365: Finance Friday: How to Become Real Estate Ready in 2023

Speaker 1: Welcome to the Bigger Pockets Money Podcast, Finance Friday edition, where we interview Remy and talk about becoming real estate ready.
Guest: I would love to invest in real estate. The area that I live in is a high cost of living area, so property tends to be relatively high. With most investment loans being 25% down, that’s a significant chunk of money that I would have to save up. Mostly looking at this as a 10 to 15 to 20 year uh return basis, like, how do I get from here to there? I think I’m in a relatively good position to be a millionaire by the time I’m 35. I’m not keen on making a move on my home, my my current primary residence, but considering, you know, it could have a big financial impact on my positioning, is that something I should consider?
Mindy: Hello, hello, hello. My name is Mindy Jensen and with me as always is my nerdy co-host, Scott Trench.
Scott: 3.14159, mathletes do it all the time.
Mindy: Thank you, Mindy.
Scott: Thank you, Mindy.
Mindy: Please tell me you had that on a t-shirt.
Scott: No, I I I I unfortunately not, not yet.
Mindy: Not yet. Not yet is right. Christmas is coming, Scott.
Scott: Trench’s T’s, yes.
Mindy: Hah!
Scott: That was one of my first business ventures that lost a large amount of money. Um, every once in a while, somebody views the Trenches T’s Facebook site or something like that. I don’t think there’s anything for sale though.
Mindy: Oh, you should make them. We should talk afterwards, Scott, because you can instead of buying inventory, you can just have it ready for somebody to order.
Scott: Mm.
Mindy: We’re going to do that. I’ll make you a millionaire.
Scott: All right.
Mindy: Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.
Scott: That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate or start your own t-shirt business. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.
Mindy: Start your own T-shirt business. That is a story for a different day. Today we’re talking to Remy, and Remy would like to start investing in real estate. So we are going to get him real estate ready. But before we do, my attorney makes me say the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott nor I, nor Bigger Pockets is engaged in the provision of legal, tax or any other advice. You should seek your own advice from professional advisors including lawyers and accountants regarding the legal, tax and financial implications of any financial decision you contemplate.
Mindy: We want to welcome Remy to the show. Remy is 26 and January 2023 is going to be a big month for him. His PMI drops off his mortgage and his car payments end freeing up about $700 a month, which is good because right now his biggest pain point is cash flow. Basically, he doesn’t have any due in large part to living in a high cost of living area. Remy, welcome to the Bigger Pockets Money podcast. I am so excited to talk to you today.
Guest: I’m excited to talk to you as well. Thanks for having me.
Mindy: Well, let’s jump into your numbers. I see a salary of about $5,600 a month, additional income $650 in rent from your girlfriend, $100 a month from fitness coaching, and a bonus that is generally 20% of your salary paid in a lump sum at the end of the year, which is where we are right now. Monthly expenses are about $5,500 a month. That’s where that cash crunch is coming from. A mortgage of 2076 including property taxes and $192 in PMI, which we just said is going to be leaving in January. HOA of $269 a month, utilities 200, home owners insurance 276 a year, gas $180 a month, restaurants 250, subscriptions $6, nice job on keeping that low. Gym $120, shopping 150, car 500 a month, again ending in January, car insurance 1149 a year, bars $120 a month, phone 45, miscellaneous 500-ish with a question mark, so you know I’m going to come back to that. Groceries $400 a month. Uh average monthly spending this year is $5,500 a month, and like you said earlier, you have some big capX numbers this year which should go away next year, $7,000 for a furnace. You don’t get a furnace every year. Hopefully, fingers crossed. Um, some uh house renovations, dog vet bills. So, overall, I don’t see anything remarkable in your expenses. Uh investments, we have $15,000 in an after tax brokerage, 4,400 in a Roth IRA, $60,000 in a 401k split between a traditional and a Roth, $4,000 in a retirement health plan, $30,000 in a cash position that you said was an emergency fund, 5,500 in an HSA, 3,000 in crypto, which I believe is about 3,000 too much, 320,000 in a mortgage at 3.125% interest, which is an awesome interest rate, a $1,500 car loan at 4% which will be paid off in January. So, Remy, what does your money story look like and what are your biggest pain points and how can we help?
Guest: So my money story really starts probably when I was pretty young. Uh, my parents always did pretty well, uh until my father lost his job in the kind of the financial crisis of 08. Uh kind of struck a cord with our family. Uh led to not a big financial rift, but uh significant enough where it caused some pain points in our life. Um when I got to college, I started to study finance, uh took a financial planning course, realized a lot of the things that uh most people get in trouble with were pretty easily avoidable. Um so I started doing that. I I now work for a relatively large financial institution where I try and help a lot of people with that or uh we try and help a lot of people with that. So, uh that’s really where my money story lands.
Scott: Awesome. What are the um prospects for your current career? Your situation strikes me as one where you’ve got great money fundamentals. There are no glaring issues here, but you are treading water is my my initial my my reaction. You’re not accumulating a large amount of cash and that seems to be, jump out of me as as the primary issue we need to discuss today, of how do we ignite that that engine of cash accumulation so that you can begin investing. One component of that is your job. You may be at this financial institution doing a role that is likely to translate into significant um income growth over the next three to five years as you advance through the ranks there, or you may be kind of just kind of uh you may you may not be clear on that. So that that that is a major impact I think on on the remaining part of the discussion. That’s why I’m asking that question.
Guest: Sure. So my career prospects as they sit right now, uh I’m in a great position to advance in my career. Um currently looking at positions within my company to move around. Uh probably not necessitating a huge increase in in salary or increase in pay in general uh over the next year or two. Uh but the prospects are good for probably 25% earnings growth over the next 10 years or so. Uh so a really good position to uh start to accumulate more uh salary income, more bonus income uh over the next few years, especially as the pay grade start to get higher. Uh my company tends to do more bonus-based compensation. So the salaries grow relatively steadily, but the bonuses increase uh significantly. So uh that’s really where a lot of uh folks at my company start to make uh very good money as they advance.
Scott: Um and and where do you want to be in the next couple years? What’s the best way we can help you? I guess there’s a couple of things there so tell me if I’m wrong.
Guest: Yeah, the best way that I’m that I’m thinking you can help me today is positioning myself to where I can get real estate ready. So I would love to invest in real estate. Uh the area that I live in is a high cost of living area, so property tends to be relatively high. Um with most investment loans being 25% down, that’s a significant chunk of money that I would have to save up. Um mostly looking at this as a 10 to 15 to 20 year uh return basis, like, how do I get from here to there? Um I think I’m in a relatively good position to be a millionaire by the time I’m 35, um but is there positions that I could take to accelerate that sort of thing. You know, I have a high equity position in my home for only having it for two years. Um so I’m looking at is that something that I want to make a move on? I’m not keen on making a move on my home, my my current primary residence. Um but considering, you know, it could have a big financial possession or financial impact on my positioning, um is that something I should consider, that sort of thing.
Scott: Well, great. I I I think I think what I would love to do is start with the basics and look at, you know, what how much cash are you going to accumulate on an annual basis given your current income and your current expenses. Um and go through that because that that I think is is important here. Um I’d love to look at the prospects for growth in your job within the next 12 months as well. And then, yeah, I think that’s right. Let’s let’s take a look at the house and the housing um situation and and there’s some there’s some ideas there. Um, so that’s that sounds great. Do you want to start with expenses and Mindy, do do you have anything that that jumps out to you?
Mindy: I have a couple of things that that jump out at me and they are insurance. Your homeowners insurance feels low at 276 a year. So, typically a mortgage will be principal interest, taxes and insurance. I want to make sure that you’re not double paying insurance. And if you aren’t double paying insurance, like I think mine is $600 a year, and I go for a super high deductible. So, my house is a little bit more expensive than yours, but it isn’t like I don’t think that is the cost what really generates the uh cost of the homeowners insurance and I have like, I asked for a $25,000 deductible and my insurance company or my mortgage company made me drop it down to 10,000. Um but I think yours is really, really low. So I would just double check that your home owner’s insurance is actually $276 a month. Your car insurance on the other hand seems kind of high. You are younger than me and your male, but at 26, your car insurance should drop significantly. Also, if you get married, your car insurance should drop again. I would have that recoted, especially if you’ve been with the same company for a while. Now that you are older in quotes, um and more mature and responsible, you should see a deduction in a reduction in your annual cost. I would also uh what kind of car do you have? Do you have like a fancy car, a sports car, or do you have like a boring car?
Guest: I have a Jeep Grand Cherokee.
Mindy: Okay, that might be uh big on the theft list which would increase your car insurance, but also I think that you should just get it requoted because that seems kind of high. Um and different areas of the country have different costs. Um but overall, I would wonder what that 500 in miscellaneous is. I don’t see a lot of really crazy expenses.
Scott: Could you give us information about what the homeowner’s insurance is?
Guest: Sure, exactly. That’s where I was going next is the two insurance pieces. So, the homeowners insurance at 276 a year, uh I’m sorry if I said a month. Um a year is the is the quote that I or the um the payment that I make. Uh that is for the interior of my condo. So, um my HOA covers a master insurance policy for the building. So they of uh fires, floods, that sort of thing, it protects my my property value, my home insurance or my home value. Um the property on the inside, which is like couches, furniture, TVs, um you know, toilets that are inside, like that kind of stuff is covered on the home insurance that’s $276 per year and I think I believe I have $50,000 in coverage.
Mindy: That being a condo explains a lot. Okay.
Scott: Do you have $50,000 worth of stuff?
Mindy: That’s the minimum.
Guest: Yeah, I believe that’s the minimum, yeah.
Mindy: I argued with my condo insurance company as well. I’m like, I have like $1,000 worth of stuff in here. They’re like, well, it would cost more to get it back.
Scott: So, so here here’s where, so, and and this is going to be, this is going to, you know, probably get some people fired up, but like, I at 26, I didn’t have $50,000 worth of stuff in there. The most valuable thing I owned was my suit at that point and my computer. So, if this is not required, maybe you don’t, you don’t have it. I I don’t think it’s something that I would have done at that point. I I don’t think I, you know, I, I guess I do have renters insurance now, I’m a renter, um, which which covers some of the same things, but something to consider.
Mindy: Interesting.
Scott: Okay. Scott, I think we should applaud him for having a approximately $120,000 in investments. Oh, yeah. Even though 3,000 of that is crypto. Sorry. We should we should take a moment and say you’re doing great. Um, there’s a lot of fundamentals that are going really wonderfully here. I just jump immediately with my brain to, okay, problem here, not having enough cash flow. Let’s go let’s go and attack it. Um but yes, we should take a moment and say you’re you’re doing fantastic. You you clearly audit path to become a millionaire by 35 like you said. Um assuming the market gives us reasonable historical tail winds. Um so I think things are a lot of a lot of things going right. Hope you can forgive us for going straight into the the issues here.
Guest: Sure. Yeah, and and uh if I can just clarify a little bit on the cash flow. So, you listed the income as 5,600 a month. Uh most of that is dictated by the fact that I have over the, you know, maybe up until about four or five months ago I’ve been socking a lot of my income away into retirement accounts, thus the relatively high income, or I’m sorry, investment balances. Um so my gross income for a month is right around $9,100 a month and after backing out things like uh health insurance, uh 401K, Roth, uh HSA balances, it comes back down to about 56. So I intentionally do that as a sort of a forced scarcity metric. Um I have since kind of reallocated some of that to try to accumulate more of a cash position. And especially now that some of these big payments are going away like the car and the PMI, I’m really considering how much of that I’m putting into Roth, especially if I’m considering financial independence at, you know, say 35 or 40 versus um, you know, the traditional 60.
Scott: Love it. I think that’s a great that we should talk about that. That’s a great um situation or or or challenge there. You’re you’re right in this frustrating spot um of having a good income and having pretty pretty reasonable expenses associated with that. But being forced to make tradeoffs that are hard for a mathematically oriented person who works at a large financial institution um to to to consider there, right? You either can put it all into your tax advantage accounts or you can put it into cash. Um cash has has less obvious, more subtle but very, very powerful advantages in enabling future real estate opportunities, flexibility and those types of things. and the tax advantage accounts have very clearble uh value that you can put into your spreadsheet very nicely. Um it all depends on where you want to end up in that 15 years in those in in 10, 15 years and what you want that portfolio to look like. So let’s let’s start with that question. What do you want that portfolio to look like? you have you have a million and a half at age 37, let’s call it. What’s the dream portfolio?
Guest: I would say the dream portfolio is probably about two or three investment properties uh generating somewhere in the order of a few thousand dollars in monthly cash flow. I I think is a pretty reasonable to say, maybe three or $4,000 in monthly cash flow.
Scott: That’s reasonable if the properties are very lightly leveraged. So you have a very high equity position in those properties, right? Otherwise you’re going to get much less than that.
Guest: Okay. And then um alongside that, a relatively healthy, you know, ETF uh stock investment portfolio, maybe somewhere in the order of half a million, um $600,000 something like that where uh you know, a million dollars worth of my net worth is in uh real estate and cash flowing, um positions and then the rest of it is in investments that I can either draw from or just let ride.
Scott: That’s awesome.
Mindy: Yeah, I love that you’ve thought about that.
Scott: Most people can’t answer that question.
Mindy: Yeah, I love that you’ve thought about that. Um, as you were telling your story and specifically with regards to your income, you said that income salary kind of steadily increases, but bonuses have a much higher opportunity for increase. Uh have you talked to your boss about how to position yourself for a larger bonus? Like how does the company evaluate bonus compensation? What can you do to make sure you’re getting the most bonus that you could possibly get every single year because salary doesn’t sound like there’s a lot of opportunity for growth.
Guest: Yeah, so uh the answer to the bonus question is essentially ascend in paygrade. So, um when you ascend in pay levels, we have uh very clear kind of uh rubrics for what pay levels look like and the bonuses associated with them. So, there’s always a pay range for each level um and then assigned bonuses that go with them. Uh I won’t disclose the percentages of those uh just as a matter of uh keeping it private for my employer. Um but those things ascend pretty significantly as you go into uh more of the uh vice president kind of role types, um you get into very significant compensation where um potentially half of your yearly income can come from something like a bonus.
Mindy: Okay. So, is there anything that you can do to accelerate that if you plan on staying at this specific company?
Guest: Uh essentially for my company, a lot of career advancement is based around uh breadth of experience rather than depth of experience. Uh this is just my personal uh viewpoint of of how I see the firm. Folks that move around a lot within the firm and have a uh wide breadth of experience, uh tend to move up um because you can kind of jump from side to side and do the kind of the the career twister as I call it where you just kind of move from spot to spot, whereas if you try and be super deep at say software engineer, um the the career path is very linear, which is great, but it doesn’t ascend as high as potentially something on the business side where you can kind of go back and forth between what you’re doing. um do something in investments, do something in risk, do something in product development, that sort of thing.
Mindy: Okay, so it sounds like you’re aware of what you need to do to qualify for those extra bonuses. Um, you mentioned two years in your house and potentially moving to a different state. When did you purchase the house?
Guest: I purchased the house in August of 2020.
Mindy: August of 2020. So, oh, so you have actually been in there for two whole years. Um just to reiterate, that is the magic number for paying no capital gains taxes when you go to sell. What did you purchase the house for?
Guest: 350.
Mindy: And what do you think it’s worth now?
Guest: It’s about uh I would conservatively say like 460. a few months back there was one or two units in my development that sold for 500. Um but with interest rates coming down, the last one I saw, I think was like 475. So let’s just say 460 for sake of argument.
Mindy: Okay, so that’s still a nice chunk of change. One thing to consider moving to another state that has no income tax is that they recuperate that with sales tax, property tax, um a lot of other ways to to tax. So, do some research before you pull up and move to a different state simply to save on income tax, you could find yourself um not saving anything over time. And you I hear people listening right now saying, he’s got a 3.125% interest rate on his house, don’t sell it. It might be worth it to sell it and move to a different place because you don’t make a lot of purchases, your property tax would be lower or you don’t buy a house, you simply rent and then you’re not paying property tax at all. Um what do rents go for in the area that you’re thinking about moving? If you are paying $2,000 a month for your condo and then you would move to a place where you’re paying $2,000 a month in rent, maybe it doesn’t really make sense to move, maybe it does. You sound like uh you know your way around a spreadsheet, I would throw some of these numbers into a spreadsheet and really dive into that. Um, moving like how far away would this move be? I’m not familiar with the north
Guest: So uh I could go as as close as New Hampshire, so 20 miles for me. or I could go as far as somewhere like Florida or Texas. Um, you know, I think no sales tax and places where my company has um satellite offices. You know, all three of those are potential um spots.
Scott: What would you want to do with your current house? Is your instinct to keep it or to sell it when you move somewhere?
Guest: So my instinct when I bought this place was to uh if I as I moved on, I would keep this and rent it. Uh but with the current payment and HOA, I’m not sure that that sort of thing would cash flow. It would be close. Um I would have to really look into things like how my utilities work out, um what insurance on a rental property like umbrella insurance and something things like that would work out to, um in order to figure out if it would cash flow. I would say it’s very close. um but my instinct was to to keep it unless I just found an opportunity where hey, you know, my girlfriend who someday hopefully will become my wife. um just happened to find our dream home and the only way to make it happen is that um we need the equity from the home in order to make that happen. Now, of course, there is cash out refi. um but I’m I’m kind of not banking on that in the near term based on the fact that interest rates are high and um it doesn’t seem like the best financial decision to make given the interest rate that I have.
Scott: You’re not going to cash cash out refinancing this place for several years in in a meaningful effect at least. Um that makes sense. Um you’re thinking about moving. Um I learned about this today, this morning from an an uh an expert on the subject. Um this concept ofble mortgages. If you have an FHA mortgage or a VA or a USDA loan, these are eligible for assumption. So you could you someone buying your property because you purchased it with an FA loan, could simply assume your mortgage. if you wanted to sell it to somebody, they would have to come up with the the cash difference there, but assuming that they qualified and met the qualification of the loan, uh they could just simply take over the payments for you and and assign that. And that that would be an option available to you as well. that could be a powerful tool to to lean into or learn about when you make this move. The issue on your end as well, uh that it will will be if you want to buy a $400,000 property, then you will need and and and the FHA loan, let’s let’s make this up um is 300 grand on that property. you’re going to need to come up with $100,000 to pay the difference. You can do that with your own cash, you can do it with debt, um but you can’t get another mortgage from like Fanny May to to bridge that gap. So because of that, uh and because you don’t want to keep this property, that makes me lean towards selling this property soon, whenever you whenever you move, um taking that cash and then potentially exploring something like this. I think it’s a really powerful way to house hack right now and this is would be kind of where I’d be looking if I was looking to build to start my my portfolio from scratch uh in a new state. I would probably be looking, okay, are there duplexes in particular? Are there single families? Are there are there multi-family properties that have an FHA or VA loan that I can where I can maybe assume that mortgage that’s got a low interest rate. That’s a dramatic change in in purchasing power or cash flow on that property. um as long as you can come up with the cash to cover the spread. What what’s your reaction to that?
Guest: I really like that. Um something that I’ve also heard you can do is through an asumable mortgage, let’s say they have, you know, 50% equity in the place and you can’t come up with 250,000. Um, there is potentially um options out there where you can get a a second like to cover the different mortgage where you still have 25% equity, so I’d be putting 100,000 down. But as a way to kind of bridge the gap between what the assumed mortgage would be and the shortfall would be, you can kind of do a um essentially a bridge loan um without the balloon payment sort of strike like traditionally that a company’s a company is a bridge loan.
Scott: That will come with a very a very high interest rate. 10 easily 10 plus percent interest. Which will make which will make your decisions very easy, right? So you buy the property and then you don’t have to worry about investing for a year or two while you pay off the the bridge debt.
Guest: Exactly, exactly, right. So, I have considered something like that. Uh unfortunately, you know, I I really just don’t have enough knowledge in that sort of area, which is one of my homework assignments over the next six months. Scott, I really like one of the things that you talked about in a recent podcast around take, you know, three months uh you know, four times a year, take three months, figure something out uh where you really want to dive deep on it and that’s one of the things that I want to do is is dive into assumable mortgages, um duplex, multi-family and figure out uh where is the cash flow at what at what um equity rate is there cash flow and then start to target that as kind of like a cash position that I can you know, essentially try and reach in order to put myself in a position to be ready to pull the trigger when the when when the moment strikes.
Scott: Right. And a quick aside aboutble mortgages based on what I learned today is my understanding is that uh again, they only apply to VA, FHA and USDA loans. And you must occupy the property in order to uh in order to do that. So I I I imagine, again, I’m I’m I’m still new to this, but I imagine that that has a one-year requirement of living in the property when you do that. So it’s not a tool available to investors. There are other tools like subject to um that an investor, someone who is not going to occupy the property could use. Um but that makes it powerful. Now, with the VA loan, if you are not a veteran and you assume a VA loans of VA loan, then that uh veteran loses some at least some of the entitlement for using another VA loan, right? Um and there’s probably nuance there that I’m I’m I’m not I’m not stating correctly, but know that that will be a disadvantage to a non-veteran. So um something something to think about there. Okay, so we’ve we’ve talked about we’ve talked about the this, when would you like to make the move?
Guest: So that’s the thing. We myself and my girlfriend don’t really have a timeline. Uh she is a nurse. um she’s very good pay for the purposes of of this episode, you know, just kind of putting that sort of thing aside like her pay and her benefits. Um there’s the potential for her to do travel nursing. Uh she’s not huge on that sort of idea, the idea being, if you live 50 miles away from where you’re working, you can get travel nurse pay, which significantly increases the amount of pay that you get. Um so for us like moving to New Hampshire, moving 30 miles away, she would be able to get travel nurse pay, but then she has to commute 50 miles. So, you know, there’s that sort of thing. um But the uh the timeline for us would probably be in the two to five-year sort of time frame rather than more of the more immediate like one to two years. um just as a matter of one cash flow, um two career establishment and uh three potential family, you know, things like getting married, having children, that sort of thing.
Scott: Okay. Well, I would I would consider re-reconsidering that stance with the property. Um even if you don’t move away, if you just move down the block and get a better rental property, um you’re going to be you’re going to be making the biggest, this is the biggest most actionable step inside of the next six months that I can see to moving you towards that portfolio that you just described in a future state. If you could sell this property and reposition the equity into another property that was a better rental for for this for, you know, some sort of investment, some sort of house hack. Um so I I would just encourage you to think that through. If it’s not, if it’s truly not an option, we will go to to other parts of your portfolio um with this. So I think the next area I would explore is your cash allocation decision. So we we we understand the goal. we want to back into one and a half million dollars with a million in real estate equity and 500,000 in stocks spread across tax advantage and after tax brokerage accounts. Is that is am I stating that correctly?
Guest: Yeah.
Scott: Okay, so that’s a heavy, heavy, heavy real estate portfolio. It also sounds to me, um, you know, we’re not we’re not going to be conservative, we’re going to be realistic about this. It sounds to me like you’re going to advance in your company and you’re going to get larger and larger bonus potential in future years. So you’re going to have disproportionate back backloaded income in this. To me, that suggests get the cash out of these retirement accounts now, build it up in your in your per your your cash position right now and continue to be aggressive about the real estate stuff right now. You want your portfolio to be two-thirds real estate um and 1/3 stocks, you’re going to have an opportunity to back end, backload the stocks I think. Um but it’s going to be really hard to accumulate, it’s going to be really hard to max out those retirement accounts now and have significant amounts of cash with which to buy real estate lightly leveraged later. You want to buy that real estate now, fix it up, add equity, pay and start advertising those loans today if you want to back into that future portfolio.
Mindy: I don’t I know I I can hide this really well. I don’t like the idea of pulling any money out that is already in there.
Scott: Oh no, I do not pull any money out. Yeah.
Mindy: Oh, okay. Okay.
Guest: Oh, I I I thought that you were suggesting is take the out of the
Scott: Sorry. Yes. I am so sorry. Yeah, I’m not suggesting that. I’m suggesting stopping the flow into the retirement accounts beyond any obvious wins like 401k match and putting that instead into a purpose driven real estate investment.
Mindy: Okay, so I will pull back my grimace a little bit and and sort of agree and sort of not agree. So I think we’re all on the same page. If your company offers any sort of match, absolutely contribute all that you can to get 100% of that match. I like contributing to the HSA as long as you can because early retirement is in your plans and you make a decent salary and I am assuming because you didn’t say that you have large medical bills, I am assuming that you are in relatively good health. You are dating a nurse. I am assuming that you have very low medical expenses. You you cash flow those as you can and you contribute, you max out your HSA as much as possible while saving receipts for the random bandaids and contact solution and prescription and every once in a while you go to the doctor for whatever, save those receipts up while you have the HSA and then as soon as you no longer have access to the HSA, you can cash in those receipts. You don’t have to cash them in the same year that you’re use them. You can also just let it grow and then I want to say it’s 55 or 59, you can start just pulling that money out as it’s like an extra tax-free retirement account. Um the Mad Scientist has an awesome article about the HSA being the best retirement account on the planet or something like that. Um I would continue to contribute to a Roth IRA. I like the Roth IRA, especially at your age. It’s going to grow tax free and help fund your post-retirement accounts. Um plus the limit for contributions is $6,000 this year. I think it goes up to 6,500 next year, but don’t quote me. Um the I still love contributing to a a retirement account, but if you want to be so heavy in real estate, building up your cash position, putting feeler out, you mentioned Texas and Florida. Those are going to be less expensive than the uh northeast and you could get some really great cash flowing properties there. Um start looking into those areas and keeping an eye on the market and seeing what’s happening. I mean you’ve got $30,000 in cash right now, maybe some amazing property comes up that it’s worth buying. You deplete your cash position because you know you can replenish it simply by stopping your contributions to your retirement accounts and you you know, jump in on a smoking hot deal. I wouldn’t jump in on a mediocre deal but I would definitely jump in on a smoking hot deal.
Scott: Remy, uh how much cash could you accumulate if you didn’t do anything with your retirement accounts? How much how much how much incremental cash would you be able to generate after tax?
Guest: Probably like in the order of 20,000 a year, something like that. That’s that’s just extra by the way, like uh so like on top of whatever cash position that I could create through income with the way I contribute now, I’m saying an extra 20,000.
Scott: And how how much total cash would that be with if you combine both?
Guest: Oh, um, probably like 35 in a year, something like that, 30, 35.
Scott: Okay, 35 a year. um that allows you to buy one property in your area every two years with if you find a really good deal, maybe two and a half years with 25% down.
Guest: Yeah, probably probably more like three years because we’re looking at like for a 25% down anywhere in the area, you’re looking at like 400,000 as a minimum unless you just like get a real beat up property that you can do everything. I have a little bit of handiness where I can I can do some things myself, but like big structural things where you would get that smoke and hot deal as somebody who would understand how to do that thing, that is not me.
Scott: Right. So that puts us at three, four, maybe four properties in 10 years. I’m going to give you a little bit of credit that you’re going to your income’s going to expand over that time period. It’s not going to be static with this. So that that that gets us pretty close to to your goal. But probably closer to 500,000, maybe 700,000 in equity, not a million in equity. If you pair them or do something creative or house hack, you’re going to get there faster. So we’ve got the tools to get to we have to back into that in a reasonable sense. I think I agree with Mindy based on that. Uh we can slow that a little bit, especially again, if you’re willing to do something with your primary residence and take the match, take the HSA, max the HSA and max the Roth max the Roth. That’s going to pull out 8 grand between the Roth and the HSA and then a few more thousand pretax with the 401k contribution. So I I like that that that’ll slow you a little bit but that still gives you the the 70/30 of the accumulation of is going on after tax in a way that can help your real estate portfolio. Also, no knowing a little I know about you, I I wonder if having cash after tax is going to make you feel somewhat uncomfortable um and give you a little bit of a sense of urgency to deploy that cash because it’s because you’re you know you’re missing the opportunity cost of being able to put it into these retirement accounts.
Guest: That’s that’s definitely it. I opportunity cost for me is huge um and and sitting on cash for, you know, two years as much as I like to think I have the behavioral uh mindset to be able to do that sort of thing. I do see the opportunity cost of hey, I could just put this in the market. And that’s one of the things that I’ve considered is, okay, do I just accumulate this this uh money in an after tax brokerage account, um put it in a 60/40 blend um or a 50/50 blend and let it ride and if it happens and, you know, it catches lightning in a bottle and it accumulates 20% in the next three years and I come out on the on the an upside, then great. And if it um and if it comes out on the downside and I lose 20% over the next three years and it comes out on the downside and it takes me an extra year to go toward that real estate investing route, is is that something I’m okay with as well? I I think that’s sort of where I’m trending with it. Uh, what say you?
Scott: I love that question and my honest answer is, I at 26 in your shoes, I would have put it in the brokerage account. Most people are going to gasp and horror and say you can’t do that um with that, but like I would have said, I’m here to play a mathematical game that’s going to advance me toward financial independence as rapidly as possible. This is not going to bankrupt me. It can it’s only going to either accelerate or decelerate my progress towards that goal. So I’m going to play the I’m going to I’m going to play the odds in the way that I think are are the best to get me there and accept that two years out of 10, I’m going to have a major step back on that and bad luck and bad timing and the other eight years, I’m probably going to get some good return on that. That’s my honest answer. Um a lot of people folks would disagree and I wouldn’t I wouldn’t encourage everyone to do that for sure. But
Mindy: I am going to tag off of Scott and say the same thing. I have many buckets from which to pull if I needed a rapid infusion of catch. And not the least of which is a series of credit cards that I can swipe and buy myself a month of time to figure it out. So, even though I host this money podcast and tell everybody they need to have an emergency fund, I currently have as much in my emergency fund as Scott has in my emergency fund, which is zero. I don’t have an emergency fund at all and that’s because I have access to funds in many different ways.
Scott: I do have emergency reserve, but it’s not an emergency reserve that’s setting me up for my next investment. It’s my emergency reserve.
Mindy: You have cash just sitting there doing nothing waiting for you to spend it?
Scott: Correct.
Mindy: Oh, okay.
Scott: I do that and I love your approach. But personally, I have a large pile of cash, a year and a half, two years of expenses sitting there, doing nothing for that. Remy has six months, eight months, nine months sitting there doing that. That’s great.
Mindy: And I have zero.
Scott: Um, you you pick a number you’re comfortable with for that and everything on top of that that is going to go towards that next real estate investment, I I wouldn’t have a problem it’s just it’s a matter of your risk tolerance and how you want to play it. Um, I wouldn’t have a problem with sticking that all into your after tax brokerage account and being ready to pull from that. You will pay, make sure you account for gains, if if things do go up, um you will have to you have to uh pay tax on those gains. Um, but yeah, I I think that would be that would be fine. And the way I’m wired, I can’t stand a bad bet. Um, so it’s it’s I can I can I can lose money. I just can’t live with being not not doing what I think is a reasonably optimized approach. The cash I have sitting there that’s doing nothing, to me, is optimized because that is that is my reserve, that’s my cushion. I don’t have to worry about my entire investment portfolio at any given point in time because I can just draw down on my cash position.
Mindy: Now, is that your personal or is that your business emergency reserve?
Scott: There that is my personal um and it waxes and wanes a little bit as I plan for tax payments throughout the year.
Mindy: Okay. So there are three different approaches and I think it’s important to note that I have access to other funds. That’s why I don’t have an emergency fund. Um if you don’t have access to any other funds, if you don’t have, I mean, I’m 50 years old. I have lots of credit and I have lots of, I mean, if really, really worst came to worst, I could call my mother and say, Mom, can I borrow some money until next month. Like, I’ve set myself up in such a way that I should say we because it’s my husband too, but we’ve set ourselves up in such a way that we are able to pull from a bunch of different spots. So we do put all of our money into the stock market um or real estate. But if that’s not you, then I think an emergency fund is a great position. Also can you sleep if you don’t have any emergency fund?
Guest: I I could sleep, uh I wouldn’t feel as comfortable. Uh one of the biggest things that I keep the emergency fund around for is like uh you know, I have a house that was built in 1986 and one of the things that I just had to do is replace a furnace, you know, $7,000. It’s not exactly a cheap cheap thing to have happen. Um so, you know, maybe that doesn’t justify having $30,000 hanging around. But um you know, that sort of thing does help me a little bit just thinking about uh from a comfort perspective, having a little bit extra money around does make sense for me. Uh making sure that I can cover anything that comes up uh in you know, just my regular checking accounts. Um it’s something that’s important to me. Uh so that’s why I keep the the kind of the hefty um cash reserve. But you know, it is it is a decent thought exercise to say how could I more optimize that? Um because I even I’ve thought about, hey, $30,000 for my job is relatively secure. Um I have income coming in from other ways that I could ramp up if I wanted to in terms of like the side gig, I I could um start to ramp that up. Um so there’s there’s opportunities for me to be able to cover shortfalls if that sort of thing were to happen. Um it wouldn’t happen right away, but it would be um, you know, having a $15,000 cash position instead of a $30,000 cash position wouldn’t fundamentally change the way that I think about my finances, but it could put me in a better position to optimize how I deploy that cash.
Mindy: Yeah, I think it’s remarkably silly to take all this money and throw it into the stock market and then be anxiety ridden every minute until you can build it back up. Uh but if you do this thought exercise and and really think about it, talk about it with your girlfriend if it’s you know, things are getting serious and you’re talking about marriage, talk about money with her too. How do you feel about this? Oh, I think that’s really silly. We should have 15. You know what? I’ve done the math, 15 feels good. We’ll take 15 and put it someplace else. Or hey, it really gives me anxiety if we have if we have less than six months. Okay, then we’ll keep the 30. It’s not like we’re talking about you have $500,000 in cash sitting there that could be doing so much more. But it’s something to think about, how much are you comfortable with and just, you know, putting putting thought into your finances. It doesn’t have to consume every minute of your day like some of us nerds, but
Scott: In your situation, your your plan is to work your job for the next 10 years. If you told us, I want to quit in three or begin looking at other options and moving moving my business, you know, exploring entrepreneurial pursuits, you should be building up a way bigger cash position. um or that the 30 or or or more. But I’d feel totally comfortable in your situation of of bringing that down and putting more of it in in the market if if if you’re really confident in your and your 5, 10 year plan here and you’re like, you know, great, I’m want to have work this stable job, I’m want to have good cash flow. Um then to me, I I you know, my my thoughts would be thinking about how do I deploy more of it. Not and it’s not a big deal. It’s just a it it’s a it’s a percentage in in your thing. The big moves are going to be what you do with your primary residence and how soon you do it, um and where you where you accumulate you put your cash and you’re making and and making that next and how fast you can make that next, the second big real estate decision. First one being being your primary. Those are the big moves, I think the big levers. and then yeah, I think you got some you can keep controlling your expenses and keep advancing at your career, um but this is this is a good plan. You’re you’re in a you’re in a good spot and I think you can achieve what you want to do as long as you make the big asset allocation decisions and then roll the dice those those three or four times with those those properties.
Mindy: And Mindy, I wanted to come back to your thoughts on the miscellaneous, uh, you know, expense line. So, here’s why I put 500-ish with a question mark. Um it tends to be kind of a not a revolving door but just kind of like a musical chairs of of what it’s going to be this month. like as an example, October, I had two weddings, so there’s $700 in wedding gifts in October. Um uh let’s see, in July, there was homeowners insurance bill, I’m sorry, and the car insurance bill. So that covered uh that that budget line item. Um so as far as like monthly expenses, I I budget that monthly expense as part of that 500-ish per month um as a way to just kind of like even it out as the as the ride throughout the year.
Mindy: Okay. Uh that tells me that you’ve thought about it which I like a whole lot more than oh I don’t really want to look at this expense so I’ll just put that in miscellaneous. I think some people who aren’t so thoughtful about their expenses are just shoving things in miscellaneous. I’ve seen $1,000 in miscellaneous. I’m like, that’s too much money in miscellaneous. That $1,000 can get categorized. $10, $50 is just like random. Oh, I know I had 50 bucks but I don’t know what I spent it on, that’s miscellaneous. That’s probably not going to kill your budget but 500 tends to be a little bit but you’re thinking about it and that’s as long as you have a good answer, that’s all I need.
Scott: I think if you don’t have that assumption for the unknowns in your budget, they’re going to derail your budget. So, I love it. Well, Remy, um hopefully was was this helpful for you?
Guest: It was. Yeah, it gave me some some things to think about, especially around how I allocate my cash, what to think about over the next year or so. um gave me some some things to think about as I approach um how I want to set up next year and then thinking about 2024 as well because it sounds like 2023 is going to be largely spent accumulating a cash position or or some sort of uh money position that allows me to to do some real estate investing and then 2024 is probably the year where it starts to get deployed.
Scott: Awesome. Well, I’m glad that was helpful. Thank you for for sharing um uh your numbers and your story with us. Uh I think this has been really really illustrative. You’ve got a a classic set of challenges that I think a lot of folks have uh in the context of a really strong uh financial foundation. You’re just at this you’re just at this point where you’ve got to make trade-off decisions at the highest level in big ways to shape that future portfolio and the fact that you’ve thought about it and have the strength the strong position you have right now, um is is fantastic. You’re you’re in a great spot.
Mindy: Yep, absolutely. I agree with Scott 100%. and I look forward to next year when you reach back out to give me an update so we can see where you’re at.
Guest: Yeah, definitely. I would love to to reach out and and be pen pals about, you know, decisions that I’m making or or things that I’m interested in. I would love to make sure that one, I’m not doing anything stupid. and then uh secondly, I’m uh uh you know, just updating you guys on the success.
Scott: I don’t think you’re doing anything stupid. No, that that that is unlikely.
Mindy: Okay, well, it’s Mindy at biggerpockets.com and Scott at biggerpockets.com.
Guest: Awesome.
Mindy: Okay.
Guest: All right, thank you so much.
Mindy: And we’ll talk to you soon.
Guest: All right.
Mindy: All right, that was Remy and Scott. I think Remy has a very good financial situation. What I love about him telling his story is that he has thought about a lot of his of the aspects of his financial situation. He doesn’t just throw money into a miscellaneous category because he doesn’t want to think about it. It’s a conscious decision. He’s putting money away for his retirement. He’s thinking about real estate, he’s thinking about other things. He’s doing things consciously and that’s the best kind of financial story we can talk about.
Scott: Yeah, I mean, I I think Remy’s doing a lot of really good things. I do think that his situation illuminates a trap, the middle class trap in this country and he is not going to fall into it. Um but where he’s at is the guy essentially generate he generates some cash flow, he’s got a good emergency reserve, but most of his wealth is getting funnel into his home equity and to his retirement accounts right now. And that’s great. Uh that’s a responsible position. That’s what the normal is here um, in in America for a lot of folks. But the problem is that if if that is carried out, then in 10 years, his well he’s going to be a millionaire, but with all that wealth in retirement accounts, some cash left over and then a bunch of home equity that he can’t really harness in any meaningful degree to have freedom in his life. And so again, to break that, we constantly, you know, we hear this all the time in the Bigger Pockets money podcast and with a lot of different financial positions and you probably, you listening probably see it with friends, family, maybe in your own lives, that situation happening because it’s so automatic and such big chunks of money go into it. $19,000 a year in your 401k, $6,000 in your Roth, 35, $3,600 into your HSA. It’s very easy to then have nothing left over for the vast, vast majority of America, if you’re even privileged enough to be able to max out those items. And then the what’s left the little leftover that is being accumulated is going to go towards a small emergency reserve and then the the the home uh the the primary residence mortgage. And that’s it. And and that’s what I think we’re trying to break here at at BP money is we don’t want that outcome. Um, that’s that’s going to take you 30, 40 years to really realize the benefits of those decisions and have some flexibility at the tail end. Let’s have that flexibility much, much earlier in life um and be able to to do things that we want to do and have control um be able to make decisions like starting a business, taking multiple years off, um, start doing something entrepreneurial or investing in real estate.
Mindy: I agree with that with an asterisk at the top. Take advantage of the opportunities that you can only take advantage of while you are employed like the Roth IRA. You can only contribute to a Roth IRA when you have earned income. I really like the Roth IRA plan. I like it for everybody, but I really, really, really like it for the younger people because it grows tax-free and because you have such an amazing opportunity to have vast sums of wealth and you can only contribute $6,000 this year. That’s $500 a month. If you back that out, that’s $125 a week, $25 a day. You can contribute a lot to your future wealth by contributing to a Roth and it caps off after a certain income. It just makes a lot of sense when you’re young to contribute to a Roth. The HSA plan, I love for so many reasons. If you are in good health, uh even if you’re not in good health, the HSA plan, having a high deductible plan can be a great plan if you are financially stable and can uh financially secure, I guess table is not the right word. Uh and can contribute to and cash flow the expenses that you are incurring now. You can just it’s like an extra retirement accounts. But like you said Scott, so many people we talk to have these large 401K plans and then nothing in after tax brokerage accounts or, you know, real estate or whatever their their easily accessible before retirement age accounts that they choose. So, yeah, I think I I love Remy for thinking about it in advance.
Scott: And Mindy, I I can hear what you’re saying and I understand it. I just with with folks that are starting in their careers, you know, Remy’s Remy’s kind of like almost in a in a midpoint for, you know, the average American in their career. Like 9,000 a month is a really good income uh with that. But he’s still in a position where that 8 grand, 9 grand that goes to the HSA and then the Roth and another maybe four, I’m making this up. I don’t know how much it would be for his 401k match. Um that hurts. That’s that’s like a third of his cash accumulation for the year, right for a year eaten up right there. That makes a dramatic impact on his ability to invest in that next real estate investment or build up that emergency reserve for those types of things. And it hurts even more if your total cash accumulation is going to be 10, $15,000 and now you’re sucking up 65% of that. And so that’s where I think that that uh that real that gut check or that really hard decision exists for so many people out there of making that conscious choice about, where what do I want that portfolio to look like in a few years and how am I going to make the very painful tradeoffs of taking advantage of these great accounts you just mentioned or actually building flexibility right now for for opportunities I can’t even see yet. And and that’s that’s I think I want I just want to make people aware of that hard choice because it’s so easy to just say, yeah, let’s do the HSA. Let’s take the 401k match. Let’s put the Roth IRA. I agree with those things. If your position is such that you can accumulate enough cash to max all those things out and still have plenty left over and you’re that privileged with that with that level of income and low expenses to be able to do that, then yeah, you go down that list. For most people there, you’re going to have to make again those really painful trade-offs and there are there are just decisions to make that I want to make people aware of and there are consequences to not making those decisions and putting all the money in those places.
Mindy: Yes, and I think that it’s great to bring those up and people should be contributing consciously and not just, oh well, this is what I should do, this is what I should do. I just I really like the the tax-free accounts. The the uh the the 401k and the traditional accounts where you’re reducing your taxable income are great, but I really like the tax-free growth that some of these other ones provide for the younger and you know, it you don’t have to max them out forever, but just getting a few years in at the beginning of your working career and just watching it grow. I mean that that tax-free growth because after it’s been in there for five years, you can withdraw the the principle, you can withdraw the principle for several purchases including housing, medical bills, housing, and I think college at any time, but you can withdraw the principle after five years just for living expenses. So there are it it is accessible before your retirement traditional retirement age. It’s just the tax-free growth is just not something you get very frequently.
Scott: I agree. Well, I’d love to hear um folks thoughts on this. Let’s make it a discussion topic uh in our BP money Facebook group, which is can be found at facebook.com/groups/bpmoney.
Mindy: Awesome. I will post that in the Facebook group at 8:00 on the day that this episode comes out. All right, Scott, should we get out of here?
Scott: Let’s do it.
Mindy: That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench and I am Mindy Jensen, saying catch you on the rebound.