Mindy: Welcome to the BiggerPockets Money podcast, Finance Friday edition, where we interview David and Danielle and talk about aggressively pursuing financial freedom and setting yourself up for financial success through big life changes. Hello, hello, hello. My name is Mindy Jensen, and with me as always is my back to house hacking co-host, Scott Trench.
Scott: That’s right, Mindy, and I am here as always with my serial live-in flippin’ awesome co-host, Mindy Jensen.
Mindy: I love that. Scott and I are here to make financial independence less scary, less just for somebody else. To introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.
Scott: That’s right. Whether you want to retire early and travel the world, go on to make big-time investments in assets like real estate, start your own business, or deploy the equity in what is likely your biggest asset, your housing, to the pursuit of financial freedom, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.
Mindy: Speaking of getting things out of the way, Scott, I am going to blast through this disclaimer that says the contents of this podcast are informational in nature and are not legal or tax advice and neither Scott nor I, nor Bigger Pockets, is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate so that I can get to this big announcement. You’re house hacking again? I thought you were a renter, Scott.
Scott: That’s right. On uh April 30th, I moved back into a house hack uh of a property I own.
Mindy: What’s going on?
Scott: Yeah, we we enjoyed our time living in a rental. Um, uh, in the Wash Park, a nice a nice kind of posh area here in Denver where you there’s a a beautiful park and we decided we want a little bit more space and uh I think in 2019 or 2020, uh I with a partner bought a duplex out in Lakewood, about 20 minutes west of Denver, just nestled right under uh, right close to the mountains here. And anyways, this is a big duplex. Each side is five beds, three baths. Um so that’s 10 beds, six baths total. It’s got a nice yard on each side, a garage, all that kind of stuff. And the uh mortgage on the property is 3200 and the other side pays 2700. So I will pay rent. This is a slightly smaller side, um of just slightly less than that to my own business that I owned with a partner, right? Uh, uh, in there and and that that, um, will recycle pretty nicely and make and allow it to be a pretty pretty cost a-effective way to live with a little bit more space and uh really good financial decision and, you know, I was a little apprehensive, would I really like it? And I’m like, I love living there. So, you know, yes, I would absolutely live in the rental properties that I own. I have lived in multiple of them, uh, to this point, so.
Mindy: Nice.
Scott: Um, yeah, we’re we’re loving it so far. We’re a couple days in and and uh still still unpacking and unboxing or whatever, but um yeah, I’m excited.
Mindy: Well, that’s great. And then the baby has a little running around room when she starts to run around.
Scott: Oh, just tons of space. Yeah. We’ve got we’ve got it’s so great. I’ve got, uh, we’ve got our master, we’ve got the uh baby’s room. We’ve got a nice living room area with a with a fireplace and then downstairs we have a main area with our um very non Bigger Pockets money friendly uh 77-inch flat screen and then uh and then and then uh my wife’s office and a guest bedroom, which will double as my office. So it’s a perfect. We’re we’re we’re thrilled with it and it’s luxury living for sure, luxury house hacking, I guess, if you want to still call it house hacking, but we’re back.
Mindy: I’m coming to your house for the Super Bowl next year, Scott.
Scott: Yeah, go birds.
Mindy: My Eagles will be back. They just had a fantastic NFL draft.
Scott: I was gonna say.
Mindy: Congratulations to the Philadelphia Eagles on their amazing draft success. As always, the Bears disappointed.
Scott: The only one not happy with this move is our cat, Fred. He’s he’s he’s not really enjoying the new place quite so much. It’ll probably take him another week or two.
Mindy: He has more space. Come on, Fred, get with the program.
Scott: He’ll eventually come around. Yeah.
Mindy: All right. Well, today, Scott, we are speaking with David and Danielle, who are considering a big move just like yours. They are looking into ways to use their primary residence to further their financial position. In the beginning of this show, I run through their numbers and it looks like they have a deficit of spending. We find out a little bit later that that might not totally be the case. So, stay tuned to this episode and before we bring in David and Danielle, let’s get to our money moment. This is the new segment of the show where we share a money hack, tip, or trick to help you on your financial journey. and today’s money moment is, are you paying for a gym membership? Check your health insurance policy. Some health insurance plans will reimburse you for gym memberships and other fitness-related expenses. Do you have a money tip for us? Email money moment@biggerpockets.com.
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Mindy: David and Danielle have three kids and are interested in figuring out their path to FIRE. Last October, Danielle left her job, which has put a bit of a strain on their finances. They are currently overspending by almost $1,000 a month. Danielle and David, welcome to the Bigger Pockets Money Podcast. I’m super excited to talk to you guys today.
Guest: Thank you so much for having us. We’re excited to be here.
Mindy: Yeah. Let’s dive into your money snapshot. I’m showing a salary of $5,000 a month with bonus potential up to $30,000 a year depending on performance, on average about $5,000 net every three months. monthly expenses, I’m showing 5,800. So overspending by about $800 a month. And overspending, I mean more than what you’re bringing in. So, we’re going to look at these expenses a little more closely than we might in a different episode. Mortgage, $1,400 a month. That’s property tax and insurance. There’s no HOA. I think that’s a great mortgage payment. Utilities, 371. Gasoline, 200. Oh, groceries, 1,200. Restaurants, 500. Guess what I’m going to talk to you guys about. Subscriptions, 25. Gym, 60. Car, 70. Daycare, 800. But Danielle doesn’t have a job. I see another topic of conversation. Gifts, $50. Entertainment, $85. Travel, $220. Miscellaneous, I’ve got medical 200, home maintenance 200, and pets 80. So, I did call out a few things that we will talk about later.
Scott: Quick question on that, those are allocations, not you are estimating for those types of expenses, not those are not actuals, right?
Guest: So those are based on the past four months. Uh, we just average out the cost and that’s what it kind of is.
Mindy: Okay, let’s look at where that money is going. We’ve got investments of $62,000 in cash, $15,000 in a brokerage account, $25,000 in a traditional IRA, and $9,000 in a Roth IRA. And the only debt is 130 on a mortgage.
Guest: Yep, that’s right.
Mindy: Okay. Well, that’s awesome. Let’s celebrate that. There’s no outstanding debt except the mortgage, which in my opinion doesn’t count because you got to live somewhere. So, that’s good.
Scott: And what’s the home equity? Um how house value?
Guest: Yeah, the house value is about $310,000.
Scott: Awesome. So we got 180 grand in the house in equity.
Mindy: Okay. So, Danielle, why don’t you give us a bit of an overview of your money story?
Guest: I started working at a young age when I was 16 in the restaurant industry, you know, bussing tables. and 18 I went into banking. So I’ve always wanted to earn my own money. However, I spent it. spent it quite easily. I my parents didn’t really teach us about savings, more than I always heard save 10% of every paycheck, but I guess occasionally, not not too often and it wasn’t shown to me, like they would see that, but I didn’t maybe I didn’t trust it. Um, and so I just never really thought about fi, financial independence. It wasn’t really something that I was aware of. I grew up here in Texas and my family, my granddad worked until, you know, his his last day on earth. So I literally have been shown that you work until either retirement at a very late age or um, until you die. Um and that’s just kind of the mindset I had was you can just you can spend, enjoy your life and and spend, you know, or save slowly over time. So I began saving up through the bank that I worked at. I had a little uh retirement account, um going in a 401K and over time that grew to about 15 grand and then in my previous marriage, I wound up with someone who was very had made very unhealthy financial decisions, like is used to taking out loans and things like that and I was kind of uh had this decision that we went through to for me to stay home with our kids for a year that I needed to cash in my 401K of 15 grand to live off of. So that was a very unwise decision. I later learned. I didn’t really think about it at the time like how detrimental that would be to my future financial life, but um yeah, so cash that in and then from there it was really a life of like financial strife, like living off payday loans and it was really hard. I eventually became single mom, stayed home, I had to stay at home for a little while and and then start out on my own and literally build back and get back get into a career. Um so I went down the road of getting into sales and working really hard and I finally saw that I could have a really good income. I could make a really good living with sales. And so I met David and um, we were doing really great until last year when I I reached a point of burnout in my career and I ended up not planning it, but giving up and kind of just for my mental health, just saying I can’t do this anymore unfortunately and without thinking about, you know, the repercussions of that. Um, and so that put us in a really difficult place and ever since we’ve been struggling, we’ve be having, you know, the the issues come up. So, uh, yeah, it’s been really tough and I met David and he really changed my way of thinking and taught me about financial independence and how we could have that could be a life for us one day that we could reach fi at a young age and really enjoy our life and travel and I became fully on board and and that’s kind of where we are today.
Scott: David, can we hear a quick little, uh, bit about your money story?
Guest: Yeah, so I think mine starts back in Hungary, that’s where I grew up, uh, in Europe. I started working in 2015 and I discovered, like the concept of financial independence and I was reading the blogs of Mr. Money Mustache and Rock star finance and all these different things. And so I knew about index funds and I knew about real estate investing, but in Hungary, there was no platform to do that. So I just kind of, you know, I had it in my mind, but I wasn’t able to do it. So so I I put it aside. But even back then, I was lucky enough to live in an apartment that my parents bought, so I didn’t have rent payment. And I thought to myself, oh, if I just move to Nepal, I could rent out my apartment and basically live off the income. So I I always wanted that. I just didn’t really have like a, it didn’t seem realistic to move to Nepal. It’s not something I wanted to do. But then I moved to the US and after we got married with Danielle, it it really became a whole different ball game because previously I had like a backup plan. I thought, if everything, you know, everything goes sideways, I’ll just move to Nepal and live off my rental income. But when we got married and we had kids, that wasn’t an option anymore because we had to be here. So, like the struggle got real where where we realized if we’re going to live here, we have to start making more money and saving more money and just be able to cover our expenses.
Scott: Awesome. And, um, and and walk us through what what you’re doing currently for work.
Guest: Yeah, so I work in recruiting. I’m a talent sourcer. You know, that’s a level below a recruiter, uh, but or people call it a head hunter. And I go and I identify talent, I message them and uh try to get them a job.
Scott: So yeah you you your so that comes with a large amount of upside potential whenever you place a candidate, right? you get you get a large bonus is that correct, or as you place more candidates?
Guest: Uh, typically that’s how it works. For me, I get a base salary though of $80,000 and then there’s like a on target earnings component, a a quarterly commission, if I hit my targets, I get paid out the quarterly commission.
Scott: What I’m observing about your situation, when I combine this, is whatever the past decisions here, you have, again, zero debt, you’ve got tens of thousands of dollars in liquidity and tens of thousands more in investments, 180 grand in in your home, at home equity, and this situation of being cash flow negative clearly hasn’t been going on for a long time. Right? So this is a new situation, at least in the combined, in the sense of the combined finances. Is that right? Is that driving with with with reality?
Guest: Yes. Right.
Guest: That makes me very nervous, especially given the fact that, um, with the ex-husband, we’ve been going to court every year spending about $20,000 a year in legal fees and so it’s uncertainty whether that’s going to keep happening and when a big expense might come up, you know, like even if we’re just running out a $500 a month, if all of a sudden we get a $10,000 check from the attorney, then that scares me a lot.
Scott: Okay, so we we you you have reason to believe or at least reason to worry that a liability that does not exist in the in the debts that you’ve, you know, anywhere on your financial statements exists and you will have to shell out cash and this coupled with a declining slow, very slowly declining, I imagine, savings account is is the are the two primary concerns in the in the nearer term.
Guest: Yes.
Guest: And we’ve had some issues with the home that’s come up that we, you know, dip into a few thousand here, a few thousand there. We live in an older home, you know, it was built in the 80s and these issues are unforeseeable as to when they’ll occur next. It kind of feels like it’s it’s one thing every month, you know, that pops up. So along with the attorney who um, charges us, you know, not every single month but about every other month or so. And you know, it’s thousands of dollars out of time. So our court should be ending at the end of this month, our whole case, but like we would be happy to walk away but we don’t know if, you know, he they file something again if they don’t get their way and so the next in a year from now, we’ll be in this situation again, that’s what we don’t want.
Scott: Okay. We’ve done a lot of BP money episodes here and whatever irresponsible is, your current situation is not that. Uh you you’re doing you’re doing great here, but we we’re we’re we’re gonna attack the root of the problem here and and figure out how and and brainstorm some ideas to to solve it, to solve it. nonetheless.
Mindy: I have an idea. Let’s start with food. I’m showing $1,700 a month in food. What does a typical grocery shopping excursion look like?
Guest: Yeah, well, um, part of it is a bunch of baby diapers and wipes to be honest and baby necessities. so I almost feel like we should budget that in a separate area, like maybe miscellaneous or something start putting that there because the baby requires that every week. Typically it’s David’s gluten free. So the, you know, his needs for from the grocery store everything that’s hiked up for gluten free products. So we buy gluten-free in addition to regular products as well. We’re both pretty good eaters ourselves. I like to cook. I like to cook a lot a bunch of family meals at home, you know but typically the grocery store I would say the cheapest like we could get out of there for is is about 120 bucks. That’s, that’s like I did good. I feel like I did well.
Guest: For a week? No. Would you say or three days, four days?
Guest: Well I I think, I think the problem is is that whenever we go shopping, we always miss something that we might need or, you know, we forgot to buy snacks for the kids to go to school. So then we go back to the store and end up coming home with another hundred dollars worth of items.
Mindy: Yes, yes. I live the same exact life because I always just get one thing and then it’s you don’t just get one thing, you get like 15 things and if that was once a month it’s not a big deal, but when it’s every week or several times a week, it gets to be a very big deal very quickly. Um, I would challenge you to take time and sit down and make an inventory of what you’ve got and make a shopping list and I read this book by Stephen and that Economus, America’s frugal family go shopping or something where they go shopping once a month and that’s it. And if they forget it, they just don’t go back for it. And that was huge in changing my mindset about going to the grocery store. So I would challenge you to give yourself a couple of weeks to really get used to this, but shop when you are not hungry, when you don’t have the children with you, and when you have time to make sure you have everything on your list, make a list before you go, only get what you need and then leave. Another way to do this if time is an issue is do ordering online and curb side pickup. Um, so that you’re not going in, you’re not tempted to get this one thing. You can make the list on your or you can shop on your computer and then, you know, hold it for a little bit, come back. Oh, I forgot the bananas. I forgot the fruit snacks. I forgot the strawberries and shop the sales. We have had several episodes over the course of our existence where we’ve talked about ways to save money on groceries. Um, episode three with Aaron Chase from $5 dinners, she recommends shopping the sales. Oh, chicken legs are on sale this week. That’s what you’re going to eat this week. You’re not going to go for the steak even though you have a hunger for it because it’s, you know, $10 a pound and chicken legs are $0.69 a pound. Now let’s talk about restaurants. How frequently are you going out to restaurants?
Guest: I would say on average about once a week maybe when we go out with the whole family, it easily goes to 130 or so when all five of us go. So around once a week, sometimes twice a week but we get a lot of coffee to go.
Mindy: I would just look into making coffee at home. I know this is like not a huge deal every once in a while, but when we’re trying to reduce our spending, you know, you can get really, really great beans and figure out how to do it at home and then your your entire expenses for one month is on the espresso machine. I’ve got a great, I can’t remember the name of the espresso machine. it’s like $99 and it makes, I’m not a espresso connoisseur, but it makes really good espresso. I pour it on top of my regular coffee and it’s fantastic and that was, you know, now I don’t go out and get coffee at home or out, I can make it at home and it’s the exact way I want it. Um, I would encourage you to cut back on that restaurant spending just because right now you do have the deficit, but look for ways to cut out the spending so that you can continue to have the things in your life without spending full price or retail price for it. Something we haven’t talked about Danielle is, do you plan to go back to work?
Guest: Yes, yes, definitely. and I never thought, you know, quitting my job wasn’t something that I planned. Definitely was like a heat of the moment thing was just terrible that it got to that point but I’ve been interviewing tirelessly and I do actually have, finally, I have two offers um on the table. So I’m actually reviewing an offer today, later this evening uh with one company and so yes, so I’ve always planned to go back to work and I just never thought, you know, I thought that I would snag something right away. Um just kind of transition into another role immediately. I didn’t even plan on taking a break. Um but it was as soon as, I think a lot of the, I work in tech and the layoffs started happening and there the job market became, you know, uh flooded and the the competition is fierce for a lot of the roles. There were over 50 applicants that they were had through the whole interview process. It was just really tough. I’ve been doing interviews weekly for months now. So finally I do, I have multiple offers to consider so I’m really excited about that. It looks like I’ll be starting at the end of May on the 30th.
Mindy: Oh, that’s fantastic. Okay. And what sort of income are we looking at here?
Guest: It looks like it would be no less than a base salary of uh 55,000 okay per trying to get that up a little bit. Um and then there’s some salary, some commission um potential in addition to that roughly averaging about $2,000 a month possibly.
Mindy: And your plans for that will be to replenish the emergency fund and then what?
Guest: That’s really what brings us here another thing that brings us to this conversation is we don’t want to make the same mistake again because where I was at previously, I felt like we were kind of living life large, like our kids wanted it, wanted for nothing, you know, but we were not taking advantage of that additional, we could have been saving $5,000 a month when I had my previous job and we weren’t really saving anything. It was just all kind of going out the window. So we want to be very careful now and and decide where can we, where can we put our savings? where can we invest to help us along in our journey to financial independence.
Scott: I have a bunch of questions here. this is the whole game. So we’re going to have $55,000 in annual income above what we thought. Um, this completely eradicates the over the overspending by $800 issue that we came in with. What is going to happen for childcare? What’s happening currently and what will happen after you return to work?
Guest: Yeah, right now, we still pay, uh, daycare, $800 a month and we’re planning to keep that because we both work from home and it’s very difficult working with a screaming baby in the background.
Scott: And that is you’re paying that, um, that’s excellent from a price point perspective. Right? You got a hook me up because I am we’re going to pay much more than that. Uh what what uh uh, do you keep that in place, uh, Danielle, um, while you’re not working because it’s hard to get into that same program or what was the rationale for that.
Guest: Yeah, well, here’s what actually happened. when I, when we moved, uh, from the Austin area up north a little bit to Temple, the the cost of living is slightly less than where we were. And so we were really excited about the cost of daycare and signed him up immediately planning for myself to return to work and to be able to have that ability to interview without the interruption. However, in January, we realized that, well, nothing’s coming along. I’ve been interviewing for a few months, maybe we should remove him from the program so that I can take, we can take that $800 off David’s plate and I can contribute in some way though not financially, I can contribute with child care. Well, the daycare uh was amazing and very gracious and they offered us half off of the tuition, um, which was amazing. They offered us um, $400 a month moving forward, only temporarily until I returned to work. I know. And so, um, we we were really excited about that and decided like, we should okay, now I should really like ramp up the interviewing process and take advantage of this, um, lesser price we’ll be paying. So that cost has gone back up now to the 800 as of last month and luckily I have a job that I’m about to start. So that was the rationale there was was keeping him in in daycare and um, keeping our sanity at home during the day.
Scott: Well, this is wonderful. So so now, let let’s say that we we didn’t just have this whole conversation on groceries and restaurants, right? As soon as you return to work starting June 1st. So month of June, we’re going to bring in another at least 2 to $3,000 a month. let’s call it $3,000 a month after tax that you can deploy towards whatever you want. That’s $36,000 annualized. Is that is that right?
Guest: Yep. Yeah.
Scott: Okay, so this this so I I agree that we should we there’s things to look at in the expenses and this month would be a really good month uh before you return to work full time to really kind of put in some systems for keeping those types of expenses low. But now we’ve got a whole different problem of we’re not so so what are we going to do with all this money? you’re going to by the end of the year if you don’t have a settlement problem um that comes out of the of the ongoing legal uh situation that you described earlier, you’re going to have $100,000 in cash in the bank. So, what do you what do you want to do with that $100,000 by this time next year? is one way to put the the question.
Guest: Yeah, I think that’s the, that’s the big question. Something, something we wanted to get some advice or maybe, you know, brainstorming session on because when Danielle left her job, that it really forced us to think about her money situation and now we’re kind of turning it around when she gets a job, we’re going to have all this extra money that we don’t want to spend like we previously did. But where do we put it?
Scott: So let’s go, let’s go through what are what are the top options you’ve been considering?
Guest: Well, we’ve considered, um, real estate. Um we’re both really interested in it. Danielle’s been wanting to run her own Airbnb and, um, out here where we live in Temple, it’s a big medical community, big veteran community and we think that our house that we live in now could be a great medium term rental possibly. Uh, so that, that’s something we’ve considered. Um, putting some of it into Locust Index funds, um, but we haven’t really figured out what our best. What direction?
Guest: That is. I have another idea as well too. With the layout of our home, you know, we’re in like a classic, maybe you would call it ranch style home from the 80s and the way it’s built out is that you could split our our home, um, uh, by building a door between our kitchen and our laundry room, hallway, uh, and garage area. We built a door there, they could, we could literally like rent out that as a side of the house, um, as a living space for a family. They would have access to one master bedroom, a laundry room. But doesn’t come without some renovations. So we would have to fully, um, close in the garage and put in a kitchen and, um, insulation and, and, um, make that space livable. But my idea is to house hack in that way by putting in some renovations and being able to actually rent out part of our part of our house now and cut, you know, put that towards our mortgage payment here. Um but that does require some renovations and we don’t know what we’re looking at cost wise with that.
Mindy: Okay. I would look at getting a quote. Talk to a contractor and see what that would cost. Are we looking at $20,000? Are we looking at $200,000? I’m thinking off the top of my head, it’s going to be 30, $35,000, but I don’t live in Temple, I don’t have any contacts there and I don’t know, you know, what your situation is. But for 35,000, what could it rent out for? If you could rent that out for $1,000 a month, you’ve got three years of payback before you start generating income. Could you do any of the work yourself?
Scott: If you moved out of this property and rented it as it is today, how much would it rent for?
Guest: Roughly around 2,000 a month, maybe conservatively, maybe 2,200.
Scott: And tenants would pay utilities in this in this place so you would be clearing 2,000 minus your 1450 mortgage payment?
Guest: Yeah.
Scott: Yeah. So I, I think you’ve got at least a break even if not a slightly positive rental here, especially if that number is conservative, um, on a standalone basis. Is your property zoned to have multiple units? Would you be allowed, illegally allowed to separate it into two units, or would you be operating a kind of illegal uh duplex if you did that renovation?
Guest: Well, we looked into, um, zoning for like adding a tiny house in the backyard or something like that and it seems like it’s zoned for that, but I don’t know if it’s the same rules for converting a garage into a living unit.
Scott: Okay, I would, I would, uh, evaluate that because you don’t want to spend because like if, if, if you can rationalize the investment as a standalone rental property, that makes this much easier, right? Imagine you’re not living in it and you’re like, hey, I own this place. Would I put in $35,000 to separate into two units? Would that add value to the property? And then what would the cash flow and returns be? That will give you a very clear answer about whether to do this. And I think it would be much more murky if you do it without understanding if it’s legal, uh, if it will be a legal duplex when you, when you exit or whether you can rent it out this way. And if you only run it on the income while you’re living in the property, right? That that will produce. I think that will make the, the R O I of this a lot harder. Also, the official advice of course is to abide by all laws and and do all everything about the books. Uh anyways.
Mindy: Yes, that goes without saying. Uh, however, something to consider is, if you do turn this into a rental, where are you going to live? Your housing costs are almost assuredly going to go up because I’m assuming that you have a lower interest rate on this property.
Guest: We have a fairly high interest rate. We just put a lot of money down. Our interest rate is 5.625%.
Mindy: Oh okay. Um, and all the equity we have in the house is just money we put into it when we bought it.
Scott: Okay. When did you buy this house?
Guest: We bought it when October, September, we sold our previous house and we were lucky enough where we got a big chunk of money out of that and we just rolled it all into this new house.
Scott: So, you know, what one of the things that at 5.6, you said 5.6%?
Guest: Uh, 5.625.
Scott: 5.625, okay. At that interest rate, you know, that brings up another, another option here, which is just pay the thing off, right? You could, you would be, you’d be completely done in two years, um, if you took your current cash position and the savings that you’ll generate over the next two years to pay it off. Is that like the math that’s super, super awesome and and crazy here? No. Um, you know, the spreadsheet might model out some other things, but that then chunks you down to, you know, that that completely solves the spending issue here, uh, and allows you to have a very stable position that you can grow from on the other side. So, I won’t necessarily push you down that route. It’s just one to consider and it’s a very simple and freeing choice if you choose to go.
Guest: Yeah.
Scott: Okay, and the other option, but but I think the fact that you’re willing to use this house as an asset is why you’re going to be successful one whichever direction you you go in. Um, you can hold this property as a rental and put down another down payment on a new new property. You can sell this thing, uh, and take your your your proceeds out and move into a true house hack, like a a legal duplex for example that would have have those those items or one that is zoned for that type of project. Uh, you can go down the Mindy route of a live-in flip, which is perhaps the most powerful option available, right? Because over two years, you have to do it as fast as you like, but if you stay there for two years, you’ll get the tax benefits of being able to sell the property, um, for a tax free capital gain. and I, I don’t know but, you know, I think doing that with kids might show a lot of value creation to them might be a very valuable life lesson to see the property actually getting fixed up, um, over time and and improving, um, if that’s work that you can do yourselves or do some of the work yourselves and hire it out. So I I mean, that’s your biggest asset and an allocation decision here is is this house and I think you’re thinking about it the right way in, in, in raising towards financial freedom. So any reaction to any of those ideas or thoughts?
Guest: Yeah, I I agree with that. It’s, um, it’s something we’ve talked about a lot. It it is a valuable asset and it’s, it’s really close, um, like he said to the hospitals and, um, I think it would rent very well. Um, I think we have to definitely give it more, a lot more consideration, but I’ll be researching, you know, the the the legality of, um, blocking it off like just putting that dividing line between, you know, even if we do that, we still have so much house left. Um, which is really awesome. Um, so, uh, we could definitely get away with that. I think, but, but yeah, it’s, it’s also, um, I think we would both be willing to sacrifice, um, if we see the, uh, the returns, the results a couple years down the line.
Guest: Yeah and I, yeah, I think it’s really helpful just to, um, have it broken down so clearly because we we kind of had an idea of these possible scenarios, but they were just floating around in our head and we couldn’t really put a finger on like, okay, these are our three best options or something. Let’s just pick. It was like, should we do this? Should we do that? Like, it was a lot of talk without much clarity really on what’s a tangible option for us to pick.
Scott: Well, well great. And and just to kind of go one half step deeper on a couple of those, right? The house hack, you should be able to rule that out within rule either say yea or nay on that within the next month, right? That would be very achievable. Right? You need to make do some research with your city to understand the zoning and and do that. Ask questions if you need to, set up appointments. And you need to get a quote or maybe several quotes from contractors if it if it’s, in fact, uh allowed legally for you to to separate the units there, um and and and do something permanent that would add value, right? If it’s not, then you have some other decisions to make around whether you want to proceed with some variation of that, a tiny home or whatever, but that that should be something you can, you can be clear on whether to do that or not by the end of May. We’re recording this May 2nd. Right? This on the flipping side, it doesn’t matter what the what the financing is for a flip, right? Like like doesn’t matter if the loan is asumable or not because you’re going to have to add a ton of value most likely. I mean, it could matter if it’s habitable, but you’re not really looking for a VA loan on a property like that. Where you’re looking for a VA or FHA loan and an asumable mortgage is if you’re willing to move into the property, you have to live in the property in order to assume the mortgage. Um, and if you are, um, and and if it would work as a long term rental because you lose the advantage of that asumable mortgage if you refinance out of it, right? You don’t want to, you don’t want to take a 3% mortgage over and then a few years later, refinance it to 6%. That defeats half the value of that of that particular purchase. So that would be one where you’d want to not have to do a ton of work on the property most likely or if you do, not not put yourself, you understand that you’re probably won’t be refinancing and extracting the cash for a long time. This will be a long-term hold that would probably be a cash flow uh deal after you move out of that future hypothetical house hack.
Guest: Great. Thank you.
Scott: I agree with all of that and I’m thinking, oh, I uh, do this live in slip all the time. Why didn’t I go on that rant my own self? Well, David and Danielle, thank you for reaching out to us and thank you for coming on the show today. I really enjoyed talking to you.
Guest: Thank you both so much for your great.
Scott: Thank you guys.
Mindy: Okay, we’ll talk to you soon.
Guest: Bye.
Mindy: All right, Scott, that was David and Danielle. That was a fun little twist. I think I should have asked them if Danielle was planning on going back to work before we jumped into their finances, but I think that that brings up a bit of a an interesting point. When you are planning on quitting your job, I would say if you’re planning on going back to work, if you want to leave a job and go to another job, start looking for the next job. If I had spoken with Danielle before she’d left, I would have given her that advice. Take your time, find a new job before you quit. I I’ve worked some terrible jobs. I know that it can be so soul crushing to walk into work every day and be like, uh, I don’t want to be here. but it’s a lot easier to find a job when you have a job.
Scott: Yeah, and I I also think if you’re working a job that is soul crushing, then just take a small pay cut. I feel like people don’t move jobs unless they get a raise, but like if you just go from like 60 to 56 or something like that in in annual income and the job is less terrible. That’s a huge win and I think that that’s the way to that you can escape something that’s sucking your soul out if you’re if you’re working all those hours. It it’s a little bit hard to stomach the loss of four grand, but it’s nothing compared to taking, you know, several months off the job. I I do want to point out though that what’s awesome about David and Danielle is that once you returns to work, they’re going to earn these are two people who are making median incomes, right? The median income in this country is $64,000 a year. So both of them make less than that with their base. Um, David may make a little bit more than that if he has a good year. he has potential to make much more than that, um, but on average he’ll make a little bit more than that. So this is nothing, this is nothing unrepeatable about this. A long history of good financial decisions, um, uh, uh got them to a place where they had cash to put down on a on a property here. Um, so they they had a a stable base. And the path to financial freedom for them though, what I think is fascinating is it has to be done through housing if they want to get aggressive about it, right? Because we looked at it and we can zoom out and say, you’re going to accumulate $36,000 a year, that’s $360 grand over 10 years. It’s not enough. It’ll get you halfway to a million, $500,000, but it’s not enough. The best way to get to a large amount of personal net worth in a fast in a short period of time is start a business. That’s not really an option, um, that that presented itself as immediately actionable for David and Danielle. They can always go down that path. The next best one is housing and most middle class Americans who are earning these median incomes are not willing to chunk out their home equity and reimagine how they’re going to do it. House hack, cut their house in half, literally and and um uh rent it out to somebody. And if you’re willing to do that, that’s the cheat code. If you if you’re not an entrepreneur, and you don’t earn a six figure income or have two six figure income earners in your household, I think you have to go to housing and use it as as a key strategy in your journey to financial independence.
Mindy: Especially now with interest rates so high and housing prices so expensive, changing the way that you look at housing is going to be the key lever that you can pull to change your financial situation. I don’t want to be like Debbie Downer and be like, oh, it’s going to be impossible, but it’s going to be really, really hard to buy a brand new, beautiful, perfect house and still reach financial independence without having extraordinary financial circumstances already.
Scott: Yeah, you have to earn income, high income, you have to have some other very fortunate situation come about, you have to have like a you invested in Tesla 10 years ago, uh like Carl here, uh you know, or or you start a business. I I I don’t know how you do it. I think and I think that that’s it’s sad that a lot of people are not like David and Danielle and willing to say, you know what? I do I do need to evaluate my housing. This is not going to be the place where my kids go to high school or college. It’s going to be the place that pays for my kids’ college, um, and and our retirement after that. So I I I think that that’s a hard harsh reality. Um, and like I don’t have advice for somebody, I don’t have advice for David and Danielle to get to financial independence in less than 10 years or very close to it without using this. and I’m so glad that they brought it up and wanted to use it.
Mindy: I could not agree more, Scott. All right, should we get out of here?
Scott: Let’s do it.
Mindy: That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench, and I am Mindy Jensen saying, “Bye-bye, apple pie.”
Guest: Bigger Pockets Money was created by Mindy Jensen and Scott Trench, produced by Kalyn Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the Bigger Pockets team for making this show possible.
