteran loses at least some of the entitlement for using another VA loan, right? There’s probably nuance there that I’m not stating correctly but know that that will be a disadvantage to a non-veteran. So, something to think about there. Okay, so we’ve talked about this, when would you like to make the move?

Remy:
That’s the thing. Myself and my girlfriend don’t really have a timeline. She is a nurse. She’s very good pay for the purposes of this episode, just putting that sort of thing aside, like her pay and her benefits. There is the potential for her to do travel nursing. She’s not huge on that sort of idea. The idea being if you live 50 miles away from where you’re working, you can get travel nurse pay, which significantly increases the amount of pay that you get. For us, moving to New Hampshire, moving 30 miles away, she would be able to get travel nurse pay, but then she has to commute 50 miles, so there’s that sort of thing.
But the timeline for us would probably be in the two to five year sort of timeframe rather than more immediate one to two years. Just as a matter of one cash flow, two career establishment, and three potential family things like getting married, having children, that sort of thing.

Scott:
Okay, well, I would reconsider that stance with the property. Even if you don’t move away, if you just move down the block and get a better rental property, this is the biggest, most actionable step inside of the next six months that I can see to moving you towards that portfolio you just described in a future state, if you could sell this property and reposition the equity into another property that was a better rental for some sort of investment, some sort of house hack. So I would just encourage you to think that through. If it’s not truly not an option, we will go to other parts of your portfolio with this.
So, I think the next area I would explore is your cash allocation decision. We understand the goal. We want to back into one and a half million dollars with a million in real estate equity and 500,000 in stocks spread across tax advantage and after tax brokerage accounts. Am I stating that correctly? Okay. So, that’s a heavy, heavy real estate portfolio. It also sounds to me, we’re not going to be conservative, we’re going to be realistic about this, it sounds to me like you’re going to advance in your company and you’re going to get larger and larger bonus potential in future years. So you’re going to have disproportionate back loaded income in this.
To me, that suggests get the cash out of these retirement accounts now, build it up in your cash position right now and continue to be aggressive about the real estate stuff right now. You want your portfolio to be two-thirds real estate and one-third stocks. You’re going to have an opportunity to back load the stocks, I think, but it’s going to be really hard to accumulate, it’s going to be really hard to max out those retirement accounts now and have significant amounts of cash with which to buy real estate lately leveraged later. You want to buy that real estate now, fix it up, add equity pay, and start amortizing those loans today if you want to back into that future portfolio. Mindy is grimacing here. So what do you think, Mindy?

Mindy:
I don’t like… I know I can hide this really well. I don’t like the idea of pulling any money out that is already-

Scott:
Oh, no.

Mindy:
… in there.

Scott:
Do not pull any money out yet.

Mindy:
Oh, okay.

Remy:
Oh, I thought’s what you were suggesting, is take the penalty.

Scott:
Sorry. Yes, I’m so sorry. Yeah, I’m not suggesting that I’m suggesting stopping the flow into the retirement accounts beyond any obvious wins like 401(k) match and putting that instead into purpose-driven real estate investment.

Mindy:
Okay. So, I will pull back my grimace a little bit and sort of agree and sort of not agree. I think we’re all on the same page. If your company offers any sort of match, absolutely contribute all that you can to get 100% of that match. I like contributing to the HSA as long as you can because early retirement is in your plans and you make a decent salary. Because you didn’t say that you have large medical bills, I am assuming that you are in relatively good health. You are dating a nurse. I am assuming that you have very low medical expenses.
You cash flow those as you can and you contribute, you max out your HSA, as much as possible while saving receipts for the random Band-Aids and contact solution and prescription. And every once in a while you go to the doctor for whatever, save those receipts up while you have the HSA and then as soon as you no longer have access to the HSA, you can cash in those receipts. You don’t have to cash them in the same year that you use them. You can also just let it grow and then I want to say it’s 55 or 59, you can start just pulling that money out as it’s like an extra tax-free retirement account.
The Mad Fientist has an awesome article about the HSA being the best retirement account on the planet or something like that. I would continue to contribute to a Roth IRA. I like the Roth IRA, especially at your age, it’s going to grow tax-free and help fund your post-retirement accounts. Plus the limit for contributions is $6,000 this year, I think it goes up to 6,500 next year, but don’t quote me. I still love contributing to a retirement account, but if you want to be so heavy in real estate, building up your cash position, putting feelers out, you mentioned Texas and Florida, those are going to be less expensive than the northeast and you could get some really great cash flowing properties there.
Start looking into those areas and keeping an eye on the market and seeing what’s happening. I mean, you’ve got $30,000 in cash right now. Maybe some amazing property comes up that is worth buying. You deplete your cash position because you know can replenish it simply by stopping your contributions to your retirement accounts and you jump in on a smoking hot deal. I wouldn’t jump in on a mediocre deal, but I would definitely jump in on a smoking hot deal.

Scott:
Remy, how much cash could you accumulate if you didn’t do anything with your retirement accounts? How much incremental cash would you be able to generate after text?

Remy:
Probably in the order of 20,000 a year or something like that.

Scott:
Okay, 20.

Remy:
That’s just extra by the way. So, on top of whatever cash position that I could create through income with the way I contribute now, I’m saying an extra 20,000.

Scott:
And how much total cash would that be if you combine both?

Remy:
Oh, probably like 35 in a year, something like that, 30, 35.

Scott:
Okay, 35 a year. That allows you to buy one property in your area every two years if you find a really good deal, maybe two and a half years with 25% down.

Remy:
Yeah, probably more like three years because we’re looking at, for 25% down, anywhere in the area, you’re looking at like 400,000 as a minimum unless you just clicked a real beat-up property, and you can do everything. I have a little bit of handiness where I can do some things myself, but big structural things where you would get that smoking hot deal as somebody who would understand how to do that thing, that is not me.

Scott:
Great. So that puts us at three, four, maybe four properties in 10 years. I’m going to give you a little bit of credit that you’re going to… Income’s going to expand over that time period. It’s not going to be static with this. So, that gets us pretty close to your goal but probably closer to 500,000, maybe 700,000 in equity, not a million in inequity. If you repair them or do something creative or house hack, you’re going to get there faster.
So, we’ve got the tools to get to back into that in a reasonable sense. I think I agree with Mindy based on that. We can slow that a little bit especially, again, if you’re willing to do something with your primary residence and take the match, take the HSA, max the HSA, and max the Roth. That’s going to pull out eight grand between the Roth, nine grand between the Roth and the HSA and then a few more thousand pre-tax with the 401(k) contribution. I like that that’ll slow you a little bit but that still gives you the 70/30 of the accumulation is going on after tax in a way that can help your real estate portfolio.
Also, knowing the little I know about you, I wonder if having cash after tax is going to make you feel somewhat uncomfortable and give you a little bit of sense of urgency to deploy that cash because you’re missing the opportunity cost of being able to put it into these retirement accounts.

Remy:
That’s definitely it. Opportunity cost for me is huge and sitting on cash for two years. As much as I like to think, I have the behavioral mindset to be able to do that sort of thing, I do see the opportunity cost of, “Hey, I could just put this in a market, and that’s one of the things that I’ve considered is, okay, do I just accumulate this money in an after-tax brokerage account? Put it in a 60/40 blend or a 50/50 blend and let it ride. And if it happens and it catches lightning in a bottle and accumulates 20% in the next three years, then I come out on the upside then great. And if it comes out on the downside, then I lose 20% over the next three years. And it comes out on the downside, then it takes me an extra year to go toward that real estate investing route, is that something I’m okay with as well? I think that’s sort of where I’m trending with it. What say you?

Scott:
I love that question, and my honest answer is I, at 26, in your shoes, I would’ve put it in a brokerage account. Most people are going to gasp in horror and say, “You can’t do that with that.” But I would’ve said, “I’m here to play a mathematical game that’s going to advance me toward financial independence as rapidly as possible. This is not going to bankrupt me. It’s only going to either accelerate or decelerate my progress towards that goal.
So, I’m going to play the odds in the way that I think are the best to get me there and accept that two years out of 10 I’m going to have a major setback on that and bad luck and bad timing, and the other eight years I’m probably going to get some good return on that. That’s my honest answer. A lot of folks will disagree, and I wouldn’t encourage everyone to do that for sure but-

Mindy:
I am going to tug off of Scott and say the same thing. I have many buckets from which to pull. If I needed a rapid infusion of catch, not the least of which is a series of credit cards that I can swipe and buy myself a month of time to figure it out. So, even though I host this money podcast and tell everybody they need to have an emergency fund, I currently have as much in my emergency fund as Scott has in my emergency fund, which is zero. I don’t have an emergency fund at all, and that’s because I have access to funds in many different ways.
If you also have access to funds, I mean, what is an emergency fund for? It’s for an emergency. If all four tires on my car and I just changed my tires this weekend from my regular to my snow tires and two of them have metal sticking out of the tire, they’re bald in ways that frightened me when I pulled it off, I’m like, “Oh, wow, that’s a problem. I need to change that.” I can go and buy new tires, I can afford that. I have a job that’s going to pay my credit card bill, and I’m going to swipe it, and it’s going to take me 30 days to pay that off. So I don’t have emergencies because I have a lot of buckets to pull from.

Scott:
I do have an emergency reserve, but it’s not an emergency reserve that’s setting me up for my next investment. It’s my emergency reserve.

Mindy:
You have cash just sitting there doing nothing waiting for you to spend it?

Scott:
Correct.

Mindy:
Oh, okay.

Scott:
I do that, and I love your approach. But personally, I have a large pile of cash, a year and a half, two years of expenses sitting there doing nothing for that. Remy has six months, eight months, nine months sitting there doing that. That’s great.

Mindy:
And I have zero.

Scott:
You pick a number you’re comfortable with for that and everything on top of that, that is going to go toward that next real estate investment. I wouldn’t have a problem, it’s just a matter of your risk tolerance and how you want to play it. I wouldn’t have a problem sticking that all into your after tax brokerage account and be ready to pull from that. You make sure you count for gains if things do go up. You’ll have to pay tax on those gains. But yeah, I think that would be fine. And the way I’m wired, I can’t stand a bad bet so I can lose money. I just can’t live with being not doing what I think is a reasonably optimized approach.
The cash I have sitting there that’s doing nothing to me is optimized because that is my reserve, that’s my cushion. I don’t have to worry about my entire investment portfolio at any given point in time because I can just draw down on my cash position.

Mindy:
Now, is that your personal or is that your business emergency reserve?

Scott:
That is my personal, and it waxes and wanes a little bit as I plan for tax payments throughout the year.

Mindy:
Okay. So here, three different approaches. And I think it’s important to note that I have access to other funds. That’s why I don’t have an emergency fund. If you don’t have access to any other funds, if you don’t have… I mean, I’m 50 years old, I have lots of credit, and I have lots of… I mean if really, really worse came to worst, I could call my mother and say, “Mom, can I borrow some money until next month?” I’ve set myself up in such a way that… I should say we because it’s my husband too, but we have set ourselves up in such a way that we are able to pull from a bunch of different spots. So, we do put all of our money into the stock market or real estate. But if that’s not you, then I think an emergency fund is a great position. Also, can you sleep if you don’t have any emergency fund?

Remy:
I could sleep. I wouldn’t feel as comfortable. One of the biggest things that I keep the emergency fund around for is I have a house that’s built in 1986, and one of the things that I just had to do is replace a furnace. $7,000 is not exactly a cheap thing to have happen. So, maybe that doesn’t justify having $30,000 hanging around, but that sort of thing does help me a little bit. Just thinking about. From a comfort perspective, having a little bit of extra money around does make sense for me.
Making sure that I can cover anything that comes up in just my regular checking accounts is something that’s important to me, so that’s why I keep the hefty cash reserve. But it is a decent thought exercise to say how could I more optimize that? Because even I’ve thought about, “Hey, $30,000.” First, my job is relatively secure. I have income coming in from other ways that I could ramp up if I wanted to in terms of the side gig. I could start to ramp that up. So, there’s opportunities for me to be able to cover shortfalls. If that sort of thing were to happen.
It wouldn’t happen right away, but it would be having a $15,000 cash position instead of a $30,000 cash position wouldn’t fundamentally change the way that I think about my finances, but it could put me in a better position to optimize how I deploy that cash.

Mindy:
Yeah. I think it’s remarkably silly to take all this money and throw it into the stock market, and then be anxiety ridden every minute until you can build it back up. But if you do this thought exercise and really think about it, talk about it with your girlfriend, if things are getting serious and you’re talking about marriage, talk about money with her too. How do you feel about this? “Oh, I think that’s really silly. We should have 15. You know what, I’ve done the math, 15 feels good. Let’s take 15 and put it someplace else” or, “Hey, it really gives me anxiety. If we have less than six months.” “Okay then, we’ll keep the 30.”
It’s not like we’re talking about you have $500,000 in cash sitting there that could be doing so much more, but it’s something to think about how much are you comfortable with and just putting thought into your finances, it doesn’t have to consume every minute of your day, some of us nerds, but-

Scott:
In your situation, your plan is to work your job for the next 10 years. If you told us I want to quit in three or begin looking at other options and moving my business, exploring entrepreneurial pursuits, you should be building up a way bigger cash position or that the 30 or more, but I’d feel totally comfortable in your situation of bringing that down and putting more than in the market if you’re really confident in your five, 10-year plan here and you’re like, “Great. I’m going to have work this stable job. I’m going to have good cash flow.”
Then, to me, my thoughts would be thinking about how do I deploy more of it? And it’s not a big deal, it’s a percentage in your thing. The big moves are going to be what you do with your primary residents and how soon you do it and where you put your cash and how fast you can make the second big real estate decision, first one being your primary. Those are the big moves, I think the big levers. And then yeah, I think you can keep controlling your expenses and keep advancing at your career, but this is a good plan. You’re in a good spot, and I think you can achieve what you want to do as long as you make the big asset allocation decisions, and then roll the dice those three, four times with those properties.

Remy:
And Mindy, I wanted to come back to your thoughts on the miscellaneous expanse line. So, here’s why I put 500-ish with a question mark. It tends to be, not a revolving door but just a musical chairs of what it’s going to be this month. As an example, October I had two weddings. So there’s $700 in wedding gifts in October. Let’s see, in July there was home insurance bill, I’m sorry, and the car insurance bill. So that covered that budgeted line item. So as far as monthly expenses, I budget that monthly expense as part of that 500-ish per month as a way to just even it out as the ride throughout the year.

Mindy:
That tells me that you’ve thought about it, which I like a whole lot more than, “Oh, I don’t really want to look at this expense, so I’ll just put that in miscellaneous.” I think some people who aren’t so thoughtful about their expenses are just shoving things in miscellaneous. I’ve seen a thousand dollars in miscellaneous, I’m like, “That’s too much money in miscellaneous. A thousand dollars can get categorized.” $10, $50 is just like random. “Oh, I know I had 50 bucks, but I don’t know what I spent it on.” That’s miscellaneous. That’s probably not going to kill your budget, but 500 tends to be a little bit. But you’re thinking about it and that’s as long as you have a good answer, that’s all I need.

Scott:
I think if you don’t have that assumption for the unknowns in your budget that it got to derail your budget, so I love it. Well, Remy, hopefully was this helpful for you?

Remy:
It was, yeah, it gave me some things to think about especially around how I allocate my cash, what to think about over the next year or so. Gave me some things to think about as I approach how I want to set up next year, and then thinking about 2024 as well. Because it sounds like 2023 is going to be largely spent accumulating a cash position or some sort of money position that allows me to do some real estate investing. And then, 2024 is probably the year where it starts to get deployed.

Scott:
Awesome. Well, I’m glad that was helpful. Thank you for sharing your numbers and your story with us. I think this has been really, really illustrative. You’ve got a classic set of challenges that I think a lot of folks have. In the context of a really strong financial foundation, you’re just at this point where you’ve got to make trade-off decisions at the highest level in big ways to shape that future portfolio. And the fact that you’ve thought about it and have the strong position you have right now is fantastic, you’re in a great spot.

Mindy:
Yep, absolutely. I agree with Scott 100%, and I look forward to next year when you reach back out to give me an update, so we can see where you’re at.

Remy:
Yeah, definitely. I would love to reach out and be pen pals about decisions that I’m making or things that I’m interested in. I’d love to make sure that, one, I’m not doing anything stupid. And then, secondly, I’m just updating you guys on the success.

Scott:
I don’t think you’re doing anything stupid.

Remy:
Yep.

Scott:
That is unlikely.

Mindy:
Okay, well, it’s [email protected] and [email protected]

Remy:
Awesome.

Mindy:
Okay. Thank you, Remy, and we’ll talk to you soon.

Remy:
All right. Thank you so much.

Mindy:
All right. That was Remy and Scott. I think Remy has a very good financial situation. What I love about him telling his story is that he has thought about a lot of the aspects of his financial situation. He doesn’t just throw money into a miscellaneous category because he doesn’t want to think about it. It’s a conscious decision. He’s putting money away for his retirement, he’s thinking about real estate, he’s thinking about other things. He’s doing things consciously, and that’s the best kind of financial story we can talk about.

Scott:
Yeah, I mean, I think Remy’s doing a lot of really good things. I do think that his situation illuminates a trap, the middle class trap in this country, and he’s not going to fall into it. But where he’s at is the guy, essentially, he generates some cash flow, he’s got a good emergency reserve, but most of his wealth is getting funneled into his home equity and to his retirement accounts right now. And that’s great. That’s a responsible position. That’s what the normal is here in America for a lot of folks.
But the problem is that if that is carried out, then in 10 years, he’s going to be a millionaire. But with all that wealth in retirement accounts, some cash left over and then a bunch of at home equity that he can’t really harness in any meaningful degree to have freedom in his life.
And so, again, to break that, we constantly hear this all the time in the BiggerPockets Money Podcast and with a lot of different financial positions. And you, listening, probably see it with friends, family, maybe in your own lives, that situation happening because it’s so automatic and such big chunks of money go into it. $19,000 per year in your 401(k), 6,000 in your Roth, $3600 into your HSA. It’s very easy to then have nothing left over, for the vast majority of America, if you’re even privileged enough to be able to max out those items.
And then, the left little leftover that is being accumulated is going to go towards a small emergency reserve and then the primary residence mortgage, and that’s it. And that’s what I think we’re trying to break here at BP Money, is we don’t want that outcome. That’s going to take you 30, 40 years to really realize the benefits of those decisions and have some flexibility at the tail end. Let’s have that flexibility much, much earlier in life and be able to do things that we want to do and have control, be able to make decisions like starting a business, taking multiple years off, start doing something entrepreneurial or investing in real estate.

Mindy:
I agree with that, with an asterisk at the top. Take advantage of the opportunities that you can only take advantage of while you are employed, like the Roth IRA. You can only contribute to a Roth IRA when you have earned income. I really like the Roth IRA plan. I like it for everybody, but I really, really, really like it for the younger people because it grows tax free and because you have such an amazing opportunity to have vast sums of wealth. And you can only contribute $6,000 this year, that’s $500 a month. If you back that out, that’s $125 a week, $25 a day. You can contribute a lot to your future wealth by contributing to a Roth, and it caps off after a certain income. It just makes a lot of sense when you’re young to contribute to a Roth.
The HSA plan, I love for so many reasons. If you are in good health, even if you’re not in good health, the HSA plan, having a high deductible plan can be a great plan. If you are financially stable and can… if financially secure, I guess stable is not the right word, and can contribute to and cash flow the expenses that you are incurring now, you can just… It’s like an extra retirement account. But like you said, Scott, so many people we talk to have these large 401(k) plans and then nothing in after tax brokerage accounts or real estate or whatever their easily accessible before retirement age accounts that they choose. So yeah, I think I love Remy for thinking about it in advance.

Scott:
Mindy, I can hear what you’re saying, and I understand. With folks that are starting in their careers, Remy’s almost in a midpoint for the average American in the career, like 9,000 a month is a really good income with that. But he’s still in a position where that eight grand, nine grand that goes to the HSA and then the Roth and another maybe four, I’m making this up, I don’t know how much it would be for his 401(k) match, that hurts. That’s like a third of his cash accumulation for the year. Right? For a year. Eaten up right there. That makes a dramatic impact on his ability to invest in that next real estate investment or build up that emergency reserve for those types of things, and it hurts even more if your total cash accumulation is going to be 10, $15,000 and now you’re sucking up 65% of that.
And so, that’s where I think that that gut check or that really hard decision exists for so many people out there of making that conscious choice about where, what do I want that portfolio to look like in a few years and how am I going to make the very painful trade-offs of taking advantage of these great accounts you just mentioned, or actually building flexibility right now for opportunities I can’t even see yet. I just want to make people aware of that hard choice because it’s so easy to just say, “Yeah, let’s do the HSA, let’s take the 401(k) match, let’s put the Roth IRA.” I agree with those things.
If your position is such that you can accumulate enough cash to max all those things out and still have plenty leftover, and you’re privileged with that level of income and the low expenses to be able to do that, then yeah, you go down that list. For most people that you’re going to have to make again, those really painful, and there’re just decisions to make that I want to make people aware of, and there are consequences to not making those decisions and putting all the money in those places.

Mindy:
Yes. And I think that it’s great to bring those up and people should be contributing consciously and not just, “Oh, well, this is what I should do, this is what I should do.” I really like these tax-free accounts. The 401(k) and the traditional accounts where you’re reducing your taxable income are great, but I really like the tax-free growth that some of these other ones provide for the younger. And you don’t have to max them out forever but just getting a few years at the beginning of your working career and just watching it grow. I mean, that tax-free growth, because after it’s been in there for five years, you can withdraw the principal. You can withdraw the principal for several purchases including housing, medical bills, housing, and I think college at any time.
But you can withdraw the principal after five years just for living expenses. So, it is accessible before your retirement traditional retirement age. It’s just the tax-free growth is just not something you get very frequently.

Scott:
I agree. Well, I’d love to hear folks’ thoughts on this. Let’s make it a discussion topic in our BP Money Facebook group, which is facebook.com/groups/bpmoney.

Mindy:
Awesome. I will post that in the Facebook group at eight o’clock on the day that this episode comes out. All right. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench, and I am Mindy Jensen saying catch you on the rebound.