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Andrew:
The opinions expressed here are my own and do not reflect those of the Marine Corps, the Department of Defense, or the United States government.

Mindy:
Welcome to the BiggerPockets Money Podcast, Show Number 315, where we interview Andrew and Haley and talk about their journey from his financial messes to their real estate successes.

Andrew:
When we saw the potential, though, we realized we are not compromising. Again, we’re just loving future us. You know? We’re living in … and it was an upgrade for us because we’re coming from Denver where square footage here is not cheap. So we moved into the mother-in-law suite and it was an upgrade. So we still … That’s how we looked at it. Yeah, we could be in the big two bedroom house, and have a nice guest room and all that other stuff. Or we can live in the small mother-in-law suite and just pay to have our friends stay at a hotel whenever they come visit. That was the options that we had and I don’t regret it at all. I love that little place.

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and joining me today is my hard-hitting co-host, Scott Trench.

Scott:
That’s a rocking good intro, Mindy.

Mindy:
Scott and I make big 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 where or when you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments and assets like real estate, start your own business, or simply get out of a hole where your credit score is 412. 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, you just mentioned a magic number of 412, which, spoiler alert, is the lowest that our guest Andrew’s credit score was at, at one time in his life. Which is … I feel super judgemental, but that is really, really low. But why was it low? Because he didn’t know what he was doing with his finances. He was never taught about financial literacy. He was never taught about how to do his thing. What I want to make sure that we celebrate is the fact that he took charge of his financial situation. He recognized it was a problem.

Mindy:
He saw that somebody else was having success and reached out to that person and said, hey, how are you doing it so that I can do it too? And that takes a lot of guts. You could very easily be like, well I guess I just have credit card debt for the rest of my life. I guess I just have a 400 credit score for the rest of my life. And he didn’t stay there. He wanted better. So he sought out the information to do better and then took action in order to get better. And I think that’s really important to note.

Scott:
Yeah. Andrew is a long-time friend of mine. We played rugby together. And I worked with him through his financial difficulties. Was that now five, six, seven years ago at this point. And it’s just been amazing to see what he’s been able to do, how he’s been able to get current on all his student, all his debts, build a financial success story, and now owns a number of rental properties that are cash flowing tremendously well. So it’s been a phenomenal privilege to watch his journey and start learning from him on this. And I couldn’t be more thrilled to invite him on the show today.

Mindy:
He has a great story. And he’s joined by his wife, Haley, who didn’t have the struggles that he had, but joined him on his real estate journey. And I really like where they are in their real estate investment space. They’re making money in this market. They’re continuing to buy in this market. They’re not letting the market define what they’re doing. They have decided what they want to go after. And they’re still buying properties. They’re still making it work. So people who say, oh well, the market’s changed so I can’t make money anymore. Well, sorry, Andrew and Haley are doing it so you could do it too, if you wanted to, but you have to do the work. I think it’s a fun, fun story today.

Scott:
Awesome. Let’s get to it.

Mindy:
Andrew was your typical 20-something. He didn’t know anything about finances, so he just spent his money without any thought. He racked up tens of thousands of dollars in debts. Many of which were delinquent. In 2017, he made a hard pivot and changed his financial situation dramatically. Now he’s in a great financial position, owns six rental units across two properties, which would not have been possible if he had not taken notice of some young kid buying beer for the rugby team so many years ago. Haley, on the other hand, is perfect in every way. Andrew and Haley, welcome to the BiggerPockets Money podcast.

Andrew:
Hey guys, how’s it going?

Haley:
Thank you so much for having us.

Scott:
Thanks for coming on. We’re excited to have you.

Mindy:
I’m super excited to talk to you guys. And since Haley is perfect, Haley, I’m sorry. We’re going to have to that.

Haley:
That intro.

Mindy:
Push you to the side and focus on Andrew. Andrew, tell me all your faults.

Andrew:
Oh man. All right.

Haley:
True confessions.

Andrew:
Yeah. Where do we start? I guess-

Mindy:
Let’s start in high school.

Andrew:
High school? Okay. My dad was a fighter pilot instructor in the military and that had set up my family’s expectation of once we, once my dad gets out of the military, we will have the opportunity to … He’ll go to a major airline. We’ll have a bit of a nicer lifestyle. And so we moved to Colorado. We experienced 911 shortly after. And my dad basically lost everything. He lost his high paying salary, his pension, his security, his seniority, all this other stuff. And from then on, financially, my family, they struggled. My dad had to refinance the house a number of times to pull out equity to pay off credit card debt. And then also, he went back to the military part-time and started working weekends and days off as a reservist out in Colorado Springs.

Andrew:
I just didn’t have a ton of great financial education growing up. So I joined the military myself in order to pay for school. I wasn’t aware of all these amazing scholarship opportunities for lower income people. And I thought, I had to work or have somebody pay for college. So I decided to do the work route. I joined the military, went off to Air Force basic training and was in the process of becoming trained to be a load master in the Air Force, out of Colorado Springs. When President Obama scaled back military funding and I wasn’t an essential personnel, so my job basically got cut during the sequestration. But I had kept up my end of the deal. So I had full benefits and went off to college. And this is where things took a turn south. Instead of using my GI bill, I just, I didn’t-

Scott:
What year is this? Where you went off to college?

Andrew:
This was 2010. So …

Scott:
Okay.

Andrew:
I had already done about three semesters before I joined the military. My dad did have enough to help me go through the first three semesters and that gave me enough college credits to get a really good job in the Air Force at his unit, which he set up. He was amazing doing that. So I had a little bit of experience. But in 2010, I cut ties with the Air Force officially, and went up to Colorado State, up in Fort Collins. And my thought process was, I’m not going to use the full GI bill benefits and waste them on a state school, which doesn’t really cost that much. I’ll save that for medical school. Because that was my plan at the time. I’ll use the GI bill to the maximum potential and use it for medical school.

Andrew:
So what ended up happening was I pulled out all the subsidized and some unsubsidized loans as I could. And then I was working part-time and then my last little bit of financial runway, I guess, was provided by a credit card. And I ran the credit card up. Pre-med studies were a lot harder than I thought. I couldn’t end up working as much as I wanted to. So maxed the credit card out and then couldn’t make the payments. Had to eat, so … Chase Bank took a hit for a while. I had maxed it out and then they closed the account, sent it to collections, all that stuff. And I graduated, like many graduates at the time. Had a difficult time finding a job. So I moved back in with my parents for a little while. I was working, waiting tables, doing all that stuff. Finally, got a job at a local hospital doing oropharyngeal cancer research.

Scott:
And can you give us a couple of your timestamps in some of these two. You graduated what year? How long did you wait tables? When did you start this new job?

Andrew:
Yep. I graduated in 2013. Left Fort Collins and came back to Denver. And then I worked at a blood bank for about six months doing blood draws for plasma donations. I waited tables for a couple months. And then at the tail end of 2014 is when I got a job over at Porter Hospital in Denver doing some cancer research, which is what I wanted to do. That was my dream of doing medical school and all that stuff and getting into Oncology. So I was in the environment I wanted to be, but definitely not making the money that I would’ve hoped for.

Andrew:
So I was living paycheck to paycheck. Living, I finally moved out of my parents house to a rat-infested apartment down in Denver and had a roommate, a good friend of mine, but he was on hard times at the same time as I was. So I was not in a good place. But the one good thing about it was, it was very close to the rugby pitch and I could walk there. So my outlet was going and practicing rugby. And it was a new sport for me and I absolutely fell in love and met some of my, to this day, some of my best friends, so. It was definitely a trend upwards starting there. So …

Scott:
Well, we got to pitch the club. What was the club called?

Andrew:
Yeah. Queen City. Yeah. Yeah.

Scott:
Go Rams.

Andrew:
Yep. It was Queen City Rams. So I was a Colorado State Ram and then I came to Denver and I was still a Ram. So it was great.

Scott:
So what’s your position? This is up to 2014 we’re in.

Andrew:
Yes.

Scott:
How would you summarize your position at that point in time?

Andrew:
Oh, I was living paycheck to paycheck. I had no savings. The money that I had, I spent on either food and what little I had left, I tried to spend on fun just to stay sane. I had no dating prospects whatsoever. My car was a piece of junk. It was pretty abysmal there for a little while.

Scott:
What was your income at that point in time?

Andrew:
I think I was making around 32,000 a year, which, if I had the financial literacy, I could have done good things with that. I just didn’t know what I was doing, so. I made the money. I spent the money. That’s how it worked.

Scott:
And how much total debt did you have and what was your credit?

Andrew:
My credit at the time was in the low 400s. So I think the lowest it ever got was a 412, if that’s even possible. Yeah. I look at it now and I’m just astounded that it ever got that bad. But having that card go to collections and not having done anything with it, I didn’t know I could call and settle, and try to close the account. That knowledge came a little bit later, so. My financial savings were nonexistent. I couldn’t qualify for any new credit cards to rebuild my credit at the time until I settled with this defaulted account. Yeah. It was pretty bad.

Scott:
And how much total debt do you estimate you had?

Andrew:
So with student loans and that credit card debt, I was in the mid to upper 40s. I think 47 was the highest it ever got.

Scott:
So what happens next?

Andrew:
So at a rugby social for the start of the new season, I hear this player who I’d watch play, I was the second string, it being a new sport for me, but I really admired him and some of the other guys in the backfield. Toast the team and say, hey, “This is celebrating me closing on my second property.” And I’m looking at him going, I’m like, this guy is definitely younger than me. How is it possible that he owns property at all, let alone has closed on a second property in Denver?

Andrew:
I literally had a rat crawl across my bed last night, I kicked against the wall. How is this? How is there so much disparity? Like, he plays rugby. He can’t be that much smarter than me. It’s like, yeah. And that’s when I pulled this guy aside and I was like, hey man, “You got to help me. I don’t know what I’m doing. You clearly have some knowledge that I don’t. Point me in the right direction.” And that was Scott Trench. So yeah, I’ve known you as Trench, basically, our entire friendship; but yeah, professionally, I should say CEO of BiggerPockets, I just happened to bump into, there at a dive bar. I

Scott:
I have very few personal friends who refer to me as “Scott.” So yeah. It’s always Trench with my personal friends, so. But yeah, that was awesome. Yeah, that was, I remember meeting with you after that and talking through some of those things. So do you want to walk us through some of the situation, how things maybe changed or what that was like, thinking through that and how things progressed from there?

Andrew:
Yeah. I remember you came into my apartment, sat down, and said, all right, let’s see the damage. What’s going on? Pull it up. And I didn’t even know where to find that stuff, because it had been delinquent for so long. I didn’t know the logins. So I remember sitting there for an hour trying to just get into the actual results and the statements and stuff. But when we finally found it, you said, “All right, what you need to do is carve out some time and you’re going to make some really long phone calls.” And I got a little discouraged and I was like, “I don’t want to do this.” But you framed it in a way that made a lot of sense to me and motivated me to do it. And that was like, “Think of it as, this phone call could save you thousands of dollars.” So even if it takes 10 hours-

Scott:
This was because there was a lot of debts in your position that, if I remember correctly, were old debts that were long-time delinquent, had likely been sold from the original creditor to other loan collections agencies and such. And so they already discounted that debt. And so the reason you do that is you call the debt and you say, hey, can I pay off a fraction of this somehow?

Andrew:
Yep.

Scott:
Would you be willing to take a percentage of it?

Andrew:
Yep. Yeah. So you had explained it as you can get rid of this debt for pennies on the dollar possibly. So you’re not going to know until you make that call. It could take 10 hours. But I specifically remember you saying, “If it saves you a thousand dollars and it takes 10 hours, you just got paid a hundred dollars an hour.” And that really set off a light bulb in my head. I was like, oh, “That totally makes sense.” So …

Haley:
Says that to this day, when we have to make phone calls.

Andrew:
Yeah.

Haley:
So that’s like a household phrase now, Trench.

Andrew:
That’s logic that I use to this day. I’ve passed it on to other friends. Do your due diligence, do your comps. If you’re looking at property, don’t overpay $10,000 if it’s going to take two hours for you to realize, hey, that’s not where the market is right now. And so that’s wisdom that I’ve been able to pass on. But that’s, that’s really where it clicked. And I was like, okay, I can dig myself out of this hole. It’s going to take some elbow grease, but it’s not impossible. And so we went through all of my accounts and set a plan. But you set a hard deadline for me. And you said, “I also want you to do some homework.” And you gave me your copy of The Richest Man in Babylon. You said, “You need to finish this before we speak again.”

Andrew:
And that really lit a fire under me and said, not all information is free. I’m going to have to put some work in. I’m going to have to make these calls. I’m going to have to do a little bit of homework. And I devoured that book. I think that’s one, it’s not a huge book, but I think I finished it in two or three days. And just total mind … What’s the word I’m looking for? Mindset.

Haley:
I actually know what you’re looking for.

Andrew:
Yeah. Total mindset shift. And I realized, oh, I don’t have to be the one putting in all the work. If I put my money to work for me. I assign a job to every dollar that I make. I pay myself first and then I pay the rent or whatever. And that just completely, it blew my mind. And one of the biggest things I learned from that book wasn’t even what I gleaned from the book itself. But it was just, wow, knowledge and education is power. You don’t know what you don’t know until you meet people sometimes. But then after that, I just started devouring all these financial literacy books and financial planning and investments and all this other stuff. And that transitioned me into, I guess, the next stage of my financial journey. So I go into that now.

Scott:
Well, let me ask you a couple quick questions here. Were you able to get any of those loans reduced? And do you have any anecdotes about those calls?

Andrew:
Yeah. So the one I remember was that Chase card and it went over. 3000 was my limit. But somehow, I got it up to 3300 or something. And I think I ended up settling for, I think it was just under 2000. So it was 1920, 1950 or something. And to be honest, had I known that a closed account and a charge-off, how it was handled by the credit bureaus, I’m not sure I would advise people doing that again. Because that literally just fell off my credit report last month. So a charge-off somehow stayed on my credit history for seven years. And it was because it was 2015 when I finally paid it off.

Andrew:
And knowing that, I think I would … I’m not sure. It probably was too late to go to Chase and pay the full amount and not have it hurt me anymore. And I still would’ve had the delinquent payments and all that other stuff. But yeah, that one stung for a long time. But after I paid it off, I saw, I want to say it was a 150 or 200 point bump the next month. After it registered with the credit bureaus and all that stuff, my score went up big time. And then I was able to actually-

Scott:
So you’re saying, because it was a credit card debt and I negotiated it down, that credit, that negotiating it down, resulted in a charge-off, which hit my credit score and stuck with me, but I didn’t have to pay it.

Andrew:
Yes. I did have to pay the 1900 or whatever. But once it was, paid off, the way it was reported was finicky. It was reported as something different than just paying off the original debt. And that was weighed heavier, I guess, in the way they score it than just being delinquent on an account, if that makes sense.

Scott:
Okay. So within six months of our conversation and you’re reading Richest Man in Babylon, what are some milestones or what are some things that maybe changed? You said your credit score bumped up.

Andrew:
Yeah.

Scott:
Were you able to pay off this debt?

Andrew:
My credit score bumped up and we had, after I finished the book, you came and sat down with me and helped me come up with a rough budget, ballpark budget. And you said, “The next thing you need to do is you need to save up an emergency fund.” You can’t have a blown tire wreck your finances. You can’t just be waiting for a disaster to wipe you out. So I saved up. I think $1000 was my first emergency fund. And for me, at the time, that was three months rent. At the time where I was living. So that was plenty of runway for me and that saved me.

Andrew:
I remember, I got into an accident, and I had to pay for some repairs on my vehicle and I was able to do that without tapping into credit and paying interest and possibly defaulting again. So that’s what set me up. And then after I had the emergency fund, I started, I had read a few books on investing and I wish I had read some different ones before, trying to invest myself and getting into the stock market and all that stuff. But I actually had enough funds to where I could start making some future money decisions instead of just living in the moment.

Scott:
Awesome. So you built up the emergency fund and then you began investing or did you begin paying off debt? What did you decide to do from there?

Andrew:
So I got current on my student loan debt and I was basically paying the minimum. I had very low interest rates on those. And my strategy at the time was I want to get into a better financial position and then I can pass up on good returns in the market and pay off the student loan. So I still have student loan debt, especially since it’s been in forbearance forever, at this point now with COVID. But that has been … If I can make eight to 9% in the market, before this month started, it doesn’t make sense to pay off a student loan that’s at 3%, so. I paid the minimum. And that had gotten me current. And then the rest of my money was going towards saving and investing.

Scott:
A at the beginning of 2014, you were negative. You’re spending more than you’re bringing in for the most part or treading water with that. By the end of 2014, how much of a monthly surplus do you think you’re generating if you had to guess?

Andrew:
Yep. So this was mid 2015. So it’s . little later than that, but I was coming out ahead, maybe 150, 200 bucks a paycheck. So it didn’t seem that substantial. But I reigned in the … I got a little smarter with Happy Hours. For me, a big expense is food and socializing. So it always has been. To this day, it still is. But that is where my biggest expenditures were. And so reigning that in, I said, you’ve got X amount of dollars to spend. I think it was $30 a week, I got to spend on fun. And that was movies and extraneous meals and stuff like that. So I really had to plan.

Andrew:
And once I had that emergency fund up, I had just finished a book on negotiating. And so I was able to negotiate a new position at a different hospital that almost doubled my salary. So having understood how lifestyle creep works and all that stuff, that really just catapulted my savings and all that stuff, because I basically continued living on what I was living on, and all the extra income just went straight to savings and paying off debts.

Mindy:
Did you feel like you were giving up things? Did you feel like you were being punished or that you weren’t able to enjoy your life while you were going through this period? Because a lot of people feel or a lot pf people, when you talk about this financial independence movement or oh, you have to pay down your debts. Ugh. Now I have to give up everything and live like a popper and everything’s going to be horrible.

Andrew:
No, I just, I was more intentional. I would make plans to go see a movie with friends later in the week. And that would be the carrot that I’d dangle in front of me and say like, okay, don’t go throwing on extra beers tonight at dinner because we’re saving it for the movie with our friends. And so having that as a goal in the future, I basically fell in love with future me. I was just like, future me is more important. Let’s set it up for future me to enjoy. And that worked. Yeah.

Scott:
Yeah. That’s a really great framework. I’m falling in love with future me and I’m going to make sure that they’re taken care of.

Andrew:
That was before I met Haley and fell in love.

Scott:
I’m sure, future you.

Scott:
With Haley. Yeah.

Scott:
Well great. So you get this new job. You double your income. What’s next? What are some other milestones on this journey?

Andrew:
So at that point, you and I were talking about just lowering the cost of living. And you had talked to me about your house hack over here in Denver and all this other stuff. So I was cognizant of that and I wanted to do something similar at my next living situation. So I found a friend of mine, an old hockey buddy, who wanted to live downtown Denver. Worked for Deloitte. Made very good money. But traveled for work so often. He told me, “It doesn’t really make sense for me to have an apartment all to myself. I’m basically just spending money to have it sit there empty half the year.” And so I told him, I was like hey, “Let’s join forces. I’m looking to upgrade my lifestyle a little bit.” That apartment that you met me …

Andrew:
… Upgrade my lifestyle a little bit. That apartment that you met me in actually got condemned because of the rats. I’m not kidding. I was looking to upgrade my lifestyle a little bit and we found a great apartment really close to Coors Field and everything, and I told him, I was like, I’m happy to split the rent with you, but let’s do something to where cost of living is even lower for us. When you’re out of town, let me Airbnb your room. I’ll manage it. I’ll be here and we’ll split the profits. I’ll manage it. Basically you’ll pay less. He basically lived out of a suitcase anyway, so cleaning his room wasn’t super difficult, but I did everything and that was my intro into house hacking and that’s what we did. There were a few months, especially during peak season, where we both lived for free because that one room in downtown Denver across the street from the baseball stadium was prime real estate at the time.

Andrew:
In 2015, Airbnb was getting up off the ground and there weren’t a ton of units in Denver at the time, so that was really where I noticed the potential of Airbnb. Then I met Haley shortly after. The first night I met Haley, I had guests in my apartment. I was planning on being out of town for that weekend, so I had the entire apartment rented out, both rooms, and met Haley and decided, hey, I’m actually going to stay in town. This girl is awesome, and we wanted to go down to the swimming pool. It’s in an amenity at the unit, but I didn’t have my bathing suit, so I had Haley go over and be like, hey, my… I was like, just tell them your boyfriend forgot her suit, and I was like, we’ll see how this goes over, and she did it. She went over and knocked on the door. The guest came to the door and she’s like, my boyfriend forgot his bathing suit. She went in and got it, and that was the first night we met. Yeah. I forget that.

Haley:
It’s kind of fun.

Andrew:
Yeah.

Scott:
That’s awesome.

Haley:
I flew to Denver to check it out, and this will come in later in my story, but I flew to Denver to check it out to see if I wanted to live here. Two hours later, I was sitting at a table at The Nickel downtown in Denver with my friend who was going to host me and her apartment next door neighbor was this guy. That was pretty cool. Decided on Denver pretty quickly. Let’s just say that. It’s pretty fun.

Scott:
That’s a wonderful meet… what is that?

Haley:
Meet-cute, right?

Mindy:
Meet-cute.

Scott:
Yeah.

Haley:
Yeah.

Scott:
Yeah.

Andrew:
Yeah. It was interesting for sure. Came straight from the airport to the restaurant and we met and the rest is history. Pretty quickly. Denver gripped her, I’ll say. Yeah.

Haley:
Well, you did too.

Scott:
We’re 2015. You’re doing this really ingenious house hacking solution that I think is awesome. You’ve got your new job. I presume you’re saving quite a bit and you’re generally being very methodical about what you do spend on or intentional about what you spend on. What is your savings rate at this point and what’s happening to your overall wealth position, your credit score, the other types of things?

Andrew:
Around this time, I had devoted most of, I guess, my extra income to investing. I had a decent run with Redfin when they went public. I had a great run with Tesla there a couple times, but I was really seeing some great gains with my personal investing. Looking back on it now, I realized I was getting lucky because I don’t know why to be quite honest. There were just a few of those where I got really excited, put all my extra money into it and it worked or I broke even, so I wasn’t too heartbroken about that, but I was also putting more of it towards student loans at the time, because yes, market gains will come and go, but I’ll still have these student loans looming over me, so I wanted to just be out from underneath those. I’d say at that point I was saving about 20 to 25% of my monthly income and putting it towards investment or towards paying off debt.

Scott:
What is that? Is that like a $2000 a month kind of thing or $1000, $2000 a month?

Andrew:
At that time, no. It would’ve probably been about $700, $800. Yeah. I still wasn’t making that much.

Scott:
Okay, but the snowball’s turning.

Andrew:
Yeah. Oh, yeah.

Scott:
We’ve gone from $150 to $700 bucks at this point and it’s starting to pick up.

Andrew:
Yep. It’s rolling now, and about…

Scott:
You meet a wonderful lady. Life’s getting better throughout this period. Is that right?

Andrew:
Yeah. It’s taken time and it’s taken conscious decisions, but I don’t regret any of them. I’m starting to devour more books. Around this time is when you sent me Set For Life, when it was still in the editing phase, and that book was so heavy. It took me forever to get through. I think by the time I finished it you’d already published it, so I wasn’t able to help at all, but there were so many concepts in there that just blew my mind. I couldn’t get through it very quickly, but you had mentioned just setting your investments on auto pay, which is something [inaudible] loved. I will teach you to be rich for that point. He just gives you a play by play of do it this way. You’ll never see it, it’ll never hurt type thing, and that’s kind of where my next steps were at that point. We’re in like the middle of 2017, tail end of 2017 at this point, so it’s been a couple years at this point, and there were bumps in the road where I made a stupid purchase of a toy or something I felt like I deserved and I can’t even tell you what that is at this point. That’s how important it was to me. Yeah.

Mindy:
Okay. I want to make a comment. You said that Scott really set you on this path, but we are overlooking the fact that it’s so impressive that you actually did the work. I have had these conversations with people in similar situations that you are. Hey, this is the stuff you have to do, and then I never hear from them again. There are so many people who want to be in your current position, but they don’t want to do the work necessary to get into your position, so we need to celebrate the fact that you actually took this information and did something with it. That is the hardest part.

Mindy:
Scott had the knowledge. Great for him. You did the work and it sucks to do this work and you did it anyway, and that is the thing that we need to celebrate. Hooray for Andrew for doing it right and doing the work and taking the time to do, because it takes a while. It’s not like you picked up the phone and you’re like, hey, Chase, I want to pay this off and they’re like, great. Now you’re amazing. You had to do this a bunch and you had to slog through this. Where did we start? 2013, 2014, and now we’re in 2017. This was not just an instant, wow, I had a 420 credit score and now it’s 800 five minutes later. It’s four years later or three years later you have a good financial position. When did you buy your first property?

Andrew:
We didn’t buy our first property until October of 2020, so seven years later.

Mindy:
It just jumped way ahead. Okay. No, but still.

Andrew:
Yeah.

Scott:
You had a terrible financial position, and you articulated that. There’s a rat crawling across your bed in the middle of the night, but you’re willing to come in and confront the reality of a situation head on, say, here’s what I’m up against, here’s what I need to do, and begin attacking it; piece by piece, one call at a time, 100 bucks at a time and grind. Then start the snowball and the grind that takes a few years to get going. Then the magic that begins to happen when you commit to that, it’s much harder month to month than you think it will be, and then you look back and you’re like, wow, I made a lot more progress in the last two years than I thought I could have possibly done. That’s the… go ahead.

Andrew:
I was going to say, there’s a little story I’d like to tell just to emphasize that. In those people’s defense, Mindy, and the people you talk to who just say it’s too much work, I was one of those people. I feel like most of those people, they don’t have a good example to look at. I saw Scott and I was like, this guy’s done it. I don’t have an excuse. I can’t say that some pie in the sky, like that only happens to one in a million people. There’s this regular Joe, if you will, that I play rugby with who has done this. I can’t attribute it to him being a trust fund baby or all this other stuff. He worked.

Scott:
That’s nice of you to say, but I will say that a lot of people would’ve that had that excuse in your situation. I didn’t have student loans. I had a higher paying job coming out of college than what you had with that, so there were advantages I had that you didn’t have and you chose, no, I’m going to ignore that and I’m going to go after it and begin attacking what I can control and what I can influence there.

Andrew:
Yeah. Absolutely.

Scott:
I definitely want to give you lots of credit with that.

Andrew:
Well, thanks. Yeah.

Scott:
You are an example for other folks that have all of those headwinds that have piled against them to begin overcoming.

Mindy:
There are people who see Scott buying the beer and saying, trust fund baby, not even looking at how he could have done this. They just automatically make an excuse for him because there’s no way he could have done this by himself. Clearly he had help. I’m going to make my own narrative for him so I don’t have to dive further. You asked him how he did it, and maybe his answer was going to be, I’m a trust fund baby, and you’re like, okay, fine. This isn’t what’s for me then. I’ll just move on, but you had the initiative to even ask the question. Let me celebrate you, Andrew. Take it.

Andrew:
Yeah. Fair enough.

Scott:
Well, let’s jump back ahead to 2017, where the snowball is turning. What are the next milestones there and how do we get to Florida and that first property?

Andrew:
Yeah. At this point, the journey kind of takes a pause. I originally had joined the Air Force and wanted to get my college degree and all that stuff so I could follow in my dad’s footsteps of being an aviator in the military. When I was basically pushed out of the Air Force, I thought that dream died, but I went into a Navy recruiter just wanting to know what the chances are of me doing the military part-time like my dad did so I could have an additional stream of income. As I’m walking out, I had a Marine Corps recruiter call at me and was like, why are you talking to them? You know they don’t do anything cool.

Andrew:
We just struck up a conversation and unbeknownst to me, I was still eligible to be a pilot. I didn’t know that. There were a lot of hoops I had to jump through. I guess kind of to your previous point, Mindy and Scott, these things take time. I called my dad and I asked him, I was like, should I do this? I’ll be old by the time I get done and everyone I’ll be going through training with will be younger than me. He’s like, well, what’s going to happen in four years anyway? You’ll be four years older regardless, so just do it if you want to do it type of thing. You’ll get there whether you want to or not. You might as well come out ahead type of thing. That was my mentality, but I started pursuing a pilot slot through the Marine Corps and I eventually got it.

Andrew:
In 2017, I was notified that I had gotten a slot, pending I could pass their physical fitness standards. After about a year and a half of training, the run was what killed me. I qualified for it and then went off to training in 2018, very shortly after meeting Haley. My whole financial progress and journey and all that stuff was kind of put on hold for a little while because I didn’t make it through training the first time. I made it to the very last week and then got hurt and had to get sent home. They said you can try again if you want to or you can just quit.

Andrew:
I went back to my job at the hospital while I was waiting for another slot to open up so I could attempt it again. I had that job for six months. That’s all it was protected for through USERRA laws and all that stuff. They have to give you your job back for a minimum of six months, but after that six months, I was unemployed, so I ended up Airbnb’ing my current apartment. I would stay with friends or my parents or something like that whenever people would come in. That was my sole income.

Haley:
Or me.

Andrew:
Yeah. Or Haley.

Haley:
Sorry, mom and dad.

Andrew:
Sorry, mom and dad. Yeah. Basically I realized the earning potential of Airbnb once again. Then I did an arbitrage. I guess it wasn’t officially an arbitrage because the landlord didn’t know it was solely being used for an Airbnb, but I was like, well, I’ll just find a property without a state owner. They’ll probably never check in on it. It’ll be fine. There’s nothing in the lease that says I can’t do it. I had another downtown apartment that I had set up strictly for Airbnb and managing those two, doing the cleanings, doing the messaging, all that other stuff, maintaining those was my full-time job until I got another chance to go back. In January 2020, I went back to Virginia to try the officer candidate school a second time. My first awareness of COVID was when they told us that our graduation was canceled because of COVID, so I graduated 10 weeks later, which was right in the middle of March, and that’s when everything hit the fan with COVID. My family wasn’t able to travel out to my graduation, but Haley, come hell or high water, she made it. That was kind of my first indicator, like, hey, I’ve got to hold onto this one.

Haley:
That was your first indicator?

Andrew:
That was the final indicator, I should say.

Haley:
That was a week after Denver public schools closed. Yeah. That was hard because those 10 weeks are grueling.

Andrew:
Oh, yeah.

Haley:
Especially the first time around and we couldn’t talk to each other for…

Andrew:
You’re radio silent.

Haley:
… a number of weeks for that. Now I guess I can speak as a military spouse, but as someone who has a loved one in the military, that was pretty bitter. There were times when you can’t be there for their graduations. Celebrating is a big part of it. After two 10-week experiences of not being able to actually be there, our first kind of hoo-rah for your military career, that sucked. Yeah.

Andrew:
It was a hard time for the entire world.

Haley:
It was.

Andrew:
Shortly after that, I went to the basic school, which is a requirement for Marine Corps officers. Every Marine Corps officer becomes an infantry platoon commander, so you learn infantry tactics and how to lead a platoon and all this other stuff. That school is six months long.

Haley:
Same area, Quantico.

Andrew:
That was in Quantico, Virginia. At this time, I bumped into one of my superiors Dozier, Captain Dearth. He is a pilot, and he was the liaison for all the pilot contracts who were there at the basic school. He mentioned, you’re going to get down to Pensacola. Be sure to grab property immediately. You’ve got to start your financial journey and all this other stuff. I kind of picked up that he had done this, and talking to him, he said, oh yeah, I do this kind of part-time. I have 14 properties in the area and I’m going, okay, whoa. We’ve got to talk type of thing.

Andrew:
He basically turned me on to you buy a property with a VA loan. You live in it while you can, and then you rent it out once you PCS, permanent change of station, when you get orders to another duty station. Talked to him extensively. Asked him how he did it. He had a whole bunch of JVs that he had done. He had some short term rentals. He had some long term. Most of them are long-term, but I told him, I’m getting ready to go down to Pensacola. Can you give me any advice? He said, yeah. Buy as big as you can and get it as an investment, so we were looking for…

Haley:
He said buy as many units on one property as you can.

Andrew:
Yeah. When he said big, he meant as many units. The VA loan allows you to get up to a quad, up to four units, and it’s all dependent on the local area and what cost of living is and all that stuff. I think we qualified for 493 is what I qualified for max, so we set that as our search. We found a realtor who was highly recommended down here. Shout out to Michelle over there. She did a number of virtual walkthroughs with us via FaceTime while I’m sitting there in full camo gear with a 90 pound ruck coming back from a 12 hour hike and all this stuff and I’m trying to stay awake while she’s doing a walkthrough of her property. There was one property specifically that it was the first one that I saw on Redfin actually.

Haley:
It was the first MLS email she sent us.

Andrew:
The first.

Haley:
Had a quad right near downtown. Andrew was like, oh my gosh, this is a great property. I was like, no, wait. We have to analyze many properties.

Andrew:
We have to look at 30 or 40.

Haley:
That’s what [inaudible] Turner said. We have to go through many of them, build that analysis muscle, and then we’ll be good. This can’t be it.

Andrew:
Yeah.

Haley:
It was it.

Andrew:
Yeah. That was the one.

Haley:
Since then, we keep an eye on the property and on the market. We have not found the same deal since then.

Andrew:
Now that we’re into the expansion mode, we’ll never find a deal like that one. I pray we will, but it will be unlikely. The way the house was set up was it was a two bedroom, one bedroom bath that they added an office and a laundry room onto in the 50s or 60s. Then in the 90s they added on to the back of that, they added a law office. There’s law offices everywhere in Florida, if you didn’t know that.

Haley:
This is a 1920s home. It was very small.

Andrew:
Built the 1920. Very small. What… 1100 square feet maybe. I don’t even know officially. In sections, it’s hard to…

Haley:
Yeah, because they added on twice.

Andrew:
They added on twice. They closed in the porch and made it… they call it a Florida room, but they have done basically all the work that a lot of people are doing now and adding ADUs, walling off certain sections, adding kitchens, all this stuff, so we saw the photos and we’re like, this has a lot of potential.

Haley:
As well as the carriage house.

Andrew:
Yep. The law office could also be like a mother-in-law suite. It had its own kitchen and bathroom. Then they had a carriage house out back, a separate building that was converted in the 60s to an upstairs and downstairs one bedroom apartment each. It was built as a triplex, but if you consider the mother-in-law suite, it really was a quad. We bought it as a triplex… well, I should say.

Haley:
We bought it as a triplex, but once you close the door, you have four units, and it was a two sided security door and we sound proofed it.

Andrew:
They were asking 489 for it, which was just under what we qualified for. At the time, that was overpriced. I spoke to my mentor and he’s like yeah, that’s a little steep.

Haley:
The comps didn’t the support it as well.

Andrew:
The comps didn’t support it, and also it had been on the market at that point like…

Haley:
We caught it when it was on the market about 30… 20 days or so. We made an offer I think at about 30 days, our first offer.

Andrew:
I talked to my mentor and he said, make an offer. The worst they can say is no. They will most likely counter. The worst they can say is no. They will most likely counter. We undercut the you know what out of it.

Haley:
We made a very low offer.

Andrew:
We offered them 400 and they came back and just flat out said no. Didn’t counter. Nothing. We’re like okay, they seem to be pretty set on their 489. With all the closing costs and all this other stuff, I’m not sure… even with the VA loan, there’s extra expenses, so I’m not sure we can do this. I don’t want to have to liquefy my stocks in order to pay for this, which now in hindsight, that’s a no brainer, but I’m glad it worked out that way because about a week and a half later…

Haley:
First, me being the analysis paralysis guru was like, oh great. No problem. We’ll walk away.

Andrew:
Yeah. We’ll find something else.

Haley:
No, we’ll find something else.

Andrew:
We did. We looked. We sent our realtor… poor thing. She went through probably six or seven more houses before they came back, but she’s talking to their agent the whole time saying like, hey, you know this is overpriced. You’ve got to come down a little bit and all this other stuff. We didn’t know that until later.

Haley:
She was amazing.

Andrew:
Yeah. She was incredible.

Haley:
She really advocated for us.

Andrew:
Michelle Barre with the American Value Realty is a rockstar, but she came back and said, hey, they actually countered. This is a week, week and a half later, 10 days later. They came back and they countered and they said, we’ll sell it to you for 440. We were like, whoa, okay. We just saved… what did we just saved?

Haley:
We just moved the dial so much.

Andrew:
So much just by making a bold offer. We talked about it and came back and said, we’ll do you one better. We’ll do 450 if you cover all the closing costs.

Haley:
We had no money at that time.

Andrew:
Yeah. We did not. I did not want to…

Haley:
We needed any liquid cash we had.

Andrew:
Yes. They agreed. They accepted and our agent wrote it in that they would pay closing costs or up to what was it, 3.2% of the purchase price?

Haley:
Yeah. She wrote the initial contract, and closing costs were 3.2% of the price of the house or the sale price of the house, which turned out to be more than we needed for closing costs, but that was the initial contract where she expected the realtor to come back and say…

Andrew:
We also had $5,000 of repairs written in, which any real estate agent would go like yeah, you’re joking. Give me a break.

Haley:
We expected a little back and forth.

Andrew:
We expected a little pushback, and they just accepted.

Scott:
Did you move into this property?

Andrew:
We did. Yeah.

Haley:
This is a house hack. Yeah.

Andrew:
Yeah. They accepted, and long story short, we ended up walking away with cash in hand at closing. Like I said, probably won’t be able to do that one again, but we moved into the mother-in-law suite. The upstairs and downstairs apartments had existing leases that we inherited that were like maybe 60% of…

Andrew:
Pieces that we inherited that were maybe 60% of the market rate. So we knew we had room to increase the rents there.

Haley:
But something safe to move into.

Andrew:
But something for sure. Something to move into. And our goal was to work on the main house, the 2:1, and make it livable for long-term tenants. Our goal was to get military people in there, because there’s students coming in and out of Pensacola. There’s probably a thousand students a year go through there, and they’re only there temporarily before they go from pilot training to other places. So-

Haley:
Yeah, our initial goal was long-term tenants. So we fell into STR.

Andrew:
Yeah. We knew Airbnb was a potential, though, just from previous experience. And so we put the two bedrooms there up on Airbnb, and it just took off.

Haley:
Yeah, we were initially looking at, we talked to a bunch of his pilot school training friends and said, “Hey, you guys interested in living on our property?” We imagined that them all studying together, all of us being nearby could be fun. And everybody was just finding other places farther away from downtown-

Andrew:
For cheaper.

Haley:
… for a little cheaper. And so we started to get a little nervous.

Andrew:
That’s true.

Haley:
We also looked at the main house, which again, its core is 1920 and then added onto. And the couple before were kind of retirement.

Andrew:
So the original plan was to put long-term tenants in there. In the process of us repairing one of the bedrooms, we had put it up on Airbnb, and the Airbnb just took off. We did not realize what a huge market the Panhandle is for short-term rentals until we put that first unit up. So then when the next lease expired, we didn’t even think about putting a long-term tenant in there. We just went out, furnished it, opened it up as our second Airbnb. And then we wanted a little bit of insurance, just in case for whatever reason, this was just a quick blip of business for Airbnb. And in case it crashed, we kept one of the long-term tenants and renewed her, increased her rent. Not nearly enough. She was very happy to keep the lease at that rate, but pretty much regretted it almost instantly when we started seeing the second unit income. So-

Haley:
The second unit was making about 2000 a month on Airbnb?

Scott:
What was the total income from the property from the rent? From the short-term rent and the long-term rent once you completed this?

Haley:
Long-term rental was 700 a month last year. So quick math, what would that be?

Andrew:
700 a month would be, what would that?

Scott:
Yeah, 700. So yeah, 700 a month from the one, the long-term rental. What are we getting per month from the second unit?

Andrew:
So for Airbnb, I mean, it’s seasonal. So we were doing between, I want to say 1500 to 3000 per month, just with one Airbnb, which was covering the mortgage. So that-

Scott:
So double to quadruple.

Andrew:
Yes.

Scott:
Double to quintuple.

Haley:
Yes.

Scott:
The revenue of the long-term rental.

Andrew:
Yes.

Scott:
And what was the main house getting?

Andrew:
The main house was getting about the same. So a little more.

Haley:
I’d say the main house was a little higher.

Andrew:
2 to 45. I’d say 2000 to 4,500.

Haley:
Yeah. We had some really good months in the summer.

Andrew:
Yeah. I mean, obviously-

Scott:
So on the low end, you’re getting 4,200 a month. And on the high end, you’re getting six, seven, 8,000.

Andrew:
Yes. Correct. Yeah. So this is-

Scott:
And what’s your mortgage payment on this property?

Andrew:
Our mortgage payment at the time was 2820.

Haley:
Yeah.

Andrew:
Yeah.

Haley:
2,800.

Scott:
This is a killer house hack.

Andrew:
Yes. Yeah, it did.

Haley:
We were living for free.

Andrew:
I get a housing allowance from the Marine Corps. And my housing allowance was half of what the mortgage was. So I was willing to eat it if everything went to hell, then I would be paying out of pocket to live, which is what everyone does. So worst case scenario, we saw this as a win. I’m at least buying equity, or the Marine Corps is buying me equity. So, but I mean, we have yet to pay to live in Pensacola. So-

Haley:
Yeah. We’ve never paid a mortgage.

Andrew:
Not a dime.

Mindy:
I have a couple of things I want to highlight really quick. First of all, the VA loan is not for investment properties. You have to live there, but that doesn’t mean that it can’t be used for a fourplex. I mean, the VA is not going to approve a loan that doesn’t qualify for. They’re not going to approve a property that doesn’t qualify for the loan. But I just wanted to clarify that you can’t use a VA loan for a strictly investment property. So you’ve done a VA house hack, a VA hack where you’re using this no money down, truly no money down. You walked away from closing with a check in your pocket. You had a property that was mis-categorized on the MLS. There was a mistake. It’s a fourplex, but they’d listed it as a three-plex, and you changed it to make it into a fourplex. Or actually, you lived in the one unit, and you were still collecting rent from three other units. I have a little acronym called the MLS Is Not Dead Yet. And if you go by the initials, it’s MINDY.

Haley:
That’s great.

Mindy:
You knew it was a great deal because you could see, you could do math. I think that all investors have an opportunity to get that one rockstar deal, and not everybody takes advantage of it. This is, again, an opportunity to celebrate, you guys, because you could have been like, “It’s the first property. I don’t know.” And yeah, most of the time, your first property, the first property you look at isn’t going to be the best thing ever. But that doesn’t mean it’s not going to happen. So know what a good deal is. And keep an eye on the market right now, because things are changing, and maybe there will be another really great deal coming up on the market. I love what you said.

Scott:
Yeah. I just want to agree with everything Mindy said and say, this was a perfect house hack with this. I don’t think it was listed incorrectly. It was a triplex, and there’s a mother-in-law suite, right? So you just moved into the mother-in-law suite, which is perfect for you guys from that. And in the context of a house hack, and that allows you to Airbnb out the other units with that. Your only quote, unquote mistake is that you could have done all three units from a short-term rental perspective with this.

Scott:
You also were willing to do work on the property. I remember you telling me about this property a year and a half ago. I guess, was that almost two years now. And yeah, it just seems like that’s all the stars aligning with that. The VA loan, 0% down, this triplex, quadraplex, whatever you want to call it on there. And then being willing to, obviously, there’s a lifestyle sacrifice. You could have qualified for a $440,000 house that was all to yourself with that. So there’s a big sacrifice you’re making in order to exchange for that income.

Andrew:
Absolutely. Yeah. When we saw the potential, though, we realized, “We are not compromising. Again, we’re just loving future us.” And it was an upgrade for us, because I mean, we’re coming from Denver where square footage here is not cheap. So we move into the mother-in-law suite, and it was an upgrade. So that’s how we looked at it. Yeah. We could be in the big, two-bedroom house and have a nice guest room and all that other stuff. Or we can live in the small mother-in-law suite, and just pay to have our friends stay at a hotel whenever they come visit. That was the options that we had, and I don’t regret it at all. I love that little place.

Haley:
We really do.

Andrew:
A lot of good memories.

Scott:
So what happens next? Now that you have this place, how does that affect your cash position, your investing? What do you do? How do we get to the present here?

Andrew:
So this entire time, we haven’t touched our stock. I mean, we’ve been continuing to maximize our IRA contributions every year. All this other stuff, we have our retirement funds, and we continue to contribute to that. But we realized Airbnb has some serious potential in this town. Let’s try to just-

Haley:
Lean into that.

Andrew:
What’s the word I’m looking for? Scale. Thank you. Let’s try to scale with Airbnb. And so I started looking for another property. And we wanted to get as many units as possible. We looked at a number of duplexes in the area, but by this time, this is late 2021. And the market is just insane, and properties are selling literally within minutes, people have offers on properties. There were two properties specifically that I told my agent, I was like, “I want to make an offer. Draft it up.” And she calls me back and she said, “They just accepted an offer.” And I’m not kidding. It shows on the MLS, listed 49 minutes ago. And you’re just going, “This is insane.” So we looked at a couple of properties in this specific area in Pensacola that we were wanting to move. Because we had just hit our year mark in the home with the VA loan. So we are allowed to get out free and clear at this point.

Haley:
We also crunched the numbers and realized that it was costing us to stay.

Andrew:
Yes.

Haley:
That we could make more money if we moved to the big old apartment complex downtown, we would cash flow a thousand dollars a month if we moved out.

Andrew:
If we started paying rent. Yeah. We would’ve made money. So we said, “Why pay rent? Let’s just-”

Scott:
Because the spread between your Airbnb and the mother-in-law and your rent would’ve been so large?

Andrew:
Yes. Yep. So whenever we traveled, I mean, we’re doing it now. Whenever we travel, we list our home as an Airbnb to subsidize the cost of traveling. And every time we traveled, we would make more money on, because we furnished our home in the way we want to live. And so I had smart lights, and I had my splurge of a big screen TV for watching hockey, and all this other stuff. So whenever it rented out on Airbnb, it was getting more than the house. And so we realized, if we can make this standard, then we’re losing money by staying here. And so we decided, “Hey, we’ll start looking for a property. If we don’t find one, then we’ll move downtown to a very cute downtown area in Pensacola.”

Andrew:
But we were pretty certain, we’d be able to find a house. And if we could find one wit a mother-in-law suite or an ADU or something like that, then we could-

Haley:
Get out ahead.

Andrew:
… get out ahead. Yeah. And so we put offers on a couple, none of them got accepted and a friend of mine, this goes into who you know, and networking and all that stuff. I told my friend what my plan was. And driving through the neighborhood, he saw the realtor, hammering the sign out in front and was like, “Call him right now.” And within, I mean, I think by the time we made an offer, it had been on the MLS for less than an hour. So they actually didn’t go with our offer, though. Originally they were asking 360 for this house. And the reason we went with it was they converted the garage into the master bedroom, put a bathroom in it.

Andrew:
And it had an external door where you could walk straight from the driveway. Didn’t have to go through the main front door. And we saw it and we’re like, “Okay, there’s one door from the garage into the house. We’ll just wall that off. And that’ll be another Airbnb.” It’s just like a suite. It doesn’t have a kitchen or anything like that, but it’s like a hotel room. And so that’s what we called it. We called it the suite. And originally we offered 360, which was their asking price. But we asked for $10,000 to go towards closing costs. So really, we underbid them, which was bold. But we thought that getting in there as fast as we could, maybe they would just take it. And they didn’t, they went with somebody else. And so we were in Colorado, actually, for-

Haley:
Christmas.

Andrew:
No, that was for Thanksgiving. Yeah. We were in Colorado for Thanksgiving. And our realtor called us back and said, “The people that they went with went with another property, and lost their earnest money and all this other stuff. But they were willing to do that because they wanted this other property, and now they want to go with you.” And so we ended up getting it after all. So this is now twice where we have bought property and had the seller give us money towards closing, which I mean, is ideal. And I don’t know if we’ll be able to do it again, three times in a row.

Scott:
So walk us through this property. Where did you live? How much income were you able to produce, and what was the mortgage payment on it?

Andrew:
So the mortgage on this one is 20-

Haley:
2300.

Andrew:
2300. Yes.

Haley:
This property is my property.

Andrew:
Yes.

Haley:
Unofficially. And this Airbnb is-

Andrew:
Yeah, it’s her baby. And she’s-

Haley:
It’s my baby.

Andrew:
… crushing. We went with a conventional loan. We were thinking of doing an FHA, but they offer a conventional at 5% if it’s your primary home. So we are thinking, “Okay, one and a half percent extra is not a ton, but it gets us out from under lifetime PMI.” So at some point we’ll get to the 20% down, if we decide to pay that extra, but that’s going to save us. The PMI, I think, is $187 or something a month right now.

Andrew:
And so over the course of, once we get past 20%, which I looked at. It’ll be in the next three or four years at the rate we’re paying. Then we’ll get out from under that lifetime of PMI. And we saw the writing on the wall, rates are changing. We most likely won’t be able to refi into a better rate to get out from under the PMI. So we just went ahead, and just did the conventional 5% down. Did finally have to liquidate some of my stock holdings, but it was absolutely worth it. So-

Haley:
Put money down. Yeah.

Andrew:
We furnished it and-

Haley:
It was turnkey. And we furnished it. We put it on Airbnb two weeks after we closed. We didn’t have our place set up just yet. But that Airbnb was flawless. The first full month, we made $4,700 on a one-bedroom, one-bath hotel-

Andrew:
Suite.

Haley:
Suite. Dial thing.

Andrew:
She has the number-

Haley:
I knocked all of our units out of the water.

Andrew:
She has the number one Airbnb for two people in Pensacola right now.

Haley:
Yeah. I’m top of the algorithm at this point. So, you did say perfection, I’ll just throw that in there. So that has been my baby, and was super fun to see that.

Mindy:
I do believe I said perfect in every way.

Andrew:
Yeah. Yep.

Scott:
Except for that third unit.

Andrew:
Yeah.

Scott:
At the old place. Yeah.

Haley:
Yeah.

Mindy:
We blame Andrew for that one.

Andrew:
Almost. Yeah. Yeah.

Scott:
Yeah. That-

Andrew:
Yeah.

Haley:
No, that was actually probably a security thing of mine. I’ll take that.

Andrew:
Maybe. I don’t remember.

Mindy:
Let’s look back at that. That was, they had just opened up Airbnb again after closing all of Airbnbs and returning all the money to the tenants, or the renters or whatever.

Haley:
Guests.

Mindy:
So to the guests, yeah. Airbnb closed it. You didn’t have the option to close it. And Airbnb gave all of the refunds to the guests. You didn’t have that option. So to keep one unit as a long-term rental for the security a year and a half ago is not a bad choice.

Andrew:
Yeah. That’s fair.

Haley:
Yeah. With all the waves of COVID, we didn’t know what was going to happen.

Andrew:
Yeah.

Scott:
So we’re now, and so you have the suite and you have the main house. Is that there just one unit or are there multiple more units? I’m sorry if I missed that on this property.

Andrew:
Yeah. So the property’s a single-family home with the suite as a Airbnb. So that was our fifth Airbnb. We have the four on the quad, and now the one on the new property. And we live in the house. And we have a guest room, finally. So-

Scott:
And this is your current situation. You own these two properties with these six units, the ones that include the one you live in.

Andrew:
Yes. And shortly after that, we set up the deal for our next closing, which is in July. I had just listened to the podcast-

Haley:
Pace Morby.

Andrew:
Yeah. With Pace Morby about doing Sub2 and seller financing and all that stuff. And actually, we were driving to look at a property that we got turned down on. I was going to show my neighbor. And drove past a “For sale by owner,” sign and just pulled into the driveway and called the number. And the owner was actually there in the garage. And she walked out to me and talked to me. And she told me what she wanted for it, which was so expensive, so far out of my price range. But I had literally just listened to this podcast about, “Just talk to the sellers, see if they’re willing to accept terms or anything like that.” And I just pitched it and she said, “Oh, absolutely not.” And I was like, “Oh, well, we tried.” And about three weeks later, she called me and she’s like, “Are you the one who was talking to me about seller financing?” And I was like, “Yeah, I am.” And she goes-

Haley:
There’s a trend here of getting turned down.

Andrew:
Yeah. It’s so true.

Haley:
Came back.

Andrew:
Yep. She came back and was like, “I think we might be able to set something up. We talked to some lawyer friends of ours, and I think this could be beneficial for everybody.” And so we went and sat down with them. They were asking, this is a duplex in the same neighborhood, which is, it’s like the Wash Park of Pensacola, basically. They’re all-

Haley:
Very sought-after neighborhood.

Scott:
Very nice neighborhood.

Haley:
Yeah.

Andrew:
What’s that?

Scott:
Nice neighborhood. For folks that don’t know.

Andrew:
Yeah. It’s coming up. It used to be a rough neighborhood, and now people take a lot of pride in their homes. They’re no copies of… Oh, sorry. Yeah. We’re short on time. Okay. Nice neighborhood. Yes. But they were asking, it’s a duplex on the main street through there with all these cute breweries and restaurants and all this other stuff. And they were asking 750 for this duplex, which I looked it up, going through the county assessor and they paid about 340 for it a year and a half before. So they went through, and they’re both-

Haley:
We have to caveat that it’s a 3:2 on each side.

Andrew:
On each side. Yes. So they’re large.

Haley:
It’s 3:2 condo on each side.

Andrew:
Yeah. But they’re both general contractors. So they gutted this house. Completely redid it. And I walked through it and it is, I mean, they spared no expense. It looks very, very good. Still, though, our realtor ran comps for us, and she said, “It’s about $60,000 overpriced.” So even with that, we looked at the potential. We paid for a survey and a report on Pensacola Airbnbs through AirDNA or one of those, I can’t remember.

Haley:
Match Advisor.

Andrew:
Match Advisor. One of those, just to see what our competition was like. And the number one Airbnb in Pensacola is one property with two homes. And I went through all the reviews and everyone was saying, “It’s so nice to be able to come here with my family. My brother had his own house with his kids. I had my house with my kids.” And every single review is like that.

Andrew:
And there, this property is not anywhere close to as nice a location as this one. So we went in there, and we’re like, “We can do some damage with this.” So even at their asking price of 750, which we agreed to, we are looking to come out ahead considerably. And a house about four houses down from them sold, same building, same style of duplex, not identical, but it sold for $350 a square foot. So at that rate, the house is already worth over a million. So we haven’t even closed. We have it under contract. We’re closing on it in July.

Scott:
So let’s sum up your position right now. You have five Airbnb units currently with two more on the way, or one more. If you’re going to rent this out as one big Airbnb with two units on it. What is your current Airbnb income that you project on average for a month? Or what’s the range that you expect from the current Airbnb income across all of your units?

Haley:
Last month we made 17 grand.

Scott:
Wow.

Haley:
Last year we made $75,000 on one and a half units.

Andrew:
Yeah. Two, one and a half, two units.

Haley:
Slowly brought them up. We are projecting in this coming year, and it might be conservative, to make 150 just on the first property, I think.

Andrew:
Yeah. On the first property.

Haley:
Yeah. And then we’re house hacking the one we live in. And at the rate we’re going, we can cash flow on that property about $20,000. So that’s 170-

Andrew:
Our primary home. And then this duplex that we have, we did seller financing with $60,000 down total in three chunks. So 20,000 at closing, 20,000 6 months later and 20,000 at a year with-

Haley:
We locked in a great interest rate.

Andrew:
We locked them in. We have them under contract for 3% with, it’s a two-and-a-half year balloon. So that’s a big chunk of change that’s coming due here soon, but we have no worries about it whatsoever. We have-

Haley:
There’s the option to sell at two and a half years if everything goes bust.

Andrew:
Yes.

Scott:
What do you expect the income for that property to generate?

Andrew:
We’re expecting between 450 and $600 a night. So that’ll be about it. It’ll do the same as the quad. We’re expecting about 15 to 20 a month through that.

Scott:
All right. Last question here. What’s next after this, what’s on the future for the next couple of years for you guys?

Andrew:
Well, we’re actually looking at a property here in Denver tomorrow. We want a place to come stay at. We are here quite often. So my sister’s moving out of her apartment, and her landlord called me and said, “Hey, seem like you might be the type of person who’d want to buy this.” So we’re going to have some drinks and discuss it. But I would love to help other people in the way that you helped me in just helping educate and just basically showing people, not to be arrogant, but through the example that what we’ve been able to do. Showing other people in the military specifically what potential is, regarding real estate and investments and stuff. I’ve had a number of friends who’ve taken me up on the offer of opening their own Airbnbs. And they’re doing quite well right now as well. So for those who are willing to listen, I mean, they’ve seen some benefit.

Scott:
All right, Haley, let’s hear a quick background about your journey with money here. Could you walk us through how things start for you? Maybe starting in high school, college and up until the point you met Andrew?

Haley:
Yeah, absolutely. I grew up in a very money-conscious family, mainly surrounding debt. My parents have always touted that they just have not ever had debt. We didn’t grow up super-wealthy. We always had enough, but we were aware that we made certain financial choices to stay within certain margins. I loved growing up that they emphasized spending less than you earned, staying within your means, which was a principal that I lived by for quite a while until I expanded my financial literacy. Went to college, did an undergrad in psychology, graduated in 2012. Up to that point, I had had jobs here and there, but mostly for fun money. Then after that, I didn’t quite know what I wanted to do post-college. My parents had always dreamt of just paying for my college for me, because their parents were able to do that for them.

Haley:
Instead, we were just in a spot where that wasn’t totally feasible. So they shouldered half of the debt. I shouldered the other half. I graduated with about $24,000 of unsubsidized student loans at that point. I moved home in my parent. I didn’t have a direction I wanted to do go. I considered graduate school. Didn’t quite have the answer. And so I took my mom’s advice, and just moved home. And started working at a hospital, paying off that debt and living for free. I would throw a thousand dollars each paycheck at 12-something an hour towards my debt. And I managed to pay off the $24,000 in two years. And along that journey, I did the Dave Ramsey, Financial University bit. And I credit a lot of just doing that debt snowball and paying that off so quickly to that program, and my parents’ diligence about debt. And I remember my mom-

Haley:
… program and my parents’ diligence about debt, and I remember my mom saying, “Whatever direction you go, at least you can start here and you don’t have something you’re dragging behind you and bringing along,” and I thank them for that. I did decide to go on and do a counseling master’s degree after that, and having just paid off debt, I was not interested in getting into more debt. So I stayed at home for the next four years, worked full time. It was often 60, 70-hour weeks on top of that. You have to do internships and practicums. So it was a hard-fought four years there, this getting into now the end of 2017 where I was wrapping up my degree, and I graduated with my master’s in counseling with about $8,000 of debt, where I could have just kind of sloughed it off, and those were subsidized student loans.

Haley:
So I graduated with $9,000 of subsidized student loans that had been accruing interest pretty quickly, where I could have graduated with $40,000. So I appreciate that at-home time to kind of get through that. But right after I graduated was when I decided I wanted to leave the Midwest, and the cold, and check out Denver, and Andrew and I met early in 2018, and I was very interested in the house hacking. He was doing Airbnb around that time on and off, and kind of shutting it down, heading into the Marine Corps. It’s just been really cool since then to allow him to be the acceleration, where I’m the brake, learn from him with risks. I think he’s learned from me on planning, and being more proactive about things, and strategic, and I think we make a great team on this.

Andrew:
I’d be inclined to agree.

Haley:
We’re working it out. It’s interesting. In our relationship … I think one thing when you’re doing something with the spouse, as well, if I can extrapolate, is we’ve had to figure out when we’re in husband-and-wife mode and when we’re in business mode. To balance that all out, we have to call it out in moments of like, “Hey, this is not business time. This is our time,” and we love it so much. We’ve noticed ourselves on date nights and stuff like that starting to talk about the business, and as much as that’s good, we really had to start balancing out how much we put into our relationship and keep nourishing that, because it can creep up on you. Because it’s fun, but there’s some distinction there that’s really helpful. But it’s been a wild ride, and totally loved it. Totally loved it.

Andrew:
It’s been a good time.

Scott:
Well, that’s awesome. Are you both working full time right now, or is the business taking up a lot of that time? What does that look like for you guys?

Andrew:
Recently we finally got a chance to go on our honeymoon, and when we did that, we had to basically establish a team because we were going to be unreachable for eight days. So we set up a team and took a breath for the first time in 18, 20 months-ish and realized, “Oh my gosh, this-”

Haley:
We should have been doing this way earlier.

Andrew:
We should have been doing this way earlier. So in the last month our focus has been: We need to set up a team, because all the time we’re spending on managing is time that we could be spending on expanding. So we have realized that 15%, maybe even 20% is a small expense when it comes at the cost of us being able to spend more time with each other, us being able to think of bigger-picture goals, that type of stuff. So that is our current focus, is just kind of handing off management and instead of managing units and Airbnbs, we’re going to start managing people. Which, that’s what I’m paid to do by the military. So I’m hoping it’ll be an easy port over into our little side hustle.

Haley:
And yes, to answer your question.

Scott:
It sounds like a great honeymoon.

Haley:
Yeah.

Andrew:
Oh, it was phenomenal. Yeah, yes.

Haley:
We went to the Galapagos, and did a dive trip. Represent.

Andrew:
Yeah, it was incredible. But that’s what it took for us to kind of step back, and I wish we would’ve done it sooner.

Haley:
I work at a mental health agency job and just started a private practice, small, and then did this on the side, and we haven’t even mentioned that we own a Tesla only by putting it on Turo. That’s another side hustle. So we were getting warning signs before the honeymoon to slow down, to hire help. But it’s a total mind shift to go … When you move up socioeconomically, it is an adjustment. Because we are in the mindset still of thinking we have to do everything ourselves, we have to work super hard, we have to be hands-in, and bringing other people on is the next level of doing that. So, it’s an adjustment.

Scott:
It’s a function of profit and cash flow, too. You have so much profit and cash flow that you can begin thinking in those terms, and guess what? Because you can do it all yourself, if there is a problem in the market or something like that, you can always go back to doing it yourself and continue to just walk those things through.

Andrew:
Exactly, yeah.

Haley:
Yes, it’s true.

Scott:
So you’ve got a large number of exit options with these properties, with the first two properties in particular, where you could just long-term rent them and they’ll probably produce a reasonable cash flow, or sell them. But with this next property you’re taking a big risk with the two and a half-year balloon, but this is after you’ve built your systems and have those things in place. So, I’m optimistic. I think it’ll be great.

Mindy:
Going back to doing everything yourself, if you know how to do it, then you can hire somebody who will do it well. If you don’t know what you’re doing, it’s really easy to hire somebody who also doesn’t know what they’re doing. But when you already know how to do it, you interview somebody and you’re like, “Oh, you’re full of garbage. You don’t know what you’re doing. I’m not going to hire you.” But if you don’t know how to do it, then it’s easy to fall for a really, really slick talker.

Haley:
Absolutely.

Andrew:
And we’re still learning. Unfortunately we’re about to fire our first person. They’re not doing-

Mindy:
[inaudible].

Andrew:
Yeah, it’s not enjoyable, but unfortunately it’s business.

Haley:
You have to have the right people on the bus, and yeah, doing it from the ground-up really helps you know what you need. I think the lesson is to just not get caught in the scarcity of like, “I have to do everything, because who knows if this is going to keep working?” Really, we have a year of data on Airbnb and what we’ve been able to do, but there are still parts of us that are like, “If everything goes down … ” And you have to fall back on those plans of like, yeah, there are long-term rentals. Overall, our properties have appreciated already …

Andrew:
Significantly.

Haley:
Wildly.

Scott:
What do you guys think is a good cash position for someone doing the type of investing you’re doing?

Andrew:
We agreed early on that our comfort level is six months of runway with no income whatsoever. So that was initially what we wanted to save up, and it got to the point where we were actually losing opportunity by having that much. So we’ve scaled it back. We have about three months of runway for each property to pay the mortgage, no questions asked, and we’re very confident that we could find a monetary solution to whatever ailments we may encounter had we needed to tap into that. So, 90 days is I think more than enough for us to kind of fix whatever goes wrong. It’s a little risky, I guess, but something cataclysmic would have to happen for both of those to go bust at the same time. So, that’s where we’re comfortable.

Scott:
Should we go ahead and do the Famous Four here?

Andrew:
Let’s do it.

Haley:
Absolutely.

Announcer:
Famous Four!

Mindy:
Haley, what is your favorite finance book?

Haley:
I would have to say, I Will Teach You to be Rich by Ramit Sethi. I know that’s an intro book into the field of investment, but his straightforward instructions, along with the relationship he’s noticed between psychology and finance just really spoke to me, especially being in the mental health field.

Andrew:
Yeah, I love that one. That’s definitely my number two, but my first one would have to be Richest Man in Babylon just because it started this whole journey. That one is super easy to digest, it’s super short, and if you’re a former contact sport player like me and have a little bit of head trauma, it’s really easy to understand.

Mindy:
That one’s also my favorite, Richest Man in Babylon.

Andrew:
Oh, awesome.

Haley:
The fables are awesome.

Scott:
What was your biggest money mistake?

Andrew:
Do you know?

Haley:
I’m just running through them …

Andrew:
Yeah, I can’t decide. I would say, early on we decided to do some long-term Airbnbs, and the tenants that we had at the time were a little rough on the house and we looked at it and were like, “Who cares? They’re giving us a great rate. We have this secure … ” and all this other stuff.

Andrew:
Looking back on it now, they ate up our entire busy season, they wrecked the house, we had to replace a furnace. We really regret letting these tenants stay in, and also allowing I guess the claims window for Airbnb to expire before reading up on our protections and all this. Airbnb would’ve completely covered everything, but we ended up eating it just because I didn’t do my homework, and I got scared and thought a sure thing was going to be better than risking it early on. So for the sake of security, we just went with a sure thing that actually ended up hurting us. I would say that was one of our early mistakes.

Haley:
Me personally, when I started to save my money after paying off all of that student debt and I was in a higher-paying job during my master’s degree, I was contributing pretty heavily to my 401k because I was really excited about actually investing. But I was excited about keeping my money, so I allocated my investments at that time to be very conservative. So for eight years those sat in a 401k that was very conservative and did not earn the money that I could have, that compounding interest over time really could have done me a favor. I missed out on that, but there were opportunities later to earn that back.

Andrew:
She kept me from buying a timeshare once, which would’ve been the biggest financial mistake ever. Holy cow, oh my Lord.

Mindy:
Good.

Haley:
I was like, “Man, you’re getting suckered right in.”

Andrew:
Yeah. I think it was the moment when the salesman said, “You can’t run the numbers. This has to be an emotional decision.”

Haley:
“This is an emotional purchase,” and I was like …

Andrew:
I was like, wait a second. I got suckered.

Haley:
My mathematical, logical-minded husband. I was like, “Where are you? Where did you go? How am I on the other end of the spectrum?”

Andrew:
Yep. I was like, “It’ll be great. We can visit the mountains every year.”

Haley:
It’s like, oh buddy.

Andrew:
So that was a close one, but yeah, fortunately dodged that bullet.

Mindy:
Good, yikes. Timeshares should be illegal. I can’t imagine a situation where a timeshare is a good idea for anybody. If you want to change my mind, you can email [email protected] No, you can email [email protected], unless you’re with a timeshare company. In which case, no. What is your best piece of advice for people who are just starting out?

Scott:
Timeshares are a great way to help make the salesman financially free.

Andrew:
No kidding.

Mindy:
Yes. A timeshare is a great idea for the person selling them. Okay. Haley, what is your best piece of advice for people who are just starting out?

Haley:
I would say … We’re speaking from just our experience. The thing that changed my mindset was if you want to have large assets, have them in a way that they can make you money. You can have large assets, just have a plan for them. We have two properties. They make us money. We have a Tesla, which we wouldn’t be able to afford otherwise, and the only reason we have it is because renting it out on Turo for a number of days during the month, right now it’s like four days pays the bills for it every month. My uncle came to our house and joked and said, “Everything you own is for rent, huh?” and I was like, “Yeah.” You just kind of hold things loosely. So, that’s kind of where I see our mindset, how we shifted to making this money and using our assets well.

Andrew:
I would say don’t look at setbacks as roadblocks, look at them as just bumps in the road. You’ll make an offer on a property and you won’t get selected. I can’t count how many offers we made that got turned down.

Haley:
Don’t be afraid of, “No.”

Andrew:
You have to be resilient. You have to be willing to make lemonades out of lemons, and even a roadblock will eventually be moved once the construction is done. You have to just be persistent and diligent at the same time. So yeah, don’t be easily discouraged.

Scott:
I think it’s fantastic, and I think when you look at your story, Andrew in particular, where you came from a 412 credit score and all these other problems in your financial position, and now you’re so focused on building this real estate empire and driving cashflow and making these investments and making deals with that. It’s that you’ve done this incredible period of self-sacrifice, self-education, you’ve overcome all these hurdles.

Scott:
You don’t even think about … We asked you what your biggest money mistake was, and you’re like, “Oh, I rented to some folks in Airbnb suboptimally,” and we just spent the first 20 minutes, 30 minutes of this podcast talking about how you were living in a rat-infested hotel because you couldn’t afford anything else with all this. So, it’s funny how those roadblocks kind of just take the back seat over time.

Andrew:
Yeah, absolutely.

Haley:
They fade away.

Scott:
Once you’ve really overcome them and gotten this grind going and gotten to a stronger position, you almost for forget those. They recede to the background, it seems like, and you’re focused on the recent things, the challenges you have today as a big-time real estate investor.

Andrew:
Yeah. To your point earlier, Mindy, this is not a short trip. This is a long road, and you have to be willing to be in it for the long haul, and I hope that people can see through all of our examples here the potential if you just decide to put in the work.

Scott:
What is your favorite joke to tell at parties?

Andrew:
Mine is a bit tailored to me. I would have to say my favorite joke is: What is red and bad for your teeth?

Mindy:
What?

Scott:
I don’t know. What?

Andrew:
A brick.

Scott:
So, why is that one tailored to you, Andrew?

Andrew:
So, my name on the rugby team was Ruthless Toothless, and that’s because I lost some teeth playing hockey, and I can drop them out at will. So for those of you watching.

Mindy:
Oh.

Haley:
It’s a great party trick.

Andrew:
It’s a great party trick. I can photo bomb anybody. It’s amazing.

Scott:
It’s pretty remarkable.

Andrew:
And then in Navy medicine’s defense, they are fixing these in like a month. We just happened to film at the right time. 10 years coming.

Scott:
Oh no, that’ll be devastating to have all your teeth set.

Haley:
It will be memorialized here.

Andrew:
Yes. These will go onto the mantle piece as a keepsake.

Mindy:
Oh, how charming.

Andrew:
What’s your favorite joke?

Haley:
Oh, gosh. I don’t think I have one.

Andrew:
No?

Mindy:
How are false teeth like stars? They come out at night.

Andrew:
That one’s great. Oh, okay. All right, that was funny.

Mindy:
That could be Haley’s, tailored towards Andrew as well.

Haley:
There we go.

Andrew:
That’s amazing. I laughed so hard I almost spit them out. Yeah, that’s great.

Haley:
I will say part of my guest book in the suite is to ask people for their favorite dad jokes when they sign in. So it’s name, where are you from, what do you like about the area, and your favorite joke. And none of them are coming to my mind right now, but jokes are so essential. I love them.

Mindy:
Well, that’s really good.

Andrew:
What was the most groundbreaking invention ever? You remember that one?

Haley:
The shovel.

Andrew:
Yes.

Haley:
Oh, I got one.

Scott:
Well, this has been awesome, guys. Thank you so much for coming on. It’s great to see you. Thanks for stopping through Denver, and agreeing to share your stories here, and your incredible real estate journey. We appreciate it. I think this has been a fantastic episode. I hope it helps a lot of people who may be struggling in the way that Andrew was at first, and some folks who are struggling to get into real estate in recent years with prices the way they are. You guys have been really creative, really consistent, and I can’t wait to see what’s next.

Andrew:
Thank you so much, guys. We really appreciate it.

Haley:
Thanks, Scott. Thanks, Mindy.

Andrew:
A real honor to be here. It’s such a pleasure to meet you, Mindy, and we look forward to keeping you updated on progress.

Mindy:
I look forward to those updates, and it was lovely to meet you, too, guys. We will talk to you soon.

Andrew:
Thanks, bye.

Haley:
Thanks, guys.

Mindy:
Scott, that was an awesome story. That was a super fun little twist at the end with Andrew’s teeth. What did you think of the show?

Scott:
Well, like I said, Andrew … Or Ruthless Toothless, as he self-identified at the end of the show, I wasn’t going to out him, is a long-time friend of mine and it’s just been so fun watching his journey from really a pretty tough financial situation to the success that he’s had. It’s an overnight success story in seven short years, to see what he’s been able to go from and to with this, and it’s really combined every part of his life. His housing, his car, his career, all of those things have been made with financial freedom in mind, and I think he’s got a lot to show for that now. A wonderful wife, a property portfolio, the career of his dreams. It’s just been fantastic to watch.

Mindy:
Yep, and I think the core on all of that is he took action. It is so easy to leave the military … He was separated from his original Air Force not by choice. It would have been easy to say, “Oh, okay. I guess I’m not in the military anymore,” and just go about his life. He could have decided, “Oh, well, I guess I just have debt. Whatever. That’s just how it is.” Even with Haley, he could have decided not to take action with her. You have to take action in order to make things happen, and he is kind of the embodiment of what can happen when you do take action, when you are intentional with your actions. That’s such a terrible word, but when you are intentional, you can make things happen. You can change the course of your financial life, your whole life. But you have to do the work.

Scott:
Yep. You have to do the work, and the work almost always comes with a grind, a several years-long grind to get from point A to point B, or that next milestone. It’s not even a several years-long grind to get from start to finish, it’s a several years-grind to get from start to the next point of optionality in this journey. I think Andrew demonstrated that through the self-education that he put that he has subscribed to, through finding mentors throughout the journey. Which is kind of weird, but I guess I was one of those on that journey, and he has his military advisor or the person from the military who gave him some advice on rental properties in Florida, and he takes action based on that. And then the relentless self-education that is just enveloping in all of that.

Mindy:
Yep. He’s just a success story. Like you said, overnight success in just seven short years. I love it. Okay, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 315 of the BiggerPockets Money podcast, he is Scott Trench and I am Mindy Jensen saying: You can change your financial future, and Andrew is proof. But you have to do the work.

Dave:
Hello, everyone. Welcome back to on the market. I am your host, Dave Meyer. And today, we are going to talk about an issue that is on the minds of many and is plastered across the news constantly. Is it better to rent or to buy in this super crazy economic time? To do this, we have an incredible guest, Ken Johnson, who will be joining us and sharing all of his academic research into this topic. And then we will be joined by James Henry and Jamil to add some context for investors about what to make of Ken’s information and how they should be thinking about whether they should be buying, renting, house hacking, maybe just renting and investing in rental properties. We’ll get into all of that. But first, let’s hear from Ken Johnson.
Ken currently serves as the Associate Dean of Graduate Programs at Florida Atlantic Universities College of Business. Additionally, he is the President of the American Real Estate Society. If you haven’t heard of Ken or want to look into him, we’ll definitely link to some information and some of his academic research because he has some incredible data about this topic that you’re going to want to dig into yourself, but let’s hear directly from Ken himself. Ken Johnson, welcome to On The Market.
Ken, can we start by having you fill us in about what exactly you do and what your background is with real estate economics and data analysis?

Ken:
Sure, sure. My very, very beginning background was I was a real estate broker for a dozen years. Had a small business in my old hometown. Eventually, I went back to school and got a PhD in finance, but all my work is in housing economics. So the best way to describe me is I’m a housing economist. I’m also the associate dean here in our graduate programs at AFU and the College of Business, but that’s the administrative side of what I do. All of my research is related to housing markets and price cycles. Where are we now? Buy versus rent? What’s better to do in terms of wealth creation? Where are housing markets in terms of price right now? What’s going on in the rental market?
And we do have three indices. And when I say we, I work with a couple of different professors at different universities. We have a buy versus rent index called the BH&J for Beracha, Hardin & Johnson Buy vs. Rent. We also have a pricing index for the top 100 US markets by size, and a rental index for the top 100 markets by size. They’re not exactly the same because not every one of the markets have the necessary data. So we might have go down to pop center 105. And then the rental markets, we actually got down to roughly population size 300 or so, I think. So we got pretty deep into that one. Getting the data was not as easy there as it was with the other index.

Dave:
I came upon your work because someone shared with me the rent versus buy index, and that peaks my interest because with inflation, and housing prices, and rental prices accelerating so rapidly over the last few years. It’s on the top of minds of not just real estate investors, but everyday Americans, what is better for the average person? Should they be renting or buying? So can we start there, and can you tell us a little bit about, first, just briefly, for those of us who don’t have PhDs, what your methodology is for determining whether it’s better to buy versus rent? And maybe share with us some of the key insights of your research.

Ken:
Sure. What we do is we want to have what we call a horse race between ownership, and building equity, and renting, and creating wealth through investing those monies that you would’ve otherwise put into ownership, that down payment, your monthly taxes, insurance, maintenance, etc. And then we simply take that money and invest it into a portfolio of stocks and bonds, and we have a way of being able to make, whatever city you’re in, that portfolio as risky as your housing market. And then we just go forward and see, on average, in windows of eight, 10 and 12 years, and see which way, on average, wins. And believe it or not, renting and reinvesting on average wins. But the real big takeaway from that is it wins on average, but not buy that much. Both, on average, are really good at creating wealth. One of the difficulties with the rent and reinvest is many people want, and then they’ll simply rent and spend the difference on beer and cookies, consumption. That’s wealth destroying. You don’t want that third option. You should choose one of the first two.

Dave:
So just to make sure I understand correctly, you’re taking the housing, a traditional buying a house, using, let’s assume, 20% down as the down payment?

Ken:
We do.

Dave:
Okay. So you put 20% down and then you factor in all the associated home ownership’s costs. And then, on the renter’s side, you’re saying, this hypothetical person, in any given city, rather than using that money for a down payment, invests it into a different asset class, like the stock market. And then you have a horse race between those two scenarios?

Ken:
That’s exactly correct.

Dave:
Okay. That seems like a very good methodology. And you said that renting wins, has that always been the case, or is that the most recent analysis of this index?

Ken:
Sure. When we look back in some total, renting wins, on average, but there are stretches of time where it’s better to rent and reinvest. And there are other times when it’s better to own the and build equity. So when you look at our index, again, if you just Google BH&J Buy vs. Rent Index, you’ll see each city has a graph where it’s zero to one and zero to minus one. If you’re below zero, you’re better off owning and building equity. If you’re above zero and approaching one, you’re better off renting and reinvesting. So there are times when you see our graphs and when you see that below zero, that’s when it was better to own and build equity. When you see where you are at some point in time, that’s when it was better to rent and reinvest. And then you simply look at the last data point and see where your metro is at that point in time.

Dave:
And I’m looking at these graphs right now. They’re super easy to read. And we’ll share in the show notes, at the end, where you can find this data for anyone listening to this. But it looks like, if I’m understanding this data correctly, that not only is it better to rent, but in every market that you analyzed, it’s better to rent than to buy. Is that correct?

Ken:
Well, when you look at the US as a whole, right now, it is.

Dave:
Is that true of every market you’ve analyzed at this point in 2022? Or are there some markets where it’s still better to buy?

Ken:
No, there are a few that are in buy territory. Most are in rent territory right now. I’m trying to do them off the top of my head. One that was surprising, and I’m so sorry I don’t have it in front of me, and we’re juggling as many as two cities, but Honolulu, Hawaii was one of those that I do believe is in buy territory, but that’s because of a historic average. We’re not saying it’s incredibly inexpensive to live in Hawaii. It’s just between those two, in Honolulu, between those two, owning and building equity is just marginally better.
But when you see those points, Dave, cluster around zero, it’s pretty much a toss up. Even when you see them slightly into rent territory, what’s taken us a decade to figure out is that house just isn’t an investment good. It’s both investment, it’s consumption. In some ways, it’s also necessary good in terms of shelter. So a lot of people, the house is where they’re going to raise their family. They want to be close to certain parts of a city, shopping, entertainment, etc. It’s more stylized to what they want. And so it’s not unusual to see just above zero. And you don’t see really changes in prices. You don’t see markets respond to that.
Now, when you get dramatically away from zero in any one of those two, like if you look back through time, roughly 2007 in markets like LA, Chicago, Atlanta, Miami, and numerous others, you can see our metric got really close to one, if not two, one. And right after that, the markets bottomed. The housing collapsed, it crashed. And basically, what you were seeing at a measurement of one, not to get too wonky, but your three standard deviations away from that tie, is highly unlikely. Roughly speaking, you had about a one in 100 chance of owning, and building equity, and creating more wealth than you did through renting and reinvesting. So you had virtually no chance to win, and markets collapsed, and stopped buying or stopped owning at that time. And we saw the dramatic fall in prices.

Dave:
Thank you for explaining that. I think that, not to get too wonky, but it shows the depth of the statistics and analysis that’s going into this. When you look at the impact of the pandemic on this analysis, it seems that housing prices having risen so quickly, have really tilted the market in favor of renting as you’ve said. Do you see anything in the housing market right now that may change this dynamic? Or do you think the reality that renting for the average homeowner is better than buying right now is going to remain that way for the foreseeable future?

Ken:
Renting one way, you can look at renting as if it were a put option. Buying at this point in time, with relatively high rents, why would someone want to do that? And the answer is, you don’t want to necessarily lock in at a really high price at the peak of a current housing cycle. And all signs are around the nation right now that we’re at the current peak of varying housing cycles around the market. So maybe you’re paying a little bit higher in rent, and that’s not a good thing, but you’re paying a little bit of a premium to avoid locking in a price, where if you will look at pricing cycles, and we do have a couple other indices that I mentioned, but if we look at pricing, sometimes it could take 10 years between this peak and the next peak, which it did last time around in many parts of the country.
Set another way, the price that you bought at 10, 12 years ago is the price that you sell at today. So you have to wait a really long time. So you might want to be paying a premium and reinvesting. And on average, you’d be a little bit better off. I understand why people are out there buying right now. And part of the pricing impact, though, is also that there’s such a severe shortage, both across rental units and units available for home ownership. So everything is high right now, but renting still gives you that option to avoid the peak of a housing cycle.

Dave:
That’s really interesting. So basically, you’re paying a little bit more in rent than you normally would in order to buy time with the assumption or a thought that housing market prices are going to go down. Now, that makes sense to me, but there’s also a presumption in there that the housing market is going to go down. So it sounds like you think, since we are at a peak, you are expecting prices to go down in the US in the, let’s say, next year or so?

Ken:
The strategy also works if markets only go flat. They don’t have to fall. They just have to stop going up so rapidly. The average property appreciation rate has to become slower than the long-term pricing trend, which that’s all it really is going to take for that strategy to have worked for you in terms of wealth creation as a renter. But yes, there are some markets around the country, which I expect that you’ll see tremendous price declines. There are other markets around the country where you’re probably not going to see a crash like we did last time around. And what you’ll get instead will be a prolonged period of housing unaffordability.
We are significantly separated from long-term fundamental prices and rent rates around the country, that we can’t have gotten this far away without there being a reckoning, some price to pay for that. And it’s going to come in two forms, I think, this time around, which will be a decline in prices in some markets, and not necessarily a decline in prices, but a flattening of housing prices, and then a prolonged period of unaffordable housing in a given market.

Dave:
That sounds a little scary, I think, for those of us who are real estate investors who own real estate. If you’re saying in some markets, and I’m not necessarily disagreeing, I just wanted to clarify, that in those markets that you say might have tremendous drops in prices, what scale are we talking about here?

Ken:
Well, the magnitude could be quite big. And these metros have characteristics that stand out from those that are going to see this prolonged period of unaffordability, high rents, high home prices. So if you’re looking at a market where you’re seeing less of an inventory problem, and you’re seeing population, either go stagnant or actually decline, then those markets are going to be tremendously exposed to significant downturns in prices.
Now, their housing affordability issue will go away overnight. And a market that really stands out right now is Detroit. Michigan, Detroit, Michigan is roughly, by our metric, in the top 100 IS housing markets in the second index. It’s a roughly 50% above where its long-term pricing trends should be. And plus, their population, if I remember correctly, is actually going to go down 1% over the next 10 years. That’s the expectation. That market’s highly priced tremendously above where it should be. There’s not as much of an inventory problem. People are not moving in. The city’s not growing. So you’re going to see a significant decline in prices there in Detroit, so I would be very worried.
Now, does that mean that there’s going to be good buy and resale opportunities? I’m not so sure of that, but I’ve seen this before. And when markets do this, what happens, typically, you see, while their prices either go flat or go down significantly, their rents don’t change that much. So you get a good rent flow, if you will, but you’re not going to probably pick up much in capital gain for quite a while.

Dave:
Got it. That makes sense. And again, if anyone listening to this wants to see this top 100 US housing market index that Ken and his colleagues have created, we’ll put a link to it in the show notes. Or if you’re watching on YouTube, you can check it out in the description below.
Ken, you’ve mentioned a few things about housing affordability in the US, and I’d like to dig into that a little bit because this just seems like a large societal problem, where we’re reaching a point where purchasing is extremely expensive and renting is extremely expensive, regardless of which one’s better. For some folks, both feel unachievable. What do you see as the source of this problem? And is there anything that can be done about it?

Ken:
Sure. It’s easy to find the culprit, and the culprit is just a lack of inventory. There’s a shortage in units to own, or that are subject to being owned, and there’s a shortage in units to rent. And that is true across the country to varying degrees, but in areas where people are moving to, mostly into the Sun Belt and parts of the Northwest, you see this rapid influx of population, and we’re way short of inventory. You have less inventory issues as you get into the Midwest, and Northeast, and a few other parts of the country. So inventory is always something that’s really hard to measure, though.
I would hazard a guess, if I ask 100% of mayors, either city, county, 100% of municipal leaders around the country, what are the total number of housing units in municipality? Less than 1% could tell you what it is. I’d be surprised if 1% could tell you that number. They could tell you that they have an inventory shortage or they don’t, but when you ask them, can they describe the magnitude of it? They don’t know. They notice prices are changing rapidly, or in this particular case, shooting up. And they’re being told, “We’ve got an inventory shortage,” and they almost certainly do.
But I’m amazed that we talk about inventory shortage all the time, but no one can actually count the total number of units. As an investor, that’s the first thing I would be trying to get in a market, is what’s the total number of units, how many people are expected to move in, and those opportunities will start to stand out. You really want to look for that shortage right now, that’s probably there in most places, or pick out a shortage before others can, and see the people moving in. And those are going to probably be the best opportunities going forward for real estate investment.

Dave:
That’s a great piece of advice there. Is there anywhere you recommend that people listening to this can find some of that data?

Ken:
Sure, sure. One of my favorite little tools, and it’s really easy, it’s from Stats America. It’ at the Kelly School at the University of Indiana, but it’s easy to Google. It’s Big Radius Tool. And then a third grader can use it. Big Radius Tool, you put in the metro that you’re interested in. You tell it to look in certain radii, I guess, would be the correct way, pick a radius. And it’s not a perfect circle because sometimes you’re up against a water, or sometimes it’s wanting to pick up bordering counties and there’s a methodology for it, but it gives you a really good idea how many people are going to be moving into that area in the next 10 years, is the span on it. And the population estimate gives you the current unemployment in the area, the average salaries in the area. It’s a great little demographic, quick and easy, not the absolute premium data, but you can get quick and dirty estimates, very, very quickly.
Inventory, that’s a toughie. It usually just means you’ve got to dig into the US Census Bureau data, find building permit survey, find housing starts, and then just dig, and dig, and dig through the minutia. And they will. You can find, and it’s usually by metro area, the housing starts every month. Then the big problem is finding that base number, which is pretty easy to get through Google, but I don’t know how accurate it is. So if you Google the total number of housing units in Miami-Dade County, it’ll tell you. You can find it. Now, I don’t know how much I trust that number because I’ve never been able to replicate it from the US Census Bureau data, but they say it comes from there. And I’ve spent a lot of time on this, and we just haven’t replicated it exactly. So it’s always going to be a bit of an estimate, Dave, but you really want to put those things together and see if you really do have an inventory shortage.
And not to take up too much time on this, but I would tell you, we’re told we have an inventory shortage here in Southeast Florida, that’s Miami-Dade Broward Palm Beach County, that we have an inventory shortage. The national occupancy rate of the typical unit, owned or rented, is 2.5 people. Yet, here in Southeast Florida, every time I do this estimate, it usually comes up around 2.35, 2.36, somewhere less than 2.5. So if we have a housing shortage here, why do we have less density?
So there’s a couple of reasons why, and you have to work through that such as here. It’s pretty clear. There’s a lot of second homes, excuse me, where people, they live in the Midwest and the Northeast, and they winter here. We also have a lot of Airbnb type stuff that’s here because people want to come in vacation. All of these are registering zero of occupancy, year round, so that’s bringing down that average. And lastly, we’re seeing this COVID influx of temporary people that are coming in and working from their office, might as well be doing it in Fort Lauderdale or West Palm beach, as opposed to Chicago, where I have to stay inside and it’s cold and I’ve got to work from home.

Dave:
Got it. That makes sense. And I love that advice, Ken, because so many people, you read these headlines about inventory shortages. And the reality is that every individual housing market is going to be different, and that the depth and scale of each inventory situation is going to be different. And I know, if you’re listening to this, you may be thinking, “Oh, digging into that data is complicated and it’s hard,” but it’s not really that hard. If you’re able to Google it and look at some census data, you will get an advantage that most real estate investors are not willing to do. They’re not going to put in that legwork. And you can do that. You just got some great advice on data that you should be looking at to understand the long-term trajectory and long-term dynamics of supply and demand in each individual housing market.
Ken, I do want to return to the idea that rent is better than buying right now because as a real estate investor, I look at the rapid rent price growth over the last two years. In certain markets, it’s hit 30% year-over-year. I’ve seen, I think, in Portland, they said it was almost 40% year-over-year, at least asking rents. And I think that’s unsustainable things have to slow down. But when I hear you say that it is a better financial decision for the average person to rent rather than buy, do you think that means that the will be continued upward pressure on rents going forward?

Ken:
Not really because there is, ultimately, this big pool back towards home ownership, family, not only just a roof to live under, but developing a home. And we see this time and again, and I always get really amazed at how we talk about, wow, the nation’s going to become a renter nation, or it’s going to become a 100% home ownership. We’ve always stayed somewhere between plus or minus 65% home ownership rate. That just doesn’t change that much. I do expect there to be a more and more bit of a migration towards renting and reinvesting because Wall Street’s coming into the marketplace now, and you’re seeing these bill to rent developments that are coming along. They’re being professionally managed, and they’re built, and set up for young working professionals to be working in Atlanta, Georgia today. But if I have to move to Houston, Texas for a better job, I’m going to be able to do that. When I own that home, it’s a far more difficult thing to do.
I think all of these things… Corporate America getting involved in the market, all in all, is a really good thing. But especially on the rental side, they’re going to provide a greater variety, more professionally handled, if you will, because they’ll have to scale to be able to do that. And you’ll see people more willing to rent, and they’ll understand that they need to be reinvesting. Again, it’s not a big win, but renting and reinvesting does give you certain advantages. The cost of sale could be, on average, 10 or 12% now just to sell and move. By the time you pay the movers, and buy your new home, and sell your old home, you’re out 10, 12 plus percent where it’s much easier to leave that rental unit and move to another city. Or maybe you’ve gotten a job in a different county and you’re not really that far away, still you’re going to have to move and you’re going to have to incur all those costs. There’s a lot of reasons why you want to rent and reinvest.
Now, for example, though, as a potential buyer or renter, and you feel like I don’t have that monastic discipline to put aside that money every month, you had to estimate the property taxes, the property insurance, the homeowner’s association fee, and you think I don’t have that just strict discipline to put that money aside every month, then perhaps you want to own because, at its heart, ownership is a forced savings plan.

Dave:
That’s excellent advice. I mean, you see across all sorts of economics, that people don’t always behave rationally. So that’s a perfect example. And if you know yourself and you know that having that money sitting in your bank account is not going into the stock market, then maybe you should buy, force yourself to own. And there are some other intangibles about home ownership that I think are really beneficial. You listed some of them earlier, like being close to family or being part of a community, some things like that. Ken, we do have to wrap this up in a little bit, but I have to ask you about something you just said, which I’m very curious about. You said that, overall, corporate America getting involved in the housing market is a good thing. I’d love to hear your opinion on that.

Ken:
I’m an economist. I study markets. You love markets that are efficient. And by efficient, I mean informationally efficient. So you have price discovery that’s easy to do, and rather instantaneously. And when you have markets that are very efficient, you can sell things quickly and at earn your price. It makes markets more liquid. And we want that in our housing market. We’ve never really had it. We talk about typical time to sell in weeks or months. You never hear anybody talking about the typical time to sell a stock. It’s a highly efficient market. And that means you can look at that stock prices, and within a very narrow margin, know whatever price you see is the true value of that asset at that moment in time.
Now, stock prices tend to go up and down quite a bit. Home prices tend to be quite a bit more stable, but still, there’s more volatility in them than you think, but that’s not the point. The point of efficiency is, if I need to sell my home today and the market’s very efficient because we have all of these Wall Street types that are now scouring through the market, looking for deals, will drive a very efficient pricing process. Price discovery will be rather instantaneous. And when you go to sell, you’re going to be able to sell at or near your price rather instantaneously. You’ll see a lot of things go down, all the costs associated with that selling, brokerage fees, closing costs, other finance fees. Those things are all going to become less. So we want to see a very efficient market. I know most people are saying, “Oh, this is somehow Wall Street, corporate America is part of the problem in the housing market right now.” They’re not, they’re just an easy scapegoat. Long-run, this is exactly what we want.

Dave:
That’s a fascinating take, ken. I would love to have you back to talk more about that because we are running out of time. But that, I know, as a real estate investor, relatively small one and representing our audience, which is composed of people who are aspiring investors up to big time investors, see the Wall Street entrance into the market as serious competition and could be making housing more unaffordable. But I love your unique opinion about this, and maybe we’ll have you back some time to discuss that. Before we go, though, you’ve obviously done a huge amount of research, have so much experience in the housing market. For the audience I just described, do you have any advice on how they can best utilize your research to further their own financial goals?

Ken:
Sure. I guess, Dave, I’d start with the fact that I actually, again, I was a broker for 12 years. And the primary reason I was in the business was, not so much to sell properties to and four people, but I was there… I knew the deals would come across my desk. And by my estimation, plus or minus, I’ve bought and sold roughly 60 properties in my life, most of which when I was practicing, not so much now. It’s more a hobby and it’s fun for me. I go looking at homes on Sunday afternoon and my wife thinks I should be playing golf, but I get excited riding around looking for deals, which there are very few out there right now, obviously. So I’m playing more golf now, though, on Sunday afternoons. But certain things always hold true from an investment standpoint.
And I don’t care if Wall Street’s there or not. And I just think you have a little bit of an advantage if you’re aggressive, and you’re out there, and you’re constantly looking. This is sad to say, but this is very true, and I don’t think it’ll ever go away. There will always be financial distress caused by job loss, divorce, other issues in your life that will cause financial distress. And there are always properties that aren’t necessarily in the best condition. They’re they’re structurally sound, but aesthetically a bomb.
The next thing I would tell you, so you’re looking for distress, you’re looking for structurally sound, but doesn’t really look the best, but that’s paint. That’s a new set of tile, and you can do that superficial stuff, and it’s relatively inexpensive. And the other thing that you’re really looking for is you want to take away uncertainty for people. People hate uncertainty. It’s a basic economic Axiom that people cannot stand uncertainty, and they will pay to get away from uncertainty. They will. It’s the same thing.
When you look at the roof on a home, and I used to see this all the time when I was in the business. This is a long time ago. That roof should cost you about 5,000. You’re going to buy the house. I think it’s going to cost you about 5,000. Well, let’s take 10 off the price just to be safe. That uncertainty drives and creates a problem. So if you, as a potential buyer, can take away uncertainty from those people that have that aesthetically, not so nice house, but structurally sound, but are in financial distress, and you’re standing ready with a cash offer and a large earnest money deposit that says, “I will make all this go away in the next very short period of time,” and this large earnest money deposit is to show you that I’m going to do what I’m going to say. And I always bought with large earnest money deposits. The only contingency I put in the agreement was that they passed clear and marketable title to me. I assumed quite a bit of risk, but if I was doing enough volume, I got pretty good at spotting, some structural issues and other things that I just knew would be a problem from experience.
So I would tell people that old fashioned way of finding properties is never really going to go away. If you’re trying to buy on the upside and you’re just going to ride your way to a profit, that’s always very, very possible. We all know you make the money on the buy, not on the sell. So all of the research is one thing, but I think that basic strategy for buying is never going to change. And then, sometimes this buy and hold. I hate flipping. I don’t think I’ve ever flipped a property in my life, but sometimes you buy and hold and you rent in the interim, and sometimes you buy and resell, but I like the buy and hold because you’re usually going to be buying at the bottom of the market. You can get a good tenant and ride the market up a little bit.

Dave:
Ken, it sounds like we have a very similar philosophy. I’ve also never flipped a house. Love buy and hold. Also, love looking at deals even when I’m not necessarily in the market. But I really appreciate that advice because I think, especially in this market, where it is difficult to find deals, that advice about finding distress properties and adding value, taking a house that is not aesthetically pleasing or is not going to be habitable for the average home buyer, and you could be the person to go, and add value to that property, and rehabilitate it, and add inventory to the market, and create places for people to live, that is a surefire way that works in pretty much any type of market conditions. Ken, thank you so much for joining us today. We really appreciate your insight and expertise here. Where can people learn more about you or interact with you if they want to?

Ken:
Sure. The three indices that I work on right now, and we put out, two of them are monthly, and that’s the Top 100 US Housing Markets. That’s the easiest thing to Google, Top 100 US Housing Markets, and it’ll pop up, and the graphs are interactive. The next one would be the Waller, W-A-L-L-E-R, Weeks, W-E-E-K-S, & Johnson, my name, J-O-H-N-S-O-N, Rental Index. And then you can go in, and you can pick your city, and there’s little dropdown boxes, and you can see what premium, if any, you’re paying, year-over-year rate of change, etc. So that’s there as well for investors.
And then the index that we originally started talking about was the Buy vs. Rent Index, which we’ve been doing for about a decade plus, a little over a decade. And that allows you to see, should you be renting or buying. But unfortunately, that index is only in 23 cities, where the other is up to a hundred markets. So those others are a little broader. But we’re looking to, quite honestly, sunset the Buy vs. Rent Index in the next year. We’re working on a price to rent ratio, and looking more of trends, and being able to analyze more markets rather than quarterly, like the Buy vs. Rent Index data is, and only for 23 markets. We think we might lose a little academic punch, a little explanatory punch, but we get stuff that’s timely that people can access every 30 days. And watching that price to rent ratio is very much like watching a PE ratio. And it tends to signal when markets are more prone to find deals in and when they’re not as well.

Dave:
Great, thank you so much, Ken. We will link to all of those sources in the show notes and in the description of the show. Ken, thank you so much for joining us on, on the market. We’d love to have you back sometime

Ken:
Enjoyed it. Dave, have a great day.

Dave:
You too.
Thanks once again, to Kenneth Johnson for joining us and sharing all of his original research about renting versus buying in the US. To further shed light on this question, we have James [inaudible 00:36:11], Jamil [inaudible 00:36:12], and Henry Washington join us to make sense of all this. Jamil, would love to start with you. What was your biggest takeaway from the conversation I had with Ken?

Jamil:
I mean, there was a ton, but I think the biggest takeaway that I had is, of course, renting, the way that he describes it is proving to be a better option for many people than home ownership. But I want to see what this is going to look like once we take into consideration the different types of buyers we have in the marketplace right now. We’ve got institutional buyers that are continuing to hit the gas. And I don’t know that that absorption rate is not going to have a positive impact on home ownership and values over time. I mean, over time, we’re definitely in a frothy part of the market right now, but what happens to all those homes? They’re not going to be magically coming back on the market. The intention of buying all these properties for these Wall Street buyers is to hold them. So I don’t know that we really have accurate data to digest this thesis, that renting is better than buying, because I don’t know what the impacts of this massive absorption rate is truly going to be on the housing market.

Dave:
Yeah. Well, there’s a couple important things there. First and foremost, as Ken states, and you can see in the graphs, if you look at them below, this is just a point in time. What he’s talking about renting better than buying, that’s right now, frothy market, high interest rates. So that can also shift. But it seems like, I don’t know, don’t want to put words in your mouth, but you’re buying into this idea of we’re becoming more of a renter nation, or we could be because Ken saying that, historically, we’ve had a home ownership rate in the US that’s hovered in the mid ’60s. And right now, that’s true, but a lot of that data lags a little bit. And so it seems like you’re concerned or thinking that that might actually start ticking up, even though we haven’t seen that reflected in some of the census data yet.

Jamil:
Absolutely. I think that’s exactly what we’re going to find happening. And that has to have an impact on value. What did Taylor Mar said? 18.6%, I believe, I hope I’m not misquoting him, but 18.6% of all absorption right now is from the institutional buyer. That is a huge amount. It’s not small. It’s not 2% or 1%, it’s 18.6%. There has to be an impact from that. And we don’t know what that impact looks like. And I think, in five, 10 years, we’re going to look back at this and say, “Oh, this created a huge vacuum in the housing market, and we never really recovered, inventory wise, to accommodate it. ”

Dave:
Yeah. Just to clarify with Taylor, I’m pretty sure what he said is that 18.6% is all investors.

Jamil:
Yes.

Dave:
But it’s hard to know who’s an institutional investor and who is real. And that is, honestly, one of the hardest data points to track down. I’ve tried to a lot. And anecdotally, we hear, from experienced investors like all of you and in the broader media, that institutional investment has picked up, but it’s really difficult to nail down that number, which furthers your point Jamil, that we don’t really know exactly what the impact of this is going to be because it’s extremely hard to get data about what’s happening.
Henry, let’s move on to you. What did you take away from the conversation with Ken?

Henry:
Yeah, man, that was a super insightful conversation to hear. Again, we keep bringing people that bring this actual data points to the themes that we’ve been talking about since the inception of this show. And so it’s super cool to hear some of that. I understand his analysis of renting versus owning and how right now renting could be a better option. And I think the caveat there is, if you do it in the way that he explains. So he’s essentially saying, if you rent and then you take your additional expenses that you would have as an owner, your maintenance, taxes, insurance, and your down payments, and then you reinvest that money into a vehicle like the stock market, over time, that proves to be better at generating wealth.
And that’s probably true, but most people aren’t going to do that. I would say 99% of people aren’t going to do that, or aren’t going to do that in the way that he’s saying. Maybe they take a little bit of that money and they reinvest it, but most people aren’t going to take every bit of that money. They’re not even good enough at… People aren’t even good enough at budgeting their daily expenses, nonetheless taking what they would be spending in ownership. And most people don’t even know what they would be spending in ownership because a lot of people haven’t owned yet. And so the idea that you make more money if you invest that, is probably true, but most aren’t going to do it. And then, that’s also assuming that you’re a savvy enough stock market investor that you’re going to invest in things that are going to trend in the right direction. Jamil’s a trader. He throws it in the stock market, he’s going to be flipping it the next day.

Jamil:
I won’t be able to help myself.

Henry:
So it makes some assumptions there that you’re going to pick savvy investments that are going to stand the test of time. And then, we don’t know how long that time is. Right now, the stock market’s taking a big ding. And so that might not be the best move in this very moment. I just want to put that caveat out there that, if that’s something you’re thinking about doing because the buying scares you right now, and especially when you heard all the data points that were talked about in this interview, just understand that that method is going to take way more discipline on your behalf, and it’s going to take way more education and research because you need to know what you’re going to be putting that investment into, and then have a plan to hold it long term.
Buy the things you think are going to go up and then delete the app from your phone so you’re not looking at it every day because right now I’m getting my butt kicked in the stock market, but I know it’s a long term play for me. And so you just have to understand what it’s truly going to take to reach those numbers, and don’t just take that advice and go, “Oh I should rent.” you should rent and be disciplined with the money so that you’re going to get the wealth long term that he’s talking about.

Jamil:
He’s he called it monk like discipline in order to be able to accommodate saving that money and allocating it correctly.

James:
That doesn’t sound that fun. I’m all for discipline, but monk style discipline? That’s a little aggressive.

Henry:
Yeah. But I just wanted to mention that with the scenario of buying, you have done the investment when you bought it. You are now invested, and you get the benefits of not just potentially cash flow, but tax benefits, depreciation, debt pay down by somebody else. You are investing. And so with the other strategy, you have to be a disciplined investor continuously. And that’s just not most people. And a disciplined investor continuously in something that’s not real estate, so it’s also been a required education. So yes. And he said, the difference between the two isn’t very big. And so if I have to choose one over the other, and one I get to invest and almost set it in, forget it, and one, I have to be super monk like discipline every day, I’m going the other route.

Dave:
That makes sense. And what Ken is saying too is a scenario where it’s a home buyer or renter. It’s not someone who’s necessarily an investor. And again, this research really just talks about primary residents. So I think there’s also a question here is if you had, let’s say you had 50 grand to invest, and if you’re going to be a homeowner, could you invest that into a rental property and continue renting? So again, this is just one scenario that Ken is talking about, and I do want to come back to this topic of using that money to invest rather than buying your primary. But James, first wanted to hear what your take on the conversation with Ken was?

James:
Yeah. I definitely like what Henry said. It depends on how you can reinvest your money. I thought that was interesting that he said that, “Hey, if you rented and then reinvest in the stock market, you could do better.” But again, it comes down to what you’re good at doing. The thing that’s not included in this data point is that walk in sweat equity, the bird style properties. If you’re buying at that discount, and you’re creating instant margin day one, buying your home’s going to outperform the stocks automatically because I can’t go buy that stock for 20% off just by doing some extra hard work right now, but I can do it with a house, where I can create that margin.
And the other interesting point that I got out the whole thing is just all the data, it’s amazing. On the show, we’ve been exposed to all this different data sources and different types and ways to interpret it. And this is a great way to do it, but they all point to just being overinflated right now. Every time we do this, it’s always that everything is overinflated. And these are just additional tools that you can use now, like how he cuts up this data with how high are rents juiced up, what markets are appreciating fast enough. We can use all this. As we go into a transitioning market, all these data points help us pivot, and they help us move in the right direction. And just by getting this extra data points, you really can look at how do I want to buy in this market?
If it’s really high on the appreciation factor, like Boise, if it went up 54%, I’m going to factor none of that appreciation into my… When I’m looking at that deal, I’m going to look at, “Hey, what’s the true cash flow” because what he’s talking about and what this whole data says is… Because he goes on later to talk about, if you buy at the peak and it drops dramatically, invest in a stock market. It’s going to be way, way better. But at the end of the day, if you’re just looking at on a cash flow standpoint, it doesn’t really matter. You want to chase that return. If my cash flow return’s higher than my stock market return, I’m going to go that way all day long because I get a hard asset, it pays me every month rather than just gets compounded back into the deal, and it just tells you how to buy in that certain market.

Dave:
James, when you are advising primary home buyers as a real estate agent, do you give them that advice to look for things that are under market value, and put in sweat equity, and refinance? Or do you find that most home buyers are driven by comfort lifestyle that they’re looking for rather than making it an investment?

James:
It depends on the price point. So I only sell discounted property. If someone comes to me and says, “Hey, I want to go buy a turnkey property.” I can’t sell it to them. It’s just not how I operate. I get why people want to do it. It’s easy. You move right in. You can run your budget, but that’s just not… Fundamentally, I’m so against that, that we just don’t sell it. So I think no matter what, if you’re looking at that… Buying your primary residents can be one of the best tax savings that you can do. You can buy it, you can live in it two to three years. If you’re married, you get the $500,000 tax free appreciation and bonus. And so when you make that strategic right buy, you can increase your wealth in your position in life so dramatically if you make that first buy. And then you take that first buy and you roll it into the second buy, and you can compound your equity.
I mean, we took… Back when I was a primary, my first primary bought as a married person, we just got married, we went and bought the cheapest, ugliest house for sale, and nobody wanted it. It was the ugliest thing I could find, but by doing that, we made 300 to $400,000 on that house. And then we rolled it into another house. And on a four year basis, we picked up over $2 million in equity position because you’re buying right. And so that’s what these data points don’t tell you, is the full story of what the potential is. And that’s why real estate is so beautiful, is you can manipulate it and you can look at it all different ways, and you can buy whatever type of asset you want, but it depends on how hard you want to work for it. It is not convenient. And if you want to put in the work, you will 10x the stock market all day long, in my opinion, but you got to put in the work and you got to have the right systems in play.

Dave:
That’s a great point because people… Again, I’m not really criticizing Ken. He’s not an investor. That’s not who this audience is for. What we’re trying to do here for everyone listening is to contextualize Ken’s research for people who are either active or considering real estate investments. But what I love about what you just said, James, is that buying your primary residence could be a great learning opportunity in getting your foot into the door if you want to be an investor. And it’s impossible to know who’s listening to this and what situation they are in life, but some people out there, I imagine people I talk to think this, it’s a trade off between buying my primary residents or becoming an investor. And as you said, James, there are ways to hedge between those two. And if you are willing to put in work, you can turn your primary residence into a good investment. And obviously, in the media and in these academic scenarios, you have to create this dichotomy where it’s either rent or buy, but there are other options out there. So really interested in and love that point you just made.
Another part of this research that I think is really interesting is that the alternative to home buying is renting and then investing in the stock market. I kept thinking, what about renting and using the money to buy a rental property, not your home or another investment? Jamil, do you ever see investors who do that, or do you ever recommend something like that?

Jamil:
I’ve done it myself.

Dave:
Really?

Jamil:
Yes. In my early stages of real estate investing, I never really could afford to own the house that I wanted to live in. So I would typically rent them. But what I would do with the surplus money that I would make from wholesaling is I would buy rentals. And so rather than buying my primary residence, I was continuing to buy rentals until I ultimately sold them, and then ended up in this house that I’m in right now. But again, I think that it’s an incredible strategy if you are trying to build wealth. And again, to James’ point, and I think Ken made it at the end of his interview as well is, the fundamentals of buying are still there. And you can always game real estate by understanding the fundamentals of underwriting and knowing what a good deal is.
You buy a good deal, you make your money when you buy. And regardless of what’s happening in the housing market, if you are sticking to those fundamentals and you’re buying assets that you force appreciation on and then turn into rentals, I think that you absolutely can create for yourself greater opportunity, greater returns, and then decide whether or not home ownership is the way to go. I mean, there is nothing wrong with owning 10 rentals and renting your primary residence. I think that’s an absolute, fantastic strategy for the right person.

Dave:
Totally. I mean, I rent right now also. I mean, that’s partially because I live in another country right now, but I would do the same thing. Before I picked this home, I ran an analysis and decided, was it better to invest my money into a primary residence or to continue to invest it elsewhere? And that can be a continuous thing. You don’t have to make that decision right away and stick with that forever. I’m curious, Jamil, do you think it’s… There is this culture in the United States where home ownership is seen as the vehicle with which to build long term wealth. Do you think that’s still true?

Jamil:
I think paradigms are changing all around because that was that whole concept of buy a home, you’re going to college, you’re going to buy a home, and you’re going to be set up for life. I think we’re reevaluating the utility of college for a lot of families. We’re reevaluating the utility of home ownership. We saw, in 2008, what happened to so many households that got crushed, that had to lose their primary residence and had to walk away and reset their finances. And so I think that the paradigms are absolutely shifting. And I think that we may decide in 10, 20 years that, no, it didn’t make sense to own a home. It made more sense to invest my money in other things, like rentals. It’s not that it’s not real estate, it just might not be your primary residence.

Dave:
That makes a ton of sense. Henry, one thing that you’ve talked a lot, we’ve talked a lot about house hacking on this show. And I think that, again, we’re talking about this dichotomy, home ownership versus renting, and maybe they’re being gray area. Do you think house hacking is a third option here?

Henry:
100%, absolute. House hacking, rent hacking. Just think of the concept. I was thinking as Jamil was talking, I had a roommate in college I rented a place that I could afford on my own. And then found out that if I got a roommate to rent the extra room that I didn’t use, but for storing stuff in, that I could cut my rent in half. And so I did that. I just wasn’t smart enough to take that surplus of money that I had coming in and then use it to invest. And so you don’t even have the house hack, you can rent hack. As long as you rent someplace you can afford if you didn’t have a roommate, then get the roommate and then take the surplus and use that to invest in real estate. That gives you a huge advantage, wealth advantage.
But yeah, man, house hacking is still one of my favorite strategies to build wealth, especially if you house hack and buy a multifamily, two to four units. That is such a cheat code to building wealth in general. And so that would allow you to do both of these strategies because you could buy a property, get all the benefits of investing in that property, rent it out, get the benefits of cash flow, and then maybe use that cash flow to either go buy more rentals, or even, like he says, invest in the stock market. And so you could diversify your investing portfolio with just one purchase of a multifamily that you live in. And I think that what a cheat code of building wealth.

Dave:
Absolutely. People always ask me on Instagram all the time, they’re like, “Do you think house hacking in this market, or this condition, or this makes sense?” And I always just say, “I think house hacking works in any market for anyone in any economic conditions.” It just makes so much sense. There’s almost no scenario in which you won’t decrease your cost of living. In almost every type of scenario, you’re going to… Even if you’re not cash flowing, you’re spending less money. And as Henry just said, you can use that money with which to make other investments. Right before we got on here, we were all just chatting, and it sounds like, Henry, you used some of the tools Ken recommended already. Can you tell us a little bit about that?

Henry:
Yeah, man. What does he call it? It’s called the Big Radius Tool. I thought was a super cool data analysis tool to allow you to put in a city, a city of your choosing, and you get to see population size, you get to see population growth percentage. And so I just put in my market just to take a look at it, and it immediately tells you the population of the city. We’re at a 23.2% growth, a 10-year growth. And then it takes all the counties and cities surrounding because you can pick a mile radius. So it takes all the counties and cities in that mile radius and gives you what their growth percentage is. And then what I really like is it takes the economic industries and gives you employment numbers, and what percentage of the total that is, and what the average earnings are. And so you can see what are the economies in that market that are driving it.
And so that’s super cool data, especially if you’re looking to invest out of state and you’re wanting to analyze a market, especially as times are changing right now. So you can essentially put in the markets you’re thinking about and see what economies are driving that market and see if that market is growing. So if you’re interested in investing somewhere, like for me, I would be looking at what are the economies in that area that are as recession proof as you can get. So I’m looking for things like healthcare. I’m looking for things like the tech industry. And I’m looking less at manufacturing, things that are either being shipped overseas or that automation is taking over. And so it can allow you to really do some quick… Literally, took seconds. So you can really analyze multiple markets pretty quickly at some of the most critical factors that we would use, as real estate investors, to determine, is this an area should I invest my money? Are people continuing to go there? And then what industries are drawing those people there? And are those industries long lasting or recession proof? That’s gold.

Dave:
So this tool that Ken mentioned, which is, again, called Big Radius Tool, provides all sorts of incredible economic information. And one of the things that Ken hit on related to this data was markets that might start to see a downturn. And he relayed this back to markets that have excess inventory. James, is this something you’ve ever tracked or ever heard of? Or how would you recommend people use this type of information to try and inform their own investing, or home ownership, or rental decisions?

James:
Yeah, we’ve been tracking inventory since 2006. That’s the biggest thing that I actually look at because that’s going to dictate a lot of things. If you have a lot of inventory in the market and you’re flipper, that means your property’s going to sit on market longer. That’s longer hold times. Those are things that you have to take into account. But the typical rule of thumb is that the market starts depreciating after you have five to six months worth of inventory in the market. And so that’s why I’m always watching that too because the closer we get to that amount of supply in the market, that’s where you’re going to see the slower appreciation, and then you’re also going to see the depreciation at some point. So we’re always tracking that.
And same with rental absorption rates. You want to know, how many people are coming to market? How quickly can it absorb? And then, one part that he also talked about in that radius tool was what the population growth because he said that… And it’s a no brainer. Low inventory with high population growth is going to give you the best economic conditions, which makes total sense. But you have to watch that data on what market that you’re also in because in Washington or Seattle, King County’s our best market. It’s our biggest, it’s our largest. And it actually had a reduction in population last year, but high appreciation because I think the reduction had to do more with affordability factors, where people that historically have lived here for their whole lives just decided to move out of the market. And then that’s what’s caused the population decrease, but then the median household income went up 20%. And so more people with money are coming to market, so there’s some other extra points that you also want to look at inside of these data.

Dave:
Yeah, that’s a great point. Again, people, if you want to take a look at what James, and Henry, and Ken just said all about tracking this information, you could do that on Big Radius Tool. There will be a link in the show notes and the description below. Redfin also has some pretty good data there as well, so you can definitely check out that information.
Jamil, before we go, I just want to come back to you for one last question here. What would your recommendation be for the average person who’s just trying to decide if they should rent or buy? How would you go about making that decision?

Jamil:
Well, first and foremost, I think self-awareness is key. Let’s really hammer home what Henry said and what Ken was saying there, do you have the discipline it takes to reinvest the money that you’re saving? And if you can honestly answer that question as yes, then possibly, renting and reinvesting that money might be a better way to go. But if you are like 99% of the people in the world, and that monastic discipline isn’t the way that you’ve been brought up or the way that you operate, then you absolutely should take advantage of using your primary home as a forced savings, and use the second really incredible point there to buy right.
If you talk to James, James will never buy a retail property. He’ll never live in a retail property. He’s always going to buy a home with the fundamentals of making sure he’s buying at distress, he’s buying discounts, he’s making sure he’s paying 70 cents on the dollar for his acquisitions. If you take those approaches and you apply that to your primary residence, I think that you’re putting yourself in a much greater situation than you would be if you just took all that money, and plopped it in the stock market, and prayed and wished.

Dave:
That’s great advice. I actually, I… No, I just said that was the last question, but I had one more question that I really wanted to ask and forgot. James, do you think if Ken’s analysis is correct, and again, we’ve had a lot of caveats, but just for the average person, if they’re listening to this and thinking, “Oh, you know what? I’m going to rent for now,” what do you think that means for long-term rents in the United States? Do you think that it’s going to… If it stays like it is now, does that mean rents could continue to go up at the rate that we’ve seen today or just continue going up faster than they have in the past?

James:
I think the gap between home ownership and rent costs is so large right now that I do think rents are going to keep going up. I mean, at the end of the day, we still have a very low supply in rentals. And if no one’s buying that’s is going to require a higher absorption rate in the rental market, which is going to cause the pricing to go up. And I think people are going to Ken’s principles. They’re getting smart about what they want to do in life. Buying and renting, that fundamental question always comes down to what market are you in.
We have two homes. I have one in Newport Beach and I have one up in Bellevue, Washington. I live in Bellevue, and then I’m in Newport part-time. The cost of housing makes zero sense in Newport Beach. I don’t know why you would even buy there. We rent this house for 12 grand a month, which is a ton of money, but I would have to put down $4 million, no, $4.5 million on this house to get my mortgage cost down to that same number. If I’m making 10% on my money, that’s $45,000 a month that by not buying that house, I’m making $45,000 a month. And after taxes, I’m doubling my income every time on that.
And so you just have to look at what the market is that you’re in. Use time, value, money. How much money do I have to put down to get it down to the cost of rent? What can I make on that money? Look at the Delta, and that will help guide your decision at the end of the day. I’m actually a person that doesn’t really like to rent. I like to own my property, but the math is the math. And using time value, money, and doing it that way will keep it very simple, and it guides you on whether you should buy or not.

Dave:
That’s an excellent example, James, and a perfect way to round out this discussion. So thank you. And 12 grand in rent is quite a [inaudible 01:06:09]

James:
But my money’s paying for it. It’s actually free because I didn’t put the money down.

Dave:
No, no. I totally get it.

James:
It’s absurd.

Dave:
Probably just a sweet house is what I’m trying to say.

Henry:
I just want James [inaudible 01:06:21] problems. That’s all. James [inaudible 01:06:24] problems, that’s the problems I need.

Dave:
Yeah. That just seems like a great house. So we’re going to record there next time.

James:
Whenever that comes out of my mouth, it does make me sick to my stomach. [inaudible 01:06:34]

Dave:
Well, for everyone out there who is trying to decide whether to rent or buy or wants some more information about this, we actually have a tool to give away to you, which we will give away right after this.
All right, welcome back. We now are going to go onto our crowd source section for today. And we have a data drop for the first time in a while. Actually, I guess it’s not necessarily a data drop, but it is a data tool. I, alongside the CEO of BiggerPockets, Scott Trench, created a calculator that helps people analyze, not just buying versus renting because there are a lot of great tools out there, but it’s actually a buy versus rent versus house hack tool, which lets you look at three different scenarios based on your market. So you can actually go in there, and we have data for the median rent and the medium home price for, I think it’s like the top couple hundred markets. So you can look those up or you can use other tools in BiggerPockets to look at rent for a specific property, something like that.
And you can input in there and it will tell you how much more money you’ll be making by rented versus buying versus house hacking, what your break even points. You’ll have all sorts of graphs for you to break that down. It is a super cool tool. I guess I can say that even though I created it, but I do think it’s really cool. If you want to check out this tool that we created for you, you can find it in the show notes or the description below, or you can go directly to BiggerPockets. The URL is biggerpockets.com/rentorbuytool. That’s biggerpockets.com/rentorbuytool. It’s completely free and you can download it there, and tons of other really helpful information from the BiggerPockets website.
James, Henry, Jamil, thank you all so much for being here. Appreciate all of your insights and information today. Can’t wait to see you guys again real soon.
On The Market is created by me, Dave Meyer, and Kaylin Bennett, produced by Kaylin Bennett, editing by Joel Esparza and Onyx Media, copywriting by [inaudible 01:08:53]. And a very special thanks to the entire BiggerPockets team.
The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

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.