Finance Friday: When to STOP Investing and Start Saving Cash Instead

Mindy:
Hello, our dear listeners, and welcome to The BiggerPockets Money Podcast. My name is Mindy Jensen and with me as always is my money savvy co-host Scott Trench.

Scott:
Thanks, Mindy. Great to be here with my you-can-always-bank-on-her co-host Mindy Jensen.

Mindy:
Oh, I like that.

Scott:
All right. Hi, Mindy. We’re here to make financial independence less scary. Let’s just for somebody else to introduce you to every money story including Dan’s today because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.

Mindy:
On today’s episode, we are talking to Dan about how he can reach his financial independence goal in 10 years by working strategically to decrease his spending and increase his income. This is a great real-life case study of a family that has a solid income and some assets, but needs a bit of a reset on the basic fundamentals and needs to do the hard work of committing to the long-term resource allocation decisions.

Scott:
Yeah, I think it’s likely that a lot of people are struggling with the same high-level questions that Dan and his wife are struggling with, and specifically in this episode, we’re going to talk about and reveal the struggle and the tough choices you need to make to free up cashflow and fortify your day-to-day financial position and the equally hard and even more important, arguably, long-term decisions about how to direct the large, often automated flows of cash to the investments that are truly congruent with your long-term goals, right? Is that should you be always on with that 401k or should you be directing those flows to real estate?

Mindy:
Dan, welcome to The BiggerPockets Money Podcast. I am so excited to run over your numbers and dive deep into your financial situation. So let’s jump right in. We are going to look at your income. I see a grand total household of $8,700, that’s $4,500 for you and $4,200 for your wife. Dan, you also have not one but two house hacks. Can you explain the cash flow situation in those house hacks?

Dan:
Yup. So the first one is completely rented out. That was my first house hack and it brings in about $3,900 a month in rent, and after all said and done, the true cash flow is around 400 a month. And then the second house hack, which is also a duplex and about a street over is about $4,900 a month in mortgage and I’m getting 2,150 for rent of the first unit and living in the second unit.

Mindy:
Okay, so they’re paying a portion of your mortgage. That’s great. Monthly expenses, I see a total of $6,500 including 2,800 in mortgage, 600 in groceries and eating out, 200 in electricity, 100 in internet, cable and subscriptions, $1,500 in fun money, which isn’t really broken down so much. It just says fun. So that’s a category that I would encourage you to really dive into just to see if there’s anything to cut out. But again, $1,500 all-encompassing doesn’t seem like such a huge amount. $45 for a gym membership, $140 for 529 plan contributions, $500 for debt payback, $500 for savings contributions, and the big whopper, childcare at $2,300 a month. So that all equals up to just about what’s coming in, not much left over for savings with the exception of the $500 that you are contributing to your savings as part of your expenses.
Debts, I have a HELOC on your first property of $33,000, hospital debt of $7,000. Your first property, you have a mortgage of $444,000 approximately and your second property you have a mortgage balance of around $700,000. Your net worth, you’ve got some equity in these houses, $216 in the first property, $100,000 in the second property. Your investments total $215,000 between you and your wife and that split up between the 529 plan, a Roth 401k, a Roth IRA. Oh, you are singing Scott’s song, Acorns and Coinbase savings and house reserves. So a total net worth of about $530,000 at age 30.
Here’s a spoiler. You’re doing way better than I was when I was 30, so you’re in a good situation, although there’s not a lot of opportunity for savings right now. Dan, what are you looking to get out of this phone call?

Dan:
Yeah, so I’ve always had this idea in my head that I wanted to reach buyer by 40. So I just turned 30 in September. I am at that weird early midlife crisis I guess where I have 10 years where I feel I want to make the next 10 years intentional and I feel that, yes, I’ve done well in my 20s and I figured some stuff out, but I feel like that next step is just very confusing and I’m lost in that sense. And so I am trying to figure out a good slow FI plan for a 10-year period I guess, and yes, my expenses are going up so that’s why I’m like not 100% sure what to do.

Mindy:
Have you determined what your FI number is? You have a 10-year goal, but do you know what that number is going to be?

Dan:
Basically, that 10 year goal to me isn’t necessarily like … I guess it isn’t true FI in the sense of where I’m legit stopping, I’m not doing anything else. I want to reach 10,000 a month in passive income, somewhat passive income $10,000 a month and then really just have the ability to … I think I’m just a worker bee. I’m always going to do something that’ll realistically make money, but is that something that I feel has to be $200,000 a year or is that something that’s just a $30,000, $40,000 a year extra of just more that little play money I guess? So that’s really my goal by 40, $10,000 a month.

Scott:
Okay. And just observing the overall position, it looks like we went from being able to accumulate a few thousand dollars pretty comfortably a month in cash to being break even. Is that feeling stressful a little bit right now or is that another issue we should tackle?

Dan:
Yes, absolutely. So my last year, 2023, my wife and I were definitely on a solid pace where we were putting money into our ally HSA and tackling some of those savings costs that we knew were going to come like our yearly car insurance or house stuff or whatever and that felt very comfortable and then we’re also throwing a lot at the debt. Now we’re at the point where we just had our first daughter, which was very exciting, but she decided to come very, very early. So she’s going to be in the NICU the next couple months and we will 100% … We pretty much already hit that out-of-pocket in the first month, so we’re expecting those expenses on top of my wife and I lived in the hospital all December, so that was likely going to hit last year’s out-of-pocket.
So my debt is definitely going to increase and I’m not a person who takes that lightly. So yeah, definitely feeling a little bit more constrained now.

Scott:
Remind me how much cash you have on hand right now.

Dan:
Not ton, honestly. I don’t like to even really think about the house reserves as me having it on hand because it’s for the house, but I have close to $10,000 for that between the two houses. And then personally in savings, in my high yield savings account have about 7,000 and then in just I guess the random make of America account that we just never got rid of, there’s probably like 2,000 or 3,000. So nothing crazy, nothing substantial. We’ve been pretty much playing a lot of offense the last couple of years, I would say, and putting it back into the house and putting it back into paying off the HELOC and stuff. So now I feel like I need to play a little bit more strategic defense, but still grow.

Scott:
I think that you’re thinking about this in the overall right way. That’s what jumps out to me here is, right now, the last few months and the next few months are about, “How do we preserve the cash position and get baby home from the hospital and set up into the new normal stable environment that we’re going to be transitioning to in the next few months?” What do you expect your out-of-pocket costs for healthcare to be in the next few months?

Dan:
So for the family plan we’re on, it is 6,200, so I definitely expect that 6,200 to come up. We’re still trying to figure out what last year technically was because my wife and I both were on separate plans and we both had HSAs and definitely meet the deductible with all the baby stuff, but then the out-of-pocket costs, we’re still trying to figure that out because this all happened in December, so there’s about three weeks where her hospital stay was like $115,000, and obviously, we’re not paying all that, but there is a chance that we could have to pay a large sum from that for the out-of-pocket costs. So I would say at least right now the 6,200.

Scott:
Okay, so we’ve got 6,200, maybe as much as another 10,000. I’m making that number up, but just to be very conservative, there could be another expense on top of that that will come out of cash. I assume you do not have childcare yet until baby comes home from hospital?

Dan:
Yes, correct. So realistically, childcare, so the budget I have essentially that you guys went through is what will be moving forward once baby Savannah comes home from the hospital and then my wife and I will both be on maternity leave for about two months. So realistically, if all goes well, she’ll come home April, so wouldn’t have to start that until probably two months after give or take.

Scott:
All right, so look, we’ve got $10,000 in cash. We are going to be cashflow negative for the next several months while we figure out the hospital bills and then we’re going to be cashflow neutral following that. And that’s the challenge. I think we have two challenges here to work through. One is, how do we manage cashflow for 2024 so that you’re not dipping into investments or doing that as minimally as possible and feeling comfortable like you’re on a pace to accumulate? And the second is, how do we then transition that to a 10-year plan that’s going to put you well beyond millionaire status, so you’re FI by 40? Is that the game in a nutshell?

Dan:
Yup, pretty much.

Scott:
Okay, so here are some observations I have about your cash situation. You said $10,000 in total cash for 7,000 in reserve. Yeah, I guess I have $15,000 in total cash right now. The second piece is cashflow. Walk me through your rationale for why you’re contributing, why you’re maxing out your Roth right now with 15 and 18%.

Dan:
So I’m actually not maxing it out because I make … So I make 88,000 a year in salary and then my bonus can definitely fluctuate, but it’s usually 10 to 20-ish percent, so I make a little over 100. So I’m doing 15% of mine, which isn’t the 21 or 22 I think right now maxing now and my wife’s doing about 18. We’ve just been doing that for years now, which is definitely something I would love your opinion on today too is, do I go that route and continue to be pretty diversified with doing a decent amount in index funds every paycheck and then also trying to build somewhat of a real estate portfolio or is that actually hurting me the fact that I’m doing half and half? But yeah, it’s just been something we’ve always done.

Scott:
Look, I think it’s a great move, right? I love contributing to the Roth 401k. This is not a 401k. This is a Roth 401k, correct?

Dan:
Mm-hmm. Correct.

Scott:
So I love the move up until now and so because of what we just discussed. You are going to have a cashflow bind for the next year, right? You’ve got a little one that’s in the hospital, you’re going to have hospital bills and then you have childcare to figure out and smooth out. And until you resolve your core fundamental cashflow, how much cash is coming into your life, I think you’re going to be very stressful and you’re going to be faced with increasingly difficult problems there. So there’s one of two choices you can make here to resolve that. One is to just stop those contributions for one or both of you and put all that cashflow back into your after-tax take home pay. That would go a long way to smoothing out your cash position in the next couple of months.
You’ll lose those six months or a year, whatever it is of investing, which is going to hurt, but it may be a lot less painful than trying to figure out, “We’re going to be break even and we’re not going to make progress on the HELOC and these other debts and we’re going to have very little in the savings account.” So that’s one option. The second option is in between, which is just to switch it. Just make it a 401k contribution instead of a Roth 401k contribution, so it’s pretty taxed. And that will also increase the amount of after-tax take home pay. I can’t run that math easily in my head, but you might get 40% or something like that or 30 to 40% depending on what state you live in and your marginal tax bracket back into your cash flow situation of the combined total amount that you’re currently contributing to your Roth.
So I love the Roth, but those would be two. Mindy looks like she’s going to say something. I’d love to hear what she says and your reaction to that as one easy first step.

Mindy:
Well, I would like to get Dan’s reaction to what you just said first because I’m going to go in a different direction.

Dan:
Yeah. So I hadn’t thought about doing a Roth through just a traditional one, so that I agree. I’d have to look into and see what I would actually get out of that. I have thought about the option of just pretty much completely pausing it for the time being, which I guess at the end of the day is something I will realistically could have to do with these bills and everything. I’ve just obviously been trying as long as possible to not do that, but I understand the situation. It doesn’t necessarily give me that option.

Mindy:
You have a property with $216,000 in equity that brings in $400 a month. That’s not going to help with your cashflow issue necessarily, but if you sold that house, there’s $216,000 in your pocket. That was a house hack, so I’m assuming that that was purchased as a primary residence, and if you have lived there for two of the last five years, you would get the Section 121 exclusion. Did you live there for two years?

Dan:
It may have been just under two years to be honest. I think it was just under-

Mindy:
Move back in.

Dan:
Yeah, it was not-

Mindy:
Is this a property that you see yourself holding long term? What’s the condition of this property?

Dan:
Yeah, so I love this property. Honestly, that one’s my baby. If I had to kill off one of them, it would be this one that I’m currently in. Not that it’s any worse or anything, but that one, I love. That one … I’ve always been the buy and hold kind of guy. I’ve never really made moves for short-term stuff. The condition’s great. We spent a lot of money renovating it pretty much when we first got there, did a lot of stuff as we were living there too and everything. So it’s in great condition. It’s a great area, a solid two-one in each unit that rents really easy. So I haven’t even had to flip or switch out tenants at any point either. So that one I’ve always thought I will never get rid of and I’ve always had the intention with properties that I’ve always told myself I want one per kid, so that I could have the option to either, a, leave it for them or, b, have that pay for their college.
So in my world, I’ll probably have two to three kids. After how this has gone with everything, maybe Savannah will be an only child, I don’t know, but definitely I’ve always said to myself, “Okay, three properties for sure. One for each kid or whatever.”

Mindy:
The issue that we are seeing that Scott alluded to was a cashflow problem and selling that house, like I said, doesn’t really change the cashflow issue. What is your job and are there any opportunities to increase your income and what does your wife do?

Dan:
Yeah, so my wife is in HR. She likes her job a lot. We both roughly make around 100. I don’t see her wanting to leave at any time soon, that particular job. My job, I’m in marketing research and I make roughly around 100. Like I said, that bonus is a huge chunk of it, so that can really sway the needle too. The last couple of years, we’ve done really well, so my bonuses have been 20 to 25%, but this year was definitely a slow year, so I am waiting for that and a little bit nervous that it’s going to be substantially lower. We’re still are getting it, but I don’t think it’ll be that 20.
And that’s definitely something too I’ve been really having a hard time with is I do like my job, I like my team, I like the work-life balance, but I’m really just unsure if … In the marketing research world, how it works is you’re either supplier side, which is an agency or client side, which would be like a Coca-Cola or a Home Depot or something like the corporate side. And on that client side, you make a lot more. And I’m on that agency side right now and I’m just not sure realistically if I should make that switch. I’m at that pivotal part where I have the experience under my belt that it could honestly make me 50 to 90k more if I were to switch into one of those client roles and do relatively a similar role and everything.
So I’ve had a hard time with that because I also have my real estate license, which I got a couple months ago. Thanks to the advice that I got from Mindy a couple years ago. I just didn’t get off my butt and actually do anything about it, but that’s always been on my mind. And so I go back and forth to like, “Do I just want to solely focus on that one income or do I want to take the fact that I do have a good job that pays, could pay more, but I’m not working 90 hours a week?” I am comfortable, I’m happy, I love the team I’m with and everything, but obviously, it’s like, “Do I want that or do I want to work just one job?” because I do a lot of side hustles and stuff like that. So I’m just like, “Okay, is the 10 jobs worth it when I could be making that much at the one and even more realistically?” So that’s definitely something I have had a lot of issues with lately.

Mindy:
So we interviewed A Financial Mechanic on episode 97 and A Purple Life on episode 110 and I’m telling you both of these numbers on purpose because I want you to go back and listen to them. Both of them have a similar story where they would essentially job hop to higher paying jobs and they went from, it’s been a minute since we did these episodes, this is like episode 500 and something, but they went from like 35,000 to 60,000 to 100,000 to 150,000 just because they job hopped every year, every other year and it can be very lucrative to your bottom line and solve this cashflow problem if you change jobs.
And having this opportunity, if there is an opportunity, to go from one team to the other team that has such a different income is something that I think would be worth looking into and exploring just to make sure that the income is there and the opportunity is there. If you’re doing really well on your current team, you can still have lunch with those guys and girls and go make more money on the other side. Just an observation because that would solve your cash problem with an extra $50,000 a year.
I’m looking back at, you said your wife really likes her job right now and that’s awesome. Liking your job is really, really, really important. Have either of you asked for a raise recently? And if you haven’t, why not? And if you have no idea why you haven’t or it’s uncomfortable to ask for a raise, make a list of what the things that you have done that have contributed to your company. Erin Lowry was on talking about her third book, How to Have Uncomfortable Money Conversations and one of them was the asking-for-a-raise conversation. And what her recommendation was is have in your inbox a praise folder. And every time somebody emails you, “Thank you so much, Dan. Your contribution to XYZ project really moved the needle. I’m so thankful for you,” you save that in your praise folder. You say thank you, but you save that in your praise folder.
And then when it’s time to go in and ask for a raise, you go to that praise folder, you print out every one of them. You don’t just forward them to your boss, you print them out and you present them to your boss along with the request for why you want a raise, how much you want, why you think you deserve it, etcetera, etcetera. I’m sure your wife has been the recipient of raise requests and could help you formulate this, but if you haven’t had a raise in a while, that could be something worth exploring as well. But I really like the idea of going, I’m sorry, did you say too client-facing? Is that the one with the more money?

Dan:
Being the client. So right now, I am client-facing. Now, I’m the one who’s working with the client and helping them do whatever they need to do. If you’re on the other side of that and you’re the client, then you make a lot more for sure.

Mindy:
Yeah. So I wonder what it would take to get on the other side and how you could seamlessly, I mean, have a conversation with your boss.

Scott:
I want to go back to your expenses here. Walk me through the math on where you currently live. What is your mortgage and utilities and all that kind of stuff and what is the rent you’re getting from the house hack?

Dan:
Yes, so we use an FHA loan to get into this second house hack. It’s the mortgage which does include the taxes and the insurance is 4,938 a month. And the reason we did get this house was because we’re living in the other duplex, which was two-one on each unit and we knew we wanted to start a family and we knew we wanted to be in this area and we knew we needed more space. So we had it in our mind that, “Okay, the next house hack is going to be one that we can see ourselves in for probably five to 10 years, honestly.” Whereas the first one, I was gung ho on trying to get out of there as soon as possible, not because I wasn’t comfortable, but just because I wanted another one under the belt.
So this one is a duplex and the unit we rent is a two-one and the unit we live in is a four-two, but yeah, so it’s about 4,900 a month and we get 2,150 from the tenants, which is just a young couple. But yeah, so other than that, I get a stipend from work for cable and for internet, so it’s really like 185, but I get 100 bucks for it and then the electricity is about 180.

Scott:
And is the tenant share in that cost?

Dan:
They have their own electric bill. So honestly, in terms of expenses here, so I spent last year about $14,000 between both rentals, that’s both properties for maintenance and repairs. So I do spend a couple grand a year on oil. The first house was only needed to fill it twice a year. It’s great. It heats up, it’s small, it’s easy. This house is much bigger. So I fill it up a couple times a year, and obviously, we all know how expensive oil is.

Scott:
And where’s this located?

Dan:
It’s just north of Boston, Massachusetts, so expensive area to boot.

Scott:
I don’t think a lot of places around the country are … I think it’s normal to just fill up the oil for a house for heating. We don don’t do that out here in Colorado, right? So it’s an interesting way they do it in the northeast.

Dan:
Yeah, it’s expensive, it’s not fun, but yeah, so not too bad. I tell people too, we’re past that, what I refer to as that stabilizing period when you get a house hack. You live in it and you see what’s going wrong and things you need to fix and how much it actually takes to maintain it and everything. And on the first one, it really doesn’t take that much. It doesn’t take that much to maintain. There’s really never any issues or whatever. The second one, spent the last year and a half learning like, “Okay, I went through all the seasons. I see all the things that need to be fixed or replaced or whatever.” So I am hoping that, honestly this year, one of my goals is to keep that maintenance bill under 10,000. And I do think that’s doable with what I have.

Scott:
So look, I’m just going to zoom back out again and reframe the situation as I’ve come to understand it through our conversation. You and your wife both bring home more or less 100k each, right? Fluctuates with bonuses or whatever. You’re putting in about $30,000, maybe even higher, maybe $35,000 to $40,000 into your Roth 401k on an annualized basis right now. Is that about right?

Dan:
Yeah, about 30, yeah.

Scott:
To live, house property number one produces a modest cashflow, net of all expenses, using reasonably conservative assumptions. So it’s a non-factor in the situation. We can just call it zero for now because the cashflow is probably lumpy enough where you can’t really count on it, but it’s not also not burning a hole in your pocket at this point, so you don’t have to sell it to get rid of a negative cashflow situation. It will build wealth and accrete over time from appreciation and rent growth most likely over the next 10 years. House hack number two costs you at least $2,000 a month to live in the net of mortgage and rent received, but probably realistically another 1,000 on top of that between maintenance and oil and those other types of things. So we’ve got a $3,000 monthly housing bill. How am I doing so far?

Dan:
Yup, that sounds pretty correct.

Scott:
Okay, groceries. You guys have mastered your grocery and eating out budget with $600 a month. Good job. Kudos to you guys. Your electricity bill seems reasonable. Your cable and internet seems reasonable. You spend $1,500 a month on fun and for a household earning $200,000 per year, spending $1,500 a month on fun and basically everything else is not unreasonable. You’ve also got $1,000 a month that are coming in that is debt payback and savings contribution. So those are discretionary, those are building wealth in the sense that paying down debt is the equivalent of investing. Depending on the interest rate, it can be one of the most lucrative types of investments. How much of that $500 debt repayment is mandatory versus your voluntary going above and beyond?

Dan:
Yeah, it’s $342 right now, minimum month. Yeah, it’s at 10% interest rate. So that’s obviously gone up too. It was I think 3.5 when I opened it. So that’s definitely where I go back and forth like, “I want to use that.” And the total of the HELOC is 55, so we’ve been paying it down since November 2022.

Scott:
Look, my initial takeaway here is that, in 2024, you need to make one of several decisions. One is, and the easiest and simplest one is stop contributing to the Roth 401ks and put that $30,000 to $40,000 into your savings account, pay off the debt and just refortify your financial position. You just had a baby. There’s some health issues to deal with and that’s going to be the simplest thing. You’re going to lose one year of investing. It’s not the end of the world, but it will drastically fortify your position and probably make you feel better and sleep better at night. From a cash position, you’re not going to run out of cash, which is a real possibility. It’s a real possibility to run out of cash and have to dip into your 401k, your ROTH or take on more debt to some degree.
It’s not the end of the world, but it would stress me out a little bit. And so I like that as the simplest approach to just pausing, resetting, getting through this year and then beginning the new path of accumulating wealth. You guys are doing great. So these are all options, a degree, and because you have such a good net worth, you have a lot of options. The second one is go job hop, right? Another $50,000 a year in pre-tax income goes a long way, right? But it’s probably another $25,000, $27,000 to $33,000 into your pocket after tax and solves the problem that we just discussed the same way.
After that, we then have to think about, okay, once we get through 2024 and refortify the financial position, which I think should be your first priority right now, not more investments, not this other stuff, it’s getting that cash reserve and making sure that you have the rainy day fund set up, then we got to think about what the right way to invest going forward is. And I like your approach at the highest level, right? The Roth 401k is a great one. You might consider doing more of the pre-tax stuff with the 401k and maybe laddering that out because it might be more tax advantaged.
If you truly intend to FI at 40, you can back into that and plan there. So there’s really some really good work from the Mad Fientist and I like your real estate approach and continuing to do that as you accumulate lumps of $50,000, $60,000, $70,000 to put down on the next property, which should happen every 18 months for your household if you decide to prioritize that over the 401k and Roth position. So how am I doing summarizing this so far?

Dan:
Yeah, that definitely sounds great. I guess one of the questions I would have is I understand that this year getting into a solid position with terms of paying off as much debt and having a bit more of a safety net, and then realistically afterwards, do I still continue to take the breaks or take the gas off the 401k stuff and then more focus that towards real estate, I guess that’s too what I’m liking because I’m definitely doing a little bit of both right now. Really do my area for appreciation. I know it’s not a cashflow king here, but the appreciation is insane. It’s nuts. It’s very easy to find tenants and stuff and the rents go up and I would love to continue to invest in this area. I would love to just self-manage a small but mighty portfolio and maybe that will take me longer.

Mindy:
How much time are you spending on your real estate right now? And I ask that from a mom standpoint, not from an investor standpoint. You have a baby who was born early, who is going to be in the NICU until April-ish and then come home hopefully healthy, but there are more issues at stake when you have a tiny, tiny baby. So that’s going to take a lot of time off your plate. I don’t know that I love the idea of adding more properties to your plate at this time, even though there are such great appreciation options.

Dan:
Yes, so I’m happy you asked that. So I love to track my journey on social media and stuff. I’m always arguing with people that being a landlord is not as time-consuming as people make it out to be. So this last year, I tracked up all my landlord hours, I guess how I want to phrase them and it was 40 for the entire year. So 40 hours for the entire year is what I spent on both houses doing landlord-related stuff that doesn’t count as things that I would have to do at a primary residence no matter what. And my second, I mow the lawn. Thank God I have two very tiny lawns. They take me about 15 minutes, but mowing the lawn at this house that I live at, I consider that just a household duty that I would have to do. Mowing the lawn at the other house I consider a landlord duty. So the entire year, it was only 40 hours. So it really was … I consider that when you do that cost breakdown, incredible honestly.
So obviously every property is different and I could have a lot more headaches than that, but yeah, this year, I was very good and I’ll continue to track that too and see if it gets better or worse.

Mindy:
If you have a great property, if you have great tenants who pay their rent on time and, “Hey, I’ve got this little thing,” and you call up somebody and they come fix it and then what was that like five minutes? So yeah, I get that.

Scott:
I’m certainly in camp real estate for you. Sometimes, we get folks on The BiggerPockets Money Podcast and I’m like, “You shouldn’t be in real estate,” but your situation is perfect for it, right? You’re willing to house hack. You guys earn a very high income. It’s very consistent, so you have an income stream to borrow against to buy these properties. You seem to know the area really well. You have a conviction in it at the highest level. What is real estate investing in essence? It’s a long-term bet on appreciation and prices and rents in a local area and you believe that. And you’ve got your training ground with the house hacks and what you’ve got currently. So I think that the challenge here at the highest level is cash accumulation, so that you’re able to continue doing this responsibly. You used the HELOC to buy this next property, is that right?

Dan:
On the first property, yes. So how it worked was I was living in that property, and again, I was so gung ho that I had to buy a second house hack immediately after the first year or whatever and I didn’t luckily because that just wouldn’t have worked for me financially, but I took out a HELOC on that and I did have a ton of equity then, but I told myself I never wanted to be in more debt than X amount and that X amount for me was 55,000. So that was the number I felt like, “Okay, obviously, I don’t love being in debt for 55,000,” but I didn’t want to take out the 90,000 that I had because I just was a little more like, “All right, I don’t trust myself with this.”
So I only took out the 55 and then the rest was savings and that 55 was basically the renovation cost for this second property. So that’s pretty much what I’ve been paying back, is that renovation cost.

Scott:
Awesome. So here’s the problem with that. And when you use a HELOC to buy a property or finance renovations or whatever, you have to think of it as a short-term loan. And the shortest you can think of a short-term loan in my book reasonably is five years, right? Otherwise, it’s a long-term loan. So five years is 60 months, and if you take out $60,000 HELOC, you’re going to be paying back $1,000 a month in principle, right? 1,000 times 60 is 60. What am I doing here? I’m being silly. You’re going to pay back $1,000 a month in principle on a $60,000 HELOC over five years plus interest, right? And right now and today, this is a root cause of the problem we have around your temporary cashflow situation, right?
Again, you’re doing great. We just have to figure out like, “Hey, 2024, we’re going to buff up the reserves and we got to pay back this debt before we can invest.” And so I think your big challenge around real estate investing is cash accumulation, because if you don’t accumulate a lot of cash to put down on the down payment, you’re going to have to use other sources of debt. And that’s actually going to make that next property suck cash out of your life for the next several years, which compounds the strain on it versus if you could put down 150,000, now that property puts cash into your pocket day one with that.
And so that I think is your fundamental challenge for real estate investing in the local areas. How do you divert enough, a sizable chunk of cash over the next two years, maybe away from these Roths, maybe by getting that extra, that additional job, pay off this debt, fortify your position and spend the 24 months needed to probably accumulate $70,000, $80,000, $100,000, $120,000 to buy that next property so it puts money in your pocket day one? That is the approach that I’d feel really comfortable with if I was going to take real estate investing in your shoes and you do that over a period of years as the snowball keeps moving and you probably get reasonably close to your $10,000 a month in passive cashflow after five, six properties that way over the next couple of years.

Dan:
I think I do understand from your point. It sounds like for me, it sounds like my 20s really were about learning, learning as much as I could, getting set up there and it sounds like my 30s just need to be about earning and earning as much as I can and putting those back into investments and everything, but yeah, and that I do agree.

Mindy:
All right, thank you, Dan. Thank you so much for your time today and we will talk to you soon.

Dan:
Yeah, thank you guys so much.

Mindy:
Scott, that was Dan and that was an interesting set of scenarios that he has going on right now. I really loved your outside of the FI scenario suggestion of stopping his retirement account contributions right now or at least stopping the Roth portion, which is quite shocking, Scott, you’re a big proponent of the Roth plan.

Scott:
Yeah, well, look, I just ground the journey to financial independence and wealth building and it always goes back to the very beginning of, “Do I have any bad debts? Okay, I’m going to pay those off. Do I have an emergency reserve? Okay, I’m going to build that up. Then what am I investing in and is it congruent with the goal of early financial independence?” And I think that before we even get to his overall position, yes, the guy’s worth $500,000, yes, he’s doing great, but his baseline financial situation is not strong right now because of the various circumstances that are affecting his life in the back half of 2023 and early part of 2024. And so we got to go back to basics, reset that and then resume our long-term strategy. And that’s just my overall framework.
And then like we said a couple of times in the show, I just think folks in this income bracket, this 100 to 250-range for household income, depending on where you live, it’s great. You’re earning six figures. You’ve got the income to build wealth, but you can’t do it all. You cannot max out your HSA and you take your 401k match and max out your Roth and have a lot left over to invest in real estate in most cases. And you have to choose. And that choice is not being made and I think that that’s creating a compounding scenario of risk creation if he continues to go down the real estate path without making the conscious choice to actually divert several hundred thousand dollars in cashflow to real estate over the next couple of years.
And that’s a problem I think a lot of people listening to BiggerPockets Money and BiggerPockets in general have because it is a painful trade off. It is very uncomfortable to not contribute to your 401k and instead divert that into cash for your down payment of $90,000 on a rental property in a couple of years. But that’s what actually moves you toward that financial freedom state as a real estate investor and that’s the conscious choice I think people need to make if they want to go all in on real estate like Dan said he does.

Mindy:
I like what you just said, Scott, the conscious choice. Don’t just stop contributing to your 401k because you heard Scott say it one time on the show. Make a conscious decision. Dan is potentially going to stop contributing to his 401k to free up some cashflow in his current scenario. He’s got a great income, he’s got a goal in mind and he has a plan to make this happen. He’s not just going to stop contributing to his 401k on a whim and I like that you said that, Scott. I hope that people hear the rest of it too.

Scott:
Yeah, and last, I always want to call out, I love it. Dan’s a BiggerPockets Money listener and so investments are a huge priority. You can tell that because they’re contributing such a huge percentage of their income to their Roth 401ks and have otherwise gotten into real estates, house hacking, all that kind of stuff. But at some point, life comes along and you have to interrupt that flow of investing to some degree and that point has hit for Dan’s family. He’s just needs to take a break here and pause, sit back and say, “Look, we just had a baby. She came very early. We’re going to sit back and we’re going to just pile up a little bit of cash and take a breather for a few months and we’ll resume the investing goals and still get to our path over the next 10 years once we reset.”

Mindy:
Absolutely. 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 TTFN, baby hen.

Scott:
If you enjoyed today’s episode, please give us a five star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at YouTube.com/biggerpocketsmoney.

Mindy:
BiggerPockets Money was created by Mindy Jensen and Scott Trench. Produced by Kailyn Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to The BiggerPockets team for making this show possible.