My Personal Finances, what's my next step

19 Replies

I am going to be completely transparent with my wife's and I finances in hope to get some good suggestions of the direction to go to lead us to our goals. We currently owe approximately 140k on our personal residence valued at 180k, we owe 108k on a duplex that is currently rented and valued at 136k, we are in the process of a flip that should net us approximately 12k that should be finished by the end of the month, I have 12k in student loans, and we owe 38k on a truck. My wife and I both currently work every Friday, Saturday, and Sunday night-12 hour shifts(results in approximately 50k in incentive pay per year between both of us.) We make good money but have basically no flexibility with our full time jobs, but it does give as an excellent opportunity to work on our investments throughout the week and we cash flow approximately 5-6k a month not including our current rental income. We have limited savings since we recently purchased both of our investment properties but we have our personal emergency fund and rental property reserves in place. We contribute enough to our 401k's to get our top employer match. I would like to continue to grow our portfolio to a point where we can both go part time and off of weekend package, which would allow us to have an incredible amount of flexibility with our W-2 jobs while maintaining some great perks and benefits. Plus, we both like our jobs, just hate the current strict schedules. As we progress, I would like to employ the BRRR technique with our own private funds. I have basically been given two options to accomplish this, have however much money I need to buy and rehab a property in my checking account or use a HELOC and then refinance with a traditional mortgage to get my initial cash back out of it. My issue is that I'm far better at paying extra on loans than I am at just having money laying around. We currently have basically no equity in either of our properties, and I hate having a car payment. At the same time, we don't owe money on anything with more than 4.5% interest. Should we pay down our vehicle loan, our personal residence, duplex, keep money in traditional savings, or stuff as much as I can in something like a Vanguard total index fund.

I apologize for the lengthy post, but thank you each in advance for taking time to weigh in on this for me. We would like to terminate our weekend package contracts in the next 18 months so I just want to make sure we are on the path to leads to that goal. 

Did I read that right; you guys only work your w-2 on weekends? That's a pretty good gig, social life and church notwithstanding. I guess the question is whether you want to completely replace that income in 18 months, or would you be willing to live on less to have more freedom. A 38k truck looks like a boat anchor on your cash flow to me, unless you absolutely need it to get your work done. A cheaper truck would get you independent quicker, albeit with less frills.

18 months is not enough time to park money in an index fund (at least not a stock fund). Greece goes belly up it will take the market it with it for a little bit.

Sell the truck and get something cheaper.  If you're serious about setting yourself up financially for the future, you need to make some sacrificing now. A vehicle that expensive is holding you back. 

@Johnny Mack yes, we both work Friday, Saturday, Sunday night from 6:30 PM to 7 AM. It is rough on the social life, but we have a nice routine of breakfast Sunday mornings before church at 8. If we both work part time we can continue to cover our own expenses. I basically want to get to around 80-100k to properly execute BRRR strategy. The model SFR we look at can typically be completed all in around 75-85k with an ARV of 100-115k. So if we had 100k cash on hand or say our duplex paid off(to use a HELOC), we could purchase a property for 60k, rehab for 20k, have it appraised for 100k and then finance at 80% LTV recouping our initial 80k(theoretically). This would allow us to repeat until we had a portfolio to our satisfaction.

My wife won't let the truck go. It is our only real frill and we use it as we do all of our own work on our properties. She works weekend package because of me(which nets us an additional 50k/yr combined) and goes along with all of this stuff so its not worth it to me to take that from her to try and save 15k.

Basically, I'm asking if we should pay down our personal mortgage, rental property mortgage, truck, or just try and save cash.

Cody,

My vote is for knocking out the student loans and car payment first before building the brrrr bankroll. 

That's exactly the place that my wife and I are in right now. We actually have remarkably similar numbers, i.e. about 50k in consumer debt and two properties, including our personal residence,with minimal equity. 

My reasoning is that by reducing our mandatory monthly payments, our life gets more flexible. Killing off a $500/mo truck payment feels very similar to bringing an investment property online that cash flows $500. 

My advice is to not count on HELOC money until you have talked to a lender who you are sure will lend on the situations you are proposing. What if you pay down the duplex and then find out that you can't HELOC it? Not saying you can, not saying you can't, but if it's an integral part of your strategy, how confident are you that the HELOC will be available? Also consider any seasoning time needed before you can HELOC your cash purchases. Every market and every lender is different. Just be sure you have someone who will be able to help execute your plans! Me, I'd take six months and pay down the truck. Or maybe three months, pay down half of it, and then refinance the truck into a new 6 year loan at 2% at a credit union. That should bring your payment down significantly and free up DTI room for property financing. Even if you aren't looking for purchasing financing, HELOCs are still going to peek at your DTI.

If you aren't willing to sell the truck, then it's just a math problem; your biggest return will be to pay down whatever has the highest interest.

In the meantime, this post might put things in perspective. You are absolutely delaying your goals by keeping that truck, when a $3000 used one will probably do what you need it to. That's fine if you like your toy that much, just understand what it's costing you.

http://www.mrmoneymustache.com/2015/04/28/what-doe...

i agree with those that are saying 2 things. 1, get rid of the truck. if you need it to work on the houses, you are going to scratch it up, and damage it in other ways just in the course of doing your work. add on the depreciation, and you have an item that is slowly sucking the life out of your finances. buy a cheaper truck. number 2, learn to live off less money. there is always a price for freedom. you have enough equity in other assests to capitalize on that equity. pull out some of that equity and buy another property that will more than make up for the additional expense of refinancing. repeat that process and soon you will be living as you do now, wit more freedom

You can buy a truck that doesn't have a huge payment attached to it.  Lots of trucks out there to do work, but a 40k truck is not a work truck it is an anchor that will slow you down if not sink you.  

@Cody Kauzlarich  

First, I commend you for sharing your finances - that's brave.

Second, sell the truck. I don't necessarily think its holding you back a ton, however it's quite the debt burden and is the exact opposite of being financial responsible, which is what you are trying to do.

The wife doesn't want to get rid of the truck? Well, convince her it's worth it. Make sacrifices today so that you can live like a king tomorrow. The ONLY thing that will take a hit when you downgrade is your pride. Is your pride that important?

Another way to look at it: in five years, would you rather have a paid off, depreciated truck? Or would you rather have five additional rentals throwing off 15% returns and $300-700 per month? It's a no brainer.

Medium logo blackBrandon Hall CPA, The Real Estate CPA | http://www.therealestatecpa.com | Podcast Guest on Show #196

You and your wife work hard and deserve a nice vehicle that you can afford.  Keep the truck, cut back on other expenses, don't pay down low interest debt, save a mound of cash until you can pay cash for a rental, rinse and repeat.  You have to be able to control your money and if for some reason you can not just let $100K+ sit in a checking/savings account until you find a property then you will keep working that J-O-B and your dreams will not come to reality.  Nice to see none of the debt is credit cards. 

Just to pile on with the others: if you're serious about about addressing your financial future in an empowered way you'll rethink that truck. The payments, the  insurance, the gas... if you don't hear a giant sucking sound every time you turn the key, you're not listening. 
This is also an interesting statement: "My issue is that I'm far better at paying extra on loans than I am at just having money laying around." I can relate to this, one- I'm not much good at saving I can always find something "better" to do with it.

You guys are young, and in a totally awesome and enviable position. You have the potential to earn a lot in a little time, and you could absolutely be financially independent before you know it. The magic puzzle piece is to not spend so much of it right now, or you will be trapped on that work/spend treadmill for a long time. 

I highly recommend that blog that @Johnny Mack linked to. The guy has an interesting perspective.

Medium team zen logo vJean Bolger, 33 Zen Lane | http://www.solidrealestateadvice.com

Well, insurance costs me $68 more per year on the truck than it does on my 10 year old Nissan Sentra and I average about right at 19.5 mpg. So, far better than any $3000 truck. And it starts, runs and requires nothing other then routine upkeep. 

My student loans are subsidized stafford loans and are differed interest free for another 8 months. Two months left to complete my BSN and then six months post-grad. I intend to pay them off before a cent of interest has accrued. 

Seeing a balance in your checking account makes it too easy to spend. Have an amount of your pay checks deposited into a separate account, automatically if at all possible so you do not see it as part of your check. Or consider it a loan payment to yourself. The key is to keep it out of sight out of mind. Do not link it to your checking account with no cash card , I,e you have to work hard to get at it. Then regardless of whatever else you do about the truck or other options, you will be paying yourself first, and in a year you should have chunk of cash for your next investment. Good luck

@Julie Macd that is what we currently do with our emergency fund. It does work well and is what we would continue to do just with a larger percentage of our income. 

Originally posted by @Cody Kauzlarich :

Well, insurance costs me $68 more per year on the truck than it does on my 10 year old Nissan Sentra and I average about right at 19.5 mpg. So, far better than any $3000 truck. And it starts, runs and requires nothing other then routine upkeep. 

My student loans are subsidized stafford loans and are differed interest free for another 8 months. Two months left to complete my BSN and then six months post-grad. I intend to pay them off before a cent of interest has accrued. 

Cody...I'm going to get some flack for this, I'm sure, but I'll say it anyway...

1) Read the book 'Rich Dad Poor Dad'...it will put things into perspective and you will start to question if you are working for money or if money is working for you...oh; and about that education...it is great that you are getting your education...I got mine also (MBA), but the degree won't do much for you in real estate, although it can help you to have a better understanding of finance.

2) You are contributing to a 401k for retirement in a job you don't intend to keep...although you are probably getting a nice contribution from your employer and you are saving tax free, you are also freezing money in a device you can't touch until you reach retirement age, or else you get heavily penalized. Think about how you could be putting that money to work for you in your RE investments, which will start paying you right away allowing you to acquire more and more properties.

3) I get what many on this forum are saying about your truck...it is an anchor, but it is also a nice bargaining chip to keep your wife in the game of RE! I say pay it off to free up that truck payment so you can keep investing. It would be difficult to get a property that will cash flow the amount of your truck payment.

Just my opinion...grain of salt!

hey @Cody Kauzlarich ,

I like the plan, but I'd be very surprised if you can get a HELOC on the duplex. I know a lot if people and know anybody who will do a HELOC on anything but a primary residence these days.

Also, Fannie rules do not allow you to do delayed financing at 80% LTV. After buying with cash from your HELOC or otherwise you can finance out at only 70% LTV of the appraised value and for now more than the original purchase price.

From a cash preservation standpoint you are better off using a private loan at 70% ARV that covers purchase + rehab. Then rate-term refinance out of the private Note into a traditional loan at 75% LTV on the appraised value. If you buy right and add sufficient value your traditional loan at 75% will pay off the private Note and you can roll the cost of the new loan into the new loan.

You mentioned you and your wife both have 401k with work. Federal law allows you to borrow 50% of the total value of your 501k or $50k, whichever is less. Interest rate is like 4% or so and amortized over 5 years, so you're paying almost no interest. The best part is you are paying yourself back rather than paying a lender. The monthly payments go directly into your 401k and the loan does not count as debt for DTI purposes. You xan pay the loan off in full anyvtime and you can take loans for the full amount every year, though details will vary based upon your 401k plan administrator. If you leave your job you will have 60-90 days to repay the loan in full, depending on your administrator's rules.

Oh, and get a truck with lower payments. Owning a big asset that generates no income is not congruent with your goals.  Use the truck money to buy a property that generates enough income to cover the payments on the truck.

Jeff Pollack, Trident Equity Group | [email protected] | 650‑533‑8534 | https://www.meetup.com/San-Jose-Real-Estate-Networking-Club/

Hey Cody,

I would recommend reading Total Money Makeover by Dave Ramsey for more info on paying off debt and getting your personal finances in order. It's crazy how that can boost your investing career. That being said, on the other end of the spectrum I would also recommend reading Rich Dad Poor Dad for info on how liabilities (truck debt) work against your investing and how cash flowing assets will help pay off your debts. 

I know they're both totally different books, but there's a lot of different ways to achieve your financial freedom. Use your knowledge to see what route works best for you!

I would also be careful banking on getting that HELOC before talking to your lender. Just like the Kenny Rogers song goes. "You never count your money when you're sitting at the table, there'll be time enough for countin', when the dealin's done".

I've been declined on a full amount HELOC that I applied for because of my debt-income ratio wasn't high enough. I'm not saying you won't get it. I would just make sure it's available before you put your plan together.

Good luck!

Kevin