An All-Out Approach to Financial Independence at an Early Age

 Mindy: Welcome to BiggerPockets Money, Show Number 2.It’s time for a new American dream, one that doesn’t involve working in a cubicle for 40 years, barely scraping by. Whether you’re looking to get your financial house in order, invest the money you already have, or discover new paths for wealth’s creation, you’re in the right place. This show is for anyone who has money or wants more, this is the BiggerPockets Money podcast.

Mindy: My name is Mindy Jensen and I am hosting today’s show. We have something a little bit different today. Today’s guest is usually on this side of the microphone with me but today I’m putting him in the hot seat. I want you to get to know him and there’s no better way to get to know someone than to interrogate them. So I am going to bring in Scott Trench, the Director of Operations at BiggerPockets.com and usually my co-host. But today, he is my guest. Scott, welcome to the show.

Scott: Awesome. Well, thanks, Mindy. Yeah, I’m excited to be here. We’re going to be posting this show forever so we thought it would be good to have each of us—you’re going to be next week—share just kind of our philosophy and our story and how we approach money so that you guys, the listeners, can understand where we’re coming from when we’re talking about money and finances and all that kind of stuff.

Mindy: Yeah, lend a little credibility to the show, if you will. So I’m just going to kind of jump in with both feet and start at the beginning. Tell me about your childhood. I’m just kidding. Well, you know what? Tell me about your childhood.

Scott: Well, I was born in a—

Mindy: Born in a small town. So what kind of childhood did you have, like a regular rough-and-tumble childhood or you were born with a silver spoon in your mouth? You had no money and you were homeless forever? What’s your quick background?

Scott: So, I grew up in an upper middle class neighborhood and went to—I was in an excellent school district throughout my entire life growing up, had two wonderful parents, and if I were to kind of define my childhood, it would be defined by competitive sports.

Because I was lucky enough to have parents that would provide for all these things, I can’t remember a time between the age of maybe five and eighteen where I had more than two weeks off from playing various sports. I was always in a soccer league, a basketball league, lacrosse, rugby, you name it, I played sports my entire life. And that’s really how I kind of define myself as a child. I was an athlete, a competitor.

Mindy: So gosh, Scott, do you still play sports now?

Scott: Yes, I still play sports. I played rugby in college and I still play rugby to this day although I’m continuing to rack up some injuries from rugby.

Mindy: Yes. I’m laughing—people may not be aware of this—I’m laughing because Scott comes into the office frequently with a black eye and just as frequently with stitches. So he’s actually bruise-free right now—well, his face anyway is bruise-free right now. So it’s just funny to see somebody in a professional setting with this black eye. He gets it from rugby, not fights. Or are you calling it rugby but it’s actually fight club?

Scott: Who cares?

Mindy: Rule number one. Okay, so you had a happy childhood. It wasn’t filled with a lot of strife or anything.

Scott: No, no, no. Again, I had the great privilege of being able to really kind of focus on my athletics and my academics without too many things going on in my personal life to distract me from being successful in those things. And I’m very grateful to my parents for that. That’s an advantage that a lot of people don’t have. I’ve tried to do the best that I can, given that advantage. I went to college at Vanderbilt University and studied finance, economics, and then got my first job in the finance world out of there, graduating debt-free. I had that nice head start into the world right there.

Mindy: That is a huge head start. I think how you grow up is really important. It doesn’t define you and we’ll have a guest on in a few weeks who took a not-so-amazing childhood and really turned it into something amazing. So I don’t think it has to define you but I think it’s definitely interesting how it affects the rest of your life.

So fast forward, how did you discover this concept of early retirement or financial freedom? Because you went to school, you studied—presumably, you went to college to get a four-year degree so that you could go out and be whatever for the rest of your life and work until you’re 65. And then you said your very first job was not so fabulous.

Scott: Well, in college, probably towards the end of my senior year, I became very interested in finance. And I began reading some things like Rich Dad, Poor Dad and that kind of stuff. So I understood the concept of building wealth. But it didn’t really click. I think you kind of have to absorb this information or this perspective over the course of months or years before it becomes, oh, for some reason, this one is going to hit me at this time. And things are going to become crystal clear and financial freedom is going to become the obvious concept.

So out of college, I actually went and spent all of the money I had been making at internships and what not for the summers on a trip to Europe with a couple of buddies so I could start—just to make sure that I could start my career broke. And so, I started out with two or three grand in my checking account and my first job here in Denver, Colorado, and within three months, I figured out, hey, life has just hit really hard. I am now on my own with a solid job. I was making $48K a year but this is it. This is what I’m going to be doing with my day to day for the rest of my life.

Mindy: And did you enjoy that, what you were doing?

Scott: I didn’t. I didn’t. And I don’t think the reason I didn’t enjoy it was because the work was bad or I was treated poorly. But if you go back to my childhood, you know every single day, every single week, for my entire life I had been competing. I had been practicing or straining myself to the utmost with some sort of challenge with something that’s going to challenge me to the utmost mentally and physically. And my work was not doing that at the time.

But I’m not one to waste time and I’m not just going to sit there and just because I don’t have any work, allow myself to sit around and twiddle my thumbs. I spent as much time as I could reading and learning and figuring out how do I become better and better and better at my job with every possible moment. And I soon found that there was very little marginal utility to that. The job is make the spreadsheet, come up with the projections, here’s how to do it and then update that once a month and give us your feedback.

I was a financial analyst, which basically is, how much do you think we’re going to spend? How much do we spend? Do we need to make any changes? What’s the difference? And so there really wasn’t much to it. You could only get so good at that particular role over time. So once I figured that out, I just started learning more and more about finance in general and that was when I came across the concept of financial freedom isn’t studying to become better for my job.

Learning more about finance, I discovered the realm of personal finance and really dived in and particular, I remembered that two of the key resources were the Mad Scientist podcast—I think it’s called The Financial Independence podcast, and his first ever guest was a guy named Mr. Money Mustache who you might remember from last week. And once I discovered Mr. Money Mustache and began reading his blog, everything clicked. I just agreed with every single piece of information that I absorbed on Mr. Money Mustache and from there it was off to the races.

Mindy: And how old were you?

Scott: So I was 23 at the time when I first started doing this. It was 2013, so I was 22 or 23.

Mindy: Okay, so at 23 you discovered the concept of financial freedom and early retirement. What was your next step after you decided, okay, this is something I want to do? What did you do after you’ve decided, okay, I want to retire early?

Scott: So once I decided that, I was like, hey, I need to just focus on saving. And I realized that saving was not going to be something I could just do immediately. I wasn’t going to be able to suddenly start saving thousands of dollars a month. I had to change things step by step. Now, I had the good fortune of not making too many big mistakes prior to discovering financial freedom. If I had discovered it a year or two later, I might have been locked into some choices that would be much harder to erase.

But the big things that I did in those first few months before I got serious about financial freedom was, I bought a car. I bought, at the time, a 2014 Toyota Corolla and financed it. And that was probably my biggest financial mistake, which I’m lucky that’s my biggest financial mistake because it’s a Corolla.

Mindy: Yeah, it’s a nice mistake to make.

Scott: But what I should have done is I probably should have waited another couple of months, taken public transit, and then bought in cash just a 2004 Corolla, ten year older model, and I’d probably be doing a little better today. That was one decision. And the second one that I made that really helped me move forward was I lived in an apartment with a roommate. It was my college roommate.

And just continuing to live with a roommate in an apartment, I was able to spend $550 per month, maybe $600 per month with utilities to live and so by doing that and having an economy car, the Corolla, and beginning to make lunches, I was able to start saving initially. And then over time, I was able to make changes that even accelerated my savings to about a 50% rate.

Mindy: So what kind of changes did you make in your life to be able to save 50%? That’s a nice savings rate.

Scott: Yeah, so it took me a year to get up to that rate. What I did was I started off by learning how to cook. Sounds simple but for a 22 or 23-year-old guy who’s never really cooked before, that was a challenge. I had to buy pots and pans. I had to go—I’d use a website called LadiesCrockpot.com or something like that. I eat a lot. I’m a rugby player so I’m a little larger and I like to consider myself an athlete. So I would make family meals and eat them all myself or maybe have a little bit for lunch the next day. So that was the first thing I did. Just by doing that, I think I saved a ton of money.

Again, the fact that I had made a decision out the gate to pay $550 a month for my housing and it enabled me to come up big there, so I think it was—I’ll have to look back at the numbers specifically at some point but I think it was $600 bucks a month for housing an utilities, let’s call it $350-$400 for food, and then another $300-$400 for the car payments and insurance and all that stuff.

I’m looking at $1200-$1300 a month in expenses, and then I have $700 that I’m blowing on fun. Drinking beer, having friends over, going downtown, that kind of stuff. And that was plenty of money to do that. Maybe the occasional ski pass would come in there and you averaged that out over the winter months.

But I didn’t take very many trips. I avoided—a bunch of my friends from college went on a trip to I think it was Cancun or one of the Bahamas and I remember being like, no, I’m serious about financial freedom. I’ll spend $20 bucks on a case of beer to go downtown with my friends but I’m not going to spend $1000 to go to an island resort. And just by consciously making those decisions, avoiding big expenses and still having fun with a few hundred bucks a month—I was bringing home around $3500-$4000 after tax pay, so that was how I did it.

Mindy: So what did you do with the money that you were saving?

Scott: Basically, after I had about $2000-$3000 in my savings account, I put everything else in index funds. And so this is where a lot of people get a little antsy because they’re like, oh, you’re not supposed to put your reserves, the cash you’re accumulating into investments. Otherwise, you might lose them and they might go down.

Mindy: You should have done bitcoin. That’s a way better investment.

Scott: Oh, I would be way richer now if I had done bitcoin, that’s for sure.

Mindy: I’m gonna jump in right now and just say, we’re currently recording this at the end of December and I think bitcoin crashed today? It went down 25% or something and there’s kind of like a whole schpeel about how—you’re not a fan of bitcoin, are you?

Scott: I did not believe that—I believe bitcoin is a currency. So if you want to call it currency speculation investing, you can. I’m not here to discredit people that have made money from it but I certainly am not touching it myself. I don’t believe that bitcoin is an investment that can reliably be expected to appreciate in value or generate cash flows. That’s my criteria for investment.

Mindy: Okay, I concur and I don’t want to make this a bitcoin podcast so we’re going to skip over that. I just think that’s funny. So people, I would not recommend putting your money into bitcoin while you’re waiting for your investment. Okay, so my question was where did you put your money while you were waiting? Did you know you wanted to buy real estate?

Scott: Actually, that’s not true. Let me go back into this and really dissect what I did in that first year more carefully, because it’s been a couple of years since I thought about this. What I did, actually, was I stockpiled that money in cash at the very beginning because my employer offered an employee stock purchase plan. So I could buy the stock of a company at 15% off.

This is what I did. So, I put that money in a bank account and I was like, shoot, next quarter, I’m going to take a zero paycheck. I literally had paychecks of less than $100 for that quarter because I put all of my money into the employee stock purchase plan. And the way it worked was a paycheck goes in there and at the end of a quarter, let’s call it 14 days after the end of the quarter, they buy company stock and then they sell it. And you can sell it once you own it that same day. So I was basically arbitraging a 15% discount. So I think I put in like $5,300 or something like that into the stock purchase plan and then I immediately sold it for like $6,100—I forget exactly what the numbers were and made my 15% return. So I did that like instantly.

Mindy: That’s a guaranteed 15% return.

Scott: That was the first thing I did with my savings was I put myself in a position to do that. And that quarter kind of sucked because I didn’t have—I was running low, waiting for the ESPP to come through. I had still just bought the car so I was kind of low on cash at that point. But then I got that huge boost. I got $6000 and I was like, oh, I could last for years now.

Mindy: Exactly. That small tweak.

Scott: That was it. You were right. That small thing allowed me to make a lot of extra money. It got me used to being very careful with that money in the first quarter and then of course, I applied it again in the next quarter but then I had a big chunk to invest. And so, I put some of that money into investments and stock market and kept a reserve that I dwindled again the following quarter.

And of course—and this is in 2014 so of course, by the end of the second quarter, I was looking for another job and got one at BiggerPockets. And so by the time I got through one full year of employment in September of 2014. Between the ESPPs, some side gigs, my savings rate and all that, I had accumulated roughly about $24,000 in cash.

Mindy: While making your salary of $48,000.

Scott: Yes, but then remember I was able to increase that because I was doing the ESPP and I did a couple of side gigs.

Mindy: An ESPP is Employee Stock Purchase Plan.

Scott: Yes.

Mindy: Okay. I just want to clarify for anybody who might have skipped over that. I skipped over that the first time you said that. Okay, so you have some money in stocks and some money in company stocks and then no money in company stocks because you sold it all. Did you know that you were going to invest in real estate or were you just saving at a high rate? You had mentioned Rich Dad, Poor Dad which is the #1 real estate inspiration book. That is everybody’s favorite book on the BiggerPockets podcast. Did you know that real estate was your goal?

Scott: Yes. So I had told you that Mr. Money Mustache was the big thing and I really kind of got into him in December 2013, January 2014. But you know, after reading that for a little bit, one of the things that Mr. Money Mustache and a lot of guys in the personal finance base talk about is index fund investing. And I think index fund investing is great. I’m a big fan of it. I just told you I invested in index funds with a lot of my excess cash.

However, when I boiled it down, I was like, what is really killing my ability to save money at a higher rate? What is really the thing that is holding me back right now? Well, it’s this rent. No matter what I do, and $600 is not a lot of money for a place like Denver, to rent a room.

Mindy: No, that’s nothing. If you can find a $600 a month apartment now, get it.

Scott: But it’s by far the biggest part of my expenses. And I was like, I’ve got to eliminate this if I want to do this. How do I do this? And that’s when I kind of turned to real estate investing. I think I discovered an article by Brandon Turner that was How to Hack Your Housing and Get Paid to Live for Free. I think he published that in 2013 or early 2014 and that was the moment.

Mindy: That’s a great article.

Scott: That was the moment I knew that I was going to get into real estate. And real estate was a side effect. I invested in real estate because I looked at real estate as a way to eliminate my housing expense. But I knew going into that first house hack that I didn’t want to be in that duplex or in that part of town or in an area or an investment property that would be a good house hack permanently. I knew it was a stepping stone to something else.

So by definition, if you’re going to use a house hack to eliminate your expenses and then intend to keep it as an asset, you’re going to be a real estate investor. And real estate investing makes a lot of sense in a lot of other ways. So my goal was to never become a full-time real estate investor and it still is not to become a full-time real estate investor. My goal was to eliminate my housing expense and acquire stable cash flow assets, one at a time, over the years, in a way that would help me accelerate rapidly towards financial freedom.

Mindy: Oh, I didn’t know that you didn’t want to be a full-time real estate investor.

Scott: No. I even say this sometimes—I don’t even like real estate. I talk about real estate all the time and I love talking about it. I love doing that. But if you told me, hey, here’s a better way to create equity and to build wealth and to generate cash flow with your money, I’m out. I’ll go do that one. Real estate—I like the income that real estate produces and the equity it builds, not the physical structure itself. If I could make that much money without having to deal with tenants and repair toilets and all that, I’m all in. You tell me.

Mindy: Okay. Well, that’s interesting. I did not know that about you. I’ve been working with you for like two and a half years. I didn’t know that. I thought you loved real estate. I love real estate. I love the structure. I love the concept. I love all of that but that’s interesting. I was just thinking, it’s kind of hard to interview somebody when you basically know the answers. So this is great. We can go on this tangent. So you discovered real estate—how did you discover BiggerPockets?

Scott: Well, I mean BiggerPockets was already, at the time, the go-to resource for real estate investing online. It was impossible to avoid. After you read—let’s say you read Mr. Money Mustache or you read any of these bloggers and any of these guys that have their whole philosophy put on paper—I guess, it’s not paper. Internet. You read all these posts. The outline becomes pretty clear. You save your money. You invest in index funds. You try to find ways to make marginal differences each month and you accelerate and accelerate and accelerate in perpetuity.

Real estate is a little different. Real estate is where you can really put in a serious amount of education and reap benefits from that education. It’s not like, hey, here’s the practical way to decrease my lifestyle expenses and then invest in index funds. Real estate, you can learn every bit about how to analyze deals. Which neighborhoods in your market are there? Which people in your market are good? How much—you could spend a lifetime learning how to do DIY construction projects. You could spend a lifetime learning the ins and outs of various tenant law in various parts of the country.

There’s just so much to learn. And so putting in that excess education, I believe, gives you a shot at learning outsider’s return in real estate in a way that might not in other asset classes. So I became obsessed with the BiggerPockets podcast. I must have listened to all, at the time, a hundred or so episodes that were out. Now, there’s 250. But I listened to all of them and began to feel more increasingly confident by the time the end of 2014 came around and I made my first investment.

Mindy: Okay, you just threw a lot of stuff at us again.

Scott: Yeah.

Mindy: I like real estate for the same but different reasons. I like, you had said that you can do research and get a competitive advantage. I like real estate because I’m in control. I am not in control of Enron, the company. So when they go and do whatever monkey business they did that caused the whole company to crash, I have no control over that. I can’t tell them to stop. I can’t do any of that. So my preferred method of investing is real estate and I will talk next week about mine but I love the control it gives me. I’m kind of a control freak.

So you mentioned an article by Brandon Turner called House Hacking or How to Hack Your Life—what was it called?

Scott: How to Hack Your Housing and Get Paid to Live for Free. I’ll never forget it.

Mindy: So let’s talk about house hacking for people who don’t know what this means. Tell me what this means.

Scott: So house hacking is—I said that my goal was to live for free. The way that you can do that with house hacking is, I’ll explain the concept of house hacking with my first duplex. So if you’re following the story so far, I had just quit my job at the Fortune 500 company and moved to a job at BiggerPockets. My role was still technically finance so I was able to use my base income to help me qualify for a mortgage. And so I bought my first duplex in November of 2014, shortly after I had joined BiggerPockets.

And by the way, I did not really get any benefit at working at BiggerPockets when I bought that duplex because I had met someone on BiggerPockets before I even joined the company, as a regular user. And that person brought the deal to me and all that. So this is not like I had some super secret advantage here in buying my first property. This was all done external to BiggerPockets. My latest deal, I did get some advantage. But I’ll get into that later.

My big thing is, what’s realistic and repeatable and what’s not, is what I always want to try to convey. So anyways, I get this duplex and it’s a $240,000 duplex. And it’s a foreclosure. It’s been owned by Fannie Mae and being sold through a bank.

Mindy: Okay. Was anybody living in it at the time?

Scott: No, it was completely vacant. So this is an ideal first property for me for a number of reasons. One, it was in an area of town—I had been networking with investors throughout town for months previously trying to get a feel. And I joined a Mastermind group with these kind of other real estate entrepreneurs, some of them who were just getting started like me and some of them who had pretty reasonable businesses going, even big businesses. And they had told me this is a good area of town. So I knew going in what numbers kind of made sense for various properties and what town I wanted to be in. And when this property hit the market, I knew it was something I should go look at. Or at least when it came to me from this agent I knew, it was something to look at.

So I go and take a tour and I’m not sure whether I want to buy it. I’m kind of having that analysis paralysis. I’m kind of scared. But the reason I was able to get it was because for 30 days, it was only available to owner-occupant. Only owner-occupants were allowed to put bids on the property.

Mindy: I have that house, too. Did you say Fannie Mae Home Path?

Scott: Yep. Exactly. So this was great. If there are foreclosures, which there haven’t been in Denver for some time, at least not very many, the Fannie Mae Home Path program can be a pretty good place to look if you’re a house hacker because this was a duplex. So most owner-occupants—house hacking wasn’t a thing. It’s been around forever but it wasn’t like something that was very popular.

So I was the only person in the city that offered on this property even though it was a pretty good deal and a lot of the investors I had talked to said, yes, if that property comes on the market, I’m going to offer at that price. So I had it all to myself for that first offer. Nobody else—no investors were able to offer on it and all of the homeowners were interested in single-families. So that’s how I was able to have that couple of days to really get my offer through without having to face a lot of competition. So, great opportunity for me to get into that first property.

Mindy: I think it’s important to note that Fannie Mae is a government program that wants to put owner-occupants in the homes. They will sell to investors but they don’t want to. They want to put regular people in homes. So for the first 30 days, they have this window where only owner-occupants can bid on it and then after 30 days, it’s opened up to everybody if it hasn’t gone under contract yet. And then I believe there’s an investor premium of $10,000 or something like that where if you buy it, you have to state that you’re going to live in it or not live in it. And if you’re not going to live in it, you have to pay an extra $10,000 for the privilege of buying it.

Scott: Hmm. I did not know that last part but the first part was exactly right. So a part of the deal was, hey, you’re buying this property. You have to live in it for a year at least.

Mindy: You have to live in it for a year, and this is something that comes up on BiggerPockets forums frequently. It is mortgage fraud which is a felony to say you’re going to live in the property and then not actually live in the property. You have to claim this as your primary residence. You have to live there and people will ask, well, what are they going to do? Are they going to drive by? Yeah, they might. Is it worth five years in jail to get a property? No, it’s not worth five years in jail.

Scott: This is a cheat code to life. So a way to vastly expedite your financial position, you put down 5% on a Fannie Mae loan as an owner-occupant. And I got a good deal on the property. 3.5%, you could put down even less. And you get to have this enormous loan and ability to wipe out your housing expense with a mortgage interest premium. But that advantage is pretty great and the only trade-off is one year of living in the property. That’s a trade-off I’m willing to accept. That’s like signing a lease.

And the other thing is, well, you’re right, it’s mortgage fraud. This is not like you’re condemning yourself to be in there for the whole year and have no flexibility whatever. If your mom gets sick or you get a new job or something else comes up that’s a legitimate emergency, you can move away.

Mindy: Yeah, they have reasons. They have a couple of exceptions to their rule. But it’s to keep people from jumping in during the owner-occupant period.

Scott: If your intention is to defraud the system, you’re not doing it right.

Mindy: No, and I hope you get caught because you should just be honest in the way you deal with your life. So okay, so quick—in case somebody is listening and doesn’t know what a duplex is, what is a duplex?

Scott: It’s just a two-unit building. So it’s a house with living space. It’s like a townhome.

Mindy: Like two completely different spaces but just stuck together.

Scott: Yeah, it’s usually with a shared wall. So this property was a side-by-side duplex as opposed to an up-down duplex. A lot of duplexes are converted homes that have a basement living area and an upstairs living area. This was a side-by-side. Each side was about 700 square feet. It needed some work but not work that a first-time guy getting into this couldn’t handle. It was like painting, drywall, and installing a vanity, caulking, you know, staining cabinets. That kind of stuff.

So I bought the place for $240,000. I brought $12,000 in cash and I probably put another $8,000 into it over the course of a few months. And then after that, I was able to install a set of tenants in there that were paying $1150 a month. And my roommate paid my $550 a month. So if you’re following the numbers, that’s $1700 per month I gross rent and the mortgage was about $1550. Now, there’s expenses that come up and maintenance. But I’m basically eking out a free existence at that point.

And that’s great. That’s huge. I was paying $600 a month before. That’s $7200 per year. That’s like a 55-60% return in just rent savings alone on my down payment. It’s a 35% return on a $20,000 in total of cash I put in. So it was a great, great return. And that was just on the rent reduction. That’s not even including appreciation.

Mindy: And you’re learning how to be a landlord without having like a 500-unit building.

Scott: Yep, which is why house hacking, which I think is a cheat code that many people should consider if they’re trying to achieve financial freedom. Just logically kind of moves you into that space of real estate investing that’s not very scary and can be approached with a lot more comfort. It’s like training wheels for real estate investing.

Mindy: So you said your mortgage payment was $1500?

Scott: $1550 about, yeah. That’s principle, interest, taxes, and insurance and the mortgage insurance premium.

Mindy: Okay. So you could afford that comfortably on your salary if neither side was rented out and you were just the only person living in this whole building?

Scott: Oh, yeah. This is just fundamental to my philosophy in life and investing. My investments should always be something that can help me accelerate and improve my financial position but they’re never something that I could depend on solely. I should never depend solely on a single investment in determining my financial future. It’s always going to be incrementally additive. So yes, I was not dependent on this investment working out in order to sustain my lifestyle and make that mortgage payment.

Mindy: Okay. And I think that’s really important. It’s not a good idea, in my opinion, to buy a house that you can’t really afford even when the lender says, oh, you can afford $5000 a month in your payment. You’re like, well, I’m really more comfortable with $1500. Don’t buy the house that’s $5000 because if you’re planning on renting portions out and then for some reason, you can’t, your bank still wants that mortgage payment every month on the 1^st. So I think that’s really important that you could afford this on your own and then you didn’t have to.

So now you’re saving $600 a month in rent. You’re just going out and partying every night? What are you doing with that money?

Scott: I’m continuing to live my life in exactly the same manner as I had lived before. Going out on the weekends, going skiing. All the same stuff. In fact, I probably relaxed my spending just a little bit. Maybe had a little bit more fun.

Although I did remember, I got really serious. I was like, I’m going to live this perfect life. I’m going to bike. I didn’t have a dryer so I just had a washer and I hung and dried my clothes outside, that kind of stuff. But I really just had fun on the weekends, went to the mountains to ski, played rugby, did exactly what I wanted to do that whole time. I just happened to no longer be paying rent. And that was the big thing.

I will point out that this house hack, also the reason I chose this area was because I thought it would appreciate but also because it was within an easy bike ride of work. Which is another thing that allowed me to save a lot of money.

Mindy: Oh, like Pete talked about last week, living closer to work so you don’t have to have a car and insurance and gas and yadda yadda yadda.

Scott: There’s two ways to be able to bike, right? You have to move your home closer to work or you can move your work closer to home. And I did both. So really, part of the reason why I chose to work at BiggerPockets, aside from the fact that I was a fan and loved it and thought it was a good opportunity was because it was within biking distance of my first apartment.

And part of the reason I chose this house hack was because it was within biking distance of my new job at BiggerPockets. And that was definitely all intentional. So with my day-to-day life, my commute, and my living, I’m not spending hardly anything. I’m saving tons of money. And that’s the point at which my acceleration began to take off.

Mindy: So what were you doing with your money after you got the duplex and now you’re living for free? You are saving money on your rent. What are you doing with that money?

Scott: Sure. The duplex purchase took pretty much the majority of my cash over the first few months. Because remember, I put in $20,000, $12,000 down and probably another $8,000 into it and I’m paying the mortgage without much rent help. So I’m pretty low on cash, maybe down to like $5,000 or $10,000 at the point where I get my first set of tenants. So that first year, 2015, was really spent—I allowed my rent to stockpile in a reserve account and I built that out to about $20,000 before taking—I just built up that reserve with my savings before I started really thinking about investing elsewhere. I don’t think that reserve was as necessary for my personal life but once you had an investment property, you are now running a business and a business needs capital and cash in it to make sure that it survives any problems.

Mindy: Right. What if you get like this Murphy’s Law kind of perfect storm thing going on and you have problems with your water heater and problems with your plumbing and problems with your electrical and problems with your furnace and problems with your roof? You can’t afford all that if you have no money.

Scott: Yep, so my goal in life that year was basically I’m going to work hard at my job, keep my expenses low, still have fun but I’m going to build that up to about $20,000 in my emergency reserve. And then I had a little bit of extra cash after I got back up there. I began putting my money back into my Scott trade account and investing in index funds.

Mindy: Scott trade.

Scott: Yeah, of course. My name is Scott. So I had like $3000-$5,000 in personal cash, $20,000 for my business, and then I began building up my next reserve there.

Mindy: Okay, so I know that you have more than one property. When did you start looking for your next property? How long did it take you to find and when did you move out? You did fulfill that one-year owner-occupancy requirement, correct?

Scott: Yeah, so the next property was purchased in March or April of 2016. So almost 15 months later. And I closed on the property in November 2014. So that one was an up-down duplex. Probably wasn’t the best deal. I got it on the MLS but it’s a nice place to live. It’s an up-down duplex. I live in the basement. It’s in a really good spot that is pretty speculative. And so, that place overlooks a Light Rail station that goes to downtown. It’s also got a bike trail which I often use to get to work. And it’s got a nice garage for a man cave. I can throw events there with my rugby buddies and all that kind of stuff. We play ping-pong in the garage and all that kind of stuff.

So it’s just a great kind of lifestyle investment. And the upstairs pays I think $1575 on a $2000 mortgage. So I’m doing pretty good there but it’s not the cash—it’s not great as good of an investment as the first property was. So I think that, it’ll probably, when I move out, rent for like $1200 in the basement and $1500 upstairs and the mortgage is about $2000. So not quite. I’ll probably break even on a cash flow basis on this property after all the expenses are accounted for as opposed to my other property which now produces about $2600 a month in rent on a $1400 a month mortgage. So that’s a difference there.

Mindy: Those are good numbers.

Scott: On my most recent property, it was actually a fourplex. Me and a partner each brought about $50K, or $45K for the down payment. We put down the $90K and bought this $355,000 quadplex. The quadplex rents for about $3200 a month, or it did at the time we purchased it. And the mortgage was about $1700 per month. So I can go through the rest of the numbers there but yeah, we got a good deal there. We did as though, is we bought a property that had some problems. So there was a tenant being evicted at the time. There was a guy living in the crawlspace. There was a murder on the property a few months before we bought it.

This guy was selling because he had problems with his tenants and we have a problem tenant. I do not believe anybody is gang-related that’s currently living on the property. Like, I believe the murder was gang-related and those tenants are out. But we’re having some issues and that is part of the process of getting a good deal. Now, I think I’m a real estate investor or at least a fledgling real estate investor as opposed to a house hacker that’s kind of cheating to acquire properties.

Now, I’m buying deals that have value added and I need to come into the table, solve problems—and I will solve these problems—and make sure that property is stable and not taking up any of my time over the course of the next year, as leases renew and all of that kind of stuff comes up.

Mindy: Okay, first of all, it’s not cheating to house hack. Don’t say that.

Scott: I love calling it cheating. It’s a cheat code.

Mindy: You’re cheating expenses but you’re not cheating as a real estate investor.

Scott: Suppose you made $50K a year. If you house hack and you’re able to wipe out your living expense, even at my level, $600 a month. That’s $7200 in saved rent a year. That’s probably 15-20% of your after-tax take home pay. You’re going to get a 30% raise in order to cover that same level of expense? No way. That’s unrealistic for your average median income earner. And then if you’re working on the property and improving it, you can increase your equity. You’re paying down the mortgage, which is another couple of grand. It’s a cheat code. There’s no other way to describe it. You have to start a business that would produce $10,000 or more per year in your free time to even come close to the benefits of house hacking. There’s really no way to make up for the advantage without some sort of Herculean effort on the income front.

Mindy: That is a really good way to look at it. And I want to say, I want to point out that you had said that now you own a business. Now, you’re a landlord, you own a business. You really do have to treat this like a business. But think about starting your own business. What do you need to do? You need to like come up with a billion things. You need to have a product or a service. Starting a business is really, really hard.

Scott: Generating revenue is really hard.

Mindy: Okay, well yeah. You can just say, I’ve got a business now. And yeah.

Scott: I started a lot of businesses that generated no revenue.

Mindy: Okay.

Scott: It didn’t go bankrupt. It just did nothing. Because there are no revenue and no expense.

Mindy: Okay, let’s not delve too far into economic terms. So you have eight units, seven of which you’re renting out. What is your biggest hurdle with all of this? You mentioned that you had a murder in one of your units. Somebody was living in the crawlspace. That’s not an illegal unit. That’s just somebody living in some little like—

Scott: Someone broke into the crawlspace and was apparently living there for a couple of months before I owned the property, not while I owned it. So I just put a lock on that. But when you say biggest hurdle, my biggest hurdle is I have a set of inherited tenants that are a little bit of a pain right now. And it’s not that big of a hurdle. It’s like, maybe I get a phone call once every couple of months about some sort of misbehavior from them. They parked the car on the front lawn, which drives me nuts. There’s like so many parking spots in front of the house. It’s like perfectly legal street parking. It’s completely empty.

And there’s their car not only parked on the front lawn, but parked in front of another tenant’s door. In addition to the fact that there’s perfectly legal street parking right in front, six feet away from where they parked their car, with nobody in it, there’s also reserved parking in a little section with concrete that they could park on. And they don’t park there. So I’m just like, what is going on? Just a bunch of little things that drive me nuts. That’s my biggest hurdle. It’s not really a hurdle at the end of the day.

Mindy: No, that’s not. That’s pretty easy.

Scott: And the reason for that is because I come into this strong financial position. I self-educated a lot so I’ve learned from other investors’ mistakes, which I think have allowed me to avoid making some mistakes of my own. And then I’d like to think of myself as a pretty reasonable guy. If someone is having a problem or something like that, I’m going to try to work out a solution for them rather than strictly enforce my lease on certain terms.

Like for example, I had a problem with the trash at the property. One of the tenants was having a little trouble paying the rent. He’s never been late but he’s like, hey, what can I do to get a break? And I said, well hey, if you can get rid of all the trash for me at the property in between now and when I get the garbage cans from the city, I’ll pay you $25 a week. And he was like, great, yeah. I’ll do that. I don’t have to go there and pick up trash from my property now. Which doesn’t sound very appealing to me on a Tuesday afternoon.

And he gets a little break on rent, like about $100 and it’s helping me solve a temporary problem. That kind of stuff. If I can be reasonable with certain things and work with people, I’m able to avoid problems. My real estate business should provide me with passive income so that I can put my best energies into my job here at BiggerPockets and producing content on financial freedom.

Mindy: So what is next for you? Are you looking for more real estate? Are you looking to branch out in your real estate investing? You mentioned passive multiple times. I have become—since I can’t find any deals, I have become a private lender and I am the money side. I’m the bank for other investors. Do you have any interest in something like that or do you have any ideas?

Scott: I do want to talk about that but before I get to that, I would like to put out something that has been underlying all of this that hasn’t been brought up yet which is my income, my earned income.

Mindy: Okay, so I’m going to say right here. I actually work with you and you’re not supposed to talk with your coworkers about income so I didn’t want to talk about that.

Scott: Well, I won’t talk specifically about it, but I’ll talk generally about it because I’ve said this before publicly on this kind of stuff. When I started, I was making $48K a year and I lost some of the income potential I could have had with a pending promotion at my first job to join BiggerPockets, which at the time was a startup. But because I had saved up all this money, I had come off my second ESPP and had been lumping up some extra cash, by coming into this new job with about $15,000-$18,000, which was enough for me to feel very confident about going into a job that was less certain. Instead of a Fortune 500 company, going to a two-person startup was a big difference.

I perceived opportunity at BiggerPockets and I loved the prospect of working here, right? And that decision did not pay off at first but it paid off big-time over the course of the—the first three months, it paid off immediately because I enjoyed my work and loved my life and was proud of what I was doing. But financially speaking, it didn’t pay off for the first six months or so.

And then after that, it really began to because I was in charge of sales for advertising. And because I was in charge of sales for advertising, I was able to earn commissions and grow the advertising sales of the company and I was able to do that—I’ll briefly outline how I did that in three quick steps.

So first, we increased our audience. More audience means you can sell more advertising, right? Second, I was able to teach advertisers how to put together more effective ads. So, at first, they were not really good at advertising but I learned my audience and I studied what was happening, so I was able to get them really effective ads. So if you read the newsletter or listen to the podcasts, these are ads that we’ve designed that are useful to the audience and designed to help produce a good return for advertisers and hopefully hook up the users and listeners with good products.

And then the other thing I was able to do was increase the amount of inventory that we had so that BiggerPockets was able to sell more advertising. So because of those things, I was able to increase my income and that is what has helped me accelerate towards owning these current real estate investments and having a lot of liquidity to make future investments at the present time. Does that make sense?

Mindy: That makes a lot of sense. Were you asked to do this or did you ask to do this?

Scott: Well, that’s the beauty of joining a small company and a startup, is more risk, more opportunity. So that was something that I weighed and I was able to take advantage of that. When you say you start out saving money, it’s a guarantee. You don’t spend $10 on a beer at the ballpark, you’re guaranteeing yourself to be $10 richer.

When it comes to earning more income, it’s hard work. You’re going to have to work harder and longer and smarter than you’re used to. But you have the potential to earn more. And the cost of that is going to be the stability of a high-base pay at a stable company.

Mindy: I think it’s important to point out that you were what, 23 or 24 when you started with BiggerPockets? And you’re not married. You don’t have any children. So you’ve got nothing holding you back. Nobody is dependent on you. You don’t have this huge mortgage payment because you’re currently renting. That’s the time to take the risk. It’s a lot easier—you could have worked at McDonald’s and pay all your bills while you were looking for another analyst job when BiggerPockets didn’t work out.

Scott: Absolutely. And that’s exactly right. And the reason for that is I had accumulated a lot of cash and felt like I could last a very long time even if things didn’t work out. And of course, I got to BiggerPockets and I quickly learned that we’re in great financial shape and the business is booming and we ended up hiring a lot more people and going off to the races, which certainly was a big boost to my career.

But the point is, that is something that people ignore because it’s really difficult for an immediate income-earner to earn significantly more money within just a few years unless they change and go into a job that is less certain. And the way you can kind of get yourself convinced to do that is if you have this stockpile of cash relative to your expenses. So for example, if you’re married with kids and you spend $60K a year, unlike me with $18K-$20K, you’d probably need $60,000-$70,000 to feel comfortable with a similar decision.

Mindy: Right. Right. That’s a good point. So, with great risk comes great reward.

Scott: But I just wanted to throw that in there because that is where I’m really working on with my best efforts throughout this entire time period where I go from accumulating my first house hack to my third one. It’s really going into, how do I produce great results that are scalable for my company that I work for and love and for myself?

Mindy: So what are you doing now? What’s next on the horizon for you investment-wise?

Scott: So, investment-wise I plan to continue to create and buy assets. The way I’m going to do that is I’m going to continue to save aggressively. I still spend very little. I’m a little bit more willing to go out for wings and stuff on Friday night now. But I’m going to continue to save pretty much exactly what I’ve always saved—spend exactly what I’ve always spent and earn a good income and then pile that money into one real estate investment every 12-18 months here in Denver. Although I might do that a little sooner. I’m thinking about buying a triplex or a quad in a nice neighborhood that’s a little closer to work and more convenient in the next six to eight months here. So that may happen.

And then if I have excess cash after that, I’ll continue to hope to buy one property every 12-18 months in Denver but I may also buy properties out of market if I continue—if I’m able to execute my Denver plan at kind of dollar-cos averaging here in Denver. Then I might try my hand at some alternative investments elsewhere. Or like lending private money. Whatever is opportunistically a good bet for me at that time.

Mindy: Okay. When you say out of market, do you mean out of the Denver market or off market, not found on the MLS?

Scott: Yeah, so I mean this gets into my real estate investing philosophy, but when I say out of market, I mean somewhere that’s not Denver. My core philosophy, what I started with, what I’m trying to sustain is regular periodic investments in the Denver market in properties that I can stabilize and manage myself is I believe long-term in this market. But I also don’t want to overextend in this market. So if I have extra cash beyond what I’m expecting, I’m going to put that somewhere else and begin to diversify.

Mindy: Okay. Ooh, diversify. That’s a really good word. A couple of seconds ago, you said dollar-cost averaging. What does that mean for people who aren’t familiar with that term?

Scott: Sure, so dollar-cost averaging—most people when they go to invest are not like, oh, I’m going to invest—I have $100,000 sitting in the bank and I’m not sure what to do with it. I’m going to dump it into the stock market. Right? Instead, what most people do is they’re like, oh, I’m saving $500-$1000 a month. I’m going to put that into the stock market and invest it.

So, if you’re doing that, that’s called, you’re really dollar-cost averaging. You’re buying a bit of stock, small amounts, consistently over a period of time. And what that does for you is it ensures that you’re more likely to get the average return of whatever you’re investing in.

So you’re not going to invest all of your money at the top. You’re not going to invest all of your money at the bottom. You’re going to invest some when the price is high and some when the price is low and you can get close to the growth rate of whatever you’re investing is, over time.

Mindy: Sure, that makes sense.

Scott: And so I’m just trying to repeat that formula with real estate investing and what’s kind of great about it, especially if you’re a house hacker, is you can kind of leap frog. So like, I’ve been house hacking for a while which allowed me to put down very little amounts of money for my down payments and stock pile a lot of cash. I was able to put down a lot of cash on this last property. By the next property, I can house hack again and put down a very small amount of cash so that next year, I’ll have even more to put down on a bigger property that is not a house hack. Does that make sense?

Mindy: So what size property are you looking at? You bought a duplex, a duplex, a fourplex—are you going bigger?

Scott: So I think it’s probably still going to be a residential, which is a three to four, or in my case, a triplex or quadplex, but I’m going to buy in a nicer area in a place that generates more cash flow. When I say size, I’m referring to the amount of income I can generate relative to my investment or the quality of the property I can get relative to my investments. So it’s the difference between a $400,000 quadplex and an $800,000 quadplex, may not be very significant. Like the structure may be the same but the location and the income they generate as a result may be very different.

So I’m looking probably in that $400,000-$700,000 range for my next investment that I’m going to house hack. So a bigger house hack. And then I’ll probably look for a similar size investment to try to put down 25% maybe on my own or maybe with a partner in two years.

Mindy: Nice. Okay. Wow. This has been very informative, Scott. Thank you so much for taking the time out of your busy day. This is your job.

Scott: Yes, I’m very lucky to get to do this for a living.

Mindy: Yes. Okay, it is time for the new Famous Four. Are you ready, Scott?

Scott: I’m ready.

Mindy: What is your favorite finance book?

Scott: My favorite finance book. Hmm. My favorite finance book is The Millionaire Next Door.

Mindy: Such a good book.

Scott: One of the things—it was really disappointing because I believe the author died because he was killed by a drunk driver just a couple of years ago. And I was like, I always wanted to meet him because what he did is he did the data behind all of this. He went and interviewed millionaires, dozens of them, maybe hundreds of them. He conducted studies. He gives you the data behind exactly what America’s millionaires did back in—what was that? I think it was written in the ‘70s or ‘80s, or the ‘90s. But he went and found out what they did, who they were, how they lived, and what we kind of understand today. But he was the pioneer in that field.

And it’s just really fascinating to look at what these folks do. Two-thirds of them are business owners or self-employed. They earn high incomes. They live in expensive houses but they don’t live expensive lifestyles. They live in nice neighborhoods but not in new houses, right? He talked about how they pass wealth onto the next generation, what their outlook is, what the effects of all that stuff is. It’s just a fascinating, data-driven book into who the millionaires are. And the sequel, The Millionaire Mind is also a pretty good one.

Mindy: I have not read Millionaire Mind but The Millionaire Next Door is a must. If you don’t have a book to read right now, pick up a copy of The Millionaire Next Door. Do you remember what the #1 car is for a millionaires? The #1 vehicle that millionaires drive? A Ford F150 pickup truck.

Scott: Really? Nice.

Mindy: Or maybe it’s a Ford F250. No, probably not a new one. Eight years old, I think, was the average.

Scott: Oh, wow. Yeah.

Mindy: Speaking of cars, what was your biggest money mistake?

Scott: Well, I have two money mistakes that I want to talk about. One is, I get a little tunnel vision sometimes and I dismissed the idea of travel hacking and credit card hacking and all that kind of stuff. So I just recently dived into this world. It’s like, while you’re spending your normal amount of dollars, if you’re just the type of person like me who’s going to spend money on a credit card and then pay off the balance in full every month and be responsible and track your finances, you can sign up for these credit cards and you get to the $2000-$3000 spending limit in the first couple of months. You do it when you have an expense come up like your car insurance or whatever and you hit the spending limit, you get like 50,000 miles or points that you can use for travel miles.

And so, I just did this for my first ever credit card. I just got the 50,000 miles and I was like, why wasn’t I doing this before? It’s like $600 in free travel. I’ve got friends all over the country that are getting married over the next year. I need the travel points. I’m going to continue doing this in the future. So I don’t know why I dismissed that. I just thought, oh, I’m going to use one credit card and do that. But that was a mistake.

And the other one was the car. I should have probably—Mr. Money Mustache has a great article on cars where he talks about cars in terms of inventory. And it’s like, BiggerPockets is a business. We have books that we sell. We would not go out and print off 20 years of books and store them in a warehouse. That would be a ridiculous investment. We would have way too much inventory. You buy as much inventory as you need to sustain your operating needs for a reasonable amount of time and go from there.

Well, my Toyota Corolla is a good, stable, long-lasting car. It’s probably going to last 20 years. So I just bought 20 years of car inventory with my Corolla. And again, this article, I forget which one it is but it’s by Mr. Money Mustache so I’m crediting him with this concept. If you buy an older car, 10-15 years old, you’re still going to have 5-10 years of inventory in that car which is plenty.

So don’t buy as much inventory as I did in your vehicle. Buy something that meets your needs more realistically and is better—that will allow you to deploy that cash that you had invested in that in something that can produce some more investments. I could have invested the difference between the $17,000 I paid for my car and the $6000 I could have paid for a ten year older model.

Mindy: So I want to illustrate this in a slightly different way. I totally agree with that. The two cars that I have—well, I have three cars right now. Two of them, I bought brand new and they are the only two cars that I have purchased brand new. And this was before I had discovered this whole financial independence thing. But we had a friend who had a 1991 Acura Integra, just like a plain old, seats four people, hatchback whatever car. And he was getting rid of it because he wanted to buy a new car. We said, well how much do you want for it? He said, $2500. Great. Sold.

I know this guy. I know he takes meticulous care of his car. People are always complaining, oh, I don’t want to buy somebody else’s problem. I’m never going to get a used car. You’re not necessarily buying somebody else’s problems. If you know the person or if you can have it checked out by somebody, you can get a good quality vehicle for a whole lot less money. $2500. I drove it for 100,000 miles and then sold it for $1500 when I was done.

Scott: Yeah, I think it comes down to self-education there. You did your homework. You knew the guy. You knew the car.

Mindy: Yeah, and it was a great little car. I mean, it had some problems, but Acura makes a good car. Okay. Sorry.

Scott: Yeah, but if you’re willing to self-educate, you can go through these things with much less risk. If you don’t know anything about cars and you’re just going to buy something off Craigslist without ever meeting the guy, you put yourself at risk unnecessarily.

Mindy: Yes.

Scott: If you’re able to do your homework and inspect it and have this insight, you could do really well and that’s the way that I would go in the future. In 20 years, when I buy my next car, I’m going to do exactly what you did.

Mindy: In 20 years. In 20 years, all the cars will drive themselves.

Scott: That’s probably true also.

Mindy: Okay, what is your best piece of advice for people who are just starting out?

Scott: Get to a 50% savings rate. Whatever you’ve got to do, spend a year or two, however long you need to, to get to a 50% savings rate. If you get to a 50% savings rate, everything starts to fall into place really quickly. You’re going to accumulate, by definition, 50% of your after-tax take home pay. So if you can achieve that, you’re going to start to see, again, advantages piling up. Your credit score is going to improve if you’re paying any attention at all to your debts. You’re going to have the flexibility to leave your job for a year or more. You’re going to start a business, travel the world, do whatever you want. Just the ties that are holding you in place in life will begin to melt away.

Mindy: That’s good advice. What is your favorite joke to tell at parties?

Scott: All right, I can’t remember. I’ve told a lot of jokes.

Mindy: This is your question.

Scott: I’ll try to come up with one that I haven’t told already. Here, I’m wearing one right now—this is really a joke.

Mindy: We’ll move the microphone. The microphone’s in the way.

Scott: So my shirt has a picture of a rock saying to a ruler, “You rule!” and the ruler is saying to the rock, “You rock!”. So I like that one. I like funny t-shirts. Now, what happened when the blue ship collided with the red ship?

Mindy: I don’t know.

Scott: Both of the crews were marooned.

Mindy: Ugh. Okay, so we sat around talking about when Scott and I were getting the concept for this podcast and we wanted to do a Famous Four. This is the new Famous Four and this was Scott’s question—what was your favorite joke to tell at parties? Scott is the king of ‘bad dad jokes’. I think—what’s the opposite of oxymorons? Double statement.

Scott: Yep. I’m the king of ‘good dad jokes’.

Mindy: No, there’s no such thing as a good dad joke. You’re the king of ‘bad dad jokes’.

Scott: A pirate walks into a bar. And he’s got a roll of paper towels on his head and he says to the bartender, “I’ve got a Bounty on me head”.

Mindy: Ugh, I quit you. I’m going to turn this off. Okay, Scott, where can people find out more about you?

Scott: I’m on BiggerPockets. Look me up on BiggerPockets. I’m pretty responsive if you message me or PM me there. So I like to talk to people. If you’re in Denver, I’ll probably ask you to meet me for coffee one morning before work, because I like to meet as many people as possible and just make sure that I’m absorbing perspectives, that I can be helpful to as many people as possible and I adjust my approach accordingly when I get new information and perspectives.

Mindy: Awesome. Well Scott, thank you so much for taking time out of your busy day—you don’t do anything, right? To talk to us and share with us your views on life and finances.

Okay, Scott, I’m going to get out of here. Thank you very much and I will talk to you soon.

Scott: Awesome, sounds good. Thanks for having me on as your guest.

Mindy: So, huge thanks to our guest, Scott Trench, the Director of Operations and author of Set for Life: Dominate Life, Money, and the American Dream, available at BiggerPockets.com and wherever good books are sold. For the BiggerPockets Money Show, Episode 2, this is Mindy Jensen. Over and out.