Mindy Jensen: Welcome to the BiggerPockets Money Podcast, show number 310, Finance Friday edition, where we interview Jill and talk about what to do with your primary residence after you move out.
Jill: But now I don’t know how, if I just keep that going with my investments or I try to kind of cash flow all these renovations as quick as I can and kind of, you know, I guess scale back on the investment piece. So I guess how do I balance the retirement accounts, the after, you know, tax brokerage account, 529s, like all these other things we invest in with the real estate piece now.
Mindy Jensen: Hello, hello, hello. My name is Mindy Jensen, and with me as always is my real-life, actual human being, never going to ask you to IM him about crypto co-host, Scott Trench.
Scott Trench: And with me as always is my spamming me with a new intro Mindy every week. But seriously, the spammers on these Instagram things are nuts. Please know that neither me nor Mindy, nor BiggerPockets Money, Instagram—none of those accounts will actually reach out to you and then ask you for Bitcoin or any other types of money or whatever from that. Please just report the fake accounts if one of them happens to try to go after you.
Mindy Jensen: Yep. And feel free to send me a note or post a copy of it in the Facebook group, so that we can all report them and get that mess off of our sites. Thank you, because I hate them. Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to everybody’s story, because we truly, truly believe that 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 make the decision between selling and renting your home, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.
Mindy Jensen: Scott, I am super excited to talk to Jill today. She makes a good income, she has her expenses fairly under wraps, she is buying a second home and considering turning her first home into a short-term Airbnb.
Scott Trench: Yeah, I think it’s a good discussion, and it’s a situation that probably a lot of people are going through. She has a good problem. She has a lot of equity in her primary residence, and she needs to figure out how best to deploy that—whether it’s by keeping it as a rental and generating income, or redeploying it.
Mindy Jensen: I really like that you threw that out there, Scott, and gave her something to think about. Hey, it seems like a no-brainer, but maybe you could take this equity and this money that you have tied up in this house and do something else with it. Maybe you could redeploy it in a way that would generate even more income. I really like the way that you gave her things to think about. Before we bring in Jill, let’s note that 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. Jill and Joe are preparing to move to a new house that they plan to live-in flip, while turning their old home into a short- or mid-term rental. Debt is not Jill’s friend, so there’s a bit of anxiety surrounding this move. And even though she realizes that taking on this low-interest debt can help her family realize their long-term goals, it’s still weighing on her just a little bit. Joe is newly self-employed, so they’re still navigating the fluctuating income while he stabilizes his new business. Jill, welcome to the BiggerPockets Money Podcast.
Jill: Thank you. So excited to be here and actually talk to you guys live.
Mindy Jensen: I’m super excited to have you. I am going to say that Jill lives in a medium cost of living area in the Midwest. So that gives you a framework for where these finances and this information is coming from. Let’s jump into your numbers. What do you make and where does it go?
Jill: So I make $250,000 W-2 income. That’s kind of straight, I would say, you know, biweekly income, but then I do get a fluctuating bonus that can be anywhere from $50,000 up to $100,000 depending on what’s going on. And then my husband has a new business that he started. He started it before COVID, but we had to kind of put it on hold with COVID, and we also were living abroad, so 2022 is kind of his first year fully doing this. So it’s between $1,000 per month and $5,000 a month.
Scott Trench: So you make $250K base salary plus—
Jill: I make about $200K base, and then plus bonus, which averages about $50K.
Scott Trench: Okay, okay, got it.
Jill: And then my husband’s around $1,000 to $5,000, I would say, per month. And I think conservatively we’ll profit about $30,000 this year.
Scott Trench: Great. And this is all pre-tax?
Jill: Yep.
Scott Trench: Awesome. So post-tax, we can plan on $175,000 to $200,000 maybe in post-tax dollars.
Jill: Yeah. So I guess monthly I get about $10,000 a month, and I take everything as much as I can out of my paycheck. So I’m a very automated person. So I take my 401(k). I actually do my auto and home insurance through work ’cause I have a group plan and it’s discounted. I do a flexible spending account for dependent care. All of that is taken out of my paycheck before, you know, I actually get the money. So monthly I have about $10,000 to work with.
Mindy Jensen: Okay, I want to pause here and praise you for that, because that’s awesome. You never see that money. When you take it out of your paycheck and you put it someplace else, that’s money that you can’t spend. I’m saying “spend” in air quotes for those who are just listening and not watching on YouTube. You can watch on YouTube if you want to see all these fun faces that I make all the time we record. But this is money that you’re not spending because you’re not seeing it, so it’s not there. And I think that’s really, really cool when you can do that. I don’t know that I have that option to pay my insurance, but there are things that I have pulled out of my paycheck ahead of time, and there are things you can have pulled out of your paycheck if this is an option for you. If your expenses are a problem, if your spending is the big issue that you’re trying to tackle, see what you can pull out of your paycheck before you have to spend it, because that’s a check you’re not writing—I’m so old, I write checks—that’s a check you’re not writing to pay the bill. But that’s also like money that’s not available for you to spend. So it’s like it never hits your bank account and maybe goes someplace else before it gets to where it needs to go. So I love that it’s here.
Jill: Yeah, it gives a huge discount if you do payroll deduction. So I actually talked to the insurance to switch it at one point, and it would go up $1,000 or something. So they really like that if it’s through a payroll deduction, they give you a huge discount. So if your company offers it, try to go for it, ’cause it’s also like a group plan, so they give you lots of discounts.
Mindy Jensen: That is an awesome tip. We were just saying we learn something every show, and that is awesome. Okay, Scott, now we gotta talk after the show about maybe HR. Anyway, okay, let’s look at—
Scott Trench: Well, let’s go through expenses next, and say, where’s all that money going? How much are you spending per month, and where is it going?
Jill: So right now—so we did make an offer on another house, but I won’t talk about that yet. So our current house that we live in, we have a mortgage. With the mortgage and taxes, it’s $1,690. Childcare is $1,200. I give a decent amount of donations to different organizations per month, so that’s about $300. Gas and car maintenance is $150. Medical is $350. I have an HSA, so I’m a big fan of the high deductible plan, so I try to cash flow anything we have going on with doctor’s appointments or prescriptions and then just save the HSA. Clothes, kind of kids’ activities, personal care, pets are about $300 per month. I know this is bad, but groceries and eating out is about $2,000 total per month for a family of 4. All the home stuff—we do have someone who cleans our house, the lawn, garbage pickup, recycling, house items—is about $600 a month. Then we have a few other bills, you know, cell phones, streaming, which is $300. I’m down to one student loan, which is $160 per month, and we’re only keeping that just in case Biden forgives loans—we will try to take advantage of that, but it’s low interest. Travel is $400 per month, and then I do have a few investments that I put—$200 into a 529 for my girls, and then another about $1,000 in a brokerage, after-tax brokerage account.
Scott Trench: Awesome. And so where are your assets and liabilities? How much cash do you have, and what do you invest in?
Jill: So I have a 401(k) through work, which is $440,000. Most of it’s pre-tax. Recently, through listening to your show, I switched to Roth, so about 10% of it is Roth now. I also have a Roth IRA that’s $40,000. A rollover IRA—that’s another $40,000. I just set up a SEP IRA because of my husband’s self-employment, so we only have $650 in there, but we just started it last month. I have an HSA that has $10,000 in it, 529 plans for both my girls that total about $15,000 total. After-tax brokerage is $33,000. And then I have about $60,000 in cash, and that’s going to go towards a down payment on a house. And then our current house—mortgage is $200,000, we have about $250,000 equity into it, and we just refinanced our mortgage last year for a 15-year mortgage, and it’s 1.875% interest, which is kind of unbelievable to me.
Scott Trench: Awesome.
Jill: And then we have 2 cars that are paid off.
Scott Trench: Great. So what is your total net worth here?
Jill: I didn’t total it up, so math is not my strong suit.
Scott Trench: Let’s do some quick math. We’ve got, what, $500,000, $520,000, $550,000-ish in retirement accounts. We’ve got $565,000 retirement accounts and 529 plans. We’ve got $33,000 after tax, $60,000 in cash, and $250,000 in home equity. So what is that? About a little under $1 million in net worth.
Mindy Jensen: I have $839,000.
Jill: And my used cars are apparently very valuable these days, so maybe that gets me up higher.
Scott Trench: Great. Awesome. Okay, so what’s the best way we can help you today? What are your goals?
Jill: So, I mean, we have had a lot of debt. So graduating, you know, my husband and I had between the two of us probably about $90,000 in student loan debt. So we’ve been plagued with student loan debt for a very long time. And we finally got to the point that we got pretty much completely out of debt, and we can really take any bonuses I get and my husband’s income and just use that towards investments. We’ve been wanting to get into real estate for a very long time, but because of the debt, I was never really comfortable doing this. So my last bonus that I got, I paid off all of my student loans, most of my husband’s, and we also had a construction loan on this house that we had to make our HVAC—well, we didn’t have an HVAC, so we had to put one in. We had to make our house a bit more energy efficient, so I paid that off as well. So I finally got to the point I’m comfortable buying a second house, and we want to convert this house into an Airbnb. We live about a mile and a half from a very, very popular college football stadium, which is in walking distance. So people during those 6 home games, it’s about $1,000 a night on average that people get for their houses.
Mindy Jensen: Wow.
Jill: So even if we just rent for the tailgating for the home games, plus like graduation and some of the big events, we think we could, you know, profit about $30,000 on this house. And our house right now is not in the best—we bought it before we had kids, so we didn’t think about neighborhoods, sidewalks, busy roads—so it’s not in the greatest place for us. We want to be in a neighborhood. It’s really cheap here—we live right outside of the very popular town, so our taxes are lower. So I’ve been really reluctant to buy another house. But I think now, with my debt situation, I’m comfortable. So we found a great house, one that needs a lot of work, but the bones are really good. And I actually got advice from one of your recent shows about—it’s a house that had no pictures online, just the front of the house, and we went to look at it, and it’s dated, but the bones are really good. It’s all like cosmetic work that needs to be done, and nobody was looking at the house. It was horribly marketed, so we made kind of a lowball offer on it, and they took it. So now we have the second house, so we think we’ve got a really good value in it. We can renovate it, you know, live in it—which it has a neighborhood, and I think it’s the right place for us to be—and then try to really make profit out of the Airbnb on this house. But it’s still really scary to me to go there. But I still think all the planning and all the numbers work, we just kind of have to, you know, go for it. So I guess, yeah, I just need advice on how to get started and how to make the most out of going in this direction.
Mindy Jensen: Jump in with both feet and don’t look back. No, that’s awful advice. The video you’re referring to is my “leftovers” video, where I talk about—in this market, nothing is sitting around, except every once in a while something is sitting around, and it could be a disaster, or it could back up to train tracks, or it could be overlooked. And those are the properties that you look at. I just today closed on a property for a client that was a leftover that is going to be gorgeous in about 15 hours of elbow grease. And that’s probably what you’re going to be into—maybe a little bit more than 15 hours of elbow grease. But I think I love a good live-in flip.
Jill: But our inspection was yesterday, the guy couldn’t believe that everything works. Like appliances that were 50 years old still work. But like the roof is redone, the HVAC is brand new. All the big stuff was done. It’s just shag carpets and wallpaper.
Mindy Jensen: Oh my goodness. Okay.
Scott Trench: Well, let’s take a step back here. Your current home is going to become the investment property, right? Let’s start with analyzing that one. So the mortgage is $1,690 per month, and— it’s a great rate.
Mindy Jensen: She can rent it out 6 weekends a year for $1,000 a night, approved as a short-term rental.
Scott Trench: So that’s $12,000, right, for 12 nights—$1,000 times 12. Okay, so that covers a big chunk of your mortgage.
Mindy Jensen: Correct. And there’s other opportunities—it’s not just those, but those are the big ones. So I don’t like jumping in with both feet and not really running the numbers. But with this property, if you can rent it for $1,000 a night and your mortgage is $1,650 a month, or $1,690 a month—that’s, you’re going to rent it for 2 nights for the weekend easily, maybe 3 nights, but probably a 2-night minimum. That is a no-brainer to look at and be like, okay, there are other opportunities as well—I will at the very least be able to cover my mortgage on this. But you’re going to be able to do way more than just cover your mortgage on this. There are setup costs—I mean, you have to furnish the whole thing, and that’s something that I think a lot of people who are considering short-term rentals don’t necessarily think about. Scott, have you set up a short-term rental yet?
Scott Trench: Well, I think we start with—Jill, have you analyzed this property? What is your analysis? We have—probably more than “hey, I can get $1,000 on 6 big weekends.” What is the income you think the property will generate? What are the expenses? Have you run that analysis?
Jill: So my husband did some analysis. Yeah, he got on your website, he’s run a few numbers. So he thinks that, you know, we can have monthly, if we rented it out, $1,800 a month, if we did between home games, all the big events at this university that’s very close to us. And then we’ve also like dabbled with Sabbatical Homes—I don’t know if you’ve ever heard of this.
Scott Trench: How much per month?
Jill: $1,800.
Scott Trench: $1,800 per month in income, in short-term rental income.
Jill: Yeah, this is after taking out the mortgage, you know, having like extra costs for renovations or fixing up the house. He thinks it can cash flow $1,800.
Scott Trench: And what would be the gross short-term rental income before expenses?
Jill: I don’t know, he ran all the numbers, so I don’t have it in front of me.
Scott Trench: Okay, I’m going to put in $3,500 as a placeholder there, assuming you’re—okay, I’m going to say you’re assuming you can get $3,500 a month, and that $1,800 of that will pass through as cash flow per month, after your mortgage expenses, after cleaning fees or—
Jill: Cleaning, yeah.
Scott Trench: —maintenance, repairs, all that kind of stuff. Probably—and I’ll assume for now that we’ve got conservative allocations there for CapEx, handyman expenses, those types of things in there as well.
Jill: Yep.
Scott Trench: Okay, you have $250,000 in equity, and you’ll be generating about $20,000 to $25,000 in cash flow per year with $1,800 per month in cash flow. So that’s not bad, that’s a reasonable investment opportunity. Let me ask you this: how long have you lived in that property?
Jill: We are going on 10 years now.
Scott Trench: Okay. Would you buy another identical property? Would you do the exact same thing with $250,000 down?
Jill: I don’t know. This house is a difficult house. So to get it to this point, we had to do a lot of work on it, I guess. It’s on septic, it’s well water—there’s a lot of things that we had to go through, first-time homebuyer education, to get it to the point that it is today. So it was kind of—I probably wouldn’t go for this exact house, but something similar.
Scott Trench: Okay, so here’s why I’m asking this, right—it’s because you have $250,000 in equity that you can sell and tap into right now, tax-free.
Jill: Yeah.
Scott Trench: You will lose that advantage if you move out of the place after 2 years. So my bias in general—oh, sorry, 3 years. That’s right. I have to live there 2 of the last 5 years. Thank you, Mindy, for correcting me there. So that’s my bias, is almost always to have a strong preference towards selling a primary residence rather than keeping it and reinvesting or keeping it as a rental. I think your situation might be different, but—and this is where I’m going to have to—because you have a 1.875% mortgage, but you’re on a 15-year term.
Mindy Jensen: Right.
Scott Trench: So I wonder if you replicated this exact same project with another property, if you wouldn’t have approximately the same cash flow, because your payment will be smaller, but you’ll have a higher interest rate, for example, with it. So I think there’s some puts and takes here that make this really interesting from an analysis standpoint—whether to keep an Airbnb or sell—because you could just sell and then redeploy into an even more ideal Airbnb investment, for example. And you get your gain out now tax-free and get a new basis to start with the new project.
Jill: Our reason for keeping it is this side of town has continued to develop. So when we bought it, it was farmland. You know, it was people who had been here like for 70 years, kind of like live-off-the-land type neighbors who shoot squirrels in the backyard. But we have—like, definitely the area has developed. So they’ve built really fancy condos on one side of us that are going for $600,000. They’re building like a very nice pub in a historical barn across the street from us. So we keep thinking this side of town is developing more and more. And we really like this town, and there’s not a ton of properties that you can have the taxes this low in this location that, yeah, you have like the kind of the same value out of it that we have here. So we’ve always wanted to hang on to the property because we actually have a decent amount of property as well. We have about an acre. So we wanted to see how this side of town developed, and I think our equity will keep going up on that.
Scott Trench: Absolutely. What I’m trying to say, though, is you have $250,000 in equity in this property. You’ve done well. And it sounds like you believe it will be a reasonable investment going forward. Your problem is that in 3 years from now, if you sell the property, you’re going to lose—like right now you have $250,000 in equity that you can harness and sell. Probably isn’t all gain, but let’s assume it’s all gain. If you sell it 3 years from now, you’re going to pay a 25% capital gains tax on that. And that’s going to cost you $62,500. Right? If you sell this property and then redeploy it into an identical investment property down the block, you’re going to get a new mortgage and reset, but you’re going to harness that gain and have a new basis that you’re going to take advantage of with that tax break. And so that’s kind of what I’m talking about here. And that’s the decision you have to make. And from there, we can say, okay, my property is good for Airbnb. We know that. We’re happy with that. You’ve obviously done the analysis and you’ve got good— but can you do better or about the same with a nearby property, for example?
Jill: Right.
Scott Trench: I think that’s your challenge that you need to kind of go through here, because your strategy might be the right one. It just might be—you know what, if I actually optimize, like I bought this house to optimize for my family, in our situation, and it happens to be a good Airbnb, but this one a few blocks down the road is actually even better from an Airbnb perspective with current market values. And for the next 10 years, I’ll be better off with that, make more return, executing the same strategy, but just taking advantage of my tax break. That’s what I’m trying to get at with these questions.
Mindy Jensen: So you said well water, and I don’t know how sulfury your well water is, but when you say well water, I think sulfur water. And I’m wondering how much of an attraction that is going to be as an Airbnb. Is there any plan to bring city water to the property?
Jill: Not at this moment, but we do have lots of filters on it. So it—
Mindy Jensen: It’s okay.
Jill: You don’t notice it now, but it took us a while to figure out the right combination of filters and softeners to get it.
Scott Trench: I grew up on well water.
Jill: Do people not like well water? Yeah, we drink it.
Mindy Jensen: No, it’s disgusting.
Speaker 2: No.
Speaker 3: Oh.
Mindy Jensen: If you didn’t grow up like—
Scott Trench: It’s totally normal for me.
Mindy Jensen: And there’s different kinds of well water. No, you’re weird. There’s different kinds of well water, Scott. And some of them are like, oh, okay, I didn’t even know this was well water. And some of them are like, is there a dead mouse in this water? It’s disgusting. My grandma had that kind of water. I never wanted to drink water at her house because it was just so gross.
Scott Trench: I always look forward to having a big glass of water from my parents’ house.
Mindy Jensen: You probably have. Yeah, there was something dead in my grandma’s well, I think. Anyway, yeah, so if you’ve figured it out, I would just be really, really sensitive to any reviews that you’re getting about that. And maybe have a trusted friend come over and taste that water. But like Scott is saying, you know, you didn’t say that this is—I just always assumed that it’s in the middle of town when people are talking about this. It’s got an acre of land. Who’s going to take care of that acre of land? What is going on with that acre of land? Since it is near a place that holds football games, are people going to host big parties at your Airbnb? Could you be making your neighbors really upset?
Scott Trench: Well, if she’s got an acre, then she’s got a big plot of land and they can throw even bigger parties. She can charge more.
Jill: They’re very like, “it’s your land, you can do what you want” kind of person.
Mindy Jensen: Okay. Okay. That’s good.
Jill: They’re shooting squirrels in the backyard, so it’s no problem. Yeah. No, we’re right over the border into the township, let’s say, and it changes pretty fast. But because this town is so popular, it’s kind of spilling out this direction. So there really is no more land in the town. Everybody has to buy land out here. So that’s why we think it’s valuable. But I think a lot of those concerns you have are something to consider.
Scott Trench: I think you got a great thing here. I would consider—I would sit down and do the exercise and let your math tell you what it needs to. But I would consider selling the property, harvesting your capital gain, and then buying one or maybe 2 additional Airbnbs that are perfect for your strategy, right? Maybe there are other properties nearby, even closer, that don’t have a yard to maintain and all this other stuff. And your yield goes up even further with that. If you’re able to redeploy the equity into that, just go through the exercise. You may determine, let’s keep it with that. But that’s a big lever in your financial position right now.
Jill: Yep. Yeah. The other thing is within the town, you’re not allowed to have Airbnbs unless they’re part of your house, unless you’re living there. So that’s another thing. So there’s a limitation on how many Airbnbs can be in this town, which is maxed out, and now you have to be living in the house. You can rent part of your property. So it’s actually—
Scott Trench: So if you’re one block away from the town, you’re not subject to that law and you have it.
Jill: Correct.
Scott Trench: You’re now supposed to be—
Jill: I have some loopholes, but yeah, I totally get what you’re saying.
Mindy Jensen: And there’s, you know, another thing to think about—the cost of furnishing it. I would definitely go after the college clientele and the college decor, which should be actively available in, yes, thrift stores and garage sales in and around—I don’t know if you guys have, do you call it “hippie Christmas,” where all the college kids throw all their stuff away at the end of school?
Jill: Graduation weekend is one of our favorites. We get lots of new stuff.
Scott Trench: A long thin table, you know, but you’re back.
Jill: Yep. Okay, great. Beer pong tables. Yep. We got it covered.
Mindy Jensen: Perfect.
Speaker 1: Well, great.
Scott Trench: And so let’s talk about the next, the new property that you guys are buying and your intentions with that one. Is that just going to be a primary residence, or is there a longer-term plan for that?
Jill: For now, yeah. Well, I mean, it’s a little bit of a question mark. I don’t like to be locked into places very long. So I mean, we’ve gone abroad twice now. If it was up to me, I would probably never settle into one place, but I think for my family, they need some stability. So I want to get into a neighborhood, but I’m not sure if I want to stay there forever. So our idea was to buy this house, renovate it, make it, you know, either sellable or rentable, either one. We kind of were open to either. Live there for the 2 years and then kind of, you know, either rent it or sell it and then move to the next property, or abroad, or wherever we want to live at that point.
Scott Trench: Can’t argue with a live-in flip. Sounds like you’ve really done your work, and it’s mostly cosmetics. You’ll be able to move through it really quickly. And Mindy, you know, Mindy is an example of how profitable that can be.
Mindy Jensen: I’m going to change your mind a little bit and say you only have to live there for 1 year if you are going to rent it out. You have to live there—well, you don’t have to live there—you have to live there for 2 years to get all of the capital gains exclusions fully tax-free. But if you’re going to rent it out, it doesn’t have to be a full 2 years. It can just be 1 year.
Scott Trench: Can you move in and then immediately rent it out for 6 months while you travel the world? That’s still your primary residence. Your mail goes there. Then come back and spend the next 6 months. Does that technically meet the requirements of that being your primary residence during that period?
Mindy Jensen: I would not say to do this, because that sounds a whole lot like mortgage fraud. It has to be your intent to live there. And maybe you could have a roommate, but if you rent the entire house out, then you have no place to live, and therefore it isn’t your primary residence.
Scott Trench: Yeah. Obviously, we don’t want to do anything illegal. I’m just asking the question because I know that some—I have friends and family, for example, who live abroad, and they need a US residence because they need to pay taxes in the US and get their mail to the US and stuff. So one of these individuals literally rents a place nearby to be his house while he is abroad.
Mindy Jensen: I don’t—but that’s not mortgage fraud because he’s renting.
Scott Trench: Fair enough. Yeah, I don’t know the answer to it. Just something to explore. You might—maybe you can have your cake and eat it too, as long as you’re traveling or vacationing for a portion of the year, and not living in these other places, and are there for most of the year.
Mindy Jensen: Yeah, well, I think she just needs to have a place to come back to. So if she rents the entire house out, then she doesn’t have a place to come back to. Whereas if she rents one bedroom out, she has a place to come back to.
Scott Trench: Or if it’s prepared for short-term rental.
Mindy Jensen: Yeah, yeah, you can short-term rent your house out. That’s just—you happen to not be there, so you’re making money while you’re gone. That’s different.
Jill: Okay.
Mindy Jensen: Let’s see. Let’s talk about this new house. You have basically cosmetic stuff to do. That’s very exciting.
Jill: Mm-hmm.
Mindy Jensen: The big things are done. That’s super exciting, ’cause A, it’s really expensive with inflation, and B, you can’t find anybody to work on anything. So the fact that you have all the big stuff done—I mean, anybody can install flooring. It’s not that hard.
Jill: Mm-hmm. Yeah, so it’s mostly floors, walls, the kitchen’s dated, but actually everything works in it, so it is usable. It’s just we probably want to get, yeah, just a facelift so it looks a bit more updated. But other than that, the outside’s nice. When they did things in this house, they did it high-end—like the windows are all Andersen windows from 7 years ago, there’s no drafts in the house, no creaks in the house. It’s pretty unbelievable. And the neighborhood’s really nice. So, yeah, I think I actually am worried we fall in love with it and never leave, actually, which was not originally the plan.
Mindy Jensen: Well, you have to live someplace. If you like where you live, that’s great.
Jill: Yep. But we have an out if we want it, I suppose.
Mindy Jensen: I think it’s interesting—I know this is a side note—but I think it’s interesting that they didn’t get any interest on this house. You said there were no pictures up on the MLS.
Speaker 3: Mm-hmm.
Mindy Jensen: I wonder if they went with an agent who doesn’t offer full service in exchange for a discounted price for the agent agreement, and then ended up costing themselves a lot of money because nobody came to see the house.
Jill: Yeah.
Mindy Jensen: It sounds like a case of, what is it, jumping over dollars to save pennies. Here’s a fun fact.
Jill: Yeah, I mean, we looked at—we’ve given offers to other houses and it’s crazy in this area. I mean, it’s down to cash offers, no inspection, and we’ve lost multiple other houses that we just weren’t willing to waive inspections on old houses. And this house, there was another offer, but it was an investor, and they wanted to go with a family that was actually going to live in the house. But we had the inspection, we didn’t waive that. And yeah, we made an offer 10% below listing, which apparently the whole realtor office was shocked and celebrated, that this went through as the first below-offer acceptance that they’ve had in a year. So pretty proud that we got it.
Mindy Jensen: That’s an awesome story, because in this market, nobody is doing that.
Jill: Yeah, but it definitely was. I mean, we found a new realtor. So we had a realtor showing us houses that really didn’t know anything about investments, and we couldn’t really get any good information. And I happened to run into someone at my daughter’s preschool who flips houses, and she has like 7 rentals in town. And within her first 3 houses she showed me, we made 2 offers on them. So she knew exactly what we were looking for. She kind of knew the houses that had value in them. So it really—finding a good realtor, I think it makes all the difference.
Speaker 3: Yes.
Jill: If I can give a plug for realtors.
Mindy Jensen: Yes, you can. You should. Finding a great one is the key to your investing success, the key to your purchasing success. You can still find deals in this market. Now, you can’t find deals in this market the day they come on the market. This was a leftover property, and it sat there for a while. And the reason that it’s out there is because they didn’t get a good real estate agent. And that’s not your fault.
Jill: Yeah.
Mindy Jensen: That’s their fault. They should have chosen somebody else. That’s exactly what happened with the property that we closed today—the listing agent didn’t insist that they clean the house. It was so filthy.
Scott Trench: Well, I think your real estate approach is awesome. You’ve made hundreds of thousands of dollars in your primary residence. You got a great option as an Airbnb that seems pretty well thought out. I do think you should go through the exercise of at least looking to see what it would look like to sell and redeploy into similar properties, for example, and think about that tax hit—how that would work over a 5- or 10-year period—because you may be able to get what you’re looking for there without that. But it may be that the nuances of your house are perfect, being just over the township line and enabling you to Airbnb, and having a perfect thing there. So that may be great. It may be an exception to that where you should keep the house. Your new strategy of live-in flip, you can’t argue with that. It sounds like you really did a lot of research and found exactly what you’re looking for. So I think that’s awesome. Is there another part of your finances or your strategy that you’d like to talk about besides the real estate today?
Jill: Well, I think, I mean, my strategy before the real estate was just kind of slow and steady, I guess, investing in my retirement, maxing it out as much as I could. We did start the brokerage account because I feel like all my money was tied up in retirement that I couldn’t access until I was a certain age. But now I don’t know if I just keep that going with my investments, or I try to kind of cash flow all these renovations as quick as I can and kind of, you know, I guess scale back on the investment piece. So I guess, how do I balance the retirement accounts, the after-tax brokerage account, 529s—like all these other things we invest in—with the real estate piece?
Speaker 1: Right.
Scott Trench: I think if you’re going to have a rental property, the vacancy is going to kill you. So I think you make sure that you can move into your new property, and that your current one is able to be rented out. And that’s the first priority, because you’re going to be losing $3,500 a month, or whatever your gross rent is, every month that that place is vacant. So you have no choice there. That has to be, I think, your top financial priority.
Jill: Yeah.
Scott Trench: Once that’s done, I think you have, it sounds like, the luxury of going right down the stack of maxing out your 401(k), maxing out your HSA, maybe contributing to other retirement accounts. Your husband has a business, so there are options to really sock away a lot of money in pre-tax retirement accounts, like a self-directed IRA.
Mindy Jensen: Mm-hmm.
Scott Trench: So I think those are all options to you, but I would also observe that the bulk of your position is currently in retirement accounts and then currently primary home equity, soon to be rental home equity. So you’re not able to really access any of that except for the $250,000 in your house, which is why I think there’s a big decision there for you to sit down and do that analysis. So I think it’s a matter of what you want. Generally speaking, we hear people in a situation similar to yours that parallels yours saying, I want more flexibility in a general sense. And if you want that, then you’re going to have to make trade-offs by not putting quite as much into the retirement accounts as you are capable of right now, paying taxes now, and generating the liquidity with that.
Jill: Yeah, I mean, that was my worry, because I’ve been working in corporate jobs for a long time. It feels like 20 years, since I was 20, and it’s exhausting, and I work pretty crazy hours. And eventually I would like to have the flexibility that if I don’t want to work something as intense as I am today, I can do that, whether that’s scaling back and doing part-time or consulting or something more entrepreneurial. I want to have options. And so that’s why I kind of wanted to diversify and have this rental income as well, so that I can access some of the money now instead of waiting till I’m 59 and a half.
Scott Trench: Yeah, I think you have to look at it and say, okay, let’s say 5 years from now, where do I want to be? You’re going to generate probably $100,000 in investable income after your expenses, per year, over the next couple of years, right? Right now, huge percentages of that are going to go into your 401(k), Roth IRA, your rollover IRA, all of those different types of things. And it looks like maybe $40,000 or $50,000 is going to go into your after-tax stuff. So that’s going to give you—
Mindy Jensen: Yeah.
Scott Trench: $250,000 in cash that you’ll build. So by that point, you’ll have $600,000, $700,000 in assets outside of your retirement accounts in real estate and investments, if things compound and go reasonably well, right? I don’t think that that’s flexibility in your situation. I don’t think you’re going to feel comfortable saying, I’m going to stop working now, based on your spending. So I think you should back into that and say, what would flexibility look like to me in 5 years?
Jill: Mm-hmm.
Scott Trench: Is it $1 million in after-tax investments? Is it $1.5 million? Whatever. What does that look like? And is my position backing me into that? And I think that will involve hard trade-offs about how much you contribute to retirement accounts versus how much you put into real estate versus how much you put into after-tax brokerage versus how much you put into cash. Because you have plenty of income, but you just can’t go quite all the way down the stack and max out everything in your pre-tax accounts and then have so much left over that you can still have financial freedom outside of those right now.
Mindy Jensen: Okay, so I have a little exercise based on your 401(k) only. The rule of 72 says that essentially your investments will double every— this is a rule of thumb, it’s not guaranteed, it’s not set in stone, past performance is not indicative of future gains, all the disclaimers abound. But in 2022, your balance is $440,000. In 2030, your balance will be roughly $880,000. In 2038, your balance will be roughly $1,760,000. In 2046, your balance will be $3,520,000. And in 2054, in 32 years, your balance will be $7 million, roughly, in your 401(k), assuming you don’t put any more into it, assuming the same returns that we’ve seen historically. That’s a lot of money. Now you’re getting into RMD territory. That’s just if you don’t put anything else in there. Do you have a company match?
Jill: Yes, a very good one.
Mindy Jensen: I would continue to put in, if I was in your position, I would continue to put in to get the entire company match. And if you have to contribute over the course of the year, I would stagger it out over the course of the year. Because you want to invest in real estate, I might pull back a little bit in the 401(k) so that I could invest in real estate as well. I don’t think that you are set in stone in your 401(k). I would still— I mean, personally, I would continue to invest all— I’m still maxing out my 401(k). Did we ask how old you are?
Jill: I don’t think we asked how old you are. I’m 40.
Speaker 3: 40.
Mindy Jensen: Okay. So I’m 50, and I’m still maxing out my 401(k), just because there are ways to get to it before you are 55 or 65. The Mad Fientist has a really great article about accessing your retirement funds early. I’ll link to that in the show notes, and I’ll email it to you when we’re finished here. But there’s lots of ways to access your retirement funds. The Roth conversion ladder, the 72(t)—is that the substantially equal periodic payments? He’s got 3 or 4 different options, including just taking it out early and paying the penalty. I just still like that original house as an Airbnb with all of the stipulations that you have. It is so close, there aren’t a lot of competition, so you would have a lot of demand for it. I think that perhaps your husband’s idea that $3,500 as the income is maybe a little bit low. Always better to run the numbers conservatively, because if he’s right, great, it still cash flows. If he’s wrong and he’s bringing in more money, well, oh shucks, I brought in more money than I thought I was going to. Who’s gonna say no to that? Oh no, don’t pay me, ’cause that’s too much for this month.
Jill: Mm-hmm.
Mindy Jensen: So I think there’s a lot of great options. But it comes down to— we’ve recorded a couple of shows this week, and we’ve been using a fun little P word, a fun little 4-letter word called plan. So I think it takes some time to sit down and talk about your financial plan. What is it that you want? When do you wanna retire? When do you and your husband want to retire? Is it in 5 years? How much money do you want to have in—
Jill: Mm-hmm.
Mindy Jensen: Whatever time, let’s call it 5 years. How much money do you wanna have in 5 years? Then you can step it back and say, okay, in 5 years we want this, and we have to step back to—these are the money moves that we need to make now.
Speaker 2: Mm-hmm.
Mindy Jensen: Or 10 years or 20 years or whatever it is. But sitting down and having a plan will help. And it’s not a 5-minute plan. It’s not a come-up-with-it-in-5-minutes sort of thing. It’s not even a 1-day plan. Just, you know, start having the discussion with him. What are you thinking about? What am I thinking about? Let’s get on the same page. Let’s figure out how to work backwards from that and then move forward towards that goal, and continue thinking about it, continue fine-tuning it and honing it depending on, you know, because sometimes the stock market’s going to be down 15% in one quarter.
Jill: Yeah, it’s rough looking at my accounts. Real estate looks good.
Mindy Jensen: Don’t look at them.
Jill: I try not to, but it’s been bad.
Mindy Jensen: Yes, I hear you. I hear you. I just don’t look at them. But I hear all these people talking about, oh, it’s down, it’s down. I’m like, well, I’m not investing for tomorrow morning, so I don’t need to look at them right now.
Scott Trench: Well, what else can we help you with today?
Jill: No, I think it’s kind of this whole planning piece. You know, I think we were just overloaded in retirement accounts, at least in my opinion, and I felt like we couldn’t access them. So I feel good that we’re moving more towards the real estate piece. I guess just planning the next 5 years, 10 years, 15 years. I mean, we always said 15 years we would try to retire. Both of our—all of our parents are in their 65, 66, and still working full-time with no real intent to retire. And we don’t really want to do that. We really want to, when we’re 55, be able to scale back. I mean, our kids will be in college. We have lived abroad twice. I want to continue to live abroad, and this time get to enjoy it instead of working the whole time. So it’s just kind of— I think my husband wants to make sure we enjoy today, and I’m like, just shoot, do what we need to do to prepare for 55, so we can really completely be financially free and do what we want to do. So it’s just kind of balancing those 2 things, I think, and how to do that.
Scott Trench: Yeah, I think Mindy’s advice is spot on. Put together a plan. Say, here’s where I want to be in 3 years. Here’s where I want to be in 5 years. Here’s where I want to be in 10. Here’s where I want to be in 15.
Speaker 1: What is it?
Scott Trench: Here’s a portfolio that is supportive of that, and my current path is pushing me here. What adjustments do I need to make to get to exactly where I want to be, backing into that portfolio? Let’s say it’s $2.5 million in 12 years, to cut 3 years off of your 15.
Jill: Mm-hmm.
Scott Trench: Right, what’s that portfolio look like? Probably I’m going to be mostly in retirement accounts if that’s the case, right? Because you’re going to be close to that 59.5 age point. You only need to bridge it for a handful of years, less than a decade, so you can go heavy into retirement accounts if that’s the plan, and continue doing that, as long as you’re putting, you know, 30%, 40%, 50% of that cash flow into your outside after-tax brokerage accounts, real estate, those types of things. And I think you’ll probably be able to make it and have a strong cash position.
Speaker 2: Mm-hmm.
Scott Trench: So if it was 5 years, we need to really shift that, though. And we need to really pull it out of the retirement accounts and into stuff that you can access right now. But it’s all about what that plan looks like.
Jill: Yeah, I can’t get my head around 5 years, I guess, coming from a family that doesn’t think about vacation days or anything. They’ve never taken them. They’re gonna die working. 55 to me seems like very—
Scott Trench: You can make a step change, a chunk change in your finances in 5 years with intent and grind, especially with your income.
Mindy Jensen: Yeah.
Jill: So true.
Scott Trench: And I could see a situation—how’s this for 5 years, right? You are going to generate $500,000 in investable liquidity from your job and income and the spread there. And your husband is just starting a business, right? Probably your idea is that that business is not going to be terrible and generate very little income for the next 3 to 5 years. You’re probably starting it because you think it will do something positive over time.
Jill: Yeah.
Scott Trench: So, okay, I’m sitting here in 5 years, I’ve generated $500,000 in investable liquidity, bought a couple of rental properties and some after-tax stocks, continued to take the match in the 401(k). Now my net worth is sitting from $800,000, it’s at $1.3 million, plus I get whatever I’m adding to the pile from the business. And at that point, things may look very different from a 5-year perspective if you’re intentional about this as a goal from that point in time.
Jill: That’s true. It seems aggressive, but I think we could probably do it. It’s just, yeah, I don’t—I’ve been working so long, I don’t know what it looks like to even think about not working in 5 years, but—
Scott Trench: Well, that’s what our job is to do. 5 years, I think, is a really reasonable amount of time in a situation like yours, or for someone who’s willing to make big changes to get a step-function change in your situation. Is it enough to go from zero to multimillionaire retiree? No, but it’s definitely enough to go from zero to maybe a few hundred thousand in net worth for somebody, or from a few hundred thousand to well over $1 million, in your case, with substantial actual passive cash flow, if you’re intentional about it and that’s your plan.
Mindy Jensen: Intentional and plan. I like those 2 words, Scott. Okay, Jill, well, this was a lot of fun. I really appreciate your time today. I’m super excited for pictures of your house. Please send them to me, your live-in flip, and hit me up with any questions you have about it, because it can be super fun. And every once in a while you will hit a brick wall and be like, oh, what am I getting myself into? So if you need words of encouragement, reach out, because I have them. It’s not always pretty, but it’s really fun cashing those big checks when you sell it.
Jill: Have you seen shag carpets that have rakes in the rooms that you have to rake the carpet?
Mindy Jensen: I usually rip those out the day I close.
Jill: That’s actually in good shape. But it was funny—I was like, why is there a rake? And the realtor’s like, yeah, that’s how you don’t vacuum shag, you rake it. So, oh, it’s gonna be an experience.
Mindy Jensen: When you pull it out, have a mask on, because, like, one of those big breather masks, because all the garbage that they didn’t rake, didn’t vacuum up, will be there.
Jill: Good to know.
Mindy Jensen: Gross.
Jill: See, learning already.
Scott Trench: Smells like money.
Mindy Jensen: Yuck. Okay, Jill, we will talk to you soon.
Jill: All right. Thank you.
Mindy Jensen: Thank you. All right, Scott, that was Jill. That was a lot of fun. I really, really enjoyed your take on where she’s going, and I just always get something out of these episodes. I had a lot of fun with her today.
Scott Trench: Yeah, I think it was a good discussion. I think that she’s made a lot of really smart decisions. It sounds like they’ve really come into a really good income situation. I’m excited to see how her husband’s business takes off. I’m excited to see what they decide with the primary residence that they currently have, what they’re going to do with that. And I’m excited to see how their new live-in flip goes. So, I mean, they’re doing all the right things. And I think they’re going to build wealth a lot faster than they think over the next 3 to 5 years.
Mindy Jensen: I agree. I think they have a lot of things going in their favor. And number one is that they don’t have debt. And they have a great income. They spend less than they earn. She has an impressive income. And then she has things being taken out of her income, out of her check before she even sees it. I love that tip, that tip right at the very beginning of the show. Love that. Talk to your HR department and see what you can get taken out of your paycheck, and see if there’s a discount for having that done.
Scott Trench: Yeah. By the way, let’s call something out here. She just finished paying off a lot of debt, has put everything into retirement accounts at this point, and has the home equity. This is really an inflection point for Jill, where she has created a really good situation and has the ability to invest on a go-forward basis. I think that she’s like, what are you talking about? 5 years from now, I’m going to have a really good outcome here, or have a lot of optionality. Well, I think that’s right. I think you can’t count on it, but you can say, looking back at stock market returns over the last 150 years, the compound annual growth rate is close to 10%, it’s a little less than 10%. So you say, okay, I got $800,000, I’m going to save up $100,000 a year for investable liquidity, and I’m going to make a 10% return. So that’s $180,000 in wealth building going on every year with the $100,000 that I’m building compounding. Now, then that’s going to go up, and then I’m going to increase my wealth by another $18,000 on top of that $180,000. So just under $200,000 the next year, and then $220,000, and then $240,000, and so on and so forth. And that compounding—and again, that’s going to happen in an average long-term environment, it may not happen next year, the next 5 years might be terrible—but why would you build your model on something that is drastically different from the long-term averages, and plan for what you think is a reasonable set of events to happen downstream? And if you’re used to having a huge debt burden, the opposite effect is taking place. You’re getting interest accruing against you, and you’re pushing the ball up the hill, or the rock up the mountain. And then when you get on the other side and you start investing, it’s starting to roll down the mountain from that. And I think that’s what a lot of people can maybe take away from this: yeah, it sounds crazy, but once you’re out of debt and beginning the investment process and thinking through it really intelligently, I think you have a really good shot at compounding those gains and snowballing over a fairly— and you should bake that into your plan, right? Because what’s at stake here is prime years of your life doing what you want to do. So that’s the consequence of getting this right, right? There’s a consequence to being too aggressive and running out of money and creating a problem. There’s also a consequence to not being realistic and being way too conservative and not doing the things you want to do earlier in life when you want to do them.
Mindy Jensen: I could not have said it better, Scott. Absolutely, 100% agree. What is the opportunity cost of not being able to do the things that you wanna do because you’re busy paying off debt? It just goes back to that—spend less than you earn, invest wisely, earn more. There’s a lot of things that you can do to game the system just by being intelligent and being conscious with your spending. Okay, Scott, should we get out of here?
Scott Trench: Let’s do it.
Mindy Jensen: From episode 310 of the BiggerPockets Money Podcast, he is Scott Trench. Here’s a fun fact.
Speaker 3: You’re not just buying a house. You’re marrying the neighborhood, the commute, the noisy street, all of it. Till death or a very motivated realtor do you part. That’s the kind of real talk you get on Own It with Angie Hicks, the new podcast from Angi co-founder Angie Hicks. She sits down with designers, agents, and everyday homeowners to talk about what actually matters when you buy, renovate, or just try to survive your to-do list. New episodes every other week.
Mindy Jensen: Subscribe to Own It with Angie Hicks today. And I am Mindy Jensen, saying, give me a hug, ladybug.
