Real Estate vs. Stocks: Which Will Make You MORE Money? (Rookie Reply)

Ashley:
Is this the right time to buy a rental property or should you be investing more in the stock market using your retirement accounts? Today we will break down a strategy where you can actually do both. I am Ashley Kehr and welcome to the Real Estate Rookie podcast. Tony just had his wonderful little baby girl. So today we have a special guest from the BiggerPockets Money podcast, Mindy Jensen. Mindy, welcome to the show. Thank you so much for joining us today,

Mindy:
Ashley, I’m so excited to talk to you. This is going to be fun.

Ashley:
Yes. So we have our first question today, and this is from Ricky Martinez in the Real Estate Rookie Facebook group. So his question is, guys, I need a topnotch credit repair expert. I’ve already paid off most of my debt and have been current with my payments and credit cards, but my credit score just won’t budge. I followed most of the traditional advice such as keeping card balances at 10%, but I still can’t get past six 90. I need a reputable professional who can help me turn things around. Thank you. So Mindy, are you that reputable professional that can help today with some tips, tricks and advice for this person? So where would you start if you’re in this situation of trying to repair your credit?

Mindy:
First I want to share with Ricky, it takes time to repair your credit. Your credit scoring companies are pulling from at least the last 12 months of data. So if you have 12 months of not so great credit, not paying your bills on time, running up your credit cards all the way to the top, and then you have one month of, Hey, I’m turning myself around, that’s not going to change your credit score. So just know that this is a time taking process and there are a ton of credit repair companies out there, but there’s a lot of fraud. So a company called Credit saint.com is one that I have heard is among the most reputable credit repair agencies. But again, if you get even an inkling of, Ooh, I don’t know if this is right run, you definitely want to make sure that you are working with a reputable company.
You really want to be super careful about who you’re using. And like I said, credit repair is going to take time, but your credit score is made up of five factors. First and most important is the payment history. 35% of your entire score is based on how frequently you are paying your bills on time. So if you’re always paying them late, you’re never going to have a great credit score. You can combat this by either having it automatically withdraw from your account or putting a notice on your calendar so that you’re at least making the payment on time every single month. That’s hugely important. And even one late payment is a huge ding to your score. The second factor is the amount that you owed, and he said that he was keeping it below 10%. This is 30% of your credit score is just how much of your credit you are utilizing at any one time.
So let’s say you have a thousand dollars balance or a thousand dollars credit limit and you’ve got a $900 balance, that’s a 90% usage. You want to make sure that you’re not using very much of your available credit. I know it’s counterintuitive. Well, they gave me a thousand dollars. Why can’t I use a thousand dollars? You have to play the game by their rules. Length of credit history is 15% of your score. So if you got that first credit card that JC Penney or Sears credit card a hundred years ago, if that’s still open, keep it open every once in a while, throw a charge on there, pay it off right away, but keep that card open because let’s say you got that card when you were 18 and now you’re 25 and you haven’t opened up any other cards. You close that card, you’re starting from scratch.
So you want to make sure that you keep your oldest card open every once in a while, throw a charge on there just to make sure that they don’t cancel it on you. New credit is 10% and credit mix is 10%. Never, ever, ever make a late payment is what I’m going to say. And since this is rookie reply, you’re probably asking about this so that you can qualify for a mortgage. Your mortgage lender is a partner is your credit journey. So reach out to them and ask them if they have any tips and tricks for you. What do they want to see? What can you do to work with them to be able to qualify for a mortgage even if you don’t get all the way up to 700.

Ashley:
Mindy, are there any other benefits you have in good credit besides just getting approved? Do you have a better chance of getting a better interest rate or anything like that that we would want to increase our credit even if we’re already improved at a decent rate?

Mindy:
And credit scores go from I think 350 to 850. So it seems like six 90, oh, that’s like more towards the 800 than the 300. Your good credit scores don’t start until 700. So he is right there. But also 700 to seven 40 is the sweet spot. Anything over seven 40 is just bonus. Anything under 700 is not as great as 700. So yeah, you get better rates, you get better faster approved, and you can still qualify for a mortgage with as low as a five 80 credit score, but only with the FHA program, you’re going to pay higher interest rates and it’s just going to take longer to get approved. They’re going to go through everything with a fine tooth comb, they will anyway. But when you have a higher credit score, your credit score is you saying, I’m going to pay my bills on time, and you keeping your word. So the lender wants to know that you’re going to make your mortgage payments. They do not want to repo your house, they want your mortgage payments instead. So as soon as you get up to 700, you can start shopping for rates again or you will have a better opportunity to shop for rates. But even right now, I would start including your lender as in the conversation so you can see where they’re coming from.

Ashley:
I really like that idea of including your lender and I think signing up for some kind of credit score tracker like Credit Karma is one where you can actually see what’s happening to it, what are the changes, what’s influencing it I think can be beneficial. But rookies, this is something to really think about. If you are not ready to buy that property yet, maybe you’re still saving instead of just thinking about, oh, I need to save 20 grand. Also thinking about where can you get your credit by the time you’re ready to actually purchase the property to.

Mindy:
And the federal government guarantees that you can get one copy of your credit report for free every year from each of the three credit reporting bureaus. So one from Equifax, one from Experian, and one from TransUnion. I have heard people get all three at once just so they can see that all of the reports are the same. I have also heard people getting them one every four months. So you get Equifax one month and then four months later you get Experian and then four months later you get TransUnion. So you have the ability to keep track of what most lenders are seeing on your score. And annual credit report.com is where you go for that free credit report from the government. It’s a federal law that you have to be able to access that once per year from each one of those three reporting companies

Ashley:
And rookies. Please be careful where you are entering your information, like your social security number that you are at the legitimate site. So before we jump into our second question, I wanted to tell you that if you’re eager to get started in real estate that we have a smart first step is to partner with an investor friendly financial planner who can help you get to your house in order and ensure you’re set up for financial success from the get go. You can find out more at biggerpockets.com/tax pros. We’re going to take a short break and we’ll be back after this.
Okay, welcome back with Mindy. And we have our second question, and this question actually comes from the BiggerPockets money group on Facebook. So if you’re interested in all things financial, it makes you go and follow and join the BiggerPockets Money group on Facebook. So this person asks, should I purchase a house hack or continue to invest in stocks? I am a single 25-year-old and live with my parents. I contribute a little towards the household, but overall my expenses are low. I’d like your advice on whether I should purchase a single family home with the intent of renting out two rooms while I live there. Two, I should stay home for another year and then consider purchasing a house hack. Three, I should double down on aggressively investing in the stock market for the foreseeable future. So here are some of my numbers below. My salary is 116,000 and it does increase over year over year. My brokerage account has 105,000, my retirement has 77,000. My HYSA has 50,000 and my car loan is 9,000. My car is worth about 30,000 if I were to sell it today, my student loans are 25,000. Okay, so Mindy, we have a picture of this person where they are at financially and they’re considering these three options. So where would you start if you were in this position and had to choose, what resources or tools would you look at first as to how you can make this decision?

Mindy:
First and foremost, I want to make sure that this person actually wants to own a house and wants to own a house that they’re living with other people in at 25 years old. I mean, they live at home with their parents. They’re used to not having their own space, but I see a lot of people, oh, the American dream is to buy a house, therefore that’s the next box I need to check. You don’t have to check that box if you don’t want to. I know a lot of people who are renters and renters for life and that’s fine. I am going under the assumption that you do in fact want to own real estate. You want to do a house hack, you want to start down this journey, which is great. I would like a bit more information, but based on what we’ve got here, $116,000 at age 25, let me tell you, my salary at age 25 was a lot closer to my age than 116,000.
So that’s awesome. And you’re living at home. That’s even better. I hope you’re saving aggressively. And with these numbers, it seems like you are at your age. I would want to see your retirement accounts in a Roth as opposed to a traditional. The Roth means you’re paying taxes now, but it’s going into the account with all taxes paid. It grows tax free, and when it’s time to withdraw the money, you can withdraw it tax free. So the younger you are, the longer your timeframe is for it to grow all of that money Growing tax-free is a better choice in my opinion. If your company doesn’t offer a Roth, you could always go into the HR department and ask them if they would consider offering a Roth 401k option in the future. I love your allocation. I love that you’ve got money in a brokerage account after tax brokerage.
I love that you’ve got money in the retirement account and in the high yield savings account. I think that you are going to, if you continue down this path, avoid what Scott and I call the middle class trap. And this is what we say is you’ve done everything right. You’ve contributed to your 401k pre-tax. You have bought a house and put, you’ve got all your equity in there and you find yourself kind of trapped because you’re a millionaire on paper or you’re rich on paper, but all of your money is in accounts that you can’t access without penalties. So I think by continuing, this is awesome with the $9,000 car loaned, but on a $30,000 car, if it’s your passion, this car is like the car that you love and you’ve always dreamed about owning, I don’t see a reason to sell it. But if it’s not your passion, if you would rather sell this and get a cheaper option, you’ll be pocketing $10,000.
I think that’s a great idea. Just make sure you’re buying a good $10,000 car and not a needs repairs all the time. $10,000 car, unless your student loan interest is super low, I would want to get that knocked out of the way. Scott and I like to say if it’s 7% interest rate or higher, you pay that off. If it’s 5% or lower, you don’t make any extra payments and in the middle it’s kind of a your call. If it gives you a lot of anxiety to have the loan, then pay it off, but it’s $25,000 and you make $116,000, it seems like you should be able to knock that out pretty quickly. Okay, now that I got the money housekeeping out of the way, I want to talk about your actual questions. Should I invest in real estate or stocks? Rates are not coming down anytime soon. Yesterday, inflation numbers came in super hot. The fed said we aren’t lowering rates anytime soon. So if you are looking at buying a house, know that this is going to be your payment for the foreseeable future. I heard a lot of people say, right when rates started going up, I’m going to buy anyway. And when rates come down, then I’ll refinance. Ashley, have you heard anybody say that?

Ashley:
Yes, I have. And what you should be doing is saying, okay, the deal works at this number and it’ll be a bonus if I get to refinance later on. Not that you’re banking on refinancing later for the deal to work.

Mindy:
Yes. So this said, with inflation coming in hot, the jobs numbers are coming in hot, everything is coming in hot, and the Fed is saying, we’re not reducing rates. They might raise them, which will make your mortgage more expensive next year. So I would really start looking for a property, really understand what it is you’re looking for. You want a three bedroom house? Don’t look at two bedroom houses, or you want a four bedroom house. Don’t look at three bedroom houses. The more bathrooms, the better. If you’re co-living, the more bathrooms the better. Have all the bathrooms, but get an idea of what it is you want. Find a great real estate agent. biggerpockets.com/agents is a great place to find an investor friendly agent who understands what you’re talking about and what you’re looking for. Find an agent, tell them this is what I want, and have them set up that search so that you can keep an eye on it because you’re not desperate to get out of your parents’ house.
You can keep an eye on what’s coming up while also continuing to save, continuing to invest and continuing to pay off your car and your student loans. I have a favorite saying about real estate, and it goes like this. When you buy a house, something’s going to break. I guarantee you something’s going to break. But the cost of that repair is inversely proportionate to how much money you have in the bank to cover that cost. So I am, I can cover the cost of any repair in the house that I buy. My light switch breaks. I knew somebody who bought a house, they didn’t, and they spent every penny they had on the down payment and all of the closing costs and then their furnace went out. That’s a five to $8,000 repair when it happened. It was several years ago. You need to have a good emergency fund.
How much does a roof cost in your area? In my area, they’re like $25,000. A furnace is about $12,000. Now, H-V-A-C-A new refrigerator is, you could probably get one for like 800 bucks, but 1200 to $2,000 have that kind of money in your bank account. Is your HVAC and your roof going to go out at the same time? Probably not. But now you’re covered and you don’t have these repairs hanging over your head. So with all of that said, I think now is a great time to put feelers out while continuing to save money. I wouldn’t put any money into the stock market that you need for your down payment. The stock market is at an all time high valuation. It continues to be at an all time high valuation. Since 2014, we have been predicting, we people have been predicting that it’s going to crash and it really hasn’t except for covid. But that doesn’t mean that it’s not going to crash tomorrow or next week. So I would say if you need the funds within the next four or five years, don’t put ’em in the stock market. Put ’em in a high yield savings account because it’s your job to protect the value of the money today.

Ashley:
To add on to your kind of gauging, especially for a rookie investors, it’s hard to know the cost of repairs and how much you should have in reserves. And three to six months of expenses is usually a rule of thumb. But one thing that you can do is when you actually have the inspection done on the property you’re purchasing is ask the inspector to say, okay, what do you think the lifeline of each of the mechanics in this property are? Or the roof even go through and tell me what do you think is going to need to be replaced within the next year, the next three years, the next five years, the next 10 years? And usually they can have a pretty good idea of, okay, this furnace, it’s probably got five years left. And you can kind of gauge of like, okay, this is the amount of money I’m going to need within the next 10 years.
And if they’re correct, things could definitely fail before then. So getting an understanding of the age of the mechanics and the property and some of the materials like the roof and things like that too, can be beneficial and helping you gauge. One thing that I did think about though, talking about their brokerage account is what do you think if they continued to invest in the stock market, put money into their brokerage account and then took a line of credit using their brokerage account as collateral and then use that money to actually go and fund their real estate and to use as their down payment,

Mindy:
That is a great option. In fact, my husband and I did that when we bought our house two years ago. I will caution that you need to keep an eye on that margin because what happened, we had this much margin and we bought our house, so then we had this much margin and we slowly watched the margin go, go, go, go, go, go. It actually went negative. And if we hadn’t, we took out a HELOC on our primary residence and threw some money at that margin so it wouldn’t go negative because when it goes negative, the company that is giving you this line of credit starts selling your stocks and you don’t get any say in what they’re selling. So it’s a great option. I actually learned that from Tony the first time I interviewed him on the BiggerPockets Money podcast. I was like, wait, what?

Ashley:
I’ve

Mindy:
Never heard of this in my life.

Ashley:
And usually you’re getting a really good interest rate because it’s so liquid. Like you said, they just go in and they’ll take it and sell it and they get their cash. So usually you’re getting a better interest rate than you would if you’re using real estate as collateral too. But there are some limits you have to have at least. I think it’s like a hundred thousand dollars in your brokerage account, which this person does. They have 105. But like you said, that margin, you have to maintain a certain balance in your brokerage account depending on how much money you’re taking. And the stock market does fluctuate too. So definitely something you have to be cautious of if using this strategy.

Mindy:
I love being able to pull from a bunch of different buckets. They may be able to borrow from their 401k. That’s another option. Talk to your HR department and ask if there’s any 401k loans available. You can borrow up to 50% or $50,000 of your balance, whichever is lower. So because they have 77,000 in retirement, they would be able to borrow up to 50% of that and then you pay it back over the course of five years and you’re paying yourself interest and blah, blah, blah. But it’s another opportunity to gain cash should your brokerage account dip too low or it’s just I love having backups to my backups.

Ashley:
And to kind of explain the difference between using those two options, your brokerage and non-retirement account or using the 401k is that when you get the line of credit on the brokerage, your stocks are staying invested, your money is staying invested in the stock where the 401k, you’re actually pulling your money out of the stock market to borrow it, and then you’re paying it back every week or whenever you get paid through your paycheck. So there is that difference where the brokerage account, you’re staying invested and you’re not pulling your money out, but you could find that great deal where pulling your money out of the stock market or maybe your 401k options aren’t that wonderful at your job. So it makes sense to take as much money as you can out of there and use it towards real estate. Yeah,

Mindy:
I’m glad you made that distinction. So just to recap, they want to know, should they purchase now, should they purchase next year or should they just heavily invest in the stock market? I would say continue investing so that you get any 401k match that your company offers, maybe a little bit in your brokerage account, and then just put the rest into your high yield savings account so that you can have the optionality to pounce on a good deal if one pops up. But definitely find a real estate agent, again, biggerpockets.com/agents to find an investor friendly agent in your area to set you up to receive an MLS listings. I am an agent myself. I can tell you it takes like 45 seconds to set up this search. So if somebody gives you a lot of pushback, that’s not the agent for you.

Ashley:
Yeah, so I think looking at these three options you have a lot of work you have to do to actually know what’s best for you. As Mindy mentioned, building out your buy box, what you want into a property, and you can go to biggerpockets.com/ricky resources where we actually have a template there to help you build your buy box. We’re going to take a final ad break and we’ll be right back. Okay, let’s jump back in with Mindy. Our next question is from Morgan. I’m looking for advice. I bought a flip in September, 2023 and it has not gone well. But beyond that, my lender and I both got the final appraised value wrong and the value has dropped since September, 2023. So in short, my lender is telling me my only option is to bring $30,000 to the table to refinance. I don’t have 30,000 to drop on a refi.
Any ideas on a creative strategy to handle this one? I can’t think of anything, but I’m hoping someone in here has experienced something similar and has an idea. So this is not a great situation to be in where your property did not appraise to what you thought it was. So to set the table here, it looks like someone borrowed a short-term loan, so often called a bridge loan where they used it to fund the deal and now they have to go and refinance the property with some kind of long-term debt on the property, able to do that to pay back their short-term loan. They will have to bring $30,000 to the closing table when they do their refinance. And this could be the new loan they’re getting, they’ll only lend 80%, 70%, 75%, and there’s not enough equity there to keep that 20% in the property where he would have to bring another $30,000 for them to lend that 80 or 70%, whatever that is. So Mindy, what would be your first move here if you were in this situation?

Mindy:
I would look long and hard at this property. What went wrong during the rehab? Did it just go on too long? Are they paying more fees and penalties because they took out a short-term loan and had to extend it? The final appraised value incorrect. Sometimes that happens. The market changes. You just guessed wrong. I hope you didn’t guess. I hope you did this with numbers. But from September, 2023 to February, 2025 is a very different market that we’re looking at. Can they just sell it and walk away? Do they still have to bring the 30,000 to the table if they just sell because they’re talking about refinancing. So I think they did get a short-term loan, which has the higher interest rate and the penalties and fees for extension. I wonder if this property could be turned into a medium term rental or even a short-term rental for the foreseeable future just to generate some more income.
How close is it to a hospital or to a corporate center? I have had a lot of success with a medium-term rental. Just people want to get away from their hot weather in the summertime. So they come up to where I’m at where it’s not quite so hot or it’s not quite so cold in the winter. So they come and visit in the winter or they’re just moving to my town. There’s a company called a LE solutions.com, which is a company that places insurance, what is it? Insureds who have had an issue with their house where they can’t currently live in it, like the house burned down or it flooded or something. They need to live someplace else. They will place people in your property and pay you kind of a higher rate because they do either month to month or three months at a time, rental agreements.
And then when they’re done, they’re done. They just let you know, Hey, we’re out now. So they don’t really give you a lot of notice, but they will pay a little bit more for the inconvenience of having not a lot of notice looking at different options. But this goes back to the very beginning. Before you buy a property, you should have multiple exit options. And I know that you guys have talked about this on your show, but if you’re buying it to flip it, what happens if the market changes and you can’t flip it? Does it work as a long-term rental? Does it work as a medium term rental? Does it work as a short-term rental or is it really only a flip? Maybe that’s not the right time to, that’s not the right house to buy. So I hope there’s other options. I mean, we have a housing shortage. There’s lots of opportunity for long-term rentals. It might not make the money that you need it to, but if you’re trying to refinance, I mean selling it might just be the best option for you.

Ashley:
So I think just a couple things to add as to talk to the lender that you got the short-term loan from and see if there’s any way to renegotiate. Sometimes that’s a better option, them having to go through the foreclosure process in New York State, it can take about two years for the foreclosure process to actually go through. So this could be an option for the bank to want to negotiate with you and to see what kind of deal they can make out. But yeah, it’s definitely a tough situation to be in. And you don’t want to put yourself in a situation like this. So before you even go into a deal, like Mindy said, have a way to pivot or have a separate exit strategy in place, or have those big reserves so that if you do need to bring money to the table and you refinance, or even if you go and sell it, Tony tells all the time about a Shreveport property where when he sold it, I think it was $30,000 that he had to bring to the table too when he sold the property because he owed more on it than what someone was willing to buy it for.
And he was able to do that because he had reserves in place. So just a couple of lessons learned from this person’s experience as to the ways you can be proactive by having reserves in place or a way to tap into money. In our last question, we talked about lines of credits, things like that. Money, borrowing money from your 401k to pay that 30,000 as painful as it may be to give up that money, that hard earned money, it may be something you have to do.

Mindy:
Yeah, and when you are going into renegotiate with the lender, have all of your finances there so you can show them. If you truly do not have $30,000, show them that you truly do not have $30,000. Most of these lenders, I would in fact say all of these lenders don’t want to own your property. They don’t want to repossess your property. They want to work with you. Maybe you could negotiate to pay this on the backend after the market improves when you finally do sell it or work out some sort of longer payment plan, but be honest and upfront with them because it doesn’t do you any good to hide any of this. And if you can’t do 30,000, maybe you can do five or 10 or whatever you’ve got available. But yeah, having reserves is key, which doesn’t help Morgan, and I’m sorry about that, Morgan, but start looking at the other opportunities to rent it out and see if there’s any other ways that you could handle this property.

Ashley:
Ricks, we want to thank you so much for being here and listening to the podcast. As you may know, we air every episode of this podcast on YouTube as well as original content. Like my new series, Ricky Resource. We want to hit 100,000 subscribers and we need your help. If you aren’t already subscribed, please head over to our YouTube channel, youtube.com/at realestate rookie and subscribe. Well, Mindy, thank you so much for joining me today on Real Estate Rookie and besides the BiggerPockets Money YouTube channel and podcast. Where else can people find you and reach out to you?

Mindy:
I am on all social media at Mindy at bp, so that’s M-I-N-D-Y-A-T, BP like BiggerPockets.

Ashley:
I am Ashley, and she’s Mindy. Thank you so much for joining us for this episode of Real Estate Ricky Reply.