David:
This is the BiggerPockets podcast, show 630. When I’m working with an agent, I want an agent that knows the area, that knows what zip codes are better, that knows where development is going in, that knows where demand is strongest. I’m not just using them to write offers, I’m using them to educate me on opportunity out there.
So when you get on that first phone call with the agent, that’s what you should be doing is, tell me about the area, tell me about the kind of people that work here, tell me about the jobs that are moving in here. What part of town is in development? Which part of town is the best place to live? If they can’t answer those questions, that’s probably not the agent that you want representing you, especially if you’re buying out of state.
What’s up everybody, this is David Greene. You are host of the BiggerPockets real estate podcast here today with a Seeing Greene episode. On these Seeing Greene shows, I take questions from you and your contemporaries specific to real estate investing, whether it’s a problem you’re encountering you can’t figure out, an overall question about strategy, or just knowledge that you think will help you get over the hump in building wealth through real estate. And I answer them for everybody to hear. These are very fun shows. They’re also challenging, because I never know what I’m going to be asked when I do these. So buckle your seatbelt and get in for a wild ride.
Before we get into today’s show, the quick tip is going to be, please leave us a rating and review online wherever you listen to your podcast. People won’t hear about these shows, if we don’t have more ratings and reviews. And every single week there’s new competition that’s coming in that wants your attention and wants to be the one educating you. And I want to stay in that seat. And we at BiggerPockets want to make sure that we are giving you the best shows possible.
We are constantly changing up the format, bringing in different guests, finding ways to add more value, including doing shows like this, to stay the best real estate investing podcast in the world. And you can help us to stay there by leaving a rating or review.
All right, in today’s show, we get into some really cool stuff. We talk about if cash on cash is the best metric to consider when determining if you should hold or if you should sell. We get into how to make your investing returns more reliable, how to stabilize the cash flow you’re getting from real estate so that you can quit your job or retire early. And we get into planning how to enter a market, when you don’t know anyone there, if you want to go start a new business or find new investment opportunities. All that and more on today’s show. All right, let’s get to our first question.

Duane:
Hi David. My name is Duane. I am in Long Island, New York, and my wife and I are in the process of closing on our first investment property. My question for you is we have an apartment that we can turn into a possible two or three bedroom apartment with one bathroom.
And what we’re trying to figure out is the best way to go about understanding what the market demands are in the area to make the best decision to ensure we have a property that people truly want, i.e, there’s no point in making a three bedroom apartment, if everybody’s seeking two bedroom apartments or even a one bedroom apartment, simply because of the area that it’s in. Or we make a three bedroom, but it really doesn’t make sense because we can only get another a hundred dollars in cash flow on the property from doing that, versus the cost of making it more than one bedroom might be several hundred dollars. Look forward to hearing your response. Thanks.

David:
Hey there, thank you Duane. I like where your head’s at. You’re reverse engineering success. I hear your question and you’re saying, “Hey, does it make more sense to go for a two bedroom house or a three bedroom house, a two bedroom apartment, three bedroom apartment, maybe even four? How do I make sure that I’m hitting the right supply for the demand that’s out there and how do I maximize my return?” So I like where you’re thinking. Few pieces of advice I can give you.
There’s probably not any area where there’s no one that wants a three bedroom or a two bedroom, they only want a one. In every area you’re going to have families, you’re going to have single people, you’re going to have people that want to go in with a roommate that are going to want two bedrooms. So I don’t think you have to worry about is there demand for a two bedroom or a three bedroom as much as what kind of rent can I get for it.
Now, a few pieces of advice I can give you with that. The easiest thing is you can use the BiggerPockets rent estimator tool. So if you log in a biggerpockets.com and you see the little banner across the top, there’s a section that says tools, hover your cursor over it, and then click on rent estimator. And it basically will run comps in the area and tell you what you can get for a two bedroom or a three bedroom, and then show you the comps that are around it so you can compare your property to theirs. The quickest way that you can figure out what rent to get.
But even more so than that, getting involved with other people in your area, other investors, that own properties, they’ll be able to answer that question for you pretty quick. Because I don’t actually own property in Long Island, I can’t give you specifics on that information. But I can tell you that if I was there, I would be talking to property managers and saying, “Hey, is it hard to find three bedroom properties? What about four? Where is there the least amount of supply? So I can take advantage by creating that supply. And what kind of rents do I think I would get?” Same is true of other real estate investors. I would be asking them, “Hey, what kind of a demand are you seeing for these properties?”
And then the last thing would be looking for floor plans of homes that can easily add bedrooms. So maybe you go after a two bedroom house that has a family room, a living room and a dining room, and you can take the living room and the dining room and turn them both into bedrooms and turn that two bedroom into a four to get more rent. Or even turn it into an ADU situation where now that one property with the four bedrooms can be split into two where you rent one of them out as a single home and the other one out as an ADU, but you have two different rental properties.
I’d be looking at opportunities like that, as far as answering this question, but there’s tons of people out there in your area and they’re almost always happy to share the information. So good news is Duane, this is not going to be a tough problem for you to solve.
Another thing to consider that I’ll throw in here at the end is that if you can get more bedrooms, you can actually rent out by the room. Now, some people aren’t as comfortable with this, but if you really want to maximize return, renting out by the room, becomes a win-win for everybody. You get more rental income, because you’re going to make more renting by the room than you are as it by the unit, and the people who are staying there all get cheaper housing, if they rent a room instead of renting the unit.
The only place where anybody loses is in comfort. It’s not as comfortable to only have a room and rent out the rest of the unit to other people. But especially with the economy getting tougher with inflation hitting, with everything becoming more expensive, I think you’re going to see a lot more demand for people that would rather rent a room than rent an entire unit and save some money. And them saving money will help you make money, which is what we’re all about with real estate investing. Good luck to you and your wife. Let me know how it goes.
Next question comes from Mahru in Malvern, Pennsylvania. During a recent webinar, you mentioned that you know some agents in Florida. How did you select the agent who helped you with a short term rental house, and how can I find an agent like that? That’s a good question, Mahru.
So I’ve talked at length in different shows about what kind of questions I ask real to agents, when I want somebody to be working for me. I’ll give you a couple pieces of advice here and I’ll recap those conversations.
The first thing I would say is BiggerPockets has an agent finder, you can use. If you hover over the tools banner, and then you click on agent finder and type in the city that you’re looking for, you’ll get a list or a directory of different agents in that area. And you can check out their profile on BP, you can see how many other people they’ve sold houses to. You could get a feel for their history when you’re going to choose your agent.
Now I use that tool sometimes, I add those people to the list, but it’s not the only thing that I use. What I’m doing is I’m calling and I’m looking for agents who own the type of property that I want to buy. If I’m buying short term rentals in Florida, I ideally want an agent who also owns a handful of short term rentals because now I’m not only getting their expertise and I’m not only getting their service, but I’m also getting their resources.
They’re going to be able to tell me what property management company they use. They’re going to be able to tell me what properties booked better than other properties. I get the benefit of all of their experience, when I use them. This is the same reason that people come to the David Greene Team. They don’t just want a real estate agent, they want an agent who has worked with me or helped buy properties for me, or has been taught by me because they’re getting all my experience when they use those agents.
So you can call different brokerages out there and you can ask for an agent that specializes in short term rentals or that owns short term rentals. You could call property management companies that would be managing your deal and ask them if they have any agents they recommend that they’ve worked with before, because they know what agents are referring them a lot of business and they’d love to be able to refer business back. But more importantly, if an agent is referring them a lot of business, they’re doing a lot of business in that asset class, so you’re getting a more experienced person.
A lot of people think that what’s important as an agent is responsiveness or handholding. Those are nice, but they’re not the priority. The priority is their experience. When I’m working with an agent, I want an agent that knows the area, that knows what zip codes are better, that knows where development is going in, that knows where demand is strongest. I’m not just using them to write offers, I’m using them to educate me on opportunity out there.
For the most part, I can tell them what I need, what the offer price needs to be. What I need from them is their knowledge of the area. So when you get on that first phone call with the agent, that’s what you should be doing is, tell me about the area, tell me about the kind of people that work here, tell me about the jobs that are moving in here. What part of town is in development? Which part of town is the best place to live? If they can’t answer those questions, that’s probably not the agent that you want representing you, especially if you’re buying out of state.

Nicole:
Hi David. Nicole Eller here from San Diego, California, currently living in Jacksonville, Florida. Our question to you is whether we should cash out on our Orange County, California condo, and allocate those funds into a few properties here in Florida, throughout Florida? We should get about $250,000 if we were to sell today and want to know if you think that is a good idea.
We currently have a few things to consider. Number one, the HOA has pending litigation, so we will need to sell here pretty soon or else be held up without being able to get a loan in that community. So want to strike while the iron’s hot. Also we will avoid capital gains if we sell in the next two years, so we’re thinking of just go ahead and getting our equity out of there and reallocating.
One thing to consider is that we really want to move back to California eventually and it’s a nice little property to have to slide back into. It’s affordable. Also, we have a 10% cash on cash return, which is not bad, and it’s getting us $425 a month. So we could leave it as a long term rental, but not sure what to do. Anything you have would be wonderful for input.

David:
Thank you, Nicole. So in case you didn’t know this, I actually have a real estate team that works in Southern California and they are awesome. So you need to reach out and I’m going to set you up with a consultation with one of them. But for the advice of everybody listening, I’m going to tell you what we’re going to be going into, so that other people know what conversations they should be having with their agent.
Now, if you’re a real estate agent, you might want to check out the book I just had released with BiggerPockets called SKILL, which is all about how to be a top producing agent, because the conversation I’m about to describe here is taught to you how to do in the book. And this is how top producing agents should be having conversations.
So you mentioned some really relevant and pertinent pieces of information that we would need to know during the consultation. You’ve got an HOA situation going on, you want to be able to move back to California at some point and you’re trying to figure out, should you sell, and if so, where should you put the money. You also mentioned something about a cash on cash return of 10%. You said that you’re making $425 a month, I believe is what it was. So let’s do a quick analysis of what your return on equity would be.
So you have $425 a month, times 12 months in a year is 5,100. If we divide that by 250,000, which is what you think you’d walk away from, you’re actually making a 2% return on your equity. You made a very common mistake that everyone makes, you said I’m making a 10% cash on cash return. That means that you’re looking at your return from the money you put into that deal when you bought it, but that’s not accurate because now you have more equity than you did when you first bought the deal.
So you’re actually getting a 2% return on that condo, as well as taking a significant amount of risk, that there could be an assessment that comes your way through the HOA that’s going to take all of that return you think you’re getting and remove it. So at first glance, the answer becomes, yes, you should sell it. And the question now becomes, where should I put the money? And this is why I want you to reach out to one of us because we can walk you through this and handle it all for you.
Now you’ve got a couple things to take into consideration with where you put the money. You want to invest it somewhere that you get more than a 2% return, that becomes a win, and you probably want to buy something in California because you mentioned you want to go back there. Now, if you can’t find anything in California, that’s okay, but we need to make sure when we help you reinvest that money, that we do it in a way that you have access to liquidity, so when you want to move back to California, you can buy something else.
So that’s the two ways we approach this, you either buy something in California now and you keep it and rent it out so that when you move back you’ve got a property, or you keep the cash available so that when you want to move back to California, you can buy something.
Now the question becomes, as far as maximizing efficiency, are prices going to go up in California, go down or stay the same? If you think prices are going down, you should keep the cash set aside or invest in something with a really big down payment where you could get the equity out of it, when you want to buy in California. If you think prices are going up, we would want to help you to buy something in California, so you’re not paying more later. And this is the benefit of having a team that works in the area where you’re talking about.
Ideally, what we would do is we would sell your condo. We would take the money that you say is tax free because you’ve lived in it recently enough that it’s free of capital gains. We would help you buy an investment property in California that had multiple units, a three or a four unit type of a property. You would rent those out and you would make a return, but you’d have a space there available, if you wanted to move back. It doesn’t have to be your dream home, but it’s enough to get your foot in the door, and from there, we would help you to find your dream home.
With the rest of the money that you didn’t have to spend on that property, we would help you buy some other things in Florida or different states. And before I give advice on that, we would have to ask what your goals are. Do you want to own short term rentals, are these long-term rentals or is this something you just want to add equity to, so you can pull it out later and sell it and put that money somewhere else, or do you want to own long term?
When we have our consultation that’s the kind of stuff we’re going to be going over. I really appreciate you asking this question, because it gives me an opportunity to let our audience hear how a good realtor is going to approach the question of, should I sell my condo or not?
What most realtors are going to do is say yes, let me sell it and then you’ve got to figure out what you’re going to do with the money later. The best agents are also consultants. And in addition to being a consultant, they have resources that they can put towards helping you achieve your goal, and they do what I just did, they present options. You could do this, you could do this, you could do this, which of these resonate the most with you?
And then you’ll say, “I really like the 80% of what you said, David, but this 20% doesn’t work and here’s why.” Good let’s adjust how this 20% would work, so it does meet with your goals, then we paint a more clear picture. It starts off very fuzzy and through the consultation, it gets sharper and sharper and sharper until now you know what the right move is. And then it’s just putting you in touch with the right people to help you do it. So thank you very much for the video, Nicole. Please reach out to me. You can either email me. You can hit me up on social media, whatever it is we’ll get you set up.
And for everyone else who is listening, look for a realtor that does this. And if you’re a realtor and you’re not doing this, it’s time you start practicing so you can learn how to have these conversations to really look out for your client’s interest.
All right, we’ve had some great questions so far and thank you everybody for submitting them. We wouldn’t have a show if you didn’t submit questions. So you are the real MVP. If you would like to submit a video or a written question to me to answer on this show, please go to biggerpockets.com/david. I’ll tell you a secret, we were going to do a show like this years ago. We just couldn’t figure out what URL to use to send the questions to.
All right, at this segment of the show, I like to read comments from previous videos that I have done, hosted on YouTube, where people have commented on the show. We often have people that write something that’s funny or silly or provocative or thought provoking. And so it’s cool when I get to read through these and hear what you guys are saying, and this is also my way of saying, go on YouTube and leave me a comment right now about what you like about the show or something you thought was funny so that I can read your comment on a future episode.
All right, first comment comes from Noah Ofisa. Planning for my first investment property in a year. Thank you for your encouragement and wisdom. Love to hear that Noah. Best wishes for you on that and please stay in touch and let us know how it goes.
Next is from Ice Gazer, that’s a very unique name. Hey David, great podcast once again. I have a situation you may have dealt with in your life. I’m a police officer as my day job and when I’m working, I have no issues or qualms about getting on the phone to call someone back. I don’t ever hesitate, but when it comes to real estate, I hesitate every time. I’m very new to real estate, which is most likely the reason. I was wondering if you have any tips or advice that could help me over that hump. Thank you, from Taylor H.
That’s a really good question, because this is the stuff I think about in my own life all the time. Oftentimes when I’m at work and I have to get on the phone and solve a problem, I do it right away, but in my personal life, if I have to call the cable company or DIRECTV or the internet or something, for some reason, my phone starts to weigh 500 pounds and I just don’t want to do it. It all has to do with mindset.
So here’s my guess. When you were first a police officer, you were very nervous about making these same phone calls, but your training officer forced you to do it. They made you go through it, that you had accountability right there. And you did it enough times with supervision that you then got over your fear of doing it and it became second nature and you didn’t worry about it.
You need to find the same thing with real estate. You need a person who’s going to make you make these calls, who’s going to watch you do it, who’s going to listen to you and then tell you what you could have done different. That could be a broker, it could be another agent in your office. If you’re on a team like mine, we provide that to the agents. We make them do the hard stuff until it doesn’t feel hard anymore.
And then last thing I’ll say is don’t beat yourself up, because this is human nature. It is like this all the time. I’ll just be transparent. When I was younger, I was very skinny. You wouldn’t think so from looking at me now, because that’s not a problem that I’m still struggling with, but it was a big problem for me that I was a bean pole and I was very insecure. I thought about my skinniness and my lack of masculinity constantly. It was painful.
I was very intimidated and nervous and would not go to the gym because every time I went, I just saw bigger, stronger guys that made me feel bad. And that pain was so much that I would think about going to the gym, I would drive by the gym, I would look in the window, but I would not go in there because I was too intimidated to go try to learn how to use the machines or lift the weights without any help.
I had a friend named Paul, Paul Cole, and Paul brought me to work out and I still remember him to this day because his oversight, which was a very small thing for him, he just brought me along and taught me the different movements that you’re supposed to do, gave me the confidence to start working out and that is now a pretty big part of my life and my health and my fitness.
The same is true of jujitsu. I knew I wanted to go for a long time, but I just did not want to show up on my own and say, “I’m here.” And my friend, Justin Hoglund got me into doing jujitsu. He went with me, we did some private lessons and eventually I ended up getting into the class. So what I’m saying is if I struggle with this, it’s okay that you do and it’s okay when everyone else does.
When I was a brand new agent, I remember having another agent in the office that would sit there with me and make me call the people from my open house and whisper in my ear what to say when I would get stuck. I was so scared of talking to people that I would not call the people from my open house. Now I can get on the phone, I can jump into any situation and I’m not nervous at all because I know how I’m going to get through it, but it didn’t start that way.
Don’t think it’s weird that you’re going through this right now because everything in life is like this. There’s a lot of people, especially introverts that are not comfortable just throwing themselves into new situations. The secret is to get a friend, a mentor, someone to help you that will do it with you until it becomes habit. Thank you for leaving that comment and giving me a chance to share some of my own struggles with you.
From SF Trail. Buying at market price is bad advice. You need to have a margin of safety in any investment. Okay, so this comment comes from one of the previous videos I did where apparently I gave some advice when I was telling people, hey, you should buy and it’s okay to pay market price, or maybe I was saying that there’s people that are trying too hard to find the best deal ever and they’re buying nothing. And I really like this comment, even though it was written in a way that was confrontational because it gives me a chance to explain what I meant by that.
The problem with looking at real estate and saying I want to pay less than market price is that market price is a moving target. What market price was two years ago is different than what it was last year and it’s very different than what it was five years ago.
In my experience, I have seen so many people that five years ago had a chance to buy a house for 500 grand, but the seller wanted 510 and they wouldn’t budge, they said, “I’m not going to overpay.” And so they walked away from the deal and said, “I’m going to wait for a better opportunity.” And five years later, those properties are 800, 900, sometimes a million dollars, okay? To save 10 grand, they lost out on a potential half a million life changing wealth that wasn’t built.
And I’ve seen this happen so many times in my own life. I have what I thought was overpaying, I didn’t feel great, the seller wouldn’t budge. I loved the area, I loved the property, I loved either the rehab plan or the lack of a rehab plan. I loved a lot of things about the deal, but I didn’t love the price. And I went through with it and I look back now and I’m like that property’s gone up $350,000.
I’ll give you an example. I had two properties in Maui that I was trying to buy maybe a year and a half ago, year ago and I wrote offers on 12 deals and I got counters on maybe four or five and two of them I was able to put in contract. And one of them had a problem with the bathroom. There was a lot of mold and it was going to be like 15,000 bucks at best, maybe more to find a person to go in there and to fix it. So they were going to have to rip it apart and put it back together after they fixed the mold.
And I was stuck. I did not like the seller, would not budge at all. The market was somewhat soft out there. The seller had listed their house for about 650. I had it under contract for 550 and I wasn’t sure what it was going to appraise for yet, but I had to make this decision. And ultimately I said, “All right, I’m going to have this property for the next 30 years. I’m sure I’m going to make this $15,000 back at some point, let’s do it.” And I closed on the deal.
That specific property is now just south of a million dollars. The condo right next to it that’s not as upgraded as mine just sold for about $975,000. Mine’s a little nicer, so it could be worth a million. This is over a year and a half. That’s how much money I made in that deal.
Now I was buying at a time when nobody else was buying. Other people didn’t want these properties. Travel was restricted because of COVID, so the Airbnb numbers were very low. I totally understand that I was taking a risk and making a move that other people wouldn’t have done.
But what I’m saying is I was in a mindset that thought, I don’t want to overpay, I don’t want to overpay. And does it look like I overpaid now? Unless I talk about that deal on a podcast like this, I don’t even remember it. I don’t think about the fact that I made $500,000 from one good decision. My brain doesn’t bring that up. It just brings up the times I might have lost. And that’s what I’m getting at.
I don’t want people to overpay, but what I think is that overpaying is a moving target. It’s not the same way that real estate used to be. Values go up so fast and can go down so fast that using whatever today’s current market value as your barometer for good wealth is just unwise. It’s not going to stay at that price forever.
If real estate didn’t go up in value and it just held its value, I’d be saying the same thing, don’t overpay, get it below market value. But to wrap this up, there is no market value. There’s only today’s market value. Tomorrow’s will be different. A year’s will be different.
And this works the other way too. Let’s go back to 2006 and you get a property for $800,000 that appraises for $900,000, you crushed it. You’re telling all your friends how great you negotiated and this awesome deal you had and you’re feeling good about yourself. And then 2008 comes and that property’s worth $300,000. Did you crush it? Were you safe because you got it under market value? Absolutely not.
And all I’m trying to highlight is there’s a false sense of security, a form of a fallacy that if you get your property for less than the list price or less than the appraise price that that inherently means you’re safe, because it doesn’t. When values drop, they drop precipitously. There is no stopping it. Your equity evaporates, before you can do anything. And when prices go up, what you thought was a so-so deal becomes an amazing deal.
So I’m just saying, stop looking at real estate from this perspective of right now at this exact moment, this is what the COPs show that that property is worth. Take a longer term approach and bring some wisdom into what you’re buying and don’t let your ego in the form of, I don’t overpay get in the way of making sound, smart financial decisions that are going to set you up for the future.
All right, so again, please comment on YouTube. Let me know what you thought, but don’t just do that. If you’re listening to this anywhere else, on Apple, on Stitcher, on Spotify, wherever you hear your podcasts, would you please do me a favor and write us a review? The more reviews that we get on this podcast, the more people find it, the more people we can help and the bigger we grow our community. That helps with better questions in the forums, better questions being asked on episodes like this, and more members of BiggerPockets to share more wisdom with.

Salman:
Hey David, this is Salman. We actually met at BPCON in NOLA last year. I think you complimented my shirt. I told you my wife had picked it out, so I couldn’t tell you where to get one.
Anyways, I’m currently in New Jersey. This is where I live. I’m looking to invest. I’m currently looking to flip at the moment so I can regain some capital and throw it into other future rental properties. The problem I’m running into right now is the price of the homes for the acquisition and some of the rehabs are very expensive. And in one instance, a contractor quoted me the rehab was actually more than what the acquisition price was.
I’m finding it more and more challenging right now in this current market to find a deal in a property that’s within my budget and it’s got me thinking whether or not I should be looking to flip right now at the moment, or maybe should I wait, or do I look at a different market or do I look at waiting out a little bit and just acquiring rentals instead? So appreciate your help. Love the podcast.

David:
Thank you for that, Salman. You should have put the shirt on that I commented on that I liked when you made the video, then I probably would’ve remembered. But I do do that sometimes, I’ll see somebody wearing a shirt that I like, and I’ll go up to them and ask them what brand it is or where they got it, because I’m terrible at shopping and I would rather not have to go try to figure out how to find clothes I like. I’d rather just order something that looks good on somebody else.
So I think the problem that you’re running into is a very common one in today’s market. Flipping homes in general is very difficult and finding homes on the MLS is very difficult. Put them together, and it becomes super difficult to do what you’re trying to do.
For a long time, home flippers were solving a problem that other people did not want to solve. They could go on the MLS, they could find the properties that were beat up or not selling, or nobody wanted, and then fix them up and sell them for more. And the reason they made money was because they were solving a problem.
When there’s such a lack of inventory, people become less picky about the house that they get, they just want a house. And so these houses that used to sit forever, that a flipper could go pick up at a great price, now isn’t sitting at all and they’re selling very quick, and that’s why you’re having a hard time finding a deal.
Now, couple that with the fact that there’s so many people that are doing rehabs on their homes, that contractors are very hard to get. It’s not just flippers that are using them. Agents like me that are going to sell a house for somebody else are using contractors to fix it up before we put it on the market to get our clients more money. People that are buying houses that are not fixed up, are using contractors to fix the house up, once it’s been bought. And people that are not even putting their house on the market are having it fixed up because they see it’s adding equity to the deal. Everybody wants contractors right now and that means that they charge a lot more and they’re harder to use. This is a serious problem when you’re trying to flip homes.
So I’m not going to tell you don’t flip, but I am going to say, if you’re going to flip, I would probably not be looking on market. I would be spreading word of mouth to find an off market opportunity for someone that wants to get rid of their house that needs some work, try to flip it that way.
The other piece of advice I’ll give is maybe flipping isn’t worth the juice isn’t worth the squeeze, I’ll say. The amount of work you’re going to have to put in to find the deal and the amount of work you’re going to have to put in to get it ready for the profit you’re going to get is going to be very low. And that’s one reason that home flippers are having a hard time right now. Flipping works better when there’s a lot more inventory to pick from, when there’s more supply and therefore you can pay a better price for the same home.
So maybe look at a different strategy. If you think home prices are going to keep going up, maybe start buying a primary residence with a low down payment in a great area and let appreciation go up and do a live-in flip. Slowly fix the house over time, where you don’t have hard money costs, or you don’t have as high of capital costs and you’re not as dependent on the contractor to be available. You can do it in small pieces while you live there.
While it might not be as sexy as boom, a quick influx of capital, it does reduce risk. It is safer and is usually a smoother ride. Mindy Jensen who hosts the BP Money show is notorious for doing live-in flips. She’s got a really good system together where she’s lowered her risk and has been okay with a more reasonable return on her money, because it’s happening over a couple year period of time, but it’s like a guaranteed win. She’s getting market appreciation as homes go up, then she’s getting forced appreciation from doing the work.
And if it doesn’t work out, if for some reason the bottom drops out of the market, you just keep living in your house and you wait until later. It’s really a safer way to invest and I think in this market that might work out better for you.
All right, next question comes from Fernando in Tokyo. Hey Dave, big fan of the show. I’m 33 years old living in Tokyo with my family. We have two single family rental properties, one in Seattle, one in Nashville. We’re going to sell the Seattle home because we’re no longer comfortable with the business case for the property and would like to redeploy that capital and liability through a 1031 exchange.
I’m considering using a turnkey firm, such as Doorvest or another active wholesaler to find and manage the replacement properties. The reason is that I’m from abroad and I’m not sure I can commit the work needed to find a better deal myself. It would allow for a safer way to use the exchange and I could learn the process since it would be my first 1031 exchange. What is your advice in this situation? Should I take the lower return to try to learn the process by using a turnkey property, or should I try to maximize returns and risk finding the deal and rest myself?
All right, Fernando, good question here. Let’s see how we can tackle this bad boy. 1031 makes sense if you don’t like the area the house is in, so that, you’re good there. Now we’re talking about how we’re going to put the funds into place.
Turnkey, the idea behind that is that it’s a can’t miss, you buy the property, it doesn’t need any work, it’s going to rent well, it’s going to be managed well. It’s hands off, you don’t do anything and you’re going to get less of a return, but still a return, okay? Under those assumptions, I think that could be a good idea for you.
My problem is that it rarely ever works out like that for the investors. Many people’s expectations when they buy a turnkey property, do not turn out as good as what they thought. They often end up paying more than market value and then their return is less than what they thought. And the house has more problems than they thought, and it’s not in as good of an area as they thought, and then they end up wanting to get rid of that home just like they wanted to get rid of the Seattle home, but they can’t because they paid more and the area isn’t appreciating.
You rarely find turnkey company providers finding deals in the hot markets that are going up the most. In fact, the way they make that business model work is that they go to the areas that don’t have as much appreciation, where rents don’t go up as much and there’s less demand from other investors. That makes them able to get more inventory that they get, that they spruce up and then they sell.
So if you’re going to go the turnkey route, I would say, make sure you study the area independently of what the turnkey company provides you. Don’t just look at a picture of the house, use Google Maps and go through the entire neighborhood. You don’t want to be buying the nicest house in a terrible neighborhood. Make sure you have a history of what rents are doing. Are they actually increasing every year or are they staying the same? Look at how much available inventory there is in that market for you to go buy. There’s a possibility that you go find a house that is in just as good a shape as their turnkey option in the same neighborhood, but for less money, and you could just buy it, use a property manager and boom, it’s the same as turnkey.
The other thing to consider is you can do it yourself, but there’s going to be more time that you’re going to put into it. So maybe find a property management company and see if they can function as a turnkey provider for you. Can they go find you a deal and then manage the rehab that’s going to have to happen, whatever handyman has to go in there, paint, carpet and kind of function in the same way as a turnkey company, but maybe get you a better price.
The last piece of advice I’ll throw is that not every turnkey company is the same. There’s probably people listening to me saying, “I bought with this turnkey company and they were amazing and I loved it,” just as much as there’s people saying, “I hate turnkey because they did a terrible job.” So don’t assume all turnkey is equal. If you have a good relationship with a really good company that you really trust, yes, I would say it makes sense to do that. If you don’t know that company very well, don’t assume that they’re going to do a good job for you.
All right. Our next question comes from Brian Schaffer in Cheyenne, Wyoming. I’m active duty Air Force and I’m separating the service in November. I’m becoming a real estate agent following my separation in a market where I have no connections. How am I to build rapport and make connections right now in an out-of-state market so I can hit the ground running regarding both investment opportunities and being an agent. Thank you, David.
All right, so one thing to keep in mind, Brian, and really anybody else who’s listening to this, if you’re in the military and you like BiggerPockets and you’re going to be transitioning out anytime soon, they have a program that at one point was called the SkillsBridge program and now I think has a different name, maybe it’s Career Opportunities program or something like that.
But basically for your last six months of employment, they will allow you to mentor with a different company to learn skills that you can use when you get out of the military. So I’ve had several people that were active duty Air Force or other branches that moved to California and interned with me to learn either how to be an agent or how to be a loan officer or one of the companies that I have. And at the end of their six months, they either kept their job with us or they moved on to go do something else, but it was really a risk free way of learning a new career.
And I would highly encourage you, Brian, if you’re going to be in Southeast Idaho or if you’re going to be staying in the area that you’re living in now, in Wyoming, that you should look for a person that you could intern with through that SkillsBridge program, that would be really helpful for you now.
And also if you’re someone else, please reach out to me if you’re in the military and you’d like to do something like that and we’ll start those talks. If you are looking to build rapport and make connections in a different market, that you’re not, the first thing you need to do is be very active on biggerpockets.com. You need to set up a keyword alert for the area you’re going to be moving to, the different cities there and start answering everybody’s questions that are curious about what to do in that area. You need to start building relationships. You need to go add colleagues from that part of the country. You need to start building relationships with those people.
The more information you get of your own on BiggerPockets, the more you can point people to when you get to that area and you want to have some trust and credibility also built. Not living there, you’re going to be tough on other options. You’re not going to be able to fly there and actually build people and make relationships. So what I would do if I was going to be an agent is I would start researching different brokerages from out there and finding the one you want to work with and then getting to know the leadership in that brokerage so that they can give you books to read or things to study or something to do to prepare yourself for being a real estate agent when you get there.
Another thing you should do. So I’m looking at buying some property in Scottsdale. I bought one with Rob, I’m looking to buy some more. And I started thinking, at some point it might be nice to have a David Greene Team in Scottsdale that could help other people buy properties the same way that I’m buying. My mind started going to, what would I have to do if I wanted to do this? And it reminds me exactly of what the question you’re asking here.
So I started thinking about how I would need to get a map of Scottsdale divided into different zip codes and start studying what each of those zip codes were known for, where the boundaries were. I would need to start getting a feel for the city itself, so if people had questions, I could answer it with confidence.
Now I’m probably not going to be the one doing that, but I would give these marching orders to whatever agent I hired to be my Scottsdale representative out there. I would want to quiz them on different parts of the area and see if they could answer confidently, when people wanted to know what’s going on. I would need to know different zoning restrictions. I would need to know what the political office in that area is doing concerning what type of permits they’re going to be issuing.
I would start learning a lot of the questions that people are going to be asking you when you get there before you actually get there. That way, when it happens, you’re speaking with confidence and you can start educating people that want to buy houses on stuff that they would have no idea they needed to know. You should know which part of town has the higher property taxes and which part has the lower property taxes. You should know where the HOAs are and what type of condition each of those HOAs is in. There’s a lot you can start doing to learn the actual city that will help you when you get there to build rapport with people.
All right, we have time for one more question and it comes from Tyler Mundy.

Tyler:
Hey David, how’s it going? My name is Tyler Mundy. I’m a real estate agent and investor here in Charlotte, North Carolina. Love the BiggerPockets podcast, love what you guys are doing. I’ve been listening for a couple years avidly and my question has to do with financial independence. I know it’s a big theme for the show as well as rental income.
So you said in the last couple episodes that you would recommend not trying to retire on rental income, just because it’s unpredictable, maintenance and tenants and evictions can cause loss of cash flow, which would obviously be huge if you’re depending on that. So I was wondering what your thoughts were on a strategy. I recently read Scott Trench’s book Set for Life, thought it was great. And he mentioned index funds in there. I know it’s a huge theme in financial independence literature in that community.
So I was wondering what your thoughts were on the strategy of trying to amplify wealth through real estate, flips, rentals, BRRRRs, new construction, things like that, build capital. And then once you’ve built some money, say a million dollars or so, whatever that number is, then putting that into index funds. And then at a 10% return, you’d have a hundred thousand a year without the maintenance and evictions and broken water heaters and plumbing like you have, that you could have in a rental. So I was wondering what your thoughts were on that, if you have some insights. Appreciate you. Thank you.

David:
Tyler, I got to say, I like where your head’s at. I like how you’re thinking. Now on the specifics of an index fund, like Vanguard, I really can’t comment because I own very little stocks. So I don’t want to give advice about something that I don’t understand, but that principle, yes, I like where you’re going.
I do think it would be wise to learn how to move money through a conveyor belt. So I have this maybe philosophy that I operate by that I call make it, amplify it, invest it. So I’m all about earning money through a job, through a business, through a side hustle, through something, amplifying that money through a flip or through a BRRRR or through some type of investing strategy where I’m going to add capital and then taking that amplified amount and investing it long term.
Now what you’re describing is something that could be about making money and amplifying it through real estate and then investing the returns into something else like this fund that you’re describing here. I like that. I like looking at how to take money like a snowball and add something to it as it goes downhill. I can’t tell you on the specifics of if you should be doing it through stocks, but I do like what you’re thinking there.
I will clarify about when I said that it’s difficult to live off of cash flow. That is true. Most people that put their numbers into a spreadsheet find that the result that they get is very different. And that problem is when you get a handful of properties and you want to quit your job and live off the cash flow. One property that needs a new roof can mean that you’re not making your mortgage payment now because that money that you thought you were going to live on has to go back into the deal. But I wouldn’t say that cash flow never becomes reliable, it’s mostly in the beginning, early stages and cycle of owning a property.
So I noticed the first three to five years of the stuff that I own, there’s just things that go wrong that I never thought would. I just can’t catch it, but owning a property for a significant period of time where a lot of the stuff that’s going to break gets fixed for the long term, they stabilize over time. If you let that tree grow, eventually the fruit becomes much more reliable and predictable. So the properties that I bought 10 years ago are very stable. The stuff I bought two to three years ago, very unreliable. So over time, your properties will stabilize.
Another thing is that asset classes within real estate tend to operate differently. Short term rentals, super volatile. The cash flow is not something that you can just depend on. Single family homes in my experience, or even small multifamily tends to have things break that you haven’t budgeted well for, but really big commercial multifamily, much more reliable cash flow.
When you hit this point where you have, I can’t remember the fancy economic term, but basically you have a scale, like you have one handyman that can do the work for all of the properties and you budgeted that person’s salary into all the money that’s coming out of that apartment complex … Someone’s going to remember this and they’re going to leave it in the comments, what the economic term I’m trying to remember is … it becomes easier to predict what your cash flow is going to be versus when something breaks and you got to pay 500 bucks for a handyman to figure out how to fix the plumbing or whatever the case may be, or rip apart the foundation to get to something that has to be repaired.
So a good strategy could be, make money, amplify it through single family investing and then sell it and 1031 into multi-family investing where it becomes inherently more stable. So I like what you’re thinking, because you’re thinking about how do I turn something unreliable into something more reliable, but there’s many different ways you can go about doing it.
For everybody listening, just consider that buying that duplex and holding it forever might not be the most stable way to build cash flow, but that doesn’t mean you shouldn’t do it. You should absolutely look at doing that, building equity, then moving that equity into more stable ways of reliable income, if you’re going to retire and stop working.
All right, thank you everybody for your time, for your attention, and for listening to the show. I know that there’s many people that all claim to be real estate experts and gurus, and that you could be listening to any of them, but you’re here with us at BiggerPockets. And I really appreciate the fact that you’re trusting us and me with your real estate investing education.
I would highly encourage you to go to biggerpockets.com/david and submit a question for me, just like all of our awesome guests have done today, so I can answer it on this show, as well as leaving us a review wherever you listen to your podcast, and leaving a comment on YouTube.
If you’d like to follow me, I am davidgreene24 on Instagram, on Facebook, on LinkedIn, on Twitter and everywhere else, and I’m David Greene Real Estate on YouTube. Thank you guys very much. Check out another show and I’ll catch you on the next one.

Ashley:
This is Real Estate Rookie, episode 196. My name is Ashley Kehr, and I am here with my co-host Tony Robinson.

Tony:
Welcome to the Real Estate Rookie podcast, where every week, twice a week, we bring you the inspiration, information and motivation you need to kickstart your real estate investing career. I love Saturdays because we get to switch things up a little bit. Right? We get to dive into some of these questions. But before we do, Ashley, just tell us what’s new with you. What’s going on? What’s new in your neck of the woods?

Ashley:
Not much actually. The last couple of episodes we talked about my knee surgery. We talked about a new deal I’m looking at. So yeah, really nothing else new that I can think of. What about you, Tony?

Tony:
Yeah. For me, we actually just lost out on a property. It was in a new market that we’re looking at and we put up $20,000 as our EMD and with everything that was going on, it’s new construction and the way they set it up was that you had to get a loan to purchase the land and then you had to get a secondary loan to cover the construction. So it was really weird how they had it set up, but with everything we had going on, we totally dropped the ball on remembering that we needs to get this financing for the land because we got this under contract, I don’t know, maybe seven months ago and now it’s like, “Hey, it’s time to start.”

Tony:
It was this mad ground to try and find a lender, but the lender that the builder recommended didn’t want to lend to us because they said that we were overexposed for short-term rentals in our portfolio. They’re like, “This is for someone that this is their first short term rental X, Y, Z,” and it was really weird. We went to three different lenders in that same city and they all said the same thing, but I guess what’s happened is that in that town, in that region, there’s been just this boom of new construction of short term rentals. So I don’t know why, but I guess they feel that there’s less risk lending than someone that doesn’t already have short term rentals. In my mind it would be the other way, because if you have short term rentals, you know what you’re doing.

Ashley:
You have experience, yeah.

Tony:
Anyway, we ended up having to back out of that deal because we couldn’t get the financing in time for the construction start date. Now we’re possibly going to lose our $20,000 EMD, so we’re going back and forth with the builder to see if we can get it back from them.

Ashley:
Okay. Well, first of all, that’s awful. That’s a lot of money to lose, but can you tell everyone what an EMD is? Your earnest money deposit. Explain that, how that process works and why you might not get it back.

Tony:
Yeah. So thank you, Ash, for asking that question. So your EMD stands for your earnest money deposit. So a lot of times when you look to purchase a property, the seller will ask for an EMD, or an earnest money deposit, to show that you have in … even though you’re … let me take a step back. Plenty of people can submit an offer on a property, right? But some people are tire kickers. Some people just want to lock the property up to see what happens. So a lot of times sellers will ask for an earnest money deposit to show how serious you are as a buyer. The way that it works is the earnest money deposit is whatever amount you and the seller agree to. Could be as low as $100, it could be as much as $20,000 or maybe more, and That money gets deposited into escrow.

Tony:
So the seller doesn’t have access to those funds. It’s held in escrow. Then typically there’s a certain point in your contract where your earnest money becomes non-refundable, which means that if you back out of the deal, for any reason, you don’t get that money back to you. It actually goes to the seller. But if you cancel before that date, then you as the buyer get your earnest money back. So we are in a situation where our expiration date for the earnest money deposit passed. So it was considered hard, right? So your money goes hard, your EMD goes hard after that expiration date. So now it’s really up to the sellers to decide if they want to be nice or not, or if they just want to keep our $20,000.

Ashley:
Yeah. I recently did a $50,000 earnest money deposit on a property. They originally wanted $300,000 as the earnest money deposit.

Tony:
Isn’t that crazy?

Ashley:
So we settled on a 50 and what happened was it was a bank that was selling this property and they just wanted to push, “We want this a quick close,” blah, blah, blah. So they’re like, “We won’t accept any more than 30 days due diligence. No more than that.” This was a massive property with so many different avenues. So what my attorney did when he structured the contract is he said, “Okay, the 30 days actually starts when you send us the title work.” So that way it actually gave us so much more time. We ended up taking two months and we still had more time locked because the bank’s attorneys just took so much time to get the title work done and sent it to us.

Ashley:
Then ended up backing out that deal because of multiple issues, but we were able to get our deposit back pretty quickly. That was such a key thing that my attorney did was put in these little loopholes where it’s on [inaudible 00:05:16], “Yeah, we’ll take 30 days due diligence, but that time isn’t going to start until we have all of the information we need to actually understand the property.”

Tony:
Yeah. We did something similar for our Big Bear hotel where we set it up to where the due diligence period didn’t start until we got all of the financials back from the summer. So that ended up giving us an extra, I don’t know, I think 14 days or something like that. So there’s some ways you can structure it. But same for us in that deal, we put up $50,000 in EMD as well and that went hard a little over a week ago. So now for whatever reason this Big Bear dude doesn’t work out, we’re out 50 grand. So we’ll see.

Ashley:
It will, though.

Tony:
Cool. Fingers crossed. We’re making good progress. Awesome. But today’s question actually comes from my DMs and if you guys ever want to get your question featured on the show, you can go to the Real Estate Rookie Facebook group, the Bigger Pockets forms, or you can slide in mine and Ashley’s DMs. We pull questions from all those places. But today’s question, I actually don’t know who this came from. So I apologize in advance if you hear this question and it sounds familiar, because I just took a screenshot of the question, but I forgot to get the person’s name. But it says, “Hi, Tony, I need your advice. I have a good chunk of equity on my home. Do you think it’s why to pull some cash from my home to purchase an investment property? If not, what do you suggest I do with that equity?” Ash, why don’t you kick us off here? What are your thoughts on this equity piece?

Ashley:
Okay, well we know interest rates are going to raise two more times this year. So if you are going to pull any money out, now is the time to do it. So you basically have two options. The first option is you can actually go and remortgage. Get a whole new mortgage on your property. So I would look at what is the current interest rate on your mortgage now. Can you get a lower interest rate if you go and refinance right now, or is it going to be higher? So if it’s going to be in higher interest rate, don’t remortgage, keep the mortgage that you have on the property. Then look at a line of credit. So pulling out a home equity line of credit on your property. Since it’s your primary residence, you’ll usually get good terms, a good interest rate. Some banks will actually do a promotional period where maybe for the first six months, the first year you’re only paying 1.99% or 2.99% on that money for those first six months and then it actually goes variable.

Ashley:
So I would definitely look into a line of credit or to remortgage and refinance and pull that money out. I think it also depends what you’re using the money for too. So if you are going to purchase property and you’re maybe going to flip it, so you’re going to make your money back right away, or you’re going to bur it where you’re going to go and refinance that money and pull it back, then you want that line of credit so you can just pay the line of credit back and then you got that money again to go do the next deal. But if you were looking for a down payment maybe, or maybe you’re looking to just purchase a property in full and with no expectation of going and refinancing anytime soon, then I would go ahead and remortgage the property instead of pulling out that line of credit.

Tony:
Yeah. Ashley, I think you hit everything, just like the nail on the head with everything you said. I probably wouldn’t refinance in today’s environment, assuming that you have a better interest rate. I know for us, when we bought our primary residence, 3% was our interest rate. If we tried to refinance today it’s two and a half points higher. So it wouldn’t make sense for us to refinance our mortgage. So I think your point of if your plan for the capital is something that’s short with a quick turnaround time, like flipping, then a line of credit probably makes the most sense. Honestly, that will probably be my approach right now anyway.

Ashley:
You can get a better loan to value too, because a lot of times they’ll lend you up to 90%, 95% of the loan value. So say your house is worth a 100,00 and you have a mortgage of 60,000 on the property already. They’re going to give you a line of credit for that other … what is that? 35,000? The math right? 35,000, give you a line of credit up to that 95% loan to value. So that’s definitely an advantage too, is that doing a line of credit you’ll be able to pull more money off. You can also do a home equity loan where you’re actually pulling the money out, they’re going to amortize it for you over so many years, you’re going to get a fixed interest rate and then you just make those monthly payments.

Ashley:
So it’s almost like a second mortgage on the property where the line of credit, the money can just sit there on the line, you can pull it off as needed and you’re only paying interest when you use it. Then if you pay the money back, the money is still there for you to pull off at certain times. So you just have to watch when that line of credit expires, when the bank can say, “You know what? We’re actually closing down your line of credit.” I remember during COVID, a lot of people started pulling all their money off their lines of credit, afraid that the banks were going to shut them down and close them off. So they were trying to pull their money off before the bank said, “You no longer have access to this money.”

Tony:
Yeah. Ashley, I think you literally said everything that I was going to say, so I don’t, I don’t think I have a whole heck of a lot more to add. Again, sorry that I didn’t grab your name, but hopefully whoever asked this question, we gave you a good response and now you’ve got some ideas or at least some flexibility in terms of what strategy you can use with that equity you have sitting in your home.

Ashley:
Tony, usually if I pull someone from my DMs, after we record I’ll send them a message saying, “Just so you know, your question was answered on this episode.” So you can send that to them so they can watch you forget their name.

Tony:
I apologize in advance.

Ashley:
Thank you guys so much for listening to this week’s Rookie Reply. I’m Ashley @wealthfromrentals and he’s Tony @tonyjrobinson and we’ll see you guys on Wednesday.

Mindy:
Welcome to the BiggerPockets Money Podcast show number 314, Finance Friday edition, where we interview Rebecca and talk about tracking actual spending, generating income outside a traditional 9:00 to 5:00 and finding your true monthly needs.

Rebecca:
I’ve learned that the money’s out there, you can get it. This job that I’ve had for three and a half years, that’s the first time I’m ever doing it. When I walked in the door three and a half years ago, I had no idea. I didn’t even have a background in it. But up until this point, I was just kind of throwing all this money away. I didn’t know what to do with it. So now that I’m on this track, now that I’m thinking about it in a different way, 10 years ago, if you would’ve said that, I would have been like, “Eh, that’s too far in the future.”

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and with me as always is my goal reframing cohost Scott Trench.

Scott:
That’s right. If the goal’s too far away, just move those goalposts closer to you.

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

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business, or simply establish clear goals that give you more flexibility, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I love today’s guest. She is in a great position financially. She just wants to speed up retirement. So we have a lot of fun talking to her about her different options today.

Scott:
Yeah, I mean, we’ve had a number of guests recently who kind of all have a similar profile in the sense. There’s all a ton of differences, so I think we had really unique show today, but the similarity or the theme that I keep harping on is this concept of you can’t have all your wealth in retirement accounts and home equity if you want flexibility before traditional retirement age. You must do something different there. And that means hard choices of capital allocation that are not going through this 401(k) and IRA ladder and to your home mortgage payment. It means an intentional shift to putting that money elsewhere and/or redeploying what is likely to be a massive amount of home equity for a lot of listeners into something that can deliver that flexibility. So hard choices. But I think you have to confront that problem, frame your goal very clearly and say, “What do I want?” and then begin actually making those actions towards it even at the cost of perhaps some more tax advantaged wealth at the end of the journey 25 years from now.

Mindy:
It’s all personal. All these options are personal to your journey and your specific position, but there’s a lot of suggestions here, Scott, today. I specifically like you’re reframing goals, conversation that you had with her. You took her $7,200 monthly passive income goal down to $4,000 in about 45 seconds. And that was, I think, hugely helpful to her. I think it’ll be hugely helpful to other people that are listening to this show who may not realize why they have chosen their specific monthly goal. “Oh, I need this much money in income. Why?” Follow Scott’s steps and what he was talking to Rebecca today, follow his suggestions and see if you can’t reframe and cut down your goal and get where you really need to be.

Scott:
Yeah. It’s this paradox, I think, where if you can cut the goal dramatically, if you can spend $2,000 a month, which was something that I was able to do when I was starting out because I was house hacking and I had a paid off car and all this other stuff, I’m spending very little on my lifestyle and now I’m financially free in some very lean sense. Well, now you can begin piling assets on top of that. And then things begin to expand, right? You have the option to work or not work or do all these other different types of things, but you can also just pile assets on top of your position. And then if you want to spend $3,000, $4,000, $5,000, $10,000 a month, you just wait until your asset base grows large enough to be able to do that.

Scott:
But if you can make the sacrifice now or reframe the game, the rules of the game by house sacking or whatever it is to lower your expenses, achieve financial freedom, realize those benefits and then pile on the assets from there, you might be able to get some huge benefits at the… You can’t have everything. You can’t spend $7,000, $8,000 a month and get to financial freedom in 15 years and have it be totally passive in Rebecca’s situation. But you can reframe the goal, make a huge amount of progress in one year, dramatically jumpstart your savings rate, have introduce a lot of flexibility, and then begin piling assets on top of that give you more and more optionality each passing year. That’s an achievable goal.

Scott:
I think that folks kind of struggle to see that if they can make those changes that are unusual like the house hack in the short run and then use that to leverage a lot of wealth later on, you can have essentially all of the things that the huge amount of passive income and the life flexibility and not have to work down the line. You just can’t have it all up front. So you got to prioritize.

Mindy:
Yes. Oh, I could not have said that better myself so I’m not even going to try. And now let’s make our attorney happy by saying the contents of this podcast are informational in nature and are not legal or tax advice. 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. Also, let’s bring in Rebecca.

Mindy:
Rebecca and her boyfriend make more money than they spend, even after contributing to retirement accounts and brokerage accounts. So that’s good, right? They also have a big challenge and I quote, “We spend a ridiculous amount on unbudgeted things. As of right now, spending is trending downwards this year. But last year we spent almost $40,000 on grocery, Amazon, eating out, Amazon, travel, Amazon, pet care. Did I say Amazon?” So Rebecca, I think I see an area to work on even before we start talking, but welcome to the BiggerPockets Money Podcast. I’m very excited to talk to you today.

Rebecca:
Good. Thank you so much for having me.

Mindy:
Okay. First off, yes, Amazon, everybody should cancel their Amazon Prime account because it is way too easy to click buy. I mean, they set it up on purpose to make it so easy to buy so you would continue to buy. However, it’s so easy. I don’t have to go out. It’s so easy to just buy. So it’s hard to cancel that. I understand where you’re coming from. I don’t want to see how much I spend on Amazon so I just don’t look at it.

Rebecca:
I tried not to.

Mindy:
What a great plan. No, it’s a terrible plan because I have no idea how much I spend on Amazon. So I am going to give myself a research opportunity, which is going to make my heart break and look and see how much I am spending on my Amazon purchases. I’m going to ask people in our Facebook group, which you can join at facebook.com/groups/bpmoney to ask. I’m going to challenge them to look and see how much they spend in their Amazon accounts as well. And I’m an Amazon shareholder so I don’t want anybody to cancel their account, but also I care about people more than the bottom line. So if you’re spending a lot on Amazon, a really great way to stop is to cancel your Prime account because there’s this thing in your head, you’re like, “Oh, it’s free shipping. I can just click buy.” But if I have to pay for shipping, I’m going to say, “Maybe I don’t need it that much.”

Mindy:
So I don’t know. Maybe other people have that same barrier. Maybe they don’t. Maybe I’m just cheap, but I don’t want to pay for shipping and Amazon Prime makes it super easy. So I’m going to go. I will let everybody know. When this show airs, I will let you know how much I am spending on my Amazon Prime. I now have a little bit of heart palpitations saying that because I’ve got to go look that up. Okay, this is not about me. This is about you.

Rebecca:
Great.

Mindy:
Let’s start over. Rebecca, welcome to the BiggerPockets Money Podcast. How are you today?

Rebecca:
I’m doing so good. So good.

Mindy:
Let’s jump into your finances, not mine. And let’s look at your income and where it’s going.

Rebecca:
Okay. So I make about $100,000 a year as a salary W-2 income from my job. I work in local government. I also have a second job as a contract technical writer. That income varies significantly between $35,000 a year and $100,000 a year. Now, something that I may have a question later on is I don’t budget for that income. So all my expenses are covered by my first W-2 salary job.

Mindy:
What do you do with that income? The contract income?

Rebecca:
Well, with my local government job, I have a 457 plan that I’m able to max out. With the second job, I have a 401(k) and I also max that out. I actually just maxed it out on Friday, was our final payday for… Yay.

Mindy:
Yay.

Rebecca:
So up until this point, those paychecks have been, I want to say relatively small, but going forward, they’ll be bigger. Usually, I take about 75% of that and stick it into our brokerage account. And then I’ll use the rest for unbudgeted, I guess, sinking funds. Like we need a bathroom remodel, I need new sliding doors on the back porch, stuff like that that I just don’t want to finance, then I’ll just have the cashing around magically.

Scott:
After working your second job, magically your money appears.

Rebecca:
Yeah. Exactly.

Scott:
I love it. Awesome. Any other sources of income?

Rebecca:
Yes. My boyfriend does have also a job with local government and that brings in about $30,000 a year.

Scott:
Awesome. So what’s coming in after tax?

Rebecca:
After tax, let’s see, and after my 457 plan, I bring home about $4,430 a month. And then he brings in about $1,880 a month. So total about $6,310.

Scott:
Awesome. Plus about let’s call it 40 grand in after tax income from your second job?

Rebecca:
Yeah, we can call it that.

Scott:
Which varies considerably, I think you discussed.

Rebecca:
Yes.

Scott:
Awesome. And where does that money go? What are you spending it on besides Amazon?

Rebecca:
Right. Well, budgeted things go to car insurance. That’s about 120 a month. We do have a Wyndham time share I got roped into about 10 years ago and it’s about $50 a month.

Scott:
Nice.

Rebecca:
Mortgage currently is $1,400 a month. I suspect that will go down a little bit next year, because as I mentioned before, my homeowner’s insurance went up, it doubled. So not only did I have to pay for what’s coming up, but I had to make up for that shortage. So I would guess it’ll go down a couple hundred bucks next year, but not significant. Utilities, which I would include water, trash, electric, internet, and then things like Netflix, Hulu and Amazon are about $475 a month. Cell phones, $125 a month. And then what I call luxury items, which are, we have a house cleaner that comes twice a week, lawn care, and a pool guy, and that’s about $325 a month.

Rebecca:
And then we have the big expense of groceries/eating out/gas and then what we like to call fun money, and that’s $1,800 a month. And those are, I guess, our lifestyle expenses. And then I have my monthly investments that come out after tax, which is $500 in an IRA for both of us, so $1,000 a month. And then a brokerage, $500 a month. And then I also budgeted $100 a month for crypto. Sometimes I do it, sometimes I don’t. If I don’t, it goes into the brokerage.

Scott:
Awesome. So if I’m doing the math here, we’ve got $6,300 in income between you and your boyfriend each month and $4,300 going out every month on average, obviously with big fluctuations in the variable expenses being a major part of that. And that leaves you a $2,000 surplus, which generally gets invested in a combination of brokerages, IRA, et cetera, not to mention that pretax you’re also contributing to your 457 plan. Is that a good synopsis of the situation?

Rebecca:
Yes.

Scott:
Awesome. And then on top of that, we’ve got an unknown factor about the tens of thousands of dollars you’re bringing in after tax from your second job.

Rebecca:
Correct.

Scott:
So we have a really strong cash generation situation here. If we factor out all those investments, we’ve got $2,000 a month coming in steady state after tax and 457 contribution. So that’s $24,000 a year. And we’ve also got about $30,000 to 40,000, I’m calling it $40,000, in additional cash coming in from your second job. So that’s a $64,000, $65,000 per year that we got to play with in order to build wealth.

Rebecca:
Yes, that sounds great.

Mindy:
Okay. So I’m seeing that she’s got all this income. I think that her expenses or her spending has some leaking in it. If you’re not seeing this giant surplus every month, where’s it going? And there is $500… What is this? $500 to the IRAs and $500 to the brokerage. So that’s $1,500. And then an additional $100, but I think that there’s more money available that is just kind of-

Rebecca:
Yes.

Mindy:
… not being accounted for.

Rebecca:
So with that second job that I have, as I mentioned, it does have a 401(k). So up until about this point, about 50% of my money has been going into that as well. And now, I mean, you also made a great point, up until this point I’ve been having about $2,400 a month extra coming in, but I haven’t been saving it. I really am not sure where it’s going.

Mindy:
Okay. So there’s the first research opportunity, is to find out where that’s going and I… What Scott?

Scott:
Well, it’s going to the IRAs and the brokerage accounts.

Rebecca:
No, this is on top of that.

Scott:
Top?

Mindy:
That’s on top of that.

Rebecca:
Yes.

Mindy:
So what I find, remember that A word that I said in the beginning of the show, in my little diatribe or my very lengthy diatribe? I really don’t want to see how much I spend on Amazon every month, every year. But I think that you would be surprised at how much is still going there even when you’re conscious of it. And I started tracking my spending. And you can follow along at biggerpockets.com/mindysbudget. You can watch me really not be doing it right, because everything is a guess. I mean, all of this, even with all of my years of financial experience, it’s still just a guess where my money’s going. And what I have found over the month of May, I actually, wasn’t writing down all of my expenses. So now at the end of May, I have to go back and enter them into the spreadsheet.

Mindy:
I have no idea how much I was spending, but when I wasn’t tracking it, every single time I made a purchase, I didn’t even have a vague running total in my head. I was swiping my card a whole lot more in the month of May than in previous months when I was far more conscious of having to type in the amount that I’m spending. So on the one hand, it’s super tedious to sit there and track your expenses so granularly like I do. But on the other hand, it’s so eyeopening when you do it. Halfway through the month, you’re like, “I’m already in the red in nine of my 10 categories. What is going on with me? I know I want to spend less. I have to make a conscious decision to spend less.” But it’s a work in progress too. Some of them, I’m budgeted too low and I need to realize that I’m spending more money.

Mindy:
If you do enjoy going out to eat, then don’t cut that. You have the money to do that. But every dollar you spend going out to eat is a dollar that you can’t put into your house or save for a down payment on a new house, or do spend in a different way. You can only spend a dollar once. And I don’t want anybody to send me an email about how you can borrow and spend it multiple times. Send that to Scott. He loves it. [email protected] You just have to be conscious of that. I think a lot of people, when you’re not tracking every penny, it’s very easy for lots of those pennies to just leave your wallet.

Scott:
Well, let’s keep rolling for a second here and go through net worth and then your goals. And that will lead us to what we can do about this situation. It could be that your spending is where we need to focus. It could be that there’s other areas we need to focus more on. My guess is spending and getting control of your dollars and having a very clear understanding of what’s coming in, where’s it going, how’s it flowing through your system is going to be the 80/20, at least in the short term here, but let’s kind of press on and make sure that’s the case before going there. What’s your net worth and where does that money go?

Rebecca:
All right. So let’s see. I’ve got a little list here. I guess I’ll just give you number figures. We got about $24,500 in a joint brokerage account, $7,000 in a regular savings. And that’s just for, I guess… I’m not sure what that’s for. But then I have $10,000 in a high yield savings account as a designated emergency fund. My boyfriend has an inherited IRA at $135,000. He’s also got the FRS investment plan, which is a defined contribution plan and it’s locked at 3%. There’s about $5,500 in there. My 401(k) has 56,000, about 3000 in crypto. His IRA has $13,000 and that’s a Roth. My Roth has $16,000. My traditional has $1,500 and then my 457 plan has $34,500. So that’s about throughout $306,000. And then-

Scott:
So of that $306,000, I’m counting that about $40,000 of that is not in an IRA. Is that right? Or similar type of vehicle?

Rebecca:
Yes. You’re talking like savings and brokerage type?

Scott:
Yes.

Rebecca:
Yes. Yeah, you’re correct.

Scott:
Okay, great. So we have $300,000 in net worth in these investment accounts, $40,000 of which is either cash or after tax brokerage and $260,000 of which is in various retirement accounts?

Rebecca:
Yes.

Scott:
And you consider your finances to be joint with your boyfriend?

Rebecca:
And then I have home equity. It’s about $174,000. So I guess that brings us to $480,000.

Scott:
Okay. And what are your goals? What can we help you with today?

Rebecca:
I would like to… Just a quick short term goal would be to save $80,000 this year. I think we’re right around $37,000 so far. But my ultimate goal is to have some passive income of about $7,200 a month. So I guess one of my questions is, can I do this without real estate? Do I need to start thinking about that? But mostly, I need a real fresh set of eyes on this. “Why aren’t you doing this? It looks like you do well to do A or B.”

Scott:
Awesome. So you want $7,200 per month in passive income as soon as possible and you want to save $80,000 this year?

Rebecca:
Yes.

Scott:
That’s what we got. Can I ask how old you are?

Rebecca:
39.

Scott:
And your boyfriend’s around the same age.

Rebecca:
He’s a little younger. 35.

Scott:
Okay, awesome. Well, great. I think we can certainly work with that and begin going there. With the passive income, what’s the goal? What would you do if you had the $7,200?

Rebecca:
I would not work anymore. That would be our PIE income.

Scott:
Okay. So you want to retire essentially as soon as possible from work?

Rebecca:
Yes.

Scott:
Love it. Let’s think through this the first. I want to make an observation for you and get to spending. You may have heard me say this before, but of your $480,000 in wealth, $40,000 of that is accessible and relevant to your goal here of achieving financial freedom. The other $440,000 is in retirement accounts and home equity, which is not going to help you generate that passive income until you reach retirement age. And from the way you phrased your goals, I can infer that you’re not looking to wait until retirement age to retire. You want to retire much earlier than that.

Rebecca:
Correct. Yes.

Scott:
So I would noodle on that and say… Let’s start with this. What does a portfolio that generates $7,200 per month in passive income look like at the end of the day? What does that mean to you?

Rebecca:
I guess I’m not sure. Just something that I don’t really have to work for. It just kind of shows up, if that makes sense.

Mindy:
Well, that’s the definition of passive income, right? I want to look at your second job. How much time does it take you to generate that $35,000 to $100,000 a year?

Rebecca:
It depends on the contract. So right now I’m doing a contract. I make $100 an hour, but I am capped at 20 hours a week. I don’t mind. I love the work. A lot of people are like, “How can you work 60, 70 hours a week? And I’m like, “Well, I work my government job and then I come home. The second job is kind of what I do to unwind.” So that works out well for me.

Mindy:
Could you continue to do that to generate a portion of this income? It’s a lot easier to work when you like what you’re doing.

Rebecca:
Yes. Yeah, I have thought about that. I think I would actually prefer to do that.

Mindy:
Okay.

Rebecca:
I mean, I know I said I would want passive, but I mean, realistically, if I know myself, I would keep doing it.

Mindy:
Okay. So if you are in a position where you’re generating, let’s see, $100 dollars an hour on this contract, can you take multiple contracts at a time?

Rebecca:
No, because it is a W-2 position and they kind of control what I do. Now I could go out into like what they call the contractor pool and take on multiple projects, but I’m not sure I would really have fun doing that.

Mindy:
Okay.

Rebecca:
But I could try.

Scott:
I want to stay focused on the goal here, because I think you’ve created a number there and don’t really have a good framework for how to achieve that. And so, because of that, I think we have an opportunity, with your permission, to reframe that goal to something that is more tangible and that can be achieved in a three to five year period that gives you more optionality. If you’re going to go by the 4% rule and you want to achieve $86,000 in passive income per year, then that says you need to build a net worth of $2.1 million, right? That is a far way off even saving $80,000 per year. But we can get to something that achieves the result of life flexibility and the ability for you to leave your job and have optionality far earlier than that if we back into a reframing of that goal, right? And we think about how to access more of your net worth in the near term than what would currently be allowed with it all being trapped in retirement accounts and home equity here.

Scott:
So I think first of all, if we go back to spending, why do you need $7,200 a month? How do you come up with that number?

Rebecca:
I kind of just took what we spend now on, I guess, a normal month, including all of my extras. And it’s between $6,000 and 9,000. And I was like, “Okay, I don’t need to be buying all this ridiculous stuff.” So I just settled on $7,200 as a happy medium in there. There’s no real science behind that number.

Scott:
Okay. You didn’t list any car payments. You have paid off cars?

Rebecca:
Yeah. We have one vehicle. It’s a 2015 Mazda. It’s paid off. And then with my job in local government, they provide me with a vehicle and gas. So I’m kind of lucky there.

Scott:
Okay. We will, I think, spend a large amount of time tackling the variable expenses, but let’s go back to housing, which for you is $1,400 a month, it may vary when you get your payment reset from the insurance thing. And we’ve got the utilities bills, that’s $1,800 a month. If we were able to drastically eliminate those, for example, now you don’t need $7,200 anymore. And if you’re able to cut out a bunch of that variable expenses from spending from Amazon and get that down, I mean, you could conceivably get your spending down to $3,000, $4,000 a month if we were able to pull those numbers down, is that right?

Rebecca:
Yeah. Seems to be that way.

Scott:
Okay. So now you don’t need $7,200 in income. Now you need $4,000 in income per month or, or $5,000. Maybe you need $2,000 in passive income and you’re like, “Okay, I cannot retire, but I can leave the main job and just do the side hustle, and that will more than cover my expenses,” right? This is, I think, the power of reframing the goals around what I’m hearing is flexibility. You want the option to leave your job at an early time period and you want passive income and flexibility to enable that to happen as rapidly as possible and give yourself lots of options downstream. Is that right?

Rebecca:
Yes, that sounds great.

Scott:
Let’s start with what I call financial runway. Right now you have $17,000 in cash. Is that right?

Rebecca:
Yes.

Scott:
So what happens if you leave your job right now? How long do you run out of, before you run out of cash?

Rebecca:
It depends. If I lost both jobs then about three months.

Scott:
Yeah. I think that’s where I would start. I think you’d feel a lot better if you had closer to six to 12 months in an emergency reserve. You earn more money per hour at your side hustle than your main job. That’s exciting. Something’s there. I think that a runway of putting that cash towards, let’s call it $30,000, $40,000 in that emergency reserve, is going to be really powerful for you because you have the side hustle opportunity. And because it sounds like you’re doing a lot of home improvement projects as well with that. So I don’t think you have enough cash on hand given the opportunities that I’m beginning to smell in your circumstance. What do you think about that?

Rebecca:
I agree with that 100%. Definitely the $10,000 in the emergency fund, it doesn’t make me feel warm and fuzzy. I would feel better just with the emergency fund closer to $15,000 or $20,000. And then maybe having an additional $15,000, $20,0000 and something else.

Scott:
Yeah. I would think about “How big does that emergency plan have to be for me to feel comfortable leaving my full-time job for six months to a year to pursue this side hustle?” You don’t actually have to do it, but I think if you build your position and concentrate the next $40,000 in cash that you’re generating primarily going towards that goal, then things will light up for you in a way that they wouldn’t for somebody. I would not be given the same question, the same thought process, guidance, to somebody who did not have a big side hustle that was so lucrative. But I think in your situation, that’s going to be really powerful.

Rebecca:
Okay. No, that’s a great, great plan.

Scott:
Okay. So second, let’s talk about your home… By the way, that will come at the expense of continuing to stuff dollars into these IRAs. You’re doing this approach where you put a little bit in this one, a little bit in this one, a little bit in this one, a little bit in this one, and then you have very little cash and everything else is going into the mortgage payment and these other expenses. Instead, I think you need to prioritize what you think the best opportunity is. And so far, we have lots of discussion left, but so far it sounds like we’re thinking maybe stuff it into the savings account or the emergency reserve and be willing to use that for some sort of opportunity downstream. So that means you’re going to have to not contribute to all these other areas and prioritize that one until you get to your first goal. But I think that will open up flexibility and options for you. So I would consider that.

Scott:
Second thing. Let’s talk about home equity. Where do you live and how much do you like your house?

Rebecca:
I live in South Central Florida. I like the house. It’s small. It’s a little small for us. I don’t know. I’m open to moving that’s for sure.

Scott:
So you have 174 grand in home equity right now, and that’s costing you $1,400 a month to maintain. I would consider, I would put on in there the house hack, right? Is there a duplex? Is there a place that you could live with… We just interviewed a couple from… Where were Andrew and Hailey from, Mindy?

Mindy:
The east coast?

Scott:
Well, they’re from Florida as well. I think they’re on the west coast of Florida, if that makes sense.

Rebecca:
Okay.

Scott:
They’re in a town where homes are $300,000-ish and they’re able to buy properties with excess units and Airbnb them. And that is more than covering all of their housing costs while they live in a fairly nice unit and rent out the other units. I think you could either consider that long term or short term. That’s super powerful. And if you want to get lots of flexibility very quickly, you can take that $175,000 in home equity, cash out a ton of that, use that to beef up your emergency reserve for example. Buy one of these properties, maybe even a second rental property within six months or year following that. And now you’ve got a potential way to live for much cheaper on average. You’re going to have to do some work managing the Airbnb or the tenants on the side, but that might be a way to jumpstart your rental property portfolio if you’re interested in doing that.

Scott:
You may also find that you’re able to live a very comparable living arrangements depending on how you want to do it. You obviously would generate less income or have less of an advantage if you buy a really nice place and live in the nice unit, versus if you buy a place that has more income potential and live in the garage, depending on your preference there. But I would put that bug in your ear and think about, hey, that’s a big lever in your situation because right now we don’t have much to play with in the form of cash or your IRAs. You can’t do much with those. But we can do something with the home equity. That’s a strategic move you could make in the next six to 12 months to redeploy what you do have.

Rebecca:
Yeah. It’s definitely something to think about. I’ve been in the landlord business before. I’m not opposed to getting back into it. I guess I hadn’t really thought about it too much just because of where the housing market is right now. But that’s pretty much the only reason I just…

Scott:
You’re already exposed to the housing market in a big way with your current property, right? So the disadvantage to what I just said is you’re going to trade your current interest rate for a higher one, right? So it’s up to you to kind of determine, is that trade off worth it because of the income potential I can generate from these properties? But you’ll have the same amount of wealth in the housing market before and after the transaction if you buy a property that’s around the same value as your current home, for example.

Rebecca:
Okay. Yeah, that makes sense.

Scott:
So the risk profile is the same except for the higher interest rate, which you’ll have to grapple with. That’s a challenge for everyone.

Mindy:
I want to make a comment about passive income. There is this idea that passive income means absolutely no work on your part whatsoever. You have two jobs. If you had nothing to do all day, you would be bored. Sitting here for 25 minutes talking to you, I already know this. I just got back from a weekend retreat called Camp Mustache. And all of those people are on their path to financial independence or have got into financial independence. And none of them sit around doing nothing all day long.

Rebecca:
That’s a good point.

Mindy:
That isn’t what they want to do. If you enjoy this technical writing at $100 an hour, that just seems kind of like a no brainer. No, it’s not passive income, but it’s also you’re limited to 20 hours a week. That’s a couple of really long days. And then you’ve got the whole rest of the week to just lay on the beach and do nothing.

Rebecca:
Yeah, that’s exactly true.

Mindy:
Or would you find other ways to fill your day? Having an Airbnb where you are the turnover. Hands down the hardest part of an Airbnb is finding somebody to consistently clean to your standards. People who rent Airbnbs really expect absolutely pristine. And it can be difficult to leave that up to somebody else especially if you’re a control freak like some of us on this call. But it also doesn’t take a ton of time. You’re not doing it every single day. Even if you had a property that didn’t have a minimum, you would still have people who come and stay for three or four nights, and then maybe you would turn it over once or twice a week. That’s something for you to do. You’re going to be working and generate, like filling your days with things.

Mindy:
And I’m not saying this to you, Rebecca. I’m saying this to anybody listening. I think it’s a little bit disingenuous to think that once you reach financial independence, you are only going to have passive income if you’re never going to do anything else. And you don’t get to this place and then just be like, “I’m just going to do nothing for the rest.”

Rebecca:
That’s a good point.

Mindy:
Your drive, your body, your mentality, your makeup is not going to allow you to just sit around and do nothing. So if you like doing this technical writing and it pays super well, pick and choose the jobs that you want to do. It sounds like $100 an hour is the going rate that you make. And they’re capped at $20 for all contracts, or just the one that you’re currently working on?

Rebecca:
The one I’m currently working on is $100 an hour because it’s California money.

Mindy:
Okay.

Rebecca:
But it is capped at 20 hours a week. If I were to, say leave this company and go out on my own, I could probably charge in general, $50 to $75 an hour outside of California.

Mindy:
Okay. So step number one is focus on California jobs.

Rebecca:
Yes.

Mindy:
Step number two is double up on those California jobs. Go out on your own and get those California jobs. I like what Scott did. He took your desired amount and your monthly and reframed it and cut it in half for you in 45 seconds.

Rebecca:
Yeah, that’s pretty-

Mindy:
So good job, Scott.

Rebecca:
Thanks. That’s pretty awesome.

Scott:
Yeah. Well, yeah, I think that if you say, “Great, I can move to a location that I want to move to and buy the same amount of house and get income for it.” You might have a similar lifestyle, or even an improvement depending on how you do it, and now you’ve knocked that down by $1,400 bucks if you could live for free for example with an Airbnb, right? And that just dramatically accelerates this position. So I think that’s where you can say, “What do I really want here?” I don’t think you want $7,200 in income. You want optionality to leave your job as soon as possible. And then you want as much passive income as you can possibly generate over time with that.

Scott:
But there’s a minimum goal here that can be achieved in three to five years with creativity and a little bit of luck versus what you state at the beginning of this is if you save $80,000 a year and you want $7,200 in passive income, and you want to do that through passively managed real estate, long term rentals or stocks, you’re looking at building $2 million in wealth, which is going to take you 10, 15 years. That’s really long to get to what you want, what you really want, I think. And I think there’s other ways to hack around that that are faster.

Rebecca:
Okay.

Scott:
So that’s how I frame that. And the less you spend, the less passive income you generate. One way to think about it is if you go the passive stock bond route, every dollar you spend per year, you got to generate $25 in wealth in order to have the passive income to cover. That’s really hard. So every dollar you cut, reduces that. Every thousand dollars per month you cut in spending is $12,000 per year, times 25 is… What’s 12 times 25? 300 grand in wealth that you need less. So if you can cut $1,000 a month out of your budget, you reduce your journey to financial independence by $300,000 in total wealth.

Mindy:
I’m going to tag on Scott’s rant before we change topics and challenge you to use my spending tracker, emulate my spending tracker, which I got from Waffles on Wednesday. So if you google Waffles on Wednesday mobile spending tracker, Mr. WOW detailed how to do it. If you’re a technical writer, you probably can figure that out yourself. But it’s very easy. You put it on your phone. And it’s really hard to get in the habit of tracking every time you spend, but it will soon become a habit. It’s so beneficial. And almost instantly, you will discover, “Oh, I am spending on Amazon every single day. I am going to the grocery store every single day.” And that was my big one. Whatever it is you’re doing.

Mindy:
And challenge yourself. If you’re going out to eat six nights a week, see if you can do it at five nights a week. Don’t go from six to zero because you’re going to be like, “Wow, my life sucks.” Go from six to five. And then if that’s okay, go from five to four. And if that’s okay, then go from four to three. “Ooh, you know what? Four is really where I want to be.” You’re making good money, but know that every time you go out to dinner is more expensive than cooking at home. And there’s all these trade offs. So it’s not that you’re spending too much money. You’re generating a lot of income. You have this money to spend. You’re not going into debt with the spending that you’re having, but you could live far more frugally and rack up your savings faster by making different choices. And having the information in front of you helps you make those choices a lot easier. You don’t have to give up everything. Scott still goes out for beers and wings.

Scott:
I think that’s right. I think that’s where we’ve now talked about I think the biggest levers in getting you toward flexibility, which is one, emergency reserve. And emergency reserve, I would even relabel it financial runway. I think you need six months plus in your situation because I think that there’s going to be lots of opportunities that are going to light up in front of you when you’re sitting in a really strong, flexible, financial position that you’re going to take advantage of. The second is home equity and getting the fixed expenses down as low as possible. You’ve done a great job by having one car that’s paid off. So you don’t have that in your life. You just have the car insurance payment and then gas for that.

Scott:
And then the next is the mortgage payment. Your cell phones, I assume you don’t want to cut those plans, although you could try the Mint Mobile plan that I think is a lot of people are really powerful. Now we get to what you call the luxury spending, which it includes all of those other items. And so great, now we can attack some of those and think through how we want to handle that. And so let’s go through them line by line. Before we get to Amazon, I want to talk about house cleaning, lawn care, and pool guy, which you said is $325 a month?

Rebecca:
Yes, for all three.

Scott:
Awesome. I like those. And I’d keep them in your spending plan right now. But I would get into a point where I can track my total expenses and I know how much is going to those areas. The reason I’d keep those right now is because your time is worth $100 an hour, $50 to $100 an hour. So you can hire out, I imagine, those services at a lower rate than you currently work for. And you work a full time job and then some, so your time is valuable. And I don’t think that it makes sense to take those into your ballpark right now.

Scott:
If you want flexibility and you want to leave your job, for example, then the value of your time’s going to come cratering down to a large degree. And that would be a time to cut those expenses at that point if you said, “You know what? I can take care of those things in exchange for not having to work anymore.” But you can begin to kind of say, “Okay, that’s a reasonable trade off for now. It may not be later if I wanted to leave my job in three years, for example, on a modest amount of passive income, in a house hack or whatever.” So that would be one thing there.

Scott:
So that leaves us with $1,500 in other variable expenses. I think this is where Mindy’s system can become really powerful for you.

Mindy:
I have a couple of other things I want to talk about. You said your homeowner’s insurance just doubled. I want to tell a quick little story about how I had really low coverage for my automotive and insurance and really low coverage for my homeowner’s insurance, and I decided that now is the time for me to get an umbrella insurance policy. So a friend had just gotten one. She really did a lot of research. She landed on Liberty Mutual. I called them up and I talked to them and they said, “Oh, you know what we can do for you, we can give you more automotive coverage and more homeowner’s insurance coverage and an umbrella policy. Your annual premium is going to be less than what you were paying for your lower amount of auto and your lower amount of homeowner’s insurance.” And I was like, “What? This has to be a catch.” She said, “Nope.”

Mindy:
And I did increase my deductible on my homeowner’s insurance because I don’t really need… I’ve never used homeowner’s insurance in my life, but I’m always going to have it because if my house burns down, I want somebody to come in and rebuild it for me for “free.” I’m doing little air quotes for those listening. But I think that insurance is valuable and I was shocked at how much lower I’m paying now versus before I have the umbrella policy. So I challenge you to get your insurance requoted. You’re in a place where you have to have probably some certain kinds of insurance that other people don’t have. I don’t have to have hurricane insurance over here in Colorado where we have a historically low chance of hurricanes every year, but I do have… Oh, I don’t have flood insurance either. But in another house I had flood insurance because I lived on the lake and it was much more rainy there and there was a real possibility that I would flood.

Scott:
The ocean has to rise 5,280 feet for it to be an issue here.

Rebecca:
Yeah. Right.

Mindy:
And then we’ve got way bigger problems than just having flood insurance.

Scott:
I think that’s right. I think with the insurance, there may be an opportunity to combine those with the car insurance and the home insurance.We are not lawyers. This is for entertainment purposes only of course with all this. But one thought thing to noodle on from an insurance perspective is the concept of, “Do you have assets to protect?” Your assets are almost entirely in home equity, homeowners insurance. I can help with that. And then retirement accounts. You have no other assets outside of that besides the car and $40,000 in brokerage accounts and checking and savings. So I’m not clear on the advantages for you of a big umbrella policy, for example, and other forms of asset protection because you may find that when you self-educate on this topic a little bit more that the retirement account contributions and such are going to be generally more protected from lawsuits and those types of things than other forms of assets.

Scott:
So when you have a huge real estate portfolio that’s in your name or an LLC that you own, or you have other things and you get angry at somebody at the bar and punch them in the face, those can go after you if you don’t have the policies in place, right? Obviously this has not happened, I’m making this up. But that would be a good case for an umbrella policy at that point to help cover some of those higher level things. And maybe not if you punch them in the face. I don’t know if it protect against crimes that you commit. But I think that’s where you’d want to have the umbrella policy I think in place. That’s the thing that can come later. Maybe when you approach $500,000 to $1 million in net worth outside of those areas that you have would be a good [inaudible] to think about.

Mindy:
Yeah. And I wasn’t suggesting that she get an umbrella insurance policy. I was just highlighting that when I had my insurance requoted, I went from two policies, auto and home, to three policies. My auto and home coverage went up, and yet my out of pocket premiums for all three policies is currently less than my out of pocket premiums for the two policies that I had before for lesser coverage. So it was just shocking. I mean, they didn’t raise my insurance rates significantly over time. It was every year it’s like $5. Well, why am I going to go re quote my insurance for $5? Now it’s been a few years and it’s not $5. I think my insurance was $600 for car, and now it’s like $500. So I’m not saving an enormous amount, but I’m saving enough that it makes it worth my while to call up. 15 minutes can save you 15% or more on car insurance. It’s actually not even where I went. That’s where I was. But with all of this other coverage, I’m still paying less now.

Mindy:
So definitely requote your insurance. If you have not requoted your insurance in a year, it’s time to requote. Every year. They have no loyalty to you so you have no loyalty to them. Investment comment, you said that your boyfriend has an inherited IRA?

Rebecca:
Yes.

Mindy:
Are you familiar with the rules around inherited IRAs? There’s a timeline for liquidation.

Rebecca:
Yes. I believe the last week checkout was 10 years. And he got this-

Mindy:
Yes. How long has he had this?

Rebecca:
Since 2020. So only two years now.

Mindy:
Okay.

Rebecca:
I guess… I was just going to say, I think based on her income at time of death, there is no required minimum distribution from my understanding at this point.

Mindy:
Okay.

Rebecca:
But I think that changed.

Mindy:
Do you have a CPA or a tax professional that helps you with your taxes or are you a DIY tax [inaudible]?

Rebecca:
This year was the first year I actually paid someone to do it.

Mindy:
Okay.

Rebecca:
But we’re not married. So that was just for me. So on his end, he’s got a tax guy that I think his dad uses, that he inherited as that as well. So, yeah, hopefully we haven’t had any withdrawals from that account this year, but last year it was minimal and it didn’t really make a dent.

Mindy:
So I just would give him a research opportunity to look into the rules surrounding that, because you don’t want to get to year 10 and say, “Oh, now I have to withdraw all of these funds. And I have this huge taxable event that I wasn’t planning on that I now have to deal with.”

Rebecca:
Yes.

Mindy:
So you have eight years to look into this. Start looking into it now and making plans for it. Maybe keeping it in there is the best choice. Maybe rolling it over is a great idea. I don’t have an inherited IRA, so I don’t have a lot of information about it. I just know that there is a timeline for you.

Rebecca:
Okay.

Mindy:
So I’m going to send you down that rabbit hole.

Rebecca:
I think our unofficial plan is to withdraw the majority of it and do something with it. Be it put it in the brokerage or anything while his income is still low and before we get married.

Scott:
Let’s talk about your incidentals. We said they’re $1,800 a month. And if you pull out the 300 bucks for house cleaning, lawn care, and pool guy, which I think are perfectly reasonable given your income situation, that’s $1,500 for incidentals per month. That is super reasonable at the end of the day. I mean that, like if you say it’s $750 for groceries, then you have $750 between the two of you for life funds stuff and guilt free spending. What is that? That’s 375 bucks per person per month. That would be a very reasonable amount of money to spend, perhaps even on the low end, from a, “Hey, I get to do that guilt free.” I would encourage you to make that guilt free.

Rebecca:
Okay.

Scott:
So I think you have an opportunity to control that grocery budget so you’re making sure that’s going where you want it to go. But at the end of the day, with what I hear here, have that 350, 400 bucks per month be guilt free spending. Just make sure that it doesn’t go beyond $300, $400 per month, which is what I’m hearing might have been happening for the last year or two. So I think that if you can-

Rebecca:
Yeah, that’s the hard part.

Scott:
Great. Maybe it would be helpful to provide a toolkit, some options that could help make sure that that money does not advance beyond $400 a month per person for example. So one simple option would be the money date and the budget, the budgeting process, and saying, “Look, we’re going to have all these other expenses. And then here’s your fund money account and here’s my fund money account. Groceries and household goods are all included in this budget here, but then we are going to track. And all of your spending, boyfriend, I don’t think we’ve said his name yet, is going to be on this credit card. 400 bucks a month. And I’m going to get the same on this credit card, the separate one.” That way, every one of those expenses is tracked by that individual each month in preparation for the money date and you can see where those are going in crystal clear clarity, right?

Scott:
So you can even put a limit on those credit cards that is $500 or $750 or whatever, and then use your debit card or whatever for any bigger purchases if you want to control that.

Rebecca:
Okay.

Scott:
That would be one toolkit for this. What do you think, Mindy?

Mindy:
I think that’s awesome. In fact, I just made a note, “Ooh, put a new card on the Amazon account so that I can track my Amazon spending easily,” because I do think that I am using it mainly for necessities.

Scott:
That’s what my wife and I do. I have my credit card that I put all of my purchases on and she has her credit card which she puts all of her purchases on. We only use the debit card for certain expenses where it’s just really hard to use the credit card or doesn’t make sense. Like right now we’re renting, we wouldn’t pay 3% of the rent in transaction fees in the credit card. But that way, at the end of the month, it’s super easy for me to track all the expenses because it just says Scott’s credit card in our budgeting software. And so I know that I’ve got to put in all those transactions and she’s got to put in all the ones that say Virginia’s credit card. And so that’s really easy at the end of the month and we can tell where the money’s going. By the way, I’m always the culprit on the one that’s spending more frivolously than my wife every month without exception. So yeah.

Rebecca:
I’m right there with you.

Mindy:
Scott, what a surprise.

Scott:
Yeah. Yeah.

Rebecca:
Yeah. My boyfriend’s like, “Let’s just cook in.” And I’m like, “Let’s go out. We haven’t been out in three days. Let’s just go. It’s fine. We have money.” So yeah, it is-

Scott:
And that’s great. Put it on your credit card as like, “Hey, I wanted to go out. It’s going to be my credit card for this one. That’s coming out of my fund money budget. Boom. We’re good to go there.”

Rebecca:
Okay.

Scott:
And then you know at the end of the month, “Okay. Those were all my calls here.”

Rebecca:
That’s my bad. Okay.

Scott:
But that would be a toolkit that we found really powerful because at the end of the month, you just look at it and there’s no guilt. You’re not shaming the other person. You’re just facing the reality. “Here’s what was spent on Scott’s credit card. And here’s how much was spent on Virginia’s with that. We want to make any tweaks? No, we’re good. We’re going to keep going with that.” Or “Yeah, we want to get this expense a little bit more under control next month. Let’s make a plan.”

Rebecca:
Yeah, I like that. We don’t really have any guilt. I wouldn’t use that word, but it needs to get under control. Because at the end of the day, I made a goal for savings. We’re on track to meet the goal. So it feels like anything outside of that is okay. And that’s just it. It’s just okay. It’s not the right thing to do. We should be saving more. So I like that idea of splitting up the fund money.

Scott:
So without reducing what you said, which is $1,800 per month in these miscellaneous expenses, your total spending comes to $4,300 per month, right? And if you were to come out of this in a year from now, be house hacking with an Airbnb or a rental property with that, your expenses now dropped from $4,300 per month to $2,900 per month. And you’re good to go. You can cover that with your second job right now within a year. You won’t be building a lot of wealth on top of that at that point. So you may want to continue that process, maybe buy several properties over three years and set up some systems, maybe think about stockpiling $80,000 or $100,000 a year. 80,000 next year, and then maybe a $100,000 or $120,000 after a year or two if you make some of these moves, grow that income in some of these categories. And that would further cement your position. But I think you can have your goal of flexibility way faster than trying to just work towards this kind of amorphous $7,200 per month in passive income goal.

Rebecca:
Okay. All right. I do have another, I guess, small wrench. It’s not a big deal. I do have a pension with this local government job. The problem is it’s an eight year vesting period. I’m about three and a half years in and it’s already one of the longest jobs I’ve ever held. But if I stay the full eight years and then even at that point wait until retirement age, that will be an extra $1,0000 a month. So if I leave before the eight year, that’s kind of walking away from what? $300,000, right? Is that right?

Scott:
So the $1,000 a month, does that come into play four and a half years from now, or at retirement age?

Rebecca:
That would be at retirement age.

Scott:
Interesting. I have to think about how to value that asset. At retirement age, it would be worth $300,000-ish if you want to call it that, depending on how likely it is that the government is likely to pay out that pension, which is probably fairly likely in Florida.

Rebecca:
Yes. I would say. I would say fairly likely.

Scott:
But that’s discounted by 20 years by a discount rate because you’re not going to access those funds until 20 years from now. Then you’re going to access a $300,000 annuity at that point from the pension. So it’s worth considerably less than $300,000 at this point.

Rebecca:
Okay.

Scott:
Let’s value it at $75,000 for purpose of this discussion. I’m probably off there. You should go and value that by using a discount rate you think is appropriate, but that’s 20 to 25 years from now. Is it 65 or 59 and a half?

Rebecca:
Gosh, I think it’s 65.

Scott:
Okay. So you’re 25 years out. It’s probably worth less than $75,000 in present value right now.

Rebecca:
Okay.

Scott:
So that would be a way to think about that from a valuation perspective when you’re making decisions. So yes, am I going to stay four and a half years in order to make $75,000 in additional value right now? Or I could easily make more than that potentially in this avenue.” But that would be a way to think about it over the next couple of years.

Rebecca:
Okay. Okay. But yeah, that was one of my big questions.

Mindy:
I missed how long you’ve been at this job?

Rebecca:
Three and a half years.

Mindy:
Three and a half. And it has to be a total of eight?

Rebecca:
Yes.

Mindy:
Okay. Do you like your current job?

Rebecca:
I do. I do like it. It’s a higher level position. I’m not a huge fan of the human resource aspects of being a director. I’ve never been the best or most, I guess, interested supervisor. So that part of the job is not my favorite. I would rather be an individual contributor like I am with the technical writing. But right now, I mean, I like it enough that everything makes it worth it right now.

Mindy:
Okay. Then I wouldn’t make a rash decision right now because it’s still $300,000 down the road. If you hated your job, I would say four and a half years is a lot of time to spend at a job that you hate for $300,000 in 20 years.

Scott:
By the way I pulled out a present value calculator because this is fun. And the present of a $300,000 pile of cash in 25 years, 2047, would be at a 5% discount rate is $88,000. So if you think-

Rebecca:
Hey, you were pretty close.

Scott:
If you think you can earn 10% return, it’s going to go down to $27,000. So if you’re using a 10% discount rate, it’s like 25 grand with that. And by the way, you’re not getting a pile of cash for 300 grand in 25 years. You’re getting a set of future cash flows. So it’s even less than that from a valuation perspective. So all of those things, I think will be helpful perspective for you in making that decision. I would not consider… This is less than 10% of your net worth right now. Most likely.

Rebecca:
Yes. Okay.

Scott:
It’s 10% to 20% of your net worth depending on what discount rate you want to use, but probably closer to 10 or less.

Mindy:
In that case, the current life satisfaction and current job enjoyment is going to factor heavily into my own decision if I was in your shoes. If I like my job, why would I leave? It’s hard to find a job that you like, and there’s no guarantee that when you change jobs, you’re going to find one that you like better. If I hated my job, I would start looking. This wouldn’t be enough to keep me there, based on what Scott is saying, it’s-

Rebecca:
Yeah, it’s kind of-

Mindy:
He’s not saying it’s worthless.

Rebecca:
Yes.

Mindy:
He’s saying it’s not worth much.

Rebecca:
Right.

Scott:
Yeah. Well I’m saying there’s a calculable value on this income stream. And at the high end, assuming you are a terrible investor and get 5% returns on your money for the rest of your life, it’s worth 90 grand. But it’s worth less than that because it’s a set of income. It’s income from the future based on that, not a pile of cash. So it’s not worth a lot relative to your financial position, but it is a factor. I would not stay in the job for four and a half more years in order to realize that benefit at the opportunity cost of really doing things you want to do in your life, pursuing investments or other job opportunities in other locations. This is not a powerful benefit relative to your overall savings rate.

Rebecca:
Okay. Yeah, I appreciate that. I was thinking I was stuck on that, what it would take to generate $1,000 in income today. And based on that calculation, I think that’s pretty much a non-factor for a decision making going forward.

Mindy:
No, I was saying that’s really great to be able to realize that a lot of people don’t factor that in. Scott, can you share a link to that present value calculator? We’ll include those in our show notes.

Scott:
Sure. I Googled present value calculator very rapidly and then put it in there and this was one of the first results in Google. So I will go ahead and link that in the show notes at biggerpodcasts.com/moneyshow314.

Mindy:
Yeah. I think that is important to have the ability to realize, “Oh, this is a really great thing that I’m about to give up if I just worked there for another month. Or this is nothing even if I work there for 10 more years.” So it’s when the decision is much tighter than It makes it a lot more difficult to make. But this one I like that you have realized very quickly too. You’re so easy to let go of this weight, this golden handcuffs thing. That’s not the right phrase.

Rebecca:
No, that’s exactly what it is.

Mindy:
Yeah.

Rebecca:
I’ve referred to it as that before as well. No, I think it’s easy to let go because kind of over the years, I’ve learned that the money’s out there. You can get it. This job that I’ve had for three and a half years, that’s the first time I’m ever doing it. When I walked in the door three and a half years ago, I had no idea. I didn’t even have a background in it. But up until this point, I was just kind of throwing all this money away. I didn’t know what to do with it. So now that I’m on this track, now that I’m thinking about it in a different way, 10 years ago if you would’ve said that, I would have been like, “Eh, that’s too far in the future. I’m not going to think about it.” But if you had said it a year ago even, I would’ve been like, “I will never let that go.” But now here I am thinking that maybe not be worth it.

Scott:
I mean, if you’re 62 and you have another year left to vest the thing, obviously like, “Okay, we’re going to do that.” But I think that we can make a different decision or value it differently because of your circumstances. And by the way, I would discount it at a 10% rate of return.

Rebecca:
Okay.

Scott:
That’s because I am perhaps a little arrogant and think I can do much better than 5% return over the course of the next 25 years with my invested dollars with that. So that value then is $27,000, 28,000.

Rebecca:
So now that’s not the maximum I would get. That is basically the minimum if I stayed vested. Now, if I continued working there for another 20 years, which I don’t see happening, it could be quite a big sum money. Maybe $4,000 a month. It just depends on if they take the average of your top five earning years, I believe. And that’s how they base their calculations. But the less you work, the less lucrative it is.

Mindy:
Okay. We did an episode, I just want to remind people, on episode 259, we spoke with Grumpus Maximus and it was called Pensions 101. So this is something to listen to if you’re considering taking a job that has a pension, or if you’re considering leaving a job that has a pension, or if you just want to know more about pensions, because I’ve never had a pension. I didn’t know anything about them. I thought it was a very interesting show. So that’s episode 259 at wherever you get your podcasts.

Mindy:
I think this has been great from my perspective, but how do you feel about this information?

Rebecca:
It’s a lot. It’s interesting. It’s interesting. I knew you guys would-

Mindy:
[inaudible].

Rebecca:
Yeah. I knew you guys would pull out some things that I hadn’t really thought about. Yeah, it’s been really helpful.

Mindy:
I’m glad. This is not meant to be just, “Here’s all those. Problems solved.”

Rebecca:
Yes. Yes.

Mindy:
We’re done.

Rebecca:
You have homework.

Mindy:
Yeah. You have homework. You have things to look at. But it can be really difficult to get outside of your own head when you’re focused on this. It’s hard to see what else is around. So having these other options, you currently have $7,200 in expenses. Therefore, you need to generate $7,200 in expenses to be able to quit your job. And I love Scott’s way of thinking. Let’s reframe that. In 45 seconds, he cut your monthly needs in half.

Rebecca:
Yes. Yeah.

Mindy:
And then you’ve got $2,000 of that already from your current job. So now you’re down to 20 hours a week working and we’ve got to figure out a way to generate 2,000 more dollars and then you can quit.

Rebecca:
Yeah. Then I’m good to go.

Mindy:
Yeah.

Rebecca:
Another thing-

Mindy:
Or not go.

Rebecca:
Yeah, right? Which I probably wouldn’t. You were right about that. There’s no way I could just sit around. But another thing you pointed out was my lack of accessible funds right now, which I really need to think about that. I think I may try to redirect some of this into maybe a one real estate deal or something.

Mindy:
Into a real estate deal, into after tax brokerage accounts, your boyfriend’s inherited IRA. I’m assuming that because you’re not married, you don’t file jointly taxes?

Rebecca:
Correct. Yeah, yeah. Yeah.

Mindy:
So look up the Mad Fientist, How to Access Retirement Funds Early. I don’t know if you’ve ever read that article before. He talks about the Roth conversion ladder in that article. The inherited IRA isn’t a Roth so you convert it to a Roth by paying taxes currently at your current income level. So you want to look up. And this is where a good tax planner will be able to give you great direction. They will look at your situation and say, “Oh, you have this much space between your income and your capital gains tax cap where you can convert and not pay any capital gains on this.” And then once it’s sat in the Roth IRA for five years, you can withdraw the principle. Not what’s grown, but the principle, and everything that you’ve converted over is now principle. So it is an interesting idea.

Mindy:
I mean, he’s got eight years to pull out $135,000. He could Roth convert it little bit by little bit and reduce his taxable income, reduce his tax burden on that while changing it to a Roth. When the market’s low, it’s going to… I can’t guarantee. Past performance is not indicative of future gains. But I think that the market will continue to bounce back and will return. I mean, if you look at the historic market returns, it goes up into the right eventually. So you want to buy low when you can. So when you-

Scott:
That’s fantastic advice.

Mindy:
Thanks.

Rebecca:
Yeah. Thank you very much.

Mindy:
Yeah. If you Roth convert it, then it’s growing. He takes out the principle if he wants. The gains are still there and they continue to grow, or go up and down, whatever. But yeah, I think having a conversation with a tax planner, having all of your numbers out there for them to see, they can give you some really great advice that’s even better than what Scott and I are giving you because we’re not tax planners. We just know enough to give homework. So that’s another homework assignment, is to connect with the tax planner and ask them for suggestions to maximize what you have both pre and post-tax, but more along the post-tax lines and see what they say.

Scott:
What else can we help you with, Rebecca?

Rebecca:
No, I think that’s actually it.

Scott:
Awesome.

Rebecca:
That’s awesome. I got a lot to think about.

Scott:
Well, let’s recap. At the strategic level, most of your net worth is in retirement accounts and home equity. That is not going to get the job done in giving you life optionality and financial freedom. So as you acquire more cash, that needs to go into accounts that can provide that freedom. Options would include after tax brokerage accounts, your emergency reserve which I think is a great starting place because that will help you build financial runway which may create options for you, and you might consider buying real estate. Your home equity is a major part of the equation and you should think through that as part of your journey here to cut costs and potentially think about redeploying that into a house hack or other investments that can bring you this flexibility.

Scott:
You make a great income, so you’re really not at all unreasonable with your month to month spending, even though I think that’s what you thought was your big problem coming in. Although that’s assuming that you keep it at the levels that you stated and have been true in the recent past, it sounds like. So we have some tactics and tips to do that. Maybe consider the credit cards for each of the partners here, you and your boyfriend, to make sure that you are accountable for your own spending and can talk about it in a positive way once a month.

Rebecca:
Okay.

Scott:
And then lastly, Mindy had some great tips for how to think about dealing with the boyfriend’s inherited IRA and rolling that over bit by bit in order to play a really strong tax advantage game. Ideally, parts of that being done before if you guys are considering this before you get married and have to file jointly. So lots of good, I think, hopefully helpful tactics here and hopefully some helpful perspective on reframing the strategy and the overall goals. A lot of homework for you.

Rebecca:
Yes, definitely.

Mindy:
Awesome. Well, Rebecca, thank you so much for your time today. This was so much fun. I really appreciate you sharing your unique situation. I think it will help a lot of people who are in similar situations. I don’t think anybody’s going to have the exact same scenarios, but I think a lot of people are going to have this portion or that portion or that portion. So this is always really helpful. And that’s why we do these shows. I’m so glad for your time.

Rebecca:
Thank you so much.

Mindy:
Okay. We’ll talk to you soon.

Rebecca:
All right, bye.

Mindy:
Okay, Scott, I just want to give you huge, huge, huge props for the reframing idea. I really, really, really like how you gave her different things to think about and were able to basically top her monthly needs in half in such a short time frame. Nice job. That was super helpful, I know, to her.

Scott:
Yeah. I think that the goal usually is optionality and flexibility right now or very soon for most people, right? And so I think that’s-

Mindy:
Of course.

Scott:
And so when you hear a number that is just like, “Okay, we are not going to get you to $7,200 a month in passive income anytime soon with the current way things are structured. Let’s reframe the goal and let’s come up with a strategy that we can use to really jumpstart the journey towards that, by increasing the amount you’re going to save every year, moving more of that wealth into after tax investments like real estate or after tax brokerage and having a bigger runway that gives you some flexibility,” now we can play a game that is winnable in the short term and gives you real life options and improves your life.

Mindy:
Absolutely. I am so excited for her homework assignments and for what she finds out about them, because I think she is going to take this… At the end of the show after we stopped recording, we checked in with her and were like, “Hey, did we get you what you needed?” And she said, “I have so many things to look into now.” but excitedly. Like, “Now I have all these options that I wasn’t aware that I had before,” which is the whole point of this show, is just, here’s things to introduce you to so you can make sure that you are doing all the things that you need to do, that you want to do, that you can do to reach your goal as comfortably as you want, as you can.

Scott:
I love it. Should we get out of here, Mindy?

Mindy:
We should. From episode 314 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen, saying I have no clever line today. Email me, [email protected], with your suggestions.

Sarah Weaver lives with intention, reacts with flexibility, and practices patience. It’s how she managed to acquire 15 units and travel the world as a digital nomad. It’s why agents hire her to coach them. It’s how she started a company to fill a need in her industry. It’s how she earned the financial position to be able to pursue properties in the Smoky Mountains, an area that would have been out of reach for her just a year ago. 

But her journey wasn’t always smooth sailing. 2020 was a particularly transformational year, she explains on an episode of the BiggerPockets Real Estate Podcast. She admits to doing things the wrong way before learning to do them right. She wasn’t sure how to navigate her relationships with real estate agents or how to narrow her focus to the right investment strategy. That knowledge was, like Weaver’s success, earned through hard work. Now, she has carved a path that other long-distance investors would feel lucky to follow—and there’s a lot to learn from her story. 

Be Intentional

People sometimes ask Weaver how she grew her wealth so quickly. She says it wasn’t easy — but it was most certainly intentional. “I think one thing that I can say with confidence is I live really intentionally,” she says. “Was there a lot of tears and setbacks and frustrations? Absolutely. But I woke up and I was really clear on what my goals were and I didn’t let the little things knock me down.”

In 2015, Weaver wrote in her journal that she wanted to be location-independent. Within eight days, she had a job in the real estate industry that allowed her to work remotely. “And that was this ‘aha’ moment of manifestation. And so, ever since then, I’ve just been really diligent about writing down what I want in life and then not really taking no for an answer.” She knew she wanted to live in Buenos Aires. So three years ago, she bought a one-way ticket to Argentina. When you’re intentional about the life you want, you understand that obstacles are par for the course—and you don’t let them turn you around. 

Where to Start

A lot of success in real estate comes from starting with the resources you have. Weaver was living in Denver, Colorado, in 2017. The area was cost-prohibitive for her at the time, so she drove to Kansas City, knowing she could get a better price. “And so I house-hacked in Kansas City in 2017.” She went from single family to duplex to fourplex, house-hacking in different markets each time. It was never an accident that she would become nomadic. She built her investment strategy intentionally for that lifestyle. 

Co-host of the BiggerPockets Real Estate Podcast, David Greene, echoes that a lot of success in real estate and business is built in small steps. “It’s that incremental systematic progress where you’re not trying to just knock your opponent out in one punch,” he explains. That kind of patient escalation is something that Weaver has done very well. 

The Perks (and Challenges) of Long-Distance Investing

“I think long-distance investing is the absolute way to go even from day one. People ask like, ‘What do you do if something breaks?’ And I say, ‘It’s great. You don’t do anything.’” 

Doing nothing, however, requires a lot of proactive work. “ I have what I call the vendor list. And so I don’t just have one plumber. I have five plumbers because of course the day that something happens, the plumber that you love and trust isn’t available. And so that list is crucial.” She starts working on that list as soon as she’s confident she’ll close. It’s how she self-manages all of her 15 units from thousands of miles away. 

Doing nothing also requires that you do your due diligence, she says. “You have to have a team on the ground that you can trust. And so that’s where investor-friendly, investor-savvy real estate agents are absolutely clutch. You need to trust them, but just like online dating, you trust but verify. And so I like to have video tours. I walk the neighborhood on Google Earth. There’s lots of steps in my due diligence process that make long-distance investing possible.”

And though it might go without saying, strong WiFi is crucial. Weaver recommends setting up in a new locale on a weekend day to ensure you can get consistent internet access during the week. 

Though distance can be an obstacle, it also has its perks. Living abroad allowed Weaver to keep her expenses low, save more of her salary, and go from three units to 15 in just 68 days. “And when that happened, I woke up and was like, “Wow, I did it,” like I exceeded my lean F-I number or lean financial independent number. Meaning all of my expenses are more than covered by my rental income. I can easily leave my W-2.” It was always the end goal—and now it’s a reality.

Navigating Relationships with Agents

Working with agents can be difficult even when you’re not in a different time zone. Investing from abroad presents an even greater challenge. But ironically, when you invest from a distance, you rely on your agent the most. Weaver says choosing the right agent is part of the puzzle, and having flexibility in your expectations is another. “Ideally, your agent is also an investor, or at least understands investing,” she says. She asks probing questions when interviewing a real estate agent, such as:

1. What does your lead generation look like?
2. What does your portfolio look like?
3. Have you ever done a BRRRR before?

Once you have a good agent, you should, of course, try to keep them. This means setting crystal clear criteria so your agent can confidently find what you need. For example, when Weaver was in New Zealand pursuing a deal in Omaha, she provided her agent with incredibly detailed criteria. “He knew to give me purchase price, current rent, market rent, estimated rehab, taxes, and insurance.” And that information made it easier for Weaver to evaluate the deal. 

Maintaining your agent’s trust also means putting your money where your mouth is. “One of the quickest ways to be sent to the bottom of an agent’s list is to tell them your crystal clear criteria, the agent sends you that deal, and then you don’t write an offer on it.” 

It’s important to be respectful of your agent’s reputation and time. If they’re going to reach out to their contacts for you and find off-market deals that meet your criteria, you need to be certain about what you want and willing to write an offer when you find it, or it will reflect poorly on them. Weaver also has different expectations of how her agents spend their time than she would from a residential agent. “I actually don’t make my agents walk a property unless I’m under contract,” she says, because their time is spent hunting deals. 

If you’re looking for an investor-friendly real estate agent, check out Agent Finder in the BiggerPockets Marketplace to find vetted and professional real estate agents who can help you secure the deals you need.

Choosing the Right Investment Strategy

Weaver’s success was only possible because she focused on one strategy at a time. Currently, she’s finding a happy medium in the medium-term rental strategy. “If you have someone who’s willing to book your place for a month, two, maybe three months, they want it fully furnished. You, the landlord, cover utilities, and you might not get as much rent as you would on Airbnb, but there’s less turnover. There’s guaranteed income,” she says. 

This strategy also allows investors to evade local ordinances that restrict the number or type of short-term rentals allowed, which have become popular in Western states, particularly Colorado. 

Weaver says she’s had success listing her units on Facebook Marketplace and FurnishedFinder.com. But Airbnb can also be a reliable place to find medium-term tenants. Airbnb CEO Brian Chesky says more people are reserving rentals for a longer period because the pandemic has led to more remote work. In the fourth quarter of 2021, 22% of the nights booked were for stays of one month or longer. 

Filling a Market Need

Investors often have the unique ability to recognize the unmet needs of other investors, and that’s the idea behind Weaver’s newest venture. “I am now filling a need in the market. I started a company called Arya Design Services, and we help investors either revamp or fully launch their Airbnb. We can buy all of the furniture remotely, have it sent to the unit, and people on the ground can put it together, or you can fly my team in to furnish it themselves.” 

It’s just another example of the opportunities that can present themselves when you live with intention, react with flexibility, and practice patience. 

Find a Local Agent Today

The BiggerPockets Agent Finder makes it easy to connect with real estate agents who know the local market and can evaluate properties from an investor’s perspective. Here’s how it works:

1. Pick your market
2. Share your investment criteria
3. Match with a real estate agent

Knowing the right tenant screening questions to ask is key to protecting your investment. Tenant screening is vital because you’re most likely renting to a stranger. There is only so much you can tell from first impressions. Therefore, screening is your only chance to recognize a potentially good tenant from a disastrous one. 

Standard procedures for screening a tenant include checking references from previous landlords, employment references, and a credit report. However, interviewing the tenant is just as important. Asking the right interview questions gives you a chance to learn vital information about the prospective renter. You can also gauge their reaction to specific questions—more than you can from a rental application form. 

This article discusses the most important questions to ask tenants to ensure they are a good fit for the rental unit. But, it’s crucial to know why you must ask these questions. 

What Makes the Ideal Tenant?

Three factors help identify the ideal tenant:

1. Their ability to pay rent. Rental income should be three times the rental price.
2. They must have good references. This is because you can often get an idea of future behavior based on previous conduct.
3. They need a decent credit history.

These factors help to ensure three crucial things:

1. The tenant has a reliable monthly income proving they can afford the make rent payments
2. The tenant will pay rent on time
3. There is a good chance they will take care of the property

Interview Questions You Cannot Ask

Although the pre-rental interview is designed to get to know the tenant better, you must be careful. There are specific interview questions you can never ask a tenant. You should stay clear of questions that appear discriminatory or violate the Fair Housing Act. Here’s what you should know about the Fair Housing Act.

Top 10 Screening Questions to Ask a Tenant

Asking questions is the only way to assess a rental applicant. However, to ensure you get the right tenant, you must ask the right questions. And not just any question will do. The better the questions, the better your position to accurately evaluate the potential tenant. 

Here are the best 10 screening questions landlords should ask potential tenants during the interview.

1. When do you plan on moving in?

A good first question for a potential renter is knowing when they plan to move. Maybe they have time left on their current lease and can’t move immediately. In this case, it may be best to find a tenant who can move in immediately to reduce vacancy time.

On the other hand, suppose the current tenant has given two months’ notice, and you have started advertising early. In that case, someone who wants to move immediately wouldn’t be a good match.

2. How long have you lived at your current address?

A basic tenant screening question is knowing how long they’ve lived at their current place. Their answer can give an idea of their stability as a long-term tenant. For example, have they lived there for less than a year? In that case, it’s good to find out why. It may be because of relocating with work or another legitimate reason. 

A tenant who is constantly on the move may be a sign of a problem tenant, and there’s a risk they won’t stay for the entire lease agreement term. 

3. Why are you moving?

Moving can be expensive, not to mention stressful. So, it’s worth asking a prospective tenant their reasons for moving. Maybe their current place no longer matches their needs. Or, they may need to live closer to work or family. Was it an increase in rent prices? Regardless of their reason, always do your due diligence during the screening process. 

It’s always a red flag if the tenant lies about their reason for moving. For instance, they say they need to downsize, but you learn from references that they are getting evicted or regularly miss rent payments.

4. Do you have pets?

If you don’t allow pets in your rental unit, then you must find out about any animals they have. However, even if you have a pet policy allowing animals, you may have restrictions on the size and breed. So, it’s best to find out before signing the rental agreement. Additionally, you can discuss your policy on paying a pet deposit and any additional fees. 

If you allow pet owners to rent, always carry out pet screening beforehand. 

Pro tip: Remember that a service animal isn’t classified as a pet, and you can’t deny housing to someone who has one. You should also check that the emotional support animal letter is genuine.

5. How many people will be living with you?

Rental laws restrict the number of people per bedroom in a rental unit. If you have a multi-tenancy unit, asking this simple question is essential. In any case, anyone living in the apartment permanently should be named on the lease agreement. 

6. Are you or anyone who will be living in the apartment smokers?

A vital rental screening question to ask a tenant is if they smoke. Typically, a rental agreement should state your smoking policy and outline the consequences for violating the lease. However, asking if they smoke allows you to assess their reaction. 

7. What’s your current income?

It’s not impolite to ask a straightforward question about how much a prospective tenant earns. After all, you must know if they can afford the monthly rent or not. Typically, a tenant can afford rent if they spend no more than 30% of their income on housing. According to a Harvard study, the 30% rule “remains a reliable indicator of affordability both over time and across markets.”

If their pay stubs or bank statements reveal a lower amount, you should be extra cautious about renting.

It’s worth noting that reports indicate that nonpayment of rent is the most common reason for evictions. 

8. Have you ever been evicted?

Asking about previous evictions may reveal why they were forcibly removed from a previous rental unit. Of course, if they were evicted, it’s good to be cautious. But were there extenuating circumstances? Or has enough time passed, and the tenant now has a good credit history for a previous eviction not to be an issue? Again, it’s good to find out. 

9. Do you have current or previous convictions?

Before asking about a criminal record, it’s crucial to know if any local laws prevent you from inquiring too deeply into this. There’s also grey area surrounding the Fair Housing Act, and if it’s truly legal to ask this question, as it may turn out to be discriminatory. However, if you can inquire about convictions, it’s good to do so. In addition, their criminal history and type of punishment could indicate if they are a suitable candidate for renting. 

Be very careful not to ask about arrests. It’s generally illegal to ask about previous arrests when conducting a screening interview. Arrests don’t always lead to convictions. 

10. Can you pay the security deposit and one month’s rent at the lease signing?

The last question is to ensure that the tenant can pay the upfront costs of renting. At the same time, you can ask if the potential tenant has any questions for you.

Conclusion

Knowing the right tenant screening questions can help you assess applicants and choose the ideal tenant. However, never take answers at face value. Instead, always do due diligence to check that the tenant was telling the truth.

Ashley:
This is Real Estate Rookie Episode 195.

Craig:
And so, you need to look at the house with the proper layout, so that you can separate the upstairs and downstairs. For example, there’s many houses in the Denver area where the side door that is right where the stairs are to go downstairs. So, all you have to do is put a little wall up or put a little door up and you’ve got two separate units. And that would be perfect to Airbnb the downstairs. We do that. I’ve got many properties that are just that and I think that’s the most efficient way and the way I like to house hack now.

Ashley:
My name is Ashley Kehr and I’m here with my co-host, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie podcast where every week, twice a week, we give you the inspiration, information and motivation that you need to kick start your real estate investing career. Ashley Kehr, my co-host, what’s going on? What’s new in your neck of the woods?

Ashley:
Well, I’m currently in a stretched position trying to get my knee to stop being painful right now. The six-month, the never ending complaining of me with my knee problems. But hopefully, I just had my last surgery and hopefully, I’m on the mend, but I avoided my pain pill today, which I probably should not have. But I wanted to be of a sound mind for the podcast recording, but I feel like that’s not even possible, even without me on drugs, so yeah.

Ashley:
But yeah, other than that, everything’s good. I’m going to look at a property tonight that could potentially just be a long-term buy and hold and getting excited. I think when this airs, this has already happened, but I’m going out to Boise, Idaho to a conference that I’m going to be the emcee at and speaking at for AJ Osborne. And it is his CRU Circle event, so it’s on mostly about commercial real estate investing.

Tony:
Yeah, it’s exciting. There’s like a loaded lineup of speakers for that one. I think Thatch is speaking there, Brandon is speaking there, so quite a few number of people. When is it again? June, what through what?

Ashley:
June 14th to the 17th.

Craig:
Okay. I think we’re at another conference that overlaps with that, but yeah, I saw the lineup. I thought it was really cool. I wanted to attend. So, you have to give us the full download once you get back.

Ashley:
Don’t worry. Follow my Instagram stories and you’ll be able to see all that.

Tony:
There’ll plenty of that, yeah.

Ashley:
Nothing about the conference, it’s just the after party.

Tony:
Just the yeah.

Ashley:
No, I’m kidding.

Tony:
Yeah. More hula hoops and masquerading views and stuff like that. How cool.

Ashley:
Yeah. Yeah, the last time I went to an AJ Osborne conference, it was in Coeur d’Alene, Idaho and it was a Self-Storage Conference. And I remember the first night, he’s like, “Oh, I’m having just like a small VIP little cocktail hour. It’s just going to be some hors d’oeuvres and cocktails. Just join us.” And it was like oysters, fresh cut prime rib. I’m like, “Wait. What does this cocktails and hors d’oeuvres? This is like a meal, a 10-course meal.” So, the food is what I’m most looking forward to.

Tony:
There you go. All right. Not the networking, not amazing content. It’s the food. I love it.

Ashley:
So, what’s new with you, Tony?

Tony:
Actually, while we were recording this podcast, I got an email that we just closed on another one of our flips, so that’s always exciting. This one’s cool because all of our other flips, we’ve been using that money towards the purchase of more short-term rentals. But this will be the first flip that’s not earmarked for another purchase. We actually get to spend some of it, so that’s always exciting. So, we started flipping houses late last year and we’ve rehabbed, I don’t know, quite a few in Joshua Tree now. So really, really excited that we can continue to grow that part of our business.

Tony:
And we’re flipping these properties as turnkey short-term rental, so even though it’s technically a different type of real estate investing it pretty much is still what we’re doing. But instead of us keeping the property, we’re just selling to someone else at the end. So, it’s been cool to learn this other side of real estate investing and the properties turn out, we get better every single time. So, if you guys want to see the flips or you guys want to maybe buy them from us, you guys can follow on Instagram. It’s @TonyJRobinson. I usually post all the flips we’re selling there.

Ashley:
I think that it’s so cool that you are taking exactly what you’re doing and learning how to have a different exit strategy based off of it. But also helping other people get started. Having a turnkey property is a great way to get started in real estate investing if you know nothing about rehab and especially if you want to get into short-term rentals. A lot of the properties that you have bought purchased out in, and even Joshua Tree, but in the Smoky Mountains, too, a lot of them were pretty much turnkey, correct?

Tony:
Pretty much, yeah, everything we bought in the Smoky’s has been turnkey. It was an existing short-term rental, it came fully furnished and we spent a couple of thousand bucks like replacing linens and missing silverware and stuff like that. But yeah, there’s definitely a gap right now I think in the short-term rental industry, in terms of turnkey opportunities in a lot of markets. If you look at long-term rentals, there’s turnkey operators in almost every major location, but that same thing hasn’t happened yet for the short-term rental. So, we feel like we’re filling a void there, yeah.

Ashley:
Well, today, we are talking about a specific topic and that is house hacking, not short-term rentals. And we have an expert on today, Craig Curelop, who wrote the book, the house hacking strategy. So, Craig joins us from Denver where he has his real estate team, but also recently, we found out just moved to Idaho. So, Craig is coming on today to talk about house hacking, what it is, is it still possible to do in today’s market? What are the advantages, the disadvantages of it?

Craig:
And I’m glad we brought Craig on, because in my mind house hacking is one of the lowest risked ways I think to get started as a real estate investor. And Craig Curelop breaks down his five-year blueprint that most people can probably achieve financial freedom by following or using house hacking as a strategy. So, overall, just Craig is a wealth of information when it comes to house hacking and we hear a little bit about his story, how he got started, how he was sleeping in a cardboard box in his own living room. And how that led to him achieving financial freedom. So, overall, just a really cool conversation with Craig.

Ashley:
Craig, welcome to the show. Thank you so much for joining us, since last time we tried to record with you, you ditched us.

Craig:
I know, I know. Well, I missed the memo. I thought we were doing this podcast in the river in the Grand Canyon on the Colorado River. So, you guys didn’t show up, I was waiting for you.

Ashley:
You know what, I think that is the best excuse to not show up to a podcast recording. And you know what, you’ve definitely left your mark because you’re the first person to not show up to a rookie podcast [inaudible 00:06:41].

Craig:
Really? I’m in the record books?

Tony:
You’re in the record books, man.

Ashley:
Yeah.

Craig:
All right, put me down.

Ashley:
And so Craig, tell us a little bit about yourself. For people who don’t know, you’ve written the book, The House Hacking Strategy. You’ve been a big part of BiggerPockets and you’re a real estate agent. So, just give us a brief backstory on you.

Craig:
Yeah. Really, it all started like a lot of people start out in this industry, just absolutely hating my W2 job before I worked at BiggerPockets. It was honestly-

Tony:
I was I going to say, I was like, “What did you work for?”

Craig:
Yeah. Scott’s in the background there, like yeah. No, so it was when I was in California working like a venture capital job, being an analyst. And just working hundreds of hours a week and looking down the hallway and seeing that my progression would be moving 30-feet down the hall to being my boss. And maybe I worked a hundred hours a week, maybe he worked 80 hours a week, so it really wasn’t a good life.

Craig:
And so, I started getting the idea of a passive income after reading Tim Ferriss’s book, the 4-Hour Work Week. And after reading that book, I was like, “Oh, I should start thinking of my expenses on a monthly basis, my salary on a monthly basis. And then if I can just get enough passive income on a monthly basis to cover my expenses, well, I’m financially free and I no longer have to work.” And that sounds a lot of fun. I get to travel, spend time with friends, do whatever I want and live on my own time.

Craig:
And so, being in Silicon Valley, I was trying to think of dumb startup idea after dumb startup idea and if you didn’t know, Silicon Valley is filled with dumb startup ideas. And so, none of those just worked. And so then, I went back to my house and I looked around and I was living in a 20-unit apartment building. And I was like, “This little Spanish lady, who comes to collect rent every month has probably collect in a hundred grand on the first of every month. And all she has to do is drive her car here.” I was like, “That sounds pretty cool.”

Craig:
And so then, I started diving into real estate. Obviously, I found BiggerPockets, not long after that and then I went down the rabbit hole. And so, within six months of finding BiggerPockets, I found myself working at BiggerPockets, moving to Denver, purchased my first house hack. And that’s where it all started.

Tony:
Craig. I love that you made that observation of, “I’m working a hundred hours a week. Once I get promoted, I get to look forward to 80 hours a week.” Which is, it’s such a weird dynamic, but it’s what so many of us are accustomed to and it was that light bulb that made things go off for you. It’s so funny, man. The 4-Hour Work Week was one of the first books I read about entrepreneurship as well. So, for me, it was Rich Dad, Poor Dad and The 4-Hour Work Week came shortly there afterwards and that’s when I went down the rabbit hole, too, man.

Tony:
But Craig, what makes you unique, man, is that you’ve built a name for yourself around one specific strategy within the world of real estate investing. So, breakdown for us exactly what house hacking is and why you felt it was a good place for you to start your investing career.

Craig:
Yeah. So, I think anyone who’s young or anyone really, in general, house hacking is probably the best place to start. And so, what house hacking is, is the idea that you’re going to purchase a one- to four-unit property with a low-percent down, typically, 3 to 5% down. Because you’re doing a low-percent down loan, you’re required to live there for one year and while you’re living there, you’re able to rent out the extra bedrooms or the extra units. So, the rent that you’re gathering covers your mortgage and you’re able to live rent free.

Craig:
And I would bet that 90% of the people listening right now, their largest expense is their living expense, unless they’re house hacking, of course. And so then, so you’re eliminating your largest expense, you’re investing in a property, you’re living in your investment and so, things aren’t going to go bad when you’re living there, because you’re seeing it every single day. So, it’s like landlording on training wheels and you’re able to do this year after year after year until you have a pretty sizable portfolio. And you can easily achieve financial independence just through house hacking.

Tony:
Craig, thanks for that breakdown, man. So, I just want to recap it to make sure that our listeners are following. So, essentially, you go out, you buy a property and then you rent out the extra space in that property to help offset your cost of owning that home. Did I wrap that up the right way?

Craig:
Yeah, you got it, man.

Tony:
So, Craig, let’s talk about why do you feel this strategy is a great way for newer investors to start. And especially given where the market is at today, there’s a lot of fear, I think, of a lot of people who want to get into investing. Why is house hacking a great place to start?

Craig:
Yeah. It’s a great place to start because you don’t need a lot of money to get started. Simple as that. You need 3 to 5% down. So, if you’re in Denver, buying a $500,000 property, you need between $15 and maybe $30,000 down. That is a lot less than what it would typically cost to buy a $500,000 property over a hundred grand. And so, you’re not putting a whole lot of money down. Because of that, your returns on investment are massive.

Craig:
Like I said prior, it’s you’re landlording on training wheels. You’re living in your investment, so you’re seeing your tenants come in and out. You can stop things and nip them in the bud before they get too bad. And so, I think those are two really big reasons why house hacking is a great way to get started.

Ashley:
Now, you talk about that half a million dollar house that somebody is going to go purchase and maybe they’re buying that because it has four bedrooms, so they can live in one and rent out the other three. How do you get approved for these higher purchase price instead of having to buy a two-bedroom one bath, because that’s what you can afford, but if you’re house hacking this bigger property with more rooms, does the bank actually look at that income that you’re going to be bringing in on the property?

Craig:
So, this seems to change by the month, it feels. Sometimes, the bank will look at prospective rents and take 75% of border income is what they call it. They were doing that at one point. I think they stopped doing that as of this recording. By the time this releases, they may start doing it again. So, my recommendation would just be to talk to a bunch of different lenders and see if they can use any of the expected rent to offset the debt payment to increase your debt to income ratio. Now, you can definitely do that if you use an FHA loan on a two-, three- or four-unit property. I’m just not sure how that works with the bedrooms at this point in time.

Ashley:
So, now, how you talked about things change going on with lenders and definitely, everything in the market is changing right now than what we’ve seen in the past several years. So, has that affected house hacking at all? And is it still possible to house hack a property?

Craig:
So, I truly think that there will never be a time where house hacking is not advantageous. I just don’t see a time. The reason is one, there’s many different types of house hacks. And so, if you’re buying a four- or five-bedroom house, you’re living in one unit, renting out the other. In a bad economy, you’re offsetting your mortgage payment, which will only help you. You’re offering cheaper housing to people who need cheaper housing because obviously people pay less for a room than they will for a full unit.

Craig:
So, I don’t see the necessity for house hacking really going away. I thought, I legitimately thought I was nervous when COVID hit that people may not want to be living in a room with four strangers that they don’t know where they are or how dirty they are. But honestly it’s like it wasn’t even the case. So, because house hacking persisted through COVID, lasted through COVID, I just don’t see any scenario where people wouldn’t want to do that.

Tony:
So, Craig, you also mentioned there’s multiple ways that you can house hack. So, I just want to break down some of those and tell me if these different scenarios work with house hacking. So, you already mentioned you can go out and buy a big house. Buy a five-bedroom house where you rent out the other four bedrooms. What if I want to rent out my basement? Can I house sack my basement?

Craig:
Yeah, we do that all day. So, it depends. Obviously, you have to know what the houses look like in your area. Many houses in the south don’t have basements. In Denver, a lot of houses do and so, you need to look at the house with the proper layout, so that you can separate the upstairs and downstairs.

Craig:
For example, there’s many houses in the Denver area where the side door that is right where the stairs are to go downstairs. So, all you have to do is put a little wall up or put a little door up and you’ve got two separate units, and that would be perfect to Airbnb the downstairs. We do that. I’ve got many properties that are just that. And I think that’s the most efficient way in the way I like to house hack now. Now, that I like to have my own space, now that I’m a few years in.

Tony:
What about like, I don’t know, say I have a detached garage or an ADU in the back. Can I house sack those?

Craig:
Sure. I mean you can house hack anything. You can put a tent in your backyard, you can add storage units. There’s so many ways you could get money out of your house. But people ask me a lot, “Should I renovate my garage and add plumbing and add electrical and add all of these different things?” Honestly, I think it’s going to cost you 75 to 100 grand to do all that. You might as well just buy another house is my thought. It would be less work, less stress, less permits and less time. So, if you got 75 to 100 grand, I would say like, and you get to keep your garage. So, my two cents, I don’t love the garage conversion thing, but it all depends on where you live.

Tony:
Yeah. And I’m asking these questions facetiously. The point I want the listeners to understand is that whatever extra space you have, whether it’s a basement, an ADU in the back, or you buy a multifamily where you live in one unit and you rent out the other three units. Whatever extra space you have on your property, you can turn that into an income generating space as opposed to a liability like it is for most people.

Craig:
100%.

Ashley:
Also, parking for RVs and boats, that’s really big in our area, so a lot of people have these in over the winter. They need somewhere to store it in their driveway in the suburb. It might not be big enough to actually store it and so, they need somewhere else to store it. And a little side note here, our producer also chimed in with a studio space in your kids’ closet, which is how I recorded for the last three years.

Tony:
Yeah. And if you guys don’t know-

Craig:
There you go.

Ashley:
I’m at my kitchen now. No, but-

Tony:
Yeah. If you guys don’t know Ashley’s kids, they’re actually ruthless landlord. So, Ashley pays a premium for recording in that studio every single month. So, she taught them well.

Ashley:
Actually, they did. My one child has a really nice big walk-in closet and I’m forced to take the small bare minimum walk-in closet for my studio.

Tony:
Oh, my gosh. I love that.

Ashley:
The thing is with my knee, with hurting my knee, my knee has been straight for so long, so I haven’t been able to bend it enough to get into the studio…

Tony:
Get back into the closet.

Ashley:
… other than that. So, I should be able to move back in shortly.

Tony:
So, Craig, we talked about some of the benefits of house hacking, some of the different ways you can do it. But what do you think are some of maybe the disadvantages that come along with house hacking? Maybe why is it a bad approach for someone?

Craig:
It is a little bit more work, obviously. You are maintaining a house and you need to get tenants and you need to sign leases and do your diligence and all that. So, it doesn’t come without a cost. Is that cost large relative to what you’re getting out of it? I would say not at all. My story is I went from a negative $30,000 net worth to financially free in two and a half years, mainly through house hacking.

Craig:
And so, it’s not get rich super quick, but it’s get rich pretty darn quick if you want to do it the right way and you want to really be scrappy. And I was really scrappy for those first few years. And so, yeah, I just think that, I think it’s for anyone that wants to, again, expedite their path towards financial independence.

Tony:
All right. So, Craig, appreciate you breaking down some of the disadvantages of that. I think it’s important for new investors to hear both the good side and the bad side of real estate investment, because every type of real estate investing comes with some type of downside. And you just got to make sure that if you choose this strategy that it will align or that you can stomach what those downsides are, I guess.

Tony:
Now for me, Craig, one of the biggest things that I’d be concerned with from house hacking is having to share my personal space with strangers. So, what tips or advice do you have for someone that might be worried about the same thing?

Craig:
Yeah, so we talk in the book about the comfort continuum. On one side, it’s comfort and on the other side is profit. And on the far side of that continuum, the profit side, it’s, yeah, you’re living on the couch in your living room and renting out every other room in your house, so understandable if you don’t want to do that. So, you just move along the continuum towards the comfort side, which is what you mentioned before Tony, about having a house where you just rent the basement. So, that way you have your own space. I’m sure you may hear them come in and out.

Craig:
But honestly, when we’ve done this, I don’t think I’ve ever even seen my Airbnb guests. I’ve heard them walking down the stairs and stuff, but you really don’t see them that much. And so, that usually is enough privacy, so that you can still make some money, you can still cover your mortgage or at least get pretty darn close and you can still make serious leaps towards financial independence.

Ashley:
So, are there a lot of properties out there that have the basements redone or what are some things that me or anybody could look for when they’re looking for a house hack? What do you look for when you’re searching for a property?

Craig:
Yeah, so in Denver, there are a lot of basements that are completed. And so, those are really easy to Airbnb, especially if you don’t care to add a kitchen or anything like that. Obviously, if you add a kitchen, it will get you a little bit more and then you have some more flexibility with maybe splitting it up into two units later on. But if you’re just looking at Airbnb, all you really need is like a microwave and a mini fridge and you’re good to go.

Craig:
I personally like to add kitchens, because I like to have that flexibility in case Airbnb ever goes away or anything like that. And so, what I like to look for is big utility rooms. You’ve got the washer and dryer in there, but you’ve got all the exposed pipes, you’ve got the electrical, so it’s very easy to add a kitchen down there. And usually, it’s about the space that you’d want for a kitchen. And so, it may cost 15 or 20 grand to add that kitchen. And now, you’ve got a house with two kitchens, maybe two laundries. And so, you’ve got this true single family house with a mother-in-law suite that you could rent out both sides. So, it’s like a duplex, but not technically a duplex.

Ashley:
Okay. So, if you purchase one of these properties, are there zoning requirement to say you’re just doing house hacking where you’re just putting maybe a person in each bedroom? Are there zoning requirements for that? And we can talk about the short-term rental side, too, but just for having somebody do long term rental in rooms, does that matter at all?

Craig:
So, each city or each town has different rules for the maximum unrelated people living in a house, so you’ll need to know those rules and my recommendation would be not to break those rules. I would say that most of the time, those rules aren’t super enforced. But again, it’s up to you whether you want to take that risk or not. I know plenty of people that have taken the risk, they have not gotten caught, but it just takes one annoying neighbor to catch you.

Craig:
So, my recommendation is figure out what your jurisdictions laws are, surrounding maximum unrelated tenants, and then you can buy the four-or five- or six-bedroom houses based on what that number is.

Tony:
That’s interesting. I did not know that that was even an ordinance or a law that cities had. But interesting as you go narrow and deep on some of these different strategies, you start to uncover all these different weird nuances. Craig, I want to go back because you said you started off by renting out rooms in your house. That was your first house hack and you’ve graduated to this basement strategy?

Craig:
So, my first house hack was where I was living in the living room behind a curtain in a cardboard box. And then, I went to Rent Find, then I discovered that I could have my own bedroom.

Tony:
Yeah. There was a step-up above that. That’s hilarious, man.

Craig:
Yeah, yeah. Having my own room was a luxury.

Tony:
So, talk us through that. What are maybe some rules. I think it’s a little bit easier if you have separate units. If you’re living in the upstairs unit, someone else is living in the downstairs unit, you’ve got a triplex where there’s two other units. But if you’re in the same house and you’re renting out spare bedrooms, what are some ground rules you should set in place for your tenants? How you screen people to make sure you don’t get some maniac living with you? How do you set yourself up for success?

Ashley:
First, Craig, before you answer that this is bringing you back to college days where this is, house hacking is very common, where you get your group of friends together. You rent a house, each person pays by the bedroom. But I think this is very different is because you’re going and getting your friends to live with you. So, there may not be as many set rules in the house, but you also have that other person as the landlord that collects the rent from everybody, make sure the utility is paid, things like that.

Ashley:
Where now, you are responsible to make sure that everybody is paying and choosing the people to live in those rooms. You may have never have met them before. So, yeah, I’m curious as to what, do you have a rules list that’s posted on the fridge? How do you share the common area?

Craig:
I did have that rules list, but I can tell you, I don’t think people can read. So, this is obviously, it is a thing, but honestly, it’s not as bad as people make it out to be. There’s this common misconception that when you think of rent by the room, you always think first thing is college, living in a five-bedroom place with your buddies. But the thing is you’re not living with your buddies. And so, no one really cares to interact with each other, so there’s not really much like living room, people aren’t really hanging out in their common areas.

Craig:
Most of the time, people are throwing a DiGiorno’s pizza in the toaster oven or the oven, whatever, and bringing it back to their room and that’s it and you’re not. And so, really the rules, we set them right in the beginning. So, I think you always want to make sure that in the beginning and it’s “Clean your dishes, wipe up after yourself.” And then once a month, we’ll get a cleaner to clean the bathroom and the kitchen. And those main areas like that.

Tony:
Craig, did you ever have any instances where people, your tenants weren’t following those house rules that you set up? And if so, how did you go about correcting that?

Craig:
Yeah, tenants, they’re not usually that bad. In my experience, they just haven’t been that bad. Maybe I’ve done a decent job at just screening them. But in the event that something would happen, really, you have to address it soon and address it often before it becomes a habit for them. Habits take a long time to break. And so, if they have a habit of leaving that coffee stir spoon in the sink and that annoys somebody, you say, “Hey, you mind just rinsing that off and whatever, throwing it in the dishwasher?” And just tell them every single time that it happens, so that way they don’t fall back into their habit.

Craig:
And so, if you tell them just once though, you can’t get all mad at them if they do it again a second time. They’re in a habit. You’re helping them break this habit, so you have to realize that it’s going to take time for them to adjust out of that. But to continue to adjust, to asking them and asking them nicely, so there’s no hostility in the house.

Ashley:
Come on, Craig. The answer we wanted to hear is that you laid down the law, you came out, you had your mustache. You had your stored attached to you and walked around the house to make sure all the rules are followed.

Craig:
Yeah, I just walked around with a shotgun.

Tony:
Yeah, Craig, perfect execution. So, you talked about the screening piece, man, so help us understand. For me, I would probably be a lot more stringent for house hacking tenants than I would be for a traditional tenant because I have to share the space with them. So, what did your screening process look like?

Craig:
Yeah, so we would send out an application and that application would basically make sure that they give us their credit score and a background check. Personally, what I looked for was 650 or higher credit score and a clean background check. If there was a DUI like a few years ago or something like that, I would let that go, but obviously, nothing drug-related or nothing violent-related. That’s an automatic pass. And then, you have the landlord references, the employer references, the pay stubs and all that stuff. And so, try to gather as much information as you can about the tenant, verify that information, and then you can go ahead and accept them.

Ashley:
And Craig, there are separate rules for screening a tenant if you are going to be living in the same property, correct?

Craig:
Yes, that’s right. So, if you’re living in the property, there’s the fair housing laws, which you can’t discriminate based on race or sex or family or whatever. But if you’re living in the house, you can basically say any reason that you want. I recommend, just make your life easy and don’t deny somebody because of their race or their religion or something like that. But it could be like, “He looked like a high school bully of mine and I didn’t like that.” And so, that is a perfectly valid reason to not want to live with somebody and so-

Tony:
Craig, was that a real reason? Did you really turn somebody away for?

Craig:
Yeah, I got afraid of one guy. I was afraid he was going to steal my lunch. So, those are like, you can. You’re right, Ashley. You can be a lot more stringent and have weirder answer. If you just don’t want to live with somebody, it’s fine, but I would try to stick to the fair housing laws as best as you can.

Ashley:
And then, what’s a good way to make sure that you stay in landlord mode. And you treat this like a business, so that maybe you’re having everybody pay online or something. It’s just automatically deposited into your account versus getting like, “Oh, well.” Having the person next door to you knocking on your door and be like, “Hey, here’s $100. I’ll deposit the rest later and stuff.” How do you keep that, focus on your business and those systems and processes and it doesn’t get too relaxed into a friendship mode?

Craig:
Yeah, no, that’s great. So, I use a system called Rent Ready. I think I’m sure, I think they were on the bigger pockets podcast and all that. And so, it’s a software that allows the tenants to submit maintenance requests. It allows them to do automatic rent payments and all that. And so, basically you just make sure they set that up in the first month and then you never have to ask for rent ever again, which I think is amazing. As for not getting too friendly with your tenants, that’s a really easy thing to slide into, especially if you’re very friendly.

Craig:
What I would do is I would be civil and cordial with them in the house, but I would never really ask them to hang out, go somewhere to hang out. I would never ask them to go to a restaurant or go to a bar or go snowboarding or anything like that. But that’s just the culture of my house. One way that a lot of people get their houses filled is that they niche out their house, so they say like, “Snowboard is paradise,” or like, “Rock climber haven.” So then, they get a bunch of snowboarders and then they go and they become friends. And that’s actually a really good way to get tenants. So, it really just depends on how you market your house hack and what house hack you want it to be.

Ashley:
That’s cool. I’ve never heard of that before like picking a niche and trying to get people that have common interest into a house.

Craig:
Yeah, it works really well.

Tony:
Yeah. Ash’s would be, “Must have cool hip-hop T-shirts to live in this house.”

Ashley:
Yeah. [inaudible 00:29:10]…

Tony:
Or really bad knees.

Craig:
Yeah. She’s got-

Ashley:
… I should say.

Craig:
She’s got some Kenny Chesney on there now, yeah.

Tony:
So, Craig, one follow-up question to that, so the other thing that always gets me stuck on the house hack strategy is how do you split up utilities, maybe common things like toiletries and paper towels and dish soap? How did you account for all those things? Was it just one flat rate? Was it variable? Switching off month by month? What was your strategy for managing those?

Craig:
Yeah, so when I had these, I would just charge a $75 utility fee on top of the rent. And that would change based on how many bedrooms it was. If it was a four-bedroom, it’d probably be $100. Nowadays, I would actually increase that to $100 because prices are rising. But so, you just have a flat fee. In the winter months, your utility bill is a little bit higher and so, you’re going to lose a little bit. But in the summer it’s a little bit lower, so you’re going to win a little bit. And it nets out within a hundred bucks over the course of the year.

Craig:
And so, that is infinitely easier than going in, splitting it up five ways every single month, adding it all up. It’s a pain. I did that, too and I would just never do that again. And so, that’s what I would suggest, a flat fee, split it that many ways, and you’re good to go.

Tony:
Does that include all the household items, Craig? So, the dish soap, the paper towels, the toilet paper. Everything that’s needed just for the common areas, too?

Craig:
So, when I would furnish a house, I would purchase, I’ll go to Costco and I’d buy a big thing of toilet paper, a big thing of paper towels, a big thing of, like all that stuff. It would maybe cost 100 to 200 bucks and that would be really good for the year. And so, I don’t know if it includes it or not. Sure, but also if things ran out and I wasn’t around, people would replace it. There’s never been a time where we went without toilet paper or anything like that.

Tony:
Yeah. Last question, what about the food piece? Did everyone have their own section in the fridge to say, “Hey, this is Craig’s stuff. Don’t touch it. This is Ashley’s. This is Tony’s.” How was the food handled?

Craig:
Yeah, so there’s specific places in the fridge and also, everyone has their own cabinet. And so you’ve got your dry goods and your stuff you need to refrigerate. There were sections for sure, like section-ish, but sometimes, you put the milks together and you just remember which milk is yours and all that stuff. And we never really had an issue with that. I forgot to say this, if you are going to have five or six people living in the same house, I would probably suggest getting two refrigerators. We always had one upstairs and one downstairs and that way they can store their stuff in the fridge and less time coming upstairs and just more room for everybody.

Ashley:
Interesting. Yeah. I don’t know if I could ever go back to house hacking sharing crisis because I know Tony would yell at me because I’d steal his food all the time. We went to Tennessee together and we stayed at a cabin, a bunch of us. And Tony was meal prepping for his fitness competition and he brought, it’s from California to Tennessee, all of his meals in his little container. And that was the only thing in the fridge, I think that we-

Tony:
And Ash, did you eat one of them or something?

Ashley:
You know what, I was so starving when I got there. I was so tempted to, but Tony, you know how nice him and Sarah are, they actually brought me back some chicken. It all worked out, yeah.

Ashley:
So, Craig, what other tips and advice do you have for rookies that are looking to get started in their house hack? Who are some of the people they should have on their team, maybe? Do they need to find an agent who is friendly to house hacking and knows what that is? Do they need to go to certain mortgage lenders? What does their team look like that they should be building?

Craig:
Yeah. So, I think the first and probably, maybe I’m biased, but the first and probably, the most important person on your team is going to be a real estate agent, because your real estate agent is that node that knows everybody else. And so, if you find a good investor friendly agent that has worked with house hackers before in your area, then make sure they are house hackers, make sure you get along with them, obviously. But if they pass all your criteria, they’ll introduce you to their house hacking friendly lender and contractors and accountants and everything you really need.

Craig:
And so, you don’t need all that stuff up front. Get an agent, find an agent is the first step. After that, they’ll introduce you to everybody else. Let them do the work. And so, I think that’s just the most crucial piece. But I would say take your time finding a really high-quality investor friendly real estate agent and let the rest fall into place.

Ashley:
What about the landlord piece? Is it common for if you’re house hacking, to get a property manager or do you recommend that you self-manage?

Craig:
I think at first it’s best to self-manage just so you know how to do it. And just so you know if your property manager is messing up or not. So, the way I did it was I managed my first two properties myself. Once I got to my third one is when I started hiring property management and I even hired a property manager for the house I was living in to rent out those other bedrooms. And the reason for that was because I was becoming a real estate agent at the time and it just became way more, my time was better served showing people houses versus waiting in the house, having people not show up to see your room. And so, you guys have to figure out what your time is worth. And then, you’ll know when it’s time to hire a property manager. It is very obvious.

Tony:
So, Craig, you mentioned earlier that you’ve essentially achieved financial independence within less than three years through the house hacking strategy. So, what I want to do is, if you can maybe open up the kimono a little bit and give us the behind the scenes. If someone today, they’re working a 9:00 to 5:00 that maybe they’re not crazy about, how can they use house hacking to, maybe not two and a half years, that might be a little bit aggressive, but say they had five years. If someone wanted to achieve financial independence with house hacking over the next five years, what blueprint can you give our listeners to be able to do that?

Craig:
Yeah, so the way that a lot of people in Denver are here doing it is each house hack they buy is going to cash flow them between $500 and $1000 a month. And so, you’re able to buy one of those a year, every year for five years. And so, if get great deals and you can get $5,000 a month in five years, well, that’s financial independence right there. And that, of course, assumes that your rents don’t increase and property values don’t increase, because once you start getting more and more properties that are increasing, you’re able to take the equity from those properties through a HELOC or whatever else. And you can buy more and you can acquire more.

Craig:
And so, I think Brandon has talked about the stack where everybody thinks linearly, but really, it doesn’t work that way. Once you start getting 1, 2, 3 properties, you’ll have more money to then buy 4, 5, 6, 7, 8, 9. And I guarantee you, if you put your head down and buy a property a year, you’ll be very close to financial independence within that five-year timeline.

Tony:
You have my head spin a little bit, Craig. So, I live in Southern California, which is historically a pretty expensive market and a lot of cities here, just buying a long-term rental wouldn’t make sense. And it’s not necessarily house hacking, but just the idea of renting by the room in maybe a more expensive market could be a way to really unlock a different level of profitability. Because if I could rent, maybe a house by itself for $2,700, if you rented the whole house, but if it’s a five-bedroom and I can rent each one for maybe $800 a month, that’s a big difference in profitability there. So, yeah, no, no, just thinking out loud. Maybe I’ll go out and buy a house hack or a multifamily, rent it out by the room now, so we’ll see.

Craig:
Yeah, so in-

Ashley:
I already texted Sarah. She said, no.

Tony:
Yeah. No more deals.

Craig:
So, in more expensive markets, because people always are baffled that I think anyone would say, “Oh, my gosh, I can get a property in Denver,” which appreciates 20% the last two years and still get $1000 of cash flow. I think anyone would take that all day. And I don’t do that by just buying a house and renting it out traditionally. Those are for Midwestern markets and in those markets where you can buy houses for under 100 grand.

Craig:
You have to get a little bit creative in these markets like Denver, Austin, Seattle, I’m not too sure about Southern California, but these tier-two cities, maybe not the LAs and San Franciscos, but what you do. And so, there’s many ways you can do it, whether it’s rent by the room. I’ve been doing this thing now with Airbnb arbitrage. And so, I think a lot of people get excited about finding landlords to rent from, and then put it on Airbnb and keep the difference. Well, I’m just that landlord.

Craig:
And so, if someone comes to me and they want to Airbnb my place out, they pay me $400, $500 a month premium and they take on the management of it. And so, I’m saving. I’m making $400 a month more plus I’m saving on the property management fee, which is about a $600 to $700 difference than I would just traditionally. And so, I’m like all day, I will do that.

Tony:
Craig, you’re going to have so many people, who are fans of short-term rentals, who reaching out to now saying, “Please let me arbitrage your units in Denver.”

Ashley:
Yeah, Craig, let me dig into that. So, you’re not paying a property manager for these fees that the operator is taking over. So, are they taking care of all the maintenance then? Is that included in your lease agreement that they’re in charge of that?

Craig:
So, at least with my agreement, I think every agreement will be different. With my agreement, they take care of the small stuff that the guests will probably do, like little leaks here, little stuff there. If there’s something big, the AC goes, the furnace goes, the roof needs to be replaced, that’s on me, of course. And so, think like most of my maintenance is taken care of.

Craig:
And I’m a pretty nice dude and I don’t want to spoil our relationships, so am I going to let $200 once every four months really destroy a relationship I have with this person who’s given me, say helped me save $600 a month? Of course, not. And so I’m fairly lenient, but yeah, but the agreement usually is they pay for the small things, I pay for the big things.

Ashley:
Okay. So, they would still contact you directly instead of the property manager?

Craig:
Yeah, if something needs to be replaced. Yep

Tony:
Yeah. But so, you have the arbitrage STR operator and you also have a property manager or did you remove the property manager together?

Craig:
I removed the property manager because for me, those things just don’t break that often. Maybe once a year I have to call a plumber and oftentimes, I have an assistant, too. I just have them do it. And so, it’s not really. It’s sure it’s me managing it, but it really doesn’t take much time at all.

Tony:
Cool. Well, thank you for that breakdown.

Ashley:
Yeah. Would you want to go through just the numbers of a house hack for us real quick? You said maybe like $500 to $1000 on average, someone can get from the Denver market. But can you maybe show what the purchase price would be? How much you’d have to put down? What maybe your interest rate would be? And then what they should charge per room? And how much you’d get back in your pocket?

Craig:
Yeah, I can go through my most recent one. Back in July of 2021, I bought this property in a pretty up and coming area of Denver. It was actually a seven-bed, three-bath. And in this, it’s called Virginia Veil. It’s right next to Cherry Creek. It’s a really up and coming area. It’s really nice. What I liked about it’s got that top-bottom setup with that big utility room that I described earlier.

Craig:
And so, I bought this for $585,000. I can’t remember the interest of my mortgage. It was 3 point something, so interest rates were lower back then. And then my mortgage on that is $3,000 a month. So, that was my mortgage. I ended up making one of the bedrooms downstairs into a living room. And so, now it’s a six-bed, three-bath with a living room and I converted that, that downstairs to an Airbnb. I really did not like managing the Airbnb and so, that’s when I got the idea of doing the arbitrage with somebody else.

Craig:
And so, somebody’s renting that downstairs from me for $2,400 a month and she’s putting on Airbnb. And I think she’s making a lot of money because I haven’t heard any complaints. So, that works. So, in Denver, you really can only have one Airbnb per residence. And so, that was an issue in Denver Metro and this one is in Denver Metro versus in the suburbs, the rules are different. And so, the upstairs I have a traditional regular tenant and they pay $2,400 a month as well.

Craig:
And so, you can see the difference there. It’s $2,400 for a top unit, three-bed, two-bath. It’s pretty nice with a backyard versus the same exact amount for a basement unit, three-bed, one bath, no backyard. And so, that is making me $4,800 a month in rent on a $3,000 mortgage, so I’m making $1,800 over the mortgage. And I set maybe $400 or $500 aside for vacancy. Vacancy, I do pay utilities on that one and all the other things you’re reserved for.

Craig:
And so, I’m making a little over $1000 a month on that property right there. And that’s not a home run, out-of-this-world deal. I found that very quickly and just went with it and so, you can get stuff like that all day.

Ashley:
That is so cool. I love that you looked at that property and you’re okay, I want to do short-term rental. And then you’re like, “You know what? It’s not for me. Let’s twist and turn it. And let’s do Airbnb arbitrage.” Especially, that’s one of my favorite things is looking at a property and finding different ways to pull revenue off of it. And also, having those different exit strategies on it where if something’s not working, “Okay, I can do this now with that property.”

Tony:
And Craig, just really quick. You say $1000 pretty nonchalantly, but it’s a pretty healthy amount of cash flow for one property. My first long-term rental, I was making 150 bucks a month, so you did almost 10x that. So, don’t sell yourself too short there.

Tony:
One of the thing I want to highlight. You talked to Ashley about multiple revenue streams, the different opportunities from a piece property. And episode 107, we had Kai Andrew on, and he talked about land hacking, which is similar to house hacking, but his was with land. And he was making 10 income streams off of one piece of land. So, if you guys go back to episode 107 with Kai Andrew, you can hear a little bit more about the cousin to house hacking, which is land hacking and how he set that up.

Craig:
We’re going to have to give that one a listen.

Ashley:
Well, Craig, thank you so much for joining us. We do have a couple segments here to go through. Tony, you want to take the first one?

Tony:
So, Craig, are you ready for the rookie exam?

Craig:
Oh, man, I didn’t study. But let’s do it.

Tony:
The future of your life depends on this exam, so luckily for you, I think you’re going to do well, man. So, three questions for you, same three questions we ask every guest now. So, the first question is what is one actionable thing a rookie should do after listening to this episode?

Craig:
I think you should reach out to a investor-friendly real estate agent in your area. And just start asking questions and start having those conversations, so they can help. if you need some time to prepare, they can help you so that you know what to prepare. And so that way, when it comes time, you’ve got your down payment saved up. You can hit that ground rolling versus getting all the education and getting the team together then. So, start building your team now.

Ashley:
The next question is what is one tool, software, app or system, in your business that you use?

Craig:
For the house hacking piece, I would say Rent Ready is going to be the best thing that I’ve seen. It used to be Cozy, but Cozy got crappy once apartments.com bought them. So, I always recommend Rent Ready now and yeah, they do great for the property management side if you’re going to be managing your house hacks yourself.

Tony:
Awesome. Last question for you, Craig. Where do you plan on being in five years?

Craig:
Man, my future does depend on this.

Tony:
Are you going to chicken on me? We will.

Craig:
That’s always a tough question. We just bought our forever home up in Idaho. And so, I think we’re going to be there. We’re going to be settled in there a little bit more. We’re going to continue to grow the real estate team in Denver and maybe in a few different other markets and just try to help as many people as we can achieve financial independence through real estate investing. And so, similar to BiggerPockets mission, we have a very similar mission. So, yeah, we’re just going to keep taking it day by day.

Ashley:
And even better, I love Idaho. That would be my dream place to live out of all the places that I’ve been to.

Craig:
Yeah. We’ll definitely, come by and hang out.

Ashley:
Yeah, I’ll be in Boise and Coeur d’Alene in June.

Craig:
We are in Coeur d’Alene, so let me know, yeah.

Ashley:
That’s even better. That’s amazing there, so good for you.

Craig:
Yeah, yeah. Let’s at least grab lunch or you can come see the place, yeah. You can meet Grace.

Ashley:
Cool. Well, let’s give out a shout out to our rookie rock star, who is Jason Beckett this week, closed on units two, three, and four. He purchased a triple triplex in an incredibly hot and trendy Tremont neighborhood in Cleveland, and somehow managed to get it below asking with an FHA 203K loan. List price was $329,000. He got it for $290,000, out of pocket $15,200. The rehab was $70,000, which was built into the loan, which is part of the 203K loan. And his expected ARV is to be $400,000. And the rent potential is going to be between 1500 to 1650 per unit. So, congratulations, Jason, that’s awesome.

Ashley:
Well, Craig, where can everyone find out some more information about you and reach out to you besides showing up at your doorstep in Coeur d’Alene?

Craig:
Yeah. Well, you’re more than welcome to Instagram. I’m the Fi Guy. We have a podcast of our own, too, called Invest to Fi. And if you’re in Denver, you can always look at thefiteam.com as well. We’re always happy to help.

Ashley:
Well, Craig, thank you so much for joining us. We enjoyed having an expert on to talk about house hacking. I’m Ashley @Wealthfromrentals, he’s Tony @TonyJRobinson on Instagram, and we will be back on Saturday with a Rookie reply.

Real estate can be one of the most profitable investments, but it’s also one of the most costly and complicated. Not only is a lot of money involved, but real estate tends to move in trends, for better or worse. When you decide to invest in real estate, you want to ensure that you choose a property that will pay off in the long run.

As an experienced investor, I’ve learned quite a bit along my journey. Friends and colleagues often approach me when considering investing in their first rental property.

In this article, I’m sharing the most common questions new real estate investors ask me.

Question #1: Is Now a Good Time to Invest?

Real estate is a tricky business. Knowing what’s in store for the market is extremely difficult, but there are a few key indicators to pay attention to that will give you an idea of which way the market is heading. 

Those indicators are: 

• Interest rates 
• Tax rates 
• Local market trends 

In short, the answer is always yes. Now is a good time to invest. 

As long as you are thinking long term, any market fluctuations occurring today will typically not impact an investment property down the line. Looking at the last few decades of housing prices, you would see that home prices have consistently trended upwards.

The exception to the rule is if you are looking for a short-term real estate investment or if there is a catastrophic change to the market in one way or another. It’s impossible to predict the future, but events like regulatory changes, war, or financial busts can all dramatically and suddenly impact the real estate market. 

Question #2: How Can I Get My Finances in Order?

Before purchasing any property, do the math and make sure it’s something you can afford. 

You should be looking at potential profit margins, mortgage rates, and the average rental rates for the market you’re investing in. Regularly monitor your credit score and work on actively improving it if necessary. Estimate maintenance and management costs, and see how they fit in with your expenses and income. 

Lastly, you should always plan for the unexpected. Build an emergency fund that you can dip into in case of property or personal emergencies that will keep you covered without rocking the financial boat. 

Question #3: Should I Invest Out of State?

If your local market isn’t offering the investment opportunities you want, you might consider buying a property outside of where you live. This strategy can be lucrative, but there are hurdles to watch for. 

Landlord-tenant laws vary from state to state and constantly change. You’ll also need to assemble a team to help you manage your property if you don’t plan on traveling regularly. That being said, looking for investment properties in what may be a more accessible market can provide fewer barriers to entry and help you diversify your portfolio.

So, it’s up to you to figure out if it makes sense.

Question #4: Should I Invest in Multiple Properties?

You might consider adding multiple properties to your real estate portfolio to generate income faster with larger profit margins. In addition to providing multiple streams of income, a larger real estate portfolio diversifies your risk and offers more tax benefits.

I recommend you consider paying down debt substantially on your first property before you jump into a second, third, fourth, or more. While this is a more conservative approach, it will protect you in case of a downward turn in the market. If you are confident you’ll bring in more profits than the interest on your current mortgage and ancillary expenses, you might be able to skip this step. 

Treat every new property as if it’s your only source of revenue. Research your options for securing additional financing, which will vary from conventional mortgages to private loans based on your financial situation.

Question #5: Should I Invest With a Partner?

Coming up with the initial capital to cover a down payment, realtor fees, closing costs, property taxes, home maintenance, and the like can be challenging. To save on costs, many people choose to invest with a partner who can share the finances and responsibilities of owning an investment property. 

If this is a path you’re considering, create a contract or written agreement before taking any official steps. Lay out clear expectations for each partner’s roles and responsibilities, break down each partner’s finances and outline how assets will be protected. 

Look for a partner who complements your skill set. If you excel on the administrative side, look for someone who thrives on repairs, renovations, and maintenance. 

Question #6: Is Turnkey the Way to Go?

“Turnkey” generally refers to a property for sale already in move-in condition. Tenants might already occupy it, or it is ready for occupancy without requiring any updates or renovations. A turnkey property can be an excellent investment, as it usually provides quick cash flow without any upfront costs. 

I would recommend this, especially for new investors. While purchasing a fixer-upper can be a great way to save money on the purchase price, vacancies can quickly destroy your profit margins. 

Question #7: Should I Buy Properties with Tenants Already?

Sometimes the best rental properties are already rental properties. 

If you’re looking to invest in a property that has tenants, don’t make any final decisions until you understand the vetting process the current property owner went through. Please don’t assume that because tenants are living in the building, they are the right tenants for the property. Ask the current owner for as much information and documentation on the current tenants as possible. 

Ask what criteria they used to qualify the renters? What has their rent payment history been like? Are there any existing agreements in place that you need to know about?

Final Thoughts

Good investments require analysis. Setting unrealistic rates of return on real estate is one of the main reasons new investors lose money. Put in the work to understand the different types of rental properties and the different opportunities in your market. You might decide that one successful investment property is all you need, or you might find yourself searching for the next investment.

When running a business, automation and delegation can make your life easier and amplify your success. This is even truer for the real estate industry. If you’re in the short-term rental (STR) business, you might have realized by now that STRs are one of the most management-intensive real estate classes. 

This, of course, is because of the high volume of people coming in and out of your property. But even though STRs require more time and resources to manage, that doesn’t mean you or even someone else needs to be completing those tasks. 

As my business grew, I wanted to see which pieces I could start delegating to other people as most other entrepreneurs would do. 

But, instead of finding the right people for tasks, what if I could find the software or tools that can take over these time-consuming jobs without hiring people?

After all, I wanted to delegate three things:

• Messaging
• Pricing
• Guest Services

All of these can be covered by automated software. In this article, we’ll discuss those applications.

Automated Messaging

When it comes to any online travel agency (OTA) like Airbnb or VRBO, at the end of the day, they are a search engine, and outside of keywords, their algorithm rewards specific behaviors. 

One of those behaviors is how quickly you respond to your guests. The quicker you respond to a guest, the higher your account is placed in the search results. 

So, the first thing I wanted to do was automate the messaging for my business.

Before automating, I would manually send booking confirmations, check-in instructions, a check-up message once the guest checks in, a pre-check-out message, and a review request message. That’s a lot for one property, let alone managing others.

To make my life easier, the first tool I found was Hospitable. For a starting price of $25 per month for up to two properties, this tool allows you to integrate with Airbnb, VRBO, and Booking.com, and it can handle all of your messages automatically for you. They also provide excellent messaging templates, so you don’t have to worry about the specifics of your writing. 

The automated messages through Hospitable auto-fill the guest’s name, date of check-in, and date of check-out. When you are away from work, you can set up an automated message saying you’re not available, which comes in handy at night when you are sleeping.  

Another exciting tool they provide is automated reviews. This allows you to automate all of the review requests to guests. Then, the software will read through the reviews and determine which ones should display first on your listings, which can become very time-consuming after you start managing more properties.

After messaging, the next step is to automate the pricing.

Dynamic Pricing 

When I first started listing properties on Airbnb, I would sit down once every week, pull up my calendar, and assess the pricing of each listing. I would slash prices for dates that had not been booked and increase prices for weekends that I thought would do better. There was a lot of guesswork, and it simply wasn’t scalable. 

Cut to today, and I firmly believe that your property is at a disadvantage if you are not using a dynamic pricing tool for your STR. Automated pricing apps will track the local market’s rental demand and adjust prices based on it, making your listing much more competitive. Another great benefit of automated pricing is that it helps your properties rank better on the OTA search results.

The dynamic pricing tool I currently use is PriceLabs.

Digital Guidebook 

My wife and I recently took a trip to Tulum Beach, Mexico. When we checked into the resort, the front desk agent sent us a link to 4 days worth of activities. We absolutely loved this, and I wanted to see how I could apply that to the STR business. I asked myself, “How can I become my guest’s travel agent without spending too much money, and can I automate the whole process?” 

That’s where a digital guidebook came in.

A digital guidebook is a link you can send your guest that provides information and a short itinerary of things to do in your market. I suggest finding 3-4 attractions and making a daily schedule around them. When your guest checks in, you can have this sent automatically.

For instance, Asheville, North Carolina, is known for breweries, hiking trails, and restaurants. I have three separate days that are planned around those things.

The digital guidebook I use is Hostfully, but there are a ton of other platforms you can use. I recommend having a digital book compared to a printed one you leave at the property for many reasons, including easier access for a guest, ease of updating, and the ability to keep it all automated.

Final Thoughts 

These are the three tools I’ve implemented over the last two years to completely automate the vast majority of my business. Even better, applying all three of these tools to your rental will only cost you an extra $60 or so per month, more or less depending on the number of properties you hold. Regardless, the costs are a drop in the bucket to how much money and time these tools will give you back!

Find long-term wealth with short-term rentals

From analyzing potential properties to effectively managing your listings, this book is your one-stop resource for making a profit with short-term rentals! Whether you’re new to real estate investing or you want to add a new strategy to your growing portfolio, vacation rentals can be an extremely lucrative way to add an extra income stream—but only if you acquire and manage your properties correctly.