Finance Friday: Sell (Don’t Rent) Your Primary Residence When You Move Out

Mindy:
Welcome to the BiggerPockets Money podcast show number 310, Finance Friday edition, where we interview Jill, and talk about what to do with your primary residence after you move out.

Jill:
Now, I don’t know if I just keep that going with my investments or I try to cashflow all these renovations as quick as I can and, I guess, scale back on the investment piece. So I guess, how do I balance the retirement accounts, the after tax brokerage account, 529s, all these other things we invest in with the real estate piece now?

Mindy:
Hello, hello, hello. My name is Mindy Jensen, and with me as always is my real life actual human being never going to ask you to IM him about crypto cohost, Scott Trench.

Scott:
With me as always is my spamming me with a new intro, Mindy, every week, but seriously, the spammers on these Instagram things are nuts. Please know that me nor Mindy, nor BiggerPockets Money Instagrams, none of those accounts will actually reach out to you and then ask you for Bitcoin or any other types of money or whatever from that. Please just report the fake accounts if one of them happens to try to go after you.

Mindy:
Yup, and feel free to send me a note or post a copy of it in the Facebook group, so that we can all report them and get that mess off of our sites. Thank you because I hate them. Scott and I are here to make financial independence less scary, less just for somebody else to introduce you to every money story because we truly, truly believe that financial freedom is attainable for everyone no matter when or where you’re 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 to make the decision between you selling and renting your home, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I am super excited to talk to Jill today. She makes a good income. She has her expenses fairly under wraps. She is buying a second home and considering turning her first home into a short-term Airbnb.

Scott:
Yeah. I think it’s a good discussion and it’s a situation that probably a lot of people are going through. She has a good problem. She has a lot of equity in her primary residence and she needs to figure out how best to deploy that, whether it’s by keeping it as a rental and generating income or redeploying it.

Mindy:
I really like that you threw that out there, Scott, and gave her something to think about, “Hey, it seems like a no brainer, but maybe you could take this equity and this money that you have tied up in this house and do something else with it. Maybe you could redeploy it in a way that would generate even more income.” I really like the way that you gave her things to think about.

Mindy:
Before we bring in Jill, let’s note that the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott nor I nor BiggerPockets 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.

Mindy:
Jill and Joe are preparing to move to a new house that they plan to live and flip while turning their old home into a short or midterm rental. Debt is not Jill’s friend. So there’s a bit of anxiety surrounding this move. Even though she realizes that taking on this low interest debt can help her family realize their long-term goals, it’s still weighing on her just a little bit. Joe is newly self-employed, so they’re still navigating the fluctuating income while he stabilizes his new business. Jill, welcome to the BiggerPockets Money podcast.

Jill:
Thank you. So excited to be here and actually talk to you guys live.

Mindy:
I’m super excited to have you. I am going to say that Jill lives in a medium cost of living area and in the Midwest. So that gives you a framework for where these finances and this information is coming from. Let’s jump into your numbers. What do you make and where does it go?

Jill:
So I make 250 W-2 income. That’s straight, I would say, biweekly income, but then I do get a fluctuating bonus. That can be anywhere from 50,000 up to 100,000 depending on what’s going on. Then my husband has a new business that he started. He started it before COVID, but we had to put it on hold with COVID. We also were living abroad. So this is, 2022, his first year fully doing this. So it’s between 1,000 per month and 5,000 a month. I think there will-

Scott:
You make 250K base salary plus.

Jill:
I make about 200, yeah, 200 base, and then plus bonus, which averages about 50K.

Scott:
Okay. Got it.

Jill:
Then my husband’s around 1,000 to 5,000, I would say, per month. I think conservatively will profit about 30,000 this year.

Scott:
Great. This is all pre-tax.

Jill:
Yup.

Scott:
Awesome. So post-tax, we can plan on 175 to 200 maybe in post-tax dollars.

Jill:
Yeah. So I guess monthly, I get about $10,000 a month, and I take everything as much as I can out of my paycheck. So I’m a very automated person. So I take my 401(k). I actually do my auto and home insurance through work because I have a group plan and it’s discounted. I do a flexible spending account for dependent care. All of that is taken out of my paycheck before I actually get the money. So monthly, I have about 10,000 to work with.

Mindy:
Okay. I want to pause here and praise you for that because that’s awesome. You never see that money. When you take it out of your paycheck and you put it someplace else, that’s money that you can’t spend. I’m saying spend in air quotes for those who are just listening and not watching on YouTube. You can watch on YouTube if you want to see all these fun faces that I make all the time we record, but this is money that you’re not spending because you’re not seeing it. So it’s not there.

Mindy:
I think that’s really, really cool when you can do that. I don’t know that I have that option to pay my insurance, but there are things that I have pulled out of my paycheck ahead of time, and there are things you can have pulled out of your paycheck. If this is an option for you, if your expenses are a problem, if your spending is your big issue that you’re trying to tackle, see what you can pull out of your paycheck before you have to spend it because that’s a check you’re not writing. I’m so old. I write checks. That’s a check you’re not writing to pay the bill, but that’s also money that’s not available for you to spend. So it never hits your bank account and maybe goes someplace else before it gets to where it needs to go. So I love that idea.

Jill:
Yeah, and there’s a huge discount if you do payroll deduction. So I actually talked to the insurance to switch it at one point and it would go up $1,000 or something. So they really like that. If it’s through a payroll deduction, they give you a huge discount. So if your company offers it, try to go for it because it’s also a group plan so they give you lots of discounts.

Mindy:
That is an awesome tip. We were just saying, we learn something every show and that is awesome. Okay, Scott. Now, we got to talk after the show, maybe HR. Anyway, okay, let’s look at-

Scott:
Well, let’s go through expenses next and say where’s all that money going. How much are you spending per month and where is it going?

Jill:
So right now, we did make an offer on another house, but I won’t talk about that yet. So our current house that we live in, we have a mortgage. With the mortgage and taxes, it’s 1690. Childcare is 1200. I give a decent amount of donations to different organizations per month. So that’s about 300. Gas and car maintenance is 150. Medical is 350. I have an HSA. So I’m a big fan of the high deductible plan. So I try to cashflow anything we have going on with doctor’s appointments or prescriptions, and then just save the HSA. Clothes, kids’ activities, personal care, pets are about 300 per month.

Jill:
I know this is bad, but groceries and eating out is about 2,000 total per month for a family of four. All the home stuff, we do have someone who cleans our house, the lawn, garbage pickup, recycling, house items is about 600 a month. Then we have a few other bills, cell phones, streaming, which is 300. I’m down to one student loan, which is 160 per month, and we’re only keeping that just in case Biden forgives loans. We will try to take advantage of that, but it’s low interest. Travel is 400 per month. Then I do have a few investments that I put 200 into a 529 for my girls, and then another about 1,000 in a brokerage, after tax brokerage account.

Scott:
Awesome. So where are your assets and liabilities? How much cash do you have and what do you invest in?

Jill:
So I have a 401(k) through work, which is 440,000. Most of it’s pre-taxed. Recently through listening to your show, I switched to Roth. So about 10% of it is Roth now. I also have a Roth IRA that’s 40,000, a rollover IRA that’s another 40,000. I just set up a SEP IRA because of my husband’s self-employment. So we only have $650 in there, but we just started it last month. I have an HSA that has 10,000 in it, 529 plans for both my girls that total about 15,000 total. After tax brokerage is 33,000. Then I have about 60,000 in cash, and that’s going to go towards a down payment on a house. Then our current house mortgage is 200,000. We have about 250 equity into it and we just refinanced our mortgage last year for a 15-year mortgage and it’s 1.875 interest, which is unbelievable to me.

Scott:
Awesome.

Jill:
Then we have two cars that are paid off.

Scott:
Great. So what is your total net worth here?

Jill:
I didn’t total it up. So math is not my strong suit.

Scott:
Okay. So we got … Let’s do some quick math. We’ve got what? 500, 520, 550-ish in retirement accounts. We’ve got 565 retirement accounts and 529 plans. We got 33K after tax, $60,000 in cash, and 250 in home equity. So what is that? A little under a million dollars in net worth.

Mindy:
I have 839.

Jill:
My used cars are apparently very valuable these days. So maybe that gets me up higher.

Scott:
Great. Awesome. Okay. So what’s the best way we can help you today? What are your goals?

Jill:
So I mean, we have had a lot of debt. So graduating, my husband and I had between the two of us probably about 90,000 in student loan debt. So we’ve been plagued with student loan debt for a very long time, and we finally got to the point that we got completely, pretty much out of debt and we can really take any bonuses I get and my husband’s income and just use that towards investments.

Jill:
We’ve been wanting to get into real estate for a very long time, but because of the debt, I was never really comfortable doing this. So my last bonus that I got, I paid off all of my student loans, most of my husbands, and we also had a construction loan on this house that we had to make our HVAC. Well, we didn’t have an HVAC so we had to put one in. We had to make our house a bit more energy efficient. So I paid that off as well.

Jill:
So I finally got to the point I’m comfortable buying a second house, and we want to convert this house into an Airbnb. We live about a mile and a half from a very, very popular college football stadium, which is in walking distance. So people during those six home games, it’s about $1,000 a night on average that people get for their houses.

Mindy:
Wow.

Jill:
So even if we just rent for the tailgating for the home games, plus graduation and some of the big events, we think we could profit about $30,000 on this house. Our house right now is not in the best. We bought it before we had kids. So we didn’t think about neighborhoods, sidewalks, busy roads. So it’s not in the greatest place for us. We want to be in a neighborhood, but it’s really cheap here. We live right outside of the very popular town. So our taxes are lower. So I’ve been really reluctant to buy another house, but I think now with my debt situation, I’m comfortable.

Jill:
So we found a great house, one that needs a lot of work, but the bones are really good. I actually got advice from one of your recent shows about it’s a house that had no pictures online, just the front of the house, and we went to look at it and it’s dated, but the bones are really good. It’s all cosmetic work that needs to be done, and nobody was looking at the house. It was horribly marketed. So we made a low ball offer on it and they took it.

Jill:
So now, we have the second house. So we think we got a really good value in it. We can renovate it, live in it, which it has a neighborhood, and I think it’s the right place for us to be, and then try to really make profit out of the Airbnb on this house, but it’s still really scary to me to go there, but I still think all the planning and all the numbers work. We just have to go for it. So I guess, yeah, I just need advice on how to get started and how to make the most out of going in this direction.

Mindy:
Jump in with both feet and don’t look back. No, that’s awful advice. The video you’re referring to is my leftovers video, where I talk about in this market nothing is sitting around except every once in a while something is sitting around and it could be a disaster or it could back up the train tracks or it could be overlooked, and those are the properties that you look at.

Mindy:
I just today closed on a property for a client that was a leftover that is going to be gorgeous in about 15 hours of elbow grease. That’s probably what you’re going to be in too, maybe a little bit more than 15 hours of elbow grease, but I love a good live and flip.

Jill:
I think a little bit more, but our inspection was yesterday. The guy couldn’t believe that everything works. Appliances that were 50 years old still work, but the roof is redone. The HVAC is brand new. All the big stuff was done. It’s just shag carpets and wallpaper.

Mindy:
Oh, my good. Okay. Oh.

Scott:
Well, let’s take a step back here. Your current home is going to become the investment property.

Jill:
Correct.

Scott:
Right? Let’s start with analyzing that one. So the mortgage is 1690 per month, which you have a great rate.

Mindy:
She can rent it out six weekends a year for $1,000 a night, approved as a short-term rental stamp.

Scott:
So that’s 12 grand for 12 nights, 1,000 times 12. Okay. So that is a big chunk of your mortgage.

Jill:
Correct.

Mindy:
There’s other opportunities. It’s not just those, but those are the big ones. So I don’t like jumping in with both feet and not really running the numbers, but with this property, if you can rent it for $1,000 a night and your mortgage is 1650 a month or 1690 a month, you’re going to rent it for two nights for the weekend easily, maybe three nights, but probably two night minimum. That is a no brainer to just look at that and be like, “Okay. There are other opportunities as well. I will, at the very least, be able to cover my mortgage on this,” but you’re going to be able to do way more than just cover your mortgage on this.

Mindy:
There are setup costs. I mean, you have to furnish the whole thing and that’s something that I think that a lot of people who are considering short-term rentals don’t necessarily think about, and that’s going to be, Scott, have you set up a short-term rental yet?

Scott:
Well, I think we start with, Jill, have you analyzed this property? What is your analysis? We probably have more than, “Hey, I can get a thousand bucks on six big weekends.” What is the income you think that the property will generate? What are the expenses? Have you run that analysis?

Jill:
So my husband did some analysis. Yeah. He got on your website. He’s run a few numbers. So he thinks that we can have monthly, if we rented it out, 1800 a month if we did between home games, all the big events at this university that’s very close to us. Then we’ve also dabbled with sabbatical homes. I don’t know if you’ve ever heard of this.

Scott:
Right. How much per month?

Jill:
1800.

Scott:
1800 per month in income, in short-term rental income.

Jill:
Yeah. This is after taking out the mortgage, having extra costs for renovations or fixing up the house. He thinks it can cash flow 1800.

Scott:
What would be the gross short-term rental income before expenses?

Jill:
I don’t know. He ran all the numbers. So I don’t have it in front of me.

Scott:
Okay. I’m going to put in 3,500 as a placeholder there. I’m going to say you’re assuming you can get $3,500 a month, and then 18 of that will pass through as cashflow per month after your mortgage expenses, after cleaning fees or maintenance repairs, all that kind of stuff probably with … I’ll assume for now that we’ve got conservative allocations there for capex, handyman expenses, those types of things in there as well. Okay.

Scott:
You have $250,000 in equity and you’ll be generating about 20,000 to 25,000 in cashflow per year with 1800 per month in cashflow. So that’s not bad. That’s a reasonable investment opportunity. Let me ask you this. How long have you lived in that property?

Jill:
We are going on 10 years now.

Scott:
Okay. Would you buy another identical property and do the exact same thing with $250,000 down?

Jill:
I don’t know. This house is a difficult house. So to get it to this point, we had to do a lot of work on it, I guess. So I don’t know. It’s on septic. It’s well water. There’s a lot of things that we had to go through first time home buyer education to get it to the point that it is today. So I probably wouldn’t go for this exact house, but something similar.

Scott:
Okay. So here’s why I’m asking this is because you have 250,000 in equity that you can sell and tap into right now tax-free. You will lose that advantage if you move out of the place after two years. So my bias, in general, sorry, three years, that’s right. I have to live there two over the last five years. Thank you, Mindy, for correcting me there. So my bias is almost always to have a strong preference towards selling a primary residence rather than keeping it and reinvesting or keeping it as a rental.

Scott:
I think your situation might be different, and this is where I’m going to have to … because you have a 1.875% mortgage, but you’re on a 15-year term. So I wonder if you replicated this exact same project with another property if you wouldn’t have approximately the same cashflow because your payment will be smaller, but you’ll have a higher interest rate, for example, with it.

Scott:
So I think there’s some puts and takes here that make this really interesting from an analysis standpoint, whether to keep an Airbnb or sell because you could just sell and then redeploy into an even more ideal Airbnb investment, for example, and you get your gain out now tax-free and get a new basis to start with the new project with.

Jill:
Our reason for keeping it is this side of town has continued to develop. So when we bought it, it was farmland. People who had been here for 70 years live off the land type neighbors who shoot squirrels in the backyard, but we have … Definitely, the area is developed. So they’ve built really fancy condos on one side of us that are going for $600,000. They’re building a very nice pub in a historical barn across the street from us. So we keep thinking this side of town is developing more and more, and we really like this town.

Jill:
There’s not a ton of properties that you can have. The tax is this low in this location that, yeah, you have the same value out of it that we have here. So we’ve always wanted to hang on to the property because we actually have a decent amount of property as well. We have about an acre. So we wanted to see how this side of town developed, and I think our equity will keep going up on the house.

Scott:
Absolutely. What I’m trying to say, though, is you have 250,000 in equity in this property. You’ve done well, and it sounds like you believe it’ll be a reasonable investment going forward. Your problem is that in three years from now, if you sell the property, you’re going to lose. Right now, you have 250,000 in equity that you can harness and sell, probably all gain, but let’s assume it’s all gain. If you sell it in three years from now, you’re going to pay tax, 25% capital gains tax on that, and that’s going to cost you $62,500, right?

Scott:
If you sell this property and then redeploy it into an identical investment property down the block, you’re going to get a new mortgage and reset, but you’re going to harness that gain and have a new basis that you’re going to take advantage of that tax break with it.

Scott:
So that’s what I’m talking about here and that’s the decision you have to make. From there, we can say, “Okay. My property is good for Airbnb.” We know that. We’re happy with that. You’ve obviously done the analysis and you’ve got good, but can you do better or about the same with a nearby property, for example, right? I think that’s your challenge that you need to go through here because your strategy might be the right one.

Scott:
It just might be, “You know what? If I actually optimize … I bought this house to optimize for my family in our situation, and it happens to be a good Airbnb, but this one, a few blocks down the road, is actually even better from an Airbnb perspective with current market values, and for the next 10 years, I’ll be better off with that, make more return, executing the same strategy but just taking advantage of my tax break.” That’s what I’m trying to get at with these questioning, with these questions.

Mindy:
So you said well water, and I don’t know how sulfury your well water is, but when you say well water, I think sulfur water. I’m wondering how much of an attraction that is going to be as an Airbnb. Is there any plan to bring city water to the property?

Jill:
Not at this moment, but we do have lots of filters on it. So you don’t notice it now, but it took us a while to figure out the right combination of filters and softeners to get it.

Scott:
I grew up on well water. Do people not like well water?

Jill:
Yeah, we drink it.

Mindy:
No, it’s disgusting.

Jill:
No.

Scott:
Oh, it’s totally normal for me.

Mindy:
If you didn’t grow up on it, and there’s different kinds of well water. No, you’re weird. There’s different kinds of well water, Scott, and some of them are like, “Oh, okay. I didn’t even know this was well water,” and some of them are like, “Is there a dead mouse in this water?” It’s disgusting. My grandma had that kind of water. I never wanted to drink water at her house because it was just so gross.

Scott:
I always look forward to having a big glass of water at home, parents’ house.

Mindy:
You probably have. Yeah, there was something dead in my grandma’s well, I think. Anyway, yeah, so if you’ve figured it out, I would just be really, really sensitive to any reviews that you’re getting about that, and maybe have a trusted friend come over and taste that water, but like Scott is saying, you didn’t say that this is … I just always assumed that it’s in the middle of town when people are talking about this. It’s got an acre of land. Who’s going to take care of that acre of land. What is going on with that acre of land? Since it is near a place that holds football games, are people going to host big parties at your Airbnb? Could you be making your neighbors really upset?

Scott:
If she got an acre, then she’s got a big plot of land and they can throw even bigger parties. She can charge more.

Mindy:
Yeah. Absolutely.

Jill:
They’re very like “It’s your land. You can do what you want” kind of person.

Mindy:
Okay. Okay. That’s good.

Jill:
They’re shooting squirrels in the backyard. So it’s no problem. Yeah, no, we’re right over the border into the township let’s say, and it changes pretty fast, but because this town is so popular, it’s spilling out this direction. So there really is no more land in the town. Everybody has to buy land out here. So that’s why we think it’s valuable, but I think a lot of those concerns you have are something to consider.

Scott:
I think you got a great thing here I would consider. I would sit down and do the exercise and let your math tell you what it needs to, but I would consider selling the property, harvesting your capital gain, and then buying one or maybe two additional Airbnbs that are perfect for your strategy, right? Maybe there are other properties nearby even closer that don’t have a yard to maintain and all this other stuff and your yield goes up even further with that if you’re able to redeploy the equity into that. Just go through the exercise. You may determine, “Let’s keep it,” with that, but that’s a big lever in your financial position right now.

Jill:
Yeah. The other thing is within the town, you’re not allowed to have Airbnbs unless they’re part of your house, unless you’re living there. So that’s another thing. So there’s a limitation on how many Airbnbs can be in this town, which is maxed out, and now, you have to be living in the house. You can rent part of your property. So it’s actually-

Scott:
So if you’re one block away from the town, you’re not subject to that law and you have-

Jill:
Correct. So I have some loopholes, but yeah, I totally get what you’re saying.

Mindy:
Another thing to think about is the cost of furnishing it. I would definitely go after the college clientele and the college decor, which should be actively available in thrift stores and garage sales in and around. I don’t know if you guys have, do you call it hippie Christmas where all the college kids throw all their stuff away at the end of school?

Jill:
Yes. Graduation weekend is one of our favorites. We get lots of new stuff.

Scott:
A long thin table. Okay. Great.

Jill:
Beer pong tables, yup. We got it covered.

Scott:
Perfect. Well, great. So let’s talk about the new property that you guys are buying and your intentions with that one. Is that just going to be your primary residence or is there longer term plans for that?

Jill:
For now, yeah. Well, I mean, it’s a little bit of a question mark. I don’t like to be locked into places very long. So I mean, we’ve gone abroad twice now. If it was up to me, I would probably never settle into one place, but I think for my family, they need stability. So I want to get to a neighborhood, but I’m not sure if I want to stay there forever.

Jill:
So our idea was to buy this house, renovate it, make it either sellable or rentable, either one. We were open to either. Live there for the two years and then either rent it or sell it and then move to the next property or abroad or wherever we want to live at that point.

Scott:
Can’t argue with the live and flip. Sounds like you’ve really done your work and it’s mostly cosmetics. You’ll be able to move through it really quickly. Mindy is an example of how profitable that can be.

Mindy:
I’m going to change your mind a little bit and say you only have to live there for one year if you are going to rent it out. You have to live there for, well, you don’t have to live there, you have to live there for two years to get all of the capital gains exclusions fully tax-free, but if you’re going to rent it out, it doesn’t have to be a full two years. It can just be one year.

Scott:
Can you move in and then immediately rent it out for six months while you travel the world, that’s still your primary residence, your mail goes there, then come back and spend the next six month? Does that technically meet the requirements of that being your primary residence during that period?

Mindy:
I would not say to do this because that sounds a whole lot like mortgage fraud. It has to be your intent to live there, and maybe you could have a roommate, but if you rent the entire house out, then you have no place to live and therefore it isn’t your primary residence.

Scott:
Yeah. Obviously, we don’t want to do anything illegal. I’m just asking the question because I know that some, I have friends and family, for example, who live abroad and they need a US residence because they need to pay taxes in the US and get their mail to the US and stuff. So one of these individuals literally rents a place nearby to be his house while he is abroad.

Mindy:
That’s not mortgage fraud because he’s renting.

Scott:
Fair enough. Yeah. I don’t know the answer to it.

Mindy:
Spare bedroom.

Scott:
Just something to explore. Yeah.

Mindy:
I could rent him a house.

Scott:
Maybe you can have your cake and eat it, too, as long as you’re traveling or vacationing for a portion of the year and not living in these other places and are there for the most of the year.

Mindy:
Yeah. Well, I think she just needs to have a place to come back to. So if she rents the entire house out, then she doesn’t have a place to come back to. Whereas if she rents one bedroom out, she has a place to come back to.

Scott:
… or if it’s prepared for short-term rental.

Mindy:
Yeah. You can short-term rent your house out. You happen to not be there so you’re making money while you’re gone. That’s different. Let’s see. Yeah. Let’s talk about this new house. You have basically cosmetic stuff to do. That’s very exciting. The big things are done. That’s super exciting because, A, it’s really expensive with inflation and, B, you can’t find anybody to work on anything. So the fact that you have all the big stuff done, I mean, anybody can install flooring. It’s not that hard.

Jill:
Yeah. So it’s mostly floors, walls. The kitchen’s dated, but actually, everything works in it. So it is usable. It’s just we probably want to get, yeah, just facelift so it looks a bit more updated, but other than that, the outside’s nice. When they did things in this house, they did it high end. The windows are all Anderson windows from seven years ago. There’s no drafts in the house, no creaks in the house. It’s pretty unbelievable, and the neighborhood’s really nice. So yeah, I actually am worried we fall in love with it and never leave, actually, which was not originally the plan.

Mindy:
Well, you have to live someplace. If you like where you live, that’s great.

Jill:
Yup, but we have an out if we want it, I suppose.

Mindy:
I think it’s interesting. I know this is a side note, but I think it’s interesting that they didn’t get any interest on this house. You said there were no pictures up on the MLS. I wonder if they went with an agent who doesn’t offer full service in exchange for a discounted price for the agent agreement and then ended up costing themselves a lot of money because nobody came to see the house. It sounds like a case of what is it jumping over dollars to save pennies.

Jill:
Yeah. I mean, we’ve given offers to other houses and it’s crazy in this area. I mean, it’s down to cash offers, no inspection, and we’ve lost multiple other houses that we just weren’t willing to wave inspections on old houses. This house, there was another offer, but it was an investor and they wanted to go with a family that’s going to actually live in the house, but we had the inspection. We didn’t wave that. Yeah. We made an offer 10% below listing, which apparently the whole realtor office was shocked and celebrated that this went through. It’s the first below offer acceptance that they’ve had in a year. So pretty proud that we got it.

Mindy:
That’s an awesome, awesome story because in this market, yeah, nobody is doing that.

Jill:
Yeah, but it definitely was, I mean, we found a new realtor, so we had a realtor showing us houses that really didn’t know anything about investments and we couldn’t really get any good information. I happen to run into someone at my daughter’s preschool who flips houses and she has seven rentals in town. Within her first three houses she showed me, we made two offers on them. So she knew exactly what we were looking for. She knew the houses that have value in them. So really, finding a good realtor I think makes all the difference.

Mindy:
Yes.

Jill:
If I can give a plug for realtors.

Mindy:
Yes, you can. You should. Finding a great one is the key to your investing success, the key to your purchasing success. You can still find deals in this market. Now, you can’t find deals in this market the day they come on the market. This is a leftover property and it sat there for a while, and the reason that it sat there is because they didn’t get a good real estate agent, and that’s not your fault. That’s their fault. They should have chosen somebody else. That’s exactly what happened with the property that we closed today is that the listing agent didn’t insist that they clean the house. It was so filthy.

Scott:
Well, I think your real estate approach is awesome. You’ve made hundreds of thousands of dollars in your primary residence. You got a great option as an Airbnb. That seems pretty well thought out. I do think you should go through the exercise of at least looking to see what it would look like to sell and redeploy into similar properties, for example, and think about that tax hit, how that would work over a five or 10-year period because you may be able to get what you’re looking for there without that, but it may be that the nuances of your house are perfect being just over the township line and enabling you to Airbnb and having a perfect thing there.

Scott:
So that may be great. It may be an exception to that where you should keep the house. Your new strategy of live and flip, can’t argue with that. It sounds like you really did a lot of research and found exactly what you’re looking for. So I think that’s awesome. Is there another part of your finances or your strategy that you’d like to talk about besides the real estate today?

Jill:
Well, I think, I mean, my strategy before the real estate was just slow and steady, I guess, investing in my retirement, maxing it out as much as I could. We did start the brokerage account because I feel like all my money was tied up in retirement that I couldn’t access until I was a certain age, but now, I don’t know if I just keep that going with my investments or I try to cashflow all these renovations as quick as I can and, I guess scale back on the investment piece. So I guess, how do I balance the retirement accounts, the after tax brokerage account, 529s, all these other things we invest in with the real estate piece now?

Scott:
Great. I think if you’re going to have a rental property, the vacancy is going to kill you from it. So I think you make sure that you can move into your property, the new one, and that your current one is able to be rented out, and that’s the first priority because you’re going to be losing 3,500 a month or whatever your gross rent is every month that that place is vacant. So you have no choice there. That has to be your, I think, your top financial priority.

Scott:
Once that’s done, I think you have, it sounds like, the luxury of going right down the stack of maxing out your 401(k), maxing out your HSA, maybe contributing to other retirement accounts. Your husband has a business so there are options to really stock away a lot of money in pre-tax retirement accounts like a self-directed IRA.

Scott:
So I think those are all options to you, but I would also observe that the bulk of your position is currently in retirement accounts, and then currently primary home equity is soon to be rental home equity. So you’re not able to really access any of that except for the 250 in your house, which is why I think there’s a big decision there for you to sit down and do that analysis.

Scott:
So I think it’s a matter of what you want. Generally speaking, we hear people in a situation similar to yours that parallels yours saying, “I want more flexibility,” in a general sense. If you want that, then you’re going to have to make trade offs by not putting quite as much into the retirement accounts as you are capable of right now, paying taxes now, and generating a liquidity with that.

Jill:
Yeah. I mean, that was my worry because I’ve been working in corporate jobs since a long time. It feels like 20 years, since I was 20, and it’s exhausting, and I work pretty crazy hours. Eventually, I would like to have the flexibility that if I don’t want to work something as intense as I am today, I can do that, whether that’s scaling back and doing part-time or consulting or something more entrepreneurial. I want to have that option. So that’s why I wanted to diversify and have this rental income as well that I can access some of the money now instead of waiting till I’m 59 and a half.

Scott:
Yeah. I think you have to look at it and say, “Okay. Let’s say five years from now, where do I want to be?” You’re going to generate probably $100,000 in investible income after your expenses per year over the next couple of years, right? Right now, huge percentages of that are going to go into your 401(k), Roth IRA, your rollover IRA, all of those different types of things. It looks like maybe, I don’t know, 40 or 50 is going to go into your after tax stuff. So that’s going to give you 250 in cash that you’ll build.

Scott:
So by that point, you’ll have $600,000, $700,000 in assets outside of your retirement accounts in real estate and investments if things compound and go reasonably well, right? I don’t think that that’s flexibility in your situation. I don’t think you’re going to feel comfortable like, “Eh, I’m going to stop working now with that,” based on you’re spending with that.

Scott:
So I think you should back into that and say, “What would flexibility look like to me in five years? Is it a million in after tax investments? Is it a million and a half? Is it whatever? What does that look like? Is my position backing me into that?” I think that will involve hard trade offs about how much you contribute to retirement accounts versus how much you put into real estate versus how much you put into after tax brokerage versus how much you put into cash because you have plenty of income, but you just can’t go quite all the way down in the stack and max out everything in your pre-tax or towns and then have so much leftover that you can still have financial freedom outside of those right now.

Mindy:
Okay. So I have a little exercise based on your 401(k) only. The rule of 72 says that, essentially, your investments will double every eight years. This is rule of thumb. It’s not guaranteed. It’s not set in stone. Past performance is not indicative of future gains. All the disclaimers abound, but in 2022, your balance is $440,000. In 2030, your balance will be roughly $880,000. In 2038, your balance will be roughly $1,760,000. In 2046, your balance will be $3,520,000, and in 2054, in what, 32 years, your balance will be $7 million roughly in your 401(k), assuming you don’t put any more into it, assuming the same returns that we’ve seen historically. That’s a lot of money. Now, you’re getting into RMD territory. That’s just if you don’t put anything else in there. Do you have a company match?

Scott:
Yes, a very good one.

Mindy:
I would continue to put in, if I was in your position, I would continue to put in to get the entire company match. If that is you have to contribute over the course of the year, I would stagger it out over the course of the year. Because you want to invest in real estate, I might pull back a little bit in the 401(k) so that I could invest in real estate as well.

Mindy:
I don’t think that you are set in stone in your 401(k). I would still, I mean, personally, I would continue to invest all. I’m still maxing out my 401(k). Did we ask how old you are? I don’t think we asked how old you are.

Scott:
I’m 40.

Mindy:
40. Okay. So I’m 50, and I’m still maxing out my 401(k) just because there are ways to get to it before you are 55 or 65. The Mad Scientist has a really great article about accessing your retirement funds early. I’ll link to that in the show notes and I’ll email it to you when we’re finished here, but there’s lots of ways to access your retirement funds, the Roth conversion ladder. The 72T is at the separate but equal payments. He’s got three or four different options, including just taking it out early and paying the penalty.

Mindy:
I just still like that original house as a Airbnb with all of the stipulations that you have. It is so close. There aren’t a lot of competition so you would have a lot of demand for it. I think that perhaps your husband’s ideas that $3,500 is the income is maybe a little bit low. Always better to run the numbers with conservative because if he’s right, great, it’s still cash flows. If he’s wrong and he’s bringing in more money, “Well, oh, shucks, I brought in more money than I thought I was going to.” Who’s going to say no to that? “Oh, no, don’t pay me because that’s too much for this month.”

Mindy:
So I think there’s a lot of great options, but it comes down to … We’ve recorded a couple of shows this week and we’ve been using a fun little P word, a fun little four-letter word called plan. So I think it takes some time to sit down and talk about your financial plan, what is it that you want. When do you want to retire? When do you and your husband want to retire? Is it in five years? How much money do you want to have in whatever time? Let’s call it five years. How much money do you want to have in five years? Then you can step it back and say, “Okay. So in five years, we want this. Then we have to step back to these are the money moves that we need to make now,” or 10 years or 20 years or whatever it is, but sitting down and having a plan will help.

Mindy:
It’s not a five-minute plan. It’s not a come up with it in five minutes sort of thing. It’s not even a one day plan. Just start having the discussion with him, “What are you thinking about? What am I thinking about? Let’s get on the same page. Let’s figure out how to work backwards from that,” and then move forward towards that goal and continue thinking about it, continue fine tuning it and honing it depending on, because sometimes the stock market’s going to be down 15% in one quarter.

Jill:
Yeah. It’s rough looking at my accounts. Real estate looks-

Mindy:
Don’t look at them.

Jill:
I try not to, but it’s been bad.

Mindy:
Yes. I hear you. I hear you. I just don’t look at them, but I hear all these people talking about, “Oh, it’s down, it’s down.” I’m like, “Well, I’m not investing for tomorrow morning, so I don’t need to look at them right now.”

Scott:
What else can we help you with today?

Jill:
No. I think it’s this whole planning piece. I think we were just overloaded in retirement accounts, at least in my opinion, and I felt like we couldn’t access them. So I feel good that we’re moving more towards the real estate piece. I guess just planning the next five years, 10 years, 15 years. I mean, we always said 15 years we would try to retire. All of our parents are in their 65, 66 and still working full-time with no real intent to retire, and we don’t really want to do that.

Jill:
We really want to, when we’re 55, be able to scale back. I mean, our kids will be in college. We have lived abroad twice. I want to continue to live abroad and this time get to enjoy it instead of working the whole time. So I mean, I think my husband wants to make sure we enjoy today and I’m like, “Just shoot and do what we need to do to prepare for 55 so we can really completely be financially free and do what we want to do.” So it’s just balancing those two things, I think, and how to do that.

Scott:
Yeah. I think Mindy’s advice is spot on. Put together a plan. Say, “Here’s where I want to be in three years. Here’s where I want to be in five years. Here’s where I want to be in 10. Here’s where I want to be in 15. Here’s a portfolio that is supportive of that, and my current path is pushing me here. What adjustments do I need to make to get to exactly where I want to be backing into that portfolio?” Let’s say it’s two and a half million bucks in 12 years to cut three years off of your 15 with that, right? “What’s what’s that portfolio look like? Probably I’m going to be mostly in retirement accounts,” if that’s the case because you’re going to be close to that 59 and a half age point. You only need to bridge it for a handful of years, less than a decade.

Scott:
So you can go heavy into retirement accounts if that’s the plan and continue doing that. As long as you’re putting 30%, 40%, 50% of that cashflow into your after tax brokerage accounts, real estate, those types of things. I think you’ll probably be able to make it and have a strong cash position. So if it was five years, we need to really shift that, though, and we need to really pull it out the retirement accounts and into stuff that you can access right now, but it’s all about what that plan looks like.

Jill:
Yeah. I can’t get my head around five years, I guess, coming from a family that don’t think vacation days or anything. They’ve never taken them. They’re going to die working. 55 to me seems very early.

Scott:
You can make a step change, function change in your finances in five years with intent and grind, especially with your income.

Jill:
Yeah. True.

Scott:
I could see a situation. How’s this for five years, right? You are going to generate $500,000 in investible liquidity from your job and income and the spread there. Your husband is just starting a business, right? Probably your idea is that business is not going to be terrible and generate very little income for the next three to five years.

Jill:
No. It’s doing pretty well.

Scott:
You’re probably starting it because you think it will do something positive over a period of time. Okay. I’m sitting here in five years. I’ve generated $500,000 in investible liquidity, bought a couple of rental properties and some after tax stocks, continue to take the match in the 401(k). Now, my net net worth is sitting from 800. It’s at 1.3 million. Plus, I get whatever I’m adding to the pile from the business, right? Things may look very different from a five-year perspective of you’re intentional about this as a goal from that point in time.

Jill:
That’s true. It seems aggressive, but I think we could probably do it. It’s just, yeah, I’ve been working so long, I don’t know what it looks like to even think about not working in five years, but-

Scott:
Well, that’s what our job is to do that. Five years, I think, is a really reasonable amount of time in a situation like yours or someone who’s willing to make big changes to get a step function change in your situation. Is it enough to go from zero to multimillionaire retiree? No, but it’s definitely enough to go from zero to maybe a few hundred thousand in net worth for somebody or from a few hundred thousand to well over a million, in your case, with substantial actual passive cashflow if you’re intentional about it and that’s your plan.

Mindy:
Intentional and plan. I like those two words, Scott. Okay. Jill, well, this was a lot of fun. I really appreciate your time today. I’m super excited for pictures of your house. Please send them to me, your live and flip, and hit me up with any questions you have about it because it can be super fun. Every once in a while, you will hit a brick wall and be like, “Oh, what am I getting myself into?” So if you need words of encouragement, reach out because I have them. It’s not always pretty, but it’s a really fun cashing those big checks when you sell it.

Jill:
Have you seen shag carpets that have rakes in the rooms that you have to rake the carpet?

Mindy:
I usually rip those out the day I close.

Jill:
It’s in good shape, but it was funny. I was like, “Why is there a rake?” and the realtor is like, “Yeah. You don’t vacuum shag. You rake it.” So it’s going to be an experience.

Mindy:
Oh, yeah. When you pull it out, have a mask on like one of those big breather masks because all the garbage that they didn’t rake, didn’t vacuum up will be there.

Jill:
Good to know.

Mindy:
Gross.

Jill:
See, learning already.

Scott:
Smells like money.

Mindy:
Yuck. Okay. Jill, we will talk to you soon.

Jill:
All right. Thank you.

Mindy:
Thank you. All right. Scott, that was Jill. That was a lot of fun. I really, really enjoyed your take on where she’s going and I just always get something out of these episodes. I had a lot of fun with her today.

Scott:
Yeah. I think it was a good discussion. I think that she’s made a lot of really smart decisions. It sounds like they’ve really come into a really good income situation. I’m excited to see how her husband’s business takes off. I’m excited to see what they decide with the primary residence that they currently have, what they’re going to do with that. I’m excited to see how they’re new live and flip goes. So I mean, they’re doing all the right things and I think they’re going to build wealth a lot faster than they think over the next three to five years.

Mindy:
I agree. I think they have a lot of things going in their favor. Number one is that they don’t have debt and they have a great income. They spend less than they earn. She has an impressive income, and then she has things being taken out of her check before she even sees it. I love that tip. That tip right at the very beginning of the show, love that. Talk to your HR department and see what you can get taken out of your paycheck and see if there’s a discount for having that done.

Scott:
Yeah. By the way, let’s call something out here. She just finished paying off a lot of debt, has put everything into retirement accounts at this point, and has the home equity. This is really an inflection point for Jill, where she has created a really good situation, and has a lot of the ability to invest in a go forward basis. I think that she’s like, “What are you talking about? Five years from now I’m going to have a really good outcome here or have a lot of optionality.” Well, I think that’s right. I think you can’t count on it, but you can say looking back at stock market returns over the last 150 years, the compound annual growth rate is close to 10%. It’s a little less than 10%, right?

Scott:
So you say, “Okay. I got 800 grand, right? I’m going to save up 100 grand a year for investible liquidity, and I’m going to make a 10% return. So that’s 180 grand in wealth building going on every year with the 100 that I’m building compounding, right? Then that’s going to go up and then I’m going to increase my wealth by another 18 grand on top of that 180, so just under 200 grand the next year, and then 220, and then 240, and so on and so forth.”

Scott:
That compounding, and again, that’s going to happen in an average long-term environment. It may not happen next year. The next five years might be terrible, but why would you build your model on something that is drastically different from the long-term averages and plan for what you think is a reasonable set of events to happen downstream? If you’re used to having a huge debt burden, the opposite effect is taking place. Interest is accruing against you and you’re pushing the ball up the hill or the rock up mountain. Then when you get on the other side and you start investing, it’s starting to roll down the mountain from that.

Scott:
I think that’s what a lot of people can maybe take away from this is, yeah, it sounds crazy, but once you’re out of debt and beginning the investment process and thinking through it really intelligently, I think you have a really good shot at compounding those gains and snowballing over a fairly, and you should bake that into your plan because what’s at stake here is prime years of your life doing what you want to do. So that’s the consequence of getting this right, right? There’s a consequence to being too aggressive and running out of money and creating a problem. There’s also a consequence to not being realistic and being way too conservative and not doing the things you want to do earlier in life when you want to do them.

Mindy:
I could not have said it better, Scott. Absolutely, 100% agree. What is the opportunity cost of not being able to do the things that you want to do because you’re busy paying off debt? It just goes back to that spend less than you earn, invest wisely, earn more. There’s a lot of things that you can do to game the system just by being intelligent and being conscious with your spending. Okay. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 310 of the BiggerPockets Money podcast, he is Scott Trench, and I am Mindy Jensen saying, “Give me a hug, lady bug.”