BiggerPockets Money Podcast 174: Finance Friday: Reaching Semper FI (Financial Independence) Before Retirement with Fabio

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Real estate investors are known to have their hands in 20 different pots, this is doubly true for Marine and real estate investor Fabio. Fabio is a Captain in the Marine Corps and has been in service for the past 21 years. He has at least five years left before he wants to retire, but is poised to hit his “freedom number” (or what others call their financial independence number) soon.

Fabio has rental properties throughout the country: a duplex in San Diego, a house in Arizona, a BRRRR currently in the rehab stage in St. Louis, and his residence in Illinois. The problem? Some of these properties aren’t cash flowing as much as Fabio would like. He also has a high interest hard money loan on the BRRRR property he is rehabbing, plus a loan taken out against his retirement account.

This presents a handful of different options: should he sell some of the houses that aren’t cash flowing in order to pay back some of the high interest loans or wait to refinance? Which debt should be taken care of first? How can he leverage his current assets to help him build a bigger real estate portfolio.

If you’re a long-term real estate investor, you’ve probably been in a dilemma like this before. Stick around for all the lucrative options Fabio can use!

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Listen to the Podcast Here

Read the Transcript Here

Mindy:
Welcome to the BiggerPockets Money podcast, show number 174, Finance Friday edition, where we interview Marine Corps officer Fabio, and talk about real estate, BRRRRing and paying for college.

Fabio:
I’ve been trying to figure out how to get to this fine number, because I don’t necessarily want a giant real estate portfolio with just a couple properties to support it. I was thinking if I could just do one property every eight to nine months with my own money, then over the next five years, I’ll still accumulate a few.

Mindy:
Hello. Hello. Hello. My name is Mindy Johnson, and with as always is my low-hanging fruit slaying co-host, Scott Trench.

Scott:
I don’t know how you always produce these great intros, Mindy.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments and assets like real estate, start your own business or figure out the path to retirement on a military pension, we’ll help you reach your financial goals, and get money out of the way so that you can manage yourself towards your dreams.

Mindy:
Scott, I am super excited to talk to Fabio today. During the course of our conversation, we will talk about real estate, because that is one of the methods that he is choosing to pursue financial independence, and he also gets some advice from the CEO of BiggerPockets real estate investing social network that says, “Maybe real estate empire isn’t really what you need unless that’s what you choose,” which I thought was very interesting today, Scott.

Scott:
Of course, I like real estate. I invest in real estate. I think it’s a great tool, but as Brandon Turner likes to say, people don’t want a drill. They want a hole. Real estate is one of many, many tools in the toolkit for being wealth. In my opinion, the 80/20 of this situation wasn’t real estate. It was something else. I think that real estate is the 20. To do that, it’s gotta be made passive. It’s gotta be made automated and systematized, and it’s gotta fit in with his overall core strategy.
I think it’s a great introspective or dive into real estate investing as a potential toolkit in building wealth. I think we had a great discussion around it. The reason we focused on it again today is because that’s just where the bulk of his Mindshare and liquidity rest is in real estate right now.

Mindy:
I really enjoyed the conversation with Fabio today. I’m really happy that he reached out. Before we bring in Fabio, first, my attorney makes me say the contents of this podcast are informational in nature and are not legal or tax advice. 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.
This actually is some advice that I give to Fabio during the show as well when he contemplates selling one of his properties.
Today, we are joined by Fabio, a 21-year Marine Corps officer who was hoping to spend another five years or so in the Marine Corps. Semper Fi. Oh, he’s pursuing Semper Fi.

Fabio:
That’s awesome.

Scott:
Nice job, that’s a great one. All right-

Mindy:
She is a newlywed with two teenage children, so paying for upcoming college is also on his mind. Fabio, welcome to the BiggerPockets Money podcast. I’m so excited to talk to you today.

Fabio:
I’m super excited. This is awesome. I feel like I’m meeting celebrities here.

Mindy:
Well, yes, I am. Scott’s just a regular job, but I’m very famous. Everybody knows me. Everybody who listens to this show, that’s it. Let’s get a little bit of backstory. You’re in the Marine Corps, so you have, I would say, fairly steady income. Unfortunately, defending the country isn’t going to go out of business anytime soon, because not everybody loves us, even though they should because we’re awesome. Let’s talk about your income and expenses.

Fabio:
Like you said, I’m a marine officer, so my income is pretty steady. I’ve had quite a few pay races just over the years. I started off as enlisted, eventually finished my degree and became an officer. I’m a captain, but because I’ve been in so long during my enlisted time, my pay is a little bit higher than your average captain. Over 21 years in, and my wife who started a new job recently, between the two of us, we’re making about $9,800 a month. We do try to keep our expenses relatively low, so between our mortgage, insurance, personal expenses on miscellaneous stuff, some loans that we have right now, we spend about half of our income every month.
The other half is on savings and a BRRRR that we just started last year, first BRRRR that we’ve ever done. Well, I feel like we’re doing pretty good with the savings and all, saving about half of it a little less than half. But as I get closer to retiring from the Marine Corps, I’m just trying to figure out how I can accelerate some of these things, because for a long time, I was thinking a regular retired 65 kind of thing. I was working towards that, but lately, especially with COVID, I’ve been changing my mindset and trying to accelerate this a little bit.

Mindy:
Well, first, let’s celebrate this 50% savings rate. I think we’re doing okay. I think you’re doing awesome, so yay, Fabio.

Scott:
That’s great.

Mindy:
That’s fantastic. The BRRRR, how is that going? Is that a local BRRRR, or is that a long distance BRRRR?

Fabio:
It’s relatively local. I’m in Champaign, Illinois, but the BRRRR is in St. Louis, so a little less than three hours away. I’m able to go there about once a month or so and check it out. I do have family in St. Louis, so they drive by and everything and check it out for me every now and again as well.

Mindy:
Perfect. BRRRR, for those of you who are listening who are confused by that, that is buy… Oh gosh.

Scott:
Buy, rehab, rent, refinance and repeat, BRRRR.

Mindy:
I get all the Rs mixed up, BRRRR. You’re about to brr because you’re getting ready to have a big cold front coming into the Illinois area. Three hours away, that’s not so bad. What part of the BRRRR are you in? You’ve got the B done.

Fabio:
Right now, we’re in the rehab.

Mindy:
Rehab, okay. What needs to be done on the property?

Fabio:
This was a full rehab, which was a little nerve-racking. It’s a little nerve-racking still. I bought it for 25K, and hoping to get it to appraise for around 180 to 200. It was a fourplex, with very small one-bedroom apartments. I’m converting it into two townhouses with three bedrooms on each side. From top to bottom, everything, we have to replace the furnace. The heaters put in the whole new AC system, which it didn’t have, replacing all the floors, new kitchens, I mean, the whole works.

Scott:
I want to come back to this BRRRR in a little bit. Before I do that, I want to construct a balance sheet. We’ve got a great income statement here. We don’t need to dive I don’t think too deeply into it, unless you direct us to, because you have a 50% savings rate. That’s extraordinary and really effective. It means that you’re generating 5,000 or so a month in savings. Is that about right?

Fabio:
It’s a little bit less than that. Part of that right now, it’s being eaten up by that private money lender that I have for the BRRR. That’s another thing I’m trying to figure out is, “Do I want to continue doing BRRRRs?”

Scott:
That’s a business expense.

Fabio:
Right.

Scott:
Your personal spending is not crippling your ability to move toward retirement. You’re thinking, “I’m generating a ton of cash. How do I deploy it and my other assets more effectively to move towards five?” Plus, you got a pension and all these other types of things coming into play. Is that a good summary of this we discussed so far?

Fabio:
Absolutely.

Scott:
Let’s build a balance sheet right now. What are your assets and debts against those assets?

Fabio:
I have a duplex that I bought in 2016 in San Diego. I was returning to the States from Japan after being there for a couple years, and I knew that I wanted to invest in the property, so I bought a duplex there, house hacked it through Airbnb, which helped me save a lot of money.

Scott:
Awesome.

Fabio:
I ended up getting deployed to the Middle East, so instead of doing Airbnb, I turned those bullets into long-term rentals. I’ve had them as long-term rentals ever since then.

Scott:
I bet you did fantastic on this. What does that look like?

Fabio:
It’s not a cash flowing property, I’ll tell you that. That’s another thing that I’m debating, “Do I want to keep it right now?” My plan is to keep it as long as possible, but it’s definitely not cash flowing being in San Diego. I bought it for 505. The loan was down to about 488 last year, but then with the rates dropping so low, I went ahead and refinanced it. Right now, I owe 497 on it. Refinanced it last year, so I still have 29 and a half years. The interest rate was super low. I got it down to 2.6. Actually, they’ve been dropped a little bit more later on in the year, which I wouldn’t know, but nobody knows.

Scott:
What do you think the asset value is?

Fabio:
Right now, it’s valued at around 675.

Scott:
Nice.

Fabio:
It’s gone up quite a bit in the years that I’ve had it there. A lot of us see that California people are moving out. I don’t know if it’s going to be long term, but I still think it’s going to be a good long-term investment.

Mindy:
There’s still people that want to live in San Diego.

Fabio:
I definitely don’t want to live there. The rent is so expensive. The rent is 3,300 a month, so it’s definitely nowhere near the 1% [inaudible 00:09:29] or anything like that, but I see it more as a long-term appreciation and tax leverage.

Scott:
What’s your payment on that?

Fabio:
After I refinanced, it was around 2,650 a month.

Scott:
You’re lucky if you break even after the other expenses. Is that what you’re saying with the vacancy allowance, maintenance, those types of things?

Fabio:
The payment is around 2,650, but I’m paying 3,000 a month. I like round numbers, so I just kept it at 3,000 a month.

Scott:
Got it.

Fabio:
If I keep it at that rate, it should be paid off for around 20 to 23 years.

Scott:
Let’s keep walking through your assets. What other assets do you have?

Fabio:
Well, we have another property in southern Arizona, that we have. My wife bought that in 2011. Right now, she owes about 77,000 on it. It appraises at about 125, but there’s a lot of… Actually just over the last six months, they’ve started building a lot of new properties around there, so almost tripled in size just in the last year. There might be some appreciation there in the future, also not really cash flowing right now. The payment on that is seven… I think it’s about 750, 775 a month or so. The rent is 800 a month, and she hasn’t really raised that. She’s had the same tenant for about three years or so.
We could raise a little bit, but it’s been a good tenant. We haven’t had an issue to them, so we’re keeping it as this. We had another property in St. Louis, but we sold that about two years ago. We have a house right now here in Illinois that I bought when I moved here a year and a half ago, almost two years ago. I’m planning on selling that next year. Initially, I bought it with the intent of keeping it as a long-term rental just like I’ve done the previous ones. But one of the big plays on this was that I had a deal where there was a tax abatement program for the first five years, so basically, in the three years I loaned the house, I’m getting about 17,000 back on taxes.
That makes up for a lot of the loss, and there hasn’t been good appreciation in the last two years here. I should be able to sell that and make a few thousands dollars on top of the down payment and everything that I put into it, which I’ll redeploy to another property somewhere else or for something else.

Scott:
It sounds like you’ve already made your choice to sell that one. How much liquidity do you think you’re going to net out of that down payment plus the benefit? Are you going to come into 30,000, 40,000?

Fabio:
Right now, I owe 177, I believe, and it’s appraised at 210. If the appreciation continues through this year, hopefully it does, then I should make about 30K or so. It’d be a little bit less depending on fees and all that.

Scott:
Okay, great.

Fabio:
Well, I’ll get back what I put into it, and that’s [inaudible 00:12:13].

Mindy:
Where are you going to live when you sell that house? Will you be deployed someplace else, or are you in Illinois for a while?

Fabio:
No. I’ll be here until summer of next year. After that, I still have no idea. I won’t know till around January of next year where I’m going. It could be overseas. It could be somewhere in the States. I don’t know. There’s still a big question mark of where I’ll deploy that money, the BRRRR. I think I’ve gotten my wife on board with doing the house hack. She didn’t really want to do it before, but I think she’s coming around that idea. This might be our opportunity to do that.

Scott:
Love it.

Mindy:
You’re in a college town, right? Has real estate been affected in the college town? Is the college actually having in-person classes right now?

Fabio:
I’m super fortunate because this university did stay in person. They managed to… We weren’t sure it was going to make it, but they did. They were very progressive and aggressive with their plan. The market for the students has not been that bad. That said, where I bought the house is not on campus. It’s outside of campus, so it’s more of professionals and grad students that live in that area. It still works as a rental. There are people who rent there at a much higher rates, but you don’t make quite as much as the buy room rentals that the people are doing here on campus. They haven’t really been affected. They’re still doing well.

Mindy:
That’s great. We’ve got the San Diego duplex, the Arizona house, the Illinois home that you’re getting ready to sell. You mentioned the BRRRR in St. Louis. You said you bought it for 25,000, but you have a hard money loan on that. What is your payment every month, and how soon do you think you’ll be done with that?

Fabio:
The payment on that is 1,222 a month. It should be done… The goal is to be done within the next three months, or actually a little bit less now, by the end of March, end of March, middle of April to be done, and ideally to have it rented by June, July at the very latest.

Scott:
What do you think the ARV will be on the property after you finished?

Fabio:
Minimum, 180, but a lot of the properties in the area that are townhouses, they’re going for 200, a little bit over 200. If I can hit at least 180, the numbers will still work. The rent of that will be $1,000 per townhouse, so $2,000 a month. Then if it appraises for 200,000, I’ll pull out 70,000 or 70% of the refinance, so 140. The numbers should make sense at that point.

Scott:
How much is the construction going to cost you?

Fabio:
All in all, when I worked out the numbers, initially, I worked it out to 120 for the rehab, but my brother who lives in St. Louis is actually helping me with some of that stuff, so I’m hoping. We’re going to be taking over our part, because a big part of it, we have a contractor doing it, so all the major stuff, there’s a contractor doing it. My brother and I are just doing the floors, the painting, kind of like the basic stuff.

Mindy:
The fun stuff.

Fabio:
Yeah.

Scott:
You bought the place for 25. You’re going to put 120 into it, maybe less if you can. Some of that, you’re just going to arbitrage by not paying somebody else. You’re going to do it yourself. It’s 145 in, and you think it will appraise for 180,000 at the end of that allowing you to extract much, but maybe not all of your cash if things go well.

Fabio:
Right.

Scott:
Okay, great.

Fabio:
Ideally, we’ll keep the total rehab around 100, 110. Most of the major stuff’s already done. As we’re coming towards the end, it looks like I’ll be able to hit that 100 to 110 rehab. If we do hit the 200 ARV, then the numbers will work out even better. We won’t have any money left in the deal.

Scott:
That’s great. Let’s keep going. I think we’re going to come back to this because it seems where a lot of your mindshare is going is to this BRRRR right now. What are the other assets we’re talking about here? Do you own more real estate? Are there retirement accounts, those types of things?

Fabio:
I did mention the TSP, the Thrift Savings Plan, which is like a 401k and a civilian job. I started investing in that when I was very young in the military. I didn’t really know much about it. I just knew the whole 10% thing. One thing that a lot of military people don’t know, and I didn’t know for a long time, was that they only do 10% of your basic pay, not your total pay, so our housing allowance and money that we get for food, and if we’re deployed, combat zone pay, stuff like that, that’s not a complement to that. For most of my career, I was not putting in actual 10%. It was maybe more like 5% or 6%, so it didn’t accumulate that I would have liked.
That said, the reason I started doing early on is because of the calculator. I know you guys talk about that a lot. The calculator is concerned. If I’m doing 10% of this, it’ll hit a couple million dollars by the time I retire. To answer your question, right now, I only have around 35K in the TSP. I did have quite a bit more, but I pulled some of that money out in order to help with the BRRRR last year. Well, that’s [inaudible 00:17:09]. I know that’s a big no, no. I told them that in the email. That’s another reason why I wanted to get you guys thoughts on that. Should I pay back that loan? Should I keep it in the BRRR? I’m trying to accelerate phi.

Scott:
We’ve got an asset of $35,000, and we’ve got what sounds like a liability where you owe your TSP some money. How much do you owe your TSP?

Fabio:
100K.

Mindy:
You have a loan against your TSP, or you pulled it all out?

Fabio:
A loan.

Mindy:
A loan.

Fabio:
Right now, the payment plans are paused, but whenever I unpause it, I have to pay it back. If I don’t, obviously, then I pay the taxes on it.

Mindy:
My idea for that would be to pay it back, because then you have 135 in your TSP instead of just 35. Scott, I would be really interested to hear what you think about taking the disbursement, because you have to pay a penalty too, don’t you with the TSP? It’s a 10% penalty. It’s just like the 401k. It’s a 10% penalty plus taxes at your current income level. I think that’s going to end up costing you a lot of money. If you can throw all that money back from the BRRRR, that might be a really good thing to think about.

Scott:
I have a bias in terms my opinion about that, but I am not… I want to get the rest of your balance sheet first and see if we’re missing any other assets or other types of debts that are going on.

Fabio:
A couple more things, right now, I have 86,000 in savings. That’s what I’m using for the BRRR. I’ve already put almost 50K into the BRRRR deal, but next month in about two or three weeks, I’ll have the private money lender go do an inspection, and all the money that I’ve put in, although the inspection, they’ll give me that back. I started this BRRRR with about 130, 135. I’ve spent about 50 of that already.

Scott:
Were those savings accumulations you had previously, or are those savings that you got as a result of taking out this private loan?

Fabio:
It’s two things. I had some savings already. 100K came from the loan. Then last year, I had just under 30K saved up, because I’ve been saving up for… I wasn’t sure if I was going to do a BRRR or what I was going to do, but then when COVID happened, I remember talking to my co-workers about it and saying, I’m-

Scott:
100K came from the hard money loan or from your liability against your TSP?

Fabio:
From the TSP.

Scott:
Okay, great.

Fabio:
Then I had just under 30K saved up last year. When COVID happened, I saw it as an opportunity. I remember telling my friends, “I’m either going to delay my retirement by one year, or I’m going to accelerate it by a couple years.” What I did is I invested that money in some stocks which I generally don’t do. It was I guess a good year for rookies to do it. I was able to actually make pretty good money on that, just under 30K into almost another 100K. That’s where I have some of this money, but I still have the 86K in savings plus the 50 that I’m going to spend in the BRRRR. Then I still have…
As of last week, I know the market dropped a lot last week. It was about 42K. I still left in some stocks. I’m keeping that in stocks for now just as a backup for emergencies and stuff like that.

Scott:
In the last… the 80K in the savings, 50 went into the BRRRR. It was 135, and then what was that last bit in stocks? How much is in stocks about?

Fabio:
About 42K right now.

Scott:
42K at stocks. Okay, great. Any other assets or debts that we should know about?

Fabio:
Debts, we did have my wife’s credit card last year, but we paid that off. This month or this semester actually is her last semester of college for her bachelor’s degree. We’re looking at about 7,000 or 8,000 that we’ll need to pay off. But now, it’s a student loan for this semester. As I told her, I don’t really want to have that loan on our budget on our spreadsheet, so we’ll probably take some money out of savings and just pay that off this summer, once she’s done with school. Other than that, our cars are paid off. I have a motorcycle that I’m probably going to sell this summer just because now that I’m living in Illinois, I don’t get to ride it.
I was in San Diego before this, and I rode it year round. Here, it’s just sitting in my garage, so I’m gonna sell it this spring. I’ll probably get 5,000 out of that. Cars, we’re going to keep till they run into dirt, unless we get deployed overseas. Then we’ll probably sell them at that point. I believe that is it. No really other debts or anything.

Scott:
Awesome. I’m building a picture of a three to $500,000 net worth in that range. Is that how you’re pegging it?

Fabio:
Yes. Between the equity from the houses and all, yes.

Scott:
You’re really heavy in real estate here. Let me ask you this. What’s been your savings like? How much savings you generated prior to this year, on average? Your 50% savings rate, have you sustained that for some time, or is that relatively new?

Fabio:
No. It’s varied throughout my whole life. Like Mindy said, I’ve been in the Marine Corps for 21 years, and I’ve always been big on savings, because I never really knew what to do with that. But some of that money was not used to… Well, at one point, we had a student loan with my ex-wife. We paid it off. At the time, probably it was not the best thing to do, because we could have invested it. Long story short, it’s varied anywhere from 15% to 40% depending on the years. The last three years or so is where I’ve really intensified that, and started off at around 30%, 40%.
Then this past year, with my wife now working, and she moved in with me, we’ve been able to bump that up just under 50%. I think it’s around 46%, 47% savings rate.

Scott:
That’s about $4,500 a month or so.

Fabio:
If we’re counting the BRRRR payment and all that, yes.

Scott:
That’s really good. That means you’re accumulating 50… You’re going to on a future state basis be accumulating $50,000 after tax each year in wealth. I want to state that because that’s no joke in terms of savings and annual accumulation. Many of the decisions that you are going to be faced with here around your real estate portfolio and those types of things need to be in that context of, “This is a one year of savings decision. This is a two-year decision,” those types of things. The fact that your savings rate is so high gives you that phenomenal advantage of being able to do it through that lens.
If you were saving $10,000 a year, then you’re making a 10-year decision, which is totally different than a one-year, if that makes any sense in terms of those contexts. I think the story here is that most of your wealth, over half of it is just in your San Diego duplex, and then everything else is about the remaining maybe third is what I got here. Do you agree with that as an assessment?

Fabio:
Well, if I pay back the TSP loan, then a lot of that will be tied up in there. If I keep that and keep working on the BRRRR, I would say it’s probably about half and half between the equity of the San Diego property and the cars that I’ve got available now.

Scott:
Got it. You’ve got a lot of leverage going against this BRRRR, but the clean asset is the equity is all yours. The net worth is all in your San Diego duplex.

Fabio:
Absolutely.

Scott:
Then your goal again is five years. What’s the timeline to Fi?

Fabio:
For retirement?

Scott:
To Semper Fi.

Fabio:
To Semper Fi, I love that. I gotta remember that one. I’ve said 10 years. I’ll be 41 this year, so actually nine years to Fi, but honestly, with the way our expenses are set up and everything, we don’t spend that much. I think we can hit that a little bit sooner. That’s why I’ve pulled the trigger on the TSP because… I don’t remember what podcasts you guys talked about it, but it was a long time ago. I heard the term freedom number. Our freedom number is somewhere around 5,000, 6,000 a month if we really want to push it a little bit. If I retire from the Marine Corps today, half of that is already covered.
I’ll be getting promoted this year. In five years with that promotion and the added years in service, it will be about $4,000 a month.

Scott:
We got a massive asset yet to disclose here that’s been masked by all this is your pension, right? What’s that pension going to look like at your finish line?

Fabio:
As of right now, I’m planning on doing at least five more years. I want to stay longer, but it’ll depend on the ability it’ll give me if it’s a job that I enjoy or not. If I retire in five years, that’ll put me at 26 years in the Marine Corps. Our retirement pay will be right around $4,200, $4,300 a month.

Mindy:
You could have a really easy part time job that… or your wife is still going to be working, I’m assuming, that will cover the rest of that. We need to definitely mention the military pension, because that’s going to really help you out, but also this BRRRR in St. Louis should help you out as well. I did very dirty numbers on a mortgage calculator, and $140,000 at 3% is going to be $600, $700 a month. That’s just P&I. That’s not taxes and insurance. I don’t know what the taxes are in St. Louis, but I mean, that’s $1,000 a month right there, assuming that all of the other numbers come in. I mean, that and your military pension has you covered.

Fabio:
That’s what I’m thinking.

Scott:
That’s the elephant in the room here. That’s the massive asset. That’s a million plus dollar asset right there as far as I’m concerned, or at least it will be in that five years.

Mindy:
The military pension? Yeah, I mean, the military service in general is the massive asset that we’re not talking about, because you mentioned very casually housing allowance, but we didn’t talk about your housing allowance, what you’re getting versus what you’re paying in your mortgage. Is that a wash, or is that…

Fabio:
Here, it’s pretty much a wash. My housing allowance here is right around 1,600 a month, and I’m paying 1,345. I’m saving a little bit.

Mindy:
Okay, so you’re making money.

Scott:
That’s great.

Mindy:
You’re making money on your housing allowance, and because they just give you $1,600. They don’t see what you’re paying. Did you sell your house? I don’t know about Champagne real estate. Because it’s college town, I was a little leery about it, but if they’ve continued to stay open, maybe that’s not such a bad deal to maybe continue in the house for a little bit longer.

Scott:
When I zoom out on your position here, what I see is you got it. The retirement is there. It’s in your hand and you want to continue working, it sounds like, for the next couple of years. You just want that option at retirement, and you’re there. That pension is going to do it for you. Let me just throw this out here and see how you react to it. Why do you have real estate in four different cities right now from that? What’s the game plan there from a strategic lens?

Fabio:
Well, the reason that’s happened is because the military moves me around, so basically, wherever I’ve lived, I bought a house.

Scott:
That’s worked out well for you. You got several $100,000 in wealth from it over time here, but if we’re zeroed in on that five year target, I think that’s the elephant in the room is figuring out that strategy, that core strategy and what you’re going to do there, and then making it passive, because you don’t want to be in five years managing a sprawling real estate portfolio that has different property managers of different competency levels, frankly, spread across different cities. You’re going to be like, “Dude, I’m making $200 a month on this fricking duplex in St. Louis, and my property manager stinks. What am I doing? I get $4,200 a month in my pension. I could be chilling on the beach doing this. Instead, I’m on the phone dealing with that…”
Anyways, that’s a future state to avoid. On the other hand, if you have six properties concentrated in one area that you’ve got really well run or operationalized, or you have figured out this sprawling empire here, and you feel really confident about it as a strategy [inaudible 00:28:56] the diversification. I think that’s the biggest piece of the puzzle to me right now, from a strategic lens, is thinking about, “How does that portfolio advance your fundamental goal here from a strategy perspective?” Then I think we’ve gotta talk about your financing things here, because you’re sitting on $86,000 in cash, and you got a hard money loan.
You got a loan against the 401k. Something there feels like there’s some fine tuning that we can do to operate, to tweak your financing approach and how you’re financing again your BRRRR in particular here. I’m interested to dive into that. I think you’re right that that’s a big piece there, but I think it’s going to be that BRRRR, and then the real estate strategy, the BRRRR, and then what we do with the San Diego duplex from a strategic lens, because those are the big money movers, and time sucks for you right now. What do you think? Am I onto something?

Fabio:
Well, it’s definitely something that my wife and I discussed a lot last year before we bought the property in St. Louis was that now that we’re here in the Midwest, it gave me an opportunity to dive into that market a little bit more. We’re doing this first. We’re testing the waters, and if it all goes well with the one I have a few more BRRRRS in St. Louis, and that if we get $200 a property, and we get five, and there were between five and 10 properties there within the next five years, then that’ll help cover that gap between my pension and the rest of money I need to get to Fi.
I do plan on keeping working up to the Marine Corps. My wife plans to keep on working, but I want to hit that number at least on my side so that we have options. One of the things we’re talking about is maybe not having a job that pays, but going somewhere and volunteering for a year or something like that, and so just having that flexibility.

Mindy:
Scott loves the concept of low hanging fruit, and the lowest hanging fruit that I see here is the Arizona house. It’s not worth a ton. 125 is still… I mean, it’s still 125. It’s 50 more than you owe on it, and it’s not bringing in any money. Yes, you’ve got a tenant who is presumably easy to manage, otherwise, you would not continue to rent it out to that person. If the tenant left… I’m assuming it’s a woman, but it’s probably not. If the tenant left-

Fabio:
It actually is.

Mindy:
Oh, good, I was right. If the woman left, and you were able to raise the rent to market rent, how much more are you getting?

Fabio:
The market rent right now is not that much higher. It’s a three-bedroom house. It has gone up a little bit, but right now, it’d be around 875, maybe 900.

Mindy:
That’s not even really worth raising on a good tenant who’s been there for a while, but also, you’re making no money on this. You’re losing money on this deal. Even though you’re making $50 a month, there’s a lot of other things that go into the numbers that take that $50 right out of your pocket and a whole lot more. If this was my portfolio, I would look into selling that as soon as I could. It just doesn’t benefit you to continue to hold that, and you could take that 50,000 and throw it at another BRRRR, or throw it back into your TSP. There are going to be capital gains taxes and depreciation recapture when you sell that property.
If she bought it in 2011, did she live there at the time?

Fabio:
It did. She lived in it off and on for about a total of three or four years.

Mindy:
That’s too far ago to qualify as your personal residence. If you’re not going to move back into that property, I would sell it. I would take the depreciation recapture. I would take the tax hit, and just move on. I would also talk to a CPA about that, because I’m assuming that you’ve been depreciating the property for the entire time that it’s been a rental. But if you haven’t, the government doesn’t care. They assumed that you did, and they charge you depreciation recapture. That’s something if you have been, which is great.
But if you hadn’t been, then I would suggest talking to a CPA to maybe amend your tax returns for years past, so you can take the depreciation before you have to recapture it.

Scott:
I just want to say I tend to agree with Mindy on this. You, as far as I’m concerned, when we factor in that pension are a millionaire, maybe one or one and a half times, two times over with that. You’ve got this property in Arizona with 50,000 in equity. That is probably appreciating at a tiny little rate. That’s not cash flowing. Look, I get it, it’s hard because you’re going to spend 8% of the price of the property and seller fees between the agents and all those kinds of things to unload the property, but I just think it’s a distraction at this point.
That’s almost immaterial relative to your position. Again, you’re talking about a decision that’s less than probably one year of savings with that, and a chance to consolidate with your portfolio. It’s not make or break either way on this. This is probably the easiest or tip of the iceberg as far as movements on the strategic approach. I would just tend to agree with Mindy on that property, it seems like, is far flung and was not built with the intention of building your overall position long term. It could be a better asset to redeploy into.

Fabio:
No, definitely, when she bought it, it was meant to be her home, and just circumstances changed. She turned it into a rental. I’m curious to hear your opinion. One thing that her and I talked about with this property is keeping that at least for the next few years, and then when her son who is in eighth grade right now, when he goes off to college in four and a half years, maybe selling that at that point in order to help pay for his college. Do you think that’d be worth it, or would it still be better to sell it now and maybe put that money into bonds or something to protect it until he gets to college?

Mindy:
I don’t know that selling it now versus selling it in a few years is going to make much difference to his college fund. With you being military, having the GI Bill could be maybe more helpful paying for his college, and you take this money and put it into a different place in your current situation where you can grow that more. Put that back into your TSP. Put that into your another BRRRR in St. Louis if this one works out.

Fabio:
Reinvesting that money somewhere else might be better.

Mindy:
Yeah.

Scott:
I think if you intend to spend money on college, and you want it to be really low risk, you just dump it into a savings account or a CD or bunny market or something, and take the small interest rates, those types of things. In general, if you’re looking to build your wealth, I think you deploy your wealth around the best overall blend of risk return that you like across your entire portfolio, and leverage that mathematically to then give the best advantage to paying for whatever it is you want downstream, whether that’s college or something else. Again, in a long-term lens, over 50 years, I just dumped my money into an index fund and set it and forget.
If I needed it in three years, I might not do that, because I might want to put it in something that doesn’t have a chance of being super volatile in the meantime, but I don’t think that rental property… Every year, the BiggerPockets community predicts the next recession is coming right around the corner. Then that for the last seven years has been a terrifying ride for me since I bought my first property, but it keeps going up. One of these days, they’re going to be right. Are you really at any lower risk by keeping in that property until your son goes to college? I don’t know. I don’t think so.
I think you’re taking that same risk on without that. I just think, again, from a strategic lens, having this particular property doesn’t seem to be moving you towards any of your goals. I think it’s a distraction on your mindshare to a certain extent. It just doesn’t seem to be going anywhere is what I’m picking up.

Mindy:
That’s also what I was gonna say. The duplex in San Diego was a little more difficult to just dismissed outright, even though it’s not making a lot of money. It’s not losing as much money as the Arizona property is, and it’s in San Diego, which is my favorite city.

Scott:
There’s stakes in that one. That’s 135,000 in equity that we just discussed. You sell that one. You’re pulling out 140 or 150, which you can do some real damage with in that. That’s an interesting decision. What are you thinking with the San Diego duplex?

Fabio:
Another thing that I’ve looked into is the way the property is set up, I can actually build another duplex on that property. I’ve been thinking about maybe in the future, once I’ve got a little bit more capital actually doing that, it would be about 300,000 to build another duplex onto the property, but it would add another half million or more in value. I’ve been toying with that idea, but that’s probably something I would do a couple years from now.

Mindy:
Is it zoned for that?

Fabio:
Yes, it is. There’s a lot of duplexes and fourplexes in that area, and that property specifically already zoned for that.

Scott:
Do you think your work in St. Louis is preparing you to handle that project?

Fabio:
Not right now. I think maybe in the future. If I do a few more BRRRRs or something like that, then yes. I know a lot of people jump right into it, but I’m a little bit more conservative, more, I guess, careful on that side, especially being this close to retirement, it’s like, “I’m [crosstalk 00:38:14].”

Scott:
Absolutely. You’re about to retire. Look, we just said, “Hey, the pension might be a million plus dollar asset, but in the reality of the current situation is that that would be betting literally all of your net worth or very much close to it on this particular project in San Diego remote. That’s a hope one day not a practical reality of your current situation as far as I’m concerned. I think that’s the right assessment, but you believe… I guess, absent that project, because when you think about that project, ideally, the buyer, someone who were to buy your duplex would factor in that potential into the purchase price, and that would be reflected in the lot value and the value of that duplex in general.
I think that’s a good one to really think through. Maybe talk to a couple agents in the area, and see what their opinions are, maybe a couple of investors, and just test your assumptions a little bit more on a gut check level and say, “Am I really going to build another duplex on this from scratch within the next five, 10 years, or should I really be like, “Okay, that’s a potential of this, and somebody who does that more or close to this thing can do that,” because I got a duplex where that’s a potential outcome as well, but I think it’s less than a 10% chance that I actually pull off that scrape and rebuild project, and that the much more likely outcome is that somebody buys it from me and does that project.

Fabio:
it’s definitely a very intimidating project to think about.

Mindy:
Do you have a contractor out in San Diego?

Fabio:
No, I don’t.

Mindy:
Oh, okay. I will send you the name of the guy who built my house in Longmont, and then moved to San Diego. He does stairs. These are the best, most quiet stairs, rock solid. That is a tough thing to do. Everything else he does is great too, but the stairs were amazing. I’ll send you his name after we get off here. He’s fabulous.

Scott:
got it. I just think that this duplex deserves a significant bigger piece of your mindshare. I’m using that word a lot. I’m detecting that all of your attention and focus is going on this BRRRR in St. Louis. That may be correct, because that’s where you plan strategically to deploy a lot more capital over the coming years. That’s great. But right now, you got this big pile of money sitting in that property, and I think you’ve got a couple of ideas here and there about it. I think you should really test those, validate them and make a decision on that property.
That decision might be to do nothing and just do exactly what you’re doing with the current structure, but I think that that’s more than half of your current wealth that you have access to pre-pension. I just think there’s a big decision coming with that property that deserves a little bit more attention and thought. I’m skeptical that we’re going to build another duplex on that lot in a short-term time period, frankly.

Fabio:
You’d be right.

Mindy:
Well, short term, but he can hold it for five years, and then figure that out. Do you know David Parry?

Scott:
That’s true, but I think that’s gotta be more of like, “Okay, I am going to do that.”

Fabio:
I mean, it’s something I want to do, but it’s not anytime soon. I don’t know that I’ll ever get to that point, but one of the things I think about is if the military decides to station me in San Diego again, I can house hack it. While I’m there, I can build onto it. Again, it’s still a lot of ifs, so there’s definitely nothing concrete about it.

Mindy:
Do you know David Parry?

Fabio:
Yes.

Mindy:
I was going to say he’s in San Diego. He can connect you with some agents who can look at the property, look at the address and be like, “Oh yeah, you could totally do that, or, oh, that’s a terrible idea.” I think San Diego is awesome, but I know that not every part of it is awesome, although every part of it’s awesome when you live in the Midwest. Sorry, Midwesterners, I lived in the Midwest for a long time.

Scott:
Oh geez, I didn’t say anything.

Mindy:
Listen, I lived in Wisconsin, and the sun would go behind the clouds in October, and then April, it would come back out. I am spoiled in Colorado, where we get 330 days of sun every year. We are way going off the rails here, so let’s get back to… This isn’t our show. It’s Fabio’s show.

Scott:
Let’s talk about the BRRRR now. I want to know why do you have a $1,200 payment on this BRRRR, but also $86,000 in cash? How did that come to pass with all that financing?

Fabio:
Basically, I can have the private money lender do an inspection anytime, but there’s $140 fee every time they do an inspection. Because I have the money for it, I’ve been paying the rehab out of my own pocket with the intent of when the contractor finishes the first part, the first major part, then have them inspect the-

Scott:
Where fundamentally, though? What was the private money for? Was that used as a down payment or the finance construction, or what was that?

Fabio:
For everything, for the rehab, the purchase, the whole gamut from start to finish.

Scott:
I’m hearing that… Again, I’m hearing, “I started this process with 35-ish in cash. I pulled 100,000 from my TSP, and now I’ve got another loan on top of that.” How much is the private loan for?

Fabio:
It’ll be for the rehab plus the purchase, so 145.

Scott:
Fundamentally, what I’m confused on is if I’ve got 145,000 in this, and I’ve got 135,000 in cash, why did I take that loan in the first place?

Fabio:
Oh, I see what you’re saying.

Scott:
Why do I have a private money loan in the first place?

Fabio:
Well, basically, I was going to do it all on my own, and then I’m talking to the agent and all, he’s actually an agent I found on BiggerPockets. He connected me with the private money lender. What got me on to the idea of it is that I could take the loan on and do more projects at once, which I wanted to do, and I’ve been looking at more properties. I just haven’t found anymore, so my plan was around month four or so to get another property. I just haven’t found another property that makes sense with the numbers.
If I did it all with my money, then I would only be able to do one at a time. I haven’t been able to start in the second one, but that’s the intent behind or was the intent behind it, so just searching.

Scott:
I see. Here’s what I don’t love the strategic level again with this approach is I’ve got equity sitting in these other properties that are not fundamentally serving me, and I’ve got a pretty good cash rate and a good savings rate, a good chunk of savings, and I’m borrowing against my TSP, my military 401(k). That’s a really low interest rate borrowing activity net with all that reality, but then I’m also going to go on and take a private money loan, which I think increases your risk dramatically on your first BRRRR in particular with that while you’re improving the grounds. What I like…
I don’t know what the right way to do this is. Maybe there are some thoughts that we can have here, but it would be great to de risk this project or complete it and get it off the books. Do your next BRRRR if you’re going to do another one, which sounds like you are with a better source of capital, cash you already have, low interest debt that you can get somewhere else. Then when you feel like you’ve got your operational engine churning, then seek the private money with the high interest rates and those types of things.
That’s, I think, what’s fundamentally my challenge with the way you’ve structured your debt on this property. I think it’s just… I don’t think it’s causing you problems. I like the instinct to take a lot of cash. Right now, you’re in a low risk perspective, because you’ve got a ton of cash that you’re sitting on, and can handle a lot of things, and you’re almost through the rehab. You’re not in a risky situation. You’re just costing yourself some money, and not optimizing your portfolio, in my view, at the strategic level.

Fabio:
No, you’re absolutely right. What I realized once I started looking for a second property is that without a deal flow, this is just taking longer than expected. I really could have done that with my own money and saved almost $10,000 in this monthly payment, so the private money lender had done it with my own money. In my head when I first started, I thought, “Four or five months in, I’ll be able to find the second property and jump right in.” In reality, without a deal flow, it has not been that easy, so it’s been taken longer.

Scott:
All the cool kids use private money as well, which is not helpful, right? It’s like, “I want to use private money. That’s what a real investor does.” No, a real investor uses private money, because they don’t have the access to the other better sources of financing out there that they can get, and they’ve exhausted those options. Then they go to private money, which is way more expensive. What’s the interest rate of this private money loan?

Fabio:
I don’t have it on here on my paper actually. I don’t remember off the top of my head, but…

Scott:
I bet it’s north of 10%.

Fabio:
I think it’s… Actually, it was supposed to be 14%, and we landed at 12%.

Scott:
I mean, that’s my fundamental… That’s probably more than the rate of return you might be getting on some of your equity investments in real estate. That’s a 14% guaranteed return. I think that’s the elephant in the room in terms of the financing piece. For me, my recommendation would be to think through how to avoid that at all costs in the future, using your own position, and then use that as the next option. When you’re truly out of other financing sources, and you feel like you’ve got a real winner of a deal and an operationalized business, that’s a tool you can use for scale from that point, rather than the tool to get started, because that’s just…
Again, it’s going to bleed you probably about $10,000 or $15,000. Again, you’re doing a lot of things right, and your position is going really well. That’s a three-month setback in the context of your wonderful, strong financial position, but I think that would be my observation.

Fabio:
No, I think you’re right. As I’ve been trying to figure out how to get to this fine number, because I don’t necessarily want the giant real estate portfolio with just a couple properties to kind of support it. I was thinking if I can just do one property every eight to nine months with my own money, then over the next five years, I’ll still accumulate a few.

Scott:
You’ve won. Why do you need to build a rental property empire unless you want to? If you want to build a rental property empire, do it, but you don’t need… You’ve won. You only need four of these guys to completely pad over what you’re currently spending in retirement with that pension, I think. That’s another big piece of the puzzle in my mind.

Mindy:
That is why Scott is here to say things like this.

Scott:
You’ve earned it. You haven’t won. You earned it, right?

Mindy:
Yes.

Scott:
21 years in service, I can only imagine what that kind of career is like for that. I’m six years into service here at BiggerPockets. That’s phenomenal at the highest level, and so that’s where it’s like, “Hey, let’s make this easy and a nice, pleasant winner rather than a stressful high interest way to go about building this portfolio.”

Mindy:
Yes. Let’s look at this loan. Is there a penalty for early payoff? Do you have the funds right now to pay everything off, and be done with that loan? Back to your TSP, how frequently can you take a loan from the TSP? I mean, obviously, you can only borrow what’s in there, but once you pay it back, is there a timeframe before you could borrow it again?

Fabio:
It’s about three months after you pay it off that you can take a loan again [inaudible 00:49:47].

Mindy:
I’m wondering… This is more like planting a seed. Look at how much you currently owe the hard money lender, and how much you have left in your bank account, and see if you can come cover that and maybe pay that off. Focus on getting the property done. How much longer do you have on your rehab timeframe?

Fabio:
Hoping to be done by end of March, [crosstalk 00:50:13] the latest.

Mindy:
End of March. Is there any opportunity for you to go down there, it is only a three-hour drive, every weekend and just crank it out and get that done a little sooner?

Fabio:
Right now, I’m actually finishing a master’s degree. We’ll be done here in April. After that, I’m going to have a lot more free time, but right now, it’s pretty busy doing work in school.

Scott:
All right, so we got our hands in a couple different pots here as well. How about this, you got 86K in cash right now, right? Your loan is 140. Can you get a HELOC on that San Diego property?

Fabio:
I actually looked into getting the HELOC last year, but with COVID, they weren’t doing it. I haven’t looked into it recently. That’s a good question.

Scott:
You don’t want to deplete your cash position too much. I think you do want to be sitting on a pile of cash that you can finance operating activities at this BRRRR at the end of the day. I think below 25,000 is getting you into a risky territory in general cash, but if you could get a $75,000 HELOC, that’s going to be at 3%. You pay off this hard money lender, this private lender with that and plus some of your cash position. Now, you’re financing your BRRRR at 3% or 4% instead of at 14%.
It’s still a short-term debt, and you still have to refinance and pay off that HELOC. Don’t get complacent about that HELOC just because it’s at a low interest rate, because you have to pay that off. Then you gotta pay off your 401(k). I think that this private money situation at 12% is really costing you every month that you’re not addressing it, and so maybe that’s the right opportunity or way to leverage your San Diego position to a certain extent right now.

Fabio:
Definitely. I hadn’t thought about that. Ever since last year when I looked at the HELOC, it wasn’t available. I haven’t looked into it, so I can do that.

Scott:
Things are changing at that point, and I think people… I wonder if you’re going to have any trouble at this point.

Mindy:
An alternate thought is that since we were at the beginning of February right now, this episode is airing at the end of February, you have basically one more month of hard money payment. Then you can hopefully refi out of that.

Scott:
Well, he’s gotta finish the rehab generally speaking, and maybe even place a tenant before he can refi out of the hard money lender.

Mindy:
Oh, you’re right. You’re right. I forgot about the…

Fabio:
It’ll probably be May or so when I’m refinancing.

Scott:
This is costing him $1,400 a month in interest, $1,200 a month in interest, right? It’s probably interest only. The entirety of that 1,200 is probably going to interest.

Mindy:
You’re right, Scott.

Scott:
This is the elephant in the room with your finances here. I think that that’s the… To me, I mean, you can move that down to 3%. Now, you’re paying $300 a month. That’s a $900 savings activity. I don’t know what else you can do in your life to generate $900 more in free cash flow. I don’t have anything that effective.

Mindy:
Arizona.

Scott:
There’s a way there’s a way to come into more liquidity. That would be an interesting thing here. Arizona is probably building your wealth at a rate of 200 bucks a month or something like that, if we’re being generous with the appreciation rate, right? Boom, you sell that. You take out 25K after taxes and all that, which is not that much, and you get that HELOC. I bet you between those things, you’ve got the puzzle pieces coming together to get out of this a little sooner, and de risk your position. Then from there, I wouldn’t approach the next BRRRR right away. I’d sit for a couple of months, and let that BRRRR do its thing, and now you’re generating instead of $4,500 a month, $5,500 a month because you no longer have this $1,200 leaking out of your bucket.
You’re going to accumulate 20,000 in four months. The world’s going to look a lot different after you’re accumulating that kind of cash that quickly, and your next BRRRR will be that much easier to finance and tackle. You’ll also have that operational experience that you’ve just invested in. I see a position for you towards the end of the year, where you’re financing the BRRRR with much, much better debt terms, perhaps a consolidated position and are going at a steady pace. That’s still very aggressive.
It’s probably one property a year, but it’s not six properties all at once. You do one property a year and then two a year in 2022 or something like that. That’s a really nice cadence of wealth building that for you will be really sustainable with that savings rate and those types of things.

Fabio:
Absolutely.

Scott:
One last piece of the puzzle here, and I think this all ties together with that BRRR, is the money you have in after tax stocks right now. Mindy has a good point around these types of things to make sure that you’re not incurring short-term versus long-term capital gains. Assuming you held those positions for more than a year or two, you might be able to sell portions of these stocks, and redeploy them either into TSP or other retirement, things like that to give yourselves some liquidity. When I think about index when investing, I think I’m going to get a long-term 7% to 10% return. Right now, you’ve got a 12% return, but getting out of that hard money loan, that private money lender loan.
There’s some arbitrage potentially there, although I wouldn’t incur a significant short-term capital gain, which is going to be taxed at your ordinary income level in order to do that, but I might incur a long-term capital gain. We’re splitting hairs a little bit with that. But in general, that might be another source, another piece of that puzzle that can come together to help you get out of that financing challenge. By the way, that financing, you think you’re going to be done in May, and you might be, but what if it goes into September?
I think anybody that does their first BRRRR goes a little longer than they were hoping in terms of being able to refinance.

Fabio:
Absolutely.

Scott:
You may have 6,000, 7,000, $8,000 left in interest payments on this loan before it’s all said and done, something that, I think, again, you can avoid with some creativity and move in some of the puzzle pieces in your portfolio together.

Fabio:
Absolutely. That’s a great point. When I bought the stocks last year, it was spread out between March and June. We’ll definitely want to keep them in there at least until June. What I was thinking with that money is just putting it into a high-yield savings if you can still call them that today, just as an emergency fund.

Mindy:
I love an emergency fund. I’m a huge proponent of an emergency fund, but I really want to see this hard money loan get wiped out. I think that should be your first focus and then the emergency fund. We spoke before we started recording. We didn’t actually say this during the recording. You’re able to sock away $2,200 a month just into a savings account from your regular-

Scott:
$4,500.

Mindy:
What?

Scott:
I thought it was $4,500 a month.

Mindy:
The $2,200 goes into the cash.

Fabio:
After the private money loan is paid off and everything.

Scott:
How much is it per month?

Fabio:
$2,200 a month in savings, and then the private money loan, $1,200 [crosstalk 00:57:05] on top.

Scott:
I see. I got that wrong. We’re saving at… We could be saving at a $3,400, $3,500 a month rate, not a $4,500 month rate, but that would be immediately achievable after the hard money loan is paid off.

Mindy:
What I was going to say is you could crank out of a six-month emergency fund pretty quickly just based on that, and you have… I think there’s a lot there, a lot of other opportunities for that, but I have to agree with Scott. I really like the fact that he was able to look at that and be like, “Whoa, whoa, why are we doing this?” Because at the outset, “Oh, I’ll just borrow this money. It’s great. I am so cheap. I could never get a private money loan, because 12% gives me hives.” I see why that would be… It can be a great opportunity for the right opportunity.
I like the BRRRR in St. Louis. I would love to see you get another one like this after this one’s done. Because you didn’t say you had a terrible experience with your contractor, I’m assuming that you’ve had a good experience. They’ve done what they said they were going to do for the price that they said they were going to do it, maybe not quite in the timeframe. They’re always really ambitious with those timeframes. But yes, Scott said the BRRRR might go a little long. Double your cost estimate and triple your time estimate. Then you might almost come in right where you’re thinking you’re going to come in for the first BRRRR.

Fabio:
No, definitely.

Mindy:
For the second BRRRR, then you will recognize, “Oh, I didn’t have to go with this. I could go with this, and it’s off the shelf, and it’s ready now. I could do this.” We all make mistakes with our rehabs. It is the thing, but it sounds like you’re coming in lower than your rehab estimate.

Fabio:
Well, and part of that is because my brother’s going to be helping me with the floors and a lot of stuff, so that’s saving me several grand between that [crosstalk 00:58:57].

Scott:
Is he getting any economics for that, that are part of the fact that the equation get?

Fabio:
None. I’m paying my brother for that, because he’s [crosstalk 00:59:03] doing it on the weekends.

Scott:
You just pay it in cash.

Fabio:
Right.

Scott:
Okay, good. Cash is good, not these complex… Partnership’s fine, but just if… Hopefully he’s trading his time for cash, not equity or anything like that.

Fabio:
No.

Scott:
Okay great.

Mindy:
Well, I think we have a pretty good set of suggestions here, Scott. I think we’re both in agreement that the Arizona property doesn’t really do you any favors. I think you’re in agreement as well. Talk to your wife and see how she feels about letting it go. Sometimes selling something can be difficult, especially if it’s your first property. Sometimes you don’t care. I had a hard time selling my current property or my last property, just because we were there for so long. The San Diego property, I would really… It’s still bringing in… The difference between the mortgage and the rent was 650.

Fabio:
Around that.

Mindy:
I wouldn’t say that it’s losing your money. It’s just not generating the kind of cash that you want it to be generating. If you want to live in San Diego down the road, if you could build another duplex on there and turn it into a quad, I can see that as an opportunity where you don’t have to sell it right away. You can put more time into it. Definitely reach out to those agents that we talked about. The St. Louis thing we’ve talked about, you’re going to continue that BRRRR. Pull the money out. Pay off the loan as soon as you can by leveraging some of the other opportunities that you have.
Then we didn’t really talk too much about paying for college for the kids, but you’ve got the GI Bill. You said you’re getting your master’s. How much is leftover from the GI Bill that you’re using that you could share with the kids?

Fabio:
Actually, I’ve been very fortunate, where I’ve worked everything out with the military. I got my bachelor’s degree for almost free, and paid maybe $3,000 over the years, just with different programs in the military. Then the master’s here in Illinois. I’m working as a marine instructor at the ROTC unit at the University of Illinois. By working at the university, they consider me part of the staff, and as part of the staff, I’m getting my master’s degree for free.

Mindy:
That’s awesome. Can your kids go to school there for free because you are severely discount because you’re a staff?

Fabio:
They could, but unfortunately, by the time they’re ready to go to college, I won’t be here anymore, because I only have a year and a half left.

Mindy:
You should have had kids sooner.

Scott:
That’s our big advice.

Fabio:
If only I could go back in time.

Mindy:
I’m gonna give a shout out to my client, Sean, who is doing the exact same thing in Boulder.

Fabio:
Oh, nice.

Mindy:
He listens to the show, too. Hi, Sean. He’s a Marine Corps, ROTC instructor, and I think he’s working on his master’s as well.

Fabio:
I haven’t used any of my GI Bill. I initially had it set up to where it was all going to go to my son, and now with my wife and her having a teenager as well. I split it so that some benefits are going to my son, some going to her son, and we’re able to move them back and forth depending on their needs for college. But if they both go to college full time at a public school or something like that, then we will need more than the GI Bill because that only covers four years at a public institution.

Scott:
At the end of the day, you’re going to have to pay for that college some way. I just don’t see how the Arizona property, the dollars in the Arizona property are any different than dollars somewhere else near San Diego or whatever. You can finance that with any of those dollars. I just think that those dollars in particular in the Arizona property aren’t part of your core strategy, and aren’t material enough to make a difference with that. You sit here in three years. If it’s 3.5% appreciation, you might get a 8% compound. I’m completely pulling these numbers out of the air. I got no idea.

Mindy:
I think he’s getting like a 1% compound interest. I think it’s not really… I mean, it’s not moving the needle at all. I don’t know how much mental bandwidth it takes up from you, but I would just sell it and take that money and put it towards something else that will generate more than negative $50 a month.

Scott:
I mean, you’re negatively cash flowing on that because the spread between your rent and your mortgage is very small, and you’re piling up a liability in the form of that roof when it’s going to be replaced, or your fridge or whatever it is that you’re not calculating at this point [crosstalk 01:03:27].

Mindy:
There you go. Well, Fabio, this was fantastic. I think that we have covered a lot of things. I think we’ve given you a lot of things to think about. I would like to see you start contributing to your TSP again once this BRRRR is wrapped up. We didn’t really talk about that too much, but I think just consistently contributing to your retirement account is a good plan. There’s very few instances when I recommend not consistently contributing to your retirement plan.

Fabio:
The only reason I wasn’t sure about that is because I’m so close to reaching the fine number, but in my head, I was thinking, “What’s more important, reaching my number now or the retirement plan at 65?” I joke with my wife. Between being a marine and all the risk taking activities that I do between riding motorcycles and snowboarding and all that, I might not make it to 65. She doesn’t like that joke. That’s one of the things I’m focusing on is trying to reach and Fi faster, so I don’t have to worry about retirement at 65.

Scott:
I get it. I agree with Mindy. My agreement is less of a strong position, because as far as I’m concerned, your retirement account is the pension. We got a million, million… Again, I don’t know what the asset value of that is, but 40,000 a month is going to be 48,000 a year. You’re looking at over $50,000 in income guaranteed by the U.S. government. That is a significant high-value asset, right? I’m probably way conservative in a million to million five. It’s probably a $2 million asset. When you got $2 million in your pension, do I really need to get to 250 in my 401(k), my TSP at the same time?
I get that. From that stance, I do think it’d be great to pay back the loan and those types of things, and shore up your financial foundation, so you’re not having to use short term debt, except for in targeted cases. Short-term debt’s a great thing to do for a BRRRR, and the best short-term debt for that BRRRR is probably going to be a HELOC, and then maybe a loan from the 401(k) rather than private money, in this case, until your business scales from an operational standpoint. I think contributing back to the TSP will be great, but I don’t think it’s…
I agree with Mindy, but I don’t know. I also get the skepticism of like, “Okay.”

Mindy:
I hear what you’re saying, Scott. I will allow it.

Scott:
All right.

Mindy:
Fabio, I hope this was helpful. I hope this gives you some ideas to consider and to just reshift your focus a little bit. Was it helpful?

Fabio:
Absolutely. This is exactly what I was looking for.

Mindy:
Good. Good. Good. Well, I want to know how this pans out. When you’ve made some of these changes, after you sell the Arizona house, then after you refi out of this or pay off this loan, I want to talk to you again.

Fabio:
Absolutely.

Scott:
All of these are just suggestions or thoughts and what we’re doing with that. This is going to be your decisions at the end of the day. We’re not telling you to sell the Arizona house necessarily with official advice, all this disclaimer and that kind of stuff. It’s just that’s our take based on what you presented us today. Those are some things to think about. I think hopefully, they help you frame your overall plan.

Fabio:
You guys make a lot of sense. I mean, you definitely gave me a lot to think about, so obviously, I gotta talk to my wife about it. She’s the boss.

Mindy:
Yes. I was going to say that happy wife happy life. Do not make big financial decisions without talking to your wife. Yes, I think that is awesome. Set up a money date. Have a nice conversation.

Fabio:
Absolutely.

Mindy:
Wonderful. Fabio, thank you so much today for coming on and sharing your information with us. I think as other people listen to where you are at, they can start to see similarities in their mind, or, “Oh, I was going to buy this house, and now it doesn’t really turn out that it cash flows very well. Maybe I’ll look for a different deal, or however it works out.” I’m not dogging your wife for buying a house that didn’t cash flow. I bought a lot of houses that didn’t cash flow anything. I just think that it’s time to take the money and run.

Scott:
Thank you, Fabio. This has been fantastic. I hope that you reach Semper Fi with it in a shorter time period as possible.

Fabio:
That’s awesome. Absolutely. Thank you guys. This is great.

Mindy:
Thank you, Fabio. We’ll talk to you soon.

Fabio:
Thank you. Bye.

Mindy:
Okay, Scott, that was Fabio.

Scott:
I thought it was awesome. I really loved your Semper Fi pun. That was awesome.

Mindy:
It wasn’t my Semper Fi pun. It was my Semper Fi pun in the beginning that I said, but it came from Scott like always, but that’s great.

Scott:
I think it’s great. None of us have made that connection before.

Mindy:
Pursuing Semper Fi. I mean, that’s a big part of his plan is his military pension, so he really is pursuing Semper Fi. Now, I can’t wait to talk to all of my Marine Corps friends to tell them that too.

Scott:
Absolutely. I’m really liking these finance Fridays, because we’re getting such a diversity of backgrounds and money stories and situations here. It’s interesting because we thought… I don’t know. I thought at first that it was going to be a lot of folks who are getting started in this types of things, but I think we found that people with net worths in the 500, the one, two, three, $5 million ranges still are struggling with a lot of clarity and getting a simple, scalable approach to their money in place. I’m so grateful for the opportunity to dive in, and so thankful that people like Fabio come on the show and share all this detail with us so that we can learn alongside you guys, our listeners, with it.
Just any feedback on the Finance Fridays would be really appreciated. You can leave it in the Facebook group facebook.com/group/bpmoney, and we’d love to see it and check it out and have a discussion around it.

Mindy:
Yes, and we would love to talk to you about your finances. If you would like to come on and share them with us, you can apply at biggerpockets.com/financereview. We have had mainly men applying to the show, which is not a bad thing. I love my men but I also love my ladies. Ladies, if you would like to have your finances reviewed, please come in and apply. Ping me [email protected], and let me know that you’d love to share. We are not here to make fun of you or make you feel bad. We’re not the Howard Stern of finance. We just want to look at your finances, and sometimes when you’re in the middle of it… What?

Scott:
Oh, I just love it. What a nice little knockout blow for Howard.

Mindy:
He can be abrasive, and we are not. But sometimes when you’re in the middle of your finances, you can’t really see other options, or you have it in your mind, “I have to do this,” and sometimes if you do this, it’s a little bit better. We would love to look at your finances and see what suggestions we can make for you. Please fill out the form at biggerpockets.com/financereview.
Okay, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From Episode 174 of the BiggerPockets Money podcast, he is Scott trench, and I am Mindy Jensen saying I’m late for my bus, Gigantopithecus.

Scott:
Whoa, awesome. Bye, everybody.

Mindy:
Bye.

 

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In This Episode We Cover

  • Keeping monthly expenses low (especially if you’re about to retire)
  • Taking advantage of the equity you have in different properties
  • Coming up with a “Freedom Number” then shooting for that goal
  • What to do with houses that aren’t cash-flowing 
  • Taking out loans from a 401(k) or TSP account
  • Which loans to pay off first (depending on time and interest rate)
  • And So Much More!

Links from the Show