Stumped, conflicted, & confused. Please Advise!

[Ryan Holyn]

Pursing a first-time home purchase and FI (financial independence) seems not possible from my position. Do you agree? What am I not considering? Should I change my risk-tolerance in order to pursue both goals? Any guidance or suggestions would be greatly appreciated, thanks! See contextual details here below. It's first year ever pursing and learning about FI and real-estate investing thanks to BiggerPockets, Afford Anything, ChooseFI, Tony Robbins, & Tom Wheelwright. How can I better position myself for wealth creation and/or FI with the cards that are available? How to optimize?

About me: Late 20s, single, Chicago-suburbs born & raised, avid-traveler and outdoor recreation lover, not good at following a budget (need help)

Employment: W2 corporate job $100K (pre-tax) 50 hrs/wk

Goals: Close first real estate deal before end of the year because I have heard there is 100% bonus depreciation rule from 2017 tax act that ends in 2022. This property would serve as my first ever home purchase and hopefully also my first ever big ticket investment item to build wealth. 

Finances: I just started maxing out HSA ($3K) & pre-tax 401k ($20K - towards a target date fund) & Roth IRA ($6K - towards VTSAX) to the annual IRS limits, paying off Federal Student Loans ($345/mo., 4%, $20K+ balance) and Private Student Loans ($365/mo., 5%, $14K+ balance), contributing $50/mo. to a very small emergency fund ($2K balance, 1%) in a HYSA, also contributing $50/mo. to I-savings bonds from Treasury Direct ($1K balance, 9.6%), have a small amount of shares in brokerage account ($1.5K - towards risky tech stocks), no other assets or real estate, no crypto, no pets, no subscriptions, no utilities, no car, no rent/mortgage (live free w/fam), no phone/internet/tv bills.

Budgeting: I definitely need to improve on these skills, but typically spend $600/mo. on all food & beverage and $500/mo. on lifestyle (travel, fun, other)

I'm open to house-hacking but I can't afford anything in my area, nor the areas I was considering Western Michigan, Wisconsin, Illinois, Indiana. I recognize that real-estate investing requires sufficient cash reverses to buffer any disasters but I don't have much reserves and think it would take too long to save up based on current way of operating/living/spending. Based on my learnings from personal finance podcasts, I'd like to keep my future housing expenses (mortgage, taxes, insurance, HOA, Utilities, etc.) to 30% of After-tax income as a way to hedge/buffer against future disasters since I don't have much cash reserves. From my rough calculations I estimate that this would equate to roughly $1K-1.5K which means I probably can only purchase a property around $150K or less. It would be impossible to find a multi-family property for this amount in a safe, good area.

So the question is.... am I pursuing real-estate investing / first home purchase too early? Should I first be focusing on FI goals? Do i change my calculations?

I feel stumped, conflicted, & confused. It seems impossible to pursue all these goals at the same time and I'm not sure where to prioritize. BUT i'm eager to get started in the right direction especially after listening to so many episodes of BP & other channels. Please Advise!

[Quentin Moller]

If I were in your shoes, i'd buckle down and scrap together every penny to pay off those student loans as fast as possible.  If that means deferring payments towards your RothIRA for a year, worth it in my eyes to free up the cash flow.  Then you could save up for a down payment.  Also, I wouldn't limit myself to mulitfamily.  Buy a single family home, which you can find in your price range, remodel and then house hack it.  Buy a different one next year or the year after.    

[Ty Ash]

Hi @Ryan Holyn!

You've come to the right place! I expect that you're going to get a lot of advice soon.

First, I'd recommend that you keep/start learning! Podcasts, Books, and Mentors you find by networking.

Second, I'd pick up a copy of Set for Life by Scott Trench as it has a good framework for financial independence, especially for a newer investor. Real Estate is just a part of your total financial picture so don't become too focused on just real estate (seems like you're starting with a good balance so far). You'll want to learn more ways to increase your income now and in the future, keep your expenses low, and take the difference to invest into assets, real estate/business.

As you already mentioned above, a house hack will probably be one of the best strategies for you to get started and take action while giving you a great return because of the low % down needed to get started (As low as 3.5% using FHA). Once you get to this point, make sure to run your numbers for both while living in the house hack (lowering your living expense to less than what it would be to rent in your area) and post move out where you need to be at least break even after accounting for your monthly payment + maintenance, capex, vacancy, property management.

This is where I think you're maybe missing a step using a more traditional way of calculating what mortgage payment you can afford. If you house hack a duplex, say $300,000, you may have a ~$1,170 in Principal and Interest ($300,000k purchase, 3.5% down, 6% interest rate) and add maybe $500 for taxes, $200 for Private Mortgage Insurance, and $150 for insurance for a total monthly payment of ~$2,000. Here's to hoping you can find something near the 1% rule in your area that could rent for $1,500 / unit for our example. You live in one side and a tenant in the other. Your living expense is now $500 / month vs whatever you're currently paying to rent (or what you would pay to own that $150k property). Your cash outlay for this purchase is likely around $15-20k for down payment plus closing costs and plan to start with some cash in reserves too. The question comes down to, can you delay your saving/investing in retirement vehicles in order to make this house hack investment? If your goal is to achieve FI sooner, putting all of your money in accounts that aren't intended to be accessed until 59.5 years of age doesn't quite make sense right now. Instead, you could invest money to lower your living expense, pay of debts sooner with the savings, then snowball those funds and the living expense savings into a mix of retirement vehicles and after tax investing to get to your FI number (4% rule). This is classic advice from the BP Money Show if you're not a listener already!

Best of luck getting started! Here for you with any questions you have along the way!

[Scott Trench]

Great question, and I love the way you are thinking about things here. You are asking all the right questions. 

Please allow me to attempt to reframe your premise: 

Currently, you make $100K, max out your HSA, max out your 401(k), and max out a Roth. ($29K between pre and post tax advantaged accounts per year). 

You are in your 20s, single, and willing to hustle to achieve FI. 

You also have $34K in student loans at 4-5% interest on which you pay $8,520 per year (including principal in and interest), a little bit of cash, and invest the tiny bit you have after that into after-tax brokerage accounts. 

You are almost saving 50% of your PRETAX income and investing down the stack of tax advantaged accounts. 

Dude, zoom out, congratulate yourself, and take a breath. That is fantastic. You are doing so many things right. 

Now, let's address your problem: 

You want FI, and you want a house, and you want to max out all these retirement accounts. And, the realities of life in the US today mean that at your income level, you can't have all three. You have to prioritize. 

When faced with this situation personally (I was 23 and making $48,000 per year - equivalent to $60,000 per year today), I chose to forgo the tax advantaged accounts in favor of a house-hack. I'd make that same choice again today. 

The reality is that, unless you become a hermit, you cannot max your HSA, max your 401(k), max your Roth, pay your student loan debt, and still be able to accumulate meaningful cash with which to responsibly buy investment property or a primary residence. 

You have to prioritize. And that's hard, and involves real tradeoffs. You can lose one way or the other. 

But, based on what you've said here, I think the odds for you tilt in favor of real estate and house-hacking, over the tax advantaged accounts. You don't seem like the type of person who needs the forced savings and inability to touch the retirement account/HSA funds in order to accumulate wealth. You seem like the type who will treat a savings account for that first house-hack as just as sacred/untouchable, and then actually use those funds to buy property, rather take a vacation to Ibiza. 

A house-hack and strong cash position may offer life flexibility and optionality in the next few years that you can parlay into advantages that are much more meaningful to your long-term wealth than the slow compounding of tax advantaged accounts. And, forgoing the tax advantaged accounts is temporary - once a reserve is accumulated and a property or two is in hand, you can resume maxing them out. 

As @Ty Ash mentions, I do have a book called Set for Life on this topic, which I just revised. Because I think it would be bad manners to tell you to "buy my book" in response to your question, I'll offer it for free, in any format you like, if you DM me and think it could be useful. 

I hope this helps and good luck! 

[Bonnie Low]

I love @Scott Trench's advice and agree 100% that it is achievable in steps, but first you must prioritize. You have a great situation right now with a strong W2 income, living for free with your parents and no debt other than student loan. This should enable you to juice your savings so you can come up with the downpayment and maximize paying off the student loan. Every single real estate investor you will talk to will tell you they wish they would have started sooner - whether they started in their 40's or in their 20's, this is always the answer. So I think that really says something. Save for that down payment and get into a property you can househack so your roomies pay the mortgage. I agree a single family home may be more achievable for you than multi-family for your first purchase. You're a young guy used to living fairly spartan so renting out a couple of rooms shouldn't be uncomfortable for you. You don't need a huge reserve, but you do need some. And you need to free up some monthly cash flow so concentrate on paying off the student loans. With the stock market getting hammered right now, I don't think you're going to regret not putting more in if it means paying off your debt faster and getting that first asset secured.

[David Mo]

Hey @Ryan Holyn! 

Congratulations on deciding to pursue FI and welcome to BiggerPockets! I'm also from the Naperville Bubble :) 

First I'd like to say that I think you've already started in the right direction and you're in a great position. You have no expenses related to rent, a car payment, utilities, etc and your biggest expenses right now are your student loans. I'd look to pay those off as soon as possible as it'll free up a lot of your cashflow to invest in other things. 

I'll bring up a point I haven't seen others mention yet as it hits close to home. I'm a very spontaneous person and budgeting/planning/looking at the big picture do not come to me naturally. Since you've mentioned that you're not great at budgeting, I'm going to make an assumption about you that you're similar to me in that regard. When I first started my FI journey, I didn't have a FI plan/clarity on my timeline. When do you want to achieve FI? What timeline are you giving yourself, and is it a realistic timeline? A 5 year timeline puts a lot of pressure on you to make the "right choices" and maximize/optimize everything. Having a clearly defined "target" may make it easier for you to prioritize where to put your money. Allowing yourself enough time to achieve FI may relieve some of the pressure you feel. My priorities for retiring in 15 years vs at 59 would be vastly different. 

If you plan to hit FI sooner, then I think your retirement accounts fall to the bottom of the priority list and that you should focus more on assets that can produce cashflow now/pay off debts to increase your cashflow. A house-hack is a great way to start your real estate investing journey and I highly recommend it, and I think @Ty Ash gives a great example as to how you may be selling yourself short on how much of a mortgage you can afford. 

With regards to budgeting in general, I've personally found a less specific/strict budgeting plan to work best for me. I allocate a percentage of my monthly income to my living expenses/fun budget, and focus more on staying under that percentage every month, rather than going down to the nitty gritty individual expense...I've found that to be less restrictive which works better for my brain. And it personally took me a long time to build the HABIT of budgeting...it takes work and effort before it becomes habitual. I hope this helps a bit! 

[David Mount]

I largely agree with everyone else. Well done so far!

1) Decrease travel expenses for X amount of time (maybe 1 year) so you can save more toward a down payment. 

2) I would temporarily decrease some of your HSA and 401k contributions so that you can scrape together a down payment. 

3) Work to house hack for your 1st property. Even if it's a townhouse that you can rent out 2 bedrooms for $500 a bedroom, that's your best place to start. 

Best of luck, and keep us posted as you make decisions toward financial independence.

[Theresa Harris]

How much do you have saved for a down payment?  How much can you borrow to buy a home?    If you are making $100K a year, you are doing good.  You have the right idea, but start tracking where you are spending your money.

Cut the $500 a month on lifestyle and see if there are ways to cut your food budget (ie eat out less, make more stuff from scratch?).  Can you get a second job to earn more money?  Doing something on weekends, doing extra hours at your current job?

[Drew Sygit]

@Ryan Holyn

If I had to start all over again, I'd look to acquire a 2-4 unit property with an FHA low-down payment mortgage.

Getting it under market value would be a bonus.

So, would using an FHA 203k renovation loan, which would allow me to buy something unqualified for a standard mortgage, which would weed out a lot of competition and push the price lower.

Hopefully, I would increase the value of the property in 1-2 years and be able to refi out of the FHA mortgage. I'd also learn a lot about maintenance and managing tenants.

Then, with my hands-on experience, I could decide if I wanted to repeat the process or target 5+ units - which my experience would help with lenders.

Good luck with whatever you decide to do!

[John A.]

These are wonderful ideas and I'm learning quickly. I need a mentor to assist. Great knowledge being shared!!Love it.

[George Skidis]

First Join the local REIA. In your area that is the Chicago Creative Investment Advisor run by Jane Garvey. They meet in Lombard on the 3rd Sunday evening of the month. Go there: expand your education, NETWORK, keep your ears open and ask good questions. You may just meet the mentor you are looking for or even better the one you need. A lot of the BEST stuff is said after the meeting. Try and hang around and go out with the others afterwards.

Second: Don't feel like you are missing the boat. Real Estate will be here long after we are both dead and gone.

Third: Don't rush into anything. It sounds like you have a good job. Stat working on eliminating your personal debt and building that down payment fund. 

[Paul De Luca]

@Ryan Holyn

Income-wise you're definitely in a good spot compared to many other people. Like you pointed out already your budgeting could use some work and you're going to have to introduce financial discipline today to achieve your goal before the end of the year. You are definitely not pursuing real estate investing/your first home purchase too early. In fact those goals do not have to be mutually exclusive and house hacking would be an easy way to get started with real estate investing, give you your first primary residence, and get you one step closer to FI. You may want to lower your contributions to your retirement accounts if your goal truly is to get a property before the end of this year.

What areas in Chicagoland did you look at house hacking? If you could build up your cash reserves to about $20k-$30k you could probably make a move depending on the purchase price & assuming an FHA loan. Ex: $500k purchase price, 2% closing costs = $27,500. But you can ask for a large seller credit and get that closer to $20k total.

[Michael K.]

@Ryan Holyn lots of idea about the things you've said here but my number one takeaway is, not only are you very close to getting into real estate, but you're practically a poster child for the kind of stuff people preach about on here. You're young, you have a good job, you have minimal expenses (1100 on food and travel is very little, not a lot), and you're smart about saving where you can.. need I go on?

Think of real estate as an alternate savings account. Every month you will be paying down a mortgage and building equity in an asset that is going to generate cash flows in perpetuity, and those cash flows are going to grow over time. You only need 3% down to buy a place conventional, it will cost you more than putting the full 20% - but it's an option nonetheless. House hacking a condo could be a good start if you want to move on something right away. If you want to buy a multi-unit in a desirable neighborhood then you might need to save up a bit more. But in your case that's not a question of if, but when. Congrats and I'm sure you will do great. 

[Jonathan Klemm]

Hey @Ryan Holyn - I absolutely love this post and your vulnerability.  Definitely reach out.....I can help.

I think the first and most important thing for you to address is your mindset.  I literally started out identical to you.  Listening to Afford anything, MMM, etc. etc.  At that time I was living in a scarcity mindset, something that was developed when I was a child through my parents (my mom would pick up pennies & clip coupons lol).  Over time with practice, you'll be able to shift into an Abundance mindset.  

With regard to budgeting setup www.mint.com at a minimum to at least track your spending because if you don't know where its going you don't know where you can cut back.  More importantly, though focus on growing your way to wealth not saving it.

Your first goal in my opinion should be a househack.  The key to getting ahead is getting started and that is the easiest way to get started.

I am down in Chicago, but happy to link to help.  If you surround yourself with like minded people everything gets easier.

[John Warren]

@Ryan Holyn full disclosure, I don't love the budgeting aspect of FI. I love the idea of FI though, and I think this is where real estate and the FI crowd overlap. I prefer a more abundant mentality, and I think those of us on here with families will all agree that in most metros in the US you can't just save up 2 million in a stock portfolio and then coast... normal life costs a lot of money! 

I LOVE the idea of house hacking, and a lot of times I see investors miss the real benefits which include free rent/reduced rent, appreciation and depreciation. Too many folks try to see cash flow while living for free in one of the units. That may be where your numbers are going wrong. 

For me, I would always prioritize real estate over maxing a 401k, but take that advice for what it is worth. I would leverage the 401k to buy your real estate and then let the cash flow/reduced cost of living help you pay it back. I would do this over and over again. Real estate lets you put down as little as 3.5% to buy an asset which means you are getting massive leverage and tons of control of the asset. This is the direct opposite of stocks. 

[Crystal Smith]

Quote from @Ryan Holyn:

Pursing a first-time home purchase and FI (financial independence) seems not possible from my position. Do you agree? What am I not considering? Should I change my risk-tolerance in order to pursue both goals? Any guidance or suggestions would be greatly appreciated, thanks! See contextual details here below. It's first year ever pursing and learning about FI and real-estate investing thanks to BiggerPockets, Afford Anything, ChooseFI, Tony Robbins, & Tom Wheelwright. How can I better position myself for wealth creation and/or FI with the cards that are available? How to optimize?

About me: Late 20s, single, Chicago-suburbs born & raised, avid-traveler and outdoor recreation lover, not good at following a budget (need help)

Employment: W2 corporate job $100K (pre-tax) 50 hrs/wk

Goals: Close first real estate deal before end of the year because I have heard there is 100% bonus depreciation rule from 2017 tax act that ends in 2022. This property would serve as my first ever home purchase and hopefully also my first ever big ticket investment item to build wealth. 

Finances: I just started maxing out HSA ($3K) & pre-tax 401k ($20K - towards a target date fund) & Roth IRA ($6K - towards VTSAX) to the annual IRS limits, paying off Federal Student Loans ($345/mo., 4%, $20K+ balance) and Private Student Loans ($365/mo., 5%, $14K+ balance), contributing $50/mo. to a very small emergency fund ($2K balance, 1%) in a HYSA, also contributing $50/mo. to I-savings bonds from Treasury Direct ($1K balance, 9.6%), have a small amount of shares in brokerage account ($1.5K - towards risky tech stocks), no other assets or real estate, no crypto, no pets, no subscriptions, no utilities, no car, no rent/mortgage (live free w/fam), no phone/internet/tv bills.

Budgeting: I definitely need to improve on these skills, but typically spend $600/mo. on all food & beverage and $500/mo. on lifestyle (travel, fun, other)

I'm open to house-hacking but I can't afford anything in my area, nor the areas I was considering Western Michigan, Wisconsin, Illinois, Indiana. I recognize that real-estate investing requires sufficient cash reverses to buffer any disasters but I don't have much reserves and think it would take too long to save up based on current way of operating/living/spending. Based on my learnings from personal finance podcasts, I'd like to keep my future housing expenses (mortgage, taxes, insurance, HOA, Utilities, etc.) to 30% of After-tax income as a way to hedge/buffer against future disasters since I don't have much cash reserves. From my rough calculations I estimate that this would equate to roughly $1K-1.5K which means I probably can only purchase a property around $150K or less. It would be impossible to find a multi-family property for this amount in a safe, good area.

So the question is.... am I pursuing real-estate investing / first home purchase too early? Should I first be focusing on FI goals? Do i change my calculations?

I feel stumped, conflicted, & confused. It seems impossible to pursue all these goals at the same time and I'm not sure where to prioritize. BUT i'm eager to get started in the right direction especially after listening to so many episodes of BP & other channels. Please Advise!

My opinions and advise:

1. Move the money out of the Roth IRA into a Self Directed IRA. Maximize your contribution to the Self Directed IRA. You can start out putting it in stocks, bonds, ETFS,...... Eventually you'll have it built up enough that your IRA can become a private lender or purchase investment properties. You won't own it, your IRA will, which means tax free until you pull $ out.

2. Establish an LLC for your real estate endeavors.  Then research what business credit cards and/or business lines of credit you can get.  You'll have to personally guarantee whatever $ your borrow but if done correctly the $ will not show up against your personal credit. The objective- be prepared to jump on an opportunity

3. Attend as many networking events as possible.   While you may not be able to invest on your own now, you may meet some people in similar situations but together you can invest.  Lots of vetting and relationship building here but that's how the business works.

4. Since you have a decent w2 income and I assume decent credit you should find out from a conventional and Hard Money Lender what you can be approved for.  You may find out that you can do more than you think. For example:  Some HMLs will fund 100% of a renovation as long as you have $ for a downpayment or reserves. You may have to do a flip or 2 before having the cash for a house hack.

Bottom line;  You're not pursuing things to early.  Part of FI is positioning yourself to take advantage of opportunities, that means establishing as many sources of capital as possible and always continuing to do that.  

[Paul Vail]

Hmmm -- someone who is 20 and simply contributes $5k to a Roth every year, dumping it into something that averages 7% yr/yr (say, VTI) will end up with >$4mil by 80.  

I disagree with others saying to abandon HSA contributions.  Those have multiple plusses -- tax advantages, a forced health savings account, tax-free earnings forever, and frankly you can only contribute but so much per year.   But that compounding effect, just like the Roth example above, is what makes you FI.   Along with unlearning some bad habits and developing good ones, you have so many resources already at your disposal, and with a bit of discipline, your debts could be discharged in under a year.   You can easily do it.  Do you want to?