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I Just Got a Big Raise, What Should I Do With the Money?

Your late 20s through early 30s can be a financially troubling part of life. You aren’t making the most money you ever will, but you’re tackling big expenses. A wedding, a down payment, and trying to max out retirement accounts can put you in a financial tizzy. But, it doesn’t have to be so complicated, especially if you stick to a scalable investment strategy.

Today’s guest Louise is in this position. She recently changed employers and found herself with a big uptick in monthly income. She has plans on the horizon to marry her girlfriend but knows this will come at the cost of many thousands of dollars (rings, dresses, etc.) She’s also looking at buying a primary residence, but is already familiar with the home buying experience (she has two rentals!) Louise has a plan to hit FI (or at least coast FI) by age 40 and wants to know the best way to optimize her finances to do so.

Scott and Mindy have a healthy debate over 401ks, Roth IRAs, refinancing rental properties, and combining finances as partners, in order to get Louise in the best position possible to tackle her financial goals.

Mindy:
Welcome to the BiggerPockets Money Podcast show number 248, Finance Friday edition, where we interview Louise and talk about saving up for that next big expense.

Louise:
I would like to be work optional by 40. So, I’ve got a little over a decade to accomplish that. I’m trying to figure out how to prioritize this new income coming in so that I can accomplish all of those things and in what order I should prioritize them.

Mindy:
Hello, hello, hello. My name is Mindy Jensen, and with me, as always, is my smart cookie co-host, Scott Trench.

Scott:
We’re always picking up some new interest, Mindy. Thank you.

Mindy:
You’re full of nuts. Come on.

Scott:
What a sweet introduction.

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’re 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, do all of the above and have a pretty high end wedding, 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 to talk to Louise today, because she is indicative of several recent guests that we’ve had where she thinks she’s here but she’s actually up here. She thinks it’s going to take longer to save for what she needs or she’s going to need to save more money than what she actually needs. I think that we are very helpful today giving her a different way to look at where she’s at financially and where she’s going.

Scott:
Yeah, absolutely. I think it’s a pattern that maybe a couple of guests and maybe many listeners are having where they’re too conservative in their forecast. You want to be conservative. You never want to run out of money. It’s unacceptable to go broke, especially if you’re listening to BiggerPockets Money for a long period of time, but to not acknowledge the likelihood of the middle outcome, being at a certain level, I think, is also a huge mistake in your planning. It can cost you hundreds, thousands, or millions of dollars with that.
So, having a strong financial foundation, a big cushion, thinking about your real estate investments in terms of cash flow and having appropriate reserves, that kind of stuff, having retirement accounts, all that stuff is great, but you don’t also then need to stockpile $50,000, $100,000 in cash to pay for certain other items with that. You can reach into that and use that investment portfolio to draw on that from time to time, if absolutely necessary, downstream with that.
So, we don’t want to push people to an unreasonably aggressive place, but I think there’s also that level of conservatism that can hurt you. I think that’s where we went today and learned a lot. She’s doing fantastic. It’s just hard to pop out and think, “Oh, I’m actually doing fantastic. I can afford to play a little bit more to win than maybe what I’ve been doing.”

Mindy:
Yeah, it can be a little bit difficult to switch your mindset when your mindset is so focused here and you’re like, “Well…” You’re not doing a 180, but you might be doing a 120 or 130. You might need to shift it a little bit more. So, yeah, it can be hard. So, before we bring in Louise to share her story, let’s hear a note from today’s show sponsor. Okay, huge thanks to the sponsor of today’s show.
Now, my attorney makes me say the contents of this podcast are informational in nature and are not legal or tax advice. Neither Scott nor I nor BiggerPockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate.
Louise lives in a high cost of living city with her partner and is saving for her upcoming big expenses, engagement rings, wedding celebration, and a primary residence. She’s on the path to financial independence, but looking for a little bit of guidance. Louise, welcome to the BiggerPockets Money Podcast.

Louise:
Thank you very much. I’m excited.

Mindy:
I am excited too, because I think you are sitting in a fairly good position, but let’s look at exactly how good that position is. Where is your money coming in, and where’s it going?

Louise:
So, I recently switched jobs. So, I took advantage of this labor market and sold my skills to get a big pay increase. So, I’m looking at a lot more cash each month than I had been, which I think will be helpful to get your input on how I should prioritize using that cash. So, annually, my primary income comes from my 9:00 to 5:00 job. I bring in $120,000 annually, which breaks down to about after everything’s taken out $45,000 take home for me to play with. That’s including maxing out my Roth and everything.
And then I have a bonus that’s up to 20%. I haven’t gotten a clear sense on how sure thing that is. So, I’m just banking on that being a nice surprise and can utilize that for anything at the end of the year when that comes in. So, yeah, looking at $120,000 annually to play around with, which is a lot more than I had been. So, your help will be greatly appreciated.

Mindy:
Well, send the extra to me.

Scott:
Yeah, that’s awesome. What was it before?

Mindy:
There’s no such thing as extra money.

Louise:
Before, it was around $75,000.

Scott:
That’s a huge increase. Okay, so you got a $50,000 raise by switching jobs.

Louise:
Yes.

Mindy:
Okay, let’s just pause for a moment and say, congratulations, Louise. That was an awesome move. Is it in the same field?

Louise:
Yup, same field. So, I went from public to private. So, doing the same thing, but just for a different company. It’s been working out really well so far. There was no change to the skills I needed and I was able to start right away. So, I’ve been enjoying it so far.

Mindy:
Good for you. Congratulations. That’s awesome.

Louise:
Congrats. That’s awesome.

Mindy:
I like the way that you’re thinking about the bonus. I’m not quite sure what the bonus is going to be. So, I’m just going to consider it as extra. Great. First of all, it’s not extra. It will always have a job, but don’t count on it. Don’t make your budget based on a bonus that may or may not happen. I love that. Okay, is there any additional income besides the salary and this ethereal bonus?

Louise:
So, I do have two rental properties. I don’t necessarily consider that income, because anything that I’m getting, it just stays within the rental property at the moment. I bought both of them within the last year or two, which is also why I have no cash at the moment and need to save up more. So, they’re busy working to stabilize themselves at the moment. So, I don’t necessarily consider that income personally.

Scott:
Can you describe these assets?

Louise:
So, they’re both single family homes. I’m from the Midwest. So, it was a nice way to get in… I knew I wanted to get into rentals, but my family is all from my up and coming Midwest City. So, I was able to get into that market right before and slightly during the pandemic, before things got a little crazy. But they’re both cash flowing really well. The one’s bringing in $250 a month over the Capex and mortgage and everything. The other one’s bringing in $450 over. So, I would love your help on that as well. I have a few rental property questions for you later or now, if that makes sense.

Scott:
Well, let’s circle back to those. That’s interesting. What are your expenses for your personal life?

Louise:
So, I’ve been listening to BiggerPockets for quite some time. I know that Mindy is big on tracking expenses. So, partly in preparation for this conversation, I started tracking my expenses about eight months ago. So, I actually have some concrete metrics for you guys. So, my girlfriend and I split most things down the middle. So, a lot of these expenses are 50% of the total household, but my rent is $1,500. Remember, high cost of being in a city, very high cost.
Groceries ended up being about $200 a month. Utilities is about $150. Eating out is closer to $350. Travel averages to $250 a month. We have a dog, so he’s about $150 a month. My car, which recently has been giving me a lot of trouble this past year, has averaged to $400 a month and I don’t have a car payment. That’s been a trip but I’m not about to buy a car in this market either. So, yeah. And then everything else is about $150 miscellaneous stuff each month.

Scott:
Okay, so what is that total up to for those who can’t do that in their head?

Louise:
Yes. So, total expenses a month, I’m tracking to be about $3,000 to $3,500.

Scott:
Okay, great. And then walk me through your take home pay again. At $120,000, $4,500 a month seems really, really light on that.

Louise:
So, the paycheck starts out around $4,600. It’s biweekly. So, I guess I’ll switch to monthly. The paycheck monthly ends up being around $9,250. Then after insurance, that drops down by about $100. I’m new to the HSA, but I’m maxing that out, which I think is $280 a month as maxing it out. And then I’m currently maxing out my Roth 401(k), which I have some questions on. That’s $1,500 a month to max it out.

Scott:
So, what’s hitting your bank account at the end of the day? It doesn’t have to be exact. It can be just closed, like a rounding.

Louise:
So, what hits my bank account is the $4,500.

Scott:
In total?

Louise:
In total for the month.

Scott:
Okay, and how long have you been receiving these new paychecks? Is this job relatively new?

Louise:
Yeah, just a couple months.

Scott:
Okay, interesting. I’d still expect there to be more income hitting your bank account than that based on those numbers, but we can dive into that going forward there.

Louise:
Okay.

Scott:
And then what are your assets and liabilities here?

Louise:
So, assets, I’ve got a 401(k), which has about $70,000 in it; a Roth IRA, which has about 20,000 in it; a regular IRA, which is floating around from a previous pension that I didn’t stick around for that has about 5K in it; the HSA, which I just started. It has $600. I have a small couple of thousand in crypto, and then my emergency fund is 10K at the moment, which I’m trying to build up.

Scott:
Awesome. It sounds like you have the two rental properties on top of that. What debts do you have?

Louise:
So, I have about $4,500 left in student loans. And then on the rental property side, my one rental is worth about $55,000 and I owe $40,000 on it. The other rental is worth about $95,000 and I owe $55,000 on it. Rolling together in my head, I have a personal loan out that paid for a lot of the renovations on that second rental property for $15,000. So, my calculations are my net worth right now is about $140,000.

Scott:
Awesome. Well, great, you’re doing a lot of really cool stuff here and things are going your way, it seems like this year, in particular for the most part except the car.

Louise:
Yes.

Scott:
What’s the best way we can help you?

Louise:
So as Mindy mentioned, I’m looking at a larger paycheck than I have had before and then I was really expecting to have, but I’m also staring down within three to five years needing about probably $75,000 to $100,000 in cash, because my girlfriend and I are talking about getting married and also we would like to eventually buy a house. So, rolled into that large sum is both two engagement rings, two dresses wedding, and then a house likely in a high cost of living city. Looking a little bit further out from that, I would like to be work optional by 40. So, I’ve got a little over a decade to accomplish that and I’m trying to figure out how to prioritize this new income coming in, so that I can accomplish all of those things and in what order I should prioritize them.

Scott:
Okay, great. It looks to me like real estate is where you’re lean based in your current financial position, but what are your instincts or thoughts on how you want to approach it?

Louise:
Yes, so my thought is I would like to be CoastFi in my retirement accounts by 40 and then actual FI on top of that via rental income by 40. So, that regardless of if one or the other crashes, the real estate market or the stock market, I’ll be okay eventually.

Scott:
All right. So, we got a great challenge here. It’s, “How do we come up with $100,000 in cash inside of three years? How do we put ourselves way along the trajectory on the real estate portfolio and have our cake and put the money into the stock market with that?”

Louise:
Yes.

Scott:
Is that right?

Louise:
I want all the things.

Scott:
You want all the things. All right, perfect. So, FI by 40 with the caveat that we’re going to carve out 100K and then ideally with both of those things. That’s 12 years from now.

Louise:
Yeah.

Scott:
Okay, awesome. Well, it’s an ambitious goal, but it’s a very clear goal. So, I like it. You know what you want with that. Let’s just think about the real estate side in isolation, as one goal. So, pretend that we’re going just after that. First of all, you need $3,300 a month to live, right?

Louise:
Yeah.

Scott:
So that means you need $3,300 a month in cash flow from your rental properties in order to achieve that. Right now, you’re saving $1,000 per month after tax that can be used to invest in those properties, right?

Louise:
Right.

Scott:
These properties are going to cost 100 grand. What do you think that the property is going to cost going forward with this?

Louise:
Yeah, that’s probably what the market is in the area I’m looking at now.

Scott:
Okay. What’s the property’s cash flow going to produce on that? Do you think $450 or $400 like you’ve been getting is likely?

Louise:
Yes, I think I could keep getting that.

Scott:
Okay. So, you need 10 such properties. Each property, you have to put down 15 to 25%. That means you have to put down a 15 to 25 grand per property, and you need 10 of those.

Louise:
Right.

Scott:
Okay, that actually doesn’t seem as big of a challenge than I initially thought. It seems like, okay, on your current savings rate, it would be great if you could pull another $1,000 into that savings profile and then you’re buying essentially one per year without dipping into your existing $10,000 emergency reserve. But that puts you on track if you think you can actually get the $400 per month with this. Maybe I’m overthinking this, but yeah.
Okay, that one seems relatively achievable inside of 12 years. The timeline is so long that that’s what makes that achievable. A decade is a long time to produce the $3,300 in cash flow on your income, which is why I think it’s going to be easy, relatively easy for you just by following a pretty formulaic approach with that if you can operationalize and systematize the systems. Mindy, do you have any observations or thoughts on that?

Mindy:
Well, my first thought is, are you combining finances with your girlfriend once you get married? Because we didn’t talk about that. You mentioned that this is your income, but we didn’t talk about her income. So, I’m assuming that there is some opportunity for additional cash generation if you’re planning on combining finances.

Louise:
So, that’s actually something I would like your opinions on as well. So, we’ve talked about it a little bit. She’s not super into the finance as I am, which is funny because she’s very good with her money. I feel like I’ve been so focused on tracking my expenses and money and everything. Every month, we come out with the same amount of money. I put all this work into this and she just lays back and it happens for her anyways.

Mindy:
She is following along on your coattails. You’re pulling her along, because you’re not going out to fancy dinners and $1,000 a night bar tabs. She also isn’t. So, she is just… What’s that called, drifting, when somebody pulls you along or the car pulls you along? You’re pulling her along with you. So, it’s again little by little.

Louise:
Yeah, she’s definitely a good partner to have in the journey, whether she realizes she’s a partner or not. The idea of rental properties makes her a little nervous. So, I haven’t necessarily convinced her yet to get in on that with me. So, I wouldn’t necessarily bank on her income padding, at least that element of our journey.

Mindy:
Okay, that’s valid. I would encourage you before you get married, probably before you get engaged, to talk about finances. Scott and I did an episode, Episode 157. We talked about sitting down with your partner and discussing all your finances. What are your goals? Where do you see your money going? What investments do you want to make? Since you are the one who is more focused on finances, you are going to have to lead the conversation, but the conversation works best when it isn’t, “How are you going to stop spending money?” It’s more, “How can we work together to solidify our financial future?” I would like us to be more aligned in our finances.
So, let’s talk about, “What are your goals? What do you want?” It’s all about her in the beginning of the conversation and then as she sees the possibilities… I mean, if she’s not coming at this from a place of financial independence or even knowing about financial independence, you retire at 65. Maybe if you’re going to retire early at 62. So, for you to say, “Hey, we could do it at 40,” “Oh, that’s not possible,” is going to be the first response almost across the board. So, for you to say, “Hey, we can do it at 40. Here’s how if we start investing in real estate properties, if we start investing in the stock market, if we’re doing all of these things.”
You can see time and again, past performance is not indicative of future gains, but past performance is indicative of future gains, because you watch the stock market just go up into the right and it just keeps going up into the right over the long haul. So, I’m preaching to the choir. I’m just saying it’s a great episode, if I do say so myself. It’s a great episode to get you in the mindset of having a financial conversation, but I definitely suggest that. Do you have a real estate agent in your hometown?

Louise:
Yes. Yeah, he’s great. Something I am wondering at what point I should look into is the rest of the team like lawyer, accountant thing. I’ve been getting by so far. I don’t know if there’s an economies of scale tipping point where it makes sense to look into that service.

Scott:
Here’s a framework to help you with that, right? I’ll use property management because you definitely have to outsource that since you are not there, but I’ll use it as an example. Let’s say I’m making $50,000 a year, and I have my first rental property, right? This is my position when I started house hacking. Hiring out the property management, let’s take a $2,000 in rent from that property, two units. I’m making this up, right? Hiring that out would cost me $200 at 10% for the property manager.
If it takes the property manager four hours to complete that work or me four hours to complete that work, I’m arbitraging my time. I’m saying, “My time is worth more than $50 an hour, but I only make $50,000 a year. So, my time is $25 an hour.” So, there’s a sliding scale, I think, that you have to think about over the course of this journey where if you’re making $120,000 a year and you’re working 40 hours a week, your time is worth $60 an hour, right? It’s probably worth a little less than that, because I imagine you work a little bit more than 40 hours a week on average or whatever that is.
So, let’s call it $50 an hour with that. Okay, great, my time is worth $50 an hour. Is outsourcing this task… Am I going to pay somebody else less than that, right? If you value your leisure time at anything close to what you get paid at work, that’s a good framework to think about. So, with that, there’s the [inaudible 00:23:07] answer, it depends, right?
Right now, the answer might be I should do my taxes or probably not self-help too much on the legal side, but I should do my taxes to certain extent or I should be proactive and take on what I can on the legal side with that stuff safely, with this stuff and think about those things. But as my net worth and my income progress, I know that there will come inflection points where I need to transition that off of my plate and onto professionals with that or someone else with that. How’s that?

Louise:
That’s interesting, because I’d thought about it more so in terms of, “Do I have enough properties for this to make sense?”, rather than, “Could I be doing something better with my time?” perspective. So, that’s a good way to think about it.

Mindy:
I was just typing in a question to ask. Is there any opportunity to generate more income? Can you work extra hours? Can you get a second job? I’m not talking about driving for DoorDash for $5. I’m talking about your main job. Is there an opportunity to work overtime and get paid for it or do any side business that does generate some hefty income?

Louise:
The field that I’m in, they’re a little bit strict about what you can be doing outside of work. Since I’m salaried, I don’t get overtime necessarily. Something I was thinking about, which I don’t know if you guys know much about it, would be small crypto miners, like the smaller ones. I’m thinking the Helium miner, you plug it in. Since I’m in a city, it’s an Internet of Things connector. So, there are many things that use internet near me. That’s the only thing I have on the horizon, besides just buying more rental properties.

Mindy:
Well, you live on the East Coast. It’s going to get cold at some point. Yourri from Episode 236 uses his Bitcoin mining to his house.

Louise:
I listened to that.

Mindy:
I don’t know anything about Bitcoin or about mining at all. I’m not the right person to ask. Scott, you can chime in here.

Scott:
My just instinctive reaction is that I’m skeptical that that will generate a meaningful amount of incremental income relative to what you make. You make 10 grand a month plus bonus. I would think how can I increase that by 10% in order for it to be worthwhile as an endeavor to spend serious time on with that? So, unless you have a very short term thing that you’re trying to push over the edge there, so I would just be skeptical that there’s an opportunity to make that much more. But if you could spend a few hours to generate 50 bucks more a month, that’s 600 bucks. That could be a good use of time to set something like that up.

Louise:
Okay.

Scott:
Is that helpful?

Louise:
Yes. I’m thinking about it relative to how I make my most money now.

Scott:
If I’m thinking about your trajectory based on what you presented so far, over the next 12 years, I anticipate that your income is going to continue to increase from $120,000 to let’s call it $180,000, $200,000, maybe more with that. Does that seem in the ballpark?

Louise:
Yeah, it’s doable.

Scott:
Okay, great. You’re going to be able to buy a property every two years on your current savings rate, which will steadily increase in terms of that. It looks like you’re maxing out multiple retirement accounts with this. I’m thinking 25,000 or so was going into these retirement accounts on an annualized basis and HSA.

Louise:
Yes.

Scott:
Okay, great.

Louise:
Yeah. Well, that’s something I wanted to ask you about too actually. So, I’m maxing all of those out now. Is that something I should continue to do, given that I’m looking to go the non-traditional retirement route sooner rather than later and also need a lot of cash now? My company matches pretty pathetic. I think it’s like 1.25% of 6%. It takes three years to vest. It’s nothing. I consider necessarily worth sticking around for at least, I wouldn’t necessarily say the full three years if I had something better just because of that 1.25%.
Is it worth looking into either decreasing the contributions or switching some from Roth to traditional to capture some of those? I think that would increase my take home to switch some to traditional because I wouldn’t be paying taxes on it now. Or should I stay away from that and just keep maxing out and figure something else out outside of the retirement accounts?

Mindy:
This is the squidgy question, because Scott’s very firmly on a Roth 401(k) option and I am coming over to the light side of Roth 401(k) contributions. I keep going back to Episode 200 with Kyle Mast and saying he had a really great argument for why he feels the Roth option may go away in the future. The government has been sending all of these stimulus checks to American citizens, and we’re going to need to pay for that in some way. It’s a lot easier to remove the Roth option than it is to raise taxes on taxpaying citizens. So, that is if you’re going to continue to contribute to retirement accounts, I like the Roth option for you better than the traditional, but you also have a Roth IRA. See, this is where it’s hard, Scott, because there’s no one right answer.

Scott:
Yeah, your timeline is so long too that it creates a lot of optionality and a lot of nuances with some of these things. Twelve years being long in the context of this, but we’re hearing from a lot of folks with this. Here’s one way to think about it. I’m trying to back into something 12 years from now. I save $1,000 a month and I can max out those accounts. In 12 years, it’s conceivable that if I put in $300,000, which is 25 times 12, that will grow on average and be in the ballpark of $500,000 to $650,000 inside of my retirement accounts with that. So, that’s the range that I would say.
You want to plan and be more conservative and have a backup plan if you don’t get there, but that’s not an unreasonable place to expect to think that they’re going to end up over the next 12 years inside of those accounts. That’s pretty good. That’s an incremental… Let’s call it $500,000 to $650,000 to what you currently have and the compounding rate of that. So, let’s call it three quarters of a million, because your stuff that you have currently is going to grow and we’re guessing at a whole bunch of assumptions to get there. That’s great, right? At 40, that should carry you. You might be what a lot of people call CoastFi. You’ve heard that term?

Louise:
Yes.

Scott:
Great. So, for those listening, that’s when you don’t have to retire or contribute any more to your retirement accounts. They should be plenty at retirement age, but you still need to fund your current lifestyle in the meantime until you hit traditional retirement age. So, it’s like that, where you can coast. You can just make enough to do that. So, that’s the jargon there. So, that’s what will happen most likely. If it doesn’t happen, you can just work a few more years or you might expand past that with all this if you don’t change anything about what you’re doing.
Now, if you retire at that point and you stop working, if that money is in a traditional like a 401(k)… Sorry, I’m going to take one more step back here, because there’s a lot of convoluted thinking that’s leading me to where I’m at here with this. In isolation, if you want to build the most long-term wealth, I’m still on the Roth trade, right? Again, this is art, not a science, but the assumption that I’m working with is that you are 28. Is that right?

Louise:
Twenty-nine.

Scott:
Twenty-nine. Okay, you’re 29. You are earning a good income, but inflation is likely to happen over the next 30 years, right? Taxes are likely to go up, not down for a variety of reasons. The most likely outcome is that there’s both a higher tax bracket and a lot of gains inside of this portfolio to realize with that. So, for me, the Roth is generally going to be a better option for long term wealth. But if you are at 40 and you’re tired and you stop earning income, it’s possible you can do the Roth conversion ladder and move that from the 401(k) and into a Roth IRA.
So, I don’t know what that means, but again, from a strategic lens, I’m just talking this through on the spot here and trying to think about this. But maybe one reasonable takeaway from that monologue that I’m having with myself right now is balance it a little bit more, right? Because you may have that option. If you stop at 40 and you have a year with very low income or your rental properties all need a bunch of new things or a bunch of rehabs or you can fully depreciate or you buy a couple of new ones and have a big loss, that’d be a great year to roll things over.
Because you get a loss, then everything up to that loss is not taxed, right, from the rollover perspective with that. So, it may be wise to put a little bit into the 401(k), if that truly is your plan to retire and you think your income is going to drop at least for a couple of years in that meantime. So, how’s that thought process on that? Is there anything helpful there?

Louise:
Well, I like it, because it means I could switch some to traditional and get more cash in my bank account now without feeling bad about it necessarily. I would have a plan for it. So, you’re saying doing a combination, not just solely to get more cash in my bank account now, but with a plan. If FI by 40 is really the goal and suddenly my income drops, that could be a feasible and responsible way to go about it.

Scott:
Yeah, if we’re aligned on the concept that the ultimate goal is to get all that money into a Roth, if that’s the end goal at some point, then this would be a way to do that. I’m not even thinking about the lens of getting you more cash now. That would be an incidental output of this plan, but it would be a result of the tax savings that we’re thinking through here with this. So, you have to be really sure, not really sure, but just know that the trade-off is that if you never have that down year and income with this, if you agree that tax is likely to go up, inflation’s likely to loom and all that stuff, that you’re probably going to pay more tax on the money you’re putting into the 401(k) if you don’t end up having a year or two of low income or loss to make that transfer.

Louise:
Right. So, I heard that back door Roth’s were maybe on the chopping block, but conversions are different.

Mindy:
Conversions are different. Back door is on the chopping block for people who make more than $400,000 a year or something like that, which is a really great problem to have. This is just proposed. Just like this is being proposed, they could down the road propose no more Roth conversion. So, this is something to just keep in mind, but the fact that you’re aware of this starting off is already putting you head and shoulders above the rest of the crowd. I want to pose this in our Facebook group, which is found at facebook.com/groups/bpmoney, and see if anybody else can crowdsource some suggestions for you as well.
Do you continue to contribute to your Roth 401(k) while maxing out your Roth IRA and your HSA? Do you take some of those Roth 401(k) contributions and put them into a traditional 401(k), which will reduce your taxable income and therefore, hopefully, generate some more cash now?
Scott was saying that he was not quite sure why your $9,250 check is only $4,500. I did a little bit of math, $9,250 minus the $280, which is pre-tax for your HSA contribution, leaves you with $8,790. You take out the $1,500 after tax to contribute to your Roth 401(k). You’re left with $7,470 to pay taxes and all that stuff. I’m sorry, you’re paying taxes on the $8,970. It just seems like in this scenario, the $4,500 might actually be where it’s at. Isn’t there something, Scott, after $74,000 in income, then they don’t take FICA out anymore or something?

Scott:
No, this makes sense. It’s the Roth. I was thinking by month, I get paid personally twice monthly, rather than every other week. So, there’s 26 instead of 24 paychecks. So, that’s what’s probably going on with that or that was already my mental math.

Louise:
Yes, I love those three-paycheck month. So, those are also mini bonuses throughout the year.

Mindy:
Yeah, yeah, the three-paycheck month. You just go ahead and put all of that in your retirement account, or I’m sorry, not in your retirement account, in your house fund. I would continue to connect with the local hometown real estate agent and say, “This is what I’m looking for. I am able to jump on this. Whenever you have this option, whenever these parameters pop up, I’m ready to jump on it.” And then be ready to jump on it. I would talk to a local East Coast agent and start getting an idea of what houses cost and what down payment you’re going to need for that as well, just as an idea, but I don’t think you’re ready to save up for that just yet. Would you house hack the local property?

Louise:
So, that is something that my partner and I are interested in conceptually. I’ve tried using the same spreadsheet that I use to buy the first rental properties to find a deal that would make sense around here. The amount of mortgage I would need, the rent would not offset even if after we move out and rent out both sides. I haven’t found a property that makes sense, but I’ve got a Zillow filter that sends me multi-families every now and then. So, we’ll see if something comes up.

Scott:
Even a house hack that just offset your costs slightly has a huge financial upside over a place that has no offset to your mortgage payment with that.

Louise:
Very true.

Scott:
So just the fact that you’re looking is awesome with that. Go ahead, Mindy.

Mindy:
On the other hand, in some cases, renting just makes more sense. You said your rent is $1,500. I’m assuming since that split, that’s $3,000 a month. If you’re grabbing a mortgage that is $2,900 a month, that might be good, that might be not good. If you can find something that’s significantly less, that’d be great. If you can find a rental that’s less, there are always going to be lower price rentals, but it’s not going to be so nice.

Louise:
Yeah. So, we just moved into this place last weekend, actually. It’s been a roller coaster. We moved from an apartment building to a place where we at least have a front yard that we can go out and the dog has a yard too. So, we’re definitely here until and if we buy, which I think is a good place to be, because at least we know what the comparison should be for a mortgage. We’d probably buy something similar to this. So, if it costs more to buy something similar than to this every month, then we’ll just stick around and that’s fine, too.

Scott:
So, let’s talk about your real estate portfolio and building that out, because that’s the last leverage piece here with that. To buy a property, you’re going to need 25K as a down payment, give or take. Is that right?

Louise:
Yeah, probably.

Scott:
What do you think a good emergency reserve is for you to feel comfortable with your life and your current properties before you buy the next one?

Louise:
Actually, this was one of my questions. I have $5,000 reserved for each property right now and then $10,000 for my personal reserve. Given our increase in rent, I need to up my personal reserve, my personal emergency fund. I’m wondering by how much because with inflation and everything, at some point, I imagine it is less efficient to truly have that six months to a year. When I do have the Roth IRA sitting around, if something truly catastrophic were to happen, we have two incomes.
I have the Roth emergency fund. Personally, I’m thinking maybe 15K for my personal emergency. So, I’d love your feedback on that. And then for each of the houses, I have 5K now and I’m wondering, “At what point, if at any point, do I stop adding to each of those savings accounts and start rolling that extra…” I’m saving 20% of the rent right now for Capex and vacancy and all of that. At what point do I stop adding to those reserves and start rolling that money into buying the next one?

Scott:
This is awesome. Here’s how I would think about it with a couple of rentals, right, is the first one, I think you want 15K or something like that, because that’s your whole nest egg with that. I don’t think you need to add another $15,000. I’m making this up, but this is how I did it for mine, right? Your profile depending on your deferred maintenance could be different with that. The second one, you don’t need another 15K on that. You might need another $7,000 to $10,000 to feel really comfortable.
Then maybe it’s $5,000 per property with it, because what’s the chance that they’re all going to go wrong at the same time with that? The second is you need something for your personal life, right? That should be three to six months, depending on your comfort level, maybe longer if you’d like to have a little bit more optionality. But in your case, do you have these properties in LLCs?

Louise:
No.

Scott:
So, they’re all in your name. I think it might just make sense to say, “What is that boiled up number?” $5K feels too light for a property, right? Because you might need more than that, right? But $30,000 probably feels like plenty for your two properties and personal life with that, right, way more than enough of that.
So, I think, in this case, maybe you just bundle it all together to a certain extent and then as your business grows, separate it back out and say, “Okay, the business across 10 properties, I want $60,000 in there.” That’s X amount of months mortgage and plenty to cover a roof replacement or whatever with that. I also can access HELOCs or whatever else to make sure I don’t have a cash flow issue with that. How’s that for framing? Does that give you help in thinking about where to put the cash?

Louise:
Yeah, that is helpful and less burdensome too on terms of the total amount of cash I need to be aiming for those pieces.

Scott:
Yeah, [crosstalk 00:44:29] risk. Yeah, go ahead, Mindy.

Mindy:
Yeah, I want to highlight what Scott just said. He said deferred maintenance, but what he meant was just the condition of the homes in general. So, I want you to note how old the big ticket items are in each of these properties, the roof, the HVAC, the appliances, the water heater. Your roof is going to be about $15,000. If it cost you $12,000, great, but that’s something that you should be aiming for is saving $15,000. Are they both going to go at the same time? Most likely not. But if the houses are next door to each other and you have a hailstorm, maybe so. So, make sure that you are covered on your insurance, but also, make sure that you have yourself covered. A water heater is $1,000. Can you come up with $1,000? Probably pretty easily to have a new one installed.
Even if they both go out, you can cover that one pretty easily. HVAC is going to be between $8,000 and $15,000. So, having these big ticket items in your mind is going to be a lot more helpful coming up with what reserve I need to have. Is the HVAC system in both houses going to go at the same time? Well, if they’re both 20 years old right now, you could be looking at a really hefty bill really soon. But if they’re both brand new yesterday, that’s less of a concern. So, I really liked that he highlighted that your emergency fund should be contingent on not only your financial level of risk, but also the condition of the home itself.

Louise:
Okay. Was the point about the LLC, just like the if it were in an LLC, I would want to keep it very separate, but since they’re not, it’s okay to have a little fluidity between the two, personal and rental accounts?

Scott:
Well, if it’s not an LLC, no one’s going to be checking on that. So, it’s probably a best practice to make sure that you’re able to account for every dollar that’s going through each of those properties. One day, you may wish to transfer them into an LLC at some point. So, it’d be good to set things up as a business. But in terms of just aggregating the cash, I don’t think you need to leave cash in separate accounts for each one of those properties right now.
I think it just complicates your position and you can just say, “I’ve got one pile, and it’s plenty big.” Okay, great. Now, I can go out and save up for the next property with this, right? So, that’s more of what I’m thinking. There’s no right or wrong answer. A lot of people probably do it in different ways and I just articulate it. That just one way that may work for you and simplify your thinking on this.

Louise:
Yeah, that makes sense, because thinking about the amount and I’m sure plenty of people have this problem, especially right now with inflation, but thinking about all this cash that I want to stockpile away, any way that I can make that more efficient would be great.

Scott:
Yeah, I mean, so you have one big pile, which you can certainly just keep expanding the size of the pile that you need for that, right? I don’t know if this is a good analogy or not, but you’re like, “Okay, great. If it was $20,000, $25,000, in two years, it needs to be $50,000 or whatever it is. And then a year following that, it needs to be $60,000 to cover the wedding and all that stuff.”
So, that would be one way to think about it from a cash perspective with that is you just say, “Okay, I’m never going to go below $25,000 with that. But when I’m above $25,000, I’m going to sweep that into my down payment fund or I’m just going to keep piling it up in that account until I get to $50,000. And then I’m going to use $25,000 of that for my down payment. I’m going to dip below temporarily to $20,000 and then I’m going to rebuild…” That’s just an easy way to think about your cash position with this in one centralized place with that. You’re going to come in to so many things have changed or may change in the future with this.
If you change your allocation, you’re going to get some of that back. If you begin putting the money in your rentals into your business and they truly are cash flowing at that, you’re going to get another $7,000 or $8,000 per year from the rentals. That’s going to flow into that account. You might get a $20,000 bonus. You have two months of the year where you’re going to get a three-paycheck month. That’s going to flow in there. So, all of that I think is cushion in the way that you’re forecasting your cash position right now that is probably not articulated in your planning with that. So, I think you’ll come up with that. You’ll surprise yourself with how quickly you come up with the incremental $25,000 for that next real estate purchase based on it.

Louise:
Is there a different way that I mechanically should be saving for something like a wedding versus next down payment in terms of account or where to put it or even how much of the excess that I have each month should go towards each?

Mindy:
So, I am going to be raining on your parade and I don’t mean to, but you’re not engaged yet. So, there isn’t a wedding to save for right now, which might goose the conversation, which is great. You don’t have to have a big $75,000 wedding if you don’t want to. You could. I was the last of my friends to get married. Literally, everybody got married before me. It was this very tight timeline. It was wedding, wedding, wedding, wedding, wedding, wedding, wedding, and then me. Every bride said, “I spent all this time planning. I got up in the morning, and all of a sudden, it was over. I don’t remember anything and I didn’t get to talk to everybody. It was just this huge, chaotic thing.” So, I did not do that.
I said, “I am going with my best friend, my husband’s best friend, our immediate families. We’re going to go get married. We’re going to go have a party and there were 17 of us.” It was very intimate and nice. And then we had a great big blowout party, but it didn’t matter if anything went wrong during the great big blowout party because it wasn’t my wedding day. There were some issues with some of my friends and it was like a very stressful time. I’ve been married for 1,000 years. So, I know this is a very different time.
Scott just got married. It was lovely in the pandemic, but it was still lovely. It was online, and my girls love to watch it. What kind of wedding do you really want to have? Does it have to be a $75,000 wedding? Could you take that money and put it towards something else? And then you’re not working for an extra 10 years to pay that off, but instead you bought a rental house and now you can retire at 35. So, I’m just throwing these out there.

Louise:
I think with the pandemic too, the expectations for weddings have gone down, which is helpful, what guests expect to get into experience.

Mindy:
Oh, no, no, no, no, this is your wedding. It’s what you want. It isn’t what the guests expect. If they’re expecting something that you’re not going to give them, they don’t have to come.

Louise:
Fair enough.

Mindy:
Sorry.

Scott:
I agree with that one. It’s what you want, right? If that’s what you want and you want to spend the money with that, then we’ll figure out. We’ll account for that in the approach that we take with all those kind of stuff. I didn’t hear $75,000 wedding. I heard $75,000 inclusive of engagement rings, wedding, and house down payment.

Mindy:
Okay.

Louise:
Yeah. So, sliding scale for how much each of those would cost, but that’s a guesstimate for all of those things.

Mindy:
Okay.

Scott:
Okay.

Mindy:
You’re right, Scott.

Scott:
I don’t think that changes too much about what we’re describing here, frankly, with this, because right now, you have some student loans and a mortgage on your rental property and other investment opportunities, right? So, you’re asking, “Where should I store the money that I’m saving for the wedding?” Well, you have 4.5%, 5% interest rate debt currently with that. Why not just continue paying that or continuing with your current investment approach, instead of socking away the cash specifically for an event that to Mindy’s point, isn’t even scheduled yet with that?
So, I wouldn’t worry about locking it up in some savings account with that, because you’re just going to be arbitraging risk. You’re going to be getting 1% and a CD, instead of 4.6% on your student loans or your rental mortgage.

Louise:
So, in terms of the debt, I don’t know that it makes sense to pay off these mortgages more quickly given a relatively low interest rate. So, yeah. I mean, also, the student loan has an even lower interest rate. Right now, it’s zero, so I’m not paying it, but the only one that stands out is the personal loan. I think it’s like 5.8%. Does it ever make sense to pay off those mortgages early, or at that point, do I start saving for the next one?

Scott:
So, I’m answering a different question with that. You’re asking a good question with that, but I was talking about the question of, “What do you do with the 75 to 100K cash that you want to save?” I don’t think you save it. I don’t think you separate it out and place it somewhere else. I think you continue with your investing approach and then pull out the cash when needed to go with this. Because if you, for example, just set that into a bank account, there’s no reason why you’d put it in a bank account rather than paying off the personal loan. That’s a much better example, right? You almost certainly could get another personal loan at that interest rate right now.
So, if you pay it off, you’re just now not accruing interest on that, instead of having cash sitting in a bank account while you pay interest on that. So, what I’m trying to just articulate is probably your best use of additional cash is on another rental property. I don’t know. I’d have to do the math, but there’s probably a good risk adjusted return on continuing your current approach and moving towards that 10 rentals goal that will more or less get you past the five-point with that. The second best use of cash is probably in the retirement accounts and investing that you’re doing with that.
The third best use of cash would be then paying down this debt. The fourth best use of cash would be dumping it on top of the pile or creating a new pile to save up for these future expenses. That would be how I think about it in the context. There’s an infinite number of other uses of cash that you could come up with if you got creative enough. But from what we’ve talked about, those seemed like the order I would approach them in.

Louise:
Okay.

Scott:
What do you think, Mindy?

Mindy:
Yeah, no, I agree. I can hear people saying, “Oh, but Scott, you said if it’s between 0% and 4%, don’t pay it off early. If it’s between 7% and above, pay it off early. If it’s in that middle, don’t pay it off or maybe pay it off.” I want to point out, though, that you’re saying rather than taking this money and saving it in an account that’s going to pay you 0.01% interest, you’re getting a better return by paying off the 5.8% loan and getting a better return by paying off the student loans. I wouldn’t pay off the mortgage early.
You do have a 4.625% interest rate on your lower mortgage. I would look into maybe refinancing that, see if you can get a rate and term refinance, see if there’s any cash out option that you can do with that at a lower interest rate to throw at the personal loan or the student loans. Although that’s going to be a 30-year that you’re borrowing against. So, maybe a cash out isn’t the best option. But 4.625% in the whole scheme of historical interest rates, that’s a really low rate, but currently, that’s a high rate. So, I would look into maybe refinancing that, but yeah, I like what Scott is saying about don’t sit there and grow the money at this tiny little rate when you’re paying out at a higher rate for this particular thing. Mortgages don’t count.

Scott:
I wouldn’t pay the mortgage off early necessarily. There’s a very few circumstances where that’s the right move, except for folks who want to get debt free with that and that’s their specific goal. They want to have 10 paid-off rentals or 5 paid-off rentals. That’s a great goal with that. It’s not mathematically going to get them as far necessarily or as quickly, but it is a perfectly reasonable approach. I’m simply saying, rather than stockpiling a hoard of cash to pay for these items, that would be a theoretical better use than doing that. So, it’s an illustrative example of, “Oh, no, there’s 10 other better things to do with that money than to stockpile it for the future wedding, I think.”

Louise:
So, when do I start saving for those things? It would take me a while to get that much cash, which is why I’m thinking this far in advance.

Scott:
I think if you wanted to finance that wedding right now, you would have multiple sources of cash, including a HELOC or mortgage or whatever with those types of things with it. Plus, you’re $25,000 in current cash. So, I don’t think you’d have trouble financing anything less than a very lavish wedding with your current financial position. What do you think? Is that reasonable?

Louise:
Yeah, yeah, I guess if I had to, I could go basically just zero to do it, but that’s a good point. Yeah.

Scott:
I mean, you’re saying, “How do I get access to $75,000 in cash in three years?” Well, there’s no comfortable way to do that, right? One way, I’m going to have to stock trade a huge pile and sit on it for three years and then spend it. The least bad way to do that would be, I think, to invest and then borrow against those investments or liquidate some of those investments to finance the event at the time that you need it with that by increasing your access to credit and having a reasonable… Again, let’s say over the next year, we just said you’re going to save 12 grand from your regular run rate. You’re also going to have two additional paychecks. That’s another 9 grand. So, that’s $21,000.
Then you probably most years because companies like to retain their employees get a 20% bonus. So, that’s another 24 grand. Let’s call it $18,000 after taxes with that. Then you’ve also got 6 grand coming in from the rentals, give or take across that, right? So that’s 35K that you’re going to get access to after tax, maybe more if you begin putting a little bit into the 401(k), plus a raise or two that might happen in between there. So, that should be plenty of cash to finance most of these events on an ongoing basis with that. I think that something to articulate is that you’re new to the $50,000 raise situation that just occurred for you with that. So, how’s that? Feel better with that particular answer than what I said before?

Louise:
Yeah, I was just thinking that. You know what? I think maybe it hasn’t hit me that I make more money now.

Mindy:
Well, good, it shouldn’t hit you. You should take out that and save it, but also, let’s look at next year. You’ve been at the job for a couple of years. Do you have a praise folder in your inbox? When somebody sends you a note, “Hey, thank you so much, Louise, for this. This was really great. It was so helpful for you to do XYZ for me. You really saved my team time, money, whatever,” great, that gets into the praise folder. Other things go into the praise folder. Talk to your boss. I’m assuming there’s some 90-day review. Talk to them and say, “Hey, I want to have the opportunity to get the most raise possible at my 12-month review. What do I need to do?” He’s going to be like, “Oh, increase productivity by 78% and generate more revenue.” He’s going to give you specific items to do.
First of all, get it in writing and put those into your praise folder as well and keep that in your mind. While you are going through this praise, oh, this relates to this goal here, this relates to this goal here and just keep track of stuff, because it’s really great to go in at your 12-month review, your boss calls you in and they’re like, “Hey, what have you done?” You’re like, “Oh, stuff?”
It’s hard when you’re put on the spot. But if you’re constantly thinking about this, you go in and you’re like, “Oh, at my 12-month review, look at all of these things. Wait, there’s another page and another page and another page.” They’re going to be like, “Wow, we really need to keep her,” or maybe they’re jerks and you’re like, “You know what? I’m going to go someplace else. Look at all these great things I did at my last job.” So, what are you laughing at, Scott?

Scott:
I think that’s a great advice from Mindy. I’m still hung up on the wedding thing. I was like, “One more key piece of advice for someone who just got married,” not key piece of advice, but just knowledge about how it works with that. Suppose that you desire to spend $50,000 on a wedding, right? The wedding venue and the people who are going to be taking that money from you are not going to just on faith let you go through the course of the year, not paying them anything and then collect it all at once at the end of the process.
So, that was not an option for me. I don’t think it will be an option for you. It could be an option to pay all of it upfront, but most people are not going to do that either, because I wouldn’t tolerate that. You’re going to be paying in installments over the course of six months to a year leading up to the wedding anyways from a cash flow management perspective. So, sorry, just going off on a tangent back to that.

Mindy:
Isn’t your girlfriend going to chip in?

Louise:
Yeah, yeah.

Mindy:
There you go. So, now you only need $37,500.

Louise:
That’s for the down payment, too. I’m not that crazy. $75,000 is not just for the wedding.

Scott:
For the down payment, you can put down 3.5% or 5%.

Louise:
Yeah.

Mindy:
But that is for high cost of living in a city.

Louise:
It’s not 20%. Yeah.

Scott:
Even if you’re putting down on $1 million property, 5% is 50 grand, right? That’s $25,000 each for that down payment. So, 3.5% would be still less.

Louise:
So, thinking about that, the loan amount if we do buy here, we’re probably looking at between $750,000 to $1 million. It’s not out of the question that that’s how much a property would cost. Even though small interest rate is going to increase that monthly payment, is there wisdom in terms of percent of down payment? Should we be, ideally, looking at that 20%, or is that not necessary?

Mindy:
20% isn’t necessary just to buy a house. You get 20% as the threshold for not paying private mortgage insurance. So, if you get a conventional loan with PMI, then when you hit 20% of the purchase price in equity. You can request that they remove the PMI. When you hit 22%, they have to remove it. If you get an FHA loan, it’s more for people with maybe a lesser credit score or less of a down payment. It’s 3.5% for an FHA loan, so I think it goes down to 580 credit scores. The PMI stays for the life of the loan. You would have to refinance out of it.
So, if you have the option to get the conventional loan, that’s a better option. Conventional can go as low as 3%. The city that you’re in, I don’t think there’s any USDA opportunities there. I don’t even think we need to bring that up. That has a 0% down payment option, but I don’t think there’s any USDA availability where you are.

Scott:
Let’s say that it’s two years from now, three years from now, I’m just getting married. I’m thinking about a house, the $750,000 range, and have the context of financial independence or building wealth in mind while buying that house. First, I think about a house hack, but you already did that. So, great. Well, we checked that box. Second, if I have $250,000, which is more cash than you anticipate happening at that point, right? So, I could put down a 25% down payment on that property. I still wouldn’t. I would put down 5% most likely, which would be 50 grand. I take the other 200 grand, and I invest it in an asset that I think was likely to perform well with that.
Now, you can say that that’s a huge risk, but I think putting all of that money into the primary residence is an even bigger risk than that, right? So, it’s inherently risky to purchase a million dollar property in essentially any circumstance until your income is above certain huge levels with that. But if I’m going to do it, I think that putting all the eggs in that basket makes less sense than continuing to diversify the position with that. That’s my take on that. What do you think, Mindy?

Mindy:
I think you’re right. That’s exactly what I did with my property. As soon as I could pull out as much cash as I could, I did. I needed to borrow to buy this property, but then I wanted to cash out too. I had to borrow for my 401(k) and random other things. I agree with what Scott is saying. PMI doesn’t have to be a huge amount. At that level, it might be $100 or $200 a month, but what would you have to sell to come up with the 20% down? How long would you have to wait to come up with the 20% down? So, some people just automatically dismiss, “Oh, PMI, I’m never going to pay that. I’m just going to say 20%.” Talk to a lender and see what PMI would be for you in your specific situation, but it doesn’t always have to be abandoned.

Scott:
Does the PMI move like you have to pay a higher amount of PMI in absolute terms, if I put down 3% versus 10% versus 15% versus 20%? I know that when I bought a property, I paid MIP. I had an FHA loan on that with my first house AG. It all fell off at once once I got to a certain equity level or refinance the property, but there was no middle ground. It never diminished as I moved towards that equity threshold. So, sorry, go ahead, Mindy.

Mindy:
I think it’s when you buy. If you put down 3%, your PMI is going to be more than if you put down 10%. But once you get to 10%, it doesn’t drop. PMI, I believe, is the same until you refinance. We should get a lender on here to talk about all the ins and outs of mortgages.

Scott:
Yeah, that tells me that it depends on the movement between 3% and 5% and 10%, but it’s likely that there’s no point in aggressively prepaying or attempting to. Just put down the lowest amount on that, because the difference probably is not going to be that huge between those different down payment amounts, and it doesn’t change at all until it drops off entirely when you hit the equity threshold or refinance. So, great.
What that says is the reward for paying off that MIP early or getting out of it is not very large until you’re very close. It makes sense to spend the last five grand, every last five grand in cash to pay off to get out of MIP if you’re going to sit there for a while, at least, but it doesn’t make sense to bring $150,000 to get out of the MIP with that. So, that would be the framework I would use or my bias towards it. I have to think about it and probably get a mortgage lender. But does that help answer your thoughts about what you need for a down payment discussion?

Louise:
Yes, it helps my thoughts and it helps the amount that I need. So, thank you. I feel like the theme is I might need a little less cash than I thought originally, so rental properties that are closer on the horizon that I thought.

Scott:
Yeah, there’ll be a source of cash, right? You can borrow against some of them if you really do need it, but I think you’ll find in your current position, if you don’t change in an expense front in general, you’re going to be able to cash flow these events pretty handily. If things go even close to well over the next two, three years.

Louise:
Speaking of the refinance, Mindy, you mentioned refinancing the one property. Two questions, first, what would be the best way to go about searching? I’ve read many of the BiggerPockets books, but I don’t think I’ve done a very good job of searching around for interest rates. I was wondering what you think would be the best way to go about that. Second, which goes with that, it’s a lower value home. So, it’s a pretty small loan, which might have been my barrier when I first looked. I’m not remembering but that’s something to think about.

Mindy:
Yeah, I was going to bring that up. Because it’s such a low value loan, most lenders don’t want to loan under $50,000. So, look, if this house is worth $55,000, it’s not the only house in town with $55,000. There’s a lot of other more properties around that same value. So, lenders locally are going to most likely have a loan option for the lower amount, as opposed to a big national lender who’s like, “No, we don’t do anything less than $75,000.” They’re not the right person for you.
So, I would first look at all the banks in town, the local banks, not your Chase Bank or Citibank or any of those big ones, but the local credit unions, the local banks. See if there’s a mortgage broker locally, who you can talk to and see what options they’ve got, because there are people making loans less than $50,000 when the cost of the house is less than $50,000, but I think the best bet is locally.

Scott:
Yeah, I want to chime in on this. You’ve already got two properties in this town and it sounds like you’re intentional about buying more, but you really need to buy more for this strategy to work. Because if you just had that one property, it’s an annoyance. It’s so irrelevant to your overall financial position inside of the next 10 years that it’s not a powerful mover. Ten of them, a portfolio of 10 is a valuable endeavor with that and can add net worth use in a meaningful way. Just keep that in mind. If you ever want to transition out of this, I would consider selling these properties if you’re not intentional about building a portfolio in that town for some time.

Louise:
I’m nowhere near this and I likely won’t reach it, but is there anything to think about in terms of diversifying location or when might that kick in?

Mindy:
Okay.

Scott:
Not to buy $1 million house.

Louise:
Yeah, that’s true. Once my portfolio is $1 million, let me think.

Mindy:
If you had ties in another city, let’s say that you’re in one city and then your girlfriend has ties to another city that’s inexpensive, that could be an option, but just randomly choosing a bunch of different cities and I’ve got one here, two over here and one over there and three over there. You have a property manager here and here and here and here and here.
When I am a property manager and I am managing your 1 property in this town versus Scott’s 17 and Scott’s property has a problem, I’m going to be like, “Oh, Scott is 17 times more valuable to me than Louise is, times all these random places around here.” Plus, finding a good property manager is so hard. I would say, unless you have a real reason to be someplace else, focusing on the same city over and over again, as long as it’s providing good cash flow and the numbers are working would be your best option.

Louise:
Okay.

Scott:
If you believe in the prospects of the town and do your homework on the cash flow potential of these properties and feel like it is as reasonable a place to invest as anywhere else in the country and you have that advantage of it being your hometown with it, that all stacks up really powerfully. If some of those items are not true, that completely changes things and would make the diversification much more appealing with that or moving to a different town entirely where you do feel like you have this advantage. But if you believe in the prospects to a reasonable degree and you think the numbers are good and you’ve got the hometown advantage, I agree with Mindy. I think you just keep doubling down there.

Louise:
Okay, cool.

Mindy:
Yeah. One last thing, I didn’t think of this when we were talking about refinancing the current mortgage, call up the lender that holds the mortgage right now and ask them if they can do a rate and term refi, because they would rather make a little bit of money than no money when you take their mortgage away. So, if you can go from 4.6 to… I don’t know what mortgages are right now. … 3.8, that’s better and then they’re still making some money.

Louise:
Am I not closing again? Am I saving on those, or do I have to pay all that again?

Mindy:
Sometimes it’s a real easy, streamlined process and sometimes it’s not.

Scott:
I missed. Why are we refinancing in the first place?

Mindy:
Because it’s 0.4625% and I think lending right now is much less.

Scott:
Okay, fair enough. I think she’s asking a good question, though, about whether the economics of refinancing that loan will pay off, because it’s so small.

Mindy:
Yes, for sure. You don’t want to pay $10,000 to refinance this loan. This goes for any refinance. I’m glad you brought that up, Scott, because this is one of those things that’s in the back of your mind. But if you don’t say it, maybe somebody else doesn’t quite have that same frame of reference. Yeah, if you can spend, let’s say, $1,000 to refinance this loan and it’s going to pay itself off in a year and you plan on having this loan for a very long time, that’s a great deal. If it’s going to cost you $10,000 to refinance this loan and it’s going to take you 15 years to pay it off, don’t refinance. That’s not a good choice. So, definitely run the numbers and make sure that it’s a good idea to refinance. But if you can, I would do it.

Scott:
I’m wondering something else here with this, which is if these properties are going to be $50,000 to $100,000, you might find that a lender is going to be more comfortable just giving you one portfolio loan that you can up or downsize based on the size of the portfolio. Because of the value of these properties and the fact that they’re all separate, you might be a good candidate for someone to use a portfolio loan earlier than a lot of other folks who probably are better off using conventional loans to finance these properties for the first 10. So, that’d be something worth investigating. That would change your cash needs dramatically as well, because they might say, your properties are valued at 150 grand and we’re willing to loan at 75% of that.
Right now, you’ve got two loans that are at 60%. So, that’s 15 grand. You could get from these guys and cash out. And then you add that to your 10. You buy another property and just keep rolling that. That might be a good structure for you. I bet you that you have good odds of finding a bank willing to do that, especially if you take Mindy’s advice and go to the local lenders with that. I’ll do a lot of homework before that, make sure there’s no gotchas or funkiness, and that you want a 30-year am if you can get it or a long amortization. You don’t want these balloons and all that stuff. But you may find like there’s other advantages.
At 4.6, which is already a high interest rate, but your current interest rate, you might be able to get a 30-year amortization and they might let you put the properties into an LLC on that. So, that’d be a big advantage early on with this stuff, just that much less risk. So, something to think about when you’re looking for financing on that.

Louise:
Do you know, is that something that could be available as low as two properties or I guess maybe it’s bank to bank?

Mindy:
So, a portfolio loan is the banks write their own rules, because they’re keeping it in house as part of their investment portfolio. So, they don’t have to conform to Fannie Mae and Freddie Mac underwriting laws. They make it up as they go. So, if they want to do two properties, they can, because it’s their own thing.

Louise:
Okay.

Scott:
But I bet you that the worst case scenario is they’re going to say, “Not yet. When you get to this level of volume, we’re going to start doing that.” They might say, “Because you intend to buy another one, we’d love to get your business locked in early.” Yeah, I think that’s a good risk. If they say no, then just keep going with plan A. So, I think that’s a really potentially good option for you to investigate.

Mindy:
Yeah, I’m excited about all these options you have. I’m going to send you away with the note that I want to talk to you in six months and see where you are in six months.

Louise:
Sounds good. I would love to.

Mindy:
Okay. Well, this is awesome. Louise, thank you so much for sharing your story and your finances and the intricacies of all the different options that you have. You are doing a great job. Scott, we stink at saying what a great job our guests are doing. You’re doing a great job. You just want to have more and that’s great. I think that 40 is good. I think 35 is going to come and you’re going to be like, “Wow, I don’t have to work anymore.”

Louise:
Fingers crossed. I mean, not fingers crossed, actionable plan and make it happen.

Mindy:
Love that.

Scott:
I completely agree. You’re doing so many things right. This is going great. Like a couple of other stories we’ve had recently, I think you’re just like, “Oh, wow, I’m doing really well right now. Oh, my gosh, my position has transformed dramatically in the months preceding this talk.” That’s a good problem. So, take advantage of it. Keep those expenses low. I hope it gave you some things to think about that will be helpful with the three goals you mentioned.

Louise:
Absolutely. I think I got some really good guidance and also, perspective on my current status. I don’t know that I had been fully realizing the potential that I have over the next year. So, I appreciate you giving me the lens to look at that and then also some things I can tweak and pivot. So, definitely look forward to that six months talk.

Scott:
Awesome.

Mindy:
Awesome. Well, I will send you a note in five and a half months to invite you back on.

Louise:
Wonderful.

Mindy:
Okay, thanks, Louise. We’ll talk to you soon.

Louise:
Thank you.

Mindy:
All right. That was Louise and I love her future and her horizons. Scott, what did you think of her show?

Scott:
I think she has some interesting financial decisions to contemplate.

Mindy:
I think so too. I think she has a lot of great options. Now, it’s just, “Which fantastic option do I choose?” I am super looking forward to checking back in with her in about five or six months.

Scott:
Oh, that joke now makes you laugh multiple times.

Mindy:
[crosstalk 01:21:31].

Scott:
Look, what I thought was awesome about this show is she has clear command over her expenses. She is obviously intentionally building her wealth. I can’t imagine that was a total non-factor in her decision to change jobs. She has increased her income. She’s got the two rental properties. She’s got the retirement accounts. She is rolling on all cylinders in terms of getting the wealth snowball going. She’s just hasn’t quite realized that yet, what that means in terms of the cash that is going to come into our life and the options that she has.
Now, we’re moving into a world that’s much more art than science, right? That’s much more, “I’m going to guess at long term tax rates for the government with this. I’m going to guess that whether this market’s going to do better than that market. I’m going to guess what the future expense of a wedding might be and the sources of cash that I can use to get that.” I think it was a really powerful discussion to go through those options, but also framing as the backdrop of, “No, you’re not saving $1,000 a month. You’re saving $3,000 a month most likely.”
It’s going to come in increments and buckets like it always does or like it often does for people with multiple streams of income and who are finding their positions advancing quite rapidly, but that’s the reality with that. How do you play the game with the rules that she outlined, want to have this much cash available for these events about future life, a real estate portfolio, and a retirement portfolio? How do you play the game to the best of your ability? Well, at that point, you have to just be willing to play to win, but not to ruin. I think it was a great discussion. We got there today.

Mindy:
Yeah, no, I completely agree, Scott. Like I said at the beginning, I’m so excited for her horizon. I think that going through this, “Oh, I have to save this much money. I’m only saving this much money. I’m only doing this or I need to do more,” and having somebody look at it from a 50-foot lens is the whole point of this episode. The whole point of this show is to look at it from a different pair of glasses and see what we can see that you can’t. I think we saw a lot of things. At the end, she’s like, “Oh, maybe I am doing okay.” I have one request from our listeners. We did talk about her current retirement contribution. She has a 401(k), a Roth 401(k) option, Roth IRA, HSA.
We would love it if you would go into our Facebook group, which is facebook.com/groups/bpmoney, and answer what you would do. Give her advice on how you think she should allocate those contributions. Maybe it’s just continuing what she’s doing, but all the different options and the reasons behind it can be very helpful for her to look at and say, “Oh, I really like this one best. I’m going to take this advice.” Okay, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 248 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen, saying we’ve got to disappear, dear.

 

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I Just Got a Big Raise, What Should I Do With the Money? is written by The BiggerPockets Money Podcast for www.biggerpockets.com

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