Guest: Welcome to the BiggerPockets Money podcast, Finance Friday Edition, where we interview Parker and talk about house hacking and couch flipping. A little bit of both, it really depends. Um, yeah, that’s why I bought the truck I own. Um, because when I when we moved here, I bought the truck for $3,500, put some money into it, it’s probably worth five grand now. Um, so, you know, when we were renting a house, we would just buy a couch, stage it, maybe clean it up, relist it, offer delivery on the couch. Um, but I think between September 2021 and May 2022, we made $36,000.
Mindy: Hello, hello, hello. My name is Mindy Jensen, and with me as always is my can definitely bench press at least 10 pounds more than me co-host, Scott Trench.
Scott: Maybe, but no one can lift our listeners’ spirits like Mindy Jensen.
Mindy: Aw, Scott, that’s so sweet. You’re going to make me cry. 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 are starting.
Scott: That’s right. Whether you want to retire early and travel the world, take a break for a year and travel the world, go on to make big time investments in assets like real estate or start your own 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: Scott, I’m excited to talk to Parker today because he has a kind of fun set of circumstances and also a really amazing side hustle that we don’t get into until the very last minute where you will find me a little bit shocked at how much he can make.
Scott: Yeah, he Parker’s crushing it has a lot of good options. Um, and uh, you know, just needs to kind of focus on a couple of key areas and make some some allocation decisions. He can do anything, but he can’t do everything.
Mindy: Ooh, taking a page from our friend Paula Pant.
Scott: Mhm.
Mindy: All right, before we bring in Parker, I must tell you that 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 including lawyers and accountants regarding the legal, tax and financial implications of any financial decision you contemplate. Before we bring in Parker, let’s take a quick break. And we’re back. Quick note, if you’re interested in being a guest on the Finance Friday and having Scott and me review your financial situation to see what we would do if we were in your circumstances, please apply at biggerpockets.com/financereview. All right, today’s guest is Parker. He is 26 years old. He has a rental property that he co-owns with a friend and he’s busy fixing up the rental and would like to take a year off in the next few years to travel. Parker, welcome to the Bigger Pockets Money podcast. I’m so excited to talk to you.
Guest: Pumped to be here. Love the podcast. Uh, yeah, let’s do it.
Mindy: Yay. Thank you. Well, yeah, let’s do it. Let’s jump right on in. We have a salary of approximately $4200 a month after taxes and 401k contributions with additional income of $475 a month from a tenant and two to $400 a month from side hustles. We’re going to jump into those in a minute. Your debts total 400 or I’m sorry, $346,000 balance on a 30-year fixed interest mortgage at 4.125%. So since you own half the house, I’m assuming half of that is your mortgage.
Guest: That’s correct. Yeah.
Mindy: There’s no other debt. So yay, off to a great start. Uh, and 26, that’s a really, really, really great start. Okay, monthly expenses total approximately $3,000. I really don’t see anything in these monthly expenses that stand out. You’ve got $1,100 in housing, 200 in utilities. The food is something that I would like you to reconsider. I’ve got $1,000 for food, which is approximately a third of your budget. Uh, health and wellness 100, car insurance 90, gas 125, travel 100, gifts 100, Amazon 50, gym 50, clothing 50. Again, nothing really crazy. Maybe you’re eating organic or something super healthy. So…
Scott: Well, we found out at the beginning of the show that um, Parker benches 225 pounds, so he probably needs a lot of extra food to maintain that muscle mass.
Mindy: Yeah, he could eat a protein.
Guest: Yeah, food’s my big thing. I mean, I eat a lot, I work out a lot. Um, that includes Costco, so maybe some that includes some like, you know, uh, toiletries and stuff like that as well, but um, yeah, I yeah, I figured you were going to point it out.
Mindy: Moving right along to your investment accounts. We have a mostly pre-tax 401k of $28,000. That’s great for being 26 years old, $12,000 in a Roth IRA, 2,400 in HSA, 19 in cash, 10 in house equity, 1,000 in alternative investments of crypto and silver and 5,000 in truck equity, which we will talk about later. So, can you give us a very brief overview of your money story, Parker?
Guest: Yeah, let’s do it. So, I grew up in kind of like a mixed uh financial household. So my parents were solidly middle class and my grandparents were uh somewhat better off. so, you know, I was really fortunate to be able to graduate uh completely debt-free paid for by my grandparents. Um, but I also kind of got to see uh how my parents struggled with money at the same time and I didn’t want to make the same uh, you know, financial mistakes they did. So, you know, when I went to college and knew that it was going to be, you know, paid for, I knew I wanted to kind of, you know, set myself up for success, knowing that, you know, once I got out of college, it wasn’t, you know, you’re going to rely on family money or whatever, you’re kind of have to set yourself up, uh, for your own success and be able to support yourself. So, um, I’ve always kind of been interested in uh finance and I studied business, so, yeah, that’s that’s the main part and then, you know, I guess I’ve always been really independent, so I don’t like the idea of having to rely on uh other people. So being able to, I guess, financially support myself and set myself up for success is important to me, so.
Scott: Awesome. can you tell us a little bit about your career and how that’s progressed over the last couple of years?
Guest: Yeah, so I work as a financial analyst, make about 70, 75k year. Um, I started off in accounting. So I graduated in 2019 with a degree in international business and finance and moved to Boston. Uh, you know, going into the office, everything like that and then COVID happened, went fully remote. was kind of like, why am I paying all this rent in Boston? I was paying like $1500 a month for rent. Um, everything was closed, couldn’t really do anything, um, that that allowed me to save a lot of money, but I wasn’t very happy. So I was living with my buddy there from college, we were like, let’s go check out, you know, Tampa for a weekend. Came down and really liked it and we ended up moving here about a year and a half ago in 2021. You know, rented for a year and ended up doing a house hack together, which I haven’t, I don’t think I’ve heard anybody on the podcast who’s bought a property with a friend. I think it’s kind of a unique thing. Uh, people think we might be like in a relationship or it’s like a different thing, but no, we’re just friends from college, uh, who bought a property together. So.
Scott: I’ve done that.
Guest: Yeah, yeah. Yeah, it’s awesome. Um, you know, we have different strengths and weaknesses. Uh, I’m kind of the numbers guy, the design guy and he’s an engineer, so he’s great at fixing stuff up. so, um, it actually works really well.
Mindy: Oh, okay. I’m going to highlight this for a second. If you have money and maybe not super awesome at fixing things, finding somebody else to partner with who has money is not the best choice. It’s I mean, it’s good, then you’ve got two financial powerhouses that are putting money into a problem and there’s no problem in real estate that it’s too big that you can’t solve it by throwing enough money at it. However, that’s not what we are here for at the Money Show. Uh so partnering with somebody whose strengths are your not strengths. I hate the word weaknesses, but whose strengths cover what yours do not is a great way to partner. I think that’s an awesome partnership. Uh we don’t see a lot of friends getting together and buying a house together, uh because there can be some issues that happen like you’re all friendly when you start off, but then something happens and you want to do it one way and he wants to do it the other way and then the friendship can kind of fracture. But you’re still stuck together with this legal document that is called home ownership. So, um, did you guys go into a partnership agreement? Did you write out everything in advance?
Guest: We don’t have anything like, we didn’t get a lawyer and write everything down, basically, but we basically came to an agreement uh verbally, I guess, which I know it’s not the best thing, we should probably get something in writing, but um, but we have an understanding of, you know, when we’re gonna move out, what are we gonna do with the property. Um, we kind of veto each other on decisions, stuff like that. I mean, this isn’t, you know, a guy I’ve been living with like a year, we’ve been living together since my sophomore year in college, it’s been about six years. So, um, he’s a good friend, he’s as financially uh stable or even more so than I am. Uh, so we both feel very comfortable in being able to make the mortgage payments and we both kind of have a similar vision for the property.
Scott: I think this is perfect. I’ve I’ve I’ve done something very similar to this um, in my past and I think it’s great. Uh, at some point, you should put it in writing and say and and you you want to approach your friend you’re saying, here’s how, you know, we’re not we’re not going to have a problem here, right? You know this guy for a long time, sounds really reasonable. But, um, you know, one day you are going to get married. and I don’t even, I don’t even know this person. You’re not even dating this that them yet. Um so, and if you were to pass away, I might be dealing with that person, they might be terrible. So or or use yourself as a reverse, right? Um, with that or or if you if you’re already have uh significant others they say, all have a kid and that kid will be a pain in the rear, um that you’re going to have to deal with when this thing is over. So we’re not negotiating against each other, we’re negotiating against these future people in our estate and we want to get those things buttoned up. and a very simple tool, you don’t have to spend a lot of money on this. A very simple tool that I think is very powerful is this kind of shotgun clause in the in the um, um, agreement because really, if things get bad, you want to exit the deal. right? there’s a whole bunch of other things you can and should cover in the agreement, who has final say or but uh a shotgun clause, if you’re not familiar with it, essentially says if you want to exit the deal, you say, I’d like to buy you out at this price. And they have one opportunity to say yes or no, I’m gonna buy you out at that price. Um, they can reject and and and uh go the other way. Very simple and effective tool for for resolving partnerships like that in this situation.
Guest: That’s a great idea, I like that.
Scott: Yeah, probably cost you 500 bucks to get an attorney to draw something up like that and uh, it’ll just be there.
Mindy: So Parker, what is your greatest money pain point and how can Scott and I best help you today?
Guest: I think it’s really figuring this house out. um, trying to treat it more as an an investment uh as opposed to like a forever home because it’s definitely not a forever home. Um, like, you know, I could we could put $100,000 into this house if we wanted to, right? But like that wouldn’t really make financial sense in terms of a rental property. Um, at the end of the day, it’s, you know, a two bed, one bath, thousand square foot main house and a, you know, 380 square foot mother-in-law suite. So, you know, you could put a million dollars into it at the end of the day, it’s it’s not going to rent for more than 2,500 uh a month, right? Um, as it stands right now, it’ll probably rent for about, yeah, 2000 to 2200, um, in the main house and then the mother-in-law suite, we did a full renovation on it, so it’d be probably more like 1,200. Um, so I, you know, there’s more that needs to be done. The roof is going to be have to be replaced because it’s 18 years old and I live in Florida and there’s this whole homeowner’s insurance crisis going on, uh, and they won’t insure the house um, within the next year or two unless we get the roof replaced as far as I know. Um, so that’s a big expense. The AC, the H rack might need to be replaced in the next couple of years as well. So that’s maybe 20 grand right there. Um, and then the rest of the house, you know, it’s like, it’s all been kind of renovated within the past 15 to 20 years, so it’s like, it’s not bad, but there’s just like things kind of need to be updated. So I guess my main question is like, how do you view like putting in an improvements into a house hack, I guess, because I think the main goal of this property is to, to live here for two years, so then if we sell it within the next five years, we would get uh, not as paying income tax on that gain.
Scott: Be careful with that assumption because if part of it is a rental. So, let’s suppose hypothetically that uh, the property, was the property purchased in both of your names or or just one?
Guest: It’s in, it’s in both our names, yeah.
Scott: Okay. And is any part of the property a rental without you living in it?
Guest: So right now we’re living in it and we’re renting out the in-law suite.
Scott: Okay. That portion. so this is this is the pain in the rear. From a tax perspective, uh, the portion that you live in is not, you can’t depreciate and is your primary residence. And the portion that you rent does depreciate and it’s not your primary residence. So filing your taxes on a house hack is a real pain, and is even more complicated than filing taxes on a true rental property or someone with a primary residence, even if it’s a bigger property with that. Yet, the house hacker, by definition, is always a frugal, you know what? uh uh and so they’re not going to spend hundreds of dollars on tax preparation for the most part each year. So you’ll have a DIY, if if you fit that mold, you’ll have a DIY uh tax project to learn at and think about when that comes up. But I would encourage you to, to think of it more like a rental and less like a primary. Uh, well, it depends. If you’re living in the big part of the house, then it’s more like a primary than it is a rental.
Guest: Okay. I mean, what do you guys see is like the highest ROI in terms of like sprucing a place up?
Mindy: Kitchen number one hands down. but also the roof because you live in Florida where they have hurricanes. so.
Scott: Yeah, the roof doesn’t change your rent, right?
Mindy: No, the roof doesn’t change.
Guest: That’s the problem, that’s the thing. Like, I think it might have been replaced without a permit in the past because it doesn’t look 18 years old, but, uh, you know, we have state subsidized insurance because that’s the only in Florida, that’s the only insurer that would insure the house. you know, citizens, I don’t know if you’re aware. So, you know, the appraiser said it had three to four years of useful life left, which was lucky because, you know, they they won’t ensure it if it’s one to two years useful life left.
Scott: The way you win with the roof is if you sit on it for as long as possible and we had done nothing to it and then replace it at the last possible minute without having an emergency force upon you. So, you know, that’s the, that’s the game I think that you have to play as a real estate investor is is how do you time that perfectly. I don’t know if you can, but um, so that roof is going to add no value to the property other than exactly. me it may it may.
Mindy: Well, then you can insure it.
Scott: Once you get to that point, you have to, yeah.
Mindy: Okay, well, let’s run through the numbers on this property.
Guest: Yeah, we purchased it for 375, it appraised at 367, so we had to pay an appraisal gap of 8,000, but they gave us 9,000 at closing, so it basically evened out. um, I mean, they gave us that money because there was a lot of issues, uh, with the house which we can go into. um, but we put 5% down, so only two and a half percent each. So, um, you know, out of pocket, it was like 15k each at closing. Um, and then we’ve put in an additional $30,000 into renovations so far, so another 15,000 each. Um, you know, total mortgage payments 2200 which is 1100 each and then we rent out the in-law suite for 950 a month utilities included to a friend of ours. Um, so total out of pocket costs about $630 a month. Uh, for living expenses with utilities, about another 200 each, uh, about $830 a month is my current, uh, you know, living expense right now which is pretty crazy when, you know, you can’t really find a one bedroom in Tampa under 1500 or 2,000, so it’s pretty awesome.
Scott: What what what would the property rent for if you moved out? fast forward a year or two. um, it’s all stabilized. What what do you think would, will me through the cash flow analysis? So you give me some of those numbers, but what do you think will you net from a cash flow perspective?
Guest: Yeah, so the in-law suite where, I don’t know, it’s it’s tough to to value an in-law suite because, you know, the laundry room is disconnected from the house, so I guess there would be shared laundry between the main house and the in-law suite. I mean, that’s how we do it now. Um, but, you know, there’s a lot of these in Tampa, a lot of multi-generational households and stuff and I’ve seen them like similar ones go for as much as 1400, but um, you know, conservatively I’d say 1100 to 1200 on the in-law suite and then the main house 2000 to 2200 as it sits right now. so, you know, maybe 3200 for both and our mortgage payments 2200. so
Scott: and what what what could you walkthrough what you would estimate for vacancy, capex and repairs, property management, those types of things?
Guest: Our plan is to stay in Tampa, so we’d manage the property ourselves, at least for the time being. Um, you know, 5% for vacancy, it’s a pretty hot area. maintenance and repairs, I mean, I don’t, I mean, we’ve put a lot into it already, so I I like, I don’t know how you budget that on a, you know, 5% annual basis or something like that, but I haven’t really thought about that as much.
Scott: Okay, so we got $150 a month in vacancy, we got $150 a month in maintenance and capex on the on the low end. Um, and, and then, uh, I assume that tenants would pay utilities?
Guest: Yeah.
Scott: Okay.
Mindy: Okay, I have a comment. I want you to bump up your vacancy to 8% because one month is 8%, not 5%. It sounds good. And, if you’re if you can get it rented faster, that’s great. Then you just have extra built in. But if you, if it takes longer to get it rented, then your numbers are all out of whack. Capex is something that I like to personalize for each property based on the actual age of the things in the property. Like your roof needs to be replaced in the next couple of years. A roof, I don’t know what it is in Florida, but where I’m at, a roof is $10 to $15,000. So over the course and it lasts 25 years. So over the course of 25 years, you should be saving up 10 or $15,000. That’s just a couple of hundred dollars a month. But if your roof is 20 years old and you need to replace it in five years, you now need to save up $10,000 in five years. So that’s $2,000 a month. Or you need to save up 10 to $15,000 in one year to replace it. So that’s a whole lot more. Um, did you get any sort of concessions for the roof?
Guest: I mean, just the 9,000 they gave us at closing.
Mindy: just covered everything. Okay, and that’s fine. I mean, you bought it in April of 2022, which was the hottest market that the real estate uh, scenery has ever seen in the history of the world. It was tough. So, that’s why somebody’s like, oh, why did you pay more than it appraised for? Because that’s what you did in April of 2022. That’s just how it was. Um, so with CapEx, you’ve also got your furnace. You said the HVAC will need to be replaced soon. Um, I don’t know how much an AC is there. I think it’s like eight to $12,000 where I’m at. You have time to start getting quotes and starting asking people, who do you use, who’s reliable? Start getting quotes and find somebody. Don’t wait for the next hurricane to come through because then it’s impossible to find anybody to work on your house. I don’t know where you are. Oh, when was the last time there was a hurricane in Tampa? It’s been a while, hasn’t it?
Guest: 100 years, yeah, but okay. Yeah, we’re doing yeah.
Mindy: Okay, well then you’re do. So get quotes now. Um, but yeah, you don’t wanna wait until, oh, I’m going to do it in June and then the end of May something comes through and now you can’t get a new roof and then you don’t have homeowner’s insurance and there. That’s that’s my also. That’s also my concern with citizens, which, you know, their their customer base is doubling every year because of the home owner’s insurance crisis. If there was a hurricane, even if it was in Miami, you know, putting into claim could take years and could be a big financial risk. That’s my other concern in terms of getting the roof replaced and maybe going through a private insurer. but I don’t know if it’s worth paying double compared to stay a state subsidized policy, but.
Scott: I think, I think these numbers should make you a little uncomfortable. They make everyone uncomfortable, right? But with this. So, but but I think um in your case a good exercise would be to go through and do the work of customizing your cap X allocation and saying, I think my roof’s going to last me three more years, we’ll give it, give it a guess. That’s your best one. Okay, great. That’s $10,000 over three years, that’s what, 3300 a year that I need to save. that’s 400 bucks. Am I doing that right, a month? Let’s call it 400 a month. Yeah, 400 a month I need I need to save. Then on top of that, I’m going to need to replace the AC. That’s going to be five grand, making that up. right? I’m gonna that’s going to be in five years. so that’s 1000 a year, about 100 bucks, 80 bucks a month. And add those up, right, one by one. And if there’re any other things around the property, the kitchen will, you know, maybe the kitchen’s fine and you’re good to go for 15 more years before you need to really update that. Um, okay, that’ll be 10 grand, so 10 grand divided by 15 years, divided by 12, right? Or whatever it is. right? So, so yeah, I don’t know how bad his kitchen is. I don’t know, you know, maybe it’s good, maybe it’s bad. I don’t know. But like if you do that exercise, you can stare at a number and say, okay, that’s really what my cash flow is going to look like in this particular property over the next 10 years or five years and that will help you make decisions based on that. So my my belief is that once you do those numbers, and I would encourage you to keep property management in here, you’ve got a okay property. It might might break even a little bit and if it’s in a good spot and you hold on to it for a long time, it might appreciate, but this is not going to be a cash cow property once you move out, um, even when you do move it to market rents. so something to noodle on there and uh that may that may be exactly what you want. That’s fine. It’s a great way to build wealth or it may be not what you want and you want to sell it and see if you can uh harvest harvest some gains if you can add value to the property.
Guest: Yeah, I think the goal is to to keep it. um, as a rental, I mean, Tampa rents are growing like 20% year over year, so those numbers could even be outdated. but yeah, it is an old house, I do have to budget more in maintenance than probably the average house. Um it’s a 1950s house. So another thing I wanted to ask was like when we move out, should we transfer it into an LLC or just is that even possible or is that something I should just ask my lender about?
Mindy: I was going to say your lender is probably going to tell you not to do this because if you transfer the ownership out of your own name, which is where the mortgage is currently in, uh, this is this will trigger a do on sale clause where all of a sudden the lender will say, okay, now you owe us the entire remainder of the the balance of the mortgage.
Guest: So they make you refinance, basically.
Mindy: They will you will lose all of your. It could. It could. So.
Scott: So there’s a huge debate. We’re gonna we’ll get into this for a good five minutes here. This is a great one. Yeah. Go ahead, Mindy, yeah.
Mindy: My lender that I go to all the time said when rates were 2% and you could refinance at 2%, nobody really cared. Lenders were like, look, the payments are continuing to be made, we’re not gonna make a big deal of it. But now that you have a 4% mortgage and rates are like for an investor, rates are like 9%, 7%, 8%, they might make you refinance. They’re losing money on their 4% mortgages, they’re losing money on their 2% mortgages. So if they can get you to refinance, they will.
Scott: I think that there’s a lot of people who they you were we’re asking about a major policy change here. So for, first of all, the answer is can, the question is, can I put it into an LLC? The answer is, yes, you can put it into an LLC. The question is, what are the pros and cons of doing that, right? Um, the pros are potentially some some protection once you’ve moved out of the property from legal liability, okay? If you self-manage the property, guess what? They can still go after you um, for for those types of things and you really in my opinion, and I’m not a lawyer, you should ask a lawyer about this, but in my opinion, you’re for you’re like it’s kind of like, why the heck would you do, why the heck would you self-manage the property and put it in LLC when you’re exposing yourself to the risk of this um of this due on sale clause that Mindy just pointed out uh in order to do that, right? Second, if I’m going to protect the the property by putting an LLC and going to the trouble of setting up an LLC, running the LLC, filing taxes for the LLC, all those different types of things. I need to be protecting something that’s worth protecting, right? And you guys have maybe 30k in equity in this property, right? And if you sold it, how much, you know, you probably have transaction cost, you probably have very close to zero equity in the property right now. So, am I really going to do all this trouble to protect nothing, right? is another question um that I’d ask here. So I obviously have a strong opinion, but I’m not allowed to go all the way there uh uh because it’s a legal topic with this. right? Okay, next up is the due on sale clause. I actually think the due on sale risk is not that large because most of these lenders do not um, they they don’t get they don’t keep the loan on their balance sheet. They sell it to a large institution like JP Morgan or, you know, one of these big, one of these big banks, Wells Fargo, whatever that that’s going to that’s going to service the loan. And they can always sell the loan again to Fannie May, will government a government backed corporation, right? So I I don’t understand why a performing note whatever get called due. The due on sale clause is an option, not an obligation of the lender to call the note due and force you to refinance. It is possible it could happen. It hasn’t, it hasn’t really been a factor in the last 20 years for any investors. I don’t know, I don’t know a single person who has had a note called um for this and I’m not and I’m not anticipating it. But if you’re if, you know, you if you move all the properties LLC, you might get some protection, peace of mind on the uh, um, liability side, if you’re setting everything up right and hire property manager. Uh, but you might assume this keep you up at night risk of the lender calling the note due. So, I don’t think there’s a good answer to this question and I think if you post this to the bigger pockets forums, you’re going to find people with very strong opinions either way on this based on what they’ve done, um, for example, you should probably probably should post it to there and see what people say. But my my guess is that I I would keep maybe keep it in your names um for for a while here and and consider shifting it over if and when you have a much lower debt to equity balance and um, uh have something worth protecting here and they’re maybe not self-managing.
Mindy: I would say if you are going to do the LLC for protection purposes, get an umbrella policy instead. This is an over uh it’s an umbrella that covers all of your assets and interests so that you don’t uh you’re not going to be sued. your insurance company has more money than you do, so they’re going to cover you. I’m doing a terrible job uh explaining what an umbrella policy is. let’s look that up on Google so I can actually say what is an umbrella policy. Uh, an umbrella insurance is extra insurance that provides protection beyond existing limits and coverages of other policies. Umbrella insurance can provide coverage for injuries, property damage, certain lawsuits and personal liability situations. So, something that I just discovered as I requoted my homeowner’s and car insurance policies and got an umbrella coverage for all of this for less than what I was paying for a lower amount of car insurance and a lower amount of homeowner’s insurance. Um, it can be, it’s it’s not that expensive to get a very simple umbrella policy and that I think is a better choice than going into an LLC and potentially losing your 4% interest rate just to save some liability.
Guest: That makes sense.
Scott: Also, I would not put the property into an, you know, we can talk about lawyers about this one, but I I I I I would not put the property into an LLC while you live in it. Like you want protection, you living in the property, how how can it not how is that how is there going to be a corporate veil there if you’re if you’re an inhabitant of the property?
Guest: I’m not gonna sue myself, you know.
Mindy: Okay, I have a couple of other questions about your property. Yeah. How did you take title with your friend? Did you take it as joint tenants or did you take it as tenants in common?
Guest: I think whichever one like if one of us dies, like the uh equity goes to my beneficiary and not the other person.
Mindy: See’s tenants in common. That’s tenants in common. Okay, that’s good. That’s good because that makes it easier for you to to separate yourselves if you decide, hey, I don’t want to live here anymore. He’s like, oh, I would really like to live here. And you’re like, hey, why don’t I just sell my have to somebody else if he can’t afford to buy you out or he doesn’t want to buy you out. Um that makes it a lot easier to do so. If you are considering buying in a partnership, talk to your attorney, talk to your real estate agent about the different types of ways to take title. and one last question is why do you rent your mother-in-law suite out for less than it could be rented for?
Guest: We’re helping out a friend, so that’s a main thing, and then, you know, he allowed us to continue doing renovations, you know, while he was basically living in it. So it’s a very kind of flexible situation where if we need to enter the uh property and fix something or you know, do anything like that, you know, it’s also less liability because he’s our friend, we know he’s not he’s he’s going to pay on time and he’s reliable.
Mindy: I am so glad that this friend is paying on time. However, lots of friendships have been broken over this. So, I will say, because I am older than you are, I will say that uh you I hope you have a lease and if you don’t, you need to get one. and is there an end date for him living there? because you are essentially subsidizing his rent by $250 a month every month that he lives there, which is very generous. Um, and you know, him allowing you to do work on the house and while he’s still paying you rent allows you to collect some money while you’re fixing it up, but eventually that has to end. He’s listening to the show now, he’s like, Mindy shut up.
Guest: It’s it’s it’s a month-to-month lease.
Mindy: Okay. So just I would have a conversation with your co-owner and say, you know, how long do we want to let Bob Jones live in the uh the mother-in-law suite before telling him we’re going to raise the rent to 1200, which is the going rate. Would you like to continue to live here or would you like to find a new place? I have a question about that in terms of like, you know, the the backyard is is pretty much shared and, you know, the entranceway to the in-law suite, you basically have to walk past the whole house. So like how would you structure that in a lease like where the laundry area is shared and like the backyard is pretty much shared. Would you would you, you know, put up a fence to kind of make a private area for the in-law suite or um, would you write in a lease that the laundry room shared between, you know, buildings or something like that?
Scott: I think I’d write it in the lease that the laundry room is shared and I would not, I would I would just say that there’s common area um in there and I’d make it clear who’s responsible for common area maintenance. So, for example, in in in some of my properties like a duplex, I’ll just say unit A is responsible for shoveling the sidewalk and maintaining the front lawn, right? Uh and that’s just part of the deal with living in unit A. Um, unit B does not have to worry about it or whatever.
Mindy: Yeah, definitely be specific. When there is an opportunity for confusion, the tenants will take that opportunity to be confused. Uh, so if the now describe again the laundry situation, is it a like can you close off the laundry room?
Guest: Yeah, it’s just it’s just like it’s like a it’s like an outdoor closet almost.
Mindy: Okay, so, so the the the tenant in the mother-in-law suite wouldn’t necessarily be bothering the other tenants. I would absolutely post um specific laundry hours, you can’t do laundry at 2:00 in the morning. Um, laundry can’t be done after 8:00 or 9:00 or whatever, um, because that could disturb the tenants in unit A. And uh the the laundry is common area and the yard is common area and if somebody is going to be responsible for mowing the lawn, that’s great. and if they’re not responsible, then they have to pay for lawn service.
Guest: Yeah, that that all makes sense.
Scott: Well, I you know, from from the the the property standpoint, I think you have a decision to make about whether you want to sell it or keep it after a couple of years. You will have tax complications, um, advantages relative to to other folks. Uh, when when you make that decision, but um, yeah, you’ve got you’ve got a, you’ve got a property that is clearly not going to lose, that is likely not to lose money for you over the next couple of years, but it’s also, you need rents to go up for it to to continue to produce a good cash flow. So.
Guest: I have another question if that’s all right. Um, so, you know, right now, I’m basically paying $800 a month uh, to live. you know, if you if you subtract the equity towards the house, my my, you know, the cost of my net worth is like 600 bucks a month including utilities. Um, so like, you know, if we want to move out of this place, you know, it’s it’s fine right now, but, you know, I’m 26. I don’t know, I might I might want to live alone at some point in my life. You know, how do you justify going from you know, paying $800 a month to, you know, living alone and paying, you know, $1500 a month or more, like, I don’t even know if that makes sense, right? So like, is it I need to grow my income by a certain amount or is it I need to just buy another property or sell this property? because I think the goal is to turn this into a rental. but then it’s like where do I live, right? Because I don’t I don’t have the capital to buy another property. So does it make sense to turn this into a rental just to turn around and pay rent to somebody else?
Scott: I I I think it’s a philosophical question and one around your values, right? So what I did is I house hacked in, you know, dumpy duplexes for seven years, right? I came on the other side of that with a large with a moderately sized real estate portfolio, lots of savings, more cash invested in stocks and a a position of of at least a baseline for sure, well beyond that level of financial independence around the age of 30, right? Um, I just went to New York City uh, the last weekend. uh, had a blast, visited a friend, right? to rent like a one bedroom in an okay part of town is is $4500 or $5,000 a month. It’s an incomprehensible amount of money to me. But you live in New York City, you have all these different fun things you can do. There’s it’s it’s a blast, there’s tons of things whatever you want to do is there, right? It’s a life choice. what do you what do you want? Is that is that worth, you know, not pursuing financial independence for 10 years and and going and having a ball in the city and then figuring it out in 10 years? For lots of people the answer is yes. For you, it might be yes. So, um, you can’t have it all. you probably can’t go there and buy five come out, you know, with five properties in in in the next 7 to 10 years uh and do that. But you can you can do that. And so I don’t know if there’s a right answer your question. Is that even a helpful initial response in framing that?
Guest: Yeah, no, I totally get what you’re saying. Um, I think it’s more so like we know we don’t want to be here forever just because it’s, you know, two guys and sharing a bathroom thousand square foot house. Obviously, like you said, house hacking takes you have to take on some amount of uh, you know, risk and discomfort and everything like that. Uh, I think the main thing is like I want to have a plan one to two years from now on like what I’m going to do. Um, you know, I think the plan is like I said is to turn into a rental. So I guess I’m trying to mentally justify like, okay, my out of pocket living expense could go from 800 to $1500 a month, you know, if I go that route. Um, so I guess in that sense it’s just part of like, you know, budgeting for that expense to come, I guess, or trying to grow my income to match that uh housing increase.
Mindy: Yeah, well, let’s look at your income and expenses. You have $4200 a month salary and you spend 3,000 of it a month. What where does that $1200 go?
Guest: Right now it’s just going to cash. I’m about to max out my Roth so my cash is going to go down to about 13k. Um, so, you know, that’s my other thing like am I over contributing to retirement. I feel like that’s kind of hindering my cash flow like I have maybe if I want to buy another property or do other investment or other side hustles, I’m not really uh keeping that much cash after contributing to retirement. And I contribute 12% uh 8% pre-tax, 4% Roth, then I’m maxing out my Roth and I’m also maxing out my HSA this year. so that’s about you know, 19,000 towards retirement and then I’m only cash flowing about 12,000 a year plus my side hustles, maybe a little bit more. Um so I mean what’s your what’s your thoughts on that if I want to
Mindy: what does invest in side hustles mean? What what side hustle do you have?
Guest: Um, right now I’m not really doing much. I used to be really into like uh slipping furniture and stuff like that. That’s basically how I was able to afford the down payment on uh on the house. Um, I have some other side up but in terms of like investing, like yeah, like buying another property or buying another income producing asset would be my goal, I guess.
Scott: Okay, so so let’s let’s zoom out even further here. I I think I think there’s a fundamental question of like where where do you want in in one year, three year, five year, seven years, right? Like what what is what is that trajectory? If you came in if you said, I want to have five cash flowing properties and be reasonably reasonably set up there, and I’m willing to sacrifice most other things to get to that point, we’d say, okay, continue house hacking, maybe even move into the mother-in-law suite, um, or whatever with that. Um, figure figure that out, keep your expenses ridiculously low, grind insight hustles, let’s talk about this job, all that other kind of stuff. If you’re saying, you know, I’d like to have one, maybe two more properties over over that time period and live a really nice life in the meantime. Okay, now we’ve got a different, you know, a different thing there. The goal is not to be retired in five years if that’s the case and we can do that. So I guess what what what’s your hunch there? What do you what do you want?
Guest: Yeah, I think I’d like to buy another property. I just um, I don’t think I will have enough cash to do that before I move out of this property, right? So there’s probably going to be some type of place to rent while I transition, but yeah, I think I want to buy another property.
Scott: So you want to house hack another property as soon as possible?
Guest: As soon as yeah, exactly. Um, there’s a lot of what with the economy and interest rates and everything like that, but I think I’d like to buy another property maybe, you know, two to three years from now.
Scott: Well, you you could buy another property next year if you stopped the contributions to a lot of these things. You have $19,000 in cash, right? We save five by not contributing to the Roth, and we have another 12 by the end of the year in order to do that. And guess what? I I think that’s perfectly reasonable. If you you think the house hack has a good ROI, I did that. I did not contribute to a Roth and instead purchased a house hack because it’s a better, it’s a better return in many cases. Now, not always, you there’s always market risks and those types of things, but on average and a 3% inflationary environment, um, you know, advertising the loan, you you’re spending less to live, the house hacks almost always going to be better than um one of these one of these retirement account contributions if you buy reasonably well. So, that would be, that would be one, one place to think about it if that’s really your goal. You got 30 years to max out those retirement accounts, maybe 40. you have only probably five more years to house hack uh quite as reasonably.
Mindy: Mindy’s not liking this.
Scott: I am not liking this. I’m biting my tongue while you say this.
Guest: Yeah, I but that but then it’s me saying like the money I contribute now is going to be worth the most when I retire because I’m I’m never going to be younger, right? Um, especially the Roth and HSA uh contributions because
Mindy: The Mad Fientist says the HSA is the best retirement account on the planet in the whole world, in the universe, yada yada. That’s quote, direct quote. So I would say continue to contribute to the HSA because I love it so much. Um, it has a it has a lower limit too, like 3,500 or something for you because you’re single?
Guest: Yeah, 36 something.
Mindy: I would love to see you continue to contribute to the Roth IRA, but if you choose to buy a house, that’s fine too. I will give you some homework assignments. I would like you to look at what other remote job opportunities pay. So, perhaps you could find a new job that pays a lot more that allows you to continue to save for your retirement and save for a house hack at the same time. I would like to know how much time you were spending on your uh couch flipping side hustle. Was this just seriously pick up a couch and then list it and give it to somebody else? Or were you doing work to fix up the couches?
Guest: A little bit of both, it really depends. Um, yeah, that’s why I bought the truck I own. Um, because when I when we moved here, I bought the truck for $3,500, put some money into it and it’s probably worth five grand now. So, you know, when we were renting a house, we just buy a couch, stage it, maybe clean it up, relist it, offer delivery on the couch. So I think between September 2021 and May 2022, we made $36,000 after expenses and profits. $36,000? Yeah. So we spoke That’s a job. That’s a whole, and this was like part-time work. Yeah pretty much. Okay, research opportunity, get back on Craigslist and Facebook marketplace and start finding these couches and if it needs a lot of work, skip it. But if it doesn’t need a lot of work, you’re just picking it up, storing it in your garage while you wait for somebody to come and buy it, do that. That’s my new favorite thing. We should have talked about this the whole time. $36,000. Yeah. Well 18 18,000 each over nine months like probably we’re probably clearing 2k a month after expenses and profit. Um Why did you stop? So your next your next property needs to have a big garage.
Guest: It was kind of the COVID craze with furniture, furniture being hard to find is kind of I don’t know if I could continue making that. Um and the house has taken up more time as well, but Yeah, it’s been a great side hustle.
Mindy: Do you make $36,000 on your house right now? No, you don’t. So, there you go, flip couches.
Scott: I I I agree with that. I think the income is a major factor here. You’re you’re early in your career. Financial analyst is a great way to start your career. Um I’m biased. That’s how I was my first job. Um, but I I think it’s fantastic. A lot of options open up to you after that because you understand financial, you’re financial you’re literate with financial statements. You know what good what good looks like, you can tell what’s what’s going bad. You can make basic economic analysis. It’s a really good training ground for a lot of things. so you have a lot of a lot of options there. Um, it’s a slower career path if you stick with it for 15 years, right? I think there are there are other options. So I would encourage you to think about jumping around in the next couple of years and I think uh this side hustle is really exciting. Um, you know, run your numbers, do your spreadsheet on that one um as well. But and then do your spreadsheet on your house hack. Last spreadsheet you should run is on Roth IRA, HSA, 401K and compare them to a house hack under moderate conditions. Your ROI on the house hack, you put down five 5 percent in any normal environment, you know, and who knows, next year could be a bad year um for real estate with with price with I don’t know with those things. It could be a bad year for stocks, it could, you know, but in any normal environment, the house hack ROI is going to be like 50 to 100% with a low down payment on that. If you assume if you if you’re reasonably able to assume 3% appreciation on that. And so, while I get that that first year of Roth is going to be worth the most in 30 years, the first year of the house hack is going to be worth the most in 30 years, right? I mean this is a this is a, you know, I on I bought my my first place for 240 in 2014, right? Now that place is worth 550, right? My Roth contribution in 2014 ain’t worth 300 grand, right? The the whatever, you know, proportionally as much as uh as that investment is, it’s maybe doubled um in that time period. So, I think it’s, I think it’s a really powerful tool there and and uh look, you your the reality of your situation right now is you have ways to make more money, you’ve got a good property, but you cannot have your cake and eat it too. You can’t have spend $1500 a month on rent and max out your Roth, contribute to your 401k and your HSA and buy a property. You got to choose. And so, use your skill set as a financial analyst and rationalize based on highest the highest returns there and I think I think there’s no way you’ll run those analyses and come out with another house hack as the the clear winner, unless you believe prices are going to go down substantially for for a prolonged period.
Guest: Regardless of what I think, you can never really, it’s hard to predict, but um, yeah, I kind of have like these these different opinions like my finance background has me thinking, oh, and I think that’s what most people say, you should get your 401k to the match, then max out your Roth, then go back to your 401k and completely max it and then after that go into a taxable brokerage or investing in real estate. But, you know, if I did that I have no cash left, so yeah, I think that’s a good point.
Scott: Run the analysis. Ask yourself, what do I believe and then do the thing with the highest return that you believe.
Mindy: Do you have a match at your company? Yeah, uh 4%, I’d have to contribute 8%, but right now I’m contributing 12, so. I would contribute enough to get the entire match.
Guest: Yeah, I am, I am.
Mindy: What do they say that’s free money? yeah. So then you could pull back on that if you choose and take that extra 4% and put that into cash. Yeah. Or take that extra 4% and put that into your HSA and then stop the HSA and the Roth and just think about it.
Scott: I agree with Mindy that you should take the match, but I do want to also just continue to push this seed of doubt in there that you are 26 years old, you’ve already started two or three different businesses at this point. some of which have been very lucrative and opportunistic, right? Getting cash in your bank account that you’re willing to use to advance your position is going to be way more powerful for you than almost anybody else uh around in any different life life positions because you will use it um to to change that job, join the startup, start your own business, try the next rent rental property investment, those types of things. And the ROI on that is going to be higher than the 10% that you’re going to get on an annualized basis in a in an index from the stock market. Everything on top of that that you don’t need for to pursue those opportunities, I think that’s that that you dump that in, dump that into the tax advantage retirement stack as far as you can go. But I have a heavy bias towards cash for folks like you in your situation that are learning lessons, working, living literally in their business, all that kind of good stuff.
Guest: I mean now’s the time, right? I’ve got no dependence, no girlfriend, no anything, right? I feel like that’s that’s the thing I like about real estate is I can have like an active role in creating my success, I guess. Not that contributing to retirement is not a good thing, but it’s just kind of buying ETFs and just letting it sit there is is doesn’t really feel like I’m being as proactive towards being successful, I guess.
Scott: I think 10 years down the road, Parker with $30,000 in cash is going to be way richer than Parker with $50,000 in in his in his in investment accounts um and and and less in cash.
Mindy: That’s hard to argue with.
Scott: I can’t compute that in a spreadsheet though, but but the math the formula will work out. So hopefully the argument at least makes you think about things.
Mindy: Parker, this was a lot of fun and we I’m really jealous of your $36,000 couch flipping side hustle. That should be a main job. That’s not even a side hustle when it pays $36,000 a year. Uh, so, yeah, get back into that. That’s a really awesome, even if you can only only do half of that, $18,000, there’s your down payment. So, I encourage you to start combing the ads again to find the properties, the stuff that sold really really well.
Scott: and if you make that much money, also that’s a good one to set up the LLC for. so you’re asking about LLC. That’s a great LLC and a self-directed solo 401K and oh my goodness, so many fun things. Uh, okay, I really appreciate your time today, Parker. Thank you so much for joining us and we’ll talk to you soon.
Guest: Thank you guys. Love the show, so great to be on. Thank you.
Mindy: Oh, thank you.
Guest: Thank you.
Mindy: That was Parker and I cannot believe he makes $36,000 flipping couches. I’m going to go buy a truck and flip couches too, Scott.
Scott: Yeah, I think it’s a I think it’s a great side hustle and I think that you know, while we didn’t really touch on this nearly enough, the the big story here is how Parker sets himself up for income growth over the next couple of years. At 26, financial analyst making $75,000 a year. World’s world’s his oyster. He he needs to go and figure out how he can apply that skill set to a variety of opportunities. could either be continuation of his track in the in the finance world, um, taking on, starting a new business, buying more real estate, expanding these side hustles, all those things are really the major lever in his financial position on a go forward basis and I think that’s exactly where he should be focusing his time.
Mindy: Yeah, I agree. I think he’s got a lot of, a lot of different opportunities and just what does he want, what are his goals and how does he want to accomplish them?
Scott: Yeah.
Mindy: And how many different ways does he want to make money? I mean, that that uh, it seems like there’s a lot of passive and semi-passive ways that he can generate income.
Scott: Yeah, he’s got he’s got a lot of a lot of good options. um, just needs to focus and focus on them, so.
Mindy: Yep. All right, Scott, should we get out of here?
Scott: Let’s do it. And that wraps up this episode of the Bigger Pockets Money podcast. She is Mindy Jensen and I am Scott Trench saying, give me a hug Ladybug.
