Mindy: Today’s Finance Friday guest is a repeat. She is returning to the show. Last year, Alex joined us on episode 395. She was at a fork in the road whether she should invest her large cash savings into real estate or the stock market. In today’s episode, we’ll hear an update on her financial position and how she’s now reached a new crossroads and might finally be able to leave her W-2. And FI before 45? Let’s find out today.
Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen and with me as always is my blueberry loving co-host Scott Trench.
Scott: Thanks Mindy. Great to be here and really excited to jam out with you, right? That’s, very intro related. Did I intro right there? Um, BiggerPockets has a goal of creating 1 million millionaires. You’re in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for anyone, no matter when or where you’re starting, whether you’re deciding to invest in stocks or real estate. All right, today we are going to discuss Alex’s new FI number and how she should adjust her portfolio allocation to avoid the messy middle. And we’re going to discuss diversification of her current portfolio. Alex, welcome back to the BiggerPockets Money podcast.
Alex: Thank you guys for having me back. Excited.
Mindy: Alex, for our audience who didn’t yet listen to episode 395, can you share a little bit about your money background?
Alex: So my money story begins when I grew up raised by a single mom and a retired grandmother. And money was always kind of tight for us. I was always very aware and conscious of us not having a lot of excess money. We always had what we needed, but not, we didn’t take say vacations every year. We went down to the Jersey shore. We kept things kind of within our budget. And the conversation around money was always more of a scarcity mindset. So that’s kind of how I feel I was conditioned growing up. And as I approached college and after college, I graduated college with about $25,000 in student loans. And then that same year, I also got a new car. So that rounded me out for that year after college with about 40,000 between student loans and a car loan. And after those years, I was trying to be as diligent as possible paying off that debt. That was really my main priority. And I lived at home for a few years and, and got that taken care of, thankfully. So now, as my income has grown and my net worth and my savings and investing has grown, I just continue to find myself in a position where I have, I guess, somewhat of a good problem in having a lot of cash on hand, but also having investing goals and real estate goals and just trying to kind of, you know, allocate where as best as possible.
Mindy: Okay. And when we last spoke, you had a large cash position and you were considering putting it into the stock market or putting it into real estate. What did you end up doing?
Alex: Yeah. So the last time I was on the show, I believe I was speaking about wanting to have a house hack property in the town that I live in. And gratefully we were, I was, we were able to purchase a property, uh, here. It’s a house hack. I’m sitting in one of the offices in, in my house now. And, uh, we were able to renovate this home, found it off market. I think I had also mentioned that I was doing direct mailers and those sort of things to try and find things off market as well as keeping my eye on the market while being a realtor. Um, and thankfully someone reached out to me on one of my direct mailers and I was able to, you know, make it work. So we renovated it. We have a tenant downstairs. It’s been a really interesting kind of intro to real estate investing. And, um, also definitely reducing our monthly expenses for housing significantly relative to the apartment that we were living at, which was, you know, they call it a luxury apartment. But it was okay. But it was definitely overpriced. So, um, that’s been, that’s been fun and exciting. So that’s definitely where a lot of that, a lot of that money went last year.
Scott: Awesome. Can you, can you give us all the details on this house hack? How much did you pay for it? How did you finance it?
Alex: Sure. So we’ve purchased it for 480,000. We financed it with a conventional loan with 15% down. Um, because that was allowed for the primary residence. I thought, I honestly thought it was, I wanted to put less down, but that was the minimum at the time. Now I know it’s different, but, um, that’s all good. And yeah, so that was our, our financing situation. And our monthly payment is about 3600 a month with taxes and insurance. The taxes in New Jersey, as I’m sure you’re aware, are quite high. So my taxes, my annual taxes are about 10,000 a year. Um, and our insurance is about 1500 a year. So that rounds us out at about 3600 and then we get rent downstairs for a two bed, one bath in the multifamily for, uh, 2700 a month.
Scott: Okay. So it is a duplex, uh, up-down duplex.
Alex: Yes, it’s a two unit. Yep.
Scott: That’s awesome. 2700, um, for the downstairs unit is awesome. What’s the upstairs unit like? How many beds and baths? And what would you get for rent on that part?
Alex: Sure. So we live in the, the upstairs unit and it’s a two bed, one bath and with this office, the one the space that I’m working in is like a additional office space. Um, and we would probably get, we have an unfinished attic as well. We plan to finish it. We would like to. So that would probably increase it, but for simplicity sake, we would probably get about like 2800, I would say for this unit as it is, maybe more.
Scott: Sorry, that was 2800, is that what you said?
Mindy: Yeah.
Scott: That’s awesome. ‘Cause that’s a 50, if I’m doing the math right, that’s $5600 a year, $5500 a month, sorry, on a $3600 PITI. Um, you probably should be able to make that work when you account for property management, CapEx maintenance, utility, all that kind of good stuff. That’s a great cash flowing rental property in New Jersey, it sounds like in 2023 in the face of a higher interest rate environment. I thought that was impossible.
Alex: You know, I mean, a few and far between. I don’t ever promise it to my clients, you know, so.
Scott: What do you think it’s worth today?
Alex: Well, we actually, we took out a HELOC recently. So I had it appraised and, um, it came in at 730,000. And, um, I think that’s pretty accurate between 730,000 and 750,000 is probably the current worth.
Scott: Okay. And you bought it for 480. How much did you put into the rehab?
Alex: A fair amount. We did a lot up front, but then the past few months, we did the roof, we got two new boilers, we got a water heater. So we’re rounded out at about like 160-ish thousand that we put in.
Scott: And that’s been a theme that I’ve I’ve seen across a couple of deals that I’ve heard about recently is that they’re there. Flipping may be back to a certain extent in a lot of these markets. Um, and folks that are cash strapped don’t necessarily want to put in $160,000 into a property. And so there’s an opportunity there for folks that are willing to, to put in the work there. And you’ll get, you could you still have an opportunity to get a good chunk of the benefit and the gain here, um, tax-free. I don’t think you’d be able to get 100% of it because you’re treating half of it as a rental property, but you can get half of a couple hundred thousand dollar gain. It sounds like maybe $150,000 gain, um, tax-free. So this is an awesome, awesome buy, it sounds like for you guys and congratulations.
Alex: Thank you. Appreciate it.
Mindy: Okay. Let’s look into these numbers, current numbers. I have income, which I just love. Actually, let’s go into investments first. We have 120-ish in cash, 100 in a Roth 401(k), 25 in a Roth IRA, 36 in a SEP IRA, 306,000 in an after tax brokerage account. Scott, she is not going to hit onto that middle class trap. Not with all of her money being in Roth, Roth and after tax brokerage. So I love that. I’m going to come back and talk about this uh, 120 in cash you have sitting around. Uh, treasury note of 5,000. Uh, that’s interesting. I’ve never seen that before. A HELOC balance and about $367,000 in home equity. Your income, I love this, 68,000 at your full-time job, 96,000 at your 1099, and additional 20,000 in bonuses for a whopping $184,000. Nice. Let’s look at those expenses. Scott, I’m not even going to read them off because her total expenses are $4,000 a month. on $184,000 salary. I, I’m sorry, $184,000 income. Part of this is W2 salary and part of this is real estate commissions, which everybody knows can be a little unpredictable.
Scott: All right, we need to take a quick break, but we’re going to hear more from Alex when we’re back and we’re going to find out if Alex can or should drop her W-2 today.
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Mindy: Welcome back to the show.
Scott: Let me ask a question here because I just want to make sure we’re not being, we’re not misleading ourselves with this because Alex, you’re declaring your income as between you and your partner. I believe. And I’m seeing on the expenses, your half of the mortgage payment, then and those types of things. So is this half, are we looking at income on a household basis and expenses on a personal basis or some combination there?
Alex: The income is just my income and then the expenses are just my expenses. Yeah.
Scott: Okay, got it. So you have a full-time job and a 1099 and that’s what we’re looking at here to add these both up. Okay, got it.
Alex: Yep.
Mindy: Okay. So, back to what I was saying, 184,000 coming in, 49 going out. I don’t care about your expenses because you’re doing okay. You’re doing better than okay.
Scott: And the reason you’re doing that well is because your housing cost is 500 bucks, you include the mortgage and HELOC. So, okay, you’re spending 3500 everywhere else. If we were talking about, if we were adding in 3,000, 3700 a month in rent, we’re talking about expenses a lot here. But that’s the beauty of the house hack is now we don’t have to talk about expenses like, that’s just not, you you can spend as much as you want in some of these other categories, you probably feel luxurious despite the fact that you’re only spending 50k a year. I don’t know, maybe is that, is that right?
Alex: I’m, I don’t know, maybe. Definitely not, not living in luxury. That’s for sure, but, you know.
Mindy: Well, and you could afford to spend a little more if you chose to, because you’re not even spending all of your W2.
Alex: Yeah, and I think a lot of that actually is going to change this coming year with what I would like to talk to you guys about too, in kind of increasing my real estate business, because even recently, just this month, I’ve kind of invested a fair amount of money into, you know, more systems and lead gen things. So, um, I think that that’s also a great thing about being able to say live in a, you know, have less expenses, and having it allowing it to be allocated towards say, a business, um, you know, opportunity.
Scott: Yeah. Well, let’s go back and look at your cash for a second. You have 120,000 in cash and you have expenses of 49,000. Let’s call it 50,000. So you have two, almost two and a half years of current spending just sitting there in cash. So now could be a great time to strike out on your own and try to be more focused on your real estate agent career. However, I keep hearing how the market’s about to crash. What would happen if you quit your job and then all of a sudden, I don’t know, interest rates went to 1970’s levels, 17% and nobody’s buying a house. What are you gonna do?
Alex: Well, I guess I have two years, right? So I guess I could wait it out two years, but um, I think alternatively, I think around here especially in Northern New Jersey, the market is less even about the interest rate. Unlike a lot of other parts of the country where I guess I’ve heard a lot about the market slowing down because the interest rate was increasing, that really wasn’t the experience around here just because the inventory here is very limited. And they can’t build a lot. Um, so here, not to say that it’s impossible, but it’s very unlikely, I feel that home prices around here are going to significantly decrease and the market would all of a sudden be at a huge surplus unless some catastrophic event occurred and now all these homes are on the market because even in real, even in New Jersey, the foreclosure process is also two years, right? So it’s a very long extended process to kind of have some kind of incentive for for more homes to go on the market to indicate some kind of a a crash. That’d be my opinion, of course.
Scott: I saw a stat as well with the, um, real estate settlement Mindy that before the settlement was announced, average buyer agent commissions were 2.65% of total purchase price value, 2.65% and since then they’ve decreased all the way down to 2.59%.
Mindy: Oh, okay.
Scott: Which is nothing. Like it was a joke. Like there’s, it has not impacted the actual commissions for buy side agents like all this doom and gloom. Um, let’s talked about for that. So I think I think that if there’s one one school of thought that now is potentially a great time to enter into the agent business. And if you’re asking, I think you’re asking Alex, hey, do Scott and Mindy, do you guys think I should go in and lean into this agent business or my full-time and leave my full-time job? Is that is that the question you’re you’re hearing up to ask here?
Alex: Yeah, pretty much. Just kind of overall thoughts.
Scott: Well, I have, I have two questions and I’ll I’ll not even bother shying away from it, but I think the answer is almost certainly yes, but let’s couch that with a couple of other questions around this first. One is, what is the likelihood of your $68,000 per year salary increasing dramatically at your current job?
Alex: Um, I do get a 10% raise every year. So I don’t know that that’s necessarily dramatic, but, um, yeah, it’s likely that it will be going up, but at the same time, I think it’s more about the time for me even than the money. It’s more about the flexibility and, you know, not spending any more time commuting and those sort of things over money. Like I don’t, I think I could kind of whip up $68,000 maybe if I needed to. So, um, for me, I think it’s a lot more having to do with my own, like fears and of course, personal choices and loyalty to my employer type of things, which of course isn’t something that I expect you to resolve. But at the same time, I also want to think through, you know, what that life looks like as as a full-time agent and and those sort of things. Of course, considering the income, but
Mindy: So you you work full-time at this job, 40 hours a week plus commute?
Alex: Yes. So I work for my broker. He has a construction management company, but it’s down the shore, so it’s, I know down the shore is a Jersey term, sorry. It’s, it’s like an hour 45 down and then another like two to two and a half up. So, and I go three days a week.
Mindy: Quit! Quit last year.
Scott: And and you generated $96,000 in brokerage, in in agent commissions on the side while working 40 hours a week, 24 of which were in person in this office, and on top of that, there’s another what is that, seven, eight hours of commuting time? And you still generated $96,000 on the side.
Alex: I guess that’s true.
Scott: So so the big risk is, if you talk to, like, how long have you been getting agent commissions again? How many, how many years of tax returns show commissions from your agent profession?
Alex: I want to say five or four or five, I want to say. Um, this was definitely by far my highest commission year. It’s been more an average of say like 50 to 60. And yeah, this has been definitely a lot more.
Scott: So, we’ve had a couple of employees here at BiggerPockets who have, you know, gotten licensed and then go on to a situation like this. Like one example is Craig Curelop, right? He came in, did finances for us, and one day he came in and he was like, “Scott, I I sold like 30 houses last year, like on the side here.” I was like, “Craig, you’re graduating.” Um, you know, he went on to start the the FI team and it’s it’s wonderful. It’s it’s a success story. You can’t, you can’t be, you know, the job here, somebody else needs that job uh, for $68,000 a year, um, to go and work there and you need to go and make your, you know, $250,000 a year as an agent, which is just waiting there that you’re leaving on the table in this situation and it’s time to graduate, I think from from this job and I think that’s a celebration and not a, your your broker is not going to be upset about that. Like, he’s going to be or she, whoever this person is is going to be super thrilled for your success on this front and, and wish you well almost certainly if they’re a successful agent and they’re thinking about that. This is ridiculously good outcome, um, for a side hustle here and you, you, you it’s time to thrive, I think.
Alex: I appreciate the perspective very much. Yeah, that maybe it’s a good opportunity for somebody else who’s maybe more local. to come in.
Scott: And it’s going to be like, you’re going to resent your job too, because it’s like you’re making, you’re going to make half of what you’re making from an agent business on the side and you’re going to be like, I what am I doing driving down here? So that’s going to make, that’s going to also, you you you have a risk of and I don’t know if this is happening, I’m sure it’s not, but you have a risk in the next year of becoming a problem for your employer in this type of situation, I wonder. So, Does that, is that at all?
Alex: Yeah, you’re right.
Mindy: Is there anything you can do remotely for this job that would allow you to kind of have a safety net to test out this full-time real estate agent thing, or is it do you really need to be there three days a week?
Alex: Yeah, it’s a good question Mindy because it’s something I’ve been thinking about a lot recently, um, that I do plan to present, which is exactly that. I do a lot of like numbers, bookkeeping, admin type of things. Um, and certain things, yes, sure, I do have to be there, but it would be say if it was once or twice a week, um, at least for the time being. And then I think that that should be a doable ask. So I’m hoping that that would be, you know, agreeable essentially. So.
Mindy: So when you’re working as a real estate agent, you are essentially working nights and weekends. Every once in a while there’s a daytime thing. I mean, closings are always during the day, but it’s mostly nights and weekends. So you could give yourself more financial security by presenting this to your boss. “Hey, I don’t want to drive down the shore anymore because I’m spending 12 hours in my car every week and that’s not fun.” So here’s what I propose. And then if he says no, well, then you have a different question to ask yourself. But how easily would it be for you to generate $50,000 in commissions in your pocket? After your splits, after your taxes, after everything, I’m estimating that’s like selling six, seven, eight houses.
Alex: Yeah, it’d be about like five or six, I would say.
Mindy: Yeah. So how easy would that be for you to do?
Alex: It’s definitely doable. I think I have enough people in my book, like even right now that should convert.
Scott: Okay. So that’s all you need to do. That’s your minimum. So let’s say you need to sell six houses, start in January. How long does it take me to sell six houses? Oh, look, I did it in January. Uh, okay. You don’t need that job anymore.
Alex: But I think it’s chicken and egg. I
Scott: Alex, can I mind asking, uh, how old you are?
Alex: I’m 31.
Scott: I mean, this is like, like, you got it right here. This is like you’re so, you’ve got so much right here in this situation. Like you’re going to have all the energy in the world to go after this. You’ve got, how much cash where, where is it? 119,000 in cash. You got 300 grand in your extra brokerage account, which is more liquidity around there. Your expenses are low. I mean, this is and your your current income is going nowhere relative to this. This thing is taking off like a rocket ship. It’s 100 grand and you’re doing it in part-time. You can double, like there’s every reason to believe on paper, you could double or even triple that income stream if this becomes your full-time profession within two years. And it ain’t going to happen at your job in this particular situation. And your risk is so low because of the cash position and your expense profile and the upside of or the the worst case scenario, I think, is that you quit the job and you get another one like it a year or two that’s closer to like closer to home on it. Like you’re already going into the office. It’s like a lot of a lot of folks like, hard to hire people that go into the office uh on a regular basis. You do that somewhere closer to where you are, you’d probably be able to get a job that’s just as high if not higher paying if you just switched jobs today. I mean, I don’t know, do you you seem like you’re nodding along with that, like that’s true. I don’t know if that’s true, but that that’s what it smells like to me from from over here in Denver.
Alex: Yeah, I think, um, from over here in Jersey, I think you’re picking it up.
Mindy: Okay, I changed my mind. Quit.
Scott: I think you’re there from what I’m reading here and yeah, you could definitely lose. You could come back next year and say, “Scott, I didn’t sell any houses. That was, you know, that ended up terribly.” But I mean, there’s there’s there’s outcomes and there’s, you know, um, separating the two, you know, the quality of the bet, the quality of execution, the outcome. I mean, this is just absolutely screaming to me, quit, quit the job and move, move forward. It would be totally different if this was all in 401ks, if you didn’t have a cash position, if you’re spending $65,000 a year on there, and maybe I would be thinking about it differently, but this is screaming to me, you’re ready for entrepreneurship in every respect in this situation.
Mindy: I appreciate it. Stay tuned after our final ad break.
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Scott: All right, let’s jump back in with Alex.
Mindy: Only caveat I will give is on your financial goals, you want to acquire two to three more rental properties over the next two to three years. It’s more difficult to get a loan if you have self-employment income instead of W-2 income. So I would pick your favorite lender and reach out to them and say, you know, here’s my financial situation. Can I get a loan? Does your partner have the ability to get a loan?
Alex: Yes, but he’s also self-employed entrepreneur. So I think that’s been like the parlay a little bit, but I think it’s possible.
Scott: You know what I’d rather have than a better loan? Another $150,000 in income. I to me, to me it’s like I I agree with Mindy, go talk to three lenders and talk about it and get pre-qualified. Go get pre-qualified for a loan for the next property right now. There’s no reason not to do that. You are an agent, you should have those connections around there. Talk to them about it, but you have, that’s why I asked earlier about your history as an agent. You have five years of tax return history um, for that and agents are able to get loans on houses. So this is not, you’re not going to be solving a brand new problem. If you had one year of history, then I might be that was why I asked I I might be asking you different questions here because you wouldn’t have that that history to lend against. But I I would bet, tell me I’m wrong, um, and please email me if this is the case, but I will bet you that you’re going to be able to get pre-qualified um, more than you think um on the next one. And what’s going to be better than that is you have a year of rental history now on your tax return. Um, and that is going to also help you qualify for the next loan because you’ll have a you’ll have tax return um you’ll have rental income on your tax return in addition to your agent history. So I bet you your ability to borrow has increased dramatically um, or will increase dramatically once you file your tax return for 2024 in 2025. That’s actually the order of operations. I would talk to a lender now and confirm those things. and then get prequalified if I’m right, once you have filed your tax return in 2025. And you might want to delay, like that this might be a year for your consideration if that answer is hazy, to file your return in January or or February, like right away so that you have that available to take to the lender and get that information. But that’s the one question mark in your situation. I think you’re going to find it’s not going to be an issue for you um from a lending perspective. In fact, in fact, in your situation, if you’re trying to buy more rental properties, when you go full-time as an agent, you’re going to get real estate professional status and you’re going to be able to use the depreciation on the next rental property you buy to offset your agent income, um, to a large degree. So you’re going to have a field day with this, um, thing. It it all comes together for me. I’m, I’m, I’m I’m expressing much more confidence than I usually do or I’m weighing a lot of options because I think it’s, I think it’s pointing in this direction for me very clearly.
Alex: I appreciate the passion very much, Scott.
Mindy: I’m the one that gets worked up, not Scott. So for Scott to get excited about this.
Alex: That’s great. No, I really appreciate it and I didn’t even think about the um, income from the house either. I really was kind of missing that. Um, I will say, not that it makes that much of a difference, but in terms of my how I laid it out in income, that 68,000, that’s after tax. So it’s kind of like what I see. I guess it’s like a $90,000 base, but once again, it’s kind of like picking. So it’s not really makes that much of a difference, um, in terms of my decisions, but yeah, you bring up a lot of great points and I think that that’s definitely a lot of why similar to what Mindy suggested initially, why I I want to reduce the time because I think I would feel even more confident in making that leap when I feel like I have a little bit more time and I’m allowing myself to optimize my earning potential in real estate prior to going full-time, full-time. But, um, so that’s like my first step and then, but I agree with you, Scott, I think it’s, you know, kind of time overall. So…
Scott: Your boss is an agent, right?
Alex: Yeah.
Scott: Maybe you just, like in the context of it, say, “Hey, I I just made, like does he know that you made?”
Alex: I don’t think so, honestly.
Mindy: What, what brokerage are you with where you hang your license?
Alex: Oh, it’s a small, it’s a small brokerage, like a small local brokerage.
Scott: You might even like, like there’s even possibly a way where your employer’s like, grief, yeah, come join my brokerage, hang your license here. We’ll hook you up with all the systems that you need to sell property and we’ll take a cut of the commissions like any other brokerage up to a certain amount for it.
Alex: Oh, I understand. I understand your question now, Scott. Sorry to interrupt you. So I have my license with my broker. So he, he has my license.
Scott: So you still work for your broker.
Alex: Right. Either way. Basically, I’m not running away anywhere with me.
Scott: So that’s a different, that’s a different question here.
Alex: It’s kind of funny though, because it’s like that almost makes me feel a little bit stranger at times because because of, I guess the dynamic is a lot to explain for like a a short podcast, but, um, but yeah, it kind of is also a funny thing because I would be essentially, I guess I could be framing it better. I could be framing it as I’m going to be allocating more time towards the brokerage as opposed to the building company.
Scott: I mean, you can help pad this guy’s stats and make him look like a hero by just stopping doing whatever the heck you’re doing at your full-time job right now and selling houses, because he like he what he wants is he want to be like, our firm sold $100 million in real estate last year or 250 and you’re and if he just unleashes you, you’re going to be a superstar for him. Like, probably not a lot of agents in that business are going to do $100,000 in GCI this year, gross commission income for the non real estate listening nerds there, and you’re going to be able to up that dramatically next year and increase the sales volume for the brokerage to a certain degree. So you’re not really going to have to talk about quitting necessarily, which is going to make your case to the lender even better going in the next year. I think he would way rather have you selling houses than at this rate than doing the the the the other functions that you’re doing.
Alex: You’re probably right. Alex, you have a gap between your income and your spending of $134,000 a year-ish. Where are you putting that money? Um, so as you can see, a lot of it is in cash, but other than that, I put it in my, my brokerage account. I put a lot of it in my brokerage account. Um, I maxed out my Roth IRA. My Jersey came out like really heavy right there, but it it comes and goes in a wonderful way. Yeah. It’s like certain words, you should just throw some words at me and I’ll say ’em however you want. Um, so then I’ll I’ll max out the SEP up to whatever my CPA tells me I’m allowed to. And, um, what else? I don’t have a traditional 401(k) at at my company. So that’s kind of why I do rely on the brokerage account pretty heavily. And just kind of know that I’ll have enough cash to maximize the Roth and the SEP when the time comes. Um, but I think the one predicament that I did point out for you guys to hopefully help me with a little bit is kind of taking advantage of more tax advantage accounts because unless I’m wrong with this, the Roth IRA, I might not qualify to like contribute to a Roth IRA anymore because of my income. I guess it depends on how my taxes are going to be filed at the end of the day, but it looks like the cap is at 145 and I’m making a lot more than that. So that kind of takes away that other tax advantage account. So I just wanted to see if you guys had any other suggestions for something like that where it would, you know, I, I’m just going to be relying on my brokerage account, basically. Otherwise, which I’m fine with,
Mindy: Can you do the backdoor Roth as a self- an in self-employment Mindy?
Scott: Oh. That, I’m gonna let you do that while I talk about the self-employment amazingness of the self-directed solo 401(k). If you have self-employment income and you do not have any employees that work for you more than a thousand hours a year outside of your spouse, you can open up a self-directed solo 401(k). You can put the 2024 contribution limits are $23,000. So you Alex can put $23,000 in, and then your company can match your contributions up to 25% of your salary capped at 52 or $54,000.
Alex: Mindy, I I I looked this up while you were you were doing this as well. And I think Alex, you’re going to be able to contribute up to 25% like Mindy saying of your self-employment income, um, which I think will be your your brokerage dollars there to the Solo 401k. And then you should research the mega backdoor Roth Solo 401k. Mega backdoor Roth Solo 401k. What a handful. Go, go Google that term and discuss that and maybe bring in your accountant and a CPA just to make sure that you are, um, following all the rules, but that’ll be an option for you. And if things go well, there is a reasonable path here where you start doing this full-time, you’re going to have a lot of income and you’re going to need to shelter that income from taxes because you spend nothing and you don’t need to realize much income to sustain your lifestyle. You can invest huge chunks of it. And I think you, if you were to generate $300,000 in gross commissions for example in a year, you could shelter $69,000 and potentially put it into a back door Roth. Now, the Roth will eliminate some of your tax advantages, but you could do a solo 401k and shelter it, which might be an option for you, uh, some of these higher income years. Um, and then do the back door Roth on other years, um, when your income’s lower for example. That would be one option. And the second thing you can do with the rest of that cash is to buy real estate and depreciate it, cost do cost segregation. And then you’ll be able to reduce your AGI even further, based on those depreciations, especially in the in higher income years, which I think you are likely to have in 2025 if you follow this line of thinking or you have a reasonable shot at it at least. And those would be those would be two super powerful tax strategies for you. You could pop up in three, four years with a lot of income earned and very little in the way of taxes paid and some interesting options in your life at that point.
Alex: Okay, cool. Yeah, I’ll definitely look into those. I appreciate it. Mega Backdoor Roth Solo 401(k). That’s it. Okay.
Mindy: Do you have a high deductible health care plan?
Alex: I do.
Mindy: Okay. Are you maxing out your HSA contributions?
Alex: So I know that was one that, yeah, definitely.
Mindy: So the way that the HSA works is it’s only, it’s an account, the health savings account is only for people who have a high deductible health care plan. You put up to, uh, 4150 if you’re single and 8300 for a family into an account. You pay no taxes on that money that goes in. It grows tax free. You withdraw it for qualified medical purchases, tax free. So what I do is I contribute, I have a family of four, so I contribute the max of 8300 this year. I cash flow all of my expenses, which is something you can do because you have so much, I hate to say extra cash because there’s no such thing as extra cash. It is leftover outside of your spending, um, a surplus, if you will, you have a surplus. So you can cash flow all of your expenses and then save the receipts. And down the road, maybe next year when, well, next year’s going to be a little too soon, but you know, let’s say in 10 years, you have a very down year, you want to go to Jamaica for six months out of the year, you’re not going to sell any houses, you can start cashing in these receipts, $20 for this, $100 for that, $500 for this. And you can take that money and put it right into your pocket because you’ve already paid those expenses. You’re just reimbursing yourself. So that’s a great, it doesn’t grow super fast, but it’s a great account to be contributing to.
Scott: Alex, you had another question here about cash that I think is really important for us to talk about here. You have $119,000 in cash, which is two and a half years of spending. And I want to encourage you to not do anything with the cash. Leave it there. Don’t invest it in this particular situation because you were thinking about going out on your own and I believe that the returns of going out on your own are going to be out far outpace the returns you get even if we have a great year in the market next year, around that. And I think you should see how things are going come July or August of next year. And if you sold a ton of real estate and that cash position is growing, plow it into a rental property investment or start putting that into the market at that point and your confidence will be there. And if you haven’t sold anything, it’ll have dwindled to 60 or 75,000 and you might feel get your resume ready. Um, or something like that. And and that and it’ll feel a lot better at that point. would be that would be my advice to you in terms of the cash position in your situation rather than putting it into the market at this point. Mindy, what do you think?
Mindy: I agree. If you’re going to leave your job, then you have a two and a half year emergency fund and that emergency fund is going to be funding your life while you are ramping up your agent business. Um, I asked you earlier, how easy would it be to replace the amount of money that you’re spending with real estate sales and you think it would be pretty easy to do. So I don’t, if you can just cover the 50,000 that you spend every year, you won’t have to dip into this or you dip into it a little bit and then replenish it as soon as you get a a commission. But I think that that emergency fund of cash should stay in cash. Should be as liquid as possible. Don’t put it in the stock market. Don’t put it into another real estate property, or keep your eyes out right now on real estate properties while you still have a job. If something pops up that’s really amazing, maybe you push back your, your quit date a little bit while you are waiting to, you know, replenish your, your cash fund, because again, you’ve got that surplus of 134,000, you’ll be able to replenish that pretty quickly. I mean, overall, you’ve got like six different really great options to choose from.
Scott: It’s all because you spend so little, you house hack, and you accumulate a lot of cash and wealth outside of your retirement accounts. You didn’t buy a house. Um, if you bought a, if you bought a regular house last year around this time for $7, $600,000, you’d have less cash, you wouldn’t be producing cash on a monthly basis. Your expenses would be a lot higher and you wouldn’t have these options. So that that’s how powerful that single decision is, I think in making all of this so easy for me to be confident in your chances of an entrepreneur. Yes, you can fail. Um, and you can also get fired next in three months for some other reason from from your job, um, or that company can have there. But I just think the positioning, you have your positioning couldn’t be better to go after the, uh, the career as as an agent here.
Alex: Yeah, I appreciate that a lot. And I think I’ve been thinking similarly. So I appreciate the validation very much as well.
Scott: Yeah, will will you come back on the show in like a year and a half to two years when you have so much income that you have to play all these games like the mega backdoor solo Roth 401(k) and you have to use depreciation from rental properties to offset your $300,000 in conditions and those types of things. Um, or if it doesn’t go that way, tell us that too. But I I would love to hear the how those advanced strategies actually play out if that’s what you end up pursuing, which I think is odds-on. You can again, with the caveat that there’s certainly things that can go the other way.
Alex: Yeah, I mean, maybe I will replace a Google Tool and I will have to just come on as an expert in mega back door Roth solo 401k. And that’s…
Scott: I think I think the homework that I would definitely get you going, going with is first, I talk to your boss or I I figure out how to, I think about how to float around to your boss, like, “Hey, I maybe the best thing I could do for the company is to make a lot more money as an agent here.” That conversation, I think, you know, thought through appropriately is going to go fairly well. Second, I would talk to multiple lenders and ask them about what your borrowing, your capability to borrow is going to look like in March or April or May of next year once you file that tax return. Um, and I think you’re going to find really good news on that front. Um, if you don’t, let me know because that’ll be a surprise to me. Um, around there. And I think, um, the mega backdoor solo whatever whatever the phrase was uh for this Rath stuff needs an acronym. Yeah, you probably can do it this year. You you probably you may have to do it this year if you want to do it. um but I would talk to a CPA or really get really self-educated a lot on that because I think you’ll only be able to do that with 25% of the $96,000 in commissions that you estimate you’re going to earn this year. So, I think, but but that could be wrong. There could be more nuance to how the other W2 income is there. But I would I would think those would be the three homework assignments that I would I would suggest you you you go off with. And then everything else, all of that is subordinate to how you get the agent business to take to take to take off, which is obviously the main focus.
Mindy: I think focusing on the agent business, now that we’ve looked at all the different numbers, I think that’s the right play here because you’ve got such a strong cash position. Somebody else who calls in and they’re like, “Hey, I have no cash, I have no savings, I have no investments, I’m going to quit my job and become a real estate agent,” while I’ve never done it before and I’m, you know, facing headwinds, I have not had any drop in my real estate agent business. But I think you and I are fairly anomalistic. I’m not we’re anomalies. And I’m hearing from so many people, my agent business is down, I’m thinking about quitting and going getting a job, blah, blah, blah. So if you don’t have the exact same set of scenario that Alex does, then don’t take the same steps she’s going to take to grow her agent business. Grow your agent business on the side while you’re still doing your W2. But Alex has two and a half years of cash. She has five years of real estate agent business. She thinks that it is very easy for her to at least make the money that she is spending over the course of the year in next year as an agent. So that’s kind of a, a go ahead, I don’t want to say no brainer, but it’s kind of a, a an easy answer to come to.
Scott: I think in 10 years you’d regret not taking the chance way more than if it blew up in your face. The the the year you lose the year of $68,000 in income you lose. Uh, congratulations on the the wonderful progress and great options that you have here. Please do let us know what you end up deciding and how it goes.
Alex: I appreciate it, I definitely will. Alex, before we go, we would love to give your agent business a boost here. Could you tell us what you do, how people can find you, and if someone’s looking to repeat your house hacking success, how can they call you and find you as a as an agent? Oh, sure. Okay. So I’m based my full name is Alexandra Preziosi. So you can Google that. I’m very active on LinkedIn. Um, and Instagram. I think my Instagram is AlexPraziosi_realestate. Um, but I’m based in northern New Jersey. I work in Bergen County, Essex County, Morris County, Passaic County, basically anywhere, but those are my focuses. Um, and you can also find me on Bigger Pockets, Alexandra Preziosi. And, yeah, if you’re looking for a house hack or looking to sell or buy, I definitely’d be more than happy to help.
Scott: Awesome. Yeah. And Alex is got a uh, one of our featured agents. You can find her if you’re looking for an investor friendly agent under agents, biggerpockets.com/agents. Um, you can find her in those parts of New Jersey. So go check her out there and on her Instagram, um on her social handles, we’ll link to all those in the show notes. Alex, hopefully that helps you do a couple more deals next year.
Alex: Yeah, thank you guys. Appreciate that very much. Very, very much.
Mindy: Well, thank you so much. Congratulations on the success so far, amazing progress in one year. Really appreciate it. Can’t wait to hear where things go in the next year or two. Please come back on and tell us, give us an update.
Alex: We’ll do. Thank you both very much.
Mindy: Thank you Alex and we’ll talk to you soon.
Alex: Bye bye.
Mindy: All right, Scott, that was Alex and that was a fun problem to have. Uh, I liked her story because she has been so conscious of where her money’s going and conscious of what she’s spending on. And I don’t think that I would give the same advice to many people, but she’s really set herself up for life, Scott.
Scott: Yeah, she’s certainly set a really good foundation. This is I mean, this is, this is, this is like you can tell how excited I was getting as we were getting into the conversation here because her foundation is so wonderful for entrepreneurship, self-employment, the opportunity to go after big income. There’s so many reasons to believe in her financial situation, her story, her current, you know, net worth and current income that there’s going to be a really really significant future income stream that she can go after, that there’s so much downside protection because of the little amount that she spends and the cash that she generates. Um, and that there’s such great investment opportunities that go along with that because of the tax advantages of self-employment um and, you know, self-employment in her case and the real estate professional status piece. Like that’s a really good foundation to go after some serious wealth building. There’s certainly risk associated with it. But again, that risk is mitigated with a $50,000 a year annual expense and $120,000 in the bank. So I love it and that’s a situation where you can really make some big plays. And I wish, I wish, I hope that BiggerPockets Money is helping more people build financial situations that look a little bit more like that because that’s what really unlocks human potential in a different way and that’s, that’s what we’re all about here. That’s what, that that, you know, Alex is going to take over the world here and that’s what we want. We want as many people as possible to do that.
Mindy: Yeah, absolutely. I think she has, you used the word potential, Scott. I think that’s great. She has so much potential and she’s staying at her W2 is almost going to hold her back.
Scott: Yeah, I mean there’s been there’s been like three or four times on the BiggerPockets Money podcast where we’ve had a situation where the job is so obviously the problem in the situation of and just the fact that it’s irrelevant or it’s just such, has so little meaning in the context of future the the ability to build wealth going into the future. This is maybe one of those three or four times. So, this is not typically, typically the advice that we give, go quit your job now and get going. But this is one of those situations where I think that’s really, really clear.
Mindy: All right, Scott, should we get out of here?
Scott: Let’s do it.
Mindy: That wraps up this awesome episode of the Bigger Pockets Money podcast. He is Scott Trench and I am Mindy Jensen saying, “Cheery-o!”
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