Finance Friday: When Rental Property Investing Doesn’t Make Sense

Mindy:
Welcome to The BiggerPockets Money Podcast, Finance Friday edition, where we interview Allen and talk about short term rentals, credit scores, and student loan debt.

Scott:
The other big problem here is your credit score, which is not great right now. So the approach I like the best is to either, just pay down the debt or go good old fashioned index fund investing, instead of sticking all that cash in your bank account. Sit tight for a year or two. You’re going to generate $50,000, $100,000 in free cash flow over the next year, after tax, at the current rate that your life is going. And you’re going to be right back in the same position, but with a cleaner balance sheet at that point in time and a better credit score. And during that year, you can put together some really clear business plans for rental property investing, short term rentals, rent by the room, whatever makes sense in your local areas, that can produce that passive cash flow.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always, is my real estate loving cohost, Scott Trench. You’re supposed to say thanks.

Scott:
Oh, thanks. Go again. Sorry, I was not paying attention.

Mindy:
Are you new?

Scott:
Yes.

Mindy:
Let’s start over. Hello, hello, hello. My name is Mindy Jensen and with me as always, is my real estate loving cohost, Scott Trench.

Scott:
Ah, and with me as always, is the foundation of our real estate investing firm here.

Mindy:
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 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 and assets like short term rentals on a lake, or start your own business. We’ll help you reach your financial goals and get money out of the way, so you can launch yourself towards those dreams.

Mindy:
Scott, I am excited to talk to Allen today, because he has a very interesting financial situation. He makes bank, he makes a really great salary, but he has had some past financial mistakes and now has a bit of a debt scenario that he needs to contemplate paying off. And he also is interested in retiring early, which is why we’re talking to people here anyway. And he has a great home situation, where he is able to short-term rental a portion of his house, but if he moves out, he will not be able to do that anymore due to the short-term rental laws of his city. So he’s got some decisions to make, but the best part of his whole situation is that, his income is covered. He is making such a great income and that is one of the biggest problems that we see on this show is that, I want to do all these things but I don’t have any income. Well, he’s got that covered.

Scott:
I think Allen has a really strong set of financial fundamentals in his financial position, but that his goals are not really as well thought through as they could be, and his investment philosophy is not well rounded out. And then compounding that, is the fact that he’s stuck in a pretty good overall position, because of a couple of great decisions he’s made in the past, but that make it almost hard to go back on that. For example, his house is so great, his living situation is so great, how can he possibly leave that and go onto another housing situation? That lever of house hacking or scaling your portfolio through owner occupant strategies is not really available to him, because his current situation is so strong and he won’t be able to replicate it.

Mindy:
That is a problem that I think we’re going to see a lot of people facing in the next few years, just the next year, if you believe some of the reports that are coming out. But with interest rates rising, it’s going to be really hard to find a fantastic deal. And that doesn’t mean that there aren’t deals out there, that doesn’t mean that you can’t be buying real estate now, even with the high interest rates. It just means that finding a fantastic deal is going to be even harder than it was before.

Mindy:
So I am excited to bring in Allen, but before we do, my attorney makes me say 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. Someday I will have that memorized, but today is not that day. Allen, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you today.

Allen:
Thanks, it’s great to be here. Excited to talk to you both.

Mindy:
I am excited to talk to you, because I see some easy wins and some research opportunities for you, right off the bat. So let’s jump in and review your finances. Easy win, huge, huge win that you’re having is your income. Your W2 income gives you approximately $12,000 to $18,000 a month, not a year, a month. Now that’s a huge swing, that’s an entire salary in some cases, swing. So I want to review that in a little bit, but let’s celebrate the fact that you are killing it in the income front. Not only that, but in addition to that, you bring in $2,000 to $4,000 a month as a short-term rental, primary house hack situation.

Mindy:
So that’s another bunch of money coming in. Awesome job. You have $120,000 in savings, which is fantastic. Now let’s look at your debts. You have $100,000 in student loan debts, which are currently deferred and I’m assuming you’re making no payments on, which is a smart decision. You saving the money, and then I’m assuming that you’re going to pay those off as soon as the deferment period ends, but of course we’ll get into that in a little bit.

Mindy:
You have a $290,000 mortgage at 3%, for 30 years. I’m hoping you’re not going to pay a dime more than you need to on that, because 3% is not the current mortgage rate right now and you have $300,000 to $400,000 in equity on this house. So that’s another celebration you bought well, hooray. For expenses, I have $500 a month in utilities, $105 in homeowner’s insurance, $450 a month in property taxes, $65 a month in car insurance and the rest of your average monthly expenses is $7,000. The research opportunity that I see immediately, is to break this down and into really, really small categories to see if there’s any place that you can cut some larger expenses out of. I have, wife’s retirement accounts as traditional IRA, $50,000, Roth IRA, $15,000. I see no, Allen’s retirement accounts. So that’s another thing that we’re going to discuss today, Allen. Can you give us a very brief overview of your money story?

Allen:
Absolutely. So my money story began, I guess we’ll put it in… We’ll start at college. Started in college, just going for a general bachelor’s degree, not really sure exactly what I wanted to do, so just changing my majors around and living off of my student loans essentially. And eventually, I started just working some odd jobs through my early 20s. I was a line cook at a restaurant where my wife and I met. Were working at a daycare making $9 an hour. So I really never made much more than $10 an hour for several years. And so, to supplement that I was using student loans to pay for my expenses and taking out credit cards and racking up bills on those, just to pay for my everyday life. And then I got my act together a little bit and went back to school and started in my career that I’m in now, where I started actually making decent money.

Allen:
I started off making about $30 an hour and working 36 hour weeks. And since COVID, I had an opportunity in healthcare, just because there’s been such a big need for my profession. I’ve been able to increase my hourly income from $30 an hour, to the most I was making recent was $125 an hour. So I’ve definitely really making a lot more money in this field than I ever thought that I would. So that’s where I’m at now. I’m making a lot more money, and because I’ve been making so much more money, I’ve been thinking a lot about where I really want my life to go financially. And I decided that I don’t really want to do the traditional work until I’m 65 thing. So I’m hoping to use this period where I’m making a lot of good W2 income, to try and propel myself into financial independent situation in the near future here.

Mindy:
Okay. And what are your goals for post-work life?

Allen:
Post-work, I would like to not really have to do too much more than just manage my Airbnbs, because the plan is to just get up as many short-term rentals as we can. So I really wouldn’t like to do too much more than whatever I have to do with property management companies. And then, use my free time from there to travel. My wife and I both love traveling a lot. We go places several times a year, so just traveling. And we’d like at some point to open up a farm sanctuary. So I guess that would become our jobs, our retirement jobs would be running something like that. So really, just the freedom to travel and then turn whatever hobbies and interests we have into somewhat of a career, maybe make a little bit of money from that as well.

Scott:
Awesome. So in a couple years, we want to be financially independent with a short-term rental empire that allows you to have a farm sanctuary as your full-time gig.

Allen:
Yeah, exactly.

Scott:
Love it. That’s clear. We can work with that. Is that within three to five years, seven years? What’s your ideal?

Allen:
Yeah, ideally three to five years. That’s my ambitious goal. I’ve given myself a 10 year deadline at the most, because I’d really like to spend no older than 40, I’d really like to continue working. So three to five years ideally, no more than 10. That’s what I’m working with right now.

Scott:
Awesome. Anything else we should know about your financial position?

Allen:
I guess I’ll go into my variable income, which I foresee potentially being a barrier in the future. Right now, the least amount I’m making is $90 bucks an hour. I’m currently making $90 an hour, but starting September I’m going to be going back up to the $125 an hour, but I’m not entirely certain how long I’m going to be making this rate of pay. I’ve currently been making this amount of money for almost two years, but I foresee that eventually going away, once hospital systems… I’m sure they’re trying to figure something out so they can get us back to our original pay rate.

Allen:
So I’m not counting on always having this kind of income. So that’s my biggest barrier. Before I started this new journey towards financial independence, I got a master’s in clinical research, so that was my backup plan. I can make about the same amount of money that I’m making now, in that field. So I could always switch over to that if I needed to. But currently I’m making the same I would, doing that, and I only have to work three days a week. So I’m going to stick with this as long as I can.

Scott:
Could you walk us through your house hack and how that operates? What part of it do you live in? How much are you renting other parts? How much would it rent for if you were to move out and make it a full-time, short-term rental? Can you do that with the laws in your region?

Allen:
Sure, yeah. So we have a house right outside of downtown Portland, Maine and it comes with a two bed, one bath apartment above the garage, and it’s detached. So our guests have their own driveway and their own outdoor area that’s fenced off. So it’s completely separate from our house. We live in the main house, so we’re not doing the complete reversal where we’d be living in the smaller area that I know some people do, to make a bit more money. But we’re giving ourselves the full house, and then just renting out the unit in the back. And the most we’re renting it for is $145 a night, which unfortunately we were rent capped. They’re treating us like we’re a long term rental. So we can only go up by a certain percent each year.

Allen:
I forget what that is exactly, but the main issue is, if we did move out, we would not be able to short-term rental this property full time, because Portland has a law that you can only short-term rental property if it’s owner occupied. So us, staying in our house right now with our low interest mortgage, renting this place out as often as we can, that’s making us a decent amount of money enough that my wife was able to quit her job. But moving forward we would have to find some other properties to short-term rental if we were to move out of this one.

Mindy:
Is that your plan, to move out of this? Or do you plan to retire here?

Allen:
Yeah, we plan on moving out. This is our first home. So we more got it because it had this unit in the back. So we’re like, “Well we want to live in this area and this apartment’s going to help us afford to do that.” But we do plan on moving. We’re not sure exactly where yet, but definitely not our forever home. So eventually, we’ll either sell this place and collect the equity to buy another home, or we might just keep it and turn it into a long term rental, just get, still a decent amount of income from that.

Scott:
When I observe your financial position, the things that jump out at the highest level, are your spending where, oh, we have $500 a month for utilities, a mortgage, property tax, and then $7,000 of other spending. And so, that I think is a really important lever here, to understand where that’s going. In months where you make $12,000, on the lower end of your income range, you’re probably saving almost nothing and your savings are probably coming from the months where you make the higher end of that range, to a large degree on the 12 to 18 K. And I think you should get to a place where, even in the lower months, you’re saving a good percentage of your income, 20 or 30%, and that will involve getting control over that $7,000. So I think that’s one key lever. And I think the second big lever is going to be your house.

Scott:
It sounds like you do not plan to stay in there long term, and that this house is going to have a very different economic profile for your family, the day after you move out, than while you’re living in it. While you live in it, it’s a money making machine and that will evaporate essentially, the day that you move out. And so, you got to figure out what to do with the equity in that house downstream. And then I think, third big point is what you’re doing with all this cash. You’re sitting in a lot of cash, but you don’t have a good way to deploy it right now.

Allen:
Yeah. I do want to add that, the $7,000 a month includes all of those other monthly expenses. So the mortgage and the utilities and all that is lumped in with that $7,000. So it’s not a $7,000 on top of that.

Scott:
Okay. So you do have a good, clear understanding of the household spending and [inaudible 00:15:24]. My mistake there, I apologize.

Allen:
Nope. That’s okay.

Mindy:
Do you know how the $7,000 breaks down? Or is it just, “Well, I know I spent less than $7,000, so I’m doing okay.”

Allen:
It was more like we were just looking at the general breakdown that our bank account homepage showed us for how much we spend every month, and we’re surprised by it. We’re like, “Oh wow, we’re spending $7,000 month. I had no idea we’re spending anywhere near that much.” So we’ve got our general monthly expenses with the mortgage and the utilities and everything, which we can’t control, but it’s not that bad. But then yeah, there’s another $4,000 that we’re spending a month. We don’t really tighten the belt too much. We definitely enjoy ourselves and we travel a lot. So a lot of that money is from travel, booking flights and hotels and whatnot. We also like to go out to eat a lot and we go to events. And so, we just have a very active, on the go lifestyle. So that’s generally where the meat of that $7,000 is going, is just our travel and excessive date nights, I guess.

Mindy:
Okay. So research opportunity number one is, travel points and travel rewards. Do you have a favorite airline? Do you have a favorite hotel? They have a credit card. I can almost guarantee that they have a credit card. I have a Hyatt credit card, I have a Southwest Airlines credit card, and I swipe on my Hyatt credit card for every purchase, because I can pay it off at the end of every month. If you’re not going to pay it off at the end of every month, don’t listen to anything I’m about to say. But assuming that you can, put all of your purchases on one card. This helps you track your spending, it helps you earn a lot of points. I have 60 something free hotel stays coming up, but all of the travel that I’m doing right now is for work. So I’m not using them for work.

Mindy:
I’m going to let work buy me hotel stays, at Hyatts, so I get more free hotel stays. So there’s a way to still travel, but not pay so much for your travel. There’s a way to still go out to eat, without paying so much for going out to eat, by maybe not going out to eat as much. Your local airline, your local airport may not have a ton of airline options. So find an airline that you can get a credit card for and start earning points on those to reduce your travel expenses. You just said something very telling, you said, “We had no idea we were spending $7,000 a month. We know we spend $3,000 for these fixed expenses, but we have no idea what that $4,000 is all about.”

Mindy:
I think that you need to track your spending really carefully for a couple of months, and you may start to see things that shock you or you may start to see things that you’re like, “Yeah, I’m okay with that.” And either way, you’ll at least know where the money’s going. Like Scott said, on an $18,000 month, spending $7,000, you still have $11,000 left over. That’s a lot. On a $12,000 a month, if you’re spending $7,000, that’s technically $5,000, but is that $12,000 in your pocket or 12,000 pretax?

Allen:
That is pretax, yeah.

Mindy:
Pretax. So that’s probably closer to the $7,000 that you’re spending. So like he said, it’s going to be a lot more difficult to save any money when that’s all that’s coming in and you’re spending it. So I definitely want to see some tracking of spending, just to see where it’s going and to make sure that what you’re spending on, is what you value.

Scott:
If you have a bucket of $7,000 in other spending, then I think spending is a big problem. If you’re spending $7,000 in total to fund your life, inclusive of your mortgage payment, utilities, all that kind of good stuff, then I think that there is some belt tightening you could do and I think it would be good to get control over it. But I think that you’re going to accumulate large amounts of cash, in a general sense here. So I think then, I would pivot to how badly and how fast do you want this goal? If you want it in three years, for example, then you got to buckle the belt and move into this unit above your garage and Airbnb out your main house, to get the much higher rents that would come with that.

Scott:
And then, start getting aggressive about the next things. If you want it in seven years, you can probably do exactly what you’re doing from a lifestyle perspective, and then just make some bigger moves there. And if you want it in 10 years, you could probably even increase a little bit and you’ll still get there if you’re able to do a couple of, again, those bigger money moves. Walk me through your short term rental income here. You said you’re locked in at a cap of $150 a night, right?

Allen:
Yes.

Scott:
$149 a night?

Allen:
$145.

Scott:
$145, and how many nights a year are you going to rent that thing out?

Allen:
So let’s see. So pretty much from, let’s say April through October, we’re pretty much booked every single night. Portland’s becoming more and more popular, so we’re booked pretty much every night, as long as we keep it open. Granted, my wife does do all the flipping herself. So when we go on vacations and stuff like that, we just close it down. We’re hoping to eventually find a good property manager that can take care of that for us while we’re out of town. But we’re very concerned about our reviews right now. We’re super hosts, we’ve got a 4.98% on Airbnb. So we don’t want to lose that.

Allen:
We’re concerned that a property manager might lose us some of those points. So I’d say, probably a good five, six months out of the year we’re booked every single night. And then during the off season, in the winter, still booked pretty much every weekend. So it’s better than we thought it would be where we live, just because there’s not too much to do where we are, but we get a lot of local tourists coming to stay with us as well. So that’s been good as well.

Scott:
What would the rates be if you could charge whatever you wanted?

Allen:
If we could charge whatever we wanted, I don’t think we would charge too much more than we’re charging right now. And we might go up to $200 bucks a night at some point during peak season, over the summer. But part of trying to make sure that we have good reviews and people are happy, is making sure that we’re charging a rate that people are happy paying. So we don’t want to overcharge them and make them feel like they’re getting ripped off. So we probably wouldn’t go up too much more than we’re charging right now, at maximum.

Scott:
What I’m trying to get at is, your city is conducting bad policy, taking money out of your pocket and putting it into the guest’s pocket who are from out of state, by capping that price. You cannot control that, but there’s always a blessing with every curse with this. The blessing should be that you are able to get a large amount of occupancy out of this, would be the logical leap I would make, and say, “Okay. My average is going to be $149 a night, but my minimum is going to be seven nights, during these periods of the year.” What games and research can you play throughout the year, so that you’re able to just fill it up to close to 100% occupancy, given the fact that you are artificially capped on your pricing? There should be an opportunity, I would think with that, with some wiggle room. And that would be the only lever that I think you can pull right now, given that you can’t increase price.

Allen:
Just try to fill it up every day.

Scott:
By considering minimum stay requirements. You cannot stay for the weekend, in the off season, you must stay for the week. So during the peak season, you have to fill up the entire block of days that I have available and these times. You cannot stay for these things. And I think that will help you with your scheduling as well. You’ll have fewer unit turn issues for your wife there.

Allen:
Yeah, that’s true. We did end up opening it to one night bookings, which ends up being a lot more work, as you said. But we had noticed when we, because we were originally doing I think, three or four night minimum stays, and then we had all of these little holes throughout the month. That when we opened it up to one night bookings, we went from having 25 nights booked, to having all 30 booked. So just filling in those holes by doing the one night bookings. Over the winter, I’m not sure if we would be able to fill it up for a full seven days, just because most people are just looking for a quick weekend getaway. So I don’t know if we restricted it to you have to stay for a week, if we would get more or less bookings. I’m not sure about that.

Scott:
Okay. What I’m hearing you say is, you feel reasonably optimized in the pricing strategy here and that this isn’t really a major level in your financial position, to get more income out of the current short-term rental. There may be tweaks but it’s not the meat of the journey here.

Allen:
Yeah, I think we’ve optimized the space that we have to work with, just because maybe if it was more of a niche property, people might be more inclined to book it for longer periods of time. But since it is just a unit above a garage, it’s mostly just people who are looking for a quick getaway here and there, and not booking for long periods of time. Granted, we haven’t tried putting the restriction on it to see, what we did if we did restricted to, you have to book it for the full week, to see what would happen there. So that’s definitely something that we could try out this winter.

Mindy:
Something to think about as you contemplate your decisions going forward is, it isn’t just, should I rent out both units long-term when we leave? You could find somebody to rent out the smaller unit as their long-term primary residence, and then they rent out the main unit as their short-term rental, which isn’t getting around the short-term rental laws. It is operating within the short-term rental laws. You’re not renting it out, because it’s not your primary residence, they’re renting it out because it’s their primary residence. And then, you work out some sort of split with them or some sort of higher rent for the whole property. That is an opportunity… Option to look into. I’m not sure exactly the laws, but it’s their primary residents when they’re renting there.

Allen:
Yeah, that’s interesting. I hadn’t thought of that.

Scott:
I think a big challenge for you is going to be, your goal is, you want to get a couple of more short-term rentals. Where do you want the short-term rental to be?

Allen:
Right now we’ve just been looking around our area, just because we know what the market’s like in areas close to us, and at least for the first couple properties, we want to try and manage it ourselves, just to get as much of that income for ourselves as possible. So for instance, right now we’re looking at getting a lake house, which that’s a big market, here in Maine. A lot of people come, rent lake houses over the summer and even over the winter to do ice fishing and snowmobiling and all that. And it’s also a type of property that we feel a little bit more comfortable, just with the way the laws are going, because it seems like everyone’s trying to restrict short-term rentals so much.

Allen:
Just all the neighboring towns as well are putting so many restrictions on short-term rentals, that we’re trying to look at just properties like lake houses that have always been in that market and we think might be less likely that they’ll end up putting restrictions on them in the future. So we’re looking for things like that, and also beach houses as well as another popular spot up here. But we would eventually like to branch out to other states as well. But like I said, for now it’s just easier to manage it in this area, because we know how the market works in each area.

Mindy:
Okay. One of the things that you said about your goals for post-five life is that you want to manage yourself, your short-term rentals, and you want to get as many as possible. And my first thought when I heard you say that is, you should lump your short-term rentals together, because then you can pull upon your current pool of contractors and cleaners and you know the laws and everything here, as opposed to, I’ve got one here and then one over here and one down here, and then you have to find people in every single area. So I don’t know where this lake house is, in relation to your current house. Could your current cleaner, well I guess your wife is your current cleaner, would she be able to go and clean this and turn it over, or would you have to hire somebody to do that?

Mindy:
Because that is the number one problem that I hear short-term rental proprietors, is that the right word for this? Short-term rental proprietors have is that. Hosts, thank you, Scott, that’s a better word. Is that they have a hard time finding cleaners, finding good cleaners, finding reliable cleaners or finding anybody at all to clean the property. And that’s one of the biggest issues that short-term rental tenants or guests, one of their biggest complaints is, “Oh the house wasn’t clean. The house wasn’t as clean as I wanted it to be. There was a hair here or there was schmutz there or whatever.” They get really upset when it’s not perfect.

Allen:
Yeah, exactly. That’s why we’re so afraid to have anyone other than my wife do it, because where that someone else’s version of clean won’t be our same version of clean. And even between me and my wife, whenever I flip the Airbnb for whatever reason, she’ll go double check my work and I’ve left a bunch of hairs in the tub still, that I’m like, “I swear I’ve gone over it three times.” But she’s got a different eye than I do. So yeah, we are trying to find a lake house that’s within an hour of us, so she can just do that herself as well. So we’re definitely looking for places within an hour so she can run over there in a reasonable amount of time and fix any issues and flip it herself without too much trouble.

Scott:
These properties, how much do they bring in?

Allen:
We’ve been looking for quite a while and we were initially starting looking for a place, hoping to find something that we liked around $350, but after about six months of looking for lake houses and striking out, it looks like we’re probably going to have to spend around $450 to $500 minimum, to look for what we’re looking for. Which would be probably a three bed, two bath lake house, that should be able over the summer, should be able to bring in probably $300, $350 a night.

Scott:
And how much annual income is that? You have a very seasonal business here, so what is it going to be on an annual basis?

Allen:
So we’re hoping that it should be able to bring in, if we’re looking at over the summer, we’re hoping it should be able to bring in at least at $7,000 to $10,000 a month over the summer. So we should be able to get a minimum of $50,000 a year on that. Then hopefully if we are able to rent it over the winter, which we’re not positive on how well that’s going to go, but we do see that they do pretty much get booked out a year in advance over the summer. And then in the winter, there’s definitely still more holes. So we’re going to have to play around with that a little bit more, to see how frequently people are coming out in the winter to book those. But I think if we made at least $7,000 to $10,000 a month over the summer, that would at least cover us enough to get us through the full year of mortgage payments and everything.

Scott:
I do not think that this is a winning formula for you to retire early and do this, based on those numbers. So let’s say you get $50,000 in annual short-term rental income from this property, and you’re buying a $500,000 property with $100,000 down, you’re not getting that loan for less than 6%, not in an investment property that’s not your primary. So that’s going to look at a 6% interest rate, you’re looking at about $2,400 a month before taxes and utilities. So that’s $30,000 in principle and interest right there. Plus you have taxes and utilities. What are taxes and utilities going to be in this location?

Allen:
This location will be, the taxes will be less than where we are now in Portland. It looks like they’re usually averaging about $3000 a year in property tax. Utilities, probably be pretty similar, probably would be about $500.

Scott:
So now we’re at $30,000, plus $3000 in taxes, plus $6,000 to $7,200 in utilities. That puts us at $40,000. And then how about insurance?

Allen:
Insurance, I’m not sure what we’d have to pay for home insurance on a lake house. I just know that we’re paying around $105 for our home, probably about the same.

Scott:
That’s $42,000 and that’s before you have to replace the roof for CapEx. That’s before you have to do any maintenance to the property outside of cleaning. The cleaning bill I would not include in the calculation, because I’d pass that to the guests, as a cleaning bill, but you’d still have to find somebody to do that. I do not think your wife would want to drive out an hour, multiple times a week, to clean the property for an $8,000 profit before maintenance and CapEx expenses. But these back of the napkin numbers don’t work for me at the highest level on this property, in a compelling way right now with this. And you contrast that to your current property, where you’re making $2,000 to $4,000 a month on a $1,500 mortgage payment.

Scott:
And you probably could do way better if you rented out the main house instead of the unit above the garage. You’ve got a much bigger winner there, probably because you bought many years ago and have a primary home mortgage on that at 3%. I think this is going to be the real crux of it is, do you have a viable short-term rental strategy here, in this location? And when you actually analyze those numbers all the way down the line, do you get to something compelling? Is for example, the $50,000 annual income estimate way low? Does that feel way lower or do you feel like you can get way more than that?

Allen:
That’s on the lower end. Again, this is just a very rough estimate on how much we’d be making, but that’s my estimate if, subtracting the off season months. So I think that’s about how much we would make during the spring, summer and fall, we’d be able to pull in that much money. And then, however much we’d be able to pull in on top of that over the winter, which I’m not really sure what the market’s like for that. We definitely would have to reduce our nightly rate and probably wouldn’t get rented out as much. So it might be a similar situation where we’re still getting rented pretty regularly, but only on the weekends and only for $200 a night. But yeah, I get what you’re saying.

Allen:
I guess it would be more of a luxury investment, because we definitely like the idea, because it’s something fun for us to utilize as well, but in terms of cash flow, we would definitely be restricted there, like you were saying. It is tough, because like I said, we are restricted so much on our ability to get short-term rentals in Portland. I’d love to get a multifamily here in Portland and Airbnb that out and that’d be perfect. But unfortunately, we’re definitely restricted on that. So we have been looking at neighboring towns that have little leaner laws on that, but we’re not sure if they would get as much tourism.

Scott:
What’s your credit score?

Allen:
It’s about 646 right now, I think is the higher one.

Scott:
Okay. So the interest rate on any loan that we’re talking about, would be even higher than what I just articulated. It’s not terrible, but it would definitely increase it by maybe 100 basis points there.

Allen:
Yeah, I was approved for a loan at 6.57%.

Mindy:
Was that an owner occupied loan or a investment loan?

Allen:
That’s just a standard owner occupied loan.

Mindy:
When you applied to be on the show, you shared some barriers that you have, the poor credit scores, student loan debt, which we mentioned at the beginning of the show and the variable income. Let’s explore the student loan debt. You currently have approximately $100,000, which is at 0% deferred by the government due to COVID. No payments due right now, but once it comes back into undeferrment or whatever that’s called, you’ll have $80,000 at approximately 5% and $20,000 at 6.5%. Scott’s magic theory of interest rates is that, if it’s five and under, you don’t pay it off early. If it’s seven and over, you do pay it off as fast as possible. And both of yours fall in the middle with, do what makes you feel comfortable. So we are of no help there whatsoever. You also have $120,000 in cash that, it sounds like you’re thinking about using for the down payment on a house. What is your plan for your student loans once they become payable again?

Allen:
The plan, well I’ve got my fingers crossed for some sort of forgiveness that may or may not come through. So I’m planning on paying them back when I have to, but there is currently a bill in congress to forgive student loan debt for frontline healthcare workers. So that would be great for me if that does end up going through. So I’ve got my fingers crossed for that. Sounds like Biden may have finally made a decision that would forgive $20,000 of what I currently have, but other than that, my plan would just be, I would just have to start making payments on those and I don’t know if I would pay too much more towards it at the 4.99% interest rate, and I might try and save the rest to still accumulate money for down payments. One of the things I was looking for guidance on was, do you think it’s smarter to pay the absolute minimum on that and just keep moving towards saving up for those down payments? Or would it be best to just get those off my plate entirely?

Scott:
I think we got to start with the end in mind here and zoom back out and say, your goal as you stated, was to in three to five years, retire early and have a farm essentially, here. And you wanted to use that with do that through short-term rentals. And I think that what I’ve uncovered in this is, that is really a wish right now. You don’t have a clear plan to buy those short-term rentals, and what would actually be profitable and how that would make money for you at this point in time. And that needs to be refined. You know you can do it, you know that short-term rentals can be a powerful wealth generator, but you don’t have, “Oh these are the properties I’ve identified. This is the cash flow I can generate throughout the year. This is what my expense profile looks like and this is the return, and this is how I’m going to operate it.”

Scott:
You have, “I kind of have this lake area, maybe my wife can drive out there and clean it a few times in between tenants.” It’s not a business plan right now. And so, I think you should reset what the goal is. I’m going to reframe it for the rest of the conversation today, with your permission of course, if you like this, but I want the most flexible financial position possible in three years from now, that affords me the best, the most amount of life options, among which might be this farm. Does that work for a repositioning standpoint?

Allen:
Yeah, sounds perfect.

Scott:
Okay. So I think if we start with that premise, then we can acknowledge and say, okay, here’s what you got going for you. You make a ton of money, you spend a lot less than you make and you’ve got a great house hack. Your problem is you’re stuck in that house hack, because there’s no conceivable living situation that you could replicate in the near future, that is as good as what you’ve currently got going from probably a lifestyle and cash flow perspective. You’ve got a really low interest rate mortgage, a tremendous amount of equity, which is also another problem.

Scott:
Most of your net worth is in this home equity and then in your wife’s retirement accounts, although you do have $120 K in cash. So you’ve got a flexible position, but yet you’re also stuck, which is a paradox. All of your debt that you have is in this quasi realm of, should I pay? It’s not really bad, it’s not really good, it’s in this quasi realm of, I probably can invest a little bit more. And so, you have all these shades of gray in your financial position that makes it really hard I think, to commit in any one direction. How’s that sound? Is this how you’re feeling about things?

Allen:
Yeah, that’s total nail on the head. For the past couple years, we’ve definitely just felt exactly as you said, stuck. We’re like, “Where do we go?” How can we get a good cash flowing property, where we’ve got the best setup right now, we don’t want to stay in this setup, but there’s not really any place for us to go that’s going to give us more net income than we’re getting at the moment. See, I definitely… What you were saying about getting a clear picture on actually getting a business plan for our short-term rentals as opposed to, yeah, we know short-term rentals are a good idea, but we definitely haven’t refined exactly how we’re going to execute the short-term rental plan and get the highest ROI on that.

Scott:
Let’s also acknowledge that, in spite of having all of this gray zone in, which can be frustrating because you don’t have any clear options, you also have many good options because of the strong fundamentals of your current position. You pay nothing to live, in fact you get paid a lot of money to live in your home, in your area. You make a tremendous amount of money. Your wife is able to operate this really, second job that is putting $2,000 to $4,000 a month in your pocket over the course of the year. And so, life is good there. I don’t think without a clear plan that’s super aggressive, you’re retiring in three years, or five years or seven years. You might, but you’d have to get something aggressive there. But you can have many hundreds of thousands, maybe even close to a million dollars in personal net worth and a position where things are more clear and stabilized.

Scott:
But you’re going to have to go down one of, I think a couple of routes. So the first route, option A that I would recommend is, just pay off the debt. You got $120,000 burning a hole in your pocket, in your bank account making 1.5%. And right now, you’re paying a higher percentage rate on various debt that will come out of deferment soon. Maybe you don’t pay all of it, maybe you pay some of it, but the debt is a guaranteed return, it’s pretty high interest. That’s an easy button. The second would be to, and I would say you spend what, $7,000 a month and that includes all your housing expenses and you get $2,000 to $4,000 of that back. So that’s $3,000 a month from your Airbnb. Really, you’re spending $4,000 a month. If you knock that down to $50,000, your savings, you’ve got a year of financial runway sitting in the bank account, net of your Airbnb income.

Scott:
That’s pretty good. A year is a lot. And you can take that $70,000 and invest it either, in a rental property or start putting it into some stocks there. The other big problem here is your credit score, which is not great right now. So I wonder, now that I’m talking through all of this, if the best approach I like the best is to either, just pay down the debt or go good old fashioned index fund investing, instead of sticking all that cash in your bank account. Sit tight for a year or two, you’re going to generate $50,000, $100,000 in free cash flow over the next year, after tax, at the current rate that your life is going, and you’re going to be right back in the same position but with a cleaner balance sheet at that point in time and a better credit score. And during that year, you can put together some really clear business plans for rental property investing, short-term rentals, rent by the room, whatever makes sense in your local areas that could produce that passive cash flow. That was a long rant. How does any of that sound?

Allen:
No, I like a lot of what you said there, because that was another question that I had was, I’ve been holding back from investing in index funds or stocks at all, played around with crypto a little bit, but I’d never really pulled the trigger on making those stock investments. And that’s been where I’ve been at and was looking for some clarity from you guys, if it is a better idea to put that money into short-term rentals or, like you were saying, it sounds like it might be a better idea to, like you said, clear the slate and put that money into some index funds and clean up my debt a little bit. I do definitely feel stuck in this gray area right now, so it would be nice to be able to just pull out of that instead of struggling to maybe get into a stronger financial position, but without a real clear plan for that.

Allen:
So I guess I’d like… I don’t know. I don’t really know too much about stock investing, so I don’t know what the best way to go around that would be. I opened up a Vanguard account, that’s about as far as I’ve gotten, but my wife, she has some retirement accounts set up back when she was working a W2 job. I mean I’ve been holding off on that and just taking as much money in my paycheck as I can, to just save for a down payment instead of putting anything towards stocks and getting a company match or anything like that. So that’s definitely something I’d like to look into.

Mindy:
I want to say that index fund investing is fantastic. I do it myself. I know that Scott does it. However, we are entering possibly, probably a period of volatility. So just because we suggest index fund investing, please be aware that there will most likely be some volatility coming up, but you’re not investing for tomorrow, you’re not going to take the money out in a week, you’re taking the money out down the road. And past performance is not indicative of future gains, but the stock market goes up and to the right, with a whole lot of little bumps and squiggles, but it goes up and to the right I firmly believe, which is why we sit here and talk about how investing in the stock market is such a great idea. You said you don’t know how to invest in the stock market and that’s valid.

Mindy:
There’s a lot of people who don’t know how to invest. This is something we should be teaching people in schools, and we’re not. And there’s this little book called The Simple Path to Wealth, where JL Collins comes in and tells you, this is how you do it. And you’ve, you’ve started with your Vanguard account, now you need to put some money in there, but that’s not all. Once you put the money in there, you have to tell the money where to go. So make sure you do that as well. I have heard some heartbreaking stories about people who put money in the account and then don’t do anything with it. It will just sit there as cash, generating $0. They thought it was invested, make sure that it is invested. Vanguard should be able to walk you through this. It should be pretty easy to do anyway.

Mindy:
But this book is called The Simple Path to Wealth. It’s by JL Collins. It’s available everywhere books are sold, including Amazon. It’s a wonderful book and I highly recommend getting that. We keep not talking directly about your credit score and I want to, not in a accusatory fashion, but in a helpful manner. When we were talking before we hit record, we asked you what your credit score is and how it is this 646 number. And you said that in your early 20s, you made some credit mistakes and you were late on payments and that is 35%. This is actually shocking. I have a article that I’m going to link to in our show notes, but 35% of your entire credit score is made up of on-time payments. So if you have a late payment that dings you, if you have several late payments, it really dings you.

Mindy:
30% of your credit score is how much you owe. If you have, and that’s more like credit utilization, if you have $1,900 on a credit card that has $2,000 limit, you’re basically using almost all of your limit. For some reason, this looks like a bigger issue than if you had that same $1,900 out on a card that had a $20,000 limit, then you’re doing great. The same $1,900, but when the credit limit is smaller, when you’re utilizing a higher percentage of your available credit, the FICO doesn’t like it and that dings your score. 15% is how long you’ve had your credit. So if you have a credit card that you’ve had open for a long time, keep it open. Every once in a while, charge something on it to make sure that it stays open, because that is your length of credit history.

Mindy:
My husband has a credit card for 25 years. We never use this card, but every once in a while he’ll go charge gas on it, and then go pay it so he doesn’t forget to pay it, just because that’s the card that he’s had opened the longest. 10% is your credit mix and 10% is new credit. But that 35% is your payment history, is the same as your credit mix, your length of credit history and your new credit all at once. So something that you can do to make sure that you’re making your payments on time, is to just schedule automatic pay. If you don’t want to do automatic pay, you can put it in your calendar as a calendar reminder. It’s so important to pay your bills on time. And I had late payments too, don’t get me wrong. The first time I got a mortgage, she was like, “What about this bill that you paid late one time?”

Mindy:
I’m like, “I don’t remember that. I don’t know.” But it was three or four years before that, she was still asking me about this. I’m like, “Why are you asking me about a bill that I paid 30 days late, one time, three years ago?” Another thing that’s really easy, because you have the income, I wouldn’t recommend this to anybody who was a little more paycheck to paycheck, but as soon as the bill arrives, write the check and send it off. If you’re a write a check kind of person, if you’re an online payment, as soon as you see it, go online and pay it, because you have the income, because you have the balance in your account. Just pay it and get it done with. And then, what does it matter, you’re missing that little float for three weeks or whatever? It’s better to pay the bill, than to have that little float. Does that make sense?

Allen:
Yeah. Absolutely.

Mindy:
So that’s for everybody.

Allen:
I have actually been doing that. I’ve been using credit cards the way you’re supposed to be, finally. But I have paid everything down except for, we’ve got the one card now that we earn miles on and we will max it out. So if it goes through Credit Karma at the wrong moment, it might drop the score a bit, but we do pay it off every month. We never carry a balance on it. So going forward, we should be good to go. But like I said, I still have those remarks on my account that are just going to stay there forever, I guess. I was hoping that once they paid them off that they were going to go away, but I guess they stay on regardless.

Mindy:
Oh, they stick around forever. One last thing, is there anybody in your life that has a really great credit score, that could add you to their credit card as an authorized user and you don’t have to ever take possession of the card to be an authorized user. You could just, when you’re added to their card, their good credit score morphs onto your card as well, or your score as well.

Allen:
Well I am on my mom’s card, which is good, because that gives me a much longer credit history also. I’ve thought about asking my in-laws maybe, because I know they have good credit scores, but just been too nervous to pop the question.

Scott:
Yeah.

Mindy:
Have your wife ask, see if she can get on theirs.

Allen:
Well yeah, I know she is on her father’s credit card, but I feel like maybe I should ask if I can get on there too. But yeah, got to work up the courage to ask, I guess.

Scott:
It sounds like there are some tactics here, but the real key is just time needs to pass for this credit score to rebound and to get back up in the 700s, and then eventually, 800s here, and lesson learned. We have some things there, but I don’t think it really changes the strategy at a high level. It just changes the interest rate you might get on an investment property loan. And I don’t know if rental property investing is a move for you right now, because I think there’s a deeper education and business planning issue you need to resolve first, to be very clear on what you would do if you were to pull the trigger and have that become really, really clear. So again, when I zoom out and look at your position at the highest level, you’re in such a strong fundamental position because of your income, fairly low relative spending, and then your house hack, that is a monster of investment for you.

Scott:
And I think you’re stuck in a good way, in your home for that, because I just can’t fathom how you would possibly reproduce that result right now, in a similar set of circumstances because you made some good decisions a few years ago. So I think you ride that and you do one of three things. One, I really like the Dave Ramsey style approach for you and just crushing your debt. And I know you have some question marks around student loan forgiveness and all that kind of stuff, but I think your income is super high and you’re not going to qualify for a lot of those programs. And you’re also taking a lot of power out of your life and giving it to somebody else, the government, over that decision. So I really like the Dave Ramsey approach as option A and I think that’s the easy button.

Scott:
You can feel really good just being like, “You know what? I’m going to pay down the debt and I’m going to rebuild my emergency cushion. And a year from now, I’ll have read 10 more books on investing in personal finance and I’ll be working with a clean slate, high income and a house hack and no debt.” That’s pretty good. No personal debt besides a home mortgage, which I think is a pretty good option. Item B would be to come up with an investing philosophy, which will likely center around what Mindy suggested, in The Simple Path to Wealth. That’s a book about index fund investing and why it’s just such a powerful, long-term way to generate wealth. I think that in 30 years, you’d be slightly richer if you went with a simple path to wealth on average, versus paying off debt in your range.

Scott:
But that it’s so close, that it’s almost immaterial, it’s a 1% spread on this, 1% to 3% spread with a lot more volatility of ups and downs to invest in stocks, rather than pay off debt at 6.5% Interest at this point in time. So that’s option two. And then option three, is to continue getting creative with real estate, which I think could be a really good option for you in about a year or two from now. And I think as your credit score improves and as you get more sophisticated in your business plans and your ambitions for what you want to invest in, why you think it will make a lot of money downstream, and you can articulate that more. I would not buy a vacation home as a, which I think is really one way to frame the strategy you came in with today, as an Airbnb rental.

Scott:
I think that a lot of people have this concept, “Oh, I’m going to buy a short-term rental and a place that I like to stay and that’ll be my second home.” That’s great if you’re already rich and you want to do that as a lifestyle maneuver. But I think that if you want to go and visit this beach house, the best way to do it is to invest your money in the highest income producing, best risk adjusted returns you can, and then spend it, renting from somebody else at the location with that. I think it’s usually going to be a much better economic decision, than trying to turn in really, your favorite, your hobby or the place you want to visit a little bit into an income generator. I think it’s going to be a lot more challenging for a lot of folks.

Scott:
Lake housing is a rental sport like boating, not something to own, unless you’re going to use it all the time, every weekend you’re going out there, maybe you have more cost effective option to buy at that point. Again, that first choice, I think debt repayment is the easy button and where I’d steer you, I think Dave Ramsey would be the phenomenal option here. Maybe index fund investing, and then third, real estate investing. But I’d really think about tackling real estate investing from a position of a better educational framework and when you have a better credit score, maybe a year or two from now, that’ll help you with the rates. What do you think about those as takeaways?

Allen:
Yeah, I’m very comfortable with the idea of educating myself more on the short-term rental front. It sounds like I might need to rethink where I’m going to invest. It sounds like I might not be in a good area for it necessarily, just because there are so many restrictions on short-term rentals. So I might need to do some research as to where I could be investing in that. I’d have to look outside of Portland. And then, it’s really just those really high upfront, $500,000 lake house rentals are the only places that people are going to be short-term rentaling and all in this area.

Scott:
Well let me just chime in here with one comment here, and it’s a lot. We have the same rules that you’ve got in your area, here in Denver, Colorado. People are like, “Oh, it’s a pain. You can’t rent. You can’t make money on short-term rentals unless you’re the owner/occupant.” That is a tremendous advantage. Right now, you have a $1,500 per month mortgage and you bring in $2000 to $4,000 per month and you have no competition, except for other homeowners in your area who have very similar properties. So you are benefiting from an incredible amount of pricing power and a squeeze on supply in your area. And you are the poster child for someone who is benefiting from this type of policy and it’s just this elite house hack. You’re stuck because other options to live are so terrible, compared to the incredible setup that you’ve described to us right now.

Scott:
It sounds like you live in a wonderful house and a prime location, that people pay very good money to vacation in, on your garage. I mean this is wonderful. So I think that’s the benefit. The problem is, you can’t scale it very easily, but that’s a trade off. And so, with one house hack, you’re almost set. You only need that, plus another $3,000 or $4,000 and you’re done. You could just live this lifestyle without having to work either of you, indefinitely with just well under a million dollars in net worth. I just wanted to chime in with that thought and say, that’s a powerful advantage. If you just think about how wonderfully your city is helping you, not hurting you, because of the short-term mental laws.

Allen:
Yeah, that’s true. I definitely wasn’t thinking about that, because we’re in a neighborhood where most people don’t have a little mother-in-law unit in this area. So if you want to stay in this area, we’re pretty much the only option. So that’s definitely a good point. Like you said, it’s hard to move on because we pretty much knocked it out of the park with our first spot, so we can’t really envision our next move, because it’s not going to be as good.

Scott:
So, all you can do next is accumulate cash and go with one of the three good investing alternatives. And your challenge is not that you’re doing anything wrong, it’s just that you have multiple options that are all about as good as one another and you got to pick one and there’s no right answer here. This funky gray zone. And so, I’m excited to see what you pick. I think the worst thing you can do, is just sit on a pile of cash indefinitely. You’ve got better uses for that cash right now, I think, then than letting it pile up in your bank account and you’re going to accumulate another %50,000 to $200,000 over the next 12 months, because of your strong fundamentals.

Allen:
Yeah, absolutely. Because it’s already been sitting there longer than I wanted it to. I was hoping to have invested it a while ago, but we’ve just been having a hard time pulling the trigger, which may have been a good thing because we might have…

Scott:
If you have a hard time pulling the trigger, I’d suggest that by years end, you go Dave Ramsey and pay off that debt. That’s an easy button. It’s not a bad choice. You’re not going to get crushed by doing that. There may be opportunity cost items, but at the very least you’re not getting hosed on the opportunity cost of not doing the other items, and arbitrage the end of high interest rate debt with your 1.5% APR in your savings account. Anything else we can help you with today? Has this been useful?

Allen:
It has. It’s actually been very useful. Especially… I guess I hadn’t really wrapped my head around the numbers for our current short-term rental plan, which you’ve definitely given me a ton to think about in terms of not pulling the trigger on a lake house, which definitely sounds less appealing to me now. So I’m definitely feeling more comfortable with the idea of repurposing my position financially in the next year and focusing on that, to still continue my short-term rental goals, but with better credit score, better understanding of the markets. Like you said earlier, just resetting what our goals are here and looking for that flexibility, but also breaking down the numbers more and getting an actual business plan instead of just lofty daydream of having the perfect lake house that’s making us tons of money when that’s not actually going to be the case. So lots of good info. I’m definitely going to dive into this.

Scott:
I love it. And one thing to think about is, you get a dumpy old warehouse that’s not very, very pretty to look at and that pays you the income, and you just spend that on the lake house. So it’s just, where’s the dollar coming from and what’s the net return? And just think of them as, this is a dollar printing machine. It doesn’t have to be a beautiful lake house on the thing. It could be the most efficient way to harvest cash and generate appreciation long-term. And then I’ll spend that on the way I want to for my lifestyle, long-term. And that’s where the investing philosophy will come in. I don’t know if it’s real estate, I don’t know if it’s stocks, I don’t know if it’s debt pay down long-term, but I know it’s likely one of those three. It could be something else, and you got to decide, I do think that real estate can be a great one, but I think that’s a right one for you to explore next year, when your credit scores eclipsing 750, 725.

Allen:
Yep. Gotcha. Definitely. And it is pretty still new to me. I’ve been doing a lot, listening to you guys and trying to learn more about investing in real estate, but it is still pretty new idea, because just a little under two years ago I was on the set path making $50,000, $60,000 a year and planning on retiring when I’m 65. So I only just changed my way of thinking in terms of investing for financial independence. So still definitely have to do a bit more research and get a more thorough understanding of all that.

Scott:
Love it. It’s the 500 hours of self education. On the other side of that, you feel very confident about what you’re going to do and how you’re going to invest and all that kind of stuff. But until then, it’s all overwhelming and there are a million ideas, but I don’t really know what I don’t know about all that. And the confidence will come, just keep learning passively, listening to podcasts, reading books, whatever, absorbing frameworks and it’ll get clearer for you within the next year, I promise.

Allen:
Yeah. T.

Mindy:
Thank you so much for your time today, Allen. This was very interesting and we will talk to you soon.

Allen:
All right, wonderful. Thank you so much.

Mindy:
Scott, that was Allen. I thought you had some very sound advice for him. I know that’s probably not what he wanted to hear, but I do like that you were able to show him mathematically, rather quickly, that the lake house might not be the best place for him to put his money right now.

Scott:
Yeah, I think that Allen’s central problem, we talked about this a little bit after the recording, is really just, he’s beginning his financial education to a large extent. He’s made some really good choices, he’s got some really good financial fundamentals in place, but he’s not yet sophisticated with his, for example, real estate investing philosophy and strategy and how he wants to go and do that and how to analyze the deals with all those things. And that the price of entry into real estate, as we’ve often said, is 500 hours of self education. And I think that lies ahead of Allen, before investing in real estate. And I think as part of that deal, spending the next year amassing those hours or that self education, he will also improve his credit score and be in position to do that, if he so chooses a year or two from now.

Scott:
And then, I do want to point out that Dave Meyer calls the problem with Allen’s housing situation, the lock in effect. And for Allen, it’s more pronounced than most, because he’s got bad credit. But this problem is this, Allen can’t recreate… Let’s pretend he didn’t have the Airbnb in his house. He has a 3% interest mortgage, he can’t sell that place and go move somewhere else. He’s going to forfeit his 3% mortgage, and then get a 6% mortgage, 6.5% Interest mortgage. That’s what he was quoted for his personal residence. That is a 350 basis point increase. That is over 100% increase in the interest rate for his primary residence, for Allen there. So he’s stuck, he’s got to stay in this house hack, because to move is going to totally change his financial position, or totally change the quality of his lifestyle in a general sense.

Scott:
I think a lot of people are going to experience that with their primary residences right now. And so, that’s an interesting dynamic of 2022 and the Federal Reserve’s intent was to do that. They don’t want people buying more real estate, because that creates inflation. So I think there’s going to be a lot of folks that are in for that and that’s going to be a challenge in terms of scaling portfolios now is, it’s going to be really hard to recreate success with those serial house hacks, especially if you’re in a place where Airbnb is only allowed for owner/occupiers. So an interesting set of conundrums there. And then lastly, one other point I wanted to make was around the choice between paying off debt, investing in stocks, and real estate investing. I think that for Allen, the choice between investing in stocks and paying down his debt, which is typically at a 5%, 6%, 6.5% Interest rate, I think it’s a coin flip.

Scott:
I think in 30 years, it’s going to be really hard to tell which would’ve been the better decision for him. And so, when you have a decision like that, that can lead to analysis paralysis and literally the coin flip decision making protocol might be a better way to make a decision like that, because at least you’re making a decision. Either one of those decisions, paying down debt or investing in stocks for the next 30 years and moving that in there, is probably a better bet than continuing to dump onto the pile of cash that he has sitting in the bank account.

Mindy:
Yeah, absolutely agree. And I like that, a coin flip. So, Allen, grab your quarter, flip a coin. Heads, it is, pay off the student loans once the deferment period comes up. And tails is, continue making the minimum payments once the deferment period comes up and invest your cash into the stock market. And just a bit of advice there if you are going to invest it, the amount that you’re going to invest, put it all in at once. Don’t try to dollar cost average your way in, just put it all in at one time. Michael Kitsis from episode 120 gave us that advice. He said, “Time in the market is better than trying to time the market.” So, Scott, a few things that a listener in a similar situation could do after listening to this episode is, number one, if you find yourself in a position where you are spending money but you don’t know where it’s going, track your expenses. Track your spending and see where your money’s going.

Mindy:
Track it super granularly, track it vaguely, but track it in real-time, to see where your money is going and make sure that’s where you want it to go. It’s super easy to spend, “Oh it’s only a dollar. Oh it’s only $20”. And then all of a sudden, only $20 has added up to an extra $1,000 a month that you didn’t really need to spend. If you find yourself spending a lot of money on travel, look into credit card rewards programs. Go to the Points Guy or NerdWallet and look for what is the best credit card for my specific situation.

Mindy:
If you’re flying a lot, look for an airline card that gives you the most rewards for your buck. If you’re staying in hotels a lot, look for a hotel cart that works for you. Self educate, like you said, Scott, educate yourself before you start investing in something. If you’re going to invest in the stock market, if you’re going to invest in index funds, The Simple Path to Wealth by JL Collins. I think you sold $80 pertrillion copies of that book, for a reason. It’s a really great book. And if you are going to invest in real estate, make sure that you have a good credit score. You will get the best rates, you will get the best rates on your loans when you have good credit. You’ll get better rates on everything when you have good credit.

Scott:
And I would say, whenever you’re thinking about buying a vacation home in a market that you like to visit, run away. Or do that after you are a multimillionaire and want to enjoy the property, outside of investing for financial reasons. I believe that is one of the lower probability ways to build wealth, is to invest in a vacation home, in a market that you would like to stay in. If you want do short-term rentals, invest in a short-term rental market that you think is the best long-term prospects that will make you the most money, and use the profits to stay in a vacation home in the market you want to go in. It’ll be a remarkable coincidence if those two are the same thing.

Mindy:
Absolutely. I have run the numbers in my desired vacation rental market and it does not make any sense for me to buy a house there.

Scott:
You’re not competing with investors in your market. You’re competing with people who are uber rich and want a place to stay whenever they’re going out there. It’s not a investment market. And those towns are experts at extracting money from the people who buy from out of state and who “Invest” from out of state.

Mindy:
That is a really good point, Scott.

Scott:
Not saying don’t invest in short term rentals. I’m saying, don’t do it in that market that you like to go with your family on every vacation, because it’s almost 95% of the time going to be a less lucrative option for you than alternatives.

Mindy:
Okay, Scott, that was a good point and we have gone very long this episode. Should we get out of here?

Scott:
Let’s do it.

Mindy:
We’ve come to the end of this episode of The BiggerPockets Money Podcast. He is Scott Trench, and I am Mindy Jensen saying, shine bright starlight.