Month: January 2022

The tight housing supply, the extreme demand by buyers, and the overall irregular conditions we’ve faced for the last couple of years have made the housing market prime for home sellers. And, these conditions have also made it incredibly difficult for buyers and renters who are looking for housing.

According to a new report from ATTOM, a real estate data publisher, home seller profits rose 45% year-over-year in 2021, and are now up to $94,092 in average profit. In 2020, the average profit was $64,931—and just $55,000 the year prior.

The giant leap in profits is attributed to the continued acceleration of appreciation in markets across the country. The Case-Shiller Index now tracks at 276.12 points, up about 19% since this time last year—with over 90% of markets increasing profit margins throughout 2021.

So how is this massive growth affected buyers and renters—and how will it affect the housing outlook for these two groups in the future? Here’s what you should know.

Home buyers faced extreme challenges throughout 2021

At the start of the pandemic, the Fed lowered interest rates to near-record lows. This helped flood new buyers into the market, exacerbating the housing shortage and spiking prices—and rates continued to fall throughout 2021. This created a storm of home sales that culminated into one of the greatest housing markets on record for sellers—and one of the worst for buyers.

“What a year 2021 was for home sellers and the housing market all around the U.S. Prices went through the roof, kicking profits and profit margins up at a pace not seen for at least a decade. All that happened as the virus pandemic raged on, which actually helped drive the increases instead of [stifling] them,” said Todd Teta, chief product officer at ATTOM.

“Households that escaped job losses from the pandemic dove into the market, in large part as a response to the crisis. And the rising demand led the market boom onward. No doubt, there are warning signs that the surge could slow down this year. But 2021 will go down as one of the greatest years for sellers and one of the toughest for buyers,” Teta said.

Renters didn’t have it any easier

Both buyers and renters received the short end of the stick in 2021. Rental markets across the U.S. skyrocketed in price—making it a lot more expensive to pay for housing for current and would-be renters.

According to Zumper, rent prices rose 12% for a median one-bedroom apartment in 2021. In turn, rent prices hit an all-time high.

Of course, not all markets are created equally. Some saw faster price growth than others.

New York City, for instance, saw 25% growth in one-bedroom rental prices—with San Francisco trailing right behind. On average, all markets increased enough to push the national median into double-digit growth.

What these rising prices mean for buyers and renters in the future

These increased rent prices painted an especially bleak picture for younger renters and workers. For example, workers in the 16- to 19-year-old age bracket earn, on average, about $555 per week. For employees in the 20-24 age bracket, weekly earnings total about $633 on average.

And, considering that the national median rent for a one-bedroom apartment now costs, on average, about $1,374, it takes the average younger renter more than two weeks of work to gross enough funds to cover rent.

Considering the decreasing rate of homeownership amongst the millennial demographic compared to previous generations at their age, the prospects look no better for Gen Z. Not only is rent completely unaffordable for most young adults, but student debt also continues to soar—and most report having little to no savings.

Granted, most young adults in the 16-24 age demographic are either living with their parents or guardians or are in college—or both. But one of the age-old promises in this country is the opportunity for unparalleled upward financial mobility, which is driven primarily by the ability to own property and carve your own path in life.

But now, even with a bachelor’s degree, it’s becoming a lot harder to get started on the path towards the American Dream. And it’s due in large part to the fact that we have a severe affordability crisis in the United States.

Where does it all end?

I’ve repeated it in several articles, but it bears repeating again: The major issue is our severe shortage of housing units. The U.S. suffers from a shortage of a whopping 10 million units, and it’s been plaguing us since prior to the 2008 crash.

Without those units, we’ll continue to be in a supply deficit. And, based on the basic laws of supply and demand, if demand remains higher than supply, prices will stay elevated.

The housing market is, of course, unique. Factors like interest rates and wages play a role in demand. And, interest rates are expected to rise throughout 2022.

However, it’s worth noting that even though interest rates are set to rise, they are still on the lower end of the spectrum historically. What that suggests is that unless rates rise to the percentage points we saw throughout the 1980s—between 10-15%—the demand will likely remain elevated. And, that’s especially true for investors who recognize that anything below 8% is still low comparatively.

Final thoughts on the housing market challenges in the U.S.

Affordability issues are finally catching up to the sales market, so we are starting to see more and more buyers getting price-locked out of various markets. That’s especially true for first-time buyers.

Theoretically, this should help cool some of the demand. However, long-term prospects suggest that home prices will stay up—barring some sort of financial crash, anyway.

So, there is really no telling as to when the affordability crisis will end. At this point, it’s all just a matter of letting the market play out and then seeing where it takes us.

Getting rid of bad smells after a tenant moves out is one of the unpleasant parts of being a landlord. But, if you don’t take the time to do this, issues with funky odors or a foul stench can severely impact your cash flow. That’s because, after a tenant vacates the rental unit, you typically want to rent it out to a new tenant as quickly as possible. If there’s a rotten smell when you open the door, though, you will find it tough or impossible to land a suitable tenant for your unit. And that can cut into your profitability significantly if you let the issue go unresolved over a long period of time.

As such, you’ll want to get rid of the stench before you lease out the unit to a new tenant. And, that’s true whether the bad smell was caused by normal wear and tear to the apartment—like cooking foods with certain spices or ingredients—or by other things that the tenant did that violated the lease. Here are some tips for getting rid of smells in your rental apartment or unit. These tips will help you do that effectively—no matter what’s causing the stench.

Related: Security deposit deductions list

The bad smells tenants may leave behind

Some bad smells that tenants cause are part of the normal wear and tear of the unit. For example, ridding the unit of cooking smells or cleaning stinky drains are both a part of the regular cleaning you should do between tenants. And, if you allow pets in the apartment, chances are that you will also need to eliminate pet odors. 

However, other smells could result from lease violations—including things like cigarette smoke, marijuana odors, or the stench of rotten eggs caused by methamphetamines. Let’s suppose the nasty smell is because the previous tenant violated a lease clause. In that case, you can deduct the cleanup cost from the security deposit.

But whether it’s from normal wear and tear or something else entirely, the issue has to be dealt with. So what do you do if a foul odor hits you when you open the front door? Here’s what you should know.

Start by sanitizing the unit and tackling the carpet

Deep cleaning a rental unit in between tenants will often take care of most lingering smells. Start by sanitizing all hard surfaces to get rid of bacteria and lingering causes of odor, like old food, cooking oils, and other messes.

After you’ve sanitized, it’s smart to shampoo carpets, rugs, and upholstery to clean out any lingering odor-causing bacteria or other messes. You may also want to replace air filters and clean any mildew in the bathrooms, windowsills, or other potentially damp areas.

Doing this can help get your rental property smelling like new. But it doesn’t stop after the first round of sanitizing. It’s always a good idea to return the following day to see if the smells have gone for good—or if the unit needs more attention than just the basic sanitizing method.

How to get rid of cooking smells in a small apartment

Smells from certain foods and spices can linger in the unit long after tenants have vacated the property. For example, pungent spices, like cumin and curry, can permeate soft furnishings, like drapes, chairs, carpets, and couches—especially if they were used regularly. What that means is that in a small apartment, these types of cooking smells can seep into every room.

If you need to get rid of overpowering odors leftover from cooking, it will typically require you to scrub all hard surfaces in the unit. That’s because things like oils and spices can permeate the air and land on surfaces throughout the unit—and you’ll want to wipe them off of every surface to get rid of the smell.

Once that’s done, you may need to use professional-grade cleaning equipment with deodorizing chemicals that can neutralize smells in upholstery—especially if the rental unit is being rented as a furnished unit. Depending on what you’re trying to clean, though, it may be easier and more cost-effective to simply replace the item. For example, it may be cheaper and easier to replace the drapes than to spend the time and money cleaning the current ones in the unit. 

How to get rid of musty smells

If you’re dealing with musty smells, it can be tricky to get rid of them in an empty rental unit. The source of the stale air could be due to the prior tenant not opening the windows and airing out the apartment. Or, the musty odor could be due to mildew or mold issues in the unit. 

Opening the windows and letting fresh air into the unit should be the first step to eliminating musty smells left by the prior tenant. Ventilation fans, a dehumidifier, or electric fans can also be useful to increase airflow and remove damp, stale air. However, if the musty stench remains after you’ve employed these methods, you may have to check the apartment for mold growth being caused by water damage. 

And, it’s also important to remember that breathing in mold spores is a health risk. According to the Environmental Protection Agency (EPA), you should fix plumbing leaks and water problems to avoid these types of issues—or stop them from happening again if they’ve already occurred.

It’s also extremely important to dry the surfaces throughout the home. However, mold can get into porous materials, so if you have a problem with mold or mildew, it may be necessary to replace these materials or surfaces. And remember, you may be able to remedy minor issues with mold, but with more widespread or serious mold cases, it’s important to call professional mold remediators to remedy the issue.

How to get rid of cigarette smell in apartments

If you find your prior tenant smoked in the unit, you’ll need to get rid of the lingering scent of smoke in the unit. That said, getting rid of cigarette and nicotine smells can be incredibly challenging. The smell of cigarette smoke gets everywhere—and it can be problematic when trying to rent out your unit to a nonsmoker.

But, it’s not just the stench of stale smoke you have to contend with. Cigarette smoke odors contain nicotine residue, which can create serious health issues associated with third-hand smoke. That’s true for any tenant but is especially true for children or adults with severe allergies or other preexisting health conditions.

A study in the journal Proceedings of the National Academy of Sciences found that third-hand smoke contains carcinogenic substances. These can remain on carpets, clothes, furniture, walls, drapes, and flooring well after the smoker has vacated the property. And, if you don’t take steps to remove the substances leftover from the smoker, the new tenant or tenants’ health will be at risk because the toxic substances can be inhaled in dust, absorbed through the skin, or accidentally ingested, as a normal byproduct of living in the unit.

To completely get rid of smoke odors after a tenant has left, you may need to completely replace the carpets, drapes, and furniture in the unit. However, dry-cleaning drapes or upholstery may be enough in some cases.  Repainting the unit may also be necessary, as it’s the only way to stop cigarette odors from affecting the air quality.

How to get rid of pet odors

If the tenant had a cat or dog in the apartment, pet odors are expected to linger—and are just part of renting a unit to a pet owner. That said, you’ll still want to get rid of the smell before renting out the unit to a new tenant.

For example, carpets are notorious for harboring bad pet smells because pet dander and urine are difficult to remove from the padding and carpet pile. If you want to get rid of the pet stench in the carpet, the most straightforward approach is to sprinkle baking soda on the carpet, let it sit for a few minutes, and then vacuum it up.

But what if you do that and the pet smells are still noticeable after you’ve cleaned the carpet with baking soda? In that case, you can use a blacklight to find where old pet urine stains are located. Once you’ve surveyed the damage, you can decide whether spot cleaning, steam cleaning, or replacing the carpet makes the most sense. 

Related: Should you rent to pet owners?

How to prevent bad smells in your rental unit

The best way to reduce vacancy time and maximize cash flow is to prevent bad smells from permeating the unit in the first place. Preventative measures may involve some investment, but you will save time and resources related to deep cleaning after the tenant moves out. 

For example, it can be pretty costly to clean or replace carpets, soft furnishings, or upholstered furniture—but if you don’t take preventative measures, you’ll likely have to do so at some point. Likewise, repainting walls to remove unpleasant odors takes time and money. And hiring a professional cleaning crew will eat into your profits. 

Of course, thoroughly screening prospective tenants is one way to prevent cleanliness issues or look after the rental unit. But even when you screen your tenants, these types of issues can occur. As such, here are a few tips on preventing the foul smells that are difficult to remove. 

Conduct bi-annual or annual inspections

You should always have a clause in the lease that specifies your right to carry out regular inspections of the unit. These inspections allow you to address any issues in the apartment before they are completely out of control. For example, you will typically be able to detect bad smells from issues like pets, garbage buildup, smoking, or illegal activity, like drug use. 

Regular inspections also encourage tenants to clean the place thoroughly before you arrive. During the inspections, you can also check for maintenance issues like dripping plumbing, poor ventilation, or blocked air filters, which will help you to further reduce these types of issues.

Spell out policies in the lease

It is also vital to include pet policies and smoking policies on the lease to provide guidance for tenants on what you expect. If you’re going to allow pets, make sure you have the right guidance for your tenant in the lease. And, you’ll want to make it clear what the smoking restrictions are for the unit, too.

Change the flooring

Carpets tend to retain smells from all types of sources. As such, getting rid of the carpet and replacing it with good quality vinyl laminate floors can help cut down on the lingering bad smells in a rental unit. While a vinyl floor may not have the sound-dampening properties of carpets, it is easier to clean and maintain. 

Final thoughts

Eliminating smells from a rental unit is typically part of the normal clean-up routine between tenants. However, you may also have to deal with foul, stubborn odors from time to time. Removing the source of the stench, using the right equipment and chemicals, or replacing some of the items in the unit can typically get rid of the smells and help get the unit ready for the next tenant.

There is a rosy glow about real estate investing—a land of opportunity, eye-popping numbers, and the lure of a tangible asset that can be painted a calming shade of blue. And a lot of these upsides are brilliantly true! But there is one soft underbelly that gets lost in the optimism—and that’s the added stress of being a landlord.

Leaky pipes that need fixing, the mortgage that needs to be paid between renters. It’s a lot of numbers and cash flow logistics to be jumbling around in your head—and it can be stressful!

Well, that’s kind of our thing: keeping finances neatly organized. Stay for the geekery. We know a thing or two about how to gain total control of your money, and how to be totally in control of your cash flow for real estate investing. 

There are four simple rules, and they’re called the YNAB method. That’s You Need a Budget if you’ve got time to stop and smell the roses. Our secret sauce is this proven four-step method that puts you firmly in the driver’s seat for managing your cash flow no matter what tool you use.

At their heart, this method isn’t really about money management. It’s about creating a system to organize your finances, so you can spend less time stressed about money and more time living the life you want. 

What you’ll learn:

• How to use the four-rule method for less money stress
• How to know when you’re financially ready to buy your first property
• Things to budget for as a landlord
• How to remove surprises from your expenses
• How to organize, track, and gain total control of your cash flow

Without further ado, let’s meet the YNAB Method:

1. Rule #1: Give every dollar a job
2. Rule #2: Embrace your true expenses
3. Rule #3: Roll with the punches
4. Rule #4: Age your money

Rule #1: Give every dollar a job

Think of each dollar in your possession like a devoted employee. Each dollar you have right now needs a specific job. Maybe some dollars are meant to pay for mortgages, while others are set aside for utilities. Maybe some dollars are saving up for your next (or first!) rental. You want the unemployment rate for your dollars to be 0%, so each one is given a job. You get to choose. You’re the boss.

Rule #2: Embrace your true expenses

No more getting walloped by a roof repair, surprised by a water bill, or left out in the cold for the inevitable renter turnover. With rule #2, you plan for non-monthly expenses within your budget. You save for things like maintenance and repair each month, turning your monthly expenses into neat-and-tidy monthly costs.

Rule #3: Roll with the punches

Rigid budgets break. They break on paper, they break your heart, they break your budgeting willpower. So with Rule three, we future-proof the ol’ budget.

You might spend more than planned on a repair—and that’s totally ok. Just move money from another category that’s less important (like the emergency fund you set aside for such a time as this!). 

Rule #4: Age your money

Think of it like this: with Rule Four, money comes in and stays in your account for a little while. You use last month’s rental income to pay this month’s mortgages. You’re using “old” money instead of “new” money. As time goes on and you follow rules one through three, rule four is really just a byproduct—your pile of money and assets will grow larger. 

Side effects of following rule #4: balances growing plump, and extra cash left over to continue growing your real estate collection.

Let’s see the four rules put into practice with two scenarios: the new investor, and the seasoned investor. We’ll show you examples within YNAB, but you can implement the method in a spreadsheet or any other zero-based budgeting system.

Budgeting for the new real estate investor

You’re itching to buy your first rental property but it’s hard to know when to pull the trigger. Instead of trying to time the rollercoaster market, you call the shots by knowing when YOU are financially ready. After you’ve used the four rules in your own life, you can map out the specific costs it will take to enter the market and start saving. Plus, you’ll know exactly when you’ve hit the target to start shopping for property that fits neatly within your budget.

Set aside money for your own personal expenses, and then set a target for the down payment needed on your first rental property. Don’t forget to set it high enough to cover closing costs and repairs needed.

Budgeting for the seasoned investor

You’ve got your portfolio amassed, now you just want to optimize your organization system. Your budget could include all the expenses of each property, split out by address. 

Don’t forget to save for those larger, less frequent expenses in your budget as well. Consider including a Master Funds category group to cover expenses between leases, an emergency fund, and a fund for capital improvements. 

You can easily save for your next property as well in this Master Funds category group. 

Keep an account register of your rent payments and outgoing expenses for easy reference.

As you follow the four rules, watch your net worth climb every higher as your asset-to-debt ratio increases.

As you track your spending and categorize your dollars, you’ll also be able to easily see an at-a-glance income statement by month and over time.

No matter what app or spreadsheet you use, follow the method to lower your stress, grow your wealth, and enjoy your ever-larger pockets. 

Mindy:
Welcome to the BiggerPockets Money Podcast Show, number 271, where we talk to Jesse Mecham from YNAB.

Jesse:
So we really just want people’s money to help them achieve what they really, really want. Not what you find on some Instagram scroll, but what truly gets you moving. That’s what money should help you do. And that hasn’t gotten old for me. So I still enjoy podcasts like this. I still enjoy coming on and talking about it, because it’s a message that I think everyone still needs to hear.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is my all about the financial runway co-host, Scott Trench.

Scott:
I have a really good plane one, but I don’t think it’s going to land today.

Mindy:
Ugh. 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 NASA or real estate, or start your own huge budgeting business, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I’m super excited to talk to Jesse Mecham today. The Jesse Mecham from YNAB if you don’t have time. If you do have time, you can call it You Need a Budget. This is Jesse’s company that he started in college because he needed a budget. I think his story is super fun and I’m so glad to share it today.

Scott:
It’s always fascinating to hear the personal financial journeys of these Uber successful entrepreneurs as well and how they think about money with that. And it’s often at odds, but the way that we handle it personally, and with many of the folks that come and listen to our show.

Mindy:
There are definitely some times where he says things in this episode, I’m like, “What?” But then he explains them and they make more sense. And you will listen because I call him out or I say, “Thank you for explaining this,” because I’m listening for you listeners. And I can hear you saying, “What is he talking about?” So I ask for clarification all for you. Jesse Mecham from YNAB, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you today.

Jesse:
I’m very glad to be here. Thanks for having me.

Mindy:
Let’s jump right into it, because we’ve got a lot of stuff to cover with you. Where does your journey with money begin?

Jesse:
Well, I was thinking about this a little bit. When I was 14, my dad gave me three books and he said, “Hey, you may want to read these.” And I don’t know why he thought 14 was the golden age or whatever for that, but I would say that’s where it began. He handed me The Richest Man in Babylon and he handed me The Millionaire Next Door and Dave Ramsey’s, I think at the time it was just called Financial Peace. And so he gave me those three books and I read them and enjoyed them. So I really did enjoy the topic. And I just kind of took them as absolute truth gospel like a 14-year-old can where you have no other concerns or worries. And you just think, “Yeah, that sounds right to me.” And there it was. So, that was, I would probably say my first kind of foray into what some would call personal finance and I think it’s been an influence for me ever since.

Mindy:
Richest Man in Babylon is a big book for a 14-year-old.

Jesse:
Yeah. Oh, I mean, it’s a fable, it’s an easy read, but the lessons there, they still apply. There’s nothing wrong with that book today if I need to stretch it off.

Mindy:
Oh, it’s my favorite book.

Jesse:
Yeah.

Mindy:
Yeah.

Jesse:
It’s excellent. But yeah, the story, I was just like, “Okay. I’ll save a little. That makes sense. Don’t spend everything you make. That makes sense.” I remember when I was 16, I decided I would start to record everything I spent on literally a piece of paper. There was nothing fancy about it. I don’t think spreadsheets had been invented or I didn’t know about them. And I remember just every day I would think back through the day and I would log what I had spent. And it was a 16-year-old’s spending, so it was like a Jack in the Box and Taco Bell.
I mean, there was nothing of consequence there. I would go on dates occasionally. And I realized as I tracked my spending, I noticed over the months that I was spending less and less and less, and I would actually drive by the Jack in the Box and not buy it, because I didn’t want to have to record it later on that evening. So, that was kind of my first experience that I kind of self-imposed where I just thought, “Oh, awareness of spending starts to influence spending.” And that is something that I still try and preach to this day.

Scott:
So, what was your relationship with with money like through high school and college? Were you able to accumulate a lot of wealth because of this habit? Or what did that look like for you?

Jesse:
No, I wasn’t able to accumulate any wealth really at all, but I was able to avoid debt, which I think you could say that’s a way of accumulating some wealth. Avoiding going backward is certainly not the same as going forward, but it’s something. And for me and my thinking, I did not want to borrow any money for school. I had had those books that said debt was bad and I thought all debt, like just no debt whatsoever. And so when my wife and I married early, I was 22, she was 21, we married very early and we combined our very meager finances. And I still had three years of school left to get an accounting degree. And she was just about wrapping up. But her degree was in social work where she was going to end up making 10 bucks an hour full-time fully degreed. I mean that wasn’t where money is made.
And so we knew things would be pretty tight, but I knew I didn’t want to borrow money to finish school. And knowing that that was the case that we couldn’t borrow, that was kind of where that spurred me to think maybe I could find some other way to make some money and bridge this gap that we had. And that was where YNAB was born. But my upbringing was middle class. My dad was an attorney, always kind of worked for himself. He wasn’t a big hotshot attorney. He would say he almost begrudgingly did the attorney work, but you can’t make money full-time in gardening. I don’t think so. That would’ve been what he really wanted to do, but he paid the bills.
I never worried about money as a kid, and that is a huge blessing. I never worried about is there food in the fridge? or are things going to be okay? I never had that worry, and that’s a really big deal. But in that way, I just kind of grew up thinking we’re safe and we didn’t have a lot of it, but we didn’t scrape by either. And then look back, you realized, “Oh man, these things kind of started to help me form my opinions and things.”

Scott:
Did I hear that when you have three years left in your degree, you get married.

Jesse:
Yeah.

Scott:
Your wife’s making $10 an hour. Does she have any debt?

Jesse:
No, she didn’t either. She’s just naturally frugal. My wife grew up, I would say poor. She doesn’t like to say that, but she also won’t listen to this podcast, so it’s totally okay. She grew up poor, mom as a school teacher, a single mom, three kids. That story in rural Alabama. And so my wife’s upbringing was one of things just worked out. They just worked out. And because of that kind of this idea that money was pretty hard to come by, I think she held onto it pretty tightly. And she’s naturally just wired to be pretty frugal. So when she came to the marriage, she had a little money saved. I want to say it was over $1,000 or something saved up. And I had spent the last bit of my money on the ring to get her to marry me. We joined forces and had a little wedding money. It helped us buy a computer and things like that.
It was tight and our rent was 350 bucks a month though. So, you can catch up on the expense side a little bit. So we were just making ends meet, but we didn’t know any different. And we were going to make it work. And that was where the idea for YNAB kind of came in because we ended up wanting to have a baby fairly soon, and Julie wanted to be able to step out of the workforce and just focus on this new baby coming in. And that would mean we would lose her income. And I was working part-time for probably 10, 12 bucks an hour as an internal auditor. And I realized that we wouldn’t be able to make it with her income leaving and then mine being part-time and still trying to get through school, I realized we had to have some other solution. And so I thought maybe we could figure out a little side hustle, which we-

Scott:
So you founded the business while pursuing your accounting degree.

Jesse:
Yeah, I founded it back in, it was September of 2004. So it was a few months after the baby was born and I’d been working on it and then launched it. And we were off to the races from there.

Scott:
So when you say off to the races, what did those first few years look like and founding the business? And this is your income and it’s your budgeting.

Jesse:
Yes.

Scott:
I guess, app that you’re building with that. So what does that look like from your personal financial journey?

Jesse:
Yeah. At first, it was a bunch of nothing. It was not newsworthy at all. I don’t know if people know this, but I originally started it by launching a spreadsheet and just selling people a little spreadsheet. And I’d sell it for 19.95 and you’d buy it and you’d get a download link, and that was that. And it was just me. But about six months in, I realized that the spreadsheet kind of it had rules built into it and kind of a way of thinking about your money, that is useful. And so I started selling people more on the way of thinking about the money and less on the spreadsheet. And I noticed that as I started selling people on how to think about the money that sales increased and from very small to small.
And then I met a guy named Taylor who’s now a part owner and he was a developer and he said, “I could improve your spreadsheet. Let me help you do that.” And I said, “No, no, I don’t want to keep proving the spreadsheet. I want real software.” And so this was back in the days where you’d paste license keys into software and activate it and things like that. And so he and I, we hit it off and I went to Julie and said, “Hey you know that money that we’ve been making from the business that we thought would be used for a house down payment…” And here we are in BiggerPockets, so I can mention house down payments and things like that. The whole plan was back in ’06, ’05, it was crazy town.
Everyone thought, “If you don’t buy a house now, you’ll never afford one ever again.” And so we were saving up for this house. And I went to Julie and said, “Hey, instead of saving up for the house with this money that this business is making, what if we paid this guy that lives in Austin, Texas to build a software for us.” And she was okay with it. She said, “If you feel like it’s a good idea, let’s go for it.” So we launched the real software in November of ’06. And that was where things started to really move. But I was working full-time as an accountant at that time and had my CPA license. And I was thinking I’d be a partner in a big accounting firm. So it wasn’t until about a year after that I realized I would much rather run my own business and not do the 80-hour a week grind that was public accounting.

Scott:
Can you walk us through the of thinking about your money that you had come up with or thought about?

Jesse:
Yeah. Yeah. I mean, we call it our four rules. It’s the kind of the YNAB methodology. And it’s essentially rule one is that you give every dollar a job. You don’t leave anyone unaccounted for as far as the dollars go. We do that to have you feel scarcity. People don’t like that word, but I love that word. I think it’s the best word in the English language. You feel like things are scarce and so you are more careful and thoughtful and purposeful with scarce resources. So when you’re giving every dollar a job, you’re imposing scarcity upon your thinking. And that makes you thinking better. That’s rule one. Rule two is to embrace your true expenses. Meaning you want to look ahead, not just thinking about what you need right now, but with you, Scott, it would be like, “Okay, I’ve got Scott here at the table, but I also have like future Scott to care about and think about.”
And so future Scott actually comes to the budgeting meeting and you guys talk about what you need as a pair. So future Scott’s like, “Well, I want to have a new car in seven years.” And current Scott’s like, “Okay, we can make that happen. We’ll set aside a little bit every month for this car.” Or future Scott says, “Well, the roof will need to be replaced.” So, there’s a negotiation between the future version of you and you. And that is rule two, where you’re looking ahead to those larger, less frequent expenses that the future you is concerned about. You break them up into monthly amounts. And now when you’re giving every dollar a job, you’re giving jobs for Scott now that wants to go out to sushi tonight and Scott in the future that wants to go on vacation. So, that’s the second rule.
The third rule is to roll with the punches, we call it. And that means that as needed, you change the budget. And I can’t believe it’s a rule sometimes, but you really do just change your mind as needed. So the last two years now, I was going to say a year, but the last two years have told us that we should be flexible and be ready for things to change. And that’s an appropriate way to approach budgeting. You’re more like a coach making halftime adjustments. Then you are a fortune teller trying to predict the future. Exactly. And then our final rule is to age your money. And it means we would get Scott to a point where the dollar that you earn today, you wouldn’t need for 30, 40, 50 days. That dollar actually gets old as it sits in your wallet or sits in your bank account longer. So those four rules are really what make us unique. And then our software is meant to serve those rules. The software is meant to help you just implement that and think hard about your money and make sure it does what you want.

Scott:
Can you give me more detail on what you mean by age your money?

Jesse:
Yeah. So usually when someone earns a dollar, if they’re living like 80% of Americans, they’re paycheck to paycheck. And so they’ll be paid on a Friday, let’s say, and the next day, they spend some of that money. That dollar is a day old. The day that it enters the system, it’s essentially born. And it’s just a metric for us to track how long a dollar lasts in your hands before it needs to go out and pay a bill or take you on vacation or do whatever it needs to do. And that length of time where you say, “Well, I earned a dollar today, but I won’t need that dollar for 60 days,” in that window of optionality is where all of the stress dissipates. When you’re living on the financial edge, right on the edge, you don’t have time to think, you don’t have the option to choose one thing over another. Your hand is forced.
And we try and get people to break the paycheck to paycheck cycle, where they earn a dollar, they spend a dollar immediately, they have a pile of bills waiting for money. We try and flip that all around and have a pile of money waiting for bills to come along. So that’s kind of the idea of aging your money. It’s a metric that we created that the software tracks for you. You can literally log into the software and it’s like, “Oh, it’s 72 days.” Which basically means you look at how long a dollar lasts in your system and the software calculates it for you to be about 72 days, or whatever it may be, but people can watch that climb. And that’s a good metric for them to recognize whether or not they are living close to the edge or not financially.

Mindy:
One of the questions that I get all the time is where do you put your money while you’re saving up? When you said embrace your two expenses, rule number two, as you’re talking about that, I’m thinking that sounds like capital expenditures in real estate, the large things that you don’t normally buy. Like a roof, you don’t buy that every week, you buy it once every 25 years and it’s $15,000. So as soon as you buy one, then you start saving up again for the next one. So, that makes sense when in your context, but where do you put that money while you’re saving for your own personal capital expenditures?

Jesse:
Yeah, I like actually framing it that way. That’s nice. To each its own, I like to keep things very, very simple and I don’t like to have a lot of moving parts in my life anywhere. And one of the moving parts that I try to eliminate is multiple accounts. So when we are saving up for a new car, we just bought a new car recently, it’s Julie’s car, I should be clear. It’s her car. I can’t say it’s our car. It’s totally hers. But it’s her car. And we saved up for that car for 10 years and that money sat in the checking account. We would just build up right there, thousands and thousands and thousands of dollars. We keep our emergency fund. That’s kind of just a catch all, “Gosh, did we forget something?” That sits in the checking account.
If savings accounts paid more money, I would be maybe inclined to sell a little bit of my simplicity for a little more money, but as it stands, the complexity isn’t worth the trade off for me. Others love to play that game. They love to maximize it. And that’s totally okay. Just make sure that you’re aware of what the trade offs are and the mechanics that you’re kind of introducing in your system. When I run our budget, I’m dealing with one checking count and one credit card. And then all of the categories that all the breakdowns of where things are going for the roof, for the property taxes, for whatever it may be, that’s where I get my information to tell me what the money’s supposed to do. I don’t use any kind of physical account barrier to separate the jobs that the dollars have.

Mindy:
Okay. I can hear people listening to this show right now screaming, “But you’re not earning any interest.

Jesse:
Yes. Very little interest.

Mindy:
You’re not maximizing. You’re not optimizing anything.” I want to say that’s okay. Your job, especially when you are just starting out, your job is to make your finances easy for you so that you can continue on with the program. If you have all these complicated buckets and all of these convoluted things, and you’re like, “Oh, what was I supposed to do with that again? I can’t remember.” You’re going to quit.

Jesse:
Yeah, absolutely.

Mindy:
And what you need to do is whatever works for you, and simplifying is what works for Jesse Mecham, the head of YNAB, you can simplify it too, we give you permission.

Jesse:
Yeah. And I should say, I am a maximizer and an optimizer, but you just have to ask yourself what you are maximizing or optimizing. And I’m not optimizing for dollars at that point. I’m optimizing for, I don’t know, less time spent clicking, which is valuable to me.

Mindy:
Mental headspace.

Jesse:
Mental headspace is valuable to me. Hopefully, you’re always optimizing for something, but you want be clear about what it is that you’re looking for.

Mindy:
Yeah. I just wanted to get that.

Jesse:
And I’ll say like Jesse, 15 years ago, I would’ve optimized for the money because I found the money more valuable than the headspace and that’s totally okay. It changes as your life changes. And when I’m 80, hopefully I’m optimizing for, I don’t know, time with grandkids and not optimizing for anything close to money at that point. So we’re allowed to let it morph on us over time. I think that’s totally appropriate and good.

Scott:
So you said that the business began selling your subscription product into 2006 with the software. Is that right?

Jesse:
Yeah.

Scott:
At what point did it become a full-time endeavor for you?

Jesse:
I dabbled in other things. I flipped websites for a while. I quit my accounting job in 2007 and then went and worked for another company that only lasted four months. They were an internet marketing company that I just didn’t jive with at all, but I was still very afraid of relying on my own income, my own business, to fund and support this little family at the time. It was me and Julie and these two little boys. And in school, I had been taught great accounting, but I’d also been taught that owning your own business was very risky. And that the safe thing was to work for someone else. And it took a long time, like several years of me earning quite a bit of money with YNAB and not living on it, always thinking, “Oh, that’s going to disappear. It’ll go up in a cloud of smoke.”
And I just had to recognize, after a while, I realized that when you run your own business, not to sound too callous, but you are the last person you would fire. And when you’re an employee, you’re not. And it took me a while to kind of get that wiring right, where I just thought, “Hey, this isn’t as risky as I was told to be able to run my own business.” I can always go and look for a job. I could always go and do that. I’m able bodied, I’m smart, I’m a hard worker, blah, blah, blah. But it just took me a bit. So by the time I finally went in on it full-time, full focus and dropped all of my other kind of like little side things, it was five years in after starting the spreadsheet that I did that. And some days I wish it were sooner, but it is what it is. And I don’t think I’d really rewrite anything. There were a lot of lessons along the way that were learned.

Scott:
So, that was in 2009 that you start you went full-time into YNAB?

Jesse:
Yeah.

Mindy:
Whoa! 2009 in the middle of the financial disaster you went?

Jesse:
I mean, for us, it wasn’t a disaster. I noticed an uptick in September ’08 where everything really went south. We noticed little uptick. People were suddenly like, “Oh my HELOC isn’t going to save me,” and, “Bail me out again,” like it had for the mtth time. And people started caring about their money a little bit. So we saw a little bump up as far as activity goes. At the time, we were very, very, very small business. A few employees, and that was it. But yeah, five years until I thought, “Okay, this is the thing. And I’m going to go all in on it. Absolutely.” I honestly didn’t think too much about the macro timing of it. It felt right. And good.

Scott:
When you went into your full-time business and left work, how did you think about your cash management? Did you have a month of cash on hand, a year, six months? How’d you think about that? And did that influence your decision at all?

Jesse:
I hate sharing this part of the story, because it makes me look like an idiot. But when I jumped from my accounting job, and I’ll just tell everyone, I was making 45 grand a year. This was 2006 and maybe that was good money back then. Doesn’t sound great now, really. Working 80 hours a week. If you do that math, you’re like, “Hmm, there are other jobs that probably pay better hourly,” but I was making 45 grand a year there and had this kind of career path for myself. And then my side gig, which was YNAB, I was working on from 4:00 to 5:00 AM every morning, a little more on Saturdays if I was lucky and didn’t have to work. And that year of ’06, ’07, I brought in about 90 grand in profit.
Now it was just me at the time. There was no other employees. My now business partner was just moonlighting at the time. So, I was pretty flush as far as finances go, but to give you even more of insight, Julie and I were living off of 85% of that $45,000 salary. Because I had told her, I said, “Hey, we got to pretend that YNAB doesn’t exist. We got to pretend that this is our salary and this is what we’re going to use.” So we were setting aside 15% dutifully, like I learned in The Richest Man in Babylon, 15% goes to retirement. A penny saved is a penny earned, all that stuff. We were setting aside for that, living in a little apartment. And the YNAB money was again going back toward, “Okay, we’re going to build up for a house down payment,” but we always treated it as if it was just going to disappear at any moment. And it was just my insane conservatism that did that. So we had a bit of a war chest.
Gosh, I’m kind of spit-balling, Scott, but I’d venture to guess we probably had, I mean, definitely more than six months of living expenses set aside. At that time, YNAB was producing profits every month. So I knew that we could live off of that, but I also did take that job for a little bit of time because I was still just a little worried about relying on my own income. I mean, you’re talking about a guy that tiptoed in and tested the water 17 different ways before finally jumping in and being like, “Oh, you know what? I did not have as much to worry about as I thought.”

Scott:
Well, no, I always ask that for folks that start businesses, because I have noticed that there seems to be a tendency among a lot of successful entrepreneurs, it’s not a role, but for folks to build up a huge war chest before actually feeling comfortable making that transition and that leap.

Jesse:
Yeah.

Scott:
And I think it’s just interesting that okay, for you to feel comfortable to move into your own business full-time, you had to be making double that you were at your salary in one hour a day and have six months, maybe more, maybe a year or whatever it was in cash cushioning your position there in order to feel comfortable with taking that leap.

Jesse:
Yeah.

Scott:
And it’s just interesting. We’ve seen that play out a lot of times, not all the time though, with a lot of entrepreneurs.

Jesse:
I don’t know. To each his own. There’s no hard and fast rule there. I think I probably slowed down the business growth as a result of trying to play it so safe, but that’s how I slept well every night. And so I’m okay with how that went.

Scott:
Let me ask you another question. In the early years following that, how did you deploy your cash? Were you investing in other assets or building wealth in other ways with your personal wealth as YNAB was beginning to scale? Or what did that look like?

Jesse:
I would just put it all back into YNAB over and over and over again. The pile would get bigger as it would come back because the business was growing and I would just take that whole pile and just put it back in again. Occasionally, I would pull money out as a distribution and say, “Oh, I wanted to…” When we bought our house in 2008, horrible timing, but we bought a house then. And that was when I took money out of the business for the down payment on the house. Other than that, for years and years, it was just kind of ad hoc pulling money out.
But for the most part, it was always just all the chips go back on. All the chips go back on. Only in the last three, four years have I started to be more methodical with pulling money out and de-risking in that way, so that I don’t feel like I’m just… You can roll the dice at 26 and you don’t feel the same as when you roll the dice at 41. And that’s how it’s supposed to be. So I don’t roll the same dice. I want to play it a little safer and again, always trying to sleep well at night.

Scott:
No, absolutely. Thank you. I think it’s always important for folks listening if they’re thinking about starting a business. How does an entrepreneur think about their financial management? For you, essentially 100% in business for a decade, it sounds like before really beginning to diversify 15 years later.

Jesse:
Yeah. I will say there was a time… I need to make sure that I’m careful on this. I mean, in 2012 and ’13, I pulled money out to buy brand new town homes that I just thought, “Well, this seems like a reasonable price.” And I bought those and still have them to this day. And so that was a way of kind of de-risking there. I also would always maximize mine and Julie’s 401ks at the business. I would just kind of pretend that we were employees. And so we were fully maxing those. Never really thinking that YNAB itself was this growing asset. Always just kind of recognizing, “Oh, I’ll pretend that’s not really a thing. And I’ll just pretend that I’m an employee working here, and I max out the 401ks.” So we would do that. And then that was essentially it as far as… Oh, and paying off the house. That was the other bit as far as wealth building goes where I did want to have my house paid off very, very, very fast. And so I threw a lot of money in that direction.

Scott:
No, I mean, it makes sense. The picture I’m getting is… Let me ask you this. Did you also have a conservative cash position during these years to grow that out?

Jesse:
Yeah, absolutely. I mean, months and months and months of revenue, absolutely. And even buying the real estate that I did, I mean, I would put half down and have tiny mortgages. And then as soon as I had paid off my house, then it was like, “Well, I should start paying off those mortgages.” I’ve always operated from this standpoint of cash is the best thing you can possibly have. Cash is options. And I would just want to have as much of it as is reasonable. And if you make a mistake with cash, you totally still survive. If you make a mistake with debt, that’s going to be tougher. So I’ve always leaned that direction. Maybe it goes back to reading those books back when I was 14.

Scott:
And is your business entirely bootstrapped?

Jesse:
It is, yeah. We’ve never taken outside investment. Just me and Julie plowing it back in over and over again.

Mindy:
I like that you focused on being able to sleep at night. And right now with this new thing out called the internet, you can hear all about meme stocks and crypto. Have you heard about crypto?

Jesse:
Oh yeah.

Mindy:
It’s this really great thing where you can make a trillion percent return in five minutes and that you can’t lose, is what everybody says. And then you see people losing all the time in crypto because it’s not stable. And then somebody is talking about stable coins and I don’t know anything about any of that. I choose not to invest in that because I don’t know anything about it. I don’t want to do the research. I’m doing fine in the stock market. I would not be able to sleep if I took a significant chunk of my investments or my net worth and stuck it into something I didn’t understand. So I like that you’re focusing on things that you can understand and you’re not going out on these crazy tangents and all of this like FOMO is real. No, it’s not. Miss out on some stuff. It’s okay. It’s okay to miss out on Bitcoin going to a billion if you don’t understand it and don’t want to invest in it, then don’t.

Jesse:
Yeah, absolutely.

Mindy:
Sorry. That’s a tangent.

Jesse:
I’m totally bullish on Bitcoin. I think technologically, it’s super fascinating. And if it does change the world, then it will change the world of all of the companies in the stock market as well. And we’ll ride that too. So if you ever are feeling like you’re missing out on something, just make a list of all the things you’ve missed out on so far, it will be so long, and make it exhaustive, make it until your hand hurts. And you’ll just realize like, “Oh, okay, I’ve missed out on far more than I have not.” And you’re okay. We don’t want any of that to drive investment decisions. I will say this though, Mindy, on the point around sleeping well at night, reading all the books you read, The Four Pillars of Investing and The Intelligent Investor, just on and on, you read about Asset Allocation and why that’s so important and how your age kind of determines your risk tolerance.
And this is all very standard stuff that you could go onto a brokerage website and take a quiz and be told these things. I was in my early 30s and I was allocated heavily into stocks and lightly into bonds “as one should be.” And I realized about a year and a half into my 401k being allocated that way, that I was really overly concerned with what the market was doing. And I would look at it and I would think about it and I would see it go up and down. And I realized that my risk tolerance as it relates to equities and bonds and all of that was more like my grandmother’s risk tolerance. I really didn’t want to see it fluctuate a lot. I wanted it to be nice and stable.
So, almost like my man card was having a corner clip. That was the feeling I kind of have, like the super irrational emotional feeling was just like, “Oh, I don’t have the chispa to be able to ride these big market swings. So I’m 90/10, bonds/stocks. And I’m 40.” So that’s very conservative for someone my age. That being said, I realized that my biggest risk was YNAB the business. And I am heavily invested in that. So if you wanted to take the whole picture of my whole portfolio, I’m like 95% in one stock called YNAB, and then 4% I’m in all these tips in all these really safe bonds, and then 1%, I’m in the public equity market, because that’s just how my net worth is all broken down. A little bit of those town homes or whatever in there.
And I had to recognize that I’m taking real risk by running a single business. And I didn’t want my portfolio in the public index invested Boglehead style thing. I didn’t want that to not be representative of the risk I was taking with the business. Everyone needs to make sure that they’re looking at their whole portfolio and not just looking at their brokerage account allocation, or whatever that might be, if hopefully that makes sense.

Mindy:
No, that makes a lot of sense. And when you first said 90/10 bonds, I’m like, “What?”

Jesse:
Yeah.

Mindy:
You’re younger than me. 90/10 bonds, I’m at 0% bonds, but I also own 0% of YNAB. If you’d like to change that feel free, I won’t stop you.

Jesse:
Oh absolutely.

Mindy:
But when you explained it, then that makes more sense. So I can also hear people yelling at the radio saying, “What? 90% bonds? That’s crazy.” That’s crazy, if all of your investments are 90% bonds. I like the way you explained that. So thank you for clarifying that, because yeah, I was like, “Whoa, I don’t necessarily agree with that.”

Jesse:
To be fair, let’s say that it was just someone that didn’t own any other business at all and they really were 90/10, but they realized that 90/10 was what had them sleeping well at night, they will give up returns if history is any kind of indicator, they will give up returns, but that may be okay. That may okay. You really have to be introspective on what your personal risk tolerance is, truly. And I was finding through my angst that I wasn’t respecting where my allocation actually was and my emotional angst was basically surfacing for me saying, “Oh no, this needs to be different than it actually is.” And there you have it. To be clear though, I buy Bitcoin every once in a while and that’s totally money I’m okay seeing go off in a vapor of smoke, that’s totally fine, but it’s small enough that I would never lose any sleep over it if it didn’t go the way that one would hope it would go.

Mindy:
That, I think is very important if you’re investing in these things that are new and is speculative and you put… Jesse owns all of YNAB or most of YNAB. And if he puts $100 into Bitcoin and it goes to zero, Jesse isn’t going to not be able to feed his family. He’s not going to be able to not make his mortgage payments. That’s very different than some of the people that I see talking about crypto, that I know they don’t have a huge investment portfolio, but most of it, or all of it is in this very unstable thing. That’s my biggest problem with crypto.

Jesse:
Yeah, not advisable.

Mindy:
And I don’t want to kick this dead horse anymore, but-

Jesse:
Yeah, not advisable.

Mindy:
… I wanted to get that out. Yeah. That is my big problem.

Scott:
Jesse, you mentioned while we were talking previously that the rules that you have for budgeting could also be used to build a real state business. Could you walk us through kind of how those might apply in a private business, like real estate?

Jesse:
Yeah, absolutely. I actually did this. I do this still with my tiny little real estate portfolio of four properties and they’re all town homes and they’re all managed by a property manager and they’re very hands off. I bought them a long time ago. To give everyone kind of an idea, I put 50% down like I’d mentioned before. And then just slowly, I kind of snowballed the free cash flow that would be generated from all the properties into the property with the smallest mortgage balance. And then as that one paid off, I just kind of kept snowballing it. And now they’re all paid off free and clear and that’s how I like it. When I manage those properties, I actually could use the software to build essentially a P&L for each one.
So, that you’re not evaluating everything kind of in one big pile. So if you have more than a few properties, you probably have a sixth sense for which ones you like the most, which tenants you prefer, who doesn’t call you the most, that kind of thing, but you really want to have an idea of what your profits are per property. And how I set that up in the software is I would just say, “Okay, each property is a category group.” And it’ll be like, “Okay. My rent comes in. My property management fee goes out.” I would set aside a percentage for vacancy. I would set aside a percentage for repairs, and I’m building up, like Mindy mentioned those CapEx situations, I’m building up those repair funds for those individual properties, saying, “Okay, this property address here, we’re going to build up a little.” And you’re giving every dollar a job inside the confines of thinking about that property as kind of its own little unit.
And then you would do that with the next one and the next one and the next one. It is a little cumbersome, but each one of the properties is its own LLC, it’s its own bank account. You do those for obvious legal reasons. And YNAB then allows me to kind of see all of them at one glance. So I’m giving every dollar a job per property. I’m looking ahead toward what those expenditures may need to be per property. I’m adjusting when my property manager writes me and says, “Hey, the dishwasher went out, we went ahead and replaced it. It’s going to be this much.” I can adjust on the fly and say, “Okay, we need a little money here or there.” And then I’m just letting money kind of accumulate in each of those accounts until it hits a threshold where I then say, “Okay, there’s enough excess money there.” I’d pull it out into the what I call kind of our holding company, pull that money out there.
But it allows me to see all the properties P&Ls at a glance without needing to be diving into each one separately. If that makes sense. I only do it quarterly, because it’s pretty boring. You have HOA fees and a few other things going out. It’s not very exciting. But I manage it quarterly and get a good beat on it. And then when it comes tax time, I can just export that all for the accountant. And so far, he hasn’t said, “Hey this is horrible.” So I’ve liked how it’s been going. So, it’s been nice to be able to see the profits of each one separately and kind of know like, “Oh, this one works better for this or that reason.” Minor, super simple, plain vanilla.
But you can imagine if you were flipping or repairing or anything like that where this would be even more important to have really good job cost data per project, what you were doing, how much you were putting in. And YNAB lets you do all that. So I think just because people think that it’s not built specifically for real estate, but it’s built for cash flow management 100%, and in real estate, that is your metric. So it actually has worked very well for me over the years. I mean, honestly I know other people who use it as well for their real estate needs and see, I’d be remiss if I didn’t say that I think it could help others.

Mindy:
I have a personal question.

Jesse:
Mm-hmm (affirmative).

Mindy:
How much do you keep in your reserve fund either for each property or as a group of four properties in terms of monthly expenses?

Jesse:
Yeah. I think I do six months rent per property.

Mindy:
Okay. Per property.

Jesse:
I think once it gets above that, once or twice a year, I’ll pull out any excess from there and move it. And then I just go, I invest that money in my very boring grandmother portfolio allocation. So it all kind of goes back to the same thing again. But yeah, that’s the idea.

Mindy:
Okay. I just wanted to point out Jesse Mecham, a budgeter extraordinaire keeps six months per property of reserve funds. I like to harp on this because I think that a lot of people don’t keep enough in reserves. And it’s different if you have a really high paying job where you’re not spending every dollar that comes in, then you can kind of cash flow the expenses as they come in. But if you’re a paycheck to paycheck person or you don’t have a huge personal reserve, you need to make sure that you can provide the housing that you are contractually obligated to provide by that legal document that you are hopefully signing with your tenants called a lease. I like to make sure that people are well funded and I’m really glad that you are well funded.

Jesse:
The last thing I want to do is have to put in some of my own money and have money flow the wrong direction. It’s confusing. It’s messy. There’s nothing that I like about that at all.

Mindy:
And the even more last thing you want to do is have to swipe a credit card, because you don’t have any personal reserve fund or business reserve fund. And that’s what it is. Real estate is a business. So, don’t even get me started. Okay.

Scott:
I’m noticing a tremendous amount of conservatism, obviously, you’ve mentioned that in all these assets. Do you use debt for any purpose in your life or business? Do you have it, for example, on the business of YNAB to increase returns?

Jesse:
I’ve only ever used debt to purchase homes. So I put 20% down for my personal residence back in the day, maybe 25, and then paid that off. And then when I was purchasing these town homes that we’ve talked about a few years later… And I purchased them over a period of, I think two years. It’s kind of like every six months, I put half down. So I carried mortgages on those, but didn’t have a personal mortgage at the time. And then we ended up selling our house and buying another house and I got a mortgage on that one and then paid that off. And then once the personal residence was paid off, I started working on the town home mortgages and those are now paid off. So I don’t carry any debt at this time. If I saw an opportunity and that was good, I’d probably get another mortgage. I mean, it’s pretty darn reasonable.
I had to tell myself, “Well, if it’s reasonable to buy your house with a mortgage, then it’s probably reasonable within the same rules to pay off your own house and then you’re going to buy a rental with a mortgage. That sounds a lot like you having a mortgage.” So I just never wanted to leverage up so much that I felt like the cash flow was in question. And so I was always looking for a small rate of potential return, but in exchange for that a more guaranteed cash flow essentially. And at the time back in 2012, I found a few properties that did that. Now, I don’t know if I would, so it’s totally different ballgame.

Mindy:
Not where you live.

Jesse:
Yeah. Not where I am. And here I sit not purchasing any real estate for the last little while. So it’s probably a function of that fact, but I don’t look for returns from the leveraging part of the transactions.

Scott:
What’s a day in your life like? You have this financial fortress that you’ve constructed. You’re a very successful entrepreneur with this. What is that is the lifestyle?

Jesse:
Oh, it’s the same as it was 10 years ago. I have a lot of kids, I have seven kids, so you’re like, “Okay, now I know what your life is.” That’s the end of it. Just imagine a total cacophony and then turn up the volume and then you’re about right. Just normal. Nothing special. We like to go on vacation with the kids. So that’s where Julie and I splurge. That’s kind of where we say, “Okay, it’s worth flying nine people somewhere.” You wonder if it’s actually worth it sometimes, but we will do that. But besides the travel once or twice a year, I enjoy being at home. I enjoy the day to day. I enjoy my kids. And I do this thing called parlor time. I declared it parlor time. And they were like, “Dad, what does that even mean?” I’m like, “Well, parlor is like old school word for living room, I guess.” And if you ever read Little House on the Prairie, or some book like that, there’s this romanticized idea of Ma and Pa, and blah, blah, blah.
And it’s like super over the top this kind of farming romanticized thing. And they all sit in the parlor and Ma knits and Pa reads his newspaper and the kids are playing checkers or whatever. I think I’m painting the right picture. And I like that. I like parlor time with my kids where no one’s going anywhere and we’re all sitting in one room, not necessarily talking or even interacting with each other, but we’re all present. Obviously, no phones are allowed in that situation. And yeah, you can just kind of be and have it be slow for a little while. So, an ideal day for me would be you a little bit of that parlor time mixed in there for sure. Nice and slow, nice and quiet. And the kids, hopefully, not at each other and playing or whatever, that sounds like a good life to me.

Scott:
Awesome. What’s next for you?

Jesse:
Oh, I don’t know. I’m trying to get my golf game a little better. One of my sons started getting into golf last year and I was like, “Ah, maybe I should get into golf.” And he’s so much better at it than I am already. And it’s very, very annoying, but I like to do that. I like woodworking a lot. So I’m really bad at it, but I do enjoy it tremendously. So spending time out there with my hands, not in front of a computer screen is really nice.
And then YNAB, I’m no longer CEO at YNAB. I stepped back from that back in April of ’21. And that’s been fantastic. I’ve been able to focus more on things at YNAB that were more kind of what I was interested in. And Todd who’s our CEO is better at a lot of the things that I was not necessarily keen on doing, like a lot of the management stuff. So I’m focusing on getting YNAB into businesses where they can buy it for their employees and maybe have less stressed employees. So that’s kind of a new thing on the business front that has me pretty excited.

Mindy:
I wasn’t aware that you had stepped back as the CEO. How much time are you spending working at your job?

Jesse:
Oh yeah. Normal 40 hours or something-ish. You never track it, really. When you’re running your own thing, you’re never kind of too cognizant of it. I mean, you never turn it off. It’s always in the back of your mind. I’ve been doing this for almost 20 years and I do wonder what it would be like to not have it in my mind at all, because I don’t know what that feels like anymore. I’ve forgotten what that was. But I like what we do. I like how helping people be more purposeful with their money. Your money is just another representation of your energy and all of your effort. And you spend all of this effort and you sacrifice time with your kids and partner and you get an education and you work so terribly hard to earn a dollar.
And all I’m wanting people to do is just to respect that dollar a little bit. Just because that effort is now in the form of a dollar, it doesn’t mean that we don’t give it its due and say that we want to make sure that it keeps realizing what you want out of life. And so we really just want people’s money to help them achieve what they really, really want. Not what you find on some Instagram scroll, but what truly gets you moving? That’s what money should help you do. And that hasn’t gotten old for me. So I still enjoy podcasts like this. I still enjoy coming on and talking about it, because it’s a message that I think everyone still needs to hear.

Mindy:
I completely agree. It never gets old for me either. Jesse, this was a super fun show, but we’re not done yet. We still have our famous four questions. Are you ready? Now, you’re on the hot seat.

Jesse:
I think so. Yeah, let’s go for it. Let’s see what happens.

Mindy:
Okay. Out of all the books that you’ve ever read about money, what is your favorite finance book?

Jesse:
I really liked Your Money or Your Life. And that kind of goes back to what I was just saying. We’re not just talking about money, we’re talking about all of your effort, all of your life that goes into it. So that one resonates with me pretty deeply. And Vicki’s a very nice person. So I like supporting her as well.

Scott:
Awesome. We love that book and we love Vicki Robin. So what was your biggest money mistake?

Jesse:
Buying in ’08, that wasn’t great. But the part that made it painful in ’08 buying that house is we bought a house that was really great and nice, and we loved it, but we couldn’t afford any furniture for it, because I had invested about 80 grand in software that I thought would be the next version of YNAB. And when my now business partner came on board full-time and stopped moonlighting, I had been kind of left to my own devices for a year while he figured out whether or not he wanted to come on full-time and he was working on just his own other stuff. And he came onboard finally, and he took one look at the code that we had been developing and I had been paying for, and it was garbage.
And I kind of had known it, but I hadn’t pulled the trigger and I hadn’t pulled the plug on it. So yeah, we completely scrapped $80,000 worth of lousy software, and I had to go home and tell Julie what we had done and my voice echoed in our house because it was empty of furniture. And I just thought, “80 grand would buy a lot of furniture.” I don’t shop around for furniture ever, but I’m guessing we could have furnished a couple rooms with that money. So, that one hurt. I’m glad we got rid of the software. I’m glad I didn’t let bad money follow bad money, or good money follow bad money, I guess, but that one still kind of haunts me a little.

Mindy:
That one’s hard to do. I mean, you’re not a programmer, so you’re like, “Oh, okay. It’ll work. It’ll work.”

Jesse:
I kept lying to myself. I kept being like, “Oh, okay, I guess that makes sense. But no, it needs to make sense to you. You’re cutting the checks.” You know?

Mindy:
Yeah.

Jesse:
I could go on for 20 minutes on that one, but this is a lightning round kind of a thing, so we won’t do that.

Mindy:
Well, you’re the only person who’s ever paid for bad software. So sorry about that. What is your best piece of advice for people who are just starting out?

Jesse:
Oh man. I mean, this one’s a gimme, because I would just say well, you need a budget. But budgeting is not what people think it is. Budgeting is just planning. It’s just money doing what you want it to do. And that’s it. It’s just you deciding what you want your money to do. That’s a budget. It can move, it can be flexible. It will get you all of your dreams. As one of our support reps cat says to her kids, she says, “You could have anything that you want, you just can’t have everything.” And that’s what a budget does for you. It lets you prioritize and decide, “What’s most important to me?” So work with it and get really clear on what you really want out of life. And then see if money can maybe help you get there.

Scott:
Love it. Track your spending, have it go where you want it to go.

Jesse:
Yeah, absolutely.

Scott:
If you’re listening to the show, that’s the most common advice we get when we ask this question and I think it’s for a reason. It’s the most powerful.

Jesse:
Yeah.

Scott:
Jesse, what is your favorite joke to tell at parties?

Jesse:
Oh man.

Scott:
Or at parlor time.

Jesse:
Parlor time, yes. My kids like the one, because I’m not much of a swear and I don’t swear at all, so they like the one where I say, “What did the fish say when it ran into a wall? Damn!” And the kids love that mainly because they’re like, “Oh my gosh, dad just swore.” So that one’s a good one, but I like the one where there’s a guy that goes to prison, not happy about that, but he goes to prison. He’s with his inmate, his other cellmate, bunk mate, or whatever. And the first night he’s there, someone just yells out, “22,” and everyone starts laughing and he’s like, “Well, that was pretty random.” And then a few minutes later, someone yells out, “14,” and people start laughing even more and he can hear it up and down the cell block.
So he says to his bunk mate, he’s like, “What’s with the numbers and the laughing?” He’s like, “Oh, we’ve been in here for so long, and we got tired of telling all the same jokes, we just numbered them. So now we just say the number and it’s a lot more efficient and quick that way.” So he is like, “Oh, I guess that makes pretty good sense.” And then a little while later, he hears someone yell out, “31,” and like crickets, nobody laughs or anything. And the new guy to his cellmate, he’s like, “What’s the deal with that?” And the guy’s like, “Well, I don’t know. I mean, some people just don’t know how to tell jokes.” I like that one.

Mindy:
That was a good one. I like that one a lot.

Jesse:
That one’s from my dad. My dad’s full of lawyer jokes and that joke. It was a good one.

Scott:
I love it. That’s awesome.

Mindy:
Okay, Jesse, where can people find out more about you?

Jesse:
I’m on a podcast as well and excited to have you all on our podcast, but that’s at YNAB or You Need a Budget, you can find me there. I’m not on any of the socials or anything like that. But if you want to reach me directly, you can email me at [email protected], and I’m happy to respond there. But yeah, that’s it. And if you’re curious at all about the software or what we teach or taking a class from us, just go to youneedabudget.com, and we will help people. We have an army of people that have been through changing their mindset with money and now love to help people change their mindset. And so I’d love to have people join us there as well.

Mindy:
And it’s spelled out, youneedabudget.com.

Jesse:
Yeah. Or you can do yna.com. We own the four-letter one as well, if you’re in a hurry.

Scott:
Thank you so much for joining us today and sharing your money story and a little bit about YNAB. I think it’s a great product and you built a really cool business there. So congratulations, and thank you so much.

Jesse:
Thank you very much.

Mindy:
Thanks, Jesse. We’ll talk to you soon.

Jesse:
Okay. Bye-bye.

Mindy:
Okay. That was Jesse Mecham from YNAB or You Need a Budget. Scott, what’d you think of his story?

Scott:
Again, I think it’s always fascinating hearing from successful entrepreneurs about how they manage their money. And I’ve noticed again, it’s not a universal thing, but it seems to be a trend that there’s a large emphasis on a stable cash position. There’s a much less risk taking in their personal investing because they’ve got this very large financial asset in their business that they’ve run with that. And that is the aggressive part of their portfolio. And so I just think that’s very interesting and it’s worth learning from.

Mindy:
Yeah. When he said he’s 90/10 in bonds, I was like, “What?” But then he explained that the bulk of his investment is in one stock, YNAB. Okay, that makes sense. Because I don’t own a company, I’m not thinking like that. And when he first threw out there, “I’m 90/10 in bonds.” I’m like, “Whoa, we need to talk.” When you have a good reason for what you’re doing, I think that’s the most important. And ultimately, you have to be able to sleep at night.

Scott:
Yeah. So I think he’s got a very effective approach to personal finance. I mean, how could you possibly argue with that? He might be the most successful personal finance person we’ve ever had on the BiggerPockets Money Podcast. So very fun to hear from him and really learn from his approach and the way he thinks about the world.

Mindy:
Yeah. His four rules, I really like those. Give every dollar a job, embrace your true expenses, roll with the punches, and age your money. I think those are great, and I’m really glad that he had the opportunity to share with us today. Okay, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From Episode 271 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying off we go into the wild blue yonder.

 

David:
This is the Bigger Pockets podcast show 564.

Rob:
That’s what happened to me. I could not scale my Airbnb stuff, I couldn’t scale my YouTube platform. I couldn’t scale anything because I was working 40 hours a week. And so I had to make that decision, it’s time to quit because it’s actually holding me back. And the moment that I quit my full-time job, I was making $110,000 at this job. I significantly by many factors, increased my salary that same week. And it’s because I got 40 hours a week back to focus on everything that I was talking about.

David:
What’s going on, everyone? It is David Greene, your host of Bigger Pockets podcast, where it’s our mission to teach you how to become financially free through real estate. Now we believe that real estate investing is the best way for ordinary people to build wealth. And we prove it by bringing you stories of people who started out right where you are right now. Then we apply the simple but not easy framework. Look, real estate investing is definitely not rocket science, but that it doesn’t mean that it’s easy. It’s consistent steps in a positive direction that will get you big results over time. Here today is my amazing co-host Rob Abasolo. Rob, we tag team some live questions from listeners who throw stuff at us and we don’t know what’s coming.

Rob:
Oh yeah, man. No softballs today was all curve balls. But I think, really nice, man. I think it’s really interesting to kind of hear what other people are struggling with because we’ve all been there. I’ve been there, every single question that we had, I was like, “Oh, this is how I feel every day.” But when you get to examine problems from the outside and you kind of step outside of your personal situation, it kind of helps you really a problem much quicker than if you’re in it.

David:
I think that’s why it’s so valuable to listeners because we get on our own head and we see our own problems and we think whether this is the only part of real estate. Then you hear somebody else dealing with something who’s successful and you’re like, “Oh, I dealt with that long time ago.” And you realize I actually am making progress or I’m not the only one who’s going through that. So, today we answer questions regarding, should I start an LLC or should I do things in my own name? And how do I know which way to go? We had a guest who bought several properties at one time and is trying to figure out, “I have this much capital. How do I know which property to put it towards? And what order should I be moving in to get these things rehabbed and rented out?”

David:
We had a guest who stuck with tenants that aren’t paying their rent on time and they’re sort of held hostage because they couldn’t evict them during the moratorium, but now they’re able to, and they’re trying to figure out, “Well, should I keep the property or should I keep the tenants?” And they weren’t sure to do. Did you have any that stood out to you that you thought were particularly insightful?

Rob:
Yeah, definitely. Well, not necessarily insightful… More just like, “I feel you, man, I feel you.” We had one guest who called in and really trying to decide if… He’s making a very nice six figure salary and he’s like, “Should I quit this or not?” And as someone who’s been there myself, I really resonated with that because I just quit my full-time job back in April. So it really feels like, “He reminds… David, he reminds me of a younger me.”

David:
I knew that was coming. Yeah. And you gave some remarkably good advice on that. Everyone definitely makes sure that you listen all the way to that, because that’s probably other than, should I get an LLC or should I do it in my own name? The question at the front of everybody’s brain is, should I keep my job? Should I leave my job? Should I get a different job? When should I quit my job? Most people are here on Bigger Pockets because they want to have a life that is fueled by real estate, not by a W2 job and clocking into a cubicle. And so this type of stuff is very relevant. And I think we gave him a really good path to figure out at this point, you’re good to go. And that was a very talented person too. So, that’s nice to see how many of these people on Bigger Pockets are actually making progress.

David:
So we will get to the show very soon. But first today’s quick tip will be, go to biggerpockets.com/david and submit a question. We want more questions from people like you. We want to know what is on your brain. What do you wish that we talked about on the show? And we never actually get there? Well, this is probably the only podcast I’m aware of outside of maybe Dave Ramsey stuff, where you can show up and you can actually ask the questions that are on your mind and everybody gets to hear it. So please go there as well as biggerpodcasts.com/livequestions. And you could be notified when we’re going to be going live and show up and ask your question and get it answered. Anything you want to add before we get out of here? Get onto the show?

Rob:
Yeah. How do we get a back slash? I want a biggerpockets.com/rob. Can we get on that? Can we make that happen?

David:
Easy there.

Rob:
We just post a photo of my hair.

David:
Easy there grasshopper. All good things come to those who wait. Yeah. We were going to give me a back slash earlier, but we couldn’t figure out what to call it. So we finally got now.

Rob:
Well, hey, David was a little on the nose, but I like it.

David:
All right. Let’s get to the first guest. Maria Dennis, welcome to the Bigger Pockets podcast. You look so familiar.

Maria Dennis:
Yes, David. How are you? This is so exciting.

David:
I’m good. How are you doing today? Or should I say [foreign language 00:05:06]?

Maria Dennis:
I’m very good. Very pleased to be here. I’m so excited to ask the question. Kind of nervous to be honest with you.

David:
This is the second time you’ve asked me a question in the last week or so. I believe you’re in my mastermind and you asked a question there. Was it a week ago? Maybe two?

Maria Dennis:
It was a week ago, but it was a completely different question. I’m just waiting for your book to happen. So I can’t wait to read that.

David:
Awesome.

Maria Dennis:
I’m learning a lot of things from the mastermind by the way, just so you know. So…

David:
I’m very glad to hear that. Okay. What can we do for you today?

Maria Dennis:
So I wanted to ask you a question particularly about investing. And I think I told Eric about that. So basically, like I said, I did really well last year, thanks to your book, Sold, as an investor agent. And I’ve used that like a Bible just so you know. However, I’m in a position right now that I’ve worked with many investors. A lot of them are really trusting me now in this industry because I try to bring as much value as I can. And in my head, because I’m still an investor, I want to grow my portfolio. And I feel like most of these investors wanted to invest with me. So partnering up on real estate investing. But my fear is I’m still kind of new in a game, I’m afraid to take somebody else’s money and take that leap. So a little guidance is what I need to how do I do it? How do I start now that I know what the agent side works? But how do I do it legally that I’m benefiting and my clients are benefiting as well?

David:
Now, are we talking about a deal specifically with a client you’re representing them on, or just overall borrowing other people’s money?

Maria Dennis:
Basically borrowing other people’s money, maybe possible syndication or GP on something. Just something big, because I’m thinking this year I want to go big.

David:
So you’re looking for some kind of framework that you can operate out of to get started?

Maria Dennis:
Exactly.

David:
Rob, you want to take first crack at this one?

Rob:
Yeah. Yeah. Well, first of all, fundamentally, I think you got to think about what your mindset is around working with other people’s money and how you treat other people’s money. For me when I was getting started in this and I was working with different investors and everything like that, I really had this mindset where I treat an investor’s dollar like it’s four times more valuable than mine. So if I lose $100 for an investor, it feels like I lost $400 of I own money. That way I make every decision very critically and strategically and I don’t ever just like say, “Oh, it’s not my money.” It should pay you to lose money for other people. I really think that’s an important way to kind of level set when you’re starting to take on cash from a second standpoint of working with investors and everything like that.

Rob:
Especially from a mindset, a lot of people get very greedy and they’re like, “Oh yeah, I’m doing all the work. I want 50%.” And all this kind of stuff. I used to be very stubborn about that when I was working with investors, I was like, “I want 50% I’m doing all the work.” But what I quickly came to realize is that I am actually not the one that’s incurring any risk. So I would say, be very open minded with what kind of structures and partnerships and templates that you work through, don’t feel like you have to have 50%. If you have to start with an investor and you only get 25% or 20% or 15%, I think the experience that you’re going to get out of your first investor deal will be a lot more valuable than any type of equity split that you’re going to actually they have from that deal.

Maria Dennis:
That’s a great point. I think that’s what I did when I became an agent, I had that mindset of treating it as my own investing. And I think that’s how I became so successful that way. I never thought of it as a dollar, I thought of it more that will it work for my investor to make this work? So, thank you. I appreciate that.

David:
So when it comes to raising money, what I’m sensing is you don’t have enough direction yet on what you want to do with that money. And so if you have like, “Hey, I could do anything,” you’re going to do nothing. You’ve heard that phrase if you chase two rabbits, you’ll catch none. Well, this is like, if you try to chase 200 rabbits, that’s what we’re kind of at. So the first thing I think you need to do Maria, is figure out where you feel the most comfortable and the most competent investing yourself. You need to know the asset class, the types of deals, the area that you feel very good about and start with that. All of the what split do get? What do they get versus me like Rob said, that’s not as important, especially on the first couple deals. You knowing that you can go to someone and say, “Here is the plan,” is very important.

David:
What people that are in your position do that are new is they go to a person who’s very scared about investing money and maybe also scared about real estate, and they sort of say, “Well, what do you think we should do?” Which is the worst thing ever. I tell people it’s like your first day as a firefighter and they’re like, “All right, the building’s on fire.” And you’re looking around like, “Where’s the most experienced, strongest firefighter? I’m going to follow him.” And they go, “Oh, I don’t know what we should do. I’m after you.” Right? No one’s running into that building with that. So you want to sort of provide that clarity to the people that you’re investing with. The most practical advice I could give you, would be start with where you’re already helping clients. You know that market, you’ve helped them buy deals before. I can tell you’re confident investing there.

David:
So choose that market, get yourself pre-approved, figure out what your down payment’s going to be at the price point you want to be and you know that’s the amount of money you have to raise. It probably won’t be that big at least for the first one. So you could say, “Hey, I’m going to bring in 25%, you’re going to bring in 75%. I’m going to do this much work, you’re not going to have to do anything. And we’re going to split the profit 50/50.” That might be a nice place to start. And if they say, “Well, why do I have to give 75% if I’m only getting 50?” You could say, “Because I’m the one doing all the work and I have all the experience. If we switch roles and you do all the work, we’re going to lose our money for sure.”

David:
So, that’s probably where I would start with the deal. And then as you get comfortable in that market, you’ll start to get sort of the rhythm down of looking at property, what to look for, what mistakes were made. You’ll start to get more confident about moving forward, then you can start expanding into other markets or more expensive properties or some of these syndications.

Rob:
Yeah. I think I want to echo that just a little bit, just because for me I have found that when I’m working with investors, having a clear framework is pretty important. I have four or five or six tricks in my bag, if you will. And every single time I come to an investor and they’re like, “All right, I’ve got $500,000 what do you want to do with this?” Well, the moment I give them all six options. Like, “All right, so we can build a tree house, we can buy a house, we can rehab it, we can build a tree house in that house and then rehab the house.” The more options I give it, usually the investor starts getting a little bit nervous because they’re like, “Well, what is your thing?”

Rob:
So very much agree with David. That’s like, whatever your one thing is, even if you’re very good at multiple things, I would really try to be as laser focused as possible, because it’s going to be very easy for you to answer questions revolve around one strategy versus trying to answer questions around six different investment strategies and then now your investor’s a little scatterbrained because they have to think about, “Well, didn’t you say you do this with this strategy and this and this?” And there’s so much different explanation that comes along with your rationale for how you do things with every single type of investing model. So the more laser focused you can be, I think the more confidence you’re going to build in an investor.

Maria Dennis:
Perfect. Well, that’s great advice.

David:
Great point.

Maria Dennis:
Thank you so much.

David:
You know when you go to a wedding Maria, and they say, do you want the steak or the chicken?

Maria Dennis:
Yep.

David:
It’s a very easy decision. You just pick one right off the bat. You don’t want a menu that has 40 things on it that will then prompt them to ask you questions on all 40 things and say, “Well, now I need to go talk to someone else and see what they ordered. And I need to read the Yelp reviews.” You create way too much confusion and you’ll never go anywhere. Start with steak or chicken as you get that down, maybe there’s two kinds of chicken. You can sort of slowly expand, but that is way down in the future. The best thing you could do is to stay in your area of competency, what you know very well, the market that you know, and then you are an agent, so people are going to trust you because you’ve represented other people before and you’ll do great.

Maria Dennis:
So do you-

Rob:
I’m going to make that a sign, start with steak or chicken David Greene.

Maria Dennis:
So do you see it… Is it better for me to just focus on that one investor that would be bring value to me as well in order to bring that deal or multiple investors to a sense where I have more capital and then use that as a sense as I’m their main GP? So…

David:
If you have too much capital, but you’re not comfortable at where to deploy it, you’re going to feel pressured to buy properties that you don’t want. And that’s the worst thing ever. It’s going to be like all these people are pushing you from behind and you have to jump off a cliff, but you don’t know which direction you want to jump in, because you haven’t gone to the water below to see where it’s shallow, where it’s deep. That’s not a good situation to be in. You want to be able to take your time on the very first deal and know this is what I’m getting into, I know what I’m diving into, I know that I can make it. And then as you learn the areas that you’re diving into, you can slowly start to expand like what you’re saying.

Maria Dennis:
Perfect. Thank you. Thank you so much. This is awesome.

Rob:
Yes, I agree. [foreign language 00:14:26].

Jordan:
Hey, guys. Thanks for doing this and having me on. Big fans. So I appreciate the insight hear. But my question is if you guys have your properties listed in an LLC or under your personal name. I’m currently getting… I’m under contract for my first single family short-term rental deal. And I’m wondering whether I should keep it in my personal name or transfer the deed to my LLC. Because what I’m wanting to do is leverage the equity built in this first deal to purchase future properties. And I know I could do a HELOC if I kept it in my first name, but I don’t know if that’s an option under an LLC. So, I’m just curious your thoughts on how to leverage equity and how to best set up a business for success.

Rob:
Yeah, I’ve got some thoughts. Well, let me start with the caveat here. I’m not a lawyer, neither is David, and this is not legal advice. But in the past, anytime I’ve purchased short-term rentals… And honestly this changes from property to property, it really just honestly depends on how my attorney sort of instructs me on the state that I’m in. But a lot of the times what we’ve done is we will purchase a property and then we’ll do what’s called a quick claim deed into the LLC. Now, when you do that, it can trigger what’s called the due on sale clause, which basically means that the mortgage company, if they find out can call your mortgage due and you’d have to pay that back. So there are some caveats and some things you’d want to discuss with your attorney in doing that because that’s always going to be a risk with doing a quick claim deed, but there are really a few schools of thinking here.

Rob:
I’ve spoken to a lot of people that are seasoned hosts and I’ve even talked to attorneys about this. Most of the attorneys that I’ve spoken to typically want that LLC protection, but a lot of the really season hosts in the game will just have very good insurance. Very good renter’s insurance, very good short-term rental insurance that can cover you. And they may not necessarily have it under an LLC. So I can’t really to why one would do that or not, but it basically depends. Your mileage may vary and your attorney will probably instruct you a lot better than my nervous sweaty answer here because I don’t want to get sued. No, I’m just kidding. David, what do you think?

David:
That was a really good general overview of some things to be concerned about. Jordan, what are your specific concerns about your different options?

Jordan:
I mean, overall, the reason that I would want to use an LLC is just for protection, granted I don’t have a lot to protect right now because this is my first property. I have a residential home, my own home, but I want to scale this and make this a business and have multiple, multiple properties in the future. So, I kind of thought it was best to just set it up from the start and then that way I don’t have to worry about it down the road. So I guess that’s a reason why I would use an LLC.

David:
Okay. I think I see where we’re going. You’re seeing how this first step is a foundation and as you build this foundation up, if you get 17 stories high, you don’t want to have to go back and restart over. Is that kind of the fear?

Jordan:
Yeah.

David:
Well, here’s the good news. It doesn’t work that way. You can move them back and forth pretty frequently. Again, I’m not a lawyer, so don’t hear this and just say, “David told me I could do it.” There’s a way to go about it. Right? I have the strategy. I tell the people like my CPA or an attorney, “Here’s what I want to do.” They figure out how to do it. I can’t tell you how exactly to do it, but I will tell you that I move properties around all the time from one form of title to another. I would say one common misconception in my opinion is the belief that an LLC will protect you while having it in your name won’t. That comes from the understanding that if a property is held in a business, if you are sued, they can only take the assets that the business has. That’s where we say I’m protected. All right? That’s not always true.

David:
There’s many cases in court where a judge will look and say that LLC is managed by Jordan and is run by Jordan and is an extension of Jordan, and therefore they will do what’s called piercing the veil of the LLC, where they will say, if you’re guilty, right? You do something really… You leave a rabid dog in a house someone and gets bit, they can come after you personally, that LLC is not like this airtight I’m safe. So I would let go of that. It also creates a lot of complications with financing if you’re trying to get Fannie Mae, Freddie Mac products, which if you’re new in your career, that’s what you’re trying to do. So what I did and what I would say is a good option, is buy them in your name and get more homeowners’ insurance to cover you if you’re worried. So the policy will have protection against getting sued. And if that’s what you’re afraid of, jack that thing up as high as you are comfortably reasonable to handle, then you have to worry about the LLC.

David:
Now what happened in my career is I got to a certain point where I couldn’t get those kind of loans anymore, and I had to get commercial loans and the properties had to be in an LLC. So then I had to switch into them, but it wasn’t that big of a deal. I just transferred the title over there. And also when this happens, the due on sale clause, Rob talked about is a concern. It’s not at this stage in investing. It’s not a practical concern, but you could just refinance them. That’s what I did. Is I own them in my name, I refinanced him into an LLC, I got a better rate and the title was changed and I had no problem. So, I guess what I’m trying of highlight here is for everyone listening the whole, should I take it in my name or in the LLC is not hard set in cement and you can never change it. It’s probably the most over worried about question, I think in all of real estate.

David:
So I appreciate that you’re asking it, but you should just give yourself a sigh of relief because I don’t think it’s as serious as you think. The advice I do want to give is the ending is what will be affected by how you take title. So you want to ask your loan officer or the broker who’s doing your loan, can I get the loan if the title’s in this condition? Or what would have to change so that it does? And if you want to reach out to us, send me a message on Facebook Messenger or on Bigger Pockets, I’m happy to put you in touch with my team and they’ll get an idea of what you want to do and then they can say do it like this.

Jordan:
Awesome. Thanks, guys.

David:
Yeah. I also got to say the shaved head and light scratch thing you got going on. I really like it.

Rob:
You might be a little biased though. You might be a little biased.

Jordan:
Heck of a look you got going there, David.

David:
Thanks man.

Suzanne:
Hi, guys.

David:
Hey there, Suzanne.

Rob:
Hi, Suzanne.

Suzanne:
Hi. How are you guys? Thanks for taking my call. My husband and I bought four duplexes long-term, not long-term, long distance investing about a month ago and we moved our contractor to the area. So we have a great person to do the rehabs. I was wondering, is there any creative financing so that we can get that rehab done till we get to the BRRRR level? Because three of them are empty right now.

David:
Okay. So if I understand this correctly, you have a couple rental properties, several of them are vacant. They need rehabs, but you don’t have the funds to rehab them and they need to be rehabbed before you can refinance them.

Suzanne:
We have some funds, but I want to be able to not be stressed about the funding. We have 25% of the investment loan equity, and then we have probably 50 to 80,000 sitting around to get started on these rehabs.

David:
So did you-

Suzanne:
But I was wondering, is there a loan or is there besides a hard money loan, is there another way to fund rehabs or any creative investing ideas you have David?

David:
Yeah, I can start with this one. The easiest answer would be if you found private money from somebody else, I guess the first thing I’m hesitating with is if you have 50 to $80,000, how much do you need for the rehab of the first house?

Suzanne:
Our contractor said 40, but that’s not including appliances, cabinets, new hot water heaters, roofing, gas flow.

David:
So most of that money’s probably going to go to the first property. Right?

Suzanne:
Right.

David:
And then the other two are just going to be sitting vacant until you can do the work on those? So did you buy three houses at one time?

Suzanne:
Four duplexes and each duplex it’s empty, as in a different duplex. So it’s not like we can totally rehab one duplex and then BRRRR it out.

David:
You’d have to do both of them is what you’re saying? Right. So one thing I would consider would be do the bare minimum to get a tenant in there so you’re collecting rent on the ones you’re not rehabbing. And then the one you are rehabbing, you can put your funds towards that. So it would look like, get started on the first one, getting the first two units rehab so that you could refinance it and pull your money out. During that time, have tenants in the other ones if you can use them as short-term rentals or medium term rentals or whatever you have to do if it’s a long-term rental. So you have some income coming in and they’re not just dying. And then after you refinance the first one, you’ll have money that you could put towards the next one. And then that could be the money that you use. You don’t necessarily have to borrow it. So really all you have to do is solve the problem of how do you get the first one going? You have anything you want to weigh in there, Rob?

Suzanne:
Okay.

Rob:
Yeah. I was just going to ask, well, A, any amount of cashflow is going to be no amount of cashflow. And so I know it might seem like it’s putting you further from your goal of having it all done if you can only get one rocking and rolling, but it is a bit of a snowball effect. And regardless I think you’re going to get more value out of just getting one ready, rented, refinance that you can start it. You just may not… I think the big thing to understand here is you just may not get it all done at once. And that is going to have to be okay possibly. A lot of people get these projects and they want to be able to do everything and finish it and redo the paint and the appliances.

Rob:
But at the end of the day, there is no magical money printing machine, right? So we have to understand, “All right, we’re going to have to make sacrifices, maybe we can’t do the expensive wallpaper or the expensive laminate floors.” And you’ll just have to kind of be very budget friendly with how you approach renovating each specific one. But I did have a follow up question on this. Since you have four duplexes, now I’m kind of curious, do you have any other properties in your portfolio?

Suzanne:
I do. One’s in a retirement fund, one is I just refied it out and pulled some cash out to finish another property. And then I have a duplex that we have that’s completely renovated, but we’re using it as equity on a historic building that we’re going to renovate, which is great because it has great dollar for dollar tax credits once we get it approved through all the appropriate state and federal. So we’ll get a lot of tax benefits from refurbing that one. So it’s kind of anchoring that property down so we can get a million dollar line of credit to finish that one.

Rob:
Yeah. Okay. I’d have to dig into some of these details, but you may just have to focus on kind of which of those properties… Because it sounds like you have a lot going on. So, it sounds like you might have to focus on whichever properties are going to get you the biggest kind of return or cash out so that you can then funnel it into the next one. I know it’s not the sexiest answer, but sometimes it is the waiting game in real estate.

Suzanne:
Right. And these are going on simultaneously in two different states.

David:
Yeah. You sort of just took a really big bite and you’re like, “Man, how do I swallow this whole thing?” You had a lot of deals going on at one time. What stops you from taking a hard money loan to do the construction on the first one, rehabbing it, pulling out the money, putting that towards the next one, rehabbing it, pulling out the money, putting it towards the next one?

Suzanne:
Well, I actually have a hard money lender. I just hate to feel like I’m going further upside down or it’s a little hesitant because once you commit to paying something back or once you commit to, I’m only going to have it for this long, you’re kind of committed there. And I want to be a person of my word.

David:
So do you worry about not being able to pay back the hard money loan?

Suzanne:
Right. Getting it finished and we just bought these properties a month ago and the bank said it would take six months before you could pull out that BRRRR on what the increased equity would be. So having both sides done by then, and then being able to get the loan at that time with another major renovation going on on the historic property in another state, I’m just a little concerned about that.

David:
I think this concern’s not going to go away. This is just what happens when you buy this many properties at one time. And that’s not to put you down because I’m glad that you took action. But I would say you probably need to let lower your expectations of how quickly you’re going to get your money out of these, that you’re not going to hit it right on the six month mark. You’re going to have to take this big stake and cut it up into kind of like bite size pieces and you’re not going to be able to take the second bite until the first one’s done. I have to do this all the time. This is a big part of managing different businesses as I see all this opportunity come. And it becomes kind of complicated because you realize, well, we can’t do this one until this part gets done. But this is being held back by this thing. And this problem’s stopping all three of those from working.

David:
So it becomes a complicated endeavor to try to keep all these moving pieces going. And it sort of feels like a Rubik’s cube. You got to get all of them lined up just right. I want to sort of encourage you that this does not mean you did something bad or wrong or you’re a bad investor. You just bought a lot of properties at one time and you don’t have enough resources to add to all of them. So what Rob and I are really talking about, is how do we stop the bleeding? How do we get some tenants in the ones that you can’t fix to buy you some time, focus your resources on one, maybe two if you possibly could, but probably one. Get it stabilized and move on to the next one and give yourself grace that it’s not all going to happen perfectly.

David:
Here’s what will likely happen. Okay? You’re starting off at ground zero and you’re looking at how I can build my equity and my passive income. You’re probably going to dip down from ground zero before you go back up. And you have to be okay. This happens to me all-

Suzanne:
It’s hard to do.

David:
… the time. It’s very hard, but it’s an emotional problem. It’s not an actual logistical one. You have funds, you have money, you have access to loans, you can do this. You have to release in your heart this idea that it shouldn’t go bad. This happens to me. I just bought a 1.8 million place and the tenant was supposed to… I bought it from the owner and he decided not to leave. And that was costing me 10 grand a month for this mortgage. And I can’t even start construction. And then not only would the owner not leave, but we couldn’t send anyone to the house to get measurements, to submit to the city for permits. So we fell behind on that too. And then finally he gets out of there and now my contractor had taken another job. Okay?

David:
Every one of these delays is $10,000 a month that just keeps adding. And I’m looking at like, my goodness, every month I’m losing money. And if that’s all I see, I’ll never invest. But when I look back at this five years later, I’ll say, “Yeah, it just took me six more months or nine more months before I hit the profit I was expecting.” And over a 30 year period of time, who cares? And so when we only look at right now that you feel like crap, you’re probably not sleeping that well, it’s on your mind all the time you feel like you screwed up. You’re like, “Why am I even doing this?” A lot of people would have those emotions. It’s okay to let something get worse before it gets better. And here’s the bright side. Most likely you probably got house is at a good price.

David:
So you probably had some built in equity when you walked into it. Okay? During this period of rehabs to you is going to feel unreasonably long and like you’re losing money because you suck. You’re actually going to be making money as they’re appreciating in value. Okay? There’s always something that balances it out and you’re like, “Oh, that actually worked out great.” Our rains just harbor in on that one mistake and we miss the several things working in your favor.

Suzanne:
Right. Thank you so much.

Rob:
Yeah. And I also want to bring up that it’s not like a loss, it’s not like a bad thing if you have to sell something. I like to hold, obviously I’m sure David likes to hold too. But if you have to sell one of these duplexes to get your 25% back, that’s fine. I would rather you feel very comfortable and safe with 25% down to finish three of your duplexes, than you hold onto them and bleed out from the funds. Right? So I might consider that like. It might be a breakeven, you might lose a little bit, I’m not a hundred percent sure on that, but that’s always an option. And that’s not a loss. That’s actually very smart and strategic in a situation where you’re not sure how you’re going to pay for any of these rehabs.

Suzanne:
That’s an idea I hadn’t thought of. Or maybe get the first one done and sell it.

David:
Yes. There you go. And then that could fund the rest of them. All right. I had a comment or I was going to ask you a couple questions. Did you have questions you wanted to get answered before we wrap that up?

Suzanne:
No, that kind of answered my questions. A little nervous about taking the hard money loan, because I’ve done that before and it took a little longer to pay back than I had originally planned, but that all worked out. I’d be interested to hear what you have to say or your advice David.

David:
Do I have your permission to go a little deep here?

Suzanne:
Yes, absolutely.

David:
I think this will help a lot of listeners. All right? So what you just said right now, absolutely supports what I was going to ask where you said, “I was nervous to take out a hard money loan because I’ve done it before and it went longer than expected.” And I’ve noticed that theme has come up with almost every question you have, is there’s an expectation of how it should work. And if it doesn’t go according to that plan, you get very nervous and anxious and it’s almost like there’s emotional pain that’s associated with I messed up. I didn’t do it right. And I wanted to ask you, did you have an experience when you were younger with a parent person who is important to you that was a perfectionist and it was not unfamiliar for you to be reminded that you were not up to par and you made mistakes and you needed to be better?

Suzanne:
I would say not parent wise, but I’ve been really tough on myself of meeting my own expectations. And I’m probably my hardest critic on meeting goals, meeting deadlines, meeting financing, that sort of thing. But not parent wise.

David:
So, that usually comes from some form of relationship. Could be someone you dated, could be someone you… A sibling. Who knows where it comes from. But there’s usually a feeling that I’m not enough, I don’t measure up. And in order to get rid of that, we start telling ourselves, you need to be better, you need to do more. And here’s why I’m bringing this up right now. It’s affecting your ability as a real estate investor. Because these things that you’re talking about, nobody would be expected to hit all of these timelines perfectly. Real estate just doesn’t work that way. And as you’re thinking, I got to get both of these birds done exactly at the six month thing, that perfectionism is starting to cause emotional pain, which stops you from taking action and keeps you spending energy that could be used to solve problems. And instead you’re just feeling bad about yourself and you’re using that energy to try to protect yourself from bad feelings.

David:
So, as crazy as this might sound, because it’s not practical advice. If you could identify where that started, what relationship it came from or where you picked up this habit. I don’t know. Maybe let’s say I got cut from a sports team and I felt horrible and I had to watch all my friends playing basketball and I didn’t get to play anymore and I made that agreement with myself that I will never again let myself if not be the best or not be good. I don’t want to feel this anymore. And that perfectionism takes root and then I carry it around my whole life. Well, it stops me from ever playing another sport because I’m afraid what if I find out I’m not good enough? That’s an example from my life. I don’t know yours. But if you can identify where that’s coming from and forgive that person or forgive yourself or just say, “Hey, no one ever said I have to be perfect. There is no perfect.”

David:
Outside of Rob’s hair right now, perfection does not exist. All right? And I really think that if you can release whatever that is, a lot of these questions that you’re asking us here, the solutions will hit you. It’s like they’re probably right there in front of you, Suzanne. There’s a source of money or there’s a solution to this deal, or there’s a way that you can figure out this problem very easily and you just can’t see it because you’re putting all this energy into feeling bad about yourself because you’re not being perfect. And I just want to, if no one else tells you, I want to tell you this is normal. They never go perfect. We have another caller on this show and we talk about how he’s terrified of, “What if I miss something?” You’re going to miss something. There’s no way you’re not going to miss something. Everybody misses something all the time. That shouldn’t stop you from wanting to move forward. You shouldn’t be feeling fear and pain and anxiety over that.

David:
And I can see that that’s a great thing. It’s probably one of the best parts of you as a person is you don’t let people down, you probably always show up for them. But if you’re holding yourself to that same standard of you can’t let yourself down and doing anything less than perfection is letting somebody down, you got to adjust that standard. It’s stopping you been able to hit your potential when it comes to investing. If you’re buying this many properties at one time, you’re a person meant for greatness. You’re going to go do great things. So, change your definition of greatness from perfect to really good.

Suzanne:
Okay. Sounds great.

David:
Thank you Suzanne.

Suzanne:
Thanks so much.

Scott:
Hey, thank you guys so much for taking me on as a guest. Big fan of both your content. So, it’s a great experience for me. So, I just recently got my first short-term rental under contract in Blue Ridge, Georgia. I’m not taking the advice of staying in my backyard, which I know Rob would be shaking his head at, but it’s just the market I really liked and wanted to jump into.

David:
Well, first off, Scott, Rob says to stay in your own backyard because he’s got 17 backyards. He moves all over the place all the time. So, that’s not-

Rob:
Fair, fair point.

Scott:
Yeah. That’s true. That’s a good point. He is all over the country. So I guess that’s easy for him to say, right? But-

Rob:
You never know where you’ll find me.

Scott:
But anyway, the plan for me would be to essentially pack up my car, I want to get down there to see the property in-person and then putting together my shopping list for Amazon, Costco, and then the plan is essentially to just start purchasing things, work remotely there for a couple weeks, get my cleaner and my photographer in. And then once I go live, just make my drive home. I’ve done all the research, watched all the videos, but I still just have this big pit in my stomach that I’m going to get down there and realize I forgot something or that I’m just going to slip in my preparation somewhere, end up being there way longer than I thought. So just like hearing my initial plan was wondering if you two had any kind of things like keep in mind type things or just any kind of guidance or advice if any part of my plan strikes you as a bad idea. I know you both have short-term rentals. Rob, I know it’s your specialty.

Scott:
So just looking for a little validation/any kind of guidance because I’ve done all the preparation I can, but I still just can’t shake this pit in my stomach that I’m going to be halfway down there and be like, “What am I doing? I made a mistake.” So, just anything you guys have to say.

David:
I’ll say two things. The first is that’s normal what you’re feeling. It doesn’t mean you did anything wrong. Everybody feels that. The second thing I’ll say is, I don’t think there’s a better person I could possibly advise you to talk to than Rob. So, I’m going to let him jump in and tell you everything that he’s thinking because he’s probably the best person I know at this type of a question.

Rob:
All right. Let’s dive in. Okay. So, here’s the good news, bad news. Good news is… Or bad news, let’s start with the bad news. You are going to forget something. You’re going to forget a lot of things. That’s the bad news. The good news is it’s okay. You know why? Because you can buy anything anywhere. And honestly Blue Ridge is a really great market, did you buy your place fully furnished by any chance or was it a empty house?

Scott:
Yeah, it’s pretty much fully furnished. The main things are taken care of, but I know there’s still stuff I’m going to want to add. So I’m still putting together my shopping list. So it won’t be huge assembly full furnishing, but I still plan to spend at least a few thousand, just to make it as perfect as I can and just make sure I’m not cutting corners up front, trying to like cheap out. I want to make sure I am really going all in to make this a great stay.

Rob:
Awesome, man. Well, biggest mistake I see hosts make is they don’t splurge, especially in these situations. They’re like, “Oh it’s Blue Ridge or the Smokey Mountains, it’s already fully furnished. There’s nothing to worry about here. I’ll just kind of come and change a thing here.” And they kind of cheap out. And that’s what really ends up biting you in the butt. So I’ll say this. Your short-term rental is really not going to be ready for the first three months of hosting. And that’s just the truth. Even with me, I’ve got like a bunch of resources that I put out there. It sounds like you probably have my shopping list, if you don’t, I have a shopping that’s out there. Great.

Scott:
I got it.

Rob:
And you’re going to buy all those things and you’re going to think you’re ready to go, it’s going to be fully furnished, you’re going to be like, “Ah, I did it.” And then one month in, you’re going to have a guess that’s like, “Hey, the Roku’s not working.” And then you’re going to think, “Oh my goodness, I didn’t set that up how did no one ever flag this beforehand?” So the good news is that when it’s a brand new listing and people understand that, they’re typically pretty flexible. You might have to refund people 50 to a 100 bucks here and there because the Roku remote didn’t have batteries and that was one thing you forgot, but that’s fine. Use your first set of guests as an opportunity to optimize your listing. Anytime a guest checks in, “Hey, how’s everything? This is a brand new listing by the way. So if you have any feedback, please let me know. I want to make this a five star experience.”

Rob:
And rather than just fixing that or addressing that feedback after they’ve checked out, try to fix it right then and there. Anytime a guest brings anything up to me, I will usually Amazon Prime something to them, I’ll overnight it if I can, or I’ll just pay the extra shipping to have it there. And I’m able to solve problems very, very quickly. So don’t feel like it has to be perfect, just so long as there’s a couch, there’s a bed, there’s a TV and a toilet, that’s all people really care about. Right? So you can optimize as you go. Obviously you want it to be as ready to go before you go live. But it is just not how short-term rentals work. And that’s going to be the big nuance between a long-term rental where you don’t have to furnish at all and a short-term rental where you have to buy 2000 things.

Rob:
So you’re correct in feeling this pit in your stomach, because that’s how it always feels when we get started. But it is the way it goes. Even me having done this, I’ve set up 25, 30 Airbnbs at this point. I forget stuff all the time. And it’s always like a little thorn in my side, but that is just… It’s part of the process. And really the only way that you can get better at becoming an Airbnb host, or really just being the best Airbnb host out there, an expert, is you kind of have to forget things and you have to learn things the hard way. So as much as I want you to have a very seamless and perfect experience, I kind of want you to fall down every so often, have some bumps and bruises, because that’s what makes us a better host. So, conceptually your plan here does work. If you’re going to move out there for a couple weeks, great. I’ve set up all my Airbnbs in a weekend.

Rob:
So, already you’re steps ahead of me. If you’re staying there for three weeks. Awesome. One big warning I’m going to give you is that 99% of the work that you’re going to be doing is on the final three days. I just know that. So, try to really space it out as much as you can, but anytime I have two or three weeks that I’m going to set up an Airbnb, it all happens down to the wire when I’m leaving. So as long as you kind of know that going in, maybe it’ll help you kind of hustle throughout the whole time. But yeah, there’s no downtime, man. So, it’s like very stressful in the moment, but it’s a very big laughing experience after the fact. And it’s a very happy thing once you actually have those professional photos in hand and you smile and you’re like, man, I made this. So with that, thank you for coming to my Ted Talk. Sorry. Do you have any follow up questions on anything I said?

Scott:
Yeah. First of all, thank you for the guidance. It makes me feel a little better and yeah, I was going to just use my phone to take the photos of the listing. That’s cool with you? Right?

Rob:
I know you’re messing with me. I know you’re messing with me. No. To get it up and running it’s fine. I do say that, but yeah. Pay that 300 bucks to the professional photographer, you’ll make that back in the first week.

Scott:
Yeah. Absolutely. I got some reserves set aside, so I want to make sure that I’m not choosing to cut corners on the little things, go with the furniture that’s durable, get the pictures I really like, just try to make it so I can charge it a reasonable amount and cover my expenses by a bit. And yeah, hopefully this my first of many, but yeah, huge fan of all the content you guys put out. I’ve binge watched everything you’ve put out, Rob, David reread your books a million times. So, I just want to thank you guys both. And don’t be surprised if you see me continuing to pester you on Instagram because I tend to do that to both of you here and there. So, really appreciate it guys.

Rob:
We encourage it, man. Yeah, you’re going to crush it dude.

David:
Right on, Scott.

Scott:
Thanks guys.

David:
Tyler, come in live from the 1920s. It looks like you’re in black and white there.

Tyler:
Is it? Yeah. Unfinished basement office. That’s what it is. So-

David:
Right on.

Tyler:
And it plays a part into this story, I guess. So, just looking for a little bit of guidance or thoughts from you guys. Big fan of yours too, but quit my job back in 2018 to pursue real estate as a realtor, which did pretty good. My first few years here and wasn’t looking for employment, we bought our first property and now we have two more that we bought. And then we have about eight more units that we’re negotiating on. But taking this job about seven months ago, which is a… I mean it was a pretty big opportunity averaging about on track to make 160K a year doing it. But it’s been affecting my mental health essentially, family. I mean, it’s been tough. And then the hours have been really tough in the sense of we have seven doors right now, two of them are occupied.

Tyler:
We have two remodels going on right now. One that’s getting wrapped up, two that are down to the studs right now. And then a single family house that’s on the back burner. It was a cheaper cash purchase. So not a big deal, but we’re seeing it affect our scalability or our growth and our real estate side. My wife and I have kind of already talked about it. We’re kind of to the point where, “Hey, we need to look at why did we quit our jobs in 2018 to begin with?” So we didn’t really seek out employment opportunity, but just kind of wanted to get you guys’ thoughts and see what you guys’ thoughts on that were.

Rob:
So are you questioning if it’s worth keeping the job because it’s affecting your mental health and-

Tyler:
Yeah. No, I don’t think it’s worth keeping the job just because it’s affecting my real estate business too, and we want that to grow. That’s why 90% of people that are on the podcast or that are in real estate, do it for family usually or whatever it is. Everyone around us kind of thinks… Most of the people around us in real estate and investing in it, they think it’s crazy to leave a job that’s paying six figures and wife stays home and we’ve got a pretty comfortable life doing it, but we were comfortable before. So it’s like, is that extra income worth it?

Rob:
Let me ask you this. Are you a salaried employee, hourly employee, how does that work for your job?

Tyler:
Straight commission. Straight commission.

Rob:
Oh, okay. Cool, cool. And what is the line of work?

Tyler:
Work as territory manager for an HVC distributor essentially. So, dealing with dealers and selling HVC, which is I was in the trades, I was on the dealer side of it before. That’s when I left because that was labor intensive as well.

Rob:
Sure.

Tyler:
But we’re just seeing it affect… I mean, the biggest thing is, it’s affecting our rental portfolio.

Rob:
Okay. Well I guess there are a couple things here. It sounds like if you’re on commission for the most part and you’re making $160,000, it sounds like you’re very good at your job. And it also sounds like you’re giving all of your mental health to your job and you’re just absolutely crushing it. I would say that it sounds likely that someone else’s 100% effort is pretty close to your 20, 30 or 40%. So, typically when I find people in this scenario, it’s they’re working too hard and they don’t have to. They all want to be a good employee and they all want to serve their company. And I get that. But at the end of the day, I would very much… I don’t know. This is kind of unconventional advice. So, David feel free to-

Tyler:
I’m going to say, I [crosstalk 00:47:31] see my wealth grow than the company I work for. You know what I mean?

Rob:
Yeah. And at the end of the day, I’m always like, you don’t have to come guns blazing into work with just the greatest performance all the time. I think it’s okay sometimes to not give everything you have to a job so that you can give that leftover energy side hustle. And so I would say… Look, I’m not really going to sit here and tell you to quit $160,000 job, especially if that pays the bills and it’s covering all your debt service. But I am going to say maybe don’t work so hard on it. Try to perform, if you’re on commission, maybe take on less leads or less leads generation and cut back on your time and hours in that job, so that you can at least not dislike the real estate side of your job, because at the end of the day it sounds to me like you want to do real estate, but what I don’t want is for you to not have the cash to fuel that. And it’s not fun. It’s not fun to work a job that you don’t want to.

Rob:
I did it for a long time. I was in advertising for 10 years. I had a great team and great company behind me, but towards the end of it, I was like, “I am not going to let this company be my identity.” And I kind of meld it in a little bit, but in doing that, I was absolutely crushing it on the real estate side of things to the point where I overcompensated. And when I quit, I was making a lot more money on the real estate of things and I was at my company. So I don’t know, if that’s an option to just maybe cut back on hours or the leads that you’re taking on, I might try to transition slowly versus just like cold Turkey quitting. My personal advice. But David, what do you think?

David:
Let me ask you. With your portfolio, what do you have going on there that you don’t have enough time to get to?

Tyler:
Well, so contractors are an issue with everybody, but yeah. So having the vacancies is obvious an issue. We’re not upside down on them, we have enough cashflow coming in to cover even the vacancies we do have, but we just want to see it scale faster and we kind of feel like if I left… Like I said, I didn’t pursue this job they came to me and offered me the position and I was like… I told them no at first, and probably should have stuck with that answer to begin with because I don’t need the job, but we kind of thought, “Oh, having that job is going to maybe make us be able to scale real estate, but actually we’ve seen it be more of a hindrance, even though that the money’s there, the time to put into the real estate is no. Working 12, 13 hours a day in this job, make it… When you convert the hourly rate, I might as well be working 100% on my real estate portfolio at that point.

Tyler:
You know what I’m saying? And I guess I don’t really know what I’m looking for as far as… We kind of know where we want to be with things. Last year we took an RV trip for a month and a half. Can’t do that now. So we want that time freedom back. But at the same time, we want to continue to scale, which we’ve got good relationships with lenders and everybody that we can still buy properties. We’ve got plenty of capital to back it as well. Plus we’ve got liquid cash, plus we’ve got 250K in line of credit that we can purchase property with.

David:
Here’s how I would simplify this. In order to build a real estate portfolio, you need capital or money, time, and then opportunity. Or maybe you can make skill. You have to know what you’re doing. So assuming you have skill, then you have to have opportunity. So, deals. Okay? The job is offering you money, but it’s taking away the energy. It doesn’t sound like… When I say taking away… Taking away your time, that’s a better way.

Tyler:
Right.

David:
It doesn’t sound like opportunity is a problem for you. And if you’re telling me that the only value that the job is offering is money, but you already have money, then it’s a stumbling block. It’s getting in your way of your goal. Right? What Rob was saying earlier was under the assumption that maybe you need this money. We kind of assume that’s why you have the job. Because why else would you be doing it? Right?

Tyler:
Right.

David:
So here’s what is most likely going on with you? And I have to deal with this all the time in my own life. And so that’s why I recognize it. You’re getting something out of that job of knowing you’re good at it. They wanted you, you told them no, they kept coming. You know you’re skilled, you know you’re good at sales. It feels really good every time you hit that number or you see your name at the top of a list. And what you’re actually doing is you’re trading your time for that. You’re telling yourself it’s for the money, but it’s not because you have access to lines of credit and money in other areas. So that will sort of make this a much more easy decision for you to make if you recognize that the real reason I’m working there is the recognition I’m getting or the feeling of significance because they need me. I don’t know. You can figure that part out talking to your friends about it.

David:
But if you don’t need the money, you don’t need the job. So all we have to be figuring out now is how do you decide if you want to cut back your hours like Rob said, or if you want to leave the job completely and maybe you leave that door open. Right? Maybe you go scale your portfolio and then you… I mean, honestly gets a point of buying rental properties like I did where that actually stopped being fun. I don’t want another single family house. I can’t do this anymore. And I wanted to go take another job and do another thing. So be aware of that as well. But this habit of understanding, is this helping me with my goal that we’re walking through right now, will serve you no matter what stage of your career you’re in.

Rob:
Yeah. I do have a POV now that I have a little bit more context, what I have always told people, because this was very true for me. And of course your mileage may vary. But I say with the whole job thing that a lot of people that want to get into real estate and they say, “Okay, I want to quit my job.” And I’m like, “Okay, well first, you have to work that job to get to the point where you are making the maximum amount of money doing that and working your W2 or your full-time job.” And so, when I start thinking about when I should quit my job or when that actually becomes a real opportunity, is the moment that you can no longer scale. You can physically… You can literally not scale until you quit your job.

Rob:
And it kind of sounds like that’s where you’re at. So, that’s what happened to me. I could not scale my Airbnb stuff, I couldn’t scale my YouTube platform. I couldn’t scale anything because I was working 40 hours a week. And so I had to make that decision, it’s time to quit because it’s actually holding me back. And the moment that I quit my full-time job, I was making $110,000 at this job. I significantly by many factors increased my salary that same week. And it’s because I got 40 hours a week back to focus on everything that I was talking about. So it sounds like you need your time back to me.

Tyler:
Yeah. Yeah I think that… Yeah. I think that gives a little more comfort to it too because we do have… Right now we have two, four units that are pretty much going to be under contract and then another 25 unit storage facility too that we’re working on. But we’ve got the deal flow, we know how to find deal. Before I even quit my job, I got my four year education on Bigger Pockets just working in my work truck every day and putting the podcast on. So got the knowledge and we’ve got the capital built up. We flipped houses all through, well, both my wife and I were working, but once we had kids, it was like, “Hey, we got to do something where we’re trading.” I think we were just on a podcast recently we’re trading five days a week just to get two and it’s hindering our real estate too.

David:
Do you want me to give you some encouragement that will make this easier for you?

Tyler:
Yeah, let’s hear it, David.

David:
We’re in a highly inflationary environment. And what that means is that money itself becomes less valuable and assets become more valuable. So you’re actually putting the majority of your effort into the thing that’s giving you less of a return, saving up all that money is great, but it’s not worth as much as you think. Right?

Tyler:
Yeah.

David:
That $160,000 a year next year might be worth 115,000, next year might be worth 95,000. It’s really bad. And the properties that you could have been buying, they’re going to go up exponentially. So this is actually something that is happening in my own life where I’m recognizing inflation is just getting so bad that I need to put less time towards making money and more time towards getting more assets under contract because that’s the smarter wealth building move.

Tyler:
I like it. It’s great.

David:
All right, Tyler. Thanks, man. This was really good. Appreciate you.

Tyler:
Thanks, dude.

Rob:
Yeah. Appreciate it. Hey, good luck, dude. I think you’re close of being where you need to be my friend.

Tyler:
Yeah. I think we’re on the right track. So, appreciate it.

David:
What you got for us, Rachel.

Rachel:
So calling in to get your advice on a property that I purchased last year. It’s a fiveplex that sits on a bit of extra land where potentially we could build more nuts, but I’m having some difficulty with the property. I knew we were going to have some issues going into it, the property wasn’t in the best condition. And I knew in that state, the tenants that kind of came along with the property may have some issues as far as paying their rent, et cetera. So since then we have continued to experience delinquencies and we just can’t seem to get the property performing. So, I’m wondering at what point should I consider other options such as selling?

David:
Well, let me ask a couple clarifying questions here. When you say you can’t get it performing if we’re just being straightforward and honest, what’s stopping it from performing?

Rachel:
Getting tenants on track with their rent payments.

David:
Okay. And I’m going to take you down a line of questions here that I’m going to let Rob jump in. But if we’re digging into why we’re having a problem getting tenants on track with their rent payments, why do you think that is?

Rachel:
So, one issue is that the tenants have been their long-term and I didn’t have the opportunity to screen them. And I should have mentioned at the beginning that this purchase was somewhat of a rush. I had a 1031 exchange and some proceeds from it that I had to put into another deal.

David:
Totally. Yep. And I’ll just… Let me jump in for everyone listening to this. It still often makes sense to buy a deal with problems like this if it’s a 1031. This is one of the reasons that people overpay for property when we’re like, “I’d never buy that. That’s only a 4% return. They’re paying too much.” No, not if they’re saving $300,000 in taxes, they’re not paying too much. So different people are in different situations. I’ll also say in my experience, landlords don’t sell their property when they have good tenants. So almost every time that you’re buying a property that has tenants in it, you’re buying a problem or the landlord wouldn’t be selling it. So, okay, go ahead and jump in where you basically inherited these bad tenants. Do you feel that if you could get them out that your tenant base would be solid and it would be easy to find good tenants?

Rachel:
I believe so, because that would give me the opportunity to, if everyone were out at the same time to go in, we have it a little bit and then put potential tenants through a proper screening process.

David:
But are the people that live there likely to be the kind of tenants you want to manage?

Rachel:
Are we talking about the current tenants or future tenants?

David:
No, the ones you’d replace them with.

Rachel:
Yes.

David:
The people that live in that [crosstalk 00:58:34] area I should say. Is this like an oil field where you’re going to have a bunch of crazy people getting in fights and your tenant. Right? Is it like a rough and tumble area or is it pretty solid?

Rachel:
No, I wouldn’t say that. It’s actually a university town. So I see there’s potential there.

David:
Okay. That’s what I was worried about. I was afraid that you just ended up with a property in a stinker location and there wasn’t going to be much you could do to improve the experience. But if it’s just that you inherited some problem child’s, I would say you should start down the path of if they don’t pay their rent, just going down the eviction road. Possibly once you get them motivated enough, they realize they’re going to be evicted it’s going to ruin their credit. You could look into cash for keys. I would say at this point when you already have these bad habits in place to try to change their mind is just not going to happen. They are used to having the landlord before you that let them get away with this type of behavior, now you asking for rent on time in their head, they resent that. They think you’re being a jerk and you’re being a tyrant. Right?

David:
And you’re looking at it like, “I’m letting you guys off the hook every single month you should be so grateful,” but they’re not. The only way you reach that expectations in this is a clean break. So, I would have a property manager and I would tell them, I need to get the tenants out when they miss a rent payment, when they violate the lease, what options do I have for just saying we are not going to continue your lease? And if you don’t have enough funds to float it during that time, maybe you just systematically do this one by one.

Rachel:
Right? Now that makes sense. And I do have a property management company in place. We just haven’t really made a lot of progress, I think because of where the property is located and the moratoriums that were in place and just the local laws. It’s more difficult to get tenants out.

Rob:
Yeah. I think… I’m not super experienced on the long-term side of things, but with the long-term tenants that I have had, unfortunately I think David’s right here, which is like once they have a track record of paying late, there really is no way to reverse that. So you may have to… I probably wouldn’t go all at once because there might be not a statement, but if you evict one person over this, then maybe the other people in the property will start to shape up a little bit. But it does sound like you need a clean break on this. I was just kind of curious… I mean, I would never really say sell it or anything like that, if you can fix the problem, which I think you can, but I’m kind of curious, do you have equity in this property that you could roll into a new property and kind of help you get to… A property that can maybe help compensate for this one at the same time?

Rachel:
Right. At this point, probably not because I bought it midyear 2020, and based on the condition of the property not being able to really go in and make repairs, I don’t think I’m going to see of upside right now.

David:
What about a refi? Could you do a cash out refi, put that money towards another property that makes money while this one’s struggling?

Rachel:
I could. I haven’t actually looked into that yet, because the purchase was so recent, but I can definitely ask my lender.

David:
That’s what I would recommend. When people come to us with these problems, that’s one way that we would look at it. And I believe you’d have to have them double check it, check with your CPA, but you could probably pull the money out that you put in on the 1031 exchange on the refi without any kind of a tax penalty.

Rachel:
Okay. That’s a good point to look into actually. So you would just hang on and kind of try to turn the property around and clear the way-

David:
There’s always so many nuances when… Because this is kind of my job as people come to me with a property that they own and I give them advice on what we could do with that. Should we keep it? Should we sell it? There’s a few things I look at. One is this comparison of return on equity versus return on investment. So, all of us know about ROI. If I put this much money in the property, this is the return that I will get. But you also have to look at the equity in the property and say, what return am I getting on the equity? So a lot of the properties that I first bought at my ROI when I bought it was maybe 12%. And with rent increases, it’s at 65, 75% and I look like I’m crushing it.

David:
Like, “Oh, I have 75% ROI.” But then I look at the equity that’s in the property and I’m getting a 2% return on that money. It’s terrible. Right? So, the next question would become, I need to take the equity out of that property that’s not working hard for me and put it somewhere else. So there’s two ways to do that. A refinance or selling. If it’s an area that I like that I believe will continue to appreciate where I’m going to get good tenants, I just want to own there. I look at the refi option first. If it’s an area that I don’t like, or it’s a property I don’t like, it just has a floor plan that is going to work, it’s on a super busy street that I’m always going to have a hard time getting tenants or something. Then I look at the sell option. So it’s not a hard and fast rule, it’s not a computer code that you can just say if this, then that, but that’s generally the path that I start looking at for clients.

David:
And what you’re saying is it sounds like this is a good area, it’s a good property. It just has… The tenants are the problem. Right? So you don’t have to throw the baby out with the bath water, so to speak. You just have to either tell your property manager very firmly. I want the tenants out if they don’t pay on time, can you do that? And if they aren’t helping you, just find another property manager and interview them and say, I need to get these tenants out so I can get people in that pay on time and we can all make money. If I hire you. Can you do that?

Rachel:
Yep. Now that makes total sense.

David:
Any last words, Rob?

Rob:
No, I really like this strategy. That’s kind of what I was getting here. If you can use this to get into another property that can help sort of carry the slack, it’s very rare that in five, 10, 15, 20, 30 years, this property’s not going to be… It will always appreciate to the point where you’re very happy that you held onto it. So I think whatever you can do to sort of fix the problem, or at least get you to the point where you’re not draining money every single month, if that means that you replace the tenants or you get another property that just kind of carries a slack here for the next few years, I would probably go that route before just kind of getting rid of the property or anything like that.

David:
All right. Well, reach out if either of us can help anymore. And thank you for being on the podcast.

Rachel:
Thanks a lot. Have a good one.

Rob:
Bye, Rachel.

David:
And that was our show. That was a great time. We got some challenging questions thrown at us, but I think that we helped some people. What do you think, Rob?

Rob:
We did, man. I was sweating there. We got a couple legal questions and I just-

David:
Love those.

Rob:
Because you didn’t sense my uneasiness, I do want to say we are not attorneys or legal professionals. So make sure to consult an attorney for anything that has to do with legal.

David:
Absolutely. But everything else, we want you to bring that to us. So go to biggerpockets.com/david, biggerpockets.com/livequestions. Submit your question. We want to hear from you. Also, if you’re not already doing so, please subscribe to the Bigger Pockets YouTube channel, where you can share your likes, dislikes, questions, concerns, all of it in the comments. We all read those, especially the nice things that people say about me and you too, Rob. I’m sure that we’re probably going to get some dragon balls references pretty soon here. And let us what you’re thinking because we watch that and we want to hear from you. All right. If you would like to follow me, I am DavidGreee24 on all social media. Rob, what are you?

Rob:
Hey, were there 23 other David Greenes before you on social media?

David:
It’s so funny that you say that. One person asked me if it was a Kobe thing, right? Because I have that killer attitude. No, I wish it was something cool like that. It was literally my basketball number in high school. And when I first made social media, there was another David Greene and I’m very impatient. So I just was like, how do I get this done as fast as I can, having no idea that anyone would ever actually be following me at some point in life. And so now I am locked in with DavidGreene24. Brandon hates it by the way. He constantly tells me I need to change it to, the underscore real David Greene or something like that. But-

Rob:
I think you should change it to the realest David Greene.

David:
The realest?

Rob:
Yeah.

David:
That’s not bad. Well, we want to hear from you. What do you guys think by social media should be? Great point there, Rob.

Rob:
So, to answer question, sorry. I always derail you on these. You can find me on YouTube obviously, smash that subscribe and the like button, leave me a comment @Robuilt, on Instagram I’m Robuilt and on TikTok someone beat me to the punch unfortunately. So you can find me at Robuilto because I had to add an O to it. So, Robuilto.

David:
That’s funny. I’m sure it was a coincidence that another person picked Robuilt on TikTok before you got there.

Rob:
No, man. You know what? Someone reached out to me the other day and they’re like, “Hey, do you want to buy Robuilt.com for $24,000?” And I was like, “You’re the guy on TikTok?”

David:
Yeah.

Rob:
And so, Robuilto it is. I had to settle for the .co.

David:
All right, well thank you very much for your effort today, Rob. It well appreciated and well received. This is David Greene for Rob, Robuilto Abasolo. Signing off.

 

Tony Robinson:
Hey, before we get into the show, I wanted to mention Bigger Pockets is hiring a full-time supervising producer for our podcast network. This is a remote position and a chance to work with an amazing team, if we do say so ourselves. We’re looking for someone with at least a couple of years experience managing production teams and someone who will feel confident taking the lead when launching new podcasts. So, would you or someone you know be a great fit? You can find the full job description at biggerpockets.com/jobs. Again, that’s biggerpockets.com/jobs to apply for our open podcast producer job. Now, enjoy the show.

Ashley Kehr:
This is Real Estate Rookie, episode 152. My name is Ashley Kehr and I am here with my co-host, Tony Robinson.

Tony Robinson:
And welcome to the Real Estate Rookie podcast. If this is your first time joining us, every week, twice a week we give you the inspiration, the motivation, the stories from real investors who are making a living doing the thing, just getting started. Maybe they’re pros, maybe they’re not, but either way, we’re giving you everything you need to start your journey as a real estate investor. So, Ashley, what do we got going on today? What’s new with you?

Ashley Kehr:
Well, I’m off the couch with my bum leg.

Tony Robinson:
I noticed that. I noticed that. This is an improvement.

Ashley Kehr:
I’m still not back in my closet. I still haven’t set up my whole studio back up just because I’ve been traveling all around and having pieces out of the couch and it’s all just shoved in the closet. And I didn’t think about it until right before recording, but I think for our recording next week, I’ll be back in my closet all set up.

Tony Robinson:
Yeah, you’ll get back to the closet. Well, what I’m loving is I love the gingerbread house that’s in the background right now. I don’t usually get this view when you’re in your closet. So I’m appreciate of that.

Ashley Kehr:
What’s actually funny is that there was two and I threw one out, and this was probably a week ago. I’m like, “These need to go.” I went and threw one out and then I got distracted and I never went back to grab the other.

Tony Robinson:
To throw away the other one? Wow. I hope one wasn’t one kid’s gingerbread house, now it’s like other kid’s-

Ashley Kehr:
Oh, it was. It was, yeah, and they’ve noticed. They noticed. And then I still forgot. Like, oh, we’ll go throw your out. Yeah, it did happen.

Tony Robinson:
So, that’s going to come up in therapy for that kid like 30 years from now. They’ll be like, “My mom threw away my gingerbread house, but she left my brother’s and I don’t understand why.”

Ashley Kehr:
Yeah, one of them got to, they actually made them at my mom’s house. So one of them was there by himself and made one and then the other two went a separate time and they had to share one and make it together.

Tony Robinson:
Perfect.

Ashley Kehr:
So it’s already a big deal-

Tony Robinson:
It’s already a thing.

Ashley Kehr:
… which involved the other two [crosstalk 00:02:44]. So, what’s new with you, Tony?

Tony Robinson:
No, we’re keeping busy, as usual. We just got another flip under contract and this one’s going to be a little bit different for us because we’re using a new crew. Our current crew, they’re kind of operating at their max capacity right now, so they told us that they could take the job if we really needed them to, but they would prefer if we passed it off to someone else.
So, I’m learning from my last experience. We did a rehab a couple months ago where we used a new guy and it was absolutely terrible. I recorded a video about it. So, if you guys want to check it out, just like on our Real Estate Robbins YouTube channel. I think title’s like a contractor almost ruined our rehab or something like that.
But I’m kind of taking the lessons that I learned from that rehab and trying to apply them to this new rehab with this new person. So, first is that I found that old contractor on Yelp. Actually, no. He was a recommendation from another real estate investor that I knew, but that investor had never actually used him before. So, he just kind of heard of him. He was like, “Hey, I’ve heard of this guy.” So no one could really vouch for his work.

Ashley Kehr:
Yeah, because no investors are giving out their contracts.

Tony Robinson:
Yeah, no one’s given out the contractors they’re using. [Crosstalk 00:03:55] Right. So he had never used him. So it was just like, “Hey, I’ve heard of this guy.” But the new crew that we’re using, he came as a recommendation from our countertop guy and we like our countertop guy. We used him multiple times on all of our flips so far and we think really highly of him. So, he’s like, “Hey, this is the other contractor that I work with a lot.” He spoke really high of him, so there’s already a really good relationship there.
And then the second thing that I’m doing very, very differently is making sure that there’s a very, very clear, clearly defined scope of work and that we both understand who’s responsible for buying which materials and how we’re going to get those materials delivered to the house. So actually the last thing I have to do is send him the scope of work. I need him to read it, agree to it, make sure we’re on the same page. And then we’ll kind of get started from there. So fingers crossed this guy works out well. Got a good vibe from him the jump, so hopefully his work is as good as he says it is.

Ashley Kehr:
And Sarah manages your projects now, correct?

Tony Robinson:
Yeah, she does like 99% of what we do, so-

Ashley Kehr:
I think we need to have her on a Rookie Reply and like go through.

Tony Robinson:
That would be so cool, how she’s doing it, right?

Ashley Kehr:
The process how she does that. Because handling contractors is a super, super hard job, and I feel like that’s where a lot of people get stuck at or don’t want to even deal with. So I think if she came on and kind of went through that process. Another Rookie Reply idea I was just thinking of, too, is going through a scope of work and doing a budget because I’m doing my split flip now as a joint venture with somebody, and I’m literally scribbling down as many notes as possible as I’m learning their process. So I think us to kind of showing everyone what we know, what we’re learning, what we have learned, and doing an episode on that, too.

Tony Robinson:
That would be so cool. You know what even might be cool is if your partner, James, if he and Sarah talk together, because Sarah and I, we’re really new at this and if we can kind of show him what we’re doing and he’s like, “That’s a terrible idea, that’s a terrible idea,” maybe we can have him just break everything down. So yeah, we’ve got to find a way to kind of get those onto a show, for sure.

Ashley Kehr:
He’s the type of person to, we’re talking about James Dainard at @jdainflips on Instagram, but he’s the type of person that just tells you how it is, too.

Tony Robinson:
Yeah, that’s what we need. We need someone just to just cut through the fat and give it to us straight.

Ashley Kehr:
He’s like, “I don’t have time to waste. Do this, do this, do this. Don’t do that. That’s a waste of time.”

Tony Robinson:
Right, yeah, but that’s we’re we’re at with the flip, so we’re hoping to get started this Monday. It’ll probably be another eightish weeks before the property’s all wrapped up and then we’ll get it listed after that. But the flips have been really fun for us to do so I’m excited to keep doing that in the new year.

Ashley Kehr:
Yeah, so you guys check out Tony’s Instagram to follow his flip @TonyJRobinson and also his wife, Sarah, @SarahRad on Instagram. And then you can see my joint venture agreement, my first flip at WealthFromRentals.
So Tony, we’ve got another question from your DMs today. Who slid into your DMs, Tony?

Tony Robinson:
So, the user handle, the Instagram handle is Swaterzzz. So, that’s S-W-A-T-E-R with three Z’s. And Swaterzzz asked, “How are you scaling your real estate portfolio so quickly? Specifically, how are you financing all of these purchases?” So, just really quick background. So, we scaled from zero to now 12 listings in about, around a year and a half, so about 18 months. So we got our first one in August of 2020. We’re actually 14 months, we’re at 12 units right now, which is admittedly kind of fast. But we’ve leveraged partnerships to really help explode our growth or kind of maintain that growth path that we’ve been on. We bought our first four short-term rentals on our own using all of our own capital, getting all the loans ourselves, and then from listings five through 12, we’ve got partners on all of those deals. And we structured our partnership in a way where the partners are typically carrying the mortgage because it’s a little bit more favorable if they can do it because they get access to better finance because it’s their first short-term rental.
And then there’s either some kind of splitting of the down payment or maybe we’re not bringing any of the capital, but we’re finding the deal, we’re managing it. So honestly for us, it’s been our own capital, our own bankroll at first, then bringing in partners to kind of help expedite the growth from there.

Ashley Kehr:
When I first started out, I took on a partner and it was all his cash and I was just the experience. Then I started to learn a little bit about how other people bought properties. I hadn’t found Bigger Pockets at that point, but I was like, “Hey, you have a lot of equity in your house. Let’s put a home equity loan on your house,” and so we did.

Tony Robinson:
I know I’ve never done this before, but if you wouldn’t mind risking your home for me to give this a shot, I’d appreciate it.

Ashley Kehr:
Yeah, that was how we paid for the first two properties and then started talking to banks and, like, “Well, you can go and put a loan on both of these properties, a portfolio loan, and pull your cash back out.” So we did that and then we bought our next property. So it was really having that partner that had cash, had access to cash, and then really going from there.
Then after that I took on another partner and we split the funds 50/50 for any money we had to put in. But even that way can kind of keep your hands tied as to growing and scaling, because that was still buying small multi-family at that point. But definitely having a partnership was really key to helping me scale and be open to taking on new partners. So I only had two partners for a very long time and now I have three partners and even four now doing a joint venture agreement with someone.
So, I think partnerships would be my number one way to help you scale, but also getting creative with your financing and not just leaning on that 20% down as to looking at different ways that you can find money per se as to a line of credit on your primary residence. Or, do you have another investment property you can refinance? Do you have money in the stock market? So, not a rich retirement account, but if you have a brokerage account that’s non-retirement, you could actually take a line of credit against that and that would be your collateral, and it’s a very low interest rate. And there’s rules, like you have to have at least $100,000 balance in there are something like that. But there’s so many different options, even borrowing against your 401k to find that little seed money to at least start. Then once you get the ball rolling, you can propel yourself by using partners and those other. And definitely seller financing is a huge, huge way to grow and scale, too.

Tony Robinson:
I’m glad you said that, Ash, because there are so many ways that you can fund a real estate transaction. I think for a lot of new investors, they’ve only been exposed to a 20% down, 25% down loan. It’s so funny because we interview so many different people on the show and we’ll ask them like, “Oh, well, why did you… ” For example, there’s couples who we’ve interviewed who, for their first deal on a single family residence, they went with a commercial five one arm. And when we asked, “Why did you do that,” they’re like, “That’s all I knew how to do.” Then there’s other people that do seller financing. We had Heather Blankenship and she seller financed a huge RV park. We were like, “Well, why did you do it that way?” She’s like, “That’s all I could do.” You only know what you’ve been exposed to.
So Swaterzzz, I’m not sure what you real name is, but if you want to get more exposure, things like this podcast, things like the OG Show that has almost 600 episodes, if you listen to enough of the stories of different investors, you’re going to see so many unique and creative ways that people are successfully funding and financing their deals, and there are so many that don’t require the traditional bank financing route.

Ashley Kehr:
There’s also the ways that real estate can help you build capital, too, such as wholesaling or flipping. So, if you’re just starting out, maybe start out in one of those ways that can actually help you build capital and then dump that capital into long-term rentals or short-term rentals, different things that you want to hold onto. But finding different ways to build capital or even working part-time as a property manager in the real estate industry to build that extra cash can definitely help, too.

Tony Robinson:
Yeah, we need to do an episode on real estate investing side hustles. There’s so many different ways to build the capital for your real estate adventures. If you follow Ryan Pineda on Instagram, he talks about how he was a couch flipper and that’s how he built up some capital when he was getting started in his career. I’ve talked to people. I met at one guy that had a trash hauling business as a side hustle and he was using that to fund his real estate purchases. So there’s so many different ways to fund the deal, to get the lending. I think you just have to have a wide enough exposure to different people and different experiences.

Ashley Kehr:
Yeah, and even just asking banks what they have to offer, too. We just interviewed someone last week, Grace. Her episode won’t air for probably a month and a half now, I think, but she had mentioned how she found this great deal and went to a small local bank and said, “Hey, this is a great deal. Can I put only 10% down instead of 20?” And they looked at the deal and they said, “Yeah, okay. We’ll do it.”

Tony Robinson:
That easy, right?

Ashley Kehr:
Yeah, that easy.

Tony Robinson:
That’s easy.

Ashley Kehr:
Even I had the one deal where I wasn’t even really looking for bank financing on the deal, because we were going to borrow from a private lender and I was there signing for a line of credit and telling the loan officer about it. And he’s like, “Well, I think I can beat their terms.” And so he offered us a 90 day loan, unsecured, no collateral, and enough cash to purchase this house. Then we immediately went and refinanced with the bank for a 20 year long-term fixed loan.
So, there’s so many different options, especially with those small local banks, you just have to go in and not even tell them what you want, but look for or tell them what you want to do and see what they had to offer, and there may be multiple options that can benefit you.

Tony Robinson:
Ashley, we’ve got to repeat what you just said, because that was a super profound statement. You said you should walk into a bank and tell them what you want to do and not necessarily what you want. Let me say that again so it sticks. You should walk into a bank and tell them what you want to do and not necessarily what you want.
So, the difference that if I walk into a bank and say, “I want a 20% down investor loan,” they’re going to say, “Okay, cool, here it is.” Or you could walk into a bank and say, “Hey, I found a property for $50,000. It needs another $30,000 to get fixed up, but it’s going to be worth almost $200,000 once it’s done. Do you have anything for that?” Now you’ve opened up their whole perspective on the different options that they have for that specific situation that you’re in, because what you want to do is buy this property, rehab it for the least amount of money out of pocket as possible. What you want or what you think you want is a 20% down investor only loan, but there might be other options and the only way that you can get to that point is if you share what it is that you want to do. So man, Ash, that was… I don’t know how long you’ve been holding onto that little phrase in your back pocket, but that was a good one.

Ashley Kehr:
I feel like I say it all the time, honestly, I feel like there’s maybe four or five things that I harp on, I preach on, and that’s one of them just because of that time I got the unsecured load from the bank because I didn’t even know that was something they could offer. But yeah, definitely, because you don’t know what options they have and I think just being open and honest, too, about what you want to actually do, too, with the property and what your current situation is. So, if you have bad credit, just tell them upfront because they’re going to find out anyways. And especially if you’re going the residential route. They will ask you for your mom’s bank statement. They go through so much information. They’re going to find out if you are trying to hide something. So, just say it upfront and maybe they will have something available to you that they can offer you.

Tony Robinson:
Cool. Well, I think we hit everything, yeah?

Ashley Kehr:
Yeah. I think so, too. Well, if you guys have more questions for us, you can send me a DM at wealthfromrentals or to Tony at TonyJRobinson on Instagram, or you can ask a message in the Real Estate Rookie Facebook group. How many members do we have in there, Tony? Over 40,000 now, correct? Yeah.

Tony Robinson:
Really, way over 40,000 people in that group, and not only are there a lot of people, but it’s a very active group. I say this all the time, but it’s I feel like I can’t even provide value in there because every time a question is asked, before I can get to it, there’s 10, 20, 30 answers on there. So it’s super active, super encouraging group there.

Ashley Kehr:
If you need motivation, go and read some of the success stories and the wins that people are having and you may find even a story that’s relatable to you and kind of give you that push to get over that analysis paralysis or take action on that first deal.
Well, thank you guys so much for listening. We’ll be back on Wednesday with a guest. My name is Ashley at WealthFromRentals and he’s Tony at TonyJRobinson on Instagram. Let’s find out what’s something that’s going on at biggerpockets.com.

 

TVO.org has obtained a draft of 58 much-anticipated, sorely needed suggestions from the newly formed Ontario Housing Affordability Task Force, aimed at increasing housing supply and improving affordability in the Ontario real estate market.

Slated for official release on Monday, January 31, the report is said to include some “radical” recommendations that would make it easier to build new homes in Ontario’s big cities.

Improving Ontario Real Estate Market Conditions

Among the recos rumoured to be coming from the Ontario Housing Affordability Task Force are:

• population of 100,000+, to permit any type of residential housing up to four storeys and four units on a single residential lot speeding up development approval processes
• calls for all municipalities—and building codes—to make it easier for property owners to add secondary suites, garden homes and laneway housesyincrease the height, size and density along main streets and transit corridors to allow for development of vertical housing
• waive development charges for infill projects
• allow vacant commercial property owners to convert their units for residential use

RE/MAX Canada Executives: Only solution is more housing supply

We’ll have to wait for Monday’s official report, but recommendations like these have been a long time coming, in the face of a mounting housing shortage and affordability crisis across the Ontario housing market and the broader Canadian real estate market.

“We have a critical housing supply issue that’s crept its way into almost every community across the country. It needs to be addressed, or it will continue to worsen,” says Christopher Alexander, President, RE/MAX Canada. “With the amount of developable land in Ontario dwindling, it’s high time the province explores options, such as increasing building height and density in certain neighbourhoods, making it easier for property owners to add secondary suites, converting vacant commercial units for residential use, and waiving infill development charges. We encourage collaboration across all levels of government, to put an end to the inventory shortage that is at the crux of our housing affordability crisis.”

Canadian real estate has been under tremendous pressure as a result of unprecedented levels of activity, record-high average home prices, and overwhelming demand, which is only expected to intensify as immigration ramps up and the population grows.

RE/MAX Canada Executives have been vocal about the need for a national housing strategy that engages all levels of government, as the only solution to the housing affordability crisis. Past recommendations include:

• Add more housing supply with a National Housing Strategy that is a coordinated effort across federal, provincial and municipal governments.
• Do away with band-aid “solutions” such as taxes and policies, like the home equity tax proposed in the Housing Wealth and Generational Inequity report by Generation Squeeze and backed by Canada Mortgage and Housing Corp. The focus instead should be on incentivizing more development of affordable, family-sized housing and allow for more detached housing beyond our existing urban borders.
• Reduce red tape and easing the application and approval process for new residential development.
• Make every home-purchase conditional on financing, reducing instances of buyer’s remorse and helping to ensure Canadians can afford what they are buying.
• Develop a federal industry “watchdog” to review transactions where homes are sold well over asking price to ensure fair listing prices, and prevent listings well below market value intended to incite bidding wars.

From an industry perspective, it appears that the Ontario Housing Affordability Task Force could be on the right track. Stay tuned for the official report on Monday!

Some money gurus would have you believe that extreme budgeting, which includes tactics like reducing your grocery bill or car payment, is the key to financial success. While these tactics can be useful for freeing up some extra cash when you need it, the experts are missing the mark when it comes to eliminating the four horsemen that are far more destructive to your wealth-building. 

Paying interest on certain debts is one of these four horsemen—but it’s important to recognize that not all interest is the same. 

The Dave Ramsey’s of the world want you to believe that paying off all interest rate debt—especially the highest-rate debt—is the best possible decision for your finances. However, interest on debts that you can outsource to someone else—such as with rental real estate—can arguably be a productive expense.

That said, other types of consumer debt, like credit card debt, which typically comes with high interest rates, isn’t quite the same. While passing along the interest costs on a rental property to a tenant can be productive, this other type of interest can’t easily be passed off to someone else to cover. As such, nearly all experts would agree that the interest you pay on consumer debt is generally destructive in nature. 

And if all debt and interest charges are not created equal, then you need a smart, math-based approach, like the Cash Flow Index, to help you make a decision on which debt—and interest—to eliminate first. Here’s what you should know about this approach.

The Cash Flow Index: A math-based approach to eliminate interest paid

The Cash Flow Index system, or CFI, which is outlined below, is a scoring system that lets you identify how efficient each of your loans is. This system prompts you to pay off the most inefficient loans first before prioritizing the repayment order for your remaining loans, thus maximizing your results.

This system has grown in popularity over the years due to the sheer practicality of tackling your payables from a cash flow perspective. It has also been touted by many anti-financial advisors, like Garret Gunderson and Chris Miles—and the concepts of this method are long-standing and proven.

Using the Cash Flow Index to tackle your debt in two simple steps

The good thing about the CFI is that you aren’t guessing which interest rate might be best to eliminate. It takes a more scientific approach—and yes, there will be math.

Here is your two-step action plan for eliminating debt using the CFI: 

Step 1: Calculate the Cash Flow Index for each debt you carry. 

This is where the rubber meets the road with the CFI. You’ll start by calculating the Cash Flow Index for each debt you carry. So, make a list of your debts, note what is currently owed on them, and include the minimum monthly payments required on each.

Once you have that information, you’ll calculate the CFI. To calculate the CFI, the loan balance is divided by the minimum monthly payments you’re required to make.

• Cashflow Index = Loan Balance / Minimum Monthly Payments

The resulting number is what indicates how effective that debt is at the given interest rate and term. A high number—anything over 100—indicates that the loan is efficient. A low number—anything under 50—means that the loan is inefficient.

Step 2: Create a plan of attack for your debt.

Look over each debt to determine what to categorize each of your debts as—and, in turn, how to prioritize them.

Start with the destructive debt.

Debts with CFI under 50 are destructive to your wealth, so it’s important to get rid of that debt as quickly as possible. In other words, you’ll want to prioritize it—and the high interest or fees it comes with.

Destructive debt typically includes subscriptions you aren’t using, purchases resulting from overspending, purchases related to abusive practices, like drugs, alcohol, or habitual shopping, and debt that is incurring fees.

Determine what debt you can restructure.

But what if the CFI on your debt is between 50-99? This type of debt is neither efficient nor inefficient, but it is a possible candidate to restructure—and possibly eliminate.

If we’re talking about consumer debt, you’ll want to think about eliminating it. You may have the option to consolidate this type of debt on a credit card that offers a 0% intro APR, or with a loan offering an intro rate of 0% for a certain time frame.

You also have the option to pay it off ASAP. And, if the debt produces good cash flow, you can also renegotiate the interest rate to get the best term possible. For example, you can do this on a real estate loan.

Decide how to handle your efficient debt.

If the CFI on your debt is 100 or higher, the debt is operating pretty efficiently. When it comes to the debt in the most effective tier, you may want to think about leaving it in place until your other debts are eliminated or restructured—especially if it produces good cash flow for you.

You may also choose to outsource some of your effective debt to produce more cash flow for your bottom line—and, in turn, supercharge your wealth. Ideas that I’ve had success with in the past include renting out all or part of a home on AirBNB or VRBO, renting a camper on Outdoorsy, and renting a car on Turo.

Final thoughts on using CFI to eliminate debt

When I started my financial independence journey years ago, I was confused about which debt to eliminate first. I was following the popular debt snowball approach, but I wasn’t making enough headway and was denied a loan—despite having a 680+ credit score.

After learning and implementing the principles above from my mentor, I eliminated all of my consumer debt, restructured my mid-tier debt to free up cash flow, boosted my savings and credit score significantly, and became more attractive to a lender in a matter of just four months. 

Paying interest on debt out of your own pocket is a heavy weight on your finances and can drag down your wealth-building potential—which could even keep you from securing your next property loan. What actions will you take to effectively reduce or eliminate this “horseman” from your portfolio?

The common forecast for 2022 is that the Canadian real estate market and the Ontario housing sector could experience somewhat of a cooling down phase. From homebuyer fatigue to rising interest rates, there are a few factors that some industry observers believe could result in either a slowdown in growth. Does the same prognostication apply to the Niagara housing market?

Like other places across the province and broader Canada, Niagara has been suffering from a shortage of residential properties available for sale. Moreover, when homes are listed for sale, it does not take long for them to be sold.

Looking forward, real estate activity in small towns could continue its upward trajectory and remain strong in 2022, with some regions potentially eclipsing major urban centres.

For now, let’s take a closer look at how the Niagara housing market performed last year.

A Look at the Niagara Housing Market

Despite a cold and snowy winter, the Niagara real estate market has been sizzling, buoyed by declining inventory levels and an environment of low interest rates. It has been a year that, according to the Niagara Association of REALTORS (NAR), exceeded almost all expectations.

NAR data show that residential sales tumbled 15.2 per cent year-over-year in December, totalling 473 units. Nearly every area of the Niagara housing market, from Fort Erie to St. Catharines, witnessed a decrease in home sales.

At the same time, price growth swelled to close out 2021, surging at an annualized rate of 34.5 per cent in December to $720,200.

Last year “not only met our expectations, it surpassed them with record after record along the way,” the association said in a news release. “The question then becomes; will the housing market in 2022 continue at the same pace, or is there a possibility of a cooling-off and a downturn?”

Supply is a factor that has been affecting almost every region in the Canadian housing market. Niagara was no different, although the number of new residential listings edged up 2.5 per cent year-over-year, totalling 403 units in December.

Meanwhile, new housing construction slowed in December year-over-year, with housing starts slumping 29.4 per cent to 163 units. On an annualized basis, however, housing starts rose 6.85 per cent to 2,635 units, according to the Canada Mortgage and Housing Corporation (CMHC).

 Niagara Housing Market Favours Sellers

So, with so much talk about a red-hot housing bubble on the cusp of popping amid rising interest rates and tightening mortgage standards, will Niagara suffer a downturn in 2022?

Not quite, says the Niagara housing association.

Despite the fact that the Bank of Canada (BoC) is anticipated to pull the trigger on a rate hike this year, borrowing costs are still historically low, meaning that cheap credit is likely to remain, giving homebuyers more purchasing power.

Local industry observers are suggesting that Niagara could “buck the trend” of a deceleration in national home sales.

“The pace of the market will be tempered by supply, higher prices, and higher interest rates nationally but because Niagara Region continues to be attractive to GTA centric buyers, there is reason to believe that Niagara may ‘buck the trend’ and that the number of sales will exceed 2021’s record-breaking pace,” the group noted.

Indeed, supply and demand will play an important role in Niagara real estate: low inventory is the norm, and strong buyer demand is ubiquitous.

Does this mean that 2022 could be a good year to sell a residential property? Market conditions in Niagara do favour sellers. Growth may not accelerate as it did in the first 18 months of the coronavirus pandemic, but higher prices and stubbornly low housing stocks are more than likely to remain, experts assert.

According to the RE/MAX 2022 Housing Market Outlook, smaller cities and towns are expected to attract homebuyers and sustain the broader boom. Overall, Niagara will likely continue to be a seller’s market, with average prices anticipated to advance 14 per cent to a little more than $786,000.

“Less dense cities and neighbourhoods offer buyers the prospect of greater affordability, along with livability factors such as more space,” said Christopher Alexander, president of RE/MAX Canada.

Indeed, Niagara offers so much more than just the iconic Falls; one only needs to look at the real estate figures emerging from this region to know that it remains a highly coveted destination to both visit and live.

Sources:

Mindy:
Hey there before we get to the show, I wanted to mention BiggerPockets is hiring a full-time supervising producer for our podcast network. This is a remote position and it’s a great opportunity if you have the right skillset. We’re looking for someone with at least a couple of years experience managing production teams and someone who will feel confident taking the lead when launching new podcast.
So would you or someone you know be a great fit? You can find the full job description at biggerpockets.com/jobs. That’s bigger pockets.com/jobs to apply for our open podcast, supervising producer job. Okay, now enjoy the show.
Welcome to the Bigger Pockets Money Podcast show number 270, Finance Friday edition, where we interview Kevin and talk about getting your spending under control.

Kevin:
Within the next year or so my credit cards going to be gone and then I’m going to have extra income to do something with, obviously a million things I could do with it. So I’m wondering what are the best ways to use that money once it becomes available to me so that I can find the most flexibility. And as Mindy said in the beginning, detach my time from my money more and more as time goes on.

Mindy:
Hello? Hello? Hello? My name is Mindy Jensen and with me as always is my chocolate chip cookie loving co-host Scott Trench.

Scott:
I’m trying to take a bite at a good response pun to this Mindy, but it’s not working.

Mindy:
Ugh, that was awful, they’re all awful, they’re terrible. 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 state, start your own business or just start building wealth and paying off some credit card debt. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I am so excited to bring today’s guest in today because he comes to us from our Facebook group, which you can join at facebook.com/groups/bpmoney if you’re not already a part of our fascinating conversations about all things, personal finance. It’s a lot of fun. We talk about money and people ask questions and you can learn a lot. I’ve learned a lot from our members and it is a safe place to go to ask those questions that you may have about your finances.
Anyway, Kevin posted about an experience he had about six months ago where he had gone out to dinner with his girlfriend and some friends to celebrate her birthday, swiped his card and it was declined. So I reached out to him after chatting with him on the group. I thought his story was really fun and I wanted to bring him on.

Scott:
Yeah, I think we had a great chat with him today and it’s really cool to hear a personal finance story from somebody who is getting started but has had an event transform their mindset with money, like getting a card declined or something like that. I think those are really powerful transformational moments that we go looking for. You probably have noticed when we interview people about their money stories on our Monday shows here on BiggerPockets Money.
And that event is a transformational pivot point where people’s behavior and mindset or attitude or the way that they handle or move or capital allocate their money, it changes from there. And it’s exciting to talk to somebody who’s recently had that event happen and is looking to accelerate and figure out how to improve and get their financials on the right track hopefully for life.

Mindy:
Yes, hopefully for life. Okay, Scott, let’s talk about our attorney. My attorney, our attorney makes me say the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott nor I, nor BiggerPockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate.
Kevin posted a story in our Facebook group about how he had gone out for a birthday dinner with his girlfriend and a few others about six months ago and when he tried to put the whole thing on his credit card it was declined, bomp, bomp, bomp. Everyone joked about it and somebody else put it on their card but it stung.
Kevin said, “There I was, 29 years old with a corporate job in marketing and communications, with a take-home pay almost double my fixed monthly expenses. Yet I had two maxed out credit cards, a student loan, a car loan and not even enough in savings to cover a single month expenses if I were to lose my job.”
Kevin has made huge strides in the last six months, paying off one card entirely, building up a one month emergency reserve and starting to play the balance transfer game to help pay down his next credit card. But he wanted to know what to do next.
So this episode is for those of you who are just getting started on your financial journey or for those of you with high school or young adult children who may need to hear it from someone other than their parents. So Kevin, welcome to the Bigger Pockets Money Podcast.

Kevin:
Hey, thank you both for having me, excited to be here.

Mindy:
I’m super excited to talk to you. First of all, we need to celebrate the fact that you did not just swipe your card, have a decline to be like, “Oh, I guess, my life is just the life of debt. I’ll go get another card and try to max that out.” You felt the sting and you’re like, “I don’t want to live like this, I want to change this.”
So you’ve made huge strides, you paid off a whole card. That’s something we should celebrate. Yay, we don’t do the debt free scream here. But woo-hoo, you’ve paid off a card. Scream, yay. I think that’s fantastic and I want to say congratulations on that.

Kevin:
Thank you very much. And it’s kind of funny like the… I think the reason everyone was so easily laughing about it was because of just that. Because everyone’s like, “Ah,” kind of like it’s normal to have credit card debt. Like, “Ha ha, you made a payment hasn’t gone through yet? No big deal.” And it was a big deal in my head. I was like, “Ah, I don’t want to be here.”

Mindy:
It is normal. It is no big deal for a vast majority of Americans. So I’m glad that you didn’t like that and I’m glad that you made these changes. And I’m glad you posted about it because I want to show people who are listening right now. Yes, it’s embarrassing when your card gets declined and yes, you can change that. That doesn’t have to define you forever and that doesn’t have to define your financial situation. You can make changes and it starts with being conscious of where your money is and where it’s going. So with that very obvious segue, Kevin what’s coming in and where does it go?

Kevin:
Sure. So coming in is about, I’d say 3,300 a month at best take-home. So I make about 65 a year and I put about 10% into a 401(k). 5% of that is matched by my employer so I put beyond the match.
And then 3,300 comes home after that and about 1900, if I’m looking over here it’s because I have notes. But it’s about like 1900 of it is the fixed stuff so about 11 or 1200 for utilities. 550 for the car transportation so I have a car loan, car insurance, 125 for gas. And then another 150 on personal stuff so some vitamins, I have a compost service and then Hulu Spotify and stuff like that. And a charity, I give like $30 a month to a charity. So that’s the fixed stuff.
And then the big variable kind of sometimes black box is food and going out. And I look back and I had like $250 last month in cash withdrawals and I’m like, “I know some of that was food, some of that was groceries. Some of that I could not tell you where it went.” It’s like $5, $10 a year that just adds up real quick so that’s where it’s going right now. And then whatever’s left has been going to the debt sometimes, some months more than others.

Scott:
How would you quantify your average on a monthly basis the amount of cash you have to go towards debt?

Kevin:
Typically, it’s probably about 500 extra.

Scott:
Okay. So we can plan on 6,000 bucks a year as a pretty reasonable starting point for now?

Kevin:
Yeah, I’d say so.

Scott:
Awesome. And where is your net worth going? What’s it look right now?

Kevin:
It’s mostly just in the 401(k). I have a small rollover IRA from a job I had a few years ago that was a 401(k). And then I have the current 401(k) and then a small savings account if you count that towards net worth. But yeah, that’s where it all, is just basically 401(k) and some cash.

Scott:
Okay, awesome. And then if any debts, what were the levels of debts that you have?

Kevin:
The debts are, let me look down here, so it’s 7,700 on a credit card. And then I have a car loan that’s 13 and a student loan that’s a little over 10. So all in all, it’s like 30, 31.

Scott:
Okay, great. Can you walk us through the interest rates on those debts?

Kevin:
The credit card right now is zero because I just opened a new account and did the balance transfer so that’s 0% for 15 months. That started last month so I have 14 months left on that, no interest. The car loans 4.9 and the student loan is 4.2.

Mindy:
Okay, I have a couple of questions before we move on. The student loan is that a private loan or is that a federal loan?

Kevin:
No, it’s federal so it’s paused right now.

Mindy:
So it’s paused?

Kevin:
Yeah.

Mindy:
Okay, we had an episode that came out on January 17th about student loans. So if you haven’t listened to that one, I would suggest going back and listening to that one with Robert Farrington from The College Investor. That is a really great episode about what you can be doing for when it becomes unpaused.
But also some advice on, maybe the pause will be extended. It was extended right between the time we recorded the show and the time that it was released. They extended the payments till what? May, May 1st?

Kevin:
Yeah.

Mindy:
So they may extend them again, which would be great for you. You could work on paying down some of this other debt. A note about that 0% interest rate credit card, the balance transfer game that I mentioned in the intro.
You can traditionally get or typically get a teaser rate when you open up a new credit card and you transfer a balance. Now I know that there was a charge to transfer the balance but the balance sits there at 0%. And it only sits there at 0% until the end of the teaser rate and then the rate skyrockets again. So I would suggest throwing every dime you can at that because what’s the interest rate on that when it does come back to full interest?

Kevin:
Yeah, the funny thing is, it is still going to be sky high but it’s slightly lower than the credit card I just transferred it from.

Mindy:
Which is a net win.

Kevin:
Yeah, I guess. But yeah, you’re right. I’m a 100% paying that down before the end of the promo period and the fee on it was three and a half percent for the transfer fee. And I did the math on that and it was like you eat that three and a half percent right up front and I’m still going to save probably $1,500 to maybe possibly a little more than that over the course of the year. I would otherwise take me to pay it off at the old interest rate. But when it kicks back in, it would be 25%, it’s big.

Mindy:
Ooh, I think that’s nudging into usury issues but that’s not me.

Scott:
What are your goals? What’s the best way we can help you today?

Kevin:
So my goals if I could sum it up in one word it’s flexibility, I guess. But it’s the way I’m thinking about it right now. So I’m 29 so I’ve been thrown it to a 401(k) but I’ve already missed that boat that everyone talks about of invest in your early 20s and let the compound interest do the work for you. And so I know I still have time there to do that.
But within the next year or so, my credit cards going to be gone and then I’m going to have extra income to do something with. And I’m wondering what… There are obviously a million things I could do with it. So I’m wondering what are the best ways to use that money once it becomes available to me so that I can find the most flexibility? And as Mindy said in the beginning detach my time from my money, more and more as time goes on.

Scott:
How much do you currently have in a emergency fund in cash?

Kevin:
It’s probably a little over a month’s worth of expenses. It might be two months if something happens and I really tighten things up, probably last me two months.

Scott:
One of the things I like to think about… I think that the goal you have of flexibility is actually an awesome goal and we should spend just 30 seconds acknowledging that, that is the goal with finances. I think that most people should have is building a more and more flexible position.
And something to note is that, I’m sure you’re aware of here, is most of your wealth is in the 401(k) there. And you have about a month of savings along with a lot of debt, that’s not a very flexible position.
But what can happen within a couple of years if you’re doing things the right way is you might buy a house and keep contributing to that 401(k), pay off the debts and you’re still no more flexible because you still have one or two months expenses saved up and you have a higher net worth but it’s not really translating to flexibility in your life. So I think it’s an artful goal to have that in the first place.
And then the concept that I would introduce you to is this concept of financial runway, which is the amount of time that you can survive without depending on your paycheck which right now is one month I think of time for you with that.
So I think the bad news is that… I think that building out financial runway or that months of reserve is not a good idea until you’ve paid off the bad debt. The bad debt being your credit card debt right now. Yes, thank you for the plug Mindy on that. I don’t know if you’ve read, Set for Life, which is my book on personal finance. But that’s a concept that I try to build throughout the book and there is this concept of building out financial runway.
What I would advise is crush through credit card debt because if you don’t pay that you’re going to assume a 24% interest rate in 15 months. And it’ll take you about 12 months at your current run rate, perhaps a little bit less if you find some creative ways. Get a raise, get a bonus or otherwise you’re able to cut out a little bit of spending there over the course of the next 12 months.
But after that, if you can build out one year of flexible net worth after tax brokerage dollars or a combination maybe of money in a savings account or in an after tax brokerage account in some form of investments, that’s going to give you that flexibility.
And what can happen from there is a large number of options begin to materialize. You don’t have to know which option you’re going to take at that point in time. But it could be that you decide to house hack at that point in time using your year of savings or six months to a year of savings or your runway.
It could be that you decide to take a sales job or something with a commission opportunity that can increase your income. It could be that you decide to just keep doing what you’re doing, buy rental property or begin just plowing that into some other form. Or just begin piling money bit by bit into your retirement accounts or after tax brokerage accounts.
But either way that optionality, I think will give you a lot of good choices that you don’t have to know exactly what you’re going to do with right now. But you can just know that they will materialize with you.
And that at 29, early 30s, you’re saying you missed the boat. You’re right in the prime of being able to take a large number of shots in your life around starting a business, making a large investment, changing a career or whatever it is that you want to do.

Kevin:
Yeah, that makes a lot of sense because that was sort of what I started thinking. Where I’m like, I don’t want to find myself in a couple of years when I can finally afford a down payment on a house to then be just be sitting in a house and be like, “Yeah, I have a house but now I’m house poor and I still don’t have the flexibility that I would want.”
And so this is the first time I’m now starting to think through like, okay, I can see the end of the line with this debt and I can see me having more income, freed up to do things with. And now I’m trying to think through what all of those options are and what the path could be like I said to just separate the time from the money and make more flexibility.

Scott:
Yeah, you mentioned the concept of fixed expenses as well. So first of all, I love that. If you were to just go in a year from now, pay off the debt and then buy a house, you assume a mortgage payment. I think you said you were paying about a 1,000 bucks in rent right now.

Kevin:
Yeah.

Scott:
Your mortgage payments is 1500 bucks. You’re essentially at no better of a position from a life flexibility standpoint even though you now have a house from that. So again, that’s why I think the goal of flexibility is such a powerful one with that. The best way to flexibility is paying off that debt, not assuming any more high fixed expenses. And understanding that over a moving period like over five years… Let’s start with this, how much is left in your car loan?

Kevin:
A dollar amount? It’s 13.5.

Scott:
And how many years is left on that?

Kevin:
Oh, four.

Scott:
Four. Okay, great. So over the next four or five years, you could conceivably get to a position where you’ve paid off your credit card debt. You’ve bought a house hack so your monthly rent is down from a 1,000 to $400 or maybe zero depending on how good of a deal or how advantageous a thing you can find there. Your car loan is paid off and now over the course of those four years, you’ve slowly increased from that $500 a month in savings to a 1,000 to 1500 as each of these has fallen off.
And it’s not an overnight process and it won’t be, there’s not a quick path to getting to a million dollars right now. But that snowball will pick up bit by bit and will increase that monthly amount of savings, which will increase the amount of runway. As long as those goal posts don’t move, then that flexibility will continue to accrue to you in the form of these different types of investments.
And those options, like it’s impossible to say which path you should take when for an investing perspective right now. But those options will begin to appear I think as that progress is made. Go ahead, Mindy.

Mindy:
I have a lot of comments. First, I think that at your current level of spending your biggest focus should be on tracking your spend and seeing where you can cut. I heard you say that you have a compost service and I don’t know if you live near somebody else who also has this compost service. I don’t know what this is money wise but if that’s something that you can cut out… Yes, composting is great. Can you dig a whole in the backyard and compost it that way? Or can you connect with a neighbor who has a half filled compost bin and then you split the cost?

Scott:
I can’t resist, that smells like a good opportunity, Mindy.

Mindy:
Oh God, I quit.

Scott:
You good.

Mindy:
It stinks, my compost bin is gross. Anyway, I also heard you say, cash withdrawals. You use a lot of credit cards and credit cards are this double edged sword. On the one hand, it’s super convenient to just swipe and it’s also really convenient to track when you have everything on a card. But you have cards, you have debt so the cash withdrawals are a lot harder to track. Have you heard of Qube? Q-U-B-E.

Kevin:
No, I haven’t.

Mindy:
It is a digital cash envelope system and it’s… I’m going to mangle this description. But it’s an app that’s tied to a debit card and you have to be conscious of where your money’s going by saying, “I’m going to put $500 in my grocery envelope, my digital envelope.” And then when you’re at the grocery store say, “Okay, take the grocery budget and charge it on this card,” and then your debit card works. So it’s still the trackable spending but it’s not credit card spending because it’s coming out of a debit card. Does that make sense?

Kevin:
It makes sense. But does that mean it like locks your debit card until you give it permission to spend the money? Is that how it works?

Mindy:
Yes, that’s exactly. That’s a great way to say it. Yes, your debit card has $0 on it until you, on your app, say, “I want to use this bucket to pay for this charge.” And if you have $500 in your grocery bill that you’ve earned in your grocery bucket. But you’re trying to charge $600 it won’t let it go through even if you have more money in your bank account because it’s coming out of your different buckets or envelopes. So it’s a great way to have the convenience and trackability of the credit card without adding more credit card spending. So something to look into, we call this a research opportunity, Q-U-B-E. I really like this app and I believe it’s free for you to use.

Kevin:
Okay-

Mindy:
So check into that, I really like this app.

Kevin:
That’s funny because the reason… Like I didn’t always have cash withdrawals but I started doing that for the sole purpose of trying to stop using my credit card. And then that’s what ended up happening is I just have this cash in my pocket. I’d walk around with and say, “All right, here’s my money for the week or here for my money for the month or whatever.” And then it would fritter away on 5, 10, 20 getting things here or there but also groceries. And then you try to look back on it and it’s just this black box you can’t track. So that makes a lot of sense.

Mindy:
Yeah, cash is really hard.

Scott:
Yeah, I think Mindy is right to point these out, this area of… We talk about spending, the two card tips are fixed and variable. So I was just talking about some of the fixed ones but maybe the house hack or the car loan, those could cut out hundreds or a $1,000 a month from your fixed overhead over time. Those will take you a few years to fully implement all of those. But those decisions have a huge impact on your long term savings rate and are automatic. They just put all that money back in.
The other part is the immediately actionable stuff. And that’s the part where it just comes down to day-to-day management and budgeting with that and whatever tips or tactics work for you.
So in addition to Mindy’s great suggestions one thing that I do is, I just have a little habit tracker. I’m a nerd and do these little daily goals almost every single day and I have a little weekly journal with my habits. And one of them is just personal finance 101 and I’ve settled on a number of things budget or whatever.
But when I write down personal finance 101, “Did I do at least one minute or two minutes of personal finance 101 today? Did I just check my Mint app? Did I categorize the few expenses I’ve done in the last couple of days?”
And if I do that, even if I missed a day or two, I’m really coming back to it just every few days. And I’m like, “Ugh, today was supposed to be pudding for breakfast and they canceled on me, very professionally, a week ahead. And I forgot to remove the calendar appointment so I bought myself breakfast alone sadly.”

Mindy:
Scott, you’re fired.

Scott:
That’s going to show up on my personal finance 101 tomorrow when I go and categorize all my expenses. And so that little stuff just helps me eliminate more and more those types of expenses.

Mindy:
I think it’s really helpful to note that Scott and I are supposedly these experts and we mess up our money all the time. So this isn’t just you Kevin, it’s not like we are perfect and you’re making the mistakes. So we’re like, “Hmm, Kevin, why can’t you be like us?”
I am starting to track my spending publicly. If anybody wants to follow on, biggerpockets.com/mindy’sbudget and you can watch me. Right now, I’m doing great. Haven’t gone overboard in any expense yet but we are recording this on January 4th. So, so far my $4,000 monthly budget, I have already spent $1,700. I’m almost halfway.
And of course, that’s my mortgage has already hit because on the 1st it hits at property taxes and homeowners insurance, but there’s also groceries. I really struggle at my groceries. And I see you at 850 as a single person, and I’m not here to make you feel bad, but I put 650 as my family of four budget. And I guess, I haven’t tracked my spending in a year, I don’t have a clue what I’m spending on groceries. But is 850 really what you need?
I also see vitamins and supplements that you’re taking and I’m not a doctor, I’m not an expert. Do you really need those? Are they super expensive? Is there a way to cut the cost of… Is there a mail order option that makes it less expensive? And that again is another research opportunity for you.
But when you have 850 as food, how much of that is groceries that you’re cooking at home and how much of that is restaurants, bars, and beer? I’ve got a very separate category for beer and I really enjoy beer. I live in a city that has something 13 microbreweries. I spend a lot of money on beer but that’s also a really easy category to cut out.
So my categories are… Some of them are specific and some of them aren’t and I purposely separated out parties at my house because I have a pool in my backyard. I have people over, we do a lot of hamburgers on the grill. I just got a pizza oven for Christmas. We’re going to do a lot of pizza outside this year but it’s also something that’s really easy to cut if my expenses start going crazy.
So I think looking at your breakdown, I would go super specific. You don’t have to do different grocery stores if you shop at Safeway and Kroger, that can be all lumped into one. But if you go to the grocery store and a restaurant, how frequently are you going to the restaurants? I would separate those out and see if there’s a clear easy way to cut that isn’t to change your life.
Because when you go bare bones like you could really get your expenses way down if you cut out absolutely every fun thing in your life. And then your life would suck and you would hate it and you would stop. So where can you make small changes that won’t be noticeable in your life?
But every $30 you cut out is 30 more dollars you can throw at your credit card bill and cut it out sooner. And 30 more dollars that you can then throw at your car and cut that out sooner and it starts to snowball.
And I don’t know if you like this but I start seeing, “Ooh, I wonder how little I can spend this month when I’m tracking my spending?” Scott called himself a nerd, I’m a nerd too. You’re surrounded, sorry.
But it starts to be a game, “How little can I spend this month? Oh, it’s the 27th of the month. Can I go for the rest of the month without spending any money? Well, the car’s on E and I have to go to work tomorrow so no I can’t. But I can find something in the cabinet so I don’t have to go to the grocery store and buy more food.” If you can turn it into a game it’s a little more fun.

Scott:
When Mindy says fun, I’m not going to say use the word fun to describe this. If you’re like me, this is not going to be a fun activity for you. I think the way I approach it is, let’s just think rationally, and practically and calculatedly about the math behind our financial position with this.
There are four levers spend less, earn more create or invest. And right now the lever that is most controllable for you is spend less. That’d be the case for probably one, two, maybe three years before other before that flexibility kicks in and the investing or creating or earning more categories really open up in a really meaningful way perhaps via… They may be open to you currently but they may be much more open to you as your financial position becomes more flexible and you build out that financial runway. So the deal is right now, you’re giving a lot of power to your boss right now in your life because you don’t have that financial flexibility. And the way to buy that back…
The spending component of your finances is a very powerful lever to the concept of flexibility because the less you spend, the more you accumulate and the less runway you need in order to sustain your future spending. So if you can cut your spending from three grand a month to 2000 a month, you’re saving an extra 1,000 bucks. And instead of needing six grand for three months of ex…
I’m sorry, if you spend three grand, you need $9,000 in the bank to give you three months of flexibility versus $6,000 that will give you three times, $2,000 in monthly spending, I’m butchering that. That’s a really powerful concept.
And then you have to understand this is not a permanent state of affairs but it is a grind for a period of time to keep those expenses as low as possible while you build up flexibility, perhaps passive income, more scalable streams of income, alternative sources of those types of things. And then it can begin picking back up on the other side of that over the duration of a lifetime. And it’s that period of I think self-sacrifice that puts you in the position to build that flexibility and then ride it from there on.
So my spending is not as controlled as Mindy’s and I have some work to do before I would post it publicly on this. But it’s not the lever that matters right now in my personal financial position.
But when I was starting out from scratch and starting to build up my position, I was around that 2000, $2,500 a month in spending over that period of time while I was building up that flexibility on a $50,000 a year income. Because that was the biggest lever for a period of 4, 5, 6 years before it began to transition into managing my assets and expanding my career here at BiggerPockets with that.
So that’s one way to think about it is, whether it’s fun or not, it’s mathematically where the time should be spent and it’s work that goes into, I think… It’s just as much work in building an investment portfolio or trying to scale your income is really knocking down these expenses, planning out your meals, getting in control of those big categories and funneling every dollar to where you want it to go.

Mindy:
So I have a thought. So you’re a marketing communications person and I don’t know if you know this. But there’s this thing called the internet and there’s a lot of things going on, on the internet where people need marketing and communications.
I would first look at your employment documentation to make sure you don’t have any sort of non-compete or you can’t do any work for anybody else while you’re there. But if you can, start your own marketing and communications company now. Because if it completely fails, what have you lost? Nothing but $8 on a website name. And if you paid more than that, you paid too much.
But it can be a really easy way, like it’s not easy for me but I’m not in marketing communication, so that’s okay. But there’s all sorts of things that you can do for clients that are automated or easy or low time out of your day or even big upfront time and then it continues on. But having your own business and starting your own business while you have a source of income so you can try things and if they fail, that’s okay.
I think now it is a great time to start in the marketing, especially now because everybody’s budget is just opened up again. In December, it’s really difficult to get a dollar from anybody but in January, woo-hoo, they’re spending money everywhere.
So start out there. What is your area of expertise? What is your industry of expertise? What is your genre and go from there? What can you provide people and how can you do it in such a way that they send you a lot of money every month?

Kevin:
Yeah, that all makes a lot of sense. And I think I’m a little bit more in the Scott camp here where it’s not super fun for me to be just tracking all this stuff. But I think the thing that’s really changed has been like I’ve just… I guess part of what I’ve said earlier about my goal for flexibility it’s also the goal to not have to think about money all that much if I don’t have to.
And the mindset shift that’s just happening for me very recently is I need to think about it a lot more right now so that later on I don’t have to think about it as much. And the fact that I haven’t been thinking about it that much all these years has actually been driving me further and further into a position where now I need to think about it way more than I want to.

Scott:
Yeah, Mr. Money Moustache has a really good framework for thinking about money in one of his blog posts. And that’s a great blog for you to check out if you haven’t already, that extreme mentality. I would say he’s fairly extreme, I think most people would agree with me, on the savings front. But that really was a big motivator for me, was his blog and kind of embracing a lot of the concepts that he talked about. And that might be a good entry point for you to just start perusing a couple of random articles.
And there’s one of those he talks about, a healthy relationship with money may ultimately look like your relationship with tap water. And I’ve used this before on the podcast. But roll with me for one second here.
Tap water, you turn on the faucet, you take what you need, you use it, you shower, whatever and then you turn it off. You don’t waste it. You have complete control over where it’s all going but you don’t really think about it on a day-to-day basis. It’s not just something that’s there. That’s the ultimate goal, I think in finance with that.
But right now, what your story is telling us is that money is leaking through all these different holes or has been for a while in your ship and you need to plug all of those before you can really begin to turbocharge the income creation.
And you’re well on your way, you’ve clearly done most of the work. You just have a little bit more left to clean up particularly around the day-to-day side of money management. And yeah, it doesn’t have to be all consuming but it should be every single day or close to it that you’re tracking and managing those expenses. Go ahead, Mindy.

Mindy:
I have one more thing that may be a bit controversial so I’m going to post this in the Facebook group and I’m really going to do it, JT. I’m not going to just say I’m going to do it and then I’m actually going to put a calendar notification. My friend JT listens, he’s like, “You always say you’re going to do it and then you forget.” Well, yeah, I do.
So you have a $30 charitable giving line item in your current budget but you also have $7,000 in debt at what will be 24% interest rate. So at what point do you stop your charitable giving to focus on paying down your debt? And $30 is not just going to magically wipe out your credit card debt, and it’s not going to wipe out your student loan and that is a nominal fee. But if it was a $1,000 that would be a really easy place to tell you to maybe pull back a little bit. So I’m going to ask people in the Facebook group, where do you start and stop giving? And this is charitable giving, this isn’t like a tithe to a church, is that correct?

Kevin:
No, no, it’s not. It’s just a monthly donation to a group that I like the work they do.

Mindy:
Yeah, and like at 30 bucks… I just use the term $30. “Oh, every $30 is more $30, you can throw down your credit card.” But this is doing good work so where is the balance? But is that the only charitable giving you’re doing? Could you use that money to pay down your debt and then just throw a big bunch of money back at them now that you’re not making your $250 minimum credit card payment? I’m not encouraging not being charitable but also you have to look out for yourself. I’m just tripping all over this, Scott help me, you know what I’m trying to say.

Kevin:
I think what I’m hearing is you’re trying to tell me to look everywhere. Look everywhere where all of your money’s going and look every single thing and where could you cut something and where do you not want to cut things? And my immediate reaction to that is like, yeah, if it was a bigger number, I would look at it harder. But I know there are other places I can cut a lot more and cutting that first would make me feel a little weird inside.

Mindy:
Yeah, well, exactly.

Scott:
I’ll tell you another place to look. So I’ll see Mindy’s controversy and up her razor with this, go to the 401(k), take the match on that. But why are you investing in the 401(k) when you have credit card debt that’s going to be incurring a 24% interest rate with that?

Mindy:
I didn’t want to say that.

Scott:
And personally, I didn’t and probably if I were in your shoes, if the money’s going to hit my bank account, I’m going to waste it, put it in the 401(k), for sure. That’s a tax advantage place to do it. But if you’re going to intentionally manage every dollar flowing through your position and direct it towards the goal of flexibility, the 401(k) is not going to provide that.
So I didn’t and if I was to do it again, wouldn’t contribute to the 401(k) in the pursuit of building up that first year of financial runway. Because for me, I would intend to use that runway to jumpstart that next phase of my career, buy a house hack or do something else that’s going to have a way bigger impact on my flexibility early in life than the 401(k). Your thoughts on that?

Kevin:
I thought about that, I’ve been thinking about that too. I’m contributing twice what my employer matches right now. And that was some of the feedback I heard from some of the people in the Facebook group too there.
Why don’t you take that other 5% and put it in a Roth IRA? And then you might be able to use that down the line as part of a down payment. And I don’t know exactly how that would work or if that even makes sense or if I could just keep it as cash.
If the house Act is going to happen in the next say five years, does it even make sense to put it through into an index fund through a Roth IRA? Or just to keep it as cash if I’m going to take it back out that soon? That’s a weeds question but it’s another thing I’ve thought about?

Scott:
I just wouldn’t be maxing out a Roth IRA when you have credit card debt so it’s all about arbitraging. So there’s some way to mathematically compute this that I can’t do in my head here. But you’ve 15 months and then the credit card rate is going to go to 24%. So you’re at 0% for now but you have to play either a timing game to do that and you’re going to take market risk.
So if you max out your Roth IRA and put $6,500 in there instead of paying off the credit card debt. You might, if things go really nicely, be able to pay off the credit card debt before that hits and have a year in the market. Big whoop, you’re going to get 10% on that Roth IRA return this year and have that sitting in there. I think it may be a game worth playing.
But to me it seems like a much simpler and clearer order of operations is, no, no. Cut all spending that I can, that’s reasonable, divert every dollar to where I want it to go. Doesn’t mean don’t have any fun. You clearly have enough savings to have the fun you want to have with this. But make sure I’ve got control of every dollar that’s going out.
I’m diverting all of my cash. I’m taking my employer match because that’s a 100% return, that’s going to dwarf your 24% interest rate on the credit card debt. But then after that, everything’s going toward the credit card rate debt then I’m building out my financial runway to the point that I’m comfortable with. And then I’m using that to go and pursue some sort of opportunity.
That’s going to have a really powerful impact on your situation if you think you’re actually going to use that flexibility to some sort of financial advantage like a house hack or changing careers or starting some sort of side hustle that requires capital or making another large investment. If you don’t think you’re going to use the financial runway, then start maxing out the Roth IRA or the 401(k) instead of building out the flexibility.

Kevin:
Yeah, I guess, my question was so even if I didn’t touch my 401(k) contribution right now, right now at the rate I’m paying credit card debt down, it will be gone well before this promo period is over. So if I was to then take that additional 5% that I’m putting in a 401(k) and stop doing that, should that just be stacking in a savings account for that runway you’re talking about? Is that like…

Scott:
I think it’s whatever flexibility means to you. So that’s the big question like where should I store my runway? So a lot of people put that in like, “Okay, I want a savings account that gives me flexibility.” Some people are like, “I’ll put it in an after tax brokerage account because I can spend that whenever I feel like it.” And some people put it in money… It can be a Spectrum, it’s whatever you’re comfortable with.
When I was getting started, I put it all into an index fund in my after tax brokerage account. I’m not sure that was a good idea but that worked out in 2013 for me at that point in time. And I really wanted to get started in investing and I was like, “Okay, I’ll just build double the amount of flexibility that I need in that brokerage account over time.” And that’s flexibility to me and then I pull out some of that to buy my first house act.
I learned later I could have used money in a Roth IRA that I had contributed and pulled out, I think up to $10,000 to be the down payment. So that’s a good option but it adds some complexity into the situation and there’s less uses of… I think it would be harder to pull that out to start a business from scratch, for example or at least the gains would be harder to pull out to start the business.
So there’s differences in what you think flexibility means. The obvious answer is a savings account but then you better take some advantage of it if you’re going to build that much of a runway in a savings account. And use that flexibility to your advantage because you’re just going to be destroying purchasing power to inflation if you leave it there too long.

Kevin:
Well, that makes sense too because about that piece you just said that I pulled out I wasn’t thinking through was the amount you can take out of a Roth or something like a down payment on a house is only the contributions. It’s not the gains that you might see in the next five years.

Scott:
Well, you can actually pull out $10,000 I think of the gains to be used as part of your house down payment. So you can pull out the contributions anytime but the gains, there’s a set of exceptions up to certain limits that you can use them for. So it’s reasonably flexible but it’s not quite as flexible as other.

Kevin:
Just like a brokerage account, yeah, yeah.

Scott:
Yeah. But yeah, I think that’s the way. So let’s pull out the next. So you’re saying, should I stop contributing the 401(k)? The question is should I stop contributing to the 401(k) and the Roth and pay off the credit card debt?
Well, if you think you’re going to pay off the credit card debt really fast, it doesn’t really matter. Let’s say you pay it down by the end of this year, then you can divert everything back to the 401(k) and still max it out next year, or to the Roth, and still max out as much as you can next year with that.
But I think that a simple, all out step by step approach might make a lot of sense rather than kind of piecemealing it here if the goal is flexibility over the next 12 to 24 months.

Kevin:
Yeah, I think that’s what I’m trying to think through. It makes a lot of sense. So I’m trying to think I could do all of these things at the same time or if I do them one at a time, what is the all order in which I do them? And that’s helpful.

Scott:
Yeah, to me that order screams, “Credit card, financial runway, then maxing out probably with Roth rather than the 401(k) in your situation.”

Mindy:
And then the 401(k).

Scott:
Yeah, but here’s the thing like there’s just no… At your income and your savings rate, you’re not going to be able to get through that whole list inside of the next year or two.

Mindy:
But that can be a goal.

Scott:
Yeah.

Mindy:
Also he’s going to start, Kevin’s really awesome, marketingandcommunicationscompany.com and then become a trillionaire.

Kevin:
Is that domain taken yet?

Mindy:
I don’t know. I didn’t look it up but probably not.

Scott:
Better take it before it’s there’s.

Mindy:
Yeah, so if you need Kevin and his really awesome marketing and communications company, just go to that .com. Okay, so I’m going to invite you to listen to episode 75 with Justin from the Saving Sherpa in regards to cutting your food budget because Justin is a master at cutting your food budget. What does he spend? A $1.50 a month on his grocery, Scott. It’s something really ridiculous and still doable because he shops the sales. God it’s been almost 200 episodes.

Scott:
I think he spends more than a $1.50.

Mindy:
It’s probably more than a $1.50 but it’s not much. It’s like 35 or $50 a month or something. And of course he’s not eating filet mignon every night. He’s not eating steak and he doesn’t have a lot of meals with meat in them. But when there is meat on sale, he will buy it in bulk and put it in the freezer so that he can have meals with meat down the road.
But he grew up without a lot of money and his mother would play a game with him. “What’s the lowest price you can find at the grocery store? What’s the cheapest meal we can make?” So they ate a lot of creative meals but beans go a really long way as a source of protein. And if you can cut the meat out of a meal once or twice a week, that is a huge gain in your grocery budget. I would look at what is your groceries? What kind of groceries are you buying and how are you shopping?
Oh, in episode three with, what was her name? Erin Chase from $5 Dinners. She has a plan where you can make dinners for $5. And Scott, she was… I’m sorry, I’m remembering this show and this is right when we first started. And she’s talking about shopping the sales and Scott’s like, “I’m going to change my whole way of grocery shopping.”

Kevin:
Yeah, that’s insane to me like $5 dinners is one thing. But yeah, I’ve listened to the show for a while and I’ve heard some of these episodes of families of five feeding themselves on $400 a month. And I’m like, “How the hell do you do that?”

Mindy:
Yeah, it can be really, really tough. I don’t know how is able to do that.

Scott:
I bet it helps because sometimes if you live far away in a pretty rural or remote area, you’ve got to buy in bulk and plan it all out for the month or whatever. So I bet that also helps and may skew some of that. Because like Mindy, I think does a pretty good job, is that 650? And I’m probably at 650 or 700 at groceries for the two, me and my wife. So I’m not so great at this one, I probably need to go back and listen to that episode.

Kevin:
And it makes sense though, because the house I live in now, I just moved into a few months ago and before that I was living in the city in Boston. And just by moving like 20 minutes out into the suburbs where now the closest things to me are grocery stores instead of the million takeout joints that aren’t around on my block in Boston, I immediately started spending less. I was spending even more before, I still have a ton of room to cut.
But I knew that was going to happen too like just the act of moving out here. Where now it’s like the two or three closest food places are grocery stores and not the 12 takeout joints I pass on my way home from work. Immediately made it easier but that was a passive thing. And now I’m at the phase of like, now it’s time to get into the active phase basically.

Mindy:
My 650 I need to qualify that with again, we’re recording this on January 4th, so far I’m doing great but it’s only four days in. My 650 is a guess. I really hope to come in under a 1,000. I mean, it’d be really nice to come under 650 but I really think I’m going to blow that out of the water and need to really figure out how to fix my grocery budget. But also Scott said the P word, plan. When you go to the grocery store, do you have a list or do you just grab of what looks nice?

Kevin:
Oh, I have a list but I also grab a few things that look nice sometimes.

Mindy:
Ooh, so here’s an idea, spend money to save money. Have you tried the grocery shopping apps where they shop for you? Because if you give them a list of things, they only give you that stuff. They don’t think, “Oh, maybe you would like these bananas, and this milkshake and these grill bars that I thought looked good.” They only give you what’s on that stuff or a reasonable substitute. So that could be something interesting to try when you’re trying to cut your budget. “Oh, I need 17 things,” only buy 17 things. And if you can’t maybe have somebody else do it for you so that you don’t buy other things. Also don’t go to the grocery store hungry.

Kevin:
Yeah, that also is a mistake.

Scott:
One of my things is I… Well, and by the way my wife will make fun of you because I don’t really go to the grocery store quite as much anymore. So thank you Virginia, for a lot of… But when I was doing this like I would just make the same thing every week and I learned from Erin Chase that it’s a mistake because if you’re a more masterful cook, then I was with three or four recipes that I could make. She can say, “Okay, I’m going to actually modify my whole plan on the fly based on what is on sale and I can see that through the apps or whatever that the stores have and all that kind of stuff.” So that’s probably another tip that is better than I ever did but that might be helpful.

Kevin:
Yeah, I make a lot of the same things despite whether it’s on sale or not.

Scott:
Yeah, so she knows-

Mindy:
Aw, I see a way to cut. But yeah, having a plan and you don’t have to have a whole actual like I stick to this plan specifically. But if you have a week’s worth of groceries or a week’s worth of meals planned out and you say to yourself, “Oh, I thought I had chicken breast and I don’t. But I do have pork chops and that was what I was supposed to make tomorrow.” You don’t have to go and buy that stuff because you know in advance, “Oh, I’ve already got this for the next meal.” So then you can go get chicken later.
Because when you go to the grocery store like you just said, I also did the same thing. You go with the list but you come home with extras. All the things that you’re saying you do, I do too. I’m just sitting here like, “Oh, this is what you should do.” Is that what I do?

Scott:
Well, but again it comes down to, it’s all about the lever in your financial position. And this is the one that is immediately actionable to you in the next couple of months that will save you several $100 with this. Is it going to get you to a million dollars in net worth? No, way. But it will get you to start, begin building you the flexibility. And then you need to leverage that flexibility within the next two years to make a big investment and/or start a business or take an income opportunity or whatever. And the power of this activity right now is, is in accelerating the time when those opportunities are going to be more accessible to you.

Kevin:
Yeah, like I said, I think all this stuff makes sense. All this stuff conceptually makes a whole lot of sense. I think this whole thing is coming down to mindset for me and it’s coming down to this the way that I think about money. It’s always looked like something that was in the way or that was a burden or that was something I didn’t want to think about.
And now I’m seeing it as an opportunity and that’s helping make it easier to make these decisions and help it easier for me to get excited about making these kinds of plans. Because I see that it’s an opportunity and it’s not just like something that I have to do and that money is in the way and I’m like, “Ugh, I don’t want to do this or that.” I’m like, “No, if I do this or that, I get to do this because then I’ll get to do X, Y, and Z down the line.” And that mindset shift has been a game changer for me.

Scott:
Yeah, it’s power over your life and every aspect of it with that, that will accrue over time with that. So this process that we talked about, I think this should be a Q1 goal for you. “I’m going to master this and knock this out so that in Q2, maybe my strategy fundamentally doesn’t change with where the dollars go. But I’ve got such a lock on my spending that I feel like, you know what? Maybe there’s more I can do but it’s really just not a lever anymore. I’m not going to go after 30 bucks in my giving budget at this point with that, I’m good there. Now it’s about income generation or my investment approach that I’m working towards. How I read a bunch of books to become a master of real estate investing or this other thing.”
But just knock this one out as a lever, get control over it so that it’s not so that it’s not a variable in your equation. You can focus on the more fun ones of earning more or investing which I sense that you want to get to.

Kevin:
Oh yeah, I definitely want to get there and that’s why I’m here talking to you all right now. I feel like I can finally see beyond the phase that I’m in right now and I’m starting to think about what the next thing is. And getting a lock on the spending now would just basically, part of that’s going to free up my time and I’m like, “All right…” Just my time and every day of what I might spend doing like hobbies and things.
Now that I’m excited about this and what I can do next. I’m like, “What do I want to learn about next that’s going to be one of those options I can then actually take when I have the money to invest in it?” Whether it’s real estate or whatever it is. That one I’m definitely thinking a lot about is like, how to do I spend that?
I think it was a recent episode I was listening to you both where you say, “Are you willing to spend 500 hours learning about something to really get good at it?” And I was like, “Wow.” I could probably spend 500 hours in the next year or in the next year while I’m paying down this debt so that when it’s gone, I’ve learned a lot and I can just be ready to take the next step.

Scott:
I think that’s perfect. I also think if you’re looking to get more aggressive that we’ve described here… So we talked about, “Hey, cut expenses.” You really have that one category of variable expenses right now with that. The other ones are going to be the bigger fixed ones like when you move next time, can you cut that rent even more with some sort of creative strategy? I don’t know, Airbnbing somebody’s property. I don’t know, maybe there’s a way to do that, the house hack in the interim or something like that.
But it’s really about those variable expenses in the short run and then having a plan for when the expiration date hits on your car payment and your housing payment and whatever. So that you don’t reassume those and you can knock them out and you’re spending permanently decreases by that level ideally for the rest of your life. Because the next time you buy a car, hopefully it’s in cash when you have the financial position to do so.
So then I think it’s like, what are you going to do with the excess cash? Will you put it into some logical order? My preference personally if the goal remains flexibility and that’s actually the primary goal, would be to do an order of operations.
Take the match because that’s a 100%. If it’s a 100% match, it’s a 100% gain on day one. But funnel essentially every other dollar towards the highest and best next use. Pay off the credit card, build out the emergency reserve or whatever you consider to be financial runway. That’s something you’ll have to internalize about your own risk tolerance there where you want to plop that money.
And then I think in the meantime, once you’ve locked that down on the spending side and figured that out you now know, “Great, I’m saving 500 bucks a month, maybe 650, 700, depending on how much control I can get over those variable expenses. It’s going to take me this long to pay off my credit card debt. What can I do in the meantime if I’m motivated to do more in my free time and it’s not going to distract from my quality of life?”
So what I tried to do is I tried to start various businesses every 90 days that required little to no capital or some side hustle. And most of them failed for the first two and a half years. I tried to start a company that sold winter gloves for driving. I brought a proposal to my mastermind group that I had joined about winter tire rentals, the theme there.
And that was a terrible idea because if you buy a set of tires and you rent it out for a year, I pay 400 bucks for the tires, I make 250. But then the next year they may not rent and I just have a pile of inventory that is only going to last me three years and I got to buy more tires for all… Like the cars just have-

Kevin:
Renting tires they’re not rentable for very long.

Scott:
So they talked me out of that. But I tried those and most of them were terrible ideas but then over time things started hitting. My house hack was one of the things that I did which I consider to be one of those things. I wrote the book. And so a number of those began to over time become valuable contributions I learned from each of those.
So that could be a framework to deploy is like every 90 days I’m going to start something that has some potential to either help me learn but won’t cause me a lot of grief and losing my money. And those opportunities will get better and better as your flexibility improves. So that would be another thing to think about once you’ve locked down your spending, focusing on that second lever of these opportunities.

Mindy:
I want to point out that all of your failed endeavors involved, not all of them, but most of them involved holding physical inventory, which is something that you have to put money into in advance and hope that somebody comes and buys it.
Whereas Kevin’s super-duper amazing, marketingandcommunicationscompany.com is $8 for the website or nine or whatever. And then Kevin, I’m assuming that Kevin can put together the website or know somebody who can and then it’s just his time. So if it is a big flop, he spent eight bucks or nine bucks. And he already has a computer, he already has the capacity to do it, he already has the ideas. It’s just your mental space, which is free. And I don’t mean that in a bad way, although it sounds bad. You’re not paying right for that so if it doesn’t work out, you’re not out a huge amount.
And Alan Donegan was on episode 17 or 18 and he has this thing called PopUp Business School, where he teaches people how to do a super lean startup. Don’t go out and buy all the things and then test the idea. Test the idea first.
So I love Scott. I love that your mastermind people told you don’t rent winter tires because I don’t love that idea. I love the creativity behind it but even kevin’ssuper-dupermarketingcompany.com will be able to get you a lot of business there. Or maybe it would, oh, maybe that’s a really great success story, kevin’ssuper-duper marketing. We’re so good we can even sell Scott’s rentable snow tires. But anyway, I just wanted point that out.

Scott:
One day I’ll prove them wrong.

Kevin:
Yeah, if you ever revive the idea call me, will set up the website.

Scott:
That’s great. Okay, what was it? kevinsuper-dupermarketing.com?

Kevin:
Marketing-

Mindy:
Super-duper marketing and communications-

Kevin:
Yes, marketingandcommunications.com.org.

Mindy:
Or if you can’t remember that email Mindy at biggerpockets.com and I can connect you to Kevin.

Scott:
I’m going to remember super-dupermarketingandcommunications.com for the rest of my life. So hopefully this is getting at least some ideas sparking the strategy in the short run with what your cash is going be doing? Is pretty clear cut I think for me, for the most part with that. Depends on how far you want to go without reallocating the capital you’re accumulating, perhaps away from the 401(k) to the debt or not. But it’s probably credit card until it’s paid off and then into that flexibility.
And then if you can knocking it out and saying, “Can I set myself up to try some of these ideas whatever ones look good do at the time?” And if you can go and look back and say, “Hey, in two and a half years I’m going to look back. Where am I at?” Well, I’ve paid off my credit card debt. I’ve built out a year of runway. So I have the FU money if I ever need it from my job. I’m using that to my advantage somehow and I’ve tried 10 businesses or scaled one 10 times over 10 quarters to get to something.
Surely some good outcome in excess of what the formulaic math would tell you would happen over that two and a half year period that would put you ahead of just saving 500 bucks a month times 30 months.

Kevin:
Yeah, that makes a lot of sense.

Scott:
What are your thoughts? Is this answering your questions? Is this helpful?

Kevin:
Yeah, no, it is. Yeah, it absolutely is. It’s real like I said, I keep coming back to the mindset thing. I keep coming back to the framework of, should I be trying to spread things across multiple or should I just focus down and do things one at a time? And that makes a lot of sense. And the thing you just said about the formulaic math versus the unseen opportunities or the compounding effect of what you can do with flexibility, that’s motivating to me.

Scott:
Awesome. And you can’t diversify right now, this is not a good time to diversify. Diversification is great, I’ll vouch for diversification but you have to diversify when you have assets to diversify. So I love the idea of just going all in on the thing that you think is best for a year or two. And then you can diversify when you have hundreds or thousands dollars in assets into 2.5 years to begin diversifying with that. That’s a point where I think it makes more sense to begin with those types of things. Otherwise, you’re just going to ensure that you have a small pile that doesn’t lose money versus using that flexibility to go after big opportunity.

Kevin:
Right, okay. Well, it sounds I need to talk to you in two and a half years when I have my super-dupermarketingcommunications.com-

Scott:
90 days, 90 days.

Kevin:
Oh yeah, that the website will be in 90 days. Yeah, okay, makes sense. I’ll call you and we’ll spin up that tires idea.

Scott:
Sounds great.

Mindy:
Oh, did you hear that Scott? We’ll spin up that tires idea, he’s just like you-

Scott:
Yeah, I like that.

Mindy:
Thanks Kevin.

Kevin:
Yep, that’s what I do.

Scott:
He’s like, “I’m not sure I’ll give us some credit for that one.”

Mindy:
Okay, Kevin, when you have your website up and running, let me know and I will make the announcement in the Facebook group. “Hey, remember Kevin from episode 270? Well, now kevin’ssuper-dupermarketingandcommunications.com is up and running-”

Scott:
Rolling.

Mindy:
“So I will give you a plug…” Oh, it’s rolling, yes. “His first client is Scott so he’s lost money on Scott’s stupid idea. So he needs more clients so call him up.” And then, because self promotion is not allowed in the Facebook group but it’s my group so the rules don’t apply to me and I can post anything I want. So I will post that for you so let me know. So hurry up.

Kevin:
Will do, I got nine bucks.

Mindy:
Okay, Kevin?

Kevin:
So I got nine bucks.

Mindy:
What? You got nine bucks, there you go. Okay, Kevin, this has been so much fun. I’m super excited for you, you’ve got a slog ahead of you. But just by talking to you today I know you are going to crush it.
And when we check back in on you in two and a half years, you have to reach out to me, remind me that you have crushed life and you want to come back and share it with everybody. Everybody else will know too that you have absolutely crushed it and you are well on your way to becoming a millionaire by age 40 simply because you are doing what is different.
You’re not swiping your card, getting the decline and saying, “Oh, I guess, that’s just part of my life. You are taking action to make changes and that’s how it works. So thank you so much for your time today and we will talk to you soon.”

Kevin:
All right, thank you both.

Mindy:
Okay, that was Kevin. That was his fantastic story and that again you can find him at kevin’ssuper-dupermarketingandcommunicationscompany.com, maybe. He’ll probably shorten that because that’s kind of a mouthful. Scott, what do you think of his story?

Scott:
I thought it was great. I don’t think he’ll probably be filing for trademark for that particular corporate name in spite of your great suggestion, Mindy. But I think it was a good episode.
One of the observations there is, and I have to imagine this is frustrating to Kevin and perhaps a lot of people in his situation that are just getting started. Is we talk about the four levers and there’s so many different ways to think through.
Hey, if someone comes on our show and they have five properties and some syndication investments and a 401(k), these other assets and two or three different sources of income and a variety of different expense buckets that look like they’re a little over.
Now we can go through and we have a complicated discussion about which area to focus on and which is the biggest lever in that situation that depends on their net worth, their income sources, their spending. If they have a business or any income that they can control? How we can think about those?
And when it comes to Kevin’s situation and folks are just getting started on this journey or have debt and are in the hole, we really have to keep that focus on that first lever of spending less and getting complete control over every dollar is going. And say that the strategy here is understanding that it’s a grind to get through that and control that and sustain it for years really to pay off that debt and build that financial position. And then the game begins to open up a little bit more when that flexibility is built and there’s investment opportunities or income opportunities with that.
But really that’s the most powerful lever when someone’s just getting started. And it’s getting control of every dollar, knock it out and know that I’m going to have to sit on that. Self educate and prepare myself for that opportunity that’s going to come a year or two years down the road as I build out that stronger and stronger financial position to make that first house hack investment or that first serious business opportunity or that career change or whatever to scale my income. And begin applying those other levers in the journey.
But in the meantime, there’s one major lever that makes the big difference and it’s that control of that spending, that’s the one that is within your control and ability to change in the short run.

Mindy:
I was struck by the parallels between our advice for him at the start of his journey and our advice for people who are in the middle of their journey and doing well and just waiting for their wealth to grow. It’s a slog. And right now he’s paying down his debt before he can start waiting for his wealth to grow. But it’s a slog to pay it down and you have to just keep going and keep doing what you’re doing. And it’s proven that this will work.
But it’s just like the higher net worth individuals that we talk to who are, “I have $200,000 in net worth and I want to retire with a million or 2 million.” “Well, keep doing what you’re doing. You’re doing great, keep going.”

Scott:
Well, actually, I’ll call that out. I think that is an important takeaway and I have a slightly different twist on that, now that you said that with that. I think his situation parallels to an extraordinary degree a household that might have two or $300,000 in 401(k) assets and $200,000 in home equity and a net worth in the four to $500,000 range but still only has one to three months of emergency reserve. They may have a cleaner financial position but they’re really not any closer to flexibility than Kevin is in terms of his journey with that.
I think it’s a powerful takeaway for me from this is, if he can build that out and build that flexibility so it’s outside of those retirement accounts and outside of that home equity as the primary drivers of his financial position. He may be able to get into a flexible financial position that is capable of supporting him for several years or at least a year within two and a half years and sustaining that for life.
So I think that’s an important takeaway of where you build your wealth can have a huge impact on your flexibility if that is in fact one of your goals from finance, which I think it should be.

Mindy:
I think that’s really key Scott, where you build your wealth has a huge impact on where your flexibility is. Because yeah, I’m a big proponent of the 401(k). I like the 401(k) for the multiple benefits. It reduces your taxable income, it gives you a way to invest for your future.
But you also, especially if you’re planning on retiring early, you need to invest for the years between the time you retire and the time that you can take your 401(k) without penalty because you’ll always pay taxes on your 401(k). But why pay a 10% penalty if you don’t have to?

Scott:
And personally I’m a little cocky or arrogant perhaps with that. But I thought and think that if I was repeating my journey, that money that was in my bank account or accessible to me was going to do me far more advantage because I would find a way to use that to pursue an opportunity in excess of what was in the 401(k).
Not that I’m averse to the 401(k) or the Roth or retirement accounts in general, I do contribute to them, especially today with that. But in the first four, five years of building wealth, I really didn’t contribute that much to my retirement accounts. And I instead put all those dollars into my savings account essentially and buying rental property or investing after tax in index funds that I would have that flexibility.
And to me, I thought that that gave me a great advantage in my life in seizing opportunities or going after investments that I couldn’t have done if I had tried to max out those tax advantaged accounts in the early years. I don’t know what the right answer there is. I think it’s an art but I think that flexibility needs to be considered and is a worthwhile debate.

Mindy:
Another person who did that was Craig Curelop in episode 35. He had $80,000 of student loan debt and chose to pay the minimums on those and aggressively pursue rental properties. And renting his property out on Airbnb and living behind the curtain and sleeping on the couch so he could rent out his bedroom. And really aggressive, I think that’s the best word to describe his journey, is he aggressively pursued different ways to generate income so that he could pay off his student loan debts without having to sacrifice from his job.

Scott:
One thing that I’m really interested in is, I think that there’s a lot of Baby Boomer businesses like the services businesses, HVAC Plumbing, janitorial carpet cleaning. And I go on Colorado buy biz sells sometimes and look at these businesses and they’re selling for one times cash flow. So that’d be like a rental property selling for 300 grand, that produces 300 grand in cash flow next year with that. You can buy these businesses with 50 or 60 or $70,000 down with a small business loan and perhaps seller financing because there’s nobody buying these businesses. There’s nobody that’s in those markets with that.
And I think that if I was starting over again right now and trying to do that, I would buy the house hack with my finance runway. But I would be thinking about is there an opportunity in some sort of business like that, that’s earning the two, $300,000 a year range, that’s got an owner that wants to sell? And is there a way to put myself in position for that? I don’t know why I’m thinking that but that’s something that I would be interested in I think right now, if I was starting over.

Mindy:
Oh, sounds like we’re going to have a conversation as soon as I hit stop recording, Scott.

Scott:
Yeah. If anyone is doing that, if anyone owns a business like that or has bought a business like that or interested in exploring that, please reach out to me. It’s [email protected] I’d love to hear from you and maybe that would be a good BiggerPockets Money Podcast show. We’ve also had a number of shows on that on the BiggerPockets Business Podcast if you want to go back and listen to any of the archived episodes on that, especially the one with Nigel. I’ll find that one in a moment here.

Mindy:
Nigel with the hard last name?

Scott:
Yes, Nigel. I’m not going to try to pronounce it right now.

Mindy:
No, no, try to pronounce it, that’ll be fun.

Scott:
Nigel Geisinger, Geisinger.

Mindy:
Geisinger.

Scott:
Geisinger, Geisinger, yes.

Mindy:
Geisinger.

Scott:
All right, Nigel. Oh, but that BiggerPockets Business episode 51 talks about this concept a lot and I really enjoyed that episode. So go back and listen to that one if you’re interested in this. And if you have bought a business or operated business of the type that I just described, I’d love to hear from you or hear about your experience and maybe bring you on the BiggerPockets Money Podcast here.

Mindy:
Yes, that’ll be a lot of fun. Okay, this episode wraps up our January 2022 month, and Finance Friday episodes. We are always looking for more Finance Friday guests so if you would like to join us and have us go through your finances, please reach out or please apply at biggerpockets.com/financereview.
And if you’re not part of our Facebook group, go join. We have a lot of fun talking about money and nerd stuff. So facebook.com/groups/bpmoney. Okay, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 270 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying, may the raisins in your cookies always turn out to be chocolate chip instead.