Mindy Jensen: What if you were 36 years old with $1 million already invested for financial independence, but you still weren’t sure if you’d made a major mistake? Today, we’re diving into the story of a family with 2 young kids who have built a $1 million FI portfolio and are now questioning whether buying a primary residence will set their early retirement back. Cheryl wants to know what it would take to reach Coast FI and work part-time in the next 5 years while also aiming to retire with a $3 million net worth by age 59 and a half. So did buying her house blow up her FI path, or is there a way to make all of these goals work together? Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen, and with me as always is my loves Finance Friday episodes co-host Scott Trench.
Scott Trench: Thanks for that handoff, Mindy. I’m going to take the rest of this intro to the house. We are so excited to be joined by Cheryl and excited to see what options she’s got on this episode. So without further ado, Cheryl, welcome to the BiggerPockets Money Podcast. Thank you, Scott.
Cheryl: Thank you, Mindy, I am so grateful to be talking to you guys today.
Mindy Jensen: I’m super excited to talk to you. I want to dive right into your numbers because you have built a really impressive portfolio. What I am seeing is total assets of $2.2 million against debts that are mostly mortgages of $1.1 million. So a total net worth of $1.07 million. That’s awesome. And we’ve got net liquid financial portfolio value of $500,000. Of that $500,000, we’ve got a nominal amount in cash, $386,000 in your traditional accounts, your traditional IRA, traditional 401(k), $56,000 in Roth, and $51,000 in other like HSAs. Total retirement accounts is $494,000. We also have an after-tax stock portfolio that looks like you’re just getting started with $1,200 in it. You have an illiquid financial portfolio, which includes a rental property worth $552,000 with a mortgage of about $300,000 on it. So $250,000 in equity in this property. It kicks off $1,000 a year. So we’re going to talk about your rental property a little bit later. In your debts, we have a mortgage on your primary home of $880,000 at a 7% interest rate and a mortgage on the rental property of $300,000 at 3.25%. Boy, if you could only swap those 2, right?
Cheryl: Right.
Scott Trench: Cheryl, can you tell us a little bit about where you live, what you do for work, how old you are, and what is going on in your personal life?
Cheryl: Yeah, so I am 36 years old. My husband is 39. We live in Los Angeles, very high cost of living area. We’ve got 2 young boys, 3 and 5. I’m a product manager in a medical device company in Orange County. And yeah, that’s us.
Scott Trench: Awesome. And then it sounds like the questions you had for us today were, what would you do with the rental property? Did I blow up early retirement possibilities by buying this house and what would it take to reach Coast FI and work part-time? Is that what you’re hoping to get out of today’s show?
Cheryl: Yeah, I felt like I was in such a good place before I bought this house. You know, I know BiggerPockets had that goal of creating 1 million millionaires and I was one of them. Our household became a million-dollar household in March and then we bought a million-dollar house in April. So I feel like we blew up everything. I introduced so much financial anxiety back into our lives with this mortgage.
Mindy Jensen: Yeah, you should have bought a $500,000 house in LA.
Scott Trench: But that’s the challenge, right? That’s what I think is really interesting. And thank you very much for coming on the show today to talk about this, because I don’t know what the right answer is in the situation. There’s not a judgment about whether there’s a good or bad decision being made here. There are trade-offs and consequences of various financial decisions. You know, at some point, many people who become millionaires work hard and make good money want to buy a house. And there’s good reasons to do that. I mean, everyone talks about financial benefits of buying versus renting. That’s great. Like, I love Ramit Sethi. He loves to dump on the buying a house decision. But guess what? When you buy a house, you can put in your home gym, you can customize it the way you want, it can be the place where you spend 10 or 15 or 20 Christmases with your children, if that’s something that’s important to you. Well, you know, whatever that is, that’s really important. And that’s often dismissed, I think, in a lot of personal finance. So I wanted to go into this discussion today with that framing and say, what happened here? What’s going on? And where do we proceed? But before we can answer your questions, I think we’ve also got to look at your cash flow. Right, your income statement and cash flow here. I think that’s really important because we’ve got the asset base and what’s going on there. We also have the income and expenses. And so it looks like your household’s going to bring $228,000 in gross income. You’re going to defer $20,000 in your HSA or 401(k), and you’re going to pay taxes of about $55,000 this year is the rough projection here, which gives us about $152,000 in after-tax cash generation. Sound about right?
Cheryl: Yeah, that sounds about right.
Scott Trench: All right, that’s about $12,500 a month, somewhere in that range, $12,000 to $13,000 a month hitting your bank account. On your expense profile, this is where I struggle. And I want to frame this and say, I don’t believe these numbers at first pass. I want to hear you explain them. But I see $5,700 in your mortgage payment. That’s just principal and interest for the house.
Cheryl: Correct. Yeah.
Scott Trench: On top of that, we’ve got another $2,000 in utilities, taxes, and insurance, you know, and household maintenance allocation. Is that right?
Cheryl: That’s right.
Scott Trench: So that brings us to $7,700 a month just in your housing expense. You’ve said your total monthly spending is $9,400. I just don’t believe you can live in LA on a family of your size on $1,700 a month with this housing cost. Can you help me understand what these numbers are showing?
Cheryl: So I’ve been pursuing financial independence for a long time now, listening, consuming personal finance podcasts for a decade now. And I married someone who was like-minded in that we appreciate low-cost adventures and low-cost experiences. We don’t eat out at fancy restaurants or go on expensive vacations. Our vacations are driving out to Vegas for the weekend and staying at cheap hotels. Also for our kids, for childcare, we don’t have childcare expenses. We moved out here to be close to my parents and my parents are so kind that they provide us free childcare. So we don’t have that expense there. They also feed my kids and we go to dinners there a lot too. So our grocery bill benefits from that as well.
Scott Trench: Okay, fair enough. Thank you. That’s my first reaction to these things is how can that be possible? But that explains some component of it. So then the question is we have $9,400 in monthly spending or $113,000 in annual spending. How much did this house impact our ability to become financially independent? And I think the simple answer here is you take this $7,700 a month, and we’re going to multiply that by 12. So $7,700 times 12 is going to be $92,000 per year. And then if we multiply that by the 4% rule times 25, that increases the FI portfolio just on the housing position because this is fixed for 30 years. So the 4% rule is a 30-year time horizon. That requires a $2.3 million incremental financial portfolio. Have you modeled that out before as part of this process?
Cheryl: Yeah, I did. And that’s how I got to this number of $3 million by the time I’m 59 and a half. I think before I was in that average boat that everybody, like you comment on often, which is the $2 to $2.5 million. I was even in the $1 million when I first started this journey, but $1 million just doesn’t seem like the same amount that it was before. Obviously.
Mindy Jensen: It’s not.
Scott Trench: The question is, what do we do next about this and what’s the right path to moving toward? You said you basically, did I ruin FI, right? Did I ruin my approach to Coast FI?
Mindy Jensen: Yeah.
Cheryl: And just to say that, you know, all of the numbers that I had been previously working on, it was while I was paying $2,000 a month in rent. So when I increased our housing expenses to over triple the amount it used to be, I kind of got overwhelmed with the numbers and thought, I really need Scott and Mindy’s help.
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Scott Trench: So let’s talk about Coast FI. You said you’re 36 right now. You want to retire at 59 and a half. Your safe withdrawal rate, we’re going to assume the 4% rule for this, and we’re going to assume an inflation-adjusted growth rate of 7%. I’m going to actually kick it down and be more conservative. I’m going to put it at 6%. So that would be like a 9% nominal yield assumption, for example, after 3% inflation is how we’ll think about that. Your annual expenses are going to be $3,600 times 12, right? And that’s kind of where we’re at right now, excluding your principal and interest payment, right, which is about $43,000. I’m going to round that up to $45,000 for the purpose of this calculation. And then we’re going to have no passive cash flow for now, but you have passive cash flow. We’ll get to that in a second here. And then we’re going to talk about your current balance. So the answer is you are already clearly Coast FI according to this set of calculations here. You’d only need $286,000 to be Coast FI with the rest of your assumptions in this particular scenario, right? And if we just take this rental, let’s say we do nothing with the rental, but same deal, just let it amortize over the next 30 years and this mortgage balance goes to zero. We can get to our rental property statement here.
Mindy Jensen: Okay.
Scott Trench: I’m going to delete your mortgage payment of $2,500 on this rental property. I’m going to put another $800 into your expense category for insurance and taxes. So a little bit of cheating here, that’s going to increase your cash flow by the time this is done to $1,700 a month, or $21,000 a year by the time the property’s paid off. Does that make sense to you?
Cheryl: Oh, yeah.
Scott Trench: This is what I think the beauty of real estate investing is, is, you know, yeah, sure, you might get a better return in the stock market, you can, we can debate all these types of things on there. And I think there’s a real debate. But, you know, it depends on how much leverage we have. But if I just ignore your mortgage on the rental property, I think it’s a fair assumption to say over very long periods of time, your property is going to inflate within inflation. It’s going to stay flat in real terms, and the income stream should largely stay flat, right? In inflation-adjusted terms. So this $21,000 today, I think should be roughly equivalent. That should be the assumption. At least if you don’t believe that, you should sell it. That’s the assumption of where that’s going to be in 30 years or however many years are left on the mortgage. Do you know how many years are left on the mortgage here?
Cheryl: I bought it in 2017, so there must be 21 years left.
Scott Trench: Perfect. So by Coast FI, do you think it’s fair that we could put in this full cash flow stream here? I’m approximately $20,000 a year in inflation-adjusted income by the time you hit 59 and a half.
Cheryl: Yeah, theoretically it makes sense, but that’s crazy. So that’ll cover half of my expenses already just from the rental? Yeah.
Scott Trench: You know, if we put that $21,000 in inflation-adjusted income in retirement, then that brings our Coast FI number to only $152,000 per year. I think you might’ve been coming in today expecting us to tell you, you blew it. This house has completely screwed you over. You’re never going to retire. Life is going to suck. And man, I don’t know what to do here. It’s kind of hopeless. That’s not what this initial analysis says. The analysis here says you’re on great track to have plenty in traditional retirement. You have an inflation-adjusted income stream that’s going to support a significant amount of your spending once you get to your target of 59 and a half. You ain’t going to be financially independent in the meantime. This is not a, I’m going to retire by 45, right? That is a consequence of buying the house. But no, I don’t think that this home purchase has blown up your dream of Coast FI at 59 and a half, assuming that the rest of the numbers you presented to us today are accurate. I’m a little skeptical. I would have a little pushback about how confident are we in this $1,700 in non-housing spend per month for a very long period of time. That’s a tough life, I think, in the LA area. So I would want to buffer you on that particular point. But assuming that these numbers are accurate, at least in the meantime, and you sustain them, you’re already Coast FI as far as I can tell. Most of the income you generate, or the lion’s share of this work for the next, you know, 15, 20 years is going to go towards paying down this house, this mortgage interest. But no, it has not, in my view, wrecked Coast FI at your target of 59 and a half. Mindy, do you have anything to add there?
Mindy Jensen: I do, because all the numbers that I ran were based on the $3 million goal that she had, which my numbers say that she’s not quite Coast FI yet. Annual spending at $120,000 would mean that she would need $632,000 invested today. And she’s at just under $500,000. So she’s really close if her goal is $3 million. I’m really cautious to say, yes, you’re Coast FI right now because LA is a very expensive place to live and you have somebody watching your kids for free. You said they pay for the kids. How old are the kids right now?
Cheryl: 3 and 5.
Mindy Jensen: 3 and 5. Okay. They’re going to eat a lot more down the road. I have 2 girls who eat like linebackers after a game. You have 2 boys. They’re also going to eat like linebackers after a game. I don’t know what it is about teens, but they cannot put enough food in their mouth. So your expenses are going to go up. And I don’t want to say, yeah, you’re Coast FI, go ahead and start working part-time now. And then in a few years you realize, oh, little boys grow into big boys and they can eat. And now $40,000 doesn’t even cut it in LA. And yeah, there’s lots of ways to get inexpensive food in LA, but there’s also lots of extra expenses. Scott loves this rental property and wants you to keep it. I see you making $90 a month off of this rental property knowing that it’s a condo. And going back in my mind, when I owned condos, I never owned a condo and did not also have a special assessment.
Scott Trench: What I’m trying to say is, if you assume that this is your spending number, you’re going to need a huge number in order to support FI. What I’m saying is no, at your Coast FI target, you’re going to be much closer to this number. Like once this mortgage is paid off, what does your expense profile look like? That’s my question.
Mindy Jensen: Right. And I think that the expense profile is going to be more than what is there.
Scott Trench: Great. So yeah, let’s talk about that.
Cheryl: That makes a lot more sense because we had depleted all of our after-tax brokerage and all of our, you know, emergency fund, like our savings to buy this house. So we have to replenish all of those savings accounts and funds with the boys growing. We’re going to go on vacations that my husband and I weren’t interested in going on before. Disneyland’s down the street. We’re going to be there lots of times. So yeah, it’s going to get more expensive. I know that.
Mindy Jensen: Scott, looking at her expenses of currently $9,000, but if you take out that $5,700, then you’re down to what, $4,000 a month, $3,600 a month? I just wonder how feasible that really is in Los Angeles.
Scott Trench: So I don’t believe that, by the way. You know, I heard her say it. I just like, that was my first question is I don’t believe it.
Mindy Jensen: One of the things that makes me think that that might not be super accurate is every expense on her personal financial statement ends in zero. So vehicle is not $180. It might be $172 or it might be, you know, $346, but not everything ends in zero. And I know she’s rounding, but I would encourage you, Cheryl, to keep actual accurate, very specific numbers to see just how accurate that $9,400 is. That’s my first recommendation. You mentioned that you had depleted your savings and your emergency fund and your after-tax brokerage account in order to buy this house. You’re going to want to build those back up. And like Scott said, you’re saving, what, what did you say, $60,000 a year?
Cheryl: Yeah.
Mindy Jensen: You’re able to put that into investments by living very leanly, which is a weird word, but how lean do you want to live and for how long?
Cheryl: Right, right.
Mindy Jensen: I don’t think that going to part-time right now is the right choice. I would continue to work full-time until you have more of a buffer. I like to say when you buy a property, something breaks the next day and the cost of that something that breaks is inversely proportionate to how much money you have in the bank to cover the cost. So if you’ve got a big emergency savings, you’re going to fix a light switch. But if you have almost nothing, you need a new roof and a new furnace or air conditioner in LA. And if you haven’t had a big expense yet, how are you going to cover it if one pops up? Hoping that it never does. I hope you have the best house ever and it never needs anything. But how are you going to cover that with very little in cash and very little in emergency fund?
Cheryl: Yeah, right now my emergency fund is like tapping into my HSA or taking a withdrawal from my retirement account. It’s very fee penalty and fee-prone avenues here.
Mindy Jensen: Cheryl, have you heard of a 401(k) loan?
Cheryl: I have. We actually used it to fund the down payment for this house.
Mindy Jensen: Oh, and is that in this, these numbers in the spreadsheet, the repayment?
Cheryl: Yeah, I lumped it in with my normal 401(k) contributions.
Mindy Jensen: Okay.
Scott Trench: The debt is not included, but the cash outflow going to repaying it is included. Correct. Yeah. Okay.
Mindy Jensen: I like a 401(k) loan versus just taking money out of the 401(k). When you take it out of the 401(k), it’s a taxable event, and that’s a 10% penalty if you’re not 59 and a half or older. Whereas the loan, you just borrow it and then you’re paying yourself back. You have to know what you’re doing when you’re doing this. It could be a great way to borrow. The thing is, when you pull it out of the 401(k), you can’t ever put it back in if you just take the withdrawal. That is the taxable event. So I like that you borrowed against it instead of pulling it out completely. Just know that if you separate from this company, you have something like 3 or 6 months to pay back that 401(k) loan, or all the money that you haven’t paid back becomes a taxable event, which also comes with a 10% penalty. So just have that in the back of your mind. I don’t know if HR would consider you separating if you went down to part-time, with regards to paying back the 401(k) loan. And that’s not really a question I’d ask them right now either.
Scott Trench: I want to take a step back here though, right? Because under the assumptions you gave us in this spreadsheet, I just disagree with Mindy on this particular point. Yes, you are Coast FI, because Mindy’s saying your retirement portfolio, your investment portfolio alone, is not quite enough to get you to Coast FI with the Coast FI calculator.
Mindy Jensen: Based on the numbers she gave us.
Scott Trench: If you sell the rental property and reallocate it, you’re there. Or if you add in the income stream, any income stream that’s reasonably defensible from that rental property, once the mortgage is paid off, you’re there. You can’t ignore the rental property and say you’re not Coast FI. That doesn’t make any sense to me. And so we have to say, what is your spending going to be at that future target date? And that spending is not going to be $45,000 a year. It’s probably also not going to be $120,000 a year, right? Not sustainably in inflation-adjusted spending at your retirement age, right? Now, you asked about a vacation in the middle, right? To Disneyland and all that kind of stuff. This is the problem, right? So if you tell me, hey, I’m going to liquidate my retirement accounts or my HSA, which I’m including in your Coast FI number as my emergency reserve, now my analysis of Coast FI does not apply anymore, right? Because that assumes that those grow right at those rates. And I’m also immensely, you know, buffering in that you’re contributing to a 401(k), taking a match, continuing to invest in other things as part of this, to some degree, which buffers it even more. As more and more of those things become question marks or not true, now my opinion on the situation begins to change here. What will be the challenge for you in the near term is, I think you need to bust it or make these numbers as true as possible on the expense side in the near term and repay this 401(k) loan and build up more of a liquid cash reserve, because you’ve got a big house right now, and maybe those expenses are not even conservative enough on the, you know, $2,000 a month you’re allocating for utilities, taxes, insurance, and other improvements to the house. So that’s a major concern I have about your situation. But I also think that at retirement, kids out of the house, we’re not supporting the kids at that point in time, we probably will need to pay off the rest of the mortgage, or we’ll need to project that that will roll off 5 or 6 years into retirement. Maybe the mortgage is not quite paid off on this house at 59 and a half, but you’re only a few years out, right? And that changes the way we’re going to think about the cash flows. So if I can mark that down to zero in 25 years, and the rental mortgage is knocked out and the kids are out of the house, I think it’s very hard to find a set of calculations that make you not Coast FI, unless we don’t have the right information, right? If the information’s wrong here, that begins to change these things. But I think that should be reassuring to you. There’s a hard work component that’s going to need to be made here, and this is not a FI journey in the meantime. There’s risks. You’ve got to keep this job. It assumes you’re going to keep staying employed at these numbers throughout that period. This is not like a free lunch with this house purchase. But no, I don’t think at 59 and a half, under these assumptions, it’s unreasonable to declare that you might be there, pretty close. What, Mindy, what’s your reaction to that?
Mindy Jensen: I would really rather be cautious than overly optimistic, because she’s in a very high cost of living area, because so many of her potential expenses over the course of the next, you know, 15 years are either being paid by somebody else or very low because the kids are young. Who knows if they’re going to be into sports and, you know, do very expensive sports things, or, you know, some other kind of travel or capital-intensive thing that kids do that you don’t know at age 3 and age 5. I definitely don’t want to be like, oh, totally just go part-time and everything’s going to be fine, and then in 6 years you’re like, wow, I really shouldn’t have done that.
Scott Trench: No, you cannot go part-time right now. I read the question as you want to go part-time at 59 and a half.
Cheryl: Oh no, I would like to be done working at 59 and a half completely.
Scott Trench: And you want to go part-time now?
Cheryl: I don’t mind making money. I like making money. I don’t want to go part-time right now, but I liked when I could. I liked when that was an option, and it’s not an option anymore.
Scott Trench: I think that’s fair. I am certainly in Mindy’s camp. This is not a position where you can go part-time. I think your numbers are too tight right now to justify that. And I think that you have so much uncertainty on the expense side, I think we’ve got to repay this 401(k) loan and build up the cash position, at the very least, before even a slight reduction in income can come into play. So I think there’s real risk in your situation here as a result of this home purchase. What I was saying is, as long as you don’t withdraw these, there’s a reasonable shot at Coast FI at 59 and a half under today’s income and expense profile. What has happened, your choices leading up to this point, allowed you, in my opinion, in my belief, to buy this house and still retire at 59 and a half, if that’s something that you want. There’s a real shot at that, but they do not allow you to go part-time right now and still retire at 59 and a half. That’s how I feel about the numbers here based on this.
Mindy Jensen: And to be less pessimistic, I think that you’re almost Coast FI. And I think that with your stock investments of about $500,000, if you do the rule of 72, and it doubles — I’m going to give us some conservative numbers — it doubles every 9 years. At 36, you have $500,000. At 45, you have $1 million. At 54, you have $2 million. At 63, you have $4 million. So I think $3 million by age 59 and a half, you’ll either hit it or get real, real close.
Cheryl: Okay.
Mindy Jensen: Yeah.
Cheryl: So with all of this, you know, it’s so dependent on my spending and our spending. It’s really dynamic. It’s going to change as the boys keep growing older. Or, I was going to transition this into the townhouse, because I would really like to know what your thoughts are on the condo that we have.
Mindy Jensen: I’d like to take that first. What I see is annual cash flow of $1,000. That’s not a misspeaking. That is $90 a month, or $1,080 of annual cash flow. I have owned condos in the past for a total of 5 years, 2 different condos. I always had a special assessment. My least expensive special assessment was $200 a month for 4 years. So if you’re only making $90 cash flow, all of a sudden now you are losing $110 every month. And without a ton of wiggle room in your expenses to begin with, that’s not really something that I want to see you tackling. You have almost $250,000 in equity that you could take and replenish your emergency fund. How much did you borrow out of your 401(k)? Isn’t it like $50,000 is the max?
Cheryl: $50,000, correct.
Mindy Jensen: Yeah, so you could pay back your 401(k) loan completely. You could build back up your emergency reserve, put this money into your after-tax brokerage and build that back up, and then have a lot more buffer and be Coast FI at that time. But this property has a 3.2% mortgage, and I can see how that’s difficult to give up. I am not a big fan of condos because I’ve been burned. Perhaps this condo has a really great, rock-solid emergency reserve fund, and they’ve got plans for replacing everything, and it’s going to be great. But that is also called a unicorn, and unicorns don’t happen in condos. What is the strength of their reserves? Do you know?
Cheryl: I do not. I do not actually. And what’s the special assessment that you’re talking about, Mindy?
Mindy Jensen: This is the best part of condo associations. So when you live in a condo association, you are responsible for anything that breaks within the walls, like from the drywall in. So your light bulb breaks, or you want your window — maybe it depends on the association — but the roof is not your sole responsibility. The roof is the responsibility of everybody who lives there. And the way that an HOA works is, supposedly, they take $10 a month from every single person and put it into the roof fund. And then they take another $10 a month from every single person and put it into the parking lot fund. In reality, they keep HOA assessments really low. And then, oh, the roof needs to be redone — we don’t have enough money in the roof fund — so everybody who is currently living here has to pay extra so that they can cover the cost of the roof. When in reality, anybody who’s ever lived in the building should have been contributing a little bit, because they benefited from the roof being there.
Cheryl: Gotcha. Yeah. Okay.
Mindy Jensen: You’ve owned this since 2017, and you’ve never had a special assessment before?
Cheryl: We had increases to our HOA, which I think were — must have been results of special assessments?
Mindy Jensen: It can be just like regular expenses going up because, you know, energy gets more expensive and everything gets more expensive over the course of the last 9 years. But a special assessment is in addition to your regular assessment. So let’s say your assessment is $200 a month. In my case, it was $200 a month, and then the special assessment was also $200 a month. So I buy the condo, and then, like, the next month they’re like, hey, we’re going to have a special assessment. Now you have to pay $400 a month. I was making $24,000 a year at the time — it was 100 years ago — and that was a huge ding to my expenses that I didn’t know about and had trouble paying.
Cheryl: Okay, yeah, gotcha. Thank you for that. That’s scary.
Scott Trench: When I zoom out and look at this rental, I see a very mediocre investment property. This does not seem like a very strong income property. And then you also put that this is a moderately annoying property — not easy, not super annoying, but moderately annoying. And then you put that you have very average prospects for this particular property. You don’t think it’s going to be a home run. You don’t think it’s going to be a loser necessarily either. Is that the right way to interpret?
Cheryl: Yeah, we were accidental landlords here. This is where my husband and I first lived. And then when we moved, we held onto it, and we wanted to sell it before we bought this house, but when we consulted a real estate agent, they said, you’ve got a 3.25% mortgage. There are other units in the community that are for sale right now, and you’d be competing with them currently. So we were really discouraged from selling it at the time and held onto it.
Scott Trench: When did you move out of this property?
Cheryl: In 2021. We are going to get that capital gains tax. We don’t qualify for that exemption for having lived there before.
Scott Trench: This changes things. What do you think this thing is actually worth, if you were to sell today?
Cheryl: I think we would have to, with the competing properties, we would be more around $500,000 or $510,000.
Scott Trench: Okay, so this is where I think things get interesting here, because Mindy’s absolutely right with the numbers you provided us. Let’s say that it is worth $500,000, and then you sell it. You’re going to pay a capital gains tax, you’re going to recapture depreciation, and you’re going to pay a 7% transaction fee to get out of this property, right? I don’t know what those numbers are. But let’s say you net $100,000 from the sale. If your net equity on this property is $100,000, I think you have a harder decision. I think that all of a sudden, that lower price point — because if I were to say that this property is worth $400,000, right, I’m making this up, but if I were to say it’s worth $400,000, all of a sudden your return on equity is going to go up significantly with this low interest rate debt, if that’s actually what it would take you to get out of it. So I think there’s more analysis that’s needed here, because at some price that you would sell it at, it becomes a keep. At some price it becomes a sell. And I don’t know the answer to that. I think I agree with Mindy that it’s a sell at $550,000, but at $475,000 or $450,000, it may be a clear — now all of a sudden it may be a great income property, right? That’s bad news for your balance sheet. So I think there’s another layer to the analysis here. And I think the homework for you — and this is going to be tough — is you’re going to have to figure out, how much have I actually depreciated this property? What’s my depreciation recapture if I were to sell it? The price doesn’t matter in that particular situation for that item. The price does matter in determining the capital gain that you would realize on that. And that’s going to stack with your income, which is pretty high, right? I’m not sure how California treats that either. And then you’re going to have transaction costs to sell it, which I usually plug 7% in there. It could be different in California for this particular property, I don’t know. But I put those numbers together and I say, what am I actually going to get out of this thing if I sell it? That’s really my equity basis in this property. And then, does that change how I’m going to think about selling or keeping the property? You following all that?
Cheryl: I think so. And I was really hoping there would be a very obvious sell or keep here, and so it sounds like there’s not, and there’s homework to be done.
Mindy Jensen: Well, I was going on this based on the $550,000 number and the fact that you just bought this other house in April. I thought you would have moved out of this property into the new house?
Cheryl: No, we had been renting. And that’s how we jumped from $2,000 a month in rent to almost $6,000 in mortgage.
Scott Trench: My very back-of-the-napkin guess here is that if you sold this thing for the $550,000 price you think it is — or you have in the sheet — that you’d clear somewhere in the ballpark of $200,000 and be able to put that to other uses right away. That would be great. If that’s unrealistic, and it’s unrealistic by a lot, that’s where I think the thing gets harder. But the good news is, again, if you just hold onto the thing, and it actually does cash flow — like, that’s a real question mark here on this — but it actually does cash flow to this level, and you feel that at the current price you get a higher return on equity keeping it here than you would by selling it or redeploying it to somewhere else, in the next 23 years or whatever, it’s going to be passively building up there and will be a major contributor. It could be a significant contributor to your Coast FI at that point as an income-producing property. So, you know, I have a little bit of a real estate bias, of course, but that’s how I would think about this particular property. That’s the framework I would use to decide whether to keep it or sell it. Either way, I do not think it deserves a zero on your Coast FI calculation. You had 3 questions. What would you do with the rental property? We gave you a, “it depends.” That’s very unhelpful. Well, we gave you some homework there. You said your second question was, did I blow up early retirement possibilities by buying this house? We did not say we blew up Coast FI. At least we’re not sure yet. And the third question was, what would it take to reach Coast FI and work part-time? Those are 2 separate questions. With the question about whether you can go part-time right now, I think — I mean, that depends on how much income you’re going to make part-time. How much income would you bring in part-time, Cheryl?
Cheryl: I don’t know. Like I said, I don’t actually want to lose my income, but I like being able to. I like the option.
Mindy Jensen: Can you structure your time at work so that you’re not working 5 days a week every week? Maybe you’re working 4 days a week and you just work four 10s? Or does your work require you to be there 5 days a week?
Cheryl: I think it’s realistic that I could ask for some kind of flexibility, but it’s not something I’m comfortable asking right now when so much relies on my income right now.
Scott Trench: I think that’s the trade-off. Personal finance only has trade-offs here. And what this—you bought a $1.1 million house with an $880,000 mortgage at 7%. That means that you can’t go part-time. I don’t see a realistic path to that. I mean, maybe something unique happens if you go and search for that. But no, I don’t think that’s a realistic possibility based on your situation. I think that’s the trade-off. If you wanted to go part-time, I think you’d need to sell or think about renting or move somewhere else in the country. It just doesn’t seem like that’s going to happen in this particular situation. That is more of the trade-off here than, did I blow up my plans for FIRE? I think based on your questions, I think you can still get there, but I don’t think you can go part-time, at least not for a while, until you’ve really shored up your financial position, built out your cash reserve. And I would treat it like an emergency. I would really focus and hustle on that for the next year or two to rebuild that, pay off that 401(k) loan, rebuild your cash reserves, and lock in on these spending things. But if two years go by and you’ve contributed $20,000 a year to your retirement accounts, buffed up your cash position here, paid off the 401(k) loan—maybe two or three years—and your spending is still reasonable, I would say feel much better about the Coast FI projection being correct. I still might not be able to go part-time.
Cheryl: Okay, that makes sense. It does sound like I am locked in, in this job until the mortgage is paid off or until I decide that we don’t need this dream house and decide on some other form of housing. But to have this life that I’ve wanted, I’ve got to keep working. That makes sense.
Scott Trench: I think that’s right. I would say this house is going to require you to work a job like this for the next 10 years. That’s okay. It’s not like, oh hey, we blew it or anything. That’s like what most people do in this situation. And you’re ahead of most people. You are a millionaire. You’re doing great. This is not like some disaster at all. It’s just, that’s the deal. That’s the price of the house.
Cheryl: Yeah, thank you.
Mindy Jensen: When was the last time you revisited your income? I know that medical sales can be quite lucrative, and $177,000 a year is nothing to sneeze at, but are you missing opportunities at other companies?
Cheryl: That is a recent promotion, a recent raise, the $177,000. So yeah, I got this bump up in pay in December, and then by March I hit million-dollar status. And then I thought, oh, I could buy a big house. In reality, this house was something that I wanted for a while, and I wanted to make sure I got our boys in here before they started school. My eldest started school this year, so it was time. I’m glad everything lined up the way it did, and I totally understand that it’s going to come with some financial anxiety for a little while.
Scott Trench: I think the anxiety piece—there should be a little bit of urgency, or anxiety, or a real drive, because you need this job. This job cannot go away. You cannot get fired. You cannot get laid off. If that begins to happen, now we’ve got a real problem. That’s the piece that I think should be slightly uncomfortable. But again, that’s everybody. This isn’t some unique FI situation. We’re talking financial independence on this podcast all the time, so there’s a little bit of, hey, this could be a real problem. But you must crush it at this job for the next 5 to 10 years here, and you need to be a little frugal for the next two or three, I think, to shore up your cash position. But again, I don’t think this is a crazy situation. I don’t think you did anything ridiculous here. You are a millionaire. You’re making $180,000 a year. You’re doing great. You bought a house in a good school district for your boys, near your family. Come on, that’s awesome, that’s great. You should feel reassured about the choices here, while also open-eyed about, hey, like most Americans, you need a job in the next decade that pays this well to support the decision. That’s my opinion on it. I don’t know, Mindy, do you still agree?
Mindy Jensen: I do agree. I don’t know that I would’ve recommended buying this house in April, but we can’t go back and change it. I think that as long as you understand that you’re going to be living the life that everybody else in America—what did Joel from FI180 say, back on like episode 11? He said, your worst case scenario is everybody else’s everyday life. Your everyday life is just like everybody else’s. You didn’t put yourself in such a hole that you’re going to be scrambling to eat and not know if you can afford to pay your electric bill every month. You’re just not able to go part-time at age 36. Well, most Americans aren’t able to go part-time at age 36. I couldn’t have gone part-time at age 36. Well, I was a stay-at-home mom at age 36, so I was zero time, but my husband couldn’t have gone part-time at age 36. Our net worth was not even what yours is. So I don’t think you’ve blown up your life because you bought this house.
Scott Trench: Go to monarch.com to get your first year of Monarch Core half off, at just $50. That’s 50% off your first year at monarch.com with the code POCKETS. My kind of prioritization of next steps here would be, one, I would think really hard about the expenses. I would start tracking them with some sort of software, or otherwise think about how certain I can be on these, because I think they’re understated, Cheryl. I think you’re going to find that this is going to be very hard to maintain for a long period of time. And maybe you maintain them for a year or two and relax a little bit while you build your financial position. I think that would be the first step, is really getting a little bit more realistic about the outside-of-the-house spending here. The second thing I would do is I would shore up the liquidity and repay this 401(k) loan and build up the cash buffer, because I think you just bought a $1.1 million house, and there could be things that go wrong there. I think that would be important in this situation. The third thing I’d do is decide what to do with the rental property. And I think it’s a function of the net after-tax proceeds you’d get from selling it. Either way, you can count it as a long-term future income stream towards your Coast FI number if you decide to keep it, or you can take the proceeds and pile them into your liquid financial portfolio, or buffer your cash position, accelerate the other pieces of that if you decide to sell it. And then I think from there, there’s some kind of steady amount that you’ll continue to invest, I believe, in your household, assuming the job is secure and we’ve got a good situation, and that will only continue to buffer your situation. Mindy, what do you have to add for next steps?
Mindy Jensen: So Scott, I had all of those exactly the same, just maybe in a bit of a different order. Track spending, for sure. You really want to know exactly where your money is going. Monarch is a great way to get a holistic look at your financial picture. It’s got your spending tracker. As long as you connect all of your credit cards and your bank accounts to your account on Monarch, you can view your entire financial picture. It helps track your net worth. I think that that is a great piece of software. Scott and I both use Monarch.
Cheryl: I’ll jump in and say I love Monarch, and I did use the Pockets promo code to get that. So these numbers came from past spending tracked through Monarch, but I have to say, you know, we just moved into this house, so our expenses changed a lot, and I’m waiting to get the next updated trend of our spending. So we’ll see how different it is.
Mindy Jensen: Okay, that’s awesome. I love that you use Monarch. I think it’s a great way to just get a holistic look at your entire financial picture. I would have you revisit the value of the condo by talking to a real estate agent, the one that helped you buy this house. You should absolutely be able to have them run comps for you on the existing property, just to see what condos in that neighborhood, in that specific complex, have been selling for recently, because the value from even six months ago might not be what it is right now. The market has changed dramatically, especially with the most recent rate hike. I would ask HR how fast you can pay back the 401(k) loan. Maybe they have you on a set schedule right now, like you’re paying the minimum. Maybe you can bump that up a little bit after you build up a bit of a more substantial emergency fund. I would say at least three months of spending, so that would be—what is that, like $30,000? I would build up the emergency fund to $30,000 and then talk to HR about how fast you can repay that 401(k) loan. You want the money back in the 401(k), and that debt hanging over your head off of you.
Cheryl: Awesome, thank you. Yeah, that’s very direct, actionable, I appreciate it. Also, I really hope that I’ll be able to come back with good news in a year or two. I want to be one of those returning Finance Friday guests.
Mindy Jensen: We would love to have you come back and keep in touch with us. Email Scott and I and give us updates and let us know when you’re ready to come back and share with everybody what you did, what steps you took, and where you are now.
Cheryl: Awesome.
Mindy Jensen: All right, well, we thank you so much for your time today, Cheryl. It’s always helpful to our audience to see real numbers and see—struggles isn’t the right word—see what other people are dealing with and facing, so that they can look at their portfolio and their financial situation and be like, oh, I can make this change, I can make that change.
Cheryl: Happy to help.
Scott Trench: Thank you so much.
Mindy Jensen: Cheryl, is there any place people can connect with you online?
Cheryl: Yeah, I actually set up an Instagram account specifically to respond to any comments or questions and connect with anyone who wanted to talk about this episode. It is Millionaire Cher on Instagram.
Mindy Jensen: And how do you spell Cher?
Cheryl: C-H-E-R.
Mindy Jensen: All right, Millionaire Cher on Instagram. That’s awesome. All right, Cheryl, I do really appreciate you coming on the show and sharing your numbers with us, and we will talk to you in about a year.
Cheryl: Thank you. Thanks, Scott. Thanks, Mindy.
Mindy Jensen: All right, Scott, that was Cheryl’s Finance Friday, and I appreciate her sharing her numbers. What did you think of her situation?
Scott Trench: Well, I thought it was fascinating. I think that this is a real challenge that a lot of people in the messy middle are going through, especially with young families. There’s a real tension between, how do I achieve FIRE, and now I’ve got kids and this other goal here, and FIRE is much less important than this precious 10, 15-year period. And what are the trade-offs that come with the dream house, or one parent stopping work, or how is that going to work part-time? And I think you have to—there’s like a menu of things that you really want at this point in life, and you have to pick. And I think that’s what this episode reflected, is they picked the house, and that’s going to have a consequence on some other things if they want to achieve their other financial goals. But it doesn’t make it a wrong decision—it just means that here are the trade-offs. And what I hope we showed is the framework for Coast FI has to be around what’s your spending going to be like when you are that age, right? It’s not what your spending is now, it’s what your spending is going to be at that age, and what your asset base is going to grow to, and what you add to the asset base is going to grow to. That’s how you do a projection in there. I think, hopefully, that should be really reassuring to Cheryl, just as we should be reasonably cautious. Anxious is the wrong way to phrase it, but a sense of urgency about the next few years. We really got to continue generating income, make sure the job goes well, and keep doing that, because if that does go away, if there’s a problem there, that would create a real friction in life here. That’s something that we want to fight against in the financial independence world, is to remove that. But this choice to buy the house creates that—nope, we now really have to grind at the job for the next couple years in order to make sure that the financial position does in fact remain stable, and we do get to our Coast FI target. So that’s my take on the situation here.
Mindy Jensen: Something other people should be thinking about is she could be in this exact same situation without the $500,000 in retirement accounts. There are plenty of people in America who are not financially conscious and are on this same track. “I want to get my kids into a good school district, therefore I am going to buy this”—and she bought a million-dollar house in LA. It’s not like she had a lot of less expensive options. I mean, how much does a house cost in LA? Where’s the—I was joking, you know, where’s the $500,000 house in LA? It’s not. It’s maybe a condo, it’s maybe a townhouse in an area you don’t really want to live in. There’s not that many better options, less expensive options she could have opted for. It’s just the situation she was in at the time. She didn’t have a ton of liquid cash to put in there, so she borrowed from her 401(k) and she took out money from her after-tax stock portfolio.
Scott Trench: I don’t know how to pass judgment on the decision to buy a house or not in this situation. This is the current hand that we’re playing here, and here are the goals. And I think, within what we heard, we can achieve many, but not quite all of the goals. And the specific one that I think we were not able to say is achievable is the part-time work in conjunction with ensuring Coast FI at this point in time. I think that’s the only part of the plan here that was really unworkable. The rest is, with hustle and discipline, reasonably achievable with the constraint of the house, keeping the house. So that’s where I’m at on this. And I think it’s just a great example of the trade-off that I think a lot of people at this age, in this stage of life, are going through.
Mindy Jensen: Yeah, I think you’re right. Well, Scott, should we get out of here?
Scott Trench: Let’s do it.
Mindy Jensen: If you would like even more financial independence information, you can follow us on Instagram, Facebook, and YouTube @BiggerPocketsMoney, or you can head on over to the BiggerPockets Money website and sign up for our newsletter. You can also find all sorts of free resources, templates, and calculators, all designed to help you on your journey to financial independence. We will see you on Tuesday. That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench. I am Mindy Jensen, saying chop chop, woodshop.
Scott Trench: Go to monarch.com to get your first year of Monarch Core half off, at just $50. That’s 50% off your first year at monarch.com with the code POCKETS.
