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BiggerPocket Money Podcast 234: Finance Friday: From “We Can’t Retire” To Retiring Early in 5 Years

BiggerPocket Money Podcast 234: Finance Friday: From “We Can’t Retire” To Retiring Early in 5 Years

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A rock-solid financial position consists of a few things: budgeting, expense tracking, living below your means, and making extra income. Once those are accomplished, you’re on track to start investing heavily and financial independence is in sight. This is exactly the position Lynsey (mother to Mindy’s pool boy) is in.

Lynsey and her husband bring in a moderate salary from his job and her businesses of jewelry making, relationship counseling, and their garage and basement house hack. For a long time, Lynsey assumed she would never be able to retire, but as her income has grown she’s realized that she not only can retire but retire early.

Lynsey has a few key ways she could increase her business revenue: outsourcing, marketing, and scaling. Her husband also has a strong suspicion he’s underpaid, meaning a boost in income could be one ask away for him. The couple also wants to invest in more short-term rentals or buy another house hack property. But, of all the options they’re presented with, which one will push the needle?

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Mindy:
Welcome to the BiggerPockets Money Podcast, show number 234, Finance Friday Edition, where we talk to Lynsey about analysis paralysis and too much cash.

Lynsey:
I saw our retirement horizon at 20 years, but we’d love to free up time and space in our lives to pursue our own passions within the next five years, which is very accelerated because as of two years ago I was just an artist and I was like, “Oh, we’ll just never retire I guess.”

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen, and with me as always is my pun master cohost, Scott Trench.

Scott:
I don’t have one today.

Mindy:
Wow. Wow. I’m really not selling this very well at all. 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 where or when you’re starting.

Scott:
Touche, Mindy, touche. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, or start your own business, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I am excited to talk to Lynsey today because she has a really great problem, she is sitting on too much cash.

Scott:
Yeah, I-

Mindy:
And that’s actually kind of a problem.

Scott:
Yeah. Well, I think she has a lot of good options. They’re thinking through a lot of interesting things, they’ve got their fundamentals and a really strong position and now they need to pick a investment approach and go and get aggressive at it. The good news is that I think the pieces they’re laying right now are going to accelerate their ability to invest in a way that she probably wasn’t thinking about prior to the show. The discussion today I think reveals some of the power of real estate investing and just how fast that journey can accelerate once you’ve got some income in place on your tax return and can get the access to additional debt financing in future years.

Mindy:
Yeah, I think you make a really good point, she has a lot of really great options, she just needs to figure out which one is the best. I think we gave her several research opportunities today to look at things to consider with both her current situation and future situations. I really think she’s got a lot of phenomenal options, it’s just choosing which of these great options do I want to pursue first.

Scott:
Yep.

Mindy:
Before we bring in Lynsey, let’s hear a note from our attorney. The contents of this podcast are informational in nature, and are not legal or tax advice. And neither Scott nor I, nor BiggerPockets is engaged in the provision of legal, tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal, tax and financial implications of any financial decision you contemplate.
Hey, maybe if this podcasting thing doesn’t work out I could get a job as a auctioneer. Okay, that’s not any fun.

Scott:
You’re really selling that, Mindy.

Mindy:
Lynsey and her husband are in their late 30s and hoping to hit FI within the next five years, but not to retire and quit their jobs. They both have fantastic jobs that they love. They’re also in the enviable position of having a lot of cash and they want to deploy that cash in an intelligent way. Lynsey, welcome to the BiggerPockets Money Podcast, I’m so excited to talk to you today.

Lynsey:
I’m so excited to be here. And it really does, it feels like you guys are friends because I listen to you all the time.

Scott:
That’s great.

Mindy:
We are friends.

Lynsey:
We are real life friends.

Mindy:
Lynsey actually just lives just up the street from me. Her son is my pool boy.

Lynsey:
Yes.

Mindy:
Not really.

Lynsey:
He can’t wait to come back and strain the pool.

Mindy:
Once. Yay. Yeah, he picked up all the dead bugs. Okay, so Lynsey, let’s jump in and look at your income statement and balance sheet.

Lynsey:
Okay.

Mindy:
Where is the money coming in, or what is the money coming in and where’s it going?

Lynsey:
All right, so we’ve got a few different streams of income. My husband, Patrick, he brings in 60,000 a year from his W-2. I am self employed, I’m a jewelry artist and I sell online. I make about 30,000 a year on average doing that and I’ve done that for about 12 years. I started a part-time relationship coaching position last fall and that’s about $10,000 a year. And then we also rent part of our property for 8,400 a year, so 700 a month. And then our take home pay is 6,200 of that.

Scott:
Okay, so we have $6,200 in cash hitting your bank account every month?

Lynsey:
Yeah. So that’s with taxes, retirement, HSA, and our healthcare premium taken out of that grand total. So we have 6,200 left over.

Scott:
Love it, that’s really clear and easy to understand. Thank you. And where are your expenses after those healthcare, HSA, taxes, retirement, all that kind of stuff, where’s that money going?

Lynsey:
So monthly expenses, our mortgage is 1,550. Groceries are usually under $700 a month, so in that 600 to 700 range. We are a family of five, so I feel like that’s pretty dialed in for us. Life insurance-

Mindy:
Yeah, I was going to say, how did you get that down to 700? I’m going to come back to that.

Lynsey:
All right, we’ll come back to that, I’ll just dogear it. Life insurance, Patrick and I each have a 20 year term policy for $500,000 and that’s $75 a month for both of us. Car insurance, 115. We have an umbrella liability policy for 20 a month. Gas and fuel, 100 a month. Utilities, 300. So that’s our water, electric, gas and trash. Internet is 90. We have two phones for 60 a month. Dog food, 50. Clothes, 50. Eating out, we budget 50 to 100. Gifts, 100. Then travel, 150. And then I also like to include medical and dental capex, 150. Car capex, 250, and that’s for registration, maintenance, or any future payments we need to make to purchase a car. And then our home capex at 250 a month.

Scott:
I think this is fantastic. What I’m observing is what I think is complete control over your budget, as good as we’ve seen from essentially anybody. You’re super clear on it, you know exactly where all the money is going, you have reserves for major capex items and that kind of stuff. Now that I’ve said you are, are you finding that you’re able to actually hit this budget and maintain it pretty consistently over time, that you’re in pretty good control.

Lynsey:
Yeah, for the last couple of years especially. We were introduced to FI two years ago and since then I think we’ve really kept a tight budget. We have leftovers for those miscellaneous things that pop up. So I feel like the budget is pretty solid and we stick to it pretty well.

Scott:
Awesome. So after all of this expenses are you finding you’re able to save about $1,500, $1,600 a month in cash?

Lynsey:
Yeah, we’re actually saving about 2,000 a month in cash and that’s going directly into our savings account currently.

Scott:
Awesome. How long has this current state been going on where you’ve been saving that about 2,000 a month?

Lynsey:
We’ve kind of just graduated it over time. Originally it was trying to save $50 per week and we’ve got it up as we’ve paid off our car, as Patrick has gotten raises in his job, as I pulled in a new work last year. We’ve just been increasing that by a couple hundred dollars every week for the last year, so.

Scott:
Awesome. So I love that.

Lynsey:
So that’s why we have as much cash as we do.

Scott:
Everyone who’s listening, that’s how this goes, right? If you start and you’re just figuring it out, you haven’t been budgeting or that kind of stuff before, you’re probably not saving very much, 50, 100 bucks a month or something like that might be all that can be managed. But within two years, we’ve seen a lot of people who get to this type of situation with that and that’s because you guys … You just demonstrated a process that led to that, that again, took two years and got you to $2,000 a month. You were super crisp on every single point, you know where every single dollar coming in is, you know where every single dollar coming out is, and you can articulate it there and think through it. It’s just been five minutes, we’re done and we can get to where should that money go. That’s a great position to be in, that says you are going to be very, very wealthy over time. Now, it’s just a matter of what is the right approach for me and my family to begin deploying that cash. The fundamentals are perfect I think.

Lynsey:
That’s very validating to hear because a lot of this is just in my own head. I lead the way for finances, my husband’s just along for the ride now.

Mindy:
Okay, I’m going to stop you right there and say a lot of this is just in my own head, but you’re doing really well. You’ve got it really … I don’t want to say dialed in because that’s what Scott’s just said, but it’s a really great phrase, so I’m going to say it anyway. You have it dialed in. Becoming financially independent doesn’t have to be this weird thing that, “Ooh, am I doing it right?” Is your balance growing every month? Are you seeing progress? Then you’re doing it right. You’re not going to see progress every single month because life happens, but you’re doing it right and it’s …
What am I trying to say? It’s not this giant puzzle. How do I get this? Spend less than you earn, invest wisely, save money when you can, earn more. What is it, there’s the four? Spend less than you earn, earn more money, invest wisely, start a business. You’ve started a business, you’re investing wisely, you’re spending less than you earn, and you are generating more income. You said you just started a new relationship coaching job. You’re doing all the things.

Scott:
Yeah.

Mindy:
Congratulations, you won.

Lynsey:
Okay, all right. Nothing else to see here.

Mindy:
From episode 234 …

Scott:
Well, now we have an interesting strategic decision to make that will depend on your goals, where do I deploy this wealth and what is my strategy around that, and that’s got to be based on where you want to be in a period of time. So what are your goals and what do you want to achieve with this call today?

Lynsey:
We’d like to find out if we’re missing any blind spots and there’s some bigger questions about real estate investing and how to use our cash and I guess equities that we do have, to make sure that we continue to make strong financial steps forward and maybe at a quicker pace.

Scott:
Great. Well-

Lynsey:
So if we went like this, retirement … Oh, go ahead.

Scott:
Finish your thought there, sorry.

Lynsey:
I was going to say, if we went the traditional route of continuing to just put money into our 401Ks, I saw our retirement horizon at 20 years, but we’d love to free up time and space in our lives to pursue our own passions within the next five years, which is very accelerated because as of two years ago I was just an artist and I was like, “Oh, we’ll just never retire I guess.”

Scott:
No, that makes perfect sense. We have a five year time horizon to achieve some semblance of passive income, either allowing you full financial freedom or perhaps the option to just be more flexible with major life decisions. Is that a good way of articulating it?

Lynsey:
That’s a great way to articulate it. Just to take the pressure off of having to earn income and I think it’ll free us up creatively. Patrick loves his job, but he’d also like to consult more and that feels like a risk for a family of five. I like making jewelry, but I’d also like to pursue my passion in painting and not have it be attached to any kind of monetary outcome.

Scott:
Love it. Now, let’s go through … we actually skipped a section here. How would we describe or articulate your net worth today and what are your investments and liabilities?

Lynsey:
Our liabilities, the only debt we have is our home mortgage. It’s at about 250,000. Last year we locked in a 30 year fixed rate at 2.85%, so it’s that sub 3% and that’s it. I think once we finish our basement remodel our home will be valued at 550,000 to 600,000.

Scott:
Awesome. And what-

Lynsey:
All right, and then investments-

Scott:
That’s what I was going to ask, yep.

Lynsey:
Is that what you were going to ask, Scott? Yep, all right. Investments, we got Patrick’s 401K at 150,000, and then he’s going to get a $10,000 employee owned distribution at the end of this year. I have a Roth-

Mindy:
Is that in cash?

Lynsey:
It’ll go directly into his 401K.

Mindy:
Directly into his 401K?

Lynsey:
Which is nice, because then we don’t have to plan for any kind of tax event around that. I have 37,000 in my Roth. We have a HSA with $6,000. Can we put a pin that too, because I have at least one major upcoming surgery next year?

Scott:
Mm-hmm (affirmative).

Lynsey:
We have a after tax brokerage with 18,000 in it and that’s all Tesla stock. Carl, shout out.

Scott:
Nice.

Lynsey:
And then we’re also a 5% limited partner with a local bakery, but we haven’t seen any returns on that yet, so.

Scott:
All right.

Lynsey:
And then I guess our house is kind of an investment because we’re house hacking it right now too.

Scott:
I’m looking at what appears to be a, what, 300,000, 450,000, 450,000 to 500,000 net worth. Is that in the ballpark?

Lynsey:
Yeah. And then we have actually sitting in cash right now 115,000.

Scott:
Oh well, that’s another big one.

Lynsey:
Yeah.

Mindy:
Okay, that was not in the original notes that you sent me.

Lynsey:
Oh, it wasn’t? Sorry. Ace in the hole.

Mindy:
It was like [crosstalk 00:14:20] cash.

Scott:
Oh, all right. Well, we’ve got $115,000 in addition to that, that’s pretty interesting. Great.

Lynsey:
35,000 of that we’ve allocated to finish our basement remodel.

Scott:
Okay, great. So we’ve got-

Lynsey:
So we’re about halfway through the remodel process.

Scott:
So we’ve got 80,000 to play with?

Lynsey:
80,000 to play with.

Scott:
Okay, great. So we’ve got about a $600,000 net worth or so with that?

Lynsey:
I think that sounds accurate.

Scott:
Okay, great. And the goal is to get to some semblance of flexibility inside of the next three to five years? Across the levers that Mindy mentioned, spend less, earn more, invest, or create, where do you think the opportunities lie?

Lynsey:
I think create more. I would love real estate to be a part of that vision of moving forward in the future because I think that’s the way we’re going to get the quickest cashflow and it’s not going to be tied to retirement accounts.

Scott:
Yeah, I completely agree with that. If you were to just continue maxing out the traditional and IRAs here with that, I think you’re absolutely accurate, you’re not going to feel comfortable taking any big, flexible moves inside of the next three to five years. And since that’s your goal, you can’t continue to deploy all your capital there. You guys are doing great with your financial situation, but it’s not enough surplus cashflow that I think you’ll be able to max out your 401Ks and Roth IRAs and invest in real estate at the same time, so you have to make an allocation decision at some level that’s probably going to be fairly uncomfortable with that, with those things. And that’s going to be I think the biggest outcome I think from today is thinking through those approaches and where we’re going to go with that. You said create as well, you’d be willing to focus more on building these businesses that you have?

Lynsey:
Yeah, I’d definitely be interested in that, I think especially with creativity, like being able to untie money from the creative process could actually lead to something more interesting and potentially bigger growth in a business because it’s not tied to immediate sales.

Scott:
Okay. Where would you like to start? Would you like to start with a discussion in … Oh, and lastly, is there an opportunity to just earn more from what you’re doing, or the work your husband does or consulting there?

Lynsey:
I think there’s definitely opportunities for both of us to earn more. For me, I feel a little challenged in that area because I’m also a full time stay at home mom, so I tend to bookend the day with my work. I’m hammering in the morning or I’m hammering at 9:00 PM after the kids are asleep and I don’t want to take away too much time with my kids during the day. But for Patrick, I really do believe he’s underpaid for his position and I think he knows he is, so it could be as simple as him making an ask to his director. And then he is also interested in consulting.

Mindy:
Okay, I like that phrase, it’s just as simple as an ask.

Lynsey:
I know.

Mindy:
It’s so easy to ask, you just, “Hey, can I have a raise? Thanks.” We interviewed Erin Lowry. Sorry, Erin, I butcher your name every time. I’m sorry, it’s not you, it’s me. We interviewed Erin a few months ago on episode 169 and on that episode we talked about her latest book, which is money conversations to have, and one of the tips she gave us was to keep a folder in your email that is just any time you get a complimentary email, especially from a client or something like that, save it in that folder so when it’s time to ask for a raise you’re not trying to remember, “Oh, I know everybody loves me,” here’s 57 emails from people who love me.
Every time your boss sends you a Slack message that says, “Hey, great job, that was so wonderful to hear, from you,” you screenshot that or you pin it and you put that in your folder, so that you can present that, “Hey, here’s all the things that I’m doing well, I believe that I deserve a $20,000 raise,” or, “I would like a $20,000 raise because of all these things.” Anytime he’s generated more income or sales or whatever metric his company uses to determine success is another thing to write down and you just keep track of this as you’re going throughout your day.
I think he could probably figure out a great request within the next month, so I would say have him start thinking about that, have him start working on that and gathering these bits of information. But also, he’s in one of those weird jobs that’s really hard to compare. It’s not like he’s a receptionist where there’s the receptionist salary in this area is this type bracket.

Scott:
What I’m gathering here is that there’s an opportunity perhaps to get a salary increase, but there’s not an opportunity to fundamentally change the amount of income that your household’s bringing in. Maybe a good raise would bring in a couple more hundred dollars a month, but this is not to change the trajectory and get us to where we need to be in three to five years. We can ask for the raise and that kind of stuff, and I’m sure Patrick would have more information for us if he were on here about the background behind where he’s at and why that is or is not an appropriate level and how to go about doing that. But what I’m hearing is yes, that could be a to do, but I think it’ll be a judgement call that he’ll have to make based on his understanding of the company and you guys will have to talk through with that. Does that feel right in terms of discussion around income generation for you guys?

Lynsey:
Yeah, I think that feels spot on for us. He was sent a screenshot on accident by his HR department with everyone’s salary and so that’s why he feels like he could ask for a significant boost. It’s not just in his mind, it’s like okay, comparatively-

Mindy:
Oopsie.

Lynsey:
Yeah. But he’s going to wait until that annual review time. Mindy, I love the idea. I’m going to call it a hype folder, he can hype himself up with the hype folder.

Mindy:
Your hype folder, there you go. There you go, I like that idea.

Lynsey:
I feel like he could attach to that.

Mindy:
I have a comment.

Lynsey:
Yes?

Mindy:
I have a comment about your jewelry making.

Lynsey:
Yes?

Mindy:
Are you making the same things over and over again so that in your online shop you’re selling this circle necklace and this square necklace so that you could continue to make those, or are they all one of a kind pieces?

Lynsey:
No, they’re definitely a piece that I reproduce numerous times. I’ve got really great sellers and it helps keep my production time at the bench really low, so I am able to have … Maximum, I work 15 hours a week during most weeks. So their reproducibility is important currently.

Mindy:
You said you have really great sellers, do you outsource the production of some of it?

Lynsey:
No, it’s all with these two hands.

Mindy:
Oh, okay, good-

Lynsey:
[crosstalk 00:21:26] podcast hands.

Mindy:
… because that was going to be my suggestion is to outsource that.

Lynsey:
Yeah.

Mindy:
So you have created, I don’t know what exactly you’re selling, I’ll call it the circle necklace and the square necklace. You can teach somebody how to make the circle necklace, so now instead of Lynsey’s one hour to make the circle necklace, Lynsey can hire somebody for less than it costs you to sell the circle necklace. You have zero time into it now and you can continue to sell those. I happen to know somebody locally who does outsource things like that, her name is my daughter, so we should talk.

Lynsey:
Yeah, right.

Mindy:
She is thrilled. She’s 14 years old, she is thrilled to be making $12 an hour making jewelry and I’m assuming you sell it for more than $12 or that it could be made in less than one hour, so that if she is being paid to do this, or someone else, it doesn’t have to be her, is being paid to do this, then you are free to create more pieces that can be reproducible and now you have more options in your store because jewelry’s really fickle. One day this is going to sell a billion, but if you only have three in stock you can only sell three, whereas if you know that over the past three months you’ve sold 27, “Oh, maybe I could have sold 40,” so you have 40 in stock and now they’re gone. It’s a way to get more product out there without costing you any of your precious time.

Lynsey:
Oh, I love that because then I’m not the bottleneck at the bench. Currently that would really free me up to actually do marketing for my work. I currently do zero marketing, which is pretty terrible for a business and a lot of room to improve. And if I’m not literally hammering or shipping items, I could be doing something else better with my time.

Scott:
I think Mindy’s spot on with this and I’ll just observe that you’re probably not doing a lot of marketing as well because if you market you have to produce more and you don’t have time to produce more, so I love this discussion. The first framework here that we’re going over is what we’ll call unit economics, here’s how much it costs to produce the necklace or the piece of jewelry, and here’s how much it sells for, and right now you can value your time at a certain level and say if it’s cheaper for somebody else to do that, then you’re better off, as long as you actually can move the product and all of those different types of things. So I think it’s a great way to think about it. And the more products you have and the more capacity or ability to rapidly scale production based on that demand, the better off your business will be.

Lynsey:
That’s exciting to me.

Mindy:
Another thing I’m going to say, and again I don’t know what your store is, you are probably undervaluing your product. Like I said, I don’t know what your store is.

Lynsey:
Sounds of Silver jewelry.

Mindy:
Perfect. So Sounds of Silver jewelry, you might be at the right price, but most people who are doing this out of their home are undervaluing their products, so I would look at your competition and see what are they selling the circle necklace or the square necklace for, or a similar style. I wouldn’t compare you to diamonds and platinum, but if there’s other silver jewelry that has a simple pendant or a very intricate pendant or whatever it is that you’re selling, “Oh, they’re selling it for $50 and I’ve got my price at 12,” then you need to raise your price because clearly they are doing well at 50.
It can be really, really difficult, I am absolutely talking out of one side and totally not doing it on the other side, so I get it. It’s like, “Oh, well, am I really providing that much value?” Yes you are, so do a price audit as well to see if there’s more ways to generate income, especially if you can raise it just a little bit, like $5 or $10 and then you’re paying somebody else to make it. You’re now making slightly less per item, but zero dollars or zero time coming out of you.

Lynsey:
I think that’s a good idea.

Mindy:
Also, I have several high schoolers to hook you up with-

Lynsey:
Sweet.

Mindy:
… when we’re done with this call.

Lynsey:
Awesome. I might need some babysitters too, so they can make jewelry and then just transition right over to child care. Perfect.

Scott:
While I think these are all spot on observations, I do want to acknowledge that if you’re going to go from just what it sounds like is mostly creating these things with your personal skill to running a business around this sense, this is not going to be something that you’re going to be able to scale to $50,000, $100,000 a year in income without a substantial amount of work. All those processes are going to have to be documented, the pricing work is going to be iterative and trial by error. If you’re going to be hiring high schoolers, production quality problems to maintain, to put it one way, with that.
And so that’s all going to be a lot of work and you’ll have to determine what the appropriate threshold is for your schedule with all of those kinds of things, although, I think that all of those things are very achievable and you can make a big change there over the course of a year by mapping it out and working on your business rather than in your business. So a great book to read there might be The Lean Startup as well to talk about some of those points.

Lynsey:
Nice, all right.

Mindy:
Yeah, that’s a good one.

Lynsey:
I’ll order the book, that sounds good. And I think you’re right because I’m used to working in it instead of on it, so that will be a big mindset and life shift.

Mindy:
But it’s exciting to do the promotion and to be pushing it when you’re not, “Oh, I’ve got 57 necklaces to make.” Now I can take 47 pictures of this and show it all over the place.

Lynsey:
Yeah.

Scott:
If you’re going to pursue this, and I think it probably makes sense to pursue this to some degree, I would also consider allocating some of your cash to that, not a lot, but a few thousand dollars, somewhere probably between 2,500 and 10,000 makes sense to me of the cash position depending on what your business needs there.

Lynsey:
Yeah. And would that be … are you thinking that toward the marketing aspect?

Scott:
So for example, let’s say you want to scale production, most employees and this includes high schoolers are probably not down for I’m going to work whenever you have an order, I’ll be immediately available. You’re going to have to probably produce up front to some degree.

Lynsey:
Right, one order came in today.

Scott:
Yeah, that kind of stuff. So you’re going to have what’s called a working capital commitment as you make some of these changes, where you’re going to have to translate cash, buy the materials, pay people, and then you’re going to get done inventory in there and that will probably take some cash to invest to build to a certain degree, not a ton, but enough that you should probably be aware of it I would imagine.

Lynsey:
Definitely good to earmark some funds for that, that’s a good point.

Scott:
Okay. Do you feel like that’s a good discussion of the create side, or do you have other … It sounds like you might have another thing there with maybe painting.

Lynsey:
You know what? Actually, I want to leave painting untouched in terms of money. I’d like that to be more of a creative outlet, because there’s that thing about once you get paid to do something that you actually love it reduces the love for that thing, and I’m afraid, I don’t want that to happen to painting for me.

Scott:
Oh, okay, fair enough. Well, is there anything else then to discuss on the create side?

Lynsey:
If we want to toss in real estate as a create side or that could be an investment piece, but I think that’s the next area we’re really interested in looking at.

Scott:
I love real estate because it can fall in either category, but I generally lump it into the investing side because the goal at least is for it to be pretty much passive from that front.

Lynsey:
Yeah.

Scott:
But yeah, awesome. So what are you thinking in terms of real estate? What are some of the areas you’re exploring there?

Lynsey:
So right now, I talked earlier about our basement remodel and we’re actually looking to convert that into a short term rental downstairs here, and looking at numbers around the area we’re estimating between $1,500 to upwards of $2,000 a month as potential revenue from our basement. We’ve got this really unique position where we’ve got a residential mix used zoning because we’re in a downtown area. So I’ve already checked out zoning and we’re good there.

Scott:
Well, this sounds absolutely perfect. I can’t imagine a better way to begin the process of investing in real estate than turning your house into the investment. This is I think a classic or a house hack situation, and so I think that’ll be a phenomenal return. That will immediately improve your cashflow by $2,000 a month or $25,000 a year if you’re at the upper end of that on the Airbnb income side. So it sounds like you have $35,000 in cash to invest in this and that you’re currently under way with this?

Lynsey:
Yeah, so I’d say we’re more than halfway through the process. They’re finishing up framing and luckily they didn’t come today, I was a little worried for the podcast. I was like, “I hope the framers don’t show up, but maybe tomorrow.” So we’re finishing up, we’ve done a bunch of major work, we’ve added another bedroom, full kitchen, full bathroom. It’s just going to be a separated apartment downstairs. We are looking at this as a way to get our feet wet with real estate with a lower risk. We’re not purchasing an entirely new property, but we can see what kind of numbers are possible.

Scott:
Sorry, you just mentioned and I was thinking there, how many weeks until you finish this, or months?

Lynsey:
We’re hoping by Halloween, end of October is our goal.

Scott:
Okay, awesome. So really just like six to eight weeks from now you’re going to be live?

Lynsey:
Hopefully, yes, although construction this summer, has been like, “We’ll be there in three weeks.” Yeah, that’s been rough, but that’s par for the course I hear.

Mindy:
Yes, it is. So you are going to open up just in time for Thanksgiving and Christmas guests?

Lynsey:
Yeah, so we’re hoping.

Mindy:
I would make sure you’re comparing your rates to other local rates and other cities around. I’m a couple of cities away from you, if somebody wants to come in my city and mine’s all booked up, they’ll look to your city because it’s not that far away. So I wouldn’t just compare rates to your location, but to surrounding areas. I wouldn’t go all the way north to where your husband works, but I would go I think in several cities just to make sure, and price it a little higher and see what happens. If you’re thinking you’re going to get $100 a night, but you throw it up there at 150 and see if anybody bites.

Scott:
Yeah, I would also echo that from a strategic lens this is perfect, this is a very right up the alley move for you guys. It’s in your basement, like you said it’s training wheels for later investing because you can just handle it right there, you live there with all this kind of stuff, you’ve got all your numbers boiled in.
I would get really tactical over the next six to eight weeks and say, “How do I make sure that this launches super successfully, that I dot all the Is and cross all the Ts, all the little things, odds and ends that maybe weren’t completely perfect from the renovation we’re ready to handle in the weekends leading up to the launch? We’ve got really good pictures coming in, we’re going to get things booked and make sure that we get a ton of five star reviews in those first couple of weeks, even if we have to under price a little bit for that. We’re going to add those extra nice touches.” And go and read about some playbooks to make sure that you get a really good user experience and can drive that five star rating with that because those are so critical in the early days, and make sure that this launch is the way that you’re hoping. We just talked about your business for a few minutes here, but that’s earning you about $10,000 annually. Is that right?

Lynsey:
My business is 30,000. It’s the online coaching thing that’s 10,000.

Scott:
30,000?

Lynsey:
Mm-hmm (affirmative).

Scott:
Oh sorry. Yeah, okay, so 30,000. So you’d have to grow that business by 80% next year to equal the financial return of this project going well. So I don’t know which is more likely, but this one seems-

Lynsey:
Yeah, and I feel that this is so much simpler.

Scott:
Yeah, this one seems much easier and a really good starting point with that to stack on just another 25 grand into your savings rate annually.

Lynsey:
Yeah, and I think for not as much effort probably as revamping, relaunching in a way my business.

Scott:
I would completely agree with that.

Lynsey:
Yeah, okay.

Scott:
What’s next? We’re like, “Okay, well, that sounds perfect.” What are you planning on doing after launching the basement as an Airbnb from a real estate perspective?

Lynsey:
So the reason we have so much cash in our savings and we continue to just add every week is because we would like to purchase another property. We’re trying to tease out in our minds if we want that to be a short term rental, or if we want it to be another house hack, or even just buying an outright investment property.

Scott:
Nice. So what are your considerations along those three strategies?

Lynsey:
So I love how you called our basement short term rental training wheels, it makes me wish we were already on a balance bike, so we didn’t have to do that.

Scott:
I’m sorry if that came out a little insultingly, that’s not what I meant.

Lynsey:
No, I really do love it, because that’s true, it’s like the comfort of not having this separate investment, like we don’t have separate overhead for that other than doing the linens. So with the short term rental thing, we live pretty close to Rocky Mountain National Park, which is visited by millions of people a year. And our family, we love the outdoors, we hike as much as we can, we’re out at the lakes, we’re in the woods, and so we see the opportunity for a short term rental in our local area within 45 minutes of driving distance for us that we can use as a second home, but could also generate income for us.
The hard part is with our current salaries we qualify for just squeaking in to get that short term rental home, because they’re starting at close to 500,000, they’re starting at 450,000 for an okay-ish house. So that’s like our dream thing.

Scott:
So let’s unpack a couple of things there. My first reaction is I love the strategy there. You know what you know, you’ve got access to Rocky Mountain National Park, you know the local area, I presume the laws, you’ve researched the laws there and those are friendly for full time Airbnbs in the area that you’re intending to do this strategy. Is all that correct?

Lynsey:
That’s correct, yeah. We really narrowed it into the location that we want because some areas are not as friendly and some are currently very friendly.

Scott:
Awesome. And have you looked at the pricing on those types of things and put together a baseline analysis of what you think a property might sell for and Airbnb income in the areas that you’re interested in?

Lynsey:
Yeah. So there are little radiuss where I can find the numbers. It’s hard because there’s the wildcards of septic and well, which could be huge outliers in cost and that feels a little unpredictable in some ways. But we see the potential return, if we could find a place in that $450,000 range, to be making about $1,000 a month would be our goal for that one property.

Scott:
In cash flow after-

Lynsey:
In cash flow, yeah.

Scott:
And there’ll be some seasonality?

Lynsey:
After PITI.

Scott:
And you factored in seasonality?

Lynsey:
Yeah, so that’s factoring in … Yeah, because in the summers the park is so busy you could be making 6,500 a month, where in the winter it’s like if you book a couple of weekends … You just have to be strategic about maintaining that cash to pay for the house, but yeah, it could be $1,000 in the winter, about 6,500 in the summer.

Scott:
Well, from the surface level this seems like a super well researched and good strategy here. I think you still have more questions to answer, but you’ve got time to do that it sounds like. I wouldn’t execute on the next investment property until your first one is up and running. You stabilize operations in item one before I … I mean, not necessarily but that would be my bias, my lean would be towards thinking about that.

Lynsey:
Yeah.

Scott:
And then you said it’s going to be close on the income with this. Well, think about this, you’re about to launch your first Airbnb in October, get some revenue in there and make that hit in as meaningful a way as possible in 2021, and then talk to your lender, talk to a couple of lenders … Let me collect my thoughts here for a second.

Mindy:
No, I see where you’re going with this. No, that’s great, you get the income on your ’21 taxes, you do your taxes in 2022 very early on, so you have the return. You can amend them later, which I’ve never done, so I don’t know how much of a pain in the butt that is, but I know that people do that all the time. So you have the tax return to present to your lender, you also just have it in play at the end of the year so you’re getting the highest rates, so it looks like your Airbnb is generating a lot of income.
I think your Airbnb can do very, very well, where you’re located because you have … You’re so close to Rocky Mountain National Park, you’re so close to the golf course right there. I would advertise it with that golf course in there too. You’re so close to a lot of different things, I would absolutely be promoting that.

Scott:
Exactly. Thank you, Mindy, that was where I was trying to head with this and collect my thoughts on is right now your income is at X, right? And at the end of the year or in February of next year, your income will be at Y, right? And that will increase, presuming you’re able to continue doing the things with your current business, presuming you’re able to launch the Airbnb, and presuming that your husband gets a raise as we just discussed with that. And so whatever your threshold is today, it may be much higher in three to six months depending on how things go, and whatever you can do to realize that income and give yourself the best odds possible, that will increase your ability to borrow for this next property with that. So you can do some research right now and maybe you’re closer than you think right now by just calling up a couple of lenders and asking them about that. Have you done that yet?

Lynsey:
I talked to a couple lenders and the information I received so far, they wouldn’t even include my online coaching position in addition to my current business income, they’re like, “Well, you can pick one of these.” I was like, “But I have both.” So I wonder about that Airbnb, will there have to be so many years of returns? I guess that’s something a lender can answer for me.

Scott:
Yep. I think that I’ll need to think about that more, but I would continue calling lenders because income is income.

Lynsey:
Okay, yeah.

Scott:
And don’t just ask them about where you are today. Ask them where you are today because you want to know that information, you may be in position, “What can I qualify for today based on where I’m currently at?” And then say, “Once I file my taxes at the end of this year, I think you’re going to see income here, here, and here, and I expect all of these things to continue. If I do that, if I hold up my end of the bargain and continue with these income streams to that point, then at that point what will you be able to get me in terms of financing? If I file January 3rd and go there, can I get a qualified on January 5th for a mortgage based on that income?” Those are questions I’d begin asking lenders and setting them up for.
Maybe we could put this into the Facebook group thread here and see if any actual lenders out there can answer these questions for us and give us more detail about which types of income can be used when, because I think you’re setting yourself up for … You’re in I’m constricted by income limits today mode, but you’re about to … I think your Airbnb income is highly likely to be eligible to be lent against on a go forward basis. And you may even find that a portion of the short term rental income expected from your next property can be included as income, if you demonstrate history as a successful Airbnb landlord or Airbnb host with this.

Lynsey:
Yeah.

Scott:
So those are all things. I’m actually not quite as familiar with that particular thing as I am with traditional rents where that is the case, but you may find that is possible.

Lynsey:
Right, like with the long term rents?

Scott:
Yeah. Your borrowing ability may dramatically expand because your income will go up and because your tax return history will show income from this place, meaning that your next property may be able to produce income to qualify for it. This is a lot of conjecture here. I know that that is generally speaking directionally true with long term rentals, there may be some nuance with short term rentals. I think a discussion in our Facebook group may answer some of those questions.

Lynsey:
Yeah, that’d be great. I’d love to hear the brainstorm of people because I know there’s so many smart people in that group and a lot of them do have long term, and, or short term rentals, so I’m excited to pop in there.

Mindy:
Yeah, I will post that in the Facebook group and I’m going to call out several of our lenders. John [Loland 00:43:02] and Seth Jones have both been very, very helpful with getting information about lending. And then if you have any Airbnb experience specifically, I’ll post that in the Facebook groups today, which can be found at facebook.com/groups/bpmoney. I’m also going to post it in the BiggerPockets forums, which is biggerpockets.com/forums. And I’ll include a link to the actual post in the show notes, which can be found today at biggerpockets.com/moneyshow234. I know I threw a ton of stuff at you right there, all you have to remember is that last link, moneyshow234.

Scott:
I love this as an approach. I can’t think of something that smells like a better opportunity based on what we’ve discussed so far than continuing on this vane with the short term rentals in that area with that, but Mindy looks like she’s thinking something else.

Mindy:
I have one thing I want to say. No, I agree with an asterisk up at the top because I think this is an awesome way to generate income, however, I just want to make sure that you have a very well funded emergency reserve fund, because we live in a fickle area and if we don’t get a lot of snow, maybe we don’t get a lot of visitors over the winter, or maybe we get too much snow and no visitors can even get up there. I want to make sure that Delta doesn’t come slap you in the face as soon as you buy a house and then everything shuts down again. I don’t think that that will happen, but I don’t have a crystal ball and I didn’t expect the other one either. So there’s a lot of things going on right now, I want to make sure that you can buy from a position of stability, and then also not create anxiety and worry should circumstances outside of your control come in and change your plans.

Lynsey:
Yeah, I think that’s a really good point to keep that strong emergency fund, especially because these properties are more remote. The Delta variant doesn’t worry me so much as a septic tank or a wild fire. Those are big things, mm-hmm (affirmative), so very important.

Mindy:
I sold a house up there last year and three months later here comes this wild fire and they were ordered to evacuate, I’m like, “Oh my God, what am I going to do?” No, it wasn’t three months later, they still hadn’t sold their other house yet. That was the issue, they came down … So there’s lots of scary things that can happen and you should be prepared for them is all I’m saying. But yes, I think-

Scott:
I completely agree with those as the risks, you need to research those risks, but from a strategic lens this seems like a potentially good area to at least explore seriously, because you love the outdoors, because you live there, because you’re learning about the profile of your likely client in the next couple of weeks with this, and I would imagine you’re going to get the skillset pretty quickly to run a pretty good shop in this area and deliver a good experience. Those are all overwhelming advantages to me that make this at least a serious consideration. There could certainly be risks and things with certain properties or specific areas that make it a no go, or the region. If you lose faith in the region, then we have to completely reset the expectation and go in a different direction with that.

Lynsey:
I’d have to move too, then.

Scott:
Yeah. So those are definitely things to consider, but this makes a lot of sense to me. And Mindy’s reservations of yeah, this is not a place to have a $5,000 emergency reserve in this business.

Lynsey:
Right.

Scott:
You should probably capitalize it with six months of mortgage payments at the very least, maybe even a little bit more because of the risks that are associated with the seasons, the seasonality of the business, which is the same thing, but I mean literal risks that the seasons bring, like fires-

Lynsey:
Literal risks.

Scott:
… and then seasonality as brought by the market and those kinds of things. I think those are all great points, but it still seems like a really good place to keep exploring seriously with this.

Lynsey:
All right, that’s encouraging because it is a big step for our family, but I feel like it’s a strategic step that we’re not going to know unless we do it. And I’m like, “Well, what’s the worst that could happen?” I keep asking myself. I’m like, “Well, we use the property and it doesn’t make as much money and we enjoy it, and we’re in a not as big a money making income. Is our time to FI delayed by a few years?” But I don’t anticipate that being the thing. I think we need to take a big step up and try.

Scott:
One point on that last thought that I’ve thought about is I think for me, I have a hard time believing that I can purchase a vacation home or a second home and actually make that a good investment. I think I could purchase a property that I think is a great investment and maybe use it occasionally with that. But I think that that paradigm is important in thinking about this kind of stuff, because I’ve looked at a lot of these things and I don’t see a lot of friends, family, colleagues, that kind of stuff, becoming wealthy investing in their vacation homes. Those towns are generally good at sucking money out of the out of state investors, not putting it into their pockets with that.
So I think it’s a subtle distinction, but an important one as you think about this is what’s the best investment first, and if that goes on to produce a $1,000 or $1,500 or $2,000 a month, then you can spend that money to go and enjoy the vacation in the place that you actually want to vacation in with that. And so I just encourage you to just make a subtle distinction there and think about it from investment first, family property second with those types of things, because I do think that the worst that can happen is the property goes under water, there’s not a good cash flowing item there and you’re not really enjoying it in five years the way that you thought you would with that. That’s a bad outcome for one of these things and I think it’s something to weigh seriously with that.
The good news is that your alternative here is to dump the … Well, we haven’t discussed a lot of the alternatives, but we know that the approach of putting the money into the 401K and maxing out that has essentially zero probability of generating the freedom and flexibility outcome that you want in the next three to five years and this does have a possibility of generating that. So it’s still worth pursuing, but that would just be an important nuance I think to address.

Lynsey:
Yeah, that’s definitely important to consider and to really think of it as investment first because that is the goal. The goal is not to just get ourselves a vacation home for us, it is to advance ourselves financially to that place of freedom.

Mindy:
So here’s a question then, if you are considering it just as a pure investment, how much DIY would you be doing on the property? Let’s say you bought a property and it needed some work, would you tend to hire that out or would you tend to do that yourself?

Lynsey:
I would say it’d probably be a blend of the two. Patrick and I have been hands on in remodeling our home. It’s like a 50s ranch that we bought in original condition, which was cool, and it needed some updating. So we’re not afraid to hire things out and also we’re not afraid to get our hands dirty. So cosmetic stuff like painting or light fixtures, that kind of stuff, we can do ourselves, flooring, but if it’s major plumbing, electrical, that kind of stuff, we would defer to professionals, especially … We need it to be permitted work if it’s going to be a place where other people come to stay.

Mindy:
Something to consider since you do have self employment income is a self directed solo 401K, this is something that I really like because you are able to put a lot of money into it, up to $54,000 a year from contributions from you personally and your company matching your salary. What I like to do-

Lynsey:
Yeah, would that be my jewelry company or Airbnb company?

Mindy:
Well, which company is paying you money?

Lynsey:
Maybe both.

Mindy:
It’s whichever one … We have one LLC that we both have money going into and then we can both contribute to our 401Ks that way. The way it works is you have your 195 contribution just like a regular 401K, but then your company can match up to 25% of your salary. Well, my first 195 goes into my 401K and then 25% of that, which was my salary, also goes in there from my company. So I’m putting in 24,000 before I have to think about paying taxes on any money. So that could be a way, and then with your self directed solo 401K, you can use that to invest in real estate. The rules are you can’t touch the real estate, so you need to hire a property manager, you can’t go fix anything.
We did that with the mobile home park in Maine. I’m not driving over there to just fix the furnace, I’ll pay somebody to do that. And I think having it closer would have been more tempting to do repairs ourselves. But if you can’t find something locally, perhaps going out of state could be a good idea and then funding it through your self directed solo 401K. What do we call this Scott? Research opportunity. That’s a research opportunity for you to look into the solo 401K and see if you want to invest that way. The caveat is all of your investments, when you’re making money through those rentals, it’s going back into your 401K. So it’s another way to generate income for the future, not for the current.

Scott:
I think those are all awesome and effective tactics with that. I would imagine that you’re going to start rolling into a couple of those within the next three or four or five years because if you build out a Airbnb business and things go well the way that this is looking and continue to see the increases on here, you’re going to begin having a good problem of having even more cash really. Right now you have 2,000 a month rolling in, if you get another Airbnb it’ll be a $3,000 a month. Then your basement will start bringing in an extra 1,000 to 2,000. So within three years you could be accumulating $5,000 a month after tax with that. And now all of a sudden you’ve got a good problem of, “Okay, now I can actually max out the 401K and continue with my investing approach over here with that.” So that’s an interesting one.

Lynsey:
And have enough to sustain our life. I don’t have a solo 401K, so that is interesting, especially as, hopefully, this passive income starts to supplement and, or replace our current income.

Mindy:
Yeah, you don’t have one yet.

Lynsey:
Yes.

Scott:
On that front I’ve got an interesting tactical question for Mindy maybe on this one. You’ve got 80,000 in cash to play with, right? We had 115,000, 35,000 set aside for the basement remodel, you need that in the short run here. What do we do with the other 80,000 while we’re waiting to get qualified for this Airbnb property assuming that the opportunity will be in Q1, 2022?

Mindy:
I would personally go in and max out the Roth IRA for both me and my husband. We do that every year at the beginning of the year. Sometimes it turns into a pain in the butt, you have to pull money out, but I don’t think we’re there right now. So that is, what is that? 6,000 each, so that’s $12,000, so now we’re down to 68,000. I would probably put into VTSAX while I’m waiting, but there’s the risk that the market could go down. So if you know for a fact that in 2022 you’re going to be buying a house I would just put it into a high yield savings account.

Lynsey:
Okay.

Mindy:
Who did we just talk to, Scott, that had the high yield savings account? I think this is going to be another Facebook question. It was like 3% or something.

Lynsey:
Wow.

Mindy:
It was paying fairly decently.

Lynsey:
We’re at like 0.001 or something ridiculous.

Scott:
HMBradley.

Mindy:
Yes, HMBradley. You have to have a invitation.

Scott:
Don’t they need to sponsor us first?

Mindy:
Oh, HMBradley. Here’s your invitation, like-

Scott:
I have not used HMBradley. Yeah, we just had a guest come on recently who discussed that. They had an opportunity to earn 3% if you met certain criteria such as I think setting up your direct deposit and all that kind of stuff. Something to investigate, but I have not personally used it and can’t give more than a … Maybe go look into those guys with that.

Lynsey:
Okay.

Scott:
I use Ally, also not a sponsor.

Lynsey:
Okay, I was going to say my friends use Ally, so we could always try that. But yeah, I would be afraid to put it into the market, although it’s been hard to watch the market just have a great time and ours is just sitting in cash earning a penny, but we’re like, “We know why it’s there.”

Scott:
I think it’d be hard to put the 80K into the market if you feel pretty strongly that you’re going to be buying a property in the next 6 to 12 months. I think that that’s probably right is the savings account if that’s your lean.

Lynsey:
Yeah, and just to see appreciation in the area, I mean, it’s been insane, so I’m like, “Well, we better buy while we can before we get priced out and can’t earn more money to get into the market.”

Mindy:
Well, I will say if anybody has an HMBradley invitation, please send me a note and I will connect you with Lynsey so that she can be earning a little bit more money.

Lynsey:
Please.

Mindy:
People will also probably hit you up with crypto. I don’t understand crypto so I don’t invest in it. If you don’t understand it, I would recommend that you not invest in it either, but what you do is your choice.

Lynsey:
I think it’s just too volatile for our needs currently because we know that real estate is our path in the very immediate future. Crypto’s interesting to me over a long span, but not in a one year time horizon, just because I’ve seen it go up and down, and that seems to be the way.

Mindy:
It’s so crazy. It’s so crazy. So one last thing you mentioned Lynsey was a potential new house hack. So two questions to consider there, what would you do with your current property and would you stay in the same area or do you have any concerns about the house hack?

Lynsey:
Yeah. So I think just generally-

Scott:
Generally.

Lynsey:
… as a parent, our kids are very young, they’re two, four and six, and so I think my worry is re uprooting them I guess, although, it wouldn’t be very far. I could imagine us staying within a 10 mile radius, maybe this school district, so it wouldn’t be very far, but I worry about my little fledglings.

Mindy:
I moved three times. I moved three times in second grade, they’ll bounce back.

Lynsey:
Okay. All right, that’s good to hear with experience.

Mindy:
I was the new kid three times in second … We moved from Arizona to Oregon, to California, to another place in California. I mean, we were all over. We didn’t stay in the same place, we didn’t even know the same people. So yeah, they will bounce back. I get the concern, but also your kids are, let’s see, they’re outgoing and fun and gregarious, they’ll make new friends in five minutes.

Scott:
I think you’ve got to model it out because moving is no fun.

Lynsey:
True.

Scott:
But moving can have a huge financial upside to your position with that, and so I think that needs to be weighed. And so I would think first model your current home out as an investment after you move out with all the things in place. Are you going to Airbnb the top and the bottom? Are you going to rent it out as one big unit? How are you going to do that? What’s the income potential from that? Is it a strong cash flow? Would you buy it again as an investment property? Or should you just sell it and pocket all the gains, likely capital gains tax free, and then redeploy 400 grand inclusive of the sale proceeds and your 115 that you currently have with that. That’s a big decision, but it begins to get opened up. If you’re considering moving with this, you now have a $400,000 decision to make and you’re making it one way or another, if you keep the place or sell it and it’s something to think through and actually model out with that. So that’d be the first point I’d make there. Go ahead.

Lynsey:
I think this home feels like a golden goose to me, so I wouldn’t want to sell it or essentially kill the cash here. We bought it back in 2017 and with a 1,550 mortgage and that’s principal, mortgage, taxes, insurance, all of that. And if we could get 700, we rent the detached garage, we get maybe upwards of 2,000 just for the basement, and then we could rent the main for either short or long term. If short term’s going great, it could potentially be another 2,200, the upstairs is larger and also fully remodeled. And then we could almost be FI right there if we moved to one strategic location.

Scott:
I love it, I think that’s great. I just again would say it could be that’s the case, but I would just zoom out and be really cold about it in terms of the numbers, ruthless with those numbers and say, “Okay, that’s great that the mortgage is 1,500 bucks,” but that’s because you bought it at a lower point and it’s appreciated with that. Right now if you were to redeploy the capital how would that look? If you were to buy it again, right now, with a 20% down payment how would that same scenario you just painted perform relative to other opportunities in the area and those kinds of things with it?

Lynsey:
That’s a good point.

Scott:
And so that is a big-

Lynsey:
Can I ask a quick question to be piggy backing off of that? What about a cash out refi once we’re done remodeling the basement in order to use that equity?

Scott:
I think same deal with that, that’s exactly it. You’ve got most of your net worth in this area, if you’re going to consider doing this and deploying that somehow, I would do the exact same analysis, I’d say, “What does a good opportunity out here look like? What are those properties? Is my house actually one of those best opportunities, or do I want to live here?” If you want to live there we have a different conversation and we don’t treat it like an investment, but do I want to do that. And if so, does it make sense to leverage it, does it make sense to keep it as is? Unlikely, I would imagine actually. Or does it make sense to sell it with that?
And in the case of primary residences versus other investment properties, we have that special dynamic where the sales proceeds are not subject to tax if you live there for two years or longer, which introduces that as, in often cases, a much more likely option than in investment property cases. It doesn’t mean it is the option, it just means that its odds have increased if I’m looking at it across the set of should I sell my primary residence or keep it as a rental decisions. The answer is more often I think sell than it is to hold or refi when compared to investment properties that people own and that kind of stuff.

Lynsey:
Yeah, no, that makes sense.

Scott:
Is that helpful?

Lynsey:
That makes sense, especially given that we’ve lived here for four and a half years, so we’ve more than met that occupancy requirement. Mindy, fix and flip?

Mindy:
The live-in flip, the best.

Lynsey:
The live-in flip, there we go.

Mindy:
Yeah, the best way to spend every minute of your life ever.

Lynsey:
Under dust.

Scott:
The issue that I see with that decision is that I think there’s a big relation to this decision and what we discussed earlier on the income front. So I think you need to talk with some lenders and really think through the ramifications of that, because if you sell the place or cash out refi, it may affect your ability to borrow against some of these other things and that may change dramatically if you were to, for example, complete the Airbnb, get the next Airbnb property, and then you’re sitting at the end of next year with two stable Airbnb situations with that history of that and a tremendous amount of more potential income, now redeploying that asset might be a little bit different.
I’m getting way ahead of myself here and I’m making a tremendous amount of assumptions with that, but that’s where my mind is beginning to turn if the house hacking option comes into play and you’re thinking about selling or refinancing the primary on this, is run it like the other investments and then think about okay, in a year if I do this, my income situation could look like this and my cash position could look like this. There’s a huge number of possibilities from that point to think through and really formulate a good, clear plan on what you’re going to do and why in the context of that.

Lynsey:
It just seems to almost open up a can of financial worms because I hadn’t really thought about selling this property. I intended to hold this almost indefinitely because our payment is so low and we’ll have three units on this one property that we bought as a single family home.

Scott:
Yeah, your payment is so low because you have so much equity though, right? It’s not really like oh, that’s a great thing there, it’s oh, I have a ton of equity and therefore I’m-

Lynsey:
True, that’s tied up in house.

Scott:
Yes.

Lynsey:
Yeah.

Mindy:
So let’s look at the numbers really quickly. We have-

Scott:
A good problem.

Lynsey:
It’s an okay problem to have.

Mindy:
What do we have? 800 for the garage?

Lynsey:
I get 700 a month for the garage.

Mindy:
700 for the garage. Downstairs you’re estimating 2,500, and then-

Lynsey:
I’m guessing 2,000 for the downstairs and that’s a conservative estimate. I like to be conservative with those numbers.

Mindy:
I love conservative numbers, but I think that’s way too conservative. I think if you’re going of be rented out every single night it could be close to … Well, so 2,000 would be your after all expenses. What are your expenses? You’ve got cleaning, which I’m assuming you’re going to be doing because you live upstairs.

Lynsey:
I’m upstairs, yeah.

Mindy:
Yeah, so I’m assuming [crosstalk 01:05:34]-

Lynsey:
Currently my plan is to do the cleaning and eventually we could hire that out.

Mindy:
So if you’re renting it at a $100 a night, that’s $3,000 a month. So I like running the numbers with 2,000, I’m just saying I think your numbers are going to be surprisingly low, pleasantly, surprisingly low. And then what do you think you could rent out the main level for?

Lynsey:
So if we were going to do long term rental, we could rent it out for 1,800, or short term rental, I’m guessing it would be in the that 2,500 range just for the main level.

Mindy:
Okay, so that’s four, five, six, seven, or $4,500 a month. Now, taking the 400,000 that you have in equity and the 80,000 in cash you could probably deploy that 400,000 and make more than 4,000 a month in another location.

Scott:
That’s pretty good. So it could be that we’ve got one of those cases where it is a good bet to keep the place as is, and perhaps, also underlying a lot of this is because this has been in your mind for some time, you’ve been slowly converting the property into an optimal long term rental with the garage and the basement renovation and that kind of stuff. So it could be that that’s been going on behind the scenes to change the math here a little bit for us, is that possible?

Lynsey:
That’s possible.

Scott:
Look, I think you’ve got to run the numbers with it, compare it to here’s what I’m actually thinking about investing, what if I just bought four of those, compared to the primary there? Am I better off with that approach than I am with the primary? And then you can begin converting that process over time, either with a cash out refi to get some of that … It doesn’t have to be next year you do this, you could do this over the three year period if you wanted to dip your toe in and prove the model first.
But then you could say, “Okay, great, I’m going to cash out. I’m going to invest my 80 to 100 in Q1. Then in Q4 I’m going to cash out refi and use some of my savings to get number two or find another financing alternative.” Then I’m going to be like, “Okay, I’ve got the model, I’m ready to buy four through eight, time to sell and redeploy with this.” So that would be one way to approach and unpack the problem in a way that’s probably a little bit more bit sized than, “Okay, I’m going to sell the house tomorrow and then redeploy 500 grand across my new business approach, which might be a little overwhelming at first with this.”

Lynsey:
I got to do those training wheels first.

Scott:
Yeah. But this is great, we went kind of in reverse order almost, not that we didn’t start with something that was unimportant, but clearly if you’re considering this, this is the big lever to pull in your financial position over the next couple of years is the approach you’re going to take potentially with real estate and investing. And with your largest asset being on the table, your home equity, as an option that you’re willing to consider using to get to your three to five year goal that opens up a tremendous number of possibilities and hopefully gets the wheels turning.

Lynsey:
Definitely. Yeah, we’ve got to do some more numbers crunching, or I do, I’ll just present it to Patrick, “Here’s your options, A or B or C. There’s so many options.”

Mindy:
There’s so many options. Okay before we go, at the very beginning of the show we mentioned how you are crushing it with groceries and we never actually talked about how you’re crushing it with groceries. So how do you keep five people fed for $700 a month?

Lynsey:
I am a bit of a sales nerd. So every Wednesday I check out … King Soopers is our local grocery store, and so I just check out the advertisement and I see what meat, vegetables, fruit, what’s on sale that week. And if it’s not on sale, I tend to not buy it, it’s like, “Oh, raspberries aren’t on sale this week. Well, we don’t get those.” So it’s just very strategic about meal planning and matching it up with the on sale items. Is there a really good deal on hamburger this week? Well, that’s what we’re going to buy a little more.

Mindy:
Wow. Scott, that sounds a whole lot like Erin Chase’s method on episode three where you were like, “I just buy what I want.”

Scott:
Yeah, I spend more than that for a family of two. All right, moving on to our …

Lynsey:
Scott, I’ll meal plan for you, it’ll be like $300 a month for you.

Scott:
Oh well. That’s awesome. I’ll have to go and investigate and I hope that’s inspiration to a lot of folks. And that’s making a huge difference in your financial position, it’s allowing you accumulate all this cash and have all these options that we just discussed is discipline in that area among others, but that one seems like the one that requires the most ongoing maintenance to keep that low.

Lynsey:
Yeah, it just requires that intentionality, is really just observe and meal plan around that. And we don’t feel deprived, I mean, we’re able to go out and eat a couple times a month and really we enjoy home cooked meals often more. It’s always disappointing where I’m like, “Oh, I could have made a better fajita.”

Mindy:
Well, Scott, I think that’s an important point, it’s easy to let that particular line item in your budget go crazy. It’s so easy to be at the grocery store when you’re hungry and you’re like, “Oh, the raspberries, they’re not on sale, but they sure look good this week. I’m going to get them anyway.” And one time isn’t a budget buster, but every time you go to the grocery store and you buy the things that aren’t on your list and you buy the things that aren’t on sale it adds up really quickly.
So I think it is, if you’re looking for places to cut, that’s a really great one that can have a huge impact in your monthly budget. I mean, she’s $700 a month for five people. I’m not even close and my kids are bigger and they eat more and I’m not even close to $700 in my budget. I actually don’t even want to run it. I just said to Carl the other day, “We should really start being better.”

Lynsey:
We’ll expand it as we get teenagers though.

Mindy:
Yes, we will.

Lynsey:
There’s an asterisk on that, they’re two, four and six, how much do they really eat?

Mindy:
I don’t know, mine ate like line backers since birth.

Scott:
Well, Lynsey, is there anything else that we could talk about today that would be helpful to you? Was this useful, was this what you were looking for?

Lynsey:
No, this was really useful. It was not only validating, but it has me thinking more creatively. I’ll have to take this away thinking about my own business and then going forward with the short term rentals, and also really checking in with different lenders, because I’m going to need a lender who is also going to be able to think creatively because Patrick and I know we can cover an additional mortgage even if someone else wasn’t going to rent it, which is not the intention, we’re going to have someone else pay our mortgage. But yeah, just speaking creatively about financing future properties is going to be an important key to getting to our next step.

Scott:
Absolutely. And by the way, all of the things we talked-

Lynsey:
Because on paper it’s like we earn 100,000.

Scott:
All the things we talked about I was attacking from the lens of traditional conventional type financing. Other alternatives to that exist out there that are asset based and those kinds of other things. They’ll often have worse terms that are not maybe 30 year mortgages or very low interest rates, but those are things to potentially explore as well in addition to the conventional stuff. The discussion is to set yourself up for a conventional loan at least as an option in the next year or two as well.

Mindy:
Awesome. Lynsey, this was so much fun talking to you today. I really, really, really appreciate you being able to talk to us and share your story because I think that you’re in a position that a lot of other people find themselves in or very similar positions. And I bet you just taught a lot of people about how to fix their grocery budget.

Lynsey:
Hooray. Oh, other hot tip for families, potty train early, then you don’t pay for diapers.

Mindy:
Woo-hoo.

Lynsey:
Woo-hoo.

Mindy:
Or use cloth.

Lynsey:
Use cloth.

Scott:
It sounds like there are numerous advantages to that approach.

Mindy:
They’re super gross, but they’re-

Scott:
So that’s sound like great advice.

Lynsey:
The Earth loves it too. FI tip, don’t spend $50 a month on diapers.

Scott:
Yeah, I was thinking of the Earth, that’s right.

Lynsey:
Mindy laughs at the Earth. The Earth.

Mindy:
No, we had a little boy over this weekend and he had his own little potty, it was very cute because I don’t have potty seats anymore for my chairs, because we’re done. We potty trained, hooray.

Lynsey:
Yay.

Mindy:
[crosstalk 01:13:50]. They’re going to be so embarrassed [crosstalk 01:13:53]. They’re going to be so embarrassed if I don’t say it happened a long time ago.

Lynsey:
Right, Mom.

Scott:
Nice.

Mindy:
Yeah, this will be the one episode they listen to. Okay.

Lynsey:
Well, thank you both.

Mindy:
Lynsey, thank you so much for your time. This was a lot of fun and we will talk to you soon.

Lynsey:
Awesome.

Scott:
Yeah, thank you so much.

Lynsey:
Thank you guys, it’s been great.

Mindy:
Okay, Scott, that was Lynsey and that was a whole lot of really awesome options. What did you think of her story?

Scott:
I thought it was really fun. Most of her net worth is in the home equity and so we almost approached the diagnosis and unpacking of her situation and strategic options in the opposite order. And just learning for you and I, I think to be like, “Oh, well, we’re worth 550,000 to 600,000, and more than half of that is in home equity, is the home on the table?” Usually it’s just a defacto no, people are like, “No, I’m not going to sell my home with my family in it and begin using that to build equity.” But if you are willing to do that, wow, that can dramatically change the outlook and projections and speed to financial freedom with that kind of stuff.
And I think that’s going to really get the wheels turning in her mind and her husband’s mind as they unpack this and think through the ramifications of that, because they could be in a position in two years from now where they’ve got multiple real estate properties producing large amounts of cash flow from multiple short term rentals with that, or a great investment return on their primary from a cashflow perspective, which they’ve really converted into a triplex for the most part. It’s just a very interesting way that we unpacked the situation I think and really powerful, a learning opportunity for us.

Mindy:
I like you said she turned her primary home into a triplex, she did. She has a rental garage, she has a rental unit in the basement almost finished, and then her main level unit. Look for creative ways to generate more income through your current property, or when you’re considering buying a property look at properties that have other ways to generate income. A detached garage can be a great source of income for somebody who wants to store their stuff and if you don’t need it, that’s awesome. 700 bucks a month she’s getting just for renting out space in her garage.
After the episode Lynsey and I talked even more and I gave her a lot of ideas for her jewelry business. I’m super excited to see that. I know Lynsey in real life, so I am going to hound her in six months to come back and give us an update on what has happened and what options she’s taken. So look for that in about six months, that’ll be awesome. Scott, this episode ran a little long today, should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 234 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying it’s been a real thrill, baby krill.

 

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In This Episode We Cover

  • Creating a “hype folder” so you can painlessly ask for a raise 
  • Shopping the sales and feeding a family of five for $700 per month
  • Creative house hacking by renting out basements, garages, and other dwelling areas
  • Using a self-directed 401(k) to invest in real estate and grow retirement savings
  • What to do with a large amount of cash while you’re waiting to invest?
  • Outsourcing repetitive tasks in your business so you can scale
  • And So Much More!

Links from the Show

Books Mentioned from the Show