Where do I fit in the Set For Life schema?

Question

Hi all,

Just getting started here.  I recently finished reading Set For Life by @Scott Trench and wanted to get some feedback on some good approaches to take, from that perspective, for someone starting later in life with some equity but negligible liquid cash.

Here's some stats on where my wife and I are right now financially:

• My wife and I are in our late 30s, no kids at the moment, but that is likely changing very soon.
• ~$250k in equity in our small condo in Boulder, CO (worth about $530k right now) - we owe about $280k for 12 more years of a 15 year refi
• Emergency fund worth of cash (a bit low) and some insignificant retirement accounts ($10k and $30k, respectively)
• "Good" self-employment income, around $150k for both of us (it's all relative and that feels like pennies in Boulder)
• About $20k in credit card debt which should get paid off in a matter of a few months (we had some extraneous expenses in the recent past; long story; "won't happen again")
• About $16k car loan on my wife's Real Estate Mobile (she is a RE agent here in Boulder)

I feel like we're the "Sam" character in Chapter 12 of the book - classically calculating our net worth looks OK, but calculating our "Real Net Worth" comes out depressingly negative.

We really want to get started in REI, but of course we need to pay off our credit card debt and probably the car loan and save up $X first.

Right?

Or, since we have equity, can we jump ahead in the schema somehow?  Would it be stupid to get a rental property in the near term before we save up, say, $100k?  We don't want to leave our condo for at least 2 more years, but would love to get started before then.

My main question: How would you recommend I view our scenario through the lens of Set For Life?

(I'm sure I'm forgetting some detail that might help the math, so please ask questions.)

Thanks in advance!

Mindy Jensen · Answer

Living in Boulder with such a paltry income (again, for Boulder) will definitely hold you back. How attached are you to Boulder?

While I am partial to Longmont for obvious reasons, there are other, more affordable places to live. I live in SW Longmont and could ride my bike to Boulder in under an hour during rush hour. The diagonal has HUGE shoulders.

You could find a SFR in Longmont for under $500 - You could find a DUPLEX for under $500. House hack your way to being Set for Life.

Your wife could be an agent out in Longmont, too or travel to Boulder for showings.

Steve Vaughan · Answer

The simple (but not easy) 1st step for me would be to knock out the cc debt and car loan while your SE income seasons.   I'd list them smallest to largest, cut back on eating out and being cute and punch the smallest one in the face til it goes away. Wind up and hit the next one.

The sooner your keeping up with the Jones's debt is gone, the sooner you can look for property and build wealth.

If your home is your largest asset, you're in trouble. - Robert Kyosaki

Bill S. · Answer

@William Goodrich so it seems to me the greatest obstacle to the Set for Life approach is your current home. Sure, eliminating the debt is one step but your housing costs are probably the largest component of your personal finances. Perhaps you could rent your condo and buy a new home that you can house hack? Not sure what your condo costs per month from the payment perspective or if rent would cover it. You might find someone to do an owner carry on a duplex if you put some money into marketing for such a property. There are options but as you mentioned, they probably don't go through a conventional lender for at least a year or so.

There are local credit unions that will do 100% financing for HELOCs on your primary residence so for short term money that might be an option. I echo the concerns mentioned by others with regards to the downside of HELOCs.

Waiting and learning and watching the market is not always a bad thing. I would say explore and learn about the creative side of real estate. Your wife being an agent can create tunnel vision because there is a part of the real estate market that most agents are completely ignorant of which is to their detriment. For example, a house selling for a 5% discount on the MLS is considered by most agents as a great deal. Buying direct from a seller without an agent at a 5% discount puts 1% more in the seller's pocket so is a pretty easy deal to close and finding someone to agree to that is not at all hard. The reality is that it's pretty straightforward to find a 10-15% discounted off market deal with some hard work.

William Goodrich · Answer

@Mindy Jensen she does a lot of her work in Longmont already actually and we're considering a duplex option out there, but they seem few and far between.  Will keep an eye out though.

Our biggest issue is qualifying for a conventional loan right now.  We both have self employment income only and, as an example, had 9 different income streams last year.  So far we've been told we won't qualify until at least after 2018 taxes are submitted.  So, I guess we'll have to wait regardless.

@Terry Lao, thanks for the tactics.  I will look into those options to get ahead a little sooner.  I think, as I mentioned, our main issue is being stuck without W-2 income for now.

Or... maybe I should be looking for a private money lender?  It seems so unfortunate we can't tap into our equity to really get rolling, but that's what we've been told so far from conventional lenders.

Benjamin Wishart · Answer

• Financing up to $3 Million 
• 12 or 24 month bank statements or asset depletion to qualify
• Down payments as little as 10%
• No tax transcripts or tax returns required
• Credit scores starting from 620

Craig Curelop · Answer

@William Goodrich - First thing's first, pay off your credit card debt! I would argue that you use your emergency fund to pay it off. Then if a real emergency comes up, you can use the credit card and pay the exorbitant interest rates.

Car loans typically have lower interest rates so paying this off immediately, is totally up to you. If you have a 3% car loan, there is a high probability you can achieve those returns (and more) elsewhere.

I would suggest moving out of Boulder and try to find a house hack somewhere you like. You stay in the house for a year and then you can maybe live in a more conventional place once the baby is born?

My suggestion would be to take the tips in Set for Life and do your best to reduce or eradicate your largest expenses... housing and transportation. Pinch your pennies and save up for a down payment so you can house hack and open up a plethora of other options.

William Goodrich · Answer

Thanks again all.

@Steve Vaughan, I know that's the smartest most conservative approach which is probably right, but I'm just anxious to "get started" when we seem to have some relatively accessible wealth in our equity.  ...and enough income to pay down the debt simultaneously.

@Chris Lopez, we've talked to three lenders and all three have not gotten very creative at all.  The same story: come back and talk to us in a year or so.  Our personal and 3 business accounts are at First Bank so I'll go in there to speak to someone for sure.

@Omar Khan, Boulder is definitely holding us back.  We'd love to keep our condo for the long term, which is a hindrance to moving forward, but we love the idea of coming back here in 30 years.  One option for us is to move to Louisville, KY where my wife's family is.

Chris Lopez · Answer

@William Goodrich

How many lenders have you talked with? Please tell me it's more than one and not all from big banks! Have you reached out to local lenders?  Also talk with some commercial lenders (First Bank) as well. The terms won't be as great, it beats not being able to buy a property.

Omar Khan · Answer

@William Goodrich 100% agree with @Jay Hinrichs. HELOC can be a good source of liquidity but are callable and apt to be frozen during corrections i.e. at exactly the time you need more liquidity, the party stops!

As @Mindy Jensen has pointed out, one of your biggest costs is the cost of living in an expensive area. If you can suck up the commute - move. After living in Toronto and Calgary, I can tell you how weirdly cheap DFW feels (long-term DFW folks feel differently).

Jay Hinrichs · Answer

I will let the CPA's of BP chime in but i think part of the new tax law was no write off on helocs in excess of basis.. I could be wrong on that.  also I caution folks on helocs.. just simply because they can be called or frozen.. so want to know exactly what you doing with those.

Its pretty in Vegas today 87  blue skys winds out of the southwest to 20 knots. :)

Where do I fit in the Set For Life schema?

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