Afford Anything - Ask Paula - How Can I Get a Downpayment for a Rental Property?

Episode Date: June 18, 2018

#135: Time to talk about houses! I answer your questions about rental property investing in this week's episode. Our first question comes from James, age 25. He lives in Florida, where he bought a $130,000, 3-bedroom, 2-bath condominium in the Class B range as his primary residence. He'd like to buy a second home and rent out his current home. He has $4,000 in cash and is eligible to take out $5,000 as a home equity line of credit. He makes $41,000 per year, after taxes. He'd like to buy one property a year. What funding options can he look into? If he had good credit, can he bypass the downpayment wall? What general advice would I offer to someone in his situation? Here's a short summary of what I tell James: 1. Keep a personal emergency fund. 2. Keep cash reserves for your rental. If your condo rents for $1,300 per month, you'll want at least 3 months' gross rent in reserves, or $3,900. 3. Look into FHA loans, which require only 3.5 percent down. 4. Wait until the HELOC can get you at least $10,000 to $15,000. Ideally you'll also want a little extra on the side for  closing costs and other unexpected costs. 5. Think of 'one house a year' as general guideline rather than diehard order. The more properties you purchase, the faster you can buy properties, because you can reinvest the cash flow from your existing properties. Your growth will be slowest in beginning and gets faster as you move along.   The next question comes from Berlinda. She works in a job she loves, with a great company, chill manager and fantastic team. She's signed a two-year contract, and she's six months into that term. She lives in metropolitan Chicago, but her boyfriend lives in New York. She's concerned that if she moves there, she might not find a job that she loves quite as much. She bought a duplex, and now owns a total of three rental units. She needs to upgrade these units. She projects that she'll need 14 rental units before she can live on the income. How can she scale her rental properties to the point at which she can live on their income? The third question comes from Katie from Mississippi. She started reading the Afford Anything blog in 2015, after she bought her first rental property. She now owns two rentals. She bought the first for $77,000 (purchase + initial repairs) and it rents for $975, and the other for $80,000 (purchase + initial repairs) and it rents for $900. After the PITI mortgage, they collect $603 per month, or $7,236 per year. Their operating expenses have consumed this amount, and in some years their operating costs exceed their income. What's going wrong? The final question comes from Ben. He and a business partner owns a multi-unit rental property, which they purchased two years ago. His business partner lives in one of the three units; the total income is $2200 from two of the three units (plus the partner lives in one unit for free). Their mortgage is $1475, plus $120 for insurance. Ben would like to get out of the deal, but he's not sure how. He'd like to refinance the property to get his name off the mortgage, either by selling his share to his business partner or by finding another partner to replace him within the deal. What should be do? ____ I answer these four questions in today's episode. Enjoy! For more information, visit the show notes at http://affordanything.com/episode135 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a trade-off against something else. And that doesn't just apply to your money. It applies to anything in your life that's a scarce or limited resource, such as your time, your focus, your energy, your attention. And so the questions become twofold. Number one, what's actually important? What matters most to you?

And number two, how do you align your behaviors with those values? Answering these two questions as a lifetime practice. There are no easy answers. And this podcast is here to explore and facilitate that. My name is Paula Pan, and I am the host of the Afford Anything podcast as well as the founder of Afford Anything.com. Every other week we interview a guest, and every other week, we answer questions that come in from you, the community.

Today, I am answering your questions. Among these Q&A episodes, we alternate. Half of them are about general personal finance topics, and the other half are specifically about real estate investing. Today is an episode in which I answer questions from you that are specific to real estate investing. So if that's your jam, if that's what you're into, you can keep listening. And if not, check out some of our other episodes because we cover a huge array of topics, everything from time management to productivity, to starting a side hustle, to investing in the stock market, early retirement.

So if you're into those topics, check those out. And if you're specifically interested in investing in real estate, keep listening. Our first question today comes from Katie and it's one of my favorites. Hi Paula, this is Katie calling from Mississippi. I found your blog in 2015 shortly after purchasing my first rental property. My husband and I own two rental properties that we both purchased in 2015. We bought the first one for $77,000 and that is purchase price and renovations. And it currently rents for $975.

and we purchased the second one for $80,000 to include purchase price and renovations, and it currently rents for $900. After PITI, we net about $603 per month or $7,236 per year in profit. Great, you're thinking, right? Wrong. Our expenses over the past three years have consumed all of our profit. And in some years like last year, our repairs cost even more than the profit, our rental properties brought in. So I really need a pep talk, Paula. And maybe you can tell me where

we're going wrong. We're at the point where we're very frustrated and we've lost money each year that we've owned these properties. We had an inspection on both of these properties when we bought them and the majority of these costs and repairs that we have incurred are not maintenance or items that would have shown up on the appraisal. So for example, we had a raccoon infestation that we had to have the raccoons evicted and then put up softets to keep them out. We had to have a very large pine tree that began to rot at the base cut down to the tuna $1,500. We, We had to replace an AC unit that we expected to have five to ten more years of life in it based on its age, but a compressor went out unexpectedly. We had a pressure release valve on a new hot water heater that was faulty and had a slow leak that wasn't discovered for two weeks and caused quite a bit of floor damage and some mold issues on sheetrock that had to be removed and the mold remediated.

I could go on and on about the costs that we have incurred over the past three years that we have not been expecting, but it's just making me even more depressed and thinking about selling my rental properties and getting out of it. Do you think we're just having some bad luck? Your thoughts are appreciated. Thank you for all you do. Katie. Okay. First of all, your situation is totally normal. And the problem is not that you're having bad luck. You're having very normalized luck. The problem is your definition of profit and your expectations. Because here's what you've said. What you have said is this is the rental income that we collect. And then after paying the mortgage, the rest of it is profit. Wrong. That framework, that type of thinking comes from this mis

conception about rental properties that like, oh, as long as the rent covers the mortgage, then anything else left over is profit. No, that is not the case at all, not even close, not even remotely. And unfortunately, you have discovered this the hard way and the fact that there is that gap between your expectations and reality is the thing that's getting you depressed. But the problem is not your rental properties. The problem is that your expectations were not aligned with the way that rental properties work. And I hope that doesn't sound harsh. I'm not trying to harsh your game. It's just the idea, unfortunately, that many people have is, well, you know, as long as the rent covers the mortgage, then everything else is gravy. And that is just,

it's just not even remotely close to being true. Things like raccoons and pest control and ACs that break earlier than you expected them to, those are normal. And those are part of the operating expenses, and it seems to me as though the problem that you're facing, I hope I don't sound too harsh when I'm saying this. I'm just, I'm being very direct here. The problem that you're facing is that you didn't adequately anticipate the operating costs before you bought these properties. Now, that being said, looking at the numbers on your properties, looking at the amount that you paid, you paid 77,000 purchase plus initial repairs for something that rents for 925 a month, your property sound like they're doing great in terms of the cost that you paid.

Like you are exceeding the 1% rule on both of your properties. Fortunately, the good news is that it sounds, just from a cursory glance, it sounds like you made very good purchasing decisions, but you just didn't align your expectations in accordance with the reality of what is going to unfold next. Because there are many, many, many, many more costs to owning a rental property than just the mortgage. So number one, first and foremost, I want you to eliminate the word profit from your vocabulary when you are referring to rent minus mortgage. That is not even close to the definition of what profit is. Sorry, I really hope I'm not being rude. I'm just very passionate about this because this is a mistake that I see a lot of people making, especially in the beginning. So in order

to redefine what profit actually is, let's walk through the formula for cap rate. And the reason that I keep talking about cap rate so often is that this equation at a conceptual level helps you understand what true profit, quote unquote, what true return on a rental property actually is. So let's talk about that, all right? So first, we will start with the gross rent that you get on a rental property. Let's just, we'll look at one of your two properties, all right? We'll look at the one that you bought for $77,000 that now rents for $975 per month. That means that this property at full occupancy could potentially collect a maximum of $11,700 per year. This is a figure that is known as your potential gross rent.

And what that means is its highest potential of what it could collect. Awesome. Okay. But nothing is ever going to have 12 months of occupants. occupancy every single year forever and ever. So from that, we want to subtract a reasonable estimate for vacancies. Let's say that over a long-term average, a property is going to be vacant about two weeks out of the year. Now, there are some tenants that you'll have that will stay for two or three or four years, which means you won't have a vacancy during that entire time frame.

And there are other tenants that you have, you know, you'll have a tenant move out and it'll take you two months to find another tenant. Right. So let's just say that over a long-term average, you on average have about two weeks of vacancy a year. So that means that you multiply 975 by 11.5, which means that your effective gross rent is $11,212. Oh, and by the way, notice what I just did. I just contextualized some of the numbers on a rental property in terms of what will happen

over a long time frame, not a two-year time frame or a three-year time frame, but over a 10-year time frame. Because as I just said, you'll have some tenants who stay for three or four years, and you'll have other tenants who stay for one year, and then they move out, and then you have one month or two months of vacancy, right? So another mistake, I don't mean to go off on a tangent here, but another mistake that I hear you making is that you're looking at such a short timeframe. You're looking at the numbers from a three-year. You bought both of these properties in 2015. So you're looking at three years of history and you're extrapolating from that and making these like kind of decisions about your rental property over a three-year time frame. You're not

playing a three-year game. Like that's the equivalent of buying an index fund and saying like, well, over the course of the last three years, the stock market didn't do that well. I guess I should sell off all of my stocks and get out of the stock market. You don't look at the stock market in terms of a three-year time frame. You look at the stock market in terms of a 10-year time frame. do the same thing with your rental properties. So, okay, that tangent to side, 975 a month, you assume, let's say, two weeks of vacancy a year, that means your effective gross rent is $11,21212 for that particular property. All right. So from that, we start subtracting out our operating costs. And those operating costs are way more than just, you mentioned PITI on a mortgage.

So for people who aren't familiar with that, that stands for principal interest taxes and insurance. Now, we're setting the principal and interest to the side because that is part of financing, which is separate from operating expenses, right? Now, property taxes and homeowners insurance, those are a part of the operating expenses on a property because those are expenses that you will have in perpetuity regardless of whether or not you finance the property. Whether you bought it free and clear or whether you bought it with a loan, you're always going to have to pay property taxes and you're always going to have to pay homeowners insurance, or at least you should pay homeowners insurance, whether or not.

not you have to. So those are part of your forever operating costs. All right. So we take that effective gross rent, which is $11,212, and then we subtract out operating expenses. Now, that includes your property taxes and it includes your homeowners insurance and also it includes repairs, maintenance, management fees, and umbrella liability insurance policy if you choose to have one. All of the capital, the long-term capital expenditures that you have on a property, replacing the roof, replacing the windows, replacing ultimately the carpeting and the flooring and the water heater, all of those are your operating costs. And then once you subtract out those operating costs from your effective gross rent, what you are left with is a

figure that's referred to as the net operating income. And that is the net income that you have from the property after you've subtracted out your operating costs. And that net operating income, when viewed as a proportion of the value of the asset, that is your cap rate. And the reason that I talk about this formula so much is because the very construct of how you calculate this emphasizes and demonstrates that profit is absolutely not just rent minus mortgage. So the fact that you are thinking about your properties in that way, the fact that you have this unrealistic expectation that rent minus mortgage is going to equal profit, that's the problem. The good news, however, is that your properties are beating the 1% rule, both of your properties.

You've got one property that you bought for $77,000 that rents for $9.75 a month. And you've got another property that you bought for $80,000 that rents for $900 a month. Both of those beat the 1% rule, and that is very, very good news. what that means is that over a long time horizon, you have a pretty high likelihood that these properties will be profitable. Because the other mistake that I hear you making is that you take these expenses that should be amortized over a long time frame and you condense all of them down into this vantage point of one year and you say, OMG, it was not profitable in this particular year. Well, of course, if you buy an air conditioning unit, then your expenses in that particular year,

are going to be higher, just like if you put a new roof on a property or if you put new windows or new siding on a property, your expenses that particular year are going to be higher. But you can't say, okay, let's say you put a new roof on a property, right? That roof is going to last for 25 years. So you have just prepaid for the next 24 years of that roof. Right? Let's say that it costs you $6,000 to put a new roof on a property. And that roof lasts for 25 years.

So what that means is that that roof costs you $240 per year. But you don't literally pay $240 each year. You pay $6,000 in one year and then $0 for the next 24 years. So if you look at that property in the year that you make that $6,000 expense, and then you throw up your hands and say, oh, we paid all of this money to put a roof on a property. I guess this is not a profitable property. I should just sell it, then you're looking at it in the wrong way because you are looking at a long-term investment through a very short-term frame. That's what I hear you doing with, you know, when you talk about the air conditioning unit, for example, or when you talk about the tree that was on your property, the root structure, those are long-term expenses that will benefit these properties for many, many years into the future.

And of course when you view it through the narrow lens of the year that you spent that money, of course your expenses that year might exceed it, but you're not looking through the narrow frame of one year. This is a long-term investment. Think of it this way. When you buy an index fund, let's say, okay, let's say you max out your Roth IRA. You've just spent $5,500 buying these funds within your Roth IRA. Well, how much income are they giving you in the year? that you make that expense. Not much, but if you were to look at it only through that frame,

then it would look like every stock and every index fund and every house is a bad investment. That was not a perfect analogy, but I think you get what I'm saying, which is that if you take what is inherently a long-term investment and you look at it through a short-term framework, then it doesn't matter what house you're looking at, it's going to look bad. And that's the reason, again, why the cap rate formula is, I think, just the perfect conceptual framework through which to view a property because it forces you to amortize these expenses. It forces you to say, you know what, I get that repairs and maintenance and CAPX might be higher in 2017 or lower in 2019. Maybe we'll have a really big expense in the year 2022, but maybe we'll have almost nothing in the year, 2004, but over the long-term time horizon, it's going to, on average, be around this much.

It smooths out the volatility. And I think that the mistake that you're making is that you're looking at this volatility and going, well, it was volatile, so I guess it's not good. I think that's one of the two mistakes you're making. And then the other mistake that you're making, again, is that whole that construct of rent minus mortgage equals profit, which is just a construct that I want you and everybody else who is listening to this podcast to immediately get rid of. And if you ever hear anybody else saying that, I hope that I realize I'm very passionate about this answer. I hope that you address anybody else who says that with the same level of passion that I am giving it. Because if I could change one core aspect of the way that people think about rental

properties, it is that. There's so much more to a rental than just the mortgage. Okay, look at my rental property income reports. I did a video. You can find it on Fortanithning.com of my 2017 year in review. My mortgages, P-I-T-I mortgages, were ballpark somewhere. So in the year 2017, my property's grossed, and I'm just going to use like broad ballpark numbers here instead of looking up the exact figures, properties grossed around 125,000. And then about $40,000-ish of that went to the P-I-T-I mortgages. And then another 40,000 went to all of the other ancillary expenses, the operating expenses of the properties, maintenance, repairs, all of these other things, putting in new countertops, putting in new cabinets,

putting in new flooring. Expecting to run a rental property business without paying for basic things like this is like, that's like expecting to run a restaurant without paying for the cost of food or cash register software or unemployment insurance. I mean, those are, they're, it's just business expenses. Actually, yeah, maybe that's a better analogy. Maybe the analogy is, if you were to run a restaurant, you wouldn't just say, this is how much people pay for food, and this is how much the actual food costs. And so the rest is profit.

Like, of course you would never say that, right? Because you have so many more expenses when you run a restaurant, more than just the cost of food. Same deal with rental properties. Maybe that's, I don't know if that's a good analogy or not, but maybe that was helpful. Maybe it wasn't. Okay, I think I've gone on about this long enough. And I hope that you are hearing this with love because I realize I've gotten very passionate about this answer. And I'm not trying to criticize you or anything like that. I think that you've done a fantastic job. I love that you bought very, very well. You know, from the numbers that you've told me, it sounds like you have selected good properties. And if the worst thing that's happened is some raccoons moved in that you had to deal with and that's the reason that you want to sell, And you know what? Hey, shoot me the addresses. I might buy them from you because these properties sound fantastic. I mean, just from the cursory numbers that I've heard, it sounds like you're in a great spot. So if you decide to sell that $77,000 house, the one that rents for $975 a month, email me. I might want it. We'll come back to this episode after this word from our sponsors. So let me tell you about how I've been getting some of my household staples, like window cleaner and dish soap and dish towels and, you know, dishwashing detergent.

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I have about $4,000 in cash and about $5,000 in home equity line of credit, not a great option fund-wise when looking to purchase another home. And I make $41,000 a year after taxes. My goal is to obtain one property a year. So my questions would be, what option of funding could I look into for someone in my situation? where down payment could become an issue. If I have good credit, could I bypass the down payment wall?

Also, do you have any general advice you could offer someone else in my situation? Thank you for your time. I am passionate about earning financial freedom and I've been listening to you for the past year. You've inspired me to start my real estate investment journey. Thank you again. James, first of all, congratulations on being 25 and already having your first home, which will soon be your first rental property. That is fantastic.

You're starting early and that by itself is a big part of winning the game. Now, in response to your question, first of all, you mentioned that you have $4,000 in cash. I don't know if that means that you have $4,000 in cash specifically earmarked towards a down payment or if your total savings in general is $4,000. And the reason that I'm making this distinction is because I'm a big believer that first and foremost, you should have a personal emergency fund. This way, in case anything goes wrong, if you lose your job, if you have some huge unexpected medical expense, you know, in case the unexpected happens, you have something that you can fall back on. So if this $4,000 is your only savings, I would not use that for the down payment on a rental property. I'd keep that as a personal emergency fund.

But if the $4,000 in cash that you have is specifically earmarked towards your next rental property. So it is $4,000 in cash in additional to your personal emergency fund. Well, then let's talk about a second budgetary priority that I would encourage you to have. And those are cash reserves for your rental. Now, you can think about this in the following way. So number one, you want to have a personal emergency fund. Number two, you also want to have a different emergency fund that's specific to your rental property. And this other emergency fund, which will refer to as cash reserves for your rental,

this should be enough to cover three months of gross rent. So you said that your condo is valued at $130,000. Let's assume that you can rent out that condo at $1,300 per month. If that's the case, then $1,300 per month times three months means that this condo will bring you gross income of $3,900 over the course of three months, which means that the $4,000 in cash that you have is the perfect amount of money to be the reserves, the emergency reserves, for your rental. property. What I would encourage you to do is to keep that $4,000 as reserves for the rental property that you have because you're going to have months where you've got a vacancy, you're going to have unexpected repairs, unexpected maintenance. So you want to make sure that you have those reserves

set aside so that when you have those vacancies or when you have those repairs, you aren't sweating it. You'll have money in the bank to be able to deal with that. Those are your first two priorities, your emergency fund personally and your emergency fund for your rental. Now, that being said, let's move on to the next point, which is, all right, now, how do you get money for your next property purchase? Well, a couple of things that come to mind. Number one is that you can, because you're going to be moving into your next home and your next home will be your primary residence, you could take out an FHA loan. These loans require as little as 3.5% down. You might be able to take out a he lock to get the down payment for your FHA loan.

because you mentioned that you could qualify for 5,000 as a home equity line of credit, so that might be a source. That being said, 5,000 is not a huge amount of money. And every time that you take out a loan, there's paperwork, there's closing costs, there's a whole bunch of rigmarole for every loan that you take out. So what I might encourage you to do is wait for a while until you gain a little bit more equity in that condo. and wait until that helock can get you at least 10% down or, you know, somewhere between $10,000 to $15,000, assuming that you buy a home that is between $100,000 to $150,000. That way you would have a much more substantial down payment. You would have a little bit more wiggle room in terms of what you're purchasing.

Ideally, you'd also have a little bit extra on the side for closing costs and other unexpected costs that come with the purchase of the next property. I just, I don't like going into a situation where things are so tight that the difference of $500 or $1,000 can really cause you to sweat. In that vein, I would encourage you to think of your one house a year goal as an excellent goal and a general guideline rather than a diehard order. And the concept, remember, is this. The more properties that you purchase, the faster you can buy properties, because as you buy more and more rentals, you can reinvest the cash flow from your existing properties into growth. And so what that means is that in the beginning, when you're in your early to mid-20s, as you are right now, your growth is going to move along the slowest trajectory because you are relying almost entirely on the income from your labor,

you're trading time for money income in order to fuel that growth. But as you move along the ladder, as you are able to combine savings from your day job with cash flow from your investments, that flywheel starts spinning faster and faster. So in the beginning, maybe you can buy only one home every two years. And then as you have cash flow from those rental properties that you can reinvest, then that time frame shrinks to one home. every 1.75 years. And then eventually that shrinks to one home every 1.5 years. And then eventually that shrinks to one home every year. And then one home every six months. So the snowball builds as it

rolls down the hill. So I guess what I'm saying is don't necessarily think of your growth. I love the idea of buying one home a year. And I think that's a fantastic benchmark. And I myself tend to think in those terms as well. But remember, the implication of a goal like one home a year, year is linear, right? It's one home per year as a fixed linear progression. And your progression is not going to be linear. It's going to be exponential, meaning it's going to be slowest in the beginning, and then it's, the more it grows, the more it will continue to grow. So long story short, key takeaways from the answer that I just gave include, number one, wait until you have more equity in your condo so that that he lock that you borrow can get you at least $10,000 or $15,000,

not just five. Number two, make sure that you have both a personal emergency fund and an emergency fund for your rental property. Number three, look into FHA loans, specifically because you're going to be buying your next home as a personal residence. And the benefit of an FHA loan, which are only given to personal residences, is that you can qualify for those with a very small down payment. And number four, be patient in the beginning because the more you grow, the more you'll continue to grow. So right now, you're just at that very beginning phase. So if it takes you two years instead of one year, that's okay. I didn't buy my first rental property until I was 27, so you're already two years ahead of me. I hope that helped. And thank you so much for asking that question. I'm glad to hear

that you've been listening for a year and that this has inspired you to become a rental property investor because rentals are, I think, a fantastic way of growing wealth. I mean, you grow equity, you have cash flow, you have tangible assets that you can borrow against in order to buy even more assets. So I think they're an absolutely fantastic path to wealth and a great path to financial independence. So I'm happy to hear that you're already on the path to doing it. So congratulations. We'll return to the show in just a moment. Do you wear contact lenses?

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time dealing with that and more time growing your business or enjoying your life. And when tax time rolls around, you will find tidy summaries of your expense reports and your invoice details and sales tax summaries and a lot more. So if you are a freelancer and you're not using FreshBooks yet, now's the time to try it. FreshBooks is offering a 30-day unrestricted free trial to my listeners. To claim it, go to freshbooks.com slash Paula. That's FreshBooks, F-R-E-S-H-Books.com slash Paula. And when they ask, how did you hear about us?

Mention, afford anything. Again, 30-day unrestricted free trial, you don't have to input a credit card, freshbooks.com slash Paula. Our next question comes from Berlinda. Hi, Paula. Thank you for the great podcast. Here's my situation. I am working in a job that I love. My current position is with a great company, a very chill manager, and an amazing team.

I've only been here six months, so I can't and currently don't want to leave anytime soon because I've signed a two-year contract. I'm a food scientist, so there are geographical limitations to where I can live and have a job in product development, which is basically me and a lab making. food all day long for companies. I am currently in the greater Chicago land area, but my boyfriend is in the greater New York City area where I previously was. He does not want to move here. Most food companies in the greater New York City area aren't known for great company culture, but I am still quite a few years away from being able to live off of rental income. I just bought a duplex, bringing my rental units to three, but I am in the process of needing to update the units. I think I need to get a new place. I think I need to get a newplex. I just bought a duplex, bringing my rental units to

get to 14 before I can quit and just live off of rental and tell them. Can you please let me know what you think of the situation? Any ideas on how I may be able to get units more quickly or whether or not I'm in the right mindset? Thanks. Berlinda, thanks for calling in. So let me restate what I think I heard. You live in Chicago or in Metro Chicago and you love your job. You are contractually obligated to stay at this job for another year and a half, but that's fine with you because you love it. The only problem is that your boyfriend lives in New York, and if you were to move there, you are afraid that you wouldn't be able to find a job that you love quite as much. So you would prefer to be able to live on your rental income if you were to move there so that you don't

have to downgrade into a lesser job. Unfortunately, at the moment, you only have three units and you're nowhere close to being able to live on your rental income. So your question is, how can you scale up to the point where that income is something that you can live on? That's my understanding of your question. And here are a few thoughts. Number one, I don't know any of the numbers, but you were very specific in that you believe that you need 14 rental units in order to be able to live on this income. You currently have three. I am really curious as to where that came from because the number of units,

is less relevant than the income that you derive from each unit. And you're also not going to derive a uniform amount of income from each unit. So the math isn't going to be as simple as, well, if I have 14 units and each one produces a gross income of 1,000 a month, with a net after expenses of 500 a month, that gives me a total net of 7,000 per month. I mean, that's like, that's a nice projection, but reality is not going to work out in such a clean and uniform way. Because depending on what you purchase, you're going to have some units that produce a gross income of X and others that produce 1.5x or 2x and others that produce half of X. And then you're going to have some that have almost no vacancy and others that have

prolonged vacancies and some that are newer construction and require very little maintenance and upkeep and others that are much older and require a significant amount of additional maintenance. So both your income and your expenses and other variables like vacancies are going to be all over the board. And so you asked about mindset. The first thing that I would say is don't be so concerned with the number of units that you need. 14 is a very specific number. I don't think that that's the right way to think about it. I would be much more focused on how much income you need. And then I But try to find that income ideally from the fewest number of units possible because that way you minimize hassle, minimize the number of units that you have to oversee, increase efficiency per unit, and get to that income goal much faster. I mean, to phrase out another way, would you rather have 40 toilets or 20, assuming that those two scenarios bring you the same amount of income?

Would you rather own 14 kitchens with 14 dishwashers or 10? Now, to be clear, I'm not necessarily saying buy as few units as possible. I guess I'm sort of kind of saying that, but really what I'm saying is think about income. Don't think about number of units. So that's the first thing I'd say. Now, second of all, I see a little bit of a mismatch between your life goals and your way of getting there. It sounds as though you are thinking about, if I'm understanding your question correctly, it sounds as though you're seriously considering moving to New York in about a year and a half when your contract ends. Unless you are already sitting on a giant vault of money, in which case we wouldn't even be having this conversation anyway, you are not likely to purchase enough rental properties within the next year and a half that it would cover your living expenses.

18 months from now when you moved to New York, I'm curious, is your goal to eventually get to the point where you can live off of your rental income? Or is your goal to move to New York within the next year and a half and not be in a position in which you are forced to accept a job that you dislike? Because those are two extremely different goals. And certainly in a perfect world, I can see how one might be the how to the others, why? But moving to New York and not taking a job that you dislike is a challenge that has a wide variety of solutions, whereas getting enough rental income that you can live off of that is one very specific trajectory. It's one very specific path. So I would encourage you not to presume only one solution to a much broader question.

If your goal is to move to New York and have flexibility in the type of job that you take once you get there, there are a whole bunch of various ways that you can get to that. You've got 18 months to save. You can save a big cash reserve within the next 18 months. If you combination side hustle up and frugal down and just pour everything into savings, you can move to New York with enough savings to live for a year without needing to find a job. And that will give you time to look around and go on interviews and try to work. wait until you get a job that you love rather than be forced to take the first thing that you're offered or the second thing that you're offered that just seems merely good enough. And that type of approach would be, I think, a more fitting solution to your immediate short-term 18-month goal than somehow trying to buy 11 more units within the next 18 months.

So I hope that I'm understanding your question correctly. And if so, hopefully this was helpful in terms of reframing. your mindset around how you think of this goal that you have. When I listened to your question, the first half of your question was all about your job and your living situation and Chicago and New York. And then the rental property component almost seemed like a non sequitur. It came at the midpoint of the conversation, the midpoint of the question. And I was like, what?

What? What? The change in topic here. So just remember that there are multiple ways for you to be able to leave this job if that is what you choose to do and move if that is what you choose to do and give yourself the flexibility without needing to look to the longer-term goal of rental property income as the sole solution. Thank you so much for asking that question, and good luck with whatever you decide to do. Our final question today comes from Ben.

Hi, Paula. My name is Ben. Thanks for everything that you do. My question is, so I currently own a rental property, multi-unit rental property with another person. This person is, is not my spouse. We were just friends. We got the property two years ago. Since then, the other partner is located at the property, residing in one of the units, of the three units that we have. The other two are rented out to two families.

Total income that's coming in is $1,200 from one and $1,000 from the other. The mortgage payment is $1475 a month, and the insurance is right around $120. So with that being said, this property is still not in the black. You know, I received sporadic payments on my passive income from the other partner. So what legal options do I have? I'm aware that this was a bad decision. So I'm trying to find ways out of the situation to have talked.

The other partner on refinancing the property to get, you know, my name off the mortgage, and then they buy me out from the rest. Talked on getting another co-bar to take me off. That way I'm not legally responsible. because to this date, I've had to only pay two mortgages, and that was right in the beginning of initial ownership when the property was vacated. But yeah, I'm just looking on some options and what kind of recourses I have to do. So thanks for your time. Ben, I have a few comments to make about your situation, but first you asked what legal options you have.

So first, I need to make a super clear disclaimer that I am not a lawyer. This is not legal advice. I'm not allowed to give legal advice. You wouldn't want me to give legal advice. I get very nervous when the L word is said because this, I am not in any way allowed to give legal advice or investing advice. So this is not advice. See, this is my disclaimer here. I'm not an expert.

I'm just some random person who happens to have access to the internet. So talk to a professional, talk to a legal professional, talk to a grownup. So my big disclaimer here is this show is. is purely for entertainment purposes only, and you should disregard absolutely everything I say. And, you know, and that's my big disclaimer here. I in no way hold myself as or present myself as an expert. I am just some totally random person who happens to have a podcast. That is it. Nothing more. This is just for entertainment. So for your entertainment only, here are a few thoughts. Number one, I assume that both you and your business partner hold title to the property, either

is tenants in common or through joint tenancy with right of survivorship. And I assume that both of you have your names on the loan. If that is the case, then you are absolutely correct in that if you need to get out of the deal, you would need to remove your name from the loan. The last thing that you would want to do is quit claim deed over your interest in the property while your name is still on the loan. That would be a very bad situation because then you would still be responsible for the mortgage, your credit would still be on the line. You'd still be responsible for making payments, but you would no longer be an owner. So you definitely don't want that situation to unfold. So you're correct in that if you want to get your name off the loan, you will need to refinance that

loan. Hopefully, both of you have good credit scores and good income, because if you don't, then refinancing might be a challenge. But you only bought this property two years ago. So assuming that nothing catastrophic has happened with regard to your income or your credit over the course of those two years, then hopefully you should be able to refinance. Now, being able to refinance doesn't necessarily mean that you'll find somebody else who's willing to step in and take your place. If you do find that person, if you find somebody who's willing to replace you, awesome. And if that person is qualified, then fantastic. Then you could refy the mortgage, put the other person in your place, then quick claim

over your interest in the property to that person. However, I don't know how strong of a likelihood you have of finding that other person, somebody who's willing to step in and take your place. So then the question becomes, does your business partner want to be the sole owner and the sole mortgage holder on this property? And even if he or she does want to do so, are the business? are they qualified to do so? I mean, if you think about it from the bank's perspective, right now the bank has two people

on the loan. So to go from two people down to one person means that the bank would be exposed to more risk because now if you default, there's only one person on the loan to go after instead of two. So the bank is not going to want to do that unless the other person is very highly qualified. So that becomes really the next question about your business partner is how strong are their qualifications if the entirety of the mortgage were to be put in that person's name. If your business partner is qualified and also is willing, then awesome, problem solved.

That's exactly the next step to take. You'd refy the property, put the entire mortgage in your business partner's name, and then quick claim over your share of it and walk away. If that is not an option, either due to your partner's lack of willingness or lack of qualifications, then, well, zooming out a little bit, there are a couple of alternate approaches to your situation. Number one, you could ask your business partner to move out. I'm not clear on why this person is living in the property. If that was something that you both chose to do so that you could qualify to purchase this property as a primary residence, well, you've owned it for two years. So you've met that criteria. Your partners live there for, I'm presuming it has lived there for two years.

So, cool. You've met the primary residence qualifications. your partner can move out, that person can be replaced with a tenant who pays rent, and then that can help your financial situation. So the alternate solution might not be for you to get out of the deal. The alternate solution might be for your partner to move out of the property so that you can get somebody in there who's paying rent. Or if your partner really wants to live in the property, then your partner could embrace a little bit of split personality and be simultaneously a tenant and also an owner. In other words, your partner could pay rent to the two of you. You know, your partner could pay rent to the owners of the property.

And that way you would be collecting, say, 1,200 from one unit, a thousand from another unit, and whatever the fair market value is of that unit that your partner is living and we'll say that's another $1,000. Then you'd be collecting $3,200 a month in rent instead of only $2,200 a month in rent, which I presume would make a pretty significant difference to, the bottom line of this property. So those are four potential solutions in no particular order. Number one, you could find a different partner who would replace you and replace the role that you are currently playing. Number two, you could have your current business partner take over as the sole owner and sole mortgage holder. Number three, you could have your business partner move out

and have a tenant move into that unit who would be paying rent, or number four, you could have your partner pay rent to you guys. Now, assuming that none of those four options work out, assuming that there are certain obstacles that would prevent any of those from unfolding, then the next two other options that I can think of would be to either completely pay off the property or sell it. And assuming that you don't have enough cash-lating, around to completely pay it off, which I assume you don't, then this might require you guys to sell the property so that you can get out of the partnership. I've seen this happen with other rental properties in the past. I've seen partnerships that were not well set up in the beginning,

in which ultimately the partnership became unfair to one of the two parties. And then the best way to get out of that, particularly because it wasn't set up well in the beginning, the best way to get out of that was to sell the property. So that might end up being what you guys might have to do in order to get out of this partnership that you're in. Again, this is not legal advice. It's not professional advice. This is just comedy hour on a podcast. Thank you, Ben, for asking that question.

That's our show for today. If you have a question that you would like answered on the Afford Anything podcast, please head to afford anything.com slash questions. That's afford anything.com slash questions to ask your question. For the past several episodes, I've mentioned that we have a long lead time on real estate related questions. And I think by virtue of saying that, I must have scared some people off because now in the past couple of weeks, we've barely gotten any real estate questions. We've gotten a few. But the number of questions that we're getting has diminished quite a bit. So this is actually a perfect time. If you've got a question about anything, whether it's

real estate related or any other aspect of personal finance or life, head to Afford Anything.com slash questions and leave your question. We would be happy to answer it. When I say we, I mean either myself for a real estate show or myself and Joe for non-real estate shows. Happy to answer it on a future episode. I'm going to make a quick plug here that if you do not have a t-shirt yet, head on over to Afford Anything.com slash store where you can pick up a t-shirt. We've got three different designs, and all of them are shirts about investing, and 100% of the profits from the sale of these shirts will be given as a donation to Charity Water, which is a global non-profit that brings clean drinking water to communities that don't have it. So afford anything.com slash store

to buy a shirt and know that 100% of the profits are going to go to Charity Water. If you enjoyed today's episode, please do three things. Number one, tell a friend. Number two, subscribe to this show in your favorite podcast player. And number 30, leave us a review. If you go to Afford Anything.com slash iTunes, that will take you, it will redirect you to a page on the Apple, formerly known as iTunes website, where you can write a review. Or you can do so in the app that you're using to listen to this show. Next week on the podcast, we have an interview with Rich Carey. He is an officer in the U.S. Air Force, and he owns 20 rental properties. all free and clear, completely debt-free, 20 houses debt-free,

and he bought all of them while stationed elsewhere with the military. So he is currently living in Seoul, South Korea. Before that, he was living in Germany. In his career with the Air Force, he has been stationed all over the world. He's lived in Guam. He's lived in California, in, of course, Europe, Asia. And in spite of living all over the world, he has built a portfolio. of 20 rental properties, all of which are in Montgomery, Alabama.

So on next week's show, he and I are going to chat about how he did that, how he managed to buy 20 houses, all free and clear, while stationed overseas with the Air Force. So that is next week's show. And remember, please subscribe to this show in your favorite podcast playing app, whether that's Apple or Stitcher or Overcast. Subscribe to this show so that you won't miss any future upcoming episode. Thank you so much for tuning in. My name is Paula Pan. I'm the host of the Afford Anything podcast. I'll catch you next week.