BiggerPockets Money Podcast 123: Carefully Crafting Financial Independence Through Passive Income with Avery Heilbron

BiggerPockets Money Podcast 123: Carefully Crafting Financial Independence Through Passive Income with Avery Heilbron

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Joining us today is Avery Heilbron, a listener on his way to financial independence through real estate investing. But Avery isn’t going all out and buying up every property as fast as he can. He’s making calculated purchases that allow him to live for free—and also cash flow while he’s there, even though he lives in a high-cost-of-living area. Once he moves out, that cash flow increases even more!

Avery is also thinking ahead and mitigating his risk of non-payment of rent by using the Section 8 rental assistance program to help guarantee rent payments.

Oh, and Avery is 25.

He attended college through a combination of soccer scholarships and parental contributions, worked through school, studied hard, and graduated with ZERO student loans and a great job.

Do you have high school or college students in your life? This episode can help give them direction and encouragement that a little careful thought can have a HUGE impact on your future financial situation.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Mindy:
Welcome to the BiggerPockets Money Podcast show number 123, where we interview Avery Heilbron, and hear his story of wealth generation through real estate investing.

Avery:
I have a mentor, and most of his block of business in Boston is section eight, and when he talks about it and said he gets guaranteed rents, I thought, “Why are people so against this? Seems like a great thing, and you just get the direct deposit from the government, and unless the government fails, I’m going to be doing okay.”

Mindy:
Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen, and with me as always is my lead-free co-host, Scott Trench.

Scott:
Oh, my gosh. That intro is just so full of irony, so irony, ironic, ironic.

Mindy:
Oh, my goodness. I quit. I quit. I quit. Thank you from episode 123. I’m just kidding. I’m with you forever. Scott and I are here to make financial independence less scary, less just for somebody else, and show you that by following the proven path, you can put yourself on the road to early financial freedom and get money out of the way, so you can lead your best life.

Scott:
That’s right. Whether you want to retire early and travel the world, go in to make big time investments and assets like real estate or make your big first house hack or second house hack in the context of the coronavirus, we’ll help you build a position capable of launching yourself towards your dreams.

Mindy:
Scott, I am thrilled to have Avery on the show today. He is not a blogger, he’s not another podcaster, he is a listener, who is working his way towards financial freedom through real estate investing, but his goal is not to own five million properties. His goal is to start small and stay small, and just generate passive income through house hacking. I really love this story.

Scott:
Yeah. We’ve talked to a lot of people and for the most part, it seems that most of our listeners, most of you folks out there are just chugging along right now. Very few of the BiggerPockets Money listeners, some have, but relatively small portion seem to have lost their jobs, and a lot of you guys are earning a solid income. Avery is right in that ballpark. He still got his job, things are still going reasonably well for him, and he has not been scared off at all by the coronavirus situation and in fact, has taken really good advantage of that and refinancing, buying another investment, getting a great deal, and it’s just really exciting to see what he’s doing and how seriously he’s plugging along here in I think a really, really strong, intelligent, and risk-appropriate way.

Mindy:
See, he’s taking advantage of several different methods of investing. He’s doing the house hack, which means that he is reducing his living expenses personally. He’s cash flowing $750 a month in Boston. I’m sorry, Boston. How do you say that with the Boston accent? I don’t have one.

Scott:
He’s making wicked profits I think is the way it goes.

Mindy:
He’s making wicked profits.

Scott:
I think Tom Brady is cool there, but-

Mindy:
Oh. We can’t talk about Tom Brady anymore when we talk about Boston. May he rest in peace. He’s using section eight and taking advantage of that program to provide housing for a family while getting his rent guaranteed. The section eight housing is paying the majority of his mortgage. So, now, he can go out and get another one and no have to be so worried about making his mortgage payments.

Scott:
Yeah. Love it. Well, should we go ahead and bring him in?

Mindy:
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Mindy:
Okay. Huge thanks to the sponsor of today’s show. Scott, I’m going to let you bring Avery in today.

Scott:
Avery Heilbron, welcome to the BiggerPockets Money Podcast. Can you just kick us right off and tell us about how you purchased a property that was originally listed for $800,000 in January of 2020 for less than $700,000 and are you terrified to be transacting on that property right now in the midst of the whole coronavirus situation?

Avery:
Well, first off, I was just able to do it right now because there’s a lot less competition for buyers. Back in January, that house might have gone under contract for over 800,000. People were offering way over asking and still not being able to find themselves under contracts. I’m also an FHA buyer. So, that’s the least desirable buyer for a seller to have. Right now, it’s a lot fewer of those, a lot of people scared, and a lot less full cash purchasers. I was able to swoop in and just offer what I wanted to offer, and seemed like people who are selling right now are really motivated. So, it just worked hand-in-hand.

Avery:
To answer your question about being nervous, no, I’m not nervous because I’ve done my research. I know the rents. I know that I’m getting it for an undermarket price, and I’ll probably immediately have some equity in the place. So, a little bit there to fall back on. So, makes me sleep at night and feel good about it.

Scott:
I know this is a money podcast and not a real estate podcast, and we’ll get to the money story in a second here, but I do want to quick get the narrative of the story. So, tell us about what it was originally listed for, what kind of property it is, all that good stuff, and what’s going on today. Can you walk us through maybe starting from that January timeframe to right now?

Avery:
Yeah. So, I actually wasn’t even really looking into doing a house hack at that time in January because I had just done the current house hack in a duplex in a town called Everett. It’s just north of Boston, two miles. So, it was originally listed at 800, and then it went down to 750 end of March or end of February, and then right at this coronavirus hit, it dropped down to 725.

Avery:
Originally, actually, the owner had told me it had a previous buyer, but those buyers lost their jobs. So, their financing fell through. So, he was pretty motivated to get the property going off the market. I had just offered 678 with the $8,000 closing credit thinking my ceiling was 700,000 to offer just because I didn’t want to get an under contract under something that didn’t seem right. It really seemed like a good time. Honestly, I was a little shocked that I got word on Monday that the seller accepted without negotiating. That actually freaked me out a little bit thinking that why is he not negotiating, but very motivated, I guess.

Avery:
Did the inspection, and there actually wasn’t too much work going on, and met the tenants. Safely wearing a mask, of course, and gloves, and everything. They seemed very nice and they have good jobs, and they’re able to still work right now. So, that’s all exciting stuff.

Avery:
Right now, I signed the purchase and sales on Monday and I’m supposed to close end of May. Oh, I forgot to mention, it’s a three family. So, bumping up one extra unit from the current duplex I have right now.

Scott:
Fantastic. So, $122,000 off give or take on this next purchase here. Well, the last thing I want to ask about this is, do you feel like prices are going to fall further? Do you feel like that you’re getting a really good bargain on this or do you feel like this is about where it should be valued?

Avery:
I think it will probably be valued around 710 just based on what the real estate agent said. He was definitely overpriced in the original price that he thought he was going to get. I think it’s because his selling agent is an attorney, so they’re not strictly someone who works with real estate, but in Massachusets, I’m not sure if this is true elsewhere, you automatically have your real estate license if you’re an attorney. So, that was also something that played well into my hand that the selling agent didn’t really know what they were doing.

Scott:
Got it.

Mindy:
Yeah. So, that is interesting. I think that is in most states, if not all states, that if you are a licensed attorney, you also can get your real estate license. I think you just have to take the test, but if that’s not your main job, why are you listing properties? Why did he list this property with this guy? Maybe he could have gotten more in January, like you said, when everybody was there trying to bid up with all cash offers. It’s really fortunate for you that he definitely went the wrong route.

Mindy:
So, okay. So, you’ve got a three family. How many units are occupied right now?

Avery:
So, the owner currently lives in one of the units. So, he’s “doing a house hack”, but I don’t think very well. Actually, my attorney let me know that he owes the IRS $50,000. So, hopefully, I don’t make those kind of mistakes later in life.

Mindy:
Yeah. Pay your taxes.

Avery:
So, he’s living in one of them. So, he’ll obviously move out, and then the other two are tenanted. I really like the tenants. So, they’re pretty fairly small units. One is a studio. The owner’s unit is a one bedroom, and upstairs is two. In the studio is a younger guy, maybe early 20s. He works a tech job, and he’s able to work from home. So, that’s all fine. Then the two upstairs people, it’s the husband and wife and the wife’s dad. The husband and wife both work at the Encore Casino. I’m not sure how familiar you are with that in the Boston area, but there’s this huge casino that came in last year that really added to the economy of this town Everett that I’ve been very interested in investing.

Avery:
A lot of their revenues goes to the city, and a lot more people have wanted move in and start developing in the area because it’s a pretty working class town. So, a lot of stuff has been going on, and the mayor is super for making everything better and not just regentrifying, but making it better for everyone who lives here and also trying to keep the roots of everything that’s going on. So, I really appreciate what he’s doing.

Avery:
Back to the tenants, yeah, even though the casino is closed right now because of coronavirus and all the rules and everything, the Encore is still paying its employees. So, I’m not that worried about also them not paying rent. So, that’s also a good thing for me and for them, of course.

Scott:
What is your mortgage going to be, the mortgage you assume in terms of monthly payment, and what are the rents that these two units are providing?

Avery:
So, the mortgage will be right around 3,950 to 4,000 depending on the rate. Right now, the lender has quoted me at 2.875, which I think is pretty insane.

Mindy:
2.875?

Avery:
Yeah.

Mindy:
I need your lender’s number.

Avery:
Yeah, because she has some friends who have gotten that rate with some investment loans as well, which I think is pretty crazy. They just went and ask their lender if they could lower it, and I guess the lender is okay with not negotiating.

Mindy:
Wow.

Avery:
So, for the studio, I think the person who’s in there right now is paying 1,500, and the two bedroom is 2,000. Those are pretty in lined with market rents. I would just say right now the old owner didn’t have great leases, so he opted for last month’s rent instead of security deposit. There’s also just some odd verbiage in there, but right now, the upstairs tenants are month-to-month, and they’re really happy and want to sign a yearlong lease, and the studio tenant is a six-month lease that ends the end of July. So, he also wants to resign and I would put him on a year lease as well.

Scott:
What would the unit that you’re going to move in to rent for?

Avery:
Probably around 1,600 to 1,800 depending. I know my girlfriend really wants to do some repairs with me like painting and putting in subway tile. Actually, for the apartment that I’m in now, she designed everything, and helped paint. Actually, she took off her senior year spring break to help me paint. So, very grateful for that.

Scott:
There you go. So, you’re going to get 5,000 plus in rent on just under $4,000 in mortgage on this property. I assume it’s a reasonably nice property if it’s renting at that level for those units. Is that right?

Avery:
Yeah. It’s in pretty good shape. The units aren’t massive, but it’s nothing crazy, hard wood floors. It actually had granite countertops and stainless steel appliances, so the stuff that tenants are interested in. For the most part, most places in this area have a pretty standard rent. So, there’s not a whole lot of variance, but it’s nicer for me because there’s less work to do when I go in.

Avery:
For example, the duplex that I’m in now was really disgusting, had really funny tiles, linoleum floor, really weird yellow countertops, and a lot of mouse poop everywhere. So, that was a big difficult to wrap my head around when I actually realized I was going to have to live here.

Mindy:
Yeah. There’s mouse poop everywhere. You just sweep it up, you vacuum it up, you bleach your hands, and then you move on.

Avery:
Mm-hmm (affirmative).

Mindy:
Okay. So, you’re throwing out some big numbers. You’re throwing out a mortgage-

Scott:
Sounds like rat race.

Mindy:
Oh, okay. I quit. Goodbye.

Scott:
All right.

Mindy:
You’re throwing out a new mortgage for $3,900. What does your duplex mortgage run you right now?

Avery:
So, right off the bat when I originally did the FHA loan with the duplex mortgage, I was at 3,307. I mean, that was a 4.125% rate. I actually refinanced in March. It was actually really lucky timing. I was planning on doing it anyway so I could use another FHA loan to purchase another house hack. I was quoted at 3.375, which I already thought was insane, but then the lender told me about for the next purchase at 2.875. So, even more insane, but that refinance brought my mortgage payment down to 2,850, and I also didn’t have to pay my mortgage in April. So, that was really awesome for me, especially during a time when a lot of people are freaking out, and I’m at 100% for rents. So, it was a good month.

Scott:
It’s just amazing, right? Everyone is freaking out because of the economy and the coronavirus. Here you are, you refinanced, you save $500 a month, you skip a payment, which shores up your financial position, and you’re buying another house hack that seems to make a heck of a lot of sense with a ridiculous rate for $122,000 off, right? I mean, how do you play the hands any better than that? This is why we were so excited to hear your story and jump right in there with that incredible set of actions there.

Mindy:
I want to know what you do for a living that you can qualify for $7,000 in mortgages. Let’s talk about your age, too. I sometimes come off as agist, and I don’t mean to. I’m just impressed that there’s all these far younger than me people who are doing far better than I am financially. So, what is your job?

Avery:
So, I work for a pretty large insurance company just outside of the city. I’m a data scientist slash data analyst. I typically do quite a bit of computer coding, not as fancy languages as someone like the software developers, but that’s typically what I’m doing most of the day.

Scott:
Yeah. Well, we just finished the sequel to the story here. You see where I’m going with that for all you computer nerds in terms of your real estate purchases. So, let’s actually start from the beginning and go through the money story here. Where does that journey with money begin for you? How do you frame this journey to financial independence?

Avery:
Well, for as long as I remember, I have hated spending money. Maybe it’s just been ingrained in to me by my parents or maybe my Dutch history. I didn’t realize that, but I guess Dutch people are frugal, but my dad was always like that. We would go to the store. Sometimes it would be funny. He would come home and buy the cereal that nobody wanted, and I’d say, “Why did you get it?” and he said, “Oh, it was half off,” or whatever, but just those things.

Avery:
I’ve always been really interested in saving. It, honestly, physically felt uncomfortable to spend money. That’s actually something I’ve had to try to get over, especially wanting to go out or get a beer, which, obviously, can’t right now, but paying $8 and giving someone that money for the beer always makes me feel a little uncomfortable, but something I’ve gotten over.

Avery:
I’ve always really liked saving and working. I don’t really like hanging around too much and doing nothing. Something that can attest to that is while I’ve been working in this full-time W-2 job and then also looking after the real estate, I was looking for side gigs. So, I had a pretty funny side gig, and a lot of my friends would laugh about it, but it’s called deleading in Massachusetts, so lead paint abatement.

Avery:
So, on Saturdays, I would go with this guy who actually he deleaded my upstairs unit. So, in Massachusetts, it’s a pretty serious thing. My tenants are section eight, so it was one of the things that I had to do in order to have tenants up there, make sure it was deleaded. I just was talking to them because I’m a pretty curious person.

Avery:
I go, “Hey, how did you get into this? How do you all this?”

Avery:
He was telling me like, “Oh, yeah. I actually want some help part time. Go get your license and you can come work for me.”

Avery:
So, I went and got my license. Took a week off of work.

Scott:
When is this? Relative to your timeline, was this in high school, college? Is this recent?

Avery:
This was more recent. So, just during high school and college and younger years, I just worked regular jobs, part-time, and saved my money, and had internships and whatnot. Then coming out of college, and then during when I was doing the house hack is when I met the deleading guy, who then I worked for for probably six months before I gave it up because I wasn’t interested in doing it anymore.

Scott:
Well, I love that. Let’s get to that in one moment here. In terms of your position upon graduating college, what did that look like? Did you have some cash that you’d saved up? Did you have any debts? What was the overall financial position upon graduation there?

Avery:
Yeah. So, I’m super fortunate. I have no student loan debt. So, very grateful for that. So, that obviously puts me well ahead of the curve from a lot of people, and something that I’m glad I don’t have to have monthly payments for that, but I was able to have two pretty good paying internships. My sophomore and junior summers also working for insurance companies, and similar type roles, and just saved a lot of that money.

Avery:
I also was a TA at school. So, I just tried to save that money, put some towards beer and food and the other towards my bank account. Then I also was able to get a little bit of a signing bonus when I started work, and didn’t go too crazy paying really high rent in Boston. I think I could have done a little better, but looking at some of my friends and what they pay for rent, I think I did pretty well. So, I just saved a lot of my income on what I thought was necessary. I got a library card, so I wouldn’t have to pay for all the books that I was reading, stuff like that.

Scott:
Love it. So, it sounds to me like you were very frugal here. You set yourself up. We skipped over this, but I bet you studied a field that had the potential to generate high income. It sounds like you’re a data scientist. So, I imagine that was part of your undergrad education. Is that right?

Avery:
Yeah. So, I studied math and statistics, and then I had an economics minor in school.

Scott:
Great. What college did you go to, by the way?

Avery:
So, first, I actually went to the University of New Hampshire for a year and a half. I played college soccer. So, I went out there, and then we got a new coach. He didn’t like me very much. So, I transferred to Colby College. It’s a way up in the sticks of Maine, an hour north of Portland, Maine. You might have heard of that town. It’s three and a half hours north of Boston, Waterville. That is where Colby is.

Scott:
Great. So, it sounds like you studied hard. You’re a student athlete, those types of things, and you graduated largely debt-free with a substantial cash position and a relatively high-paying job out of college. Is that right?

Avery:
Yeah.

Scott:
What year did you graduate?

Avery:
2018.

Scott:
2018. So, very recently. So, what happens? When did you catch the bug for financial independence and begin going down that path?

Avery:
Well, I think it was always a cool idea in my mind. Apparently, I’ve said it to people in high school, but I don’t really remember that I never really wanted to work or just do what I wanted to do. I don’t really remember saying that. Then also while I was in school, I remember, at least at the University of New Hampshire, we had a soccer house, and they were paying 3,000 bucks to live in this crappy house that we trashed all the time, and it doesn’t make sense to me, and I just wanted to be on the other end of that.

Avery:
I always thought that was cool, but the big spark really was I started playing in a soccer men’s league, and my mom was actually out in Boston because me and my brother lived together, and my brother had hip surgery, so my mom was taking care of him, helping him around the house because he couldn’t really walk or do much or go to his doctor’s appointments.

Avery:
My very first men’s league game, which they’re usually early Saturday mornings, and these guys are ex-college players. So, they’re hung over, they’re angry they had to wake up. It’s pretty physically. 30 minutes in, some guy just crunched my ankle. So, that was the last men’s league game I’ve played over two years ago.

Avery:
So, I sprained my ankle for the fourth time. Luckily, my mom was there to take care of me and help me a little, take me to the hospital. One day, because she wanted to get out of the house, we went to the bookstore, and I’ve always liked business books. It’s silly, but I’m not super into fiction pretty practical. So, I like reading business books or finance books. I just picked one random and it was called Retire on Real Estate by Kai Anderson. I don’t think people talk about it as much, but it just mentioned BiggerPockets and real estate and financial freedom, and then I just read plenty more books and did all the research I could, and started going to meetups, and that’s when it started for me.

Scott:
Around what time was this? Was just this 2018 around when you graduated? I’m sorry if I missed that.

Avery:
Yeah. So, this was two months, three months after I graduated in August 2018.

Scott:
Got it. Okay. So, you graduated college. You’ve got a sizable pile of cash, and a good job, and you discovered financial freedom as a concept there, and the context of real estate about three month after graduation. It sounds like you’re already frugal to begin with. You weren’t renting a crazy apartment or spending lavishly on these types of things, right? So, what happens? What actions you begin to take to move towards that goal as we move through 2018 and into 2019?

Avery:
Right. So, I think I did what most people typically do when they discover BiggerPockets. They go on there and they start reading every known book imaginable. They listen to the podcasts. Then how I am, I wanted to take action. I wanted to do something. In a lot of them, they talk about going to these meetups. So, I think it was November. I went to my first one. I met the real estate agent there that I used for my first purchase, and actually this next purchase.

Avery:
He said to me, “So, do you want to go look at houses?”

Avery:
I said, “Whoa, whoa. Hold on. Why would we do that? I don’t know if I’m there yet.”

Avery:
He said, “Well, it doesn’t matter. I can just teach you about basements and boilers, and how things should look or what to look out for.”

Avery:
I thought, “Okay.”

Avery:
We just started looking at places. I noticed that it was super competitive in Boston and tough for an FHA buyer. I actually got pretty lucky with my duplex purchase as well. It was an off-market thing, which I was able to get because of the relationships that I made at those meetups.

Scott:
So, you mentioned that you’re using a … In November of 2018 is when you started looking at these properties, right?

Avery:
Mm-hmm (affirmative).

Scott:
You’ve mentioned an FHA loan a couple of times here in two contexts. What is an FHA loan? Why did you decide to use an FHA loan and why do you think that the sellers are less enthusiastic about buyers using FHA loans?

Avery:
Right. So, FHA loan is just a loan that allows you to put a lot less money down in a typical conventional mortgage. So, typically, when someone’s thinking of going to buy a home, you would have put 20% of a down payment and 20% of $500,000 to $700,000 is a lot, and not the type of money that I had at the time or have now. So, I was looking for alternative ways. Through going on BiggerPockets and reading these books, I was able to find a strategy that it seems like a lot of people started out in this way getting an FHA loan.

Avery:
So, it really just allows you to get in to something with a little bit more leverage and something that you couldn’t do otherwise. The reason why buyers aren’t as interested in it is because there are a lot more hoops for you to jump through. For example, the house needs to be of a certain quality standard, can’t have siding falling off or maybe gutters doing things that they’re not supposed to be doing, but the house has to be in pretty good condition. So, it’s a little bit harder for sellers.

Avery:
Then also, once you’re past that initial contingency period of inspections, et cetera, the appraisal will need to be appraised at what you’re buying it for because most likely, if you’re an FHA buyer, you don’t have that extra money to make up for it if the appraisal came as well. So, you’re the least strong buyer that a seller could accept an offer from.

Scott:
Okay. So, love it. That’s a great explanation. Let me ask you this. You’re using an FHA loan and you’re buying $700,000 property, right, which is too many people in this country that are listening to this in the US, they’re going to think, “Hey, that’s a huge price point.” A lot of people in Boston might think that’s very reasonable or on the coasts and some certain cities, but how do you think about risk mitigation like you say, “Hey, I’m putting down $20,000. I’m taking a loan of $680,000,” right? How do you think about risk in the context of that? Do you do anything with reserves or cashflow to mitigate that or feel comfortable?

Avery:
Right. I will admit on my first property, I didn’t think as much about the reserves as I am now, but I think that happens to a lot of people. So, when I wanted to then get to this next property, I wanted to make sure that, A, because the governor of Massachusetts just said there are no evictions or foreclosures just for single family residents and you don’t really have to pay your rent if someone was smart enough to get around it, and in Massachusetts, you really can, before coronavirus, live in a place, rent free for a year if you wanted to, but you would then be evicted.

Avery:
So, things like that, I wanted to make sure that on top of my salary, I still had enough money and with my savings to be able to ride it out. Maybe not make the repairs or the things that I wanted to do like capex if no one is paying their rent, but if things are going well, and I’m getting all of the rent or most of the rent, still also have enough money in case things break and stuff like that.

Avery:
So, I’m smarter now than I was in March of last year when I purchased this duplex. So, I feel comfortable enough with the amount of savings that I have and will have come closing to weather the storm for as long as this goes on and for whatever things that I have to fix that came up in the inspection report.

Mindy:
Okay. So, with the first property, the duplex, was there a tenant already in place or did you place the tenant yourself?

Avery:
I placed the tenant myself, yeah.

Mindy:
So, you bought it vacant.

Avery:
Yup. Yeah.

Mindy:
Okay. I really prefer that. I think that that’s the better way to purchase. So, that gives my stamp of approval. Was it being offered vacant or did you put that in the contract as a contingency?

Avery:
So, originally, I went and saw the place in December, and there was a tenant in it, and it made me not as interested to offer it because they were paying probably $1,000 less than what the at market rent was. Then someone came with a cash offer, swooped it up. They backed out. Because I knew the selling agent, he asked me if I was interested before he put it back on market and I said, “Yes.” While I offered, I did ask for it to be delivered vacant, although it was already then those tenants had left. So, it was actually already vacant on the upstairs floor. So, that made it a lot more desirable.

Scott:
Yeah. I think you’re very wise as a first time buyer in that circumstance to not want that because there’s something about if a tenant is $1,000 under market rent, right? On paper, that looks like, “Oh, a great opportunity to raise the rent,” but in reality, if you go and try to raise the rents by $1,000 on a tenant, you’re going to get pushback or you might make the news, right, which is not something that we as landlords are looking for in this type of circumstance, right?

Scott:
So, my preference is to buy a properties that either have tenants that would have passed my screening criteria when I buy them already in place, paying reasonably close to market rents or maybe 5%-10% under or I’m much more likely to pass on a property where all the units are considerably under market rents with really longterm tenants. That’s not a fun project for me as a landlord. I don’t think that your reality is going to reflect what your proforma suggests in the sense that you’re not going to really in practice be able to raise those rents as a first time landlord in a lot of cases for a bit of time, right, unless you’re pretty tough and move people out. So, I like that approach there. For me, it would have been hard to do that as a first time landlord.

Avery:
Right. I definitely agree. As I mentioned in Massachusetts, if you want you can be that professional tenant, and if someone told you, “Hey, you’re going to have to pay me 1,000 more bucks,” and I’m that much under market rent, I would probably just say, “Okay,” but then not pay. I didn’t want that scenario on my hands for the first place that I was getting in to as well.

Mindy:
Yeah. That’s a good plan. Also, there are laws in place. I’m not sure what the Massachusetts landlord-tenant laws are, but there are laws that prevent you from raising rent in some states by a certain amount, and $1,000 would certainly hit almost every state that has that stipulation in it.

Avery:
Mm-hmm (affirmative).

Scott:
All right. Hope you’re enjoying the show. We’ll be right back after a word from today’s show sponsor.

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Scott:
So, you decided on this journey in 2018, began searching at the end of 2018, closed in March 2019. Are you pursuing financial independence through other means as well? For example, are you contributing to a 401K? What’s your overall plan to get there aside from these house hacks?

Avery:
Right. So, right now, just through work, I do the regular 401K. I just put up to the matching because it’s free money and it would be silly otherwise not to. I don’t do much more than that because I’m planning on saving money for a down payment for another house hack. With that money that I’m saving, I just put it in a low yield savings account. A year ago, it was doing 2.25%. Now, it’s 1.55. So, nothing crazy.

Avery:
Then I do have a little bit of money in some vanguard stocks, so VTI, not a whole lot, but that’s something that I’m going to start putting a little bit more money in to and maybe more as time goes on and I have a bit more cash laying around.

Scott:
So, the cornerstone of your approach is going to be these real estate investments that it seems like you’re on track to build up fairly aggressively over the next couple of years, and then the surplus is going into stocks. Is that basically it?

Avery:
Yeah, yeah. That’s how I would say. Yeah.

Scott:
Great. Then you’re just going to spend less and crunch towards it. So, I love it. I think I’m seeing Mindy has some more questions about that first property.

Mindy:
Yeah. So, this is a leading question because I know the answer, but what are the numbers look like on your first property? You said it’s a duplex. So, you are living in one unit and renting out the other unit.

Avery:
Yup.

Mindy:
Okay. So, what is the other unit rent out for?

Avery:
2,400.

Mindy:
Okay. What are you doing with your property or with your half? You have a roommate. You have a couple of roommates.

Avery:
Yes. So, I have my girlfriend. She’s a very good roommate. She always mentions, “There’s no way if I left you would get any rent for the other half of the bed, so you better treat me well.”

Mindy:
I like her a lot.

Avery:
Yeah, she’s great. Then we have a roommate who pays 800 a month, and he’s got a tech job. He’s a nice guy. My girlfriend is also okay with that, which I know a lot of significant others may not be. So, again, very grateful for that. She knows that it will help us in the long run, too. So, he’s paying 800. My girlfriend is paying 400. Some people, I told my boss that once, he said, “Well, you’re making your girlfriend pay rent? You own the place, so why are you so rude?”

Avery:
Then I’m thinking, “Well, I’m not going to let her live for free,” and she also says the same thing. She’s paying a lot less rent than she would if she were on her own or even if we live somewhere together in a one bedroom. The rent would be a whole lot higher. So, it’s really a win-win-win-win situation for all of us. Maybe I said win too many times.

Mindy:
No, no, it’s a win-win-win-win-win-win-win, however many times you said it. Okay. So, a while back, a member posted in the BiggerPockets forums, “Should I charge my girlfriend rent?” To date, he received 164 responses. Pretty much down the middle, “Yes, you should,” “No, you shouldn’t.” I love your girlfriend. I think she has a very pragmatic approach. $400 for a two bedroom in Boston? I’m not even from Boston and I know it’s really expensive. I know that she’s getting a super sweet deal. Plus, you showed us a picture of the place, and that’s really cute on the inside, which she did, so you should be super thankful to her.

Mindy:
$400? No. She is doing just fine and you are absolutely fair to charge her to live there because she would have to pay more if she wasn’t. I love that she has the mindset of, “I want to contribute. I don’t want to just sponge off you.” So, to all the people who responded, “No, you shouldn’t charge your girlfriend rent,” you’re all wrong. You should charge your girlfriend rent.

Scott:
It sounds like you got a winner there all around and all these different things. So, that’s really good. With this, the other side you said was 2,400 a month. Is that right?

Avery:
Yup. Yeah.

Scott:
Then your side, I’ve got 800 plus 400 is 1,200. How much you think the unit would rent for entirely if you just lease it to a regular tenant after you move out?

Avery:
Conservatively, I would say 1,800, but that’s been going up to 2,000, 2,100 recently with people renting out two bedrooms in the area.

Mindy:
Wait. What’s your mortgage?

Avery:
Right now, it’s 2,850.

Scott:
So, the other unit almost covers the entirety of the mortgage. So, the first 400 of that is going to cover the rest. Everything else is going to be covering beyond the PITI on that property. So, it sounds like this is a great cash flowing investment. How much cash did you put down on this property again?

Avery:
So, it was 525, and it had a 7K closing credit, and I did the 3.5% FHA loan

Scott:
I cannot do that math in my head.

Avery:
I think it’s around 18 something.

Scott:
18,000? So, you put down 18,000 bucks, and you’re going to be earning probably at least $800 a month on this property in terms of net cashflow after reserves for capex and maintenance and those types of things on a monthly basis, if not, much more just doing some doing quick math. That’s fantastic. One unit is guaranteed by section eight.

Avery:
Right. Yeah.

Scott:
The other you have that in place. You’ll find out over the next couple of weeks how that goes of friends who’ve been impacted.

Avery:
Yeah.

Mindy:
So, are you and your current roommate and your girlfriend moving in to the triplex?

Avery:
No. It would just be me and my girlfriend because it’s just a one bedroom. So, it will be a little tight with a third person, I think.

Scott:
You could test that assumption about whether you can get 400 for the other half of the bed. Okay. So, you’ve mentioned, this was in March that you bought that, and now it sounds like you went under contract with this one in March a year later, the second house hack. Walk us through your philosophy on reserves, and just how you’re underrating your business and capitalizing it now that you’re more experienced. You mentioned you didn’t have very many reserves the first time around. How are you approaching the situation this year?

Avery:
Right. So, come closing, I’ll have about $16,000 in reserves. Maybe for some people that doesn’t feel enough. To me, I feel comfortable enough with it knowing the work that I could do from day one. Also, I feel comfortable enough. I am preparing. I don’t think it will happen, but I’m prepping for the potential of debting $0 for a year. So, I feel confident enough doing the math and with my salary, and getting the rents of over a year, and having section eight backing that rent and a new tenant that, hopefully, all that stuff will work out and that I would be okay in the long run.

Avery:
Assuming that that won’t happen and it probably won’t, things will go just fine and I think that that’s, for me, enough money to split between the two properties in case something big comes up.

Scott:
Okay. Given that you have 16. So, you have 16,000 in reserve, and you’re assuming about 7,000 in mortgage payments. So, that’s about two and a half months of mortgage payments in reserve. Do you plan to expand that reserve with cashflow and savings over the next couple of months or do you think you’re going to just keep it at that level?

Avery:
Well, my reserve will, yeah, I mean, I add to it every month when I get the rents and everything. I probably want it to be larger in the long run, so it can cover all the expenses like roof, water heaters, boilers, and come up to whatever that amount would be in the longterm. I just thought that I was comfortable enough with that reserve amount, and given that now was a good time to buy for someone like myself, I wanted to jump on it.

Scott:
Yeah. When I think about reserves, I think, “Hey, I’m going to put down the down payment. I’m going to put down any closing costs associated with that, all of the cash I’m going to need to actually transact in the property, any expected repairs, plus $10,000 to $15,000,” and then I usually up that per property. Now, when I bought my first duplex, I didn’t have that level of reserves. It would have delayed my purchase by another six months to build up to that type of position, 15 grand in particular. I had about six left over when I did it, but there’s a trade off there that younger, I think, aggressive house hackers have to reconcile in their heads about, “Hey, that’s perfect. Here’s where I’m at. What’s that balance of risk-reward that I’m willing to take?”

Scott:
Then what I thought afterwards, however it was, I am not in a strong position right now given the fact that I have a lot of leverage and not enough reserves to feel comfortable getting into my philosophy, but this is a right move, and I’m going to aggressively pile up that reserve and not be relaxed about my financial position until I’m at that point. Is that how you’re feeling about your reserve or are you more like, “No, I think I’m actually perfectly fine with this,” not even worried about it at all?

Avery:
I definitely feel okay with it. I mean, obviously, having more money is always better in case things go wrong, but I definitely will, barring everything going completely wrong just be saving and adding more to the reserves and probably slow down a little bit and maybe be less aggressive in the coming years or coming year and not try to do another house hack and over leverage myself and have $11,000 or whatever it would be if I bought another one in debt each month that I would owe. I’d probably feel a little bit nervous about that, but I think I’ve hit my sweet spot where my risk level is and my reserves.

Mindy:
Okay. So, I’m going to come in here as the voice of experience and say that I don’t know what either of you make as a salary, but I know that Scott is fairly well-compensated as the CEO of BiggerPockets, and was also the director of operations. So, you had a nice salary coming in. Should something have happened, should your roof explode or your boiler go out or whatever in your property, Scott, you could either finance that just from your salary or you had the credit lines, credit cards, whatever, to comfortably cover those costs, right? I’m assuming that Avery’s data scientist job doesn’t pay a minimum wage. So, if something happened, let’s say a new roof is $8,000 or $10,000, could you find that money somewhere to cover it? I’m guessing you could because you’re not working at McDonald’s trying to pay these mortgages of $7,000.

Mindy:
So, I think that, yes, I love to see much more reserves, but also, you’re coming from a position of strength because you don’t have a huge, you don’t have any debt, right, except your mortgages, which in my opinion don’t count. So, you have no debt. You have a good paying job. Does your girlfriend work?

Avery:
Yeah. She’s a lab technician at one of the hospitals out here.

Mindy:
So, she works, too. You’ve got a roommate. I mean, you’ve got a lot of opportunities to pay your bills even if something should happen and all of your tenants leave, but you also have tenants that are paying. You’ve got your one section eight tenant pretty much covers your mortgage payment. I mean, your section eight and your girlfriend together cover your mortgage payment. So, should your other roommate leave, you’ll be okay. Now, you’re just left with one property that you have to come up with the mortgage for. I’m assuming that since you’re getting a mortgage for it, they underwrote you and they said, “Oh, Avery can pay all these bills.”

Avery:
Yeah. Actually, there were a bit tighter guidelines with FHA because of coronavirus and they normally do up to 55% net income, and then they lowered it to 45% making it a bit more difficult to borrow and I’m still good under those guidelines.

Mindy:
See? So, you’re not. I don’t consider this to be over leveraged. I do agree with Scott that you should absolutely grow your reserve fund because I personally like to see six months of reserves. You never know when, I mean, I guess you do know when the roof is going to break because you can see that, but you never know when your stupid water heater is going to start leaking in the middle of the night. It’s always in the middle of the night. The furnace always goes out in the middle of winter, and it’s always the coldest flipping day in the middle of winter. Your air conditioning always breaks in the summer. So, you do need to be prepared for that, but you can cover those with your day-to-day job with no debt. So, I don’t think that … Let’s see.

Mindy:
I’d like to see six months reserves, but you have a healthy job, no debt, and I mean, you work for an insurance company. When are they going to go out of business? No.

Avery:
No. They’ve been in business since the 1850s. I was allowed to work from home pre-pandemic. So, this really isn’t too much different for our company, other than the fact that I’m working from home every single day, but they sent me a nice monitor and they actually reimbursed us up to $250 of home office equipment. So, bought a wireless mouse, and a keyboard.

Mindy:
Nice.

Scott:
Can I ask what kind of insurance?

Avery:
So, basically, everything when you’re filling out your benefits at work, except for health insurance.

Scott:
Okay.

Avery:
So, the disability, life, all that good stuff.

Scott:
Fair enough. I imagine there’s a lot fewer workplace accidents right now, yet premiums are still coming in. So, it’s probably not too bad of a time to be in your field.

Avery:
Yeah. Yeah. Actually, there’s been more of the infection viral, bacterial claims and a lot less injury and all that other stuff.

Scott:
Same revenue, much lower risk profile.

Avery:
Yeah.

Scott:
Not that I’m stock picker. No. Okay. So, very good. So, what’s next? What’s going to happen over the course of the rest of this year do you think for you or both building perspective?

Avery:
I think right now, I just want to continue what I was doing and save a bunch of money and start slowly putting a bit more into those vanguard stocks as I mentioned, just building up my cash position, building up my reserves and, hopefully, sitting back and watching everything do what I’m hoping it will do. So, that’s the plan.

Avery:
I like to have everything on autopilot. I guess I mentioned it a little at the beginning. I don’t really want to do any work if I don’t have to. I just want to make it efficient and also to work on its own and just enjoy the other stuff that I have going on.

Scott:
When do you plan to retire? What age?

Avery:
I’d say the goal of 30, but there’s no way I’m never not going to actually do anything for work. I say I don’t like doing anything, but I also hate doing nothing. So, it’s this weird balance.

Scott:
I like it. So, is there anything else that you want to touch on here before we move on to the famous four?

Mindy:
I want to touch on the section eight housing that he has upstairs because I think a lot of people in the forums talk smack about the section eight and the section eight program and how it’s just horrible. I don’t really think that that’s the case.

Avery:
Yeah, and I would agree, too. I have a mentor and most of his block of business in Boston is section eight, and when he talks about it and said he gets guaranteed rents, I thought, “Why are people so against this? It seems like a great thing, and you just get the direct deposit from the government, and unless the government fails, I’m going to be doing okay.”

Avery:
I feel really secure about getting that rent every month, especially during coronavirus. Even if my tenants had financial hardships, which I’ve talked to them, they said they’re doing good. I can hear the kids running around upstairs. They’re all having a good time. Everything would be going well.

Scott:
So, we’ve heard a little bit about section eight recently on a number of things around BiggerPockets, and how a lot of those landlords are feeling pretty good right now about what’s going on because their rent is guaranteed by the government to a certain extent at least. One of the things that I hear from these section eight landlords, almost across the board, is that they are really thorough on their screening process, and there are horror stories in the section eight space from landlords who are not doing it correctly. Did you find that to be the case as well? Is that supported by what your mentors told you? Did you put any intensive screening process together for your tenants?

Avery:
So, in terms of screening in Boston, typically, there’s the broker just does everything. It’s pretty standard to have that broker’s fee paid by the tenant. The biggest barrier to finding a good section eight tenant I would say is they’re able to come up with that broker fee, as well as have security deposit and cash, which would be two months of rent, then they’re probably pretty well-established and if they have a good credit score, then all of that stuff is fine.

Avery:
The one thing I say, too, to people is someone who makes a lot of money, one, can be really bad with their finances and, two, they can also suck. Just because you have money or you don’t have money doesn’t mean you’re good or not good people. My tenants are really awesome. They’re a family of four, and a single mom. They’re running around upstairs some time. It sounds like they’re playing soccer or whatever, but come 9:00, they’re never making any noise, and in the morning, they’re never making any noise.

Avery:
The winter, they shoveled their driveway. They take the trash bins out, and super respectful, nice people. So, like I said, it doesn’t really matter how much money someone makes. People can be good or bad.

Scott:
Fantastic.

Mindy:
That is the best way that I’ve heard that. There is more information about the section eight plan and how you can use it to basically guarantee your rents on the BiggerPockets Real Estate Investing Podcast episode 356. We’ll have a link to that in our show notes as well. I think that’s really great.

Mindy:
Those are the kind of tenants I want to keep, are the kind of tenants who are respectful, and pay their rent on time, and are good people to be around. I do not want to have any deals with … I don’t want to live on the bottom of a bunch of kids running around at 10:30 at night. I go to be early. I don’t want them to wake up at 4:00 in the morning and run around. I don’t want to live next door to party people. I just want to live next door to people who are nice.

Avery:
Yeah, I would agree.

Scott:
I got one more thing before we go to the famous four. We never finished your story about your deleading side gig.

Avery:
Oh, yeah. That’s right.

Scott:
Can you finish that real quick?

Avery:
Sure. I just took a four-day course and then you take a test at the end of it. They teach you all the stuff that I would deem unnecessary to be able to doing the work. So, you take this test that’s really easy, but then you have to take a test for the state, which is actually really difficult, probably one of the harder tests I’ve ever taken. The lady, even when I passed it on the first go around, was like, “Oh, wow! You passed? Good job,” shocked that I was able to do it.

Avery:
So, I was just working on Saturdays at various houses around Boston, wherever the guy I was working for had work. It sucks. It’s probably the worst thing I’ve ever done. You wear the full-on suit, all the protective gear that you would be wearing, the big mask. You can’t have the windows open. You can’t have the air on. So, when it was the summertime, you’re in these humid, hot houses, no air flow. You’re scraping paint off of window sills and door jams and sweating like you’re deep underwater.

Avery:
Although I said it sucked, it was fun and it was a good workout at the same time. So, it was just something to do, and it was extra pocket money, and paid for my gas and my groceries.

Scott:
There you go. Side hustle for those of you listening is deleading. It won’t be a lot of competition in that field in the future it sounds like.

Avery:
No, I don’t think so.

Scott:
It would be just one last member of that guild going today. I love it.

Mindy:
Yeah. When you described it so glamorously, I was like, “Why did you quit?” Oh. Nevermind. Okay. Avery, are you ready for the famous four?

Avery:
Yes, I am.

Mindy:
What is your favorite finance book?

Avery:
Well, I don’t want to make Scott feel too good, but it is Set for Life.

Scott:
Oh, all right. A plug. There you go.

Avery:
Yeah. I have to say when I read that, it was one of those books where I was like, “Yeah. I feel that. That’s good. I like that.”

Scott:
Did you read that before or after house hacking?

Avery:
That was before house hacking, but I had heard of the term house hacking, but I just really liked it. I don’t know about the right word, but it’s like, “Don’t listen to music in the car. Do what you can.” I was like, “Maybe some time.”

Scott:
Listen to my podcast. That was before we had the podcast. Okay. Well, thank you for the plug. I appreciate it. I’m glad you like the book. What was your biggest money mistake?

Avery:
I’ll say sometimes instead of being frugal, being cheap, I would say there’s, probably people have said this before, but there’s definitely the difference. One good example is when I went in to do the house. I renovated my own unit, but I also had someone do the upstairs unit just so it would happen faster and get it rented out. I just picked the cheapest option, and that wasn’t the right option. It ended up getting done, but it took a little bit longer, and the guy actually had random dental surgery that he knew about in the middle, so he took an extra week and a half off before returning to the job. I probably could have known all that stuff if I looked at the car that he drove in. It was missing a window. It had cardboard on it. So, things like that.

Scott:
It’s the old saying that is repeated in every industry or whatever. It’s like, “You think hiring $100 an hour electrician is expensive, try hiring a $10 an hour electrician,” or whatever. You think hiring a professional is expensive, try hiring an amateur. That’s a great money lesson.

Mindy:
Yeah. That leads into what is your best piece of advice for people who are just starting out outside of don’t pick the cheapest option?

Avery:
I would say what’s very important to me is taking care of yourself before taking care of your finances. So, I’m big into meditating, working out, eating well, trying to get away of any stress that I can have in my life. So, I’m able to control those things, feel healthy, then I feel a lot better about making my decisions because there’s less stuff to worry about, and I can just focus on those things that will build wealth.

Scott:
Awesome. All right. What’s your favorite joke to tell at parties? Bonus if it’s a lead-based joke.

Avery:
I don’t have any lead-based jokes. I went back on forth on this one for a while. Actually, it took quite a bit of thought. I had one that I normally use, but my dad sent one in our WhatsApp family group that’s just too good for me not to use. Anyway, it was, “What do Alexander the Great and Winnie the Pooh have in common?” They’re middle names.

Scott:
Ah. I like it.

Mindy:
I have a lead joke. I have a lead joke.

Avery:
All right.

Scott:
Oh, nice.

Mindy:
I would never try to poison you. Now, eat your PB and jelly sandwich.

Avery:
That’s good.

Scott:
I like it.

Mindy:
I hope people listening get it. It took me a second. I’m like, “PB, oh, yeah.”

Scott:
We periodically make chemistry jokes.

Avery:
That’s nice.

Scott:
All right. Well-

Avery:
Is that-

Scott:
Go ahead.

Avery:
I was just going to say-

Mindy:
Where could people find out more about you?

Avery:
Oh.

Mindy:
What were you going to say?

Avery:
I was just going to say it was the periodic part of the joke or are you just saying periodically?

Scott:
It was a really lame chemistry joke on this topic. Yeah. You got to call me off for that? Come on, man.

Avery:
Yeah. I would say probably just on BiggerPockets. I promised my mom I wouldn’t give anyone my email.

Mindy:
His phone never is.

Avery:
Also, I run a meetup, actually, in Boston. So, I’m pretty active on there as well.

Mindy:
Oh, perfect.

Scott:
Awesome. Are you in the Facebook groups or on BiggerPockets at all?

Avery:
Yeah. I’m on BiggerPockets. I’m not part of any Facebook groups, actually.

Scott:
Awesome.

Mindy:
Oh. Well, let me let you know that we have three Facebook groups, official BiggerPockets Facebook groups. One is called BiggerPockets Money. One is called Real Estate Rookie, and the other one is called the Official BiggerPockets Facebook group.

Avery:
Well, I better find those groups and be a part of them.

Mindy:
You better.

Scott:
I actually do know that Avery is on BiggerPockets because he messaged me on BiggerPockets. So, that is one roundabout way to reach you, is that right, on BiggerPockets?

Avery:
Yeah. That’s probably the best way, and then I’m happy to give out my information or phone number and stuff to someone who wants to message me there. Actually, one thing I did miss is I ask a whole lot of questions and I ask a lot of questions to people locally. I know it probably bothers them or maybe they enjoy it. So, I’m always really happy and willing to get on the phone with someone or talk to other people about what I’ve done if they have questions or advice, so I can at least make myself feel a little bit better about all the questions that I ask.

Mindy:
That’s what makes BiggerPockets so great is because you come on and you’re like, “I have questions. I have questions.” Then as you’re learning and you’re experiencing, you’re like, “Ooh, ooh. Now, I can answer the same questions for other people.” So, that’s what I love most about BiggerPockets is that you can talk to people about real estate all day long. We will-

Scott:
If you’re listening, don’t feel bad about it. Ask as many questions as you have. Find all those resources and learn, learn, learn. Then once you have finally bought a property, if it’s your first one or your next one and you feel like you’re getting the hang of it, that’s when you need to go and pay it forward by answering the next guy’s questions.

Mindy:
Exactly.

Scott:
All of us love answering questions because all of us were new and we got help when we needed it when we were getting started.

Mindy:
Well, some of us started before BiggerPockets was around, and had to figure it out ourselves, which makes BiggerPockets even better because I can share with you all the mistakes I made and then you don’t have to go make them yourself. Nobody needs to do this twice.

Scott:
That’s right. Mindy has been investing for nine decades. Is that right?

Mindy:
Nine decades. Yes. Nine decades. Okay. Well, we are going to include a link to Avery’s BiggerPockets profile in the show notes, as well as links to that forum post “Should I charge my girlfriend rent?” yes, you should, in the show notes for this episode, which could be found at biggerpockets.com/moneyshow123.

Mindy:
Avery, thank you so much for your time today. This was super fun and I really love your story of starting calmly and not just ramping it up. I see a lot of people saying, “I want to have 500 units.” Why? You could do a lot with five.

Avery:
I agree, yeah. Anyway, yeah. Thank you very much. It was awesome to be part of the podcast and just good to talk to you guys for a little bit.

Scott:
Yeah. Fantastic. Thank you very much.

Mindy:
From episode 123 of the BiggerPockets Money Podcast, I am Mindy Jensen and he is Scott Trench, and we will see you later.

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In This Episode We Cover:

  • Purchasing property originally listed for $800K in January 2020 for less than $700K
  • Avery’s journey with money
  • Why FHA loans are so unattractive to sellers
  • His plans to achieve financial independence
  • His rental properties
  • His philosophy on reserves
  • What the Section 8 program is
  • House hacking
  • His side hustle
  • And SO much more!

Links from the Show

Books:

Tweetable Topic:

  • “Take care of yourself before taking care of your finances.” (Tweet This!)
  • “Just because you have money or don’t have money doesn’t mean you’re good or not good people.” (Tweet This!)

Connect with Avery: