Speaker 1: Welcome to the BiggerPockets Money podcast, Finance Friday edition where we interview Alex and talk about real estating and entrepreneurship.
Scott: It’s zooming out and saying, okay, do I want two or three house hacks, uh, and portfolios? Do I want a stock portfolio? Do I want a business? Just kind of thinking through that at a really high level and saying, here’s where I want to be in three to five years. And are the actions I’m taking conducive to getting me there, or am I just continuing to throw a lot of cash onto this pile, which is great, but it’s not a, it’s not a strategy. It’s not as effective as putting together a thoughtful plan that you’re backing into.
Mindy: Hello, hello, hello. My name is Mindy Jensen and with me as always is my real estate super nerd co-host, Scott Trench.
Scott: Thanks Mindy, but I don’t think that one really was able to land. All right. Mindy 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 that financial freedom is attainable for everyone, no matter when or where you’re 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 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 your dreams. I can’t believe you took my spot, Scott. You stinker.
Scott: That’s not all Mindy. We have a new segment of the show called the money moment where we share a money hack tip or trick to help you on your financial journey. And today’s money moment is, want to save money and help the planet, switch to LED light bulbs. You can cut the amount of energy used by up to 90% using LEDs and they also last 25 times longer than regular light bulbs. So I think a lot of people skip these because they’re slightly more expensive than regular light bulbs. That’s because they use a lot less energy and last 25 times longer. So swap out all of your light bulbs with LED ones and you’re going to save yourself a lot of money, um, and a lot of uh time over the long run. If you have a money tip for us, email moneymoment@biggerpockets.com and Mindy will likely read 90% of them.
Mindy: I can’t believe you totally, it’s not even April Fool’s Day. All right. Now we’re back to our regularly scheduled slots. So, I am going to say the contents of this podcast are informational in nature 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 before…
Scott: For any financial decisions you contemplate.
Mindy: Yes, for any financial decisions you contemplate. I got to work on my memorization. That, that wasn’t that good. Uh, all right. So, Scott, I am excited to talk to Alex today. She is a newly, highly paid employee and she’s a real estate agent. She has a little bit of variable income, but also some pretty rock solid income and nice expenses. She’s doing pretty well and I’m excited to give her a bit of our own perspectives.
Scott: Yeah, I mean, this is, this is the result of a lot of work, a lot of intentionality, um, probably a lot of self-education in, um, personal finance and and real estate and and and really just hard work. And the culmination of that is a really strong, positive life cash flow. And a lot of people, it seems like we’ve talked to a number of people now on the Finance Fridays who have come into this position after a good amount of time. And it’s almost like you pop up and you’re like, wow, I’m gonna, I accumulated tens of thousands of dollars in cash in the last 12 months, last year, two, three and I’m going I’m going to accumulate 50 to 100,000 in cash in the next year or or some large amount relative to that. And I don’t really have, wow, what do I what do I do from here? I’ve got so many options. It’s overwhelming. It’s a really good problem. Um, and that’s where I think, you know, it comes down to what is the plan that you’re going to back into three, four, five, seven years from now and how do you begin making decisions that move you towards that? Because you do have a lot of good problems, but you still have a problem when you have a lot of cash to deploy and you’ve got to be intentional about it to maximize the opportunity and the abundance in your life.
Mindy: Yeah, absolutely. She has a lot of great options and opportunities and now it’s just deciding and narrowing down and I think really focusing on which one she wants to pursue first. Before we bring in Alex, let’s take a quick break. And we’re back. Alex is a real estate agent who left corporate America to pursue a job she liked much better. Kids are in the future and she’s pursuing FI, so Scott and I are here to take a peek at where she’s at and give suggestions for how she can get to financial independence. First, we’re going to take a look at her finances. I have a salary of $53,000, extra money of 1800, real estate commissions of 55,000, project commissions of 27,000 for a total of approximately 138,000 or 11,500 a month. She has savings and investments of $37,000 in aanguard brokerage account, a Roth IRA of 6,000, 6,800 in a 401k, 5,000 in Treasury bonds, 20,000 in savings and 100,000 in a high yield savings account. We’re going to talk about that a little bit more. Her expenses total around 4,000 a month and I’m not seeing really anything egregious, household rent is 1400, car is almost 900. That’s the one thing I do want to talk about. Medical 121, phone 75, dining out 180, groceries 160, subscriptions 55, business expenses 410, we’re going to talk about this at the end of the episode. Travel and vacation, $167. A grand total of 4,000 with an income of 11.5. I think she’s doing pretty good on the spend.
Scott: Yeah, she’s crushing it.
Mindy: Alex, welcome to the BiggerPockets Money podcast. I’m so excited to talk to you today.
Guest: Excited to talk to you guys too. Thank you for having me. I appreciate it.
Mindy: Let’s look at your money story. What does your history with money look like?
Guest: Sure. So I grew up with a single mother and a retired grandmother. So we were very middle class, you know, we got by, but we didn’t really dine out every week. We ate at home. I was telling Mindy before that, you know, I didn’t even really ever know that people ordered appetizers until I was in my 20s or started dating my boyfriend. I always looked at the numbers on the menu and I made sure that I was, you know, keeping it under budget. Um, so I grew up kind of with that scarcity mindset growing up. I think that’s a very common theme with a lot of people who grow up in that sort of situation. Um, and as I went on, you know, I went to college. I graduated college with about $25,000 worth of student loan debt. And then that same year, I thought it was a great idea to buy a new car. I mean, I did need a new car, but it was new. I did no negotiating. And I ended up with another $15,000 in debt. So that kind of rounded me out the first year out of college with $40,000 in debt. Um, I got a corporate job, you know, was fine. It was paying my little to no bills and all of that, but I was really not fulfilled in that work. And that’s kind of when I started to explore other options for my career as well as income, just extra income, kind of getting different side gigs and one being a real estate. So I became a real estate agent part-time while I worked my corporate job. And you know, I thank Bigger Pockets for that as well. I I stumbled upon bigger pockets and that really helped me network with a lot of people in my area. And um, I really fell in love with real estate and and real estate sales. So eventually being in that job, I tried to create kind of what Scott usually refers to as a financial runway to kind of take a risk, take a new career risk, whether that be going out on my own or what I ended up doing, which is I my broker is also has a construction management company for new development homes down in Long Beach Island, New Jersey. and he is also, you know, my broker. So I was able to kind of be a full-time agent and also work with him um, on that company full-time as as my full-time career now. And in the process, I was able to pay off that $40,000 worth of debt in about five years out of college, and that I guess brings me fast forward to now where I’m really looking to concentrate on, of course, growing my wealth and all of that, and also kind of taking more entrepreneurial risk and feeling more comfortable with that with the consideration of, you know, me wanting to be essentially coast FI by about 45. Um, so that those are sort of the two things that I’m balancing and along the way wanting to have a house purchase and and all that good stuff. So I appreciate all of your input on on those items.
Mindy: Okay, well, let’s focus on what you’re doing right. Income and spending. 11 five in income with 4,000 spent, leaves you with a giant chunk left over to save for a down payment for your house or save for a down payment for an investment property if that’s what you’re into. And if it’s not, that’s fine. Um, you can start investing in your after tax brokerage, which you actually already do. Um, I don’t think your problem is spending and I mean, everybody can tighten up everything. You can eat rice and beans, you can have no cell phone, you can live with your parents. Like you could have a totally miserable life and save way more money, but you’re doing really good right there. I don’t think that’s your problem and I don’t think income is your problem either. I wonder if focus might be needing to be tweaked a little bit. Where are you focusing your extra 7,500 on?
Guest: So, I mainly contribute to my after tax brokerage. Um, all of the so my take home pay every month is about 4,400, a little bit more than that, maybe 4,4 to 4,500 a month. So that pretty much covers a lot of my my expenses. So the extra is between my commissions and all that, which isn’t exactly a monthly thing. It’s maybe an every other month, maybe one month I have, you know, a lot in commissions and another month I don’t have any. So usually I try and split my focus is, okay, every month I’ll have the 4,400 to cover all my expenses and then when I get commissions, that’s kind of where I allocate about I put aside 30% for taxes and then after that, I put about 60% into my after tax brokerage and then another the other 40% I put in cash. Um, I’m pretty cash heavy. I know that. A lot of that is due to wanting to kind of diversify with say a a house hack multi-family property and all that. and I want to have that as a cushion for the down payment as well as any sort of repairs that come up. So that’s how I’m allocating that money currently as it comes in.
Scott: I think it’s great. I think it’s really well thought through, um, and I think you have an outstanding allocation here. Zooming back out, you paid off $40,000 in five years. I’m guessing that the current level of income is a relatively new state of affairs. Is that correct?
Guest: Yes, that’s really the last year. Prior to that, I kind of wrote it out. It look I averaged about 88,000 a year, maybe a little bit under that prior to that.
Scott: Awesome. So your income has jumped 50 grand in the last 12 months over what you’re used to seeing and now the money is starting to roll in and you’re kind of like, okay, what what do I do now um from this with this excellent problem. Is that is that a good way of framing what we what we want to accomplish today?
Guest: Definitely.
Scott: Awesome. Well, congratulations. That’s great. and the reason you’re doing that is because you’re working essentially two jobs here and you’ve got a very and you’ve done it really creatively. I I think that’s really good inspiration for someone listening. How do I if I’m looking to leave leave my job here? How do I go into like real estate as an agent, but then maybe also take on a gig that can give me full time but is acknowledged acknowledges that that license. There’s probably a lot of opportunities there, property management, construction, flip working for a flipper, you you the list could go on there and that could be really exciting for for folks. Okay. so you have right now $20,000 in cash. Is that correct?
Guest: Um, I I guess that’s my main checking account. I have about 20,000, but my high invest savings account or high yield savings account is about another 96, call it 100,000. So I have about 120,000 in cash.
Scott: Well, I missed that. so we’re in really good shape here. And you’re going to accumulate about $60,000 a year. I’m I’m guessing at that uh because there’s a lot of variable puts and takes here with that you’ve just set aside 30% of the income from your real estate commissions for taxes, all that kind of stuff. But is that a good guess? $60,000 a year in in cash accumulation is is very achievable for you in the next 12 months?
Guest: Yes.
Scott: Awesome. So we have $180,000 at the end of this year and your goal is to get into real estate. Is that uh you want to make you want to make a real estate investment.
Guest: Yes. Initially, of course, I want to have a a house hack sort of property being here in Northern New Jersey, it’s very expensive to live here. My rent, I mean, I know Mindy said it was relatively good, which it is for the area, but that is also half of it. My boyfriend pays the other half and it also doesn’t include parking, so that parking is technically part of my rent. It’s not really separate.
Scott: How much how much do you pay for for a paved piece of land?
Guest: My my car. Oh, the the car payment is gas, easy pass, just maintenance that I’ve done the past year or so. I kind of averaged it out. So that’s all an oil changes, all that. But I go very frequently, my commute down to Long East Island is about two hours around it each way and I go three times a week. So it’s pretty expensive for gas and tolls and all that. And I try and have regular maintenance on my car so it will last me forever Ideally. So that’s really where that $900 comes in.
Scott: Okay. Walk me through an investment you would make in real estate. What are some of the options you’re considering for a house hack or or similar?
Guest: Sure. So in this market, of course, being a realtor definitely helps me understand what’s available, what’s realistic, uh what the rents and the numbers look like realistically. What I want them to look like is definitely different. But on the market, I think that really I could probably find a property that’s a good deal for about $600,000, maybe both units bring in $2,500 a unit. So I know that’s not exactly the 1% rule, but the idea being, maybe, you know, we live in it, we have a lower cost of living, of course, and kind of with the mentality of holding for appreciation and appreciating rents in the long term. So, I think that that’s kind of the most realistic, I shouldn’t say most realistic, but of course, I would love to find a better deal than that. But I guess from what I see on the market, um I’ve been doing a lot of off market marketing as well, but just for example, um, like a 600 to $650,000 two family in this Northern New Jersey area is kind of a little bit on the lower side even. So, I think that’s attainable, but it’s, yeah, that that’s what we’re we’re looking at as an potential investment.
Scott: Awesome. So, one one thing, so how would you finance it? Would you put 25% down?
Guest: I would put 20% down.
Scott: and you would use a conventional loan?
Guest: Yep.
Scott: So I think this is a really good, you are a perfect use case for someone, I think who should be exploring creative finance. If you can assume an FHA mortgage or a VA mortgage, you you have the cash or will by the end of the year have the cash to bridge that right. So what what am I talking about here? If someone has a VA or FHA loan, you can take on their mortgage payment. it’s it’s an assumable mortgage. So you can essentially, uh use their three and a half, probably 4%, you know, maybe even lower um payment. That changes the math on this investment dramatically. The gotcha, the big gotcha is that you have to bring cash because they might their loan balance is not going to be 20% of the property value. It’s going to be, you know, uh I’m sorry, 80%. It’s going to be 65 or 63.2 or whatever it is. So you need to be able to bring cash to bridge the gap between whatever your purchase price is and the amount of the loan balance that they’ve got. You’ve got 120 grand, so you’re well on your way there. You may need some other source of financing, maybe friend, family, or even a hard money loan uh to some extent to bridge an extra 40, 50, 60, whatever the random amount that you’re going to need in order to close in a property would be, or you can just wait a little bit longer and you’re going to stock up uh um stock away 60 grand in cash. Have you considered this angle in as part of your your purchase criteria?
Guest: No, I guess I haven’t. Um, with a FHA being an assumable loan, I guess that would be, of course, the seller would have purchased it with an FA loan and then I’m bringing, you know, that’s a pay them out. But I guess it would be finding that. I guess that would be my one question on how to kind of go about finding something like that.
Mindy: I think as agents start to learn about this FHA being asssumable and VA loans are asssumable too, um, even by people who aren’t eligible for a VA loan normally, uh, I think as agents find out about this and people start to put their house on the market, agents are going to start asking, do you have an FHA loan? Yes, I do. Holy cow, I’m going to advertise that. This is an asssumable FHA loan. You can, like Scott said, you can only assume the balance. So let’s say they paid 80,000 for it, they got an FHA loan for 75 and they’ve paid off 3,000. Now they’re at 72 and you’re coming in and you’re going to buy it for 100. You have to bring $27, $28,000 to closing in order to cover the difference, but you get the bulk of your purchase financed at their lower rate, presumably lower rate. It doesn’t really work if they bought it last month and their rate 7%. you don’t care.
Scott: Yes. but this this is a challenge so you’re you’re unique position is that you have 100 grand in cash. Um and and you’re in a really strong financial position. So you can pull this off. but the issue is like a first time house hacker, investor that’s looking to do this, they don’t have 150, 200 grand or a means of a reasonable way of getting there um very quickly in order to bridge that gap. So you have a really good advantage uh in that capacity. So surely somebody is going to come up with a solution uh to this from a technology standpoint. If anyone knows that, please, you know, send me an email at biggerpockets.com or ping us in the Facebook group at uh facebook.com/groups/bpmoney. But um, if in the absence of a technology product that I’m readily aware of to find this kind of financing, I’d encourage you to just simply ask, does this prop you’re a you’re a broker. So you just literally contact the listing agent and ask them in a simple email, does this come with FHA or VA financing? Does it come with an assumable loan and the seller be willing to entertain that? And that’s going to allow you to purchase a lot more and the math changes dramatically when you’re using a 3 and a half% interest rate mortgage um versus a uh…
Guest: Yeah, I think I got quoted, yeah, 6.8 recently, so..
Scott: I do want to bring up, I looked up how do you get the CFP certification? Um, the experience requirement prepares you to provide personal financial planning to the public as a CFP professional. There are many ways to satisfy this requirement. Ultimately, you must complete 6,000 hours of professional experience related to the financial planning process, or 4,000 hours of apprenticeship experience that meets additional requirements. So CFP is a, it’s a bigger undertaking, which is it’s a better undertaking than just like being on line, Hey, I can do this. But it’s harder. It’s it’s a, harder is not the right word that I want to use. It’s more of an…
Scott: And I wouldn’t be surprised if there’s a job change coming up in the next year or two that aligns better with her goal of entrepreneurship in the financial coaching space.
Mindy: So, Alex, I would love to hear what you do with your uh house hack search. So, please let us know when you find a property.
Guest: Thank you so much. I appreciate your time, you guys.
Mindy: Thank you, Alex. We’ll talk to you soon.
Guest: Bye.
Mindy: All right, Scott, that was Alex and that was a really good set of problems to have, which bucket do I put my money in and which goal do I focus on? And I think narrowing and I think focus is the key here. Which goal do I focus on or which goals do I focus on? It’s it can be hard when you’re in this position of you’ve paid off your debt, you have a lot of income, where should it go? So sitting down and figuring out what you want can be really key.
Scott: Absolutely. She she’s doing fantastic. She’s got all all all these things that are going to make her super successful over the long run. It’s back into a a plan there and making intentional choices to move towards it. And I think that um, she’s still kind of in the, I have all these options phase instead of here’s my plan and exactly and the most logical choice to move towards that plan is AB or C, three logical choices are A B or C and I’m going to go with A because that’s the one that moves me the most has the most direct impact, whatever. If she can get there, it’s everything’s going to be going to start falling into place for her. And um, we can begin backing into that. The three big takeaways though that I have for today are in addition to first, having that plan. Second, thinking through the house hack decision in in the context of creative finance, right, creative finance requires you to come up with something either super creative, like, I’m going to assume lone and I’m going to do seller financing, and I’m going to bring a little bit of cash, or to have a lot of cash. And she’s in that privileged position of having a lot of cash which makes this really accessible to her, um, in a way that it may not be for many of her competitors in today’s market, right? She’s in a unique position for a house hacker of having both cash and the willingness to move into a property. That makes assumable financing like FHA and VA really available to her in a way it wouldn’t be for me as an investor, or it wouldn’t have been for me as a first time house hacker eight, nine years ago because I didn’t have $120,000 in cash to bridge that gap. So that’s number two. And then number three, I think it’s it’s this entrepreneurial bend and understanding, okay, when is it time to pull the trigger and how do I set myself up for success in that endeavor, um, so it’s a uh a smooth transition from my current state to the future state of being an entrepreneur or a business owner in this. And I think that in her case, she had ton opportunities to think through education, certifications, brand building, and then then just generally rounding out her expertise. And I wouldn’t be surprised if there’s a job change coming up in the next year or two that aligns better with her goal of entrepreneurship in the financial coaching space.
Mindy: That would be very interesting. I hope she checks back in with us. All right, Scott, should we get out of here?
Scott: Let’s do it.
Mindy: That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench and I am Mindy Jensen saying, shake, shake, rattlesnake.
Speaker 1: Bigger Pockets Money was created by Mindy Jensen and Scott Trench, produced by Kalin Bennett, editing by Exodus Media, copywriting by Nate Winetraub. Lastly, a big thank you to the Bigger Pockets team for making this show possible.
