Are You Under Leveraging? Finance Friday

Mindy:
Welcome to the BiggerPockets Money podcast, show number 158, finance Friday edition, where we interview real estate agent Wayne [Lux 00:00:08], and talk about reevaluating a rental portfolio to generate more income and reevaluating W2 employment to spend more time with the family.

Scott:
Some of the five or six properties, I would say I’ve seen greater appreciation because we purchased them around 2007, 2008. And then the rest was thanks to you guys, actually, because BiggerPockets was introduced to me by a friend of mine and a colleague. And she said, “You got to listen to them because you’re doing everything that they do, but you don’t have any real focus right now.”

Mindy:
Hello. My name is Mindy Jensen and with me as always is my Excel spreadsheet loving co-host Scott Trench.

Scott:
I always love your formula for introductions, Mindy. Thank you.

Mindy:
I thought my husband just put the garbage away, and it’s just right behind the wall. Oh, I’m going to shoot him dead.

Scott:
I can’t hear. I’m sorry. I can’t hear it.

Mindy:
You can’t?

Scott:
No, I can’t hear it at all. Mindy always loughs at these because Mindy will have one of those things and she’ll say, “Maybe this would be a good pod.” And I’m always like, “I got a formula for that Excel pod.” Sorry, I’m going to go with this but if I use her intro, she won’t laugh as much, but if I give her a new pod on the spot, I get her going.

Mindy:
But you are my Excel spreadsheet cohost.

Scott:
That’s right. And you do have a great formula for our introductions here. You’re always calculating new ones.

Mindy:
Okay. Scott and I are here to make financial independence less scary, less just for somebody else and show you that by following the proven steps, 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 to Maui, go on to big, big time investments like in assets like real estate, start your own business or simply just get a grasp of what’s next in your already strong financial position. We’ll help you build a position capable of launching yourself towards those targets.

Mindy:
Scott, I am super excited for today’s episode of the money podcast because we are introducing a new day, a new episode. Every week we are going to now come at you with two episodes. The Monday episode, where we tell a money story and the Friday episode where we review someone’s finances and give them tips and tricks for how they can work their finances better so they can reach financial independence.

Scott:
That’s right. I’m really excited about the new format we’ve got here. Today we’re going to review Wayne Lux’s financial position, and Wayne is either a millionaire or a very close to it with a very high income and a lot of problems there. It was really fun to, I think, point out some of the potential areas for leverage in his portfolio in life and what he can do to make the most of his really strong current financial position right now. I have a lot of fun with this. I’m really interested to see what Wayne does with the information that we discuss today and I think you’re going to learn a lot by reviewing his position and seeing what decisions he has to make.

Mindy:
I completely agree. I love his story. I love that he has spent the last few years, maybe 10 years, steadily building a real estate portfolio. And now it’s time to reevaluate that portfolio because it has increased so much in value and also reevaluate what he wants out of life. He has a brand new baby and he is excited to maybe step back from a W2 job that takes time away from his family and spend more time getting to know his young sons. Scott, our attorney Matt makes me say, “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.”

Scott:
That’s right. This is just for fun. It’s informative, not informative. It’s entertainment purposes only. That’s right. You’re just here for the jokes. Now, should we bring in Wayne and tell him what to do with his money? It’s informative, not informative. It’s entertainment purposes only. That’s right. You’re just here for the jokes. Now, should we bring in Wayne and tell him what to do with his money?

Mindy:
Wayne Lux, welcome to the BiggerPockets Money podcast, finance Friday, first episode of the brand new year. I am so excited to talk to you because you have a situation that actually is not that uncommon. And a lot of other people are also in your financial situation. I would love if you could give us a little bit of background on what you do and where your money’s coming from.

Wayne:
I appreciate it Mindy and Scott. I’ve been a real estate agent since 2006 in the state of New Jersey and I also help out a general contractor in Manhattan early in the morning hours. I have the 1099 employment from the real estate and then the W2 from the general contracting. We tend to have a little bit of a security blanket with the W2 employment and then with the variable commission driven business. You never know what can happen during the month, because with COVID, especially, things are getting delayed and moved to different months, but it’s been very interesting to say the least, 2020 has been wild.

Scott:
What would you say your kind of stable W2 income is per month?

Wayne:
I would say it does vary a little bit, but it’s salary for a right around $4,000 net per month. Right around there. That’s a comfortable number.

Scott:
Okay, great. And then how would you kind of say your real estate commissions come in?

Wayne:
Every year is different. This year has been very good, I can’t complain. Definitely one of the better years. I think we saw a lot of New York City transplants coming into the suburbs of Jersey. Definitely going to have an interesting ending too, 2020.

Mindy:
I want to touch on this for a minute because I’m also an agent and I have also had a wild year. I have sold more real estate this year than I have ever in my life. And it’s insane. I am closing five properties this month, which is not … I have a full-time job. I have two full-time jobs now.

Wayne:
Yeah. You got to have [inaudible 00:06:46]. I know. It’s a wild ride.

Mindy:
What are you doing with all of the money that comes in?

Wayne:
Thankfully, my wife and I we made some big moves in 2020. March 10th, we actually closed on our new primary residence in a town that we wanted to raise our two kids. And the house that we moved to actually has sort of an ADU setup in the back of the property. That cut down our living expenses quite a bit. And then we were pretty intense with saving for a vehicle for her, got rid of leases. We bought her car outright. We’ve been saving for other investment properties. We’ve been saving for our kids’ college. We’ve been saving just for our general, like my SEP-IRA. We’ve been putting money aside for certain buckets and doing a better job starting around 2019. We really got a budget down and then 2020 we’re just hitting it hard.
And as of, geez, I think it’s been since late September, we’ve been more focused on going after paying off our lowest income producing property just to get that mortgage paid for because COVID was a real eye-opener for us to get a paid for property that has the rental income that maybe if my wife wants to step away from her job, she could do that later on.

Mindy:
And what does your wife do? How much does she make?

Wayne:
She is a department chair for a board of education in New Jersey or for a school a township, I should say. And she’s a little over six figures.

Scott:
Awesome. And so what does your expense situation look like?

Wayne:
Thankfully, we cut that down quite a bit. Our mortgage, after we received the rent from the tenant, we pay about $2,500 and then we have no car payments right now. We have only one vehicle because my wife is actually on maternity leave because we had our second kid in May. As I said, 2020 was wild.

Scott:
Congrats.

Wayne:
Thank you. And now we’re focusing on getting that property paid off. I do have to purchase a vehicle in, I’d say a month or so, but I’ve also stocked a few dollars away for that. Expenses wise, just utilities and I think our credit card debt that we took on when we purchased this home for a few remodels, we threw it on a 18 months, 0% interest for, I think it’s seven grand, which, I mean, I could pay that off any day. Right now our expenses are practically nothing, which is fantastic.

Scott:
You have a solid mortgage expense there, but it’s not very significant relative to your household income here. You’ve got a large ability to accumulate cash based on what I’m understanding about your financial position on a monthly basis. Sometimes a lot, but almost every month, you’re going to be able to accumulate, even in a month we have no commissions. You’re going to be accumulating a good chunk of it.

Wayne:
Yes. Thankfully we’ve kind of positioned our lifestyle now to go ahead and just start saving a heck of a lot more. And that’s kind of where I’m, not at a loss, but I definitely want to focus on either filling more buckets or going gazelle and tents on paying off the property because COVID definitely threw some curve balls our way.

Scott:
Go ahead, Mindy.

Mindy:
I was going to ask, are all of your properties located in New Jersey?

Wayne:
Yeah. Predominantly, I have 11 doors technically, and then a couple of garages that we rent out, but the 10 out of the 11 are in New Jersey. One is in Pennsylvania.

Mindy:
Okay. Because New Jersey has a pretty interesting rental law that you can’t just kick somebody out.

Wayne:
Yes.

Mindy:
You have to give them the option.

Wayne:
Yes. It’s very tough to be a landlord in the State of New Jersey, but so far, I’ve been very fortunate with some really good tenants and COVID did delay a few rental payments here and there, but we’re working with them and having the higher income, thankfully, we’ve been able to cover them for the most part. It’s been pretty good overall and the cashflow from that, from those properties pretty much covers my mortgage payment as well. We’re able to put a lot of money away if we wanted to.

Scott:
Awesome. So it sounds like you’ve got a really strong financial position. You make a lot more than you spend. You’ve got a significant portfolio of assets. Can you give us a little understanding about how that portfolio in particular is capitalized, debt and equity and then your cash reserves?

Wayne:
Sure. Cash reserves up until about 2019 we were very light on keeping cash reserves. We’ve built that up a little bit more, thankfully because of COVID, it’s amplified that. Then we are huge proponents for lines of credit. We tend to credit card hack quite a bit and get out to Maui as much as possible, believe it or not. And then with the lines of credit, if we ever need to access something, we have that available to take care of any repairs, but we’re trying to keep about, I’d say five to $10,000 per property just to keep us in a safe zone.

Scott:
Great. So you got a very well capitalized portfolio with all that. Any other assets of note?

Wayne:
My wife and I, we’ve been pretty good with contributing to our 401ks is 403bs, SEP-IRAs. I opened up a Vanguard recently. She has a Vanguard account. We put some money aside and then I’ve been dabbling in like Robin Hood here and there. That’s kind of just play money on the side. That in total. We’re probably pushing about $550,000 in all combined retirement accounts.

Scott:
Great. And then you have a cash reserve for your personal life outside of the rental property and how much is that relative to your monthly spend? A couple months?

Wayne:
I’d say it’s probably about 10 months worth.

Scott:
All right. You got a rock solid financial foundation. This is what I think a lot of people aspire to, when they’re setting out in their personal financial journeys. You’ve got a significant cash reserve, a buffer there. You’ve got multiple sources of income. You’ve got multiple investments that you’re attacking here. What’s the biggest challenge you’ve got here and how can we help you?

Wayne:
Biggest challenge was, I mean, up until last month, I really haven’t been focused on filling certain buckets. I would love to hear your guys’ input as to what you would do moving forward with, I mean, come December, we’re going to have free incomes. That’s going to change the numbers again. And we’re going to be able to manipulate things a little differently and should I be focused on getting that one property paid off? Should I dump more money into my SEP-IRA for come tax season? There’s so many different options and I would just love to pick your brain about where would you go given the situation.

Scott:
Absolutely. First question I’d have for you there is a general, and I’ll try to help narrow this down a little bit so it’s not so wide here. But a general, what do you want? How do you want to be spending your time? When do you want that by? And for example, are you looking for a way to kind of just maximize your lifestyle right away or are you thinking, “You know what? I’m enjoying this. I want to put more time in and make more money and build up a bigger nest egg and enjoy that a little bit later with a five-year timeframe.” How are you kind of thinking about that?

Wayne:
It’s a phenomenal question because I have two young kids, two young sons. One’s three and one’s six months. I loved the time that I had with them during COVID and I think I’d like to gain my mornings back. Probably getting rid of the W2 job in the morning would be my first goal. Do I necessarily need to pay off the property before then? Probably not. I could probably pull that trigger right now, but there’s some level of comfort knowing that I have a little bit more stable income when, God forbid, the market does turn like I’ve seen it.

Scott:
Okay.

Mindy:
I’m more of a, don’t ever pay off your mortgage person, because right now we’ve got super low interest rates and you’ve got sub 5% sub 4.5% on all of your mortgages. What we did instead of paying off our mortgage was save up that amount of money and put it in an easily liquid dateable fund. Like a “high yield savings account” because they’re 0.8%, just so we could have it and pay it off if we needed to, but then we still have the mortgage so we don’t have that money gone essentially. That’s something that you can do or consider doing. Of course, speak to your wife because having you both on the same page is the best advice ever. I have a couple other questions though about your financial situation. Does your wife have opportunity to contribute to a 457 plan?

Scott:
I believe she does. I got to look into that. She has been employed at this position for about three years. I think she was able to when she was a teacher, but now she’s at the administration level. I’m not 100% sure if she does have that option, but certainly something to look into.

Mindy:
That is an even better option because those funds, they reduce your taxable income and who wants to pay more taxes than they have to. Once you separate from employment, she’s able to get access to those funds with no penalties. I think she has to pay taxes on it. You definitely want to speak to a CPA about this, or I’m sorry, a tax professional about this, it doesn’t have to be a CPA, but she won’t pay any fees to access those funds which is nice. You said that she might eventually separate from employment. That is kind of the best of both worlds. You reduce your taxable income, but you don’t have to wait until you’re 59 and a half to access the funds. I would definitely work on or look into the 457 plan and see if that’s available to her. You said that you have a SEP-IRA and I’m wondering why you chose a SEP-IRA over a self-directed solo 401k. Do you have full-time employees other than your wife?

Wayne:
No, I don’t, actually. My tech suggested the SEP back, God, probably seven years ago and just kind of rolled with it back then. Somebody else asked me the same question, “Why not do the solo?” Another option for me, I can definitely try and look into that a little bit more. What was I going to say? I’m just writing this all down for everybody.

Mindy:
That’s okay. We’re recording this so you can listen to it again. Do you use your SEP-IRA to invest in real estate?

Wayne:
I have not. No.

Mindy:
Okay.

Wayne:
Yeah. I have not utilized any retirement accounts to invest in real estate. It definitely could be an option.

Scott:
When I zoom out and look at your financial position, it sounds like most of your time is going to generating that $4,000 a month in income from your contractor job. Is that correct?

Wayne:
It’s a good mix. I definitely say that I spend an even amount of time with real estate and the general contracting company.

Scott:
How much time are you spending on the W2 contractor job?

Wayne:
It various. Pre-COVID, it was busier. Now my mornings are a little bit lighter, so I start very early in the morning, usually about 4:45 and then I’ve got about an hour commute into Manhattan and then I’m out. Any given day, it could be 10:30 up to about 1:00, but thankfully real estate, most of the time doesn’t really kick in until the mid afternoons.

Scott:
Okay. So this is a eight hour a day job, basically for about $4,000 a month. Is that right?

Wayne:
Yeah. Net four.

Scott:
Okay. After tax you’re saying?

Wayne:
Yeah.

Scott:
I think that’s probably, if I’m zooming out and looking at your overall situation, you’re a millionaire or close to it, but between your real estate equity and the investments, you’re just describing your cash position. You have a household income well into the six figures and those types of things. Your time is extremely valuable and working a full-time job for $70,000 a year, it seems like a non-scalable option to me, looking at this. When your real estate income is this high and you’ve got other opportunities with those types of things. I’m not saying, “Go out and quit your job tomorrow and think about it.” But I would approach your situation with that framework in mind. If you’re a millionaire with that kind of stuff and your household income is I don’t have $200, I’m making this up, $200, $250 a year, that puts the dollar value of your time at $125 an hour.
I mean, I guess maybe half of that between you and your wife. But you have those options and those types of things. And so what I would be doing is, I would be thinking, “Is that scalable? Am I going to be generating a lot more income from that job in the next year or two?” And if so, maybe that’s worth it. If not, maybe I got to refocus on my real estate business or something scalable here because you guys can easily get by on one income right now. You could probably retire frankly or pretty close to it. You probably want a little bit more padding based on what we know motively of our listeners and financial positions to permanently retire with that. But I think that’s the central problem that I’m seeing. If I’m looking at the 80/20 rule, your time is being spent 4:00 in the morning until at least 10:00 or 1:00 in the afternoon on this job that I don’t think is … I think it’s a scalability problem that you’re facing right now. What’s your reaction to that statement?

Wayne:
I totally agree. It wasn’t that obvious to me pre-COVID. I definitely valued my time with my family when there was the shutdown in New York City. I completely agree, just a little backstory. The owner is my father-in-law of the company. I do have a little bit of-

Scott:
Oh my, it’s completely scalable.

Wayne:
I don’t want to go that route, but I’m also doing him a favor by helping him and his company and it does have its perks. I mean, we’ve had many vacations paid for from all the expenses that we’ve used for the company. Travel hacking, I mean, we’ve gone so many places thanks to the business. There’s a little bit of that element that kind of keeps me second guessing leaving, but you’re absolutely right. I thought I could be utilizing my time in so many different ways. And it’s in the near future. I’ve had the conversation where I’m probably going to be scaling back that line of work at least three days, maybe four days a week instead of the five. And then eventually just phase it out because we’ve put ourselves into this position as of 2020, pretty much, we’ve got our budget and our expenses down to something that’s extremely manageable.

Scott:
I love it. And look, I think what’s awesome is we’ve had a lot of folks who really struggled to get into a position where they’re able to earn that kind of income, but because of your situation, I think that, to me, it sounds like you’re on the cusp of having outgrown that if you’re looking for the next steps there. You’ve got a large and growing and scaling real estate business, you’ve got a variable you can afford to focus more heavily on the variable income that you’re earning with the real estate commissions, because you’ve got that stability from your wife’s employment to cover up what looks like household expenses, which it may not even …
And even if both of those dry up entirely for 10 months, you’ve got 10 months of emergency cash reserve in the cushion. Your position is so well capitalized that I think it’s just about the obvious in the sense of, “Where’s my ROI and my time coming from.” And if that ROI is not above a set level that you think is acceptable, which I would pay get $100 to $125 an hour in your situation, frankly. I wouldn’t do it.

Mindy:
Well, there’s the added wrinkle that it’s his father-in-law. What you didn’t say at first.

Scott:
Yeah. I 100% get that.

Wayne:
There’s a backstory. I proposed to my, at the time girlfriend, which was obviously is my wife now. And I think that night he was like, “You’re going to come work for me.” It was definitely one of those, “Sure, you can have her hand, but you’re going to come work in Manhattan.”

Mindy:
You said you might want to scale that back and that was going to be my suggestion. My husband eventually retired, but when he was still working, he was like, “I don’t want to just cut the cord completely. Can I go part-time?” And his office was like, “Sure, we don’t care.” It was a lot of anxiety for him, I think, to talk to them about it and to, “I’m going to do what I’m going to do it.” And then when he finally did it, they like, “Fine, whatever. That’s awesome.”

Wayne:
That was the conversation about two weeks ago, it was like, “I’m going to scale back on the time.” And they were like, “Okay, that’s fine.”

Scott:
Well, what’s happening though, is he’s getting the skillset of a millionaire business owner for 50 grand a year net, whatever it is. And so that’s great and I understand that dynamic, but I think that if I’m thinking through your situation, I would be thinking about how do I fairly and amicably begin the process of finding a good solution here, because the reality is you’re just going to be more valuable to, I would imagine, without knowing anything else, just by hearing your position, how you handle your business and your affairs, I have to imagine that you’re a valuable employee. Lots of compliments flow in your way with all that. I imagine that that’s not going to be a central problem for your father-in-law the business owner in the sense that you probably provide a good value there.
Some of the solution, if I’m just thinking through the problem beginning to articulate it that way, one solution that potentially presents itself is finding a succession plan there to, who is somebody who really wants that job, who can afford to give more time and will go all into it because it really is their opportunity to grow. How do we find that person and groom them potentially to begin taking that over for you?

Wayne:
I think that there is one gentleman who could take that position, but he’s already abreast, he does not want the role. It’s a work in progress, definitely. We’ll see when the time comes if I do want to ramp it up and say, “Hey, listen, I want to cut this out completely.” Then we’re going to have a different conversation. But it’s in the works, I would say.

Scott:
You never know how that conversation can go because maybe there’s a bigger opportunity there. Maybe that once the problem is exposed and it’s very politely and professionally and understanding the dynamics between definitely dynamics there, maybe there’s a way to have that conversation productively, where you say, “Look, for me it’s not scalable given my position anymore.” You could even share this podcast potentially and say, “Look, I didn’t say it, Scott said it.” Here’s the situation is I’m seeing it right now. I’m wondering if there’s a better way to spend my time here maybe there’s a chance to take even more significant role in operations if that’s something that you wanted or begin scaling back or whatever, but the current status quo, I think that’s the elephant in the room in your financial position right now.

Wayne:
Yeah. I 110% agree. The timing of everything has been probably the biggest struggle only because my wife has been out for the past six months for maternity leave. Having just the two incomes right now, we kind of dipped our toes into the new lifestyle and the new house and tried to navigate COVID with all of our tenants. And so the dust is settling, I would say. And it’s definitely within the next couple of weeks to months where something’s going to happen, whether it’s going to be one of us moves from our position.

Scott:
Well, great. Beyond that particular problem, are there any other big challenges that you’re facing around that?

Wayne:
COVID has thrown so many curve balls. We owned a previous house that was our primary residence. We ended up having to give seller financing to that purchaser because they were trying to close right at the end of March, early April. They couldn’t get financing because banks were tightening up a little bit. We have some money tied up in another property. Would love to know your thoughts on potentially somehow trying to get those funds out of there sooner, because it’s a three-year balloon with a 30 year amateurization. I don’t mind being the bank for him, but I would love to gain access to those funds to invest a little bit more sooner. That’s for sure.

Scott:
So you’re the debt holder on how much?

Wayne:
That property he owes $190 of them.

Scott:
You’re owed $190,000 at 4% interest, and you’re not going to get that back until three years from now?

Wayne:
Yeah. We’re about seven months into it.

Mindy:
Has he tried to refinance?

Wayne:
I asked him a million times to try and refinance and he’s like, “Money’s just so cheap right now I just didn’t want to do it.” And I kept saying almost like, “You can even get lower than the 4% why not take that opportunity?” He just doesn’t seem to be motivated.

Scott:
Do you have any power to enforce that or is it more you’re going to have to use diplomacy here and get him to want to do it?

Wayne:
Yeah, I think he’s just going to want to, or need to have that flush or some reason to.

Scott:
I think, beyond your push of just like, “Look, I’m going to call the entire note due in three years when it comes due.” You can either have that looming over your head or you can refinance while the sun shines and the interest rates low.

Mindy:
But if he’s that motivated, unless it’s worth it to you to financially incentivize him to speak to a lender and get that going. I mean, what is his reason to, I would just want to, because I don’t want a balloon coming up in three years, rates could be 5% or more. Probably not, but they could be.

Scott:
Yeah. For those listening, by the way, a balloon payment is when you have a mortgage. And in this case, the borrower is paying interest only, It sounds like, for three years. After three years, the entire $190,000 balance will be due to Wayne here. And so that’s what a balloon payment is as opposed to a traditional mortgage that amortizes over time, you pay off the entire mortgage over the period.

Wayne:
Correct.

Mindy:
Yeah. What are his plans when he doesn’t have that $190,000 in one lump sum?

Wayne:
He’s an independent contractor so I think he was going to take a line of credit out on his business or some type of credit line from his business to pay it off. Why? I don’t know. He’s just [crosstalk 00:30:44].

Mindy:
We need to talk to him because he needs to hear this, too.

Scott:
Wait, I think this was a bad loan on your part, frankly, with this because, I’m puting myself in his shoes. He’s paying 4% interest only, for a couple of years. That’s a really light payment. And some people, I don’t know this person, but some people are of that mindset of like, “Oh wow. I can either pay 4% which is nothing, probably a few hundred bucks a month at most,” Or find it a convention of $1,100 or $1,200 on this thing.

Wayne:
It’s roughly $1,000.

Scott:
You are amortizing the loan.

Wayne:
Yes. Over 30 years. I’m sorry. I don’t know about that.

Scott:
I’m sorry. I thought it was interest only. It’s not that bad. Sorry. I retract what I said earlier.

Wayne:
I’m happy to hear that then, because in my head, I’m saying, “I thought it was a pretty good deal because he was not getting financing at the hour with the way the pandemic was moving at that time.”

Scott:
Yeah. Okay, great. I think an interest only it could be demotivating, but in this case, I just think you’re the bank at a 4% interest loan and the difference between you and a traditional bank is you can’t just go and sell this loan on the mortgage market because it doesn’t check every box under conventional mortgage market. So it’s a little bit more risky for you. Maybe in the future, you charge a higher interest rate to compensate for that. But in the meantime, I don’t think you have much leverage in arbitraging this particular money you have tied up there.

Mindy:
Yes. I would say I would try one more tack with him and just say, “You don’t know what’s going to happen in three years. You don’t know where we’re going to be. You don’t know where lending is going to be right now, interest rates are ridiculously low.” He doesn’t know where his business is going to be in three years. Why would he risk? I mean, did he give any sort of down payment on this property?

Wayne:
Yeah, it was a hefty down payment, which basically took care of the entire mortgage to the commissions, all the fees. It was large enough that I felt comfortable moving forward with.

Mindy:
He’s risking that down payment.

Wayne:
He’s risking a lot.

Scott:
You’re in a really defensible position. You’re not going to lose a lot of money, I don’t think, but you’re not going to be able to get access to that generate a higher return than 4%, it sounds like, for the foreseeable future.

Wayne:
Yes, exactly. And I would love to utilize that in a different way at this point, but unfortunately it’s kind of tied up.

Scott:
What’d you do with the money if you had access to it?

Wayne:
Probably out of state investing the prices for multi-families. I’m a buy and hold investor, so I’d be looking for something at this time.

Scott:
Okay. Your intention with investing is not to be passive in the sense that you’re going to invest in really dump more money into the stock market or index funds. You want to go more heavily into real estate and get that little bit of a return.

Wayne:
Yeah. I’ve had a little bit more better returns with real estate over the last, oh my God, since 2007, it was when I bought my first property. I definitely focus a little bit more in that realm, but definitely out of state.

Scott:
You’ve been investing since 2007. Let me ask you a little bit about current portfolio. Would you say you have a lot of properties that have appreciated significantly in your portfolio?

Wayne:
Yes. Two of the five or six properties, I would say have seen greater appreciation because we’ve purchased them around 2007, 2008. And then the rest was thanks to you guys actually, because bigger pockets was introduced to me by a friend of mine and a colleague and she said, “You got to listen to them because you’re doing everything that they do, but you don’t have any real focus right now.” I guess it was, Mindy. I think it was when you were doing the podcast with Beardy Brandon. I don’t know if you were covering for somebody at the time or if you were the co-host at the time, but that’s pretty much when I delve into the podcast.

Mindy:
I was covering for Josh Dorkin who eventually stepped away and we replaced him with David, but we didn’t have a replacement so I jumped in any chance I could.

Wayne:
What year was that out of curiosity?

Mindy:
Was that 2017 Scott or 2018?

Wayne:
I think it was ’17.

Scott:
Yeah. I think it was ’17.

Mindy:
Yes, ’17 sounds good.

Wayne:
Because 17, I started listening to you guys and I bought another multi and then went on to do a flip. You guys really motivated me and I can’t thank you guys enough for just lighting a fire under me.

Scott:
Nice. Well, congratulations. You applied that to astounding success here. You have a lot of really good options in your life. The reason I was asking for the properties is, could you give me one example of a property that you’ve owned that’s appreciated considerably and what is your mortgage balance and what’s the equity balance on that property?

Wayne:
Okay. So one, two family in Jersey was purchased for $265 back in, I think it was 2010, needed some work about $25,000 worth of work. We could probably sell that right now for about $475, maybe $500 because the market has definitely increased. Rental income on that is roughly around $3,300 a month, mortgage payments about $2,000 and our equity, I think we only owe $151,000 on it, something like that.

Scott:
Great. So let’s call it $500 of a value and $150 in debt that gives you $350,000 in equity.

Wayne:
Yes.

Scott:
Now, this is a great problem to have and a problem that a lot of investors, including myself have right now, which is where you have too much equity relative to debt. Real estate on average, returns worse than the stock market without the use of leverage. What I would do is I would take that property and others like it in your portfolio, and I would run them through, I’ll plug our bigger pockets calculators here. I run them through the bigger pockets calculators and I’d say, “What is my five-year return look like if I’m purchasing this property today with zero closing costs, because I already own it.” Those types of things.
And what is my return look like over the next five years and what happens to my return if I pull out a significant chunk of cash, still maintaining my overall conservative, bent on my overall financial position that you’ve done a great job with. But if I find a way to capitalize just a little bit more deeply, what does that look like? I bet you that you jumped from a 10 ish percent compound return over the next couple of years to a 18 to 20, depending on how things go and what assumptions you use there.

Wayne:
It’s funny you ask or funny you say that because I am in the middle of trying to get a line of credit from one of our properties to try and leverage it a little bit. A lot of the banks, unfortunately, I’ve tightened up that process and we’re working directly. I think TD is one of the only bigger ones that are handling HELOCs at the moment.

Scott:
So what I did recently is, I just straight up cash out refinanced. I did it on two of my properties that had that situation. And I’m going to find a way to deploy that cash. The second loan will close in the next three or four weeks here. I’m going to find a way to deploy that cash going forward, but that’s how I’m handling the situation is with the straight up cash out refi because I lock in that lower rate. I’m literally refinancing at a lower rate. My payment’s only going up by a few hundred bucks in aggregate and I’m getting access to all this additional cash that I think I can find reasonable ways to deploy. It’s about being conservative with that.
That’s an aggressive overall stance, but underlying that as my holistic conservative financial position with a strong cash buffer and those types of things. But I think that’s probably your other big leverage point in your existing portfolio is thanks to that great problem you have of buying a property so many years ago, experiencing hundreds and hundreds of thousands of dollars of appreciation, and now being inefficient as a result thanks to a really good problem.

Wayne:
Yeah, it definitely is a good problem to have, I guess my only concern would be, again, going back to these COVID conditions with tenants and being reliable on payments and stuff like that to take on further debt and stuff like … And to take on and leverage that property. Maybe I don’t want to do that with all of them, but one could certainly change my return, absolutely.

Scott:
Absolutely. That’s a personal preference thing. It’s a way to drive returns with the incremental risk and it’s completely personal preference. You have no bad options as it comes to your real estate portfolio, thanks to a decade of smart investing.

Mindy:
That’s a really nice problem to have, you have no bad options. I’m going to throw out a different option. I want to challenge you to go back and really review the numbers on your property. $3,300 a month in rent on a purchase price of $280 is fabulous, but $3,300 a month in rent on a value of $485 isn’t as good as you could be doing. Go back and review, are there five properties for 11 units total?

Wayne:
There are. There are five total properties and 11 doors and a couple garages.

Mindy:
Okay. I don’t think that the property that used to be your primary residence is available for a 1031 exchange because you bought it as a primary residence, but the other ones that you purchased as an investment property, if the numbers no longer make sense, considered using a 1031 exchange to take that money, take it maybe out of a less landlord friendly state and move it to a slightly more landlord friendly state where you can decide to not renew leases on somebody who maybe isn’t your favorite tenant.

Wayne:
It’s a great idea. I’ve always kind of flown solo with my investing. I have a couple of business partners, but out of state investing, I would definitely have to start networking and getting a feel for different areas. And I mean, what better place to do it then on BP? I’ve been looking just not as aggressive.

Mindy:
Wow. If only there was a book called The Long Distance Real Estate Investor, Scott. Wayne, do you have a copy of that book?

Wayne:
I believe. I’m not a reader. I’m an audible listener. I probably downloaded that. I definitely have Scott on there. I have a couple of others of the BP books, but I’m not 100% sure if I have. No idea if David Green.

Mindy:
You’ve got that one.

Scott:
If you don’t we’ll go ahead and send you one.

Wayne:
I appreciate that. Yeah I do have it.

Mindy:
That’s an excellent book. And I would definitely read that. Start looking at other markets. You had mentioned investing out of state. If you’ve got all this money just sitting there in these real estate deals, you have to make a smart choice, just make a smart purchase. Don’t sell them before you’ve got something else to buy. The 1031, it’s got a lot of rules involved in it for those of you who are listening who haven’t participated in this, a 1031 exchange is when you have purchased a property as an investment, you decide that you want to buy another investment property. You sell this one, you don’t pay any capital gains taxes if you follow all of the rules surrounding the 1031 exchange.
You essentially kick the tax can down the road. This is a great way to sell these properties, buy new ones, and not have to pay taxes or do any of those awful things. But please connect with a qualified intermediary before you do anything with your 1031 exchange. Because, like I said, there are a lot of rules. And if you miss just one, all of your 1031 exchange bonuses are gone, and then you owe a lot of taxes.

Scott:
Yeah. Another way to think about that is to say, I’m buying this property for $500,000 with $350,000 down. What could I do alternatives to that and run those analysis in parallel, understand not $350, it’s $325 or whatever it is after closing costs. Your closing costs being a little lower, I imagine, because you would facilitate the sale as an agent. And if you’re listening to this and you’re not an agent you’ll have to higher closing costs and Wayne here, but that’s another big advantage to that. And I think in terms of your assets, that’s where I think the leverage will be right now is in re-examining your existing portfolio, acknowledging your wonderful set of problems and then just deciding, “Hey, I just want to pay off the debt and I’m fine with pretty mediocre returns, but complete freedom and stability with that.” Or am I interested in driving higher returns and rethinking my overall strategy with that, but just know those numbers stare at them and the decision will become a little more helpful, I think.

Wayne:
Totally agree. And it’s great advice. I will certainly sit down and revisit those numbers.

Scott:
Great. Well, to me, those appear to be some of the big items in your financial position is the job and that the allocation of capital that you’ve got within your real estate portfolio right now. Did we miss anything or is there something else you’d like to discuss?

Wayne:
I’m looking at my list right now. I mean, you definitely answered a few of my questions as far as where you would go. And then, I knew you guys kind of were going to lean towards leveraging more of my equity and purchasing properties. Curious what the community would say as far as being within this COVID realm and whether paying off one would be a little bit better just to have a little bit of a comfort level, but I do see the value in leveraging and just go on so much further with it. I’ll probably just have to go that route and revisit the numbers.

Scott:
Well, let’s do this. You’ve already shared a lot of the numbers here. What if we say when this episode releases, let’s go ahead and have a forum thread on BiggerPockets, we’ll pin it and see if we can’t get some investors to chime in on your set of good problems. I think a lot of people have the same set of issues that you’re having right now. I’ve passively, not passively, but I’ve slowly and maybe not completely intentionally as a business, acquired a portfolio of properties that have gone through the roof in value. And now I’m moderately rich, but I don’t know exactly how to leverage that for what I want in life completely right now.
I think we’ll get a lot of good feedback. I think you’ll get some people saying, “No, let’s pay them down.” And I think you’ll get some people that say, “Re leverage them, keep doing what you’re doing.” I have no idea actually. I’m interested to see what the community will have to say about that.

Wayne:
I think it’s a great idea to just throw it out there. I mean, a lot of the listeners are probably Dave Ramsey listeners also, so they’d probably say pay it off and I’ve went down that rabbit hole of all different podcasts and sure, I would love to have paid for properties and have the cash flow. But you can just grow so much more. And if I had a little bit more time on my hands without that job, I might be able to go out of state and see some other opportunities out there.

Scott:
I think those two items are going to be directly linked in whatever path you decide going forward.

Wayne:
Yeah, absolutely.

Mindy:
I’m curious. And this is more of a, Wayne should think about it then Mindy needs to know the exact dollar amount answer, but I’m curious what portion of your expenses are covered once you have no mortgages on your rental properties, the current rental properties, and the amount of money that they’re bringing in.

Wayne:
At that point, I would say I would be able to have two or three properties were paid off, I’d have enough to cover our monthly expenses and then we would just be saving everything that we are. I would say probably three properties.

Scott:
I really like that as a framework. I think that’s a great question, Mindy, and I think that’s a great another piece of data there. Hey, what if it’s, I’m going to create an inefficient portfolio that gives me complete peace of mind, and then with the rest of it, I’m going to capitalize it for long-term value creation. That might be a great middle ground. That’s actually a noodle for myself Because there’s a lot of appeal to something like that. The expense of course that portion of your portfolio may be under appreciating over the next 10, 20, 30 years. But the benefit is complete freedom to exercise. You go after some big bets, for example, with your time.

Wayne:
Yeah. I think my wife having these past six months with our second son would absolutely love to gain a little bit more time with the family. And so to have some expenses covered would easily open that door for her and that’d be something I’d love to do for her.

Scott:
That’s a whole another one to think about there. I love it.

Mindy:
I want to suggest a money date with your wife where you sit down and the kids are asleep or they’re at a babysitter, you’re out to dinner or you’re locked in the car with her but they’re asleep in the back, to suggest a money date where you sit down and you lay it all out. Do a little preparation when you are getting ready for this, have all the numbers, look into other states that you might want to invest in. “Oh, we’ve got $2 million worth of real estate in New Jersey, and if we took this money and did a 1031 exchange to Kansas City, we could buy a 35 unit apartment complex and cover all of our expenses, plus all of those expenses and never have to work another day again.” Or whatever. I made that up. Don’t quote me on that.

Wayne:
No worries.

Mindy:
For anybody listening.

Wayne:
Find us that deal.

Mindy:
Yeah. I want that deal too. Do a little bit of research into the different areas, if you’ve got more than one state that you’re interested in, and just see what’s available, what’s a good idea. I can’t get a 35 unit apartment complex in Manhattan for $2 million. I would want that.

Wayne:
Absolutely not.

Mindy:
But maybe in Kansas City that’s an option or maybe it’s $3 million or maybe you could take on a little bit more debt combined with all the properties that you have and really have a super awesome deal in the works that could … The argument for multifamily is that when you’ve got one unit vacant in a single family home, you have zero income, but when you have one unit out of 35, you still have 34, 35th income coming in and that’s just better than zero.

Scott:
And maybe there’s a way to think about, “Hey, I can take on more financial risk if I’m going to reduce operational risk by freeing up my time to work on that project.” So there’s a whole bunch of different options there along the lines that Mindy’s discussing. But again, I love that we got a chance to discuss the job thing, because I think that whatever you decide there, I think that’s going to be a huge component of that and something to bring up. I think of money date is the perfect way to bring that up actually, because of the context we discussed earlier.

Wayne:
She’s been a strong advocate for me to take more time away from that business which is her father’s business. But she’s definitely on board with it. We’ve had a couple money dates. She’s definitely more of the visual learner. So she needed some charts and graphs and some things to color in to make it exciting for her because she wasn’t really into the podcast and all the numbers, but I can definitely have another money day with her and say, “let’s scale out six months to a year, where do we want our life to be?” And I think it’s a great way to bring it up.

Scott:
If that’s the case, I’ll plug it one more time here. I don’t usually do this at the show. Look, try the BiggerPockets calculators. If you’re not a pro, we’ll go ahead and give you access to them for however long you need to make that happen. But go ahead and try those out and use, I think, visualizing what that’s going to look like to your financial position and the returns you can get by making those changes. I think that will be helpful as part of that, because I think that’s the most leverage you have right now in terms of your assets.

Wayne:
Excellent.

Mindy:
Okay. Scott, let’s recap what it is that we are suggesting Wayne do. Number one, review all of the finances on the properties that you own and make sure that they still make sense. Some of them still might make sense and that’s awesome. Make sure you’ve got the right amount of rent that you are charging your tenants, make sure that you have tenants that you really want to keep, make sure the properties are properties that make sense financially. And like Scott said, run them through the BiggerPockets calculators, which can be found at biggerpockets.com/calculator. I don’t actually remember what the URL is so I had to run them both. We have an editing , they’ll cut off all that garbage and just make it sound like I’m awesome.

Scott:
The second thing is to determine the dollar value of your time and your wife’s time and create an exit plan from activities that you do not enjoy which earn below that threshold. Perhaps including your job. I think that’s the second key there is, you guys need to agree on that, it’s a great money date topic. You say, “Here’s what I think, what should I narrow it down to?”

Wayne:
Yeah. I love that. That’s going to be a huge conversation.

Mindy:
Yeah. And tagging on Scott. Number three is, have a money date with your wife, put out all the numbers. This is what everything means. This is where we are. This is where we want to be. And here’s my plan to get there or, “What do you think? Here’s a couple of ideas. What are your choices? Or what are your thoughts on those?” Because when you tell your wife, “This is how it’s going to be.” I don’t know about your wife, but when I hear that, that is not how it’s going to be at all.

Wayne:
That does not apply in our household, no.

Mindy:
Yeah. But when you say, “This is where we’re at, this is what I’m thinking. What is your opinion? What do you think about this?” It starts a conversation and it isn’t you against her. It’s the two of you against the world. And I think you guys are going to kick the world’s butt.

Wayne:
I hope so. We hope to be you out in Maui, just like a Beardy Brandon in the next, I don’t know how many years, but that’s our goal. That’s for sure.

Mindy:
Maui is a beautiful place. I think it’s sunny there today.

Wayne:
Certainly not New Jersey weather.

Mindy:
Wayne, this has been super fun. I really appreciate your time and I really appreciate you reaching out and asking us to review your finances because I think this is going to be helpful to a lot of people who are in a similar position.

Wayne:
I really appreciate your time guys. It was a pleasure and keep up the great work.

Mindy:
Okay. Thanks, Wayne and we’ll talk to you soon. Happy new year.

Wayne:
Take care guys. Happy new year.

Scott:
Thank you.

Wayne:
Okay, Scott, that was Wayne Lux. What did you think of this episode?

Scott:
I really enjoyed it. I think it’s just fun to … What a privilege you and I have Mindy, where we get access into the complete financial pictures of folks. And we get to kind of just understand what’s going in there. Look for the leverage points and try to point out those things and share our learnings over time with that. It’s just so much fun to hear this kind of stuff and figure out how we can help folks. I think a lot of people are in Wayne’s situation or close to it or within a few years, and to hear about the problems he’s going through with really what is a rock solid approach to personal finance? I think is really eye-opening to a lot of folks.

Mindy:
I think it will be really, really helpful for people to listen to the different aspects of different people’s finances. I think everybody listening can learn something from everybody that we showcase on the finance Fridays.

Scott:
Yeah. Absolutely. If you enjoyed today’s episode and you’re interested in looking at more, we’re going to post Wayne’s portfolio information and some of the details around that, and he’s going to be able to give a little bit of context around that to the BiggerPockets forums. You just go to biggerpockets.com/forums and it’ll be one of the pinned top topics on there and for the entirety of today, Friday, January 1st, you’ll be able to find that and go and look at what other investors around the community are saying about Wayne’s portfolio and next steps they should be taking. So go check that out at biggerpockets.com/forums. We’ll also link to the specific thread in the show notes so that if you’re listening to this later, you can go back and review it.

Mindy:
And those show notes can be found at biggerpockets.com/moneyshow158. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 158 and the new finance Friday, I am Mindy Jensen and he is Scott Trench. And we are saying [foreignlanguage 00:55:25].