Mindy Jensen: Welcome to the BiggerPockets Money Podcast, Finance Friday edition, where we interview Josh and talk about rehab overruns, borrowing costs, and the grind it out versus sell your property decision.
Josh: Really, in the last year, I’ve had to learn a lot about tracking my own expenses and my own cash flows through the construction process. And with that, because I took out a construction HELOC, there was some flexibility even there too. But now that I have really substantial housing expenses in the mortgage and the HELOC, I am projecting, I’m foreseeing that it’s, you know, I’m basically breaking even for the most part when it comes to after-tax and stuff like that.
Mindy Jensen: Hello, hello, hello. My name is Mindy Jensen. And with me as always is my wheezing co-host, Scott Trench.
Scott Trench: Mindy, the show always takes my breath away.
Mindy Jensen: That was a good one. 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 Trench: 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 decide whether to grind it out and pay off a HELOC or sell your property and start over, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.
Mindy Jensen: Scott, today we’re talking to Josh, and I’m really excited to talk to him. He is a younger guy who is on his path to financial independence. He bought a house hack, as we say, you should house hack your way to financial independence, house hack your way to get started investing in real estate, which he did. And he ran into some cost overruns and some time overruns, which happens frequently when you are doing your very first rehab. He’s on the end of that now, and now he needs to rent out his property, but he is faced with kind of a big decision. He borrowed a lot of money to rehab the property and now he needs to pay it back. And I think you have some good things for him to look at today, things to consider when he’s running his numbers. I mean, a lot of our answers lately seem to be, now you’re in the grind. And we’ve talked to so many people on this show and it seems like 10 years is the sweet spot to go from zero to financially independent. 10 years, 15 years. And I just want to make sure that people realize 10 years is kind of a long time. There is a grind aspect to becoming financially independent. We cover it in an hour, but it does take a long time. It is multiple years, except for that one guy in California last week who won that $2 billion lottery all by himself. Or herself, I should say him or herself, not to be sexist.
Scott Trench: Yeah. They’re set for life.
Mindy Jensen: They are set for life.
Josh: Yes.
Mindy Jensen: Their book is much shorter than yours.
Scott Trench: Yeah. Well, great. Should we bring Josh in?
Mindy Jensen: Yes. Before we do, let’s hear a note from my attorney who says the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott nor I nor BiggerPockets is engaged in the provision of legal, tax, or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants, regarding the legal, tax, and financial implications of any financial decision you contemplate. Today we’re speaking with Josh, a fairly recent college graduate who bought his first house hack 12 months ago and has been renovating ever since. Renovations went over budget and over time, as they tend to do, but he’s just about finished and will start collecting rent in the new year. Josh, welcome to the BiggerPockets Money Podcast. I’m super excited to talk to you today.
Josh: Thank you.
Mindy Jensen: Thank you.
Josh: Yeah, I’m stoked to be with you all. Thank you very much. Let’s get going.
Mindy Jensen: Let’s get going. So we want to give a quick snapshot of your money situation. We have a salary of about $5,800 a month. And additional income from hockey and CrossFit coaching of about $20,000 a year. I’m showing monthly expenses around $4,100. So that’s a $1,400 mortgage, a $1,400 HELOC payment, $131 in gas and electric, $35 wash, $29 water, $29 trash, no vehicle payment. Good for you. $147 in insurance, $280 in gas, $193 for trips and adventures, a bunch of like random— I’m going to call it $250 in random. I don’t see anything weird there. $317 a month for groceries, $214 for restaurants, bars, and coffee, for a grand total of $4,100 in your spending. And then you’ve got additional— oh, and let’s move to investments. We have $21,000 in a Roth. Hooray! And $6,000 in a TSP, $3,300 in a 401(k), $21,000 in cash in various earmarked buckets. We have a house hack that is in progress. What would you estimate your equity to be in that property?
Josh: Yeah, good question. I’ve estimated it at 75%. The after rehab value was $490,000. And my all-in debt on the house is now $382,000 to $383,000 with the mortgage and HELOC. So about 75% is the all-in loan to value. So 20% to 25% equity.
Mindy Jensen: We’ve got the outstanding mortgage of $227,000 at 3.375% fixed rate, which is awesome. A HELOC of $135,000, a family loan of $20,000.
Scott Trench: What’s the interest rate on the HELOC?
Josh: The HELOC’s on a 3-month float. So for the first 3 months here, it’s on 7.25%, and then it’ll go up obviously with rates.
Mindy Jensen: So $20,000 for a family loan, $12,500 in student loans, and then 0% interest credit cards. One at Home Depot with $4,500 on it and one at Lowe’s with $9,800 on it. And I think that you are sitting in a pretty good situation. Let’s look at your money story. Let’s get a quick little overview of how you got to where you are.
Josh: Yeah, absolutely. And I’m not sure if it came through or not that student loans is down to only about $2,000. I think you might have said $12,000 there, but just about $2,000 there.
Mindy Jensen: $2,000, that’s even better. Okay.
Josh: Yep, about $1,900 left in student loans. So, thankfully got an employment recruitment and retention bonus that went towards that student loan debt. So I took advantage of that. So that’s been great. But my money story is pretty complex. My parents got divorced between 2nd and 4th grade. There was a lot that was kind of falling out during that time, along with my dad’s construction business that also fell out. And then there was a recession there as well. So the foundation is a reasonable level of insecurity, but my parents did the best job that they could to teach us money lessons along the way, figure out how to adapt and overcome with your situation. We got taught the envelope method. My mom for a while had the need, seed, and greed method. So anything that we absolutely needed— 4 walls, food, shelter, all that kind of stuff— would go in one bucket. The seeds would be investments for the future. And we would kind of share those 50/50. But then if there was any like soda or candy or anything that we wanted, anything that we just wanted, we didn’t actually need or wasn’t an investment for the future, that would fall in the greed bucket. And we would have to come up with our own funds to spend in the greed bucket. And so that was a good framework. And then I didn’t start college right away after high school. I played a couple of years of junior hockey. I fell into a business relationship with a mentor who taught me business. He exposed me to real estate. He really was an influential force in growing my money story. We would have road trips all the time crisscrossing the country for our hockey business. And just listening to TED Talks and BiggerPockets podcasts and just going through and thinking and dreaming about how to build a real estate empire. So it really, my interest in real estate got started with that. And then I went to college for finance because I figured that it was applicable throughout life, not just for a job. I wanted to learn how to account, how to manage my own money and know more of the ins and outs of the financial world. So that brings me to today. I’m a financial analyst for work and I got myself into, like you said, a pretty big BRRRR there. So that’s my money story.
Scott Trench: Well, walk us through. So to understand your position, we got $20,000 in cash. We got about $30,000 in investments. And then about $510,000 in property. And that’s your position there. And then we just levered against the property. We have a couple of personal loans here. Walk me through your cash accumulation rate. Do you feel like cash is regularly stockpiling in your life? You gave us the $5,000 a month in income, plus a bonus here and there, plus the side businesses. Is cash tending to pile up and you generally have a surplus that you’re looking to deploy? Or is that not happening for some reason?
Josh: I ran the numbers to come up with a 3-month average, and that’s kind of the— those are the financial budget numbers that I gave to you guys, was kind of a 3-month average. But before that, quite honestly, it was just kind of a, hey, I’ll look at my credit card statement at the end of each month, and if it was under $800, I knew that it would put more money in my bank account than what I was spending. So it was a little more run-and-gun. Up until more recently when I’ve really in the last year have had to learn a lot about tracking my own expenses and my own cash flows through the construction process. And with that, because I took out a construction HELOC, there was some flexibility even there too. So up until recently, yes, I would just kind of come into having enough cash to then reinvest or to put into my IRA or to pay down debt. But now that I have really substantial housing expenses in the mortgage and the HELOC, I am projecting, I am foreseeing that it’s, you know, I’m basically breaking even for the most part when it comes to after-tax and stuff like that. So I’ve been running break-even through the construction period, and I’m looking forward to when, like Mindy said, in January, hopefully here, getting some rents in to then be a surplus, right? But for really the last year, I’ve been running about breakeven. I wouldn’t say that I’m clearing a surplus each month. A lot of the retirement accounts are from deductions, right? So paycheck W-2 deductions. So that all hits before I even touch that money.
Scott Trench: So great. And I assume fundamentally, that’s the first thing we want to solve today, is get into a positive situation.
Josh: Yeah, yeah, I want to get into a positive situation. There’s also a question about, you know, with my HELOC, I have a little bit of room, it’s up to $150,000. I obviously have those couple credit cards still outstanding. So those are on 0% promotional rates for now. One will clear in January where that’ll start accruing interest, the other will take until next July. But a question I had is, should I draw $6,000 from my HELOC to invest in my personal IRA at the start of the year, and then kind of cash flow it throughout the year? Or should I continue to break even? My break even also is essentially including a contribution of $500 a month to that IRA. So should I just put that lump sum into the IRA to start the year? Or should I kind of just still dollar cost average it throughout the year.
Scott Trench: Well, let me ask you this. Your mortgage payment, what is your PITI?
Josh: The principal, interest, tax, and insurance is $1,442.
Scott Trench: $1,442. Okay. And what do you expect to rent this place out to? Walk me through the math of the house hack once you have tenants in place.
Josh: Yeah. So I converted it from a 2-bed, 1.5-bath to a 3-bed, 3-bath.
Scott Trench: Wow.
Josh: And so both of the bedrooms upstairs have their own ensuite bathrooms in them.
Scott Trench: How long did it take you and how much did you put into it?
Josh: I’ve put in almost— I mean, it’s essentially $150,000 all in on debt. And it has taken me— I started rehab really intensely in the middle of October 2021. So it’s been 12, 13 months that we’ve been cooking on this thing.
Scott Trench: This is a big project. I bet you’ve learned a lot.
Josh: It’s a big project. I didn’t know what I was getting into, to be completely frank. And, you know, I know you’ll ask about my money mistake, but it was a big project. There’s a lot of learning curve that comes with that. There were some losses for sure, just by not knowing what I was getting into. Some— an example where I didn’t do my due diligence on research to figure out what it actually cost to get an interior of a house painted. And so I got ripped off. I got charged too much for an inadequate job.
Scott Trench: Mm-hmm.
Josh: But that’s being naive and being new and figuring it out. Hopefully as you learn, those losses get fewer and fewer and less and less. But yeah, it’s been a big, big process. It’s got new electrical, new HVAC, new plumbing. I took down a wall, I put up a wall, I moved a wall, to add another bathroom in one of the bedrooms. And above all that, then there were structural issues. We opened up one of the ceilings to put in new lights, and we found that the joists had cracked. So the joists had split for the upper floor. So we had to reinforce those. And there was a turnbuckle running through the middle of the house. We didn’t know where it was coming from or where it was going. So there were a lot of weird things about it. It’s an 1876 house. But on the back end, those 2 rooms upstairs, I’m anticipating very conservatively $750 each. And that’s super conservative, upwards of $1,200 for one of them and $1,000 for the other. The one has a little bit better and bigger of a bathroom. So on the high end, $2,200 a month, on the low end, $1,500 a month.
Scott Trench: Okay, awesome. So let’s plug it in the middle and say $1,800 for our purposes of discussion today. Does that work for you?
Josh: Yep, works.
Scott Trench: Okay, so you’re going to get $1,800 and your PITI is $1,442. Is that right?
Josh: Yeah.
Scott Trench: So that’s great. That’s going to make a major difference in your cash flow in a month or two. What is left that needs to be done to get this project completed? How much is it going to cost? And how long is it going to take? You say January, but can you walk us through that?
Josh: Yeah, good question. What I have left is trim work and molding. And included in that is a little bit of finished carpentry to install 4 custom doors to close off another room. So all in, I already have the material purchased for that. It’s just someone’s labor for a week, for 40 hours, and then it’s essentially done. We’re finished.
Scott Trench: And do you have a plan to contract that labor? Is that all lined up, or what’s going on with it?
Josh: Yep, that’s all lined up. They’re coming here in 2 and a half weeks.
Scott Trench: Awesome. Start— put the property up for rent today.
Josh: Okay.
Scott Trench: So start marketing it for tenants, get the move-in date. With that, if you feel like you’re actually certain that in 3.5 weeks, this will be done, put the listing up. Worst case, you just listed it and you get it in January. But that’s $1,800 that’s going to evaporate every month that you don’t have a tenant in there. So it’s like an expense going out. So that would be my first advice there. What would the property rent for if you moved out?
Josh: If I moved out, it would be in probably $2,750 to $3,000 range. I’m in a small town just outside the Twin Cities with good access to the city’s industrial centers and business centers. But it’s really a destination town within the Twin Cities. So it has really strong support for home values. A big lesson I learned is that if you’re going to do a BRRRR, make sure that you do it in an area that can support the housing values if you go on overruns. My original project, I was only hoping to turn a $250,000 house into a $325,000. That was the original project. But then walls started getting opened up and the vision started to come more through of what the house could be. And obviously that totally changed where plumbing needed to go. And we found that they had cut joists in weird spots to add plumbing upstairs. And so if we were going to have to move plumbing anyway, we might as well make it really functional. And so I didn’t ever end up— I didn’t intend for it to be this big. I only wanted a base hit and to have a modest rental a year ago. But it’s turned into this bigger project. But I definitely hear you on getting rents in as quick as possible. I’ve actually ordered the next Medium-Term Rental book. I think I got the notice that it was getting shipped yesterday. So my plan is to put it up on Furnished Finder. There’s a hospital that’s a mile away. And so that was the plan for sourcing tenants come January.
Mindy Jensen: Okay. So you said Furnished Finder, you’re going to furnish these units?
Josh: Yep. 2 bedrooms I already have the furniture for. And then the rest of the space I’ve been living in it. So, well, I actually only moved— funny story, I borrowed my mom’s camper throughout the summer so that I could live in the camper while they were doing all the sheetrock and painting and stuff inside. So I only moved back inside around Labor Day, just in time for the cold weather to set in. But that was a fun experience. Anyway, I’m sorry I interrupted you.
Mindy Jensen: That’s okay. I just want to say this delicately. If you don’t have design skills, it might be a very good use of your money to hire somebody with design skills because people will look at the pictures of your property and say, “Oh, it’s just an old IKEA bed with some random old comforter on there and there’s no pictures on the wall,” or it’s, you know, painted some random color. Like, I don’t have design skills, so I ask people who do have design skills to help me out with my medium-term rental. So I’m not accusing you of not having design skills. I’m just saying if you don’t, you could greatly improve the amount of rent you’re getting per month, and the amount of people who want to stay at your house at all, just by having a super cute Instagrammy site.
Josh: Yeah, absolutely. That’s a great tip.
Scott Trench: Yeah, I think that’s really good. You’ve already— you’re already into this project for $150,000. What’s another $2,000 in advice or whatever to actually have a good chance at bumping those rents? And I wouldn’t just do those rooms. I’d do some of the common areas if you’re going to do rent by the room as well.
Mindy Jensen: Okay. I think that we have covered the rental pretty well. Let’s talk about your HELOC strategy.
Josh: Yeah, yeah, absolutely. So I wasn’t sure if it was a common term to be called velocity banking. I know it as velocity banking. That’s something that I came into with my real estate agent slash friend—really friend first, real estate agent second—who represented me on the project. He just rolled his mortgage into a HELOC as well. He and his wife are funneling their entire salaries into the HELOC and then only pulling out little bits of their expenses each month. So every month their property debt goes down a large degree, and then it only comes back up with their expenses. I’m not doing it with two salaries. I’m only doing it with my one W-2. But the idea is that my entire W-2 will go into the HELOC. And then every month, when it comes time to pay water and utilities and pay off the credit card that I use for food, I only pull out the expenses for that, and the rest of the W-2 stays in the HELOC. So the idea is that the balance goes down consistently and frequently. It’ll be little by little, but once I add the rents to it, then it’s going down by $1,500, $1,800, $2,000 a month. And so when I did the math, it works out. Really, the question was: do I get another HELOC? Do I—excuse me—refinance my construction HELOC? Or do I refinance the entire thing into a 7.5% mortgage? This was a decision that I was trying to make a month ago, because my original construction HELOC was for only $100,000, $105,000, but it was a $150,000 project. So I had to float a lot of the expenses on credit cards. So I was trying to refinance all of that. And so the decision was trying to figure out: refinance the HELOC into another HELOC, or just do the whole thing as a cash-out refi kind of thing.
Scott Trench: Did you use the HELOC to finance construction? Or have you used the HELOC at any point so far to pay down the mortgage early?
Josh: Haven’t done that. Haven’t done that because I’ve had construction costs to repay.
Scott Trench: Okay, so you have not used the HELOC to pay down your fixed-rate 30-year mortgage at 3%?
Josh: No, no, no, no.
Scott Trench: Okay.
Josh: The fixed-rate 30 would be like paying down 3.3% versus the 7% HELOC. Like, I figure every dollar that I put towards the HELOC earns 7.25%.
Mindy Jensen: Okay, so if I was in your specific situation, I would not do a cash-out refi, because you have the 3.3, whatever, on your 30-year fixed mortgage.
Josh: Mm-hmm.
Mindy Jensen: I would leave that alone. That’s $227,000 at 3%. You’re not going to get a 3% mortgage again. So don’t touch that. If I were you, I would not touch that. The HELOC is what, 7.25% right now? That is going to go up. And I would make it a point to pay that down as much as possible. I don’t know about putting my W-2 and rental income into the HELOC and then pulling expenses out. That seems like an awful lot of extra work. I would just spend my money—my W-2 and my rental income—on my expenses, and everything left over, pay off the HELOC as fast as possible. I think that it is creating a lot of extra mental headspace. To be fair, I’m not a fan of velocity banking, and I’m not sure that you’re using velocity banking in the way that it is taught—in quotes, “taught”—online, where it is specifically for taking out a HELOC, throwing giant chunks at your mortgage, and then putting your W-2 back into the HELOC and pulling little bits out for spending. So you’re doing part of it, but you’re not using it to pay off your mortgage. And again, I wouldn’t recommend paying off your mortgage right now, simply because you have such a low rate that will probably never come around again.
Scott Trench: Yeah, when I first saw this, I thought you were using velocity banking, and I thought we were going to have a long discussion on it. You’re not using velocity banking. Velocity banking is when you use your HELOC to prepay your mortgage earlier. And if you time it correctly, you may be able to save a few thousand dollars in mortgage interest over a long period of time because of the timing of the cash flows and the way that you can strategically use the HELOC. In my opinion, that is also a very unintelligent move, because while you can save a few thousand dollars in interest payments using that, you destroy the optionality of your great 30-year fixed-rate, Fannie Mae-insured mortgage with that. You would never use your HELOC at 7.25% to pay off your home mortgage. Perfect—you’re not using velocity banking, and you’re using the term incorrectly. Go ahead and keep using that if you want to. Well, Mindy and I will have slightly differing opinions on that, but that was my big thing—you got to stop doing that right away, if you’re using the HELOC to pay off your mortgage. Velocity banking may have been an interesting, complex, kind of bad trick previously. Now it’s a really bad trick, because you’re going to swap your mortgage rate for a HELOC rate.
Josh: Yep, yep, I hear that. I hear that.
Mindy Jensen: —and start using free resources to build something amazing. Get more with Northwest Registered Agent at northwestregisteredagent.com/moneyfree. Yep, so should you get a cash-out refi? No. What I would like to address is the Home Depot 0% card that ends in January and the Lowe’s 0% card that ends in July. I’ve done these promotions—I’m assuming it was the promotional period where you spend X number of dollars and then there’s no interest as long as you’re making your minimum payments for 6, 12, 24 months. And I’ve done those. If you pay off the entire amount before the end of the promotional period, you will pay 0% interest for the whole thing. If you don’t pay off the entire amount before the promotional period ends, you will owe interest on the entire amount from the very first day you made the purchase, for the entire time that it takes you to pay off the amount. So the way that these promotions work best is if you can pay it off in time. If you can’t pay it off in time, there’s no promotion at all. It’s not like you get a discount or you don’t pay interest for the six months that you have it. I’m really flubbing over my words here, but what I want to say is: make sure you pay off that Home Depot card before the due date in January, simply because—and even if you have to take money out of the HELOC, which I don’t love, but that’s at 7%—for however long it takes you to pay off, what was that, $4,500, and then pay that off as fast as possible. But you’ll be paying much more for the last 6 months or 24 months or whatever, for the entire amount, if you don’t pay it off in January. And then the same with the Lowe’s card. I would do both of those, and I would make that my top priority to pay off, because I like paying 0% interest when I can—or 7.25% for the two months that you have to pay because you’ve borrowed from your HELOC.
Scott Trench: In terms of the way you’re managing your overall cash, you’ve got $20,000 in cash in various buckets, and you’ve got a bunch of different debt, including the HELOC. You’re almost done with the student loans. What were the interest rates on the student loans again?
Josh: 4.5% or 5%.
Scott Trench: Why are you paying off those ahead of the HELOC?
Josh: I’m really not. They’re just in deferral status right now, so they’re not accruing any interest.
Scott Trench: But didn’t you say you just got a bonus and you paid off the student loans with them?
Josh: Oh, yeah. It was an earmarked bonus, right? So it was for student loans. It was a student loan forgiveness bonus of sorts.
Scott Trench: Great, so that makes sense then.
Josh: Okay.
Scott Trench: So these are all fundamentals that you’re comfortable with and familiar with, so you don’t have an issue with those types of decisions. Your cash flow management strategy confused me at first, but it makes perfect sense. This HELOC is ruling your life. You are using that to fund your personal expenses, and every dollar of income is going into the HELOC. It’s bouncing around, but hopefully tending to go down, or should start tending to go down, once the trim and carpentry work is completed at your house. Is that right?
Josh: Yeah.
Scott Trench: That’s fine. I don’t think you have a better option than that HELOC in the near term, so I wouldn’t necessarily change what you’re doing there. Is there a reason why you have all the cash in all these different buckets, versus just saying, “I’m going to have a $5,000 balance or a $2,000 balance,” putting all the rest into the HELOC, saving 7.25% on an annual basis on that, and then continuing to use that as your revolver?
Josh: Yeah, that’s a really good question. I’ve thought about that as well myself, because all of that cash has an implied loss of 7.25% by not being used. So I’ve thought about that a lot. Keeping those accounts as they are, if anything, is kind of just psychological, to just know that I have those buckets. But it would be really easy to just throw a big chunk at the HELOC as well. So that’s a good point.
Mindy Jensen: Rather than throwing it at the HELOC, I would take, out of the $21,000 in cash, I would take some and throw it at the Home Depot card.
Josh: Oh yeah, of course.
Mindy Jensen: Before January. So we’ve got another month, and then before January, pay that one off. And then with the Lowe’s card, again, make the minimum payments until, you said, July. Pay that one off in July. But then, yes, any additional cash that you have, I would throw at the HELOC.
Josh: And I’m essentially trying to use the HELOC as a checking account, right? Like, funds are kind of flowing in and out of that—at least that’s the concept. It’s a new setup, so I haven’t actually tested it over months and months and months. So check my thinking too, if that’s a good setup or if that’s a little bit of a sketchy setup. I’m trying to flow as many dollars to that 7.25% as possible.
Scott Trench: I don’t think you have another option that’s economical here. So I need to double-check on this, make sure that you do actually have access to that liquidity, because it would be a real struggle if you ran out of liquidity. But if you have pretty high assurance that you’re going to be able to access that HELOC, then consider winding down that cash position to something smaller, putting it all towards the HELOC. And then, to Mindy’s point, bumping up the HELOC to pay off the credit cards as they start bumping into that higher interest rate range. And then once that’s set up, your game becomes extremely simple. And a little tough, but nothing you probably can’t handle. You’re going to be grinding out paying this thing—paying this HELOC down—for the next two, three years. And I think you knew that coming into the call, but that’s the reality of your situation. You’ve got to get that place rented. You’ve got to bust it on these side hustles and keep working real hard at your day job. And you have the potential, it looks like on paper here, to accumulate somewhere in the ballpark of $30,000, $40,000, $50,000 a year with that hustle, after tax. Ten of that is going to go to interest on your HELOC over the next year. That’s brutal. And then I always think of the HELOC as a short-term, so five-year debt. So if you have $100,000 in a HELOC, sixty months is five years—that’s $1,000 a month. So you have $2,000 a month on top of that that you want to be paying in order to stay on top of that. That would be the rule of thumb. And I’d say I, Josh, am going to feel very uncomfortable about my position if I am not paying down that HELOC by $2,000 a month handily each month next year. Something’s got to change, and I’ve got to start using my free time to pay that down. Because your position is not bad—it’s just, you’re into like, I’ve got a grind mode for a year or two here with what you’ve done. And it’s not like you made a mistake—the house hack bet sounds like it was a reasonable bet, it just went way over budget, resulting in this big HELOC.
Josh: Absolutely. I totally overleveraged because of the reconstruction on the house hack, right? Overleveraged relative to my own income. I need rents to really drive down the balance of the HELOC. That’s really what it comes down to. So, yeah, I agree.
Scott Trench: Now, on the flip side of this, do you believe me that that’s realistic? You could pay $30,000, $40,000, $50,000 of this a year starting next year?
Josh: Oh, yes. Yeah, absolutely. I did a whole breakdown of what the cost would be to refinance into another traditional 30-year versus doing the HELOC path. And yeah, I totally see that.
Scott Trench: Interesting. I don’t like the refinance option for you. I would have liked it if—
Josh: I don’t—I didn’t either.
Scott Trench: If we’re talking this time last year, I would have said definitely do that, because then you would have refinanced the whole loan into that. But now you’re not going to get that on a second-position mortgage. So you’re going to lose your 3.25% on your first-position mortgage. So that leaves you with the grind solution, which is no fun. But I think it’s something you can handle in this situation. And you’re going to come out smiling on the other side of this in two years, with a mostly paid-down HELOC, a wonderful mortgage rate, not paying very, very low living expenses, and likely a big skill set with which to take on a future project from where you don’t move six walls.
Josh: Yeah, that’s a good point you make. I mean, at what point—this is getting into real estate is something that I want to pursue more and pull more rental properties into the portfolio—what would some indicators be that you would recommend I wait for, or look for, to go after the next property? Like, at what point would it be too aggressive, or at what point would it be just right based on my situation, looking forward?
Scott Trench: Here’s how I think about this: property needs to put cash in your pocket on a standalone basis as a true rental if you’re not living in it. And here’s how you analyze that. You have to analyze it harshly here. Your mortgage is $1,400. Your HELOC is producing—let’s call it $800 a month in interest. And if you believe what I said, you’ve got to pay a little over $2,000 a month in principal reduction on the HELOC, because it’s short-term financing. That’s a subjective call—I believe that’s how you should treat the HELOC. So if you put those numbers together, that’s $1,400 plus $800 is $2,200, plus $2,000 is $4,200 a month. That’s before utilities and all the other kind of stuff. So those numbers look dramatically better if you’re getting $3,000, $3,500 a month in rents and you’re not living in there, and you just have that mortgage. Now you’ve got a great rental property with this. The issue with this property is the rehab budget and the HELOC expense that came with it, not the fundamentals of the investment. And so what I think you do is, okay, if you’re sitting in that position, now you’ve got $3,000 a month coming in, you’ve got a $1,400 HELOC, and you are easily cash-flowing this property as a standalone investment at the end state, unless rents collapse in your area, which is probably unlikely. So that’s a strong position from which to attack the next investment. Does that logic make sense? Do you agree with that?
Josh: Yep, I hear that. And because I’m ambitious and I like to look at the market and think about the next steps, the next plays—the only way I could start this deal was with leverage, to get myself in with leverage. And the only way to do the next deal I see is by doing seller financing and just trying to get someone to—I would need to do a bigger deal than just a single-family, but to get additional cash flow to then throw at the HELOC. But even then, I would be taking on additional landlord and other responsibilities. So I hear you, I hear you that the plan is aggressive paydown, finding cash flow as much as possible to drive that HELOC down, and then it’s a strong rental after that.
Scott Trench: Yeah, and I think if you’re going to take risks, take them on the income side in the next couple—you’ve got the side hustle that sounds pretty strong here, you’ve got job opportunities you can pursue, you’ve got those types of things. Get your agent license. Think about things like that, that you can churn and burn hours for income on, in the next two years, at a higher and higher rate. Because, in my opinion, buying another rental property in this situation—it can work if things go up, but it can also begin compounding against you. And your position is not one where, like, oh, the next property either accelerates my position, or it really will put you in a tough spot if the next property does not go well right now. Versus if you didn’t have a HELOC, then I’d be telling you to buy another property right now, because you’ve lived in the property for a year—it’s time to go do the next house hack. Go do the deal.
Josh: Yeah, but the rehab took a year, and now, because of the leverage on that, it’s going to take two, three, four years to get out of the debt of it. I hear you.
Mindy Jensen: I agree with most of what you’re saying. I was looking at his situation and wondering what sort of side hustle, additional money you could generate. How much time does your current side hustle take to generate that $20,000 a year, with the hockey and the CrossFit coaching?
Josh: Yeah, good question. The CrossFit coaching is nice because I go anyway to work out myself, so what’s another hour of being there to coach, when I was going to be there anyway? And then hockey coaching is mornings once or twice a week, and weekends—every weekend I go through their video and I give them practice plans, and I talk with them on FaceTime. They’re not in the city—the other team that I coach is in South Dakota. So I coach them remotely, and I travel out there once every month or six weeks or so. So it’s pretty easy to scale, because, as far as private lessons go and coaching goes, on the hockey side, I can kind of scale that up during the season if I need to, and do more lessons in the morning and stuff like that. So that’s relatively easy to scale during the year.
Mindy Jensen: I would say look into that and scale that if it’s relatively easy. I mean, if you’re remotely coaching a team in South Dakota, remotely coach a team in North Dakota, remotely coach it. There’s 48 other states you can remotely, 49 other states you could remotely coach a team in. And I mean, that might start to take up too much time, but if you could generate income while watching videos of hockey stuff, clearly I’m not a hockey coach remote, but you know, there’s easy ways to generate more income and there’s really difficult ways to generate more income. And I don’t think that signing up to be a Lyft driver is going to be the best use of your time. But we talked—I can’t remember who we talked to—he was a remote, I want to say remote tennis coach, making quite a bit of money just watching people’s, or maybe swimming, I don’t remember what he was doing, but he was watching people’s technique and coaching them on that completely remotely. And you can do that as well. Clearly you already are. So add another team or 2 or 3, or add another couple of CrossFit days, or you know, you’re doing it in the morning, do it after work too. Or teach a CrossFit class. Is that what you’re doing? Are you doing individual coaching?
Josh: Yeah, it’s with the group sessions. I don’t do any individual coaching for CrossFit, just for hockey.
Mindy Jensen: Ooh, maybe you could start your own CrossFit videos where you’ve got a YouTube channel and you’re teaching CrossFit videos, and then you are growing that. Do one—January’s coming up and that is a huge New Year’s resolution, to get in shape. So you start your video business now, you start pumping out videos. Are there workout videos for like people who are just starting to get off the couch? I mean, focus on people like that. Everybody’s heard about CrossFit. Here’s how you do it from a beginner standpoint. I don’t know, I’m not a CrossFitter, clearly.
Scott Trench: I think that all this is correct. Now, this is ultra—the answer here is earn more income, keep the expenses low, get the rooms filled, and grind this debt down over the next 2 years. Give yourself a 2-year target, 18 months if you can. And then it’s $100 a week at a time. $100 a week is $5,000 over the course of a year. So if you can get to $500 extra, that’s $25,000. Surely you can do that with some combination of just the 2 side hustles we talked about. And over time, if you keep this front and center, maybe additional opportunities emerge to that extent. So this is not fun. I can give you a path out of this whole situation if you want to hear that as well. So where you don’t have to—you don’t have to do that for the next year and a half. Would you like to hear that one?
Josh: A path? Yeah, sure. Hit me.
Scott Trench: Sell the property.
Mindy Jensen: I knew he was gonna say that.
Josh: I’ve—yeah, okay. Tell me more. I’ve thought of it. I’ve thought of that too, but not in a lot of depth.
Scott Trench: What’s the property worth?
Josh: $490,000.
Scott Trench: And your total debt is, as far as I can see, $362,000.
Josh: $380,000 because of the personal, the family loan too. So yeah, $380,000.
Scott Trench: Great.
Josh: $382,000.
Scott Trench: It’ll cost you 7% to sell the property, right? So what are we looking at? That’s 7%, $35,000 to sell the property. That leaves you with $180,000 to cover all of the—$80,000 left over after you pay all the expenses associated with this thing.
Josh: Yeah.
Scott Trench: Then you have $80,000. You can pay off the mortgage, the HELOC, your 2 credit cards that you have there, and your student loans. Start fresh with a pile of $50,000. Not have to grind for 2 years to pay off this HELOC. And you can start anew with a new house hack potentially. You’d have to get creative. You’ll be trading the low mortgage rate for something else, but that would be a path out of this situation. I don’t know what would put you in a better situation in 2 years, but you’d definitely be more flexible in January if you decided to sell the property today. So there is a path out immediately, if you’re actually sure on that property value. Property values are declining in many markets right now. And so I think that would be a conviction test for you on that property value. What’s your reaction to that?
Josh: Yeah, that’s an interesting thought. I had considered that as well in the summertime when I was realizing just how high the construction costs were going and trying to figure out what that breakeven had to be and get nervous about if the appraisal was going to hit it. The appraisal hit it, yes. But I listened to the BiggerPockets—I think it was the Daily, whichever one’s the little short clips, I think it’s the Daily one—they were talking about how rents are not—they’ve peaked, they’re not crashing, but they’re just, you know, mellowing out, except in 4 cities. And 2 of those cities are Minneapolis and St. Paul. And so, how much do I want to push that? I don’t know. Part of this whole thing was just about exploring and figuring out what I could learn, and see if rehabbing and flipping a house was something that was for me, and figuring out if being a landlord was something for me. We’ve learned a lot on the rehab and flipping side, but I still don’t know about the house hacking side and being a landlord and renting. I hear that as an option. I absolutely hear that. I also—I don’t know if I need to be flexible in January. So it’s a good point that you make, that I could be more flexible. I don’t know if I need to be.
Scott Trench: I think that’s right. But I think your choices here are sell it or grind. And I don’t think either is a bad decision. We talked to another individual, similar in many ways to you, a few weeks ago. And that individual had like $900,000 in debt across 2 properties and a ton of consumer debt. And in that case, it was clear, we’ve got to sell everything and start over, because you’re going to drown in this situation. You aren’t going to drown. You have the ability to side hustle and figure this thing out. You have the ability to get tenants in this place. You can grind your way out of this, no problem, if you choose to. It’s going to be a year, or a year and a half, maybe 2, of hard work. And you’re going to be coming out the other side probably in a reasonable position. Although prices may come down, rents probably—I would bet rents are not going to fall a lot, but they might fall a little in the next year, yada yada. Or you could say, I’m going to take this cash, clean up my position, and go start another project right now. Both are fine. Just make that a decision. Make that a conscious choice and be ready to be happy with it either way you go. I don’t know what the right answer is. You can do both, because your fundamentals are going to be strong in about 2 months here when you get those tenants.
Josh: Yep, I hear that. Thanks for that. Thanks for that idea. And it’s definitely a—I hear you about making it a conscious decision instead of just being, hey, this is the plan, this is what I wanted to do, so I’m going to stick with it. But I hear that. I’ll give that some more thought.
Scott Trench: And you’re not going to come out of it as a loser if you do decide to sell, because you’ve got a year of experience. And you should, I hope, take on a few more projects like this in the future, using the lessons you’ve learned. You’ve been given a very thorough education in this kind of project, so don’t squander that. Do it a couple more times in future years here.
Josh: Oh yeah, I’ve learned a lot. It’s been a great journey and a great path through it. I’m definitely glad to be on the better end of exposed walls and new plumbing and to have things put back and looking better.
Scott Trench: So, well, anything else we can help you with here today, Josh?
Josh: I don’t think so. We kind of hit all the big topics, big concepts for me. I appreciate both of your time.
Mindy Jensen: I want to make one more comment. So if you are considering selling, and you’ve already owned it since October of 2021, now we’re at a year and a month, and then that’s 2—3 months if you sell it, a year and 3 months if you sell it in January. If you wait another 9 months, you could earn some landlording expertise, experience, in 9 months, and then sell it and pay no taxes on the capital gains, because it is your primary residence, up to $250,000. I believe you’re single?
Josh: Yes.
Mindy Jensen: Okay. And up to $500,000 if you were to be married. So that is a lot of money to not pay taxes on. It’s also, depending on who you listen to, either the market is going to go nuts next year or it’s going to decline further next year. So maybe it will be better and maybe it will be worse in October of next year. But that 2-year is to the day. So if you close on October 23rd, don’t close again before October 23rd. And we had a leap year, so give yourself an extra day, just in case.
Josh: I appreciate both your times and perspectives. And, you know, this is—it’s fun to hear other ideas. And it’s what you guys bring all the time. So I really appreciate you guys and all you do.
Scott Trench: Awesome. Well, thank you, Josh. We appreciate it. You have a wonderful rest of your week. And we look forward to hearing what you do decide. Please let us know.
Josh: Yeah, you got it. Thanks.
Mindy Jensen: All right. That was Josh. And that was an interesting story. Scott, I have to be honest, when he first applied for the show, I thought we were going to be covering a lot about velocity banking, which is not my favorite way to manage money. But it turns out that he’s just using a HELOC to fund rehab, which I don’t think is our super favorite way to fund rehab, but he did. And now we’ve given him a couple of options. I mean, his property sounds great, and I think that if he wants to rent it out, I think he’ll be able to generate some good income while he is waiting to either hit the 2-year mark to pay no capital gains—no taxes on his capital gains—or sell it now and pay a little bit of capital gains. He’s just got a lot of options. He could keep it and generate, you know, start the grind that you were describing.
Scott Trench: Yeah, Josh is a winning individual here. I really liked talking to Josh and really liked his approach. Now that I can understand it from the end of the episode here, the guy bought a house hack around this time last year, crushed it. And well, it went way over his budget. But at the end of the day, he added hundreds of thousands of dollars in value to the property, got it appraised at that amount, and is on his way to doing a house hack. This is a risk that I think I would have taken almost identically to him in the same set of circumstances. It just went over budget and the project evolved in a way that got beyond his grasp. Probably would like to stay away from 1870s homes on your first house hack and remodeling project. That’s probably a wise move that folks can learn from. Maybe stick to 1950 at the earliest, if not much more recently built. But those are learning things, and he now has a really good experience set. The fundamental issue—and I don’t mind him using the HELOC to fund construction costs. The alternative to a HELOC is hard money, and I’ll do that all day. I don’t think there is a better source of construction funds, other than cash maybe, although you can argue that’s not good, than a HELOC. So I think he did it all right. He’s just now stuck with the reality that this property is going to—if you believe my assessment that a HELOC should be paid back in 5 years, then that property is going to suck cash out of his life until that HELOC is paid off. And I don’t think you should be buying more property when your current portfolio is sucking cash out of your life. I think you should fix that problem and then buy more property, such that each property adds cash into your life. And if every investor thought that way, I don’t think that they’d be having that much fear of short-term market cycles or anything like that, because you’re just like, no, every incremental property adds to my net cash flow. I finance it in such a way that that’s always true, never using HELOCs without understanding the payback considerations and the short-term nature of that debt. And you’re going to be fine to be able to snowball it. And so he’s going to be just fine, I bet you he decides to go and just grind it out for a year or two, because he can, because he can hustle and earn that extra income and pay it off.
Mindy Jensen: Yeah, that would be my choice. If I was in his same position, I would first focus on paying off those big box home improvement store credit cards that are at the 0%, and making sure that I get the 0% rate, so paying those off before they’re due. And then I agree with what you’re saying, Scott—don’t go buy another property until this one isn’t sucking cash out of your pockets. I would increase my side hustle income, my hockey coaching and my CrossFit coaching, to as many days as I possibly can, so that I can generate as much income to throw at that HELOC. I think that, like, that was a good point that you made, to make sure that he does still have access to the money. As long as he has access to the money, that could be his emergency fund. He could use that as an emergency fund while he is throwing every single dime he has at that HELOC to bring it down as fast as possible. I would put all the rent that he collects in there. I would put everything in there. And I want to just underline what you said one more time: an 1870s home is not a good first investment.
Scott Trench: And I agree with everything you said, Mindy. While I’m doing that, I’d be extremely uncomfortable about the fact that I’m relying on the HELOC as my emergency fund. So I would not be comfortable or restful, or feel like I have a good financial position, until that HELOC was largely paid off. And I’m not relying on a HELOC as my emergency reserve, because that can evaporate with a market downturn. So I’d keep $2,000 or $3,000 in cash, but 7.25% is high-interest-rate debt. I’d pay it down. I think that’s right. And I think there’s trade-offs involved in not stockpiling cash and not paying it down early. And as long as his cash flow is strong enough, that’s probably going to work for him. So yeah, not a great option. But look, that’s all in the context again of the $80,000 in equity value he created out of $12,000 actionable—that’s after transaction costs. Now it’s before taxes. It’s a great point you brought up there. It’s actually a significant tax hit if he sells now. So I wouldn’t be surprised if he does wait until next year.
Mindy Jensen: I would. Yeah, I would at least wait the 2 years if I was going to sell it. But I mean, it could be a really great property if it’s close to the hospital and he can do month-to-month rentals for travel nurses or other people that are—I’m totally blanking on who uses month-to-month rentals. If only I had a book like 30 Day Stay, Scott. The new book from BiggerPockets Publishing. You can get it wherever books are sold, or at biggerpockets.com/store. Awesome.
Scott Trench: Well, with that plug, should we get out of here?
Mindy Jensen: Yes. Okay. That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench and I am Mindy Jensen, saying see you in an hour, sunflower.
