Tuesday, December 6, 2022
HomeSoftwareFirst Down Market? Here’s How to Stop Stressing

First Down Market? Here’s How to Stop Stressing


Tech stocks were slam dunk investments for the past decade. No matter what you invested in—Google, Facebook, Amazon, or even some obscure AI toaster company—you probably made decent returns. But, after years of continuous economic growth and massive government stimulus, tech stocks are finally starting to get shaky. The problem? New investors like Zoe have huge paper losses on their dashboards. But is this worth worrying over?

Zoe is an ideal investor. At just twenty-four, she already has close to six-figure wealth, with a house hack, a respectable retirement portfolio, and a solid income every month. She’s making the right moves but feels like some of her most recent choices haven’t hit the mark. She dabbled in stock picking as her income went up, investing in some of the biggest names in tech over the past few years. Her house hack, which is almost letting her live for free, was bought at the top of the market with an average interest rate.

Zoe needs to know what to do next. Should she sell her tech stocks and invest the money into index funds where she can let it ride? Should she buy a new house hack that allows her to live for free instead of at a discount? And where should she put the thousands of dollars she’s saving every month to ensure her a life of financial freedom in the near future? Zoe has some enviable problems, and on this Finance Friday, we’ll be solving them!

Mindy:
Welcome to the BiggerPockets Money Podcast, Finance Friday edition where we interview Zoe and talk about how to invest for the future.

Scott:
The tool I would recommend there for you is a one page investment philosophy, and I think that to put that together, you have a lot of homework to do because the investment philosophy follows you for a long period of time and you’ve got to make some hard choices when you get into that. If you had come in and said, I believe in Google, Amazon, Facebook for these reasons, and I have these stocks, I think that over 30 years they’re going to do phenomenally well and I’m ready to ride the ups and downs that come with investing in tech stocks in good times and bad, that’d be totally fine. That’s not your viewpoint. You’re like, I invested in them because they’re the type of list in Robinhood and now that they’re down, I want to pull out. That means that that philosophy is not yet developed.

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and with me as always is my forward thinking co-host Scott Trench.

Scott:
That was an introduction for the future, Mindy. That was terrible. Whatever. We’ll just keep going.

Mindy:
They can’t all be winners, Scott. 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 are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments and assets like real estate, start your own business or come up with an investment philosophy. 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 am excited to talk to Zoe today because I think she’s facing something that a lot of people are facing for the first time, a downward trending market. And I really want to hammer home the thought that just because your stocks are down, just because your portfolio total value is down doesn’t mean you have lost money unless you sell the stocks. And yes, you have sort of lost money. Help me figure this out, Scott, help me enunciate this correctly. Because you haven’t lost money unless you sold, you still own X number of shares of this individual stock or that index fund. It’s just not worth as much as it was last month.

Scott:
At least in the accumulation phase of building wealth, you never spend the principle, so if I invest a hundred bucks, I’m never going to spend it. It’s just not part of my life. It’s not something I consider as part of my wealth or that I that I’m able to access. I’d only ever spend the returns generated by that hundred dollars. So the dividends for example, or the appreciation over the long term, but I’m going to stick with that investment for 30 years or maybe forever.
I may never sell the index funds that I purchase, and so, am I going to lose money? Sometimes the paper value of that will go up or down, but I just keep buying, right? Who we interview Nick Maggiulli a few weeks ago, he wrote a book called Just Keep Buying. That’s literally the title of the book and it tells you all you need to know about my index fund strategy and my real estate strategy. Now, real estate, you do have to sell at some point because you lose the depreciation benefits and there are tax reasons, so you can’t hold it for more than 27 and a half years. But if that didn’t exist, I would literally hold my properties until they fell down as well, because that’s my investment philosophy.

Mindy:
You can hold them if it’s a great performing cash flowing property, you don’t have to just sell it because you can’t appreciate it anymore, Scott.

Scott:
That’s true. Yes, but I will probably sell it because the ROI does get compressed when you have to start paying a lot more in taxes.

Mindy:
Yes, but the way you phrased it made it sound like you have to sell after 27 and a half years.

Scott:
That’s true. Yeah. Anyways, yeah, and that’s the big piece here and I think that’s hard to accept until you’ve really internalized your investment philosophy and that takes dozens, maybe hundreds, maybe thousands of hours of reinforcement of your investment philosophy through books, read different perspectives. I told Zoe our guest today to read books on how to pick stocks and books on why index funds are so valuable because that will help solidify whichever approach she chooses to take.
I’ve read them both and I’ve decided that index funds are the approach that are best for me. And because I have that perspective and because I believe I have at least a journeyman’s baseline understanding of how to pick stocks, I’ve decided to invest in index funds and that allows me to stick with my approach for the long run without having to be fearful in a market like 2022.

Mindy:
Yep. I think that your investment philosophy sheet is really helpful or will be really helpful for people who are experiencing their first down market. If you don’t know what you’re investing for, if you don’t know what your philosophy is, you’re going to have a hard time weathering the storm. Also, if you are having a hard time weathering the storm and you are a buy and hold investor and you don’t plan on selling your stocks, stop looking at your portfolio. If you’re not going to sell it anyway, what does it matter if it’s down a dollar today or up $2 tomorrow, stop looking at it until the market evens out.
Before we get into today’s show, let’s take a quick break and we are back. Before we bring in Zoe, let’s remind you what my attorneys make me say. The contents of this podcast are informational nature and are not legal or tax advice and neither Scott nor I nor BiggerPockets is engage in the provision of legal tax or any other advice. You should seek advice from professional advisors such as CPAs and accountants and attorneys before making any financial decisions. I think I did that pretty good for memory.
All right, let’s welcome Zoe to the show. Zoe is our guest today. She’s single and looking for steady income to cover her expenses and also help with her parents’ retirement. She’d like to live in a big city, which means a higher cost of living, but she lost money in the stock market due to inexperience and lack of research, which is something that happens all the time. So I hope she hasn’t beat herself up over that. Before we chat with her today, let’s look at her money snapshot. Here is a general view of where her finances are. We’ve got a salary of 5,100, yay Zoe, plus additional income of $1,400 a month from her house hacking roommates and $200 additional for utilities.
She’s projecting a 10% bonus from work and she has a side hustle that brought in $2,500 in October that is lumped together to bring us a nice great big total. Now, she sent in her expenses, but honestly they total up to $3,300 and I don’t see this as being a big problem for Zoe. If these expenses are accurate, this is a great amount of expenses for her in her situation. Of course you can always cut out expenses and you can always reduce expenses, but Zoe has a delta of $1,800 before the 1650 from her roommates for their portion of the housing expenses. So again, I don’t think spending is her problem. My advice here would be just to make sure that these are your true expenses and that if you do have approximately $1,800 left over at the end of the month, then these are your true expenses. If you have significantly less than it’s time to start looking at where your money is actually going.

Scott:
And I’ll just point out a few things there as well to follow up on what you said, Mindy, we have 1450 a month coming from house hacking roommates and a mortgage of 1630. So you’re paying $200 to live plus your share of utilities essentially, and that leaves all the other expenses that are adding up to the 3,300. So I mean you’re spending less than what, $1,700 a month on everything besides housing and 200 a month on housing. It’s phenomenal situation. So I think we’re going to have a lot of fun today. You’re going to have a lot of really good options.

Mindy:
Yeah, I think we have a lot of fun today. Zoe did send in a detailed spreadsheet, so I am fairly certain of her numbers here, more of a comment to those who are listening. Something I see frequently is people think that they’re spending X, but then they also don’t have any money left over at the end of the month. And if this is the situation you find yourself in, I encourage you to track your spending as granularly as you possibly can to make sure that you are in fact spending that much. What we find frequently is people forget about, oh yeah, I’ve got that one expense and that one expense and all of a sudden there’s where all the extra money is being eaten up.
Zoe’s also doing really good on the investment front. She has a current 401K of $1,500, but that’s because she just started a new job. She has Roth IRA of $15,000, Roth 401K of 2,900 ESPP employee stock purchase plan of $200 right now. But again, brand new in this, a previous Roth 401K of $15,000 two after tax brokerage accounts that are approximately $20,000 and cash savings of $31,000. So she’s sitting really pretty.

Scott:
Plus the house hack.

Mindy:
Plus the house hack. I mean, yeah, we didn’t even include that and we don’t have equity in that investment. We have equity, we don’t have it listed here. So Zoe, let’s look at your money story really quickly. How did you get to this phenomenal position and what on earth can Scott and I help you with today?

Zoe:
Yeah, so I grew up, I would say below the poverty line and so expenses and money problems was always prevalent in my early life. And so seeing my family struggle and pinch pennies and not having a clear goal or idea where they want to be really resonated with me. So I guess early on I was always really careful with what I spent my money on, always negotiating expenses and so as a result I’ve kind of really put myself in a position where I’m always thinking about how can I make sure I will never go in reverse, essentially. Make sure that I will never be in a position that I was growing up and making sure building wealth for I guess future generations to come in my family.

Scott:
Awesome. How long has the current situation been going on? Could you give us an overview of the recent past you you’re saving $3000, $4,000 a month it seems like when your side hustles are kicking in and has that been continuing for a long time or is that a relatively new phenomena?

Zoe:
So the side hustle started in September. So before that I wasn’t saving as much. I was closer probably to the 2K mark, but now with this additional income, I’m really struggling to decide where should I put my money and can I move on to better things, move to a bigger city like Mindy spoke to. When I graduated in 2019, I only had 5K to my name and I think 3000 of it was in a CD account so I couldn’t even touch it.
And my first position that I had a career-wise, they had us go to essentially a convention for onboarding and you’re supposed to pay for your own expenses and they would reimburse you in the next pay period. So I remember being scared because I had almost three grand on my credit card and I was like, how am I going to pay this off? How am I going to last until I get reimbursed for everything, like the plane ticket, the stay, the hotel expense, the food? And so that was kind of a wake up call, like okay, this is what it’s like to go out into the corporate world, you know, really got to focus on how you’re going to be able to give yourself that cushion. So I’m never going to be in that position again of fear.

Mindy:
I like your mindset, I want to call out all the employers that make you do this. This is so stupid. If you are hiring fresh out of high school or fresh out of college graduates, don’t make them buy their own plane tickets. That’s just mean. Okay, sorry.

Scott:
From the employer perspective, I’ll just say that sometimes employees prefer that because they get to rack up, all the credit card points and they’re getting reimbursed. So yeah, I think it’s wise to provide the option either way.

Mindy:
Yes, the option, I prefer it and I’m kind of miffed that BiggerPockets took that away recently. However, I also am not right out of college. I know it’s hard to tell, but I graduated from college a couple years ago.

Scott:
So your employer wasn’t evil, it just scared you in that situation. But that’s a really good reason to be like, you know what, I’m never going to have to worry about that again. I don’t think you will have to ever worry about that again, by the way, as we get into your numbers here, I think that’s immediately clear from the financial profile you’ve shown us so far.

Zoe:
That’s what I like to hear. Yeah.

Mindy:
Okay, well let’s talk about that initial Robinhood and E-Trade investment that you think you lost money on. Did you sell the stocks or did the stocks just go down? Because right now everybody’s losing money and it’s losing money in air quotes you still own X number of shares, it’s just worth less than it was a year ago or six months ago or whatever, but you don’t lose money until you sell. So did you sell or what were you doing with this investment?

Zoe:
That’s a good question. So I’m a buy and hold kind of investor, so I have not sold and that’s one of the questions I was going to ask. Like hey, these are all losing money, should I sell and try to invest in something safer like an index fund versus the kind of ignorant decisions I made early on with my investments. So yeah, haven’t, I’m just holding onto them.

Scott:
What are your investments? Can you give us a very quick overview of what got you into those investments, why you chose them?

Zoe:
So I think the breakdown is I have 91% in stocks, 4% bonds and 5% in crypto. So Bitcoin.

Scott:
Which Stocks?

Zoe:
So I would say the majority is in ETFs and then I would say the Robinhood amount is in individual stocks. So big names like Google, Amazon, and then when I first started, I think Robinhood has a list of top stocks to invest in were most popular and that’s kind of what I looked at and I would briefly look at the profile and Yahoo Finance and oh think this is a great investment and buy some of that stock and that’s kind of the early mistakes that I made.

Scott:
So most of your loss, so you had previously $14,000, $15,000 in Robinhood, now you have $8,500 because of a big drop in Google, Amazon, other of these name brand tech stocks, is that right?
Yeah.

Zoe:
Okay. And then the E-trade portfolio, you lost less, you had 15,000, now you have 12 and a half, 15, 16, now you have 12 and a half and that’s because those were largely an ETFs and index funds.
Only ETFs. I think only my Roth IRA has mutual funds because that’s the first thing I opened when I graduated was my own personal Roth. But all my recent investments have only been in ETFs.

Scott:
Awesome. If you were to assess what is the total number of hours that you’ve spent learning about investing?

Zoe:
I’ve been listening to BiggerPockets for the past two years, so once a week, that’s probably less than two hours a week.

Scott:
But you spent about a hundred hours learning about money but not really. How about specific to stock investing?

Zoe:
Oh, so I went to school for finance and so I kind of have an idea of how to read the numbers on Fidelity, understand what that means and some YouTube as well. So just watching some general videos and just my experience from school and what I learned in class and that’s just kind of how I did it. Also, when I first started, when I first got my 401k, I looked at Fidelity and they have ratings, so I ignorantly kind of trusted those ratings. Okay, this is rated really high so it would be in good, a good investment. But looking back I should have done further research into those, not just like what is just rated as popular or as a good investment, but really understand what historically has been the best investing strategy and what performs the best historically versus a short term period.

Scott:
Well I think there’s two issues here with this and I think again, your personal situation is fantastic because you’re spending so much less than you earn, you’ve got a great income, your house hacking, you have the side hustle that’s adding up to it, you’re going to get rich. You just need to figure out where you want to put that money from an investment standpoint. And that’s what I think you’re struggling with at the highest level is you don’t know where you want to allocate all of these funds. I think that your first issue you brought to us was asset allocation, which is exactly right. And the tool I would recommend there for you is this one page investment philosophy and I think that to put that together, you have a lot of homework to do because the investment philosophy follows you for a long period of time and you’ve got to make some hard choices when you get into that.
It’s not just like, oh, I’m going to buy some Google, that’s great, that’s what Robinhood says, that could work, but it’s not something that I think you’re able to live with. If you had come in and said, I believe in Google, Amazon, Facebook for these reasons and I have these stocks and I think that over 30 years they’re going to do phenomenally well and I’m ready to ride the ups and downs that come with investing in tech stocks in good times and bad, that’d be totally fine.
That’s not your viewpoint. You’re like, I invested in them because they were the top of the list in Robinhood and now that they’re down I want to pull out. That means that philosophy is not yet developed. So I would recommend that first you start with the framework, I’m going to get started and I’m not going to diversify, right?
I’m going to pick one asset class and I’m going to go heavy in that asset class for the first few hundred thousand dollars in net worth. Why is that? Because diversification is a great, great way to protect wealth, but I think it’s a less good way to build wealth. Now people will disagree with me, but I really like the real estate house hacking that you’re doing. I personally like index funds with that. That gives me heavy exposure into real estate and stocks, very little exposure in other markets. I don’t bother to pick stocks personally, but you could. So if you were to look at my investment philosophy and I actually posted a template which we can put in the show notes here and I’ll send to you after this. It says in five years I want to have multiple asset classes, stocks, real estate, private businesses, BiggerPockets.
I do want to get into lending at some point, but I did these one by one heavy, heavy real estate for the first 5, 6, 7 years because I felt that house hacking multiple times was a really powerful way to build wealth. But I’m 95% real estate while I’m doing that slowly moving into other investments. But I think that you need to build to frame something like that and that’s going to take some research. So I have four books to recommend to you on that topic and I’ll send you all four of these books, the titles with them. One Up on Wall Street by Peter Lynch, The Intelligent Investor by Ben Graham. If you studied finance, that book was very, very dry, but very, very important. Those books will tell you how to pick stocks, which I don’t recommend, but I think you need to learn that in order to feel comfortable with your investment philosophy, you need to see what the experts who have advice on that have to say.
And then I think that the other two books I recommend are a Simple Path to Wealth by J. L. Collins and a Random Walk Down Wall Street by Burton Malkiel. And I think that those four books will help you get a really strong grounding. And if you read those four like I did, you might come to the conclusion that index fund investing and putting all the that into Vanguard or Fidelity in one of their total market index funds is the right approach. But that at least give you the framework to approach the problem from a position, a belief set that you can actually invest with for many, many years.

Mindy:
So I have a slightly different approach. I still believe in real estate like Scott does. I still believe in index funds very much, but my husband and I invest in individual stocks heavy in the tech sector. All of the ones that you listed, some of the ones that we have, we have others as well. But here’s the difference, my husband wakes up in the morning and reads every article that came out yesterday about every stock that we own and every company that he finds interesting, he reads, and let me tell you how much, I don’t want to hear more about Tesla, I talk about this a lot because he talks about it a lot, but I would not feel comfortable investing in individual stocks if I was the one driving the boat 100% because I’m not willing to do the research, I don’t have the time, I don’t have the inclination, I would just set it and forget it with index funds.
He is fascinated by this. He wants to invest in the individual companies, he does the research. So another thing to think about is I don’t think you’re doing a bad job picking individual stocks, but I think you need to have, like Scott said, I think you need to have a reason for picking them. So I’ve been invested in Google since their IPO and it’s been a great, mostly up, but every once in a while it goes down stock, it’s a tech stock and they’re volatile more so than your blue chip stocks.
But another thing to think about is we’ve had what a 12 year run up and there’s been some downs but it’s been up, up, up this is a more, I don’t want to say more normal market, but the market moves up and down a lot and if you’re in it for the long term, stop looking at your stocks, that’ll give you a lot more peace of mind.
Just you want to hold onto this stock for a long time, then buy it and then don’t look at it again and then buy more and don’t look at it again. I mean even index funds are going to be volatile, but if you believe in the long term strength of the United States economy, which I do, then you will see it go up. I truly believe that the stock market will go up again and past performance is not indicative of future gains, but I do believe that the stock market will go up in the future.

Zoe:
Yeah, that’s helpful. I think going off of that, I have some mutual funds and I bought them early on and I didn’t really look at the expense ratios. I was thinking like oh 0.9%, that’s nothing. But then now I’m switching over to ETFs and the expense ratios are much lower like 0.03. So I’m thinking I would like to buy and hold, but is this to a point where I should sell now and reinvest what I can recoup into lower index funds because as I’m waiting for the market to recover, I’m paying these expense ratios over that period of time.

Scott:
So first we need a long-term plan in three to five years online portfolio to look like this, not like this. You need to be able to articulate that and that’s where the investment philosophy comes in. And starting with the end in mind. You’re already doing half of this right. I’m almost all of it. You have a strong cash position, you’ve got Roth, you’ve got a heavy Roth allocation, you’ve got after tax stocks, you’re building a position that’s going to support financial freedom if you continue what you’re doing with this because your asset allocation, you need to pick the investments that you’re comfortable with.
If you decide that index funds, for example are the way you want to go, then yes, I like the idea of taking the opportunity now to sell these high fee actively managed mutual funds and move that into passively managed index funds because you’re probably not going to have a big capital gain problem from them going up in value. If you’ve been doing this for 10 years, you might have to harvest $200,000 in capital gains and move it over. I don’t think you’ll have that problem, although you should do the math and check. You’ll have some homework there.

Mindy:
Yeah, I just downloaded Scott’s investment philosophy one page template and I think this is going to be really helpful for you to go through and fill out and it’ll help guide you when you are choosing your investments in the future.

Zoe:
Yeah, I think if I could start over, I would just dump all my money in index funds for long-term goals. I can change all the mistakes I’ve made in the past. And so I guess that’s kind of what my issue is now is like do I take action now or do I wait to see before I can change my portfolio to match what my goals are?

Scott:
I think now’s a great time. I think you probably have a loss, so sell, take the loss if you have one, do that homework first and move it into the investment that you believe in, right? Only don’t do that if there’s some sort of barrier, like a large capital gain you have to harvest and think about from a tax perspective, which I doubt will be the case in this situation. So I think you could easily do that now and you’ll have a benefit tax benefit if you do it correctly. That might play out in future years.

Zoe:
To offset, like the loss to offset the gains.

Scott:
You came to us with three questions, asset allocation and then the second one was around maximizing your revenue streams and the third was around reducing taxes. Let’s talk about the revenue streams. Tell us a little bit about your job, your real estate, your and your site hustles.

Zoe:
Yeah, so I work as a financial analyst for an exchange operator and I love my job. I have no intention of really leaving. I’m interested in moving up in the company and it’s a really great company to work for. I have a pretty flexible schedule and it allows me to pursue interests outside of my nine to five. And as a result I attended a lot of networking events like local real estate events, meeting, even people who have been on the BiggerPockets podcast will come to Kansas City and have a speaking engagement.
So all of those activities have inspired me to essentially pursue real estate. I started with my owner occupied home that I’m house hacking and the reason I have such a large cash reserve was because I was trying to buy an investment property and I kind of backed out of that deal because I just trusted my gut, ran the numbers as a long term rental and it just didn’t work out out.
So I kind of exited that opportunity and at this point I’m not really pursuing it unless something falls in my lap and so I doubt that’s going to happen. And now trying to understand what should I do with such a large cash reserve because it definitely covers my expenses for up to a year and just trying to understand what I should do with excess.
As far as my side hustle, I work for real estate syndication, it’s a team here in Kansas City, so essentially I’m their intern. I work about 10 to 15 hours a week, sometimes more, sometimes less, just doing it outside of my normal hours for my W2. And it’s been a really an eyeopening process to deal with tenants and to deal with underwriting and sourcing deals. I think these were all issues I had on my own. How do I understand the numbers of this property?
If I see something I like on MLS, how do I know if it’s going to work? And so that deal analysis was something that I kind of struggled with and that’s kind of why I do regret this home purchase. It wasn’t the best purchase line of numbers now that I look back at. Initially wanted to buy duplex with an FHA but there was just none on the market and I didn’t really understand how to look for off market deals or how to pursue those.
So I just feel like I kind of settled with the home that I bought. I pay HOA and they have restrictions, so definitely would not want to pursue another real estate investment inside an HOA. And with my roommates I looked at just market rents for my area and just kind of settled on a number and it’s been good so far. It pays for most of my mortgage. I think my total monthly payment for both my mortgage and utilities on my end is around 600 to 700, 700 being the max I’ll ever have to pay just from what I look at utilities and such. And I do pay a little bit more principle for my monthly payment. I’m just wondering if I should contribute more.

Scott:
Walk us through the numbers on this deal because I think that a lot of folks, myself and Mindy included are going, what is she talking about? This sounds like a great housing choice and house hack move. What are the numbers and why do you think it’s not ideal?

Zoe:
So I would say I kind of bought towards the end of when interest rates are great, I have a 4.875% and if I would’ve started earlier or maybe if I should have waited and held all my cash on hand to even have a larger cash reserve to contribute to something more like cash flowing or higher appreciation just because I feel like I kind of overpaid. I think I went 20K over and it’s technically a town home, so it’s not a single family, it’s not going to appreciate as much and there’s so many rules with the HOA, so it’s more a little bit both. I would’ve ideally liked a situation where roommates covering my entire mortgage, not just some of it.
And also the area, it’s a very good school district is what I found, but that’s not kind of what I’m looking for. I don’t have kids, I don’t need to be in a good school district. Instead I can buy the beat up house on the Missouri side and be able to put more money into it and get a higher return or build even more equity for that home.

Scott:
Your mortgage payment’s? $1,630, right?

Zoe:
It’s $1,630, my HOA is 10 and I pay an additional $46 to even it out to 1800 a month.

Scott:
Interesting. And what would the rents be if you moved out?

Zoe:
It really, I think depends. If I were to rent out each room individually versus the whole house, I think I would definitely get more if I were to rent out each room by itself versus into an entire family. I think market rents are 1,900 to 2,100 and I have three bedrooms and two nonconforming. So other goals to finish the basement. But there is a rule in the county that I live in that you can’t have more than four unrelated persons living inside a home. So there’s that to be aware of as well.

Scott:
What do you think you’ll get for rent by the room?

Zoe:
If I were to move out, my room is the largest, it’s the master and I have a master bath and it’s furnished, so I’m thinking I could probably get 1100 to 1200 a month for.

Scott:
So you bring in 2,500 without even finishing the basement.

Zoe:
Actually one of my roommates does live in the basement. She has cats, so she’s nervous that they’re going to scratch up the carpet in the upstairs bedroom. So I have a guest bed. So it’s not being used.

Scott:
You have, in my opinion, a very satisfactory investment. I don’t know if it’s going to be a home run or not. A lot of folks are scared. Everyone’s scared about their first purchase in 2022. You’ve got a good interest rate. Not the fantastic one we had two years ago, but a good one, not one that’s as high as currently. You have the ability to cash flow this. If you were to move out in a substantial way without having to finish the basement, you have more opportunity if you do finish the basement and you are sitting real pretty, in my opinion, in this particular investment you bought with a position of financial strength, I would not be fretting over this decision. If you keep making mistakes like this, you’re going to become a millionaire pretty quick.

Zoe:
In hindsight, I wish I would’ve bought earlier. I wanted to get my credit score to 740 to get the lowest rate, but because I waited for the six months that it took to get to that 740 mark, I lost out on a 2% interest rate. So in hindsight, I wish I would’ve started looking earlier even though I had an apartment lease and I would’ve had to break it, but it would’ve been worth it.

Scott:
I think we all wish we bought more earlier.

Zoe:
Yeah.

Mindy:
Yes. But you are learning by doing. Scott says maybe this isn’t a home run. I think this is at least a double and probably a triple. This is a good investment and yes, your interest rate is higher than 2%. Well so is mine and I work here. Don’t beat yourself up about this, but you are doing so you’re learning how to be a landlord. You are learning how to be a property owner and then now you know what you want and what you don’t want. Oh, you know what? I wish I would’ve done this. So the next time do that. When did you buy this property?

Zoe:
Around my birthday. So I think May 12th.

Mindy:
Of this year?

Zoe:
Yeah.

Mindy:
Okay. So you can start looking again for a property when the new year turns, maybe in February

Zoe:
Counting down days.

Mindy:
Start looking and see what you can find. You wanted a duplex and you bought a townhouse in an HOA. So don’t look for townhouses in HOAs, look for properties that are duplexes and just wait for that to pop up or keep an eye on single family homes that have the ability to finish off the basement and then you can rent it out to four unrelated people and make so much money that you are living for free and also making money as you are living there for free. I mean you’re doing a really great job on this property and you, you’re too hard on yourself. Be nice to Zoe.

Scott:
Yeah. So Zoe, a couple more questions about this property. You got three bedrooms upstairs and one of your roommates uses the basement for their cats is what I’m hearing.

Zoe:
Well there’s two nonconforming bedrooms in the basement and so she has both of those rooms. One’s for her cats and one’s for her. They’re nonconforming because they don’t have the egress window.

Scott:
How much does it cost to put an egress window into one of those bedrooms?

Zoe:
3K to 5k.

Scott:
3K to 5k. And how much more rent will you get or how much rent would you get if you rented out four rooms, the three upstairs and the two at the bottom as a suite with one conforming bedroom?

Zoe:
I think that’s a personal preference that I don’t want another roommate. I’m happy with two and I think-

Scott:
You’re going to move in February.

Mindy:
She’s going to move in May because she has to honor her one year owner occupancy agreement.

Scott:
You’re going to move in May. So forget about your personal preference right now and treat this as a coldblooded mathematical house ROI decision. You’re gone in May, you have three bedrooms upstairs and you have a suite downstairs. You can’t have five bedrooms because there’s no point in having five bedrooms to rent by the room because the statute prevents you from having more than four unrelated people on the lease. So my thoughts are one bedroom, one, two, and three upstairs, get rented, basement gets finished and becomes a suite with one conforming bedroom on there. How much would you get for rent in that scenario? Does that sound possible or practical given the setup at your house?

Zoe:
Well the two full bathrooms are all on the top floor. So one’s connected to the master bedroom and one is just a hall. So if there were three roommates outside the master, they would all share one bathroom. Essentially there is a half bath, but as long as there’s three roommates who are okay with sharing one full bath, then it would be possible. I think I could probably get 2,800 and just charge a little more for the larger bedrooms to make it even.

Scott:
2,800 for those three units plus more for the master.

Zoe:
Yeah.

Scott:
So that would give you 3,900.

Zoe:
I would say 2,800 in total with the master and then having to reduce the rents for the other three tenants just because they’re all sharing a bathroom.

Scott:
Okay, that’s close. I don’t know how much of a cost to finish the basement and put in that it may not be worth it in that scenario.

Zoe:
I think it’s 15K to 20K I think it was what I was quoted already looked into.

Scott:
Nice.

Mindy:
Are there any rough ins in the basement to make a bathroom down there?

Zoe:
So it is possible to put a bathroom in the basement, but it would be a 10K to 15K investment. It’s a small basement, so there’s not much room to work with. There’s already two bedrooms in there and then just the area where the laundry is. And so there’s not really practical layout, so I don’t think I would put a bathroom down there.

Mindy:
So then in your future properties. Keep that in mind, how can I expand this property so that I can get three roommates in here for one year and then I can move out into my next property and expand that one to get three roommates in for one year and then you’ve maximizing the four roommates in each one to maximize the amount of money that you’re making on each property. And then when you decide that you don’t want to have roommates anymore, you can find your last property and that’ll be whatever you want.

Scott:
Okay, so at the highest level I’m seeing you made a solid investment here from position of financial strength. I’m sure you have some things you would’ve changed about it, but again, this is not a disaster. This isn’t even a mistake. This is going to be I think a reasonable investment for you based on the numbers you shared with us. After you move out, you’re going to have 2,500 give or take in income on 1700 in expenses if you can charge the utilities through to your tenants. So that’s really good. I like that. I would invest that personally. So that sounds pretty good.

Zoe:
I was told that I can’t do a duplex situation unless I have 25% equity in my current home. So if I were to like come May, I wanted to buy a duplex, I would have to have 25%.

Scott:
Who told you this?

Zoe:
A lender.

Scott:
How many lenders have you talked to?

Zoe:
Four.

Scott:
And they all said the same thing.

Zoe:
I really only asked two of them and they said, I believe only one of them said about the 25% if I wanted to do an FHA with 3.5% down in May. And so with my current home I only put 5% down.

Scott:
And what type of loan product did you use?

Zoe:
I used conventional.

Scott:
Okay, so FHA is going to require you to put 25% down in May.

Zoe:
Yeah.

Scott:
That doesn’t smell right to me.

Zoe:
Well like 25% equity stake in my current home, I have to have a 25% equity position in my current home in order to use an FHA loan to purchase a duplex in May.

Scott:
Interesting. Mindy, have you heard of this?

Mindy:
I haven’t, but I think this is a research opportunity right now. Lenders are real open with their time, so I would call up your favorite lender and ask them to explain this to you. Why do I need 25% down? They could be an FHA rule, it could be what this lender specifically wants if only one of them is telling you this. But that is an interesting question. Also, if there’s a lender listening, if you want to reach out to me, [email protected] and explain what’s going on, or we can go over to the Facebook group and at facebook.com/groups/bpmoney and we can chat about this there as well.

Scott:
I am skeptical that that will be the case after you talk to more lenders and we get some feedback. But let’s presume that lender is correct and we have to use 25% down. How much does a duplex in your area cost you?

Zoe:
Oh, I meant like 25% in my current home. So if I wanted to put 3.5% down duplex, I could just need a 25% equity and I only have like 5%.

Scott:
But our other option is for you to put 25% down on the next property and avoid that entirely.

Zoe:
I would say like it’s 3.50, size of a duplex.

Scott:
So that’d be like $75,000 down. So 80,000, am I doing that right? 75,000 to a 100,000. You are saving $4,000 or $5,000 a month now that we have your side hustle in place between all of that. So 5,000 times six is another $30,000. You’re not going to be far away from being able to put 25% down in May. So you’re looking at August to be able to do that just based on the way your cash position is. You could do it sooner if you’re willing to take some of your investments out. So you have opportunities here if you would like to, I mean you have a decision at the strategic level for asset allocation first to make, do I want to be in real estate this heavy or do I want to go into stocks in something more passive?
But if you chose to do real estate, you would have the option to do this with a traditional down payment relatively soon within the next year. So then that’s a luxury of the fact that you have such a strong personal financial position and such a strong savings rate. So you have really good options here is kind of what we’re highlighting and you’ll either be able to do it with another low down payment loan or with a traditional down payment.

Mindy:
I would talk to lenders about all of your options. You are bringing up the FHA loan several times. Is that because it has such a low down payment? I would talk to them about other options that are available to you. I don’t know if there are any USDA locations near where you’re at, but the USDA loan is up to 0% down or down to 0% down. I don’t know how you say that right. That’s the only 0% down loan that I know of that isn’t the VA loan.
The FHA loan is an consumable loan. So somebody who got an FHA loan in that 2% and then needs to sell. You could assume that loan. There’s a lot of ins and outs with regards to that. If anybody is looking to assume an FHA loan, definitely talk to a lender. I need to talk to a lender about this as well so that we can get the information out there correct. But the FHA product is an consumable loan. You do have to bring money to closing to cover the delta between what they had left on their loan and the amount that you’re paying for it. That’s an option.

Scott:
I really like what Mindy’s saying there as an option for you. We’ve had other folks, and I don’t want to get people excited about assuming mortgages in a general sense because there’s risks and creativity things and all that other stuff that you really need to be smart with. But you Zoe are in a strong financial position, save a lot of money, have a good investment property, currently have plenty of cash and are piling up savings on a monthly basis.
You are in position where if you wanted to researching how to assume mortgages for folks and making your next house hack one where you just take over somebody else’s mortgage that maybe that was in that low low rate may be a great option for you to think about if you can be opportunistic in the next year. So I really like that a lot, but I don’t want to get other people too excited about that. If you have don’t have a strong financial position, then you’re just assuming hundreds of thousands of dollars more in risk that you maybe shouldn’t from that, but it’s a good option for you potentially.
Let’s talk about the other income streams for the last few minutes here. Walk us through your part-time hustle with the fund and then your photography side hustle.

Zoe:
My photography side hustle is literally like nonexistent. I stopped doing it earlier this year just because it’s slowly become more work and less more of a passion. I just started it because I wanted to capture family memories and occasionally a friend would ask me to take their photos and that’s what I did. But I’m not pursuing it as a legit side hustle, if you will. As far as the real estate syndication, actually I do enjoy that. There is some difficult parts to doing some of the property management, but it’s been very worthwhile of my time and that’s something I definitely want to pursue if my W2 will allow it.

Scott:
You made $2,500 last month from this activity, right?

Zoe:
It’s kind of like a paid position hourly. So that 2,500 was from September 15th to October 31st. That was the check for that. So normally it is around 1600 a month.

Scott:
Great. And what is the hourly rate?

Zoe:
17.

Scott:
And what do you earn at your day job?

Zoe:
I don’t know what the hourly is.

Scott:
What’s the annual

Zoe:
85.

Scott:
Okay, so your hourly rate at your day job is 42.50. You can just divide the annual by 2000 and that will give you that but that’s assuming you’re working 40 hours so that there’s not a great arbitrage on this, but you’re probably learning a good skill while you’re doing this side hustle. So I like it a lot but I do think that there would be opportunity over time to figure out how do I try to make sure that if I’m going to earn side hustle income dollars, that it’s around the same rate as my W2.

Zoe:
And it’s more of an internship position. So I just started and we’ve already had discussions of increasing my, increasing my scope of responsibilities. So that’s definitely something I’m very aware of and we’ll keep in mind moving forward.

Mindy:
With regards to that. I’m going to say that everybody and their mother wants to invest in syndications right now and you working for a syndication gives you so much educational opportunity while they are paying you to learn about syndications that I really hate to disagree with Scott, but I think it’s just fine to make less than what you’re making at your W2 because this is an educational experience in a field that you want to learn more about. If you were working at the gas station for $17 an hour, I would agree with Scott, but you are learning more about real estate and how to find deals, how to analyze deals, how to do property management, how to do a lot of different things. I think it’s a great use of your time, especially given your age and the fact that you are not married, you don’t have kids, you have the time right now to put into learning about this investment strategy, which you want to do anyway so you’re getting paid to learn. I think that’s great.

Zoe:
And to me it’s not like a job, it’s more of an interest I’m pursuing. So that kind of makes it worthwhile. I think when I was thinking of the pay, I did look at market rates and that’s kind of aligns with the market rate here in Kansas City and so there’s no really no leverage to give or negotiation. So pretty content with it and it will increase.

Mindy:
Yeah, I think that’s great. The last thing you wanted to talk about was reducing taxes. I don’t have a lot of really helpful tips for reducing taxes contributing to your 401k as much as possible.

Zoe:
Since I submitted those numbers, I did talk to a CPA and just to see how can I reduce my taxable income because my side hustle income is pretax. I’m like I’m going to have a fat tax bill at the end of the year if I don’t plan and budget for owing taxes. And that’s one of the questions that I’ve been thinking about is how do I track my expenses? I’ve just taken pictures of every receipt expense that I’ve had and is there a more efficient way of doing it? If there’s the app, I know you guys are really great at recommending finance tools. I’ve utilized like Mint and I tried, you need a budget as well. I prefer using my own spreadsheet for budgeting, but just trying to figure out the best way to consolidate all of my expenses and have a clear idea of where I’m going to land at the end of the year.

Scott:
The easiest way to do it would be to open up another bank account for that business. So just, hey, I am an intern here for this and I’m going to just put everything on the debit card for that business and then it’s all in that one bank account. You don’t have to worry about it. It’ll be super clean that way. So that would be my recommendation is the easy button to resolve that problem.

Mindy:
I think that’s great. Either a bank account or a credit card depending on what sort of expenses you have for there. I like the credit card to get miles, but if the debit card works better for you, then that’s one that I would do. I actually write on my credit card, I do have a credit card for my house investment purchases and I just write the address right on the card so that I don’t forget to use that card for just that one thing.

Scott:
I got three credit cards in my pocket or three cards. One is my personal one. One is BiggerPockets credit card when you purchase things for the company and third is my rental property debit card, which I just spent out of the bank account. I could get a credit card for the company but that would just create another complication point for me. So I do it on a debit card.

Zoe:
I do have five credit cards and each one has its own purpose. So the six too much or I actually thought about getting rid of one or two just because I do try to keep track of all five of them, but sometimes I think it might be easier to reduce the number of credit cards I have, but I kind of went credit card crazy at one point and trying to see if it’s a good idea to reduce that.

Mindy:
I would say make sure that you keep the first credit card that you ever opened open forever. It is your length of credit history and the credit giving institutions really care about that. Every other card you can look at and see is this really giving me the benefit that I thought it was when I first opened it. I have a bunch of different credit cards. One, I have for hotels, one I have, it’s the Costco card and I get cash back when I shop at Costco and cash back, back on gas one I have for airlines. So there’s a purpose for each one of them, but if they also all have zero annual fees, if there were annual fees, I would have a different outlook on them.

Zoe:
So you would not recommend getting the Chase Sapphire or?

Mindy:
It depends on how much you travel. I had the Sapphire and then we got rid of it and because of the annual fee and I think that my husband and I should have had a bigger conversation about that instead of just saying, okay, because it’s a $300 annual fee, but then you get $300 back or a $400 annual fee and you get $300 in travel benefits back every year.

Scott:
I think the fee is $95 for the preferred card and that’s the one I have. So I keep it simple with that. But I think the reserve with 495, you got to use those benefits if you’re going to pay that much.

Mindy:
Exactly, yeah, it’s not worth it if you’re not going to use the benefits.

Scott:
I want to just kind of frame a couple of things as we get ready to wrap up here. You are doing great. You’re house hacking, you make a great income. You said you’re 26.

Zoe:
24.

Scott:
24. Yeah, you’re completely crushing it. So you got a hundred thousand dollars net worth. Not even counting your real estate. That’s 75,000 net worth.

Zoe:
Got like 5K in equity in my house now.

Scott:
But great, you’re paying off a mortgage and you’re living for close to free, so you’re absolutely crushing it with this. You have not made a mistake with the rental property, even if you had the worst timing in the world and prices do come down. If that does happen, you still made a smart investment from a position of financial strength if you hold long enough and operate well based on the numbers you provided. So you’ve done fine there. What you’re missing is two things here. You’re missing a structure for how to get rich over the next 5 to 10 years. First, you need to think about the end in mind. What does that portfolio look like? I like what you’re doing right now. You have a strong cash position and most of your wealth, or a big percentage of it is outside of those retirement accounts.
If you’re in 10 years, all that wealth is trapped in retirement accounts and home equity. You’re not financially free. You have a big net worth on paper, but no actual freedom. If you keep doing what you’re doing at the highest level, you’re going to be have freedom and the ability to use those assets to live a life that you want. So keep doing that, but put together an investment philosophy that enables you to get there, whether it’s index funds, real estate or something else. So that’s a formula piece. You’re missing the formula that you’ve committed to mentally to build wealth over the long run. And your big buckets with your massive sets of asset allocation. That’s some homework for you to do. The other part is the pot shots. You have different side hustles. You have your real estate, you have these things.
What I’d recommend there is that you spend 90 days and focus on one of them at a time. I think we’ve ruled out real estate for the next 90 days. It doesn’t sound like there’s a lot of value to be added by finishing the basement or doing additional work with your property. So I like the fact that you’re doing this side hustle for this indication. I think that’s perfect. Go all in on that. Make sure that whatever you’re trying to get out of this job, this internship actually comes to fruition or begin thinking about switching it some point in the new year, right? Some sort of education, some sort of increased earning power, some sort of opportunity should materialize from this bet that you’re making with a significant chunk of your time. And if you do this 10 times over two and a half years, that’s 10 quarters.
10 90 days chunks, something will materialize for you. So opportunities will blossom, right? One of those 90 days could be buying your next property. One of them could be the next stage of the… you could just take the internship for three quarters because a new opportunity roll each time you could bring back your photography business. But if you do that 10 times and each quarter set out intentionally to make use of this extra time, you’re going to hit a winner at some point that’s going to produce a couple hundred or maybe even a thousand dollars a month in cash flow or produce a chance at significant wealth. So I like doing that, but think about it as a formula and build a system or architect a program that’s going to automatically get you wealthy with where you deposit your cash, and then that is actually scientific about taking these shots with your opportunities. Is that helpful framing?

Zoe:
Yes. I think that kind of answers some of my biggest questions that I have to take that initiative to decide what I want, and there’s not one fits all kind of a solution. Before this, I thought I had a good idea of what I wanted to invest in and just kind of reaffirming, just put everything in index funds. But I do want some short term gains. I don’t want to wait three to five years to see the money. So I think that’s my biggest hurdle to overcome is that it’s not a quick solution. It’s going to take some time.

Scott:
I agree. You could be a millionaire in three to five years if you play your cards right and have a little bit of luck on that and make a couple of big plays, probably more realistically, seven to 10 years at your current pace, given how early you are in your career and the likely future income potentially you have. I would sit back and I would say, what do I want that million dollar portfolio to look like when I get there? That’s the freedom point. It’s going to be a grind until you get there. So grind it out and be ready to do that, but don’t grind your way towards a portfolio that’s not going to actually get you what you want in the end state.
Make sure that that’s designed intentionally right now. So you’re backing into that and you’re rounding that out and it’s the three properties in the same corner that are really easy to manage in all of the same thing. Instead of a property in Kansas City, a property in Denver and a property in Seattle, whatever. It’s an intentional portfolio that is exactly what you want. Make sure you’re backing into that and you’re going to be fine. You just need to do that work and your fundamentals are so strong, it’ll probably carry you to a great outcome somewhere in that timeframe, in my opinion. Hopefully that’s good news.

Zoe:
Hopefully. Yeah, we’ll see.

Mindy:
The only thing that I would add is, Scott is saying that real estate isn’t the right thing to focus on in the next 90 days. And I agree with that to a certain extent, but I would like to see you talk to a lender now during their very slow time to see what are the options that are there. And one of the guys that works at BiggerPockets, Austin had a really interesting journey to buying his house. And he would talk to a lender and they would give him a little bit of information and then he would talk to a different lender and they’d give him another little snippet of something and he was able to piece things together and then he could start asking questions and they’re like, oh yeah, there’s this too.
So ask all the questions you can think of to ask what are some plans? What are some loan products that I can get into as a young person, as a second time home buyer, as a landlord, as all these different options. Maybe there’s something available that they don’t think that you would be interested in until you share with them what your plans are. Oh, there’s this plan, there’s this product, there’s this opportunity. Sometimes they’re just not aware of what your intentions are. So right now they have a lot of time to talk, so call them up and have a big chat.

Zoe:
Yeah, definitely.

Mindy:
Okay, well, Zoe, this was a lot of fun and I really appreciate your time today. Thank you so much for coming on this show, and we’ll talk to you soon.

Zoe:
Thanks so much for having me. Take care.

Mindy:
All right, Scott, that was Zoe. And that was, I think some very great advice for her. I think some very great advice for a lot of people listening, we are in a squidgy market and it’s going to go up, it’s going to go down, it’s going to go down some more. It’s going to go down some more and then it’ll go up a little bit and then it might go down again. And for those of you who are in it for the long haul, just buckle up and enjoy the ride. And if your investment philosophy says, I’m going to keep buying every single week, then buy every single week or month or quarter or whatever. And if your investment philosophy says, I’m going to buy when the stock reaches this price, then buy then, but have an investment philosophy and be investing for specific reasons, not on a whim.

Scott:
And after the recording was over, we asked, hey, was this helpful? We always do that because folks always say one thing on the recording and then you know, always went with the opinion. And she said, yes, of course. But what she wanted really was specific, what exactly should I do in this situation? And we’re really not supposed to do that, but I’m the CEO, so I’m going to go ahead and break that rule. And I’m going to say, what I did is my situation mirrored Zoe’s almost in an eerie fashion, right? She’s 24. When I was 24, I was making less than her, but I had a house hack. I had around that same level of savings. I had lost money by investing in stocks that I had picked, a Chinese fruit juice company that reported their financials inappropriately, all those kinds of things.
It was a very similar set of circumstances there. And what I did is I tried to maintain that cash position of $25,000, $30,000. I took my 401K match, I maxed out my Roth, I dumped everything else into after tax brokerage savings, and I serial house hacked for a few years. And then I took pot shots every 90 days on various items that would advance my career, like getting my agent’s license, like buying a property.
I started, I floated the idea at least of a winter tire rentals business, which would be a horrible plan to a local mastermind group. But I did exactly what I told Zoe there. And my portfolio today is these five rental properties, a large portfolio that is essentially all index funds, Vanguard index funds, and then my position here at BiggerPockets. That’s it. Like that’s the portfolio. And it’s that simple from that perspective.
And you just every week get a little better at your job or a little better with the side hustles or move that next project forward. And you let that compound for eight years and it’s this feeling of monotony or grind, and you look up every couple of months, you’re like, whoa, I came a long way with that by waking up every day and going a little bit further forward. So there’s nothing to be afraid of. It’s a long term investment. It could start with a plan about where you want your portfolio to be in a future state. Work the plan, make the formula work for you in a very simple way, and then allow yourself the opportunity to get lucky by taking the chances that you think are roll around, but don’t say yes to everything. Say yes to one thing at a time and move forward with it.
And that’s what you do in order to do this. And I think she’s got that all, she’s so strong in every part of her financial position, in her framework. She just hasn’t completely solidified it into a crystal clear plan yet. And so I think that’s giving her a lack of confidence in a couple of things. She’s making very minor mistakes that are almost irrelevant in the scheme of the overall story of her personal finance journey when she looks back in 10 years. But she’s perseverating over them because she just hasn’t quite solidified all that into one cohesive philosophy and framework. She’s very close though, and I will not be shocked if she’s not a millionaire within seven years, let’s call it.

Mindy:
I agree 100%. I will be shocked if she is not a millionaire in 7 to 10 years, depending on what the stock market does. But yeah, I think you need a plan. I think anybody listening needs a plan and the investment philosophy document will be in the show notes for this episode. The link to it will be in the show notes for this episode. So if you are struggling with your investment philosophy, Scott’s document can help you out.
All right. That wraps up this episode of the BiggerPockets Money Podcast. Thank you for listening. We really appreciate you. He is Scott Trench, and I am Mindy Jensen saying, got to go Buffalo.

 

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