Finance Friday: Barely Breaking Even? Here’s How You Can STILL Invest

Mindy:
Welcome to the BiggerPockets Money Podcast Finance Friday edition, where we interview Liz and talk about variable income, growing your real estate agent business and long-term portfolio optimization.
Hello, hello, hello, my name is Mindy Jensen and with me as always is my predictable co-host, Scott Trench.

Scott:
Thanks, Mindy. Great to be here with my sees through it all co-host, Mindy Jensen.

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 are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business or just get more comfortable with building a financial foundation, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.

Mindy:
Scott, before we jump in, I’m going to say the contents of this podcast are informational in nature and are not legal or tax advice, and neither you nor I nor BiggerPockets are 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.
All right, now I’m excited to talk about Liz. Liz is coming in today. She is a real estate agent in North Dakota. Scott, did you know that it’s cold in North Dakota?

Scott:
I had heard, I have never experienced it for myself.

Mindy:
I have never experienced it for myself firsthand, but I have heard it is very cold in North Dakota, which will make real estate agenting a little bit more difficult in those winter months. So we are here today to talk to Liz about budgeting for when you have variable income as well as where she should allocate her finances.
Before we bring her in, we have a new segment of the Money Show called the Money Moment, where we share a money hack, tip, or trick to help you on your financial journey. Today’s Money Moment is my own personal experience, downgrade your trash service. Do you routinely find your trash can less than full at pickup time? Contact your trash company to see if there is a smaller can or a less frequent pickup option or both available for a lower price. I cut my trash costs in half when I downsize my curbside can. Do you have a money tip for us? Email [email protected].
Liz is a real estate agent who just bought her very first house with her partner. Yay. She currently has a nice nest egg in her savings but is wondering where to allocate her money so it works best for her. Liz, welcome to the BiggerPockets Money podcast. I’m so excited to talk to you today.

Liz:
So excited to talk to both of you as well.

Mindy:
Well, let’s jump into it and look at your money snapshot. We have a salary of $2,800 a month plus additional real estate income. So that’s not real estate agent income. That’s your full-time job income, additional real estate income, which as we all know is completely variable subject to the whims of other people, which we have at $19,000 for last year and an additional $500 a year for property management. So that’s decent.
We have monthly expenses that total $2,400 a month, but those monthly expenses of 2,400 do not include your student loans at 218. They do not include your real estate fees, which do need to be paid. But their business expenses, not personal expenses, and that’s $250 a month. And when you add those in, not including your real estate income, that puts you into the red where you’re spending $2,957 but you’re only bringing in $2,800. So if we look at where your money is going, I don’t see anything really crazy. Rent looks within normal, 1,550. Utilities, 173. Gas is 213 a month. Groceries, 260 a month. Restaurants, 390 a month. Subscriptions, you’ve got like 45, $50 a month in subscriptions. Gym, $32 a month. Travel, 250 a month. Merchandise, random, et cetera, 333. So I’m not seeing any wild expenses.
Investments, we have a Roth of 5,400, SEP IRA of 1,100, whole life insurance at $5,700 is the net value. We have a high yield savings account of $20,000 at 3.75% interest. Yay! Another cash savings account of $5,000 and another cash savings account of $14,000. Debts, we have $13,000 in student loans, $900 in a personal credit card, and $800 in a business credit card. That seems reasonable. And Liz, how old are you?

Liz:
I’m 29.

Mindy:
And do you have kids? Are you married?

Liz:
No kids and not married.

Mindy:
My first question then is why do you have a life insurance policy? But we’ll talk about that later. And you are currently under contract or you have purchased this house?

Liz:
I’m under contract.

Mindy:
Okay. And when does the purchase finalize?

Liz:
So we haven’t set a closing date yet. The sellers are moving to Memphis, Tennessee, so they’re getting things organized down there and then they should have a date to me, I’m hoping in the next week, but sometime in mid-July.

Mindy:
Liz, could you give us a brief overview of your money story?

Liz:
Yeah, so I like to thank my money story started when I was 16 and started in the workforce. I was lucky to have family that helped me get a job when I was 16. Shout out to my brother Jason, who also loves the podcast. I just feel like some kids are given the opportunity to work for family members and can take advantage of it. And I was working eight-hour days in the summer in high school. I feel like my work ethics started there and I just grew from there. After high school, I went off to college and was working, doing summer jobs in college. I really feel like I learned how to save when I was doing my job in college, which was bev carting. So working for cash tips.
I do have a little hack if you don’t mind me sharing. I would take my tips, the $20 has a little number and letter on it. And so every time I get a $20 bill that had an E or a number 9 in it, I would put it in a piggy bank and save those up for the end of the year and then I would cash them in at the bank or put them into a savings account and I would save probably 3,000 to $5,000 every summer just doing that. So that’s like a little hack that I wanted to share. That’s where I learned how to save, I think, watching friends in college blowing their money and I’m just like, “I do not want to leave college and not have money to pay off student loans.”
So then I went to work for family and I wasn’t doing what I graduated with it, which was marketing. And so I think that kind of killed me for the marketing industry, taking a year off there. So I moved away and then went back to where I was going to settle down at and got a job working for a company. I didn’t love the job. I ended up getting let go and that’s when I was like, “You know, I think I want to do real estate.” And so my family’s like, “It’s a really hard job. It’s a grind, you really have to be invested in it.” And I’m just like, “You know what? I want to do it.”
When I put my mind to something, I’m going to do it whether somebody tells me yes or no. I do try and weigh the pros and cons of everything. I got my license and it was a slow first year as it is for most people, but by year two I was doing pretty well and I just love it. I love being in that business. But I think that’s kind of where that entrepreneur mentality comes into play and I just love being my own boss and doing real estate.

Scott:
Awesome. How’s it going as a real estate agent and do you see yourself scaling that this year?

Liz:
So right now it’s going okay. I think that it will start to pick up now that it’s getting warmer. I kind of took a little bit of a downturn when I moved from… I was in central Minnesota and then I moved to Fargo, North Dakota. And so the three years of business I built up in Minnesota, I basically had to start from scratch moving to North Dakota. I was lucky to have clients right when I moved here. I think that just comes from confidence and knowing the business now that I’ve been in long enough that people trust me. So my first summer here was pretty good. I had four transactions for somebody new in the market. Yeah, I was pretty proud of myself. And then it got really slow when winter came, but you saw it with everybody. It wasn’t just me. So it made me feel okay knowing that I wasn’t the only one that was slowing down in real estate.

Mindy:
Okay. You moved to North Dakota?

Liz:
Yes.

Mindy:
Here’s a little fun fact. North Dakota’s average annual temperature of the whole year is 37 degrees in the northern part of the state and 43 degrees in the southern part of the state because it gets so cold in the wintertime. I have used my real estate crystal ball to see that you will always have a slowdown in the wintertime because it is not fun to go out and look at houses when it is a thousand below zero. So I will say that this is something that you should be planning for. And when you do have the foreclosings in the summer, you should maybe tuck some of that money away for a rainy day and plan for very, very slow winter seasons. There’s not just going to be a lot of activity during those incredibly cold times. So I can understand that. Has it picked up at all in this spring? I

Liz:
I have some people in the pipeline. I don’t know if interest rates are still freaking them out. I think people are still scared of that. Housing prices are still high. But I’m not sure why it’s not picking up. I thought it would pick up a lot faster now that we’re above 40 degrees. But I just think it’s going to take me following up with some people. And I’ve been trying to, but I’m hoping that some people… I love when people just all of a sudden they’re like, “Oh, we’re making a move,” or “We’re looking to buy or sell.” I swear that’s how my business goes. It’s a lot of communication, but it’s a lot of people just deciding last minute that they’re ready to do it. So I’m expecting that to happen, but it’s still been pretty cold here and I still think some people are a little hesitant of the market.

Mindy:
I would agree. And I am going to show you a book called Sold by David Greene, the host of the BiggerPockets Real Estate Podcast. SOLD: Every Real Estate Agent’s Guide to Building a Profitable Business. This is his first book. I think that Skill was the next book. Skill: A Top producing Agent’s Guide to Earning Unlimited Income. And then Scale, which is his third book. I don’t even actually have it yet. It’s all about scaling your agent business. So you turn a real estate agent job into a streamlined business that gives you the freedom to work when you want. So I want to know if you have these books.

Liz:
I don’t.

Mindy:
Okay, well you will in about a week. I’m going to have my publishing team send them to you. David Greene is amazing. He is a real estate agent that just does not stop and he took a moment to stop his real estate agent business to write these books for us and share with you how you can go from regular old ho-hum agent to super producer very, very quickly.

Liz:
Awesome. Thank you.

Scott:
Liz, what are you doing for your day job outside of the agent activities?

Liz:
So I work for a local promoter. We book co comedy and concerts in the area. So I book the shows for the Fargo-Moorhead area. I don’t do all of the booking, but our company goes into a lot of the venues around here.

Mindy:
Awesome.

Scott:
Is this full-time? What’s the nature of this job? Because it’s paying less than 3 grand a month, is that right?

Liz:
Correct. So when I went in for my interview, I went in with the intention to let them know I do real estate. It is a priority in my life. This job, it’s super cool. I love my job right now, but it was a lot to accept the fact that I was going to enter back into a 9:00 to 5:00. So I had that conversation right out of the gate within my interview. I just said, “I want to have some flex here. I don’t know if your butt’s in seats for eight hours a day in front of your computer, but I just don’t want that lifestyle.” And so they’ve been really flexible. If I have showings for the apartment that I do property management for, they’re like, “Yep, just work 20 more minutes a day to make up the time.” They’re really flexible. If I have to go show a house, it’s not a problem.
So I really can work real estate in really well with this job. I think the only thing is that it’s probably taking away from my marketing time where I could be promoting myself and doing my learning and going to events that would help my business in real estate just because it’s time-consuming working a 9:00 to 5:00.

Scott:
Yeah. So it essentially full-time work?

Liz:
Yes.

Scott:
With flexible hours. Okay. What’s your hourly rate for this?

Liz:
So I’d have to do the math, but I’m making 42,500. My salary is 42,500 and then my paychecks every two weeks are somewhere around 1,600. And then after tax I’m at 1,410.

Scott:
Okay, great. And so I think that this is where Mindy was getting at the beginning of the show here is that we have the salary minus your expenses is not enough to cover them on a recurring basis. What’s alarming to me is you don’t have an allotment for miscellaneous expenses, the big car insurance payment, the unexpected health issue or whatever it is in there. But while I can observe that, the reality of your balance sheet, your net worth statement is that you have 40 grand in cash and 14.5 in debt. So clearly, you are managing to get ahead. And this habit, going back to the story of your high school days where you saved every $20 bill with a 9 or an E, that mindset has been preserved through this period and you are coming out ahead. But it’s saying that the side bets you’re making are what’s getting you ahead, not your fundamental position. Is that accurate?

Liz:
Yeah, I’d say so. I think I have a hard time knowing where to put my money to make it work for me. I do have health insurance through work now, so I’m not as worried like benefit wise, but I don’t have a 401(k) through work, so that’s still on me to figure out how I’m going to plan for retirement and all that stuff, but yeah.

Scott:
Okay. So our situation is we’ve got a job that is barely getting us by or neutral and we’ve got the side income from the real estate agent business. You’re high on the real estate agent business. That’s what you want to do. You want to do that full-time and invest in addition to that. The question is how do we bridge that in a healthy way. And what’s jumping to my mind as one potential solution is going back to Mindy’s seasonality comment. I imagine that yes, all real estate markets are seasonal. I have no trouble believing that Fargo, North Dakota is particularly seasonal and that all of your business essentially is going to come in a four to six month window and then transaction volume will drop off a cliff. Is that accurate in terms of your understanding of the market?

Liz:
Yeah, I believe so. Even back in Minnesota, it was just really slow in the winter with people not wanting to move. But I feel like I’m pretty good with managing my money and I can slow myself down in the winter months.

Scott:
Okay. Well again, my instinct here is you have a seasonal business, go big and make that your full-time focus potentially, or consider making that your full-time focus either this year or next year in the summer and get another job for the winter, right? Because you don’t want to just be idle for six months and there’s nothing… Like what activity sets are you going to do to grow your agent business in September through March in Fargo? I mean you can form relationships, all that kind of stuff, but there’s no way… I just can’t see a path to adding a ton of value to customers in that time period on a full-time basis for six months of the year. So what are your thoughts on that? Are there any opportunities for seasonal work or are those jobs where you can earn a decent but not great living for those six months and then make your hay while the sun shines literally in the summer months?

Liz:
So the nice thing about the jobs that I’ve had in the past are all summer seasonal. I mean, that doesn’t really work here because I’m looking for supplemental income in the winter months. When I did move up here, I was working at a brewery and bartending there, which was nice and kept me afloat. But then when it got really slow, I started to… I just don’t like pulling out of savings to pay for bills and stuff if I don’t have to. So I started to get a little panicky there and I’m like, “It’d be nice to have a consistent paycheck coming in every month.” So that’s kind of why I looked into doing a more of a full-time position. It wasn’t that I was searching actively for the job. It popped up and I’m like, “Wow, this looks super fun.”
So I ended up applying and it ended up working out for me. I figured I could balance both of the jobs out, but I think it’s hard now to find the time to do things like marketing or ads for myself in my personal life because I’m just burnt out at the end of the day and I want to just relax.

Mindy:
Okay, you just said it’s hard right now. In the winter, it’s going to be super easy because you’ve got nothing to do and nowhere to go. So that is something that I wanted to ask you about. You studied marketing. What is your brand? What is your personal real estate brand? Have you thought about that? Have you started marketing yourself? During the winter months, that’s the time to plaster yourself everywhere. “Liz knows Fargo. Liz sells Fargo. Liz is Fargo.” However it is that you are going to market yourself. I haven’t thought about it, so don’t use my ideas.
But you need to use your downtime to get ahead of the marketing so that while you are busy, your marketing machine is still running. You can pre-schedule all of your social media and start writing them now and have blog posts that are going out later and focus who do you want to work with. Do you want to work with first time buyers or investors? Or are you going to… You can’t be everything to everybody, but you can certainly target different portions of different demographics to hit them with your marketing as well. And the wintertime when everybody’s hunkering down and just drinking beer at the brewery is when you can be out there cranking it out. But also tell everybody that you know that you are a real estate agent. All those people at the brewery, maybe they don’t know that you’re a real estate agent.

Liz:
So I actually had three of my clients last year come from the brewery. I like to think that I’m pretty good about talking and adding it to conversation. I still do it even though I’m full-time at another job. I still try and slide it in there into conversation organically. As far as my brand, I’d like to think I’m kind of funny. So I started trying to make Tiktoks and Instagram reels probably back before I started this job. I was a little more consistent at it and I made some pretty funny videos if you ever want to check them out. I should have just kept going with it. You don’t see results right away, and I know that. But trying to think of content all the time, I need to just be focused on it, but I was just not getting results and I didn’t know if the content was reaching people that wanted to see it. And so it was kind of hard for me, but I know I’ve seen other people do it and it works for them, so I can’t give my hopes up.

Mindy:
I can get your hopes up for you. I’ll get your hopes up for me and say, Scott, what’s that Pat Hiban book? 7…

Scott:
7 Steps to 7 Figures?

Mindy:
Yeah, 7 Steps to 7 Figures. BiggerPockets just republish that. So we’ll send you that book too. 7 Steps to 7 Figures as a real estate agent or something, one of the tips that he suggests is to copy, borrow from other people. Don’t borrow from the other Fargo agents, but borrow from somebody in Minnesota who was doing really great videos and you think they’re funny. Rebrand them in your own face and your own style and your own way of talking. Somebody in Florida is doing something awesome. Do it for you too. “Hey, we don’t have pools up here in Fargo, but we do have snow. Look at what you can do in this house” or whatever it is you’re doing. Social media, especially… You have a phone, right? Everybody has a phone. It’s so cheap to do a good video to do your own promotion. People get used to seeing Liz’s beautiful face. They will look for these videos again. I’m sorry Scott just corrected me. It was 6 Steps to 7 Figures. So that’s even better. You’ll only have to do six things and you’ll be making seven figures.

Scott:
6 Steps to 7 Figures. That’s right. And yeah, I think I got that wrong. But yeah, I think that’s a good one.
Look, when I look at you, your situation, and I zoom out strategically, it seems like the job is getting us by. My challenge to you would be how do you find a way to get most of that benefit or all of that benefit or as close as you can to the benefit you’re getting from your current full-time job in the winter months and then go all out so that every single day full-time, you can be focused on the real estate business, which is the real prize in your financial position during the seasonal high period.
If you can approach the year in a tale of two halves here, I think that could be the secret to unlocking at least a chance at really strong income. And you have the savings and the financial foundation to do that responsibly. You have $40,000 in cash and $15,000 in debt. That’s a good runway for you. So I just think it comes down to that. And your problem is, “I don’t have enough time for marketing.” Well, this solves that problem. So you’re able to market and build this business in the times when people are thinking about selling their properties.

Liz:
Yeah. And you guys are going to think I’m crazy because at the year before, so 2021, I think I was right at like 43,000 that I made in real estate alone. I mean then I had to pay taxes, but I was right around that 40,000 work. So I’m like, “I can do it. I can do it.”

Scott:
And that was while working a full-time job, right?

Liz:
No. So I actually just did part-time when I made the 40,000 that year.

Scott:
Got it.

Mindy:
Would you like to simultaneously pay no taxes and save for your retirement all at the same time?

Liz:
Yes, I would love that.

Mindy:
Okay, so here’s what I do. My real estate agent business does not pay Mindy Jensen. It pays my LLC. And then my LLC pays me except all of my income then goes into my self-directed solo 401(k). So I think the contribution limit right now is 22,000. For the sake of math, let’s call it 20,000, I put all of that in. And then my LLC, my company can match my income up to 25%. So all of that money then gets matched, 25%. So that’s an additional 5,000 plus change. I’m not doing the math quickly enough. So now I’ve got 25,000 in there. The first 25,000 of my commission is automatically no taxes because it’s going into my 401(k). I’m not doing a Roth, I’m doing a regular. And the first 25,000, I’m not paying taxes on. So that’s all of your income right now.
So as you start cranking it up more, 25% can go into their additional up to $54,000 that you’re not paying taxes on because it is matched through your LLC. And of course, you’re going to want to talk to your self-directed solo 401(k) provider just to make sure that I am giving you the right information. But that is a homework assignment for you to look into the self-directed solo 401(k). I think they’re fantastic and I’ve been doing this for several years. I do pay taxes, but I live in a higher cost of living state where the properties cost more.

Scott:
I think that’s a great tip for retirement accounts. If you’re going to work for yourself, you’d need to set up a system if you would like to contribute to retirement accounts and take advantage of that perhaps beyond the Roth. You might be able to just use the Roth for the time being because you’re still in relatively low income tax bracket. And then when your real estate business takes off, you do exactly what Mindy just described there and take advantage of the powerful retirement account options available to small business owners of the self-employed.
I do want to talk about though asset allocation overall because right now, again, we talked about accumulation, which is the most important part in your journey. How do you set up a system where you’re generating a lot more income so there’s a bigger spread between income and expenses and you can actually get ahead on a consistent formulaic basis here? And again, I love the approach of potentially thinking about marrying the two seasons here and figuring out a way to earn a stable income in the winter and sky-high income in the summers as an agent.
Now when we get to asset allocation, right now you’ve chosen to allocate essentially all to cash. You have what? 50,000 to $55,000 in total assets, and 40,000 of that is in cash alone. Some of that’s about to go into a house. What are you thinking here and what’s the strategy for asset allocation?

Liz:
So I’m open to suggestions here. That’s why it’s all sitting there as cash because I am… And I hate that it is because I know I can be doing more for me. I just am not sure where I can put it in the most logical way to keep building on it. I am worried that now that I’m buying my personal home that I’m going to have a hard time trying to figure out how to do a house hack. I do have help with the down payment. So we’re doing 15% down and family’s helping with that. So my partner and I are doing 15% down and we are having family members help with the down payment for that. So our cash reserves won’t dry up completely, which is nice. I think I’m going to try and come up with 15K.
But I’ve looked at doing like a… Have you guys heard of the Real Estate Investment Trusts? I hadn’t heard of them, so I was kind of interested to get your input on that, or an ETF like a Vanguard account, stuff like that where I can be putting that cash to maybe start growing for me, but I don’t have to maybe do a lot with it.

Scott:
Where do you want to be in five years? What do you want your portfolio to look like?

Liz:
It’s a really good question. I want to be on the right track to not having myself be in the red for sure. I want to be moving away to where I can… I want to be moving towards where I can be my own boss and have the flexible schedule again because I plan to hopefully get married and have kids someday. So having that flexible schedule and being around at home again would be great. So I would like my money to be working for me in seven different locations. I’m not afraid of the market fluctuations. I just want to know that I’ve put them in the right spots and I don’t have to touch them. I don’t want to touch any of my savings or investments, which I’m getting worried that I’m getting to that point where I might have to be pulling from areas that I don’t want to take from, but…

Scott:
Yeah. When you say you don’t want to touch, do you mean you don’t want to actively manage your investments or you don’t want to have to withdraw those investments?

Liz:
I don’t want to have to withdraw them.

Scott:
Okay. So real estate’s not out of the picture. You’re willing to manage a property. You just don’t want to have to sell the property, right? So you don’t want to be forced to sell it and extract the equity. Is that right?

Liz:
Yeah, I think also I would like to invest money into something that can work for me instead of buying a property and managing it. I don’t have a problem doing that. I’m at the point where I’m worried that I’m not going to be able to do something like that now that we’re buying this house.

Scott:
Okay, so let’s zoom out three to five years. I’m going to construct two portfolios and ask you which one feels better, right? So one is you accumulate 15,000 to $25,000 per year. That would be aggressive. That would be a step up from where you are now. It would be your agent business doing well and you finding a way to cover costs with the full-time work or other job. But let’s say 15,000 to $25,000 a year. Let’s be generous and let’s call 20 grand a year you’re accumulating. So in five years, that’s $100,000. Which one would you prefer? Would you like to have a home that’s 300,000, $350,000 with $75,000 in equity, a retirement account with 50 to $75,000, 10,000, $15,000 in an emergency fund and be in that position? Or would you rather have 100,000 to $150,000 in stocks, real estate investment trusts, REITs, which are also called REITs and it maybe a rental property? And maybe again, 10,000, 15,000, $20,000 in cash. Which of those portfolios sounds better to you?

Liz:
Right now, the second. The second one does be because I’m not afraid of a little risk. I don’t have a lot of obligation right now. I’m not married, I don’t have kids. I am going to be a homeowner so that’s something to take into consideration. But I think the other option just sounds more safe and I’m hoping in four to five years that my goals have been met with having kids or being married and stuff like that.

Scott:
Okay, so then the big question here that’s going to make the biggest difference in terms of the asset allocation decision after the accumulation piece, it’s how much income and how much money you make and how much you spend is the biggest variable, the second-biggest thing though is this housing decision. How much is the house going to be purchased for? What’s it look like? What’s its potential from an exit standpoint?

Liz:
So it’s a five-year-old home. We got it at 343,000. That’s pretty standard around here. Three bed, three bath. It’s on probably 0.17 acre lot size. They kept it in great shape. It’s got newer appliances, stuff like that. But I did think a lot about resale standpoint, looking at this as a three to five year investment versus a long-term home for us. I feel like I would love to rent it out when we move. If I’ll have the cash to put down for another home at that time and not have to use the equity from that home to buy a new one, I’m not sure. But I would love to use that as a rental someday because it’s a great area for it for families that maybe can’t buy a home and they want to rent something.
So I looked at it strategically. If it was just me, I would’ve probably tried to do a house hack and bought a duplex or something like that. But I think with my partner taken into consideration, we were leaning more towards a single family home versus a duplex. I didn’t do much convincing on that part and I don’t know if he would’ve maybe been interested in doing something like that. But yeah, so we ended up getting this house, but-

Scott:
What would it rent for?

Liz:
Oh man, I could probably rent it for like 2,800 to 3,000. 2,800 to $3,000 a month.

Scott:
Okay. That’s much better than I was thinking. What’s the payment going to be on it?

Liz:
We’re going to be probably somewhere around $2,400.

Scott:
Okay. So you’re pretty close. It’s not a great rental with that and it would probably be slightly negative, but it’s not way under. It’s not right at the same lines there, even with today’s interest rates. So I don’t think this is going to… I was setting up for this being a real blow to your financial position. And it’s still not as good as a house hack. It’s not as good as renting someplace that’s cheaper if you could get a place for 1,500 or 1,250 for example and stashing that away. But you also got to live your life and enjoy your life for the next five years while you’re doing this.
But yes, this will be the biggest hurdle to overcome. You’ll need to cover the expenses associated with your living costs with your income and in conjunction with your partner and then apply those to another investment. That could be a down payment on the next rental. It could be to your stock portfolio, it could be to something else. So I think my instinct is, okay, this is not helping you. It’s probably slowing you down a little bit, but it’s not something going to set you back two decades like most home purchases do for most people if they’re attempting to get move toward financial freedom. What’s your instinct on this, Mindy?

Mindy:
Well, I’m wondering if there’s any opportunity to rent it out short term either on an ongoing basis, like maybe one weekend a month or when there’s a big thing, a big event happening near nearby. You said it was a good area to rent long term. Is it a good area to rent short term? Could you rent it for Christmas? If you’re going to go back and visit your family for Christmas, could you rent it out at Christmas time and maybe take a whole month of mortgage payment off of your year of expenses just by renting it out for a specific time?
I don’t know a ton about Fargo outside of the fact that it’s really cold in the winter. So maybe there’s seasonal festivals or something that would make it advantageous to leave and rent it out on a short term basis. You’ve got a two-car garage. Could you rent storage to somebody in the two-car garage? Could you park an RV on the side? Could you use it to generate any income to offset that mortgage payment?
And another thing that I was thinking of when I saw this, it’s your mortgage payment is going to be 2,400 at the current interest rates. Yes, they keep talking about raising interest rates, but I also hear them talking about them, the ethereal them, talking about interest rates will eventually come back down. If you are able to refinance, that’ll make this an even better property. One thing to note is that if you do refinance and do a cash-out refinance or even just refinance as an owner occupant, you would have to live in the house for another year to satisfy the terms of the loan. So just tuck that in the back of your mind.
But one thing that gives me a little bit of pause is that your current living situation has your rent payment at like 750 and this is going to increase that by about $500 a month if you’re going to be splitting it with your partner.

Liz:
So we talked about that because he makes a bigger consistent income than I do. So he’s told me that he’s willing to take on more like a 65/45 basically. So I would pay about 45% and then we could talk about bills and if we want to split them down the middle. Right now he’s paying for groceries. So he’s a great partner. He’s really understanding of the situation. Do I want him to have to do that forever? No, I think a partnership is a partnership and we shouldn’t have to be paying… I like to think of it as a 50/50 thing, but it’s nice to have somebody who’s understanding of the situation and willing to accommodate that. So the split down the middle is probably not going to be 50/50. It’s going to be more of like that 45/65 on our mortgage payment.

Scott:
How long have you been with your partner?

Liz:
Two and a half years now.

Scott:
Okay. I do think it would be best practice to just put this in writing and how that’s going to shake out from the ownership perspective. And if you’re having any trouble broaching that conversation, which can be a little uncomfortable at least to talk about it first, one way to put it is, “We’re not really negotiating against each other, but what if I get hit by a bus and now you got to deal with…” Everyone’s got that annoying family member that the other person would then have to deal with. You’d want this in writing to make sure that there weren’t any issues or whatever with that. And you need to work that out and what that looks like and ask some questions about how does ownership and equity look in this property if there’s not an even split payment. And again, this doesn’t have to be super complicated, but it would be good to get that in writing somewhere. So there is an agreement in place.

Liz:
Yeah. Do you suggest just doing it ourselves or is there somewhere where you’d go to get something like that done?

Scott:
I would do some research on this online and figure out some starting points about where you want to go. And then I’d call an attorney to validate some of those. This shouldn’t be 1,000 or $1,500 engagement. This should be a few hundred dollars at most to make sure your Is are dotted and Ts are crossed.

Liz:
Sweet. Yeah, I can do that.

Mindy:
Yeah, I think that’s a really good point. And Scott, that was great advice about that annoying family member. That is a great point. If something should happen, people are going to fight about money and, “Oh, this is a 50/50 split.”
“Well, actually we said “65/35.”
“Well, that’s not what I understand it to be.” So having that document will protect you both.

Scott:
“Cousin Barb who you hate, well, she’s in my will.” Yeah, so I think that… Whatever. You don’t have to go that far. But I think that would be good. And then one tip I’ll just kind of give you, you should talk to your attorney about this, but something I’ve used in the past is called the shotgun clause, which means that if for some reason parties want to break up, either you guys or someone in the one of the heirs, someone who inherits the estate, the shotgun clause basically allows you to break the agreement with a very simple out. You just say, “I’d like to end this. I will buy you out at $343,000 valuation.” And another person can either accept or they can say, “Nope, I’ll buy you out at 343,000.” So that means that parties are going to come to the table with a single good offer, single counter accept or pull the trigger, the shotgun, and you’re out.
It can be a simple tool for something like this where you just know the rules of engagement going in. So you might want to ask your attorney about that if that’s something that you guys decide to pursue and it may work in your situation.

Liz:
Awesome. Yeah, I noticed I was saying 45/65. My math is off there, so thanks. 35/65. All right.

Mindy:
All right. No worries on the math. Also, the REIT person that Scott really likes is a… I don’t know how to pronounce this, Jussi Askola, J-U-S-S-I, Askola, A-S-K-O-L-A from Seeking Alpha.

Scott:
Yeah. I’ve read a few of his pieces, but I think that so far from what I read, he’s got an interesting beat on the market. He’s very bullish on certain REITs. I’m probably a little bit more skeptical on commercial real estate right now, but that’s a temporary thing. Over a long period of time, REITs, real estate investment trusts, tend to perform worse than the stock market. So an index fund of the stock market, for example. So I personally own no REITs. I owe no in real estate investment trusts. It doesn’t mean that they’re a bad investment and that the future could be different. I just haven’t liked what I’ve seen from historical return perspective and instead prefer to put my money, if I’m going to put it into public securities, into a Vanguard Index fund personally. But to each their own. So that would be a good resource. Again, I think that guy does a good job of analyzing a lot of real estate investment trusts over at Seeking Alpha.
Liz, what else can we help you with today?

Liz:
So I just have some cash on hand and I am wondering where I can be putting that cash to be working for me, or if I should have it sitting around for a rainy day.

Scott:
My personal preference here, I think your position is very strong from a balance sheet perspective. So what do we do with cash? We put it to the highest and best use. So first, what are the interest rates on your student loans? They’re in deferment, right?

Liz:
Yeah, they’re deferred right now.

Scott:
Okay. Let’s say that they were above 6 or 7% interest. In that case, once the deferment period ends, I might consider taking some of the cash out of your position and paying those off. Why put them into your savings account earning 3% when you could just pay off the student loans at a higher interest rate? That seems like a good use of cash. After that, there’s a number that you will be comfortable with in terms of the amount of cash you want sitting in your bank account and not being put to work. If you have a very stable job that you’ve been at for 10 years and is clearly not going anywhere, you might have a very low savings balance, three months of cash on hand and put everything else into investments and expect that continue.
If you’re a real estate agent with very variable income, you might want to have six months to a year of cash accumulated, and that might be a good business decision allowing you to focus on growing your income rather than having to worry about cashflow management. That might provide really good returns for you in a subtle way you can’t see. If you wrote a book called Set for Life and would be very embarrassed to go broke, you might have a year and a half to two years of cash on hand because you couldn’t handle the jokes if that were to ever happen. So it just depends on your personal preference, but I’d pick a number. And then say everything above that number, I’m then going to invest. You may find that after this down payment on the house, you’re not there yet and the best use of cash is either paying off these student loans or just building up to what I would ballpark to be 20,000 25,000, $30,000 in cash again after the down payment and maybe after the student loans are paid off.

Mindy:
I will tell you what I’m doing with my extra cash. I am putting it into Vanguard, I’m sorry, VTSAX and VTI when it comes up. My husband really likes QQQ, which is a super fancy ETF. I don’t pay attention when he talks about that. And of course he’s always looking for more Tesla stock to buy.
So what is it that you like? Are you comfortable with the Vanguard Total Stock Market Index Fund? My husband was a computer programmer. He reads every tech report ever about everything. We invest more on the tech side. If that’s not you, then maybe the total stock market index fund is better. That’s the darling of the personal finance community, is just the total stock market index fund, set it and forget it. And there are other options available. If you really like tech, maybe go for a tech fund. If you really like insurance… Or maybe your REIT is the best. I would say do some research into what feels good to you. There are some sectors that I don’t invest in just because I either don’t have any interest or I don’t want to support it. So just look at what you want to support and what you like.
But I was waiting for Scott to finish so I could say, “Oh yeah, and I would say how much feels comfortable having in your emergency fund?” You don’t have to get rid of it all just because you’re like, “Well, I have too much money in cash.” No, you have to be able to sleep at night, so how much feels good being able to sleep at night?

Liz:
I really relate to Alex’s episode. I don’t know what episode number it is, but it’s the Fire by 45. I feel like I’m in a somewhat similar position other than the fact that I don’t have $120,000 of cash sitting around to do an assumable mortgage, which I wish I could have done. But I liked that episode for rel relevance to kind of how I am right now.

Scott:
Yeah, your position is very stable, very strong balance sheet. It’s just a matter of now setting up a grind, a several year accumulation process with this, and having a plan for where you want to put those assets. You have time to figure out the asset accumulation piece. This summer is about making it rain with the real estate business.

Mindy:
Yep. And we’re going to send you those books so you have a lot of reading to do. Let us know what you think.

Liz:
Awesome. Sounds great.

Mindy:
Okay, Liz, thank you so much for your time today and we will talk to you soon.

Liz:
Thank you guys for having me. It was awesome chatting with you.

Mindy:
All right, Scott. That was Liz and she has some interesting circumstances. She’s actually doing really well despite her expenses being slightly more than her monthly income right now, which is due to her super fun tip of saving money and just her mental state of, “I’m not going to spend all the money that comes in. I still save” and saving her real estate agent income.

Scott:
Yeah, I think Liz is doing just fine here. Getting ahead involves thinking through, “How do I solve this problem of wanting to be full-time in real estate?” Which we imagine… We could be wrong on this assumption, but we imagine there is no real full-time for a real estate agent in that particular area because transaction volume we believe is going to be so seasonal in that region that she’ll need to find other income. So I wish once she stabilizes that and gets a path to accumulation that is predictable and/or has big upside, then it’s about having a plan for where she wants to go and that needs to be thought through a little bit more.
If you ask me for the answer, “How should I build my portfolio?” I’m going to give you what I would want, which is not what you might want, right? hat I want is flexibility. I want a financially flexible position with a big cash cushion, stable, spendable, passive cash flow, and I’m willing to forego investments in retirement accounts, HSAs, a nice primary residence equity, those types of things, a nice car, whatever in order to get that. That may not be aligned with your values. And that’s where we always have to come back. If you let me ground this situation, I’m going to give you what I want, which I think Liz needs to do some more searching and thinking about what it is that she wants fundamentally from her portfolio in what amount of time and the trade offs necessary to achieve that.

Mindy:
Scott, you missed the Fargo pun. You would be willing to Fargo this.

Scott:
Oh, oh. it was set up for me.

Mindy:
An F-. It was set up for you. You get an F-. Also, that’s right. If you ask me what you should be investing in, I’m going to tell you what I’m investing in. This is specific to my circumstances. I’m not investing in bonds even though I’m 50 years old. I’m investing in aggressive growth because I’m looking for aggressive growth. All right, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench and I am Mindy Jensen saying cheerio dingo.

Scott:
If you enjoyed today’s episode, please give us a five-star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Mindy:
BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Kailyn Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.