Finance Friday: Stable Index Funds or Cash-Flow-Reliable Rentals?

Mindy:
Welcome to the Bigger Pockets Money Podcast Show Number 294, Finance Friday edition, where we interview Cecilia and talk about designing a portfolio with the end in mind.

Cecilia:
I think that’s exactly where I got stuck was I started thinking I wanted something, but a turnkey rental, a la the renter retirement model, which is, I’m just going to give you some money. Someone else is going to property manage it. Someone’s going to send me a little check, and it’s going to be not really that much money to give you. Maybe give you 25, 40 grand at the most. And then, I was like, “Well, wait a second. Maybe I want this thing that you just described, maybe I want it to be in Palm Springs where I can Airbnb it, and I can go and stay in it.” But then that is 100 grand in or 120 grand in.

Mindy:
Well, you could have both.

Cecilia:
So then I was like, “Okay, am I doing the right thing?” And then I froze.

Mindy:
Hello, hello, hello. My name is Mindy Jensen. And with me as always is my, everything is a spectrum co-host Scott Trench.

Scott:
Oh, Mindy, you really continue to come up with these great new intros, and adjectives for me.

Mindy:
Scott and I are here to make financial independence less scary. Plus, just for somebody else to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business, or find financial flexibility, we’ll help you reach your financial goals and get money out of the way, so you can launch yourself towards those dreams.

Mindy:
Ooh, I like that financial flexibility. I love Cecilia’s story today, because she truly does have financial flexibility. She has positioned herself so that she is generating enough income that adequately covers her expenses and a whole lot more. And she’s conscious about where her money goes without depriving herself. Does she seem like she’s missing out on anything? No, she seems super happy.

Scott:
She’s doing great. I mean, she’s winning. And let’s be real, one of the reasons why she’s winning is because she has a very strong income and in control over her expenses, especially the low housing payment from having bought a place in California 12 years ago, and has that. So, she’s really got a wonderful situation, living in a beautiful place with … It’s very affordable, and having plenty of income to cover that, and continue to invest and save. So, it was fun to play with a very flexible position and think about how we can make it more flexible and give her even more options to get where she wants to go over the next five, 10 years.

Mindy:
Yup, I think she’s got a lot of things to think about. We gave her some things will look into, like, does she really want to diversify her portfolio into real estate? And if she does, what type of real estate does she want to diversify into? So, let’s make our attorneys happy. Scott, the contents of this podcast are informational in nature are not legal or tax advice. And neither Scott or I nor Bigger Pockets is engaged in the provision of legal, tax, or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal, tax, and financial implications of any financial decision you contemplate.
Cecilia is a 53-year-old divorced mom of two with a great start on her financial independence journey. She could be financially independent right now if she lived in a different country, but a couple of kids, a couple of jobs keep her here. She’s looking for some advice about where the right place is for her to put her money. Should she keep paying down her mortgage, save for a rental property, buy a second home, et cetera? Cecilia, welcome to the Bigger Pockets Money Podcast.

Cecilia:
Thank you, Mindy, Scott, so great to be here.

Mindy:
I’m super excited to talk to you today, because I think you have some fun challenges. You live in a high cost of living area, known as Southern California, where everything costs more.

Cecilia:
And then some.

Mindy:
And then some. But in exchange for that higher dollar, you get sun all the time. It looks so beautiful behind you.

Cecilia:
Yeah, it’s actually sunny today. So, good thing it wasn’t the other day. Yes, spoiled, and that becomes an anchor of some kind, but I’m definitely privileged and blessed.

Mindy:
Yeah, so of course, right off the bat, I could say, “You should move, and I could cut all of your expenses right down to nothing, if you would just move to the Midwest.” Let’s do that. There you go, from Episode 294. There you go.

Cecilia:
And we’re done.

Mindy:
And we’re done. So, let’s look at your income and your expenses. So, what is coming in and where are you putting it?

Cecilia:
Okay, so I have two businesses and what I do is I draw from one of them. So, my income, I pull $7,900 a month. So, that’s not taxed up, if that makes sense. It’s just $7,900 from that business. And then, from my second business over the course of the year, I tend to just skim profits off of it, at different timings to throughout the year. And that lands me an additional anywhere from $50K to maybe even $75K that I pull from that second business, depending on how that business did that year.

Scott:
Great. And another word we could use for that is distribute.

Cecilia:
Distribute, skim, yeah.

Scott:
Of course, being legal, assuming that your profits-

Cecilia:
I’ll try to think a smarter verb for that, yes. I self distribute at my own discretion.

Scott:
Yeah, perfectly ordinary way to manage your business cash flow. That’s great.

Mindy:
Okay. So, where does that $7,900 go?

Cecilia:
Okay, all right, so we’ll walk it through. My mortgage is about $1,600. HOA is $500. Gasoline, currently, is $240 a month. Utilities, $268. Household, which is kind of a big bucket for me, but that’s groceries. That’s if we eat out. That’s toilet paper, anything you get at Target, Amazon, movies, that sort of thing is $1,400 a month. Insurance, health insurance, dental insurance is $828. House cleaner, sometimes I turn it on, sometimes I turn it off, but we’ll put $120. My yoga studio gym is $122. I put $550 into my after-tax brokerage. Currently with a tutor, which will end in about six weeks, $200 bucks a month. New car, new used car payment, so this one’s hurting, plus my car insurance is $600 a month. And then, savings, I put $500 just in my short term savings, and that’s if I charge too much on my Visa that month, or something came up for the kids, or if I don’t touch it, it pays for my life insurance every quarter. And then, my kid’s car and insurance comes in once a year. And then, right now I’m paying an extra thousand dollars on my mortgage.

Scott:
Awesome. So, you’re doing a great amount of saving just from your W2 income. And then, on top of that, we have $50,000 to $75,000 after tax that we’re able to distribute from your business.

Cecilia:
Yeah, yeah. When you say it and I hear that, it definitely sounds like a lot. But I can tell you, when I first went out on my own, when I left my official W2 job … So, I started this business in 2016 … I was not spending like this. There was no house cleaner, or no yoga, no gym, no extra mortgage, no money saved, you name it. We went really bare bones. And as the two businesses have picked … So, I haven’t been with these kinds of numbers for more than maybe two to three years.

Mindy:
Okay. Well, let’s look at these numbers, because your mortgage payment is $1,500 a month in Southern California. That’s amazing.

Cecilia:
Yeah, I know.

Mindy:
But then, you look at your HOA is $500. And my first thought was, “Well move.” But your mortgage payment is $1,500 a month. So, all in, you’re at $2,000 a month. That’s still … In Southern California, that’s like winning the lottery.

Cecilia:
Yeah, it’s insane. For a three bedroom place, it’s insane. So, I just bought at the right time.

Mindy:
For a three bedroom house? Oh.

Cecilia:
It’s a condo, but yeah, I bought in 2011. So they were just starting to rise. So, yeah, I’m very proud of it. Anybody asks me, I’ll tell them in a heartbeat what my mortgage is. I love saying that’s how much it is.

Mindy:
So, and because you’re in Southern California, the $240 in gas is understandable. Health insurance at $828, I’m assuming that’s for the whole family?

Cecilia:
Me and my ex-husband each take a kid. So, that’s for me and one kid. And yeah, it’s just through the exchange, and has gone up every year since I’ve been out on my own. So, I can expect that to continue. It’s like $50 to a $100 a year it goes up.

Mindy:
Yup, and it will. Expect that. Your car insurance is … Did you say it’s your car payment too, $600?

Cecilia:
Yeah.

Mindy:
Okay, gotcha.

Cecilia:
Yeah. So, $150 of that is the new car insurance, and then $450 is the new car payment. And I’ve had that car now for five months.

Mindy:
Okay. And then, so with the total listed expenses, I see $7906, and the total actual expenses, when we take out the after tax brokerage savings, and the savings for your kids, and the thousand dollars of extra mortgage payment, I get $5,800, which is killing it in Southern California. And then, if you take out … Before we had this conversation, I’m like, “Oh, HOA, get rid of that.” $600 for car insurance, because I didn’t know that was a car payment too, get rid of that. Health insurance, get rid of that. If you were living in another place that’s much less expensive, and you didn’t have the expensive car, because I thought that was just car insurance. That’s another $1,900 you can get rid of. So, there’s definitely room to improve, but also, you’re making a ton of money, and your actual expenses are $7,900 in Southern California. I still think you’re doing great.

Scott:
Her actual expenses are lower than that. Your actual expense-

Mindy:
Or $5,800.

Scott:
Yeah, because the extra mortgage savings, and your-

Mindy:
Yeah, the savings, doesn’t …

Scott:
Off contributions, yeah.

Mindy:
It’s an expense, but it’s not an expense. It’s an investment. And it’s-

Cecilia:
Yeah, and I draw from the business. When you say my income is $7,900 a month, I draw according to this budget plan. So, if I suddenly said, “I don’t want to draw that much. I only want to draw $6,500,” I would just cut all of those extra cushions that I have in there.

Mindy:
What do you do the income from the business that isn’t going into your bank account?

Cecilia:
It’s sitting there. So, right now, my six-month emergency reserves are in the business checking account. It goes to my, obviously, expenses for the business. And then, when I think it’s high enough … Once I get to June or July, and I feel like I know how the year is going, then I’m like, “Oh, I’ll take five grand. Oh I’ll … ” Then I might start pulling it, and I’ll either pull it to fund my … I’m weird in how I save money. I have very specific buckets of savings accounts and I have them mapped out for the next 10 years of where I want them to be. So, I know for instance … I have like a bridge. One of my after tax brokerages is bridge retirement. If I need to fund two years worth of living, I want that fund to be $175,000 for the next 10 years, I have to put $17,500 in it. And so, when I start to pull money, I fund each of those accounts, according to the map that I have for it. I’m a little weird like that, but I like seeing it in certain buckets.

Mindy:
I like that approach. Okay, I have this goal and I have 10 years to get there. So, I would like to have this much money in there. If something happens, I can divert money away and then re-divert it when the something is over. I like that idea a lot.

Cecilia:
And I would like to believe that my two businesses are on a trajectory to continue at least as well as they’re doing, if not better. But also I, in the back of my head go, “I’m the chipmunk saving the acorns.” Like, “Okay, I just need to have all this,” because if they don’t do as well in four or five years, I just want to make sure I’m okay with what I’m doing.

Scott:
Well, this is going to be fun. Because you clearly have optionality to cut back on spending. You can take action across really all of the major levers of personal financing. You can spend less. You can earn more. You can really go all in on building your business or investing in your business. And you can change your investment allocation approach here. So, that gives you a lot of options, which can be overwhelming, but also a lot of freedom So, always better to have more options than fewer.

Mindy:
Where’s that money be being invested?

Cecilia:
That’s a good question. So, in the traditional IRA, most of it is in VTSAX. I do have that with some percentage, maybe 15% or 20% in bonds, just because I feel like I should be, but I know how some people feel about bonds. Most everything, actually that’s … I keep all this money in Vanguard. So, the SEP, the IRAs, the Roth, the after tax, they’re all in Vanguard. If you aggregated those, a lot of it is in VTSAX. And just because everybody’s read that book, and I decided I wasn’t smart enough, and I just … That’s where I put it. But there are a few other things. There’s some bond funds in there, and there’s some … There’s a little bit of VTI, and maybe some other things I’ve heard about, and I put it in. But mostly, it’s in these index funds.

Scott:
How much is in retirement accounts, and how much is outside of that from your investment portfolio?

Cecilia:
The traditional IRAs is a retirement account. The SEP is … So, if I add that up, $188,000 plus … So, $196,000 might be outside of retirement accounts.

Scott:
Great. And then, that gives us like $680,000, 700,000 inside of the retirement accounts?

Cecilia:
Yeah. I have other savings accounts that I’m not adding into that. So, in the retirement accounts is $587,000 plus $70,000. So, that’s $650,000, $655,000, something like that. And then, the rest is in a non-retirement account, savings, random savings accounts, after tax brokerages.

Mindy:
$650,000 and $320,000?

Cecilia:
Yeah.

Mindy:
Your business emergency fund, I’m interested in that. Because I think that … Is it just sitting in a cash account, or a high yield savings account? Or is it …

Cecilia:
It’s just in my business checking. And it’s, yeah. So, again, I don’t know what the safe number is. I love to have at least three months in there. And then lately, it’s been getting to six months or seven months. And then, by the end of the year, it tends to be a lot. But that’s why I’m trying to get smarter about, if I pull money off of it, I keep three to six months of my income poll in that account, first of all, is that the smartest place to keep it? But where am I putting the rest of the money? Because otherwise, if I don’t have a purpose for it, then Cecilia has a new patio. She has … Then I’m buying things, and I don’t want to be doing that every year.

Scott:
Awesome. Well, okay, so we’ve got our investments. We’ve got like $970,000 or so in these investments, and we’ve got three months emergency reserve, six months emergency reserve in the business account, some other cash sprinkled across a couple of other accounts. And then, the rest is in basically index funds, or similar types of investments, bond investments across both after tax and retirement account portfolios.

Cecilia:
Correct.

Scott:
What about property? You have you have a home?

Cecilia:
Correct.

Scott:
What other … Can you tell us about that in any other assets you have?

Cecilia:
Yep. So, I have a condo that I refinanced during COVID that is a 20-year mortgage. So, I’m maybe a year into that. Crazy property value in California right now. So, what is that? Maybe $530,000 in value. So, I owe $268,000 and the value is at $760,000 right now, which is insane. That’s really my only asset. I mean, I have this car, but the decision was I was supposed to pay this car off. I bought it. And then, I said, “In March, you’re going to pay it off.” And then, I got to March, and I was like, “Well, maybe that money to pay the car off should be going somewhere else,” and then that, hence, led me to this call with you all, which is, what’s the smartest thing to do with maybe $20,000 or $30,000.

Scott:
Okay, great. So, we have a net worth somewhere in the ballpark of $1.5 million when we add in a house to this, give or take the car on that.

Cecilia:
Yeah.

Scott:
Great, and most, the majority of that net worth, $560,000 is in your home equity. And then, another $500,000, $600,000 is in retirement accounts with that. So, at least two thirds, probably a little bit more, maybe 70%, 75% is in retirement accounts or home equity.

Cecilia:
Correct.

Scott:
Okay, great. And what are … can you refresh us on your goals? How would … what’s the best way we can help you today?

Cecilia:
Well, the quandary that I’m stuck in is there’s these buckets of money that I have to do a few things with, pay down the mortgage, pay off the car, or should I be getting an investment property, and be figuring out a different way to diversify how I’m investing? And when I started to go down that route, where I got stuck was, “Am I going to buy a place that’s in the Midwest, in or in the south, in Alabama, or Ohio, or Indiana,” all these places people are buying rental properties? Or should I be buying it at a place that I might actually want to live someday or visit someday, maybe Palm Springs, or somewhere in Colorado?
Then I got stuck, because when I start thinking of those secondary places that I might actually want to live or stay, those prices are entirely different than some of the just straight out rental income properties in other places. So, a little bit of direction on where could some smart places for this money to go be, if that was a sentence. And then tax strategies, I’m just really curious. My oldest child just came off my taxes as a dependent this year, which was painful. And my mortgage interest really isn’t that much. So, I’m trying to figure out, what are some ways I can have some tax strategy, tax savings? And a rental property might be the answer.

Scott:
Can you give us a little bit more clarity on your long term goal? What’s the outcome that you’re trying to back into a few years down the road?

Cecilia:
A few years down the road. So, I envision myself in anywhere from, I don’t know, four to six-ish years, being able to be remote with both of my businesses. I do training and a huge majority of it is online. And so, if I have great WIFI, I can go live and work anywhere. And so, I want to be able to take min sabbaticals and go to either another country, or another state, and maybe Airbnb for a month, or spend the summer in Spain. Or so, that flexibility … I have the funds. I could go do that now, but at some point, I want to make sure that my investments aren’t all in the same exact thing, and that perhaps rental property might get me some supplemental income that if my expenses, let’s say they actually truly are $5,800, well, is there a way I could make that $3,800 and be bringing in a little bit of money to just carve off of what that monthly expenses are?

Scott:
Awesome. So, I might try to simplify that for me, in the terms of, you want to have a more flexible financial position in the … Or the most flexible position you can reasonably get to in a four to six-year period, call it five years?

Cecilia:
Absolutely, yeah.

Scott:
Okay, great. Let me just observe a couple of things that I’ve heard so far about your position, and see what you think about those observations. Right now, you are doing great from an income perspective. It sounds like this is relatively new in the last two years where the income has been this strong, and you also are very optimistic about the prospects of your businesses. You’ve got control over your expenses. There’s nothing crazy going on, but you have layered in a couple of luxuries, because you’re doing well, and you can clearly afford it to with that, and still maintain a very strong savings rate on just your income, and not to mention the skimming or distributions from your main business there.

Cecilia:
Yes.

Scott:
And then, you haven’t really, I think, made up your mind about what you want to do from an investment perspective, which is why you put some each month towards your Roth IRA and why you pay an extra a thousand dollars to the mortgage each month, and then sprinkle in other investments down the pipeline. Are those fair observations?

Cecilia:
Right. So, I definitely want to be smarter about where that money is going, because I feel like I’m making it up.

Scott:
And then, you’re doing great with all of this, but I also think you’re complicating some of the things around how you think about your cash position. I love that concept, but you have all these different buckets going in there. How much total cash do you have right now?

Cecilia:
How are you defining cash? Is my after tax brokerage considered cash?

Scott:
No, no.

Cecilia:
No, no, okay.

Scott:
This is money that will be in your bank accounts, checking or savings accounts, including your business account, and any household or savings accounts that you have there.

Cecilia:
Over $100,000. I mean …

Scott:
Okay, you have over $100,000.

Cecilia:
Yeah.

Scott:
So, I think just saying that, and acknowledging that at is very freeing to a certain degree, right? I think it’s just like, “Okay, great. I’ve got $100,000 in cash. I don’t have to worry about this bucket not being full, or that bucket not being full.” Cash is cash. We’re can allocate it across different things here. And that should be plenty to cover your business, personal life, emergencies, a big trip, or two, or five, or 10, and a couple … any other incidentals that might come up, and give you a lot of optionality around moving other things around.
So, I would encourage you, just at a highest level, to consider reframing the cash question, just thinking about your total cash position like that, keeping some in the business, some in the personal, and just say, “My pile is plenty large right now, what do I want that pile to be at?” And everything on top of that, I’m going to sweep out. And that’ll help you with clarity for your business account, too. You can just say, “Great, I’m going to target $30,000 or or $40,000, or whatever it is you want. And whenever it’s above that, I’m just going to sweep it, and put it into these investments down the line.” I think I would encourage you to get to a structure like that, because it’ll make all this decision making really easy for you.

Mindy:
That is one of the things that I was going to suggest is a research opportunity. Sit down and think, “How much money do I need in the business to feel like it’s got a fully funded emergency fund? And how much do I need in my personal to feel that I am fully funded there?” Because I think that you’ve got all of that available. I don’t think you’re going to have to save for your emergency funds. You may have to not skim off the top for a couple of months to make sure that they’re totally capped off. But once you have a decision on what you feel comfortable with, then you can look at what’s on top of that. And that’s a really personal decision. If it’s three months or six months of business expenses, great, that’s your choice. And you can do that, because you’re the boss.
And another thing to look at is how stable is your job, and how predictable is the year? Does your emergency reserve dip in January because nobody’s hiring you until the end of March, when it pops back up again, and that’s the same pattern over and over again? Great, it’s okay that your reserves go down in January, because in March you’re swimming in cash. You can replenish it. Or is it more of a, I really do need to keep this in here, because I never know what’s going to happen? And either answer is fine. It’s just, this is something that you’re going to have to answer.
You said that you’re not sure if your investments are all the same and they kind of are, because they’re all in the stock market, and they’re all basically index funds, but that’s not a bad thing. I mean, if you read that book, I’m assuming you’re talking about The Simple Path to Wealth by J.L. Collins, which is the one that preaches VTSAX. J.L. Collins is a smart guy. He’s done a lot of research. It’s kind of a proven method of the simple path to wealth is investing in VTSAX. So, that’s not a bad choice.
but if you want to diversify your holdings, rental real estate is a really great way to diversify. Now, do you want to be a landlord? Do you want to have a Midwest property empire that you are responsible for? Do you want to … you had mentioned traveling around and getting something that you can use. You can’t use a property that you’re renting out long term, but you can use an Airbnb property when you feel like it. And when you don’t feel like using it, you just stick it back up on Airbnb, and it rents really quickly. I mean, try to find one right now. It’s really hard.

Cecilia:
I think that’s exactly where I got stuck was I started thinking I wanted something, a turnkey rental, a la the rent to retirement model, which is, I’m just going to give you some money. Someone else is going to property manage it. Someone’s going to send me a little check, and it’s going to be not really that much money to give you, maybe give you $25,000, $40,000 at the most. And then, I was like, “Well, wait a second. Maybe I want this thing that you just described. Maybe I want it to be in Palm Springs where I can Airbnb it, and I can go and stay in it.” But then, that is $100,000 in, or $120,000 in. So then I was like, “Okay, am I doing the right thing?”

Mindy:
Well, you could have both.

Cecilia:
And then I froze.

Scott:
Well, let me ask you this. If you had $1.5 million today, how would you invest it?

Mindy:
You could have both. You could have your turnkey property and your rental real estate.

Cecilia:
Oh, yeah. Yeah, I could [crosstalk 00:26:22] up those Airbnbs.

Mindy:
And just because you have currently stock market investments doesn’t mean that you can’t transfer those into rental real estate or diversify your portfolio by taking some of this, and selling it, and buying a rental property. Read the reviews on these turnkey properties, and see if that’s something that you really want. Hop on BiggerPockets.com and read about my worst land lording story. Because sometimes it’s enough to read that story and be like, “Nope, I’m good. I don’t want to do that.” And sometimes, you can’t be swayed.

Scott:
Heck no, yeah.

Mindy:
If you can be swayed by one story, then land lording is not for you. But if you are able to just keep going, if you’re still excited about it, grab a property, and do the research, and all of that. Of course, we’re not diving into all of those numbers right now. But when you get a property that works as a rental property, it generates cash, and it’s really great investment. And when you get an Airbnb property, you can go and use it, and check it out, and, “Oh, you know what? This isn’t for me. I don’t like this anymore.”

Scott:
So, I’ll disagree slightly with this on the Airbnb side, and not in a big way. But my belief is that … I like to vacation in Colorado, ski towns, and that kind of stuff. I feel that the odds of getting a great investment return in those areas are lower than the odds of getting a great investment return in the area that I know best, which is Denver, or a market that I’m selecting for the maximum possible returns. And my philosophy is I’m going to go and put my money in a place where it’s going to perform the best, and then I’m going to spend it in the areas that I want to go and be in with that. Because even if I have an Airbnb in Beaver Creek or Avon out there, and I go and stay in it, I’m forfeiting the $2,000 or whatever it would be for the week that I would be generating in revenue from that.
So, that’s how I like to look at it is I’m going to go wherever I think the best long term returns are going to be, and I’m just going to spend it on my lifestyle whenever I want to go and travel. And I worry that some of these places that happen to be your favorite or my favorite place to go are very good at extracting money from people who did not live in those areas, and own property or visit those areas, which is probably part of the reason why they’re so fun to visit.

Mindy:
Okay, that’s a good point.

Cecilia:
True, true.

Mindy:
And I will say that I have been speaking with an agent up in the mountains, because of course I would love to have a rental property up in the mountains. And he has been saying, “Look, they don’t cashflow right now.” You buy it, assuming that it’s going to appreciate, but you’re paying taxes. You’re paying your mortgage. This is an investment that’s costing you money every month. So, there are secondary locations. If you want to be … I don’t even know where Palm Springs is. I know it’s in California, and that’s it. But is it on the beach? I don’t know.

Cecilia:
It’s in the desert.

Mindy:
If you want to be San Diego on the beach, that’s going to cost you a lot more than you’re going to generate, but it’s also going to appreciate faster. But inland might be still a nice place, or up in the mountains of California, where it’s not really a ski place, but it kind of is. Or I’m up in Colorado, near Rocky Mountain National Park. You can get a decent property near-ish Rocky Mountain National Park that could be a great Airbnb property, that could cash flow. But it isn’t … You’re not going to get the ski people coming in, and it’s not going to … maybe it’s not rented every single weekend. So, there’s secondary markets that could be cool, if that’s where you want to be. But like Scott said, if it’s not a place that you want to visit, then maybe it’s not really worth buying the Airbnb. Because it’s a higher income, but it’s a lot more expenses, and it’s a lot more, I don’t want to say hassle, but hassle, with the cleaners and people that don’t leave on time, and lots of things.

Scott:
Let me try a thought exercise here, going back a second. So, I asked $1.5 million, what would you want it to be in? And I’ll just check a stab at this personally, and see if you react. I’m in your shoes. I just have $1.5 million in cash. How do I allocate it, right now? I have none of these accounts or whatever. And I want to be as flexible as possible in 1.5 years from now, right? Well, I’m probably thinking I want to have … Okay, I’m going to put a third of it to a half of it in real estate, to some capacity, and I’m going to have a number of properties probably levered at 50/50 or something like that, 50% debt, 50% equity, which is nice and conservative from a debt financing perspective, but still allowing me to get some leverage on that. And that should generate a good amount of cash. Let’s call it $600,000 in equity. So, that’s $1.2 million in property. Maybe I’m getting a 10% cash on cash, or an 8% cash on cash return, which is $40,000 to $50,000 a year. Maybe that’s ambitious. Maybe it’s maybe it’s $35,000, $40,000 from that, right?
Then, I probably have after tax stocks, maybe $200,000 or $300,000 in, and stocks in retirement accounts, maybe $200,00O or $300,000, and a little bit of home equity, and $50,000 to $100,000 in cash. And from there, I’d be expanding each of those piles pretty … That gives me 50 … My investments are half in stocks, half in equity, some of which are retirement accounts, some of which aren’t. I’ve got a good conservative cash cushion and some home equity, since you have … A lot of people like to own their homes with that. And so, that would be … What’s your reaction to a portfolio like that?

Cecilia:
For me, I think deep down, I am anchored in stability. So, I like the idea of there’s multiple places that they are. And some of them I wouldn’t have to think about and I can just leave alone. So, the money for me that’s in my IRA, it’s like, I’m not putting more into that account. It’s fine. If I do the Rule of 72, I can see that that account in the next 10 to 20 years is fine, and I’m fine. The other two, then I think I get into, if it’s real estate, is it … Am I doing it for the money or am I doing it because I really want to be flexible, and I want to travel, and I want to be remote? So, those have two different avenues to them. And I think actually, if I hear myself say it out loud, it’s, I want to be flexible and I want to travel. So, maybe it’s the money that I would’ve put down on an Airbnb is my travel fund, or is my build it up to buy that second place that I could rent if I wanted to, but it’s not its primary purpose.

Scott:
Great. Well, let me ask you a question on that. When you say, “Flexibility,” I think that real estate’s a spectrum, right? So, if I’m buying and operating an Airbnb, that’s a lot of work. You can buy, operate, and then stabilize an Airbnb, so that you have a system to manage it, like Zeona McIntyre does. You can also buy a turnkey property with a property manager, give them some money, and in this case, in the hypothetical situation I just articulated, give the … buy $600,000 worth of real estate, either in one location that’s remote, or multiple locations and have property management overseeing them, making that largely passive, to some degree. Or you can do anything really in between there. Is that …

Cecilia:
Yeah, yeah. I like the second one, probably. I mean, at the end of the day, do I want to be a property manager? No. I would rather write the check to someone and know it’s taken care of, but maybe I just need to get clear on what’s the end goal.

Scott:
Yeah, so if you can think, “Hey, in five years, I want my portfolio to look like this,” that’s flexibility to me. Then, you can back into that. My instinct is that right now, your portfolio is not going to deliver that flexibility. And you have the ability to transform that easily over the next five years. But right now, if you keep doing what you’re doing with where your money’s going is every month, you’re putting a thousand dollars toward the mortgage. You’re continuing to expand your cash position. And you don’t really have a formal investment plan behind where that sweep is coming, which is the majority of your invested dollars each year, most likely.
And if you can put that together and say, “My ideal portfolio looks like this,” in five years, it’s $2.5 million or $2.25 million, or whatever it is that I’m going to target between appreciation of my current assets, and then the extra savings I’m going to generate, and then just begin making that happen, you can think, “Great, and that $2.2 million portfolio, it should look like $800,000 in real estate equity, $800,000 in stocks, $150,000 in cash, $400,000 in my home equity,” whatever that is, that’s how you can begin backing into that. And flexibility means whatever it means to you. So, that might be 100% in stocks that I don’t have to worry about at all, and no real estate, or it might be something like what I just articulated there.
But right now, if you keep doing what you’re doing, your portfolio is going to look like a million dollars in retirement accounts, $950,000 in your home equity, and $400,000 in other … in cash and other stocks. And I don’t think that is going to get you the flexibility that you’re looking for from that. So, that’s the change that I would encourage to some degree is to begin at allocating the dollars in a way that will back you into that portfolio that says flexibility to you.

Cecilia:
Yeah, yeah, yeah. Which I kind of thought I was doing, but it doesn’t sound the same. I thought through, “Where do I want to be in 10 years? And what is each of these buckets? What do I want each of these buckets to look like?” So if I left that IRA alone and just let it do its thing for 10 years, well, we can assume that’s going to double. And then, the SEP, if I imagined based on how much I’ve put into it each year, “What is 10 more years of contribution?” But then when we get to the after tax brokerage, it’s, “Was that earmarked for something? Should I be using that for real estate? Some of them don’t really have a particular end in mind versus the number is just got to grow.” And then … right? So, it’s just being more purposeful. I think with the more flexible buckets.

Scott:
Yup, one of the tools that I have is I have a written investment plan, because as much as I talk about this stuff, I get shiny object syndrome, like anybody else, and get excited about this, this, and the other thing. So, the fact that I have a written plan that I’m able to review with my wife at our money date, keeps it like, “Okay, great. We got extra cash that is going here. That is going here. I am on track to buy that next rental property this year with that.” And so, I think that will be really helpful as well. Because, and again, the biggest one I would … that stands out to me is the extra mortgage of a thousand dollars. You already have $560,000 in equity in your home, right? And in 10 years, you might have the mortgage down to $50,000. That’s great, but if your goal is to pay off the house, pay it off, and apply the cash. That can be incredibly freeing. If it’s not, don’t pay it off, and put it into the investment that you’re intentionally picking with that.
But right now, just this partway approach is saying to me that the flexibility is just not going to come from this financial position until 15, 17 years happen, or however long it will take you to pay it off with a 20-year mortgage, and the extra thousand there. So, I’d either … That’s where your investment philosophy can help you make that decision. You can be like, “I’m either go all in and pay that off,” which is an event. An event will happen at the end of that, where everything is super flexible.

Mindy:
Woo hoo.

Scott:
Or I’m going to put it into these other stocks, and it’s going to appreciate, and I’m going to get a better … I might mathematically get a better return if the market does reasonably well, but I’m not going to have that event. And there’s trade offs behind that.

Cecilia:
Yeah. But you are echoing what swirls around in my head, which is like, “Why am I paying this mortgage?” It sounds to me, I’m slated to pay off this mortgage in 10 years, when I’m 63. And it just sounded so beautiful to be 63 and not have a mortgage. And then, I was like, “Oh my God, my interest rate is so low. Why am I putting that money there?” Well then, I should just pay off this car. But wait, if I put this money towards the car, I’m not getting a monthly check. What if I took that same money and bought a rental property, and then I’m getting a monthly check that I could use to pay off the car? I just got caught in this mouse trap. So, finding a true line-

Scott:
Yeah, I think if you write it out, you’ll be able to go down a list. And I would feel personally better about going all in on like, “This year, I’m going to pay off the mortgage in two years, because I want to pay off.” Or, “I’m going to stop paying anything extra, and I’m going to put it all into the next rental property that I’m going to buy with this place.” And in 10 years, I’m going to still have a mortgage balance, but I’m going to have $600,000 in real estate equity, because it’s all going into down payments and into my rental property portfolio equity, because it’s all going into that, or I’m going to put it into index funds, or I’m going to invest in my business, because my business can grow.
But if you can pick those things and write them down, I just think that this like partway approach that you’re taking right now is going to end up in a position where you’re going to have $1.2 million in home equity, if things double, as you hope over the next 10 years. I’m sorry, $1.2 million in your stock portfolio, mostly in retirement accounts, if you continue doing what you’re doing, and then another $900,000 or $950,000 in your home equity, and then not much else anywhere else. And again, that to me is … That’s actually probably pretty flexible at that point, very simple, paid off property, lots of stock equity and your business. But I don’t know, is that what you want? Nothing wrong with that outcome.

Mindy:
So I’m going to play the, What Would I Do If I Was Cecilia game now? Because Scott said what he was going to do. If I had $1.5 million, here you go, Mindy, here’s $1.5 million. I would probably park it in VTSAX, or my husband would be like, “No, let’s put some in Tesla and QQQ,” because that’s his favorite thing right now, VTI. And you know, but basically the stock market. It has done very well for us. Also, my husband does a lot of research on tech stocks. That is his thing. He’s not buying automotive industry. He’s not buying airlines. He’s buying tech stocks, because that’s where he just loves to research. So, that’s probably what we would do.
But because I am the real estate person that I am, I would make a list of the cities that I would consider Airbnb traveling to, and make a list of the cities that I would consider owning real estate in outside of Southern California, places like Iowa, because I always ride Ragbrai every year, or Ohio because my mom lives there, or Minnesota, because my cousin lives there, or if you’ve got some local that you can trust, that’s really valuable. And there are several cities in the Midwest that all have about the same returns. Indianapolis, all the ones in Ohio, Kansas City, Des Moines, Iowa. So, if you know somebody there, that’s a really great place to put on your list. If you don’t know anybody there, maybe skip it because there’s other cities that offer similar returns.
And then, I would find an agent in each one of those cities that I had on my list and say, “I would like you to set me up with a search. This is what I’m looking for. I may or may not be making a purchase. I just want you to put me into a list on the MLS.” And I’m a real estate agent. This takes me maybe 10 minutes, if I have to reset my password, which they always make me do and I hate it. It doesn’t take a lot of time to set somebody up, to get a list, an automated list, and give them a maximum price that you want to pay. Give them a minimum bed amount, and minimum bathrooms, whatever, very minimal search criteria, and just see what’s coming up. Oh, absolutely nothing comes up. Well, I guess that I’m not going to invest in this city. Or holy cow, 5,000 properties came up, I guess this is a really great city to dive a little bit deeper in, or narrow my search.
And until you can start to get an idea of what the market is in … For you, I would say A properties … A class, sorry, I was going to say A+, A class properties are what you want, because you don’t want the hassles. You don’t want to deal with problems. You want to set it and forget it. It’s going to going to be easiest to find a property manager to take care of your properties when you have an A class property. So, make a list of cities that you want to go and get an Airbnb in. Make a list of cities that you want to … that you know people in, or would be interesting for you to own properties in, and just start from there, and see what is the market there. Maybe the market is so hot that you’re like, “I’m out,” but maybe the market is reasonable. And California money coming into other states, you see these properties. You’re like, “Really? That’s all that it costs?”

Cecilia:
You’re like, “I’ll write you a check.”

Mindy:
I’m in Colorado and I say the same thing.

Cecilia:
I forget if it was during the pandemic. It might have been 2019. I decided that at least every year, and I haven’t made good since this first one, I was going to go and stay at an Airbnb in a city that I was curious about. So, I started on that track. I went to Boise and I rented a place for a week. And I was like, “What’s the deal with Boise? Why is everyone from California moving to Boise? I got to check Boise out.” I think I’m probably priced out of it now. But I went, and I looked, and I’m like, “What is it about here? What is the downtown like? What is the outdoors like? Could I see myself staying here?” So, I like your advice of, “What else is on that list for me to go, and explore, and get a feel for, and see what it’s like.”

Mindy:
Another thing I want you to do is … Can you automate any part of your business? We were talking before we started, and you do coaching, is a good general category for your business, right, coaching?

Cecilia:
Probably more training, but training and coaching [crosstalk 00:45:15].

Mindy:
Training, I’m sorry, training. And is there anything that you can automate? Can you sit down and make just a world class video that helps take some time off your plate, maybe your introduction video, or week three of your training program is always going to be the exact same thing, and it’s not going to change. So, you can sit down and automate what you’re doing. Even if it doesn’t seem automated when you’re presenting it, you can automate yourself, so that maybe you’re at a place that doesn’t have super amazing internet, but that doesn’t matter because somebody that you have hired, like a virtual assistant, or an assistant that is now running the company, while you’re off traipsing around all these Airbnbs that you want to test out, can take care of the situation and pull you out of it. With your training, it sounds like you’re doing it live all the time. And if you’re doing it live, then you can’t delegate that to somebody else.

Cecilia:
Yeah, no, no. That’s a great idea. I do have one online course, and I think that is the goal. It’s done quite well during COVID. So, the plan is, what else can we create that is automatic, automated, and roll people in, and it’s not attached to my face and my time? So, yes, more of that.

Scott:
Awesome. I think Mindy’s suggestions were great there from the real estate perspective to test that out, and then you can just decide if you want that to be a part of your portfolio or not. You don’t have to be sure about that future state portfolio today. You just have to move towards working towards what you think that optimal looks like, and then begin taking the steps to do it.

Cecilia:
Yeah, absolutely. Honestly, I think it’s more about the places I might want to go and spend time in than it is Cecilia owns rental property, and has a property manager, and every once in a while, someone sends me a check for $200. I don’t really know what that gets me. So, being able to have a place where it’s like, hey, and I could go to Boise, or I could go to Colorado. I could go to may maybe a different part of California that I’d want to go to and spend a week a couple times a year, that sounds like it’s more of interest to me.

Mindy:
Test it out.

Scott:
Where exactly do you live in Southern California?

Cecilia:
I live in Orange County.

Scott:
Okay. Is it near one of the …

Cecilia:
It’s halfway between LA and San Diego.

Scott:
Like, San Clemente, or …

Cecilia:
So, like Laguna Beach. Yeah, yeah. I live about seven minutes from San Clemente.

Scott:
Awesome. So, you live in one of the most beautiful places in the world. And your home or condo is probably also a great Airbnb experience, actually.

Cecilia:
Well, yeah, you can’t Airbnb in my community. I think it’s 30 days or more, but that’s, I feel like, one of the challenges I have, which is, man, if I cash this place out, I could retire tomorrow, and go to whatever, Colombia, or Panama City, and Portugal, and I’m done. But I think this property is going to be an amazing long term rental.

Scott:
Yeah. I mean, I think there’s-

Cecilia:
The rental prices are insane.

Scott:
I, at some point, will spend a few months in San Clemente or one of those places, just to … I don’t want to live there long term, but it is one of the most beautiful places in the world. And so, you’ve got maybe the short to medium term rental, where you have somebody rented out for a month is a great way to fund some of those Airbnb experiences as well, while you’re traveling, and picking the locations that you do want to buy in.

Cecilia:
Yeah, yeah. So, swapping time, getting someone to stay here for a month or three months while I go somewhere else for a month or three months.

Scott:
Yeah, that would help you. Because again, you have this enormous asset. It’s a 30-year financial position that is not being harnessed right now in pursuit of that flexibility. It will probably cost you less than $10,000, you’d think, to reset, or reframe, or block off a section, or whatever it is of your house to make that an available opportunity, if you’re really planning on doing lots more travel and flexibility.

Cecilia:
Yeah. And sometimes I get tempted by that equity too, to have that equity work for me. And gosh, could I borrow fund, skim that equity, and do something with it as well?

Mindy:
Sure, you can. Although, a home equity line of credit, I like to say, is a short term solution, short term funding solution. Scott likes to say that, too.

Scott:
Yeah, well, that’s where I was talking about earlier. If I was redesigning a position from scratch, for me, I would be thinking $600,000, $700,000 in real estate. Another, that amount, again, in stocks and bonds. $100,000 or $200,000 in home equity, maybe $50,000 to $100,000 in cash, rounding out that stock position across both tax advantaged and after tax accounts there. And so, that would be, again, one starting framework. You don’t have to take that one to think about the position. And that would … Great, if I wanted to get there tomorrow with your position, I would cash out refi the house, use that to buy some rental properties there, generate that cash flow, and go. That might be a really scary move, because of the way that you’ve set up your position are not appropriate for various reasons. But that would be the position I’d be thinking about building towards, if I was starting from scratch. It’s the position I tried to build for myself when I got started.

Cecilia:
Yeah. Oh, I like considering that, definitely. Because when I think about paying the mortgage off or not, it contradicts me saying, “I’m in the hottest rental market. I could rent this condo out so easily for so much money.” And then, I’m like, “Why wouldn’t I just get someone else to pay that mortgage down?” Like, “Why am I paying it down?” So, if I refinanced and took money out, my mortgage, God forbid went from $1,500 to what, $2,000? And then, someone else down the line is paying that off for me. Then I’m like, “Okay, Cecilia, what are you doing? There’s probably something smarter there.”

Mindy:
If I was going to be Cecilia, I wouldn’t pay a dime towards that 2.625% mortgage rate that you have. I wouldn’t pay a dime extra. I would keep it as is.

Scott:
I agree completely, unless my goal was, I’m going to pay this thing off, and now my mortgage is zero. I’m just paying property taxes and insurance on that thing. And I’m going to use the asset as an Airbnb. It’s not the most optimal way to drive return on equity, necessarily, but it’s very freeing to have no mortgage, so no wrong answer. And you’re kind of partway in, partway out with the way you’re handling your mortgage.

Cecilia:
Yeah, I got to put in both pots.

Scott:
But that says there’s a decision there, and there’s no wrong answer with that. There’s the math, and there’s the safety, and that’s it.

Cecilia:
I think what I’m pretty good at is once I decide what I want to do, I do have discipline to hit towards it. So, me deciding, “Okay, this is the 10-year plan. This is what you’re doing. We funded it last year. We funded it the year before. Okay.” So, now I think once I work on crafting a written plan, and putting it down, incorporating exactly what is my goal, then I think it’s easy for me to make a decision like that and stick with it. So, it’s the vacillating when I’m I’m stewing over things that gets me. But once I decide, I think it works.

Scott:
Awesome. Well, let’s recap what we’ve talked about today. You have optionality across spending, across earning more income. I’m sure you’re doing what you can be to continue to advance the income from your business and your job. I think that you’re crushing it. You’ve got a $1.5 million net worth, lots of good options with all that. And the biggest thing is getting more decisive and crystal clear about that future state portfolio that you want, which may take time, may take a few months, and some iterations before you get to where you’re feeling comfortable. But once you do that, then taking all of your surplus cash and moving very methodically down that list of priorities to get to your desired future state.

Mindy:
Yup, I think we have a couple of research opportunities to look into places to live and what your end goal is. I think that you also have decided that maybe being a landlord isn’t the top choice for you. So, trapes around, and check out different a Airbnb properties, and see the cities that you like, and see are there secondary cities that might make a good income and also be a place that you want to spend time? But I think you have a lot of good options ahead you. And now it’s just like, which one of these amazing 50 options do I choose?

Cecilia:
Well, if they involve trapesing, scene, I think I’m in.

Scott:
There you go.

Mindy:
I’ll make that the headline.

Cecilia:
Thank you so much. Yeah, yeah, yeah. Nothing wrong with that. I think, and the travel bug. I think maybe as a parent, when you see the kids ready to just take their wings and fly, and then you’re like, “That’s so freeing for them,” and you’re like, “Wait, it’s so freeing for me. Where can mama go?”

Mindy:
Exactly. Okay, well, Cecilia, thank you so much for your time today. This was super fun and we will talk to you soon.

Cecilia:
All right, thank you so much, Scott, Mindy, appreciate it.

Mindy:
Okay, Scott, that was super fun. That was Cecilia and her super awesome position. And I think that we gave her a lot of wonderful things to think about, the research opportunities into does she want to do real estate as a landlord, or real estate as an Airbnb proprietor. Is that the right word? Does she want to truly diversify her portfolio, or does she just want to trapes around the world staying in Airbnbs as she Airbnbs her own place?

Scott:
Yeah, I think Cecilia has a strong, flexible position. She spends less than she earns. She has optionality to flex up on the income front, flex down on the spending front, and transform her portfolio, and think about how she wants to invest across various asset classes. And the world’s her oyster. So, she’s got all the options in the world. I think she’s going to do a really good … I think she has a bright future ahead of her, and I think she just needs to get really clear about what she wants, when she wants it, and what portfolio she’s going to design to get there. Because right now, I think the portfolio, in spite of her a great strategy, I think it’s happening to her, rather than she’s actively shaping it the way that she wants with an end state focus in mind.

Mindy:
Yeah, but it’s got a pretty good end result so far. She’s doing pretty good with that.

Scott:
Absolutely.

Mindy:
You know, Scott, sometimes when you have so many options, it can be a little bit daunting. So, I think we gave her a lot of great things to choose from today, a lot of things to think about, a lot of things to contemplate. I’m also excited. Maybe we can have her back and talk about her business. I’m excited about the opportunities for her to remove herself from her business, generate even more income, and then maybe not even worry about the Airbnb and the real estate.

Scott:
You know, I just thought of something. I think this would be a fun thing for the Facebook group. Let’s start a thread. And you guys heard mine. I would like to hear what your ideal $1.5 million portfolio would look like, if you could just start with a blank sheet of paper and allocate $1.5 million across various asset classes. What would you do with that? And I’d love to hear … I think that would be a good discussion, and see what people think.

Mindy:
Well, JT, I am going to actually remember to put this in the Facebook group. I’m going to make a calendar invite, so I don’t forget. So in the Facebook group, you will find a question at the very top at facebook.com/groups/BPMoney. What would your ideal $1.5 million portfolio look like? How would you allocate it, into what asset classes? And if you’re going to talk about, “Oh, I’d put it into real estate,” tell us what location you’re investing in real estate in, and what type of real estate you are investing. Okay, Scott, I think that’s a great question.

Scott:
Awesome. Well, I look forward to seeing what the responses there are.

Mindy:
Yeah, that’s going to be fun. Okay, are you ready to get out of here?

Scott:
Let’s do it.

Mindy:
From Episode 294 of the Bigger Pockets Money Podcast. He is Scott Trench, and I am Mindy Jensen saying, catch you on the rebound, hound.