Afford Anything - Ask Paula: Buy a Home, Buy Investments, or Pay Off Debt? How Do I Decide?

Episode Date: August 13, 2020

#270: Briana and her husband want to buy a home, but they don’t have enough saved for a downpayment. They also have student loan debt and a car loan. Which should they prioritize? Javier is sick of being in debt. What can he do to put himself in a better situation? Tracie wants to buy her first rental property, but she has student loans and a car loan to pay off. If she receives $20,000 from a cash-out refi, how should she use this money? Vanitha wants to start a non-profit organization in memory of her uncle. She wants to know: what does this process look like? Margie went under contract on a primary residence listed as a six-bedroom property. She found out that, legally, it’s a four-bedroom home. Should she re-negotiate the price, or ask for credits at closing? I answer these questions in today’s episode. Enjoy! For more information, visit the show notes at https://affordanything.com/episode270 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make requires a trade-off saying yes to one thing implicitly means saying no to something else. And that doesn't just apply to your money. That applies to any limited resource that you need to manage, such as your time, your energy, and your attention. The concept of afford anything is the concept of opportunity cost. And that opens up two questions.

Number one, what matters most to you? And number two, how do you align your daily decisions to reflect that? Answering these two questions is a lifetime practice, and that is what this podcast is here to explore. My name is Paula Pant. I am the host of the Afford Anything podcast, and today I'm answering questions from you, the community. Here's what we're going to tackle. Brianna and her husband want to buy a home, but they don't yet have enough saved for a down payment. They also have student loan debt and a car loan, so what should they prioritize?

Javier is sick of being in debt. What can he do to put himself in a better situation? Tracy wants to buy her first rental property, but she has student loans and a car loan to pay off. If she gets $20,000 from a cash out refinance against her primary residence, how should she use this money? So these first three questions are all going to cover how do you prioritize paying off debt with making investments? After that, we're going to answer a question from Vanitha, who wants to start a nonprofit organization in memory of her uncle. How should she begin? Finally, we'll hear from Margie, who.

went under contract on a primary residence that's listed as a six bedroom, but then she found out legally it's a four bedroom. So what should she do? Should she renegotiate the price? Should she ask for credits? What happens when something comes up during due diligence that you don't expect? What next? We're going to answer all of these questions in today's episode, and we have the timestamps for every question listed on the show notes page. So if you want a summary of the questions and the timestamps for when that question begins, head to the show notes page. And at afford anything.com slash episode 270. That's slash episode 270. So our first question comes from Brianna. Hi, Paula. I'm a newbie to the afford anything community. You want to believe it, but at age

27, I just learned the terms financial independence and passive income for the first time this January. Because of this, I feel a little far behind my peers. My husband and I are wanting to purchase a home, but do not have the down payment quite yet and aren't sure. if that is the right next move for us, although that is what we really want to do. We have a combined amount of $10,000 in student loan debt, a $2,000 car loan payment, but no credit card debt. He is full-time making around $24,000 while I am making around $58,000 a year. We currently have roughly $10,000 in savings, and I am currently match contributing the 5% my company gives towards a 401k and 3% to a Roth account. We are looking for a house under $130,000.

I would really like to get into the real estate space and eventually want to begin buying and flipping homes. My husband isn't completely sold on the whole idea of buying a rental home first and using the excess funds to go towards a down payment for our own home, although I feel like that is maybe what you would tell us to do. Ultimately, what do you suggest? Do we hustle and save up the down payment for our first home? Focus first on paying off all our loans or invest in a rental property before. for purchasing our own home. Thank you so much, Paula. You were the best. Well, first of all, thank you for asking that question. And welcome to the world of personal finance and financial independence. Welcome to the fire community and the fire movement. And I have to say,

if you're starting at 27, you are not behind. There are people who find this world. They find financial independence when they're 37 or 47 or 57 and they're looking into traditional retirement and then they start researching retirement and then they find the fire community. So the fact that you're starting in your 20s, you are getting a super early start. Congrats on that because I know that there are many, many people who are listening to this episode right now who are thinking, oh, darn, if only I had found this when I was in my 20s or 30s. So you're in the position that a lot of people want to be in. Now let's chat about your numbers. So you and your husband make a combined pre-tax income of $82,000 and your emergency fund, I noticed, represents about three-months.

of your pre-tax income. So after you adjust for the fact that you pay taxes, and after you adjust for the fact that you clearly don't spend every penny that you make, you have a good savings rate, I'm going to assume that that emergency fund that you have probably represents somewhere around five months or six months of your normal spending. If that's the case, congratulations on building an emergency fund that is where it should be,

meaning it represents around six months of expenses. I love the fact that you are contributing up to the employer match and that you're also putting in 3% to a Roth. That's excellent. So with all of that established, let's talk about your question. And first, let's tackle whether you should buy a primary residence as your first home or buy a rental property as your first home. Now, I don't know the price to rent ratios in your area. I don't know how good of a rental property a home that you might want to buy would be. but if your first home is a good candidate for being a rental property,

then you could combine those two suggestions. You could say for your first home, buy that first home as a primary residence, live there for at least one year, and then move out and turn it into a rental property. The benefit of doing that is that getting a primary residence mortgage is the most friendly type of mortgage that you can get. Not only is it the easiest to qualify for, but it also, compared to other lending products that are out there, will have the lowest interest rate and the lowest down payment requirements.

So in terms of if you could choose any mortgage, any type of mortgage that you want, particularly a mortgage from an institutional lender, like a bank or a credit union, a primary residence mortgage is going to give you the most favorable terms. And what's great about being able to buy something as a primary residence and then move out and turn it into a rental is that you only need to live there for one year and you get the remaining 29 years of the benefit of that primary residence mortgage locked in. So 30 years from now, you're still enjoying the mortgage terms of a primary residence, despite the fact that for the overwhelming majority of time that you'll hold that home,

it will be used as a rental. Now, of course, there are variations on this that you could choose. I don't know if there are good duplexes or triplexes or fourplexes in your area. That's also another variation on what I've just suggested. and the benefit of buying a multi-unit property, of course, is that you can start earning income right away. Rather than waiting for one year before you earn rental income, you can move into half of that duplex and start collecting a rent payment in month one or month two of owning that place. The drawback, of course, is deal flow. There's a smaller volume of those types of properties,

so you, depending on where you live, may or may not be able to find one. Single family homes, by contrast are much more plentiful. And so the likelihood of finding one, and in particular the likelihood of finding a great deal on one, maybe as a foreclosure or as a short sale, is in many markets higher simply because you have a bigger selection to pick from. Either of those two options, I think, would be an approach that combines what both of you want. You would have a primary residence.

You would enjoy the benefits of having a home that has a primary residence mortgage. and when you convert that home into a rental property, you can do that in one of two ways. You can either buy a second home for yourself and turn that first home into a rental property, or you can go back to renting after a year and simultaneously be tenants and landlords at the same time. Now, what's cool about the option of staying in that home

until you've saved enough for a down payment on a second home and then buying that second home as your primary residence, is that you can repeat the same thing with that second home. You can live in that second home for a year and then move out and then turn that second home into a rental. And you can repeat this up to four times. So you can have four primary residence mortgages simultaneously. And you mentioned that you eventually want the experience of flipping homes.

So if you were to buy fixer uppers, then that year that you're living there could give you the experience of doing what's called a live-in flip, where you live in it for a year, improve it while you're there, and then rent it out at a higher rate than what it could have rented for at the time in which you bought it. So now that we've talked about that, the remaining question is, zooming even further out, what do you do with the savings that you're amassing from this point forward? Do you want to focus on a down payment, regardless of whether it's a down payment for a primary residence or a rental property or a hybrid between the two? Do you want to focus on saving for a down payment?

Or do you want to focus on paying off your debt? And there are three factors that I'd like you to consider. One is cash flow. So how much is that debt interfering with your monthly cash flow? How big of a chunk of your budget is it taking? That's one factor to consider. A second factor to consider is interest rate. What is the interest rate on that debt payoff?

And how does that compare to the types of returns that you might be getting if you were to invest in rental properties or even if you were to invest in a broad market index fund? That's the second factor to consider. And then the third factor to consider is your enthusiasm, because people are often succeed at whatever it is that they're most excited about. So if you're really charged about paying off your debt, and I know people who are, I know people who have a sense of purpose that is associated with the idea of being debt-free. And if that's the thing that motivates you, if that's what excites you, then choose that because you're probably going to be motivated to

save more. You're probably going to be motivated to reach that goal faster. And ultimately, that motivation will make it the better decision because of the fact that A, it's more likely to happen, and B, it's more likely to happen faster, thus freeing you up to look for other goals or chase other goals. Similarly, if buying a rental property or buying a primary residence is the thing that you're most enthusiastic about, then focus on that. So those three factors, cash flow, interest rate, and enthusiasm are the three factors that I would want you to weigh. And when we talk about the actual numbers here, now a 20% down payment on $130,000 home is $26,000. So if you wanted to save the full 20%, it could take a while. But you also, if you're buying this as a primary residence mortgage, have the option of making a 10% down payment or even if you take out an FHA loan as low as a 3.5% down payment.

So, of course, that 10% down payment, assuming the home costs 130K means that you'd only have to save $13,000. And stepping down even less than that, that 3.5% down payment, you could, in theory, with an FHA loan, be in a home with as little as less than $5,000 down. Of course, you would want to save a little bit more so that you have cash reserves. You can handle initial repairs and maintenance. But you can get into that home pretty quickly if you were to take out an FHA loan. And so as I tell you this, how does that affect what you might want to do? how does that affect your enthusiasm? As you're thinking through this, and these are not rhetorical questions.

Cash flow, interest rate, and enthusiasm are three factors that I want you to really spend some time thinking about. Here's an exercise that can help you systematically think about these. And I learned this exercise from Joe Sal Sihae, who is a former financial advisor who joins me every other episode in which we answer questions. He talks about timelining your goals. And so that's exactly what I would like you to do. I'd like you to take out three sheets of paper, blank sheets of paper, right?

On the first paper, draw out scenario A. In scenario A, you focus everything on debt payoff. If you were to do that, draw a big line in the center of this piece of paper. If you were to focus all of your money on debt payoff, how long would it take? In what month and what year would all of your debt be paid off at your current savings rate? So draw that out on a line, on a timeline. And then after that, figure out how long it would take you to save for the down payment on that first home. Remember, that could be depending on what type of mortgage you get 3.5% or 10% or 20%.

So decide what level of down payment you want to make. And then how long will it take you? If you were to focus on debt payoff first, how long would it take you to save for the down payment for that first home that you buy? That's scenario A. So draw that out on a sheet of paper. Then put that sheet of paper to the side, take out a second piece of paper, and draw out scenario be, and in this scenario, you focus on the down payment. So if you were to only make the minimum payments on your debt and put everything else, focus the rest of your savings on building

that down payment, how long would it take until you were able to buy that first home? What month would that be? What year would that be? And if you were to do that, let's assume that you buy that first home and after that, you switch your focus, you make the minimum monthly mortgage payments, and you put every penny into paying off your debt. If you were to do that, how long would it be until all of that debt is paid off? And then, if you were to do that, what month and what year would that debt be paid off? If you were to then switch your focus again, and once that debt is paid off, start saving for that second home, draw this out on the timeline, draw the timeline out further. how long would it take until you were to buy that second home? So that's scenario B. And then

scenario C is similar to scenario B in that you're focusing on the down payment for your first property as the first goal. But then after you buy that first property, you continue making only the minimum payments on your debt and you save up as much as you can to buy that second property. And then once you buy that second property, then you switch focus and you pay off your debt. So if you were to do that, what would be those three points in time? We're looking for like three separate points in time, right? The point in time in which you buy the first home, the point in time in which you buy the second home, and the point in time in which your debt is paid off. And all of that is going to progress along this line. It's going to progress linearly. And the month and year in which all of those things

take place will be affected by what you do before and afterwards. So draw out those three scenarios, A, B, and C. And once you look at all three of those visually, once you see the timelines and the dates, I think you'll have a pretty clear idea of which one appeals to you the most. So as you're weighing, what is essentially a question about priorities, what's a bigger priority, buying a home, buying a second home, paying off your debt, as you're weighing those priorities, frame it into the constraints of time, see how each of those situations would affect one another. What is the trade-off of focusing on one at the expense of the other, and how does that affect the timeline, and once you have that, I think you'll know. You'll know what's the best fit for you.

You'll know what's right for you. So thank you for asking that question. And best of luck with whichever option you choose. We'll come back to this episode after this word from our sponsors. The holidays are right around the corner, and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need serveware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays. you can get up to 70% off during Wayfair's Black Friday sale. Wayfair has Can't Miss Black Friday deals all month long. I use Wayfair to get lots of storage type of items for my home,

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your commercial payments of fifth-third better. Our next question comes from Javier. Hi, Paola. Javier here. I'm super glad to know we are much better from COVID-19. Seriously, I was super worried about your condition, looking at your treat fits every 15 minutes to see any date. Would you know you are doing good?

My question is, because I'm sick and tired of pain, sick and tired. I don't know. I don't want to be in debt anymore. And so I want to know what are usually questions. I'm 35 years old. I'm currently under $63,000, $4,000 in debt. That is $28,000 in auto loan, $21,000 in credit card loans, and $4,000 in personal loans. I have $11,000 in cash for emergency in savings and checking accounts.

Cherry,000 in my Robin Hood portfolio, that's its individual. stocks and I have 46,000 between my ROT IRA and my 401 key accounts. I have a balance of $126,000 in my mortgage in a condo close to Boston, Massachusetts area. I've been living in the US since April 13. I'm a Mexican working with a work pizza. I'm terrified that any Trump policy or any bad economic situation, like the current one can affect my work status. I can be forced to go back to my origin country. I've been under strict policy for two years now. My debt was more than $100,000 when I still following the programs

and afford anything podcast in 2018. Thank you so much for all what you do. Javier, I want to start by saying two things. first, thank you so much for being so concerned when I had COVID-19, for constantly checking social media to see if I was okay. I'm truly moved by that. I'm very, very touched by that. And I don't even quite know how to put it into words. It's one thing to listen to a podcast, and it's another thing to genuinely care about the life and health of the podcaster. And when I had COVID-19 and I saw how many people in this community were genuinely really worried,

and hoped that I'd be okay. It was very, I mean, I don't know how to put it into words. It was deeply moving. So thank you so much. And second, huge congratulations to you. Actually, that should have been first. Huge congratulations to you for everything that you have achieved so far. As you mentioned, you used to be $100,000 in debt.

And you have paid off a massive, massive chunk of that. So as you said, your voicemail you. I hear that you're frustrated by the fact that there's still so much remaining. I hear that you want to get rid of the debt that you still have. But pause for a moment and congratulate yourself and let me congratulate you on how much progress you have already made, how much you've already done. You mentioned that you got serious about your debt in 2018. Two years, two and a half years of focusing on your debt, that is a long time. And it requires incredible persistence, dedication, like you've come so far already. So big congratulations to you on that. Now,

let's talk about how to get rid of the remainder of your debt. First, I noticed that you said you had a personal loan for about $4,000, and you also have $3,000 in a Robin Hood account. And I'm going to assume that your account with them is a taxable brokerage account. It is not a retirement account. You said the money there is in individual stocks. So what if you were to, some, you're going to out of those stocks, take the $3,000 that's in the Robin Hood account, and apply it to that personal loan. After making the minimum payments on all of your other debts, the next $1,000 that you save could wipe out that loan entirely. As you know, part of the stress of carrying multiple debts is that there are multiple debts, and so every month you're paying separate

bills, and you're looking at all of these different debts, and it kind of feels like playing a game of whack-a-mole. So if you can completely get rid of... of one of your debts. Case closed, distant memory in the past, I think that might free up some mental and emotional space that can energize you to then tackle the rest of what you're holding. So that would be my first recommendation. Sell out of the $3,000 in Robin Hood and use that $3,000 plus an extra $1,000 to pay off that personal loan. That's the first thing I would do. The second thing, I noticed that you have a car loan for $21,000. Would it be possible for you to sell that car and just drive a piece of junk for a little while, drive a $4,000 car.

Because even if you had to borrow the money for that $4,000 replacement vehicle, you'd still be able to wipe out $17,000 worth of debt in one single decision and in one single transaction. And once those two debts are out of the picture, once the $4,000 personal loan is gone, and once the $21,000 car loan is gone and replaced with a much, much smaller car loan, if necessary, you will have made pretty significant progress on your total debt balance. The third thing that I would recommend is you're clearly doing a lot of things right already. The fact that you've paid off so much debt in the last two and a half years means that

you already have good habits. You already are saving. You already are putting a lot of your money towards debt payoff. And because this can be such a marathon and getting to that midpoint where you're at, can feel so frustrating because you've done all this work for years, and yet you're still only at the midpoint. I'm using only in air quotes because it's a huge accomplishment, but I definitely understand how it can still feel like overwhelming. There's so much left to go. So my third recommendation, if I were you, I would find communities, including online communities,

of other people who are paying off debt and spend a lot of time getting encouragement and support from those people because I think that, you know, you're running a marathon and you're at mile 13 of this marathon. And it can be exhausting to have already run so many miles and yet still see how many more miles there are to go. And that's why support, encouragement, people cheering for you. That's why it's critical. And fortunately, you can get that for free from anywhere with a computer or with a phone. So those are the three things that I would recommend. The personal loan, the car loan, and psychological and emotional support from other people who are in the same boat as you. I think those three things will do a lot to spur you on and help you stay in the game. Because at this point,

you don't need tactics. You already are paying off your debt. You already are living below your means. You're already, the financial part, you're handling it. So if you want to think in terms of what are the major risks that you're facing right now in terms of achieving this goal? And what I love about the goal is that it's so clear. It's specific and clear. You want to pay off this debt. And one of the biggest risks to this goal right now is the chance that you might get winded at mile 13 and run out of breath at mile 13. So having a community, I don't see that as a nice to have. I see that almost as a must have because the math of money management is not the hard part. the psychology of money management is the tough part. So put yourself around people who encourage

the type of psychology, the type of motivation, the type of thinking that you need to have in order to complete the marathon. Thank you so much for asking that question, Javier. And please call back when you've paid off your debt or call back throughout the marathon. Why call at the end of the marathon? Call throughout. Call when you've paid off 20,000 additional dollars. And let's celebrate that. Let's celebrate those milestones along the way rather than just waiting for the finish line, because that's going to be a big part of keeping your head in the game as well. So call back and let's celebrate when you've got an additional 20K paid off. All right, I'll talk to you then.

Thanks, Javier. Our next question comes from Tracy. Hi, Paula. This is Tracy from Chicago. I have a goal in the next five years to make approximately $5,000 a month from rental properties. I currently don't own any rental properties, and my current income is about $120,000. Here are my current stats. I have a positive net worth of $120,000.

12% of my pre-tax income goes to my pension plan and 403B plan, and they are split evenly. My employer supports my pension plan, but does not match or do any contributions to the 403B. I have other 403Bs from previous jobs that are valued collectively around $50,000 to $60,000, depending on the market. I have three major remaining debts. One is my student loan debt, which is approximately $9,000 with a monthly payment of $383 and a collective interest rate around 5.5%. I have a car loan with a remaining loan of $8,000 and a monthly payment of about $5.74 in an interest rate of $1.9. My mortgage balance is currently $77,000 and my monthly PITI is about $800. I currently have a fairly small emergency fund of $3,000 due to me being focused on paying down my debts. So here's my question. I want to take advantage of these great mortgage interest rates and do a cash out refi. I'm planning to take out $20,000. Knowing my long-term goal, what is the best use of these funds? My initial plan was to pay off my current debt for student loans and my car and then use the remaining monies to cede my emergency fund and my down payment

for my first rental property. Is there a more optimal solution or plan that will allow me to get to goal faster or do you see any other potential opportunities for me that I don't yet see? Thank you so much for answering my question and I appreciate all of your work, Paula. Tracy, first of all, I love your goal. $5,000 per month from rental properties within five years. I love that it's specific. It's got an amount. It's got a time.

I absolutely love the goal. And congratulations on everything you've built. You have a net worth of 120,000. You're putting away 12% of your pre-tax income into retirement account. You have good equity in your home. So you're set up really well. You're making the right choices. So let's talk about your specific question. Your proposal is to take out a $20,000 cash out refi and use it to pay off your student loans, pay off your car loan. And after those two loans are paid off, that's going to take most of the cash out refi. There will be a little bit left over that you can

put towards an emergency fund or a down payment. But most of that cash out refi that you're talking about would be gobbled up by paying off those two loans. So is this? Is this a little bit of something that you should pursue? Short answer? No, I would not recommend it. I would be in favor of using the cash-out refi to buy a rental property, but I would not be in favor of using the cash-out refi to pay off your student loan and your car loan. And here's why. So now we get to the long answer. That's the short answer, now we get to the long answer. Long answer is this is the way that I frame or think about this situation. When we talk about debt, and specifically when we talk about the risks associated with debt, there are three factors that I'm weighing.

One is the monthly cash flow, the way that that debt impacts your monthly budget. The second is the interest rate. And then the third is the risk of ruin. And that basically is the question, what happens if you don't pay? Let's say some worst case scenario unfolds. And for whatever reason, you're unable to pay that debt. What would happen? How is that loan secured?

So let's walk through the three debts that you have. You have student loans, you have car loans, and you have a mortgage, right? So with the car loan, the impact on the cash flow is high. You've got a $574 monthly payment on that car loan. So if you were to pay that off, it would make a massive difference to your monthly budget because $574 is a lot of money. So the cash flow impact is high, but the interest rate impact is low since that car loan has less than a 2% interest rate. And if you were to, for any reason, get into a worst-case scenario and you couldn't pay off that car loan, the worst-case scenario is that you lose the car. So when I lay it out along those three factors, cash flow impact high, interest rate impact low, risk of ruin, I'd say moderate. It would suck to lose your car, but it wouldn't be the end of the world.

Student loans. The cash flow impact of paying that off would be relatively mid-to-low-ish. the student loan payment is $383 a month. And that's not nothing, but of the three debts that you have, that is the smallest monthly payment. So the impact of paying off your student loans on cash flow is low. The impact of paying off student loans based on their interest rate is moderate, since they come at a 5.5% interest rate. So not an outrageous interest rate. So there's a moderate impact. And the risk of ruin. So the interesting thing about student loans is that they are an unsecure. debt. If the worst case were to unfold and you couldn't pay off your student loans, nobody can

take your diploma away. Nobody can repossess your diploma, and nor can they repossess the knowledge, the skills, the confidence that you gained from your student experience, that you gained from getting that education. So the risk of ruin, the risk of some Armageddon worst case scenario unfolding that would prohibit you from being able to pay off those student loans, the consequence of that with regard to student loans is not as bad as it could be with other secured forms of debt. And I don't mean to downplay the severity of the consequences of not paying off your student loans. It would impact your credit, obviously. It would potentially get you sued depending on who your lenders are.

I mean, it's absolute hell. but not as much of hell as losing some other items. And that leads us to your mortgage. Because if the worst were to come to pass, and I know you're responsible, and I know that you would always keep paying, but just so we have our bases covered for the worst case scenario, losing your house is, I mean, that's like the last thing you want to lose. You know, I'd lose my car before I lost my house.

So when it comes to the idea of taking out a cash out refi and using it to pay off a car loan and a student loan, the way that I think about it is that you're trading an unsecured debt in the student loan example or a mildly secured debt in the car example, you're trading those unsecured or mildly moderately secured debts for a highly secured debt. and in doing so, you're increasing the risk that comes with trading an unsecured loan for a secured one. And that's, in fairness, that's the reason that you get a break on the interest rate. That's the reason that the interest rate on the mortgage is going to be so much lower than the interest rate on the student loan. I mean, that's not the only reason. There are many factors that go into what interest rates are. But part of what goes into that is the fact that mortgage interest rates can be lower because it's a secured debt. The interest rate reflects the inherent risk.

And here's the other thing. So if you're talking about paying off both the car loan and the student loan, now I noticed the balances on those two are pretty close to one another. It's $9,000 on one, $8,000 on the other. The $9,000 loan is at a 5.5% interest rate. The $8,000 loan is at just slightly less than 2% interest rate, 1.9%, which means that on average, the combined interest rate between those two loans is going to be ballpark kind of similar to the mortgage interest rate. So given that even if you did get a break on interest rate, it would be

not a huge amount, the interest rate on that mortgage is likely going to be pretty close to the average interest rate between those two loans combined. And given that set of circumstances, I especially don't see any advantage to staking your house on it. With that said, let's turn the conversation to your goal of building $5,000 in rental property income in the next five years, I do see advantage to using a cash out refi to help seed that, because in that case, you have a house loan securing another house. So if I were in your shoes, these are the next steps that I would take. First, I would decide what type of rental properties you want to buy, single family versus multifamily, class A versus class C, local versus out of state, decide what type of property

that you want to buy, find out ballpark the range of what your optimal rental property, at least that first rental property would cost. So have some type of price point in mind. And then talk to a lender about your total debt to income ratio and what you could qualify for. So that's the path that I would be pursuing. How can you use the equity in your primary residence to seed the purchase of your first investment property. That will get you closer to your five-year goal. And meanwhile, separately, you can work on paying off those two debts, the student loan and the car loan, from your ordinary income.

So thank you for asking that question, Tracy. And best of luck with everything that you're doing, with the debt payoff, with buying investment properties. You're managing your money really, really well. So keep it up. And congratulations on everything that you've built and everything that you will continue to build. We'll return to the show in just a moment.

Our next question comes from Vanita. Hi, Paula. My name is Vanita. I had a quick question for you. I wanted to start a non-profit organization in memory of my uncles and wanted to know how to get started with it. When I looked online, there were so many things and so much of information, but it was a lot confusing. I'm not sure how to get started with it.

So any advice on this would be definitely helpful. Thank you. Vanita, thank you for asking that question. And what an awesome goal. I love that you want to start a nonprofit. I love that you want to do something in memory of your uncles. So where should you begin? The first thing I would do is take a step back, zoom out, ask yourself, do you want philanthropic activity or charitable activity in memory of your? your uncle, or do you want specifically to start your own nonprofit? Because there's the goal, and then there's the tactic. So if the goal is to do charitable work in memory of your uncles, then that opens up a range of possibilities in terms of different types of tactics that could achieve that goal. Starting your own nonprofit is one of many possible tactics. So the first question that I would ask back to you is what exactly is the goal, is the goal to actually start a nonprofit

or is the goal to do charitable work in memory of your uncles? Because if your answer is the latter, then that allows us to explore a much bigger range. So for example, just to give some illustrative examples of other ways that you could launch a project or do some type of charitable activity in memory of your uncles, some of those tactics might include. You could create a scholarship with recurring funds and then have an endowment account or an investment. account that generates those funds so that rather than drawing down the principle, the interest and gains that are accrued from that investment account fund an annual scholarship. So that's one possible option.

Another would be something similar to what we, the Afford Anything community, did in 2018, where we partnered with an existing nonprofit, we partnered with Charity Water, and said, hey, we as the Afford Anything community want to solely sponsor and build a work. water project, such as a well, in an area that really needs it. And so over the span of that year, we raised about $20,000, $21,000, and that ended up actually being enough money that we, the Afford Anything community, could sponsor two wells or water projects in Sierra Leone. So right now that money is being deployed to Sierra Leone. And the people who have donated are getting email updates from Charity Water about the progress of the construction of those wells. But that's

another example of how a very specific project, you know, one particular GPS identifiable, extremely specific source of clean drinking water is being built in Sierra Leone, and that project that actually had two of those are entirely funded by afford anything. And so you could do something like that. It doesn't specifically have to be charity water, but something like that in honor of your uncles where you partner with an existing nonprofit and say, hey, we want to solely sponsor this particular project. So maybe, for example, you want to sponsor the construction of a home through Habitat for Humanity. Maybe you want to sponsor the costs of keeping a specific number of animals in a shelter. So maybe you want to sponsor five dogs at the Sarasota Humane Society.

Maybe you want to sponsor the construction of and or the ongoing operating costs of a new room that is being added onto an existing building, that is being used either as office space or as operational space for a particular nonprofit in your community that you really like and support. So there are all kinds of projects that you can do that could be named for your uncles or done in memory of your uncles

that would be done in collaboration with an existing nonprofit, such that your stamp, your specific, tangible, particular contribution would be identifiable, it would be well known, and it would be a lasting legacy of your uncle's memory. Another example, so this is something that my parents have done, and I've actually never talked about this on this podcast before, but many years ago, my parents formed a foundation called the Palladin Bindupant Orphan Foundation, and they formed it initially with an endowment

of $150,000, and the goal was to keep that principle intact and then use the interest and gains from that investment to sponsor the cost of specific children from one particular specific orphanage in Kathmandu attending boarding school. So the idea was essentially that, number one, knowing what kind of results we were getting would be very clear. We would hand-select three children. We started with three initially. We're supporting five now. But we would select three children, we would choose them when they were about five years old because that typically tends to be the age at which kids no longer have a high likelihood of getting adopted. We would specifically only choose children who are staying at this very specific orphanage in Kathmandu called Balmundir,

because that was the organization that we had partnered with. And we were specifically only going to choose children whose both parents had died. Because in Kathmandu, there are a lot of children in orphanages because one parent is dead and the other parent can't take care of that child by themselves. And so they send the child to an orphanage and then come back and visit for the holidays. And so we thought if we're going to be sending these kids to boarding school, we want to choose children who don't have any parents, both their parents passed away prior to the age of five. They ended up in this orphanage. Those were the ones that we wanted to focus on, given that we couldn't support all of them

and we had to choose only three or only five. So what we did was we went to Kathmandu, we met with the people in Balmundir, we chose initially three children, and starting at the age of five, we paid the cost of sending them to a particular boarding school. That makes the question of how well is this money being used extremely clear, because the metric is very simply, are these three specific kids attending that specific boarding school, yes or no. So we know that by paying that tuition at boarding school and making sure that that's where those kids go, they have a place to live, they have a good education, they have a good place to live, they have better opportunities and a better education than what

they could get if they were still at Balmandir, if they were still living at the orphanage. And the reason that I share that story is because that's an example of partnering with a particular organization to do a project that's in a very limited. capacity. Like essentially our project is those three kids and making sure that those three kids get the best education that they can. And that was much more achievable, much more doable than setting a goal of, say, starting a brand new shelter for women and children. That would have been a massive undertaking. And I mean, hats off to the people who do that. But this is not our full-time job. and something as ambitious as starting a new shelter, starting a new orphanage,

that would require the full-time attention of not just ourselves, but many, many, many people. So we knew that that wasn't reasonable, given the amount of time and energy and budget that we had for it. So that's why I would invite you to ask yourself, what level of time can you put into this? What amount of energy, attention can you put into this? What kind of budget do you have? do you want to fundraise or not? And based on those questions, come up with a very specific, very clear vision. So your question was, where should I start? Start with that. Get very clear and very specific on your vision. Do you want to support one specific cause or do you want to support

many causes? Do you want to do your work in one particular geographic area or do you want to work in many locations? Who else? What other groups are doing similar work on that cause and or in that location. What are they doing? How much time can you dedicate to this? And how are you going to measure the results of what you're doing? Because there are a lot of charity assessment groups that are out there that, you know, make assessments on how effective a charity is within its operations, but the metrics that they choose matter. So you have charity assessment groups like Charity Navigator and GuideStar, and they rate charities based on two factors. One is transparency, and the other is a budget breakdown of the amount that they spend on operations or on their mission versus the amount that they spend on

administration. And then on the surface, that sounds fine. But notice what I just said, right? By definition, they are evaluating charities based on a measurement of spending and not based on a measurement of results achieved. And that's why there are alternative charity assessment groups like Holden Karnovsky and Ellie Hassanfeld, who are former hedge fund managers, they founded give well, which specifically measures the very limited metric of lives saved per dollar. And of course, that metric has natural limitations, right? Because by definition, it does not highly regard nonprofits that have nebulous or hard to quantify goals, such as raising awareness or creating social change. By definition, it wouldn't highly regard nonprofits that are

committed to art or the arts. So certainly the metric of lives saved per dollar has very natural inherent limitations, which Givewell will readily admit to, but that said, you've got to choose your metric, and you've got to think carefully about what metric you're going to use, because fundamentally, when you are selecting that metric, you're asking the question, what is the goal? So with the assessment model of Charity Navigator and GuideStar, if the goal is run a nonprofit that has a lot of transparency and that commits a highly efficient proportion of its overall budget to its field operations, well, that's the metric by which those charities are being evaluated. And if the goal, alternatively, is live save per dollar, well, that's a very

different metric. It's going to produce a list of top charities that have very different results. And the reason that I'm elaborating on how these different charity assessment groups have different goals, different metrics, is because if you want to start your own nonprofit or if you want to start a project or a philanthropic project or a charitable contribution, the initial question is, what exactly are we trying to do here? And the more specific you can be about that, the better. With the Prilatin bin Dupon the Orphan Foundation, the goal very specifically is send these particular specific individual kids to this one particular boarding school. And notice all of the things that we're not doing. We're not specifically looking.

after their physical or mental health. Maybe their school will do it. I hope it does. But that's not part of what we do. We're not setting outcome metrics based on the careers that these children will ultimately have or the level of higher education that these children will ultimately have. We have no metrics based around that. We have one very, very simple question that is extremely easy to answer.

Are they in boarding school yes or no? And because the mission is so simple and so clear, it makes executing that mission incredibly simple. You know, I don't want to say easy, but simple, straightforward. And if this is something that you're going to be doing on the side, if this is not your full-time job, then the mission needs to be straightforward and simple. That doesn't mean it has to be easy, but it needs to be straightforward and simple. So hopefully that helped. Hopefully that gave you some questions that you can use as you are deciding the specifics of your vision, your goals, the metrics you'll use, or the metric singular that you will use, and as you form a clear idea of exactly what it is you want to create. And once that

idea is clear, then all of the information that you find online about creating a nonprofit will no longer seem overwhelming. If creating a nonprofit from scratch is the particular tactic that you want to take. Because when your vision is that clear, then you'll know which information applies to you and which information is just noise. But if you don't have that clear vision, then all information could potentially be applicable, and that's what makes it so overwhelming. You don't have the clarity of vision to be able to filter out the online information that doesn't pertain to you. So thank you for asking that question, and thank you for wanting to do this. I love that question. I love that this is a goal that you have, that this is something that you're pursuing, you're

dedicating your limited time and energy and attention and money to creating this philanthropic project. So thank you for. all of that. And please call back anytime. Let us know how we can support you. Let us know if you have any follow-up questions. I absolutely love this. So thank you so much for calling in. I'll hopefully hear from you soon. Our final question today comes from Margie. Hi, Paula. My name is Margie, and I have a question about buying our first house. I'm in contract to buy our first house that was listed as a six-bedroom, and our offer was based on that, and six bedroom comes in the area. But we found out that it's legally a four bedroom as the attic

quote unquote bedrooms don't have a heat source. I got the tax assessment records from the town and they confirmed that it was assessed as a four bedroom. I want to renegotiate the sale price with this coming to late, but my husband thinks it's better to get credits for closing and keep the original sale price. Do you have any advice on how to proceed? I'm concerned about paying too much and unless we remodeled to make more bedrooms, we might have a hard time selling in the future. We were planning on living there long term for now, so that's a faraway concern. This is in New Jersey, tri-state area, and we beat out eight other offers on this house. And this house was on the market for three days.

We appreciate any advice that you have in this situation. And thank you, and I'm a big fan of your show. Margie, thank you so much for calling in with that question. And congratulations on being under contract on this home. So there are two ways in which I would answer this question. One is mathematical, and the other is personal. Mathematically. We'll start with that because it's more straightforward. mathematically, what would it cost to turn these bedrooms into official sanctioned bedrooms?

Do they simply need a heat source, or are there more things that would be required? Because different municipalities have different criteria for what constitutes a bedroom. There are some places that require a certain amount of square footage for a space to legally be considered a bedroom. There are places that require two forms of ingress and egress. So, for example, there might be a door that provides ingress and egress from between the room and the rest of the home, but then there would also have to be a window that provides ingress and egress between the room

and the outside world, the yard, so that in case there's a fire, there are multiple methods of access and escape. Every municipality is different with regard to what the legal requirements are for a space to meet the specifications of what would technically be considered. a bedroom. So the mathematical approach to this question is, what are those specifications and what would need to be done to these two rooms in order to get them to a point at which they meet the spec? How much would that cost? And once you have that answer, then you'll know what type of or what amount of concessions you might want to ask for. There are two separate

questions of how much value of concessions do you want to ask for, and how attached are you to the form in which those concessions appear, because I certainly agree that asking for those concessions to come in the form of the seller covering closing costs, or to come in the form of the seller making certain repairs, or to come in the form of the seller offering to include all of the furniture along with the sale of the house. You know, there are many forms that this transaction could take. There are many ways in which value can be exchanged for other value. And if you don't have an attachment to any one particular form, then you can try to find which form of value exchange the seller is most amenable to. And if you are okay with that, then you would, in that

regard, be able to get value for value, trade value for value in a way that doesn't necessarily have to be a reduction in the closing price of the property. Or to state a little bit more broadly, in a way that doesn't have to be the seller's least favorite way of giving you that value. So that's the mathematical answer to the question. What type of value, what type of monetary costs are we talking about, and how can that value be exchanged? But then the personal question is, are you at a personal level willing to potentially risk this deal for the sake of that negotiation? because it sounds as though you like the place a lot, you plan on living there personally for a very long time,

you're buying an owner-occupied personal residence, and that is not a purely mathematical decision in the way that a rental property is. Now, given that you are already under contract, perhaps there's no risk of the deal falling through. It depends on where you are within the purchase and sales cycle. And I'm saying this for the sake of everybody who's listening, if you send an offer and the other party sends a revised offer,

well, the two parties are not under contract, so that could fall through at any moment. So if another party sends a revised offer asking for an adjustment of $3,000 or $4,000, and the very fact that they made that request causes the other party to walk away, thus causing the entire transaction to fall through, well, then the party that made that request just lost that transaction over a relatively minor amount of money. And in a situation where you don't have an emotional attachment to any particular home, in a situation where you're buying an investment property, that might be totally okay. In a situation where you do have an emotional attachment to a home and you want to make sure that the deal stays good, then that's not an amount that's great enough that would merit risking the deal. But, and here's the huge asterisk, if you're already under contract and you're in the due diligence period, and Margie, in your specific case, it says,

sounds as though you are, then talk to your agent about the legalities of this, confirm this with your agent, but you may be able to ask for concessions while not jeopardizing your under-contract status. If what you want is to preserve the deal and not lose the deal over a relatively minor amount of money, then make sure that at all times you remain under contract for the property. You don't want to fall out of contract. So long as you can manage this negotiation while remaining under contract, then sure, see what concessions they'll offer. But make sure that you don't fall out of contract, meaning make sure that you don't jeopardize the deal for the sake of that. So those are the two approaches that I have, the mathematical

approach of calculating value and the personal approach of assessing risk. So thank you for asking that question, and congratulations for being under contract on this house. You beat out a lot of people, and it sounds like you found something that you really like that you want to live in for a long time, and that is worth a lot. So congratulations on finding that. Congratulations on the move that you're about to make and the new chapter that you're about to start. And I'm excited for your new home. With that said, that is our show for today. Thank you for tuning in. Earlier in today's episode, you heard me talk about the importance of connecting with the community.

If you want to hang out with other people in the Afford Anything community virtually, you can do so by going to afford anything.com slash community. That's where you can connect with like-minded people who also listen to this podcast and who share your same goals of paying off debt, buying a rental property, aggressively investing for retirement, perhaps starting an on-profit, or becoming an entrepreneur and starting your own business or your own side hustle. There are groups within the community in which people talk about specific areas of interest. And that's what makes this community special. With a Facebook group, you have an entire community in that same Facebook group. And so if people want to talk about one particular area of interest like debt payoff, they would have to start a separate Facebook group just for that, a separate smaller one. But in this community, everyone can belong to the broader community.

And within that, there can be little villages of people who gather because they want to talk about a particular specific topic, whether that's debt payoff or being in your 30s or living in the Pacific Northwest or living in the southeast. You know, there are little groups that can gather under the framework of this bigger group, and it can all be one big community with lots of particular interests or topics that allow them to connect at a deeper level. Our community also does Zoom calls with one another. So you can join like a Zoom happy hour and hang out with other people inside of the Afford Anything community. So all of that's available. It's all free. And it's at afford anything.com slash community. And I'm going to add, we don't make any money off of that.

We don't do any advertising there. Even when I launched my course, I don't even mention it there. I keep it intentionally ad-free, special interest-free. I keep it a space that is pure community and connection without any of the other muck involved. Because I think that's a big part of fostering and supporting a community of people who are interested in lifelong learning and constant improvement, particularly constant improvement, with regard to your life, your career, and your money. There need to be spaces where people can gather and support one another and exchange ideas and not be inundated by ads.

And that is what our community is there for. So afford anything.com slash community. It's free and a great place to connect with like-minded people who can help cheer you on and answer your questions and offer insight and feedback and motivation. Thank you for tuning in. My name is Paula Pan. This is the Afford Anything podcast. and I will catch you in the next episode.

So it occurred to me recently that I might be underutilizing this disclaimer portion that needs to come at the end of each episode. I've been in the past trying to keep it light, keep it cute, make a joke out of it, but in the interest of thinking about how to think, which is truly what this podcast is about, it's a podcast about developing out frameworks of thinking, and it's disguised as a money podcast. And in the interest of that and in the interest of a framework and perspective and life lifelong learning, let me take another go at the disclaimer. And let me know whether or not you like

it. So you can find me on Twitter. I'm on Twitter at Afford Anything. Or you can find me on Instagram at Paula Pant, P-A-U-L-A-P-A-P-A-N-T. Let me know what you think of this new disclaimer. All right. Here we go. You ready? You know what, Steve, this requires a drum roll. Can we drum roll this disclaimer? Thank you, Steve. All right. Here we go. Three to one. There is a distinction between financial media and financial advice. Financial media is characterized by mass communication to a large audience on any media platform, whether it's televised like CNBC or in print like Money Magazine or Kiplinger, or on the radio and in podcasts like the Dave Ramsey Show or Bigger Pockets,

or yes, the Afford Anything podcast, the one that you're listening to right now. And financial media is an unregulated industry. We have no prerequisite curriculum or qualification. no specific set of standards and protocols to meet and maintain and no licensure requirements. Financial advisors, by contrast, operate inside of a highly regulated industry. They must have specific and rigorous training. They must meet and maintain licensure requirements. And when you meet with a certified financial planner or a certified public accountant

or an attorney who passed a bar exam and is licensed in a given state, you know you're talking to someone who successfully completed very specific education and training and who had a higher bar to entry to their occupation. So anytime that you encounter anything in the media, including the financial media, which includes this show, please know that you should never, ever, ever take what you hear in the media as a substitute for professional advice. This podcast and all the material created by Afford Anything is not a substitute for seeking out financial planning advice, tax advice, and legal advice from certified,

licensed professionals. The financial media in general and the Afford Anything podcast in particular, both exist for entertainment and educational purposes only. Nothing that we say on here has been vetted by a licensed professional, and you should always consult with a licensed professional before making any decision. Okay, cool. Okay, so that, wow, that's a lengthy new disclaimer. Yeah, that might be a little bit too long. But what you think? Tweet me, let me know what you thought. I know, I know, it's long, it's long. Maybe I'll need to workshop that. But I just figured that humorous is cool too. The disclaimer at the end of stacking Benjamin says, hey, you'd never take advice from these bozos, but just in case you were tempted to, you know, that's how their

disclaimer begins. And I thought that's cool, but, you know, of course I think that's cool. I'm the media. And as the media, of course I want to do something that's entertaining. So I guess the takeaway is don't trust the media, and that includes myself, and that includes this show. So there's my new disclaimer. That was so long, I feel like I need to sign off again. So thanks for tuning in. My name is Paula Pant. This was maybe my new disclaimer or maybe something that's too long and will only air once. I don't know. You tell me. At Afford Anything on Twitter, at Paula Pant on Instagram. Talk to you then. Bye.