Finance Friday: How to Become Real Estate Ready in 2023

Mindy:
Welcome to the BiggerPockets Money Podcast, Finance Friday edition, where we interview Remy and talk about becoming real estate ready.

Remy:
I would love to invest in real estate. The area that I live in is a high cost of living area, so property tends to be relatively high. With most investment loans being 25% down, that’s a significant chunk of money that I would have to save up. Mostly looking at this as eight and a 15- to 20-year return basis. How do I get from here to there? I think I’m in a relatively good position to be a millionaire by the time I’m 35.
I’m not keen on making a move on my home, my current primary residence, but considering it could have a big financial impact on my positioning, is that something I should consider?

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is my nerdy co-host, Scott Trench.

Scott:
3.14159, mathletes do it all the time. Thank you, Mindy.

Mindy:
Please tell me you had that on a T-shirt.

Scott:
No. Unfortunately, not yet, not yet.

Mindy:
Not yet. Not yet is right. Christmas is coming, Scott.

Scott:
Trench’s Tees, yes. That was one of my first business ventures that lost a large amount of money. Every once in a while, somebody views the Trench’s Tees Facebook site or something like that. I don’t think there’s anything for sale though.

Mindy:
Oh, you should make them. We should talk afterwards, Scott, because instead of buying inventory, you can just have it ready for somebody to order. We’re going to do that. I’ll make you a millionaire.

Scott:
All right.

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’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 or start your own T-shirt 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:
Start your own T-shirt business. That is a story for a different day. Today we’re talking to Remy, and Remy would like to start investing in real estate. So, we are going to get him real estate ready. But before we do, my attorney makes me say 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.
We want to welcome Remy to the show. Remy is 26, and January 2023 is going to be a big month for him. His PMI drops off his mortgage and his car payments end freeing up about $700 a month, which is good because right now his biggest pain point is cash flow. Basically, he doesn’t have any due, in large part, to living in a high cost of living area. Remy, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you today.

Remy:
I’m excited to talk to you as well. Thanks for having me.

Mindy:
Well, let’s jump into your numbers. I see a salary of about $5600 a month. Additional income, $650 in rent from your girlfriend, a hundred dollars a month from fitness coaching and a bonus that is generally 20% of your salary paid in a lump sum at the end of the year, which is where we are right now. Monthly expenses are about $5500 a month. That’s where that cash crunch is coming from. A mortgage of 2076 including property taxes and $192 in PMI, which we just said is going to be leaving in January. HOA of $269 a month, utilities 200, homeowners insurance 276 a year, gas $180 a month, restaurants 250, subscriptions $6. Nice job on keeping that low. Gym $120, shopping 150, car 500 a month, again ending in January. Car insurance 1149 a year, bars $120 a month, phone 45, miscellaneous 500-ish with a question mark, so I’m going to come back to that. Groceries $400 a month.
Average monthly spending this year is $5500 a month and, like you said earlier, you have some big CapEx numbers this year, which should go away next year. $7000 for a furnace. You don’t get a furnace every year, hopefully, fingers crossed. Some house renovations, dog vet bills. Overall, I don’t see anything remarkable in your expenses. Investments, we have $15,000 in an after tax brokerage, 4,400 in a Roth IRA, $60,000 in a 401(k) split between a traditional and a Roth. $4,000 in a retirement health plan. $30,000 in a cash position that you said was an emergency fund, 55 to 100 in an HSA, 3000 in crypto, which I believe is about 3000 too much, 320,000 in a mortgage at 3.125% interest, which is an awesome interest rate, a $1,500 car loan at 4%, which will be paid off in January.
So Remy, what does your money story look like and what are your biggest pain points and how can we help?

Remy:
My money story really starts probably when I was pretty young. My parents always did pretty well until my father lost his job in the financial crisis of ’08, kind of struck a chord with our family led to not a big financial rift, but significant enough where it caused some pain points in our life. When I got to college, I started to study finance, took a financial planning course, realized a lot of the things that most people get in trouble with were pretty easily avoidable. So I started doing that. I now work for a relatively large financial institution where I try and help a lot of people with that or we try and help a lot of people with that. So, that’s really where my money story lands.

Scott:
Awesome. What are the prospects for your current career? Your situation strikes me as one where you’ve got great money fundamentals. There are no glaring issues here, but you are treading water is my initial reaction. You’re not accumulating a large amount of cash and that seems to be jump out at me as the primary issue we need to discuss today is how do we ignite that engine of cash accumulation so that you can begin investing?
One component of that is your job. You may be at this financial institution doing a role that is likely to translate into significant income growth in the next three to five years as you advance through the ranks there or you may not be clear on that. So that has a major impact, I think, on the remaining part of the discussion. That’s why I’m asking that question.

Remy:
Sure. My career prospects, as they sit right now, I’m in a great position to advance in my career currently looking at positions within my company to move around, probably not necessitating a huge increase in salary or increase in pay in general over the next year or two, but the prospects are good for probably 25% earnings growth over the next 10 years or so. So, a really good position to start to accumulate more salary income, more bonus income over the next few years. Especially as the pay grades start to get higher, my company tends to do more bonus-based compensation, so the salaries grow relatively steadily, but the bonuses increase significantly. That’s really where a lot of folks in my company start to make very good money as they advance.

Scott:
And where do you want to be in the next couple of years? What’s the best way we can help you? I guess there are a couple of things there, so tell me if I’m wrong.

Remy:
Yeah, the best way that I’m thinking you can help me today is positioning myself to where I can get real estate-ready. I would love to invest in real estate. The area that I live in is a high cost of living area, so property tends to be relatively high with most investment loans being 25% down, that’s a significant chunk of money that I would have to save up. Mostly looking at this as a 10- to 15- to 20-year return basis. How do I get from here to there? I think I’m in a relatively good position to be a millionaire by the time I’m 35, but is there positions that I could take to accelerate that sort of thing?
I have a high-equity position in my home for only having it for two years, so I’m looking at. Is that something that I want to make a move on? I’m not keen on making a move on my home, my current primary residence but considering it could have a big financial impact on my positioning, is that something I should consider? That sort of thing.

Scott:
Well, great. I think what I would love to do is start with the basics and look at how much cash are you going to accumulate on an annual basis given your current income and your current expenses? And go through that because that I think is important here. I’d love to look at the prospects for growth in your job within the next 12 months as well. And then, yeah, I think that’s right. Let’s take a look at the housing situation, and there’s some ideas there. So, that sounds great. Do you want to start with expenses? And Mindy, do you have anything that jumps out to you?

Mindy:
I have a couple of things that jump out at me, and they are insurance. Your homeowner’s insurance feels low at 276 a year, so typically a mortgage will be principal interest, taxes, and insurance. I want to make sure that you’re not double paying insurance and if you aren’t double paying insurance, I think mine is $600 a year and I go for a super high deductible. So, my house is a little bit more expensive than yours, but I don’t think that what really generates the cost of the homeowner’s insurance. And I asked for a $25,000 deductible, and my insurance company… or my mortgage company made me drop it down to 10,000, but I think yours is really, really low, so I would just double-check that your homeowner’s insurance is actually 276 a month.
Your car insurance on the other hand seems high. You are younger than me and you’re male, but at 26 your car insurance should drop significantly. Also, if you get married, your car insurance should drop again. I would have that re-quoted, especially if you’ve been with the same company for a while. Now, that you are “older” and more mature and responsible, you should see a reduction in your annual cost. What kind of car do you have? Do you have a fancy car, a sports car, or do you have a boring car?

Remy:
I have a Jeep Grand Cherokee.

Mindy:
Okay. That might be big on the theft list, which would increase your car insurance, but also I think that you should just get it re-quoted because that seems high. And different areas of the country have different costs, but overall I would wonder what that 500 in miscellaneous is. I don’t see a lot of really crazy expenses.

Scott:
Could you give us information about what the homeowner’s insurance is?

Remy:
Sure, exactly. That’s where I was going next is, the two insurance pieces. The homeowner’s insurance at $276 a year. I’m sorry if I said a month, a year is the quote or the payment that I make. That is for the interior of my condo. My HOA covers a master insurance policy for the building. In the event of fires, floods, that sort of thing, it protects my property value, my home insurance or my home value. The property on the inside, which is couches, furniture, TVs, toys that are inside that kind of stuff, is covered on the home insurance. That’s $276 per year, and I believe I have $50,000 in coverage.

Mindy:
That, being a condo, explains a lot. Okay.

Scott:
Do you have $50,000 worth of stuff?

Mindy:
That’s the minimum.

Remy:
Yeah, I believe that’s the minimum. Yeah.

Mindy:
I argued with my condo insurance company as well. I’m like, “I have a thousand dollars worth of stuff in here.” They’re like, “Well, it would cost more to get it back.

Remy:
So here’s where… And this is going to probably get some people fired up, but at 26, I didn’t have $50,000 worth of stuff in there. The most valuable thing I owned was my suit at that point and my computer. So if this is not required, maybe you don’t have it, I don’t think it’s something that I would’ve done at that point, I don’t think I… I guess I do have renter’s insurance now, I’m a renter, which covers some of the same things, but something to consider.

Mindy:
Interesting. Okay. Scott, I think we should applaud him for having approximately $120,000 in investments.

Scott:
Oh, yeah.

Mindy:
Even though 3000 of that is crypto.

Scott:
Sorry, we should take a moment and say you’re doing great. There’s a lot of fundamentals that are going on really wonderfully here. I just jumped immediately with my brain too. Okay, problem here not having enough cash flow, let’s go ahead and tackle it. But yes, we should take a moment and say, “You’re doing fantastic. You clearly out of path to become a millionaire by 35,” like you said, assuming the market gives us reasonable historical tailwinds. I think a lot of things going right. Hope you can forgive us for going straight into the issues here.

Remy:
Sure, yeah. And if I can just clarify a little bit on the cash flow. You listed the income as 5,600 a month. Most of that is dictated by the fact that I, over the maybe up until about four or five months ago, had been stocking a lot of my income away into retirement accounts. Thus, the relatively high income…. or I’m sorry, investment balances. My gross income for a month is right around $9,100 a month and after backing out things like health insurance, 401(k), Roth, HSA balances, it comes back down to about 56.
So, I intentionally do that as sort of a forced scarcity metric. I have since re-allocated some of that to try and accumulate more of a cash position and especially now that some of these big payments are going away like the car and the PMI, I’m really considering how much of that I’m putting into Roth, especially if I’m considering financial independence at say 35 or 40 versus the traditional 60.

Scott:
Love it. We should talk about that. That’s a great situation or challenge there. Right in this frustrating spot of having a good income and having pretty reasonable expenses associated with that, but being forced to make trade-offs that are hard for a mathematically oriented person who works at a large financial institution to consider there. You either can put it all into your tax advantaged accounts or you can put it into cash.
Cash has less obvious, more subtle, but very, very powerful advantages in enabling future real estate opportunities, flexibility, and those types of things. And the tax advantaged accounts have very clear quantifiable value that you can put into your spreadsheet very nicely. It all depends on where you want to end up in that 15 years, in 10, 15 years, and what you want that portfolio to look like.
So let’s start with that question. What do you want that portfolio to look like? You have a million and a half dollars at age 37, let’s call it, what’s the dream portfolio?

Remy:
Let’s say the dream portfolio is probably about two or three investment properties. Generating somewhere in the order of a few thousand dollars in monthly cash flow, I think, is pretty reasonable to say, maybe $3,000 or $4,000 in monthly cash flow.

Scott:
That’s reasonable if the properties are very lightly leveraged, so you have a very high-equity position in those properties. Otherwise, you’re going to get much less than that.

Remy:
Okay. And then, alongside that, a relatively healthy ETF stock investment portfolio, maybe somewhere in the order of half a million, 600,000, something like that where a million dollars worth of my net worth is in real estate and cash flowing positions and then the rest of it is in investments that I can either draw from or just let ride.

Scott:
That’s awesome. Most people can’t answer that question.

Mindy:
Yeah, I love that you’ve thought about that. As you were telling your story and specifically with regards to your income, you said that income salary steadily increases, but bonuses have a much higher opportunity for increase. Have you talked to your boss about how to position yourself for a larger bonus? How does the company evaluate bonus compensation? What can you do to make sure you’re getting the most bonus that you could possibly get every single year? Because salary doesn’t sound like there’s a lot of opportunity for growth.

Remy:
The answer to the bonus question is essentially ascend in pay grade. So, when you ascend in pay levels, we have very clear rubrics for what pay levels look like and the bonuses associated with them. There’s always a pay range for each level and an assigned bonuses that go with them. I won’t disclose the percentages of those just as a matter of keeping it private for my employer, but those things ascend pretty significantly as you go into more of the vice president role types, you get into very significant compensation where potentially half of your yearly income can come from something like a bonus.

Mindy:
Okay. So, is there anything that you can do to accelerate that if you plan on staying at this specific company?

Remy:
Essentially, for my company, a lot of career advancement is based around breadth of experience rather than depth of experience. This is just my personal viewpoint of how I see the firm folks that move around a lot within the firm and have a wide breadth of experience tend to move up because you can jump from side to side and do the career twister, as I call it, or you just move from spot to spot. Whereas if you try and be super deep at, say, software engineer, the career path is very linear, which is great, but it doesn’t ascend as high as potentially something on the business side where you can go back and forth between what you’re doing, do something in investments, do something in risk, do something in product development, that sort of thing.

Mindy:
Okay, so it sounds like you’re aware of what you need to do to qualify for those extra bonuses? You mentioned two years in your house and potentially moving to a different state. When did you purchase the house?

Remy:
I purchased the house in August of 2020.

Mindy:
August of 2020. Oh, so you have actually been in there for two whole years. Just to reiterate, that is the magic number for paying no capital gains taxes when you go to sell. What did you purchase the house for?

Remy:
350.

Mindy:
And what do you think it’s worth now?

Remy:
It’s about, I would conservatively say like 460. A few months back, there was one or two units in my development that sold for 500 but with interest rates coming down, the last one I saw I think was like 475, so let’s just say 460 for sake of argument.

Mindy:
Okay, so that’s still a nice chunk of change. One thing to consider moving to another state that has no income tax is that they recuperate that with sales tax, property tax, a lot of other ways to tax. Do some research before you pull up and move to a different state simply to save on income tax. You could find yourself not saving anything over time, and I hear people listening right now saying, “He’s got a 3.125% interest rate on his house. Don’t sell it.” It might be worth it to sell it and move to a different place because you don’t make a lot of purchases. Your property tax would be lower or you don’t buy a house, you simply rent and then you’re not paying property tax at all.
What do rents go for in the area that you’re thinking about moving? If you are paying $2,000 a month for your condo, and then you would move to a place where you’re paying $2,000 a month in rent, maybe it doesn’t really make sense to move, maybe it does. You sound like your way around a spreadsheet. I would throw some of these numbers into a spreadsheet and really dive into that. Moving. How far away would this move be? I’m not familiar with the north.

Remy:
I could go as close as New Hampshire, so 20 miles from me or I could go as far as somewhere like Florida or Texas. I think no sales tax and places where my company has satellite offices. All three of those are potential spots.

Scott:
What would you want to do with your current house? Is your instinct to keep it or to sell it when you move?

Remy:
My instinct when I bought this place was to, as I moved on, I would keep this and rent it. But with the current payment and HOA, I’m not sure that that sort of thing with cash flow, it would be close. I would have to really look into things like how my utilities work out, what insurance on a rental property like umbrella insurance and things like that would work out too in order to figure out if it would cash flow. I would say it’s very close, but my instinct was to keep it unless I just found an opportunity where my girlfriend, who someday hopefully will become my wife, just happened to find our dream home, and the only way to make it happen is that we need the equity from the home in order to make that happen.
Now, of course, there is cash-out refi, but I’m not banking on that in the near term based on the fact that interest rates are high, and it doesn’t seem like the best financial decision to make, given the interest rate that I have.

Scott:
Cash-out refinancing is placed for several years, any meaningful effect at least. That makes sense. You’re thinking about moving. I learned about this today, this morning, from an expert on the subject. This concept of assumable mortgages. If you have an FHA mortgage or a VA or a USDA loan, these are eligible for assumption. So, someone buying your property because you purchased it with an FHA loan could simply assume your mortgage. If you wanted to sell it to somebody, they would’ve to come up with the cash difference there, but assuming that they qualified and met the qualifications of the loan, they could just simply take over the payments for you and assign that, and that would be an option available to you as well. That could be a powerful tool to lead into or learn about when you make this move.
The issue, on your end as well, will be if you want to buy a $400,000 property and the FHA loan, let’s make this up, is 300 grand on that property, you need to come up with a hundred thousand dollars to pay the difference. You can do that with your own cash, you can do it with debt, but you can’t get another mortgage from like Fannie-Mae to bridge that gap. Because of that and because you don’t want to keep this property, that makes me lean towards selling this property soon whenever you move, taking that cash and then potentially exploring something like this.
I think it’s a really powerful way to house hack right now, and this would be where I’d be looking if I was looking to build to start my portfolio from scratch in a new state. I would probably be looking, “Okay. Are there duplexes in particular? Are there single families? Are there multifamily properties that have an FHA or VA loan where I can maybe assume that mortgage that’s got a low interest rate?” That’s a dramatic change in purchasing power or cash flow on that property as long as you can come up with the cash to cover the spread. What’s your reaction to that?

Remy:
I really like that. It’s something that I’ve also heard that you can do is through an assumable mortgage, let’s say they have 50% equity in the place and you can’t come up with 250,000. There is potentially options out there where you can get a second to cover the difference mortgage where you still have 25% equity. So I’d be putting a hundred thousand down. But as a way to bridge the gap between what the assumed mortgage would be and the shortfall would be you can do essentially a bridge loan without the balloon payment. Traditionally, that accompanies a bridge loan.

Scott:
That will come with a very high interest rate, easily 10 plus percent interest, which will make your decisions very easy, right? So, you buy the property, and then you don’t have to worry about investing for a year or two while you pay off the bridge debt.

Remy:
Exactly, exactly right. I have considered something like that. Unfortunately, I really just don’t have enough knowledge in that sort of area, which is one of my homework assignments over the next six months. Scott, I really like one of the things that you talked about in a recent podcast around four times a year, take three months figure something out where you really want to dive deep on it. And that’s one of the things that I want to do is dive into assumable mortgages, duplexes, multi-families and figure out where is the cash flow? At what equity rate is their cash flow? And then, start to target that as a cash position that I can essentially try and reach in order to put myself in a position to be ready to pull the trigger when the moment strikes.

Scott:
A quick aside about assumable mortgages, based on what I learned today, is my understanding is that, again, they only apply to VA, FHA, and USDA loans, and you must occupy the property in order to do that. So I imagine, again I’m still new to this, but I imagine that that has a one-year requirement of living in the property when you do that. So, it’s not a tool available to investors. There are other tools like subject to that an investor who’s not going to occupy the property could use, but that makes it powerful.
Now, with the VA loan, if you are not a veteran and you assume a VA loan, then that veteran loses at least some of the entitlement for using another VA loan, right? There’s probably nuance there that I’m not stating correctly but know that that will be a disadvantage to a non-veteran. So, something to think about there. Okay, so we’ve talked about this, when would you like to make the move?

Remy:
That’s the thing. Myself and my girlfriend don’t really have a timeline. She is a nurse. She’s very good pay for the purposes of this episode, just putting that sort of thing aside, like her pay and her benefits. There is the potential for her to do travel nursing. She’s not huge on that sort of idea. The idea being if you live 50 miles away from where you’re working, you can get travel nurse pay, which significantly increases the amount of pay that you get. For us, moving to New Hampshire, moving 30 miles away, she would be able to get travel nurse pay, but then she has to commute 50 miles, so there’s that sort of thing.
But the timeline for us would probably be in the two to five year sort of timeframe rather than more immediate one to two years. Just as a matter of one cash flow, two career establishment, and three potential family things like getting married, having children, that sort of thing.

Scott:
Okay, well, I would reconsider that stance with the property. Even if you don’t move away, if you just move down the block and get a better rental property, this is the biggest, most actionable step inside of the next six months that I can see to moving you towards that portfolio you just described in a future state, if you could sell this property and reposition the equity into another property that was a better rental for some sort of investment, some sort of house hack. So I would just encourage you to think that through. If it’s not truly not an option, we will go to other parts of your portfolio with this.
So, I think the next area I would explore is your cash allocation decision. We understand the goal. We want to back into one and a half million dollars with a million in real estate equity and 500,000 in stocks spread across tax advantage and after tax brokerage accounts. Am I stating that correctly? Okay. So, that’s a heavy, heavy real estate portfolio. It also sounds to me, we’re not going to be conservative, we’re going to be realistic about this, it sounds to me like you’re going to advance in your company and you’re going to get larger and larger bonus potential in future years. So you’re going to have disproportionate back loaded income in this.
To me, that suggests get the cash out of these retirement accounts now, build it up in your cash position right now and continue to be aggressive about the real estate stuff right now. You want your portfolio to be two-thirds real estate and one-third stocks. You’re going to have an opportunity to back load the stocks, I think, but it’s going to be really hard to accumulate, it’s going to be really hard to max out those retirement accounts now and have significant amounts of cash with which to buy real estate lately leveraged later. You want to buy that real estate now, fix it up, add equity pay, and start amortizing those loans today if you want to back into that future portfolio. Mindy is grimacing here. So what do you think, Mindy?

Mindy:
I don’t like… I know I can hide this really well. I don’t like the idea of pulling any money out that is already-

Scott:
Oh, no.

Mindy:
… in there.

Scott:
Do not pull any money out yet.

Mindy:
Oh, okay.

Remy:
Oh, I thought’s what you were suggesting, is take the penalty.

Scott:
Sorry. Yes, I’m so sorry. Yeah, I’m not suggesting that I’m suggesting stopping the flow into the retirement accounts beyond any obvious wins like 401(k) match and putting that instead into purpose-driven real estate investment.

Mindy:
Okay. So, I will pull back my grimace a little bit and sort of agree and sort of not agree. I think we’re all on the same page. If your company offers any sort of match, absolutely contribute all that you can to get 100% of that match. I like contributing to the HSA as long as you can because early retirement is in your plans and you make a decent salary. Because you didn’t say that you have large medical bills, I am assuming that you are in relatively good health. You are dating a nurse. I am assuming that you have very low medical expenses.
You cash flow those as you can and you contribute, you max out your HSA, as much as possible while saving receipts for the random Band-Aids and contact solution and prescription. And every once in a while you go to the doctor for whatever, save those receipts up while you have the HSA and then as soon as you no longer have access to the HSA, you can cash in those receipts. You don’t have to cash them in the same year that you use them. You can also just let it grow and then I want to say it’s 55 or 59, you can start just pulling that money out as it’s like an extra tax-free retirement account.
The Mad Fientist has an awesome article about the HSA being the best retirement account on the planet or something like that. I would continue to contribute to a Roth IRA. I like the Roth IRA, especially at your age, it’s going to grow tax-free and help fund your post-retirement accounts. Plus the limit for contributions is $6,000 this year, I think it goes up to 6,500 next year, but don’t quote me. I still love contributing to a retirement account, but if you want to be so heavy in real estate, building up your cash position, putting feelers out, you mentioned Texas and Florida, those are going to be less expensive than the northeast and you could get some really great cash flowing properties there.
Start looking into those areas and keeping an eye on the market and seeing what’s happening. I mean, you’ve got $30,000 in cash right now. Maybe some amazing property comes up that is worth buying. You deplete your cash position because you know can replenish it simply by stopping your contributions to your retirement accounts and you jump in on a smoking hot deal. I wouldn’t jump in on a mediocre deal, but I would definitely jump in on a smoking hot deal.

Scott:
Remy, how much cash could you accumulate if you didn’t do anything with your retirement accounts? How much incremental cash would you be able to generate after text?

Remy:
Probably in the order of 20,000 a year or something like that.

Scott:
Okay, 20.

Remy:
That’s just extra by the way. So, on top of whatever cash position that I could create through income with the way I contribute now, I’m saying an extra 20,000.

Scott:
And how much total cash would that be if you combine both?

Remy:
Oh, probably like 35 in a year, something like that, 30, 35.

Scott:
Okay, 35 a year. That allows you to buy one property in your area every two years if you find a really good deal, maybe two and a half years with 25% down.

Remy:
Yeah, probably more like three years because we’re looking at, for 25% down, anywhere in the area, you’re looking at like 400,000 as a minimum unless you just clicked a real beat-up property, and you can do everything. I have a little bit of handiness where I can do some things myself, but big structural things where you would get that smoking hot deal as somebody who would understand how to do that thing, that is not me.

Scott:
Great. So that puts us at three, four, maybe four properties in 10 years. I’m going to give you a little bit of credit that you’re going to… Income’s going to expand over that time period. It’s not going to be static with this. So, that gets us pretty close to your goal but probably closer to 500,000, maybe 700,000 in equity, not a million in inequity. If you repair them or do something creative or house hack, you’re going to get there faster.
So, we’ve got the tools to get to back into that in a reasonable sense. I think I agree with Mindy based on that. We can slow that a little bit especially, again, if you’re willing to do something with your primary residence and take the match, take the HSA, max the HSA, and max the Roth. That’s going to pull out eight grand between the Roth, nine grand between the Roth and the HSA and then a few more thousand pre-tax with the 401(k) contribution. I like that that’ll slow you a little bit but that still gives you the 70/30 of the accumulation is going on after tax in a way that can help your real estate portfolio.
Also, knowing the little I know about you, I wonder if having cash after tax is going to make you feel somewhat uncomfortable and give you a little bit of sense of urgency to deploy that cash because you’re missing the opportunity cost of being able to put it into these retirement accounts.

Remy:
That’s definitely it. Opportunity cost for me is huge and sitting on cash for two years. As much as I like to think, I have the behavioral mindset to be able to do that sort of thing, I do see the opportunity cost of, “Hey, I could just put this in a market, and that’s one of the things that I’ve considered is, okay, do I just accumulate this money in an after-tax brokerage account? Put it in a 60/40 blend or a 50/50 blend and let it ride. And if it happens and it catches lightning in a bottle and accumulates 20% in the next three years, then I come out on the upside then great. And if it comes out on the downside, then I lose 20% over the next three years. And it comes out on the downside, then it takes me an extra year to go toward that real estate investing route, is that something I’m okay with as well? I think that’s sort of where I’m trending with it. What say you?

Scott:
I love that question, and my honest answer is I, at 26, in your shoes, I would’ve put it in a brokerage account. Most people are going to gasp in horror and say, “You can’t do that with that.” But I would’ve said, “I’m here to play a mathematical game that’s going to advance me toward financial independence as rapidly as possible. This is not going to bankrupt me. It’s only going to either accelerate or decelerate my progress towards that goal.
So, I’m going to play the odds in the way that I think are the best to get me there and accept that two years out of 10 I’m going to have a major setback on that and bad luck and bad timing, and the other eight years I’m probably going to get some good return on that. That’s my honest answer. A lot of folks will disagree, and I wouldn’t encourage everyone to do that for sure but-

Mindy:
I am going to tug off of Scott and say the same thing. I have many buckets from which to pull. If I needed a rapid infusion of catch, not the least of which is a series of credit cards that I can swipe and buy myself a month of time to figure it out. So, even though I host this money podcast and tell everybody they need to have an emergency fund, I currently have as much in my emergency fund as Scott has in my emergency fund, which is zero. I don’t have an emergency fund at all, and that’s because I have access to funds in many different ways.
If you also have access to funds, I mean, what is an emergency fund for? It’s for an emergency. If all four tires on my car and I just changed my tires this weekend from my regular to my snow tires and two of them have metal sticking out of the tire, they’re bald in ways that frightened me when I pulled it off, I’m like, “Oh, wow, that’s a problem. I need to change that.” I can go and buy new tires, I can afford that. I have a job that’s going to pay my credit card bill, and I’m going to swipe it, and it’s going to take me 30 days to pay that off. So I don’t have emergencies because I have a lot of buckets to pull from.

Scott:
I do have an emergency reserve, but it’s not an emergency reserve that’s setting me up for my next investment. It’s my emergency reserve.

Mindy:
You have cash just sitting there doing nothing waiting for you to spend it?

Scott:
Correct.

Mindy:
Oh, okay.

Scott:
I do that, and I love your approach. But personally, I have a large pile of cash, a year and a half, two years of expenses sitting there doing nothing for that. Remy has six months, eight months, nine months sitting there doing that. That’s great.

Mindy:
And I have zero.

Scott:
You pick a number you’re comfortable with for that and everything on top of that, that is going to go toward that next real estate investment. I wouldn’t have a problem, it’s just a matter of your risk tolerance and how you want to play it. I wouldn’t have a problem sticking that all into your after tax brokerage account and be ready to pull from that. You make sure you count for gains if things do go up. You’ll have to pay tax on those gains. But yeah, I think that would be fine. And the way I’m wired, I can’t stand a bad bet so I can lose money. I just can’t live with being not doing what I think is a reasonably optimized approach.
The cash I have sitting there that’s doing nothing to me is optimized because that is my reserve, that’s my cushion. I don’t have to worry about my entire investment portfolio at any given point in time because I can just draw down on my cash position.

Mindy:
Now, is that your personal or is that your business emergency reserve?

Scott:
That is my personal, and it waxes and wanes a little bit as I plan for tax payments throughout the year.

Mindy:
Okay. So here, three different approaches. And I think it’s important to note that I have access to other funds. That’s why I don’t have an emergency fund. If you don’t have access to any other funds, if you don’t have… I mean, I’m 50 years old, I have lots of credit, and I have lots of… I mean if really, really worse came to worst, I could call my mother and say, “Mom, can I borrow some money until next month?” I’ve set myself up in such a way that… I should say we because it’s my husband too, but we have set ourselves up in such a way that we are able to pull from a bunch of different spots. So, we do put all of our money into the stock market or real estate. But if that’s not you, then I think an emergency fund is a great position. Also, can you sleep if you don’t have any emergency fund?

Remy:
I could sleep. I wouldn’t feel as comfortable. One of the biggest things that I keep the emergency fund around for is I have a house that’s built in 1986, and one of the things that I just had to do is replace a furnace. $7,000 is not exactly a cheap thing to have happen. So, maybe that doesn’t justify having $30,000 hanging around, but that sort of thing does help me a little bit. Just thinking about. From a comfort perspective, having a little bit of extra money around does make sense for me.
Making sure that I can cover anything that comes up in just my regular checking accounts is something that’s important to me, so that’s why I keep the hefty cash reserve. But it is a decent thought exercise to say how could I more optimize that? Because even I’ve thought about, “Hey, $30,000.” First, my job is relatively secure. I have income coming in from other ways that I could ramp up if I wanted to in terms of the side gig. I could start to ramp that up. So, there’s opportunities for me to be able to cover shortfalls. If that sort of thing were to happen.
It wouldn’t happen right away, but it would be having a $15,000 cash position instead of a $30,000 cash position wouldn’t fundamentally change the way that I think about my finances, but it could put me in a better position to optimize how I deploy that cash.

Mindy:
Yeah. I think it’s remarkably silly to take all this money and throw it into the stock market, and then be anxiety ridden every minute until you can build it back up. But if you do this thought exercise and really think about it, talk about it with your girlfriend, if things are getting serious and you’re talking about marriage, talk about money with her too. How do you feel about this? “Oh, I think that’s really silly. We should have 15. You know what, I’ve done the math, 15 feels good. Let’s take 15 and put it someplace else” or, “Hey, it really gives me anxiety. If we have less than six months.” “Okay then, we’ll keep the 30.”
It’s not like we’re talking about you have $500,000 in cash sitting there that could be doing so much more, but it’s something to think about how much are you comfortable with and just putting thought into your finances, it doesn’t have to consume every minute of your day, some of us nerds, but-

Scott:
In your situation, your plan is to work your job for the next 10 years. If you told us I want to quit in three or begin looking at other options and moving my business, exploring entrepreneurial pursuits, you should be building up a way bigger cash position or that the 30 or more, but I’d feel totally comfortable in your situation of bringing that down and putting more than in the market if you’re really confident in your five, 10-year plan here and you’re like, “Great. I’m going to have work this stable job. I’m going to have good cash flow.”
Then, to me, my thoughts would be thinking about how do I deploy more of it? And it’s not a big deal, it’s a percentage in your thing. The big moves are going to be what you do with your primary residents and how soon you do it and where you put your cash and how fast you can make the second big real estate decision, first one being your primary. Those are the big moves, I think the big levers. And then yeah, I think you can keep controlling your expenses and keep advancing at your career, but this is a good plan. You’re in a good spot, and I think you can achieve what you want to do as long as you make the big asset allocation decisions, and then roll the dice those three, four times with those properties.

Remy:
And Mindy, I wanted to come back to your thoughts on the miscellaneous expanse line. So, here’s why I put 500-ish with a question mark. It tends to be, not a revolving door but just a musical chairs of what it’s going to be this month. As an example, October I had two weddings. So there’s $700 in wedding gifts in October. Let’s see, in July there was home insurance bill, I’m sorry, and the car insurance bill. So that covered that budgeted line item. So as far as monthly expenses, I budget that monthly expense as part of that 500-ish per month as a way to just even it out as the ride throughout the year.

Mindy:
That tells me that you’ve thought about it, which I like a whole lot more than, “Oh, I don’t really want to look at this expense, so I’ll just put that in miscellaneous.” I think some people who aren’t so thoughtful about their expenses are just shoving things in miscellaneous. I’ve seen a thousand dollars in miscellaneous, I’m like, “That’s too much money in miscellaneous. A thousand dollars can get categorized.” $10, $50 is just like random. “Oh, I know I had 50 bucks, but I don’t know what I spent it on.” That’s miscellaneous. That’s probably not going to kill your budget, but 500 tends to be a little bit. But you’re thinking about it and that’s as long as you have a good answer, that’s all I need.

Scott:
I think if you don’t have that assumption for the unknowns in your budget that it got to derail your budget, so I love it. Well, Remy, hopefully was this helpful for you?

Remy:
It was, yeah, it gave me some things to think about especially around how I allocate my cash, what to think about over the next year or so. Gave me some things to think about as I approach how I want to set up next year, and then thinking about 2024 as well. Because it sounds like 2023 is going to be largely spent accumulating a cash position or some sort of money position that allows me to do some real estate investing. And then, 2024 is probably the year where it starts to get deployed.

Scott:
Awesome. Well, I’m glad that was helpful. Thank you for sharing your numbers and your story with us. I think this has been really, really illustrative. You’ve got a classic set of challenges that I think a lot of folks have. In the context of a really strong financial foundation, you’re just at this point where you’ve got to make trade-off decisions at the highest level in big ways to shape that future portfolio. And the fact that you’ve thought about it and have the strong position you have right now is fantastic, you’re in a great spot.

Mindy:
Yep, absolutely. I agree with Scott 100%, and I look forward to next year when you reach back out to give me an update, so we can see where you’re at.

Remy:
Yeah, definitely. I would love to reach out and be pen pals about decisions that I’m making or things that I’m interested in. I’d love to make sure that, one, I’m not doing anything stupid. And then, secondly, I’m just updating you guys on the success.

Scott:
I don’t think you’re doing anything stupid.

Remy:
Yep.

Scott:
That is unlikely.

Mindy:
Okay, well, it’s [email protected] and [email protected].

Remy:
Awesome.

Mindy:
Okay. Thank you, Remy, and we’ll talk to you soon.

Remy:
All right. Thank you so much.

Mindy:
All right. That was Remy and Scott. I think Remy has a very good financial situation. What I love about him telling his story is that he has thought about a lot of the aspects of his financial situation. He doesn’t just throw money into a miscellaneous category because he doesn’t want to think about it. It’s a conscious decision. He’s putting money away for his retirement, he’s thinking about real estate, he’s thinking about other things. He’s doing things consciously, and that’s the best kind of financial story we can talk about.

Scott:
Yeah, I mean, I think Remy’s doing a lot of really good things. I do think that his situation illuminates a trap, the middle class trap in this country, and he’s not going to fall into it. But where he’s at is the guy, essentially, he generates some cash flow, he’s got a good emergency reserve, but most of his wealth is getting funneled into his home equity and to his retirement accounts right now. And that’s great. That’s a responsible position. That’s what the normal is here in America for a lot of folks.
But the problem is that if that is carried out, then in 10 years, he’s going to be a millionaire. But with all that wealth in retirement accounts, some cash left over and then a bunch of at home equity that he can’t really harness in any meaningful degree to have freedom in his life.
And so, again, to break that, we constantly hear this all the time in the BiggerPockets Money Podcast and with a lot of different financial positions. And you, listening, probably see it with friends, family, maybe in your own lives, that situation happening because it’s so automatic and such big chunks of money go into it. $19,000 per year in your 401(k), 6,000 in your Roth, $3600 into your HSA. It’s very easy to then have nothing left over, for the vast majority of America, if you’re even privileged enough to be able to max out those items.
And then, the left little leftover that is being accumulated is going to go towards a small emergency reserve and then the primary residence mortgage, and that’s it. And that’s what I think we’re trying to break here at BP Money, is we don’t want that outcome. That’s going to take you 30, 40 years to really realize the benefits of those decisions and have some flexibility at the tail end. Let’s have that flexibility much, much earlier in life and be able to do things that we want to do and have control, be able to make decisions like starting a business, taking multiple years off, start doing something entrepreneurial or investing in real estate.

Mindy:
I agree with that, with an asterisk at the top. Take advantage of the opportunities that you can only take advantage of while you are employed, like the Roth IRA. You can only contribute to a Roth IRA when you have earned income. I really like the Roth IRA plan. I like it for everybody, but I really, really, really like it for the younger people because it grows tax free and because you have such an amazing opportunity to have vast sums of wealth. And you can only contribute $6,000 this year, that’s $500 a month. If you back that out, that’s $125 a week, $25 a day. You can contribute a lot to your future wealth by contributing to a Roth, and it caps off after a certain income. It just makes a lot of sense when you’re young to contribute to a Roth.
The HSA plan, I love for so many reasons. If you are in good health, even if you’re not in good health, the HSA plan, having a high deductible plan can be a great plan. If you are financially stable and can… if financially secure, I guess stable is not the right word, and can contribute to and cash flow the expenses that you are incurring now, you can just… It’s like an extra retirement account. But like you said, Scott, so many people we talk to have these large 401(k) plans and then nothing in after tax brokerage accounts or real estate or whatever their easily accessible before retirement age accounts that they choose. So yeah, I think I love Remy for thinking about it in advance.

Scott:
Mindy, I can hear what you’re saying, and I understand. With folks that are starting in their careers, Remy’s almost in a midpoint for the average American in the career, like 9,000 a month is a really good income with that. But he’s still in a position where that eight grand, nine grand that goes to the HSA and then the Roth and another maybe four, I’m making this up, I don’t know how much it would be for his 401(k) match, that hurts. That’s like a third of his cash accumulation for the year. Right? For a year. Eaten up right there. That makes a dramatic impact on his ability to invest in that next real estate investment or build up that emergency reserve for those types of things, and it hurts even more if your total cash accumulation is going to be 10, $15,000 and now you’re sucking up 65% of that.
And so, that’s where I think that that gut check or that really hard decision exists for so many people out there of making that conscious choice about where, what do I want that portfolio to look like in a few years and how am I going to make the very painful trade-offs of taking advantage of these great accounts you just mentioned, or actually building flexibility right now for opportunities I can’t even see yet. I just want to make people aware of that hard choice because it’s so easy to just say, “Yeah, let’s do the HSA, let’s take the 401(k) match, let’s put the Roth IRA.” I agree with those things.
If your position is such that you can accumulate enough cash to max all those things out and still have plenty leftover, and you’re privileged with that level of income and the low expenses to be able to do that, then yeah, you go down that list. For most people that you’re going to have to make again, those really painful, and there’re just decisions to make that I want to make people aware of, and there are consequences to not making those decisions and putting all the money in those places.

Mindy:
Yes. And I think that it’s great to bring those up and people should be contributing consciously and not just, “Oh, well, this is what I should do, this is what I should do.” I really like these tax-free accounts. The 401(k) and the traditional accounts where you’re reducing your taxable income are great, but I really like the tax-free growth that some of these other ones provide for the younger. And you don’t have to max them out forever but just getting a few years at the beginning of your working career and just watching it grow. I mean, that tax-free growth, because after it’s been in there for five years, you can withdraw the principal. You can withdraw the principal for several purchases including housing, medical bills, housing, and I think college at any time.
But you can withdraw the principal after five years just for living expenses. So, it is accessible before your retirement traditional retirement age. It’s just the tax-free growth is just not something you get very frequently.

Scott:
I agree. Well, I’d love to hear folks’ thoughts on this. Let’s make it a discussion topic in our BP Money Facebook group, which is facebook.com/groups/bpmoney.

Mindy:
Awesome. I will post that in the Facebook group at eight o’clock on the day that this episode comes out. All right. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench, and I am Mindy Jensen saying catch you on the rebound.