Month: January 2022

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Mindy:
Welcome to the BiggerPockets Money podcast show number 267.

Robert:
You know, having some kind of system for yourself will help you immensely navigating this so that you’re on your right repayment plan. You know that you’re making your payments like you’re supposed to. You know if you’re on a forgiveness program, you’re on track and you’re not going to be one of these people that falls through the cracks. So get organized. It’s crazy, but it’s the easiest way to make sure you’re on the right track.

Mindy:
Hello, hello, hello. My name is Mindy Jensen. And today, I am talking to Robert Farrington from The College Investor about the end of the student loan repayment, moratorium, and exactly what that means for you.
Well, okay. We were going to talk about how to prepare for the end of the student loan repayment moratorium, which was going to be happening on February 1st. But after we recorded this episode, the moratorium was extended for another 90 days. Rather than scrap the whole episode, which is absolutely still valid except for the date that the repayment starts, Robert Farrington is coming back to record a new introduction to the show to help us with these new updates. So Robert, what is the latest information about the student loan repayment moratorium?

Robert:
Yeah. So just like you mentioned, it was originally set to expire on January 31st, 2022. And President Biden extended it another 90 days. So payments are now set to resume on May 1st, 2022. So what does that mean for you? Well, we are still in a state of limbo for your student loans. Everything is still paused. There’s 0% interest. There’s no payments due until May. But as Mindy said, everything we talked about in the show is still valid. You still need to contact your loan servicer. You still need to get ready to resume making payments. It’s just that date has given you a little bit more time, especially with all the craziness that is going to be the start of the year with tax season and everything else. So take the time, get organized. But now you have until May 1st.

Mindy:
Okay. And let’s say that somebody was all set to resume on February 1st. In my opinion, now is the best time to be making payments. Because during the moratorium, if you had the ability to continue make payments, paying no interest is better than paying interest, right? I mean, if you were about to start repaying your loans, I would suggest continuing with your plan. Every dollar of payment that you’re making now with this zero interest means that every dollar goes directly to your principal instead of being spread out between principal and interest.

Robert:
You know, I don’t necessarily agree with that. I think that people that haven’t been paying their loans should not necessarily start paying their loans early.

Mindy:
Oh. Wow. Okay. Why?

Robert:
Well here we go, because here’s the thing. It could get extended again. So we weren’t expecting this extension. The Department of Education made it very clear that January 31st was the final extension. And yet here we are, and it got extended until May. And the president does not have the ability to cancel student loans by executive order. But one interesting thing that he could do is continue to extend this repayment pause out over and over again, as long as there is still a state of emergency for the COVID-19 pandemic. So that’s what he’s doing. And I’m not here to prophesize that he could do it again or not do it again, but it’s a potential thing that could happen. Right? So I don’t see a reason why you should make a loan payment that you don’t have to make. I think you should be taking that money and putting it towards other loans that aren’t paused. Maybe you have credit card debt. Maybe you have an auto loan. Maybe you have other things that you can better your financial situation. And I think that’s a much more valuable use for your extra dollars than going towards your student loans early. Or invest it, shoot. Put it towards something that could start making you money in the future. Right?
So use that with your extra student loan dollars. I don’t think you should pay down your student loan debts any earlier than you have to. Remember, it’s also 0% interest. So by not making these payments, it’s not hurting you in any way either. So I’m the kind of guy that wants to say hold off, let’s see what happens April. I don’t think it would be extended again. But we live in a really kind of crazy world right now and it definitely could be. So yeah.

Mindy:
Okay. I think that is a fair argument that you have made. So I will say that once again, personal finance is personal. And if you agree with me, yay. And if you agree with Robert, yay. And just choose your own adventure that allows you to sleep at night.

Robert:
Yeah. Whatever your adventure is, just realize that at some point in time, the payment pause will. And and please be ready. Just be ready.

Mindy:
Yeah. And when it does finally end, in the next few minutes, Robert will tell you exactly how to prepare so that it is a smooth process. Okay. So without further ado, let’s jump back into the episode that we had recorded before they pushed back the moratorium and screwed us all up. So, okay. Robert, thank you so much again.

Robert:
Thank you.

Mindy:
Robert, welcome to the BiggerPockets Money podcast. I am so excited to talk to you today.

Robert:
Hey, thanks so much for having me. I am excited to be here.

Mindy:
Robert, let’s jump into this with both feet, because we have a ton of stuff to cover. In March 2020, all federally held student loan payments were put on halt. What did that actually mean?

Robert:
Yeah. So this is an unprecedented program where all federally held loans, so this is direct student loans and a small amount of Perkins and FFEL loans had 0% interest, no payments required, and no collection activity. So if you were in default, all that stuff was paused so that people did not have to make their payments for almost two years at this point in time. It’s crazy.

Mindy:
Wait. Even if you were in default, you didn’t have to make payments?

Robert:
No. So all collection activity during this time was paused. So that means people that had not paid their student loans were not getting their wages garnished, were not getting their tax refunds garnished. So it’s been an unprecedented 22 months now of this where nobody had to make payments on their federally held student loans. There were a small amount of private student loan borrowers that still had to make payments. There were a small amount of FFEL loan borrowers that still had to make payments. But for almost 40 million Americans with student loans, no payments were needed for the last two years.

Mindy:
Okay. Well sorry, but that’s ending. Now we’re in January of 2022, and the student loan payment moratorium is the end. At the end of this month, well I guess at the beginning of next month, you are going to have to start making your payments again. What does this actually mean for borrowers?

Robert:
Yeah. So for the first time in 20 months, borrowers are going to have to start making their student loan payments again. Right? It sounds pretty simple, but there’s a lot of changes that have taken place. I mean, just think of all of our lives over the last 20 months, right? Things are different. Incomes are different. We have the great resignation. People are changing jobs. The world is in a very different place. We have pre-COVID, post-COVID. I don’t know how you want to describe it. But for student loan borrowers, it means a lot of change, right?
So they’re going to have to resume their student loan payments. For some borrowers too, this might be their first student loan payment. Imagine if you graduated college in the last two years, right? So you’ve never even had to make a student loan payment.
So these borrowers need to get with their loan servicers, start planning out what February of 2022 is going to look like. It means that you need to log in, see what your loan servicer has, what your payments are. If you had an auto debit, let’s say you were paying your student loans before the pandemic. Well guess what? All those payments, they’ve been stopped. The government doesn’t know if they should still draw from that account. So you need to log in, reset up your payments, know what your payments are, and be ready come February 2022. Sometime in that month, you’re going to have to make your first student loan payment for the first time in a long time.

Mindy:
Now there was talk of student loan forgiveness, something like up to $50,000. What actually happened with that program?

Robert:
So it’s important to know that this was a campaign promise from President Biden, right? He said that he supports Congress for giving up to $10,000 in student loan debt. And members of Congress have thrown out all kinds of numbers. $50,000 was a number. $10,000 was a number. Some of them are like, “Hey, forgive it all.” But all these were campaign promises. And in all of the legislative packages that have happened over the last year, none of them have included any type of student loan forgiveness.
And what you’ll see right now is members of Congress and other people are saying, “Well, he could do it by executive order. He could just wave a pen and forgive student loan debt.” And honestly, that’s not the case. There is really no executive power that Biden has to forgive student loans en masse, or blanket forgive, or just wipe everyone’s debt away.
He does have certain powers though, that he can do. And you might have seen some of these headlines lately where he’s automating certain repayment programs, right? And the rule that Congress has set out is that says that the president has the power to forgive student loans for any program that’s already been by Congress. So what you’re seeing right now is Biden is streamlining the bureaucracy, which I think is a good thing. So he’s forgiving payments for people that have total and permanent disability. Well, think about it. These people might not even be able to fill out paperwork because they are disabled. But the Social Security Administration and the VA already know they’re disabled. So why are we making them do this crazy bureaucracy of filling out forms and all this stuff when it’s like we know they’re disabled. Let’s just forgive their student loans.
And the same is true with Public Service Loan Forgiveness, right? The IRS knows where you work. They know if you have a nonprofit job, right? The Department of Education knows if you’ve made payments. It’s not hard. We have the greatest data scientists in the country that work here. You can put two and two together and see if people qualify for these programs without having crazy government bureaucracy.
So when you’re seeing these headlines of Biden forgiving student loans, that’s what you’re actually seeing. He’s actually taking existing programs that are already are in effect, and he’s just streamlining the bureaucracy so that people that have already qualified are getting the forgiveness they deserve.
But, we’re not going to see any blanket student loan forgiveness. I’m sorry. I don’t want to be the bearer of bad news on this show. But you shouldn’t plan on it. You should plan on resuming your student loan payments in February when the student loan payment moratorium ends.

Mindy:
Okay. So it sounds like I’ve been reading some click bait headlines, and I need to actually click onto those articles and read the actual content instead of just saying, “They’re going to forgive up to $50,000 of my student loans.” It also sounds like if I’m getting a student loan forgiven, I would know about it.

Robert:
You would because you would already qualify for a program. So like I said, total and permanent disability was one of the big ones. Another one was borrower defense to repayment. So these are people that were defrauded by their schools. So these are the ones that went to for-profit schools. The schools misled them, made them take out a bunch of crazy student loan debt, and now they are now not able to repay these loans. And Public Service Loan Forgiveness. This is one of the most popular programs that the media likes to criticize. Because frankly, the government really screwed up the execution of this program. So what you’re seeing today is ‘fixing’ what should have already taken place over the last few years of getting people the forgiveness that they rightfully deserve, under the law that exists today. These aren’t new laws, these aren’t new programs. These are existing programs that have been around since 2007. It’s just they’re 10 year programs, and they were mismanaged for a decade.

Mindy:
Okay. So bottom line on that sounds like there’s nothing new.

Robert:
There’s nothing new except the fact that people are actually getting what they deserve and they should have gotten for years and years now. And they’re making the system and bureaucracy a little better, which is a win. Because honestly, for Public Service Loan Forgiveness specifically, millions of Americans qualify for this program. If you have student loans and you work in public service for 10 years, you are legally entitled to get your student loans forgiven, 100% of them, right? All you have to do is make 120 payments, which is 10 years of payments, right? And work in public service. It’s a really easy program to qualify for, but you just have to follow the rules, certify that you work in public service, and send in your forms. And that’s why I love this program. But on the flip side, it’s been very mismanaged. And a lot of people that are entitled to loan forgiveness, teachers, firefighters, government employees, people that work in hospitals. We’re not talking doctors, anyone that for nonprofits or public service entities. From the accounting team, to the office team, to the actual teachers that are in the classroom. All these people are entitled to these programs. And we just need our government to actually process the paperwork like they’re supposed to.

Mindy:
Yeah. These programs have been fraught with problems. It sounds like things are changing. I know personally, now I’m trying to think who do I know that applied for the program or applied for the repayment and was turned down? What do you do in that situation?

Robert:
Well, that’s what this thing of Biden’s waiver has come into effect. So if you’ve been denied Public Service Loan Forgiveness, what you need to do is you need to reapply for Public Service Loan Forgiveness, send in your employment certification form. You could upload it on fed loans website or the department studentaid.gov, or you can mail it in the old fashion way. But you need to get that form in by October of next year. And the Biden administration is manually reviewing every single application for it to make sure that people that are legally allowed to qualify for it are getting the loan forgiveness that they deserve.

Mindy:
Do you have anything on your website that talks more about this student loan forgiveness? Because that seems like a very important topic. But also, kind of going to go off on a tangent. And I have a lot more question for you about the student loan repayment, which is more timely.

Robert:
Absolutely. So you can go to thecollegeinvestor.com/studentloanforgiveness. I have the complete list of every student loan repayment plan there. And we can go down this rabbit hole. There’s over 80 of them. And I know some of these big ones that make all the headlines are what people like to talk about, but there might be one for you too. You got to see if you qualify. So check that out, and let’s continue with the student loan repayment pause ending. And we can talk about that.

Mindy:
Yeah. So if you’re a public employee, thecollegeinvestor.com/studentloanforgiveness. And I’ll have that link and all the other links that we’re going to talk about at biggerpockets.com/moneyshow267 which is the show notes for this episode.
Okay. So let’s get back to student loan repayment moratorium lifting. You recently survey 1,200 student loan borrowers. 71% of them said that they are financially ready to resume payments. But that still leaves 29% of people who aren’t ready. What do you do if you don’t have a job or you’re not financially ready to continue your payments again, and the student loan repayment moratorium ends?

Robert:
Definitely. So the first thing to do is actually even know what your student loan repayment is. Log into your loan servicer, track down your student loans, and see what you owe. Because honestly, it’s been two years. A lot of people’s financial situations have changed. Your own situation might have changed. So that’s where it starts.
Part two is there’s multiple different student loan repayment plans. And some of them are income-based. So let’s say something didn’t work out, you don’t have a job right now, or your income is lower than it was pre-pandemic. Well, you can re-certify your income right now in January, February. And your payments will reflect your income. And they could be as low as $0 per month legally, assuming that you have a very low or no income.
You could also apply for an unemployment deferment. This isn’t as good as re-certifying your income, but it’s an option. If you think it’s only going to be a short term that you’re unemployed, you can opt to defer your student loans for another six months. But remember, interest is going to start accruing other things. So it’s usually better to get on a payment plan, even if it’s only a few bucks a month, than it is to defer. But you can also defer your student loans because of your unemployment.

Mindy:
And I’m sorry. How long can you defer your student loans?

Robert:
Well you can do it for up to three years, but it gives you in six month increments. So you can defer for unemployment in six month increments. And if you’re still unemployed, you can say that you’re still unemployed and push it down the road a little bit. But again, if that’s really the case, it’s better to be on an income based repayment plan where your payment could be $0 a month if you’re actually unemployed and have no income. So that’s a better thing because you’re in repayment at $0 versus having your interest and stuff accrue. And you’re not really in repayment, you’re in deferment.

Mindy:
Okay. Since we’re talking about repayment and this is a big deal, this is going to be in the news, are there any repayment scams that people are going to need to be on the lookout for when the repayment plan opens back up again?

Robert:
Oh my gosh. I’m sure if anyone out here has student loans, they’ve received that robo call that says, “We can lower your monthly payment,” or, “We can offer you student loan forgiveness.” So all these things are scams. What they’re trying to do is they’re trying to get you to pay them money sometimes up to $1,200 for them to potentially enroll you in one of these repayment plans that we just talked about. So I think it’s important for people to realize what a legitimate student loan help looks like. So everyone with federal student loans can do everything with their student loans for free with no cost by going to studentaid.gov. Government website, that’s actually a really good government website. And you can go in, log in, and see all your student loans right there.
A second option that’s free is you simply call your loan servicer. Now I know a lot of us hate our own servicers, and you see the headlines. We like to rag on how they’re not competent. But honestly, for a lot of these basic questions, they’re really good. And you can call fed loan, or Navient, or Sallie Mae. Call your loan servicer and be like, “Hey, I want to change my repayment plan. What are my options?” And they will help you again for free.
Any of these companies that are promising you loan forgiveness or a lower payment, if they’re charging you money for it, it’s a big red flag. You should probably not do it. Because what I see happen too many times is people pay these companies money. And guess what? They don’t do anything for you. And you might think your student loans are being handled. Well, guess what? They’re not. And now you’re not making payments and other things. So not only did you pay $1,200 to a company. But your student loans might go delinquent or in default, hurt your credit, yada, yada, yada, right? Or part two is you pay $1,200. And this company filled out the same form that you could have filled out in about five minutes and sent in, or done on their website and sent in. And maybe they did the right thing for you, but you paid $1,200 for something that would’ve taken you about five, seven minutes to do for free on studentaid.gov. So don’t need to pay for help.
There is a difference though if you’re working with a certified financial planner or something like at. Because this person is going to look at your student loans as a whole financial picture. And this is for more advanced cases. Maybe you have a whole need for a financial planner and want to talk to a financial planner. Well, a real good financial planner should look at your student loans as well as your whole entire financial picture. So that’s different. They also have a fiduciary duty to you. But if you’re responding to a website advertisement, or a text message, or a voicemail if someone that says they’re going to lower your student loan payments, don’t fall for it. They’re not going to help you. You’re just going to pay money for something that you don’t need.

Mindy:
Okay. So on the flip side, I know that there are legitimate companies out there like SoFi is a legitimate refinancing company. What does a legitimate offer look like?

Robert:
Yeah. So what you just mentioned is student loan refinancing. So first off, let’s talk about student loan refinancing. When you refinance your student loans, you are taking out a new at student loan to replace your existing loans. That could be existing private loans or your existing federal loans. And the reason why you might want to refinance your student loans is simple. You save on interest, right? So you might see an offer from SoFi, or Earnest, or LendKey, or any of these companies. And they say, “You can get 2% on your student loans.” And you might be looking at that and being like, “Wow, that’s like half of my rate.” Right? But the problem is, is when you refinance into a private loan, you lose a lot of benefits, right?
So when you have a federal student loan, you got to have your payments paused for 22 months. When you have a federal student loan, you qualify for the loan forgiveness programs that we were just talking about. When you have a federal student loan, you get unemployment deferments, you get other hardship options. You get these income-based payment plans. You don’t get any of that with a private loan.
So it does make sense for some people that are going to pay off their student loans in maybe three years, and are high income, and aren’t going to qualify for any these programs. But it’s our estimation that about 90 to 95% of federal student loan borrowers should not refinance, even if you can save on interest.

Mindy:
Okay. So this leads me to another question. How do I know that it’s a good idea for me to refinance my student loan out of the federal into … because it sounds like if I have a private student loan, there’s not really any benefits to staying with the higher rate. I should refinance that into a lower rate whenever I can. Strictly talking about federal student loans, when is it a good idea to refinance my federal student loan?

Robert:
Definitely. So I have a few criteria of when it makes sense to refinance your federal student loans into a private one. First off is you are going to pay off the loan in less than five years. Okay? Pay it off. We’re not talking about loan forgiveness or anything. Second off, you are never going to leverage any type of student loan forgiveness program. You don’t qualify, yada yada yada. And number three is you’re not going to need any hardship options, or deferment options, or things like that.
So the reason I say that is because the lowest interest rates that you’re going to see on your student loan refinancing offer are going to be on five year or less variable rate student loans. Some of those loans are down to 0.89%. They’re super low. But once you start getting past the five year mark and going to the 10 year mark, you’re still looking at a four, five, 6% loan. Which is very close, if not the same as a federal student loan. So why are you going to give up maybe half a percent interest, but lose all of these benefits that you get with your federal student loan? Plus the longer you’re paying on a loan, the longer you could end up wanting a hardship option, or needing to change your repayment plan, or potentially qualifying for loan forgiveness. So again, there’s risks here. The shorter, more concrete loans could totally make sense to save on interest. But beyond that, the benefits that you get that aren’t interest rate, right? But the benefits are huge on federal student loans.

Mindy:
Okay. You used the term variable rate. Are all student loans variable rates, or are there fixed rates as well?

Robert:
So all federal student loans are fixed rates. All right? And as if you took out a student loan two or three years ago, your fixed rate is like 2.78%, super low. If you took out a student loan when I did about 20 years ago, we were about 6.8%. And this was in the early 2000s, which honestly is still not that bad. But the rates have continued to de increase. So honestly, most borrowers over the last 10 years or so are going to see student loan rates in the 4%, 5%, maybe even as low as 2% range. And that’s why when you refinance, you’re not going to see much of a difference.
Variable rate student loans are what you see in the private sector. So most private lenders offer variable and fixed rate loans. The variable rate ones are the ones with the really good looking interest rates that you see, because they’re offering you an introductory rate at 1.5%. But it’s a variable rate five year loan. So this is a loan that the rate can change every single month throughout the duration of your loan.
Now, we are in low interest rate times. So that could work in your favor, but honestly, we’re also in inflationary times. So interest rates could be rising. So you are taking a little bit of a gamble when you take a variable rate loan that your loan interest rate could rise over the next few years. But it’s a math question, right? Do you think the savings you’re going to get up front is going to you money? And that’s why the longer you go with these loans, the better the federal loans just are looking. Fixed rate, lots of benefits, things like that.

Mindy:
Yeah. I keep waiting for rates to go up. Rates have been so low for so long. I keep waiting for them to go up. And I didn’t realize that they were variable. My oldest daughter’s a freshman in high school. So I’m not quite into the learning about student loans yet, but we will be bringing you back to talk about how to pay for college in a few months, because that’s going to be something that I’m going to have to start learning about. So thanks Robert.

Robert:
Yeah.

Mindy:
Let’s go back to your survey. You said 65% of borrowers know what their payment is going to be. That leaves 35% of borrowers who don’t know what their payment is going to be. So first of all, why would you not know what your payment is going to be? Is that because your interest rate has changed or because … why would you not know what your payment is going to be coming up?

Robert:
Well yeah. I mean first off, it’s been almost two years. So you have a good chunk of borrowers, probably about two to 3 million borrowers that this is their first student loan payment. So they’ve never even had to make a student loan payment before because they graduated college right now during the pause. And then the second group of people are people that are on income driven repayment plans. So we touched on this a little bit earlier, but about 30 to 40% of all federal student loan borrowers are on income driven repayment plans. And these are repayment plans where your monthly payment is set every single month based on your income. So these borrowers need to re-certify their income every year based on their tax return, or you can do alternative methods like giving them a pay stub, or even writing a letter that says I’m unemployed. And that will set your payment up for next 12 months.
Well since it’s been almost two years, these borrowers haven’t recertified their payments in a long time, and the data is out of date. So right now before the student loan payments resume, this cohort of borrowers need to give the government or give their loan servicer their most recent income so that their payments can be calculated based on their current income. And they’ll know exactly what they’re going to pay. It’s a little complex and confusing. But on one hand, these payments are hugely beneficial because income driven repayment’s based on your income. You can always afford your student loans. But on the other hand, going into this repayment restart, there’s lot of gray area because people don’t necessarily know what their payment is going to be exactly. And that can give a lot of fear and doubt in student loan borrowers’ minds.

Mindy:
How long does it take to process this information?

Robert:
So it usually takes about 30 days. But, I like to put this asterisk out there. Since we are restarting loan pay payments for 43 million Americans, I could see timelines taking a little bit longer. And the Department of Education says if you’re on an income based repayment, they’re probably going to give you a grace period of up to six months for both you to re-certify your income, but also for them to process everything. Because this is a lot of people all at once. Usually you had everyone re-certifying all throughout the year at different times. It wasn’t a big deal. Now you’re going to have every single borrower trying to do it all at once. I think it’s going to cause a little bit of a paperwork log jam at these loan servicers. And that’s why I recommend you do it online. You can go to your loan servicer’s website, or you can go to studentaid.gov. You can find the little link on studentaid.gov that says certify my income, and you can do it on there. And that will help expedite everything on the backend so that your stuff gets re-certified so your first payments are accurately reflective of your income. But I would encourage everyone do it sooner rather than later. Don’t wait until right before the deadline so that you get good payment data.

Mindy:
Okay. In your survey you also ask, “Do you know what repayment plan options you qualify for?” What are the different repayment plan options?

Robert:
Yeah. So when you get your student loan for the first time, you default what’s called the standard 10 year plan. And this is a standard 10 year fixed plan where every payment for 10 years is fixed at the same dollar amount. And typically for most borrowers, this is also the highest monthly payment because it’s amortized over 10 years. It’s fixed. So that’s what you default into. Beyond that, there are the graduated repayment plan and the extended repayment plan. And the extended repayment plan is very similar to the standard 10 year, except they extend it out to 25 years. So you have a fixed payment for 25 years.
The graduated plan is like it sounds, it graduates and starts low. And then every year, it re-certifies a little higher, a little higher, a little higher for up to 10 years. So you’re still paying off your loan in about 10 years. But it’s low upfront, higher on the back end.
And then, you get into this bucket of income driven repayment plans. And there’s four of them. Three of them are the main ones. You have income based repayment, pay as you earn, revised pay as you earn, and income contingent repayment. And I knew I just threw a ton of variables out at you. So you can find this in the show notes, link to my site as well. But all four of these plans will set your monthly payment as a percentage of your income each month.
And these are great options if you have low income, uncertain income, and it changes every month. But also, almost every student loan forgiveness plan requires you to be on an income driven repayment plan. So if you want to qualify for loan forgiveness, you also want to take advantage of the income driven repayment plans, which could also set your payment at $0 a month if your income is low at enough.
So there’s a lot of benefits to these plans, even though it sounds scary that you might not be paying enough to amortize your loan, don’t. Pick the monthly repayment plan that you can afford every month, because that is going to be the savviest way, you’re going to pay off your student loans over time.

Mindy:
Did you just say there’s a 25 year repayment option?

Robert:
Yes I did. There’s actually a couple 25 year repayment options. Here’s a scarier stat though. The average time it takes for someone to repay their student loan in America these days is 18 to 21 years, depending on your loan type, graduate school, things like that. So that’s average. So you see that there’s these 25 year repayment plans. A lot of them are actually 20 year repayment plans. Yeah. That’s why we’re here today.

Mindy:
But we don’t need to work on changing college and how much it costs. There’s no problem there.

Robert:
Right.

Mindy:
That’s a story for another time. Okay. This has been super helpful. Let’s say we have a listener who has taken advantage of the moratorium. What steps do they need to take right now before the program ends to make sure that they don’t miss a payment, they don’t negatively impact their finances, etc.? Let’s make a bullet point list that we’ll include in our show notes.

Robert:
Definitely. I think the key here is to get organized, right? So it’s been two years. Log into your loan servicer’s website. Well first off, let’s back it up. If you don’t even know who your loan servicer is, let’s find your student loans. Go to studentaid.gov and log in, or you can pull your credit report if you have private student loans, and you can see all your loans listed there. You can go to free annualcreditreport.com. Right? You can get your credit report once a year from all three bureaus. So get your credit report or log to studentaid.gov. Find your loans.
Step two is to get organized. Make sure your name, address, email address are all up to date so you don’t miss your first statement. Because let’s be honest. A lot of us took out our student loans when we’re in college. Maybe you used your college email address that doesn’t even work anymore, right? It got deactivated. Maybe you put your address of your parents when you took out your student loans, and you don’t live there anymore, and you need to have your address updated.
So the key is don’t miss a statement, a letter, a correspondence from your loan servicer. Update your information. Name, address, phone number, email, all those contact forms, right?
Step three is to make sure that your auto debits and anything that you want automatically done are updated. So like we touched on before, the government turned off everyone’s auto debit when it comes to student loan repayment. So if you had automatic payments set up before the pause, you’re going to need to log into your loan servicer’s website and put in all your banking information again so that your payments automatically get pulled out on time. You don’t miss a payment. There’s a lot of reasons why they did this, but we’ll keep it simple. They did it. This is what you got to do.
Step four is update your income. If you’re on an income driven repayment plan, you need to re-certify your income. And the sooner you do that, the better so that your payments reflect your current income sooner. And then step five is if you qualify for any loan forgiveness programs like Public Service Loan Forgiveness, you certify your employment for the last two years. Because all of your paused payments for the last two years do count for student loan forgiveness programs, but you still got to make sure you fill out the paperwork to show, “Hey, I was employed in public service. I had a job, yada, yada, yada.”

Mindy:
Awesome. That is going to be super helpful for people who have taken advantage of this program. Now at the same time that they paused student loans, they also offered a mortgage moratorium. If you took advantage of the student loan moratorium, did this negatively affect your credit?

Robert:
So it wasn’t supposed to.

Mindy:
That sounds like there’s more to that story.

Robert:
There’s a lot to this story. So it wasn’t supposed to. And honestly, everything should be fixed by now. But when they paused payments that very first month, the loan servicers did not change their programming in their system. So they did report a lot of borrowers delinquent to the credit bureaus for that very first month back in March and April of 2020, however your payments lined up. Because this was unprecedented. They’ve never turned off everyone’s payments. So I think they’re on the back end. There’s a lot of technical stuff you got to do. It’s not just like pause payments, right?
So they worked hard. They should have corrected this all. But if you are seeing any negative marks on your pay out your credit report from the payment pause still, you can dispute it with the credit bureaus. And I know that’s annoying. And you got to send these letters and certify it, but it should not negatively impact your credit at all.
This is actually even a benefit. If you were in default on your student loans before the forbearance or the payment pause started in March 2020, all collection activity for the last 22 months has been ceased. So this actually is a real benefit. And hopefully people took advantage of it, because you can get your loans out of default, back on track. And you actually have a 22 month history of non-collections on your student loans, which hopefully would actually benefit some people’s credit if that was your situation.

Mindy:
Okay. So I get a copy of my credit report. I look, and I see that this has been reported as non-payment. So then I dispute it. Hopefully you are getting a copy of your credit report every single year. But if you haven’t, do that now. Like you said, annualcreditreport.com is the free credit reporting service that the three major credit reporting companies are required to provide you a copy of your report every single year. Make sure that you don’t have a negative report. If you do, file a dispute. There’s a really easy way to file the dispute with them. I believe it’s on their website. If you see something that’s incorrect, file a dispute here, click here and file it. And get that taken off of your credit report because they should not have done that. That’s very interesting. I didn’t realize that that wasn’t smooth as silk, although it shouldn’t come as any surprise since this is actually a government program. And while I would like to hope for the best, it doesn’t always actually work so smooth. Enough about that. Enough about that. We’re not getting political. Okay Robert, is there anything else that I should be asking you about student loans, student loan repayments, and all of the stuff that we’ve talked about today?

Robert:
I think the big thing to just remember for everybody out there is the key to navigating these, whether you’re talking about student loans at normal times or student loans right now when the payment pause is ending is to get organized with your student loans and your money. The average student loan borrower actually has five student loans, right? You took one for every year of school. Freshman year, sophomore year, junior year, senior year, plus fifth year, summer semester, right? So you might have five different student loans. Now granted, they all might be in the same place on the same monthly statement and you don’t think about it, but some people are unlucky and have them in two spots or different things. So the key to navigating this is to get organized. We had the step-by-step list we just talked about. But whether it’s using a tool, or writing down where your loans are and all your income and expenses, and having some kind of system for yourself will help you immensely navigating this so that you know you’re on your right repayment plan. You know that you’re making your payments like you’re supposed to. You know if you’re on a forgiveness program, you’re on track, and you’re not going to be one of these people that falls through the cracks. So get organized. It’s crazy, but it’s the easiest way to make sure you’re on the right track.

Mindy:
I love that advice. And I’m going to throw in a little bit of my own. Just because you don’t know where your student loan is, doesn’t mean it’s not there. So if you’re not paying attention to it, you’re doing that ostrich thing where you’re hiding your head in the sand, it’s still there. It’s still accruing interest starting February 1, right?

Robert:
Yeah. February 1, interest kicks back on right?

Mindy:
Figure out where your student loans are and start repaying them. Robert, this has been so much fun and so informational. I really appreciate your time today, but we are not finished. I have my famous four questions. Are you ready?

Robert:
I’m ready. Let’s do it.

Mindy:
Okay. Robert, what is your favorite finance book?

Robert:
I really love I Will Teach You to Be Rich by Ramit Sethi. Honestly, great book. I actually give it to a lot of the college graduates and things I know when they’re happening in their life events. It’s a solid book. Yes. We talked about clickbait headlines. It’s a clickbait headline. But it’s a solid, solid personal finance book.

Mindy:
See? No, I don’t agree with you that it’s a clickbait headline. Because if you follow the steps in the book, he is teaching you how to be rich.

Robert:
You’re right. You’re right. 100% correct in that one. But to sell it to somebody that doesn’t know the contents of the book, you’re kind of relying on him on that headline, right?

Mindy:
Well yes, it’s an eye catching headline. But it isn’t untrue.

Robert:
True. I agree.

Mindy:
What was your biggest money mistake?

Robert:
I think my biggest money mistake was when I graduated college, I felt like I deserved my brand new car. So I went out and bought a $40,000, financed that bad boy. It was an Acura TL. I mean, it looks sweet. I loved it. Great car, so dumb. But you know what? You live and learn. I did drive that thing for like 11 years and whatnot. But anyways, I should not have done that.

Mindy:
Yes, I think that’s one of the top answers to that question is I bought a brand new car because I deserved it.

Robert:
Because I deserved it.

Mindy:
No, you don’t deserve it if you can’t afford it.

Robert:
I mean, I could afford it. But I honestly think of all the other things I could have afforded in lieu of it. And that’s really what grinds my gears.

Mindy:
Okay. What is your best piece of advice for people who are just starting out?

Robert:
I think we just talked a little bit about it, but it’s get organized. Honestly in a decade of helping people, most people that need financial help, just start with getting organized. Most people aren’t organized. What’s coming in? What’s going out? What do you own? What do you owe? And I think part two of that though is do it in your own style.
So I’m a tech guy. I like my apps. So I will choose to do an app, but that’s not everyone’s style. There’s spreadsheet people. My sister loves to put on an actual book, and has a journal and literally draws the lines on paper. So the only way getting organized will work for you is if you do it in a style that works for you as well. So I think there’s two parts to that. You’ve got to get organized, but you also got to do it in the style that works for you that you’re going to stick to.

Mindy:
Yes. I don’t want to do an app. I’m old. I want it old school. I want it on a piece of paper. But the reason I went on a piece of paper is because then it’s in my face. It is super easy to put the phone down, to put the app down, to put the tech down, and walk away from it. But when that book is in front of my face in the kitchen where I always am, it’s so hard to ignore it. And I don’t ignore it. I don’t clean up the kitchen that frequently. It’s always there. Okay. What is your favorite joke to tell at parties?

Robert:
Oh man. Okay. Well, we should do a college themed joke since we’re here. So I’ll tell you, I don’t always study. But when I do, I just make sure my parents notice.

Mindy:
That’s awesome.

Robert:
I know, it’s a corny one. It’s a corny one, but it works.

Mindy:
C’s get degrees.

Robert:
Honestly they do.

Mindy:
Ask me how I know. Okay. Robert, where can people find out more about you?

Robert:
Yeah. So you can find me at thecollegeinvestor.com. If you’re a listener, because I think you are, you’re listening to this show. You can find The College Investor audio show on your favorite podcasting platforms. And if you like to watch content, we’re on TikTok, we’re on YouTube. You can find us at The College Investor on those platforms as well.

Mindy:
Are you doing little dances on The College Investor TikTok?

Robert:
No, we’re dropping great educational content that’s fun and entertaining in 30 seconds or less for sure.

Mindy:
Oh, that’s even better. Do you do a little dance while you do it? Maybe you should.

Robert:
I should. Right?

Mindy:
Okay, awesome-

Robert:
That would get us negative views probably.

Mindy:
I know. I told my daughter I was going to start doing TikTok videos. She’s like ew. Thanks sweetheart.

Robert:
Right?

Mindy:
So hey, if you are feeling good about yourself, have a teenager. And then that’ll just knock you right down. Okay Robert, this was so much fun. I can’t believe I waited so long to have you on the show. I’m so happy that you had time to come talk to us today. This is really important stuff. I think that a lot of people kind of know that the repayment moratorium is ending. But this solid advice is going to be so helpful for people to get their payments on track, so that they don’t miss a payment, so that negatively affect their credit. And so they can get those student loans repaid and start building their life towards financial independence. So thank you so much for your time today.

Robert:
Thanks for having me. This has been a blast, and I hope people take action. You got a couple weeks left. Let’s do it.

Mindy:
Get organized and get it going. Okay. From episode 267 of the BiggerPockets Money podcast, he is Robert Farrington from thecollegeinvestor.com. And I am Mindy Jensen, and we’ve got to scoot little newt.

 

 

David:
This is the BiggerPockets podcast, show 558.

David:
Sometimes taking the safe road is the quickest way to guarantee that you lose. It doesn’t mean you should be risky but it does mean that you should not assume conservative or safe equals success. Sometimes it doesn’t and this is one of those areas. If they stay on the path that they’re on, they’re not going to hit financial freedom, they’re going to be working for a lot longer.

David:
What’s up everybody? This is David Greene, your host of the BiggerPockets Real Estate podcast. Today here with a Seeing Green edition, where you will be submitting your video and forum questions and I will be doing my absolute best to answer them. Now, Brandon isn’t with me today, he’s with us in spirit and we put a little funny Easter egg into this video. Please, if you’re watching it on YouTube, watch all the way through and if you’re not, go check it out on YouTube, it’s going to be probably somewhere near the middle to the end of it that I think Brandon will get a kick out of.

David:
Today’s show is all about teaching you how to build wealth through real estate. We do that by bringing on top performers, expert investors and just everyday regular people and laying out those tactics and mindset that they have developed that will help make you financially free. But here’s the thing, you got to make the simple and consistent decision to take constant action and that’s really what today’s about. We are digging deep into the problems people are having, hurdles that they’re experiencing or just decisions. I’m at a trail and I can go to A or B, how do I know which one to go? I know all of you are thinking it, I’ve thought it many times in my life, I still think in it many ways. I love being able to share what’s in one person’s head with the rest of the BP community.

David:
In today’s show, we get into some awesome, awesome things. Make sure you watch it all the way through. We talk about why rents don’t keep up with the value of homes. Have you ever wondered that? Why is it that when homes appreciate the rents don’t go up to? I’m going to give a very detailed and thorough answer that should shine some light on why that happens. We talk about how to choose which market to invest in. When you live in one but you could invest somewhere else, do you have to pick one? Can you invest in both? What types of things should you get into in each individual market? And then we talk on how to decide between investing in someone else’s fund, like what Brandon’s doing with Open Door Capital versus buying your own deal. What to expect, what the pluses and minuses are of each and a strategy that allows you to do both. That and more is waiting just ahead.

David:
Now, we can’t do this show unless we get questions submitted from you, the awesome audience so I’m going to ask you to please go to biggerpockets.com/david and submit your video question. Now, if you have a question but for whatever reason, you don’t think it’s worthy of the show or you’re just too shy, that’s okay too. Go to the forums and ask it there. You’ve got over two million BiggerPockets members that are all present on that site that can help you with that question.

David:
I’ve asked you all to leave some YouTube comments and I want to share some of what those are and encourage you to keep leaving them because we do read them and we do try to make these shows in accordance with what everybody wants. The first one comes from, looks like Yugen, “Great content. Everything is perfect so far as you manage to incorporate life lessons on each question.” Well, that’s pretty cool. Thank you for that, Yugen.

David:
From Georgie Brennon, “I just wanted to say thank you, David Greene. I spent the better part of a year developing my resume and applying for jobs with no success. After hearing your job search story, I called a buddy and asked if his company was hiring. I got an interview in two days and a job offer the next day. LOL. Thanks again, man.” That feels pretty good. That’s pretty cool.

David:
And then finally from Jay, “Great analogies, just like that two loan offers with a few thousand dollars difference in closing costs on a refi, the higher closing costs ended up better as the lower interest paid back the difference closing costs in 22 months.” That is awesome. That’s exactly what I tell people is oftentimes you want to look at how much higher the closing costs are, what the rate difference is and see where your breakeven point is. You’re probably going to have the property more than 22 months. That’s an amazing application of exactly what we talk about here and I’m glad that I got to help save you some money.

David:
Again, I just want to remind you all, make sure you watch this one all the way to the end. And without further ado, let’s bring in our first guest.

Clyde:
Hey, how’s it going, David? I’m Clyde and that’s little Clyde. Basically my question today is about acquisition. Properties for investors in my area are going for about $200,000. I currently have a HELOC for $100,000 and I’m just wondering which route I should take in order to finance the property. It really doesn’t seem like 20% down will work because I’m sure that a lot of these people want their money immediately. I was just wondering which route I should take or should I use the HELOC to do hard money? I’m not really sure what to do. Thank you for this time and I appreciate everything you are doing at BiggerPockets.

David:
All right, Clyde, little Clyde, thank you very much for asking that question. It gives me an opportunity to answer some stuff that I really like. We can also tell that little Clyde here is going to be very financially savvy when he gets older, if he’s listening to BiggerPockets in the crib. Your question, if I understand it correctly is, should I put 20% down on an investment property when the market’s really hot and people are looking to sell to the strongest buyer? Or should I take out a HELOC of a 100,000 plus a 100,000 of hard money so that I can write the equivalent of a cash offer? And I want to take a minute to sort of explain what sellers care about when they’re taking an offer from a buyer.

David:
The first thing is that whether the cash is coming from your bank account or it’s coming from a HELOC or it’s coming from a hard money lender or it’s coming from a conventional lender, it’s all cash to the seller. They don’t care where that cash is coming from. The reason that they don’t like when a buyer is buying a house with a loan, is that the lender will have conditions that they want the buyer to meet or the property to meet in order to lend on the property.

David:
That could be something like an appraisal. If the house appraises for less than what you put under contract for, the bank or the lender is worried, they’re getting a bad deal so they want you to put more money in the deal to make up the difference in the appraisal. It could be them looking at you, Clyde as the borrower, specifically what’s your debt to income ratio? What your credit score? How long have you had your job? Did you get your hours cut back when you’re in the middle of escrow? Those are all things that can throw deals off when you’re borrowing money to buy the property.

David:
What I’m highlighting here is it’s not the fact you’re getting a loan. It’s the conditions associated with the loan that cause the problem. You could go with the hard money lender and they typically have less conditions associated with the loan. Now again, it doesn’t matter to the seller where that money’s coming from, what they care about is how you wrote your offer. If you’re waiving a loan contingency and you’re waiving an appraisal contingency, in many ways that now is the same to the sellers if you’re paying cash. If you back out of the deal, you would lose your deposit. Same goes with a cash offer. That’s the first thing to understand is loans themselves are not what’s bad, it’s the conditions associated with the loan.

David:
Now regarding the down payment that you asked about, is 20% down not enough for these people because they want their money? I just want to highlight their money comes at the close of escrow. When you put in your 20% and the bank puts in there 80%, it’s all the same to them. It doesn’t matter where it comes from. They just want that money. The reason that sellers will often say, “I want a bigger down payment,” is not because you’re giving them more money. That’s what it feels like to you. You’re putting more money in the deal but it just means the bank is putting in less money. What the seller’s concerned about is if you don’t have a lot of money in the bank, you’re going to get scared and you’re going to back out of the deal.

David:
We sell high price real estate in Northern California. It’s not uncommon. I’d say maybe half my deals are in the million dollar range. And if you’ve got 200,000 to put down and another 400,000 in the bank, when that roof needs to be replaced and it’s a $20,000 roof or something like that, that doesn’t scare you. You don’t back out of the deal when you got $400,000. If someone says, “I can put $600,000 down,” the agent, the listing agent and the seller both feel good that that deal’s going to close because they have enough cash. They’re not going to get scared. When it’s an FHA loan, when it’s a VA loan, when it’s a low down payment loan, it doesn’t mean that the seller’s getting less money, it means the buyer is more likely to get scared and back out of the deal. And that’s why they don’t like these buyers that have low down payments.

David:
Now 20% is very strong. That’s not low. Here’s my advice to you. I don’t think you have to go through the HELOC and the hard money, which is more expensive lending than the conventional lender that you’re already working with. I think 20% is fine. Don’t worry about putting more money down, worry about showing proof of funds that shows I have more money than this 20 grand. If it’s a $100,000 property, you’re putting $20,000 down, show them that I have another $80,000 in the bank and then write your offer in a way that gives them more protection. You may say, “I’ll do a really shortened period for the inspection and I’ll do a shortened period for my loan contingency,” so that they know in seven days or in 10 days you’re committed or you’re not committed. That’s what the seller cares about.

David:
I think personally people get too caught up in the down payment. The sellers don’t care about the down payment. The sellers care about how much money you have, that you can close the deal. The lender or cares about the down payment. You should only be increasing your down payment if you want to or if you’re getting a better deal on the loan, not just because the seller wants that. But thanks very much for asking this question. I really appreciate that and send little Clyde my love.

David:
Let’s go to the forums and the Facebook groups of BiggerPockets and pull out a few questions. The support that you are all giving each other is awesome and I’d love to see you keep that up.

David:
First question from Diana C. in New York says, “I’m trying to wholesale real estate and build some capital to be able to buy rentals. However, I do not have a job with W2 income. When I earn enough money through wholesaling, what can I do to start buying rentals since typically I need two years of income to qualify for a loan? Is there anything else I should be doing right now?”

David:
Very good question, Diana. And unfortunately, in this case, the struggle is real. It is true that if you want to get conventional financing, you’re going to have to show not always two years but a period of time where you’ve been making money. And you may find that that wholesaling income doesn’t count the same as W2 income. You’re an 1199 independent contractor when you’re making money as a wholesaler, you’re not working for someone else. That money is not steady and consistent. It varies from deal to deal. There’s a very good chance that even if you do build up income from two years from wholesaling, that’s going to make it harder to get loans to buy real estate. And this is one of the reasons why I don’t encourage everybody to quit your job and just jump into this thing because financing is highly dependent on consistent income.

David:
Now you got a couple things that you can do if you want to start buying rentals and you’re making money through wholesaling. The first thing is the boring thing. You could just get a job and do that while you wholesale and make sure that you make enough money from that job to get financing. The second thing is you could find a cosigner. You could find a person who does have consistent income, that will help you qualify for the loan and either pay them to be able to help you get the loan and not put them on title or put them on title and give them a share of equity. Either way is an option that you could use somebody else’s income if you don’t want to get it to help you qualify for that loan.

David:
The other thing is you could do direct deals with sellers. You’re already wholesaling. You’re talking to sellers and you’re getting properties put under contract. Maybe a couple of these you could just buy on terms instead of wholesaling them to somebody else. You get a $120,000 property under contract, and you say, “Hey, instead of selling this house and getting your money right away, what if I buy it from you and I make a payment to you like you’re the bank?” The seller of the property might not care that you don’t have a W2 job like a conventional lender would, that’s another way that you can get around it.

David:
And lastly, you could start a partnership with another investor and you could bring money from your wholesaling into the deal and they could get the financing. That’s another way that you could be able to put deals together. And the last one I would say, I just thought of this, is you could buy commercial properties. If you buy commercial properties, you will be able to use the income from the property to qualify for the loan, not the income from you, Diana. My mortgage company has a product where we do this all the time for people. We get them loans based on the money coming in from the property and we make sure it covers how much the property is going to cost. And we can go in qualified irregardless of how much money that they are actually making in their own personal life. You are going to have to be more creative but it’s not impossible.

David:
Next question comes from him. Nate L. in Kansas. He actually has two questions so let’s get to the first one first. “In your experience, if you transfer a property into an LLC, does a lender see the business as the holder of the property or would they still include that on your debt slash income since you’re backing the LLC? Or does this vary by lender?” Now, this is one of those questions that I’m going to answer but I do have to say, I am not a CPA so I can’t give you tax advice but here is how I understand it.

David:
The first part A, yes, it does vary by lender. There’s certain companies and products we have that don’t look at it like the debt is not on your name, it’s in the LLC’s name and so it doesn’t count against you. But conventional lenders, where everybody tends to want to be because they have the best rates and the best terms, they will usually look at the LLC and hold the debt and the income against you. And the reason is, LLCs are pass through corporations. Even though the property is owned by the LLC, you own the LLC and so you are one who is responsible for managing that LLC, which means that the debt the property has is going to be held against you. But the income will be also. If you’re buying income producing properties, this does not hurt you nearly as much and you don’t have to worry about it as much either.

David:
The exception to this would be not an LLC but a C Corp. C corporations are looked at as separate I identities. This is why I’m saying I’m not a CPA because this enters into the question. And instead of the C Corp being passed along to you or the income passing through to you, it stays in the C Corp and you are basically an employee of that C Corp, meaning all of the property that the C corporation owns, you’re not responsible for the same as you as an employee would not be responsible for whatever company that you work for, the real estate that they own. That’s one of the benefits of the C Corp. The downside obviously is it’s harder to get money out of them and there’s more rules with how to structure them.

David:
The second part of Nate’s question is, “When using the BRRRR method, I always hear you say, ‘Get pre-approved before looking for a property.’ Does this apply to both the hard money lenders to purchase initially in rehab and the bank lender you’re going to refinance through?” That is a very good question, Nate. And the answer is, yes, it would apply to both. You know that the last stage of BRRR, well it’s repeat. The one right before that is going to be refinance. You want to make sure that the lender you’re going to refinance through is going to give you the loan. They’re going to probably look at your income, your debt to income ratio, the debt that you’re carrying, your credit score and they’re going to say, “You would be pre-approved to get a loan for this amount, with X amount of equity.” If you’ve got 20% of equity in the property, they’ll give you 80% loan of a certain amount they believe you can repay. You definitely want to do that before you get jumped into this project.

David:
The second piece is that you don’t want to go writing offers on properties if you don’t know if you have a hard money lender, if that’s who you’re going to use, that will even approve you for the deal. You got to talk to the hard money lender if that’s what your goal is and find out what other criteria they have to let you buy that property. Do they care about how much equity’s going to be in it? Do they care about the area that it’s in? Do they care about the price point? Every hard money lender is different. They’re not all selling their loans to the same places like conventional lenders are. They have their own unique criteria because they have their own set of investors that are putting money to buy these properties. Absolutely talk to both of them and get a very clear picture of what they want and then target your search based on those parameters.

David:
When I myself was sort of amplifying my portfolio with the BRRRR strategy, I realized just how important financing was. Once you get more than 10 financed properties, you can no longer get conventional loans, which is what everybody’s used to. These are Fannie Mae, Freddie Mac loans. You as the person who’s buying it don’t always know or care what type of loan it is. You just want to know what the terms are. What’s my interest rate? What are my closing costs? Is it fixed or adjustable? People don’t understand why certain loans are better than other loans but once you get more than four, those conventional loans, which are typically the cheapest, become harder and at 10, you can’t get them anymore, especially for investment property. You’re forced to find alternative sources of lending.

David:
And what I found was, even though I was a very good investor, I bought very good deals, I added a ton of equity to it, I made good money, lenders just didn’t want to lend to any investor that had more than a certain number of properties. And so I found myself getting close to not being able to finance deals because I didn’t know the rules of the lender. I actually found a bank that let me take out a line of credit that would let me borrow 75% of the appraised value after my rehab was completed and I would finance those deals on that line of credit. And then when I used up the whole line of credit, I would refinance into basically am umbrella alone where all those properties were put together in one bunch and analyzes if it was a multifamily property. 10 single family houses would be looked at like a 10 unit apartment complex.

David:
But what I’m getting at is my whole strategy was put together based on what the lender required. I had to build what I did around what they would allow. That’s how important financing was. Don’t be afraid to do the same thing. If you’re hitting a point where getting a loan is hard, find out how you can get the loan and then put your strategy together to comply with that.

Matthew:
Hey David, sorry about the shirtless, but at the local pool soaking up the day. My question is, by the way, love all the content on BiggerPockets. Fantastic. I learn tons. My question is, I own my primary residence mortgage in my name, my fiance, soon to be wife, pays half the mortgage. Is there a way that you know of that I can show a potential lender that she in fact does pay half the mortgage so my debt to income ratio reflects more of what reality is? Again, thanks so much. Love the content. Thank you.

David:
Hey Matthew. First off, don’t apologize for being shirtless. I’m shirtless too. This is some really hot content we’re making and it makes it hard to stay fully clothed. I understand. Now when it comes to your question, you are in a bit of a conundrum here. If I understand you right, you’re saying that you own the property in your name and the loan is in your name but your fiance has been making half of the payment and so you’re not technically on the hook for the full amount and you’re wondering if there’s a way that you can show a lender this is a situation that we’re in, the $800 or whatever it is that she pays I shouldn’t have held against me.

David:
Now here’s the problem. While that may be happening in practical terms, you’re the only one that’s on the hook for that loan. If your fiance broke up with you, decided she didn’t want to make that mortgage payment, got her own house, whatever would happen, you would still be liable for that full payment. And what they’re looking at is what is the debt that you are liable for? What do you have to pay, you’re responsible for? Not what are you actually paying? Now you may find some unconventional lender. We’re talking about hard money lenders, private financing, some of the non-qualified mortgages that our team does. By the way, those are not as expensive as you think. I do on myself and oftentimes it’s rates between four and four and a half percent. They’re not bad at all. That may give you an exception.

David:
But anything conventional that you’re talking about, I’m not aware of anything you could do to get out of it. The only thing you could do is add her to the loan basically and have her responsible for half of that payment. But even then, usually what happens is both of you are responsible for the full payment instead of splinting it in two. Unfortunately on this deal, that’s probably not going to work out for you unless you refinance the property in a different way or you found a lender to do your next loan that wasn’t conventional. If you’re in one of the states that we operate in, send me a message, I’ll get you connected one of our guys and see if we can help you with that. If not, you’re probably going to have to increase your income or lower your debt or buy the next property in your fiance’s name and let her debt to income ratio, which isn’t affected by your property, be what they use to qualify you.

Dustin Byer:
Hey David, thanks for taking my call. My name’s Dustin Byer and my wife and I had kind of a mental roadblock question for you. We have a net worth of around $2 million and we run a bunch of businesses and we have four kids ages four through 12. We’re rather busy. All of our net worth is tied into those businesses and the house that we live in and we were trying to basically diversify and create more passive income. And so we can invest about 10,000 a month. And my question is, would you invest in those small things along the way? Or save and stick it in something like Brandon’s Open Door fund since we’re so busy all the time? Curious your thoughts. Thanks. Bye.

David:
First things first, Dustin, thank you for the video. And this is a pretty awesome problem to have. If I hear you correctly, what you’re telling me is you are pretty successful with running your businesses. You have properties that you previously bought that have a lot of equity that have contributed to this net worth of $2 million, which is awesome. That’s fantastic for you and your wife and your four kids who are probably eating away at that net worth every single chance they get. Macaroni and cheese doesn’t come free. And your question is, what should you invest in? Your fear, your concern is going to be, I don’t want to put all my money into something that’s going to take a lot of time. Something like a short term rental could be really bad for you because you’re running your businesses. And that’s why you’re wondering about investing in someone else’s deals like Brandon’s with Open Door Capital, where you could put the money in, be completely passive.

David:
That is a very good option for you. I would look into that if I was you. However, you’re investing in real estate but you’re not investing in real estate. You’re investing in a fund and this is just the way I look at it. When you invest in someone’s fund, from your perspective, it doesn’t matter that they’re investing in real estate with it. It could be investing in a hedge fund or in stocks that could get you a similar return. From your perspective, you’re giving your money to someone and you’re getting it back with interest. That’s good. You should do it. I do it all the time but I also know that isn’t going to help me achieve the purposes that people tend to look to real estate to help them achieve. Most people are buying real estate because they want to plan for their retirement. They want to grow their net worth. As you’ve seen, it’s worked for you. They want passive income coming in that they can live off of.

David:
Those are not the only things to chase in life. There is definitely an argument to be made for investing in funds like this. Like I said, I do it myself and in the future I’ll be raising money for people looking for the same thing. I just want everyone listening to have clarity that if you’re thinking, I need financial freedom, I want to own a bunch of rental properties, I want to be able to refinance them and buy more. I want to do all the cool stuff, Brandon and David talk about. This isn’t going to get you there. This could be a step in the direction of getting you there. It could help you get more capital coming in. It could also help you earn a return on your capital while you’re in this busy season of life, where you’re running businesses and raising children.

David:
From that perspective, yes, I think that would be really smart. You should be investing into funds of reputable people but you can’t let yourself believe that that temporary solution is going to get you to the permanent goal that you want to hit. You need to look at it like doing this is going to help me accumulate more seeds that I eventually will go plant real estate to get my own trees. I would, if this was me, here’s what I would do. I would set a timeline and I would say, “My youngest kid is going to be whatever age I think I’ll have more time.” Maybe they go into high school, ninth grade, maybe you make it 12th grade, “and my oldest child will be 18 and I won’t have to put as much time into them in 10 years. In 10 years, I’m going to get very serious about buying a lot of real estate. How much money can I make and amplify through investing in other things over the next 10 years so that when I get there, I have X amount of money?”

David:
You’ve said you can save 10K a month, take 10K a month, that’s $120,000 a year. What can you add on that return? If you get a 10% return, that’s another $12,000 in a year. If you get a 20% return, that’s another 24,000. You’re saving 120 plus you’re earning 24,000 if you make 20% in Brandon’s fund or whatever fund you go into, which gives you 144,000 times 10, 1.44 million. That’s what you should have when you’re ready to start investing. Now, you more or less know it’s going to be somewhere in that range, unless you make more from your businesses.

David:
But then I would say, what turnkey properties can I buy while I’m on that journey of investing in these funds? Now, when I say turnkey, I don’t mean from a turnkey company. I just mean, what can I buy in a really good area that doesn’t need a lot of work that won’t be a headache that I can buy it, have a property manager manage it and it will be fine? I don’t have to manage a big rehab. I don’t have to deal with constant tenant turnover. I may not get a ton of cash flow but that’s okay because my target is 10 years out so I don’t need cash flow right now. I need cash flow then. And maybe pick up a property every couple years that fits that criteria, while doing what you’re doing with investing into funds.

David:
And then the last thing that I want encourage you to do is to figure out how to automate your business. Everyone hates it. Nobody trains us how to do this. It’s the hardest part of everything but if you can hire people and get your business automated to where you have more time, you can put more time into buying real estate, which is where your real wealth is going to come from. That’s exactly what I’ve been doing. The last three years. I’ve been getting my butt kicked, trying to hire, trying to train, trying to manage, trying to get good agents on the David Greene team and I finally have them. They’re doing great. I don’t have to do as much of the work.

David:
It’s semi-passive income coming in on the David Greene team. Now I took that energy and I’m focusing it on the mortgage company, building up the loan officers, working with my partner, hiring new people that want to hang their license with our brokerage, finding more agents we can help do loans for their clients, finding people that need to refinance right. Building up that until that becomes passive income. When that happens, I will have all my time back plus these businesses that are bringing in revenue and I can put all of that revenue and that time into buying more real estate, which is where the real big gains come from.

David:
I know I’ve given you a lot of advice and it’s kind of centered around business, which many of our listeners that are W2 workers don’t relate to but you are running a business when you’re buying real estate. And I do want you guys to understand when we interviewed Robert Kiyosaki on episode 500 of the BP podcast, he gave so of really good advice concerning the purpose of business is to buy real estate and take on debt. To take on debt and avoid taxes. That’s the purpose of a business and you do that through real estate. All the business income you’re making is great. It’s only useful to you if you can invest that into real estate and save on taxes, take on more debt using other people’s money to build this empire so that when your kids are gone, you’re not just now starting to build wealth. You actually have had it going. You also can’t jump in with both feet. I understand you’ve got four kids, that sounds like a lot of work.

David:
Put some method of diversification in there where you consistently put money into Brandon’s deals and then you also buy a couple deals for yourself. And then at the 10 year mark, you can stop putting money into Brandon’s deals, you can put it all into real estate until you’re like, dude, I have enough, I don’t want any more of these homes. And then just keep investing into funds like Brandon’s and let them do all the heavy lifting.

David:
We’ve had some very good questions today. I am loving how this podcast is shaping out. Every single time we do it, the questions get better and better, deeper and deeper and they really give us a chance to break down and reverse engineer what it takes to be successful in investing. I love getting to do this because instead of just listening to the story of somebody else who built real estate, you get to get deep into the specific questions or struggles or obstacles or opportunities that other people are having.

David:
In fact, if you notice the pattern of what I’m getting into, most people believe they’re at a situation or an obstacle that they can’t overcome but I’m looking at it and I’m seeing that there are several ways that you could overcome this. I really hope you guys benefit from seeing just the way that my weird brain works as I look at of how I can get A plus B, how I can take advantages of strengths in different markets while also limiting my downside. Real estate is one of the few things that has so much creativity that can be applied, that you can make almost any situation work.

David:
Thank you guys very much for submitting these questions. Please go to biggerpockets.com/david, submit questions there. And maybe when you come across somebody that’s asking you something that you don’t want to answer or you don’t think that they should be asking you or you just don’t have the answer for, tell them to go ask their question there. It’s kind of cool to be able to be aired on the BiggerPockets podcast and you can share it with your family and friends and let them know that you were on the biggest real estate podcast in the world. If you guys could take a quick minute to please hit the like button on YouTube and share this with anybody that you think would benefit from it, I would really appreciate you as well as leave me a comment of what you think about the show so far.

David:
Our next question comes from Solly M. in Hayward, California. Hayward is very close to me. I represent lot of clients in that area, helping them get houses and I was just looking at houses for myself a month ago or so in Hayward. Any of you in Northern California or if you’re in Hayward specifically, please let me know. I’d love to get to know you guys better. Maybe go to the Red Chili in Hayward, best Vietnamese Thai fusion that I’ve ever had. It’s probably my favorite at restaurant and we need to get connected and have you at some of the meetups I put on.

David:
Solly asked, “My husband and I are buy and hold long distance passive investors. Our goal is to grow passive income, enough to retire in the next five to seven years. Basically we want to build a nice nest egg. We are following a rather conservative, slow paced strategy. We used our own savings for down payments and repairs and used conventional mortgages on five single family homes, four conventional and one BRRRR in suburbs of Detroit, which are A and B plus areas. Our average cash flow is about $300 per door. The ROI is about 5%. After two years of experimenting and learning, I now realize that we can’t achieve goals with this strategy. My question is, what should we do differently to increase ROI but still remain conservative enough? Generally, I believe in quality over quantity. Rather than owning four properties with $100 of cash flow per door, I prefer one door with 400 cash flow. Thank you.”

David:
What a good question that we have here. A few things that I’m going to assume based on Solly’s situation. The first is when she says that they’re buy and hold long distance and passive. And I know they live in Hayward. They probably have pretty good jobs that pay pretty well but require a lot of their time. Maybe this is software engineers. Maybe they work in some of the tech companies that are not far from Hayward. That would be the Silicon Valley area, if you’ve heard of it, where wages are really good and you have great opportunity, but it is a lot of your time. You spend a lot of time commuting because traffic can be hard. And then you spend a lot of time committed to accomplishing the goals that your project manager’s giving you at those companies. I don’t know if I’m right but Solly might be sitting there nodding her head saying, “Yep, he totally gets it.”

David:
Now what Solly said that so profound that you all need to hear is that taking the conservative approach at every single step is actually shooting them in the foot at hitting their goal. They want to be able to retire with cash flow in five to seven years. But looking for properties that are not cash flowing quite enough or not appreciating quite enough, being extra conservative so to speak, has stopped them from hitting that goal. And this is a perfect example of what I was saying earlier. Sometimes taking the safe road is the quickest way to guarantee that you lose. It doesn’t mean you should be risky but it does mean that you should not assume conservative or safe equals success. Sometimes it doesn’t and this is one of those areas. If they stay on the path that they’re on, they’re not going to hit financial freedom. They’re going to be working for a lot longer.

David:
Now, a few things that I can look at with your strategy right now, Solly, that I think would probably need to change. I agree that I’d rather have one door with $400 cash flow than four doors with 100. I don’t know that I would say that that’s risky. Sorry, I don’t know I would say that’s conservative that having less properties with more money is harder to do. I think that you wanting to buy in the Detroit area feels safe to you because you probably really like the price of the homes. That’s what I’m guessing drew you there. They are priced low and they’re in A to B neighborhoods so the gain that you’re getting is easy to get in and not a lot of headache because the tenants are great. The downside is they’re not appreciating very much and they’re not making you a lot of money. That’s what you need to question yourself on.

David:
My philosophy is that cash flow is incredibly difficult to build. And what I mean by that is if I want to cash flow $10,000 and I’m going to get a $100 per door, that’s a lot of doors that I have to get to get it to 10,000. In fact, I probably wouldn’t even want it once I had it because that’s a lot of work. Even if you get to $500 per door, to get to $10,000, what would that be? Two houses is a 1,000 so that’d be 20 homes that you’d have to own to get to 10,000 in cash flow. And $500 a door is very hard to hit. You’re probably more looking at 40 to 50 homes. A better strategy, the ones that I employ involve delayed gratification, specifically when it comes to cash flow.

David:
Rather than trying to get 10,000 a month in cash flow and then saving $10,000 to go invest into real estate, I take the opposite approach. I try to build equity because I can control equity much more than I can control cash flow. Cash flow depends on what the market gives me. Equity is something I have a lot more creativity in. I can buy fixer upper homes. I can add value to homes. I can look for the worst house in the best neighborhood. Typically as home values appreciate, rents do too but rents don’t keep up. Because at a certain point, if rents kept up with home values, people would say, “My rent’s too high, I’m just going to go buy my own house.” Inflation helps the home value even more than it helps rent, although it helps both.

David:
What I do is I buy properties in areas that I think are going to appreciate over time. I build equity in those and then I 1031 all that equity into the cash flow thing that I want, like an apartment complex. It is much easier to build a million dollars in equity through elbow grease and smart decisions and time and then transfer that million dollars into a cash flowing property where an 8% return would say make me the 10,000 a month that we’re talking about, than it is to try to wait for my cash flow to equal a million dollars And then do something with that. What I would say is stop investing in areas that are this conservative. You guys need to get into something that has a higher ability to appreciate over time, where there’s going to be less building, less supply. It’s going to be harder to get into initially so you’re going to have to put more time into getting it under contract. You may have to pay over asking price, where you may not be doing that in the Detroit suburbs that you’re in right now.

David:
You’re going to give it up on the front end. It’s going to be harder work to get that property. But once you have it, it’s going to go up a lot. What if we helped you, because I work in your area, find a house in the San Jose area? You’re going to put a lot more money down. It’s going to be more work to get it. But once you’ve got it, the rents are going to go up so much more and the values are going to go up so much more. If you bought a handful of houses in somewhere in the San Jose market and you let each of them appreciate by 300,000 and you had four of them, you got 1.2 million that you can then go invest and you’ve met your cash flow goals once you convert it.

David:
What I’m getting at is while cash flow is the goal, it doesn’t need to be the first step. Make it the end goal. And that’s what I’m doing. I look to build appreciation first and I transfer that into cash flow later versus just chasing cash flow right off the bat because that’s where you run into the situation you’re in now where you’re realizing it just takes too long. I don’t have 900 years to live before I’m going to get there. Thank you very much for asking this question. I hope I answered it well so everybody understands that I’m not saying cash flow doesn’t matter. I’m just saying I can get to cash flow quicker if I pursue it through appreciation and that doesn’t mean taking risks. That means buying fixer upper properties, buying in the best neighborhoods, getting really good deals and then waiting. Lastly, we live close to each other so reach out to me and I would love to be able to help you do something out here.

David:
Next question is from Palmer in South Carolina. “As is probably pretty common in this current market, my rental units have gone in value substantially over the last few years. As they’ve gone up in value, the rental income has not kept pace with the spike.” Side note, this is me not Palmer. That is exactly what I just described when we were talking about Solly’s question is that they don’t. They both go up, but they don’t go up proportionally.

David:
“I am looking to start selling and was wondering what factors I should take into account or if I should sell it all. I’ve been trying to think of selling in much the same terms as I consider when buying. As an example, if there is a house on the market for 80K that would bring in a $1,000 a month, then given all the other expenses that are reasonable, this makes good sense to purchase. If the same house was on the market for 120K and brought in the same $1,000 a month, then this deal I would pass on. That’s because the money’s opportunity value is worth more to me than the house. But why doesn’t the same apply when the house I purchase for 80K appreciates to 120 K and the rent lags the appreciation? Some of my houses have almost tripled in value and tripling rent would put me well above market rates. I understand there are tax burdens and other factors, including appreciation, income stream, et cetera, that need to be considered and was wanting to hear your thoughts on when to sell a rental unit.”

David:
If we had some kind of alarm, I would totally hit the button because this is going to be my favorite question of the entire day. This is big boy and girl stuff, folks, and you won’t hear answers like this almost anywhere else. Not because I’m tooting my own horn but because I don’t think other people think about these questions. But because I work with people who own real estate or want to buy it every single day, I’ve had to figure out why Palmer is in the situation he’s in because he’s exactly right. What Palmer has realized is that as the price of the house goes up, the rent doesn’t go up with it. That’s the first thing I’m going to address.

David:
The next thing I want to make sure that I cover is that he says, “If I could buy a house for 80,000 that brought in a $1,000 a month, I would buy it but I to buy a house for a 120,000 that brought in a $1,000 a month.” In fact, I’m going to start there because I want to highlight a few things. Palmer’s logic is sound. He wouldn’t spend a 120 to get a cash flow stream of a 1,000 in rent or revenue, not cash flow. And he would do it if he only had to spend 80,000 to get a $1,000 in revenue for rent. Where I think Palmer has it wrong and a lot of other people are in the same boat, especially if you’re somewhat like a newer investor. You don’t own a ton of properties, is his logic is built on the foundation that cash flow is why you buy real estate. And this is coming up a lot.

David:
Cash flow is not why I buy real estate. It is a wonderful perk. It is icing on the cake. I really like it. But cash flow alone pales in comparison to the wealth that I build from buying a $500,000 property, putting 50 grand into it and making it a $700,000 property. That’s $150,000. Cash flow takes a long time to build up that wealth. The first thing Palmer that I want to challenge you on is look at real estate from a more broad lens. Don’t zoom in and say, “Cash flow is the only reason why I buy real estate.” Say, “Cash flow is a reason why I buy real estate.” And at some form of your life, usually near the end of our lives, cash flow is much more are important than when we’re 24 years old.

David:
In fact, I’m going to go out here and say a controversial thing. If you’re 24 and you’re trying to retire in two years and you want all this cash flow so you can do it, that may be good. If you feel that’s the calling on your life, that’s cool. It may be one of the worst things that ever happened to you. You gain a lot in life through working and learning and developing skills and letting that mature you and screwing up and having mentors tell you, “Hey, you screwed up. Do it better.”

David:
There’s a lot to be said from going through life, working for people or working with people or doing some form of, I don’t just sit on the couch and watch Dancing With the Stars. It’s good for your character. It’s good for your relationships. It’s good for friendships. You build a richer life by doing something difficult, which most jobs have some bearing degree of difficulty. I’m not a huge fan of I’m 20 years old and I want to be retired in three years and never work again. You might be robbing yourself of a lot of what life offers you.

David:
And that’s one of the problems with this cash flow, cash flow, cash flow. I need cash flow. Is it sort of sets you up to make some worse decisions in life. Doesn’t mean cash flow is bad. Cash flow is incredibly important, especially if you don’t have a ton of money. That’s the first thing I want to say is look, if that or $120,000 house that you don’t want to buy because you would only buy it if it was for 80. If that one goes from 120 to 240 in six years and the 80,000 house goes from 80 to 90 in that same six years, you made way more money on the 120 house even though the cash flow of a 100 bucks or whatever the difference is, very nominal, wasn’t that much. The rent probably went up faster on the 120 house than the 80 house too. Guys and gals, as you’re considering these things, ask yourself if you are obsessed on cash flow and if that obsession is getting in the way of you making better decisions.

David:
Now, why does rent not keep up with the price of homes? Man, I love answering this. I talk to my team about this all the time. Here’s what you got to think about. The people who rent homes sometimes rent them because they want to, they don’t want the commitment of owning a home. They don’t want the maintenance and the upkeep. There is a percentage of people who rent that come from that point. I would say the bigger majority of people who rent would want to own but they can’t. They can’t get a loan or more importantly, they can’t afford the house. They can’t save up the money to buy it or houses are too expensive for them to be able to buy. And so what happens is they become a renter by default. They don’t want to be renting. Most renters if you said, “Do you want to own your house?” They would say, “Yes.” Oftentimes in it’s the price that stops them from doing it.

David:
Now, if you’re a person who can, let’s say that you bought this house for 120 and the rent was a $1,000 and Palmer here is saying, “Well, if it goes up to 240, shouldn’t the rent also double? It should go to $2,000.” The problem is at a certain point when let’s say the rent hits 1,800 or so, maybe 1,500, let’s go with that, the tenant if they could afford that rent would be better off buying. They could get qualified to buy the house themselves. You start off with tenants are always typically in the lower priced homes. Doesn’t mean that they’re bad homes. They’re just in the lower part. They’re not buying luxury homes. Not as many people rent that.

David:
Prices of homes go up, rents go up, you start to see this happen and then the rent hits a ceiling where the tenant either can’t afford it so they’re going to stop this house and go get a cheaper one. Or if they could afford it, they’re like, “Why am I going to pay $2,000 a month for rent when I could own the house with a $1,600 mortgage payment?” And that’s why they don’t keep up. What you find, if you really think about it in most areas where investors are investing, if they’re cash flow, they’re not the nicest areas. They’re not the most expensive homes. You typically take the city and the lower rung of it is where you’re going to find that you can actually make your money as an investor. There’s not a ton of investors that own a lot of Beverly Hills real estate is what I’m getting at.

David:
You’re in the situation, Palmer, where your house has naturally outgrown being used as a rental. I want you to think about a child that just has a sweatshirt and they got bigger. Maybe this sweatshirt stretched a little bit but at a certain point that it couldn’t keep up with the child growing. You need a new sweatshirt. It is natural in the real estate investing cycle to take a house that doesn’t cash flow as much as it could, meaning if you look at the equity on your property and you divide it by what it brings in every year, your return on equity, that number is lower than the return on investment you would get if you bought another property. And when that happens, if what you want is cash flow, you sell it, you take your gain and you go buy two to three more properties and you start the process over.

David:
If you wait and get frustrated that rents aren’t keeping up, you’re never going to get anywhere. What you have to recognize is I did so well that I out kicked my coverage. This doesn’t work as a rental anymore. I will sell it and turn it into three rentals and start that process over with them, letting them grow. You can buy and hold forever. There’s nothing wrong with that. But if your goal is cash flow, buy and hold forever actually works against you in many cases.

David:
Our next question is from Daven like raven. “Structuring an owner financing deal in Atlanta and there is a bit of land in the back that I would want to build on. Is that something I could get financing for? Or would I need to pay for that in cash? Assuming I got permission from the owners, P.S. It would be a cash flowing property, short term rental or long term rental.”

David:
Daven, so your question, if I understand it correctly, and by the way, Daven and David are very similar there. Is you’re buying this property, it’s got land in the back. You want to build on the land and you’re trying to figure out how to finance that. There’s a few things that we need to look into here. First off, the quick answer, if you’re expecting can I put 5% down or 10% down and the bank will give me the rest of the money to build on it? No, they will give you those really good loans when it’s the property is already improved or the land is already improved with what’s typically a property. That’s not the case here. You’re not going to be able to borrow money the same way you would when you’re buying the house in most cases.

David:
You should look into if the city or the county will allow you to reparcel that land. In which case you may be able to basically splice it off from the main parcel that you’re buying, create a second parcel with its own APN or assessor parcel number, I believe it is. You get a new number for property taxes and it’s like owning two properties now. You could sell that land or you could build on it. Either way, when it comes to the building, you’re going to have to get some form of a construction loan. You may find a hard money lender or a primary or a private lender that will let you do it but it’s going to be more tricky. How these loans usually work is they don’t give you all the money at once because they think if I give you 300 grand to build a house, you might just take off and go to Switzerland, I never see you again. They also think what if I give him 300 grand and all he does is get the foundation built, the contractor rips you off, or you don’t know what you’re doing?

David:
They’re very concerned that that’s going to go poorly. Versus when they give you a loan on a house that’s already built. How many ways can that go wrong for them assuming the house is built well? They’re going to say, “Here’s your first draw. Here’s a chunk of money. This is the interest you’re going to pay on that money.” And then you’re going to build the first phase of it, say the foundation and all the concrete and get your plans drawn up. Sometimes you have to pay them interest on the money that you’re not using because they can’t lend it to anybody else. I’ve heard that referred to as Dutch interest. I don’t know where that comes from but if they’re like, “Hey, you need 300 grand. We’re going to give you 80 grand right now but that other 220, we can’t give it to anybody else. You got to pay us, usually a smaller rate on the money, you’re not using in a bigger rate on the money that you are.”

David:
After they send someone out to verify that the construction was done well and it’s completed, they give you your next draw of say 80 grand and now you’re going to put up the framing and you’re going to do some of the other stuff and it’d be you’re rough in or whatever. And they go through phases like that with lending you the money. Now, the rates will be much higher than you’re used to because this is much more risky for them. A lot of things go wrong when you’re building a house. And I remember when I was a brand new person, it was 2005 and I was so frustrated with what house prices we’re doing and I said, “I’m just going to build my own house.” I just had no idea what it was like to build a house. And I thought the same thought I think a lot of other people think. Housing prices are getting so high. I’ll build my own. You’re probably not going to.

David:
Even the guys I know that have construction licenses don’t build their own homes. They still look for houses already built and then try to fix it up. I don’t want to discourage you from trying to build a house on the property. I do want to let you know, it has many more moving pieces. You might lose money doing this that you could have made in other areas. And this is one of the reasons that even though Californians are allowed to add ADUs to their houses, it’s not always a good financial decision because sometimes the ADU might cost $200,000 to build and you could have bought a whole house for $200,000 down and had two really big houses and nice ones versus one house with a tumor, the ADU type of a thing. I’ve said it before, financing makes deals. And I don’t want anybody here to get caught up in, oh, I would have a short term rental, longterm rental with cash flow whatever. If it takes all your capital to do that, you’d have been better off putting that capital into other opportunities where you can get a better return.

David:
And our final video question of the day comes from Mark in Northern Colorado.

Mark:
Hey David, it’s Mark Amatee from Wellington, Colorado. I’m about an hour north of Denver and maybe 10, 15 minutes north of Fort Collins. My primary question is, should I do a HELOC on my primary residence to pull out about $54,000 in equity to then buy income producing property in Ohio? Or should I wait until the house has say a $100,000 in equity? Right now it’s a three, two, it’s a new build and I’m going to be turning the downstairs into an extra two beds, a bath and a kitchenette. It’ll be a five bed, three bath after that.

Mark:
And the second part of the question is, which market should I try to focus on, the Colorado market or the Ohio market where I lived all my of life, know people and they know me? And what I’m doing out here in Colorado is I did get my real estate license but that could take forever to find clients or get to know people out here. But once I do get the downstairs finished, I’m going to be getting roommates. I’ll do a little bit of house hacking and that could provide maybe a 1,000, 1,500 a month just depending on what rent would be and who I can get.

Mark:
That’s basically all I have. And basically I’m just trying to make it as a real estate investor. And in real estate sales, I did a flip in Ohio, bought for 9,000, did some updates to it, basically at the end of the day, I made about 35,000 on it and then took that money kind of moved back here to kind of start a new life out here. Appreciate it. Thank you for your service as a cop. I was a cop as well and thanks, have a good one. Bye.

David:
Thank you, Mark. Hope you’re enjoying your time out there in Colorado. That’s actually the mecca for BiggerPockets. They are located in Denver. I love every time I get to go visit them, they got awesome staff and friendly folks. What you’re your question is, is basically coming down to, where should I buy? Should I keep buying in Ohio where I know the market and I’m comfortable? Or should I buy more in Denver where I live right now? Before we answer that and I do have some good practical tips for you, let’s talk about the pros and the cons of each so that the listeners can understand my thought process.

David:
The first thing that I like to say is, is whenever I’m given a A or B question, I want to figure how to turn that into a, A and B answer. Now I think that one of those books like Millionaire Next Door might have talked about that’s something that millionaires do is they often try to say, “Well, how can I have both?” And I do naturally think that way. And I think you can pull that off with this situation that you’re in. Let’s talk about the merits of Ohio. The price point is smaller. The deals are probably easier to come by and when I say deals, I just mean the ability to get something under contract, because Denver can be very hot and your cash flow will likely right out the gate be stronger than in Colorado.

David:
In Colorado, the upside would be you’re likely to see much more appreciation. Rents are going to go up more. The value of the property is going to go up more. You’re going to have less headache from the majority of the tenants because you know people there so you can kind of pick the people that you’re going to rent to. Overall, my opinion would be Colorado is going to build you more wealth than Ohio but Ohio would be easier to get started. Colorado has the higher upside, Ohio has the smaller downside.

David:
What I would say is how can we do both? Now, what’s going to limit you is you’ve got 54,000 that you believe you can pull out of that HELOC which is not a ton of capital to make a lot of things going but it is enough. You also mentioned that you may be fixing the property up. Here’s what I would say. Take out the HELOC with what you have now, get that $50,000 out. Do your rehab and then get another appraisal on your home, see that you’ve added value and get that line of credit to go higher. If your house is worth $500,000 now, after you fixed it up maybe it’s worth 600,000. They let you borrow 75% of that extra 100 grand. That’s now 75,000 that you’d be able to theoretically borrow on top of the 50. You’re going to have more room to play if that’s the case.

David:
But let’s start with the initial 54,000. I like that you said you flipped a house in Ohio that you bought for nine grand and made 35. That’s 60, 70% of the total capital you have right now of the 50,000 that you can take out. Can you do that again? Can you flip a couple houses in Ohio and build that nest egg to get it bigger? That’s the first thing is I don’t want you dumping your money in Ohio because it won’t earn you as big of a return over time but that doesn’t mean it’s useless, you can’t do with it. Use that money to kind of make more money short term. Flip a couple of those houses. If you get a good contractor and you can do two or three of them and you know how to find those deals, turn that 50 into a 150 doing maybe three, four or five flips. That changes everything.

David:
While you are doing that, house hack a new place in Colorado every single year. Now here’s why I’m telling you that. Everyone assumes cheaper properties equal lower down payment, equals I can buy more. And they forget that when you’re buying investment property, you got to put 20% down. If you put 20% down on an investment property in Ohio or 5% down on a house hack in Colorado, you could buy a house that’s four times as much money in Colorado and it’s the same capital out of pocket. That’s what I think you should focus on. Every year, find a new house hack that you buy with a primary residence loan, three and a half percent to 5% down depending on what you can get. It’s not going to take up all your capital. And then with the rest of your capital, use it to flip houses in Ohio. If you’re not going to flip, then only BRRR. You need to buy something in Ohio that you can get your capital back out. You don’t want to sink it in there because it won’t grow as fast but you do want to play in that space.

David:
The BRRRR method will work great in a market like that if you can find more fixer upper properties because the price to rent ratio will support it. BRRR is much harder in Colorado so don’t BRRRR in Colorado. You don’t need to BRRRR in Colorado. You’re only putting three and a half to 5% down. That’s basically the same thing as a BRRRR without all the work. What I’m getting at here is both properties have strengths to them. You got to plan on both of it. Ohio will work very good for BRRRR and for flipping because you know people, you can find deals, you can build the capital you have. Colorado will work better for the longterm place. Ohio is short term, Colorado is longterm where you’re going to continue to put low down payments down and build up your portfolio there. And if you do this right, you shouldn’t be putting all of the money that you make in Ohio into Colorado.

David:
Then nest egg should continue to grow in the middle and you pull some of it out to go into Colorado and you put some of it back into flipping more houses in Ohio and you have two sustainable wheels that are turning at the same time that are growing your wealth and you just let real estate build it up for you the way it does, boring and slow over time.

David:
All right, folks, that wraps up another episode of the Seeing Green BiggerPockets Real Estate podcast. I have a blast doing these. I really appreciate those of you that are sending in your questions and I’d like to see more. If you like this, if you heard this and thought, that was incredible, that was amazing. Or even, eh, it was mediocre. He was okay but he could have been better. Put that in the comments. I want to hear on YouTube what you guys like and what you don’t like.

David:
Also, you can comment on the show notes and get a conversation going with other people who listen to this, if you go to biggerpockets.com. Look it up. See what other people are saying, throw your opinion in the hat and get a conversation going with other people who are learning things just the same way that you are as well. All right, please be sure to follow BiggerPockets on Instagram @biggerpockets, my best friend Brandon @beardybrandon and myself @davidgreene24 and get more content and more insight into what’s going on in our worlds. For today’s show, this is David, no shirts, no shoes, no problem, Greene signing off.

 

 

 

Ashley:
This is Real Estate Rookie, episode…

Remington James:
48.

Ashley:
148. My name is Ashley Kehr and I am joined by two co-hosts today. Tony Robinson and…

Remington James:
Remington James.

Ashley:
And Remington James. Tony, what do we have today on today’s Rookie Reply? What is the Rookie Reply for the new listeners that are tuning in today?

Tony:
Yeah. So for those of you that are joining us for the first time, every week, twice a week, we give you the inspiration information, education, motivation and every other ‘tion’ you might need to get started in your real estate investing career, or keep it going and blow it up if you’ve already started, so… Love that we’ve got a third co-host here today to kind of spice things up, but Ash, what do we got on the docket for today? What are we getting into?

Ashley:
So, today’s question is actually from my DMs on Instagram. So if you guys want to send us a question, you can DM me or Tony. I’m @wealthfromrentals on Instagram and he’s @tonyjrobinson. So this week’s question is from Brandon Goldman and he said, hey Ashley, I had a quick question that I was thinking might be a relevant topic for many new investors. I’m currently renting a home in a great neighborhood at a great price, less than I’d pay for mortgage, taxes, insurance, if I were to buy the same home in today’s market. I’m looking to invest in my first rental property in a different town that is experiencing great growth. I wouldn’t live there myself due to work and family obligations, but is it a bad idea to purchase an investment property before purchasing my first personal residence? Tony, what’s your thoughts on that?

Tony:
Yeah. So, Brandon, I’m super glad that you asked this question because it’s one that comes up a lot, especially amongst people who are looking to get started in investing and I was in the same situation myself before I got my first real estate deal. The short answer to your question, Brandon is, is it a bad idea to buy an investment property before buying your personal residence? The short answer is no, but I think there are a few ways that you can go about making that decision and honestly, whether or not it is the right decision, depends on each person and their unique situation. I think one lens you can kind of look at this decision through is just pure mathematics.
Let’s say that you have a goal of getting to a certain net worth number, or you have a goal of getting to a certain cash flow number. One of those decisions is going to lend itself to help when you get to that goal a little bit faster, maybe buying your primary residence will help you get to your net worth goal a little bit faster because maybe the house or the markets you’re buying in appreciates a little bit faster. But if your goals are centered on cash flow, then maybe going after the rental property makes more sense. I can tell you what I did in this situation, Brandon, and maybe it gives you some instruction. I was, kind of had the same decision to make of, do I buy my first investment property? Do I buy my primary residence? And I went with buying my primary residence before getting into real estate investing. The reason I did that was emotional. And I can say that, with 100% certainty for me, was it was purely an emotional decision.
My wife, who was my fiancé at the time, and my son, we were living in an apartment. I grew up living in an apartment, we didn’t have that family home growing up, or you got to not your height as you were getting older and stuff like that, so for me and my family, I wanted a home base, right? One spot where we could kind of build the memories for our family. And to me, that was more important than getting the jump on my investing career because I knew that I would get that first deal done eventually. But for me, the right decision for me and my family was to get our primary residence first. And like I said, it purely emotional, but it’s what helped me sleep at night. So those are my thoughts, Ash. I don’t know, what do you got?

Ashley:
Yeah, I definitely don’t think that it’s wrong or that you shouldn’t invest in a property before you buy your primary residence, but just like you said, Tony, to look at the numbers. So maybe look at five years from now, what is your return going to be? So, if you buy your primary residence now, how long would you have to wait until you could save up cash? Or do you have another way to finance your investment property? So when would you actually be able to get your investment property?
And then the other way around too. If you go and buy an investment property now, how long until you could actually purchase your primary residence? I think that you have a property that you’re paying less than what you would on a primary residence. Yes, you’re not building up equity into anything so that’s really something to look at too, is you’re not gaining any equity by paying rent. But also, would you be able to afford to get into a property that is like kind of the one that you’re in now and be able to afford it and not have to struggle too and be able to live within your means or below your means still? So, I think there’s a lot of factors that play into mind, but I don’t think there’s anything wrong with getting an investment property first.

Tony:
I love the point you made Ashley, about trying to decide or determine how much time you’ll have to wait, whichever route you go down. Like for us, we got our primary residence and then, almost exactly a year later, we got our first investment property so that’s how much time we needed to kind of get ourselves ready. So yeah, Brandon, if maybe buying your primary residence is going to push off your investing by a decade, right, then maybe you have some reassessment that needs to happen there, but I think that’s a really good kind of barometer look at. And I guess there’s a few things to look at, right? First is your capital that you have available, right? Like how much of your available capital is going to go towards this first purchase. And then second is your ability to get approved for a loan. Like if you do out and get this rental property first, do you still have the DTI, the debt-to-income ratio, to allow you to go out and get a primary residence mortgage, whatever timeframe that that comes next. So, some things to think about for sure.

Ashley:
Yeah. And also if you’re married too, is to looking into putting properties into each other’s name so that one person has the debt-to-income ratio on the investment property and then maybe the primary goes into the other spouse’s name. And that’s, the debt-to-income affects that for the primary residence too. So there’s different ways to do that too, that you can look at if you are married. So one other thing I just wanted to add is that when I got married, we lived in, actually, my husband’s grandparents’ old house and it was still owned by his parents. And I started investing, in 2014 I bought my first property and we didn’t buy that farmhouse until 2015 and then we didn’t build our house until 2016. So technically we really did invest before we actually owned anything ourselves too. That ended up working out for us, so… Anything else to add on that, Tony?

Tony:
No, I think we hit it all. And Brandon, sorry that we don’t have a black and white answer for you, but I feel like these are the kind of things where it’s going to depend a lot on your unique situation and kind of what’s going on. But hopefully that gives you at least some kind of guard rails or some decision factors you can kind of look into to help point you in the right direction.

Ashley:
Yeah. Just figuring out the numbers and looking five years from now, 10 years from now. Just run those numbers for each scenario to see where you end up on that too. And I think the idea too, is that you’re looking to look-

Remington James:
[inaudible 00:07:22].

Ashley:
We’re losing a co-host.

Remington James:
Can I?

Ashley:
Yeah, go ahead. Say goodbye to everybody.

Remington James:
Bye.

Tony:
He’s like, I’m over this.

Ashley:
So, to kind of wrap it up. Analyze those numbers and look at it long term, and what’s going to work out best for you guys and your situation. And just to highlight too, what Tony said in the beginning is that cashflow you’re looking for, is it appreciation? Do you want to build your net worth? Do you want to become more liquid? So those scenarios play into factor, but overall there’s nothing wrong with purchasing an investment property before your primary. Especially if you’re going out and looking at more affordable markets that have that higher cashflow associated with them too than where you want to live.

Tony:
Well said.

Ashley:
Okay. Well, thank you guys so much for listening. We’re actually recording this on New Year’s Eve right now. So Tony, what’s your big New Year’s Eve plans?

Tony:
Well, I actually have COVID right now so my New Year’s plans are to pretty much sit at home and do nothing and try not to get anybody else sick, so…

Ashley:
Sounds like fun. Actually, I love staying at home so [inaudible 00:08:35].

Tony:
But you got big plans for tonight, Ashley. What’s going on in your New Year’s Eve resolutions for tonight?

Ashley:
Well, we’re doing the same thing we did last year. We’re going with a couple families to a hotel with an indoor pool and the kids just swim all night. We order food and have some drinks and just all hang out while the kids swim and entertain themselves, so…

Tony:
All right. Well take a couple extra shots for me in spirit of me not being there, me being locked away at home, so…

Ashley:
Yeah, I’m more like a seltzer person. Shots… You saw me in Las Vegas. Shots don’t do me well. Okay. Well, happy late new year everyone, because this will air a couple of weeks after New Year, but send us your messages on Instagram @wealthfromrentals or @tonyjrobinson if you want your question featured on a Rookie Reply. Thank you guys so much for listening and we will be back on Wednesday, but first let’s hear something from biggerpockets.com that can help benefit you.

 

It’s no secret that the real estate market has had a record year in Ontario. Most markets across the province have reported high double-digit growth in home prices and show signs of continuing at pace for a good while yet. And though the city of Toronto has attracted a lot of attention for its price growth, the nearby city of Brantford actually has it beat, reporting the highest year-over-year price growth for single-family homes in all of Southern Ontario.

We spoke to Adam DeGroote, a top local realtor from the Brantford area about what has made his city so successful this year, about how it stacks up against others nearby and what investors can look forward to for 2022.

According to the most recent statistics from the Brantford Regional Real Estate Association (BRREA), the benchmark price for single-family homes in the region rose to $737,800 in December 2021. This follows a long string of record-breaking months that have seen the price in this segment grow by 40.8% year-over-year.

To put this in perspective, in the GTA, detached homes rose by 30% in the same period while Hamilton saw increases of around 28%. Of the regional boards in Ontario, only the Bancroft Region reported higher yearly growth, though they had significantly fewer sales numbers. Bancroft’s location in the Northeastern Region of the province leaves Brantford as the main winner among the much more densely populated and hot Southern Ontario markets.

The story doesn’t end with single-family homes. Though that segment is still king Brantford, spillover demand from priced out buyers and interest from outside investors is doing great things for the city’s other market segments as well.

DeGroote says that with a surge of single-family home values “comes opportunities for the other sectors to flourish as well.”

“Multi-residential in our city is red hot too,” said DeGroote. “We have so many investors coming in from out of town looking hard at our multi-units and older properties that can be converted to multi-units or basement suites. A number of first-time buyers go the route of buying duplexes or triplexes and living in one unit while renting the others to make ends meet and get their foot in the market. I strongly believe that we do have properties available that will work for any type of buyer.”

In terms of why Brantford had such an exceptional year, DeGroote had much to say.

“We are ideally located central to many larger Southern Ontario cities, along the highway 403 corridor and an easy drive to multiple U.S. border crossings. Because of this, many major and global manufacturers and distributors have relocated to the area, and with that comes strong buyer demand to live near work. We are also fortunate to have lots of room to expand outwards and building has been booming in our region with buyer demand skyrocketing and bringing up the average prices.”

Along with a desirable location, the relative affordability compared to nearby cities provides a major plus. With so many working from home as a result of the COVID-19 pandemic, the ability to find more space for a better price and still reach the office when needed is hard to pass up.

“The reality is that Brantford and the area are still much more affordable than the GTA, Hamilton and KW regions, so buyer’s dollars go much further here,” said DeGroote. “You pay about 30% less in Brantford than the GTA and get a bigger yard on top of it. With a large portion of the workforce now working from home due to COVID, it makes a lot more sense for Buyers to strongly consider moving out of the big city where you can still commute easily when you need to and where you can have a lot more with most of the same amenities around.”

However, it isn’t all peachy in Brantford. The quiet town has now been gaining increasing attention from around Ontario and there have been some growing pains that came with such rapid growth. According to DeGroote: “As with anything that grows so quickly, there are certainly challenges that result.”

“Most locals are happy with the demand and the growth in their equity, but it does make it much tougher on one sector of the housing market: first-time home buyers. Brantford and the area is becoming tough for first-time homebuyers to afford and compete with other offers. That’s not to say it’s impossible for first-time buyers, but it is increasingly difficult with each passing week.”

“We also have the challenge of not being able to build fast enough to fulfill the demand that we are seeing,” DeGroote added. “We have the land and we have the builders, but material supply and regulatory delays pump the brakes a little on the new construction side of things.”

That being said, even with its challenges, the Brantford area shows no signs of stopping just yet. 

“I think Brantford has only just begun to show up on the map of major Southern Ontario cities,” said DeGroote. “I expect many more big things to come from Brantford and the area for many years to come. We have the land base, the industry, and the buyer demand to support much more expansion in and directly around our city.”

BRREA would be inclined to agree, indicating in their most recent report: “Given the current market conditions it should be no surprise to anyone that both average price and the HPI Benchmark Composite price posted another year over year gain in the 40% range. Without a significant uptick in the number of new listings in the near future, the current market conditions look to continue well into the first quarter of 2022.”

It seems nothing has united Canadians more in recent years than the feeling that the housing market in Canada is entirely out of control. Across political and demographic lines, exploding prices on homes have been hitting Canadians harder and harder with each passing year and, unfortunately, many are losing hope.

Still, two things remain to be seen: effective government actions to curb an out-of-control market and a supposed market bubble that would pop and somehow make everyone a homeowner in the process. While one is merely hypothetical, the other is something that can actually be done by our elected officials – or so they claimed with their myriad campaign promises in our recent elections. 

So, when is the change actually going to come?

One recent step has been taken by the House of Commons Finance Committee who agreed on Wednesday to hold hearings on the causes of inflation in the housing market, and others. The investigation comes ahead of the next sitting of parliament at the end of January, for whom the issues are a top-billed concern.

During a meeting on Wednesday, Conservative MP Pierre Poilievre moved to undertake a study of Canadian inflation in housing, food prices, and supply chains for strategic goods. According to Poilievre: “Our economy has become a gigantic inflated balloon. The asset class in which we see this balloon most inflated is of course housing.”

The motion was passed successfully and hearings will begin next week to continue until the 24th of the month with no fewer than ten sessions to take place. Meetings in this study are expected to feature testimony from Finance Minister Chrystia Freeland, Bank of Canada Governor Tiff Macklem, and Peter Routledge, among others.

Though the meetings can do little to change things immediately, it does serve to illuminate some of the major issues that are facing our economy today and could be a start towards helping us find a way forward. It should also help to put some pressure on the Liberal Party government and finance authorities to make good on their campaign promises with regards to housing and affordability. Despite a wide-reaching plan laid out during September’s election campaign, there have been few measures actually undertaken as of yet.

This move comes as we enter 2022 with record-high home prices across the country and many areas displaying high double-digit house price increases for the second year in a row. At the same time, the consumer price index has reached its highest inflation rate in almost 20 years.

For the last while, the ailing economy has been allowed to continue its course, justified as a necessity to protect Canadians from the recession that ushered in from the COVID-19 pandemic. Now, however, as we (optimistically) approach the end of the pandemic, all eyes are on the government and the Bank of Canada to turn things around.

Stay tuned to CREW for more coverage on the Finance Committee’s meetings in the coming weeks.

When housing market analysts discuss the British Columbia real estate market, much of the focus falls upon Vancouver, Victoria and Fraser Valley. These regions have experienced enormous gains in residential sales and average prices. Despite a sluggish recovery in the aftermath of the first wave of the coronavirus pandemic, the B.C. housing market has rebounded and has enjoyed tremendous growth. But there is another benefactor of the historically low interest rates, strong demand, pent-up savings and evolving consumer trends: Powell River real estate.

The Powell River housing market has witnessed record-setting sales activity and price gains over the past 15 months. As the rest of the country begins to record easing trends, Powell River’s real estate market is instead seeing an acceleration in prices. But can this local market sustain this growth and defy the trends seen in much of Canada? It all depends on supply – and the numbers show housing levels are finally starting to increase.

This is excellent news for prospective homebuyers hoping to get into the real estate market. But, until then, let’s take a look at how Powell River real estate has performed to kick off the fourth quarter of 2021.

Powell River Real Estate Prices Continue to Surge

According to the Powell River Sunshine Coast Real Estate Board, residential sales plummeted at an annualized rate of 63.6 per cent in October, totalling just 20 transactions. Year-to-date, home sales have risen 12.8 per cent to 380 units compared to the same time last year, indicating that demand has potentially reached its peak in the Powell River real estate market.

On a historical basis, home sales were 45.4 per cent below the five-year average for the month of October. They were also 38.1 per cent below the decade average.

The most significant development in the Powell River housing sector was price growth. In October, the average price of homes sold increased 14.8 per cent year-over-year to $538,990. In the first 10 months of 2021, home valuations climbed 21.3 per cent.

The supply issue came into focus for Powell River: listings were down, but inventories were up.

The number of new residential listings tumbled 36 per cent from October of last year, totalling 32 units coming on the market. Active residential listings dropped 5.9 per cent, with 112 units on the market to close out the month. However, on a month-over-month basis, active listings increased 4.1 per cent.

Months of inventory sat as 5.6 in October, up from 2.2 months at the same time a year ago. They were also below the long-run average of 6.7 months. This is an important measure, indicating the number of months it would take to liquidate current inventory of listings at the present rate of sales.

“Sales activity came in lower than usual for this time of year after the blistering pace seen over the past several months,” said Neil Frost, President of the Powell River Sunshine Coast Real Estate Board, in a news release. “With a steady influx of new supply, this is actually good news for buyers as overall inventories have lifted from rock-bottom levels, albeit to still historically low levels. Price gains have come down from their strong double-digits to more moderate increases, perhaps signalling an end to the astronomical price growth of the past year.”

New housing construction has been prevalent in the Powell River housing industry this year. According to Canada Mortgage and Housing Corporation (CMHC), housing starts climbed to 120 in the first nine months of 2021. In the third quarter, starts were relatively unchanged from the July-to-September period in 2020.

Is Powell River Defying Broader B.C. Housing Market?

The months of inventory available in the Powell River real estate market defy broader provincial market trends. British Columbia is facing historically low levels of supply. As the British Columbia Real Estate Association (BCREA) recently reported, total active residential listings declined at an annualized rate of 40 per cent – a record low in the province. Active listings have been trending downward for five consecutive months.

Here’s a look at the most recent active listing levels in the different jurisdictions in the province:

• Chilliwack: -44.1%
• Fraser Valley: -52.8%
• Kamloops: -49.3%
• Kootenay: -15.2%
• Victoria: -54.8%

Suffice it to say, Powell River is witnessing greater inventory levels than the rest of the province. This is positive news for homebuyers seeking to purchase property in one of Canada’s largest provinces. Although price growth has accelerated in Powell River, the new supply coming online could alleviate the substantial price increases seen this year. Either way, 2022 could be a telling year for Powell River, the province, and the overall Canadian real estate market. From interest rate hikes to new public policy pursuits by the federal government, dramatic shifts are projected to help bring real estate figures closer to levels seen prior to the public health crisis.

Sources:

I knew something was wrong, really wrong when my husband walked in the door on Thursday, December 30, 2021. 

The strong winds that had started that morning were wreaking utter havoc. At 75+ mph sustained with 100+ mph gusts, the winds lifted our 11-foot trailer off its chaulks and sent it smashing into our neighbor’s car. It whizzed branches past our heads—impaling them into the side of the house—blew away our entire xeriscape front yard, and knocked down trees in our neighborhood that had been standing for over 60 years. 

In all my years in Colorado, I had never seen anything like it.

But despite what was happening around me, what I saw in my husband’s eyes when he walked back in from running an errand was worse: It was fear. Never in 15 years had I seen that look before.

“Whitney, I don’t think Superior and Louisville will survive the day,” he said. “And quite frankly, I’m worried about us too.”

I was confused. What did he mean that the two towns, which were 1-2 miles away, weren’t going to survive the day. And that’s when the smell of smoke from the previously open door hit me. 

My daughter and I ran to the back window and saw the towering cloud of smoke, not 1 mile from us, turn from grey to dark black. Black smoke meant only one thing: man-made structures were burning. 

The towns were burning.

With a long career in fighting forest fires and forest fire mitigation, my husband’s most recent work occurred just last year on the devastating East Troublesome Fire that impacted Grand Lake, Colorado. He knew how quickly a fire fanned by strong winds could possibly move.

And then he said it: “Pack it up.”

My heart sank. 

It took just 15 minutes before we were ready to leave, not knowing if we would ever see our beloved home again.

Less than 18 hours later, the Marshall Fire in Boulder County Colorado burned over 6,200 acres, destroying over 1080+ urban homes and claiming two lives. Prior to the incident, no one had fathomed that this type of disaster could happen in an urban setting—and most were not prepared.

We were very, very, very lucky that our home and possessions were mostly fine. However, so many others suffered stunning losses—which is why it’s important to be prepared for these types of disasters, even if it doesn’t feel necessary. Here’s how you can do that—and why you should. 

Being prepared does not mean you are a “prepper”—it means you’re smart

Last summer, while hanging around a campfire with friends, we started discussing the possible disasters that could hit our little town of Boulder, Colorado. 

Shockingly, few of my friends had any stores of water, food, gas, or even a list of supplies they would need in case of a disaster. Then there was our family—and our small arsenal of supplies and our massive first aid kit.

One of my friends chided… “Wow, prepper, what are you so worried about?”

For starters, I was worried about losing everything—just as I had in 1999 in the middle of a hurricane.

“I’m not a prepper, I’m just being smart,” I shot back. 

And why was being prepared so bad, anyway? 

Disaster preparedness “is a research-based set of actions that are taken as precautionary measures in the face of potential disasters. These actions can include both physical preparations and training for emergency action. Preparedness is an important quality in achieving goals and in avoiding and mitigating negative outcomes,” according to Wikipedia.

And, preparedness is defined by the Department of Homeland Security (DHS) and the Federal Emergency Management Agency (FEMA) as “a continuous cycle of planning, organizing, training, equipping, exercising, evaluating, and taking corrective action in an effort to ensure effective coordination during incident response.”  This cycle is just one element of preventing, responding to, and recovering from natural disasters, acts of terrorism, and other disasters.

So, if the goal of preparedness is to mitigate negative outcomes, and we investors love mitigating the downside of any investment, my question to you is: Are you prepared?

5 steps to creating your preparedness plan

There are five general preparedness steps you can follow to make sure you’re fully prepared for disasters. And while the lists I present below may seem very long and detailed, they really are not. Let me explain why. Disasters rarely happen in isolation.

For example, when it comes to the devastating Marshall Fires, people may have been prepared for the initial wildfire disaster, but were they prepared for secondary disasters—like utilities being cut off for days, freezing temperatures, bursting pipes, and no access to clean water?

Unfortunately, this “disaster within a disaster” phenomenon is not uncommon. 

When the Texas power grid failed during an ice storm in February 2021, thousands of people were stranded. That’s because roads became impassable and gasoline ran out. And, their water pipes burst in the freezing temperatures because they couldn’t heat their homes, leaving many in uninhabitable conditions.

And, when Katrina hit my hometown of New Orleans in 2003, the nation watched in horror as thousands were stranded for weeks due to intense flooding with no food and clean water. 

The steps below will help you prepare your family, secure your assets, and brace for impact in these types of situations. Once you are in the middle of a disaster and supplies dwindle, it’s too late to prepare.

Step 1: Make sure you’re getting emergency alerts.

Sign up for community alerts with your office of emergency management, reputable local news sources, and the schools your kids attend. In most cases, these sources will also have an app you can download so that notices can be pushed directly to you. You want the news from these sources to find you.

Be sure to also download the Red Cross Emergency App and FEMA App. Another way to get reliable outside news is through a good hand NOAA radio.

Step 2: Make a plan for the situations you could encounter in your community.

Not sure what these situations are? Answering the questions below will help guide you.

Question 1: What event(s) are you most likely to be impacted by in your community?

• Blizzards
• Avalanche
• Drought
• Dust Storm
• Earthquake
• Flood
• Hurricane
• Ice Storm
• Mudslide
• Sinkhole
• Pandemics
• Power / Water / Gas Outage (Summer or Winter)
• Tornado
• Wildfire
• Wind Storm
• Civil / Political Unrest

Many think that disasters only apply to extreme events. However, we’ve actually activated our preparedness plans four times in the past 10 years for job layoffs, government furloughs, and supply disruptions. 

Question 2: What are the likely secondary impacts of the first event(s)? 

• Power outage
• No running water / contaminate water supply
• Looting / civil unrest
• Cascading disasters
• Disruption of services / transportation / communication
• Impassable roads

Question 3: How long of a time do you need to prepare for, where you will be and how much notice will you get?

How long do you think the events you’re likely to experience might last? Three days? Fourteen days? Thirty days or more? I build my mobile kit with supplies for one to two weeks—and have plans to acquire more supplies if necessary.

Where do you think you might need to go for each event that could occur? Would you shelter in place, across town, in another town more than a couple of hours away? Go ahead and designate a shelter spot for each location and distance.

How much notice will you get to prepare and leave for the events that could occur? Until last week, we thought our most likely event would be a major blizzard, in which we would shelter in place for 3-7 days but have 1-3 days’ notice. We were not anticipating a situation in which we would need to leave in under 15 minutes with no notice. 

Question 4: If the event happened, who needs to know what and when? 

• Immediate family: Think through where you will initially meet should an event happen. This answer is most likely your home. If your home is not safe, be sure to name a second location to rally. If your kids are in school, designate who will go get them.
• Friends and neighbors: Once you have your immediate family secured, know which friends and neighbors need to be notified of the event—or who you may need to help.
• Extended family: After you have yourself secured, when does your extended family need to be notified or checked on? Are they being impacted by the same event?
• Part of the reason why I lost everything in 1999 was that I called to check on my parents in Houston rather than making sure I had my own personal situation secured in New Orleans. Oops!

Step 3: Build a kit for the event.

Make sure it’s enough for the duration you are planning and make sure that can be easily moved. This is not the time to store 100-pound boxes.

Store your kit in one location that is known to all family members. Here are some kit essentials to consider:

• Communication devices and chargers (ie. cell phones, crank radio, mirrors, HAM radios, etc)
• Water – This should be 1 gallon per person/pet per day when it comes to drinking water. This does not include cooking, cleaning, and sanitation. Pack Sawyer water filters or iodine drops if you need to get clean water on the go.
• Food: Plan for 1500-1800 calories per day per person. Be sure to consider what you’ll need if you cannot cook, or if there are food preferences, allergies, or other restrictions.
• Power: What kind of power or fuel will you need to run in order to store food, keep lights going, keep warm or cool, store medications, run a medical device, or power other necessities? Think in terms of battery packs, solar generators, gas generators, propane, etc. 
• Heat: This can be as simple as packing clothes, jackets, hats, gloves, blankets, sleeping bags—or as complicated as packing fireplaces, stoves, and heaters.
• Cool: This can be as simple as packing water, cooling towels, and wet clothes—or as complicated as packing fans, kiddie pools, and other cooling options.
• Lights: No one likes the dark in a scary situation. Think of lighting options like candles, flashlights, lanterns, headlamps, solar lights, toys that light up, etc.
• Gasoline: This one is tricky, as you need to keep it stored in approved containers. Keep enough on hand to get you to your destination.

Other things to include:

• Money: Consider carrying an extra credit card and/or cash to pay for things quickly.
• First aid kit
• Prescription medications and contacts or glasses 
• Fire extinguisher
• Clothes, as you will want to change at some point

Identify special needs: Keep in mind who in your group might have special needs like kids, pets, elderly.  For example:

• Kids: Pack things to keep them calm and occupied that ideally don’t require power (ie, books, stuffies, puzzles, rubik’s cube, legos, etc).
• Pets: Be sure to pack Fido’s food, water, meds, toys, treats, and vaccination papers. 
• Elderly: Be sure to pack glasses, medications, hearing aids, canes, etc.

General rule of thumb: My grandfather always said “3 is 2, 2 is 1, 1 is none”—which I never embodied until I lost everything.

The idea behind this is that if you only have one way to communicate and it goes down, you then have zero ways to communicate. So, think of ways that your items can be used for multiple purposes.

For example, our walkie-talkies have flashlights on them. Our power packs can charge six devices at once and double as flashlights. Our solar-powered fan can double a lantern. We have a lot of light!

Step 4: Safeguard documents.

Keep hard or electronic files in a locking fire and waterproof safe that is easily transportable. My files are on an external hard drive that can be used with any device. I keep this stored in a RFID-proof pouch, which is placed in the safe for added security.

Here are a few things to pack for all family members (and pets too):

• A copy of your preparedness plan, preparedness kit list, and other items you would like to take if you have time or room.
• Identification: Drivers licenses, passports, SSN cards, birth certificates, marriage certificates, death certificates
• Insurance: All insurance cards, insurance policies (personal and rental), and anything that demonstrates coverage
• Legal records: Wills, trusts, deeds (personal and rental property), entity documents, pet ownership docs, and anything needed to demonstrate ownership
• Medical records: Copies of prescriptions that will need to be refilled, vaccination records, and other important medical documents
• Current pictures of all family members and pets: These come in handy should you become separated and need to hand them over to authorities.
• Video of property: Shoot videos of each room of your home documenting the condition and contents. Be sure to open drawers and cabinets to capture what is inside them. Don’t forget sheds, attics, crawlspace, and vehicles. These photos will come in handy when it’s time to replace damaged items through an insurance claim.
• Other items to stash in your mobile safe: This includes credit cards, cash, electronic backup of computer files, receipts and family photos (even ones in the cloud).

Step 5: Safeguard your home.

While it may be tempting for some to go out and buy a firearm, preparedness is about mitigating as many events as possible. Start with the lowest-hanging fruit and move up the ladder in response to the events that are likely to occur.

And, if things get too dicey at home, leave! Nothing is worth your life.

Here are a few things to consider when safeguarding your home:

• Fire extinguishers
• Locking doors
• Smoke alarms
• Carbon monoxide alarms
• Water sensor alarms in case pipes break
• Lights (inside and outside)
• Security system 
• Fence
• Locking gates
• Dog
• Security system with cameras (even fake cameras)
• Motion lights

Are you prepared?

While disaster preparation should be considered essential, many people opt not to prepare. In many cases, the reason is that preparing for disaster is expensive to do and it may be a while before you will use the kits—if you ever do.

If cost is an issue for you, start by writing down your plan. List out the necessary supplies, build your documents kit, and stash some cash. This pre-planning alone can help keep you calm in an emergency situation. 

Once that’s done, you can commit a monthly dollar amount—ideally, from $50 to $100—that you can use to purchase the supplies for your preparedness kit. After you have your disaster plan and kit prepared, be sure to review the contents annually to update your important files and replace expired items. 

And, you should train your family on the plan, where the plan is located—including how to access it—and how to pack it up. It became evident we hadn’t reviewed our plan in quite a while after my husband asked me where the radios and charging cables were—and when our daughter packed up her entire snowglobe collection instead of the family heirlooms. We gently told her that we had to take the dog over the snowglobes. She was OK with that.

We have since resolved that issue by buying doubles of all cables and storing them in our “GO” bins in the garage. We have also created a list of heirlooms to grab if we have room. 

Disaster preparedness isn’t the fun family event we are all looking to do on a Saturday afternoon. However, the goal of preparedness is to mitigate negative outcomes, and we investors love mitigating the downside of any investment.

Final thoughts

The event that changed my life happened in August 1998, when lost all of my possessions including my car in tropical storm Francies in New Orleans when my apartment flooded with 8 feet of water when the pumps on my side of town failed. I had no money, no food, no clean water, no transportation. My only saving grace was my landlord—who was also my neighbor—took me in until I could reach out to my parents for help. (I think he also wanted me to pay rent, too.)

I swore that after that time, I’d never let something take me so by surprise ever again.

Mindy:
Welcome to the BiggerPockets Money Podcast, show number 266, Finance Friday edition, where we talk to Stephanie about starting down the path to financial independence. There’s a lot of different options. There’s a lot of hybrid solutions you can do. You’re the only person that has to work for. There’s a lot of different options available, you just have to figure out what works for you. The fact you’re thinking about it at all, puts you head and shoulders above so many other people. Hello, hello, hello. My name is Mindy Jensen and with me as always is my, looks like he has a black eye co-host, Scott Trench.

Scott:
I think it’s really in style, stye, these days, Mindy, this eye.

Mindy:
That was terrible. Scott-

Scott:
I enjoyed it.

Mindy:
… claims he has a stye, but it really looks like he got punched in the eye. Either way, 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, going to make big time investments in assets like real estate, or simply get an overall understanding of personal finance and get started. 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 Stephanie today because Stephanie is basically right at the beginning. She doesn’t have a lot of debts, except for one with a criminal interest rate. I’m very angry at the window company that’s charging her 10% on her window loan. Like I say at the end of the show, I hope they stub their toe every day for the rest of their lives. I think it’s awful that they’re charging so much, but we’ve come up with a plan for Stephanie.
Stephanie is at the very beginning of her financial independence journey. And since this is the very beginning of a brand new year, I thought it would be great to have her join us today to share her story and her numbers. So other people who are also joining us for the first time or just on the beginning of their journey to financial independence could learn alongside her.
Before we bring in Stephanie, I need to tell you that my attorneys make me say, the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott, nor I, nor bigger pockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate. Scott, what do you think of today’s episode?

Scott:
What I think was great is, Stephanie has good instincts and she’s doing a lot of things right. She’s built a reasonably positive financial position here, but I think she is diving into the world of personal finance here and it is another language. I’m sure a lot of us have gone through that where it’s just overwhelming, like, what is a Roth? She didn’t ask, she did this particular question, but I can imagine someone new to this thinking, what is it a Roth versus a 401(k)? What’s a HELOC? Why should I track and budget my expenses with that? How long does that take? Can it be done in 10 minutes or is there four to eight hour slog to get it done right the first time and set up and maybe iterate on a few times with that?
All of these little things are hard individual decisions that many of us have long ago mastered, but I think are really overwhelming to folks with that. They’re very powerful and need to be put in place, but it comes down to, this is a 100, 250 hour investment. I think of time to learn all the ins and outs of personal finance. And you have to want to do that and understand that the payoff of that is millions of dollars in lifetime wealth if you’re doing that in your 20s or 30s.
I think that was the best advice we could give Stephanie today, was really go and develop those frameworks and understand why behind all these nuanced decisions, by putting in that time over the next six months to a year, casually, passively just a couple of minutes a day, and she’ll get there with that stuff. And then secondly, it was fun to dissect the position, because there was a lot of items in there that we thought we could potentially optimize based on our understanding of the basics of personal finance.
Hopefully folks will get a lot of tactical knowledge about moves that were made there, that will reinforce principles and how we think about certain aspects of personal finance and reinforce the idea of just continuing to listen and learn, is probably the best way to master all these things gradually over the course of a [crosstalk 00:04:51].

Mindy:
This is not, I think I want to fix my finances, so I’m going to tomorrow. It’s a process and taking the first step is deciding to fix your finances. You have to make the decision that you want to get better with money, and then you have to actually do it, track your spending, spend less, earn more. We talk about pulling the four levers. We don’t get into discussing the four levers today, but this is going to be a really great first start. If you’re listening to this show thinking I want to get good with my finances, think about how you can take the information and the suggestions that we give Stephanie today and apply them to your own personal situation.
Not everything is going to apply to you the way it applies to her. Some things you will have that she doesn’t, but you can take information from this episode and apply it to your life and come out on the other side with a good solid plan to start yourself. Stephanie is on the path to financial independence. She’s 29 years old and would like to reach financial independence by age 40. Our podcast has interviewed literally hundreds of people who have reached financial independence within 10 years of starting their journey.
Her goal isn’t at all out of the question, but I want to read some of the things that she shared in her application. We have a form for you to fill out when you apply to be a guest on the show. That form is at biggerpockets.com/financereview, if you’d like to apply. One of the questions is, list your investments. Stephanie’s first line in her answer is, I have no idea what I’m doing here. I’m going to stop right there. My friend, Zena Kumak tweeted something that I thought was rather profound yesterday.
She said, “Learning about personal finance is like learning a language, it takes time and practice. Don’t assume that learning personal finance should be easy. If you wouldn’t blame yourself for not knowing how to speak a language, don’t blame yourself for not knowing how money works.” Stephanie don’t blame yourself, we are here to help. Okay. Back to Stephanie’s application. Another question we ask is about the challenges you’re facing. Stephanie said simplifying everything. It seems so simple, but I’m struggling. Right back to Zena’s tweet. “Don’t assume that learning personal finance should be easy.”
That’s okay, Stephanie, we got you. That’s why you’re here. We’re going to help you out. Scott and I didn’t just learn this yesterday. It’s this lifelong learning. I’m also going to stop you right there. While you and Scott might be slightly close in age, Scott is an anomaly, don’t even think about Scott. Sorry, Scott. You’re CEO, you don’t count. Another question we ask is, do you have a budget? Stephanie responded, not currently but kind of.
I really like that B word, budget. And the follow up to that question is, do you track your spending? She responded, I have before, but not currently. All of you regular listeners know that I’m going to make her track her spending. With this in mind, I want to say, Stephanie, before we start, this is not going to be, wow, look at all the things you’re doing wrong, what a terrible person, episode. This is going to be, let’s start at the beginning and get a plan in place to get you good with money.

Stephanie:
That sounds great.

Mindy:
Stephanie, welcome to the BiggerPockets Money podcast.

Stephanie:
Thank you. I’m happy to be here.

Mindy:
Okay. Well, we start off this episode with the profit and loss income statement. What is your income and where does it go?

Stephanie:
I make about a little over 68,000 a year annually. And then I guess, as far as that it’s car insurance, gas, food, utilities, mortgage, and a large window loan, because I live in Florida and impact windows are a must.

Mindy:
Okay. Your monthly after tax is about $4,500?

Stephanie:
Yes.

Mindy:
Do you have any additional income?

Stephanie:
I do. My boyfriend moved in a few months ago and he gives me an additional 600 a month for rent.

Mindy:
Okay. Your monthly total income is 5,100?

Stephanie:
Yes.

Mindy:
Okay. Let’s look at your expenses.

Scott:
Can you give us a little bit more context as well about this? You live in Florida, what is it you do professionally?

Stephanie:
I am an environmental engineer and I work with a small consulting firm that does watershed model modeling and vulnerability assessments for coastal threats, rainfall threats, those things that need to be modeled and assessed.

Scott:
Great. We know we need to get better control of spending, we’ll talk about how to track spending and all that stuff going forward. But how much would you guess at the end of each month is piling up in your bank account? Are you on average saving 100, 500, 1000, what does that look like for you?

Stephanie:
Saving, I think it looks about 500 if I don’t go over and have a trip to HomeGoods that fulfills everything I want in my home, but nothing I want in my bank account.

Mindy:
Step number one, stay away from HomeGoods.

Scott:
I’m going to mentally think of that as about $3,000 a year, somewhere in that ballpark and savings. Is that a reasonable assumption?

Stephanie:
Yes. Yes. Because I am trying to focus more on paying off some debt. We can probably talk about this later, but the PMI off of my home loan, that would be a nice thing to not have. Trying to throw more money at certain things to then save other things.

Scott:
Well, now we can go to Mindy’s question with that. What are your investments or assets and debts with that? This is your net worth statement.

Stephanie:
I haven’t actually calculated it, but assets would be, I guess my home, but I have only about 8% in that or 8.2% equity. And then other than that, I have an account that’s a traditional IRA that I’m getting transferred to a Roth and that has about 18,000 in it. And then I have about 12,000 cash savings and another 1,800 in a brokerage account that I thought was being invested and it wasn’t, so it was just like a cash savings account the whole time.

Scott:
Okay. We’ve got about $30,000 in liquid assets between your retirement account, your cash savings and this brokerage account. Is that right?

Stephanie:
Yes. Yes.

Scott:
Awesome. What kind of debts do you have against those?

Stephanie:
Well, owing on the home, I still owe about 180,000 on my home and then I have another, my impact window loan, I still have another 13,500 on that. Those are my big debts.

Scott:
Do you have any other debts besides those?

Stephanie:
I don’t have any other debts. No car loans or anything.

Scott:
Great. You essentially have, I’m going to think of the window loan as part of your home mortgage with that. What’s the interest rate on that?

Stephanie:
That’s 9.9.

Scott:
Okay. I’m not going to think of that as part of your home mortgage, that’s a higher interest rate. Well, first thing I want to acknowledge is, I’m sensing that you feel a little overwhelmed by the vastness of the language of personal finance and all of the different decisions that we need to make across the spectrum to feel comfortable with every choice that we’re making with that. I think a good goal for today’s session should be, how do we help you come up with something that is very simple, that you can do for the next six months, that will almost certainly be a good choice for your financial position.
And then how do we help you in general build yourself a toolkit. So you’re able to make all of these decisions with confidence about what you’re investing in, how you’re investing in there, how you track all of this stuff and how you can measure progress against that. And again, want to continue to acknowledge this is great considering, it sounds like you’re very new to this world of personal finance and learning the ins and outs of these types of investments and this kind of stuff.

Stephanie:
Accurate.

Scott:
Well, great. The first thing, you want to become financially independent in 10 to 12 years, right? With that, and to do that, we’re going to have to invest. But before we invest, we need to think about attacking bad debts and building an emergency reserve with that. What stands out to me based on what we just discuss here, is that you have this window loan of 13,000 bucks, 13,500 at a 10% interest rate, 9.99%. Is that correct?

Stephanie:
Yes, that is correct.

Scott:
There’s not much that I can think of from an investment standpoint that has a better return than a 10% interest rate that’s guaranteed. You’re guaranteed to get a 10% interest return if you pay off your debt, versus invest in another asset class. To me, that looks like a really good place to start. Mindy and I were chatting earlier and she had a really good thought where, hey, why do we have a 12 or $13,000 cash savings position and $13,000 in what I would call bad debt? A 10% interest rate is a high interest rate. It’s not a favorable one with that.
One place to start here I would say, maybe you take all but 2,500 or all but 5,000 of that cash position and pay off this debt. And then apply your savings that you’re generating to this debt on top of that extra 250, 300 bucks a month that you’re doing. That’s a really easy decision to make that simplifies everything. It’ll probably take you three to six months between using some of that cash position to pay off that high interest debt. And in those three to six months we can work on building a tool kit for you to think about all of the personal financial decisions that you need to make through a reading list, some audio books.
We will be so cocky as to recommend maybe listening to some of our older, BiggerPockets Money podcasts, or maybe some other podcasts on personal finance out there as well. And just by absorbing that for half an hour, an hour a day, over the course of six months, you should be able to gather a ton of frameworks. You can think about, what is the right amount for an emergency reserve? Should I do an IRA or a 401(k)? What should I invest in within those IRAs or 401(k)s? If I’m going to do index fund investing, what does that mean? What do I need to be prepared for psychologically? And how do I think about that from a long term per perspective with that?
How do I get the PMI off of the mortgage? We can talk about all of these things today, but I think of reinforcing them with some cadence of self education over the next couple of months, would be my biggest tip to help you get comfortable with that. Aside from that, I’ll put that as my most important suggestion. And then we can talk about each of the line items that you do have, and try to answer them as best we can on the call today with all this other decisions.

Stephanie:
Okay. That sounds great.

Mindy:
Okay. I agree with everything that Scott just said.

Scott:
Great. What are some of your questions? Let me try this again. Are your questions more generally like, how do I begin putting together a plan, I don’t even know what questions to ask or do you have some specific questions that you’d like us to answer on the call here?

Stephanie:
I guess my biggest question was where to focus and paying off that window loan to then free up myself to focus on some thing else that’s kind of, kind of already answered that for the most part. But then what do you focus on next as far as, I do own a house and it’s in a rent super rentable area. I went in way under what I was allowed to get for a mortgage, got a house that I was comfortable living in. It was actually renovated, but it’s still a hundred years old. It does need some things. My washer, dryer’s very tiny. I guess, is that worth updating, spending money to do that, when I should maybe be for focusing on saving for a down payment for a duplex?
I guess, I don’t know where my next steps are and maybe it is just the education that you’re talking about and I’m jumping three levels ahead of where I should be.

Mindy:
Let’s talk about this. Step number one, I agree with Scott, should be paying off, or at least significantly paying down the window loan. What is your level of comfort with your emergency fund? A $12,000 emergency fund is awesome. Every time I start to think of something I’m like, wait before that we have to do this and before that, we have to do this. Let’s go back to tracking your spending, which we haven’t even talked about except at the very beginning.
How much does it cost you to live every month? You think it’s about $4,600. Where in your spending can you cut? First of all, stop going to HomeGoods. I’m not trying to be mean.

Stephanie:
No, I know.

Mindy:
I went to HomeGoods the other day and I shouldn’t have gone, because you can’t walk out of there without spending a whole lot of money, because everything’s so cute. But again, just don’t go.

Scott:
I’ve never been to HomeGoods.

Mindy:
Wow. What a shock Scott? I bet Virginia has.

Stephanie:
And this is why you’re an anomaly.

Scott:
I’ve been to Home Depot.

Mindy:
Yeah, same. It’s not the same thing at all. Same, I’ve been to Home Depot-

Stephanie:
Is in the plant department.

Mindy:
Anyway, if you have $4,600 in expenses, can you get that down to 4,000? Can you get it down to 3,500 without feeling like you’re giving something up? Because when you feel deprived, you can go through it for a while, but then all of a sudden you explode and all of your gains are wiped out with some massive trip to HomeGoods. And now you have a brand new, amazing, cute house and your entire savings account is wiped out. Let’s see how comfortable you are with an emergency fund of $1,000 or 2,500.
I would love to see that window loan wiped out by the end of March or April if that is comfortable to you. Right now you said you’re paying $430 a month to the window loan. Once the window loan is gone, you can put $430 back into your emergency fund every month. You can build that up pretty quickly. But how much emergency fund feels comfortable? How secure is your job? How easy could you get another job? Do you work for the government or do you work for a private company?

Stephanie:
Private consulting firm.

Mindy:
Okay. I’m assuming that Florida gets a lot of rain, so there’s a lot of rain studies available. It seems to me that you would be able to get a job pretty easily, but I don’t know, I’m not in that field. These are questions that you have to ask yourself when you’re considering your emergency fund, how much money do I spend every month? What’s the bare minimum that I could get by with? How easy is it for me to get a new job and how comfortable am I in the job security that I have?
Let’s say you’re really comfortable in your job security, it would be super easy for you to get another job and you could cut your expenses down to almost nothing. Then you could have a much lower emergency fund, take that cash savings, almost all of it, pay all or almost all of the window loan off. And then you’re not paying that horrible 10% interest rate. They should be in jail for charging 10%. Step number two is to go to the HR department and get information on their retirement options. Do you have a 401(k) at work? And if you do, does the company offer any sort of match?

Stephanie:
We don’t offer. We don’t have a 401(k). It is something that the owner has been looking at for a while, but it hasn’t actually happened yet. That’s something I’m struggling with is how to do that on my own.

Mindy:
Okay, well that was easy. Okay. You mentioned that you are taking a traditional IRA and rolling it into a Roth IRA.

Stephanie:
Correct.

Mindy:
This is a taxable event, meaning you are going to have to pay taxes on the entire amount that you roll over. This could bump you into the next tax bracket. I’m not sure what the tax brackets are.

Scott:
Why are you doing that?

Stephanie:
That money, which actually this is going to be, I’m probably losing a lot here, the money in that traditional IRA was actually rolled over from two previous 401(k)s from previous jobs. I rolled it over into one account. I honestly thought I was rolling it over into another Roth. I don’t know how I understand when I’m researching and looking. I signed it up with a Vanguard account and I thought what I was getting was a Roth and it ended up not being. Would it be better to open a separate Roth and just keep this traditional IRA as is?

Scott:
My instinct is until you have a really good understanding about why you’re doing what you’re doing, to just leave the money where it is. Understand what you’re investing in, so if it’s in a traditional IRA and you want to invest it, you could consider putting it into an index fund and making sure it’s invested in something that you think will appreciate long term. But my instinct is to advise you not to roll it over from a traditional to a Roth at this moment in time, unless you have a fully formed strategy around that because you will pay taxes on that and then you’ll get the money into a Roth.
I would say, if it’s in a traditional IRA, you should check this. Is it a traditional IRA that is pre-tax or tax deferred. I would keep it there. And for future investments, if you’re looking for an easy answer, again, this comes down to, you have to do a lot of research to internalize these things, because the why’s behind it is a fun two hour discussion if you’re like me. with that. But I would say, keep it in the traditional IRA for now. Don’t take that money.
In the future, when you invest in retirement accounts or put money into retirement accounts, put the future money into a Roth IRA, would be the simple answer I’d have there for now. But again, that comes down to a personal preference and there’s a lot of nuance behind that.

Stephanie:
Well, I’ll definitely look into that.

Scott:
I would say don’t make a big move by rolling it from a pretax to a Roth right now, until maybe after a couple of months of really thinking through some of the personal finance nuances here. Zooming out to simplify all of this, with this, to get wealthy, you have to do two things, right? You have to generate cash and then you have to deploy it. Right? When we talk about tracking your spending with this, your income is 68,000 plus the 600 you get in rental income from your boyfriend with that. That’s hard to change.
You can always think about changing that by getting a new job, asking for a raise, waiting for the promotion, getting a bonus, whatever that is, but that’s not something you can immediately action, take action against following this call most likely, right? If you think there is, then we’d be happy to help you out and go into that. But that’s where I think Mindy and I are recommending on the expense side. If you’re just in control of that spending and where every dollar is going by tracking it and setting an intentionality behind that, there’s probably another 500 to $1,000 in your budget to pick up here on a monthly basis over the next couple of months.
You can do that by doing the grind of tracking your meals out and take out and whatever it is that you’re doing on a day-to-day expense profile. A two step process that might be more effective would be, great, do that, set a budget and say, I’m going to commit to spending no more than this amount on alcohol and this much on takeout and this much on whatever with that. That will help control to a certain extent, but even more powerful are things eliminating the monthly expenses that recur, your mortgage payment, canceling a subscription, or reducing your mortgage payments, or knocking out this window loan payment with that.
And so if you’re able to focus on that over time, you can save 200, 300 bucks a month by just being thrifty and controlling your expenses. You can save 500 to 1,000 a month by knocking out some of these payments that are recurring on here with that. That’s where we start with the tracking of the expenses. That’s I think a really good, day one, weekend project, is to sit down and say, I’m going to sign up for a service like Mint. How would you go about tracking your expenses? Maybe we can start there.

Stephanie:
Previously I used the EveryDollar app from Dave Ramsey. That was okay.

Scott:
That’s a great one.

Stephanie:
I don’t know if I found one for me yet, but maybe it’s just me not having that self-discipline and figuring it out.

Scott:
I think a part of it also is, it stinks. It is not fun work. You have to sit down and it is excruciating, especially the first time with this, where it’s going to take you four hours or the better part of a day to track your expenses over the course of the last couple of months with that. You’re going to have to figure out the system and then you have to figure out what the heck was that payment that with this arcane, that was a gap station in Nebraska that I stopped at with that. That’s why I can’t figure out what it was. I filled up half a tank because the amount doesn’t look.
This process is not fun, and for that, the encouraging advice I would have for you is, too bad, you have to do that in order to I think get control of your spending, at least at first, to really understand it and to make some of those changes. The trade off there is, by doing that for the first couple of months and getting comfortable with it and putting in the time to wrap your head around it, you will shave 10 years off of your working career, probably at minimum from that.
That is a really good return on time, but it is not a fun project if you’re like me, to go through and categorize every one of your expenses. It gets easier and it becomes less of a chore, I think, downstream. Some people genuinely like it, maybe that will be you, but that is not me, for sure. Hopefully that’s helpful context with the tracking your spending piece.

Mindy:
I do it two different ways. I started off with a notebook, my husband and I were just really curious, why are we spending so much money? We started, I put the notebook on the countertop, which is where I walked in the house every single day. Every time I walked in, it was through the garage door. And I went to right there. That’s where I kept my keys. I would write down, I saw the notebook and I have to write down my expenses. It was a daily thing. It was a multiple times a day thing. I started noticing a pattern instantly, because it was in my face multiple times a day.
I made a mental note not to move the expense tracker. I added it up as I went and it was rather shocking how fast it added up and it was rather shocking. The trend, I was always going to the grocery store, every day I would go to the grocery store, and that was my spending problem. When I finally got that under control, we took the, wafflesonwednesday.com wrote an article about using a Google form to make a mobile spending tracker. It’s super customizable.
It’s literally everything that you, if you want to have a different category for beer and a different category for tasting rooms and a different category for wings like Scott has, you can make them all the different categories and get as precise and detailed as you want. As you fill it out on your phone, it goes into a spreadsheet. At the end of the month, you can just look through the spreadsheet. You don’t have to write everything down. The only issue with that is it isn’t in your face and sometimes you can forget. Every time you swipe your credit card, you have to remember to write it down.
But it gets to be a habit and it’s pretty easy to make it a habit. Maybe you do a hybrid. Maybe you put the notebook right where you come in everyday, and you’re like, I got to remember to do my expenses. You write down when you think of it. You’re at the gas station and you think of it with your phone there. Getting in the habit is really, really helpful. There’s also an app called Qube, Q-U-B-E. It’s a digital cash envelope system. You go into their app and you decide how much you’re going to put in each little envelope and you use a debit card and you have to say, hey, on this debit card, I want to pull from this envelope.
It puts all that money on the envelope. And if you don’t have enough money in your envelope, you can’t make the purchase. And so then if there’s not enough money, you have to move things around. It’s not really budgeting or tracking, but it’s forcing you to think about how you’re spending anyway. There’s a lot of different options. There’s a lot of hybrid solutions you can do. You’re the only person that has to work for. There’s a lot of different options available, you just have to figure out what works for you.
The fact that you’re thinking about it at all, puts you head and should above so many other people. Let’s call her the top 1% of Americans.

Scott:
I would agree with everything Mindy said there, with that, that there are numerous apps. There’s this Qube thing. There’s writing it down in a piece of paper. I used mint.com, which is a perfectly fine net worth tracking application that’s completely free to access. Although you’ll see ads on that. I used that for six, seven years. Now, I use, You Need a Budget, my wife and I moved to that software once we got married and merged our finances with that. And then EveryDollar that you’ve used in the past is also perfectly fine.
I think, you could spend two weeks trying to figure out which one of these is the best, I would pick one and EveryDollar, Mint or You Need a Budget are probably one of the best three to start with. They’re probably all fine for what you’re trying to do with that. If you already have paid for EveryDollar, I’d recommend just sticking with that. I’ve used that one as well with this. Man, I am a nerd with this kind of stuff. I would start there and just follow the instructions on how they do it.
Dave Ramsey, Zero-based budgeting works really, really well and I think will be really powerful for that. But whichever one you choose, you’ll have to put in all that time and effort. I like the ones that are digital versus Mindy system a little bit more for me, because they automatically get populated each time. I can just-

Stephanie:
I think that’s my problem.

Scott:
… I don’t have to actually physically write them down.

Stephanie:
We’ll see. I’ll probably-

Scott:
Definitely use the paid version of EveryDollar or the paid version of You Need a Budget, or if you want a free version use Mint. Mint will do the same thing, but be free.

Stephanie:
Okay. Sounds great. Good advice. Thank you.

Scott:
Remember we had two things that you need to think about in order to build wealth. One is generating cash and the second is deploying it, right? All of this budgeting stuff will help you generate more cash or at least not spend as much, or make sure that if you do spend as much, you’re really getting the value that you want from your lifestyle out of that spending. So nothing’s going wasted. Waste as little of that income as possible. And over next couple of years, think about obviously how you can increase that income if that’s something that you want to explore by changing jobs, advancing at your work, whatever that is.
Best leverage we can get over your generation of cash is on reducing expenses and by control, and the first step to do that is understanding it and then controlling those. The next piece comes down to, what do we do with the cash that we generate? What you’ve chosen to do to this point with your cash is you’ve piled up a $13,000 emergency reserve, a little over 12 to 13,000 in emergency cash savings. You’ve put a big chunk into these retirement accounts, and you’ve put a small chunk into a brokerage account. You’ve also put a down payment on a property and have equity in that property. That’s how you’ve deployed your cash.
That’s actually pretty good. I don’t see anything wrong with that to a large extent. I don’t think if you spent the next year reading up on things, you’ll make some tweaks that’ll be subtle and very important, but not fundamentally different than what you’re doing with this, in my opinion. The biggest deployment of cash decision that we have here, I think, has to do with that window loan, right? You are at this point, I would say, not an advanced investor, so you’re not expecting more than 10% annual returns from your investment profile.
That’s why reducing that cash position in your emergency reserve and paying off that debt to whatever extent you feel comfortable with, maybe leave a few thousand in there after that, but that makes a lot of sense. That’s a much better return than the 0% you’re getting in the cash reserve. And the point of the emergency reserve is to avoid accumulating bad debt, like a 10% interest rate. That’s a really good use of cash, is to redeploy it from your savings account to that debt. And then as you generate more cash, as you generate the couple hundred, maybe as much as $1,000 per month, depending on where you think you can get to, once you start tracking your spending, then you have to figure out that approach.
What we think, Mindy and I, I think is that it’ll take you a few months at least to pay down the window loan, even after you put a big chunk of your current cash towards that. From there, in those next couple of months, you need to self educate to figure out what the next piece should be. However, we can also give you some ideas on those last pieces, because there probably is a couple of things you can do on the home side to get there. How you generate cash, how you deploy it. That’s how we’re breaking this down for you at this point.

Stephanie:
Sounds great. Simple is great.

Mindy:
One last thing we didn’t talk about is your life insurance and long-term savings account. Let’s talk about this for a minute.

Stephanie:
That’s one of those things that I started financial advising, and it seems like a good idea. From their explanation, it’s basically a long term savings account. I asked specifically, should I just get a bonds account and be contributing to that? The financial advising staff told me that this is actually better because it’s, is it tax deferred when you pay taxes up front, or which is the opposite?

Mindy:
Tax deferred means you’re not paying taxes on the money that goes in.

Stephanie:
Okay. It’s the opposite of that. No, no, you are. I’m sorry. Basically it’s just better tax if you do it through their life insurance, because it’s the exact same account basically that they offer for a long term investment. I have-

Scott:
My belief is that you have a complicated product that you don’t understand in this.

Stephanie:
Yes.

Scott:
Is that right?

Stephanie:
Absolutely.

Scott:
Okay. Without knowing anything more, my guess is that you have been sold a whole life or permanent life insurance policy with that. You’ve got somewhere in the ballpark probably of three to $500,000 in coverage, would be my guess. Does that sound something like what has been discussed with your financial advisor?

Stephanie:
Yes.

Scott:
Do you know what the payout benefit is?

Stephanie:
Yes.

Scott:
What is that?

Stephanie:
Okay. The payout benefit is, sorry I just had to pull it up. Depending on your age, it goes up. If I’m 29, so it starts to being at 30, death benefits, 130,000, right now.

Scott:
You have really expensive life insurance with this, in my opinion. When you think about life insurance, we had a great call with Joe Saul-Sehy. Mindy, do you remember what episode that was?

Stephanie:
139.

Scott:
Okay, awesome. Biggerpockets.com/moneyshow139 has a great discussion on life insurance with that. My big takeaway from that discussion was, why are you buying life insurance? What is the point? Why do you buy insurance for anything like a car accident? Well, it’s in case I get an accident, I want to cover those types of payouts with that. And so, why do you buy life insurance? Well, I want to buy life insurance so that my dependents or the people who might depend on me are covered and have some sort of financial security in the event of my death.
So suppose, let’s say your goal it to become a millionaire by 40, that’s 11 years from now. Well, if you have a million dollars and your financially free, and you said, my family needs million dollars to live this lifestyle forever, I’m retired at that point, then you need no insurance, right? You could buy insurance to continue padding that, but you don’t need any insurance from this, because you’re self-insured. You have built a lifetime of wealth. You don’t need a million dollar check, because you’ve already got a million bucks in assets with that.
As a single person, before I got married, I didn’t carry any life insurance. I probably, I may never carry life insurance personally, because I have enough assets that I think that my family will not need those types of things. A great way to think about this is, if you’re not married and have no dependents, you may not need life insurance. You may want to have a net worth of 20, $30,000, so that any expenses that would cover your untimely death get covered and do not have to be covered by your family and putting a burden on there.
But you’re already at that. You’ve already got 20 or 30,000 bucks with that. Morbidly that would cover any funeral expenses most likely if you were to pass away untimely with this. If you get married and have kids, okay, maybe then you want to say, I want one, $1.5 million life insurance policy in case I die, so that there is a check there because I’m earning this income that’s not going to get generated to fund my family’s lifestyle. For that, you can use a different type of policy called a term life insurance policy, which will cost 1/15th of this amount per dollar.
Instead of being $160 a month for $130,000 payout, it might be $10 a month for that payout. The difference is, if you don’t die during the term, or hey, if I die in the next 30 years, I get this benefit, then you don’t get anything. The policy you have now is guaranteed to pay out, but it’s 15 to 20 times more expensive. It’s $160 a month drag on your finances. You can’t invest with these types of things. If you are a very advanced investor, then maybe some of the arcane, in my opinion, gibberish, that the whole life insurance policy salesperson spouts can be applied to some benefit if you’re going to apply an advanced long term strategy.
But there’s no way, I think in my opinion, based on where you are right now, that you’re going to be able to apply that or that you’re going to want to apply that. I think it’s a very, very low probability that this is a good, either a whole or permanent life insurance policy is a really strong choice in your situation versus a term insurance policy. And again, this is another one of those things that you got to spend an hour, a couple hours digesting this over the course of some of that self education, a great place to start is that episode 139, with Joe Saul-Sehy where he breaks this down much better than I could there. Is that helpful?

Stephanie:
Yes. I guess, I came into that with this same idea and they basically, which obviously they’re trying to sell their product, is also that this was more of an investment account. My 160 is actually being invested every month. And then there’s an annual dividend that I also get from the company into that investment account. It’s just very slow growing, which is how they got me. Because I was like, if it’s an investment account and my 160 is actually being used for something, that’s a different story than just paying $160 a month for life insurance I don’t really need yet.

Mindy:
They’re trained to-

Scott:
I think a great-

Mindy:
… talk really good.

Stephanie:
Yeah. I know

Mindy:
They sell this product as a great investment and it just might not be. I would ask, and this is a research opportunity, I wouldn’t just say cancel everything, give me all my money back right now. I would look into it. Maybe they have you invested in some amazing product and your $160 a month is now $46 million, but it’s probably not. I would look, I would do research, ask them questions. What are you investing in for me? How much has it grown? What is this costing me? Because it is absolutely going to cost you money to have it invested with them too.
There’s got to be some fees of involved in there. You’re not just giving them $160 and it’s growing and they’re investing for you out of the goodness of their heart. There has to be fees involved in that. What is it costing you and what is your current balance and what happens if you decide to stop, say, I don’t want this anymore? I want my money or I want to stop investing or I want to stop giving you more money. These are all the questions that you want to know what happens when you decide to stop this account. How long have you had this account?

Stephanie:
Only a few months.

Mindy:
Okay. So it’s like five or 600 a dollars in there.

Stephanie:
Yeah. I just started the financial planning process.

Mindy:
Okay.

Scott:
Here’s the thing, if you don’t know what you’re doing or why you signed it up for this and you feel you were sold, I would argue against what Mindy said there. I would bias towards canceling the policy. You can always restart another one with that, when you have a better framework. This is just, I think general advice for anyone listening, if you’re going to a financial planner, you need to ask them, are you a fiduciary to me? I will bet you, 97.5 to one, that this person was not a fiduciary to you, that this person made a commission by selling you this product. That’s how they earn earned money with that. A better way, was the visit free to you, did you have to pay anything?

Stephanie:
The visit’s free. She did say she was a fiduciary. It’s actually, I think with this company, it ends up being that having life insurance feels like it is in my best interest to her. There’s always those kinds of lines to cross.

Mindy:
I will say I rescind my advice. Since you have only been there for a couple of months, I would say, just call her up and be like, I don’t want this anymore, cancel, give me my money. Because if it is pre-tax, you will incur taxes, it’s a taxable event. But it’s like 500 bucks, it’s not going to kick you into the next tax bracket.

Scott:
I’m going to exert some executive privilege here with this. Here’s some advice go to XY Planning Network and look for a fee only financial planner that you think you might like from there, and schedule a virtual or in person call with them. BiggerPockets will cover the cost of that first call with a fee only financial planner, with that. Because I bet you that that person will be able to in that next level, get you a deeper dive into whether this is a good bet. I’ll bet, like I said, 97.5 to one, that the right move is going to be likely to cancel this insurance policy and restart with either a term policy or no policy with that. But we’ll see.

Stephanie:
Okay. That sounds great. Thank you.

Mindy:
We’ll work all of that out outside of this call, but yes, I’ve got that. I’m taking notes on all of your steps to work on.

Stephanie:
Me too. Thank you.

Mindy:
Okay. Scott, now, can we talk about her house?

Scott:
Yes. I’m sorry.

Mindy:
That’s okay. That’s okay. Okay. Stephanie, let’s look at your house. Tell me all about your house, what kind of beds and baths, is it Airbnbable? You said it was in a rentable location. Tell me all the things.

Stephanie:
It’s in Florida. A lot of my neighbors are renters. It’s not, I wouldn’t say it’s Airbnbable because there is the other side of the train tracks is where all the other Airbnbs are. It’s not a bad neighbor, but it’s not high priority where people would stay to be closer to the beach. I am technically still only two miles from the beach though, so possibly. It’s a 3:1, which it’s a hundred year old house. All of them in this area are actually 2:1s. A 3:1, the garage has been turned into a third bedroom. I’ve been looking in to see if it was feasible to get a second bathroom or even a half bath.
At the moment it’s just not, it would be very, very expensive. But the things I want to do to it even to make it more comfortable while I’m sitting in it, staying, planning for the future, and maybe a future investment property, is getting a full size washer, dryer, which wouldn’t fit in the house. I’d have to close in the back patio, put it outside. I was told it’s already going to be $1,500 in just permits. That’s going to be an expensive endeavor as well.
And then I really want a bathtub, especially if you’re renting it. It’s a decently low income neighborhood and there’s a lot of families. If I do rent it, someone’s going to want to a bathtub, not just me. That’s where I’m at with the house. My PMI, it’s actually, I just looked into it. It’s only $50 a month, which is worth it for right now, but still something I’d rather not have. I should focus on the windows and then maybe work on the PMI.

Scott:
What do you think it would rent for if you moved out?

Stephanie:
I’ve been looking, it would rent probably 15 or 1600 a month.

Scott:
Great.

Mindy:
When did you buy it?

Stephanie:
July 2020, right before the whole market went up.

Mindy:
Nice.

Stephanie:
Yeah, right before.

Mindy:
Scott, are you familiar with a rate and term refinance?

Scott:
No, I would love to learn about this.

Mindy:
I don’t know either. I was going to ask you because I wanted you to talk about it. You have PMI which stays on the loan until you have the equivalent of 20% equity. If you bought it a year ago, it’s entirely possible that you have the equivalent of 20% equity, but you can’t request that the PMI comes off unless you refinance, which isn’t going to make much sense because PMI is only 50 bucks a month. I wonder if there’s another way except with, I wonder if you could pay for an appraisal. If you’re a lender and you’re listening to this, let me know if there is a way for her to potentially get her PMI removed.
She has a conventional loan. It’s a 30 year, 2.875 rate. So she isn’t really excited about getting rid of that rate or doing a refinance and incurring all of those costs, just to get rid of her $50 a month PMI. If you know of another way to do this, please hit me up, [email protected] or comment in our Facebook group, which can be found at facebook.com/groups/bpmoney. Okay. What other things can we talk about, Scott?

Scott:
Well, let’s stay on the house here. How much do you think the house is worth right now?

Stephanie:
Initially it appraised for 220 and then once the market started going up, there’s another 3:1 down the street that went for 250. There’s a 2:2, 3 doors down that they just put on the market for 340. I’m thinking maybe 260, 280, if I’m lucky is how much it would, the house.

Scott:
Your mortgage is 180?

Stephanie:
My mortgage is 1200. 1225.

Scott:
Sorry. What’s the balance?

Stephanie:
Mortgage. Sorry. Yes. It’s 180, correct.

Scott:
Okay. That actually changes a couple of items for me. I didn’t realize you had that much equity. I thought you had 8% equity with that. You have much [crosstalk 00:53:13].

Mindy:
You have 50% equity.

Stephanie:
How so?

Scott:
You have about $7,000 in equity in the property. Because if you sold it, you would pocket 250 after closing. Before closing costs enough to get all that stuff. You’d sell it for 250, you’d pay off the mortgage in 180 and you’d pocket $70,000, minus transaction costs. Right? Those would be substantial. Those would be, let’s call it 25,000. You’d pocket somewhere in the ballpark of 45 to 50,000 on selling this property. Okay. That actually changes a few things. I told you that the ways to build wealth were to generate cash and then deploy it. Well, you also have built wealth with this deployment of cash, your net worth has increased.
And so that gives a few more minor options to play with here, with that. One is thinking about a refinance. It probably doesn’t make sense to knock off $50 in monthly PMI, but it is something to, I think ask in the BP money Facebook group, or we can ask that for you and see if any lenders have any advice on what to do. Since you do have so much equity in that proper, there may be some options that we’re just not quite in tune enough with the world of mortgages, to discuss here on the show with that.
Second, you can consider what’s called a home equity line of credit, or HELOC. H-E-L-O-C. That could be a really good option for you to say, great, I’m going to use 7,000 of my cash savings. 7,500 from that 12,500 in cash savings. I’m going to pay down my window loan with that. And then I’m going to take out a home equity line of credit, you may get approved for somewhere in the ballpark of 20 or $30,000 for a home equity line of credit, with that. That will be at a low interest rate, like three to 4%. You can use 5,000 of that, a very small chunk of that to then pay off the remaining window loan.
And then you can pay off, so instead of paying a 10% interest rate on that window loan, you’re paying a three to 4% rate on your home equity line of credit. That would be another option to pursue there, to talk to your local banker. Again, one of those things that I would spend a few hours listening to some podcast or reading up to get familiar with what is a HELOC and can I use that? And where can I go get one? But that would be, I think a potential option for you that has materialized knowing that your property might be worth $250,000 instead of $188,000. That’s great.

Mindy:
Yes. I was going to suggest that as well, get a HELOC and pay down your window loan, completely pay it off completely, and then pay off your HELOC. Now, your HELOC might be, you might be approved for $25,000. You don’t have to borrow all of it. It’s like a credit card where you can borrow some and then pay it back and then borrow again and pay it back. Whereas if you did a cash out refi, you take out the entire amount and then when you pay it back, you don’t get to borrow it again. It’s like this line of credit. It’s this amount of money that you’re able to borrow.
Now, they could close it out. That happens rarely, but it’s just there available for you to borrow. I recommend not borrowing it unless you need to. And it’s a short term loan. I wouldn’t borrow it for long term money, but if you need a quick pay off your window loan, then you still have your cash available, your cash cushion. That’s your only debt, right? I That’s your only debt.

Stephanie:
I learned from you guys not to take out a car loan, so thank you.

Mindy:
Yay.

Scott:
Awesome.

Mindy:
Hooray.

Scott:
Well, let’s summarize what we’ve discussed here so far with this, right? First and foremost is, think about it as, how do I get equivalent of 10 books under my belt. That’s a hundred hours of passive learning about personal finance and over the next year, right? That’s an audio book in the car once a month or a podcast in the morning when you work out or whatever that looks like to you, just getting some sort of way to absorb this stuff so that it’s not all a foreign language with that. And then in the meantime, we have generate cash and deploy it with those two things.
On the generating cash thing, it’s all going to come down to expenses for you in the short term, right? You can always think about the career moves later with that. The first step is just tracking your expenses and getting control over the day-to-day. There might be as much as 200, $300 a month, maybe more in there, just from that, with that. We said, if you remember that we were saving 250 to 300 a month, maybe it was a good ballpark guess as to what was currently going on prior to this call.
If we get another 300 that’s $600 per month in savings, let’s call it 500 a month in savings to be conservative with that. This window loan is killing you. You’re spending $430 a month on it. And if you can wipe that out and refinance with a HELOC, maybe you spend 7,500 from your cash position, knock out big chunk of the window loan, and then take out the remaining $5,000 in a HELOC. That might knock down the amount you have to pay on that from 430 to $100 per month, because you’re paying on a much lower interest rate and a much lower balance towards your HELOC. Great.
Now we’ve increased your savings by another 300 bucks, right? Now we’re at $800 in savings. If we cancel this life insurance policy, then that’s another 160 bucks, which brings us to $960 per month in cash saving with that. I think those are all really potentially achievable items for you in the next three months that you could get to. Now you’re saving a thousand bucks a month. That’s $12,000 a year. That’s enough for another down payment, if you want to do another move into a property and fix it up and live in it and rent out the bedroom, a couple bedrooms, keep this one is a rental, right?
Now you’re beginning to start a portfolio. That’s enough to fully fund an emergency reserve with that, that’s really stable and think about just aggressively pursuing other investment options. You may find you’re able to start saving more than what I just described there, especially as you pay off the HELOC and get rid of that extra a hundred bucks on that debt with that. A lot of options begin to present themselves with that. And there’ll be I think, more that next level of decisions to make about how you want to invest or allocate your portfolio going forward.
Probably sometimes towards late summer, fall of next year in 2022, we’re recording this in late 2021, this will release in January, 2022. But there will probably be some good options for you in around that time, September, October of this year. How does that sound? Does that sound rational or like it makes make sense and is achievable?

Stephanie:
Yes, definitely a lot more research to do. I’ve heard the word HELOC, I’ve never thought in my mind I would look into it for myself. It’s exciting. Thank you.

Mindy:
Now that we have HELOC money available, I would suggest looking into getting quotes for putting a bathroom in the garage bedroom. The reason being, if you are two miles from the beach and you can rent out your house for six nights a month at $100 a night or 12 nights a month at $50 a night, somebody else is paying your part of the mortgage. And now your housing cost is zero. If they have their own bathroom, then that’s better. Because I don’t want to share an Airbnb with somebody that I have to share a bathroom with, I think that’s gross.
Call me a diva, I don’t care. I want my own bathroom when I go to an Airbnb and I specifically choose Airbnbs that I don’t have to share a bathroom with. I think that a lot of people are like me and I’m sure you’re lovely and wonderful in every single way, but I don’t want to share a bathroom with you. Having that bathroom could help you, if it’s going to cost $50,000 to put a bathroom in, don’t do it. That’s not worth it. But if it’s going to cost, I don’t know, $5,000, how much does the bathroom cost? I’m so out of touch with how much a bathroom costs because I do it myself.

Stephanie:
I was told definitely over 10, the way my house is laid out.

Mindy:
I would get a couple of quotes. If one guy says-

Scott:
It may have some sort of complication with-

Mindy:
Plumbing. Yeah.

Scott:
I think Mindy is right. That you have to think about what is the highest domestic use of this property and can I invest 10, 15, 20, 25,000 into the property to allow it to generate more rent or become more valuable when I move out, especially if the plan is to potentially buy more rental properties. That’s a really good idea, but I definitely don’t think that’s a short term move for you. I think that the first couple of steps would be getting out of that window loan by paying it down or refinancing it with a HELOC, doing a lot of research, getting comfortable with that financial foundation and then putting together this as the next piece to that.
But if you’re able to get a really strong savings rate in three to six months with that, and you feel you’re in command of those types of things and you’ve got this HELOC available, and you’re like, great, if I had a bathroom onto that bedroom, I could generate 200, 300 bucks a night on Airbnb. That might be a great move. It would be a gamble. I would definitely say that would be something to spend another 50 to $100 thinking about prior to executing on, because it’ll be a big risk relative to your financial position currently, but that could be a great, a great option with that. That is your biggest asset, is this house.

Stephanie:
I’m of the mindset that even just making this a 3:2 instead of a 3:1, or even a 1.1 bath, just adding another bathroom is going to even make the value go way up. Because there aren’t a lot of those in this neighborhood and that’s why our house is down the street selling or listed for a 100,000 over what I paid. That kind of thing.

Mindy:
Yeah. Two toilets is always infinitely more valuable than one toilet in a house. When you are-

Scott:
My wife was very thrilled when we moved to a place that had a second toilet.

Mindy:
Yes.

Stephanie:
Rightfully so.

Mindy:
Okay. Out of the bathroom into different types of real estate. You have mentioned saving up a down payment for a duplex. Is that your goal to become a real estate investor?

Stephanie:
Yes. My real goal is to have some passive income. Real estate investing, I love it. I love the house hunting. I love properties, even old historic ones that need help. I want to help them, but I also don’t know how to fund that situation to make it worth it and not just buy a house that needs a lot of work, because I love how old it is. It’s not a good investment either.

Mindy:
Okay. Let’s see, where am I? Step six? Step seven. Watch the movie, The Money Pit with Tom Hanks and Shelley Long, and don’t buy historic houses is my personal recommendation. But if you enjoy real estate while you are saving up for your next down payment, I would say, see every house that’s available, go to every open house. When you’re not in a position to buy, I wouldn’t take your real estate agent and take their time to go see all these houses. I would absolutely reach out to the person that helped you buy your house. If you like them and want to work with them again, I would reach out to them and have them start sending you listings.
Go to every open house there is. And they ask you, do you have an agent? Say yes, unless you’re looking for a new agent and then say no. But if you have an agent that you like, get listings and start looking and start watching the market and seeing what’s going on the market, seeing what’s selling and for how much. Just because they listed that house down the street for 260, doesn’t mean it’s going to sell for 260. Maybe it sells for 280. Maybe it sells for 220. You want to keep an eye on what’s going on.
If you want to buy in your area again, send out letters to every house that looks interesting, hey, I’m looking for a house, I’d like to buy yours if you’re thinking about it. Or do you know anybody in the neighborhood who I live down the street and I would love to buy another house in this neighborhood and see what happens. There’s a lot of people that are sending out those same letters too, and you never know which one’s going to stick, but starting to look and starting to learn the market again, because the market that you bought in a year ago, isn’t the market that you’re in now, which is unfortunate.

Stephanie:
Yeah. Very, very true.

Mindy:
Continue to learn the market and see what houses, if you want Airbnb houses, go see where the houses are Airbnbing the most. If it’s a mile away, start looking in that neighborhood instead and, find that sweet spot where it’s super affordable and also super desirable.

Stephanie:
Sounds great. Thank you.

Scott:
Agreed. I’ll just piggyback on that and say, it’s the same framework here. It’s several hundred hours, if personal finance is 100, to really master the language or get to know it well enough to feel confident, real estate might be 250 of that, to really feel comfortable. What is cash flow? What really does add value? How do I know my market and what makes sense with that? And so that would be the investment of time I’d be prepared to commit going into that.
I obvious think it is a great avenue to build wealth and do it personally with that, would be fully supportive of you pursuing that. This next year, I think we’ll be one of fortifying your financial position and getting things ready, so that you could make those kinds of investments in 2023 and beyond, would be my estimate.

Stephanie:
Awesome. That really sounds great. Definitely this is exactly what I needed.

Mindy:
Awesome. Well, I think that this is a good start and I think in six to nine months, we need to circle back and see what you have accomplished. Celebrate the paying off of that window loan and go on to the next step.

Stephanie:
Am in it.

Mindy:
Awesome. Okay. I’m going to send you a note then in about six months. I’m going to send her a note in six months. I just need to make a note here to myself to send that note. But yeah, this is going to be great. The fact that you’re paying attention, the fact that you actually want this to happen is huge. Now you have to take the steps, but we’ve given you several things to look into. The steps that I have written down are, pay off the window loan, leave the traditional IRA where it is until you have a reason and a plan for rolling it over into the Roth IRA.
It’s not a bad idea to roll it over into the Roth if you have a reason to do so. But just because I heard that I might want to, is not necessarily reason enough. Let’s come up with a plan and you can do that anytime. Step number three-

Scott:
What was her financial planning session?

Mindy:
Yes, yes. Talk to your financial planner at XY Planning Network, which is step five. We haven’t gotten there yet, Scott. Step number three is specify the brokerage account investments. When you set up a brokerage account, that’s a great first step, but then you actually have to say, I want this money to be invested in this thing. If it is not yet invested in this thing, it will just sit there until it is invested. The personal finance community is really big on index funds. It’s a set and forget it. You decide there are VTSAX, the Vanguard Total Stock Market Index fund is the darling of the personal finance community. It’s the entire American stock-

Scott:
We of course can’t specifically recommend a specific fund or whatever with that.

Mindy:
Yes. We would never.

Scott:
That’s just one that happens to have been mentioned by Jay Collins, with that.

Mindy:
VTI, another one [crosstalk 01:10:40]. There’s a bunch. Look into different indexes, look into specific stocks. Although I would not recommend a specific stock for you personally, unless you have a lot of time. Scott said 200 hours for real estate. If you have 10,000 hours to devote to researching one company, then you can invest in their company. But until then I would personally, if I was in your shoes, I would go into an index fund. I’m not in your shoes and I go into an index fund.
Step number four is listen to episode 139 with Joe Saul-Sehy, review your life insurance. I wrote this out before we decided that we hate your life insurance company. You’ve only been in there a few months. If I was Stephanie, I would call them up and say, I don’t want this plan anymore. Cancel it. Stop taking my money, give me all the money that you have. This is what I would do if I was you. It is a research opportunity for you. I would listen to the Joe Saul-Sehy episode 139 and learn about life insurance.

Scott:
Again, because this is so specific with this, we need to be careful from a legal perspective with that kind of stuff. All this is entertainment purposes anyways with that, but canceling the life insurance policy, I would talk to your XY Planning Network, fee only financial advisor about that. What I’ll say is, I bet you I’m going to up it from 97.5 to 99 to one odds, that canceling that is going to be a smart, long term financial move. There is a tiny percentage of the population that can benefit from that if you’re willing, but I think the profile of that person is more like an executive that’s going to work for 40 years and is going to have a specific and detailed plan for regularly borrowing against and adding into the cash balance and that life insurance policy. I don’t think that’s you.

Mindy:
Yes. Okay. I will say specifically-

Scott:
I’ll leave it at that level of odds.

Mindy:
… specifically to Stephanie. However, in a broader sense, if you are listening to this show, if you have a life insurance plan and you’re not quite sure what you should do, if you should keep it or not, listen to episode 139 of the BiggerPockets Money podcast with Joe Saul-Sehy, review your life insurance plan to see exactly what you have, what happens to that plan if you no longer pay the premium, does it automatically cancel? Do you have some sort of investment account like Stephanie does? Does the money stay in the account? Do they write you a check? What happens when you cancel all of this?
Make sure that you’re not making, Stephanie has had this account for a few months. She doesn’t have any dependents. She doesn’t have a real definite need for life insurance at this moment in her life. That’s why this advice is specific for her. We would, if we were in her specific position, not continue to pay it. But again, that’s a good point, Scott. If you have life insurance and you’re listening to this, definitely do a little bit of research before you just jump in with both feet. Step five is, we’ll talk after the show, Stephanie, to reach out to the XY Planning Network, to get you a session with a planner that you like.
And step six is to contact some lenders and look into getting a HELOC to help you with step one, paying off that window loan. This has been so much fun. I’m so glad you had some time to talk to us Stephanie, because this was great. I hope that this gives you some steps to take. I hope this has you feeling good about your financial situation, because you really are doing great. You’re not sitting here in hundreds of thousands of dollars of debt. You don’t have bad debt besides the window. You got windows out of it, it’s not like it’s horrid, horrid debt.
They’re the nasty ones for are charting you 10% interest. They should feel ashamed. I hope they stab their toe every single day for the rest of their lives.

Scott:
Wow.

Stephanie:
Well, thank you. This was really great.

Mindy:
The pinky one too.

Scott:
I just want to thank you as well. Thank you for coming on the show and bringing this to us. The fact that there was, again, I think you’re doing a lot of fundamentals really right, even though you feel overwhelmed, you’re making a lot of really good choices here with that. You’re doing something we call house hacking already, intuitively, by having a place and getting some of your roommate, your boyfriend to pay off some of that mortgage. You’re investing in all that kind of stuff. A lot of really good stuff going on here.
Because a lot of this is new, we had a lot of chances to make some tweaks that we think might be beneficial and hopefully some of those would be helpful.

Stephanie:
Yes. Thank you so much. That’s what I was hoping for, was a perspective that wasn’t overwhelmed personally to look at what I have and share your knowledge. Thank you so much.

Scott:
Great. Well, we will be in touch about this list and to follow up in about six months.

Stephanie:
Sounds great. Thank you.

Mindy:
Thank you, Stephanie. We’ll talk to you soon. Okay, Scott, that was Stephanie. I’m so excited for her plan. I’m excited for her path. I think she is going to start and take a couple of steps and then take a couple of more steps and then just start running. I really think she is going to be in a vastly different financial position in December of 2022, than she is here in January of 2022.

Scott:
I agree. I think she’s doing a lot of things right and she’s looking to advance her position and figure things out. I would agree that she’s not in a bad position right now. I think she’ll be in a much stronger position this time, next year. I’m optimistic, I’ve been accused of being too optimistic in the past with this, but I’m optimistic that if she can make this change, she could stockpile as much as 10 to 15,000 in incremental cash over the course of the next year, maybe more with that, and begin having that next set of options present themselves from an investment perspective.

Mindy:
I think she is, the world is her oyster and I think she has so many opportunities and she’s really, really, really just going to fly by the end of the year. I can’t wait to check in with her. Should we get out of here, Scott?

Scott:
Let’s do it.

Mindy:
From episode 266 of the BiggerPockets Money podcast, he is Scott Trench and I am Mindy Jensen, saying, may your pillow always be cool on both sides.

 

A prospective tenant’s rent references can tell you a lot about their rental history. And, checking a rental history report as part of the screening process is just as vital as verifying a prospective tenant’s credit history, employment, and income. After all, tenants who have a history of moving frequently or being evicted may not be the ideal candidate to fill your vacancy.

If you want to complete a thorough rental history check, you need to ask the potential tenant a series of questions and then the facts with previous landlords. That said, checking a tenant’s rent references may not be as straightforward as it seems. For example, some landlords will give a glowing report about a bad tenant who’s still occupying one of their properties just to get rid of them. Or, you may have applicants without any rental history, making it impossible to check. Plus, there may be legitimate reasons for what appears to be unusual behavior, like a tenant moving frequently in a relatively short period of time. 

Whatever the case may be, most landlords agree that going through the process of rental history verification is a crucial component of property management. So how can you ensure that a rental applicant is a good match for your rental vacancy? Well, you can find helpful tips on how to decipher a rental history report below.

What is a rental history report?

A rental history report is a report that contains information on a tenant’s current and prior housing. This may include the current address and the contact information for the landlord or property owner.

The report should also contain two or three previous addresses for the tenant. Any information about late rent payment, rent debts, or eviction records is also essential—as this information comes in handy when you’re making decisions on who to rent your properties to, and who you should steer clear of.

How to check a tenant’s rental history report

A tenant’s rental history report is just as important as verifying their income or credit score. A thorough screening process can help you identify a great tenant who pays rent on time and looks after the rental unit.

Conversely, skimping on the screening process can cost you in the long run. After all, it’s more difficult to get rid of a bad tenant than to let one rent your property.

To get you started on the right path for checking a tenant’s rental history, here are four steps to follow:

1. Start the rental history report using pre-screening questions.

The rental verification process starts when you first speak to the prospective tenant by phone or email. Before you start, it’s a good idea to check with your current state laws and the Fair Housing Laws to be clear about the questions you can and cannot ask a prospective tenant. 

In general, though, you should be ready to find out the following information: 

• How long they have been living at their current address
• Why they are moving
• Whether they are willing to submit a rental application and authorize a background check
• Whether they are willing to provide references from previous landlords and employers
• Whether they have been evicted from a previous apartment

It is helpful to ask some of the questions on the rental application during the call and then note the answers. This information is important because you can check the verbal answers against the information included on their rental application—as well as the information former landlords provide.

2. Use the rental application process to build a rental history report.

The rental application form should gather information about the prospective tenant’s current and previous addresses. This should include the dates in which the tenant lived at the addresses as well as the landlord’s contact information. It is also essential to ask for consent to contact previous landlords. 

Most of the time, the tenants who have nothing to hide will be OK with you calling former landlords and rental property owners.

Related: How technology can help process rental applications faster.

3. Check the rent references.

If the tenant consents to a check of their rental history, you then have to take on the laborious task of making lots and lots of phone calls to verify the information. You may have the urge to skip this part, but don’t give in to the temptation. Doing so could mean the difference between renting to a great tenant or renting to a bad one.

The goal of calling previous landlords is to verify that the tenant’s information is accurate. It’s also an excellent time to ask how the tenant treated the property and if there were any lease violations that occurred during the tenancy. If possible, it would be best to ask open-ended questions to better understand the tenant better. 

For example, you can ask how the tenant maintained the property, what the communication was like, and why they would rent to the tenant again. 

Before calling the landlord, it’s also a good idea to do an internet search to confirm the contact information you were given for the landlord. It’s not unheard of for a tenant to give a friend’s contact number as their landlord’s number. The friend will then pose as the prior landlord. 

Thoroughly checking a tenant’s rent references takes time, of course. However, it’s worth spending the time on vetting possible tenants to find a suitable tenant for your rental unit. 

4. Verify information with the tenant.

Let’s suppose the rent references you check out differ from what the tenant has stated during the screening call or on their application. In that case, it’s worth the time to check with the tenant on the discrepancies. These could just be simple mistakes or purposeful inaccuracies on the part of the other party. For example, a prospective tenant is able to provide misleading information just as easily as a landlord is able to lie about a tenant. 

Of course, it’s not easy to know who to believe in these situations. You will have to rely on your own judgment, but asking a few questions usually clears up any misunderstandings. And, if you call at least three former landlords, you might be able to get a better idea of who is telling the truth.

Rental history online services

Savvy landlords also use property management apps to run complete background checks—including rental history—on tenants. Not only can the apps build a profile of a tenant’s rental payment history, but they can also be used to run credit checks, look into criminal history and eviction history, and see employment history.

Related: The pros and cons of property management software.

Why rental history matters

Rental history allows you to get an idea of your prospective tenant—which is why it’s so important. For example, previous landlords can tell you if the individual paid rent on time, if the tenant looked after the unit, and whether was a good tenant. This information is a good indicator of how the tenant will treat your property and your rental agreement—so you should never skip a check of a prospective tenant’s rent references. 

However, rental history is just one aspect of the screening process. For example, employment history and bank statements can help you determine whether a prospective tenant can afford the rent on the unit. A credit check can provide insight into their attitude toward paying bills on time or getting into debt. 

What if a tenant has no rental history?

There is always the possibility that a prospective tenant has no rental history to rely on. In that case, the typical rental background checks can help determine a first-time renter’s suitability as a renter instead.

You can check their pay stubs, employment history, and ask for additional references. Also, first impressions are important, so their behavior during the interview could help you determine if they are a good fit. 

And, just because the prospective renter is a first-time tenant with no rent references doesn’t mean they will be a bad tenant. If you verify their proof of income and their credit reports check out, they are probably OK to rent to. If you are in doubt, you can always ask for a co-signer on the rental agreement.

Final thoughts on tenant rental history

A tenant’s rental history is a vital part of the screening process. Ensuring that rent references check out and they have enough income to afford the unit can help you make an informed decision in the rental process. While it may take some extra work upfront, checking a prospective tenant’s rental history can save you time, stress, and resources in the long run because you’ll know you have the right tenant for your rental unit.