RE/MAX Canada Award Winners Named at R4 Event in Las Vegas

The 2021 RE/MAX Award winners in Canada have officially been crowned at the Canadian Awards Celebration that took place in Las Vegas on Sunday February 25, 2022 as part of the larger RE/MAX R4 event. In what was a competitive and record-breaking year for real estate, RE/MAX Canada is thrilled to recognize such a deserving group.

Among the 2021 winners, RE/MAX celebrated the following career distinctions:  Paramount of Excellence, Luminary of Distinction, Circle of Legends, Lifetime Achievement and Hall of Fame. New this year, RE/MAX introduced the Founder’s award and the Spirit of Canada award, with two awards handed out in each of the two categories.  

Access the full list of award winners below: 

“Congratulations to all of our award winners across Canada,” says Christopher Alexander, President of RE/MAX Canada. “This has been an unprecedented year for the real estate market across the country and it is an honour to recognize the accomplishments of so many high-performing individuals and teams in the Canadian network.”

“Once again, our dedicated Sales Associates, Brokers, Managers and Administrators had a successful year. They continue to provide unparalleled customer service and expertise, as well as a deep commitment to community,” adds Elton Ash, Executive Vice President of RE/MAX Canada. “It’s a great honour to recognize their outstanding achievements.” 

2022-02-28 15:26:41

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What can new census data tell us about Canadian real estate?

The Government of Canada’s robust census program is a source of invaluable information for all kinds of topics. Unfortunately, this level of detailed data collection takes a lot of time and effort, and as a result, a census is only conducted every few years. That means until recently, we have been working from census data collected as far back as 2016. 

There are some statistics that change slowly, so this older data can still be most relevant. However, when it comes to real estate, obviously a lot has changed, especially in the last two years where the real estate market has had multiple major surprises and unprecedented performance. Now, we are starting to see some of these effects.

Because the census covers five years of changes, you cannot chalk everything up to pandemic effects, however, a lot of the trends in housing were already at play as far back as 2016 only to be exacerbated by recent conditions.

Luckily, this month, Statistics Canada has released newly compiled data from the 2021 census. Let’s take a look at some of the insights it contains:

Canada’s fastest-growing cities

Over the past few years, changing conditions due to the pandemic and housing market conditions have seen a lot of Canadians relocating and settling elsewhere. As a result, some cities have been seeing increasing and decreasing levels of population.

Among the fastest-growing municipalities were large areas that are peripheral to larger Canadian cities.

The fastest-growing region was East Gwillimbury, a municipality between Toronto and Barrie. The area saw a growth of around 44% in the last five years. Other areas in Ontario such as The Blue Mountains, New Tecumseth and Milton also displayed growth of over 20%. Larger cities in the province also saw high growth with Brampton, London, Oakville, and Kitchener all seeing around 10% growth. For comparison, Toronto grew by 2.3% over the same period. Curiously, Mississauga was just about the only city reporting a decline in population over this time, shrinking by 0.5%.

In BC, the fastest growing area was Langford, just outside of Victoria. Other areas seeing growth of more than 20% include Lake Country and Squamish.

In Alberta, cities in the Calgary area such as Cochrane, Airdrie and Canmore also saw a high growth of 24%, 20%, and 14% respectively. For comparison, Calgary grew by about 5.5%.

According to an analysis by Statistics Canada, it was areas farther away from major centres that saw the most decrease in population, showing that the trend of migration out of major cities only has effects to a point.

The complicated story of housing supply and vacant homes

One major theme in the discussion of housing in recent times has been the lack of supply in Canadian real estate markets. Another hot issue in relation to this has been the supposedly high number of vacant homes – those that are owned but not being used for residential purposes, which some claim is having a negative impact on our housing availability and affordability. The new data helps to shine a light on some of these concerns.

In Toronto, for example, where the population grew by about 2.3%, the total number of dwellings grew by over 6%, indicating the fact that supply is not the sole factor driving the market in this city. Similarly, in areas like greater Vancouver, Montreal and Calgary, the growth in housing matched or exceeded the growth in population. Clearly, there is a large demand issue still at play despite the hard work of home builders to meet the needs of the growing population of Canada. The issues in the market can not be addressed from the supply side alone.

Meanwhile, looking at the statistics for total private dwellings occupied by usual residents, we can learn a bit about the state of vacant homes across Canada. Statistics Canada describes a dwelling occupied by a usual resident as “a private dwelling in which a person or a group of persons is permanently residing”. By taking the number of total dwellings and subtracting this figure, we can get some idea of how many dwellings are not occupied (for any number of reasons).

In the last five years, Toronto has seen an almost 40% increase in vacant homes, totalling about 92,346. This means that although 74,000 homes were built in the last five years, there are now around 26,000 more homes that are empty, severely eating into the new supply.

In Vancouver, the story is quite different, likely owing in part to their tax on vacant homes. In 2016, there were about 66,719 vacant homes in Greater Vancouver, while in 2021 there were just 61,213. This means that in addition to the 76,000 new homes built, an additional 5,500 vacant homes were filled with residents. Overall, this paints a positive picture of the success of their vacancy measures.

New data to be released periodically

Overall, the current release of census data provides some interesting insights into the real estate market in Canada. However, this is only one part of the upcoming releases from Statistics Canada. Until November, they will be releasing further data on themed topics such as “Canada’s shifting demographic profile”, “Portrait of Canada’s families and households”, and of particular interest to us, “Canada’s housing portrait” set to be released in September. Stay tuned to CREW for more coverage of relevant census data in the coming months.



2022-02-28 13:43:13

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Digital Nomad-ing and Answering All Your FIRE Healthcare Questions

Health insurance for early retirement? Is that even a thing? If it is, it doesn’t seem self-evident in the United States. For most early retirees within the USA, you have a couple of options for healthcare—make a low enough income to qualify for government-subsidized healthcare or pay an exorbitant amount of money to either buy healthcare upfront or pay out of pocket any time you get sick. But, that’s not a terribly safe way to live, especially when you’re working with a (relatively) fixed income.

Throughout their world travels, Amy and Tim from GoWithLess have had to learn this the hard way. They were originally insured on a healthshare plan but found it far riskier than they would have liked. Now, as they travel throughout the United States, Mexico, and the world, they’re making sure they’ve covered all bases so a random surgery or two doesn’t force them back into the working world.

Early retirement health insurance is one of the biggest reasons that financial independence-chasers stay at their jobs, so if you’re itching to get your post-work-life travel on, listen to this whole episode. In it, Amy and Tim drop gems about finding health (and auto) insurance when retiring early (or abroad). They also discuss the best questions to ask a healthcare provider or broker, what to look for in a healthcare plan, and how to save money with digital nomad insurance.

Mindy:
Welcome to the BiggerPockets Money Podcast, show number 279, where we check back in with Amy and Tim from GoWithLess, and see how their travel around the world retirement is going in the middle of COVID.

Amy:
So being financially independent is one of our biggest assets. Being healthy is one of our biggest assets, but being flexible is certainly on the very shortlist. And we have found that we are so flexible that we’re kind of like yoga teachers because the pivoting and adaptability we’ve had to exhibit is mind-blowing.

Mindy:
Hello, hello, hello. My name is Mindy Jensen, and today I am flying solo. I am here to make financial independence less scary, less just for somebody else, to introduce you to every money story because I truly believe financial freedom is attainable for everyone, no matter when or where you are starting. That’s right. Whether you want to retire early and travel the world, go on to make big-time investments in assets like real estate, or start your own business, we’ll help you launch your financial goals and get money out of the way, so you can launch yourself towards your dreams. Our regular listeners will know that Scott usually says that, but he’s off being CEO today. So I am talking to Amy and Tim by myself.
Joining me today are Amy and Tim Rutherford from GoWithLess. We last chatted with them in January 2019, on episode 57. Amy and Tim shared their money story of being high income earners, who also happened to be high savers. They thought they’d be able to retire by age 55, but within one year of learning about FIRE, they were financially independent. They were really big savers.
They had been spending $115,000 per year living in a big house and thinking that they were being super frugal. If you listen to their original episode, I said I wasn’t going to judge them, but I totally judged them because after discovering FIRE, they cut their spending down two $36,000 a year, living in a paid off townhouse and missing absolutely nothing about their former life. In fact, their new life, their retirement life was going to be filled with travel, both domestic and international, house sitting and pet sitting for complete strangers all around the world.
Amy and Tim, welcome back to the BiggerPockets Money Podcast, and let us pick up where we left off. In the beginning of 2019, you were waiting for your youngest daughter to graduate high school, and then you were good going to get rid of everything, sell the townhouse and travel the world. Everything happened the same way you played it, right?

Amy:
Absolutely.

Tim:
Exactly.

Amy:
Yes.

Mindy:
Okay. From episode 279, thank you. Okay. So what happened?

Amy:
So 2019, we still did a massive amount of traveling. We spent [crosstalk 00:02:58] well over a 100 days traveling. We had a house sit in the French Alps that summer. We spent some time in Northern Italy. Our daughter did graduate from high school and not only did she graduate, but she became completely independent herself, which was really surprising, at the age of 18. We weren’t expecting that. We were expecting to give her quite a bit of help, but she went off to Boston and just became independent. She’s now a student there and she just kind of enrolled a couple years after she graduated. And so we are paying for her education, but still, we are very proud of that for her.
So we got rid of most of our stuff in 2019, that included every piece of furniture, every lamp, every rug, most of our stuff. And we got down to a 5×10 storage unit by the end of 2019. And in the very first week of January 2020, we sold our town home and we hit the road with plans to go… a plan all 2020 to go from Provence and Scotland, to Kuala Lumpur. Well, of course, all of that changed from COVID and we had a giant pivot.

Tim:
Yeah. I can’t remember in our episode, if we talked about the fact that we were moving to Texas. So we moved to Texas, we now domicile in Texas.

Amy:
That’s right.

Tim:
We have a service there that allows us to do that. And so we are officially citizens of Texas, so we did that. And then like Amy said, I think we had over 200… did you already say this? Over 200 nights in houses that we had planned for 2020, and every single one of those-

Amy:
Everyone.

Tim:
Every single one of those fell apart with COVID. So we had to rearrange our year based around what happened with COVID. And so we got lots of comments on our YouTube channel about the, “You need to buy a house, you need to move in, you need to buy an RV, you need to do something different.” And so we were thrilled to not have those things in our life.
So we like to say that we were… Obviously, this lifestyle is something we were designed to be doing, otherwise in COVID I think most people would’ve just given it up and said, “Okay, this is kind of crazy,” and buy a place and move back in. But we are more thrilled than ever about our lifestyle.

Mindy:
Well, let’s remember back. Let’s go in the Wayback Machine to March 2020, where all of a sudden, everything in America shut down. I remember talking to you and you’re like, “We’re stuck in New Orleans.” That was like the height of the New Orleans, the original New Orleans COVID outbreak, because they had just had Mardi Gras, and everybody didn’t know to wear masks, it wasn’t a thing.
It’s so hard to remember back then, when people weren’t washing their hands every five seconds and doing hand sanitizer, and wear masks, and social distancing. I don’t know if you’ve ever been to New Orleans during Mardi Gras. Were you there for Mardi Gras? I can’t remember.

Tim:
No.

Amy:
Well, I’m going to… so when we launched-

Tim:
By the way, this memory’s very vivid for us.

Amy:
Yeah. It’s not way back. It feels like it was yesterday and a decade ago, but it’s crystal clear for us. So when we sold our home at the beginning of January, we drove, we did keep our car and we drove… and I’ll just kind of fast forward. We just sold that car three days ago, or a couple days ago. So we no longer have a car.
So we got in the car, drove to Texas. And when Tim says we became residents of Texas, I think it’s important to mention, we do not own a home or rent anything in Texas, just because it’s called domiciling in Texas. And the way we look at it, if you don’t have a home, then go find a cheaper state to be your home in terms of taxes. So Texas doesn’t have state income taxes. We don’t have a home, we’re not drawing on their services. So we became Texans. This is Tim’s former home, where he grew up.
So we get to Texas, we took a cruise out of New Orleans. We kind of kicked off our journey and our adventure with a cruise in mid-January after we became official Texans, drove over to New Orleans, and we had a 10-day cruise or something, got off that cruise, left our car behind in New Orleans for two months, went to the West Coast.
COVID was a big problem in Asia, but it was not… no one was even thinking it was here. This is January 2020. So we were in the Bay Area, California. We were in Maui, Arizona, traveling all over the place. And we were both… Actually, I was sicker than I have ever been during that time, and it is absolutely possible. So we weren’t in New Orleans for COVID… Sorry, for Mardi Grass, but we were in New Orleans at the end of January, and it is possible that we had COVID.
We took antigen tests, antibody tests on the other side, in June when they were readily available. We did not test positively, but they may have been in our… we will never know if we had COVID at that time, but we were very, very sick. And we came back to our car two months later in New Orleans, sheltered in place there. And-

Tim:
So when we showed up in New Orleans was literally the day or the day-

Amy:
The day.

Tim:
They started shutdown. So basically everything was closing and we were in a friend’s place. Our intention was to be there for like a week and then to move on. And so, as things started to shut down, we weren’t even sure that we were going to have a place to sleep because they were talking about hotels being closed, Airbnbs being closed. There was no place to really go.

Amy:
We were scared.

Tim:
Yeah. So our friend, we worked out a deal with our friend and we were able to stay there for… how long were we there?

Amy:
We were there for six or seven weeks, and that’s a Denver friend who had a second home in New Orleans. That’s her retirement idea, her place to be. So she wasn’t there. It was just us in New Orleans, and it turns out I’ve only been to New Orleans, passing through for a cruise sort of a thing, maybe twice, so I didn’t really know it.
And it turns out that New Orleans was absolutely beautiful. We were there from March 14th, I think it was, for six or seven weeks. And it was heavenly because we were near the big park. We went out every night and took a five mile walk every single day for our time there, unbelievably beautiful.

Tim:
It was.

Amy:
Yeah. So [crosstalk 00:08:59] Obviously, there was no partying.

Tim:
Yeah.

Amy:
I’m not a party person anyway, but I’m a big walker. And we loved seeing cool things and beautiful trees, and it had that in space.

Tim:
This was early COVID. So this is when people were leaving their mail on the front porch for weeks and having food delivered and leaving it on the porch for a day or whatever, so we were trying to figure all that out. This was all brand new for us as well, as well as our neighbors. And so it was kind of a crazy time.

Amy:
Yeah.

Mindy:
Yeah.

Tim:
So time to reconfigure our life.

Mindy:
Well, so let’s take yet another step back and look at this. You spent the end of 2019 setting up all of your travel for 2020.

Tim:
Yeah.

Mindy:
You had the whole year planned out. You were going to go here. I’m assuming you had several plane trips already booked.

Amy:
Yeah.

Mindy:
You were going to go here and then move there, and then move there. And everything travel related was completely shut down. Airlines canceled flights. The Airbnb canceled every stay, returned all the money from the hosts to the guests, it was a big uproar. We are BiggerPockets, we talk about real estate investing, short-term real estate investing is a big part of conversation on the site, and people were in an uproar over this.
And on the one hand, I can understand this. You make the rules for your short-term rental. And if you have a cancellation, if you have a no cancellation policy and no refund policy, then the person doing the canceling doesn’t get their money back. On the other hand, I can see why Airbnb did it, because if the guests lose their money, basically they can’t… it’s not their fault, it’s not the host’s fault. There was no good solution to this.

Amy:
No.

Tim:
Yeah. As a matter of fact, so after we left Louisiana, we went to Tennessee and then ultimately, we were in Asheville, North Carolina. We stayed at Airbnb there, and because of COVID, we called it COVID pricing. We got a great deal for… we were there for-

Amy:
Another six or seven weeks.

Tim:
Another six or seven weeks, we were in Asheville, North Carolina. We got COVID pricing, which was fantastic. We considered going back to Asheville this summer, to that same area [crosstalk 00:11:09].

Amy:
A year later.

Tim:
And the price point was unaffordable versus what it was during the COVID pricing. So we are having a hard time right now in the states finding affordable Airbnbs. It’s like, things are twice as much as they were-

Amy:
Yeah.

Tim:
I guess pre-COVID from a rental standpoint, so it’s kind of [crosstalk 00:11:26] The market for Airbnbs is tough for us right now.

Mindy:
Yeah. Well, what did you do? You sheltered in place in New Orleans for six weeks, and then you went to… you hopped over to the East Coast, but you had an entire year’s worth of travel and you have no house. You do still have a car at this time. So what do you do?

Tim:
So we had intended to be in Europe and we had intended to be in Asia, all that fell apart. We were sort of stuck in the country. So do you want to go through the list of where we were?

Amy:
Yeah. So what I’ll do is I’ll… So it wasn’t just… as people remember, the idea was this was not going to be forever. This was going to be two weeks, four weeks. So first, we canceled the beginning. We started in the north, in the United States, driving around. We were going to sell our car June 1st, 2020.
So first part is the US stuff, that canceled first. Then we wondered, “Are we going to our Europe plans on June 1st? We need to kind of make a plan.” We had a flight, we had all kinds of things booked. We had houses, Airbnbs, flights, totally booked. So at some point we needed to make alternative plans and cut bait.
So we didn’t just cancel like forever upfront. It was in waves and in stages. So first, we canceled the US because that was up through June 1st. And then I don’t know, six weeks in advance of June 1st, we canceled all of Europe and had to find a plan B for that, which we ended up having the plan B, a plan C, a plan D. We’re now at like plan Q, Q, Q.
And then we had Asia. We were going to go to Asia in November 2020, Tokyo, Malaysia were to start, and those were all booked. And we didn’t cancel that. In the early part of summer, we were still wondering whether we were doing that in something like August or something, “Are we going to Asia in November?” And we ended up canceling that.
And so, we’ve had these waves of where if we make a plan and we are just now… I say that we are so… We’ve learned that our biggest assets… actually, there’s several biggest assets. So being financially independent is one of our biggest assets. Being healthy is one of our biggest assets, but being flexible is certainly on the very shortlist. And we have found that we are so flexible that we’re kind of like yoga teachers, because the pivoting and adaptability we’ve had to exhibit is mind-blowing.

Tim:
I think it’s also important though, we didn’t lose a nickel from any of our travel cancellations.

Amy:
Yeah.

Tim:
So everything that canceled, we got every single penny back.

Amy:
Well, we got a credit that we subsequently used.

Tim:
That’s right.

Amy:
Yeah.

Tim:
So we were able to use the credits.

Amy:
So we didn’t lose money, which was really good.

Tim:
So after we left New Orleans, we went to Tennessee. We were there for how long?

Amy:
We were in a house sit at a farm.

Tim:
House sit, farm. That was super cool.

Amy:
That was great. If you want to be sheltering a place, a farm in rural Tennessee is the place to do it. It was awesome. It was my first time on a farm and we’re city people. I’m a super city girl. So cows and pigs and donkeys, and mules, and chickens, and all that. And it was awesome.

Tim:
And we did our Airbnb in Asheville, North Carolina. We were there for, again about six weeks. Fantastic. That was during the summer, perfect weather. They have great beer in North Carolina, or in Asheville specifically. So that was a great time.
Then we moved across the country. We drove, we kept our car. We were supposed to be selling our car in June as we went to Europe. We kept our car and decided to keep it until we just sold it a few weeks ago. So we drove from Asheville through Denver, on our way to Washington State. So we were briefly in Denver for about a week.

Amy:
Denver was our former home.

Tim:
We saw friends. I think we saw you Mindy, potentially, when we were there last summer in August. And then we drove up to Washington to Mount Vernon was basically where we were in Washington State. We were there for-

Amy:
Beautiful part. It was actually the water. We were there for two months in north of Seattle, about 90 minutes. So we had no idea that Seattle would be that gorgeous in August. It was ideal.

Tim:
Yep. And we made our way down south. We went to LA area for a bit.

Amy:
For a month, for a house sit.

Tim:
For a house sit. And then we were in Mexico briefly, in Puerto Penasco, which is right outside of Phoenix. We were there for, again, three weeks.

Amy:
Three weeks, yeah.

Tim:
Three weeks.

Amy:
We drove down there. That was just a rental.

Tim:
Then we came back to Los Angeles, and then we were in LA briefly. And then we went to Phoenix, Arizona for about two weeks.

Amy:
Yeah, for Christmas, for a house sit.

Tim:
And then that wrapped up our year. So that was our whirlwind year.

Mindy:
Well, that’s just 2020. We’re recording this in November 2021. It’s not going to release until 2022, but what have you done this year?

Amy:
I’ll take that part. So we have had 70% of our days of 2021 have been house sitting. House sitting was not expected to be such a huge part of our story and our plan, but because the US this year has become so expensive, and we’re just kind of waiting for the world to open. So we’re enjoying the ride and loving it along the way, but this is not… we weren’t supposed to be in the United States.
And also, the United States has gotten much more expensive in 2021 than 2020. So we didn’t want to be paying those high prices for a place we weren’t really dying… this wasn’t our first choice. So we took on a lot of house sits. So we started January, just north of Austin, Texas for a month at a house sit. A friend of ours went and volunteered in South Africa for six weeks, starting in February.
So we went down to her place and kind of paid her a nominal rent to be there. We drove over to the Washington, D.C. area where we had three months at a house sit in Washington, D.C. which was great because my dad and stepmom live very, very close. So we were able to spend a lot of time with them. One of the biggest silver linings of COVID for us.
And after we left the Washington, D.C. area, that was at the end of middle of June, things have been breakneck speed since then. We have learned a lot of lessons. We learned lessons constantly after every sit, every stop. Well, since the middle of June, we have been quick traveling and we are suffering from it. It’s our own choice and it’s our own problem, it’s our own doing, but it is our reality.
And we have all these things in the books that were too… So what we keep learning over and over is that this nomadic life, it is not a vacation. We still do… Like here we are talking with you. We are in a resort hotel here in Mexico. We’re doing a podcast. We do a weekly video every week. We have an active Facebook group. We still are in touch with friends and family. We pay bills. We do all kinds of stuff that are normal people activities. What people do on weekends, we’re kind of doing that. [inaudible 00:18:16] the week, we’re taking long walks. We’re not just on holiday going to museums and the beach every day of our life.
So the quick moving around, and I’ll tell you, one of the biggest surprises is how much effort it takes to plan where we’re going, and not just planning where we’re going, but there’s other dynamics. Things are twice as expensive. That is a humongous factor that we would not have been able to predict before COVID. Countries are changing the rules constantly.
So cities and states are changing the rules in the United States constantly. So the idea of like, here’s where we’re even going, even during COVID, that’s changing all the time. So the idea of how long it takes for us to figure out where we’re going, takes up hundreds of hours a week maybe. But I will say, so many people who look at our life say, “That sounds awful.”
The thing is we actually enjoy that. So if you didn’t enjoy it, this would be a horrible life because it is a huge chunk of our time.

Tim:
It’s like a big puzzle that we’re trying to solve all the time.

Amy:
It is. It is. [crosstalk 00:19:22] Yeah. So we also get Airbnbs and flights, and weather.

Tim:
It’s worth mentioning that Amy and I both had health crises. How do you say that word?

Amy:
Crisises? I don’t know.

Tim:
Multiple crisises. I don’t know.

Mindy:
Crises.

Tim:
Anyway, we’ve had health issues and-

Amy:
Big ones.

Tim:
I went to the hospital in December 2020. I had diverticulitis, and so that was sort of some exciting… a very expensive exercise.

Amy:
For three hours, that’s it. Three hours.

Tim:
For three hours, but very, very pricey. And then Amy had some surgery in… that was February?

Amy:
No, it was early March.

Tim:
Early March, when she had surgery. So we had all this going on.

Mindy:
Yeah. You’ve been in the US the whole time.

Tim:
That’s right.

Mindy:
You had US surgeries and US hospitals. So yeah, that’s why I [crosstalk 00:20:06].

Amy:
And Tim did not have surgery with that. He just had a three hour in… just a visit at the hospital.

Tim:
[crosstalk 00:20:10] But that was difficult in the middle of COVID, just simply getting in to be seen was a challenge because the hospitals were very, very busy. And so at the time, we had some weird-

Amy:
Liberty HealthShares.

Tim:
Liberty HealthShares. Last year, in 2021, we’re on an ACA plan, but we had Liberty HealthShares. We had just-

Amy:
In 2020, we no longer have them

Tim:
We had just changed to a higher deductible. They don’t call the deductible version of Liberty. So every single [crosstalk 00:20:36] that I spent on this hospital visit was out of pocket. So I think even if we had it, it wouldn’t have been much different, but anyway, it was several thousand dollars just to be in the hospital for a few hours.

Mindy:
Okay. Well, I’ve got a lot of questions then about that too, but I want to get back to the quick traveling. You said we’ve been quick traveling since June at breakneck speed. What does quick traveling mean to you?

Amy:
So I’m going to go… So less than a month would be breakneck.

Mindy:
Oh.

Amy:
But it’s not a month… So I’ll give you the super duper auction years version of this. So we were two-and-a-half weeks in Westchester, New York. We flew down to Mexico. We had four nights in Queretaro Mexico, four weeks in San Miguel de Allende, Mexico, five nights in Guanajuato, Mexico.
We flew back to get our car up in Philadelphia. We spent two-and-a-half, three weeks in Philadelphia, drove down to see some of my family in Charlotte. We were there for five nights, took the car to Charleston for three nights, Savannah for two nights, drove over to Austin on a road trip. We were in Austin for a week. Drove up to Denver, left our car by behind in Denver at the airport, flew to San Francisco, Bay Area, had eight nights in Sonoma.
Another house sit in San Francisco for two-and-a-half weeks. Did three nights in Santa Cruz with friends, back to a house sit in San Francisco, Denver for a week, and then we got here three days ago.

Tim:
And that is just as exhausting as it sounds.

Amy:
It is exhausting.

Mindy:
So yeah, I have listened to people talk about how they want to travel all the time. And my thought is I don’t want to do that. I like having a routine. I like having my own bed to sleep in. I like to go visit, but I like to come home. What you’re describing though, is kind of how I travel. Two weeks in one place is a very long time for me.

Amy:
Yeah.

Mindy:
Four nights in one place is normal. A quick travel to me is like every other night, and it took a while for me to convince my husband to stop making plans like this, but he’d be like, “Oh, we’re going to go here for a night. And then we’re going to change hotels and go here for two nights, and we’re going to change hotel.” I’m like, “No, can we just go to one place? There’s so much to see, even in a small town. Let’s just park and be in one place.” I don’t want to pack my bags and move around a lot.

Amy:
Oh my goodness. So much packing of the bags in that story.

Tim:
This has been a big lesson for us. So I think that when you’re on vacation, you’re trying to eke every bit of just… I want to do everything there is to do, and I want to see everything there is to see, and I’m trying to squeeze it all in. And so we have that same compulsion, but we’re realizing that it just doesn’t work with us.

Amy:
[crosstalk 00:23:22] normal vacationing, right? So this nomad thing, we’ve been doing it for close to two years, but there’s so much learning, I’m going to say. So we’re really torn because… so we could have spent more time in Charlotte with my family, and then we would’ve skipped Savannah and Charleston. We really enjoyed our time there. It was way too quick, and we were hoping to kind of… what we’re hoping to do is cross some places off of our list.
The reality is we have crossed nothing off of our list. Even the places that we’ve spent a long time in haven’t been crossed off our list. So we want to go… that’s why we’re nomads. We have more of the world to see than we have time left to see it. So we’ve cut out the sitting on our couch at home because we want to go see all the places, but what you say of like, I am also a homebody. I love my own home. I love coming home.
So I am an unlikely nomad, and we both like routine, but we do prefer… I have these two sides of, I love a homebody routine, my stuff, I’m a nomad who loves stuff, no nomads say that. But the other side is, say we’re addicted to new and that exciting newness, and the idea that we have limited time to do it, compels us to… that is more the scales tip where the more stable routine takes a backseat. Now we’re just trying to establish some of that on the road.

Tim:
Yeah.

Mindy:
Oh, that’s interesting. And if you’re traveling, changing places every month, that’s going to be a little bit different than every couple of days. How much lead time do you have for a house sit?

Tim:
So it varies. So it’s kind of all over the place. So we like the idea of having a plan. So right now, we’re kind of quasi plan. We have a framework basically throughout September next year. So we’re waiting, we’re intending to go to FinCon. FinCon’s up in the air in terms of where they’re going to be, but we have a framework for that together.
So with how house sitting, we kind of like the sits that show up that are a little further out, because that also means that the homeowner’s more of a planner, and so we might be more in sync with them. So things that show up that are next week sort of thing, number one, we’re probably planned out, and also the person who’s putting something out, that’s going to be there in a week, may not be the kind of… person, that just sounds bad, but the kind of sit in we want to sign up for just because of the-

Amy:
It depends on the reason though. If they had a sitter cancel and left high and dry, that’s different. But if they’re like a last minute, “Oh, let me find a house sitter for my two-month sit in a week,” [crosstalk 00:26:05] because we’re really like a plan kind of people, as much as we can be, I guess, in this life. So that wouldn’t be a personality fit potential, as much.

Tim:
So we’re currently… What is it? The middle of November right now, we’re planned through the middle of January.

Mindy:
Okay.

Tim:
So we don’t really have a gap-

Amy:
Every day.

Tim:
From January, basically to the middle of March that we intend to fill, for a variety of reasons. We don’t have that planned yet, but probably within the next two weeks, we’ll get all that set.

Mindy:
Okay.

Amy:
So we are learning to be more comfortable with having not being so planned. So it’s kind of nice having some chunks of time available so we can have serendipity into our lives. So as Tim mentions, we’re totally planned out for the next two months through January 14th.
Right now we’re wide open for two months, and then we are pretty planned for the next two months. And then we’re wide open for six weeks. So that just allows us to fill in and-

Tim:
There’s also the-

Amy:
And we’ve gotten comfortable with that.

Tim:
There’s this see-saw. So we like to be planned out, but at the same time, when things show up that are amazing, if we’re too far planned out, we can’t go do this amazing thing. So that’s something that we want to have, is this flexibility in our life to make that happen. But once we’ve committed to something, if we’ve committed to a house sit, we’re going to be there.
And so we have to play with that. So it’s always an ebb and flow of what we’ve got going on, and trying to figure out what the right thing is to do from a planning standpoint.

Mindy:
That makes sense. So what happens if you have this gap you’ve got… Having your holiday season planned out way in advance is smart. Those house sits like the Christmas house sit on San Diego Beach is probably going to get snapped up pretty quick. So you’re going to want to grab that as soon as you can and hold on for dear life. I would.

Tim:
Yes.

Mindy:
You don’t have anything planned in January. What happens if just nobody needs a house sit? Where do you go when you have no place to go?

Tim:
So this is something we’ve actually… So at all moments, there’s a place to go. It’s just, there’s a cost disadvantage. If we wait till the last minute and we can’t find something, then we can always go stay in a hotel. We can stay in an Airbnb. So in the middle of COVID, it was sort of scary because we weren’t sure. All of our options seemed to be, “We may be sleeping in our car.” And so, that was-

Amy:
Not an RD.

Tim:
That was scary in the COVID, but in our current life, it seems like there’s always a place to go and be. It just might cost us more money to be there. And matter of fact, so when we were coming into Colorado, we didn’t seem to be in Colorado for a month. We were going to be there for the film festival. We were going to see friends and family and do a lot of work.
Well, it was looking like to be in a situation that we wanted to be in Colorado, in an Airbnb is going to cost us about $4,000 for the month to be there in an Airbnb.

Mindy:
Oh.

Tim:
So what we decided is that, “Well, we’re just going to be in Colorado for a short while and we’ll pack up and go to Mexico instead.” So that’s why we’re in Mexico right now.

Amy:
Early.

Tim:
Early.

Amy:
Early.

Tim:
We had planned to be here in the middle of November, but we went ahead and decided to come down because it was going to be more affordable here than to be in Colorado. And so we always have this sort of, if you wait till the last minute and nothing good comes together, there’s the option of staying in a place that’s going to cost you some money, but we’ve never… what’s the shortest time we’ve ever been planned out? Two weeks maybe?

Amy:
Maybe about a month, would be kind of on the short end. So we weren’t intending to be house sitting all of the time. We were intending to be house sitting no more than 50% of the time. And as we move forward, we are becoming a little more particular about the houses that we take on. So when you mentioned, like you can’t find a house that we’re looking for, we’re not looking for a lot of dogs anymore. Our sleep is something that we’ve had a challenge with, and it’s not so much the sleeping in different beds, but it’s kind of being on a pet schedule that isn’t our own that really affects us.
So we want to be careful that we’re not just doing pet sit to pet sit that requires us to be following the pets’ routines. So the Airbnb kind of stuff allows us to live on our own timeline and that’s been very valuable. So I think as we look into our future, that we will not be at those 70% house sits anymore. I think we’re looking to be under 50%, but still quite a bit of it, but just not like we house sit or nothing. I think Airbnb is heavily in our plan now.

Tim:
I also think, so at the beginning of the episode, you mentioned that we were spending about $36,000 a year. We have roughly been spending that for the prior six years.

Amy:
Six years.

Tim:
This year, because of all of our medical issues and a variety of other things, we’re going to not make this number happen. Also, we’re going to give ourselves a raise next year. So we’ve always lived way below our retirement means, if you’re utilizing the 4% rule or whatever, we’re living way below that. And so we’re going to give ourselves a raise. We don’t know exactly what it is yet, but we’re going to have some more money to spend next year.
Also, inflation obviously in the states is a big thing, and we’ve never made an adjustment for inflation to our spending.

Amy:
Or we’ve never given ourselves a raise. We’ve been retired since 2015.

Tim:
We feel very justified in our raise, but we’re going to do that.

Mindy:
Everybody gets a cost of living raise, or they should.

Amy:
[inaudible 00:31:14] for six years.

Mindy:
Okay. Your raise is granted. You can be up to-

Tim:
Thank you.

Mindy:
$38,000 now and change. That brings me to my next question. What does your retirement account balance look like now after an unbelievable year, but also a lot of unplanned expenses? And when I say unbelievable year, I mean like an unbelievable stock market year. The stock market has been on an absolute tear. So I’m expecting with your cheapness, frugality, that you will have had some increases, but you’ve also spent a lot of money.
And I don’t need specific numbers if you don’t want to share them, but percentages, are you up? Are you down? You retired in 2015, you should be reducing your account balances by pulling money out, right?

Tim:
I’ll tell a little… So in 2019, when we launched, we sold our house. And so all of our money, all of the proceeds from our house sale in 2020 that-

Amy:
Did you say we owned it outright?

Tim:
I didn’t say that. So we owned our house outright, our little town home. And when we sold it in 2020, all those proceeds went into cash. We didn’t put it immediately in the market. And then March rolls around. So we had have all this cash from that, and I made some bad decisions. I sold a little bit because I just… the pandemic was scary. And it’s like, “I don’t see how the upside of this is going to happen.”
I didn’t sell a lot, but I sold a little bit, and then I’ve subsequently put some money back in the market. But basically, our situation has looked like this throughout. So we’ve never… I’m going to say we have close to a 30% gain over the course of the year over, I guess [crosstalk 00:32:51]

Amy:
Over the year, but since we retired-

Tim:
Since we retired.

Amy:
Close to a 100% since we retired. [crosstalk 00:32:56] When you consider that we sold our home. Yeah. So from 2015 to now, we are close to a 100% increase. And that, like I said, we did have a paid off home in that mix, that is part of the mix.

Tim:
Yeah. So overall, it’s been a great year for us from a financial standpoint, just because of the market and what it’s done, certainly.

Amy:
And I do want to mention the income that we make from our, I guess, side hustle. So we kind of alluded a little bit that we do a YouTube channel and people will say, “You aren’t really retired because you have a YouTube channel.” We’re very transparent with how much we make. We report it every year. We used to report it every month, but all of our business, everything that we do, we make under $10,000 between the two of us, putting out a video every week. We have a lot of things in the mix.
We don’t sell things like merchandise and Patreon, and all that stuff. So we still consider ourselves retired, and I think that when we consider the cameras and web hosting and all that stuff, I think that we actually pay to do our YouTube. But the money that comes in from those activities does offset a little bit, at least the cost of our [inaudible 00:34:05].

Tim:
Oh, I have a confession to make also. I invested in crypto, so I have a $100 in Ethereum and a $100 in Bitcoin. So far, they’re off about 11%.

Amy:
You just did that last week.

Tim:
Yeah.

Mindy:
Wait. No Shiba Inu coin or Dodgecoin, or any of that garbage?

Tim:
Nothing that crazy. Bitcoin’s crazy enough. Isn’t there Ethereum? I don’t know.

Mindy:
Okay. So it’s like you are reading my mind because my next question was, what does your investment mix look like?

Tim:
Mm-hmm (affirmative).

Mindy:
Bonds versus stocks, versus index funds. And then I typed in, I have a little show notes too, I remember what I’m going to ask. And it said, “Versus crypto.” I typed that in as a joke, because I didn’t think you would be into crypto at all.

Amy:
We like to think we’re 28 years old. We’re like digital nomads [inaudible 00:34:51].

Tim:
I don’t know if this offends people or not. I think it’s sort of like gambling, and so it’s like, I figured just the kind of money I have in it, if I lost it, it’s no big deal. It’s just sort of a fun thing to watch it and see what’s going to happen there.
The space seems to be more and more legitimate every day. Banks are getting into it. So it’s kind of, I don’t know where it’s going to go, but it’s just so-

Amy:
It’s fun money.

Tim:
It’s fun money.

Amy:
And we don’t have any individual stocks.

Tim:
We don’t have any… No, we don’t. And so-

Amy:
No real estate holding.

Tim:
We did a video last year sometime, talking about sort of our asset allocation and how our mix works, and how our spending works. And I can’t remember off the top of my head, how all that sort of plays together.

Amy:
But we do have different buckets of pre-tax, post-tax. As an example, we have three kids and I save every single penny of my income, it was taxed, and it went into our accounts. That’s part of what we’re living on now. So we had different buckets of when do we need this money? It’s the post-tax money, is mostly in VTSAX and some bonds.
The money for the near-term that we are using to live on, that is also a lot of VTI, VTSAX. We’re heavily in low cost index funds, like a couple bond funds. So varies-

Tim:
Speaking of non-risky investments, I bought I bonds a few weeks ago. So this is a… Treasury Direct sells these bonds and they’re adjusted for inflation. So they’re earning like 7% for the next half a year. So this is a phenomenal, very secure investment. So I have that. The max you can put in, in a given year is $10,000 per person. So we have $20,000 in theses I bonds.

Mindy:
That are giving 7%.

Tim:
Correct.

Amy:
But only on $10,000 a person. So you’re not going-

Tim:
Yes, but that’s the current yield, and then it adjusts. Anyway, it’s something that people should, I think look at.

Mindy:
Do you have to hold it for more than the six months?

Tim:
Yeah. So you have to hold it for a year at a minimum.

Mindy:
Okay.

Tim:
And then I think it’s five years after that. Otherwise, you’re penalized, I think it’s a quarter’s worth of interest, but the only reason you would get out is if the investment isn’t paying any interest. And so probably the interest you’d walk away from if you had to walk away from a quarter’s worth of interest isn’t going to be very much.
And also, it’s guaranteed not to go below… It’s always going to have a positive yield, which may be 0.00001%, but it’s always going to have a positive yield. It’s also guaranteed to double after 20 years. And so if you put in $10,000 and you leave it in for 20 years, it’s guaranteed to double after 20 years.

Amy:
We consider though, like a stock market is generally every seven years. [crosstalk 00:37:24] Yeah, this is bonds [crosstalk 00:37:28]. Safe, safer, safe.

Tim:
Yeah. Boring sort of thing, but kind of cool when it’s yielding 7%.

Mindy:
Okay. Regular listeners to this show will know that I hate bonds. I am not old enough to have bonds and I am the same age that you guys are, so I don’t think that you’re old enough to have bonds either, but these bonds were really interesting to me because they’re paying 7%, and what have bonds been yielding? Like 1% or 2%? I could do better with [crosstalk 00:37:52] stuffing it under my mattress almost in the past, but now this one’s really interesting. And I may start looking it just to see what sort of… We are getting into a hyperinflation mode, most likely.
I can’t predict the future, but I think that’s a pretty solid prediction. There’s going to be some inflation and there’s already inflation started, so I like that.

Amy:
I’m going to say that we have a different situation. So we may be a similar age, but you have an income. That changes things. So you don’t have to be worried about your putting… and we’re not worried, but when you have a job and an income, and if Carl is… your husband is-

Mindy:
He’s unemployed.

Amy:
Potentially has businesses that bring in money. We’re like the worst business people in our retirement. We’re not maximizing in the slightest. That’s not our goal to make money. So I think that it’s very different. So when you’re like, “Not old enough to do bonds,” I totally get that, but you do have an income and we’re not in the traditional age to not have an income.

Tim:
So the sequence of return-risk is just a lot more real when the income is sort of off the table. So it’s just sort of in your face a little bit more.

Mindy:
Yeah.

Tim:
But I think if things play out like we hope, there’s some chances that, well, we would probably adjust our spending quite a bit after we have access to our pre-tax dollars, but there’s some chance that we don’t need access to our pre-tax dollars, if things go right with the market, and our spending stays what it is. So that money can just be there and be available for our kids or whatever else. So some foundation, I don’t know.

Mindy:
Have you done any Roth conversions?

Tim:
Yes. Every year we do Roth conversions.

Amy:
That’s part of our move to Texas.

Tim:
Yeah. So basically, as a matter of fact, like Amy said, when we were in Colorado, I started doing this exercise and all the people that blog about Roth conversions are either abroad or they don’t talk about the impact of state income taxes on these conversions, because all they talk about is, “This is federally tax free,” and they don’t [crosstalk 00:39:58]. There is a state income tax if you happen to live in a state that taxes you.

Mindy:
Oh.

Tim:
And so I got a 5% or 6% ding on some conversion from Colorado when we were there. But anyway, it’s something to consider.

Mindy:
No, that’s a really good point. I didn’t realize that there was a state income tax on a Roth conversion.

Amy:
Neither did we, the first year. So thankfully, it was a small potatoes’ year of doing it. But that is one of the big reasons we moved to Texas, was so that we could do that. We haven’t taken advantage of that because we are [crosstalk 00:40:32]

Tim:
Aggressively. Every year we move a little bit over from… So we have this… again, another weird dynamic. So with the ACA, because-

Amy:
We’re on the Texas ACA.

Tim:
Because our income is so low, our ACA is heavily subsidized. And so if we have too much income in a given year, then it wipes away the subsidy. And so we do conversions to basically make our income happen during the year. So Roth conversion is accounted for in your income, whenever you’re doing the ACA planning.
Next year, we’re not going to have an ACA plan. We’re going to have a plan that requires that we’re out of the country for six months or more out of the year.

Amy:
Like an expat plan.

Tim:
Like an expat plan. So we’re going to have something like that.

Mindy:
Okay.

Tim:
We haven’t signed up for that yet, but got to get on that.

Mindy:
Do you know Bryce and Christie from Millennial Revolution?

Tim:
Yep.

Amy:
Yeah.

Tim:
Bryce is, I don’t know, obsessed. Is there a word that means more than obsessed? With health insurance plans for retirement, and he’s a great source of information.
They’re Canadian, aren’t they?

Mindy:
They are Canadian, but they travel into the US and they also travel abroad and-

Tim:
Sure.

Mindy:
He’s a really good source of information. And yeah, as long as you’re out of the country for six months and a day, you can… their health insurance costs are like nothing.

Amy:
Because they’re younger.

Tim:
They’re also younger. So I think the plan we’re going to sign up for is going to be a high deductible plan, $10,000 or $15,000. And it’s going to cost us $3,000 or $4,000 a year to be covered.

Amy:
And just as a heads up, I’m currently 53, Tim is 54. So for your viewers, we’re in our 50s. So it’s very different. As you age, you pay more.

Mindy:
You need to go back to work so you can take advantage of that over 50.

Tim:
No, ma’am. [crosstalk 00:42:19]

Amy:
No regrets.

Mindy:
I am super excited. Next year I turn 50 and I am super excited for the over 50 extra contributions to my 401(k) and my Roth IRA. And then after that, I’m going to revisit where I want to put my money, but that’s very exciting to me.

Amy:
You were made for this life, Mindy. Everyone else is excited to go on holiday and celebrate in a big way. You’re excited to save more money.

Mindy:
Oh my God, we just installed solar panels on our house. And you know, Carl, he did it himself with the help of an electrician to upgrade the panel. And then our friend Todd is up in the next town over, he’s an electrical engineer and his dad was an electrician. So he has both skills, which are not the same. If you don’t know, electrical engineer is not an electrician. So he helped him wire up the house.
And then other friends came and put the panels on, and yesterday they flipped the switch. And now, we are selling electricity back to the electric company.

Tim:
That is awesome.

Mindy:
And Carl’s like, “You got to turn off all the lights. We have to sell them as much electricity as possible.”

Amy:
You guys are endlessly hustling.

Mindy:
Huge dorks. Let’s go back to healthcare for a minute because that is absolutely the number one question that American early retirees have is, “How am I going to pay for healthcare?” You were on a healthshare plan and left. Let’s talk about why you left because on the surface, it sounds awesome, but in reality, it may not be so awesome.

Amy:
Okay. So we are going to tiptoe in this one.

Mindy:
We don’t have to talk smack about anything. There’s no [crosstalk 00:44:05].

Amy:
No, we’re not going to talk, but we started… So we were on the ACA in Colorado. So Colorado was where our home was and we retired in 2015. We started on the ACA in… I’ll just give our little health trajectory because it’s different every year. So we started January 2016 on the Colorado ACA plan. We had the same plan for two years and loved it a lot.
And then in 2018, that plan, they kind of stripped all the doctors out of that plan. So we changed to another plan in 2018. It was so terrible. I didn’t use a single doctor, not even a… I couldn’t get in to see one person that took that plan the whole year. So we realized we had to do something different so that we had to see some regular doctors, number one.
And number two, what we learned, which was a total shock, was at least in our Colorado plans, that all of the times we have left Colorado domestically, we were not covered with insurance. We had no idea and nobody talks about this, and you could have… So it depends upon your state. It depends upon your plan. We have friends who were in, I think Bend, Oregon, their insurance only… their ACA only covered them in their city-

Tim:
County, county. They had a whole county.

Amy:
That’s it, but not even the whole state. We have friends who are domiciled out of Florida. Not only do they have national coverage, they have some international coverage through that ACA plan in Florida. Well, our plan in Colorado, we learned two years after having it that when we left the state, we were covered for major, major, major emergencies. And it was very unclear as to what that would be, what would be covered, how much would we pay? And I do not believe that there was an out-of-pocket deductible, which is really where it gets very scary.
So if we had a $1,000,000 aneurysm, $1,500,000 aneurysm, we don’t have an out-of-pocket maximum outside of Colorado. And we did tons of domestic travel the moment we became FIRE. So we got on this Liberty HealthShares as a way to get to the doctors that we have been using for over a decade, A, and B, to help us in the United States, because that is where the real whole is.
You can get expat insurance. You can get ACA as long as your income is kept low and is subsidized, but the big problem is this, in the US, out of your state, oh my goodness. And people don’t know about it and don’t talk about it. So we added Liberty Healthcare in 2018 in the middle, with our Colorado ACA plan that we never touched, not one thing. So we were on Liberty from June 2018 until December 2020.
Now, our problem with them was that they were very slow to pay our minimal claims. We never even hit close to our deductible. Our deductible, they don’t call it deductible, they don’t call it claims. It’s all different lingo, but it’s the reality, whatever. So some deductible-ish thing. So because they were so slow to pay on claims and it was actually quite a hassle to get claims even submitted for us, we didn’t even submit our claims anymore.
So we said, “It’s just like our general doctor stuff, we’re not even going to submit them.” And so at that point we said, “Let’s move to more traditional kind of insurance.”

Tim:
So our concern was that if we had a $50,000 event or whatever, that we would be left waiting for Liberty to potentially… Usually, the way it works is you pay your claims out of pocket. Whoever the provider is, you pay them out of pocket, and then Liberty reimburses you. And then whether or not they have… they don’t really have necessarily negotiated rates with every hospital in the country. They will go back after the fact and try and negotiate with the provider.
So it didn’t feel… So it is not insurance. So it is something [crosstalk 00:47:56] insurance light. It’s not regulated, and so they have a lot of leeway to just do what it is that they want to do. And so they could actually deny a claim based upon… and I’m going to be… This is hyperbole, but if I had a beer and they didn’t like the fact that I had a beer that day, and then I went out and fell down in the street and broke my leg, well, they could choose not to pay that claim. And then again-

Amy:
But that’s our understanding,

Tim:
That’s our understanding. There’s enough sort of restrictions with it that it just seemed like it wasn’t something that it’s not real coverage, at least in our eyes. And there are some of… I think there’s some secular health sharing things now that are less sort of restricted, but I still would have the same sort of concerns with those.
I think for us, we’re going to stick with more traditional insurance just going forward. And again, this isn’t necessarily a ding against these companies that are doing this. It’s just for us-

Amy:
It wasn’t for us.

Tim:
It just isn’t for us.

Mindy:
Yeah. Well, I’m really glad that you’re here to share this because, A, I didn’t know that some of these plans didn’t cover you outside of the state. I didn’t know that some of these plans didn’t even cover you outside of the county. And I’m sure there’s a lot of people who are listening, who also didn’t know this.
When you have health insurance through a traditional like Blue Cross Blue Shield or UnitedHealthcare, one of those like nationwide things, yeah you’re in network here, but also if you’re traveling and you break your leg, you’re kind of in network there too, because they’re nationwide. So I think I know who you had in 2018, because in 2018, all of my doctors got stripped from my plan too. It was [crosstalk 00:49:27]

Amy:
Well, let me even jump in because it’s not been national plans. We were on national plans. ACA and corporated plans are not the same, that’s why we assumed. We were on Cigna the first two years, and it was terrific. We had had Cigna through Tim’s employer, so the difference isn’t it’s Cigna, it’s just apples to zucchinis, and the problem is-

Tim:
Even the network may be different. So it’s like-

Amy:
It’s totally different.

Tim:
The Cigna network of doctors in Colorado for ACA is different than the Cigna network of doctors for corporate coverage.

Amy:
So that’s the difference, is yes, so even if it’s Cigna, just because you have… that’s why we were so shocked and we hadn’t even thought, we didn’t know, that was what was such a big wake up call for us, was that it was the same Cigna that we thought we had always had, and it wasn’t. And we had no [crosstalk 00:50:20].

Tim:
Like now in Texas, we have Blue Cross Blue Shield of Texas, and it only covers us really in Texas. And when we say it only covers us, if we had an incident outside of the state, they have some weird one-off, “Maybe you’re kind of covered, but it’s not really [crosstalk 00:50:34].”

Amy:
But then there’s no out-of-pocket deductible. So the problem is we’re not going to be bankrupt. Our out-of-pocket deductible is not unreasonable. It might be $10,000 a person. We’re not going to go back to work because of $10,000 a person. But I’ve had two friends who’ve had an aneurysm that cost the insurance company at $1,500,000, when it’s splits instant, and totally out of the blue. And that is a big deal, a really big deal.
And if you don’t have an out-of-pocket maximum, you are in very big trouble. If your insurance does not cover you where that happens, you’re not going to get home. You need to just deal with it where you are. And that is why we know many, many people who still work. And the reality is there’s no convenient answer. We wish we had better dues. We wish we had better news.

Mindy:
Yeah. I wish you had better news too, because this is not such a great bit of conversation we’re having right now, but it’s like you said, you didn’t know. I bet there’s a lot of people who are listening didn’t know. I didn’t know, because I’ve always had a corporate coverage, except for this weird two-year stretch where Carl was working and I wasn’t, and his company was like, “Hey, we’re not going to give you any benefits anymore. So go get your own.” And we went on the ACA and it was extraordinarily expensive, but that was okay because it covered nothing, which is super awesome.

Amy:
Actually, our ACA does cover. We love our ACA plan, I will say. Let me just even put a plug in for this. So our ACA plan, if we’re in Texas, we love it. We had our shingles vaccines. These are $300 each person, two, two. So for $1,200, free shingles vaccine. I had a major, major surgery. So just the night and day of the traditional health insurance and our Liberty HealthShares, I had major health insurance. Every single thing was proved in two days. I had surgery scheduled two days out, everything was taken care of instantly. I didn’t have to think about it, worry about it. And the claims were paid within 10 days.
So as long as we’re in, playing by the rules, and know the rules, it’s been great. And the doctor… we can use almost any doctor in Texas. So our Texas ACA has been rockstar great. It just, [crosstalk 00:52:53] you can’t leave Texas.

Mindy:
Don’t leave Texas. Okay. So what are you looking for in the plan documentation when you’re trying to find this information, that, “Don’t leave Texas?” Does it have a limitation section or… First of all, Amy, you just said, and I want to highlight this, you said you have to know the rules and play by the rules. When you get new insurance, they send you a giant wad of stuff, 47 dead trees worth of information.

Tim:
Yeah.

Mindy:
You kind of need to read all of that, but who has time to read all of that? And frankly, it’s written in legalese. Who can even understand it? So I used to work in the HMO office of one of those great big doctor facilities, where they had specialists for everything. And this was several decades ago, but working in there really taught me all the things about health insurance, and continue to ask questions and call ahead, “Is this covered? Is this doctor in network?” But not everybody worked at the one HMO office that I worked at 27 years ago. So what are you looking for in these docs?

Tim:
We don’t pretend to know the answer to that necessarily. So it’s like, I guess our experience has given us-

Amy:
Yes.

Tim:
We kind of know the questions to ask, and also, we worked with a broker when we were in Colorado, all the ACA plans, it’s sort of difficult to sort through what’s there. And so I think there are brokers in most of the markets that will help you sort of sort through what you’re are looking for, but even if you ask questions directly, they may know the answer, but you’re probably not necessarily going to know to ask some of these questions. You’re not going to ask it.
So [crosstalk 00:54:37] most people aren’t in our situation. Most people are in their state where they’re going to have coverage. They don’t leave. As a matter of fact, I saw a statistic recently that a sixth of people in America have never left their state. And so it’s like there’s-

Amy:
Ever.

Tim:
Ever. And so they-

Amy:
They don’t need health insurance outside the states.

Tim:
[crosstalk 00:54:55] That’s sort of-

Amy:
So we’ve had a lot of experience. So we’ve been on four different ACA… We’re at the end of six years figuring out our own health insurance post-retirement. So we’ve had four different traditional ACA health insurance plans in those four years, and overlapping and just solo, the healthshare.
So we have enough experience to know the questions, and that doesn’t mean that we won’t be blindsided, but we are… And I don’t know that I even share this with Tim, but it was when… So the idea that we were in the US for the majority of 2021 with this Texas situation, that’s kind of scary because we have this giant… we had, we’re in Mexico for a while, but we had this big, huge hole of no coverage. And I was just praying to get to Mexico that we can get on an expat plan and be covered.

Tim:
So brokers are great, and so that would be my advice, is if you are looking for health insurance, even… So we’re looking for expat coverage or… I guess that’s what it’s called.

Amy:
Yeah.

Tim:
What we’re going to be signed up for next year, and there’s a broker in Arizona that we work with, that’s helping us sort through that and that’s been very helpful, but I think-

Amy:
It’s his specialty.

Tim:
Same thing, if you’re looking for an ACA plan, I would look to a broker and have them help you sort through.

Amy:
And they don’t charge you anything.

Tim:
That’s right. There’s no fee. All the brokers are compensated by the insurance companies and [crosstalk 00:56:24].

Amy:
And I think you find them through like the ACA exchange sites.

Tim:
Yeah. That’s right.

Mindy:
Okay.

Tim:
Yeah.

Mindy:
Okay. That’s good advice. I don’t know if you saw the article from Tanja Hester on Our Next Life, We Think About Risk All Wrong. How Riding A Bike Almost Ruined Everything. Long story short, her husband was riding his bike. He fell, he was mountain biking. He fell. He broke his spleen or something and had to go have surgery.
They live on the border of California and Utah, and they were in one state and had to go to the other state to get the surgery necessary. It was just, “Hey, this is a now thing, or he’s maybe not going to live die.”

Tim:
[inaudible 00:57:10].

Mindy:
So it’s a really great article about how sometimes when you think you’re being frugal by getting these healthshare plans or these discount insurances, or having an insurance plan in Texas that doesn’t cover you in… name a state that touches Texas? Arkansas? [crosstalk 00:57:31].

Tim:
Oklahoma.

Mindy:
Oklahoma, and you’re on the border. And then you have to go to the other state to get surgery, you might not be covered. And these are things that you don’t think about when you’re planning your early retirement and just, “I’m just going to fly by the seat of my pants.” Sometimes that doesn’t work out.

Amy:
And our group of early retiree kind of FIRE people tend to be very measured and careful, and cautious, and one more year syndrome, all of that. So we are a cautious, conservative group. We’re saving a high percentage of our income. We’re not the YOLO crowd so much. So with that, so it’s kind of funny because a lot of people don’t… This is a big… It’s like a blinders on for a lot of the community, not everybody, but a lot of people because they don’t… again, we don’t know enough people who are sharing these stories, I guess.

Tim:
I think also a lot of the community, especially in the FIRE space, they’re younger people and they have this invincibility syndrome or whatever. It’s like, “Nothing bad’s going to happen to me.” And so the problem is if you don’t have traditional insurance, and like Amy mentioned her friends, literally you could show up at the hospital with an aneurysm. It could cost you a million bucks. This isn’t like hyperbole. It could cost you a million bucks.

Amy:
Actually, it was $1,500,000 for my friend.

Tim:
So it’s like, that is a bankruptcy sort of event for some people, most people I would think, and that is a problem for most people. And so if you don’t have some sort of coverage, and I think that’s also changed our thinking about insurance. So we don’t look for insurance to cover us if we’re going to go to the doctor and spend $200 for a physical or whatever, that is not even a part of the equation.
The equation is I just want coverage that if I show up there, it’s not going to be a bankruptcy sort of event. So that’s really the only qualifier we have as we’re looking for insurance. And so I think that’s part of the reason we walked away from the healthsharing stuff, is we just weren’t sure that they were going to be there to cover us if we had one of these million dollar events.
And so traditional insurance, I think there’s just… since they’re regulated, there just needs to be more likelihood that we’re going to be in good shape.

Mindy:
Listening to you guys tell these stories of your health insurance reminds me of Suze Orman on the Afford Anything Podcast, when Paula asked her, “Do you like the FIRE movement?” She’s like, “I hate it. I hate it. I hate it. You need $30,000,000.” And you’re thinking to yourself, “No, you could just get by on a $1,000,000.”
If you retire with a $1,000,000 and garbage health insurance, and you go outside of your county up in Oregon, and you have a brain aneurysm, you could be wiped out. And I don’t know how medical bills are discounted. I haven’t done that kind of research.

Amy:
Actually, we found quite a bit. So when Tim was in… so because we were at the last days of our Liberty health insurance, and because we had never come close to our deductible-ish, they just offered this new plan and said, “We’re going to do a crazy, like a $10,000 deductible, instead of $1,750.” We said, “Great. We’ve never even come close to it. It’s like two months before the end of the year, and we’re switching anyway.”
Well, lo and behold, at the very tail end of our two months, Tim goes to the hospital. The interesting thing is that he paid… I think he had an 85% discount as a self-pay person, which is significant.

Mindy:
Oh.

Amy:
It was over… It was about…

Tim:
$3,000.

Amy:
About $3,000, I think it was for a three hour visit. He had no procedure done. He had nothing. He was just-

Tim:
I had a [crosstalk 01:00:49]

Amy:
A CAT scan.

Tim:
A CAT scan.

Amy:
Had a CAT scan, $3,000. They did a little pulse oximeter, wasn’t that like $500? Just to measure his pulse, crazy.

Tim:
I could have bought 12 pulse oximeters.

Amy:
But he did get an 85% discount, which helped, but again, if it’s… So there is definitely that, that helps.

Tim:
But the hospital has to be willing to work with you. Anyway, it’s [crosstalk 01:01:12].

Amy:
And every hospital’s unique. I do-

Tim:
So health insurance is something I think if you have any assets, you have to do something to mitigate the risk associated with… Yeah, I have a huge event. [crosstalk 01:01:23]

Amy:
And let me mention that there’s something that is… I guess I’m going to say it’s a silver lining, getting out of the country. You kind of said it a little bit, maybe about the six months in one day. That is a way to get around it. So how do you… If you want to be somebody who travels a lot, how do you make this life work and not be potentially wiped out by a disastrous event?
And I think the answer is, so the expat insurance plans do rely… if you get a plan that includes the US for up to half the year, if you pay more for that option, if you’re never in the US, you don’t need to pay that much, but if you are, and then that will cover you in the US, and it is with traditional insurers. I think we’re looking at one that is backed by Cigna and it is a wider range of providers in that plan. And we will ask a million questions of that broker.
So that is one way of like, “Okay, I’m all sold on this FIRE thing. They’ve totally burst my bubble.” We’re not intending to do that, but going somewhere like Mexico, go somewhere great, go somewhere for great weather during your winter or something like that, go for six months or go three months, twice a year. And then you can have decent insurance anywhere in America as a retiree, before you pick Medicare age.

Tim:
Yeah.

Mindy:
What are some of those questions that people need to ask their brokers and their insurance companies about the plans? You said that you guys know some of the questions to ask, what are some of those questions?

Amy:
First of all, think of the worst case scenario. People do say like, “Is my general doctor’s visit included?” Your $250 doctor’s visit is not a lot. That should not even be part of the… that’s really not the reason to pick your plan. What happens, and people say like, “I’m going to get hit by a bus,” that’s kind of what the thing.
So if I had a million dollar emergency incident and I am like… and think about if I am in state, how much does that cost me? If I am out of the state in America, how much does that cost me? If I’m out of the country, do you cover that? How much does that cost me? And how much is my out-of-pocket maximum? That is key. I think that’s a key one.

Tim:
I think explain your scenario to the broker. “I’m going to be in and out the state,” or whatever, and let them know what your travels plans are, because that is apparently… not apparently. It is something they need to know in order to help you figure out what the options are.
I think also, it’s come up with a list of worst case scenarios, just like Amy said. So it’s like, I-

Amy:
Big ones.

Tim:
I get cancer, how is that going to be dealt with? I am in an auto accident, how is that going to be dealt with? Do I have to go to specific doctors? Because like with Kaiser, for instance, when we had Kaiser in Colorado, you could really only go to Kaiser facilities. You’re not going to go to anybody outside of Kaiser. So it’s important to know who you intend to see, and how that works? What if I have an emergency situation and there’s no Kaiser facility near, then what does that mean? What are the costs going to look like for that?
So I think it’s just kind of dream up the worst case scenarios and run these by the broker, and see what they have to say about what the coverage might look like for these worst case scenarios.

Amy:
And I think with insurance, so you hope for the best, plan for the worst. And again, we were not fully planning for the worst and we weren’t, and we have been fortunate that it hasn’t been problematic for us, but-

Tim:
By the way, I think we drove our broker crazy because we had all these questions. So we asked question after question, after question, because we have all these weird scenarios that may be a part of our life, and we want to know what the answers are. And so the broker would always have to go do research for us.
Anyway, we were a lot of work, I think, for the broker, but I thought they earned their money with us.

Amy:
And actually, if we can piggyback, now we are talking about insurance, to another exciting insurance topic, which is car insurance when you don’t have a car. I do want to talk about that.

Mindy:
Yeah. Break it up.

Amy:
So we just sold our last car just a few days ago. We have no car, but we do come back to the US. We might rent cars. We may do a house sit where we use the house owner’s car. We don’t have intentions to buy a car for years, maybe ever.
Okay. So there’s something called a non-owner policy, and this is another thing to be aware of. And again, people aren’t really talking about this either. So if you don’t have any car, then you wouldn’t have any car insurance normally. And we found this plan through GEICO from us, and we have good driving records and things like that.
So for, I think it was about $150 for six months, and you have a non-owner… So you don’t own a car and what that does is if you are driving your friend’s car or a house sitter’s car, or your parents’ car or something, if you hit a school bus of children in an icy snowstorm or something like that, even though they have insurance on their car, if there’s a lawsuit against your driving that car, even if they have insurance, the attorneys are going to come after you too. So that covers you for liability, the lot.
And another one, people with… we’re big on credit cards. We have about 30 active credit cards do travel hacking. So many people will say, “I don’t need insurance because of these credit cards.” Credit cards generally, if not always, cover you for the car. So if your car is wrecked, that’s what it’s covering. [crosstalk 01:06:47].
It’s not covering that you hit somebody and it’s $5,000,000 that you owe. That’s the liability piece. Credit cards do not cover that.

Tim:
It’s collision.

Amy:
Right. Collision covers the car, isn’t that right? And liability covers like you hit this school bus, and now you owe $150 million.

Tim:
Here’s another reason to have this non-owner policy, is that if you… Let’s say you went away to jail for 20 years and you get out of the jail and you want insurance, you are a risk. And so insurance companies are going to charge you a premium because you’ve been in jail for [crosstalk 01:07:17].

Amy:
You have no history.

Tim:
And so the fact that you don’t own a car anymore in the states, and you have no insurance, they assume you’ve been in jail basically, and your rates are going to be sky high if you have a gap in coverage, is what it’s called. So if you have a gap in your auto coverage because you don’t have one of these non-owner policies, and you want to buy a car five years down the road, you’re going to pay a huge premium when it comes time to sign up for insurance.

Amy:
And this is for the two of us, it’s about $300 for the two of us for the year. So that is something that we’re very careful with money, but that is well worth paying because it will protect our island of savings.

Mindy:
No, that’s really great advice. I did not know that there was such a thing as non-owner policy, and I didn’t know that this is something that you needed. I knew about the gap in coverage in healthcare, but I didn’t realize that that was also for car insurance, but I’ve been driving since I was 16. I’ve had insurance the whole time, because I’ve not been in jail.

Amy:
And actually, this is Tim’s first time without a car, and it’s the same, since he’s 16. I lived in New York City, I didn’t have a car for years. I didn’t have a car, I think until I was like 34 years old. So yeah, but these are things that… be protected I guess, is really going to be the theme here. It’s supposed to be about fun, no mad life. It’s really about being protected.

Mindy:
Yeah. Well, I’m really glad that you came on the show today to share all this information that you have learned from being an early retiree. We haven’t had a lot of people who are post FI, who are pulling down from their retirement accounts and traveling the world and doing all this stuff, come on the show and talk of about it.
And I’m so thankful that you gave me your time today, take time out of your very busy day of being by the beach and looking at amazing beautifulness. Amy, what does your life look like now?

Amy:
Well, we have just made it to Mexico this week. We’re here for two to four months over the summer. I’m so over the winter, and our goal is to find 75 degrees as much as possible for our entire lives. I’ve lived in snowy climates every year of my life. I hate snow. I hate cold. We are done with winter.
So here we are in Mexico. We’re going to be in Europe for the summer in 2022 if everything is on plan with the world. We already booked in everything there, and we’re back in the US for the early fall. And then hopefully getting to, or back to Southeast Asia at the November 2022 for five or six months.

Mindy:
Wow.

Amy:
So we have some really exciting things. So I look at our last, I guess 22 months of being nomads, they’re kind of like nomads with our training wheels on. We had our car, we are in America, we know how it works. Now the wheels are off. I’m learning speaking Spanish every day. So we’re doing the international piece, which is what we really had intended to do all along. Very exciting.

Tim:
Very exciting. Amy’s favorite thing also is to meet people. And so, Amy’s doing her best to meet new people every day. So our Facebook group is growing by great guns and it’s a great way to hook up with people and meet face to face.

Amy:
Yeah.

Mindy:
Well, you can’t say hook up, Tim, you have to say connect. [crosstalk 01:10:35] Hook up means something [crosstalk 01:10:37].

Amy:
Get together. Is that okay? Get together?

Mindy:
Get together, yes. Hook up means something totally different.

Tim:
I know.

Mindy:
I learned that when I said that at work and they’re like, “You can’t say that.”

Amy:
We’ve been married a long time, but yeah. So meeting our viewers and then people in our Facebook group is literally like my favorite thing in the universe, aside from Tim now. And yeah, so we hope that your viewers will reach out and join the Facebook group because that’s where we are making those connections really easily.

Mindy:
Okay. Well, that leads to my final question. That’s a great segue into, amy and Tim, where can people find out more about you?

Amy:
Well, we do a video every Wednesday on YouTube at GoWithLess. There are no spaces in that. So GoWithLess, all one word. Our YouTube group… I’m sorry. Our Facebook group is of the same name, and I do think that we’re going to be starting on TikTok. I think we’re going to be putting some of our fun [inaudible 01:11:28] stuff, because our YouTube channel seems to be more about FIRE life and more like the conversation.
And I think the little snippets of the fun things we’re doing around the world, I think those are going to end up on TikTok and YouTube Shorts. So we’re still getting over this hump of this quick travel. In two more weeks, we really settle things down. So those are the coming attractions.

Mindy:
No Instagram?

Amy:
Oh yeah. Instagram too, of course.

Mindy:
Okay. We will include links to all of these things at our show notes, which can be found at biggerpockets.com/moneyshow279.
Amy and Tim, thank you so much for your time today. It’s always a delight to talk to you. You are lovely people. The next time you’re in Denver, please let me know with more than like four minutes of notice. I saw a picture, you’re like, “Hey, we all met up.” I’m like, “Oh, I could have gone down there.” But yes, I would love to see you the next time you breeze through Denver. W

Amy:
FinCon next year. We don’t know where or when, but we will be there.

Mindy:
Yes. I’m hoping, hoping that I will be able to go to FinCon but my childcare situation has kind of changed.

Amy:
Oh.

Mindy:
So it’s up in the air, but I’m really, really hoping I’ll be able to go.

Amy:
I hope so too.

Mindy:
Okay. Well, from episode 279 of the BiggerPockets Money Podcast, they are Amy and Tim from GoWithLess. I am Mindy Jensen saying, put it on their tab, yellow lab.

 

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2022-02-28 07:02:32

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BiggerPockets Podcast 576: Short-Term Rental Roundup: Small Markets, Partnerships, & When to Go “All In”

The short-term rental market seems to get bigger and bigger every day. This should come as no surprise, seeing that short-term rentals not only work for vacationers, traveling business people, or anyone else who wants a nice, unique place to stay. But, while the rest of the world is focusing on which mountainside chateau they’re booking for their weekend getaway, real estate investors worldwide are figuring out how they can buy, rehab, furnish, and profit from these vacation rental ventures.

With so much competition in the market, it begs the question: is the short-term rental space becoming oversaturated? And, if it is, how can investors get on the ground floor of sleepy markets that will explode in popularity over the next decade or so? Of course, with questions like these, we need our short-term rental and wave-hair-styling expert, Rob Abasolo at the side of Sir BRRRR himself, David Greene.

In this Q&A episode, David and Rob will discuss a handful of topics, mostly centered around short-term and vacation rentals. Topics like: how to mix a long-term rental and short-term rental in one property, how to market outside of the top short-term rental platforms, can you convert a regular rental into a vacation rental, and the pros and cons of real estate partnerships.

David:
This is the BiggerPockets Podcast show 576.

Rob:
When you’re investing big amounts of money, you’ll never get the same return as you can with small, unless you just got lucky on a deal, but it won’t be sustainable. That’s just two things to keep in mind as you’re moving forward. If you’re investing smaller amounts of capital, you can almost always get a higher return. And if you’re putting in more than just capital, you can increase the return on your capital, but go into it with your eyes wide open knowing that’s what you’re doing.

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets real estate podcast, the podcast where we teach you how to find financial freedom through real estate. If you’re looking to build wealth and build a better life through the power of real estate, you my friend are in the right place. You should check out the website, BiggerPockets.com, if you haven’t already. It is a community of over two million members that are all on the same journey as you. This is where you go if you’re looking for answers to your questions, agents, loan officers, handymen, other resources that you need to be successful. If you want to read blog articles about other people that have found success who are willing to educate you, BiggerPockets is a place to do it, and this is the podcast branch of that company and that website.

David:
Here today with me to help educate you and take down some tough questions is my good friend, Rob Abasolo. How’s it going, Rob?

Rob:
Hey, man. I’m excited. We have a really, really good episode here. We dive into a lot, a lot of nitty-gritty curveballs, as I like to call them. They always keep us on our toes here. We talk about things like partnerships, and the implications of a good partnership, and the implications of a partnership gone wrong. The true meaning of ROI: is it just money or is it time? And what about pioneering a new market? Is it too early to get into a market? Should you be the one that gets brave and braves a new market all by themselves, if there are no comps to support the data? And oversaturation. Is this the end? Is this the end of the real estate market as we know it? Really excited to get into some of these because I think we got some pretty interesting POVs along the way.

David:
That is a great point. Now, if you guys would like to be featured on a show like this, please go to BiggerPockets.com/LiveQuestions, scroll to the bottom of the page, there’s a lot of instructions, and you can join us for a behind-the-scenes look at how we record a podcast, as well as getting yourself on the podcast. That’s going to double-up as our Quick Tip for today is: please, get yourself involved. We love answering questions. We love when you’re here live because we get to dig into the specifics of each caller, and give advice that is custom built for them. And I don’t think that there’s another podcast, radio show, anything that’s doing what we’re doing right now, where people can literally show up and throw whatever pitch they wanted at us. Curveball, fastball, screwball, forkball, it doesn’t matter, we will do our best to swing at it, and I think that this brings a lot of value to listeners that you’re not going to find somewhere else.

David:
The whole tried and true, “Here’s my story. Here’s what I’m doing,” is great, but it doesn’t really let you dive deep into the specifics of where the person’s at, and that’s what’s different about these shows. We want to keep them going, and we want to hear what you think about it. If you’re not already doing so, please follow BiggerPockets on YouTube and leave a comment below, and let us know what you thought about what each person said. Tell us what you like. Tell us what you wish we would have done different. Tell us what we didn’t cover that we should have covered, so you can get the education that you need.

David:
Before we move onto the show: Rob, do you have any last thoughts?

Rob:
No. I just want to tell everybody: definitely make sure to catch this on YouTube because someone revealed there at the very end that there’s a bit of a hair shimmer with every good question that’s tossed out. So be sure comment every time you see my hair-

David:
That’s right.

Rob:
… give a little wave.

David:
You don’t want to miss that. All right. Let’s bring in the first caller.

Dana:
Hey, David. How are you? How’s everybody doing?

David:
I’m great. Thanks for asking. Rob, how are you?

Rob:
Oh, man. It’s a beautiful day in the neighborhood over here.

Dana:
David, I’m so proud of you. You are doing such an amazing job, San Louisville, Kentucky, because that’s… Good job. Pat yourself on the back.

Dana:
My question is tied in a little bit with your webinar a couple of weeks ago, or whenever that was, where you were analyzing a property in Louisville, Kentucky, and you were talking about how everything is appreciating at a great rate… this, that, and the other… and that area, it’s a tricky area. That ties into the fact that I want to house hack where my nephew has been stationed. He’s in South Carolina, and I want to get a property there, multifamily, where I get a long-term rental, a long-term tenant, and then the family can go and visit anytime they want in the other half. My question is what are the main things I should be focusing on in term of house hacking at long distance?

David:
All right. Well, the first thing we have to go over is the phrase. “House hack” is actually used when you’re living in the house yourself, so it’s for a primary residence. I think what I hear you describing is more of turning a house into two different units. Is that accurate?

Dana:
Yeah.

David:
Okay. So that’s not technically house hacking, but I totally understand. And that’s actually a common mistake because it sounds like you’re hacking a house up into several pieces, which is why it’s called that. It actually came from… Brandon created the phrase. It came from a computer hacker that can get into a program and make it work for them. It’s a way to make your house work for you. You’ll hear this said with credit card hacking, or something like that, a way to make your credit card work for you by getting you bonus points. That’s where the origination of that name came from. But if what we’re talking about is buying a mixed use property, which is what you’re talking about, you’re saying you want one side to be a long-term rental and the other side to be a short-term rental? Is that right?

Dana:
Yes. And I’ve actually found a property using a lot of your criteria. You know, you want to have plenty of parking, and lots of square footage, lots of bedrooms. I’ve actually found a property online that I feel like I can maneuver, but I just need to… And it needs a tremendous amount of work as well, so several pieces to the puzzle as to how I can make this work. And I haven’t been able to find an investor-friendly agent there, so that’s tied-in to the question as well.

David:
Rob, why don’t you start with this one because this is right down your wheelhouse. And a lot of the questions and concerns Dana’s having are ones that you and I literally talk about.

Rob:
Yeah, for sure. Every day. Hi, Dana. How’s it going?

Dana:
Hey, Rob.

Rob:
A couple clarifying questions. I want to ask just about your overall goals here. Is your goal to make money on this property? Or is your goal to just have a property that breaks even, and as long as you’re covering expenses you’re happy?

Dana:
Great question. As long as I’m covering expenses, I’m happy, and to break even. The most important vision for this particular property is for the family just to be able to go visit my nephew whenever we want, and not have to pay to stay in a hotel.

Rob:
Yeah. That’s great. Well, the good news is I think that’s super possible. Typically, whenever I’m looking at a deal like this, I’m looking for something that has… It doesn’t necessarily have to be a duplex. It can also be a house with a detached bonus space or bonus room. I prefer for two separate entrances, personally, something that is somewhat of a duplex. And usually I’m running my calculations to see if this property is going to work on a long-term rental basis, so a lot of tools out there that you can use; I think Rentometer is one of them. You can go, you can plug in your address, and it’ll spit out the market rate on a long-term basis. And so that’s how I would try to make the deal work if you’re just trying to break even. See if you can find a property where both units will help you pay that mortgage.

Rob:
Now for me, obviously my strong suit here is Airbnb; so I like making a little bit of money, if I can. I’m typically targeting properties that are going to be somewhat of a… at least a 20% cash-on-cash return, and I think that Airbnb definitely opens up the opportunity to do that. If you were run the numbers based on a split use long-term rental and short-term rental, what you would then do is take the bed/bath configurations for the long-term rental, and you would run that through the Rentometer like we talked about. And then on the other half of it, there are so many tools online that you can use to run calculations based on a short-term; one is called AirDNA. You go, you plug in your address, and then the bed/bath count, and it’ll project what you’ll make on a short-term basis. And then you can average out both of those to see where the cards may fall with that specific property.

Rob:
Now, when you’re mixing short-term rental and a long-term rental like that, I will say that, for the most part, covering your mortgage is going to be something that you can definitely do unless you’re just buying in a very thriving location, and all that kind of stuff. But I think what you want to look for specifically, when you’re getting into something like this, is try to reach out to your realtor and ask them about their Rolodex, if you will. Ask them if they know any good cleaners, any good handyman, any good contractors that you can have on call, should anything happen while you’re out. But I think that, for the most part, if this is one of your first deals, for example: managing this on your own from a distance is actually quite easy because what most people don’t realize is when you’re doing any kind of short-term rental, or anything like that, your cleaner acts as your property manager. As long as you have a good cleaner, you’re paying them a fair living wage…

Rob:
I never negotiate with my cleaners. I always like them to be super, super happy. As long as you have a good rapport with your cleaner, they’re always going to report back to you with anything that needs maintenance on the property, anything that needs to be repaired or replaced, or anything like that. If you find a good cleaner, then you’ll have pretty much a self-sustaining… and a property that’s also very easy to run from afar. So between your cleaner in your handyman, I think you’ll have a pretty smooth operation.

Dana:
Awesome. And I think I heard you say that if someone actually goes in the property and then they let you know what is wrong, you immediately send out whatever it is to fix it, so that was good information as well.

Rob:
I do. I mean it depends. A lot of that I try to troubleshoot at the beginning before I send out a handyman. I mean 99% of the problems that I have, especially in short-term rentals, are usually things that can be solved just by me troubleshooting it with them, or just communicating a lot of basic things like, “Hey, this remote’s not working. Well, it’s probably the batteries,” and then I point them to the cabinet where the batteries are, versus sending out a handyman, just because everyone’s time is at stake here. And I’m fine giving up my time; but if I start involving my guest, I start wasting their time, everybody gets grumpy, and it’s not quite as smooth. I try to have a lot of systems in place that create redundancy, and have backups to my backup. So anytime I’m visiting an Airbnb, even if I have a whole pack of batteries, for example, I’ll always buy a new pack of batteries because those are the one big pain point that I have in my entire business.

David:
That’s funny.

Dana:
That’s awesome.

David:
All right, Dana. Any follow-up questions after getting that rundown from Rob, the Rob rundown?

Dana:
The only other thing is should I be concerned about the area? Like I was saying with the property that you were analyzing in Louisville, what should I be concerned about in terms of… This particular property that I’m looking at, it needs about $100,000 worth of work, but it will really fit my needs. So in terms of the after repair value, and things like that, should I be concerned about that?

David:
Okay. I’ll answer this one quickly because we have another caller, and we’ve got to get them before they go, but here’s a couple pieces of advice for you to take into mind. If you’re going to dump significant money into a property, and I would consider $100,000 significant, it has to be in a really good area. As a general rule, do not dump money into a property, regardless of how well you it’s going to cashflow afterwards, if it’s not an area where it’s likely to have the ARV increased from that $100,000. If you’re in an area where everything else is low and this one takes $100,000 to get it up and running, don’t put $100,000 into that property. Save and put that money into a property that is in a better area that will pump-up the ARV.

David:
And the other thing is that if you’re in Louisville and there’s a lot of cash-flowing opportunity, don’t fall in love with any one specific property and try to make it work. If you’re in an area where there just isn’t a lot of that type of deal, and so this is what you’ve got to do, that is the case for me in the Bay Area: I’ll make it work; I’ll figure out a way. But if I was where you are and I’m like, “Man, there’s a lot of single properties around here looking for a little bit of Dana in their life,” I would absolutely continue dating until I committed that $100,000 to that one deal.

Dana:
All right. Off to the dating game.

David:
There it is. Thank you, Dana.

Dana:
Thank you all.

Lexi:
Rob, I watch all of your YouTube videos.

Rob:
Thank you.

Lexi:
And you’re actually a huge inspiration for why I started my short-term rental, which I literally just started in January, like two weeks ago.

Rob:
Woo. How’s it going? Is that what this question’s about? Please tell me. Good things, right?

Lexi:
Yes. We’re super excited. I’m from Austin, Texas, but we have our short-term rental in Canyon Lake, which is Texas Hill country. And it is definitely slow, because obviously we launched in slow season, so I knew it would be slow, so trying to stay positive here. But now that we have actually been doing it, I just wanted to get some input from you and your thoughts on if you feel like the short-term rental market is starting to get saturated. Because I’ve been looking at a lot of our competitors, and even one of the houses right next to us is actually an Airbnb as well; they’ve been there for a while and they said that it is just really crazy seeing all the people that have come into the market. And I really like… I mean every time we travel we do Airbnbs, and so I really like the model and want to stick with it, but I do get concerned using these apps like Airbnb and VRBO where they control how you come up in the SEO, knowing that a lot of people are starting to get into short-term rentals.

Rob:
Sure. Yeah. I guess let’s unpack that a bit. You launched a lake property in January, so it’s expected that that’s going to be a little bit slow, which is a good thing. I would really take that as an opportunity to optimize your listing as much as possible. I think a lot of us get into these seasonal places and we’re like, “Oh, my God. It’s slow. What am I going to do?” But if you realize that you have two or three months to get any repairs in, any remodeling in, it can actually be a really, really great opportunity to get your Airbnb in tip-top shape. I think just stick it out here. Once March comes around, I think you’re going to be doing okay.

Rob:
And now in terms of market saturation, this is, believe it or not, the number one question that I get from every single person out there, and I totally understand it because there’s a lot of new Airbnbs popping up every single year. What I want to say is that the concept of short-term rentals has been around for a long time, it’s not like it’s a brand new thing that came around, but the popularity of short-term rentals has really come about in the last 10 years or so when Airbnb came out. I don’t worry about market saturation as long as I’m doing my job.

Rob:
And what I mean by that is when I’m going into a new market and I’m taking a look at my competition, the first thing that I’m going to do is I’m going to gauge myself against the competition and say, “Are they marketing themselves correctly?” What this means is have they gone through the effort of staging their property with high-class furniture, with high-quality furniture? Most of the time, if you are in just any regular place, the answer to that’s going to be no. Most people will be thrifting or going to Craigslist free and trying to cobble together the furniture in their new listings.

Rob:
Two, did they pony-up the cash to get professional photos done? Again, most of the time the answer is no. Most of the time people like taking photos of their Airbnb on the iPhone 3. They’ll spend $10,00, $15,000, $20,000 on an Airbnb, and then they’ll say, “I don’t think I can afford $300 on professional photos.”

Rob:
Three, I take a look at the listings. Did they actually spend time to copyright and really just make the listing copy sparkle? Most of the time the answer is no. They’ll write two little sentences.

Rob:
I like to go in and take a look at my competition. Now, if I go into Canyon Lake and there’s a specific neighborhood that I like: well, if every single person has beautiful photos, beautiful interior design, great listing copy and they’re booking, I’m still going to probably invest in that area because if they’re booking, then that means that people are wanting to book in that location. But if they have all that and they aren’t booking, then maybe I move on.

Rob:
I think market saturation will really start to affect you if you stay married to one specific spot or pocket in the actual market that you’re looking at. Market saturation doesn’t really affect me because when I find myself in an area where I can’t be competitive, that’s fine. Maybe it is saturated. I move on. And that’s why I start compiling lists of my top five markets.

Rob:
David and I right now are looking at a couple markets right now. I have realtors and basically resources on every corner of the country because sometimes it’s a little tough to get into it, but that’s okay because there are a million houses in the United States, so just find one that works for you.

Rob:
All to say: yeah, it can be, but I really find the power of good marketing do the work. Good marketing works 100% of the time. Truly, it does in this industry, I think.

Lexi:
Right. Yeah. I’ve followed literally everything you said. We have decorated it really nice to try to make it nice, because we did notice a lot of the properties in the area… Not ragging on them: it’s like they used their parents’ furniture. It’s not cute. When we go travel, I’m specifically looking for things that are cute. And we just launched it, so we don’t have our professional pictures yet, but they are coming this week.

Rob:
And that’s okay. And let me just clarify: it’s totally fine to take cellphone photos in that first week or two while you wait for a photographer, but some people just never actually switch them over.

Lexi:
Right. I guess my question in terms of everything being saturated is: would you ever go so far out to create Instagram pages, or something to help the word get out, that’s not just depending on Airbnb to boost you in the SEOs? Because I know there’s ways to get boosted, but I’m just trying to think of ways to market it beyond just those platforms.

Rob:
That’s a good question that really does get asked quite a bit, too: if you should go direct, or if you should create a social media handle. You know what? I’ll be honest. I’ve got two social media handles for two of my properties. I have I think 14 or 15 at the moment. One of those handles has about 2000 followers; the other one has about 4000 followers. It’s great, I’m grateful for the followers there, it’s a good thing. But when you’re first starting out, creating an Instagram account and posting photos could help you get more booking, but nothing is going to help you get more bookings than having a completely solid listing.

Rob:
I get a lot of people that will come to me and say, “Hey, I’m not booking. I want to create this Instagram account. Maybe if I can get some followers I can start getting bookings.” But the reality is when Airbnb listings really start getting that traction online, it’s whenever they’re a little bit bigger, they go a little bit more viral, they have maybe 10,000, 20,000, 30,000 views and re-posts, and they get in the real game, and those go viral, TikTok viral, all that stuff. It’s possible, but a lot of people take their attention away from the main task at hand, which is to just make sure that their listing is up to par.

Rob:
Now I understand you don’t know necessarily want to give all of your attention to Airbnb because it’s one platform. But I also want to remind you that Airbnb and VRBO, they do all the marketing for you, and they own 90% of the market share, and their actual booking fee is relatively low; it’s like 3% to 5%. They put you in front of millions of people, from an impression standpoint. I think it’s better to just work with them versus trying to hedge your bets against, but I don’t necessarily mind creating a direct booking website. There’s just so many logistics that are needed with that, that people don’t think about, like insurance, and concierge services, and customer service, and all that kind of stuff. Once you start laying all those different logistics, it becomes another job. You know? And so that’s why, for me, I don’t necessarily mind going with the main OTAs, online travel agencies.

Lexi:
Right. No, that is all super helpful because people have asked if I do direct booking, and I’m like, “I already have a job plus this Airbnb.”

Lexi:
And then just one quick last question, because it’s hard to ask anybody, especially if they’re in the area because they’re competing against you. You actually brought up the cleaners on the last question, and you said you don’t really ever negotiate with them because you want them to be happy, obviously you want them to do a good job. And so we’re in this weird phase of launching it brand new, it’s in slow season, and our cleaning fee… If we were to put our cleaning fee at a rate where we were actually getting it covered by the guests, it is close to our booking fee that we need to just get booked in the slow season, not like when it will be in the summer. But have you ever just had to lower your cleaning fee so you’re eating part of that cost, so that you actually do get bookings?

Rob:
No, I have never done that. I might lower the cost of my nightly rate; but the cleaning fee, it is what it is. In fact, I know a lot of hosts: I would say 25-45% of hosts might even mark-up their cleaning fee, but I have never taken a hit. I would say for that to be worth it, you start looking at things like three, four, five night minimum. Because right, if someone wants to come and book your place for a night and it’s 200 bucks, and the cleaning fee is 200 bucks, to stay there for one night it’s $400, and that… It makes sense why someone might scoff at that. Right? But if the minimum is five nights, well now they’re spending that $200 over five nights, and so it’s much more for people. But no, I’ve never really reduced my cleaning rate.

Rob:
But at the end of the day, whether you reduce your cleaning rate or your nightly fee, it ends up being the same thing, so that’s up to you. If you’re not getting booked right now, like I said, it’s January in a lake town. You’re not alone here. Everyone’s going through this right now. I’m in the Smokies right now. My chalet out there did not book a single time in let’s say the last two or three weeks; that’s fine. That’s why we save up. All this means is whenever March, April, May, June, July, August come about, save that money. Don’t go spend it on the next thing. Pad your bank account and have a little bit of cushion for the Januaries and the Februaries out there.

Lexi:
Okay. Awesome.

David:
Lexi, I think Rob gave you some fantastic micro advice. I would not change one thing about what was said. So for the near future, that’s exactly what you should do; and if you want your units to operate efficiently, this is really, really good for everyone listening.

David:
I’m going to add some macro advice, so don’t be confused by what I’m about to say, because it doesn’t apply to today right now, which is what your specific questions were. But because I can tell your heart is concerned about oversaturation, that’s why I want to give this perspective. The first thing I’ll say is Rob mentioned short-term rentals have been around for a long time. We used to call them bed and breakfasts. You guys ever heard of that phrase before?

Lexi:
Right. Yeah.

David:
It’s the same idea. I’m going to be traveling somewhere. I need a place to stay. It’s not going to be a hotel. It’s a bed in breakfast. You look it up in the yellow pages in a phone book or something, and it was done with direct booking. Part of what’s caused the increase in popularity in this is that the technology, specifically Airbnb and VRBO, has made it incredibly easy for the person traveling to find somewhere to stay, and that’s made it incredibly easy for the person who owns the property to book it. Right? So that’s acted as lubrication to increase how easy these people are able to get a hold of each other… and then, boom, we’ve seen an explosion in the industry… but that doesn’t mean that it will always work that way.

David:
There was a time when just having a website for your company was all that you needed to be able to make a lot of money in online sales. There was a time that email marketing, believe it or not, had an 80% click-open rate, right? There’s always a period of time where some form of technology increases the efficiency of a system, and you see an explosion, and then it changes. So I would expect at some point… and I’m not talking about next year, two years from now… where we will see a change in the way technology works. Okay? And when that happens, the model is the same… I’ve got to find someone to stay in this place and pay me for my unit, and I have to make it very comfortable for them… but the way you go about doing it will change, and we don’t have to live in fear of that.

David:
Right now, there’s no reason to use anything than Airbnb and VRBO for most cases; and like Rob said, here’s how you maximize them. But I would still plan on, the overall business is, I own a hospitality business and I need people to stay here, so there may be a way where we have to look for other ways to book people in the future. That’s just one thing to think about.

David:
The other thing is, regarding the oversaturation, this is true of any business. Let’s say it comes to selling houses, and I’m a realtor and you want me to sell your house, and you come to me and say, “Hey, David. I want to sell my house, but the market’s not that hot right now. There’s not a lot of buyers looking.” It’s true, but what that means is that if you want your house to sell, there’s still buyers in the market. They’re going to go for the best thing they can get. If your property lands within that top era of where the buyers are, they’re going to buy your house, and they’re going to pay whatever they have to pay to get it.

David:
It’s when your property starts to decrease in desirability… either location, or you’re asking too much, or it’s not in good condition… but you fall below what the buyer pool thinks they can get, and that is where it sits there forever and doesn’t sell and it starts to lose value. So Rob’s point was if you’re the best option, it doesn’t matter what everybody else is doing, and that’s what I want to highlight that you should be looking at. As you’re getting into this business, don’t assume Rob’s crushing it with Airbnbs, everyone’s doing great, “I’m just going to go buy one and it’s going to be really easy.” It might be like that right now in many cases, but it won’t stay that way. So make sure your property is a great property, it’s in a great location, and it has great furniture; it’s the most desirable one.

David:
It’s like if a lion’s chasing you, you don’t have to be faster than the lion. You’ve just got to be faster than everyone in your group. That’s what Rob’s talking about when he’s describing how he’s analyzing deals. He’s looking at everyone else. And he’s like, “Man, if these places are just like disgusting and they’re booking, if I make a nice one I’m golden,” and that’s really what we’re getting at. That’s how you hedge your risk is you stay in the best markets, and you just do a better job running your business than other people do, and that’s the advice he’s giving you about getting pictures taken, and high-end furniture, and giving the client a great experience, making sure there’s batteries there so they’re not pissed-off at one o’clock in the morning when they can’t get the TV control to work, or the thermostat’s broken because there’s no batteries.

David:
What to expect for the future of short-term rentals? I personally think that people are going to continue to do this more often. I think that communities are going to say they don’t like it because it makes houses more expensive and harder for people to buy them. If you’re trying to figure out not just saturation, I think you should also look into the area that you’re buying into, and what the political environment is like there. Areas like Arizona are very pro-business. Florida, pro-business. They are very likely to say, “Yeah, we want people to be able to rent their houses out.” They see the higher property taxes they’re going to get. They want to welcome that. If you’re in an area that’s not pro business, you’re more likely to see legislation pass that limits how many days out of the year you can do this, or whatever. So don’t forget to include that when you’re making your decision. If you’re buying in an area that’s super just traditional, doesn’t like change, doesn’t like all these people coming in and out of their neighborhoods, that’s where you could get stuck paying a lot of money for a house and then not able to use it.

Rob:
Yeah. And I would just add to that: just make sure, as you go into your next investments, and everything like that, take a look at travel trends. Take a look at if the amount of people going to that destination is increasing year-over-year. For example, right now a lot of people would say that the Smokey Mountains are oversaturated, and it’s a really fair debate because there are a lot of cabins out there. Traditionally speaking, 12.9 million people have visited the Smokey Mountains. I think last year it was over 14 million, or something like that, so more people are going there more than ever; it’s because it’s in the middle of the country, it’s eight hours away from all these different cities. People are continuing to go there. And so I think just take a look at that and stack it up against how many Airbnbs there are in the area. The Smokey Mountains there’s like 3000 cabins, or something like that, so that 3000 cabin number is a lot smaller than the 14 million people that are visiting the smokey mountains. I’m just gauging, “Are more people going there on a yearly basis? And how many more Airbnbs are popping up every single year as well?” which is data that you can research.

Lexi:
All right. Well, you guys have been so awesome. I listen to you both all the time. I do have a client call so I do need to drop, but thank you for answering all those questions.

Rob:
How’s it going, Christopher?

Christopher:
Doing good, man. Love your stuff. Been trying to study up and take notes and everything, and one of the questions that came up was whether to put the efforts of starting an Airbnb into all three of my current long-term rentals, and just order everything at once, hit hard and fast, get them up and running, and navigate that all at once. Or just tease it out with one, and then go from there, and just keep both the long-term and the short-term going?

Rob:
Yeah. Let me ask you this. Where are the three long-terms?

Christopher:
Uptown Phoenix, downtown Phoenix right next to Roosevelt Row, and then I’ve got one closer to Steele Indian Park, a little venue area. Those are the three areas. Midtown, uptown, downtown,

Rob:
All in Phoenix though, for the most part?

Christopher:
Yes. Right in Phoenix.

Rob:
Okay, cool. Well, here’s the good news: that’s an amazing market for short-term rentals. I can vouch for that market. I’ve got friends out there; they’re absolutely crushing it. You know, generally my advice to people has always been, “Jump in head first. Figure it out,” kind of thing. But considering you’re new to the game, I also like to take the approach of crawl, walk, run. And the reason I say that is because setting up an Airbnb, it’s not rocket science, it’s not hard, but it is hard work. And so setting one up, you’re going to have to go and get all of your different furnishings, you’re going to have to get art, you’re going to have to pick up all the boxes, break them down, set up mattresses. It’s going to really take some time for you to do that. At a minimum, if you’re working alone, it’s going to take you a week. In a pair, probably still about a week, week and a half. Just in the actual setup time itself, it’s going to be a lot.

Rob:
And then from there you have to automate it, you have to set up all your automated messaging, you have to hire your cleaners… your Airbnb Avengers, as I like to call them… and so that’s a lot of work to do for just one Airbnb. Now, if you’ve got three rentals that you want to convert into Airbnbs each, then now you’ve got to do that three times, and that’s going to be a solid month of fully sprinting. I would say if you’re prepared for that hustle, it’s not the worst thing to consider; but honestly, as I develop and really change my philosophies on real estate investing, and all that kind of stuff, a lot of it, talking to [inaudible 00:31:46] over here, but for me I’ve really learned the importance of diversifying.

Rob:
And so I really don’t think that there’s anything wrong with keeping one or two of your current rentals as a turnkey rental. If you’ve got tenants in there, if they’re paying rent on time, if you book and you can raise your rates a time, I think it’s okay to do that; and keep two, or one or two of them, as long-term rentals, turn one into the Airbnb. Make sure you like Airbnb. This is what I always tell all of my students and everything: learn the model, love the model, become profitable at the model, and then go all in.

Rob:
Figure out that Airbnb is something you want to do first, and that you like it, and that you like customer service, and you like the grind; and if you do, convert those other two into Airbnbs. But Airbnb is going to exist tomorrow, next year, three years from now, so I don’t think you have to jump all in right now because you’ve got options. You already own these houses. Stakes are pretty low for you to just convert one to the other anytime you want. I’d say start small, work your way up, personally. That’s how I would do it.

Christopher:
Okay. I like that. Yeah. The downtown one was an Airbnb when we were… It was my wife’s old house, so we were… Whenever she could Airbnb it, she could. So we have some experience and we’ve stayed at some, so I’m familiar. But yeah, I think I like that perspective. Crawl, walk, run. And then learn, love, be profitable, and then go all in. Appreciate it.

David:
Let me give you a little perspective just to take with you as, as people are listening to this and they’re hearing about short-term rentals. I get this from house hacking also, a few things. I just want to clarify because sometimes they sound too good to be true. We have house-hack clients that will get a 78% return on their investment, it’s incredible, and a lot of people think, “Well, if that’s the case, I should be able to get a 78% return on my investment. I’m just going to keep looking for another investment property.” Or Rob says, “I look for a 20% cash-on-cash return on this deal,” and that sets a barometer in people’s minds, and they go, “Well, anything less than 20% I don’t want to do because that’s Rob’s standard.” Here’s what’s semi-misleading about it, and it’s not intentionally misleading, and that is why I’m putting this out here.

David:
ROI is a metric that measures the return on your investment, but it’s literally talking about money. A true ROI is where you put money into something and nothing else, and that’s the return you get on your money. What we’re talking about with Airbnbs, with short-term rentals, with what Rob talked about, he just mentioned a solid month of sprinting. There’s time and energy that’s going into that investment as well. It’s not just money. So you can increase the return on your money if you put other investment into this thing and it goes well, like your time, like your energy. Does that make sense?

Christopher:
Yeah.

David:
That’s one thing to keep in mind: that yes, the people that are getting incredible returns are often putting in more than just money. And so if you’re only looking to put money in a deal, don’t be misled by these big numbers.

David:
The other thing is, and this is a principle of wealth-building that just everyone should know: the less money that you put into something, the higher your returns can be. If you go buy a fixer-upper burr, like what I used to do, and I’m just buying a place for $90,000, and it’s going to be worth $120,000 or $150,000 when I’m done, and then maybe I put in $10,000, $15,000 into the rehab: I could get 50%, 70%, 80% ROIs on those all day long. Sometimes 100%. I’d get all my money back out before I even did anything. That’s because I was only putting a little bit of capital at play. Nobody with big amounts of capital… institutional funds, insurance companies that have hundreds of millions of dollars they have to invest… they’re not getting 20% returns. There is no one that’s doing that unless they’re taking big risk. Hedge funds might get you something like that, but they’re not just putting money; they’re putting their time, their resources, their experience, their education. They’re actively trying to go after the best returns they can possibly get in the market, and they often lose money.

David:
When you’re investing big amounts of money, you’ll never get the same return as you can with small, unless you just got lucky on a deal, but it won’t be sustainable. That’s just two things to keep in mind as you’re moving forward. If you’re investing smaller amounts of capital, you can almost always get a higher return. And if you’re putting in more than just capital, you can increase the return on your capital, but go into it with your eyes wide open knowing that’s what you’re doing.

Christopher:
Yeah. Great point.

Rob:
Yeah. I think it’s a journey, man. It’s like when you’re starting out, our time is not worth much when we’re starting out, and that’s why we can give all of it to any project. But as you begin to grow, and as your wealth be begins to grow and your portfolio begins to grow, it starts flipping slowly until money is actually less important than your time. Once you have it, right? And so for me now when I’m looking at deals, now I’m looking at them more from an ROT, return on time. I’m trying to give up as little time as possible for a return that I’m okay with. I’ve worked my cash-on-cash and my like return standard is down significantly over the years because I know that certain ones might have a high yield; but if I have to give 10 hours, 20 hours of my week every single week, then it no longer becomes worth it for me.

David:
That’s a great way to sum up. But I described to make it practical.

Christopher:
David, a question for you. Was not expecting it, but I have the opportunity to engage in an off-market deal through a colleague, and I do know that he needs to take the equity out, and I would like to know if you have any ways to frame it or structure it to where he could get most of his equity, if not all of it out, in short amount of time, but still allowed me to keep it all to myself, like not bringing in another partner, or asking for some other loan, non-traditional. I don’t know if I can qualify with four mortgages already, for a new one.

David:
I’m a little confused. You know someone that owns a house in has a lot of equity, and he has a partner with it?

Christopher:
No, no. He’s just trying to sell it, and he’s contacted me to try to buy it from him. I’m just curious to see what’s a way. Because I was thinking of seller financing, I can give him a good down payment, and then pay him the rest over the next two, three years, but it seems like there’s more of a push toward getting the equity out.

David:
For him you’re saying.

Christopher:
Yeah. The seller.

David:
He wants some cash.

Christopher:
Yes. For the seller.

David:
Why don’t you do this: why don’t you contact us, We’ll see if we can get you a loan based on the income the property would make instead of just the income you have, because you said that might be a problem. So you get a loan, and he gets all that cash. And then the down payment part, you see if you can do seller financing for that part; so you end up either putting in less money or no money, and he still gets his cash, because the bank provides that, or the lender provides that.

Christopher:
Ah, I see. All right.

David:
Instead of trying to do seller financing on the whole thing.

Christopher:
Seller finance the down payment. All right.

David:
Because that’s the part that matters to you, right?

Christopher:
Yeah.

David:
That’s what you’re trying to do is put less money in.

Christopher:
Right on. All right. I’ll be contacting you soon then.

David:
Sweet, Ozzy. What have you got for us?

Ozzy:
All right. My business partner and I… And by the way, forgive me. You may or may not hear my six-month-old whining in the background, but… My business partner and I are looking at purchasing property in a small market, and my main question is: when looking in a small market, how do you know when it’s too small based on… Again, this is for Rob on the Airbnb side. Looking at small markets, if there’s not enough comps on the Airbnb platform per se… or on VRBO, for example, or any other platform… how do you know when the market is too small if you believe that it’s a good deal, number one, financially; but also, based on AirDNA comps, and also based on the destination that it’s in. So it’s not a large market, not a lot of people know about it, so how do you know when you’re too early, or how do you know when you’re just at the ground floor and it has a potential to boom?

Rob:
I mean it has happens all the time, honestly, where you will find a really nice house and you’re like, “Great. Okay. This seems like a winner.” And then maybe you run it through the AirDNA Rentalizer and you’re like, “Okay, this sounds good,” and then you go to pull comps on Airbnb and there’s two houses. That is not necessarily an alarming thing for me, but I would say that the confidence to do something like that comes a little bit later with time, basically. For me, I’m willing to take a swing like that because I’ve got a pretty diversified portfolio. But at the end of the day, it’s pretty risky to be the first Airbnb or the second Airbnb out there.

Rob:
I get this all the time with glamping people who want to buy a piece of property, and it’s super secluded, and they’re like, “Hey, I don’t see any other tents, Airstreams, or domes out there. Am I too early?” and the answer is, “Yeah, you might be.” But being too early isn’t necessarily a bad thing because it could actually really work in your favor, but it’s risky. And so if you don’t have any comps to support the investment, I wouldn’t necessarily steer a newbie into that market because a newbie may not have a portfolio that can handle the dips, the ups and the downs of that. So for me, if someone wants to go and explore a market, I’d like to see a little bit of experience and a little bit of padding in the rest of their portfolio to help them hedge that bet a little bit.

Rob:
Now, there are other things that you can look to, to really determine that. Obviously, you can look at, “How many hotels are in the area? Are there hotels? Are there hotels being built?” If so, then yeah. That means people are going there. Those hotels have already spent $10,000, $20,000, $30,000, $40,000, $50,000, $100,000 on market reach search to decide that it’s worth building in that area.

Rob:
The other thing that I’d like to really point to is how many people are visiting that town. If it’s a population of 1000, well already that’s a tough one for me to co-sign just on the sole basis that finding vendors in that 1000-person town is going to be really tough because vendors are everything. Whether you’re flipping a house or you’re renting an Airbnb, or starting any business, you need vendors that can help you run that business. But aside from the actual population, I like to see how many people are visiting. If it’s a population of… Let’s say there are places in Arizona that I invest where it’s a population of 8000 people, pretty small town, but millions of people go through that town to get to the nearest national park: well, then we’re onto something. Then I’m like, “Okay, just because the town is small doesn’t mean it won’t be successful.”

Rob:
There has to be something that’s drawing people to that town or through that town that makes it a worthwhile stop as an Airbnb, and so that’s something that I think you need to consider. There may not be Airbnb comps; not necessarily a bad thing. But if only 10,000 people are visiting every year, I’d probably walk away. However, if it funneled you to some kind of national park or state park where hundreds of thousands of people, or millions of people, are going through, then that’s something that I would consider. And unfortunately, when it comes to comping a deal, especially on Airbnb: sometimes it’s 50% art, sometimes it’s 50% science, sometimes it’s 90% science and 10% art, and then sometimes it’s 90% art and 10% science. It really is going to depend on the market and how much data is available to you. That’s why I say if you’re on the newer side of things, I would be weary about entering a market like that. But if there’s data that supports that there’s visitation in that area, by all means. I think it’ll be okay.

Ozzy:
Awesome. Perfect.

Rob:
David, what do you think? Do you ever shy from a place if it’s like… You know, from a burst standpoint, or any kind of real estate standpoint, do you ever shy away from a place if it’s a small market?

David:
Yes, I do. I wouldn’t outright say I won’t do it. But the problem is, for me, I don’t want to put a lot of time into the stuff I’m looking at. I want to be able to just set it and forget it. And the way you make a deal work in a small market is you make up for lack of ease with more elbow grease. You can invest in really bad neighborhoods. You can invest in D-class neighborhoods, but you’re not doing that passively. You’re going to have to be putting a lot of time, and screening tenants really good, and marketing to the right ones. And it can work, but it’s becoming more like a job. And I have a job…. I run a couple companies, I make this podcast… so I don’t want another one trying to keep a property filled. That’s how I would perceive that. The more data I have, the more of an understanding I have walking into it; I know what I can expect.

David:
Now, what I was thinking when you were talking is that there’s more value into buying real estate than just the return on your money. Okay? There’s things you learn. There’s skills that you build. There’s relationships that you develop. This is why when people are new starting off it just feels so, so hard. It’s like the first time you go to the gym ad you haven’t gone in 10 years. Like everything sucks. But you didn’t get a lot of value, as far as muscles you built, going to the gym that first time. Just like buying your first deal, you’re probably not going to get a lot of money, but your body getting used to the workout is of value that you got out of it. You learning how to use the machines a little bit better. You probably ate a little bit better day after you worked out. It made it a little bit easier to go the next day, right? There’s value that you get out of doing this thing even if it doesn’t show up as, “I want to be super strong,” or “I want to have a strong cash flow.”

David:
So if you’re in a situation with very low risk, I say do it yourself. If you’re in a situation with high risk, but you still want to learn and you feel like this is a market you want to learn in, get two or three buddies and all of you can go in together. Now, it won’t be efficient, but you’re not doing this to be efficient. You’re doing this to learn. Three of you can learn from one deal, right? Three of you have reduced the risk amongst the three of you, if you’re going to do this; so that if it doesn’t make a lot of money or it doesn’t cover the mortgage, instead of you taking the full $500 a month hit, that’s split three ways, right? And then eventually you will figure out how to make it do money and you’ll be good, and maybe you’ll sell it and go put your time into something better, or you’ll keep it because you figured it out. But what I’m saying is don’t stay out of the gym just because you’re like, “I’m in bad shape. It’s hard to find a workout that’s going to help me here.”

David:
I’m also not saying to go buy. Don’t buy in this area if it looks like it’s a bad idea. We’re assuming that you see something of value in this market that makes you think, “Yeah. I know there’s a way to make it work. But it’s not conventional and it’s going to be messy as I try to get to that point.”

Ozzy:
Got you.

David:
Is that helpful?

Rob:
Yeah. That’s really great. I think the synergies of partners like that, honestly on your first deal or on a deal like that, is really important because I had partnerships for a few of my first Airbnbs, and for my first real estate investments in general, and I can’t really point to how much money we made in that; I don’t really care. But what I really liked was the problem-solving that all three of us were able to do through that deal. There was a problem every day, it seemed like, and so we were just texting back and forth, “What if we did this? What if we did this? What if we did this?” and we learned how to like solve problems together, and I think that’s really what you’re doing on your first couple deals. You’re learning how to problem solve. You’re not necessarily going to be printing cash. It would be great if you did; but what you’re really learning is how to be resourceful, efficient and intuitive.

Ozzy:
A hundred percent. And that’s what we’re going through right now with… My very first property that I purchased was four years ago. I live in Fort Lauderdale and I bought it in Columbus, Ohio. I’ve never invested in a property in my own home state, so everything’s been remote, everything’s… In the beginning it was nerve-wracking and crazy. But yeah, it’s cool to go into those few couple deals with your partner and just again have that synergy, bounce ideas off each other, make mistakes, and that’s really… That’s the best way to learn, in my opinion. Make as many mistakes as possible.

David:
And reduce your risk while you’re in that phase.

Ozzy:
Sure.

David:
Right? That’s why we ride a bike with training wheels where it can’t go as fast, but we reduce our risk. And then as you start to build-up your skills, there’s a point you take them off; and your risk is higher, but your skills are also higher, so it’s not as risky.

Ozzy:
Right. Exactly. And that’s what we did. Our very first property we purchased for $87,000, and flipped it 19 months later. We rented it out, long-term rental, flipped it 19 months later for like $135,000. So very low risk at 87,000. We went in with 20% down, very little money upfront. So yeah, that’s what we did. And I’m still doing that now. I mean everything is managed calculated risk. So yeah, very much appreciate it, man. Appreciate it.

Rob:
Well, awesome, man. Well, good luck on that. Based on the experience he just told us about it, I’m really not sweating it. It seems like you’ve got some systems and experience in place that can help you mitigate some risk.

Ozzy:
Yeah, man. Appreciate you guys. Thank you so much.

Julian:
Okay. So I have two questions. One question is when are we going to start selling Bay Area as a one-up for selling Sunset? And the second question is I’m doing a partner deal with a friend of mine, it’s going to be a house hack, so I just want to hear do you have pros or cons about doing a partner deal, and one person taking up the loan while the other person does the real estate aspect of it?

David:
Are you saying that only one of you will be on the loan and the other person will be managing the real estate?

Julian:
Yes, exactly.

David:
Are you each going to be living in the house together?

Julian:
Yeah. It’s going to be a deal. We’re both going to be living in it as a house hack.

David:
Is the person who’s doing the loan meaning they’re putting down the down payment and the other person’s managing?

Julian:
Yeah, exactly.

David:
All right. Rob, you want to take that one or you want me to start?

Rob:
I could start, I think. Pros of a partnership is, as we just talked about not too long ago, you are spreading out the risk over two people, which is a really nice thing. Number two is I really like the comradery of partnerships, and having a good partner that you can live or die by. Right? And all of my partners thankfully, that I’ve ever had, I’ve always had an amazing relationship with them, and it’s always gone pretty smoothly, and I’ve really learned a lot just based on seeing how smart they are, and feeding off of all of their ideas. So those are going to be the two things for me that I really like in a partnership is obviously I don’t have to worry about as much from a risk perspective; I’m going to learn a lot from that partner.

Rob:
On the flip side of this, not all partnerships are perfect; and I think the con of a partnership… not necessarily the con, but one of the things to look out for… is communication and communication styles. And that was something that I didn’t really figure out in my first couple of partnerships, was explicitly communicating exactly what it is each of us were going to do or ever writing anything down. We never wrote down responsibilities or anything important. And so I think the con here is that it can really build tension if you or your partner aren’t necessarily very good at stating: a) what you’re feeling; or b) what you feel the other partner should be doing. And so a lot of partnerships really have falling out, if you will, because of this main thing, because of the communication. And it’s really easy to get into a partnership; it’s really hard to get out of a partnership.

Rob:
Everyone gets into a partnership excited. No one really plans on breaking up. But if you buy a house together, and that partnership must dissolve, there’s a lot of hoops that you’re going to have to go through for that partnership to equitably dissolve, and the implications of that can be really huge. If you’re buying a house together, one person put down the down payment, then the other person didn’t, now you have to sell the house. And if you’re having to eat the closing fees, and all that kind of stuff, it can make for a little bit of tension, if you will, a little bit of a grudge.

Rob:
And so I think that’s really going to be the big one for me is… I don’t really like any kind of controversy or confrontation in my relationships. I like to keep it pretty chill with all the people that I know in my life. And so I think a lot of people are very, very fast to get into a partnership. I don’t think you necessarily have to, if you don’t want to, but I would definitely consider the implication of the worst case scenario, and a lot of people don’t. They just think about the best case scenario. I’m not saying plan for the worst case scenario, but acknowledge its existence; because the moment you can do that, the moment you and your partner can start outlining all of the different facets of your partnership, “If this, then what? If this happens, what happens?”

Rob:
And really, I think for me, my first couple partnerships I never brought in an attorney because I was like, “Oh, we’ll figure this out. What’s the big deal?” But the moment I brought in an attorney on some of my later partnerships, they started asking a lot of questions that I had never thought about, and questions that were really awkward to answer in front of my partner. And I think that for me, that was one thing that I was like, “Oh, I probably should have brought one in a little bit sooner, so that we could have had a lot of this in writing.” So not necessarily pros/cons here, but kind of. I mean there’s a lot that could be said about partnerships. Luckily for me, all of mine have gone pretty well.

Rob:
David, I don’t know about you. Maybe you have this a little bit more… maybe a more pointed POV here on an actual pro and con.

David:
I’ve never really done partnerships, I’ve avoided them for almost all my career until this year, and that’s mostly because in our mind we look at a partnership and we say, “Well, I will do this and they will do that, and we’ll get the best of both worlds,” but what I think it actually turns into is it’s double the work because everything each of them has to do, they have to report it by the other, and then the other asks a bunch of questions to make sure that they like it. And then if the person who’s doing it one way, if that’s not in favor with the other person, then they’re going to question it, and that’s where hurt feelings come from. So there’s a lot of ways partnerships can go bad. It doesn’t mean don’t do it. But I think if there’s an exit strategy, that’s much more important.

David:
If you’re buying a deal that has a lot of meat on the bone… or you’re going to be living in the house together, so each of you is getting some value from this other than just the property itself… it’s a much safer bet for you. Because if you’re going to be roommates and you each own the house, I like that much more than, “We’re going to buy an investment property and we’re going to argue over how to manage it.”

David:
What would concern me about your specific situation is let’s say the partnership dissolves. The person who is going to be doing all the work of managing the rental has no work anymore and no liability and no nothing. They’ve walked away. The person who put the down payment on the house and who’s on the loan is stuck holding the bag. So it’s not really an even risk or responsibility over both people. And if it goes great, the person who put the money down isn’t doing work, and the person who’s managing the property has a job; the other one has passive income, and that can also lead to hurt feelings and expectations.

David:
I would probably feel better about this partnership if each person was putting money in for the down payment, and the person who was managing it was getting paid out of the money that the property makes to compensate them for their time, then they won’t get upset if they get paid a property management fee out of the property to manage it. And then if each of you are living there, well then the money that they’re being paid to manage it is very minimal, because maybe there’s only a handful of people that they have to find to put in the property, so the passive person isn’t going to feel like, “This is a ton of money.” It’s a very small amount and the risk is mitigated it by living there.

David:
I guess my gut tells me that if you were each going to rent a room in the house, and then you were just going to rent out other rooms to other people, you each put in the down payment, you were each on the loan… or at minimum you just put skin in the game, even if you’re not both on the loan… then the partnership is more likely to last longer. And then if you decide, “Hey, I want my money out of the thing,” you spell out, “We’re either going to refinance it or we’re going to sell it, and this is the way we’re going to make that decision.” And then when the partnership has run its course, if it does go that way, it’s okay. No hard feelings are there. You’re going to have some equity and you’ll be able to get out of it, and then you have all the knowledge that you learned to put into the next deal where you might not need a partner.

Rob:
I actually want to harp on this a little bit because something that David said is super important, and it’s that having some kind of skin in the game is going to be great because now the person that put the money into the deal isn’t going to hold a grudge for having done that. Even if they agree to it, at a certain point it is pretty common for that person to be like, “Hey, I put all my money in this deal. I’m the one that’s holding the risk.” And then the other person doing the sweat equity, they might have agreed to work for free for the next three years before they get a cut, and then that’s really great for the first year; but then as they start figuring out that their time is super valuable, then on year two and three they might start getting a little bit frustrated that they agreed to a deal that they’re working basically for free, for their sweat equity. And that’s why it’s important what David said is: maybe compensate that person for the actual management of it so that even if it’s just a stipend, even if it’s just a little bit, at least they’re making something for their work.

Rob:
Because there are a few deals that I’ve gone into where I said, “Hey, I’m going to take 50% equity in exchange for doing all the work, if you pay for it,” and those partners are like, “Great. That sounds awesome,” and I was like, “Awesome.” But now I’m a year-and-a-half into this deal, and it’s still a great deal, it produces cash, I’m still managing it, but in the year-and-a-half since we purchased this property my time has become significantly more valuable to me, and now I’m barely starting to get paid from that property, and it took a long time. And I’m not frustrated or there’s no tension, but I can see how someone in a different situation might say like, “Man, this is tough. I wish I was making a little bit of money right now.” I knew that going in because that’s how I’ve worked all of my deals, but a lot of people aren’t really prepared for that realization when it hits.

David:
And that’s what no one ever thinks about is the person they are right now, when they’re doing this deal, is not going to be the same person they are five years later, 10 years later. I see this with business partners that I have where everything looks great right now, but what if our business is successful and we make millions of dollars? Do I know what they’re going to turn into once they have millions of dollars, right? You just can’t predict a lot of the time: how success will impact you; how adversity will impact you. What if your partner in a business or in a property ends up having a family and just decides, “I don’t want to do any work at all,” and someone else is stuck holding the bag? How long before they get bitter?

David:
I’m not saying don’t do a partnership. I’m saying don’t plan on having the perfect relationship for 30 years. Have a plan in place for, “When we’ll exit. How we’ll know,” and don’t wait until the relationship is so terrible that there’s bitter feelings before you get out of it. But I want you to buy something.

Rob:
Yeah. And agree on the exit strategy because that’s something that’s always, “Yeah, we’ll get there when we get there.” And then when one partner wants to sell and the other one doesn’t, it starts creating really difficult conversations for both partners.

Julian:
That’s really good. Awesome input.

David:
You’re not discouraged, are you?

Julian:
No. Not at all.

David:
Okay. Right on. Julian, what’s your social media if people want to follow you, see how this deal goes?

Julian:
Julian Gonda. J-U-L-I-A-N G-O-N-D-A. Shoot me a Follow.

David:
Julian Gonda. Awesome. Thanks, Julian.

Julian:
Yeah, of course. Thanks, guys.

David:
All right. That was our show for today. So that last caller, Julian, had some pretty good questions, just practical, “I’m going to get in a partnership on a house hack. What are some things I should be aware of?” Rob, I thought you gave some really good advice when it comes to predicting the future. You pulled out your little crystal ball and you said, “Well, a year-and-a-half ago I was in this a situation, and now it’s completely different,” and that’s not things that people ever predict.

Rob:
Yeah, man. Hindsight. Or what is it? Oh, shoot. I’ve already forgotten the… Oh, hindsight is 20/20. I knew I could do it. Thanks for believing in me. Yeah, man. I’ve had probably six or seven partnerships over the years. This is all good stuff to really keep in mind is that one thing that we learn more and more in our career is that time is just the most finite source on this planet, and I think nothing brings that to light than both a good and a bad partnership.

David:
That’s a good point. What else did we talk about today? We had some pretty good conversations about how to handle a short-term rental, how to know if the market is becoming oversaturated, the importance of marketing within business. And I thought that we gave some really good insight… particularly you, Rob… about how the return on investment is… We’re not just investing money sometimes. A lot of the time we’re putting in time, we’re putting in energy, we’re putting in effort. And the whole reason that many people are listening to this podcast is they want their time back, or they want their energy back; they want to give it to their family, they want to give it to their friends, they want to do other things. So if you build your empire in a way that maximizes the return on your capital, but still requires consistent energy and time being put into it, you may get everything you wanted, but it’s not going to serve the purpose that you had. So I think that’s something that people would be wise to consider before they just become these ROI hungry paper-chasing cashflow fiends.

Rob:
Yeah, definitely. I think it’s really that’s the difference between someone starting out and someone becoming a little bit more seasoned, is really understanding that ROI, that the I in investment is both money and time, and it starts to turn into time on the later half of your career.

David:
Very good point. Well, thank you for joining me here, Rob. I appreciate your support as always. You always give a really good perspective, and it’s just fun when you’re here, so I appreciate that.

Rob:
[crosstalk 01:01:09].

David:
Any last words before we get out of here?

Rob:
Yeah. Where can people find you, my man? If people are like, “Hey, I want knowledge bombs dropped on me,” how can people find you on the internet to get those?

David:
To be dropping bombs. Well, I’m DavidGreene24 on just about all social media. You can also message me directly through bigger pockets. A lot of people don’t realize that’s a really good way to get a hold of anybody that you find on the podcast, is go look them up on bigger pockets. They probably have a profile. You can send them a message there.

Rob:
All right. I’m inspired now to go and check my inbox after you said that. I probably have a few messages there.

David:
How about you? What’s your preferred method of contact?

Rob:
Well, as always, people can go and smash that Sub and that Like button on YouTube. Find me on YouTube at Robuilt. You can give me a Follow on Instagram at Robuilt as well. And if you want to see me do silly dances on TikTok… no, I don’t do that. But you can find me on Robuilto because, as always, people always snag my handles out from under me, so I always have to add an O because someone took Robuilt.

David:
That’s funny. All right. And you heard Rob and I talk about properties that we’re looking at buying together. If you’d like to invest with us, you can go to InvestWithDavidGreen.com, fill out the form there, and we will get in touch with you about what the opportunities look like. Other than that, keep listening to podcasts like this. Check us out on YouTube, leave comments in the YouTube section to let us know what you liked about the show, what you wanted more of.

David:
And the last thing I will say is in order to make more of these shows, which are totally free for you, we need people to show up and ask questions. So those who are here, thank you. If you like to ask your question, if you would like to be featured on the biggest real estate podcast in the world, if you would like your opportunity to make Rob’s hair tingle in a cool way, please go to BiggerPockets.com/LiveQuestions and bring your best questions, and you’ll see that literally Rob’s hair will move when a good question is asked. He’s that in tune with the force of real estate.

Rob:
I’ve trained it over the years. It’s a little muscle in my forehead that allows it to just give it a little shimmer.

David:
Very, very impressive. All right, I’m going to get us out of here. This is David Greene for Rob-the-hair-Jedi Abasolo signing off.

 

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2022-02-27 07:01:04

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How to Borrow Money for Down Payments (and Pay it Back!)

This week’s question comes from AJ through Ashley’s Instagram direct messages. AJ is asking a question many new investors have: If I borrow down payment money from friends or family, what’s the best way to pay back the down payment while cash flowing on the property?

For many rookie investors who don’t have large cash sums sitting around, much of their initial investment has to be done through borrowed money. This means not only getting a conventional loan from a bank but privately financing their down payment as well. But, before you start asking your grandma for some “seed funds”, make sure that your bank will allow you to borrow down payment money.

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

Ashley Kehr:
This is Real Estate Rookie episode 160. My name is Ashley Kehr. And I am here with Tony Robinson.

Tony Robinson:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the information, the inspiration, the motivation and sometimes we answer your questions directly so you can get started or keep going on your real estate journey. Ashley, what is going on today?

Ashley Kehr:
Not much, Tony. This is actually our third rookie reply. If you guys are watching this on YouTube, you probably realize that we’re the- well, Tony’s in the same shirt every day. We record a black T-shirt. For me, say you love it, three weeks in a row or care to reply. I’m not really sure what other small talk we could fake since we recorded it too`.

Tony Robinson:
I actually have one, I actually have one. My house in Louisiana, all of you know about it, it is under contract for a third time right now, and feels like we’re inching closer to actually being able to close this one. We just got the buyer’s request for repairs, so we’re giving them a credit for that. I think the appraisal has come back already above what we’re selling it for, so fingers crossed that this one actually ends up closing this time. It’s almost bittersweet because it’s if we actually do end up selling this property I won’t have anything to complain about on a regular basis. This is the only part of my life that I allow myself to openly complain about, but on the flip side I’ll get to save the money that I lost last year on it, so.

Ashley Kehr:
Well, if you need something to complain about Tony, you can complain about me. [crosstalk 00:01:39]

Tony Robinson:
There you go.

Ashley Kehr:
That Ashley, her laugh. It’s always overpowering the podcast.

Tony Robinson:
Fair enough.

Ashley Kehr:
Okay. Well, it’s very exciting for you to hopefully have that property to the end and I think this is actually a very valuable lesson to anyone listening as to, okay, they might have bad investments, but also as people trying to buy properties, those person that’s buying this property from you, they know you want to get rid of it, but probably don’t know the extent of what you’d be willing to do to get rid of this property, so [crosstalk 00:02:17]like how they give you your repair list.

Tony Robinson:
If they said, Tony, we need your left leg, I would give them my left leg.

Ashley Kehr:
Yeah, like the repair list, you’re just giving them a credit. Did you even try to dispute it or anything?

Tony Robinson:
For what reason?

Ashley Kehr:
Right. They probably could have asked for a lot more and you would’ve just said, okay, yeah. Let’s go ahead, yeah.

Tony Robinson:
Fair. At this point, I’m willing to pay them to take it off of my hands, so.

Ashley Kehr:
So if it comes onto the market for a fourth time, you guys know.

Tony Robinson:
You can pretty much ask me anything and I’ll say, okay.

Ashley Kehr:
Yeah. Okay. So, we have another question from my DMS. You can send me a DM @wealthfromrentals, you can send one to Tony at @tonyjrobinson on Instagram, or you can leave a message on our voicemail box at 1-888-5-ROOKIE. And those voicemails actually get emailed directly to Tony and I, so we do listen to them and we do get to play some of them here on the show for you. So today’s question is from AJ Seaton. “Hi Ashley. I enjoy the podcast. Here’s the question and scenario I have. Let’s say I borrow from the bank to purchase a rental property. Then I borrow money from family or friend for the down payment. What’s the best way to pay back the family friend, the down payment. For easy math, the home is $100,000 purchase price. The bank will be putting 80,000, holding the mortgage for that. A family friend would be paying me or giving me $20,000 to borrow. Let’s say I pay a thousand dollars as a fee, so I owe them a total of $21,000. What’s the best way to be able to still cash flow the property and pay them back?
So the first thing I think of is if you are borrowing from a bank for a rental property, make sure that for the down payment, you are allowed to borrow money and that you don’t have to use your own money. If you’re doing an FHA loan, they do require you to use your own money, some conventional loans. You could go to the commercial side, where they usually don’t care at all where the money is coming from, but just make sure that it’s clear with the bank that you are allowed to borrow for the down payment. If you are not allowed to borrow for the down payment, you can receive money from family and friends, but you’ll have to have a gift letter written. So the letter is stating that, say, your mom gave you $20,000 for the purchase of this property, and it is a gift and does not need to be repaid back. So that’s something that can be done if you do need to get that down payment gifted.
So for saying a $1,000 fee, so what you work out with the family members is, or your friend, is doing a payment plan and making sure that just works into your number. So say your mortgage on this property is $500 per month, and you are going to pay back your family the balance plus, maybe 3% interest or something like that. And that ends up being another $300 I month per se. So can your property afford an $800 mortgage payment per month? Or you set this up outside of the property where maybe when you’re running your numbers, you’re putting that down as $20,000 invested as cash put into the deal. And then that way you can see what your cash on cash return is, and then the money you’re actually paying back your family is coming out of maybe your W-2, coming some out of the cash flow of that property.
So, there’s different ways to analyze it and look at it, but check out biggerpockets.com and go to the tools in the rental property analysis. And you can run, especially if you’re a pro member, you can run reports as many times as you want. So run it different ways, in different scenarios and see how it actually ends up.

Tony Robinson:
Yeah. So much good information there, Ashley and I think AJ’s question is essentially on how to structure this partnership. And we’ve talked about this a lot, is that there’s no right or wrong way to structure a partnership, as long as you’re not breaking any laws and both partners are happy. Ashley, you talk about this all the time, that you partnered with someone to where you put the money up for the deal, and you’re not getting any cashflow from it, right, but you’re playing that situation with the equity. So, that totally works, AJ. If you find someone that says, I like this area, I like this house and I just want the equity play, then you don’t even have to worry about paying them back, right. Or maybe you say, hey, we’re going to buy this house and we’re going to hold it for five years, and then when we sell, maybe that partner gets all of their capital back at that point, plus whatever interest has accrued.
Or, hey, we’re going to say, hey, AJ’s managing the property on a daily basis, he gets a hundred dollars a month in management fees, then all of the additional cashflow goes to the partner and so the partner’s paid back. So you can get as creative as you want, AJ, with how you structure this partnership. At the of the day, all that matters is that you and the partner are both happy and that the property itself can produce a positive return.

Ashley Kehr:
Awesome, Tony. Yeah, that’s great advice. That’s the hard thing though, is that there’s so many different ways to do a real estate investing. So many different ways to get money, so many different ways to structure a partnership and really, it’s just making sure it’s legal and that it works for you and your partner. And also feel free to post in the Real Estate Rookie Facebook group. Maybe some options that you’re thinking of doing for this partnership and put it in there and just get people’s opinion and advice on it there of ways you’re thinking of structuring it. Tony, anything else to add?

Tony Robinson:
No, I think we hit it all, ash. I’m excited to see where this one turns out, AJ. So if you do get that deal in the contract, just shoot us a note. If, actually AJ do me a favor, go into the Real Estate Rookie Facebook group that Ashley just mentioned, and when you do finally buy this property, just drop a little comment or drop a post there, let us know how you actually end up structuring it.

Ashley Kehr:
Well, thank you guys so much for listening. I’m Ashley, @wealthfromrentals and he’s Tony, @tonyjrobinson on Insta and we’ll be back on Wednesday with a guest, and let’s hear something from Bigger Pockets that will provide you guys, the rookie is so much value.

 

 



2022-02-26 07:02:20

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Prices Continue to Climb in the Calgary Housing Market

The Calgary housing market miraculously succeeded in balancing affordability with conservative growth throughout the course of the pandemic. But the city might be joining its other major urban counterparts, as Calgary’s housing sector sizzles.

It was no secret that Calgary was late to the red-hot pandemic-era nationwide real estate boom. The coronavirus public health crisis and the collapse in energy prices posed challenges to the Alberta real estate market overall. But times have changed as more people see opportunities in this dynamic Western Canada city,

And while Calgary once served as an affordable alternative for prospective homeowners, recent price and sales growth have caused the housing market to heat up. So, in a rising-rate environment and oil prices trading at their highest levels in eight years, might the Calgary housing market about to boom?

The answer to that question may rest in the market data. Let’s look at how a hot 2021 wrapped up, and what could lie ahead.

Prices Continued to Climb in the Heated Calgary Housing Market

According to the Calgary Real Estate Board (CREB), residential sales surged 44.9 per cent in December 2021 on a year-over-year basis, totalling 1,737 units. The strong performance in December added to the record year for the Calgary housing market, with sales activity soaring close to 72 per cent, to 27,686 units in 2021.

The total residential sales price advanced at an annualized rate of 10.1 per cent to $463,900. All property types witnessed exceptional gains to finish the year:

  • Detached: +11.9% to $547,300
  • Semi-Detached: +9.9% to $432,400
  • Townhome: +7.4% to $300,100
  • Apartment: +2.9% to $252,00

Last year, the total benchmark price climbed a little more than eight per cent to $451,567, short of the annual record in 2015.

Supply became an important factor for Calgary real estate in December.

New residential listings rose 4.9 per cent year-over-year to 1,230 units. Active residential listings tumbled 29 per cent to 2,608 units. The months of inventory, which measures the number of months it would take to exhaust current supply of listings at the present level of sales activity, declined 51 per cent to 1.5.

“Concerns over inflation and rising lending rates likely created more urgency with buyers over the past few months. However, as is the case in many other cities, the supply has not kept pace with the demand, causing strong price growth,” said CREB® Chief Economist Ann-Marie Lurie in a news release.

CREB warns that the Calgary real estate market can expect some of the tightest conditions on record this year, something that could accelerate the city’s housing prices and diminish its affordability status.

But the positive trend is that more supply is coming online as new housing construction intensifies.

According to Canada Mortgage and Housing Corporation (CMHC), housing starts soared 103 per cent year-over-year to 2,192 units in November. In the first 11 months of 2021, housing starts increased 65.1 per cent to 13,862 units compared to the same period in 2020.

But how did the surrounding areas perform in December on a year-over-year basis?

Airdrie

  • Sales: +30.3% to 116
  • Price: +13.2% to $398,100
  • Active Listings: -62.7% to 82 units
  • Months of Supply: -71.4% to 0.71

Cochrane

  • Sales: +5.9% to 72
  • Price: +9.5% to $460,300
  • Active Listings: -60% to 60 units
  • Months of Supply: -62.2% to 0.83

Okotoks

  • Sales: +17.5% to 47
  • Price: +5.9% to $476,300
  • Active Listings: -39.7% to 38 units
  • Months of Supply: -48.7% to 0.81

Unlike Toronto and Vancouver, Calgary is retaining young professionals and attracting young first-time homebuyers from other big cities across Canada.

Will 2022 Repeat This Performance?

While Calgary is experiencing an exceptional housing boom, the Canadian real estate market is forecast to balloon more than nine per cent this year. In Calgary, housing prices are forecast to grow 2.5 per cent to $506,685, with the number of sales estimated to jump four per cent, according to the 2022 Canadian Housing Market Outlook Report.

With a rebounding economy, a resurgence in the oil and gas sector, and more Canadians trying to find more affordable housing options, experts say that Calgary is one of the few remaining large markets with price tags that won’t send your budget spinning.

Sources:

2022-02-26 01:08:37

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How to Quell Your Money Anxiety (Even as a High Earner!)

If you want to know how to save money, just look at your expenses. Odds are, if you’re like most people, you aren’t budgeting or tracking your expenses to a tee. But there’s no need to be so hard on yourself, even our money mages themselves, Scott Trench and Mindy Jensen don’t always write down every cent spent. That being said, if you’re planning for a big trip, different expenses, or a sudden life change (like leaving your job), there is no better time than NOW to start tracking your expenses. Today’s guest, TJ, knows this all too well.

TJ makes a phenomenal income and already has a multi-million dollar net worth. But, he still suffers from money anxiety and not knowing how much he’ll need to step away from full-time work. Not only that, TJ is planning to take his children on a two-year-long expedition around the globe, all while TJ and his wife aren’t bringing in their regular high incomes.

But he isn’t just relying on his salary for monthly cash flow. TJ has also invested in rental properties as well as real estate syndications—both of which are providing him thousands a month in passive cash flow. But, after the globe-trotting ends, will TJ have to find himself another job or can he happily ski his way to early retirement upon re-arrival?

Mindy:
Welcome to the BiggerPockets Money podcast, show number 278 Finance Friday edition. Where we interview TJ and talk about asset allocation and reducing spending.

TJ:
We have so many dynamic things in the future, and we’ve been so aggressive with our investments up to this point that I feel like if we’re going to go on this trip, that I should be more conservative going into it. But in the grand scheme of things, if I continue to invest in real estate over the next few years, that passive income will increase and hopefully help supplement more of the trip and make when we’re gone less of a stressor.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is shine bright like a diamond co-host, Scott Trench.

Scott:
That intro really has a nice ring to it. Thank you, Mindy.

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

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business, or make capital allocation decisions at the highest level, 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 so excited for today’s episode. I can’t wait for our listeners to hear it. In the beginning, TJ lists his salary and it is extremely high, but I want you to continue listening because at first I was like, wow, what are we going to tell this guy? We actually have a lot to say to him. We give him a lot of things to look into and a lot of things to consider when he is contemplating reducing his work time for the next couple of years or in a couple of years to go on a one or two year trip around the world with his kids. And there are a lot of things for him to consider, including reducing his spending, which is not something that you would normally suggest that to somebody with such a high income.

Scott:
Yeah, I thought this was a fascinating episode. Spoiler, TJ is worth two million bucks and earns over $300,000 in household income. Yet has some challenge is about the basic math of early retirement and what kind of flexibility that position affords him and his family with that. And I think it’s a really good reminder to kind of come back to basics and look at the very simple math of what is my spending, what is my net worth? How does that relate from the 4% rule for my passive income perspective and how do I get control on those things? Where is my lever around spend less, earn more, create or invest? And looking at his situation, I thought for sure it was going to be on the investing front and so did he, but I think it was really back to the basics of spending.
And there was a really important reason for that. It was a multi-million dollar decision as we’ll kind of unpack on the show for his particular financial position. And I think it’s a really… It’s just really fun and exciting to have these kinds of discussions with people who are really smart and really capable and really go looking for that key leverage point to help them achieve their life goals with this. I just had a blast in this one today. I hope it was helpful for TJ and I hope it’s helpful for everyone listening.

Mindy:
Yep. I completely agree. This is a lot of fun. Before we bring in TJ, my attorney makes me say the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott nor I, nor BiggerPockets is engaged in the provision of legal, tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal, tax and financial implications of any financial decision you contemplate.
TJ has invested and saved to prepare for a two year hiatus from work while his kids are still small. The family is to travel around and see the world and then come back and resume work, but in a different capacity. So TJ’s looking for asset allocation advice and commentary on his general plan. TJ, welcome to the BiggerPockets Money podcast. I’m super excited to dump into your numbers.

TJ:
It is surreal to be on this show with you guys. I’ve been following both of you for, I guess since day one, listen to every episode. So it’s awesome to be here.

Mindy:
Well, thanks for listening. Well, let’s share your numbers. What is your salary and where’s it going?

TJ:
Yeah. So on a given month, we bring in about 18 eight. We have a duplex and then we’re invested in some syndications and each of those bring in about a thousand. So just over 20 per month. And then we spend about 12 grand a month over the last 12 months average. So housing is 2,600, taxes I have in there for 2300, that’s the biggest item that was in there. Kids, we spend about 1500. Thankfully that’s on its way down, now that one of our oldest is in public schooling. We spend a lot on travel a month. So it’s like $1,400. That’s probably our non-negotiable, don’t touch it. Don’t talk about it. We love it. And then food is 980, shopping’s 950. Cars, we don’t have any car payments. That’s one of the first things that we got after when we first learned about FIRE. So just gas and driving to work basically and fuel for travel. Bills is 500, entertainments 350, and then just some miscellaneous stuff that gets us to that total number.

Scott:
What is your pre-tax income?

TJ:
Pre-tax, oh, I don’t have it on a monthly basis. Annualized, we’re about 330.

Scott:
Wow. And what general industry are you guys in?

TJ:
My wife is in engineering and I started in engineering and moved into operations management.

Scott:
Nice. Okay. Well, awesome. That’s a huge income with this. And you guys obviously bring in a lot more than you spend, even after fairly high spending in a couple of categories there. Where does the money go once you bring it in?

TJ:
Yeah. So when we first started learning about FIRE, I guess to back up a little bit. My mom was actually a financial advisor growing up, which was like the basis for everything that I even know about being smart with money. So kudos to mom for that. But basically, we had been maxing out both of our 401ks for the more recent time. And then we automatically invest at least for a while after tax and brokerage accounts. So we’ve been a hundred percent in index funds, total stock market basically from the time that we started working. I basically started right in the beginning of the housing crisis. So 2007, 2008, and my mom basically forced me to max out my 401k, like very early on. And obviously, we’ve been marching pretty high ever since then. And then the COVID dip obviously happened and we kept marching forward.
So I think the hard thing for us was we got a pretty high net worth in stocks. And I think it was like 2017, I started listening to BP, actually the regular real estate podcast before yours came out. And that kind of got me interested in real estate, both for diversification and I get a little nervous when you talk about FIRE and selling the principle of your investments. And so, one thing that I’m really interested it in from a real estate perspective is just the passive income that comes in and not having to worry about selling the assets basically to get the income to cover it. So over the last four years, we’ve been focused on diversifying away from just a hundred percent stocks. So we bought a duplex in 2019, did I’d say a pretty poor job of burying it.
I probably could have, but I didn’t know what it meant at the time. So bought it, renovated one side, started leasing both sides out and it’s done super well since then, appreciated a ton. In that timeframe was also when I had two kids. So I’ve got a six year old and a four year old and actively managing a duplex was not something my wife would advise ever again, but she was a trooper and it’s bringing in income. So that’s awesome. So that’s what got me into syndications. I think on BP was looking around trying to figure out other options, note investing, land, all these different things, and syndications came up and I pretty much dove in the deep end to try and learn as much as I could about it. So ever since then, we’ve continued to max out our 401ks and index funds and then all of our after tax money has gone into syndications.
So we’ve been investing in those. And I’ve been over the last few years, basically trying to figure out how to get as much money diversified into real estate compared to what I had in stock. So I refied our house and did a cash out refi with rates being as low as they are. And then I refied our duplex to take out the cash that we had into it to continue invest that equity back into real estate. So I’ve been trying to figure out how to get roughly 50% of our income passively or 50% of our spending covered with passive income. And then basically for the most part, been keeping our equity investments fairly aggressive with a small, like transition to some alternatives like gold, just with some of the things that are going on, but trying to stay away from bonds with how scary the market is right now.

Scott:
So can you walk us through the numbers here in your net worth statement?

TJ:
Yeah, so our cash holding. So I’m not a huge believer in emergency funds. I basically save up whatever I can in cash in our checking account to throw into our next investment, whether it’s a syndication or whatever. So we’ve got about 67 grand in cash and that’s about 50 grand in our checking account. And then I have a $15,000 like safe account for our duplex in case something crazy happens with maintenance. Then taxable accounts, we’ve got about 240, Roth IRA 100, traditional IRA 150, 401k 760, HSA, we’ve got 60, we’ve got about 815 in real estate and that’s equity between or assets like our primary and the duplex. And then we have 370 in syndications.
So on the asset side, we’ve got like 2.5 that doesn’t include our kids 529 accounts or my pension, but I don’t really know how to include those nor, I guess do I want to consider them available to me so I left them out. And then for liabilities, we’ve got roughly five grand in credit cards and then basically the two mortgages on our property and our duplex, which totals about 620. So we’re roughly right about two million for a net worth.

Scott:
Awesome. And you pay off that credit card debt every month, so that’s just like the balance you carry?

TJ:
Yeah. We try to charge absolutely everything we can to our Chase cards, to do some transitions for points and get three to one back on like the CSR rewards and stuff like that.

Scott:
Okay. Well, awesome. It looks like… What I’m hearing you say is… When you said 800 in real estate, was that the equity, your asset value of the primary?

TJ:
Good question. That was the asset value of the primaries and the duplex.

Scott:
So what’s the equity value of your real estate?

TJ:
Just a sec.

Scott:
Because I was going to say, you’re at 50/50 already if that’s the equity, but it’s not.

TJ:
Yeah. So in my primary I have 75 and then in our duplex we have 125. So we’re about 200 in equity.

Scott:
Aside from having 50% of your expenses covered from passive cash flow, what are your goals? What’s the best way you can help you today?

TJ:
Yeah, so I’ve got a trip planned here in like two and a half years. So unfortunately, my dad passed away when I was pretty young. And so I have this like deep perspective that FIRE is the only way you can buy back time. That’s like legitimately how I view FIRE. And so I’ve been marching as hard as humanly possible to maximize my income as has my wife so that we can enjoy our kids’ lives and the time we can get with them before they turn into teenagers and become little monsters, like everyone tells us. So we are planning a year abroad or two years abroad where we’re going to travel around the globe to hopefully just have this outstanding experience. And so we’re trying to figure out, both from an asset allocation perspective and when we come back and transition, hopefully to like more of a FIRE lifestyle where we work what we want, I’m looking for advice from you guys on asset allocation.
And if you have any advice on basically what I should do with my after tax spending. So after tax today, I have basically a hundred percent equities and real estate. And there’s things like I bonds where you can buy up to 10 grand per social security number. And those are fairly conservative, but I don’t really have a conservative after tax position other than the cash flow that I get from real estate. So I think we’ve got a fairly big nest egg after tax, but say we pull the plug in two years in the market tanks, the only thing I’ve got is the cash flow from real estate. So looking for your guys’ advice on what you’d recommend for where to invest the savings that we have over the next couple years to put us into the best position.

Scott:
I’m not fully understanding the question. The question for the next two years is to put yourself in the best position, from what perspective? Like wealth building, stable passive cashflow? Are you going to take a year or two off and then go back to work when your kids hit the monster years in 1516, if we get a little bit more detail, I think we can help a little bit more with that.

TJ:
Yeah. So our plan is to FIRE when we get back. So my hope is that we’re in a good enough financial position that we can afford the year and the two years away. And then when we come back, I want to be a mountain town guy that works as a ski patroller and does local search and rescue stuff. Like that would be my dream. So looking for, I guess, your financial advice for us to turn FIRE when we come back after that two years, but really the next two years, I’ve got 150K a year that I can save. And I don’t really… I can keep marching away at syndications, but I feel like I’m pretty aggressive. So I guess, do you think I’m too aggressive going into FIRE, knowing that I’m probably going to work a little bit when I get back or what would you recommend?

Scott:
Well, let’s start with this, you’re spending right now is 12,500 per month. Is that right?

TJ:
Mm-hmm (affirmative).

Scott:
So 12,000 per month, that’s going to be about $150,000 per year in spending, with what you’re currently spending. So if we extrapolate that out 150 times 25 is… One second, that’s 3.75 million. So you’re not FIRE and you’re still about 1.7 million away from FIRE if you are thinking about the 4% rule as a basic rule of thumb, right? And there’s a lot of reasons to like the 4% rule, which can include your pre-tax and post tax net worth because there’s that 60/40 equity to debt balanced portfolio. It’s proven or it has made it through 98% of historical situations, and it’s a pretty conservative rule of thumb there. So the first question I think we should start with is what’s your spending going to be while you’re doing this year or two abroad and what do you think it’s going to level out to long term post FIRE?

TJ:
Yeah, so I looked at the expenses that we would be able to reduce once my kids come back and they’re not in daycare and it gets down to like 8,500 a month. So our housing price per month is somewhat inflated because we’ve done a fair amount of renovations to our primary. So between our refi and getting our mortgage down and then having kids out of daycare, which is 30 grand a year, we get down to like 8,500 a month as a retirement spend. So that’s kind of what I’m targeting from a spend when we get back. And then we’ve basically budgeted for like $5,000 a month for the two years abroad.

Scott:
Okay. So the $5,000, if you’re saying $5,000 per month for the two year is abroad and are you still going to have your home, your mortgage payment and stuff from here? Are you going to rent it out or?

TJ:
I’m planning on renting it out.

Scott:
Okay. So you’re FIRE at $5,000 a month. You’re way past FIRE at $5,000 a month in spending. But if, again, doing the same basic math, if we’re looking at $8,500 per month in expenses that translates to 2.5 million, right? 8,500 times 12 is a hundred and some odd thousand times 25 is going to be 2.5 million. So you’re still a few hundred thousand dollars short, something that you could potentially come up with over the next two years from this. But just kind of looking at the very, very broad picture of basic back of the napkin math. I think that that spending number is your biggest variable in this journey, right? I mean, if you can get that number down, then the rest of this becomes that much easier, and you have that much better of a shot at being able to just your passive income to cover those expenses.

TJ:
What are your thoughts on how to include real estate income into your net worth statement or what your FIRE number is?

Scott:
Well, I think that… I don’t include real estate income in my net worth statement, I include the equity in that. And one of the great things about real estate is that it typically delivers a bigger yield than an equivalent investment in stocks or bonds. So for example, I think most real estate investors would be very disappointed with anything lower than a six to 10% cash in cash return from their assets with that. And so that’s a mechanism here. In the preview to the show, while we were talking about this before getting started here, I think you had mentioned that you were uncomfortable with spending the principle. Literally selling off portions of your equity position. Real estate’s a popular alternative, because you don’t have to make that choice and you can’t make that choice. You can’t sell off properties one by one to fund retirement, you have to spend just the income.
So in a lot of ways, a well-managerial real estate portfolio is more conservative than a stock and bond portfolio because you’re only spending a minority of the cash or you’re only spending a portion of the cash proceeds that the real estate deals are kicking off.

TJ:
And that’s, I guess when you talk about like the FIRE number, that’s one of the things that I’ve been struggling with is I get to like the roughly 2.5 number, and then I took our thousand dollars syndication income, our thousand dollars duplex income, multiply that by 12, and then multiply that by 25 to basically get a reduction in my FIRE number. At least that’s how I’m roughly thinking about it.
So, part of me in my mind was, you can either look at it at a monthly level and get to that 50 to 75% passive income coverage, or I was trying to figure out, what does the net worth total need to be to try and get to that point? So the hard part for me is I’m trying to really focus on the time of when my kids are a certain age as the point that we transition so that I can essentially have the time with them before their lives get crazy. And if that means that we do our two year trip and come back and need to go back to work, we’re A okay with that. Ideally, I would not want to just because I’ve been grinding pretty hard for the last 15 years, but that’s kind of the method behind why I was trying to drive to this three year out mark. Just so we can get them out and teach them as much as we can before they hit their teenage timeframe.

Scott:
I think it’s a fantastic goal, and I think there’s no reason you can’t achieve that. And most likely have… I think even at this point, right… Let’s talk about the 4% rule. In most scenarios in history if you started out with a portfolio and sort of withdrawing at a 4% threshold, you end up with more wealth at the end of a 30 year period than you began with. So even if you left right now with your current portfolio and stopped working for several years, odds are that you’d actually end up exiting every year period, work hiatus with more wealth or it’d be closer, because you’re probably at like a 5% rule with the $8,500 a month in spending. But it’d be pretty close and you’d probably be break even or substantially better over that period with this.
So I’m still dancing around your primary question here, which is how should you allocate your capital? But I’m trying to think about your overall situation and your goals to kind of come up with that approach. And I think it’s going to be way more art than science in your case, because it’s going to depend on your risk tolerance and how you want to play some certain probabilities with this. Do you want to come in, leave and have a perfectly stable forever financial position? Well, that’s where you de-leverage, you pay off some properties and you shoot past that number or you’re willing to have that part to time work to help supplement some of that. Do you want to play the best long term game? That might work out where you have way more wealth at the end of the period. It also could mean that you’re going to have to go back to work after a four or five year hiatus with that.
So I think those are the philosophical questions you’ve probably grappled with many, many times, and that we’re not going to have, I don’t a silver bullet for on the show today. But it’s fun to think about and we can maybe begin zeroing in a little bit.

Mindy:
Well, I have a lot of questions and Scott, you’ve been doing all the talking, so now it’s my turn. You said you don’t want to sell your assets in retirement. So I’m wondering why you don’t want to sell your assets in retirement and are there any dividends in your after tax stock holdings?

TJ:
Yeah, I’m okay, I guess selling assets. I just, when you look at like the stock market, I never really understood how real estate and passive income actually worked. And now that I have the repeatable income, ideally for me, I’m like, if I can let that ride and have my real estate income be the conservative part of my portfolio, I like having the upside with the stocks. So I don’t have anything heavy into dividends. VTSAX gives you what a quarterly dividend of whatever that is, but I have that kicking out to my taxable account right now, so I can do more real estate with. So for me, I’m mostly interested or driven right now about this syndication space, but I think that’s because it’s new and fresh to me and I’ve been passively investing in the stock market however long. So I’m a little nervous about continuing to run down this syndication space just because it is still pretty new to me, but I do like the diversification opportunities that it provides.

Mindy:
Okay. So some of the issues that I have had personally with syndications is that it can be kind of hard to find a deal. They, the syndicators present this really great picture, but then sometimes when you dive a little bit deeper, what they’re saying actually isn’t all that good or what they’re promising isn’t actually realistic. So I have actually had a hard time finding some syndications. Are you able to easily find syndications that look really good when you start doing research in them? And have you… You said you’ve listened to all the episodes. Have you listened to the J. Scott epic two hour, all about syndications episode.

TJ:
You needed to do that like a year earlier because I had to like, self-educate on everything and then he’d did this super eloquent podcast with you guys and basically walked through it in perfect detail. So yeah, I did listen to that one. I saved it. It’s one of my favorites. So I do have some fairly reliable performing, I would say like syndicators right now. They’ve been very trustworthy and they’ve delivered on their expect so far, but that’s taken three years of research and interviewing people that they’ve invested in and reviewing all their past deals and they are still performing well. So I have no reason to doubt them other than I just, it’s a small group of people so far that I’m trusting enough to invest in.
So I’m basically concerned about branching out even further just because it feels risky knowing… You know, you’ve said it before Mindy and you’ve had some experiences, so I’m like, oh, am I going to get caught on one of these? And so the hard part is it’s like the stock market’s overvalued, real estate’s overvalued, interest rates are increasing. So bonds are kind of a terrible place to put your money. So it’s like, I don’t really like Bitcoin that scares me. It feels like a risk. So for me, it’s like, I’ve put some money in gold, but in the grand scheme of things, there aren’t that many safe places to put money right now. And so, yeah.

Mindy:
Yeah. Well, and that’s the thing, there aren’t that many safe places to put money. If you want safe, we can give you safe options, but those don’t come with exponential growth options too. So that’s where the trade off is. Your syndicates that you’ve been working with, do they have any new deals on the horizon? I would reach out to them and ask them because I’m having a hard time finding new deals that are worth doing right now.
So if you have an opportunity to do that, that’s kind of a, I don’t want to say a no brainer, but that seems like an easy way to continue with your diversification is investing with people that you trust, who you seen firsthand they’re doing great work. I would caution you to make sure that you’re reading through all of the documents just as if you were joining for the first time again, because every deal’s different and you want to make sure that they aren’t promising you the world. And then, oh, wow. That was really attainable when you go back and look at it after you’ve lost money. You’re like, what were they promising? Oh yeah, that wouldn’t have worked. So you mentioned a pension as well. Do you have a government pension or a private pension?

TJ:
It is a private pension.

Mindy:
Okay. Oh, I’m sorry. I meant to say that was episode 219 that we interviewed with J. Scott on the syndications. Episode 259 we talked about pensions with Grumpus Maximus. And this is a private pension that can be a little risky. How stable is the company? Is GE going to go out of business? Is IBM going to go out of business? Is, I guess Apple doesn’t have a pension, but like those old companies that have been around forever could have a pension forever, or they could go bankrupt tomorrow. And the government pensions are more solid and if they go out of business and there’s a whole lot of problems. But do you have the option to buy out your pension? Do you like your pension? Those are things that you’re going to have to look into but I think you said that kicks in at 65.

TJ:
Yeah. It kicks in at 65. It’s 116 year old company. It’s private. And they actually stopped offering pensions the year after I started. So when I started, I didn’t even know what a pension was. My mom, the advisor is like, this is amazing. And I no fricking idea. I was just glad to have a job in 2007 when the market was tanking. And so they do have an estimator that you can basically run simulations as to if I quit right now, withdrew, starting at age 65, what it’s going to be. The pension is currently overfunded, which, makes me feel somewhat good. But it’s hard to know if that’s going to continue, I mean, they’ve got to obviously be obligated to those payments for a long time. But yeah, as of the last few years through COVID, we work in an environment where we’ve done very, very well.
And they’ve used a lot of that profit to put it back into ensuring that our pension is fully funded. So that makes me feel good about it. But everything I hear about non-government pensions makes me kind of think twice about it. But at age 65, that’s like $39,000 a year that it’s projecting back into my pocket, which is an insane amount of money that I can’t even, I don’t even really believe it. But they don’t offer a buyout option. So if I leave the company in two, three years, I need to remember when I turn 65 to sign up and get it going again. So, yeah, I’ve got a big red flag right there to make sure that I follow up on that when it’s time.

Mindy:
Yeah. If you leave the company, could you come back to the company? Would you continue to get the pension because you started, when they still had a pension? When you leave, could you take a leave of absence instead of quit all together? And these are just research opportunities for you.

TJ:
Yeah. That’s a good question.

Mindy:
Because that doesn’t obligate you to come back, but you could come back. Maybe you go around the world and you spend two solid years with your kids and you’re like, that was super fun. Can’t wait till they’re in school and I can go back to work. 24/7 with your kids is amazing and then sometimes it’s nice to have a little bit of a break. And I hope that doesn’t make me sound like a horrible person, but it does. I’ve just spent two years with the kids.

TJ:
Yeah. We tried it out this summer. We did a two week road trip with our kids in a camper van across Canada. And looking back on it was awesome. In the moment, there was definitely some times where we needed to escape into the woods, one parent at a time to escape the craziness that’s for sure.

Mindy:
Yeah. I mean, everybody needs downtime, but that’s just an idea if you can take a leave of absence, because I mean, you said you’ve worked there for 15 years. If you can take a leave of absence and then come back and decide, you know what? I do want to continue on with this job. Maybe that doesn’t put a hiccup in your pension, because I can see them saying, well, you left so now you’re a new hire. So now we don’t give you pensions anymore. So all you have is the 15 years of pension, instead of whatever.
You made a comment about an emergency fund. And I’m going to agree with you. I don’t have an emergency fund, but I also have a lot of buckets I can pull from if I needed to fund an emergency. So I can fund an emergency. Therefore, I don’t need an emergency fund. Does that make sense? I’m not explaining that right. But, yeah. I agree with you, but I do want to caution people who are listening, if you cannot easily fund an emergency, then you should have an emergency fund. And you even said you have $15,000 for your duplex, should something big and wampy, need to be replaced right away.

TJ:
Yeah. And I might need to revisit that once we get closer, because I’ve also got a nice savings rate right now that allows us to float. If something crazy came up, we could float. Just wait a month or put it on a credit card and pay it off the next month and it wouldn’t destroy me.

Mindy:
Yeah. Who’s managing the property right now?

TJ:
We just transitioned to a property manager a year ago because it was the first year was pretty rough. We renovated one side. There was some work that wasn’t done correctly and the tenant had a fair amount of things that needed following up on. And so that was a lot for me. And then for a modest fee now, it’s easily managed and the last two years have been outstanding. It’s been super seamless.

Mindy:
Okay. So are you open to buying more real estate that way? Because with the syndication, you’re making a thousand dollars a month or the syndications, you’re making a thousand dollars a month and you will have the upside whenever they sell, but you don’t really get much of a say when they sell, which is-

TJ:
Correct.

Mindy:
… Kind of my… On the one hand, I’m super excited when the non-performing one sells. But on the other hand, I am kind of bummed when the really well performing one sells. Yeah, I just got a big influx of cash, but those monthly checks you were sending me were really nice, because they were like over and above what I was expecting. So with a duplex that you own, you get to decide when you sell, you get the appreciation, the price appreciation and in your market, is there price appreciation or is it more cash flow?

TJ:
It’s, in the area that I have one in, it’s mostly appreciation.

Mindy:
Okay.

TJ:
So the cash flow like our rent increases haven’t been that significant if you look at like the market rent in the area, but I’ve been struggling with exactly what you’re mentioning Mindy. I’ve got this one duplex and I’ve been getting like an 11 and a half percent return year over year, which has been super reliable. And I have the mortgage in my name and going through these syndications, I don’t necessarily see as much control or direct influence as I can provide on the duplex. But I feel like I’ve done so much research in that space now, that the amount of time it would be to find a good deal in the duplex space is kind of why I haven’t gone that route. I was actually considering selling my duplex to even go more passive, but it’s like, I don’t know what you guys think about that. It’s like, I’m getting an 11% return. Over the last two years I’ve had zero maintenance issues. It seems like I should just set that and forget it and never really deal with it again.

Scott:
And just hearing all of this, I’m kind of, I think I’m putting the pieces together for overall what’s going on here. For you’re spending and I know I’ve already a harp in this. But you’re spending $12,500 a month, which implies a 3.7 million net worth with a 4% rule. It also implies that you need 150,000 or 12 and a half thousand dollars in passive real estate income per month with that. A syndication investing will general and there’s a myriad of op out there. So you can go in a bunch of different directions. But on the one hand you might get a preferred return of like six to eight to 10%, depending on which syndicated you go with. And that’s going to get you a certain yield that you can predictably spend each month with the duration of that investment.
And the second is you’re going to be more like an equity partner where you’re going to get very small yields in the initial years while the property is getting stabilized and turned around and then a big payday when the property is sold for that. And so with one of those, you’re going to need a cash flow situation or a big savings account to be able to weather those periods in between and with the other, you’re going to need a much greater net worth, right? You’re still to need… You’re going to need 1.5 million in syndication equity at 10% yield to get you that passive cashflow. And so that’s where I kind of keep zooming back to the fundamentals with this is. I think what your question is am I close to being done and what’s that conservative way position my portfolio to cover my expenses with that?
And I think my, maybe harsh or blunt reaction to that is you’re not that close to being done with your current situation with this, unless you can change that spending profile to something that is going to make that math a lot easier, right? You have a tremendous net worth, but you earn, you said $330,000 per year in income. And I bet that might be understating it to a certain degree if there’s upside from 401k matches and your rental properties and appreciation and maybe other things that are going on and me… well, I’ll stop there for a second. Am I painting a reasonably close to accurate picture with the situation, TJ?

TJ:
Yeah. Yeah.

Scott:
Okay, great. If that’s the case, then I think we come right back and say, I think it’s back to that as fundamentals and saying, what is my spending truly going to be post retirement, when I come back from this trip and how do I put that in a position that’s at this level? And from there, okay, if I want it to be 8,500 or $10,000 a month, then I need to figure out how or what I can do when I come back, that’s conducive to my goal of being with my family, but it might not be being a ski instructor in the winter. It might be, I’m going to start a small business that has that capacity to generate… I’m going to buy a small business for 200, $300,000 that has that capacity to generate 150, $200,000 in income and gives me that lifestyle flexibility with that. Right? So there’s a lot of really good options. The world is your oyster. You’re crushing it on the income front. You’ve got this fantastic net worth. You’ve got it in all the right places from all these different types of things.
It’s just not quite at that threshold to fund $150,000 in spending or even a hundred thousand super duper conservatively so you’d never have to shut off the worry switch ever again. How’s that for try it first as the overall situation?

TJ:
I love it. I think the hard part is we have so many dynamic things in the future and we’ve been so aggressive with our investments up to this point that I feel like if we’re going to go on this trip, that I should be more conservative going into it. But in the grand scheme of things, if I continue to invest in real estate over the next few years, that passive income will increase and hopefully help supplement more of the trip and make when we’re gone less of a stressor.

Scott:
Well, I think also the conservative side of thing is your plan after retirement is probably, well, it’s almost certainly within one spouse’s income generation threshold with this. You’ve built a net worth of two million already with this. So your position is… Whatever you’re doing is working to a tremendous degree. So I don’t think you’ve taken undue risk with your investments, but that they just mean… They’re not going to… If you repositioned everything into a hyper conservative portfolio, right, you’d have your two million bucks invested in something that might generate a two or 3% safe yield. And at that point, two or 3% safe yield is just not going to come anywhere close to covering the expenses that you’ve outlined for your family or for your long term situation. So I don’t think that would be a good option.
That’s a good option for, we had somebody on the show a few weeks ago, Mindy, who wanted to move to the Midwest and was super clear about that. They were on the East Coast. They wanted to move to the Midwest, buy a home in cash and be done and live in a small town where they grew up and raise their family with that. And like two million bucks conservatively managed with a couple of paid off properties is perfect for that. They’re absolutely, you’re done. Game over, never have to worry again with that. Probably not for Park City, Utah, or whatever you want retire as a ski bum.

TJ:
Yeah. And I think the hard part for me is it’s been so easy to invest aggressively because I believe so much in the market going up. And as we even like remotely come close to this transition, I get like terrified of what had actually me and if the market drops 40% tomorrow. So I just need to continue to focus on the plan that’s going, that’s working and just be confident in the fact that I’ve got three more years. And when we do our trip, if we come back and I need to do another job that is also supplemented with some fun time in the mountains, that it’ll all work out. I just, I’m a very like nitpicky person at all of my decisions that I’ve made with personal finance. So it’s hard for me to make a change because everything’s just been going well. And I’m anxious about making a mistake or going down the wrong path and undoing the last 15 years of acceptable or successful performance. You know what I mean?

Scott:
Well, let me try to psychoanalyze you here on the show, one extra degree here with this, right. I also think you generate such a tremendously high income that it’s just like, that’s always the ace in the hole, in your financial situation is at any point you can generate this $330,000 per year income, perhaps too… I don’t know, whatever you’re earning personally with that. But because you can generate this extraordinarily high income, it just lets everything else kind of fall into place. You can have this nice bucket to spend and why shouldn’t you, your spending is not unhealthy relative to your income, right? And you do a great job on that. And you’re able to still max out your 401k, max out a bunch of after tax buckets, invest in syndications and fund your travel that you like with you and you and your family.
And with that ACE in the whole, why would you invest conservatively? Right? I mean, you’ve got, I don’t know exactly how old you are with this, 50 more years of prime production capability in you with this. So that I think is the challenge with FIRE to a certain degree for someone like yourself is because that income generation is not effortless, but something that’s so clearly within your capability set, and probably you’re not even approaching what you would peak at if you were to stay at the job for another five to 10 years, it just makes that investment situation so difficult. Or not so difficult, it makes it so easy to comfortably invest in really aggressive alternatives. Versus when you leave the job, that’s terrifying because what is the equivalent of a, I don’t know, what’s 25 times 330,000?

TJ:
That’s a lot of money.

Scott:
That’s eight million bucks in income generation over the next 25 years, right. That’s going to evaporate. That’s what’s terrifying and that is scary. And that should be scary. So that’s the trade off or the challenge of FIRE for someone like yourself is you’ve won most of the game, but the trade off is you’re not going to generate that eight and a half million bucks from your income. And you’re going to have to instead get comfortable with living off of a minority of the cash flows from your investment portfolio with it. That’s the philosophical challenge, I think you’re going to have to grapple with on this and game is not over at 12 and a half thousand dollars in spending. It may be over $8,000 in spending, but it’ll be fairly close. It’s definitely over at less spending. And also, it doesn’t have to be over necessarily either. If you like what you do and you want to return to work when your kids reach the monster years as [inaudible 00:43:02].

TJ:
Well, and that’s the hard part is I feel like I’m struggling with giving up this great high side and income opportunity as a trade off for the time with my kids. And I see, and my drive has been to try and come back that trip and really work for a passion. So I’m trying my best to full throttle up until that point. So that when I come back, I can be lower stress and less anxiety. I think I carry a ton of mental health challenges because of my job and how much stress I put on myself. So there’s a health factor to all of this, that I haven’t really come to grips with until lately and it can be terrible.
So it’s like, I’m in this tough spot where I’ve got this amazing income, but I’m scarred from all this history that I have with thinking I’m going to die at 55. So I’m like, kind of in this tough spot where I want to prior prioritize as much time as I can with my kids. And I can’t let go of the fact that I think when I come back, I can’t go back to work. And that’s totally a super easy option. And it’s what everybody does and it’s what I do every day today. So I should be a little less hard on myself that I’m like a hundred miles an hour to this finish line when I’m arbitrarily creating it for myself.

Mindy:
Okay. It sounds like I’m talking to my husband right now.

TJ:
Uh-oh, I don’t own any Tesla.

Mindy:
He did not have this level of income. And I still considered us to be high income and we spent significantly less. And he was having a really hard time coming to terms with quitting this well paying job, because he grew up financially insecure. His dad was a union electrician in Chicago and all summer long he’d work and then every winter he would get laid off. I mean, like clockwork. And at one point his parents sat him and his sister down and said, Hey, dad lost his job again. And they’re like, yeah, whatever. We’re not going to lose the house. And they’re like, well, we don’t think we’re going to lose the house. And he was like, wait, what? I didn’t even know that was a possibility we could lose our house. So he’s like, why would I quit this amazing paying job when I grew up financially insecure?
Why would I… Like who am I to say, no, I don’t need to work anymore? So he really struggled with that. We hit our FIRE number and he continued to work. And I think he worked for another year or year and a half. The numbers are now kind of hazy. And after, I had a job and he was able to leave because I had a job. As soon as he left, like a week later, he’s like, man, I should have done this so much sooner. And I have all these things I want to do. And the money has… I mean, yes, he calls himself wife-fire and which is fine. I do have a job.

Scott:
That’s another good option for you.

Mindy:
Yeah.

TJ:
Yeah. Right.

Mindy:
[Inaudible 00:46:05], maybe you can flip flop. But he wasn’t able to leave until there was a safety net and you have a really good safety net. You make $330,000 a year. That’s a lot of money and it can be difficult to change your thinking to where you feel like, oh, well, why do I need a budget? I make so much money? But I’m right there with Scott. I didn’t get a chance to harp on you about your spending and yet, but I see that as like on the surface, you make a great income, you don’t need to budget. But you don’t want to continue to work forever. I challenge you to start tracking your spending very, very carefully and see what are you spending on that you could stop spending on that doesn’t have any effect on your life?
How often are you going out to restaurants? Can you call that back and not have a difference in your life? I’m trying to see, you’ve got $1,200 for shopping. I don’t know what that is. I’m not judging. I’m judging you, but I’m not judging you. Like this is something you need to look at. Food and dining, 957 for four people. That’s probably going to be okay. Health and fitness, you’ve got almost $500. What is that for? Is that for a personal trainer every single week? Do you really need that? Or is that for like some hoity-toity gym membership? Is there another gym membership that they still have weights there too, or whatever you’re doing. Bills and utilities, that’s probably not going to be able to be something you can cut back on. Entertainment, we’ve got $450. That’s something that could be cut back on. Instead of going out to the movies every Friday night, maybe you have Friday night, we make pizza at home and play games.
Our kids love making pizza at home because then they get to make the pizza and it’s super fun for them. And they love playing the games like board games and stuff, because they’re just sitting there and we’re having fun together. You said, travel is non-negotiable, don’t talk about it. Don’t touch it. I even type that in because that’s $1,400. How much could you cut that back and not change your life? Like, what does that mean? Are you flying someplace every single month? Does that… And these are all research opportunities for you. You’re not responsible… You don’t answer to me. There is something that you put in when you applied, you put uncategorized $2,000. That seems like a really good place to look into. And I’m not trying to make you feel bad. I’m just giving you ways to look at this because I’m looking at my spending.
I’m doing this year long spending tracker, publicly tracking my spending. You could follow along at biggerpockets.com/Mindysbudget. This is my first month. We’re recording this January. This is my first month. And one, two, three, four. I already have five categories that I am over budget in, simply because I haven’t tracked it in a really long time. And some weird things happen. Like I needed a new windshield washer pump, and that’s why my auto is going overboard right now. But there are that like is now it’s a game to me. How low can I get my spending? And it isn’t because I’m in fear of running out of money. It’s because I want to make sure that my FIRE number is actually doable. I planned for this level of spending and last year was this level plus like a whole nother level.
And it happens when you don’t track it all of a sudden just kind of goes away. So I’m wondering what sort of spending you can cut out without changing your life. I mean, you can cut out a whole lot and change your total life. And peanut butter and jelly and rice and beans, you never go anywhere and you don’t have any fun. And that would suck and you wouldn’t want to do it. And you would get a lot of pushback from your family. But I am in agreement with Scott, that I think that there are a lot of things to cut in the expenses that would help you feel better about the delta between what you’re spending and what you’re bringing in and your net worth versus your FIRE number. And you could go be a ski bum in Park City, Utah, where it’s going to cost a lot of money to buy a property. But when that’s your only expense, like you’ve got $3,000 in mortgage payments where you’re at currently, you could get a really sweet house in Park City, Utah for $3,000 a month.

Scott:
At the beginning of this whole conversation for the last couple minute moments here, we talked about margin of safety and your margin of safety is your job. You don’t have a good margin of safety, in my opinion, in your personal financial situation outside of that. You have a four month emergency reserve, which is good, but it’s going to keep you up at night if you’re thinking about quitting your job in that context with this. Your passive income is $2,000 a month outside of your retirement accounts with that. And so that’s also going to keep you up at night, I think overall with that. And there’s two ways to build out that runway component of this. One is to spend less because that allows you to accumulate more and the other is capital allocation, right?
Actually spending less does two things, right? It allows you to… If you cut your spending from 12 to eight, your current emergency reserve goes from four months to six or seven months, right. Just see how you do that. And the other way to do it is to allocate your capital and drive that passive income. And we just said that in order to your expenses here, you need 1.5 million dollars in real estate equity, generating a 10% cash in cash yield, which is either going to take a lot of work or put you into a high risk investment category. If you’re going to get that in a preferred rate in a way that you can kind of predictably rely around. That’s a hard goal. That’s 10 more years or six to 10 more years of kind of what you’re doing with a lot of this stuff.
The other component and directly related to what Mindy was just going through is if you can go line by line through your spending, you don’t have to make all of those changes today. Your situation doesn’t call for it. You earn plenty of income to justify those different types of things. And I get it, right. You can’t take a vacation… You can’t go skiing on Tuesday with your job, right? Like, I’m almost in a pretty similar situation to you in some ways with this. If you want to take a nice long vacation, you’ve got to do it a very prime three day holiday weekend when rates for your travel are going to be through the roof, right? You’re going to go visit your family for Christmas, you’ve got to take the flights, or Thanksgiving, you got to take the flights around those times to make sure you can meet that holiday expectation.
Well, when you retire and become a ski bum in Park City, you can take that… Like that travel expense is going to change because you don’t need to take that vacation on that prime three day weekend, right? You don’t need to take the flights the day before Thanksgiving and come back on Saturday or Sunday of that long weekend. You can do it on your own schedule, combine another trip or something like that. So if you can really go line by line through those expenses and say, no, no. It’s nonnegotiable for me today because I need it to preserve my sanity in the next two years. Fine. Like, I get that, a hundred percent. I can empathize, but also think about what’s in next in two or three years where that budget may be very negotiable, right?
And if that’s the cost of sleeping well at night and feeling you can have those two years or three years or five years, or however long it is with your kids fully present, then maybe that’s the cost of it. And I think that’s, that’s a way to think through that expense category and which I think is the biggest leverage in your peace of mind category. It’s certainly not the biggest leverage in your, how do I get to the maximum net worth in 25 years. But if you’re trying to be done in two years, that will be the case. And then lastly, wrap all that up. I would say that the concept of flexibility, which we’ve talked about a few times on the show, I think is something that you should really internalize and think through because your situation currently is not very flexible.
In spite of the great net worth you’ve built with this, you only have four months of runway, four or five, depending on how you want to think about that passive cash flow. And I think if you could build that out to a year or two years, you’re going to feel a whole lot better looking at the other side of it. Even if it may not be the highest return use of capital you have there, and that flexibility can come in the form of additional cash or equivalence with that, it can come in the form of just slowly building out your passive cash flow, like you just said, and it can come in the form of reducing your expenses. A combination of all three is going to be the most powerful.

TJ:
You guys are awesome. The spending concepts or comments are awesome. I was so focused on like the big three in the beginning. So like paid off our cars and I’m driving like a 2000, I’ve got like a 300,000 mile car on it because I have this like love for cheap vehicles and it still works, so why buy a new one? And I refied our house and focused on like the big things, but then that’s kind of where I stopped. So over the last like four months, I’ve been focusing pretty heavily on trying to get at some of these smaller categories. And I don’t know how familiar guys are with Mint, but they’re is that like view over your net worth. And then you can swipe to the side and you actually see your monthly spending. I have never really looked at that on the spending side.
I’ve always been like looking at the net worth, what can I do to maximize it? And now that I… They’ve got that stupid little dotted line that says you’re $113 more than last month. That’s like what I look at every morning now, so I can see every transaction so I can start to challenge myself. So I’ve been doing really good for four months, but our 12 month average is still the 12 grand. So we’ve got a couple house modeling things that are going to fall off. And then I’m hoping that I can see some continued stability as we focus on being more intentional with some of these things that we’re not on today. We’re just, we’re doing whatever we want. And aside from the big housing, car, and I guess those are the big ones that we’ve done stuff on, we haven’t really made a bunch of effort on the others. So it seems like an awesome two years, I need to keep grinding on understanding exactly where each of those dollars are going.

Scott:
Yeah. And again, you don’t have to have like, oh, I got to cut back tomorrow. You don’t need to do that with your current situation. You just need to do it, you need to be ready to do it when you leave your job and you’re going to be trading, Hey, I’m not going to earn that high income. So I need to be totally in control of my expenses when I leave the job in order to do that. So it may not be practical for you to run a super tight household ship if the hours are crazy long in the short run, I don’t know.

Mindy:
Okay. I have a couple more comments before we get out of here. You asked if you should sell your duplex to fund more syndication investments, or if you should look for more duplexes? And I would say, reach out to your real estate agent and have them set you up to receive listings, because if some smoking hot deal comes on the market and you’re not getting these listings, you’re not going to know about it. I would be prepared to act on something because you know what you for this property, you know what the rents come in at. I would even make it kind of a tight little circle for where you’re looking and just be prepared to act if some amazing deal comes up. And if your duplex is on a street with other duplexes, I would send a letter to all of the owners of all of those duplexes around you, Hey, if you’re thinking about selling, I’m looking to buy and see what happens.
I mean, if they come back and say, Hey, we want four million for you. You’d be like, yeah, I like that, here’s my agent. But if they’re like, hey, we want $4 more than you pay for yours. Okay, that sounds like a great deal. How can we make this… How can we connect? But if you’re not looking for a deal, you’re not going to know there’s a really great deal out there while you continue to look for syndication deals from your trusted syndicators, as well as maybe branching out into other syndicators because maybe somebody has a great deal. I am personally not super excited about syndications right now, but that’s just because I’m not finding these. As soon as we stop recording, I’m going to be like, who’s your syndicator?

Scott:
Yeah. Another thing to consider about the real estate is that when you leave your job or on sabbatical or whatever that is with this, you’re no longer going to be able to as easily get mortgages in the way that you’re used to. So that would be a vote in favor of it doesn’t really change the game, a syndication versus a regular real estate investing, but it might be a small vote in favor of waiting that just a nudge higher in your overall portfolio because that will be an option available to you now very powerfully in a way that it won’t be, or may not be if you carry through your plan in a few years.

TJ:
Yeah, we’ve actually been considering if we could align on the long term location where we want to live, do we buy that property now while our income can cover it and then rent it out for the two years while we’re gone so that we can get some income and then not have to deal with getting a mortgage on it when we move back.

Mindy:
That’s a really good point, too.

Scott:
Great. So you’re already considering that whole thing. So that’s great.

Mindy:
Okay. TJ, is there anything else we can talk about before we let you go today?

TJ:
I don’t think so. This was an awesome conversation, you guys.

Mindy:
This was a lot of fun. Yeah, I feel like we gave you a lot of things to think about, a lot things to talk with your wife about and a lot of things to look into, which is kind of the whole purpose of the show. So this was great.

Scott:
This was, I think it was a great conversation. Thanks for bringing this all to the table. I think it was, it ended up being a tough conversation. I was optimistic coming in that there would be, oh, we just put, invest here. Boom, boom, boom done, done, done. But I think it ended up being a little bit more nuanced than that, but I think… I hope it was helpful. And I think it was honest from my perspective about how I’m reading your overall situation.

TJ:
Yeah, it was hard. I have a lot of like internal challenges with myself and like getting to here and being successful and not letting the family down, being accountable to being successful. So great to have you guys give me some coaching.

Scott:
You’re amazingly successful. You’re crushing it with all this stuff. You’re certainly not letting anybody down and life is good. And you’ve got some fantastic options downstream here. So you almost have… You’re actually not even that far, if your were doing it for five more years, you’d be able to probably get to your goal of just passively funding, the entire thing at 150,000. So you’re doing great and you shouldn’t be worried about anything that will give you an indication to the contrary because this is a crushing it financial position. Doesn’t get much better than this.

TJ:
Thanks to again, guys, appreciate you so much.

Mindy:
Thank you, TJ. We’ll talk to you soon.
Okay, that was TJ and that was a lot of fun. Scott, I have to say, I am actually kind of surprised that you suggested he look at his spending. You were the one who brought it up first and this isn’t something that you frequently suggest. Whereas, it’s something that I’m almost all is thinking of when we are doing these finance Fridays. So I found that very interesting.

Scott:
Yeah. I found that and it might be just a product of the guests who come on the show, right? And it has appeared to me for, a couple for at least for some of the guests in the past that, Hey, before I’m going to apply to be on the BP Money Show, I’m going to really clean up my spending and really get command to that, sit on it for a few months and then apply and then come on with that. And I think that TJ is obviously not spending irresponsibly or anything, but I think he presented a more kind of honest view of his finances than maybe some of the folks… And I don’t mean that anyone’s being dishonest. I just mean that as like that, I would probably want to clean up my expenses before coming on the BiggerPockets Money Show, and then talking about my expenses with that.
And I’m not saying he didn’t, or [inaudible 01:02:54] irresponsible. I just think we got a picture that’s more reasonable for most people who are earning TJ’s income. That’s probably what they’re spending to a large degree.

Mindy:
I agree.

Scott:
And it has major implications in his… He came in and when I was looking the notes prior to the show recording, I was like, okay, this is good. I think this is an investment case here, but when we kind of started talking about, oh, in two years, I want to be done. I want to retire forever with that. Well, then it comes back to the very simple, basic math of early retirement. And it was like, I just don’t think we’re that close on that front. And we could be, if we were able to knock out 50% or reduce the spending by a third. We’re almost there. And it makes a huge, huge difference in the amount of wealth accumulated, the amount of flexibility he might feel about his situation and the amount of passive income or wealth that he needs to sustain permanent early financial independence.

Mindy:
Yeah. I agree. And I really, I can really see where somebody at his level of income is coming from. Well, why would I want to look at my spending? I have so much leftover from my income and I still get to do whatever I want. I’m doing great with my investing, I’m doing great with everything. Why do I need to look at my spending? And that’s when your spending starts to creep up. So, like I said earlier in the show, I am doing a year long spending track and it is very eyeopening. What are we two weeks in, three weeks into the spending tracking? And I’m already over budget in five categories because I have no idea how much I’m spending in these categories. And the reason I don’t have any idea is because I haven’t been tracking it for a long time.
Even though I do this podcast every day for four plus years. And I tell people all the time to track their spending, I haven’t been doing it in a while. So I am a big fat hypocrite. But now that I’m tracking it and I do, I want to do it publicly because I want people to see, it’s not that easy and it’s okay to make mistakes. And you just learn and move on. And sometimes things come up like my pump in my car, my windshield wiper pump broke. Of course, it broke during the public spending tracking. It didn’t break before then when I could have just not showed everybody that I’m going over my budget, but it just, I think it just highlights that the power of tracking your spending. So I’m excited for him to do that too.

Scott:
I mean, Mindy is it work?

Mindy:
Not really.

Scott:
Oh, I thought you were going to say the opposite.

Mindy:
What do you think I was going to say?

Scott:
It’s work tracking your spending. You got to set up a system. It’s going to take you a few hours and maybe if you spins to figure out what, whether you like Mint or YNAB or Personal Capital or a spreadsheet, or your notepad or whatever. And if you like one, maybe your spouse doesn’t like the other one. And then you’ve got to actually go back and track all the expenses. And at first it’s like, you’re not doing it all the time. So at the end of the month, you have to go in and be like, what the heck was that one? And what the heck that was that one? And what was that?
And once you set up a system and do it a few times a week and just click, click, click, click, categorize the expenses, you can look at it in 10 minutes and know where everything’s going, and you’ve got that power. But it’s a good, probably it might take you 30 hours to really figure it out and get into the groove with this kind of stuff. And that’s real work of free time with this.

Mindy:
I didn’t take that much time, although I did have an ace in the hole. So Mr. WoW, from Waffles on Wednesday was actually visiting me over Christmas. And he set up my spreadsheet with all the pivot tables and all the fun things that he set up. So it was very easy for my spreadsheet to display the way that it is displaying at biggerpockets.com/Mindysbudget. That is all Mr. WoW, kudos to Mr. WoW. But I’m also using his mobile spending tracker. So once we sat down and did that, put it on the phone, it is with me all the time. And it’s actually very easy. My husband and I are on the same page. That’s a really good point, Scott, that I didn’t even think of. Because we’ve always been on the same page. It didn’t occur to me that other people might not get on the same page with their spouse about attacking their spending. But I just wanted to be able to track-

Scott:
If I’m not really like really good friends with one of the world’s most prominent budgeting experts on this, who can come over to my house and set me up with a system that is perfect from end to end with, it might be a little more difficult. But we probably can solve that to a certain extent. We should probably put an invite them if they’re willing to help us with a YouTube video on how to set that up and [inaudible 01:07:36].

Mindy:
Oh, yeah. Oh, I will reach out to him and see if he will do a YouTube video for us, for how to set up the spreadsheet. Because yeah, his site’s down right now. He got hacked. Hopefully by the time this comes out, his site is back up and running. Especially since we’re talking about it. I’ll include yet another link [crosstalk 01:07:55].

Scott:
Yeah, I’d hope so. Hopefully, a spreadsheet can’t get hacked either.

Mindy:
Yeah. Oh, huh, don’t take that as a challenge. I don’t know. Yeah, but you can follow along and it is like, it’s just, it’s really eye opening when you see where your money’s going. So you can make changes mid month, midweek. And now it’s a challenge, now it’s a game who can spend the least, how little can we spend this month? I’m actually doing great on my groceries and I’m super excited about that. But I know in future months it’s not going to be so great. So follow along. Okay, Scott, should we get out of here.

Scott:
Let’s do it.

Mindy:
From episode 270 of the BiggerPockets Money podcast. He is Scott Trench and I am Mindy Jensen saying, see you on the slopes.

 

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2022-02-25 07:02:03

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Unlocking your U.S. home equity: How and why?

Many Canadians choose to buy homes over the border in the U.S. for the leisure and lifestyle opportunities they present, but your U.S. home is so much more than just a place to escape the cold winter. As you pay off your mortgage and build equity, your home can also become a powerful financial tool.

If you have owned a home in the U.S. for more than a few years there is a good chance your home has appreciated a decent amount of equity, especially given the rapid price growth seen since 2020. If you haven’t taken advantage of your home equity yet, you may be leaving a lot of money and other benefits on the table.

We spoke to Alain Forget, Head of Sales & Business Development at RBC Bank, the U.S.-based division of the Canadian bank and a national residential lender specializing in helping Canadians to buy cross-border. Forget is a fellow Canadian with over 15 years of experience in cross-border banking. 

 “A lot of Canadians don’t even know that they can leverage the U.S. home equity they have built over time,” said Forget. “And they might not know about the strategies to put that equity to use.” 

If you have only recently purchased a U.S. home or are planning to soon, you should still know about these options for utilizing U.S. home equity, even if you may not be able to take advantage of them just yet. As your home equity continues to increase in value, these options will become available to you as well.

In the U.S., there are two major ways you can take advantage of your home equity. The first is a cash-out refinance and the second is a home equity line of credit (HELOC). Both have their own unique benefits, and each may be more applicable in different circumstances. Let’s look at these two options in more detail.

Cash-out refinance

When you refinance a mortgage, you are essentially paying off your existing mortgage loan and taking a new loan in its place. This provides homeowners with benefits like better rates or mortgage terms or lets them access their home equity with what is called a cash-out refinance. 

A cash-out refinance allows you to turn your home equity into usable cash through a refinance.  The reason this is possible is that the price of your home at the time you bought it is lower than the current value. This means you can take out a mortgage worth more than what you owe, use it to pay off your previous mortgage, and collect the difference as a lump sum in U.S. dollars. You are now free to use this freed-up equity for anything you choose, such as a down payment on another property, purchasing a car, home renovations, and more.

Repayment is essentially the same as your previous mortgage, though you may have a new amortization period and mortgage rate which may be reflected in your monthly payments.

If you own your U.S. property outright (debt-free) it is even better for you since you have full home value to pull equity out without having to repay an existing mortgage. In general, for a second home, you will be allowed to pull up to 80% of the value of your home in a cash-out refinance, though you may go lower if you wish. 

For example, if your mortgage is worth $250,000 and your home is assessed at $450,000, you can pull out 80% of that value ($320,000) and collect the difference between the two, or $70,000.

The process for getting a mortgage refinance will be similar to the mortgage process we outlined in a previous article, so expect to have at least 45 days or so of turnaround and some amount of closing costs to be paid.

Home equity line of credit

A home equity line of credit, or HELOC, is another popular way to tap into the equity of your U.S. home. With a HELOC, you are able to draw upon your home equity on an at-will basis, as opposed to a cash-out where you get your money in a one-time lump sum. 

Also, unlike a refinance, with a HELOC there is no need to renew during the first 10-year draw period. In addition, with a home equity line of credit, you will only be required to repay interest monthly on the outstanding amount of your line of credit that you actually use. Your line of credit may be up to 80% of your home appraised value, but you can also always replenish your available credit by paying down your outstanding amount.

“The beauty of a home-equity line of credit is the flexibility of accessing your equity in U.S. dollars when you need it,” said Forget. “If you need $25,000 to buy a car or you want to pay your property taxes or your home insurance and you don’t want to contend with the exchange rate (currently around 1.28-1.30) you just use your line of credit. So you have U.S. dollars to pay U.S. expenses which helps save a lot of money any time you need USD.”

“Another benefit is that you only need to pay interest on the amount that you borrow. So for example, if you have a $300,000 line of credit but you only need $50,000 for home repairs or renovations, then your monthly payments will only include interest on the outstanding balance used.”

A HELOC generally has around a 30-year life cycle. The first 10 years are the draw period, during which it serves as an open line of credit. Beyond that time, you will enter a repayment period with regular payments to both principal and interest, though you can also repay in full at any time without penalty.

Which is right for me?

Though both of these options allow you to draw from your home’s equity, they each have uses for which they are most suited. In general, a refinance is most appealing for its large lump sum aspect. This means if you have a specific large purchase in mind, a cash-out may be right for you. Another purpose is to use your cash-out funds to consolidate your debt into a lower-interest loan.

A home equity line of credit is useful when you want to take out smaller portions of your equity as you go along. This can be helpful for any unexpected costs that come up for property maintenance or just for general lifestyle expenses when you are in the U.S.

Why tap into your home equity?

For a Canadian who holds a U.S. property, taking advantage of your home equity offers a lot of benefits. For one, there are many costs involved with owning a home and your lifestyle over the border. If you are constantly converting Canadian dollars into USD, you will always be at the whim of the exchange rate and any related processing fees. The benefit of using your equity is that you can draw on funds in USD that never need to be converted. Using your U.S. home equity then allows you to have a financial source on both sides of the border, which can help you make the most of currency exchange whether the loonie is up or down.

In addition, many Canadians use their U.S. properties as temporary vacation homes. If you return for the winter and are surprised by unexpected repairs needing to be done, your home equity can help cover these costs without the stress of bringing funds over the border, or if you have simply owned your home for long enough that you want a refresh in the form of a renovation or other improvements. For condo owners, with an unexpected “special assessment” from the Home Owner Association, your home equity can help.

You can also go the other way and draw U.S. funds to convert back to Canadian dollars. With the loonie where it is, your equity will go even further after conversion and can be used for anything you wish back in Canada – especially if you purchased your U.S. property in cash while the Canadian dollar was at par with USD. 

Finally, one of the most compelling reasons to tap into your equity is simply that it is available to you. Your property is a home, but it is also an investment, and investments should provide value to you. Many people believe that to get their equity out of their home they need to sell, but this is not the case! With a cash-out refinance or HELOC, you can get the best of both worlds, and take advantage of your home equity while still getting to enjoy the benefits of a U.S. property.

“Also, the beauty is that a traditional U.S. refinancing or home equity line is not a taxable event,” adds Forget. “A lot of people have seen their property go up in value over the last two years and think maybe they should sell. They could, but then they have a capital gain and they are going to trigger a lot of legal and tax issues that will have to be addressed, and the big question remains: where do they go next winter? Instead, if they keep the property, they can enjoy it while they benefit from the equity that the property offers.”

As usual, whenever it comes to cross-border real estate and banking, Forget encourages you to consult professional financial, legal and tax experts to get advice on those underlying cross-border issues when deciding to go with any of these options. Not only can they help you avoid potential pitfalls, but they can even help you find benefits like tax deductions you may not have been aware of.

RBC Bank offers Canadians access to their own network of legal and tax professionals who are trained to help support you with your financial needs over the border, as well as full-service support for all the rest of your cross-border banking needs. Until the end of June, RBC bank is offering a $0 underwriting fee on eligible mortgages and zero/low closing costs on eligible HELOCs, an offer that could save you hundreds or even thousands of dollars. Visit them online today to learn how you can unlock your U.S. home equity.



2022-02-24 13:21:00

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Why You Must Raise Rents 33% to Break Even (Part I)

“How dare that guy say this!”   

I know that’s what many of you are thinking. 

Yeah, I feel sheepish about it, too. But as the author of a book on multifamily investing, and a commercial real estate fund manager, I want to raise a flag…yet again…about the danger of overpaying for stabilized assets in an overheated market. Or passively investing in deals like this. 

What am I talking about…and who does this apply to? 

This post reviews how potential cap rate decompression could lead to a significant drop in the value of your assets…and how to avoid or overcome this potential danger. 

This could apply to you if you are a passive investor in multifamily or any other commercial asset type that is valued by this formula: 

Value = Net Operating Income ÷ Cap Rate

This applies to apartments, self-storage, mobile home parks, RV parks, senior living, industrial, hotels, malls, retail, cell towers, and more. 

So why am I picking on multifamily? 

Partially because I had the “humility” to entitle my 2016 apartment investing book, The Perfect Investment, I feel responsible for ensuring investors know what they are getting into. The “perfect investment” isn’t perfect if you overpay to get it. 

Now that said, many apartment investors aren’t overpaying. Some are crushing it and making millions for their investors.  I’m visited one in Dallas last week who is doing just that. 

But I’m concerned when I see so many telltale signs of a potential bubble. And so many assumptions about rent growth, continued cap rate compression, and high LTV debt with aggressive assumptions about interest rates.  But that’s not all. 

I’m really concerned about syndicators/investors making risky bets on assets that great operators already run and have optimized/stabilized. Many of these will need to hope and pray for inflation with continued low-interest rates to survive. 

While I’m all for hope and prayer, this is not the best business strategy. Especially when you’re investing your hard-earned capital. 

Why on earth would you say I have to raise rents 33% to break even? 

It’s because of the possibility of cap rate decompression

That is the chance that cap rates could go higher. Which means asset prices go lower. And this issue is accentuated at low cap rates (high prices) more than at cap rates from days gone by. Here’s why…

The cap rate is the projected unleveraged rate of return for an asset like this in a location like this in a condition like this at a time like this. Since the cap rate is in the denominator of our value equation, asset values change in inverse proportion to the cap rate. 

When cap rates were 10%, a 1% move up or down resulted in a value change of 10% down or up. So, a decompression from a cap rate of 10% to 11% results in a 10% decrease in asset value. 

But cap rates haven’t been 10% for most assets for a while. In fact, current cap rates sometimes run in the 3% to 4% range. We’ve seen a lot of multifamily (and other deals) in the 3% range lately, in fact. 

So, what if your 3% cap rate goes up to 4%? What is the impact on the value? Let’s assume the net operating income is $500,000. At a 3% cap rate, the value of that asset is: 

$500,000 ÷ 3% = $16,666,667

You’ll have to spend $16.7 million to get a half-million annual cash flow. And with debt, mortgage payments will significantly cut the net cash flow to owners. 

With a 1% rise in cap rates from 3% to 4%, the asset value is: 

$500,000 ÷ 4% = $12,500,000

So, this is the math backing up the title of this post. A 25% drop in value from a generally uncontrollable metric (cap rate) must be offset with a higher rise in a generally controllable metric (net operating income). 

Taking the 4% cap rate equation and increasing the net operating income by 33.3% gets you back to a breakeven asset value:

1.333 * $500,000 ÷ 4% = $16,666,667

This is why you need to raise rents by a third to get back to the same value. Now this may be reasonably achievable with inflation over several years. But what if inflation doesn’t materialize as you predict? 

Worse yet, what if you find yourself in an economic downturn where occupancy drops, concessions rise, and rents are stagnant? If you don’t believe this could happen, I’m sorry to say that your opinion is at odds with all of investment history across every asset class. Read Howard Marks’s classic Mastering the Market Cycle if you doubt. Or listen to Brian Burke tell what happened in his worst deal in 2008. 

An important caveat

Caveat: Someone will argue that raising rents 33% will provide much more than a 33% increase in NOI since operating costs don’t go up by the same amount. Great point. You got me. 

But I will argue that you will likely experience significant inflation in your operating expenses (OPEX) and capital expenses (CAPEX) as well. And the increasing labor (and material) shortage will potentially raise your costs even more than expected as the labor market for maintenance and similar trades continues to shrink. 

But if you persist in this argument, I will grant you that perhaps you can cut this 33% figure down a good bit. Feel free to assume 18% if you wish. That is still a big problem in the short term. Especially if that short-term includes a refinance. 

Oh, and before breathing a sigh of relief at “only” 18%, realize this… cap rates could easily decompress by much more than 1%. What if they go up from 3% to 5%? Then you’re looking at double the problem I’m presenting here. 

Five potential impacts of decompressed cap rates 

I talked about this concept to a friend yesterday, and he said it was more academic than practical. Really? Let’s discuss five potential impacts of decompressing cap rates. 

1. Refinancing challenges from appraisal

Syndicators with a short hold time or short window until refinancing can get clobbered if cap rates rise. The appraisal is directly based on the cap rate, so a situation like that above, where the asset loses 25% in value, can cause potential challenges. 

2. Refinancing challenges from interest rate

Unfortunately, higher cap rates often go hand-in-hand with higher interest rates. So decompressed cap rates coupled with higher interest payments from new debt can be a double whammy. 

3. Capital calls – the need for fresh equity in a stale deal 

The result could be the need for a capital call from investors. A new equity injection. But investors may already be doubting the viability of this deal and may resist the offer to throw good money after bad. You could find yourself in deep water here. 

Investors may adhere to the wisdom of Warren Buffett here: 

Warren Buffet quote

To be sure, you and I may not view this issue as “a chronically leaking boat.” But it doesn’t much matter what we think. This is the investors’ hard-earned capital, and their opinion will rule in this situation. 

Besides, let’s be honest, every deal doesn’t go as well as planned. And if (when) you have other problems like achieving occupancy targets, rent goals, and income projections, this refinancing/capital call issue may look like the last straw in an investor’s evaluation. 

4. Lower IRRs

I‘m not a huge fan of internal rates of returns for most deals. These IRRs are usually misunderstood and can be manipulated. The drive for IRRs often results in short-term thinking, which is not usually the path to building long-term wealth. 

Nevertheless, if you, as a syndicator, project IRRs at a certain level, cap rate decompression and its ugly twin, higher interest rates, can result in significantly lower IRRs. Why? Four potential reasons include: 

  1. The inability to refinance out lazy equity as a preliminary return to investors
  2. Lower cash flow as the result of higher interest rates (with floating rates on the original debt or higher rates on additional debt) 
  3. Lower valuations if selling in the short term
  4. The inability to sell at all in the short term. This delay can significantly lower IRRs. 

5. Impact on future deals – in the eyes of investors

Mr. or Ms. Syndicator, do you plan to be in this for the long haul? I hope you do. Because the most significant wealth is usually built by those who choose a lane and stay in it for a very long time. 

If you take on risky deals with risky debt and suffer the consequences in points 1 through 4 above, I can assure you this will mar your track record. And it will hinder or even cripple your opportunities to raise more capital in future years. 

And to you, Mr. or Ms. Passive Investor, I recommend you carefully evaluate deals with this lens. To assure you’re not getting into a deal with these risks. And to ensure your syndicator doesn’t have a history and tendency to play with this brand of fire. 

Do you really know how to evaluate these risks? If you’re unsure, you may want to invest with a group with the collective knowledge to analyze these operators and deals. And you might want to pick up Brian Burke’s outstanding BP book, The Hands-Off Investor

Storing Up Profits 3d 1 1

Self-storage can be a profit center!

Are you tired of overpaying for single and multifamily properties in an overheated market? Investing in self-storage is an overlooked alternative that can accelerate your income and compound your wealth.

Three ways to avert this potential disaster

1. Safe debt

One way to avoid this issue is to invest with relatively safe debt. What is “safe” debt? It can be low LTV debt. It can be fixed rates with a long time horizon. Hopefully, it is both. 

There are a few good reasons, especially with new construction, where 80% LTV, floating rate, 3-year term debt makes sense for a developer. 

But let’s face it… while real estate developers are some of America’s wealthiest entrepreneurs… some of them end up in the poorhouse. After being millionaires in their thirties or forties, some of them spend their retirement as Walmart greeters. (There is nothing wrong with being a Walmart greeter. But it’s not the way most of us dream of retiring.) 

So, what if you acquire an asset with a low cap rate that decompresses in year two? If you have to refinance, especially at a higher interest rate, you could be in big trouble in year three. But if you have low interest rate debt with a long term (like 10 or 12 years), you may be just fine. Sure, you may not be able to refinance to pull out equity as soon as you hoped, but the benefit of long-term holds at low interest rates can cover a multitude of sins. Especially in an inflationary environment

2. Assets with intrinsic value

This graphic shows the estimated ownership of large (50+ unit) apartments vs. self-storage and mobile home parks. This is important because the seller of a real estate asset often plays a role in determining the upside potential for the buyer, a professional operator. 

Independent operators own about three-quarters of America’s 53,000 self-storage assets, and about two out of every three of those only own one facility. This often means there is upside potential when acquiring the asset

Mobile home parks are even more weighted to mom-and-pop owners. Up to 90% of America’s 44,000 parks fall into this category

Trust me when I say there is often a lot of meat on the bones on mom-and-pop deals like this. Check out this article on finding deals with intrinsic value. 

You can find mom-and-pops in any asset class, but as you can see, they are probably easier to find outside of the multifamily realm. 

Acquiring and improving a mom-and-pop deal can create significant value for investors. And more importantly, for risk mitigation’s sake, this can help you grow an increasing margin of safety between your monthly income and your debt service. This is referred to as the Debt Service Coverage Ratio, and it is one of the essential concepts in real estate investing. 

3. Don’t invest in real estate

A third way to avoid this potential disaster is to avoid real estate investing altogether. You may want to avoid the stock market and other equities as well. These paths will certainly avoid the risks and perils of investing in real estate. 

Your options include collecting interest from a bank or money market account (current yields = 0.5% to 0.7%). You could also invest in the U.S. government. You can get long-term rates of over 2% today. 

There are many other debt instruments that could yield higher rates. Some municipal bonds yield 2% to 3%, and there are debt funds with higher risk and higher returns.  

You could invest in precious metals or cryptocurrency, but I believe these “investments” are more like speculations or insurance policies than investments. Yet I think it’s wise to have some of this insurance in any economy.  

You could even bury cash in a hole in the ground. But an esteemed ancient Jewish rabbi offered strict warnings against this practice in investing and life. 

Final thoughts

Every investment has a risk and return correlation. And some of the risks involved in these low-risk investments are hidden from plain sight. We’ll discuss this next time in part two of this post. Hint: the ravages of inflation could cause you to lose money with every low returning debt payment. 

So, what do you think? Do you see and agree with the logic and the math here? Or is the author like the boy who cried wolf? 

2022-02-24 15:31:32

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Four in 10 parents helped home-owning children with purchase: OREA

With growing prices in the real estate market, it’s now a very common practice for parents to help their children financially with a home purchase. A new report from the Ontario Real Estate Association (OREA) has found that up to four in 10 parents of young homeowners (aged 18-38) have helped their children financially in some capacity with their home purchase.

Of the participants polled, these parents “overwhelmingly” acknowledge the growing barriers to homeownership compared to their youth, citing concerns such as home prices, the difficulty of saving a down payment, the job market, and low housing supply. Faced with these new challenges, many young people have had to turn to their more financially established parents in order to purchase a home.

Affordability isn’t the only factor, however, that drives parents to want to help out their children. The older generation also values homeownership highly. Around 91% of parents of children who do not own homes believed that it is important that their children are able to buy a home one day.

On average, parents lent around $40,000 to their children, while those who gifted money outright gave around $73,000. This money largely came from personal savings (44%), though up to 15% drew from their own retirement savings and investments. This puts parents in a tough spot as the older generation approaches retirement amidst the highest inflation rates in decades but the younger generation is faced with their own housing crisis. Clearly many have faced the tough decision to choose between the two when it comes to where their money will go.

While we are seeing a growing difficulty in buying a home, up to 92% of Ontarians believe that it is important we make homeownership accessible to younger generations. Despite this widespread agreement, government intervention has still done little to curtail worsening conditions. While some have been lucky enough to have generous parents, this is simply not an option for everyone and most of these people are simply excluded from the market altogether. 

“We are in a housing affordability crisis being driven by severe lack of supply and increased demand,” said OREA CEO Tim Hudak in the report. “Without meaningful action at all levels of government, Ontario’s millennials and young families will be forced to look outside the province for their first home.”

As it stands now, young people are doubtful of their futures in the province and other provinces with more affordable housing have already seen a large influx of those leaving Ontario for somewhere they can afford to settle. According to OREA, around 80% of Ontarians now fins the price of housing is making the province an unappealing place to live and work. While this may be a boon for growing markets outside the province, this also has the effect of not only breaking up families but could also affect the economic future of the province.

On the topic of supply issues, the Ontario Government’s Housing Affordability Task Force has recommended that Ontario should build at least 1.5 million homes in the next 10 years in order to meet demand, or about 150,000 new homes a year. 

Yet, in 2021, a year of record housing starts, the province only saw 100,000 starts, a gap of over 50,000 that will need to be filled.

Ultimately, industry and government are going to have to seriously improve their efficiency in new developments in order to meet the rising needs of Ontarians, lest our younger generations are forced to give up the idea of homeownership, which has long been one of the most dearly-held values of the Canadian middle class.



2022-02-24 14:30:00

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