Finance Friday: Can I Live in Flip My Way to FI at 55 Years Old?

May 11, 2022

Almost every age group wants to know how to retire in ten years. Whether you’re in your teens, your mid-thirties, or your mid-fifties, retirement can seem like an eternity away. Those who retire early and find financial freedom tend to do so through a combination of smart investing, early saving, and a tenacity for budgeting (without giving up everything they love). But what if you don’t have time on your side? What if you’re still paying off debt ? Is it still possible to retire?

Thankfully for today’s guest Rik, and all you listeners at home, we can safely say that retirement is in reach, even if you feel like you’re a little off track. Rik has three degrees and as a result, is strapped with some moderate student debt. He wants to retire in five to ten years and realizes that it will take some work to get him in that position. Thankfully, he has some hands-on real estate investing experience—owning a duplex and performing a live in flip on his primary residence.

Rik is more than willing to get his hands dirty in his pursuit of early retirement, whether that means doing remodels himself, limiting his booze budget, or simply living a little leaner. With some smart investments under his belt, he’s been able to set himself up in a good position to take on more projects, have smarter debt, and keep more cash. But, Rik will need to take care of a few things first before he can continue building this retirement runway that’s already underway.

Mindy: Welcome to the BiggerPockets Money Podcast, show number 302, finance Friday edition, where we interview Rick and talk about cutting your spending and analyzing your real estate investments.

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

Scott: Never question your intros Mindy, though, but thank you. Thank you very much for another good show today.

Mindy: Scott, thank you for a good show today. This is a great show. 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 just get a little bit more flexibility in your financial position, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy: Scott, I am excited about talking to Rick today. When I first read his application, which he applied at, I felt the frustration that he had about his financial position. But once we started talking to him, I think that he’s being a little bit hard on himself. Yes, he’s having some cash crunch issues, and yes, I believe there are things that he could be doing better, but I think that he is in a good financial position, especially given all of the situations that he started off with. We’ll start off with a bit of his background to give some context to where he’s coming from and then jump into his numbers and see where he’s going.

Scott: Yeah, I think Rick has a lot going for him, a lot of positives in here. I think that he wishes he’d started earlier. I’m sure most people wish they’d started earlier, but he’s doing great. There’s a lot of pieces to move here, and I think there’s a lot of fun discussion that we can have and a really complex but interesting financial position to unpack and make some moves. So I think we helped Rick, and I am excited to see what he does over the next couple months.

Mindy: I am too. Okay, before we jump in, we need to tell you that 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.

Mindy: Rick lives in a medium cost of living area, is former military, and looking to retire early in about five years. He’s looking for guidance on how to grow his real estate portfolio to help him generate enough income to make his early retirement dreams a reality. Rick, welcome to the BiggerPockets Money Podcast.

Rick: Thank you so much. It’s a pleasure to be here. I’ve been listening to you since COVID happened, and I was starting rehabbing a duplex. It’s just been such an amazing learning experience for me, so I’m happy to be here today.

Mindy: So Rick, let’s jump into a little bit of your backstory before we look at your numbers. Where does your journey with money begin and what sort of system are we looking at before we look at where your money is going?

Rick: It depends on how far back you want to go. If we start with my childhood, my financial journey started with zero money, and I’ve heard this from other guests on the show as well. My parents divorced when I was seven. My dad was a veteran. He wasn’t working at the time. My mom was a stay-at-home mom raising two kids. My financial journey really started with seeing somebody who was working hard as a mom and then trying to pick up jobs, go forward with her education. She started in a mental hospital working as a nurse’s aid, went and got some certification, went back to a hospital. She went on to more school, got an LPN. She went back to school, and by the time I graduated high school, she had a baccalaureate RN. So what I saw was a mom who was struggling financially, we were on public assistance the entire time, but she was going to school, getting a job, going back to school and getting another job.

Rick: And so, that really set a foundation of hard work for me. And so, I started working when I was 12 with just paper routes and stuff, but I was able to buy books and things like that. I wasn’t very good with my money because I spent it all. Every time I went and made the collections for the newspapers, I’d give to the newspaper what they needed to have, and then the rest was my money, and it went to like things like video games and comic books and stuff like that. Later on in high school, I became a little bit more responsible and so I would use whatever money I got from work for things like buying new football shoes every season, things like that.

Rick: So, I think I had a good idea of how not to spend money unless I absolutely needed to later on in life because I didn’t have any money. And then going on to college, I basically did that all with student loans for my undergraduate. And that was because I couldn’t get Pell Grants or anything like that because my mom made too much money. She had gone into the Air Force. I’d been listening to a lot of the college expense shows you’ve been doing recently. I went into the financial aid office and I said, “Well, why can’t I get any Pell Grants?” They said, “Your mom makes too much money.” And I told them, “But she’s paying back her student loans. She just got out of college a year ago.” So I had about $30,000 of student loans by the time I graduated. And then I had to figure out how to pay all that back. I just didn’t have the financial literacy to really understand what I was getting into as a college student taking out all these loans.

Rick: And so, I had done a lot of jobs that trained me to be a videographer. I was once a wedding videographer, the worst job in the world, but they always had Swedish meatballs, and they were great. The funny thing about that is that this was in UP of Michigan, and they’re mostly Finnish people. So I don’t know what it was with Finnish people and the Swedish meatballs. Some kind of cross-cultural thing going on there.

Rick: And so, after college, I was just burnt out because I was working all of these production jobs. I didn’t want to go work at a news channel or something like that, so I went out West and I started working construction, but that wasn’t paying me enough. And then I ran into a friend who was working for a fishing company in Alaska, and he came back with a brand new, shiny truck, and he made $15,000 in three months, and this was mid-nineties. And so, I said, “This is my get rich scheme here. I’m going to go, I’m going to work for six months, and I’m going to pay off all my student loans.”

Rick: And then we didn’t catch any fish. So I came back with no money at all after that. And so, my last resort was… And it wasn’t a last resort, it was actually my first resort, but I went and did the fishing because it would’ve been faster. I joined the military, the Army specifically, because they had a student loan repayment program. After three years of service, they would’ve paid off a year’s worth of my loans for those three years. So I’d be debt free there.

Rick: And so that’s what I did. I joined the military. They paid for that, and then I got the GI Bill on the tail end coming out, and then I went back to school for a master’s. I had to start taking out more student loans, like I didn’t learn my lesson the first time. I got my MA, and then I went on for a PhD, and I just took out still more student loans. So I ended up with about $60,000 in student loans after I got my PhD. And by this time, I’m old already and now I’m older now, 12 years later. So I’m trying to dig myself out of all of these holes, and I think I’m doing a reasonably well job, but I really just need more help. I’m almost 50. The gray hairs are just coming into my beard, not up here, I don’t have any gray hair up here, I don’t know why.

Rick: And so, how can I retire even at 65 or 67? But I would really like to retire in the next five to 10 years because I’d like to play a little bit, have that financial freedom, and do some of the things I haven’t been able to do because I’ve always been behind that financial eight ball.

Mindy: Okay, so I have a question about your student loans. You have the GI Bill, and you still have student loans on top of that. Did you exhaust the GI Bill, or did you not qualify for the GI Bill?

Rick: No, at the time, the GI Bill paid for your classes, your tuition and fees, and I think there might have been a little bit in there for books and stuff, but it wasn’t covering living expenses.

Mindy: Oh, okay.

Rick: I was working as a teaching assistant, so I was teaching the first year composition course. First, I went back and got another bachelor’s, which is I needed to do because I had, I think, a 2.84 after my first bachelor’s. I was one of those resistant students, like, “I just want to take the classes I need for my future profession. I don’t want to take all these other courses.” So I did fail Arab Islamic history. That was a really bad one, and a few other courses. When I was in the Army, I really decided that I really wanted to go back to school, get a graduate degree, and possibly become a professor. The only way for me to do that was to go back and get another bachelor’s, and I did that. Just went back to my original school, just took the credits for the English major, which cut it down to about a year and a half. So I had enough funding, really, to get through that first year and a half of school, finish the bachelor’s, then move on to the master’s in English.

Scott: Thank you for giving us that awesome backstory with this and great to hear the goals five to 10 years, getting to financial freedom, having room to play and run with that. Could you tell us about your situation right now in more detail?

Rick: Sure.

Scott: Income expenses, assets, liabilities, general situation?

Rick: Definitely. We have one single family home that we’re living in now. That’s our live-in flip situation. I’ve actually been working on baseboards all morning. You can’t see them behind me.

Scott: Who’s we? Who’s we?

Rick: Oh, my wife, Kendra and I. And so, we moved here during the beginning of COVID. It was that March. We were actually working on rehabbing our duplex. We had one side rented out, and we had one side that we were living in, so we were house hacking that. And then our tenants moved out. It wasn’t for COVID-related reasons, but they left in the middle of March, and then I started plans to finish the rehab over there and rent that. That took me about six months. And then we moved over here. So now we have a duplex and we have a single family home. Our take-home pay is around $8,000. Kendra has a car. That’s about 405 a month. We have the mortgage, taxes, and insurance, because everything’s in escrow, for our single family home, and that’s $1,100 a month.

Rick: Car insurance about 123, phones around 100, electric, internet, that’s around 200, pets costs around 100 to $150 a month. We have two dogs. Then we have things like water, Netflix, Amazon Prime, a pet plan with PetSmart for 78. I think other big items are food. We’ve been using Mindy sheets. We use those for January and February, those worksheets. They were super helpful for us because we were spending way too much on food, especially HelloFresh and eating out. I learned from Mindy also that you can have a separate booze budget, so we have a separate booze budget that is around $200 a month. We try to keep eating out to between 50 to $75 a week. Kendra has a 401(k) she puts $1,200 into a month. I only put $50 into my… It’s actually a 457 through my university. I only put $50 into it because that’s the match, so it’s not very good.

Rick: So that’s really why I focus on real estate, putting my money into that, doing the work myself as much as I possibly can. We put $200 a month away for no-questions-asked fund money. Learned that from your podcast as well. We also have a travel fund that we put $500 into each month. Those total expenses come to around $6,000 a month. There are just things I think that come up every month that take you over the 6,000 that we plan to spend every month. We’re basically living check to check.

Scott: Yep. And what do you guys do right now?

Rick: I’m a professor at a university here in Chatanooga, and she is a nurse. We have good jobs, but we don’t make a ton of money in those jobs. And we keep our real estate separate. We really don’t count that as income.

Scott: Okay.

Rick: And really, it’s just been getting off the ground, so we really can’t count it as income.

Scott: Is that income, the 8,000 a month, is that pre-tax or post-tax?

Rick: That’s post-tax and all deductions, even for investments and stuff.

Scott: So combined income is probably close to 120, $130,000 a year-

Rick: Yeah.

Scott: … pretax. Okay.

Rick: That’s about right on.

Scott: Awesome. What does your wealth situation look like? Can you walk us through your cash position, investments, and debts?

Rick: Yes. It’s going to be a short list, folks.

Scott: No problem.

Rick: Especially these days. My gosh, I looked at my account this morning, and it had lost 12% for my 457. I think our net worth is estimated to be about $349,000, which I looked up stats and stuff, was like, “We’re not horrible. We’re above the median.”

Scott: Yeah, you’re doing good.

Rick: So investment accounts, we have roughly $120,000 in those. In real estate I think we have about $275,000 in equity. I have a paid-off car. It’s a truck. These days, trucks are going for a lot, so I don’t know if this is going to last forever, but I’d estimate that’s worth between 15 to $20,000. Kendra’s car still has lean on it, so if you pay that off, we have about $6,000 worth of car there. We have our travel fund which is about $2,000 right now, cash reserves about 4,000. I would also call that our emergency savings. Other than Visa, Visa’s really the emergency savings because they’re always there.

Mindy: They are always there.

Rick: So that’s our assets. And then in terms of liabilities, our duplex still has 148,000 on it, and that’s at 3%. Our single family home’s at 157, and that’s at 2.75%. Kendra has a credit card of $5,000. I don’t know what the percentage is on that one. That was an emergency fund spend right there. One of our dogs, she tore an ACL, and so we had to get that replaced, and that’s what that cost. Her car alone is at 11,5 at 4%. And then I have a few credit cards where is basically all house rehab. I have one at 11,000, and that’s at 0% financing until April of next year. And I have one at $11,000 for another that at 0% until April of ’23. And then I have 4,000 on a card that I just use to get our floors redone.

Rick: And then the two other big items, of course, are student loans. I have $54,000 in student loans, but I’m probably going to get those discharged through the Public Service Loan Forgiveness program this summer. Because they’re updating the counts right now, but I’m pretty close to that 120 mark. And then Kendra has $80,000 from her undergrad nursing degree and then her master’s nursing degree. And because she’s been working at nonprofits too, we can go through that employment certification process, and she’s probably getting close to that as well.

Scott: Love it. Well, thank you for all the detail here, this is great. This is really helpful, and I think we’ve got a lot to work with here. This is awesome. I’ll also just say, you guys are doing a lot of right things. You’re building wealth, you’ve got the rental properties, you’ve got the investments going, you’re spending less than you bring in with that, especially when you count how much is going towards retirement accounts. So lots of good things here with that. We’ve got a clear goal, five years, we want the most flexible position possible ideally. If not, in 10 years, if we can get there in 10 years. Is that right?

Rick: That’s right. I mean, if we could make it happen for tomorrow, I mean, you guys, would be working some magic.

Mindy: Well step one, win the lottery.

Rick: Step one-

Mindy: If you could just go by the winning lottery ticket, that is going to get you there tomorrow.

Rick: Okay. We’ll cut here, and then you can give me the numbers.

Scott: There’s actually a lottery called Set For Life, which is very confusing.

Rick: Is it, really?

Mindy: Okay, I want to focus on the student loans because it’s going to be a really quick focus. Yours are supposed to be Loan Forgiveness programmed this summer. I’m just going to give you a research opportunity to make sure that you have done all the things that you’re supposed to do. You made reference to the 120 payments that you have to make so that you can qualify for the loan forgiveness. I’m going to have you make sure that you’ve done all of the things. I know that there were some problems maybe 10 years ago, five years ago with the Loan Forgiveness Plan, so just make sure that all of your ducks are in a row because you’re so close. Kendra’s student loans are a little farther out. So that’s another research opportunity. How far out does she have to go? How many payments has she made? Is she 10 years into the program? It’s 10 years-

Rick: Yeah, it’s 10 years of [inaudible 00:19:22] repayments.

Mindy: … a plan. Is she two years into the plan, or is she really close to the end? If she’s just in the beginning of the plan, sometimes it’s better to make the payments. If she’s close to the end, sometimes it’s better to just go for that. Because there is the Loan Forgiveness part, you may have to pay taxes on the part that’s been forgiven. And this is where I get into the I don’t really know what I’m talking about, so I’m going to send you to or Student Loan Planner to find out more about these programs and make sure that you’re following all the rules surrounding them and to make sure that it’s the right program for Kendra. Since you’re so close, it is the right program for you because you’re about to not have to pay all of that money back.

Rick: Right, absolutely. Some of the things that are confusing, it was confusing for me at first too, is the annual recertification of your employment. You have to fill out that form every year, send that in, and then they have to do their check to verify that you actually work for that employer. And that’s the form your employer actually has to sign, send to you, and then you should be sending that in. You shouldn’t wait for your employer to submit that for you.

Rick: So, Kendra is farther out because she’s only been in the program for about three years now. She was working for a nonprofit hospital for several years, way back when, and that can count. So you have to go through and get the employment certification form from that employer that says you were a full-time employee from this date to this date, then you submit that to the program, the PSLF. And it’s really not PSLF, I think it’s Federal Student Aid. You submit it there first, then they update the counts of how many months you have. And so, that’s one of my summer tasks is to get that information from her, get that form all set up so we can send that in. Because it could be that she’s close to the 10 years and 120 payments, but we just don’t know yet.

Mindy: Okay.

Rick: So that’s a great question.

Mindy: Another thing is to look at, after you’re retired, do you want to do any sort of work at all? Do you want to teach one class a semester or zero classes and you’re completely done? What does your retirement look like after you have hit the number where you are generating enough income through your rental properties that you don’t need to work anymore?

Rick: I think in part it’s going to be what I’m doing right now for my part-time job, like managing the rental, doing the rehab. Maybe I want to get out of that because my hands are starting to fall apart as I age and it’s getting harder and harder to hold a hammer. One of our goals is we would like to travel. If we had a short-term rental, even just one to start with, right, we’d want to pick someplace where we want to travel to. We have a few cities in mind where everybody is investing. Like Avery Carl, she’s invested in Destin and Blue Ridge and up there in Gatlinburg. And of course, those are really close to us in Chattanooga. Those are all drivable places for us. So that’s really one of our big goals. And then I could be self-managing all of those rental properties as we go. So I don’t see me giving that up, but I do other things. My first bachelor’s was in painting and drawing and film and video, and so I’d really like to get back to doing some of the art that I used to do that I don’t have time for anymore.

Scott: I think the first thing we have to think about is what’s going to happen if nothing changes over the next three to five years about your financial position, right? And right now, you’re accumulating $1,200 a month in wealth via Kendra’s contribution to the 401(k). You’re also paying down the mortgage slightly. But how much cash flow beyond that is being added to your savings account each month?

Rick: Savings account? What’s a savings account?

Scott: How much cash are you accumulating after tax, yeah?

Rick: Really none because all of my cash goes straight to the rehab, the properties, anything like that.

Scott: That counts, right? Cash going into your rehab counts, right? That’s an investment, it’s just an alternative to the stock market or other types of investments that you’re putting in there. So how much are you accumulating on average over the course of a year or monthly?

Rick: I would say monthly because I’ve been trying to pay it off as I go, even though I don’t because the significant credit card debt that is in my name, the roughly 22,000… actually 26 now after the floor, a lot of that is from doing the rehab, and I’m able to put in probably at 1,000 to 1,750 a month to start paying that off.

Scott: Okay, so-

Rick: That’s my leftover cash goes towards that.

Scott: So I’ll call it 1,500 a month or $18,000 a year in cash is being generated by your household that can go towards investments outside the 401(k).

Rick: I mean, I would hope, but I think where I’m getting stuck is I have to pay off these credit cards. Now, I love to dance around with the zero APRs, move the debt from one card to the next, but I feel like I’m going to have to start paying that off once the rehab is complete. And so, everything’s going to go towards that.

Scott: Absolutely. But you’re generating $1,500 a month in cash, and that can either go toward credit card payments, it can go towards rehab, it can go towards investments, but that’s your cash surplus that your household is generating right now.

Rick: Right, right.

Scott: So that’s $18,000 a year, and over five years that’s about 100 grand. Right? That is, I think, the critical first step in thinking a situation like this. Do you have opportunities to increase income? This can drive opportunities to increase income on a regular basis. Can you cut a few hundred dollars out of the monthly expenses in the next couple of months and then maybe a thousand or two over the next year or two? For example, pay off Kendra’s car, no more car payment. That might be three, four years, I don’t know how long the payment is. But those are the kinds of things if you can think through how I can get that number to widen, you can get that from 1,700 or 1,500 to 2,000, 3,000. Now you’re accumulating 36,000, $40,000 a year. That will give you many more good options and much less, I imagine, stress about balancing payments going to credit cards versus rehabs versus other investments at this point in time.

Rick: Yeah, well, first on the jobs, I don’t think we can do anything. I’m an associate professor at my university and professor. As you’ve probably had a guest in one of your previous podcast, professor jobs are hard to get. You’d have to move if you wanted to get higher pay, basically. You can’t really go in and say, “Please give me a raise because I’ve been doing these things.” Right? You really can’t even construct that sort of argument.

Rick: Kendra’s a nurse. She probably has more flexibility to move about, but she started her current job about a year ago, and she’s been really happy with it. Really loves the people and the patients. And I think it’s the stress level of the kind of nursing she’s doing now compared to her past work in an ICU, I don’t see her really wanting to move jobs. I think things like trying to cut our budget. Maybe the booze budget has to go down a little bit. Her car, I think we could try to pay extra towards that every month. I did that with my truck because I bought my truck just a year ago. And before it really kicked in the rehab over here, I was putting an extra 1,000 to $1,500 on the truck every month. So I paid that off in about nine months, really just doing what you’re advising us to do. So maybe we could try that with her car and get that $11,000 down in the next year or so.

Scott: Okay. And Mindy, I think you had a couple of notes about the budget as well.

Mindy: I do. I see that your phone is $99 a month?

Rick: Yes.

Mindy: My friend, Mint Mobile is $15 a month, so that’s a big savings right there.

Rick: I’ve heard that.

Mindy: … if you were to take advantage of that. I use Mint Mobile. I think it’s great. It’s solid service. It’s just less expensive. I mean, I don’t notice any difference between Mint Mobile and… I can’t even remember the name. I’ve had it for so long, I can’t remember who I had before them. So that’s a savings of, what? $85 right there, 75? Yeah, $85 right there.

Scott: Also, Mint Mobile is a sponsor. They’re not paying us for Mindy’s ad right now.

Mindy: No, that’s my personal-

Scott: I think they’re great. I personally don’t use that. I want to spend all the money on the data, on the very limited, very expensive plan. But yeah, I think it’s a really good alternative to save a lot of money, and that would be one of the first things that can go.

Rick: Yeah, I’ll look at that. Okay. That makes sense.

Mindy: Yes. Another thing to look at is you have Netflix and… Well, it says Amazon Prime? Is that Prime or Prime Video?

Rick: The Prime Video? Well, we have the whole Amazon.

Mindy: The whole Amazon thing.

Rick: The whole Amazon ecosystem.

Mindy: So something I’ve noticed is that when I have Amazon Prime, it is super easy to hit Buy. But when I don’t have Amazon Prime or when the item isn’t Amazon Prime, I think about, “Do I really want this if I have to pay $3 for shipping?” Because I’m so cheap. But-

Rick: Yes.

Mindy: … get rid of Amazon Prime and see how much easier it is to not buy things at the click of a button when you have to think about how much you’re going to have to pay for shipping. And you have Netflix and YouTube Premium, are those for the same things, are those for the different things, and do you really need both of them? I mean, I’m a Netflix-

Rick: That was a great question.

Mindy: … shareholder, so I don’t want to tell you to get rid of Netflix. Everybody should join Netflix. But this is not for my personal gain, this is for your personal gain. How much time do you spend watching Netflix? And can you get that someplace else? Can you get that cheaper? Can you go to the library and rent videos? I’m showing my age, but we’re the same age, right?

Rick: No, no, yeah.

Mindy: You go to the library and you rent a DVD.

Rick: Absolutely.

Mindy: They have Redbox still outside of the grocery store. But seriously, when was the last time you watched something on Netflix? Is this something that you’re really doing?

Rick: No, it’s a great question. That would be the one for us to go, would be Netflix. It’s the one we watch the least. When it comes to Amazon Prime, it’s where I go to buy a dethatcher for the loan. So my Amazon spending, it’s really just I click, but it’s usually just stuff for the house. I really don’t buy things for myself. So I would probably keep that, get rid of Netflix. YouTube, I have that because I hate ads, and I actually watch a lot of YouTube for the do-it-yourself videos, BiggerPockets videos, so commercials, I feel like I’m losing time by having to sit through promotions.

Mindy: Okay, so start with Netflix and see how that works, and change your phone. Your pet plan is $78. I don’t have a pet, so I don’t know what this is or what it covers.

Rick: This is something we have through PetSmart, and it allows them to have as many visits as they need. Our dogs are getting older, so they can come in and have as many visits without charges. It’s like pet insurance.

Mindy: Like veterinarian visits?

Rick: Yeah. It’s vet services through Banfield Pet Hospital, which is in every PetSmart.

Mindy: Are you using $78 worth of services a month? I don’t know what a pet costs, so…

Rick: I’m going to say no. We had the dog who had the torn ACL, which cost $5,000, but we had to go to a specialist surgeon for that sort of service. So I don’t know if we’re getting our money’s worth with that. That’s a really good question.

Mindy: Look over the past three to six months and see how many times did we take our dog there versus how much would it have cost? Like if you took the dog there once and it would’ve been a $50 charge but you’re paying $78 every single month for this, that’s an easy thing to like cut, but then take that $78 and just put it into an account for six months so you have pet-

Rick: I think that’s smart [inaudible 00:32:16].

Mindy: … fees in case you need to pay them.

Rick: It’s our money. So, it stays with us if we’re saving it.

Mindy: Yeah. Why are you paying for Amazon Prime Video for the duplex?

Rick: It’s not really a long story. It was a long-term rental on that side. We had a tenant who moved to Hawaii. We wish we could have gone with her too. She had really nice furnishings, and so we actually turned that duplex unit into a mid-term rental. We bought her stuff. We put about 5,000 into the unit total with buying her stuff, and we turned that into a mid-term rental that was actually generating about $750 more a month than it was as a long-term rental.

Mindy: Okay, so that’s just a cost of doing business.

Scott: I would separate out expenses like that from your personal expenses. That’s the business. And you say, here’s my revenue and expenses, and that’s a perk you do to attract tenants 10 bucks a month for $750 more a month, good return.

Rick: Except we’re ending that. It’s just the rental prices have gotten so high, right, in our area, we are actually starting to lose money on the mid-term rental. So now we’re converting it back in July to a long-term rental, we’re charging more. So we’re going to be making more money not paying for things like that at the duplex, not paying for electricity and water.

Scott: Let’s get to the duplex in a second here.

Rick: Sure.

Scott: I have one more item, which is travel savings.

Mindy: Yeah. Well, there’s two more items, the no-questions-asked fun money and the travel savings combined.

Scott: I like the no-questions-asked fun money. That’s good. That’s healthy.

Mindy: Well, you would.

Scott: The travel savings, though, you’re spending $6,000 a year on travel. Now, that’s fine, you may like to travel and all that, you can definitely afford it to some degree. But I would challenge you, you’re doing a rehab, you got all of these credit cards and all this stuff, why not challenge yourself to get travel rewards and use points effectively if you’re putting large expenses in your rehab onto these credit cards and see if you can knock that down to 200 a month or 100 a month to cover the incidentals and you can pay for the flights and hotels with travel rewards. That’s a research opportunity that I think could save you four or $5,000 in your situation because of the amount you’re spending on cards for rehabs.

Rick: Yeah. Yeah, that’s a good point too. I mean, we just started this. We’ve been listening to your podcast, and so we thought, “Oh, we should have a travel fund because we’ve never had a travel fund and we really don’t ever travel.” So we thought it would be a good idea to start one so we could. We’ll go a whole year without going anywhere. So we thought like, “Well, let’s put money aside and do this as something we could use if we want to go down to Destin for a weekend, we could do that. And so, rewards, credit cards is another great idea. I have a Amazon credit card, which gets me lots of points, but no travel points. I have a Lowe’s credit card, which saves me 5% all the time.

Scott: Well, the Southwest cards right now, what you can do is if you spend 3,000 in the first three months, you get 50,000 points. And if you spend 12,000 in the first year, you get another 50,000 points. So that’s 100,000 points. You’re also getting points for dollars spent. You spend a little bit more on your rehab, now you’ve got 125,000 Southwest points, which gets you the Companion Pass for Southwest. You can buy one, get one, and do that. So there’s research opportunities like that to uncover. If you don’t want to fly Southwest, you want to drive and have hotel points, then maybe the Sapphire Preferred or something like that might be a good card to explore.

Rick: I was just hesitant to get another credit card, even if it’s just locked away in some travel lockbox that I can only get to when we’re traveling.

Scott: So we’ll get to cash flow management as well in here. But I think if you’re going to spend money on the rehab and it’s going to go on a credit card, it might as well go on a credit card that’s going to get you travel rewards points if you’re thinking about that.

Rick: Yeah, no, that makes sense. I mean, I have USSA card that gets me points. You can turn it in for cash. But it’s just such a small amount it’s hardly worth it. So yeah, looking for something that would have bigger rewards would be great.

Mindy: This is where I’m going to jump in because I have done all of this. I have done a ton of live-in flips with rehabs that I am swiping my card on all the time. I will say, open up one card at a time. You want a hotel card, you want a airline card? Like Scott just said, the Chase Sapphire Preferred card, it has a $500 annual fee, which really, really, really hurts to pay but-

Scott: At the Reserve card. I have the Preferred card with [inaudible 00:37:20] fee or whatever it is.

Mindy: Yes. So I didn’t like the great big fee, but you get something like $300 in travel vouchers. Now it’s only a $200 fee when you take that into consideration. And then it’s like you more than make up for it if you use the points the right way. And there’s all sorts of articles if you search, I think they’re called Chase Ultimate Rewards Points. And if you research those, it’s you earn a point for every dollar you spend and those points can be transferred to Southwest. So you want to spend 10,000 Southwest points, you transfer 10,000 over. There’s people who devote their whole life to telling you how best to spend these points. So definitely do some research on those when you’re getting ready to travel, but there are a lot of really great ways to really cash in. I mean, you would spend the money on the rehab anyway, why not have that fund your vacation so now your vacation costs you $12 instead of $1,200?

Mindy: I will say, from my own personal experience, open up one card, get that spend, know in your head that you need to spend 3,000 or 5,000 or whatever. It’s so easy to do. I spend so much money at Home Depot and Lowe’s. And then open up another card and hit that spend. But when you open up two cards at the same time, you might forget, and then you don’t get to spend on either one of them and then it’s a big mess, and you miss out. I did that on purpose… or I did that on accident once, and I was really mad.

Rick: No, that makes sense.

Scott: I don’t think this is your number one opportunity here, but I think it’s an important one. What you need to be focusing on is sit back and say, “Over the course of a year, how much cash am I generating?” And I mean that by income minus expenses in your personal life, right? And then, “Where am I deploying that?” is the next question, right? You’re deploying that right now all to your rehab, right? And really, you’re putting all that and then some into the rehab, which is why your credit card balances are going up. But if you can get that number to increase from the 18,000, I’m ballparking that right now, per year to 30,000, 50,000, 75,000 over the next five years, that is the formula, that’s the foundation of the engine that will move you towards financial freedom.

Scott: And then it’s about, “Okay, I’m going to deploy that. I’m going to rehab. I’m going to buy real estate. I’m going to invest in stocks, whatever, that can compound.” But those investments are subject to the whims of the market to some degree, right? Those will go up and down. So you need this baseline engine to be stronger in the next couple of years, and that’s going to involve a disciplined budget in your case and I think continuing to be open-minded as the next 1, 2, 3, 4, 5 years pass about income opportunities. Is there a traveling nurse opportunity that doubles her income? That is also a good gig. Okay, maybe I got to make some hard decisions at that point because of the impact that will have on these other bigger goals from a financial perspective with that. Those will be things to think through.

Rick: Yeah, I think that it makes sense to focus on those fundamentals first and get that sorted out and do what you’re talking about in terms of snowballing that savings and paying off of debt. I guess I’m wondering, “What else can I do to make more money?”

Scott: I think the biggest opportunity with that is your housing, which is exactly what you’re doing. So walk me through your single family house that you own right now. You moved out of the duplex, your house hacking, what was your thought process with this house?

Rick: It was cheap, and I knew I could fix it up, was really the whole thought process. It’s kind of funny, the duplex is only three doors down the street. And so, we tried a new real estate tactic. I believe it’s a new strategy called walking dogs for dollars.

Scott: Love it.

Rick: And so, we got to know the neighbors, and there was a couple here who had an RV and they were planning to retire, and they wanted to sell their house. It’s a longer story, but basically, they wanted to sell it to us. Houses in my neighborhood right now are… Chatanooga is a cheaper market comparatively, but this house will probably go after rehab for 275 to 300,000, and we bought it for a little under 162.

Scott: This is the way. This is, I think, the way you solve this problem, right? How long have you lived in the house?

Rick: Less than two years. Will be two years in August.

Scott: Two years in August. Will you be done the rehab in August?

Rick: I hope so. I’m putting in a half bath, so that kind of plumbing, I’m not sure. But yeah, I think most of it will be done in August.

Scott: So you’ve got the summer, right, as a professor to work on the project, to project manage, to do it yourself, whatever, with that, right?

Rick: Mm-hmm. Absolutely.

Scott: Okay, so that’s $160,000 gain that we’re talking about, tax free, right, that you’ll be able to redeploy from that. I think that strategy is really sound. We have a house hack. You’re saying most of your wealth right now is because of your house hack and what you’re doing from a housing situation. I love that approach. That’s what BiggerPockets is all about, to a large degree. You are subject to some market risk with that, but I think the fundamentals are really strong for that. How much have you put in? You bought it for what, and how much are you going to have put in by the time you complete the rehab?

Rick: We bought it for 161,5 in August of 2020, and we’ve got about 26,000 into it.

Scott: And how much more needs to go into it to complete it by August?

Rick: I think it somewhere in the neighborhood of 5,000 to 7,500. It just depends on how the plumbing goes.

Scott: Great. So 7,500, maybe let’s call it 10,000 because things never go on time or on budget with a rehab here. So that will put you 160 plus 30,000, maybe 40,000 into it, and you’ll sell it for 260. So you’ll make a 60,000… How much did you say it will sell for, I’m I’m losing myself again?

Rick: I think it could go for 275 to 300,000. I’m adding a half bath. It only has one bath, but has three bedrooms.

Scott: Okay.

Rick: So it’s kind of a smaller mid-century house.

Scott: This is an 80 to $100,000 tax-free gain that you’ll be able to pocket when it’s all said and done, after the purchase price plus the rehab. And you’ll probably walk away with much more than 80 grand. You’ll probably walk away with 100 and $120,000 of that because that cost is into equity now into the property. Right? Is that realistic?

Rick: I think that’s realistic. I guess my follow-up question is, should we sell it? I mean, does it make any sense with this particular home to keep it as a rental property?

Scott: I almost always bias towards, yes, sell the primary residence if you didn’t buy it with the specific intention of keeping it as a rental long term. Let’s do this, you sell it, you’re going to incur some sales costs. Maybe let’s call it 8% of the property value to sell it. But you’re also going to be harvesting a 80, $100,000 capital gain with no tax effect, right? If you keep it as a rental for many years after that, then you’re going to have to pay tax at some point if you don’t sell it before the five-year cutoff period. So that, I think, is good strategy at the highest level is to bias heavily towards always selling the primary, even though it’s hard. That’s the property you know, and that’s the one you’re comfortable with. It’s right next to the other one with that-

Rick: Sweat and blood and lots of tears sometimes.

Scott: But I think the strategy in the way the tax system works should bias you towards that. And then also, you have a personal financial situation to clean up here to some degree. What I would love to see from your financial position is something like, “Hey, I’ve got 30 grand in cash reserves after my next down payment on my next property. I’ve wiped out this credit card debt,” that’s got to be causing you stress and a never-ending game of 0% over here, 0% over here.

Rick: That’s right. It’s a dance.

Scott: Yeah, wipe all that out. Maybe wipe out the car loan depending… A car loan’s not at a high interest rate probably, but I’d love to see the proceeds from this sale go into, “Okay, I got a $30,000 cash reserve or something in that ballpark,” whatever you’re comfortable with, six months, “I’ve got no credit card debt, and I’m beginning the next project with a reasonable, healthy down payment.” I would just do it again this live-in flip.

Rick: Yeah. The benefit that I have is I can use a VA home loan…

Scott: Yep. Perfect.

Rick: … as well.

Scott: Then you can have that reserve and you could maybe buy two properties with this. You could buy an owner-occupied home with 0% down and maybe a small rental with the proceeds after paying off your other cash. I would love if we could unwind a little bit, if we could go back in time for you to be in a slightly stronger financial position prior to attacking the current project, and I think it’s a little like, “Oh, what’s going to happen with the market later in this year?” but I don’t think you have much of a choice. I think you have to plow ahead and finish your rehab here and attempt to sell in August, at that point in time, to harvest the gain.

Scott: Who knows, maybe you’ll get, depending on how the market goes or whatever, slight less gain or whatever. Who can time all that? But you’ll be buying the next one at that much lower of a price anyways. I think your live-in flip strategy is the way for you with this. So focus on that foundation, expenses minus income, and then you live-in flip two times over the next five years and buy a rental with that strong position as things get going, you could be sitting in a position three years from now where you’ve got all your credit card paid off, you’ve got a second live-in flip completed. Maybe that nets you 100 to 150, if you can back in the numbers that work like that, in tax capital gains. You’ve got your duplex here, and you’ve bought one more rental property. You’ve also got your student loans forgiven, and you have a timeline that’s very clear for Kendra’s student loans, right?

Scott: Is that financial freedom? No. But you’re now much closer to a million than you are to 500,000 in personal net worth with maybe some better options. How’s that sound? Does that sound realistic?

Rick: No, I think that sounds really realistic. I mean, I was always like, “Five years is a dream. 10 years is probably more realistic depending on how things go.” So I think that kind of plan makes a lot of sense. I guess my one question is, we’ve been toying with that idea of getting a short-term rental someplace because we know that the potential for cash flow is much greater than any other kind of rental, it seems like. So we were considering maybe we should just stay here and sit on the equity that’s here. Maybe we can refinance it if the rates come… I mean, I don’t think the rates were awful. I bought my duplex at 4.75. So I know they’re up over five these days. But would it make any sense for us to stay here, possibly refinance, pull out cash from there, or refinance on the duplex because it has so much equity and use that for something like a short-term rental?

Scott: Yeah. Again, I bias heavily towards selling your primary right now, right? I know it’s probably different living in it, seeing it, working on it with all that, but from my seat here in Denver at the strategy level, I’m just like, okay, you’re going to have 120 or $130,000 left in this thing. You can buy your next property and flip it with 0% down with a VA loan for this. You can pull out $120,000 out. Right now you’ve got a ton of other debt financed way worse than this mortgage will be. If you cash out refi, you’re not going to be able to get most of that 120,000 out. You’re going to get like 40 out, right, which does not attack the meat of your financial situation with that.

Scott: And so, it could work out. There could be many other things that you think about in the weeks or months following our call here, but my bias, it’s screaming, “Sell this place. Use the proceeds to reset and clean up. Make sure that financial foundation is really strong and you’re generating cash in a snowballing way on a go-forward basis.” And then I got absolutely no problem with the short-term rental, I think that would be great if you’re interested in short-term rentals. That is a great thing to do in general. I would just caution you that a lot of people want to buy these short-term rentals in Vail. If you live in Denver, “I like to go to Vail.” Right?

Scott: Vail is really good at taking money from people who don’t live there, right? And you’re competing with people who don’t want to make money but who are very wealthy and just want a place to go that’s theirs, that they’ll rent out sometimes. So you’re competing with people who are willing to operate at a significant loss to just offset their luxury vacations with that. So I would really think hard about your short-term rental market, and I wouldn’t necessarily bias towards the place you like to visit the most, although that can be a factor. I would go, “Where’s the most money? I’m going to make the most money I can for my dollars, and then I’m going to spend it wherever the heck I want.” I’m like, “I’m going to make my money here in Denver on properties I know in an environment I’m very comfortable with where I know I’m competing with true investors, not people who are willing to go at loss, and then I’m going to spend my money in Vail visiting the guy who’s subsidizing me, really, with their fancy short-term rental.”

Scott: So that’s how I would think about it at the highest level or I’d bias you towards that mentality. And then, Destin, Florida might be a perfect short-term mental market because that’s what everyone does there. It’s not really a thing. But if you’re biased towards that, you’re at risk of compete of competing against people who are playing a different game than you.

Rick: That makes sense.

Mindy: That is a really important thing to note, Scott. And yeah, I could not have said that better because there are… And this isn’t any market. You need to make the offer based on your numbers, and you are going to be sometimes competing with people who are playing a different game. And that’s fine. It really makes me sad when people are like, “I have to win at any cost. Make the highest offer possible. Win, win, win.” And you’re like, “But other people are doing different things with their money.” They might be wiping away or kicking taxes down the road through a 1031 that makes it advantageous for them to pay $20,000 more even though they’re not going to be making much money on this because they’re about to lose their 1031 protections. So they make the offer that’s higher, and then now they have more time. They’ve just bought themselves more time to go and find another better 1031 property down the road.

Mindy: I do like Scott’s suggestion. I do want to bring up that he’s got a 2.75% loan on his primary mortgage, Scott, and rates right now, they’re in the high fives. What can you get a property for currently, if you were to go out and buy a house tomorrow?

Scott: I think that is a factor, yeah.

Mindy: I mean, that’s not something to be taken lightly, but what house price are you looking at right now? Could you get another house for 160, or are they already up to 225?

Rick: I would say they’re all up around 300, even for something that has wallpapered bathrooms from the seventies. And there’s all the brown and gray combos that the fix and flippers are creating these days, which is very unattractive color scheme. I don’t know why you’d have brown floors with grey walls or cabinets. It’s really odd. But yeah, anything you want to buy here in Chatanooga that’s decent is probably going to be somewhere in that $300,000 range. And then you’re still going to have to do work on it.

Scott: I think that the interest rate is an interesting thing. If your interest rate’s going to jump from 2 to 5% on the property, that needs to be thought through from a financial consideration, right? You’re going to be paying more. You’re going to be consolidating all of your debt from a blended… Most of your debt right now is at a 2.75% interest rate, right? Then you have chunks that are at higher interest rates, presumably, and credit cards that are much higher interest rates. So you consolidate that all into a 5% mortgage, are you better or worse off with a new property? I don’t know. That’s an interesting question there. Without that as a factor, I would definitely bias towards selling the property and consolidating all of these things. I think that there might be some complicated math to think through about what happens to my blended rate, the risk profile, all that kind of stuff. Most of your high interest debt is short-term debt on these properties. Yeah, and you’re not going to be able to refinance that into your duplex necessarily.

Scott: Okay, so let’s do this. If you decide, you know what? I’m going to keep the place as a rental because of the interest rate thing. The tax considerations and the ability to clean up my position and pay off these other debts with the proceeds from the sale, they don’t outweigh the overwhelming advantage of the low interest rate I’ve got currently on the property. If that was the case, you’re not going to pull out anything at that point because you can’t refinance the loan. So how do we attack the rest of your financial position from that future state? Right? Because you’re going to end this process, you’re going to have no cash, you’re going to be trying to get the next property, and you have all of this pile of various debts that we have to address one by one or as a group.

Mindy: I was going to suggest a medium interest rate, HELOC. Right now he’s got a couple of cards at 0% interest, great. You’ve got one at 12%, pay that 12% off as fast as you can. I don’t see that [inaudible 00:57:09]-

Scott: I think you’re refinance into the HELOC, that’s what you do. You take the HELOC out to pay off the credit card debt.

Mindy: Or take the HELOC and pay that off and keep those 0%. There you go, thank you, Scott, I’m not thinking seven steps ahead. Pay that $4,000 off and then look at those ones that are 0%, pay those off, or wait until they’re at the higher percent, kill those with the HELOC and throw all your money at the HELOC because then you’re paying the lower interest rate. You’re not opening all these credit cards to try and do that. Because the balance transfer game used to be, we’re both old enough to remember, it was free to balance transfer and then they started charging you like 3%-

Scott: 3%, yeah.

Mindy: … of the transfer fee. And that made it not so much fun anymore. But if you can keep these 0% for 15 months, I think you could knock out the $4,000 while these other ones are at 0%. We didn’t say what Kendra’s interest rate is. We could knock that one out probably while these are still at 0% and then-

Scott: Wait, we can’t just take out a HELOC and pay off the loans. We’re going to get charged a 3% balance transfer fee in order to do that.

Mindy: No, we could pay those off now, but they’re at 0% right now. It’s silly to pay the HELOC money when he’s got them at 0% for 15 months.

Scott: I think that’s fair, but I would say, let’s say you complete the project, you’re in August, and you’re at decision time, am I selling or keeping, right? I still think you probably have a bias towards selling even after all of this discussion. But supposing you go with the 30% chance that you do want to keep the place long term, I think then you open up the HELOC and I think you pay off a bunch of these cards, starting with the highest interest rate ones, but also some of the ones that are at zero, because you don’t know what the future is going to hold, right? You don’t have enough cash flow this year to pay off all of that stack of debts. So you don’t want to be in a position where you’re left holding the bag on these interest rates and they’ve come in because of a bad market conditions or whatever. I don’t think you want to rush to do it, it’s not an emergency, but I think you want to make that decision, consolidate, and clean it up not year in advance, but months in advance of when you’re going to be running into problems with that. Because that HELOC, is dependent on… You don’t want timing to come into play.

Mindy: Well, lucky for Rick, he is a self-professed spreadsheet aficionado, so he can-

Scott: That’s right.

Mindy: … take all this information, run all these fancy scenarios and decide what is the best choice for him. But I do like the idea of opening up a HELOC because those are going to be a little bit higher than a mortgage rate but way less than a credit card rate. So if you’ve got the ability to open that up right now, I would do that. And then if you go and sell it in August, they’ll just close that out for you.

Rick: Okay, that makes sense. Yeah, I wasn’t really sure how to go about the HELOC. I know that, what? They have adjustable rate-

Mindy: It’s adjustable rate.

Rick: I was always a little skittish about those.

Mindy: It’s only on what you take out. There’s the home equity line of credit and a home equity loan. And the line of credit, you can borrow and then pay back and borrow and pay back. It’s like this big pool of money that you can borrow from. A home equity loan is you borrow it and then you pay it back, but you don’t have it open all the time. So you want the line of credit so you can borrow it again if you need it. Maybe some amazing deal pops up down the street where another neighbor wants to go join your other RV neighbors and they’re like, “Yeah, I’ll give this to you for 160,” and you’re like, “Okay, great. Here’s my down payment, and let me go find the loan now for the other property.” And maybe that makes this whole thing really easy and now you can sell this property. Maybe that doesn’t work out, but having the line of credit open, I really like that option.

Scott: I would definitely go and open the line of credit. In terms of using it, you can then draw it when you need to to do these things. And you might say, “I’m paying high interest right now on card F. I’m going to pay that one off with the HELOC, and I’m going to pay, instead of 10%, 3 or 4% on the HELOC there.” And I would do the HELOC on your primary, not on the duplex-

Mindy: Yes.

Scott: … because you’re going to get a better rate. It’s going to be a lower volume, but I don’t think you need tons of that right now. So I would put it on the… Yeah.

Rick: Right. So that would be based off of the equity in the single family home or primary residence. And then how do they figure out that value? Do they just look at comps? How do they figure out how much I can get in the HELOC?

Scott: Well, you can get an appraisal or they may just say, “Hey, we think it’s probably about this, and we’re going to cut it down to here to be conservative and give you this much.” But Mindy will probably… Yeah.

Mindy: Yeah, it’s just like buying a house. There’s either an appraisal where they come out and actually see the house, or they could do a desktop appraisal where they just look at the comps around.

Scott: They always give you less on the desktop appraisal. They’ll charge you for the real appraisal.

Rick: No, it sounds like a good plan. I’ll definitely look into that right away.

Scott: Okay, awesome, so let’s recap where we’re at here. I think step one is back to fundamentals and basics. You need to generate more cash annually, and the lever we have right now is in your budget. It’s not a ton, but there is perhaps $1,000 a month more that we can get out of that budget, which is $12,000 a year. That brings you from 18,000 in accumulation to 30. It’s a big difference, right? That’s all of your consumer debt outside of the car is paid off in a year with that amount of cash flow generation. That makes things a lot simpler here.

Scott: Second, I think is the primary house right now. We’ll see how things are in August with that, but I still think you got a heavy bias towards selling that place and using that as an opportunity to clear out all of these debts and/or the HELOC. And then you’re sitting in a really good spot with easily 60, $70,000 in cash that you can deploy towards the next opportunity. Maybe it’s a, “I’m going to buy another one with my VA loan, put nothing down, and fix it up. And I have 30,000 for the rehab as a buffer. And then put the other 40,000 into a short term rental or another property that I’m interested in buying as more of an investment, or the starting chunk towards that next investment with that.”

Scott: I think that’s the essence of the strategy we’ve talked about thus far, actually. We have one more item, which is the duplex here, which I think is another huge… There’s probably a few other things, but I want to spend a moment on the duplex. You have 200 grand in equity on this duplex. It means your loan is like 150 and the property’s worth 350. Is that right?

Rick: I’d say probably closer to about 300,000. It’s hard to find exact comps, but the comparables I’ve seen recently are around the 250 to 275 range, but they’re not nearly as nice.

Scott: Okay. And what’s your mortgage on it?

Rick: I say that with some small amount of pride, but I-

Scott: I love it.

Scott: What’s the mortgage on it?

Rick: That’s $1,133.

Scott: And the balance?

Rick: I believe that was 147, qq.

Scott: Okay, so this is most of your wealth is in this property. Well, 40% of your wealth is in this property.

Rick: Yeah. Yeah. I think it’s fair.

Scott: Okay. And then how much rent are you getting from the duplex or will you get once you make some changes? What will be your future state income by the end of the year for this?

Rick: Well, just off hand, I know that we’re cash flowing about $500 per door in the duplex.

Scott: You said you were going to move it from a medium-term to a long-term rental and that was going to increase things.

Rick: Right.

Scott: So what will your cash flow be at the end of the year?

Rick: It would end up really just going up about $100 a month. So it’d be $1,100 a month in cash flow.

Scott: Awesome.

Rick: For the whole duplex.

Scott: Do you have a bank account for this or is this getting deposited into your main bank.

Rick: No, it goes in straight into a separate account.

Scott: Okay. And how much cash do you have there?

Rick: About 4,000 right now. And that’s because we switched to the mid-term rental, we put about 5,000 into it, and then rents kind of skyrocketed in our area, and it didn’t make sense anymore to keep up the mid-term rental. And because we’re rehabbing this house, we’re just going to take a bunch of the stuff that we put over there that we bought and bring it over to this primary house. So that took out a big chunk of our revenue last year, and so this year things are going to be much better.

Scott: Okay, great. I don’t think you have that much to do here actually now that we’ve talked about it. I think 50/50 debt to equity is a little low on the debt side, but super comfortable. You’re getting $1,000 a month in cash flow from this property. $12,000 a year adds on to your position with this. I do think you have a capitalization issue. Same deal. You have too many of these little debts down here and too much complexity with how you’re going to manage cash flow. Do I pay off this debt? Do I put it toward the rehab? Do I do all this kind of stuff? And so I think when you finish the housing project, your single family house this summer and make your decision to either get the HELOC or sell it, that’s another opportunity here.

Scott: I would be uncomfortable until I had a situation where I had 10 to 15,000, at least, sitting for that rental set aside, and then maybe another 10, 15, 20,000 for my personal situation. A 30,000, maybe, total lump. Now I don’t have to go and drop the HELOC or get another credit card thing to make repairs here, that’s a strong capitalization position. I think you’re going to be able to be more opportunistic and I think will help your investing activities if you have a liquidity position that you’re able to build towards and that you’re constantly replenishing with cash flow from your life on an annual basis. That all can take place by October, September of this year if you complete the rehab.

Rick: Yeah, yeah, no, I think it’s really useful because, I mean, we make good salaries and we have a good, decent quality of life, but just every month I feel like we’re living check to check because of all these rehab expenses.

Scott: Yep. You can’t stop now.

Rick: No.

Scott: You got to finish the rehab, and that’s going to leave you vulnerable a little bit-

Rick: That’s right. Yeah.

Scott: … until the event happens where you’ve completed the rehab and made your decision on the next thing and either stabilize it as a long-term rental that you’re going to keep. Here’s the thing, I would encourage you to pull out the HELOC before you move out of it, right? You could tell your lender that too, you don’t want to do anything nefarious with that, but I think you get a better rate on a primary HELOC than you will as a rental property with that. So maybe a lender could help us out with that. We can ask that in the BiggerPockets Money Facebook group to make sure that there’s no issues there from an ethical or legal standpoint. My bias tells me there’s an opportunity to pull out the HELOC before you move out, and that will get you better rates and better terms.

Mindy: Which can be found at And I will type this into the Facebook group this morning on the day that this show releases, which is Friday, May 20th.

Scott: What else can we help you with, Rick? Has this been helpful?

Rick: This has been super helpful. It’s answered a lot of questions that have been nagging me really for months. I mean, I’ve been playing the bounce transfer dance for decades. On the one hand, it’s worked in a particular way, but there have to be better ways, and I think you’ve given me those better ways of doing things so that I can move forward. We had been thinking about possibly selling the house, and I think you’ve really confirmed that for us, that that’s something we need to really seriously consider if we want to have a good foundation moving forward.

Scott: Yeah, I think the only major blocker to selling the house for me would again be if there’s a huge interest rate spread and you’re effectively reconsolidating all your debt into a much higher interest rate. That would be the only way that would be a major problem. And it still might be more advantageous in that one because it might allow you to do a bigger flip with more upside downstream to some degree or something like that. But I think there is a situation where it may not be. There may be an alternative. So think it through with that. I don’t know what the right answer is there, but I bias towards the sale generally in these types of situations.

Rick: Now, are there any resources for figuring out that kind of comparison? I do love spreadsheets, but I don’t know how to use formulas. So I am pretty much addition and subtraction sort of level spreadsheet skill.

Scott: Interesting. I think this is a spreadsheet exercise, unfortunately, because I think you have to say, “Okay, what’s each debt? What’s the amortization period? What’s my interest rate on it?” And it’s not just interest rates, it’s also the amortization period, right? And it’s which ones are variable rates. Your credit card rates are going to go up in an increasing interest rate environment. Your HELOC’s going to go up in increasing interest rate environment. Your mortgage is going to be fixed most likely for 30 years. The mortgage rate is lower risk than these other types of debt. So I think there’s a multifaceted thing. I think you have to go in and say, “Here’s debt one, here’s the interest rate. Here’s my payment terms with that. Here’s debt two.” And then it will be some math, but also some subjectivity, how I feel. Which one do I want to pay off first because it’s technically better to leave this one here? But it could go up a lot in a rising interest rate environment, and that’s going to give me some stress next year. So I think that’s why it’s inherently a spreadsheet exercise, although, there may be some resources out there. We’ll have to, again, ping our Facebook group for that. Maybe I’m not thinking of them.

Mindy: Yeah, I think the help of an existing mortgage calculator will help you with the amortization schedule, so you don’t have to do that one yourself.

Scott: That’s right.

Mindy: Like Scott said, it’s going to be subjective. “Oh, okay, my payment right now is 1,100. And when it goes up, it would be 1,700. That doesn’t feel good at all. I want to stay here.” or “My payment is 1,100 and it would go up to 1,300. That’s more doable. Maybe I do want to do this.” I think it’s going to be more like 1,700 or even 2,000 because not only are you paying a higher interest rate, you’re also paying more for the property. So I’m not saying don’t sell, I’m saying look at your options. It’s entirely subjective. But run the numbers, numbers don’t lie, and when you have them… I’m just making numbers up right now. When you have them in front of you and you’re looking at real true numbers, it could be very easy to make the decision. It could be really hard. That’s why it’s your research opportunity and not mine.

Rick: Well, hope for the easy decision.

Mindy: Okay. Rick, this was super fun. I really enjoyed going through your numbers. I heard you struggling with your situation when I read through your application, but you’re doing great. Just because you’re having a bit of a cash crunch now doesn’t mean you’re not in a good financial position. So I hope you’re feeling better about your situation. I think you’re doing a lot of great things. I think a little bit of rearranging, a little bit of rethinking this versus that, and you’ll be doing phenomenally. I’m not sure retiring in five years is going to be the case, but 10, I think, is a really great, doable goal. And the five years is more just because we are about to enter a period of down markets.

Scott: Well, that’s perfect for you, right? Because you’ll be starting your investment. You’ll be doing the bulk of your investing journey over the next five years.

Rick: In a downturn. So I should get the HELOC now and not wait.

Mindy: I would definitely start talking to different lenders.

Scott: You never time the markets here, but there is definitely a first time in history, most Americans think now is not a good time to buy a home. That came out from Gallup this week. Now, paradoxically, people think that places are going to go up for housing, so that’s interesting, but people don’t think it’s a good time to buy a home. Investor sentiment for the stock market is bearish right now overall. And those are all things to consider with that, which is why you like to act with more speed here. But again, we’re recording this in May and your timeline is to complete the rehab by August, right? Got to do that, I think at this point. It’s just too close to the finish line and lots of other things happen. That’s a gamble I think you need to take and finish out as quickly as possible with it. That could be bad luck if there’s a problem in the meantime, but I think that’s the sense of urgency I would apply to completing this project over the next three months to make sure that you are in a much stronger position to attack the second half of the year and the next three years.

Rick: Yeah, it makes sense. So what you’re telling me is I should stop working on the baseboards today, replacing those, and move on to researching HELOCs and talking to some banks.

Scott: I’m telling you opposite. Finish the baseboards. Finish the rehab. Get the project done so you have the option to sell and/or your house will appraise the maximum value when you need to get the debt financing. The rehab-

Rick: Yeah, I think that was my question. So, don’t do the HELOC now because the project’s not done and you won’t get that high appraisal.

Scott: You could talk about the HELOC. It might be that the property’s already worth enough more where you could consolidate some of these things, and you’re like, “Oh, I can get a HELOC of $70,000 right now. I don’t need $70,000. Great. Game over. I don’t have to worry about that. And I can take that and begin consolidating some of the debts at this point, maybe the ones that are not 0%. But some of them you could knock out and you could draw down on that and have a little bit more cash, to some degree, to finish the rehab a little bit more comfortably. So you might do that now. But when you come home from the appointment with the lender, you finish the baseboards.

Rick: Yeah, absolutely. Maybe I could buy better knee pads with the HELOC.

Mindy: Okay. Well, Rick, thank you so much for your time today, and we’ll talk to you soon.

Rick: All right. Thank you so much.

Mindy: Scott, that was Rick, and I really like where he’s at right now. He wishes he started earlier. Well, don’t we all, Rick? I think he’s been too hard on himself in the past, and I think that we really shared with him and showed him that he’s not doing as bad as he thought he was.

Scott: Yeah. I mean, Rick’s doing great. He’s got hundreds of thousands of dollars in wealth. He’s got a number of moving pieces. He’s got a number of advantages. I mean, if we list out all the things that are going to be different perhaps one year from now, right, he’ll have accumulated 20 to 30,000 more dollars in cash. He will have gotten $55,000 in student loans forgiven which, by the way, we should have reminded him he has to plan for the tax consequences of that student loan forgiveness. He will have completed his home project and likely be able to harness the home equity in there either with a home equity line of credit, which will help him consolidate other debts, or by selling the property and redeploying it into cashflow rental real estate and perhaps a second rehab and another live-in flip, which can propel his wealth.

Scott: He’s got a great job. His partner has a wonderful job as well. They’re doing great. And they could be having 100, $200,000 more in wealth in the next 18 to 24 months, and maybe multiple hundreds thousands more in the next three to five years by pursuing their plan. So lots of good things going on here, lots of advantages. And I think he’s going to have some good wins over the next couple of years.

Mindy: Yes. In months and years. I think his goal of five years retirement might be a little too aggressive, but I think 7 to 10 he will be able to realize his dreams and be able to retire and travel the world, do whatever he wants to do, and sit really, really pretty based on some of the actions that we have suggested today.

Scott: That’s right.

Mindy: Okay. Scott, should we get out of here?

Scott: Let’s do it.

Mindy: From episode 302 of the BiggerPockets Money Podcast, he is Scott Trench, and I am Mindy Jensen saying, ready, set, go, Joe.

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