Finance Friday: Tips to Build a House Hack STACK in Your 20s

Mindy:
Welcome to the Bigger Pockets Money Podcast Finance Friday edition, where we interview Parker and talk about house hacking and couch flipping.

Parker:
A little bit of both, it really depends. That’s why I bought the truck I own because when we moved here I bought the truck for $3,500, put some money into it, it’s probably worth five grand now. So when we were renting a house we would just buy a couch, stage it, maybe clean it up, re-list it, offered delivery on the couch. But I think between September, 2021 and May, 2022, we made $36,000.

Mindy:
Hello, hello, hello, my name is Mindy Jensen. And with me as always is my can definitely bench press at least 10 pounds more than me co-host Scott Trench.

Scott:
Maybe, but no one can lift our listener’s spirits like Mindy Jensen.

Mindy:
Aw, Scott that’s so sweet, you’re going to make me cry. 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, take a break for a year and travel the world. Go on to make big time investments and assets like real estate 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’m excited to talk to Parker today because he has a fun set of circumstances and also a really amazing side hustle, that we don’t get into until the very last minute, where you will find me a little bit shocked at how much he can make.

Scott:
Yeah, Parker’s crushing it, has a lot of good options. And he needs to focus in on a couple of key areas and make some allocation decisions. He can do anything but he can’t do everything.

Mindy:
Ooh, taking a page from our friend Paula Pant. All right, before we bring in Parker I must tell you that the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott nor I, nor Bigger Pockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate.
Before we bring in Parker let’s take a quick break. And we’re back. Quick note, if you are interested in being a guest on the finance Friday, and having Scott and me review your financial situation to see what we would do if we were in your circumstances, please apply at biggerpockets.com/financereview. All right, today’s guest is Parker. He is 26 years old. He has a rental property that he co-owns with a friend and he’s busy fixing up the rental, and would like to take a year off in the next few years to travel. Parker, welcome to the Bigger Pockets Money Podcast. I’m so excited to talk to you.

Parker:
Pumped to be here. Love the podcast. Let’s do it.

Mindy:
Yay, thank you. Well, let’s do it. Let’s jump right on in. “We have a salary of approximately $4,200 a month after taxes and 401K contributions, with additional income of $475 a month from a tenant and two to $400 a month from side hustles.” We’re going to jump into those in a minute. Your debts total or I’m sorry $346,000 balance on a 30 year fixed interest mortgage at 4.125%. So since you own half the house, I’m assuming half of that is your mortgage?

Parker:
That’s correct.

Mindy:
There’s no other debt, so yay, off to a great start. At 26 that’s a really, really, really great start. Monthly expenses total approximately $3,000. I really don’t see anything in these monthly expenses that stand out. You’ve got $1,100 in housing, 200 in utilities. The food is something that I would like you to reconsider. “I’ve got a $1,000 for food,” which is approximately a third of your budget. Health and wellness a 100, car insurance 90, gas 125, travel a 100, gifts 100, Amazon 50, gym 50, clothing 50. Again, nothing really crazy. Maybe you’re eating organic or something super healthy.

Scott:
Well, we found out at the beginning of the show that Parker benches 225 pounds, so he probably needs a lot of extra food to maintain that [inaudible 00:04:19].

Mindy:
Yeah, I’m thinking he’s eating protein.

Parker:
Yeah, food’s my big thing. I eat a lot, I work out a lot. Thankfully it’s Costco, so maybe some that includes some toiletries and stuff like that as well. I figured you were going to point it out.

Mindy:
Moving right along to your investment accounts. We have a mostly pretext 401k of $28,000, that’s great for being 26 years old. $12,000 in a Roth IRA, 2,400 in an HSA, 19 in cash, 10 in-house equity, 1,000 in alternative investments of crypto and silver, and 5,000 in truck equity, which we will talk about later. So can you give us a very brief overview of your money story Parker?

Parker:
Yeah, let’s do it. So I grew up in a mixed financial household. So my parents were solidly middle class and my grandparents were somewhat better off. So I was really fortunate to be able to graduate completely debt free, paid for by my grandparents. But I also got to see how my parents struggled with money at the same time, and I didn’t want to make the same financial mistakes they did. So when I went to college and knew that it was going to be I paid for, I knew I wanted to set myself up for success knowing that once I got out of college it wasn’t you’re going to rely on family money or whatever. You have to set yourself up for your own success and be able to support yourself. I’ve always been interested in finance and I studied business, that’s the main part. I guess I’ve always been really independent, so I don’t like the idea of having to rely on other people. So being able to financially support myself and set myself up for success is important to me.

Scott:
Awesome. Well, can you tell us a little bit about your career and how that’s progressed over the last couple of years?

Parker:
Yeah, so I work as a financial analyst make about 70, 75K a year. Started off in accounting. So I graduated in 2019 with a degree in international business and finance and moved to Boston, going into the office, everything like that. And then COVID happened, went fully remote. Was kind of like, “Why am I paying all this rent in Boston?” I was paying $1,500 a month for rent. Everything was closed, couldn’t really do anything, that allowed me to save a lot of money, but I wasn’t very happy. So I was living with my buddy there from college, we were like, “Let’s go check out Tampa for a weekend.” Came down and really liked it and we ended up moving here about a year and a half ago in 2021. Rented for a year and ended up doing a house hack together, which I don’t think I’ve heard anybody on the podcast who’s bought a property with a friend. I think it’s a unique thing. People think we might be in a relationship or it’s like a different thing. But no, we’re just friends from college who bought a property together.

Scott:
I’ve done that.

Parker:
Yeah, it’s awesome. We have different strengths and weaknesses. I’m kind of the numbers guy, the design guy, and he’s an engineer, so he is great at fixing stuff up, so it actually works really well.

Mindy:
Oh, okay. I’m going to highlight this for a second. If you have money and maybe not super awesome at fixing things, finding somebody else to partner with who has money is not the best choice. It’s good that you’ve got two financial powerhouses that are putting money into a problem, and there’s no problem in real estate that is too big that you can’t solve it by throwing enough money at it. However, that’s not what we are here for at the money show.
So partnering with somebody whose strengths are your… not strengths, I hate the word weaknesses, but whose strengths cover what yours do not is a great way to partner. I think that’s an awesome partnership. We don’t see a lot of friends getting together and buying a house together, because there can be some issues that happen. You’re all friendly when you start off, but then something happens and you want to do it one way and he wants to do it the other way, and then the friendship can kind of fracture. But you’re still stuck together with this legal document that is called home ownership. So did you guys go into a partnership agreement? Did you write out everything in advance?

Parker:
We didn’t get a lawyer and write everything down basically, but we basically came to an agreement verbally which I know is not the best thing. We should probably get something in writing, but we have an understanding of when we’re going to move out, what are we going to do with the property. We veto each other on decisions, stuff like that. This isn’t a guy I’ve been living with a year, we’ve been living together since my sophomore year in college, it’s been about six years. He’s a good friend, he’s as financially stable or even more so than I am. So we both feel very comfortable in being able to make the mortgage payments and we both have a similar vision for the property.

Scott:
I think this is perfect. I’ve done something very similar to this in my past and I think it’s great. At some point you should put it in writing. And you’ll approach your friend with saying, “We’re not going to have a problem here.” You’ve known this guy for a long time, sounds really reasonable. “But one day you are going to get married and I don’t even know this person, you’re not even dating them yet. And if you were to pass away, I might be dealing with that person, they might be terrible.” Or use yourself as a reverse with that. Or if you already have significant others and you say, “I’ll have a kid and that kid will be a pain in the rear, you’re going to have to deal with when this thing is over. So we’re not negotiating against each other, we’re negotiating against these future people in our estate and we want to get those things buttoned up.”
And a very simple tool, you don’t have to spend a lot of money on this. A very simple tool that I think is very powerful is this shotgun clause in the agreement. Because really if things get bad you want to exit the deal. There’s a whole bunch of other things you can and should cover in the agreement who has final say, but a shotgun clause if you’re not familiar with it essentially says if you want to exit the deal, you say, “I’d like to buy you out at this price.” And they have one opportunity to say, “Yes,” or, “no, I’m going to buy you out at that price.” They can reject and go the other way, very simple and effective tool for dissolving partnerships in that situation.

Parker:
That’s a great idea, I like that.

Scott:
Probably cost you 500 bucks to get an attorney to draw something up like that and it’ll just be there.

Mindy:
So Parker, what is your greatest money pain point and how can Scott and I best help you today?

Parker:
I think it’s really figuring this house out. Trying to treat it more as an investment as opposed to a forever home, because it’s definitely not a forever home. We could put a $100,000 dollars into this house if we wanted to, but that wouldn’t really make financial sense in terms of a rental property. At the end of the day it’s a two bed, one bath, a 1,000 foot main house and a 380 square foot mother-in-law suite. So you could put a million dollars into it at the end of the day, it’s not going to rent for more than 2,500 a month. As it stands right now it’ll probably rent for about 2,000 to 2,200 in the main house. And then the mother-in-law suite we did a full renovation on, so it’d be probably more like 1,200.
So there’s more that needs to be done. The roof is going to have to be replaced because it’s 18 years old and I live in Florida, and there’s this whole homeowner’s insurance crisis going on. And they won’t insure the house within the next year or two unless we get the roof replaced as far as I know, so that’s a big expense. The HVAC might need to be replaced in the next couple years as well, so that’s maybe 20 grand right there. And then the rest of the house it’s all been renovated within the past 15 to 20 years, so it’s not bad but it’s just things need to be updated. So my main question is how do you view putting in improvements into a house hack? Because I think the main goal of this property is to live here for two years. So then we’d sell it within the next five years we’d not pay income tax on that gain.

Scott:
Be careful with that assumption because if part of it is a rental… So let’s suppose hypothetically that the… is the property purchased in both your names or just one?

Parker:
It’s in both our names.

Scott:
Okay. And is any part of the property a rental without you living in it?

Parker:
So right now we’re living in it and we’re renting out the in-law suite.

Scott:
Okay, that portion… so this is the pain in the rear. From a tax perspective the portion that you live in you can’t depreciate and is your primary residence, and the portion that you rent does depreciate and is not your primary residence. So filing your taxes on a house hack is a real pain, and is even more complicated than filing taxes on a true rental property or someone with a primary residence, even if it’s a bigger property with that. Yet the house hacker by definition is always a frugal, you know what? And so they’re not going to spend hundreds of dollars on tax preparation for the most part each year. If you fit that mold, you’ll have a DIY tax project to learn at and think about when that comes up. But I’d encourage you to think of it more like a rental and less like a primary. Well, it depends. If you’re living in the big part of the house then it’s more like a primary than it is a rental.

Parker:
Okay. What do you guys see as the highest ROI in terms of sprucing a place up.

Mindy:
Kitchen, number one, hands down, but also the roof because you live in Florida where they have hurricanes.

Scott:
The roof doesn’t change your rent, right?

Mindy:
No, the roof doesn’t change it.

Parker:
That’s the thing. I think it might have been replaced without a permit in the past because it doesn’t look 18 years old. But we have state subsidized insurance because in Florida that’s the only insurer that would insure the house, Citizens, I don’t know if you’re aware. So the appraiser said it had three to four years of useful life left, which was lucky because they won’t insure if it’s one to two years useful life left.

Scott:
The way you win with the roof is if you stay on it for as long as possible, and do nothing to it and then replace it at the last possible minute without having an emergency forced upon you. So that’s the game I think that you have to play as a real estate investor is how do you time that perfectly. I don’t know if you can, so that roof is going to add no value to the property other than you saving money.

Parker:
Exactly.

Scott:
It may.

Mindy:
Well, then you can insure it.

Scott:
Once you get to that point you have to.

Mindy:
Okay, well let’s run through the numbers on this property.

Parker:
Yeah, we purchased it for 375. It appraised at 367, so we had to pay an appraisal gap of 8,000, but they gave us 9,000 at closing, so it basically evened out. They gave us that money because there was a lot of issues with the house, which we can go into, but we put 5% down, so only two and a half percent each. Out of pocket it was like 15K each at closing. And then we’ve put in an additional $30,000 into renovations so far, so another 15,000 each. Total mortgage payments 2200, which is 1100 each. And then we rent out the in-law suite for 950 a month, utilities included to a friend of ours. So total out-of-pocket cost about $630 a month for living expenses with utilities at another 200 each. About $830 a month is my current living expense right now, which is pretty crazy when you can’t really find a one bedroom in Tampa under 1500 or 2000, so it’s pretty awesome.

Scott:
What would the property rent for fast forward a year or two, it’s all stabilized. What do you think of the cash flow analysis, you gave me some of those numbers, but what do you think you’d net from a cash flow perspective?

Parker:
Yeah, so the in-law suite, I don’t know, it’s tough to value an in-law suite because the laundry room is disconnected from the house. So there’d be shared laundry between the main house and the in-law suite, that’s how we do it now. But there’s a lot of these in Tampa, a lot of multi-generational households and stuff, and I’ve seen them similar ones go for as much as 1,400. But conservatively I’d say 1,100 to 1,200 on the in-law suite, and then the main house 2,000 to 2,200 as it sits right now. Maybe 3,200 for both and our mortgage payments 2,200.

Scott:
Walk me through what you would estimate for vacancy, CapEx and repairs, property management, those types of things.

Parker:
Our plan is to stay in Tampa, so we’d manage the property ourselves at least for the time being 5% for vacancy. It’s a pretty hot area. Maintenance and repairs, we’ve put a lot into it already. I don’t know how you budget that on a 5% annual basis or something like that, but I haven’t really thought about that as much.

Scott:
Okay. So we got $150 a month in vacancy. We got $150 a month in maintenance and CapEx on the low end with those, and then I assume that tenants would pay utilities.

Parker:
Yeah.

Scott:
Okay.

Mindy:
Okay, I have a comment. I want you to bump up your vacancy to 8% because one month is 8%, not 5%.

Parker:
Okay, that sounds good.

Mindy:
And if you can get it rented faster, that’s great, then you just have extra built in. But if it takes longer to get it rented, then your numbers are all out of whack. CapEx is something that I like to personalize for each property based on the actual age of the things in the property. Like your roof needs to be replaced in the next couple of years. A roof, I don’t know what it is in Florida, but where I’m at a roof is 10 to $15,000 and it lasts 25 years. So over the course of 25 years you should be saving up 10 or $15,000 and that’s just a couple of hundred dollars a month. But if your roof is 20 years old and you need to replace it in five years, you now need to save up $10,000 in five years. So that’s $2,000 a month or you need to save up 10 to $15,000 in one year to replace it, so that’s a whole lot more. Did you get any concessions for the roof?

Parker:
Just the 9,000 they gave us at closing.

Mindy:
Just covered everything. And that’s fine, you bought it in April of 2022, which was the hottest market that the real estate scene has ever seen in the-

Parker:
It was tough.

Mindy:
… history of the world. It was tough. So that’s why somebody’s like, “Oh, why did you pay more than it appraised for?” Because that’s what you did in April of 2022, that’s just how it went. So with CapEx you’ve also got your furnace, you said the HVAC will need to be replaced soon. I don’t know how much an AC is there. I think it’s like eight to $12,000 where I’m at. You have time to start getting quotes and start asking people, “Who do you use? Who’s reliable?” Start getting quotes and find somebody. Don’t wait for the next hurricane to come through because then it’s impossible to find anybody to work on your house. I don’t know where you are. Or when was the last time there was a hurricane in Tampa? It’s been a while hasn’t it?

Parker:
100 years.

Mindy:
Okay, well, then you’re due, so-

Parker:
We’re due.

Mindy:
… make the quotes now. But you don’t want to wait until, “Oh, I’m going to do it in June.” And then the end of May something comes through and now you can’t get a new roof. And then you don’t have homeowner’s insurance and then there’s a lot of-

Parker:
That’s also my concern with Citizens, which their customer base is doubling every year because of the homeowner’s insurance crisis. If there was a hurricane even if it was in Miami, putting in a claim it could take years and could be a big financial risk. That’s my other concern in terms of getting the roof replaced and maybe going through a private insurer. But I don’t know if it’s worth paying double compared to a state subsidized policy.

Scott:
I think these numbers should make you a little uncomfortable, it will make everyone uncomfortable with this. But I think in your case a good exercise would be to go through and do the work of customizing your CapEx allocation and saying, “I think my roof’s going to last me three more years.” Give it a guess, that’s your best one. Okay, great, that’s $10,000 over three years. That’s what $3,300 a year that I need to save, that’s 400 bucks am I doing that right a month.

Mindy:
Let’s call it 400 a month.

Scott:
Yeah, 400 a month I need to save. Then on top of that I’m going to need to replace the AC, that’s going to be five grand making that up, that’s going to be in five years. So that’s 1000 a year, about a $100, 80 bucks a month. And you add those up, one by one, and if there are any other things around the property. Maybe the kitchen’s fine and you’re good to go for 15 more years before you need to really update that and that’ll be 10 grand. So 10 grand divided by 15 years divided by 12 or whatever it is. I don’t know how bad his kitchen is. Maybe it’s good, maybe it’s bad, I don’t know. But if you do that exercise you can stare at a number and say, “Okay, that’s really what my cash flow is going to look like in this particular property over the next 10 years or five years.”
And that will help you make decisions based on that. So my belief is that once you do those numbers, and I would encourage you to keep property management here, you’ve got a okay property. It might break even a little bit and if it’s in a good spot and you hold onto it for a long time, it might appreciate. But this is not going to be a cash cow property once you move out, even when you do move into market rents. So something to noodle on there and that may be exactly what you want, that’s fine, it’s a great way to build wealth. Or it may be not what you want, you want to sell it and see if you can harvest service some gains if you can add value to the property.

Parker:
Yeah, I think the goal is to keep it as a rental. Tampa rents are growing 20% year over year, so those numbers could even be outdated. But it is an old house. I do have to budget more in maintenance than probably the average house, it’s a 1950s house. Another thing I wanted to ask was when we move out should we transfer it into an LLC or just… is that even possible or is that something I should just ask my lender about?

Mindy:
I was going to say your lender is probably going to tell you not to do this because if you transfer the ownership out of your own name, which is where the mortgage is currently in this will trigger a due on sale clause where all of a sudden the lender will say, “Okay, now you owe us the entire remainder of the balance of the mortgage.”

Parker:
So they make you refinance basically.

Mindy:
You will lose-

Scott:
They could.

Mindy:
… all of your… it could, it could.

Scott:
This is a huge debate we’ll get into this for a good five minutes here. This is a great one. Go ahead Mindy.

Mindy:
My lender that I go to all the time said when rates were 2% and you could refinance at 2%, nobody really cared. Lenders were like, “Look, if the payments are continuing to be made, we’re not going to make a big deal of it.” But now that you have a 4% mortgage and for an investor rates are like 9%, 7%, 8%, they might make you refinance. They’re losing money on their 4% mortgages, they’re losing money on their 2% mortgages. So if they can get you to refinance, they will.

Scott:
I think that there is a lot of people who… we’re asking about a major policy change here. So first of all the question is can I put it into an LLC? The answer is yes, you can put it into an LLC. The question is what are the pros and cons of doing that? The pros are potentially some protection once you’ve moved out of the property from legal liability. If you self-manage the property, guess what? They can still go after you for those types of things. And you really in my opinion and I’m not a lawyer, you should ask a lawyer about this. But my opinion it’s like why the heck would you self-manage the property and put it in an LLC, when you’re exposing yourself to the risk of this due on sale clause that Mindy just pointed out in order to do that.
Second, if I’m going to protect the property by putting it an LLC and going into the trouble of setting up an LLC, running the LLC, filing taxes for the LLC, all those different types of things, I need to be protecting something that’s worth protecting. And you guys have maybe 30K in equity in this property and if you sold it you probably have transaction costs, you probably have very close to zero equity in the property right now. So am I really going to go through all this trouble to protect nothing is another question that I’d ask here.
So obviously I have a strong opinion but I’m not allowed to go all the way there because it’s a legal topic with this. Next up is the due on sale clause. I actually think that the due on sale risk is not that large because most of these lenders they don’t keep the loan on their balance sheet, they sell it to a large institution like JP Morgan or one of these big banks, Wells Fargo, whatever that’s going to service the loan. And they can always sell the loan again to Fannie Mae, a government backed corporation. So I don’t understand why a performing note, whatever get called due. The due on sale clause is an option, not an obligation of the lender to call the note due and force you to refinance. It is possible, it could happen. It hasn’t really been a factor in the last 20 years for any investors.
I don’t know a single person who has had a note called for this and I’m not anticipating it. But if move all the properties to LLC, you might get some protection peace of mind on the liability side if you set everything upright and higher a property manager. But you might assume this keep you up at night risk of the lender calling the note due. So I don’t think there’s a good answer to this question. And I think if you post this to the Bigger Pockets forums, you’re going to find people with very strong opinions either way on this based on what they’ve done.
For example, you probably should post it there and see what people say. But my guess is that I would maybe keep it in your name for a while here and consider shifting it over, if and when you have a much lower debt to equity balance and have something worth protecting here and are maybe not self-managing.

Mindy:
I would say if you are going to do the LLC for protection purposes get an umbrella policy instead. It’s an umbrella that covers all of your assets and interests so that you don’t… You’re not going to be sued, your insurance company has more money than you do, so they’re going to cover you. I’m doing a terrible job explaining what an umbrella policy is. Let’s look that up on Google, so I can actually say what is umbrella policy? An umbrella insurance is extra insurance that provides protection beyond existing limits and coverages of other policies. Umbrella insurance can provide coverage for injuries, property damage, certain lawsuits and personal liability situations. So something that I just discovered is I re-quoted my homeowners and car insurance policies, and got an umbrella coverage for all of this for less than what I was paying for a lower amount of car insurance at a lower amount of homeowners insurance. It’s not that expensive to get a very simple umbrella policy. And that I think is a better choice than going into an LLC, and potentially losing your 4% interest rate just to save some liability.

Parker:
That makes sense.

Scott:
Also I would not put the property into an… we can talk about lawyers about this one, but I would not put the property into an LLC while you live in it. You want protection, you living in the property, how is there going to be a corporate veil there if you’re an inhabitant on inhabitant of property.

Parker:
Not going to sue myself.

Mindy:
Okay, I have a couple of other questions about your property.

Parker:
Yeah.

Mindy:
How did you take title with your friend? Did you take it as joint tenants or did you take it as tenants in common?

Parker:
I think whichever one, if one of us dies the equity goes to my beneficiary not the other person.

Scott:
So you used tenants in common.

Mindy:
That’s tenants in common. Okay, that’s good. That’s good because that makes it easier for you to separate yourselves if you decide, “Hey, I don’t want to live here anymore.” He’s like, “Ooh, I would really like to live here.” And you’re like, “Hey, why don’t I just sell my half to somebody else,” if he can’t afford to buy you out or he doesn’t want to buy you out. That makes it a lot easier to do so. If you are considering buying in a partnership, talk to your attorney, talk to your real estate agent about the different types of ways to take title. And one last question is why do you rent your mother-in-law suite out for less than it could be rented for?

Parker:
We’re helping out a friend so that’s a main thing, and then he allowed us to continue doing renovations while he was basically living in it. So it’s a very flexible situation where if we need to enter the property and fix something or do anything like that, it’s also less liability because he’s our friend, he’s going to pay on time and he is reliable.

Mindy:
I am so glad that this friend is paying on time, however, lots of friendships have been broken up over this. So I will say because I am older than you are, I will say that I hope you have a lease and if you don’t you need to get one. And is there an end date for him living there because you are essentially subsidizing his rent by $250 a month every month that he lives there, which is very generous. And him allowing you to do work on the house while he’s still paying you rent allows you to collect some money while you’re fixing it up, but eventually that has to end. He’s listening to the show now and he is like, “Mindy shut up.”

Parker:
It’s a month to month lease.

Mindy:
So I would have a conversation with your co-owner and say, “How long do we want to let Bob Jones live in the mother-in-law suite before telling him, ‘We’re going to raise the rent to 1200, which is the going rate, would you like to continue to live here or would you like to find a new place?'”

Parker:
I have a question about that in terms of the backyard is pretty much shared and the entrance way to the in-law suite, you basically have to walk past the whole house. So how would you structure that in a lease where the laundry area is shared and the backyard is pretty much shared? Would you put up a fence to make a private area for the in-law suite, or would you write in a lease that the laundry room is shared between buildings or something like that?

Scott:
I think I’d write it in the lease that the laundry room is shared, and I would just say that there’s common area in there, and I’d make it clear who is responsible for common area maintenance. So for example, in some of my properties like a duplex, I’ll just say unit A is responsible for shoveling the sidewalk and maintaining the front lawn. And that’s just part of the deal with living in unit A, unit B does not have to worry about it or whatever.

Mindy:
Yeah, definitely be specific. When there is an opportunity for confusion the tenants will take that opportunity to be confused. Now describe again the laundry situation, can you close off the laundry room?

Parker:
Yeah, it’s an outdoor closet almost.

Mindy:
Okay. So the tenant in the mother-in-law suite wouldn’t necessarily be bothering the other tenants? I would absolutely post specific laundry hours. You can’t do laundry at two o’clock in the morning. Laundry can’t be done after eight o’clock or nine o’clock or whatever, because that could disturb the tenants in unit A. And the laundry is common area and the yard is common area. And if somebody is going to be responsible for mowing the lawn that’s great, and if they’re not responsible then they have to pay for lawn service.

Parker:
Yeah, that all makes sense.

Scott:
Well, from the property standpoint I think you have a decision to make about whether you want to sell it or keep it after a couple years. You will have tax complications advantages relative to other folks when you make that decision. But you’ve got a property that is likely not to lose money for you over the next couple of years, but is also you need rents to go up for it to continue to produce a good cash flow.

Parker:
I have another question if that’s all right. So right now I’m basically paying $800 a month to live, if you subtract the equity towards the house, the cost of my net worth’s is 600 bucks a month including utilities. So if we want to move out of this place it’s fine right now but I’m 26, I don’t know, I might want to live alone at some point in my life. How do you justify going from paying $800 a month to living alone and paying $1,500 a month or more? I don’t even know if that makes sense. So I need to grow my income by a certain amount or is it I need to just buy another property or sell this property? Because I think the goal is to turn this into a rental, but then it’s like where do I live because I don’t have the capital to buy another property. So does it make sense to turn this into a rental just to turn around and pay rent to somebody else?

Scott:
I think it’s a philosophical question and one around your values. So what I did is I house hacked in dumpy duplexes for seven years. I came on the other side of that with a moderately sized real estate portfolio, lots of savings, more cash invested in stocks and a position of at least a baseline for sure well beyond that level of financial independence around the age of 30. I just went to New York City last weekend, had a blast, visited a friend. To rent a one bedroom in an okay part of town is 4,500 or $5,000 a month, it’s an incomprehensible amount of money to me. But you live in New York City, you have all these different fun things you can do, it’s a blast. Whatever you want to do is there, it’s a life choice.
What you do you want is that worth not pursuing financial independence for 10 years and going and having a ball in this city and then figuring it out in 10 years? For lots of people the answer is yes, for you it might be yes. You can’t have it all. You probably can’t go there and come out with five properties in the next seven to 10 years and do that, but you can do that. I don’t know if there’s a right answer to your question, is that even a helpful initial response in framing that?

Parker:
Yeah, no I totally get what you’re saying. I think it’s more so we know we don’t want to be here forever just because it’s two guys and sharing a bathroom, a 1,000 square foot house. Obviously, like you said house hacking you have to take on some amount of risk and discomfort and everything like that. I think the main thing is I want to have a plan one to two years from now on what I’m going to do. I think the plan, like I said, is to turn into a rental. So I’m trying to mentally justify, okay, my out-of-pocket living expenses could go from 800 to $1,500 a month if I go that route. So in that sense it’s just part of budgeting for that expense to come, or trying to grow my income to match that housing increase.

Mindy:
Well, let’s look at your income and expenses. You have $4,200 a month salary and you spend $3,000 a month. Where does that $1,200 a month go?

Parker:
Right now it’s just going to cash. I’m about to max out my Roth, so my cash is going to go down to about 13K. That’s my other thing am I over contributing to retirement? I feel like that’s hindering my cash flow. Maybe if I want to buy another property or invest in other side hustles I’m not really keeping that much cash after contributing to retirement. And I contribute 12%, 8% pre-tax, 4% Roth, then I’m maxing out my Roth and I’m also maxing out my HSA this year. So that’s about 19,000 towards retirement. And then I’m only cash flowing about 12,000 a year plus my side hustles, maybe a little bit more. What’s your thoughts on that if I want to…

Mindy:
What does invest in side hustles mean? What side hustle do you have?

Parker:
Right now I’m not really doing much. We used to be really into flipping furniture and stuff like that, that’s basically how I was able to afford the down payment on the house. I have some other side hustles. But in terms of investing, buying another property or buying another income producing asset would be my goal.

Scott:
Okay, so let’s zoom out even further here. I think there’s a fundamental question of what do you want in one year, three year, five year, seven years? What is that trajectory? If you said, “I want to have five cash flowing properties and be reasonably set up there, and I’m willing to sacrifice most other things to get to that point.” We’d say, “Okay, continue house hacking.” Maybe even move into the mother-in-law suite or whatever with that, figure that out. Keep your expenses ridiculously low, grind and side hustle. Let’s talk about this job, all that other kind of stuff. If you’re saying, “I’d like to have one, maybe two more properties over that time period and live a really nice life in the meantime.” Okay, now we’ve got a different thing there. The goal is not to be retired in five years if that’s the case and we can do that. So what’s your hunch there? What do you want?

Parker:
I think I’d like to buy another property. I don’t think I will have enough cash to do that before I move out of this property. So this is probably going to be some type of place to rent while I transition, but I think I want to buy another property.

Scott:
So you want to house hack another property as soon as possible.

Parker:
Exactly. There’s a lot of what ifs with the economy and interest rates and everything like that. But I think I’d like to buy another property maybe two to three years from now.

Scott:
Well, you could buy another property next year if you stop the contributions to a lot of these things. You have $19,000 in cash, we save five by not contributing to the Roth, and we have another 12 by the end of the year in order to do that. And guess what, I think that’s perfectly reasonable. If you think a house hack has a good ROI, I did that. I did not contribute to a Roth and instead purchased a house hack, because it’s a better return in many cases. Now, not always, there’s always market risks and those types of things. But on average in a 3% inflationary environment and you’re advertising alone, you’re spending less to live, the house hack’s almost always going to be better than one of these retirement account contributions if you buy reasonably well. So that’d be one place to think about it if that’s really your goal. You got 30 years to max out those retirement accounts, maybe 40.

Parker:
That’s true.

Scott:
You have only probably five more years to house hack quite as reasonably. Mindy’s not liking this.

Mindy:
I am not liking this. I’m bit my tongue while you say this.

Parker:
Yeah, but then it’s me saying the money I contribute now is going to be worth the most when I retire because I’m never going to be younger, especially, the Roth and HSA contributions.

Mindy:
The Mad Fientist says, “The HSA is the best retirement account on the planet, in the whole world, in the universe,” yada, yada, that’s direct quote. So I would say continue to contribute to the HSA because I love it so much, it has a lowered limit too like 3,500 or something for you because you’re single.

Parker:
Yeah, 36 something.

Mindy:
I would love to see you continue to contribute to the Roth IRA, but if you choose to buy a house that’s fine too. I will give you some homework assignments. I would like you to look at what other remote job opportunities pay. So perhaps you could find a new job that pays a lot more, that allows you to continue to save for your retirement, and save for a house hack at the same time. I would like to know how much time you were spending on your couch flipping side hustle. Was this just seriously pick up a couch and then list it and give it to somebody else? Or were you doing work to fix up the couches?

Parker:
A little bit of both, it really depends. That’s why I bought the truck I own because when we moved here I bought the truck for $3,500, put some money into it, it’s probably worth five grand now. So when we were renting a house we would just buy a couch, stage it, maybe clean it up, re-list it, offered delivery on the couch. So I think between September, 2021 and May, 2022 we made $36,000 after expenses.

Mindy:
$36,000, that’s a job. That’s a whole job and this was like part-time work.

Parker:
Yeah, pretty much.

Mindy:
Okay. Research opportunity get back on Craigslist and Facebook Marketplace and start finding these couches and if it needs a lot of work, skip it. But if it doesn’t need a lot of work you’re just picking it up, storing it in your garage while you wait for somebody to come buy it, do that. That’s my new favorite thing, we should have talked about this the whole time. $36,000, good God.

Parker:
Well, 18,000 each over nine months. We were probably each clearing 2K a month after expenses in profit.

Mindy:
Why did you stop?

Scott:
So your next property needs to have a big garage.

Parker:
It was kind of the COVID craze with furniture being hard to find. I don’t know if I could continue making that and the house has taken up more time as well, but it’s been a great side hustle.

Mindy:
Do you make $36,000 on your house right now? No, you don’t. So there you go, flip couches.

Scott:
I agree with that. I think that income is a major factor here. You’re early in your career. Financial analyst is a great way to start your career. I’m biased, that was my first job. But I think it’s fantastic, a lot of options open up to you after that because you understand financial… You’re literate with financial statements, what good looks like. You can tell what’s what’s going bad. You can make basic economic analysis, it’s a really good trading ground for a lot of things. So you have a lot of options there. It’s a slower career path if you stick with it for 15 years, I think there are other options. So I would encourage you to think about jumping around in the next couple of years. And I think this side hustle is really exciting. Run your numbers, do your spreadsheet on that one as well.
And then do your spreadsheet on your house hack. Last spreadsheet you should run is on Roth IRA, HSA, 401k and compare them to a house hack under moderate conditions. Your ROI on the house hack if you put down 5% in any normal environment, and who knows next year could be a bad year for real estate, I don’t know with those things. It could be a bad year for stocks. But in any normal environment the house hack ROI is going to be 50 to 100% with a low down payment on that, if you’re reasonably able to assume 3% appreciation on that. And so while I get that first year of Roth is going to be worth the most in 30 years, the first year of the house hack is going to be worth the most in 30 years.
I bought my first place for 240 in 2014, now that place is worth 550. My Roth contribution in 2014 ain’t worth 300 grand. Proportionally as much as that investment is, it’s maybe be doubled in that time period. So I think it’s a really powerful tool there. And look, the reality of your situation right now is you have ways to make more money, you’ve got a good property, but you cannot have your cake and eat it too. You can’t have spend $1,500 a month on rent and max out your Roth, contribute to your 401K and your HSA and buy a property. You got to choose. And so use your skillset as a financial analyst and rationalize it based on the highest returns there. And I think there’s no way you’ll run those analyses and come out with another house hack as the clear winner, unless you believe prices are going to go down substantially for a prolonged period.

Parker:
Regardless of what I think it’s hard to predict. I kind of have these differing opinions. My finance background has me thinking, “Oh-” And I think that’s what most people say you should get your 401K to the match, then max out your Roth and go back to your 401K and completely max it, and then after that go into a taxable brokerage or investing in real estate. But if I did that I have no cash left, so I think that’s a good point.

Scott:
Run the analysis, ask yourself what do I believe and then do the thing with the highest return that you believe.

Mindy:
Do you have a match at your company?

Parker:
Yeah, 4%, I’d have to contribute 8%, but right now I’m contributing 12.

Mindy:
I would contribute enough to get the entire match.

Parker:
Yeah, I am, I am.

Mindy:
What do they say that’s free money. So then you could pull back on that if you choose and take that extra 4% and put that into cash. Or take that extra 4% and put that into your HSA, and then stop the HSA and the Roth and just think about it.

Scott:
I agree with Mindy that you should take the match, but I do want to also just continue to push the seed of doubt in there that you are 26 years old, you’ve already started two or three different businesses at this point, some of which have been very lucrative and opportunistic. Getting cash in your bank account that you’re willing to use to advance your position is going to be way more powerful for you than almost anybody else in different life positions.
Because you will use it to change that job, join the startup, start your own business, try the next rental property investment, those types of things. And the ROI on that is going to be higher than the 10% that you’re going to get on an annualized basis in an index fund in the stock market. Everything on top of that, that you don’t need to pursue those opportunities I think that you dump that into the tax advantage retirement stack as far as you can go. But I have a heavy bias towards cash for folks like you in your situation that are learning lessons, working, living literally in their business, all that kind of good stuff.

Parker:
Right now’s the time I’ve got no dependents, no girlfriend, no anything. That’s the thing I like about real estate is I can have an active role in creating my success. Not that contributing to retirement is not a good thing, but it’s just buying ETFs and just letting it sit there doesn’t really feel like I’m being as proactive towards being successful.

Scott:
I think 10 years down the road Parker with $30,000 in cash is going to be way richer than Parker with $50,000 in his investment accounts and less in cash.

Mindy:
That’s hard to argue with.

Scott:
I can compute that in a spreadsheet though, the formula would work out. Hopefully, the argument at least makes you think about things.

Mindy:
Parker this was a lot of fun and I’m really jealous of your $36,000 couch flipping side hustle. That should be a main job, that’s not even a side when it pays $36,000 a year. So get back into that, that’s really awesome… Even if you can only do half of that $18,000, there’s your down payment. So I encourage you to start combing the ads again to find the stuff that sold really, really well.

Scott:
IF you make that much money also, that’s a good one to set up the LLC for, so you were asking about LLCs.

Mindy:
Yes, it’s a great LLC and a self-directed solo 401k and oh my goodness, so many fun things. I really appreciate your time today Parker. Thank you so much for joining us and we’ll talk to you soon.

Parker:
Thank you guys. Love the show, so great to be on. Thank you.

Mindy:
Aw, thank you.

Scott:
Thank you.

Mindy:
That was Parker, and I cannot believe he makes $36,000 flipping couches. I’m going to go buy a truck and flip couches too Scott.

Scott:
I think it’s a great side hustle and I think that… Well, we didn’t really touch on this nearly enough. The big story here is how Parker sets himself up for income growth over the next couple of years. At 26 financial analysts making $75,000 a year, the world is his oyster. He needs to go and figure out how he can apply that skillset to a variety of opportunities. Either continuation of his track in the finance world, starting a new business, buying more real estate, expanding the site hustles, all those things are really the major lever in his financial position on a go forward basis. And I think that’s exactly where he should be focusing his time.

Mindy:
I agree. I think he’s got a lot of different opportunities and just what does he want, what are his goals and how does he want to accomplish them, and how many different ways does he want to make money? It seems like there’s a lot of passive and semi passive ways that he can generate income.

Scott:
Yeah, he’s got a lot of good options just needs to focus in on them.

Mindy:
Yep. All right, Scott, should we get out of here?

Scott:
Let’s do it. And that wraps up this episode at the Bigger Pockets Money Podcast. She’s Mindy Jensen and I am Scott Trench saying give me a hug, ladybug.