Mindy: Welcome to the BiggerPockets Money podcast, where Scott interviews Carl and me about our most recent real estate investment, purchased with creative financing, in a changing real estate market, within a rapidly rising interest rate environment. It’ll be fun. Spoiler, it will not be fun.
Scott: I think what I’m hearing you guys say is, look, we we made a set of rationalized decisions that to us seem very reasonable and we borrowed against the cheapest source of capital, which was this one, one and a quarter ridiculously low interest rate margin loan and that that didn’t work out in 2022. And, you know, when we talk about thinking in bets, this is a bad outcome, good decision. And this is something that you would do again, and that if you did it, if you do it over the course of 10 years, nine out of 10 years, this is probably going to work out as the cheapest source of capital um to use to finance a rental property in your situation and therefore it makes a lot of sense.
Mindy: Hello, hello, hello. My name is Mindy Jensen and with me as always is my steady hand co-host, Scott Trench.
Scott: Thanks Mindy. Today we’re shaking it up as you said and having um inviting Carl to the podcast. So thank you guys for coming on.
Guest: Yeah, Scott, it’s good to see you again. It’s been a long time. I understand your family size has increased by 50% since the last time we talked. Congratulations on that.
Mindy: We’re jumping into the money nerd numbers already?
Scott: By one human. We we can consider our cat part of the family so it’s probably just a third. Um but close enough.
Guest: What’s that noise cats make when they’re angry? That’s pretty good.
Mindy: Okay.
Scott: 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.
Mindy: That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business, or deal with the ramifications of good problems, like getting 100X returns on tech stocks and figuring out how to maximize that. Uh we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.
Mindy: Uh Scott, I like that foreshadowing, so I’m going to go with what 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. And also, the stock picks that Carl and I made are not recommendations for you. If you make picks and they don’t work out, don’t come blame us.
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Scott: Well, let’s let’s set this thing up and you know, and and and try to try to kind of frame the story we’re about to tell here. Uh I’ve already kind of alluded to it in the intro there, but you guys um are have picked technology stocks in the past and they’ve done very, very well. And and you know, incredible returns, thanks to, you know, perhaps really skillful investing, perhaps a bit of luck, um, and you know, a great a great bull market here. I would love to hear about that story about how that came to pass, what how you started investing in tech stocks uh and those returns. I’d love to hear about uh how that led up to the events of 2022, which are I think are really interesting and illuminating story for us.
Mindy: Okay, Carl, you want to talk about your uh massive luck? Scott said maybe a little bit of luck. I’m going to go with it was a whole big bunch of luck.
Guest: Yeah, I think it was pretty much luck. I feel like we need a sound effect like the wayback machine because Scott I’m going to take you back to way back to 2004. And before I tell you about these couple stocks, I want to preface my story by saying I’m a big believer in index funds, but I did not know what an index fund was until like 2013 and 2014. So, back then I was a computer programmer and I was kind of obsessed with everything around that, the the technology. And the first time I encountered Google, I could go full on nerd on you but your audience does not want to hear that. I thought Google was incredible. So I’m like, I want to invest in this company. And it wasn’t quite public, but then I learned it would be public in August 2004. So we bought, I think it was probably about $5,000 worth of Google shares. And Google’s done super good. It it’s done awesome. Uh, and I just continued to buy other tech companies. We bought Facebook in that IPO. I think that was around 2012, although double check me on that. Another one I bought, I’m a nerd and I thought Elon Musk was cool. All that that that might have changed recently based on current events. But he was doing all this cool tech stuff. I’m like, God, that guy is pretty cool. and then I saw a Tesla on the road and I’m a car guy too and I thought, man, that’s a pretty neat car. I’m just going to take like a a couple thousand bucks and throw it into Tesla and see what happens just just on a whim. I didn’t really expect that to amount to anything, but that was back in the end of 2012 and I think the split adjusted shares were like uh 66 cents right around there somewhere. And now they’re still despite the things that have happened recently with the stock decline, they’re still over $100. So it’s been a fantastic return. A couple others real quick, we have Amazon and Apple as well and uh my biggest strength is just being a stubborn ass, which usually doesn’t serve you well in life, but when you hold stocks and they do well, not selling when they have an an incident or wrong things happen, bad things happen, bad temporary things happen, um it works out well. most of the time.
Mindy: So, I think that Carl is glossing over the fact that he reads every bit of news about every one of these companies obsessively every single day. And it’s kind of difficult to get the the idea of the scope of his uh his research into all of these companies just with a quick five-minute overview of his investments. But he subscribes to this newsletter and that newsletter and he listens to every Tesla podcast and all the time. And, I mean, I know listeners have heard me chide him jokingly. He talks about it all the time. He’s constantly doing research and reading articles and gathering knowledge. It isn’t just, oh, I googled something once so I thought it was a cool company. So I threw some money at it. He did a lot of research into each one of these companies before actually throwing money in there. So, I don’t think that you should never, ever, ever, ever, ever pick individual stocks, but I think that if you can’t discuss at length the corporate values and what the company does and tons of information about that company, why do you think you should be investing in that company? If you don’t have the time to do the research, why do you think they deserve your money?
Scott: Yeah, and I I just want to echo. I agree conceptually, you know, I invest in index funds, essentially all of my stock portfolio is in index funds, um, because I do not believe that I can I can generate those outside returns. I do not I that’s not me saying I don’t believe it can’t be done. Clearly people can do it. It just takes an elite level of commitment and, you know, um an obsession perhaps to the same level that we obsessed over real estate a lot a lot of folks in the real estate community perhaps even more so in the in the public markets with that. So so Carl, to thing up the next question, what is the next um hundred bagger stock that we can invest in currently over the next eight to 10 years so we can skip all of that research?
Guest: Yeah, I just want to emphasize even though we’ve had this, I’m going to say an important four letter word here that’s not a bad one but that ends in CK, it is luck. And I just happen to be a nerd who read the right things at the wrong time. Um I might have had a little bit more insight because I can tell you all about how the dry electrode battery process works at Tesla and what advantages that gives or maybe why Google search dominance could happen, but um Tesla could be disrupted tomorrow by a solid state battery that someone comes up with or Google might be being disrupted right now by Chat GPT, these AI things that have sprouted up on the internet recently. So, even though I’ve got lucky, I very skittish, all our money is going towards index funds and I want to make that abundantly clear. Uh do as I say, not as I did. Is that what dads say? That sounds like a dad thing.
Mindy: You’re a dad.
Guest: Hey kid, don’t don’t do as I yeah.
Scott: Let’s get a sense of proportion on the on this. Um so how how much uh you know, can you give us maybe a relativistic sense of your the percentage of your net worth that you invested and the percentage of your net worth that these winning tech stocks became?
Guest: It was pretty small initially because they were small things in my post tax portfolio. Uh most of our investments, most of the money we put in were through 401Ks and Roths and with those, they were mostly into some kind of fund, which I transitioned to index funds. And the main reason for that was I couldn’t invest in individual stocks because it was a company 401k. Uh so the amount of money we put into stocks was very small, but at its peak it probably consumed about half of our portfolio. Uh yeah, about 50% and that has since changed. Cue the scary music.
Scott: Yeah. So okay, so so these these small amounts of money, 5,000 bucks at a time at first, maybe a little bit more as the years passed, really became hundreds of thousands, millions of dollars because of the incredible returns of these companies and a huge part of your portfolio, um, which which have which is waned a little bit because the market’s come down in particular in 2022, particularly hitting some of these winners, but it’s still 100 X return in some of these categories, 10, 20, 30 X returns and some of in some of these individual stocks over the last 10 to 15 years.
Guest: Yeah, that is correct. Despite recent what has happened recently, we have still outperformed the index funds which is uh pretty rare and I don’t think it’s repeatable. I also don’t think to something you alluded to earlier is it’s probably not sustainable. Every company usually goes bye-bye and it’s very hard to predict when that tide is going to turn. I think the average length of a company now is like 20.7 years and it’s actually decreasing. So good luck even if you do pick a winner, good luck knowing where to step off that winner.
Scott: Well safe to say there was there was a big win here, uh regardless of whether, you know, we we missed the peak or it’s coming back or whatever, who knows the future with that. Um, walk us through how this how this relates to real estate and and maybe introducing some of the events in 2022.
Mindy: Well, we were not looking for a house and a house popped up in our neighborhood where uh the neighborhood that we live in is a desirable neighborhood in the city. So we knew that the and I’m a real estate agent. I am able to run the comps easily because I have access to the MLS and I knew that this house was at the price that we were negotiating it, it was going to be a really great buy. And we decided that we wanted to purchase this house. it’s directly next door to a friend of ours and it’s a ranch style house. Our current house is a split level and it has stairs everywhere.
Guest: It’s got four levels.
Mindy: Four levels of stairs. There’s just stairs all over the place, which is great if you have little kids and not so great if you are 97 years old trying to live around your house. Our main level doesn’t have a bathroom, it doesn’t have a bedroom. So it’s you have to get you have to use stairs to get to any of this stuff. And we decided a ranch would be much better. So we negotiated a really great price on this house and we bought it with a margin loan. And back when Tony Robinson was on the podcast, Tony Robinson is the host of the real estate rookie podcast, he casually mentioned the concept of a margin loan and I asked him for more information about this and I sent Carl a note. I’m like, do you know you can take out like essentially a Heloc against your stocks? And Carl said, I’ve never heard of that. And he did some research and discovered that Tony was in fact telling the truth. Not that I was doubting him, I just never heard of this before. So we gathered up all of our portfolio into one location and had the opportunity to take out a margin loan. I think our margin at the time was around $1 million. That was the amount that we could borrow. And we ended up borrowing 500,000 to buy this house.
Guest: Actually it was a little bit different. I want to jump back to something you alluded to. It’s a ranch and we intend to move into this house once our kids are out in six or seven years. But yeah, we had enough margin in there. So after we borrowed the initial $500,000 to buy the house, we still had 1 million in buffer, which I thought would have been enough. Again, Q the scary music.
Mindy: Oh, we had oh, okay.
Guest: Yeah.
Scott: what was the So so you you you could have borrowed up to one and a half million and you borrowed 500,000 with the ability to go up to another million if you needed to, right?
Guest: Yes, I should have taken a screen capture, but I believe it was right around there.
Scott: Awesome. And then and what was the interest rate on this on this? Because these I was Tony said they were very attractive interest rates, like very, very low.
Guest: Yeah, so interactive brokers is the company best known for offering these kind of arrangements, this line of credit against your portfolio, but then I called E-Trade and said, what can you do? And they gave me an even better rate and a lot of cash to transfer our money over there. So, at the time we bought the house, it was a little bit over 1%. So we could borrow money like I think it was like 1.2% or something like that, but again, Q the scary music, that rate is variable.
Mindy: Yeah, and it’s not variable like a uh adjustable rate mortgage, which goes up every, what is that every year? This goes up every month.
Guest: Or no, every day it can change. It can change every day.
Mindy: This gets worse every time you talk. Don’t talk anymore.
Guest: We need to have better money dates to discuss this stuff. I’m sorry. I feel I didn’t I’m liable for not full disclosure.
Scott: Okay, so we’re we’re we’re we’re we’re on top of the world. It’s early 2022. Stock market is is well wealth has never been higher. Um these these you know, big big tech stocks have exploded in value over a decade and are are really in at at incredible valuations. We’re you’re you’re borrowing but it feels like an incredibly conservative amount to borrow um against uh because and and it’s an incredibly attractive interest rate. So this all makes perfect sense. You can’t argue that any of this at this point is is a uh even even somewhat irresponsible financial decision. Why why are we queuing all the scary music? What happens next here?
Guest: Well, what happened next is inflation happened next and the Fed started raising rates to combat inflation and those rates are tied to the rate of the line of credit. And the other effect of this is when rates start going up, money flows out of growth stocks, which are mostly the tech stocks that our line of credit was against and flows into other things. So I think the S&P 500 was down like 22% in 2022, but I did not actually check to see what the Nasdaq was down, which is mostly tech focused, but I’ll bet it’s down quite a bit more.
Mindy: Tesla was down 80% if you’re keeping score.
Scott: I like what you said Scott, we were taking what we considered to be a very conservative position.
Guest: Yeah, and and the danger to a margin loan is that the money you borrow is collateralized by the money by your investments. So if those stocks go down, E-trade is eventually going to get to a position where they’re unhappy because they’ve loaned you $500,000 and then all of a sudden your stocks are worth like $550,000 or something like that. I’m just pulling numbers out of thin air here, but you have to maintain a certain amount in there and if you don’t, they will start selling your investments whether you like it or not and paying down your loan for you because they want to make sure they get their money back.
Mindy: And that process we are referring to as getting called out of our loan. So, uh I don’t know what the actual phrase is, but we didn’t want to get called out of our loan or have our stock sold for us.
Scott: So so to give an example here, if I have a million dollars in Tesla stock at the beginning of the year and I borrow against that, I could borrow up to half of that potentially at these really attractive interest rates for 500 grand. Um if Tesla stock drops 80%, now all of a sudden, I’m borrowing 500,000 against 200,000 in stock. I’m either going to be on the hook for bringing 300,000 or or really probably $400,000 to the table so my my loan is half of my stock value, which is now 200,000, um 100,000 or they’re going to start selling my Tesla stock for me in order to recollateralize that loan. And they’re going to really start doing that before I get to that point. So if I’m at if it drops to 800,000, they’re going to say we’re going to start doing that until your margin’s 400,000 and they’re going to do that on the way down um on the way down this set of journey. This is something you thought, we’re going to completely avoid this risk in its entirety because we’re only borrowing one-third of the value, but when Tesla goes down 80%, that creates that begins putting this pressure on even the conservative loan you took against the portfolio. Is that is that a correct way of phrasing this?
Guest: Yeah, that is exactly right. And to add pain to our pile, uh E-trade and interactive brokers value your holdings differently. So if all this would have been in like VTSAX like an index fund, they would have allowed for a bigger line of credit and they would not have been as aggressive with calling their money back because those investments are much less volatile than Tesla or Amazon.
Scott: Awesome. Okay. Um, well not awesome, but I think we understand the concept here. How how what what happens next here? What happens throughout the rest of 2022 and how do we how do we resolve this problem that’s beginning to compound?
Guest: Yeah, so So the one thing we did do is because we’re so conservative, even though we did have a huge buffer and this will come into the story a little bit later, we went and got a Helock against our primary home. We’re like, we I think the chances of us getting called out are so small, but I really, really don’t want to be forced to ever sell anything. So let’s get a Heloc just in case this rare, rare scenario does actually happen.
Scott: By the way, can I I want to I want to point out something else here. This is also probably scary because you have 100 X capital gains in some of these stocks, right? And so if you had to sell those stocks, not only are you going to be paying having to sell that stock and pay off the the loan, you’ve also got to claim these incredible amounts of gains, which are then taxable, right? So that puts compounding pressure on on the situation as well, right?
Mindy: Yes, we were really, really, really anxious to not sell stocks in 2022 calendar year. So, I think it was August, we went and opened up a Heloc locally and just in case, we didn’t think we would need any of it, but we wanted to be able to pull money out of the Heloc, throw it into this loan to buy ourselves some time to think instead of having to make a snap decision because I think the way that it works is once you go below the whatever the threshold is, you have three days to put the money back into the account or they’re going to start selling your stocks. And we wanted to have more than three days to think. So we took out a Heloc, they gave us I think $108,000 on against our house and we didn’t we opened the Heloc. We didn’t take any money out yet. We were just waiting.
Guest: The one thing I was going to say about a Heloc is that can be scary too. We had a Heloc on a house when 2008 happened and uh the bank actually said up, you can’t have your Heloc anymore because house prices have declined and uh that’s close it.
Mindy: We’re gonna close it whether you like it or not.
Guest: So, yeah, you you never know what’s going to happen to your. You make backup plans for backup plans, but
Scott: So how how did the situation end up resolving? We we took out Is was the Heloc sufficient to cover the the the margin that you needed?
Guest: Yeah, so this was a a good roller coaster of a ride, but the down part in this case, most roller coasters are fun going uh going down but with your stocks it’s not fun going down. The up part is more fun. Um yeah, Tesla really started to go bad probably towards the last quarter of the year. Elon Musk had to sell a bunch of his own shares to buy Twitter which I don’t think he wanted to do and his SpaceX shares and that caused people to freak out. He also went a little uh off the wall on social media and I think people lost faith in him and uh the money just poured out of the stocks and that combined with other ones as well, the big outflow of money from growth stocks, we were really, really close and I think we have dates in our spreadsheet here. Yeah. So on 12:22 it was getting a little bit close, so I went to the bank, I did a walk of shame with my head down to the bank person and wired $80,000 from our Heloc over to E-Trade to make sure we wouldn’t have to sell a stock. And I’m going to say something real quick which I should have said before. I never like to sell stocks. I like Warren Buffett’s philosophy. If you do buy a stock, your holding period should be forever. And if you don’t think you should hold the stock forever or you can, then you shouldn’t buy it in the first place. So the thought of having to sell a stock really did not sit well with me.
Scott: On this note, I want to just to to dive for one second here. I I feel like we’ve had a couple of folks who have had this, I’m going to call it an air quotes problem where they’ve made an a single investment that ends up being a huge percentage of their net worth, right? And so it sounds like that was Tesla for you guys or maybe some of these other tech stocks. We had a gentleman um many episodes ago on the podcast who had a condo in San Francisco and he held for 15 years and that just skyrocketed in value and became, you know, when you have something like that that’s the, you know, the bulk or a huge percentage of your net worth, but you’re your philosophy is index funds, you know, because things evolve at this point. How does one think through exiting that approach? So, you know, how how because there’s tax ramifications, right? If you have a million bucks in Tesla stock, you want to sell it, you got to pay 200 grand in capital gains tax, you know, rough give or take. So what do you have any thoughts or advice for folks that might be struggling with that that problem conceptually?
Guest: Yeah, it’s a really good problem to have and I have two thoughts. The first thing that’s Tesla specific or any stock specific is that the stock price itself is a reflection of the company but it might not be the most accurate. There’s macro things that happen. Uh the CEO goes off the rails occasionally. There’s recessions. Uh if you really follow the stock, you should be following, you should never follow a stock. You should be following the business and if you still believe in the business, who cares what the stock does in the short term. On the other hand, yeah, it’s a dangerous position to be in because what’s the old famous Rumsfeld quote? There are no knows and no unknowns and there are unknown unknowns and you don’t know what unknown unknown is going to come out and topple your castle or company or stock and uh you’re probably not going to see it until it’s too late. People laughed at the that Steve Balmer laughed at the iPhone and uh now where is Windows phone. So I think if you do have a big amount, I would I capital gains started at like $84,000 of income. I would try to slowly uh slowly liquefy your portfolio and and maybe try to maximize capital gains. I think and uh that’s a moving target too. who knows what capital gains are going to do in the future. And if the company does go to zero, you would have wished you had paid those capital gains instead of holding on to the company to maximize your tax benefits.
Mindy: But is that what we’re doing?
Guest: Um we are not doing that yet and my thinking is we’re we’re very fortunate. I feel so ridiculously lucky to be able to say things like I’m about to say. and that’s if any of our individual stocks or all of them went to zero, it wouldn’t change our life. Uh it would still be great and I’m so thankful for that. So I don’t feel the pressure that some people have. I know two people in my personal life that have like 95% of their wealth tied up in Tesla and the other 5% isn’t that much. So if you’re in a situation like that, that’s uh extremely dangerous if it did go to zero, it would ruin them. But it’s all personal decision, but yeah, eventually they’ll come a time when we will um start unmoting it. maybe even this year sometime, although I don’t think so. I’m still confident in the fundamentals on the company. Uh Scott I could tell you hours about dry electrode battery technology but I’m sure you don’t want to hear that and nor do your listeners.
Scott: Next time we’ll have a BP Money special, 4-hour special on dry electric batteries featuring Carl Jensen. Thank you. Yeah. We’re looking forward to that.
Mindy: I’m not able to make that recording. Sorry.
Scott: Uh what what how has your strategy for the property that you bought changed at all as a result of this? Do you think you’re going to still hold it as a rental?
Guest: Yeah, it lit a fire under our butts to get it done sooner than later so it starts to generate income instead of taking all of our current income to to have money to it. Our our scope did expand a little bit due to issues we found with the house and a couple other things, but yeah, I think we’re still going to do the exact same thing just uh yeah, I’m going to get over there right after I’m done with this, I’m going to be working in the air compressor and nail gun. Scott, if you’re not doing anything, if you want to come up, learn some home improvement.
Scott: We’ll do that we’ll do that at the same time as we record that four-hour dry battery podcast here.
Mindy: Oh yeah, you guys could talk about the dry batteries while you’re working on the house.
Scott: That sounds wonderful. So it sounds like you guys sounds like it doesn’t change anything and maybe a lesson there to learn as a takeaway as well is, you know, if you are able to get a really attractive source of financing for a property, but there’s a variable interest rate or it’s a non-traditional source of financing, maybe you should still run the numbers on that property with more traditional um uh rates, you know, at that, you know, at the rates that maybe current 30 year mortgages or even with a little bit of a buffer, make sure it’s still cash flows in case there is an issue that requires you to rearrange your financing because that may change the return profile. And it sounds like in this case it’s still works even with the higher rates.
Mindy: It does, it just doesn’t work as well. But you know, the some of the advice that I see in the Bigger Pockets forums over and over and over again is have multiple exit strategies and we did. We had the plan is to have this as a medium term rental because the neighborhood doesn’t allow for short term rentals. Have it as a medium term rental until our kids move out of the house and then we will move into it because it’s a better retirement house than our current house. We could sell it, we could turn it into a long-term rental. This neighborhood commands good rent rates. So even a long-term rental would make sense. Short-term rental is out. Um it’s a flip. We could sell it just outright if we decided that we get to the end of it and it doesn’t work out. We can just sell it. There are three exit strategies and we’re going to move into it. Like we could technically move into it. It doesn’t quite fit our family. It’s a smaller house than what we have now. um but if we had to, we could move into it as well and then sell this house.
Scott: Yeah, and I think investing should destress your life with each incremental asset, not put compounding pressure on you until you reach these break points three to five years out.
Mindy: Oh, you feel seen.
Guest: I should have talked to you got like eight months ago.
Scott: Well, great. Well, guys, thank you so much for coming on the BP Money show. This was wonderful and really, really appreciate it. and hope to hope to have you back to discuss, you know, a big winner next time. You know, next year, let’s do that. That sounds great.
Mindy: Thanks for having us, Scott. We had a great time on the Bigger Pockets Money podcast.
Guest: Thank you Scott and please say hi to Fred for me.
Scott: We will. We will certainly do that. And kiss your baby for me.
Guest: Always.
Mindy: Bigger Pockets Money was created by Mindy Jensen and Scott Trench, produced by Kalyn Bennett, editing by Exodus Media, copywriting by Nate Winetraub. Lastly, a big thank you to the Bigger Pockets team for making this show possible.
