Mindy: We are so excited for today’s episode. We are joined by Whitney Elkins-Hutten where she gives a tease of one of the big pillars highlighted in her book, Money for Tomorrow, How to Build and Protect Generational Wealth. We discussed the concepts of the four horsemen and how these parts could massively impact the longevity of your financial independence portfolio. Scott and I then use this special teaser as a jumping off point for a discussion of what you can do to retain your wealth if you’re working towards financial independence, or have already retired early and you’re afraid of losing everything.
Scott: Hello, hello, hello and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen and with me, as always, is my has money for tomorrow co-host Scott Trench. Thanks Mindy. Great to be here with you. We’re always in an estate of discussing personal finance topics. All right, whatever, we’ll we’ll move on from that one. Bigger Pockets has a goal of creating 1 million millionaires. You are in the right place if you want to get your financial house in order and then keep it in order because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting. Whitney Elkins Hutton, thank you so much for joining us. Welcome to the Bigger Pockets Money podcast.
Whitney: Thank you so much for having me. This is such a pleasure.
Scott: Whitney, let’s jump into your financial journey. Where does your journey with money begin?
Whitney: You know, uh, it actually starts when I purchased my first property in 2002. I bought a house with a significant other and, you know, I thought I was doing the responsible thing, you know, good job, stable relationship. Um, you know, let’s dive into home ownership, right? Uh, but, you know, the relationship ended about a month after purchasing the house. Fortunately, in this case, everything was under my name. All the all the mortgage, the deed, you know, um, all all the expenses and utilities too. Um, but I, you know, really I found myself stuck, or I felt like I was stuck with all these expenses that I just really couldn’t afford. And this house was, you know, we we now call it a burr property, but at the time I’m just sitting here going, oh my gosh, there’s green shag carpet all over the, all over the floors and psychedelic daisies painted all over the walls and I don’t have the skills. Like what am I supposed to do? So I had two choices. I could panic or I could get resourceful. And so I, uh, chose to get resourceful. I rent it out every single one of the rooms to cover the mortgage and the expenses, taught myself how to renovate the property. Um, mind you guys, YouTube didn’t exist back then, so I was a reading a book, the Home Depot 1, 2, 3 book and, uh, going to a lot of the Home Depot classes to figure out how to, you know, resurface floors and do drywall. Um, about 11 months later, I sold the property. And it was really at that point in time that it clicked for me because I walked away with 52k in cash at the closing table, uh, which was more than I made in my day job that had me traveling quite often. And that was really a light bulb moment moment for me because that’s when I realized that if I was going to build wealth, I had to figure out how to stop trading time for dollars and make money work for me, not me work for money. And so that just really set me on the path, uh, towards a real estate investing. You know, in the next few years, I was live in flipping, house hacking, scaling single family rental portfolios, buying multi-family buildings. But the, I started off with that house hacking and flipping, and if I wasn’t doing flipping, I had another job. And so, uh, really that’s where the whole journey begins for me.
Mindy: That sounds very similar to my journey. Um, I bought a house. Did you buy your house as a primary residence or as an investment?
Whitney: As a primary residence. Uh, the our relator, Yeah. Scott’s like, “Yeah, how’s that?” Um, but at that point in time, um, that our relator put the book, uh, Rich Dad, Poor Dad out in our hands. And I read the first two chapters and I was like, oh, this is really intriguing. Okay, great. We’ve done everything. Check, buy below value. We bought a property that in a great part of town. And then I just skimmed the rest of the chapters and I put down the book. Uh, I really wish I had read the rest of the book because I never would have sold that property.
Mindy: You know, I’ve got a lot of properties in my past that I wish I would have kept, but that’s not the right way to look at it. It was a great learning experience. It started you on the path, so it is the best thing that you could have done to see that there’s money there. Like if you would have kept that property and just lived in it for a while, maybe you wouldn’t have seen the power of how much money you can make in real estate just by fixing up a property. You did a burr, house hack, live and flip, all like together. And Bigger Pockets wasn’t even around yet to make those phrases up yet.
Whitney: Oh, no. And I was 103% financed with other people’s money in this deal. Yeah, so I borrowed $7,000 from my grandfather who God bless him. He cashed out. I’m sure he was making on, uh, 15% on the CD that he had purchased in the 1970s. So, uh, he, this was true love. He cashed it out, gave it to me for the down payment. Um, I closed with a first. Guys, this is 2002, very different time. I closed with a first, and then immediately a second uh, was able to, you know, to, uh, as soon as the home, um, equity line of credit closed, I was able to cash back out that seven, uh, 7k and give it to my grandfather.
Mindy: So when you say you closed with a first and you closed with a second, you’re talking about a first mortgage and a second mortgage?
Whitney: Home equity line of credit, yeah.
Scott: All right, we’re going to take a quick break. But before we go, I want to announce that we are now offering early bird tickets for BP CoN 2025, which is October 5th through 7th in Las Vegas. You can score that early bird pricing of $100 off by going to biggerpockets.com/conference while we’re away. And yes, we will be having a Bigger Pockets Money track. And yes, despite hosting a personal finance podcast that touts responsible personal finance habits, I love craps uh, a few times a year with a small, very small amount of money.
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Mindy: Welcome back to the show with Whitney.
Scott: So Whitney, let’s let’s zoom out a little bit here. That’s a this is an awesome uh, first foray into real estate investing and a wonderful success story, uh, there. How did you transition from what I would say, you know, treating real estate as a supplement to your job to then building wealth, building really long-term wealth and a portfolio on there? How does that, how does your story evolve to to that journey? Part of the journey?
Whitney: Well, you know, it it takes quite a bit of time. Um, because I only knew live in flipping and house hacking. So I did four about five more, uh, deals like that. And, you know, over that time, that’s when I’m realizing, if I’m not flipping, I’m not earning a paycheck. Like I can’t pay the grocery bill at the grocery store. I can’t pay my utilities. I just have chunks of equity. And so really, uh, I pick up a book called Money Master the Game in 2014. And so that book, you know, by Tony Robbins really started opening my eyes to like how money works. And you know, two big concepts that come out of there is one ownership, and then which I was like, yes, I own assets. And then two, cash flow. How do you get cash flow at all different stages of the game? And so, uh, I’m the, I’m the, the jerk that’s going to our 401k benefits advisor and going, hey, can we expand our offerings within our 401K. Uh, can I get part of this money back so I can go invest in real estate? And you know, have down payments for some single family homes. You know, I get shut down left and right. And then I really take matters into my own hands in about 2016 and that’s when I bought my first single family rental. I still had not found Bigger Pockets at this point in time. Um, I did a lot of things wrong on on this property, which is, I wanted to purchase it for cash flow, but I put down an $80,000 down payment and I think the property cash flowed $400 with me managing the property. So the first month, the toilet breaks. I’m in the hole, the first month. And like, oh, okay, baby steps. I’ve proven to myself that this model will work that are the tenants will pay the bills, um, but I don’t have cash flow. And so that was the first property. Um, quickly switched to out-of-state real estate investing, focused on cash flow.
Scott: Can I, can I ask a question about that? Because if you’re if you’re cash flowing, if you put $80,000 down, you cash flow $400 a month, that’s a 6% cash on cash return. So it’s not, it’s not necessarily as awesome as what we’re hoping to get out of real estate investing in there, but it’s also not nothing. Are you saying that that was a phantom number because you had not accounted for things like the toilet or those types of things and that was actually overstating your cash flow?
Whitney: Yeah, it well, you know, I know a lot of people self-manage their properties. And so if I were willing to take, you know, just really give my time to the property, I think that that, yeah, 6% is fine. But at some point in time, I wanted to have the size of a real estate portfolio that I could actually hire out property management, which means I did not leave myself enough margin to do that. And so, um, also, I hadn’t set aside proper maintenance and CAPEX uh, you know, allowance for the property. That became very evident very quickly.
Scott: To get $400 a month divided by times 12 is 4800, divided by 80 is 6%. But we were not actually getting a 6% cash flow is what we’re saying.
Whitney: I think I figured like it was closer to like 1.5, like if I figured in property management and I was upside down, if I were setting aside the proper allowance for CAPEX and maintenance. And I see a lot of investors actually do that. When they go into their first properties, they are like, oh, I’ll manage it myself. And, oh, by the way, um, I you know, they’re not setting aside two or $300 a month for CAPEX and maintenance. Guys, water heaters break. It can break in the first month of ownership, it could break in the 48th month of ownership. It’s just a matter of when.
Mindy: The water heater thing, yeah, you’re absolutely right. It will break, it breaks in the middle of the night, you’re welcome, uh, so you know when it’ll break. I don’t know which night, but it will absolutely break in the middle of the night and, uh, the the thing is I like to say this about real estate, something will break as soon as you buy the house, the cost of that repair is inversely proportionate to how much money you have in the bank in reserves.
Scott: You guys have completely set me up for this transition here. You found yourself in hot water with this property, Whitney. What happens next with your portfolio and how you build things out?
Whitney: I find a website called Bigger Pockets and I actually learn how to calculate properly, you know, the due diligence of the deal, right? How, how can I truly underwrite the deal? How can I calculate the cash flow? How can I actually start understanding like, you know, uh, how can I build financial independence through real estate? And then it like clicked for me, and I’m like for me and my goals, I want to be independent of my W2 job, so I need cash flow. Uh, you know, for some people their goal is to build equity. Okay, that wasn’t my goal. My goal was cash flow. And so I quickly start building out of state. I start, I went to two markets, Indianapolis and Kansas City. And so the first year I secured 10 single family rentals. The year after that, I got 15, and then the next year I got 15. But along in there, I started transitioning from single family rentals into small multi-family buildings, then eventually a 52 unit apartment building.
Scott: Walk us through the transition point, the inflection point of I am aggressively building wealth with as much leverage and activity as I possibly can, and transitioning to a portfolio that I can really believe will provide money for tomorrow.
Mindy: And what year was this?
Whitney: You know, I’m building very aggressively aggressively between 2016 and and latter part of 2019. But when 2019 hits, I’m starting to see a lot of those adjustable rate mortgages, um, that I saw or it was eerily similar for what I saw in 2016 when I was live and flipping in house hacking.
Mindy: So you said you saw the market changing. How did you see this? What clues were you starting to to notice?
Whitney: Yeah, so at this point in time, I’m um, in a a general partnership at a private equity firm and we’re doing, um, you know, private syndication on multifamily buildings. And none of the deals really worked unless there was a short two or three year construction debt piece with adjustable rate mortgages. And yes, the operators, um, us included, were putting, you know, interest rate caps on the property, locking in, you know, um, you know, IO for three or four years, you know, interest rates, but our underwriter was just like red flag, what happens if the interest rate environment shifts at year three and you cannot exit. And I was like, wait a second. Okay, hold on. Show me the math. And he showed me the math and I’m like, oh we’ve got a storm coming, guys. I don’t, I don’t know what to tell you. There’s a storm and so many people, um, were, I felt like were very unprepared. I’m like telling everybody like, okay, we’re going to focus on the core four, the four horsemen that are in our portfolio. We’re going to fortify our foundation. We’re going to get all of our line of credit, you know, taking out right now. We’re going to, you know, shift part of our portfolio into cash flowing debt. And they’re all like, no, Whitney, you’re nuts. Like I’ve got this equity deal here that I can go into. And I’m like, no, hold on, like we need to balance things out.
Mindy: Okay, what are these four horsemen you’re talking about?
Whitney: Yeah, and we’re not talking about the four horsemen from the Bible. But, you know, really what are those big four wealth destroyers and that can destroy anybody’s portfolio, no matter, you know, you know, how much you scaled, whether you have five figures in your portfolio, or if you have, you know, eight, 10 figures in your portfolio. And the first one, um, I really go over six different wealth destroyers in the book Money for Tomorrow, but there’s four core ones that anybody can focus on. And one is making sure that we’re using debt wisely, right? Um, most people assume that all debt’s bad. You know, uh, but debt itself isn’t the problem. It’s the bad debt. You know, a lot of times we’re focused on the high interest rate, a consumer debt. This can bleed tens of thousands of dollars from somebody’s portfolio over their lifetime. So, we talk, I know you guys talk a lot about like, hey, have a cash flow piece of real estate, making sure you have good quality debt on the property, where it cash flows greater than the expenses on the property, everything’s cool. That’s not the type of debt I’m thinking. I’m thinking about, you know, people who have tons of car loans, um, or credit card loans, private loans. Um, you know, what’s not start scaling extremely rapidly until we have a good payoff order of that debt. Simply take the loan balance, your outstanding loan balance, divide it by the, uh, minimum monthly payment you need to make, okay? Not what you’re actually making if you’re overpaying, but the minimum monthly payment, and you’re going to get an index. And that index, if that number is 50 or below, that debt, you’re probably going to make a higher effective rate of return on your money if you pay off that debt as opposed to taking that capital and deploying it. I know people that have taken taken loans on credit cards all the time to buy real estate, but let’s get those things paid off as quickly as possible. Um, so that’s one, you learning how to, you know, order off the payoff of our consumer debt. Number two is leveraging insurance appropriately. So it’s really tricky with insurance. You can either overpay, the the two big issues I see people is either they’re over paying for the insurance or they’re under insured. And so we want to make sure that we’re hitting the proper balance there. And so insurance is a big one. And we’ve got two more horsemen. Uh, really quickly, you know, taxes, one of the, that’s one of the reasons why we love investing in real estate or if you’re here listening, you’re probably curious about investing in real estate, but taxes can be a huge wealth leak. And so are you making sure that you’re working with a strategist that’s helping you leverage the depreciation, um, you know, on the portfolio, maybe, um, you know, helping you organize your investing to invest in tax advantaged investments and pair it with tax advantaged vehicles. And it’s just more, just being proactive about the tax plan. I see so many investors that try to master taxes themselves because they don’t like hiring a professional. I’m all about asking the question, how can I? And when you ask that question, how can I solve this problem? It doesn’t always mean I have to acquire the skill. Sometimes it it means I go find the person that can help me solve the situation. In this case, making sure that you’ve got a good tax strategist on your side. And then my favorite one and Scott, I would love to get your insight on this, you know, especially in the fire movement is, you know, the the big horsemen that I see draining people’s portfolios is uh, investment fees, right? It can become from like banking fees or loan origination fees, pre-payment penalty fees. But I’m talking about retirement fees. And so for people who have like a traditional 401k, um, they’re probably losing about 31% of their portfolio over a 21-year period to just fees alone. And the average person investing in a 401k is, I don’t know, I haven’t looked up that stat in a while, but I think 35, 40 years. So 31% is probably a huge underestimate, under uh, underestimation of that. And for context, if you’re just maxing out your 401k at say $21,000 a year, you’re getting a modest 7% in the stock market, which I know we were just having a conversation before, probably not the case right now, but like average returns over time. Um, and you don’t get a match from your employer, you’re probably still losing a solid six figures, $100,000 or more just to fees in your your portfolio. So be intentional about your investing. And this is where, you know, I help people in the book, Money for Tomorrow, to lay out this blue plant, lay out this plan so they can make some of these really, truly minor adjustments in their portfolio to help them save and keep money in it and grow the wealth for themselves and not somebody else.
Scott: Whitney, it was so amazing to connect today. Thank you so much for your time. We don’t want to talk about any of the other concepts in the book because you can find that book Money for Tomorrow, How to Build and Protect generational wealth in the Bigger Pockets bookstore. So just go to biggerpockets.com/m4t. The letter M, the number four, T. Also, if you want to learn more about Whitney, you can listen to episode 889 of the Bigger Pockets podcast.
Mindy: That was a quick tease with Whitney Elkins Hutten and now Scott, I am excited to dive in a little bit deeper into the concept of the four horsemen. These aspects of your portfolio are really important to look critically at to retain your wealth if you’re working towards financial independence or are already retired early and you’re afraid of losing everything.
Scott: Thanks for sticking with us.
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Mindy: Let’s start with the first one Scott, interest. So she says that interest, I don’t think she’s really talking about um, your, your, the interest on your mortgage. I think she’s talking about your consumer debt interest. The high because I didn’t pay off my credit cards interest, the the high because I don’t have good credit interest that you are paying and shouldn’t be shouldn’t have to pay. It’s not that hard to have good credit. It’s not that hard to, uh, pay off your credit cards on time. If you can’t afford it, then don’t charge it. I mean, that’s unless that’s your emergency fund, which it shouldn’t be, but, you know, if you need tires and you don’t have anything, you have to put them on the credit card. Uh, but I think that interest can sneakily suck out a lot of money from your wealth that you’re not even really paying attention to because it’s I think it, it happens more for people who aren’t as educated about their money in general. What is your thought on the interest?
Scott: No, I I I completely agree. I I and I will go further, right? this is a Bigger Pockets of money. You have consumer debt with high interest, like you’re listening to the wrong podcast. Like we don’t we don’t do that here at Bigger Pockets of Money. That’s an emergency, we pay it off. We don’t even think about it, right? So when I think about, uh, interest, I don’t have any consumer debt, uh uh, out there besides the balance I pay off in full each month on my credit card. so I can amass those points and never spend um, that we talked about was the points guy. Um, a few weeks ago. Uh, on there, but but so I when I think about interest, it’s home, it’s it’s interest that’s backing assets, or that’s extremely low low rate, um, against, you know, maybe like a car loan, for example. Sometimes they give you can get those at 2%. Although I don’t I don’t have any on the on my cars right now. But when we talk about, when we talk about that, like I think minimizing interest expense comes down to that interest for me, if I’m going to use interest to finance the acquisition of a long an asset I intend to hold for a long period of time, it must be fixed rate and it must be very low interest, below ideally 5, 6%, um, uh in in those areas, I may go a little higher, but I’m starting to get wary of it. If I’ve got 7 or 8% interest rate debt, I’m paying it off. I’m not like, I just don’t think that I’m as I’m good enough of an investor, um, to beat a guaranteed 7, 8, 9, 10% interest rate return over a long period of time. And I just take it. That’s a win. Like if someone offers me 8, 9, 10%, after tax, because that’s what most uh, types of this interest are are for for in most situations, um, outside of business expenses, I just take it. So if it’s between 5 and 8%, then we’ve got a little bit of a gray area, but at this point in my life, I’d lean toward paying it off if I was in in aggressive accumulation mode, I would be potentially fine with it. And below 5%, I’m not, I don’t, I don’t pay off my my rental mortgages, for example. at below 5% interest rate. So that’s how I think about minimizing the impact of of interest, um, while also using it sparingly as a tool, um, especially now later in my my fire journey.
Mindy: How about you? I don’t have any consumer debt. I don’t pay any interest except my current mortgage, which is uh, in the high 2%. Um, I don’t pay a single cent more on my mortgage payment.
Scott: Love it. Yep, I I uh, I I I don’t either. Uh but I will if if if it cross that threshold, I would go all in on it. But if if it doesn’t cross that threshold, I pay the minimum. Same as you. So I do own two houses. One I own free and clear and one I have a mortgage on. The reason that I own it free and clear is because I bought it with, well, actually no, we did pay it off. Okay, so uh, I bought it with a line of credit against my stock portfolio when interest rates were a horrific 5% after being two and 3% forever. And I didn’t think that interest rates would stay so high so long. So we just paid uh cash for it, cash and air quotes because it was going to um, it was I was I pulled it out of my line of credit. Uh, and then we have been paying that down. Um, we just paid it off completely and we that that leads me into our next Horsemen, insurance. So I have these two properties. They’re actually located in the same neighborhood just around the corner from each other. The house that I’m sitting in is my primary residence. I have a mortgage on this property and I tried to raise my deductible on my homeowner’s insurance to the highest that the insurance company offered, which is $10,000. And I think they do this to kind of uh, protect their their customers. How many people, outside of, you know, the fire community, there a bunch of frugal weirdos. How many people can come up with $10,000 to pay for the repair on the house? You know, let’s say you need a new roof, it’s $20,000. Well, you’re going to foot 50% of that bill. So $10,000 was the highest I could go. I, I locked it in. I was saving significant money on my uh, premiums every month or every year and then I get a letter from my mortgage company that said, oh, you can’t do this. You can only have a $5,000 deductible. And I’m like, but I’m really good with money. I, I can I please let me have this $10,000 deductible. And they said absolutely not. If you don’t drop it down, we will get you a different insurance policy and bill you the difference. What was the premium difference? You know Scott, it’s been a couple of years and I don’t remember, but it was a couple of hundred dollars. It might have been $500 a year. So I mean that’s that’s that’s one of the benefits of ownin property free and clear in this is is there’s no mortgage person that’s requiring you to do this stuff. My my philosophy on insurance is I want a good carrier who will pay out the claim with full coverage and I’m never going to call them unless it’s a disaster that threatens into the tunes of, you know, high single, high five figures or at least six figures, if not seven figures. is where I’m I’m going to be calling for that. I’m going to keep a cash position that will cover a solid deductible into the tens of thousands of dollars. My deductible is actually uh north of $30,000 on my primary and I have a similar situation for a paid off rental that I recently recently purchased and that is a a wonderful wonderful situation, it increases cash flow on those and you know, I don’t know about about you, but I’ve been doing this for 10 years as a rental property owner and investor, I’ve never filed a claim. I’ve had to replace roofs and those types of things, but it’s not a, I for my situation with the roof replacement, it was not an insurance thing. The the roof needed replacement. It was part of the deal of buying that property. It’s why I got a good deal on that property. um uh uh uh in part because there was some deferred maintenance. So I have paid those types of expenses out of my um, portfolio of reserves and the cash flow produced by it and that’s my plan going forward. Maybe I’ll never file a claim, or maybe I’ll file two across a lifetime, hopefully. um um in there, but when that day comes, I want that to happen. So I completely agree. interest, I minimize by making sure I a- I only have long-term fixed rate, low interest rate debt in my portfolio. I may take on additional interest, but then I would prioritize paying it down. um if that if I were to do that on a specific deal because I’ll take my my 8 plus percent return, enjoy it. And then insurance, it’s about making sure I have quality coverage from a real provider who will pay it out, but sending a clear message that I’m never going to call them unless it’s a, I really need the insurance to kick in in a, in a significant way. And I think that that’s a very massive advantage that those in the fire community will rapidly have access to because you should be accumulating a lot of wealth very quickly, um, in here and having access to liquidity that would allow you to self-insure, um, smaller claims to a large degree. Smaller being less than 25,000, $50,000.
Mindy: My deductible on my paid off house is 10% of the value of the home.
Scott: Mhm.
Mindy: Which you can do when you don’t have a mortgage.
Scott: Yeah, and and when you when you do this the the the insurance brokers will think you’re crazy, they don’t even they don’t do this very frequently and it’s a new concept. You have to educate them on that. Like I I I when I’m shopping for insurance, I have to educate the broker and say, here’s what I’m trying to do. I literally want this to be there. And they’re like, well, the highest we can go is 1% or 3% or 5% of your your home value or whatever I’m on there. So there’s it’s a very unusual way of shopping for insurance but it’ll save it’ll save you huge if you’re willing, if you know that when you do file a claim, you will have a large deductible, um, as part of it. And over time, that math, I think will work out in your favor. Now, one thing, I do not maximize this to the point of insanity. So in some cases, you add on 50 bucks and now you can cover your car for collision or whatever around there for. Like I’m going to do that, that those kinds of things and put and and and take um reasonable ones there. So it’s not a pure, how do I take this to the the ultimate extreme? It there’s a there’s a little bit of common sense you have to apply um for these quotes on a line item basis as well when you’re shopping for insurance.
Mindy: Yeah, but I mean, sit down and take the time to, what I like to do is email. I don’t like to talk on the phone with insurance brokers, I want to get them on email, I want to ask them the exact same thing, copy paste it into a bunch of different uh companies and compare quotes, written quotes uh right next to each other. I think that’s easier for me personally than to try and take notes as they’re talking and trying to explain stuff to me. Um, yeah, but yeah, if you’ve got more than one house and one vehicle, you should be looking at changing your insurance company if you’ve been with them for more than one year. Uh, I’ve got, actually if you have insurance, you should be looking to get quotes every single year. The end. I don’t I’m not going to caveat that with how many you have. Um, I recently went from a homeowner’s company that I thought I was paying a decent rate for, and they had my car insurance as well. To a new company because a friend recommended them saying telling me how much great coverage she got. I went from kind of bad coverage on my house and really bad coverage on my cars to significantly better coverage on the cars and brought my house value up to replacement value instead of what I purchased it at. And I purchased it at a huge discount. And added an umbrella policy all for less than what I was paying at the other company for worse cover.
Scott: Yeah, it’s remarkable. You know, you I think you got to shop this around with four or five different carriers once every two to three years right? Uh because otherwise, you know, if you if you just keep renewing, it’s amazing how in my experience at least, they just it’s just like, whoa, like I’m getting a, I got a quote now. um my my the the insurance carrier on my house that I bought a year ago increased my premium 90% and I’m now shopping around, I’m getting quotes that have better coverage for 1/3 of the annual cost of the premium on my current provider. It’s ridiculous on there. And so I I think it’s it’s a you have to be willing to shop this stuff every couple of years. I think as part of it, and it’s a real pain and I got nothing for you yet. You’re going to spend an hour at least on the phone with four or five different carriers to shop this across home auto and uh home auto and umbrella if you choose to get an umbrella, which I think a lot of people should. Um in there and I think I think it’s just it’s just a time you got to spend um because it’s several thousand a year and it’s a very high hourly wage you’re paying yourself to make sure to keep those costs low after tax.
Mindy: Okay, let’s talk about fees.
Scott: What I think about minimizing fees, right? There’s two major investments that I participate in, right? The stock market and real estate. Right? So the stock market, you know, I think by this point Bigger Pockets money listeners and those pursuing fire, know well and good not to use any the a money manager that charges an AUM fee, um, of 1% of assets under management. And know the the math on how how crazy those fees stack up to over a lifetime in terms of helping your financial advisor become financially independent instead of you, um, is is has been well documented and I’m sure we’ll talk about that in a minute. The other part though that I want to talk, so you just buy ETFs or directly invest through like a a mutual funds like like uh through Vanguard or fidelity and stock mark low fee index funds. That’s how you avoid all those fees essentially over a long period of time and uh aggregate a lot more wealth for yourself. Um, in real estate, though, um, fees can really begin to add up as well. And so as a real real estate investor, I encourage folks, not on their first deal necessarily, but if you’re going to do three, four, five, 10 real estate deals across your lifetime and begin massing a rental portfolio, get your license. Um, go get your license, and after the second or third deal, you can, you know, really begin representing yourself to a large degree. So this is what I do here. And when I need advice, because I don’t transact, like Mindy’s a real agent, right? You you you help people buy and sell real estate all the time. But when I need to transact on properties, I then pay Mindy an hourly fee that she’s happy with. I still owe you actually I have to get a check uh uh, for the for the recent property here that you helped me with. But I pay you a fee and it’s a good fee, right? It’s a good hourly rate I think for you.
Mindy: Yeah, it’s great!
Scott: I’m on there. And and a lot of agents would be willing to accept that. And then I save the 2 1/2% fee that I need to to what I would otherwise need to pay a buyer’s agent over a long period of time. So again, I would never do that on my first deal or even my second deal. But by this point, this is my sixth property I’ve purchased, right? I don’t, I don’t I I I kind of know what I’m doing on this front, and I feel like I’d I feel like the the 150 hours of uh, of education I did to get my real estate license, plus the continuing education and the three-ish thousand dollars per year to get that license has totally been overwhelmed by the hundred plus thousand dollars in fees that I have saved to buyer’s agents over the last several transactions. So I completely agree with the philosophy of minimizing fees and that’s my approach. I get my license and maintain it, um, as a real estate investor in order to to to avoid those over over a long period of time.
Mindy: I will say that there is more to having a real estate license than just, you know, taking your continuing Ed every year. It is a big commitment upfront and you need to have some level of real estate knowledge. I had been flipping houses for I don’t know, 15 years when I got my real estate license and then took the real estate exam and was shocked at how frankly unvaluable it is to have that information in your head. And I don’t even have that information in my head anymore. Let’s be honest. The course work teaches you absolutely nothing about buying and selling real estate. But Scott is a real estate investor. He’s the president and CEO of Bigger Pockets. He knows real estate. So he uses my help for the contract part of it. You definitely need somebody’s guidance if you’re not going to be doing this as a full-time job. But even giving up a little bit of your, of the commission as a, you know, hiring somebody to guide you through the transaction is a great way to save on fees. But I would caution that this is for somebody who is buying and selling a lot of real estate.
Scott: You got to buy a property every year or two or every year or three in order to justify this, right? If you’re not going to do that, then then don’t get your license. But, but I think if it’s part of your major part of your portfolio over a long period of time, the absolutely keeping fees down makes a huge difference over a long period of time.
Mindy: Fees, Scott, are not just for real estate. They are for the stock market too. I would like to read something that Ramit wrote, uh, Ramit Sethi, I will teach you to be rich. He says, think a 1% fee isn’t much? Here’s the surprising math behind paying 1% to a financial advisor. Let’s say you’re 30 years old and you invest $50,000 and contribute another $1,000 a month. The first thing you want to do when picking your funds is to minimize fees. Look for the management fees or expense ratios to be low around 0.2% and you’ll be fine. Most of the index funds at Vanguard, T Row Price and Fidelity offer excellent value. In 35 years with a low 0.2% management fee and assuming a 7% return, which is a reasonable assumption, you’d have just over $2 million. But if you pay a financial advisor 1%, you would only have $1.7 million. That’s that he says that’s more than $380,000 going into your advisor’s pockets in fees.
Scott: It’s right. 1% because you’re multiplying 1% of the portfolio value every year. So it can take up, it will take, it will make you almost 30% poorer to pay a 1% fee every year for 30 years. It’s a remarkable impact on your, on your long-term wealth. This this 1% AUM fee.
Mindy: I’m just questioning his math because you had two point, you had $2 million and now you have 1.7. So that’s only 30,000, not 3 point or that’s 300,000, not uh 380,000. But either way, that’s $300,000 going into your advisor’s pockets. By the way, if you paid 2%, that’s over $750,000 in fees. This is what I mean when I say that a 1% fee can cost you 28% of your lifetime returns.
Scott: By the way, even even his even his example of the low fee, 0.2% is a very high fee for some of these passively managed funds. Like Vanguard’s total market index fund has an expense ratio of 0.03%. That’s a major difference, almost 10 times less expensive from a fee perspective than the 0.2%, right? 0.2% versus 0.03% um for for a uh uh an index fund. The ETF like VTI or it’s equivalent VTX um or VOO, um, the the the uh um, uh S&P 500 version of that. So there are funds out there that have very low ones. Fidelity has similarly low expense ratios. Um, they’re like 1 hundredth of a base one basis point, 1 hundredth of a percent higher in some cases than than Vanguard. But there’s some extraordinarily low fee index funds and that’s the easiest way to avoid these fees.
Mindy: So, yeah, when you think, oh, it’s only 1%, it’s not only anything.
Scott: Yep.
Scott: Now let’s talk taxes, Scott.
Mindy: I loved what Whitney said about having a tax planner have a conversation with you. Look, if you have a W2 and that’s it, you have a W2 and a 401K and that’s it, you probably don’t need to have a conversation with a tax planner. But Scott, I hope you’re having a conversations with a tax planner because you’ve got a real estate portfolio and you’ve got a stock market portfolio and he’s got a lot of other investments. You’re invested in bigger pockets. You’re invested in a lot of things. It would be very helpful to you and I bet you would make up the money that you spent on the tax planning session way more so than with the the savings that they provide to you just because you don’t know everything. I, as much as it pains me to admit, don’t know everything. So, having somebody who does have so much expertise in one subject, tax, and the tax code is like four billion pages long or something like that. It’s huge, it’s enormous. It’s meant to be confusing. Having somebody who has sifted through that and gone through and said, oh, this is how you use this. This is how you use this. I mean, I have had people, Scott, talk to me about they need a new, uh, an advisor, I’m sorry, they need a new accountant because their last accountant didn’t have them taking depreciation on their rentals for the last five years, which makes my heart break because there, their accountant didn’t know anything about it.
Scott: Yeah, absolutely. I I want to just kind of, this is the one where I think I would actually diverge with Whitney and many other investors from a philosophical perspective, while completely agreeing that this needs the advice of a tax planner from a long-term perspective. So one of the, one of the things that I think traps people’s thinking, right? And this is fire specific is this I want to absolutely minimize my tax bill in the near term, right? And my goal is not to have a $100 million in wealth at 90. My goal is to build a portfolio that allows me to enjoy Tuesday in my 30s and 40s. And a consequence of that philosophical difference, I believe, is not fearing paying taxes today, right? If my wealth, if I have a if I if I’ve been investing for a long period of time in in the next funds, for example, and I want to start harvesting some of that wealth beyond just the principal I committed into those into those funds, at some point, I’ve got to be willing to pay taxes. I’ve got to be willing to realize that gain so that I can spend it on a trip, on a house, on whatever um that I I want to do there. And so I’m not afraid to realize that gain. I’m also not afraid to realize that gain when I can’t sleep at night, right? So I paid taxes when I sold my index fund portfolio out of fear for high prices in the stock market in February of this year and that those taxes will get paid to Uncle Sam. I’ll do my part to reduce the national Treasury uh, here, and I sleep better at night. So I’m just not afraid to to to do that um from a uh a one perspective. Second, um, I have a long-term bet in place that you can disagree with, but I think that taxes are going up long-term. So, um, while it is true, so if if you if I have a uh $100,000 invested in the market and I pay a $100,000 gain, right? And I pay taxes on it and then reinvest it right away in Colorado, that high that marginal tax rate could be as high as 25%, 24.55%, 20% federal for capital gains and 4.5% for Colorado. But if I realize that gain and they put it right back into the market, then I will be less wealthy in 30 years after tax, even after I sell it because the way that the math works. You you can go play with that concept if that’s uh if I’m losing people on that. Um but I believe that tax brackets are going to go up over the next 30, 40 years from where they are at today. So I believe that when and nobody knows what that’s going to look like. So I believe that between the combination of me realizing a gain when I feel like it’s the best move for my portfolio, paying taxes, potentially getting a better risk adjusted return with whatever I’ve then reinvested the proceeds into and combine combining that with the fact, combining that with the second fact that I believe tax rates will go up long-term. And third, the fact that I want to use that wealth to built to enable me to send Tuesday uh how I want in my 30s and 40s. I’m not afraid to pay taxes. That said, I always understand the impact of the moves that I’m going to make from a tax perspective. I’m going to stay in an asset class if I want to 1031 exchange something, right? I want to think through those those types of decisions here. I also want to point out another thing here that why you need a tax planner on this. As I was recently talking to somebody who wants to sell, I think $200,000 worth of stocks in order to fund a home improvement project. Right? That’s their choice. So you I see you’re you you don’t like that as a a philosophical item, but that’s what they want to do. Let’s think about the tax implications there. Like I want it to all be long-term capital gains. Well, if you invested $100,000 in November 2024 in the stock market and it’s up one that has grown to $101,000 right now, and that’s part of the piece that you sell here, that $1,000 gain will be taxed as a short-term gain at your marginal income tax bracket, right? Now, if you sell $100,000 of stock that you bought with a basis of $50,000 several years ago, you’re going to have a $50,000 gain that you’re going to pay taxes on with a long-term capital gains rate of 15 to 20% depending on your income tax bracket. Do you see where I’m going with this? Right? W- wouldn’t you rather realize the short-term gain of $1,000 and pay 4 or $500 in taxes to access some of that wealth today, then to pay the long-term capital gains by selling the chunk that you invested in 5, 10 years ago? That’s the kind of thing that people miss and don’t think about when they’re thinking about the tax planning perspective here, right? As there’s a, there’s the amount of the gain and and there’s the type of of realized income, right? Um on there. And so that’s something that you got to really be careful of when you’re thinking about this. It’s not as simple as, oh I’m going to realize the long-term capital gain except the short-term one.
Mindy: And the thinking behind both of those sides that you just shared is absolutely solid. Oh, I want to do long-term capital gains because that’s a lower tax bracket than my current tax bracket of, you know, 30% or whatever. But it’s not necessarily the right move, like you just highlighted. So yes, that is a great point and that is absolutely what tax planning can help you figure out.
Scott: Yeah, so like when I sold some of my stocks recently, I put that into place and I I I will have short-term capital gains that will be taxed at a marginal income tax uh, income tax bracket here and I’ll have some long-term ones, but I made the the move. It was a very complicated exercise, frankly, in in into some of these to think about it. simple toggle inside of the uh, um the the the the Schwab uh uh trading account there. But it was it was uh it was it was a it was a complicated exercise to kind of figure out how do you minimize that tax hit in here on this. And there’s also that philosophy. Like do I want to pay I am I just cool paying a portion of taxes here to have a lower basis on the next of uh, of an investments that I, that that I invest here. Those are all things you got to think about here and it’s the place where I diverge from Whitney philosophically, uh, but also uh agree completely with the sentiment, you got to really understand what you’re doing here and minimize taxes in in with respect to the goal that you have. When do you want to use that money?
Mindy: This is super fun. I like these these four horsemen and I encourage our listeners to uh, check out the book, Money for Tomorrow, How to Build and Protect Generational Wealth. This is a Bigger Pockets publishing book. You can buy it on our website at biggerpockets.com/store or wherever books are sold. 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. I am Mindy Jenson. He is the Scott Trench saying Toodaloo mountain Dew.
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