Finance Friday: Who Should (and Shouldn’t) Be Investing in Real Estate

May 11, 2022

Investing in real estate is a proven way to build wealth, produce more cash flow, and retire early. But, not everyone is cut out to do every type of real estate investing. Some strategies take dramatically more time and effort than others. House hacking may be perfect for investors or couples without kids, live in flips could work best for those with some rehab experience, and BRRRR investing is reserved for those with proven investing experience.

While some of these strategies are as simple as buying a house and renting out a side, others require far more of a time commitment—time that many investors, like today’s guest Jeff, may not have. Jeff is already an established investor, currently living in a house hack that’s helping him offset his mortgage. But, he wants to expand into more return-focused real estate like live in flipping and BRRRRing.

But, with a high-paying job and lots of money in the bank, Scott and Mindy ask the question, “is real estate investing even worth it for Jeff?” Should he be sticking to stocks or does a labor-intensive rehab clearly outweigh the costs? If you’re wondering whether or not you should choose the real estate investing path to FI, make sure you hear out the arguments in today’s episode.

Mindy: Welcome to the Bigger Pockets Money podcast, show number 280, finance Friday edition, where we interview Jeff and talk about real estate investing.

Jeff: A few years ago, I stumbled upon… I don’t know where on the internet, but FIRE. So I would like to eventually retire early. And I know, before that, you need to get financially independent first. So right now, the first steps, I guess we’re looking towards doing, are becoming financially independent. But not sure exactly if we should do it through stocks necessarily. I mean, we’ve been dabbling in this house hacking, in terms of trying to see what it’s like to be a landlord. And so far, it’s been pretty good. I mean, we think we’ve just been blessed with a really great tenant.

Mindy: Hello, hello, hello. My name is Mindy Jensen. And with me as always, is my more fun than bubble wrap co-host, Scott Trench.

Scott: What a popping off introduction, Mindy. Thank you so much.

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, going to make big time investments in assets like real estate, or start your own business, we’ll help you reach your financial goals and get money out of the way, so you can launch yourself towards those dreams.

Mindy: Scott, I’m super excited to talk to Jeff today. He is unsure about his investment strategy, but what we discover, is that he’s actually doing pretty good. He is being conscious of his spending. He is not just spending whatever he wants. I think they track their spending, and they’re doing continuous contributions to their 401ks and being very cognizant about their money, which honestly, is going to be one of the best things you could do, is just be money conscious.

Scott: Yeah. And the fundamentals are all set up. He’s got no debt. They’re accumulating a healthy amount of cash each year, and it’s, where do I deploy it? Real estate? Stocks? Something else? And I think there’s a lean towards real estate. And the implications of that are, I think really fun to discuss. And I think we had a great discussion and hopefully gave him some things to noodle on today.

Mindy: He’s got several research opportunities, and lucky for him, he’s got a lot of investment opportunities available to him, again, because he has crushed his fundamentals. He’s really doing a great job. Before we bring in Jeff, my attorney is going to make me tell you that the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott, nor I, nor Bigger Pockets are 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. Jeff is a new dad making great money, and he has his expenses nailed down. He and his wife tested out house hacking, but they aren’t sure if they want to continue now that they’ve got a baby. He’s looking for some general advice about his investment plan. Jeff, welcome to the Bigger Pockets money podcast. I’m so excited to jump into your numbers today.

Jeff: Thanks for having me. Appreciate it.

Mindy: So let’s get right to it. What are you making and where does it go?

Jeff: Well, me and my wife combined, we gross about 176. And I think around net, after taxes and HSA contributions, 401k, I think we are down to about 109.

Scott: Awesome. So we’re looking at 9000 a month, is that right?

Jeff: Yep.

Scott: After tax.

Jeff: Yep. That’s correct.

Scott: Great. And any bonuses or other sources of income there?

Jeff: I don’t necessarily count on it, because I’m still sort of new in my company. Only been here about, going on two years here now. But they do provide us with stocks every once in a while, and we also do get a bonus at the beginning of the year as well.

Scott: Awesome. And what do you think those would amount to, in an average year?

Jeff: The bonus, I’d say maybe around 4000 to 5000, somewhere between that. And these stocks, it does seem as though it’s pretty random whenever they gift us those, dependent upon how the company is performing.

Scott: Great. And then any other income besides the bonus and the base salary?

Jeff: No. Other than what Mindy mentioned, we do house hack as well. That also, I believe, accounts for around 1350 per month.

Scott: All right. So we’ve got 9000 a month plus 1350 a month, plus another 10, 15 grand a year, I’ll call it maybe, from the bonus and stocks. Where does all that money go?

Jeff: Our home, I believe we have a little bit of a high interest rate on our home, but our mortgage is about 2000 a month. Cell phones are about 170. We’re supporting some other family members on a family plan there. Car insurance is about 250. Car gas, we spend a little less than 150 a month. And on food, we spend about a little bit over 500 a month on food. [inaudible 00:05:36] pretty heavily, about 10% of our salary, so that’s about 900 a month. And we also give ourselves a little bit of leeway in the month, for just miscellaneous shopping, for about $200 there. And we just have some subscriptions as well, that I’d say total up to about, a little high there, but around $300 a month in subscriptions altogether. That includes cable, internet, Netflix, Spotify.

Scott: So there’s a little room there, but it’s a pretty tight budget that you’ve got, you run with all this, from what I’m picking up. And that’s about $5000 in total monthly spending. Is that right?

Jeff: Give or take. Some months we might be a little bit more heavy, might go up to about 6000. But on average, I’d say it is about 5000, I guess.

Scott: Okay. So not even factoring in the house hack income or bonuses or whatever, you’re accumulating about three to $4000 per month. Does that sound about right?

Jeff: Yep.

Scott: All right. Great. And what do you do with that?

Jeff: So right now, we’ve just been sort of trying to throw some of it into a high interest savings account, as we’re trying to save for another rental property. Or our first rental property, true rental property. So we save about half of that. And then the rest, we just put into various sinking funds. We have [inaudible 00:07:09] We have a new baby, so we stash money away for him. And miscellaneous car expenses as well, we try to save about four. And also, vacation budget as well. And just the house as well, needs updates every once in a while, so we try to save for that.

Scott: Across all of those sinking funds, excluding, let’s call it… Well, across all of them, how much cash do you have?

Jeff: You mean currently, just all saved up right now?

Scott: Yep.

Jeff: I believe liquid, we are about around 102,000.

Scott: Wow.

Mindy: You have $102,000 in cash?

Jeff: Yes.

Scott: Awesome.

Mindy: Okay.

Jeff: A good amount of that is for our emergency fund. We have about six months saved up there for emergency fund, and the rest of that is what we’ve been trying to save up for the purchase of a rental property.

Scott: What other assets do you have, besides that cash?

Jeff: So we do have, me and my wife, we do invest in our 401ks. Combined, we’re at about 73,000 there. I have an HSA that I’ve been… I just recently started maxing that out last year. I was also contributing to that previously, but that’s at just under 9000. And as I mentioned, my company gives me some stocks in the company, that’s at about 80,000 right now. And I have a small afters tax brokerage, which is about 5000. And I guess it doesn’t really count for me, but I opened up an investment account for my son as well. That’s at about 500 right now.

Scott: Awesome. And then you have a house. Do you have any other assets besides that?

Jeff: No. I mean my car, but it’s pretty old. That’s not really worth too much, I guess.

Scott: What’s the value of your house and the mortgage on it?

Jeff: So we purchased the house in 2020, for around 330. Right now, we’re at around, I think 311 on what we owe. And if I had to guess on how much is worth, I mean, looking at Redford and Zillow, probably around, a little less than 400,000.

Scott: Awesome, so I’ll call it 375. So you have 60000 in home equity there. So wait, wait, wait. I guess we covered all the assets there. What are your debts? And let’s start with that mortgage. What’s the mortgage payment, and what’s that comprised of?

Jeff: The mortgage payment per month is, I think just a little bit over 2000, like $2020. And I mean, in total, as I mentioned, right now it’s at 300,000. I’m sorry, what was the… Can you repeat that?

Scott: Well, just do you have PMI? Sorry, I’m stealing Mindy’s question that she’s writing in her notes here. But do you have PMI on that, because you put down a very small down payment?

Jeff: We do. At this point, I really don’t know how much PMI is on it. I’d say it’s about maybe 150, but I haven’t really looked at that in a while.

Scott: Okay.

Mindy: Okay. I have a research opportunity, and this is something for you to weigh your pros and cons. Because you have the large cash account, and you mentioned emergency fund of six months. Is that included in that 102,000 in cash? Or is that separate?

Jeff: That’s included in that.

Mindy: Okay, okay. What is your PMI? How much longer do you have to go until you pay it off? And you mentioned, you think you have a high interest rate. Do you know what your interest rate is, off the top of your head? Okay. Depending on when you got the mortgage, it could have been during a blip where it was a little high. I’m not sure that you can really refi out of that, where it would make sense. I think you’re going to be right around there right now, but it never hurts to talk to a mortgage broker and just ask them, “Hey, what is the rate right now?” Maybe you could refi out of the PMI. But if you have just a short amount of time before you pay off your PMI, maybe it makes more sense just to pay that down, so you can get rid of that payment. So this is a math opportunity, go in there and run some numbers, and see what it makes… Does it make sense to throw that money at your mortgage, or does it make sense to continue the $150 a month in your PMI?

Jeff: So I did just log into my mortgage online here, and I do see that my mortgage is about… My PMI on my mortgage is about 150 a month.

Mindy: Okay. So I would invite you to run some numbers, and see when does that make sense to pay down? Because I believe it… Oh, this is a conventional mortgage, not an FHA mortgage, correct? I should ask that.

Jeff: That is correct.

Mindy: Okay, good.

Jeff: Yes, it is conventional.

Mindy: With a conventional mortgage, once you have paid down the equivalent of 20% of the purchase price, then you can request that they remove the PMI. And with an FHA mortgage, it never goes away ever, so that is something that I forgot to ask you ahead of time. So I would run the numbers and see when you can pay that down. You could also reach out to them and ask them to reevaluate the value of the home, and sometimes you can get PMI removed that way. There’s a lot of different options available to you. But I mean, why pay 150 bucks if you don’t have to? On the other hand, if you’re going to take that cash, that 102, and buy another property with it, maybe it makes sense to continue paying this 150 on the PMI, because you have another opportunity. Some really amazing property comes up, and you have the opportunity to jump on it. Maybe the 150 PMI is worth continuing paying.

Mindy: So that’s just a research opportunity for you. In the beginning of the show, when we were talking about what kind of income you have, you casually mentioned that every once in a while, your company gives you company stock. And then you said you have $80,000 in your company stock, which is a little bit more than just a casual mention. I just thought you worked for some random company that’s like, “Here’s one share of stock. Here’s $5.” So, that sounds like a significant gift that they give you. Are you paying taxes on that, or do they just give it to you and you don’t have to pay? I don’t know. Bigger Pocket should start selling stock and then give me some, Scott, so I can figure out… It’s a research opportunity for me.

Jeff: It would be nice if Scott did that.

Mindy: Thank you. That’s two, Scott. 66% of the people on this episode-

Scott: I like that idea.

Mindy: Agree with me, that we should sell stock and give some to me.

Jeff: So when they gift us the stocks, they do take out a portion of it. Similar to if it’s a regular paycheck. So when they give it to you, they take out the stock… The taxes for you.

Mindy: Okay. So what happens if you sell that stock? Are you able to sell that stock? Is it publicly traded?

Jeff: Yeah, we are publicly traded. There are blackout days where we’re not allowed to trade, but when it’s open season, I guess we’re able to. I’ve yet to dabble in that, just because I thought that… We are a pretty good company, and I do believe in the company, somewhat. Still working here. And I do think that they will continue to grow and become more profitable in the future.

Mindy: Okay. So I have a couple of friends. One works at a company that gives him stock, and he sells it instantly. And one works at a company that gives him stock, and he holds onto it forever. And I want to have them come on and explain their different opportunities.

Scott: Well, let me go back a second here and say, so we’ve covered all your assets. We covered your house and your mortgage payment. Do you have any other debts? Is there anything else we need to know, to understand your net worth?

Jeff: No, there’s no other debts there. I mean, every month, me and my wife, we do use credit cards, but we try to pay those down every month as well.

Scott: Okay. So you have a small credit card balance that is paid off month to month, which is, in my opinion, not debt. I do the same thing. Okay. So I’ve got a net worth here, somewhere between 300 and $500,000 based on this. Is that about right?

Jeff: Yeah. I mean, we track our expenses on Mint, and it says we’re at around 370.

Scott: Perfect. Okay. And so if we break that down into a pie chart, the biggest slice of the pie is cash, right? That’s where you’ve got $102,000 in cash. The second biggest slice of the pie is company stock, to Mindy’s point, it’s $80,000. The third biggest is going to be your retirement accounts, between your 401k and HSA. And then the last will be your house and some small other accounts.

Jeff: That’s correct.

Scott: All right. What are your goals? What are you trying to get to?

Jeff: I mean, a few years ago, I stumbled upon… I don’t know where on the internet, but FIRE. So I would like to eventually retire early. And I know, before that, you need to get financially independent first. So right now, the first steps, I guess we’re looking towards doing, are becoming financially independent. But not sure exactly if we should do it through stocks necessarily. I mean, we’ve been dabbling in this house hacking, in terms of trying to see what it’s like to be a landlord.

Jeff: And so far, it’s been pretty good. I mean, we think we’ve just been blessed with a really great tenant. But we also did our due diligence, in terms of picking out that great tenant. So we are thinking that we can go ahead and expand to a traditional rental property. But there’s been some hiccups, I guess, in terms of just offers not being accepted. And it’s just been tough out there, trying to find a property. So we’re just, I guess, getting a little defeated, we feel like, in our spirits. And thinking that we should just lean on stocks instead, sometimes. But we do have, in the back of our mind, we do still want to go after real estate. But I guess I’d say the goal is to hopefully retire in about 10 to 15 years, ultimately.

Scott: How long has the current situation, more or less, been going? You’re saving three to $4000 a month, after tax, maxing out your 401k, all that kind of stuff. How long have you been in this position, where you’ve been accumulating wealth like this?

Jeff: Well, we’re maxing our HSA. 401k, we’re just contributing, just to get the match from our companies. But we’ve been doing this for about, a little over a year. A little over a year, today.

Scott: Great. And how old are you?

Jeff: I just turned 30, a couple months ago.

Scott: Okay. So you’ve got a very strong position, relative to the amount of time that you’ve been putting into moving towards FIRE with this. You’ve got a great foundation, and if you just sit on what you’re currently doing, you’re going to accumulate 40, $50,000 a year. Three to $4000 per month from your job, plus 1300 a month from the house hack, plus the stock options or the stock grants and the bonuses, right? That’s going to be about, somewhere between 30 and $60,000 per year, I would imagine with that.

Scott: And that’s going to make a… And then that all gets invested in compounds. So the question here is, you want to retire in 10 to 15 years, you’re going to sustain that, hopefully grow it over the next five, 10 years as your careers both continue to accelerate. And where do I apply the rest of the cash from there? And it comes back to the options of stock versus real estate. And you’re saying that the next move, in the short run, you think is a rental property, but you’re getting hung up on the purchase details. Is that the right framing of the overall situation?

Jeff: I think so. Yeah. I think that explained it pretty great there.

Scott: Awesome. Any interest in entrepreneurship or anything like that? Are you pretty happy with the jobs, at this point?

Jeff: I’m pretty happy with my nine to five right now. The only entrepreneurship I guess I’d really be looking at, would be in real estate. But that’s about it really, I’d say. I guess I don’t have any other ideas really, for entrepreneurship at the moment.

Scott: So what is your… Walk us through the approach you’ve had with real estate and what your challenge has been.

Jeff: Well, as I mentioned, I’m in Southern Maryland here, so it’s not exactly as expensive as the DC market, but we do have a little bit of residual as people move outer, to the suburbs here. So it gets a little bit more expensive than the area I’m in, so I’ve been trying to start looking into other markets across the country. But I guess just not being on the ground there, it’s a little bit more difficult to pull the trigger, in terms of, do I want to actually put in an offer on a property there? So by the time, sometimes, we get around to putting in an offer or letting our agent know that we want to put an offer, it’s sometimes already under a contract already. Or we have been outbid, I guess a few times already as well, too.

Scott: In terms of research, how much time have you put into learning about real estate, in your local market or these other ones?

Jeff: Well, just in general, I’ve been on Bigger Pocket since about 2017, I’d say. So while I was paying down my debts, my student loan and my car debts, I was just listening to the OG podcast and the rookie podcast, and recently came across you all’s podcast here as well, too. So I’ve been listening and running numbers in my market here, since about 2017. But these other markets, and the one I’m specifically looking at now, I’ve been running numbers there for, I’d say about maybe for four months or so now, at this point.

Scott: Okay. So you feel like you’ve put in plenty of time and are very comfortable with the concepts of real estate investing, and you’re having trouble now, between these two markets. Walk us through your current market. What’s a good deal look like there.

Jeff: Well, I guess in the current market, I mean, a three, two. Three bedroom, two bath, I’d say a good deal on that, would probably be… In the Southern Maryland area here, I’d say somewhere around 200,000 or so, that’d be a good deal on that. And if you’re able to fix it up, hopefully you’re able to sell that for probably about 350, closer to 400.

Scott: And how much would it rent for? Is your goal to sell it or to rent it?

Jeff: I’d love to hold onto these as rentals, but that would be the ARB on it, if I was trying to do a BRRRR deal there. The rent on that, I believe would be about 2500 a month, to 3000.

Scott: I mean, sitting here from Denver, those sound like great numbers, right? And it’s funny, because Mindy and I, maybe a year ago, did some sort of meetup in the San Diego market. And a lot of people from San Francisco were attending the San Diego meetup, because San Francisco is way too expensive, and San Diego is much more affordable. And all the San Diego folks were talking about how Denver… San Diego’s way too expensive. And so Denver is way more affordable. And of course, all the Denver folks are saying, Denver is way too expensive, and I need to go to the Midwest or something, because that’s more affordable with all this. So there’s this giant chain reaction of people thinking in those markets. And I think that a lot of people listening, and from my seat, that sounds like a phenomenal potential market, if you believe that appreciation prospects are reasonable there. I mean, those numbers are something that a local investor might be able to work with all day, it seems like. Mindy, what are you thinking?

Mindy: I’m thinking, when you are naming these numbers, I’m thinking to myself, can you actually find houses at the 200 mark? Because that would also be a really great deal here, but there’s no such thing as a $200,000 house in my market. So if you can find a house for 200,000, put some money… And what are you putting into it? If you find it for 200 and you’re putting 150 into it to get it up to 350, that’s not a good deal either, because that’s a lot of work. Every time you open up a wall, something else goes wrong. You find another thing that needs to be fixed that you didn’t realize needed to be fixed before. So if you’re buying at 200, putting in 50, and now it’s 350, that is a much better deal.

Mindy: Also, who’s doing the work? That’s the biggest question that I have, because I don’t know about in Maryland, but in Colorado, there’s no contractors. We can’t find anybody. Everybody left during 2008, and they didn’t come back. And we just had a huge fire that burned down 1000 houses, about 20 miles South of me, on December 30th. So all of the rebuilding, is going to… All of the contractors are going to be focusing on that, and it’s going to be even harder to find a contractor. And of course, that’s my area, not your area. But everybody across the nation is saying, “I can’t find a contractor.” So unless you are really good at DIY, or maybe your dad’s a contractor and would love to work on this house for free.

Scott: And that challenge does not get easier when you go out of state.

Mindy: Yeah. That challenge doesn’t get easier any place. I mean, that’s one of the number one reasons why Carl and I do so much DIY, is because it is so much easier just to learn a brand new skill, than it is to find somebody to do that at a reasonable price. So on the other hand, if you could get that property at 350 and it’s renting out at 3000, maybe that is… I mean, that’s close to the 1% mark. If it’s already rehabbed, maybe it’s worth it to buy the already rehabbed property. You have a baby, you have a job, you have things taking up your time already. It’s a lot of work to do this DIY. I am very casual when I say, oh, we do these live-in flips, we do all the work ourselves. It’s also a lot of work. And Carl doesn’t have a job, that’s his full-time job, is to work on the house. So I keep forgetting that, because that’s just kind of how our lives have always been.

Scott: I think that’s a great point. Jeff, what is a property look like in your market, that you don’t have to do a major rehab on? That would be rent ready, with just maybe less than $15,000 of work. Painting.

Jeff: I think it would be going for around 350 in my market right now. But I guess that was the whole thing, is that after listening to some of these podcasts, I realized that one of the more ideal ways to go about real estate investing, is to find a property you can fix up a little bit, and then eventually be able to put in some sweat equity and take your money back out, so that you can go ahead and lather, rinse, repeat, pretty much. So that you can do it a little bit quicker, so I don’t have to save back up over that long period of time. That was my goal.

Mindy: The BRRRR method is a really, really awesome method, but I think they don’t focus enough on the… I don’t know which R it is. The rehab part of it, where you are finding somebody to do the work for you. And I mean, do you have any contacts in the remodeling space?

Jeff: I mean, I guess I do have a few people here. I had to have my… Where I’m renting out in my current home here, I had to fix up a little bit, to get it ready for that. So my local market, I do have a few contacts that have built up. But in this other market that I’m looking in currently, I don’t have anyone who I’ve actually worked with, as of yet now. No.

Mindy: Okay.

Scott: So what’s a successful BRRRR here? We still haven’t answered the question of, you buy it for 200K, how much are you going to need to put into a property like that to get the ARV of 350?

Jeff: I mean, I believe around 50,000 should to be able to get it to that ARV of around 300, 350.

Scott: Okay. So we have $102,000 in cash, we put down 25%, that’s 50 grand to buy the $200,000 property. We have another 50 grand for the rehab, and then it’s worth 350 at that point. Mortgage is 150 on that, and you can bump that up to probably 250 at that point, and pull it all out. That’s what we’re thinking.

Jeff: Yeah. That’s right. And I mean, in a perfect world, that’d be great. But as Mindy was mentioning, it’s just so hard to find these properties for that amount. And then too, also to actually get the work done as well, and on time, because I understand timing is a huge factor of it too.

Scott: Yeah. So your timeline is 10 to 15 years. And remember, you’ve only been sitting on your current cash flow situation for one year, right? And it’s only going to improve if you stay disciplined with the spending on that side of things. So that’s where, let’s zoom out and say, forget about the BRRRR, and you’re just buying the $350,000 property, renting it out for 2500 a month, right? And making a small cash flow there, right? Well, you buy one of those every two years, for the next 6, 7, 8 years. It’s 3, 4, 5 properties with that. You’re probably in a relatively strong position, 10, 15 years down the road, without having to do the rehab component of that.

Scott: So, that’s what I’m trying to kind of put in there. You know you’re going to accumulate 30 to $60,000. Let’s call it 50, because more often than not, you’re going to get that stock grant or the bonus paid out in most years. So over a 10 year period, that’s $500,000 in cash that you’re going to accumulate. And that’s plenty to buy about $2 million worth of real estate with that, over a 10 year period, right? Even without any BRRRR, that real estate should, on average, appreciate a little bit. Let’s call it 3% per year. And you’re going to amortize a loan. Let’s call it one or 2% per year, for those properties. And then generate, incrementally, more cash flow each time, stacking up, right? So you’re actually going to accumulate more than $500,000 in cash to invest, because the cash flow from these next few properties, will move in there. And so you may find that is an acceptable amount to achieve your FIRE goal, without having to do these rehabs. Although, the BRRRR strategy will help you accelerate that and get the first few faster than what I just described there.

Mindy: And then if you can keep your expenses low, $2500 per property, times five properties, just because we’re throwing out numbers there, is $12,500 per month in cash flow, when they’re paid off. Since you’re working, you don’t need to have them paid off, if they’re just covering their expenses and they’re appreciating, and you’re making a little bit to cover your CapEx and all of that. I’m not saying, go out and buy a property just because it’s there. Run your numbers and make sure it’s still a good deal, but that’s generating enough income to cover your expenses after you retire.

Mindy: You listen to the OG podcast and they’re like, “I want to own 500 single family homes.” That sounds like a nightmare. You’d have to get somebody to help you run that, because that’s too much. But you can have just a few properties that generate a lot of income monthly that covers your expenses. And I mean, I’m glossing over taxes and rehab and things like that, but a few properties can generate real income that allows you to become financially independent. What is the definition of financial independence? When your investments cover your monthly expenses. I guess I should look that up.

Scott: Yeah.

Jeff: Well, I mean that is my goal right there though. I mean, just to have these investments just on autopilot, able to take care of and bring in enough money every month. Such that, I don’t have to worry about paying my bills, I guess, from my nine to five money.

Scott: Well, let me ask you this, because you said you’re in 176000 cumulative, in the household income. Do you believe that the prospects at your job are pretty good, for you to substantially increase your salary over the next five to 10 years?

Jeff: I mean, I think between both me and my wife, there is room for growth in our careers. It is a little difficult for us. I mean, especially now that we have our baby here, to put in the time in order to study, in order to get to raise that income. But we are both dedicated to trying to do that, at least.

Scott: Well, I guess what I’m asking is, do you sense that your time, your extracurricular time is better spent advancing that career to the next phase? Or managing a BRRRR portfolio, and really getting active in your real estate business? That’s the trade off.

Mindy: If we were in court, this would be called a leading question, because Scott really thinks that your prospects are better, managing your job than your BRRRR portfolio.

Scott: I honestly don’t know.

Mindy: I would agree with him.

Scott: I honestly don’t know. Yeah, with that.

Jeff: I’ve never thought about it. I mean, I guess for me personally, I make about 95 right now, per year. But I guess, if I were to go and just focus solely on my career, I think I’d probably be able to push my salary up to around 120 to 130. But at the same time, I mean…

Scott: Within what time period?

Jeff: Maybe in about two to three years, possibly.

Scott: And then on the BRRRR front, you’d be adding, if you pulled off a $200,000 dollar purchase, put $50,000 into it and increase the value to 350, you’d be making $100,000, if you believe that back of the napkin math. And you may be able to have both, but that’s the choice, I think. Because it will consume a tremendous amount of your free time, especially the first few of those BRRRR, I imagine. So that’s going to be, I think the challenge for you, is do I want to do that? Or do I want to focus on the career and do something more passive with the real estate? Like buying the property that’s maybe not turnkey, but is pretty close and is only going to require a small rehab to get it rent and ready. Putting the blinds in, a paint job and carpet.

Jeff: Yeah. I mean, now that I’m thinking about it, I mean, ideally I think doing both would be great. I mean, I know my wife, she definitely wants to do both. She has amazing ambitions ahead, and further her career. Me, on the other hand, I mean, I definitely want to be like Mindy’s husband, I guess, and just solely focus on the real estate.

Scott: In Tesla.

Mindy: [inaudible 00:34:33] So I am going to give you another research opportunity, and invite you to listen to both episode 97, with financial mechanic, and episode 110, with a purple life. Both of these women have, I don’t want to say job hopped, but essentially job hopped their way to a much higher salary. And you can go in and ask your boss for a raise, or you can change jobs, change companies, and get a big bump up. And they tell their story much better than I do. And it’s been a while since we talked to them. I can’t remember the exact specifics, but I know that they both moved across country, which may not be an option for you. But they moved jobs, for sure, to get a bigger increase. And I mean, in some cases, it was a 25% increase.

Mindy: So I’m not sure what exact industry you and your wife are in, but there’s this great resignation going on, where everybody’s quitting and nobody can find anybody to hire. I would suggest looking into your options and seeing what’s available. You’re getting company stock, maybe the company stock combined with your salary is where you want to stay. But maybe she’s not getting company stock, and she wants to move to your company where she gets company stock, or another company that offers a lot more money. I mean, if the end goal is just to generate as much income as possible, that could be an opportunity to exponentially grow your income.

Jeff: Yeah. I mean, that is a great option there. I mean, I know early in my career, I definitely changed jobs a little bit, but since having a baby, I thought I should probably try to stay a little bit more stable here.

Mindy: I wouldn’t suggest both of you leave at the same time, but one of you could leave and go to another job, while the other one stays at their current job. And then once they get set in their job, then the other one leaves and goes to a new job and gets set. And you just kind of hip hop, frog hop each other. Leap frog. That’s the one I’m trying to look for.

Scott: Yeah. I think you are in a position to do that and take some chances on there, if you think there’s opportunity there. You can live off of just your income, from what I gathered from this, or very close, with that. So that would be another option. For example, if your wife wanted to take some time and manage the BRRRR for example, or get involved in that business, that would be another option. If you thought, “Hey, I’ve got a reasonable shot at getting $100,000 profit on this deal.” That sounds like it’s more than your wife’s current income with that. So even if you just do one per year, that could be an interesting option as well.

Jeff: Yeah. I mean, just to throw out here as well. I mean, something else we’ve been playing around with also… I mean, I know we throw out a lot of these things here, and we need to sort of stick to just one, but we’ve also considered… I mean, we’re not exactly set here, and loving our home, but we are considering moving to another home and possibly doing a live-in flip to also try to get another property that way as well. Just thinking that, that might be a better option for us possibly.

Mindy: Wow.

Scott: That would be a potentially fantastic option.

Mindy: Let’s talk about that live and flip. Let’s go back to the BRRRR, the R of the BRRRR, the rehab part. Who’s going to be doing the work on the live-in flip?

Jeff: Well, as I mentioned, I mean, we accumulated some contacts here in the area, as we got our current home up to standards for the renter. So we’re comfortable and confident that we have some competent workers who would be able to do that contracting work for us.

Mindy: Okay. That is…

Scott: That instantly becomes my favorite of the next steps for you, if that’s something you’re willing to do, because what would your house hack… Right now, you’re getting 1350 from the house hack?

Jeff: Yes, that’s correct.

Scott: What’s the rent when you move out from your section?

Jeff: I guess it depends on if we were to rent out the entire home all as one, or split it up and just rent it out as an upstairs portion and a basement portion. But if we were to do it all in one, I believe we’d be getting maybe just shy of 3000. Around 29, 28 possibly. But if we were to split it up, we could get upwards of around 35, to possibly even a little bit more, 36,000.

Scott: Either of those-

Jeff: I’m sorry. 3600.

Scott: So I love this potential option. Now let’s think about this, right? So you move out, you instantly have a rental property. That seems, to me, to be cash flow positive. If you believe in the appreciation prospects of your home, you’ve got a great option there. If you buy the next live-in flip, you can probably use another three or 5% down mortgage. And if you buy something in the two to 300,000 range, that’s going to be six to $9000 down payment, maybe six to $15,000 down payment. So you’re not even using most of your cash, you still have it all for the rehab on that property. You can get started right away on that rehab, and you’re going to accelerate your cash flow. Well, let me think about that. What would the mortgage be on your next… On a live-in flip there?

Jeff: We haven’t gone that far, in terms of the idea of that yet. But I guess we would try to keep it somewhere manageable, around to where we’re at right now. No more than 2300 a month, is what we’d probably try to target.

Scott: So you’d actually be saving a little less per month, in that case, because you’d assume another $2300 in mortgage, and you’d only increase your rent by maybe a little less than that. But it would still be… But now you have a shot to make several $100,000, tax free, if you’re able to pull off the live-in flip appropriately, and sell it after a two year stint in there. So I really like that potential. If you’re going to go all in, that’s a great approach. It will have lifestyle implications, but Mindy, I think is proof of the power of this particular strategy.

Mindy: It will have lifestyle implications, but your live-in flip doesn’t have to be the same level of my live-in flip. I moved into an incredibly ugly house, and we’re going to touch every single wall. The main floor plan is the same, we haven’t moved… Well, we’ve adjusted walls, but we haven’t moved walls and done structural changes and things like that. I’ve done other houses where I pop the top. Don’t do that with a baby, that’s a disaster. I speak from experience there. You can do a kitchen from Ikea. I just did a kitchen from Ikea for the very first time. That’s a very inexpensive way to do it. They designed it, so that anybody can do the Ikea kitchen. You can check out my video on the real estate rookie channel, where I walk you through my kitchen. It’s actually really beautiful.

Mindy: I’m never going to do an Ikea kitchen again, because it’s so time consuming to put all the cabinets together. But I mean, you’ve got two years to do the work. I wouldn’t tackle things like structural issues or mold or meth, for a first live-in flip. But I mean, an ugly house can just be painted and new flooring, and it’s way better. And a kitchen remodel is so much value. A bathroom remodel is so much value. I wouldn’t go around and rework all the walls in the house, but there’s varying levels of a remodel, and you can really make it beautiful for very little effort. And then you can learn new skills too, if you can’t find somebody to do the work for you. Come over to my house, we’re doing everything. I’ll teach you everything.

Scott: Yeah. I mean, if you back into a picture from three to five years from now, right? If you do the live-in flip, that will probably consume a good chunk of your cash, but you’re well… You have plenty of cash to potentially take on a live-in flip, in my opinion, with this. You can put down a low down payment, again, to preserve that and save it all for the rehab with it. And once you finish that rehab, if you come in under budget, all the remaining cash can go towards the next rental property with it. You’ll be committed to that place for two years, but there’s no reason you couldn’t, if you do a live-in flip, rent out one of the sections of the house, if that house layout made sense for it. Kind of like what you’re currently doing.

Scott: So you potentially have a lot of options with that strategy. Again, the tax advantages. And you’re able to use the best source of financing, which is your local one. And if you do a live-in flip, I think you’re going to get a lot of confidence for your BRRRR strategy as well, from the firsthand experience in rehabbing that. So I think there’s a lot to like about that, from a strategic choice. Obviously, a lot of people are not willing to do that with a new family, but if you are, I think you should. That would be the first place I’d look.

Mindy: And talk to your wife and make sure she’s on board with it. You will be living in a construction zone, which is not the most fun. If she’s on board with it, I mean, you can make a lot of money. I’m proof of that. You can make a lot of money with a live-in flip, but it’s also… I mean, it can be a little bit draining. Keep a room that’s untouched, like your master bedroom. Don’t be working on that while you’re working on the other house too, so you have a place to go where you can just decompress and be away from the construction for a little bit.

Jeff: Yeah. I mean, we’ve had the conversation with it a little bit, but it’s just been in passing and very infrequent. Definitely, we focus a little bit more on the stocks and the traditional rental properties. But I mean, after this conversation here, with you all, I think we’re going to go ahead and try to sit down and have a date about this, and I guess, consider a little bit more.

Scott: Okay. What other things are you interested in hearing about today? Did we answer all your questions?

Jeff: I think you all did. But I guess, in terms of, from what you all heard in terms of our goal, would it seem like we’re too liquid, I guess, in our cast that we have right now? We’ve had a conversation with the financial planner in the past, and they mentioned to us that we might be a little too liquid. But we were thinking that, I mean, given our goals of trying to put 25% down on a rental property and just making sure that we maintain our emergency fund, we thought we were pretty good there.

Scott: I mean, you have to use it at some point. You can’t sit on this pile of cash for the next year and a half, otherwise you’re going to destroy purchasing power. But if you’re going to invest in real estate, I think you’ve got a very appropriate amount of cash, especially if it’s not going to be another house hack or whatever. You’re going to need, in your market, to put down $60,000. And so you’ve got a very… You got a perfect financial position, from a cash perspective, for that pursuit, right? You put down $60,000, you’re left with 40. That’s a comfortable amount of cash to make sure you have a strong emergency reserve, and still have some liquidity for both your personal life and your property. So I think it’s an appropriate amount of cash in your situation, but you need to use it for that purpose, at some point in the next couple of months here. Next six to 12 months.

Mindy: Yeah, I would agree with Scott. I can see where the financial planners are coming from. “Wow, you have a lot of money in cash.” I mean, you heard me say, “You have $102,000 in cash?” But you have a reason to spend it. I would not be putting that in the stock market right now. Because the stock is so very volatile at this very moment, you could put in 102, and then when it’s time to make a purchase, now it’s 80. I think it’s a terrible idea to put it in the stock market. It’s a great idea to just keep it in, whatever your high yield savings account is, because you’re going to make a purchase. But if you don’t have a real estate agent that you’re working with right now, I would connect with one and have them send you listings, and start looking at these properties and make a solid plan to purchase either a live-in flip.

Mindy: You’ve lived in your home now for more than a year, so you can move out and rent it out and not pay any cap, because you’ve satisfied the terms of your mortgage, which are usually, you must live in there for 12 months. So now you can move to another property, turn your old one into a rental. If you plan to sell your old one, I would hold onto it for two years so you don’t pay any capital gains taxes when you do sell. But also, be keeping an eye on the market. Maybe some smoking hot deal comes on the market. You’ve got the cash, you’re ready to jump on it as soon as you are ready to jump on it, as soon as you find it.

Scott: I think all of that is right. One caveat on the stock thing is, it’s a great time to invest in the stock market, if your plan is to pile consistently, year after year, into a long term index fund, and build that as part of your wealth. And I am still investing in the stock market and putting money into the index funds. It is not a good idea to put your excess cash into the stock market, and then later, go to pull it out to invest in real estate, because of the volatility. So it’s fine to have it in cash until you buy the property, rather than sticking it in the stock market until you buy the property, because you don’t want to be subject to, oh, the stock market just dropped 30% and now I can’t buy that place anymore.

Mindy: Yes. Thank you. The stock market is a great place to invest. It is not a good place to store your money for your down payment. So people are always asking, “Oh, it’s just sitting in this high yield savings account, and it’s only making 0.2%. And I see all this stock market going up.” Well, the stock market could just as easily go down. So yes. Thank you, Scott, for clarifying that. That’s what I meant.

Scott: Great.

Jeff: I mean, I’m glad you all brought up, I guess the stock market as well, because I guess that’s something else that we… Or I guess I was looking into, in terms of, as I mentioned earlier, I have hopped jobs a little bit in my past, and I’ve gathered a little bit of money in a few of my 401ks. I was wondering if I should go ahead… Is this a good time to, I guess combine all of those, and to make a Roth IRA, and start contributing to that as well?

Scott: So do you have 401ks, or do you have… You’re talking about a rollover or a combination. You have several 401ks from old employers?

Jeff: That’s correct. And I was considering rolling those over into a Roth IRA.

Mindy: Are any of them Roth 401ks? Or are they pretax 401ks? Because you could roll over [crosstalk 00:49:14] from a 401k into a traditional IRA, and that is not a taxable event. Meaning, you’re just taking it out of this pre-tax account and putting it into this pre-tax account. If you take it from this pretax account and put it into a Roth account, that’s a taxable event, and all the money that you turn into the Roth, is taxed at your current tax rate. So it may be more financially advantageous for you to roll it over to a traditional IRA, or to keep it in the current account if it has really low fees.

Scott: Yeah. In addition to Mindy’s great points there, if you have multiple 401k accounts and you just want to consolidate them to make life easier for you, that’ll take some paperwork and maybe a little bit of fees, but it may be worthwhile if you’re going to combine them into a 401k through Vanguard or something, and have low fees and be able to put it into an index fund and set it and forget it for a couple of years. I think rolling it over into a Roth IRA, is a tough sell for me right now, for you, because you guys earn a pretty high income already and that will be a taxable event to roll it over. Instead, what I think is… If you want to combine them into one 401k, that’s a good time to talk to a CPA or somebody else, to make sure that you dot all the Is and cross all the Ts on that particular point.

Scott: But then sit on it, invest it in something you think will grow, and wait. And maybe in 10 or 15 years, when you FIRE and no longer have income, and you’re doing your flip or your BRRRR, you might have a giant loss as a real estate professional that year, and that would be a great time, when you have a taxable loss, to then roll over the $75,000 or whatever it grows to, into the Roth IRA, so you don’t have to pay tax on it. But right now, it’s just going to add more to your tax. I think it could be a very expensive year to do that. If you never think you’re going to have a year where you’re going to have a low income year, which will be unlikely for you as a real estate investor, if you go down that path, then you can do it at some point, and now might be fine. But my instinct would be to leave it untouched and let it grow tax deferred, and wait for an opportunity to come along in downstream years, to then roll it over to the Roth.

Jeff: Yeah. I mean, there are several… They are just regular 401ks, and I don’t believe they have any high fees associated with them. So I was just considering, just to make life easier, in terms of tracking it on the month to month. Just having it all in one, instead of several smaller accounts.

Scott: Honestly, I have a couple, and I just leave them. I haven’t bothered to do all that, because there’s just fees associated with it. So if you feel like you’ve got a good provider, you can just leave them and Mint will track them, you got to update the logins every once in a while, but there you go. But if you do want to, that would be fine, I think. I don’t think there would be a major cost, one way or the other, to consolidate them and roll them into just one central place.

Jeff: Okay.

Scott: But it definitely would be something to just spend a couple 100 bucks on the CPA or the CFP, to help you make sure you get that.

Mindy: Yep. I agree with what Scott just said. I had an IRA that was super high fees, and by the time I finally got around to transferring it out, it had eaten up half of my balance in super high fees. And I mean, we’re talking from $1000 to $500. It wasn’t a ton, but it was still, 50% is 50%. And I would’ve preferred to have those $500 in my pocket, instead of somebody else’s. So yeah, if it’s not high fees, I mean… And another thing to look at, is what are your options within that portfolio? Sometimes the options are really terrible.

Jeff: Yeah. I haven’t even really… Once I left those employers, I haven’t even turned back to really look at those, except for just to check the balance and that’s about it.

Scott: Yeah. I’d take a look. I’d revisit what’s invested in there. And if you see something, like a one and a half percent fee plus a high fees for each of the funds, probably a good time to roll them over into a better plan. If you see really low fees, probably no need to bother. But that would be… Because you don’t know, my fear is that you’ve got high fee plans with that. That tends to be the case, but hopefully not.

Jeff: I hope not, but I’ll definitely be doing that as a homework assignment here.

Scott: Well, great. Keep going. Anything else that we can help you with?

Jeff: I mean, no, I think that was the bulk of my questions there really. Just trying to, I guess, make sure that I was heading in… I had some good options, I guess, ahead of me, in terms of what we have planned out for FIRE. But I think that’s about it really. So I guess, me and my wife have some conversations to talk about here, in terms of which direction we want to go here from now.

Scott: Yeah. Well, love it. And just to reiterate, I’m glad you told us, hey, you’ve… It sounds like you went through a period of paying off a lot of debt and getting a strong financial foundation built. And now you’re sitting in this really strong position where you’re accumulating all this cash each year, and you’re accumulating too much cash, you don’t exactly know what to do with it and what the best approach is. That’s a great problem. And if you keep that up for the next five, 10 years, you’re going to amass hundreds of thousands and millions of dollars of wealth with that, and it’s just about where you apply it.

Scott: And I love how you’re asking that question next. So I think you’re in a really strong position and have a really good trajectory. And if you come back in three years and you just save at the current rate that you’re doing, and apply it to either stocks or boring old real estate, or the BRRRR, or the house, you’re going to be successful any which way. It’s just a matter of degree, which I think is the right question to be asking. So thank you for sharing all this, and for the great discussion today.

Jeff: Well, I appreciate you all giving me your perspective and reassuring me here, and making sure I feel really good about our position here now.

Mindy: You are doing fantastic, Jeff. And you will definitely hit your goal, unless some catastrophic thing happens, and then nobody else is going to hit their goal either. But you’re doing awesome. And the 50% savings rate, or almost 50% savings rate, is a huge help. That is something that I don’t think we celebrated enough. So hooray for you, you’re doing wonderful. This was awesome. Thanks, Jeff.

Jeff: Thank you all.

Mindy: Okay. Well, talk to you soon. All right. That was Jeff and his fantastic story. And I can see how it could be a little bit daunting to have to decide, which of these amazing options do I pursue? And I think that we had several things for him to consider, that maybe he hadn’t considered, Scott. So I believe that this was very helpful for Jeff. What did you think?

Scott: Well, I hope it was helpful for Jeff. I learned a lot and enjoyed the discussion. And I think we just can’t stress enough, how the… I’m sure there’s so many people out there that are listening, that if you’ve been listening for a couple years maybe, you’ve gone through this slog, or have paid off the debt and you’re kind of in that position that’s like Jeff’s, where you’re just starting out being able to make these large investments each year. And you’re at the beginning of, what really is a grind for several years with it.

Scott: And I can’t stress enough, how healthy of a position that is to be in, where all the right things are being done. Incomes strong, credits good, there’s no bad debt, there’s no debt at all, besides the mortgage and the monthly credit card balance. And it’s just a matter of continuing that for a period of time, not having the spending goalposts move, and stacking up those assets. And he can win in any of 10 different directions. The two that we discussed today, being real estate and stocks. But if he went down either of those paths, he’ll become wealthy over the next 10 years. And it’s just a matter of degree and how much, and how much cashflow, depending on how active you want to be in that investment portfolio.

Mindy: Yeah. I like that he can win in any one of a number of opportunities that he chooses, and he doesn’t have to focus on just one. We talked about real estate, because I think that’s where he had the most questions. And we are Bigger Pockets, so why ask us about other things when you can ask us about real estate? He’s got some great options. And the contractor piece, I think people don’t really… You know what? I should talk to the real estate podcast, because I don’t think they focus enough on how difficult it can be to find a good, reliable contractor.

Mindy: So they need to focus on that R, maybe do a whole episode on that R and finding contractors. You can find contractors, they are out there. And treating them well, paying them well, paying them quickly, is a great way to get them to come back to you over and over again. But finding them in the first place, can be kind of difficult. But yeah, he’s got a lot of options. I also love his timeline. “Oh, I’d like to be financially independent in 10 or 15 years.” Our history of 279 other episodes, shows that’s a very realistic goal.

Scott: Absolutely. And I think that, again, if he can just apply the fundamentals, he’ll get there with any one of those strategies.

Mindy: I agree. Okay. If you are listening to this show, that means that you really like this show. Have you heard your story, or would you like to share your story? Please apply at biggerpockets.com/review to be a guest on our finance Friday episode. We are always looking for more interesting stories to share with our listeners. Scott, should we get out of here?

Scott: Let’s do it.

Mindy: From episode 280 of the Bigger Pockets money podcast, he is Scott Trench, and I am Mindy Jensen, saying be sweet, parakeet. Because I forgot to look that up today. You could also send me suggestions, [email protected]

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds. Thanks! We really appreciate it!

Related Posts