Afford Anything - Ask Paula - How Can I Get My Friends Interested in FIRE?

Episode Date: November 12, 2018

#161: Matt is interested in achieving financial independence, and he wants to encourage his friends to pursue the same goal. What podcast episodes provide a light, digestible introduction to the world of financial independence and retiring early? Daniel wonders why everyone pursuing financial independence seems to have a blog or podcast about this topic. Is the purpose of FIRE to sit around writing and talking about how you’re FIRE? If so, then what’s the point? Tom is an entrepreneur with an LLC in California. Should he buy a rental property through that LLC? Anonymous from California wants to know how I decide whether to use a property manager vs. self-manage my rental properties. She also wants to know how to estimate the cost of repairs and maintenance. And how should the tax benefits of rental properties play a role in choosing a property? Brett owns a rental property in Las Vegas, which used to be his primary residence. He’s getting a strong cap rate but a marginal return on equity. Should he hold the property in the hopes that it will rise in value? Or should he sell the property? Anonymous is an Indian citizen who lives in California on an H1-B visa. There’s a chance that his visa won’t be renewed, which means he’ll need to move back to India. What should he do with his rental properties? Can he manage his properties from another country? If so, should he purchase more? I answer these six questions in today’s episode. Enjoy! For more information, visit the show notes at https://affordanything.com/episode161 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a tradeoff against something else. And that doesn't just apply to your money. It applies to your time, your energy, what you do all day every day. You can do anything but not everything. And you can afford anything but not everything. So what tradeoffs are you going to make? Well, in order to answer that question, you really have to unpack two sub-questions.

Number one, what's most important to you? What do you value beyond anything else? And number two, how do you live your daily life in a quarter of? with those values. To answer these questions is a lifetime practice. There are no simple answers, but it's something that we work on every single day, and that's what this podcast is here to explore. My name is Paula Pant. I'm the host of the Afford Anything podcast and the founder of Afford Anything.com. Every other week we interview a guest and on the weeks in between, we answer questions that come from you, the community. Today's episode is going to be a little bit unusual because in one out of every four

episodes. I specifically answer questions that you ask about the topic of real estate investing. But lately, we've been getting a different genre of question. We've been getting a different topic. And we've started receiving a handful of questions that are specifically about the fire movement, which stands for financial independence, retire early. Some people also refer to this as FI for just financial independence. So in today's episode, we're going to kick off. with two questions that are specifically about fire. And after that, we'll transition into four more questions about real estate investing. If you're interested in fire, but you're not interested in real estate investing, just listen to the first two questions, and then you can drop off and listen to some of the other stuff in our archives.

And if you're interested in all of the above, awesome. Glad to have you here. Our first question comes from Matt. Hi, Paula. Matt, Michigan. Thanks for taking my call. I'm fully bought into fire, but I have, friends looking for fulfillment, and FI seems to be right for them. Any recommendations on a

light gateway podcast episode to introduce them to FI? Thank you. Your show is wonderful and look forward to listening. Thanks for asking that question. So I wanted to lead with this for a few reasons. Number one, our listenership has grown pretty significantly in the last month. And a lot of new people, particularly new people who are listening to this podcast, I think, have a very similar question. Either you yourself are new to fire or you're trying to introduce fire to a spouse or a loved one or friends. So how do you do that? I'll talk about recommended podcast episodes in a moment, but first I want to share a few tips. Number one, lead with what you're moving into, not what you're moving away from.

Let's say that you're talking to somebody who feels ambivalent towards their job. They're not in love with it, but they don't hate it either. It's going to be a very hard sales pitch to say, hey, guess what? If you live radically below your means, you can walk away from this job that's actually not that bad. That's hardly motivating. But that's because the focus of that conversation is, A, what you're giving up in terms of spending, and B, solving a problem that's not really a problem in the first place. But what if you reframed that?

And what if instead of focusing on what you're moving away from and the sacrifices that it will take to get there, you instead focus on what you're moving towards and the benefits that you will enjoy once you get to that new destination. In that case, you would say something to the effect of, hey, haven't you always wanted to go backpacking across South America for a year? Or haven't you always wanted to take your whole family on a big RV trip and road school the kids for a year and take them on the ultimate field trip where you get to go see the Grand Canyon together? You can learn about geology at Yosemite and you can learn about history at Mount Rushmore. Isn't that something you've always wanted to do? Well, hey, here's a way that you can do it. So framing it like that, framing it in ways that are enthusiastic and positive about the future rather than negative about the past or present,

is I think one of the best ways to introduce the notion of FI or fire to people. Now, in terms of specific podcast episodes or articles that I would recommend for that, The number one thing that I would recommend is I have a free ebook. You can download it at afford anything.com slash escape. That's affordanything.com slash escape. It's totally free. It's about 70 pages long. And it walks you through both the philosophy and many of the tactics around escaping that 9 to 5 cubical job,

or at least escaping the obligation of having to go there out of necessity rather than choice. As far as podcast episodes are concerned, here are a few that I would recommend starting with. Episode number 39, the seven stages of financial independence, which is an interview that we did with Joshua Sheets. By the way, that was one of our most commented on episodes, particularly among our first 50 shows among that initial batch, that first year. It was one of our most commented on. And on our YouTube channel, this is one of our most watched videos. And when I say videos, I'm putting that in air quotes because it's just audio only with a little thumbnail. But this by far has been one of our most popular episodes.

Joshua Sheets is the host of the Radical Personal Finance podcast, and he came on our show in episode 39 to talk through the nuances of different types of financial independence, starting at stage zero, which is total financial dependence, and then moving up the latter through financial solvency, financial stability, then you've got debt freedom. And then you go into security and then independence and then all the way up to abundance, which is a step even higher than financial independence. So we talked through all of that in episode 39. I would absolutely start with that. And then also, episode 65, how to improve your relationship with money, which is more of a kind of high level 30,000 foot view about understanding that money is not just a tool in your arsenal. It is really something that you have a relationship with. and many of the scripts that you have around it will influence the way that you treat it

and subsequently the way that it treats you in return. Finally, I would also recommend episodes 87 and 89. These were episodes in which we talked about some of the ideas about money that are ingrained in us from an early age through our society. Episode 87, we question some of these ideas that come in the dominant paradigm. And episode 89, we talk

about what would happen if you have five to ten years to live? What would happen if you have only 24 hours to live? We kind of go into these probing questions that put your life into perspective. So those are the four podcast episodes that I would recommend a person new to FI start with. Now, closely related to this is a question from Daniel. Hey, Paula. I was wondering if you had any opinions on the saturation of the financial independence, blogging and podcasting pursuit. It seems like every other person who pursues fire has some kind of blog or podcasts that they write about it on.

And honestly, it doesn't seem like any kind of new information at this point. And I was also wondering, what percentage of fire pursuers do you think does some kind of blogger or podcast? It almost seems like it's a necessary step these days to create additional income by talking about how you're so financial independent, which kind of seems like a contradictory thing in the first place. Obviously, you've been extremely successful with it, and I know you're not going to stop because you are very successful.

But, you know, for the thousands of other blogs out there, what's the point? Daniel, I can answer this question in two words, selection bias. And here's what I mean by that. The people who write and podcast about early retirement might. myself included, are by definition, the most public and visible voices. But we're only a really tiny handful of people. There's maybe two or three dozen of us among the tens of thousands of people who pursue this path. So when you look at people who blog about it or who podcast about it, you're looking at a fraction of a percent of the overall pie. The vast majority of fire

followers are leading quiet, private lives. They're the people who are well-funded, fully-funded skiing instructors or little league coaches or preschool volunteers. They're the ones who quit their super well-paying job to go make $30,000 a year as a local community organizer or starting their own nonprofit or becoming a scuba diving instructor because that's the thing they were really excited about. Heck, you heard Clark Howard on a recent episode of this podcast, Clark talked about how he reached fire when he was in his 30s, which now he's in a 60s, so that would have been the 1980s. He reached fire in the 1980s, and he went and lived on the beach for four years and did absolutely nothing. And he wasn't blogging about it because it was the 1980s.

Blogs didn't exist. He just hung out on the beach. But we never heard that story because there's no way for him to tell that story because, by definition, he wasn't blogging about it. Like the only reason that we know that story now in hindsight is because now 30 years later he hosts a radio show so he can tell that. But think of all the other beach dwellers with him who were, they were spending their time surfing and they were spending their time raising four kids and they're spending their time doing all sorts of other really cool stuff. But we never hear their stories because by definition they are not the people who tell their stories. Now you know where you can find these people? So here's what I recommend.

Quit your job, step one. And go to Bali, Indonesia, or go to Medellin in Colombia, or go to Chiang Mai in Thailand, and meet the people, the expats, who are living there. And you're going to discover that they fall into a number of different categories. You've got a group of people who are just living the gig life, right? They never made a bunch of money. They never have. They probably never will.

They're just working seasonally. or part-time, like they're doing the gig life and they're gigging it up. They're living a life that is very similar to what Kim described on episode 139 of this podcast, where they're just bouncing from gig to gig, making it work out, and having a grand old adventure along the way. And that's awesome. There are a bunch of travelers who fit that description. But you'll also find people who are well-paid, entrepreneurs, they are location-independent. They're not financially independent, but they're location-independent.

but they're location independent entrepreneurs. Like that's another subset of people that you meet in these communities. And then you'll also find people who are financially independent, people who saved up some money and are now living on their investments. They're living on their rental property income or they're living on their portfolio investments. And living cheaply in the mountains of North Thailand, these are the people that you meet when you go to really interesting places that attract interesting people. And these are the people whose stories are often untold because they don't want to go through all of the time and effort to set up a blog and a podcast. And rightfully so, because it's a bunch of time and effort. I know many people who are fire or on their way to fire who are not well known.

They're not bloggers. They're not writers. They're not podcasters. They're not public. And I invite them to come on to this show. And oftentimes they say no because they want to keep their private life private. They don't want the entire world knowing that John Doe has a portfolio with $950,000 in it. They don't want their siblings knowing that.

They don't want their buddies from high school knowing that and then hitting them up for a loan. The people who are truly representative of a fire lifestyle are not the ones that you will encounter on the internet. Because they're doing things that are much, much cooler than anything that I'm doing, anything that any of us are doing. so we don't hear about them because they're not spending their days in front of a laptop. Sampling bias shows only the people who take great efforts to go public. And that's why on my podcast I put a big effort into highlighting stories of people that I meet in real life. Kim from episode 139 is a perfect example. She's a firefighter for the city of Austin.

She began her firefighting career five years ago with a starting salary of 42,000, and she saved more than 50% of her income during her. five-year career. So she is halfway to fire. But the thing about her, and you can hear this when you listen to the interview, is that she doesn't think of herself as somebody who is pursuing fire. Like she would not self-identify as somebody in the fire movement. In her mind, she's just saving up so that she can keep her options open. In her mind, that's all she's doing. And she doesn't even know that there's a movement out there. I mean, she doesn't. because she's friends with me, but even now that she knows that there's a movement out there,

she still doesn't identify with it. Like, she thinks we're a bunch of nerds who spend way too much time on the internet, right? She's not doing any of this. She's just living her life and doing it with a high savings, right? And that's pretty much the end of the story. Okay, final thing that I'm going to say about this before we move on. Your question is very, very similar to a question that gets asked in the travel blogger communities, where people say, wait a minute, every traveler sees.

to go to another country, you go to the leading tower of Pisa or the temples of Bagan or Horseshoe Bend in Arizona. Wait a minute. Do you go to all of these places explicitly for the purpose of writing a blog post about it and taking some cool photos for Instagram and making money doing it that gives you the money to go take the next trip? There's this criticism in the travel blogging community where people are wondering like, wait a minute, is this extremely circular? Do you spend all of your time traveling so that you can make money writing about traveling so that you can use that money to travel more? Like, does that not just lock you into this loop that you can never escape from, like almost like a travel hamster wheel? So it's a criticism within the travel blogger community. And of course the answer to that, and I think this is probably a bit more obvious when you talk about a concept like traveling. Of course the answer to that is if you look at the entire universe of people who travel, only a very small.

small fraction of them actually blog or podcast or Instagram about it. And of those who do, only a much, much, much smaller fraction of them make any money doing so. The bulk of people who are skydiving in New Zealand are not blogging about it. The same is true with financial independence. You've asked a very important question, and I think that that is a perception that we're going to have to battle. Because the thing is financial independence is, in a visible, right? Like if a person travels, then their actions are visible. It's quite abundantly clear that Joe from down the street is currently in Croatia. That's unmissable. And the story behind that, the finances behind that, you don't necessarily know. But when somebody's traveling,

you don't miss the fact that they're traveling. With financial independence, it's very different. The only people who others know are financially independent are people who have proactively chosen to disclose very personal private information about their assets and liabilities and net worth. As a result, the sampling bias of who we understand FI people to be skews towards those who have chosen to share their story. And that's not even remotely representative of the community. And so I think that as a fire community is something that we are going to have to figure out how to resolve. And my solution to that is

let's share more stories of non-bloggers. So please, anybody listening, please call in afford anything.com slash voicemail with your story. If you, regardless of whether or not you've reached fire, if you're on your way to fire, call in and leave a voicemail and

explain what's motivating you to get there and where you are now and where you hope to be later. If you have just learned about fire and you think it's intriguing and you've decided that next year is going to be the first time that you start ratcheting up your savings rate to anything in the double digits. That's amazing. That's a success story. Call and leave that voicemail. Let's hear from more voices. So thank you so much, Daniel, for asking that question.

So at this point, we are about one third of the way through the episode. We have just answered two questions about fire. And next up, we're going to answer four questions. about real estate investing. Now, as I said in the intro, if you're interested in real estate investing, stick around. If that topic does not interest you, first of all, my assurances,

we only cover this in one out of every four episodes. So 75% of our episodes are about all kinds of other topics, ranging from personal finance to entrepreneurship, side hustles, optimizing your money in your life. So check out our archives, dig through all of our episodes that are about loads of other topics.

And I will catch you in the next episode. Thank you so much for sticking around until now. Now, if you are interested in real estate investing, stick around because we're going to take a quick break to hear from our sponsors, and then after that we're going to go into our first question. I got a question. Do you run a small business? If so, as you know, payroll and benefits are hard, especially for small businesses. These really old school payroll providers aren't built for the way that you work.

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estate portion of the episode. And the first question comes from Tom. Hi, Paula. My name is Tom. And thanks largely to your My wife and I are looking at getting into the long-term buying hold rental property arena. I have a pre-existing LLC through which I offer consulting services. So that's a California LLC. We have some money that flows through there, but generally don't hold many assets in the bank accounts that are under the LLC's name. What I'm wondering is, as we start to purchase properties, should we be

put them into that LLC. I understand there are general benefits to owning property inside of an LLC, but I'm wondering if it makes sense to sort of combine that with other active income work like consulting that we do. Thank you. Tom, that's a fantastic question. Now, first of all, in episode 86, we did a deep dive into should I put my properties into an LLC. So I would definitely recommend checking that out for general information about the pros and cons. of holding properties in an LLC, but specifically to your question, which is that you have an existing LLC with other business that it operates, should you keep your properties there or not, that adds a new flavor to it. So let's explore that because that's, I like this. This is a very,

like, it's a question with a little bit of spice. So if you have an existing LLC and if that LLC has what's called a Dun and Bradstreet number, often referred to as a D&B, or some of you have an existing LLC, or sometimes called a DUNS. If your company has that, then that means that your company itself has a credit rating. So zooming out a little bit, when it comes to borrowing money in order to buy a rental property, the reason that most people struggle to borrow money as an LLC is because you yourself as an individual, Tom, has a credit rating, but Tom's LLC does not. If you have an existing LLC and it's been around for a number of years and it's established a D&B, then that LLC might itself have a credit rating.

And if it does, then that will improve your odds. It's of course never a guarantee, but it may improve your odds of being able to borrow money as an LLC. And if you can do that, if you can take out a mortgage loan as an LLC, then that puts you in a very rare position. among investors. Now, I don't know if you will be able to or not because lenders are much more stringent about their requirements these days. So it may be the case that even if your LLC does have its own creditworthiness as an entity, you might not still be able to take out financing under the LLC. The reason that that matters is because you've got to buy the house as the entity that takes out the financing. So if Tom the individual takes out the financing, then Tom the individual

has to buy the house. Whereas if Tom's LLC gets the financing, then Tom's LLC can buy the house. So you see where I'm going with this, like, who gets the financing gets the house? And that's the reason why if you do plan on borrowing money to buy this property, which the majority of investors do, you most likely are going to have to buy it in your own name unless, as I just said, unless that existing LLC has enough of a history to be able to allow you to circumvent that. A couple of other comments I'll make. You mentioned that this is a California LLC. Do you plan on buying rental properties in California or do you plan on buying them out of state?

The reason that I ask is because, and of course I'm going to preface this with this is not legal advice, please talk to a lawyer, all of this is for entertainment purposes only. This show is not meant to teach you anything. It's just meant to be the least funny. comedy show you've ever heard, so don't listen to anything I'm saying, and I don't hold myself out to be a professional or even an adult. So there's my disclaimer. So for entertainment purposes only, if your properties are in a different state, then you may want to form the LLC in the state in which your properties are located. And if you choose to do any property management yourself,

or if you, for the aspects of the business that you yourself handle, you can have a separate entity in your home state in California that handles that. And then you've got these two entities that interface with each other, your entity in that other state and then your entity in your home state, one of which holds the properties and the other of which handles the management and interfaces with the other property. So this is not legal advice, but the point being that that is another consideration that you would make that given that this is a California LLC, the location of your properties is also going to make a difference in what state you would prefer to register an LLC in if you choose to use an LLC to hold the property at all. Now, third and final comment

that I'll make about this is that if you do choose to hold your property, let's just say in a hypothetical world, that you plan on buying a property located in California and you plan on paying cash for that property so that financing is not a variable in this equation, right? So you pay cash for a California property and as a result, you decide that you want to buy it with your existing California LLC because it's in your home state and because financing isn't an issue. The third thing that I would urge you to think about is whether or not you want this asset that you own, this rental property, to be extremely. exposed to any lawsuits that might arise from your other business activities. So if you have, if somebody

with whom you do business through this LLC, with whom you do non-rental property related business, if somebody decides that they want to sue you and they want to go after the assets of your company, well, the more assets your company holds, the more that they can potentially go after. And vice versa, if you have a tenant in that property and the tenant decides to sue you, well, now the tenant can go after not just the value of the home itself, but also the other assets that are being held by the company, the company's other bank accounts, the company's other investments. So you want to think carefully about whether or not you want to co-mingle all of those assets into the same LLC, given that you will have more exposed. I mean, that being said, of course, it simplifies things too, right? Like managing the paperwork for multiple businesses is a giant burden. It's a huge paperwork burden.

So I completely understand the benefit to consolidating multiple types of investments under the same business umbrella. Absolutely. But there are – the feature is also the bug, right? There's two sides to every coin. The benefit is that it's simpler. The drawback is that you risk. additional exposure. It is not unusual for a business to buy a property, right? If we don't think about this as Tom buying a property, if we think about this as this business is buying a piece of

real estate, well, that happens all the time. Businesses purchase equipment, businesses purchase property, businesses purchase cars. So at a conceptual level, the fact that your business wants to buy a property is a very normal thing to happen. The thing that you want to think about, because remember, you are a separate entity than your business. The thing that you want to think about is whether it makes sense for your business to own the asset or for you yourself to own the asset. And that's going to come down to risk exposure, financing opportunities, and the

geographic area in which each of you operate. Thank you so much for asking that question, Tom. and good luck with whatever you decide. Our next question is also from somebody from California. Now, this caller has multiple questions, so I'm going to play her first question, and then I'm going to cut it off midway through the voicemail, answer that first question,

and then we'll move to the second and third question. Hi, Paula. This is Anonymous from California. I have a few questions for you. First, what factors go into your decision on whether or not to use a property management company? Are they purely personal, or are there any financial factors that you take into consideration?

All right. Anonymous, you have a bunch of questions, so I'm going to answer these one at a time. So let's start with this first question, which is, what factors play a role in my decision as to whether to use a property manager or whether to self-manage a property? Well, there's a chart, and I'm going to put this chart in the show notes, that illustrates the relative hassle and cost of hiring a property manager for different types of properties.

And here's what I mean by that. Let's say that you have a property manager who is willing to represent you and represent your properties for a 10% fee. Now, let's say that you have two properties. One of them rents for $4,000 a month, and it's a really nice Class A property with very well-qualified tenants. It's in new or newly renovated condition. And it's in a safe, stable neighborhood.

So the risk that you are going to have to chase down tenants for rent or make a lot of repairs or deal with a lot of maintenance issues is fairly low. And yet the cost that you pay to that property manager at 10% of the rent, if the gross rent is $4,000 a month, that is going to cost you $400 a month. So that's example number one of a Class A residence. Now, let's say you also own a property that is a class C minus residence, and it rents for $700 a month. But it has tenants that have a history of making late payments or have a history of needing to be reminded to make payments. It has high turnover, high tenant turnover. It has a lot of deferred maintenance issues, a lot of repair issues. This property is probably going to need more management, more oversight.

And yet the cost of hiring a manager on this property is going to be significantly lower. That being said, so the example that I just gave is a property that rents for $700 a month. There are some managers who have a floor, so they will charge the greater of either 10% or some X raw dollar amount. So you might pay $70 a month for representation on this property, or you might pay whatever that property manager's raw dollar floor is. So you may be paying 100 a month or even 150 a month. And as a percentage of the rent, that's greater. But as a raw number, we're talking about 150 a month. Yeah, I get that that's 20% of gross, but it's still 150 a month for something that's going to need a lot of handholding as compared to 400 a month for a property that won't need as much management or at least is unlikely to need as much.

So that is the fundamental place from which I make my decisions. How much is this going to cost in terms of actual raw dollars, not as a percentage, but raw dollars, how much will this cost? And what will that buy me? So that is my answer to your first question. All right, let's keep going. Second, how much, if at all, should a new investor weigh the tax benefits of a property purchase? I would not let the tail wag the dog. When you are looking for properties, choose the property that is going to, in your estimation, be the best investment that you can make.

And once you purchase that property, then tax optimize it. If you choose a property based on what you think the tax benefits will be, if you make decisions based on taxes first and ROI second, then your priorities are flipped. make that decision based on your ROI, your cap rate, your cash flow. Even heaven forbid your cash on cash return, those are all of the formulas that play into the return that you'll make on the investment that you choose. Choose a property based on that. And once you own it, then you can squeeze as many tax benefits out of it as you legally can, but that's that in and of itself should not be your determining factor.

And finally, I've seen some investors use 10. of the gross rent instead of the 1% rule when estimating repair and cap X expenses. Do you have any opinions or thoughts on using one versus the other? I understand there are only estimates, so maybe I'm thinking too far into it, but just wanted to ask your opinion. Thank you so much for everything you do. Let's walk through the math of it because those two numbers are actually very close. First of all, the 1% rule with regard to estimating repairs and maintenance. So for listeners who are unfamiliar with this, the 1% rule in this context,

states that approximately 1% of the price of the property is the amount that you will pay annually for repairs and maintenance. And so when we math this out, if you have a property that is $100,000, 1% of that is $1,000. And divided by 12 months of the year, that means that you would be setting aside $83 per month. So that is how much repairs and maintenance would cost as an estimate using the 1% rule. Now, to what you ask, 10% of gross rent, all right, remember, gross rent is different from potential gross rent. Potential gross rent is the amount that a property would rent for at full occupancy, but obviously you're never going to have full occupancy. So, let's take the same property. It costs $100,000, it rents for $1,000 a month, $1,000 multiplied by 0.95, if you assume 95% occupancy, multiplied by 10%,

gives you a result of 95. So in scenario A, you're estimating $83 a month for repairs and maintenance. In scenario B, you're estimating $95 a month for repairs and maintenance. Are you familiar with the expression precise but not accurate? When we're talking about making estimates with this degree of margin of error, right? We're talking about should I estimate $83 a month versus $95 a month per $100,000 of house. there's no way that life is going to be that close to what you put on a spreadsheet. In my course, I have my beta testers.

They have this monster spreadsheet of property analysis, and there are three columns in there. There's worst case, best case, and a middle case. And the variables that they put in swing wildly. Because I want to really drive home the lesson that when we look at numbers on a spreadsheet, those numbers can be unduly precise, spreadsheeted out to decimal points. And when we see a number that has that level of precision,

precision can give a veneer of accuracy. But the fact of the matter is, projection is just a fancy word for guess. And the thing that's really going to impact your repairs and maintenance costs are the newness and condition of the property. That's the elephant in the room. That's the 80 of the 80-20. What that means is that in some ways, your CAPEX and your repair and maintenance costs are a little bit inversely related, right?

The more money that you put into CAPX so that you make those long-term repairs, you put in new windows, you put in a new water heater, you put in new flooring, a new siding, a new roof, the more that you make those capital expenditures, the less money, most likely, you'll have to spend on repairs and maintenance. So do you pull it out of column A or column B? And how much is that going to be and how new is the property and how well has it been maintained? And is it in a humid climate versus a dry climate? All of those factors are going to play into what the repair and maintenance costs are. And so I would not recommend that you spend a lot of your mental bandwidth trying to iterate your spreadsheet to increasing levels of perceived precision because at the end, at the risk of repeating myself, at the end of the day, precision and accuracy are completely different concepts. So really the thing to do, if you are going

to be using these broad rules, is pick one, either one, I don't really care which one, but pick one and apply that same one to all properties that you're looking at, assuming that that basket of properties are all in the same area, same age, same condition. As long as you do that, then you will be able to hold that variable at a uniform standard as you look across this basket of potential properties. And that will allow you to compare property A to property B to property C to property D. And at the end of the day, that's what you're really doing when you're using these spreadsheets. you're making cross comparisons between your various options to see which one you should pick.

You're not trying to set a budget for fiscal year 2019, 2020. You're just trying to compare 123 Main Street to 789 Main Street. And that at the high level is what a lot of this is about. It's about choosing the right property. Because here's the final comment on this. Here's the thing if you think logically about both of those rules is if you think logically about them, you can see how both of them are completely illogical. Because the price of a property is going to fluctuate based on broad market conditions. And likewise, the rent will also fluctuate based on market conditions.

2007, 2008 was a perfect example. In that year, we saw properties drop in value very dramatically. Did that mean that their repair and maintenance costs also dropped in value proportionately? No, of course not. The price was influenced by a huge gamut of factors, many of which have absolutely nothing to do with the ongoing operating costs. So whether a property costs $200,000 versus $250,000 versus $300,000 and then the market's dropped, and now it's back to $250 again, but then, oh, some big company announced that they're opening a huge branch in your city, so now the price of properties have skyrocketed back up to $350,000, right?

The price of real estate fluctuates based on a lot of factors that have nothing to do with how much repairing the toilets are going to cost. And likewise, the cost of rent, same thing. Your property is located in a smaller town and a factory in that town shuts down. all of a sudden there are fewer jobs. People start moving out. There is a housing surplus. Rents go down. Is that going to impact your repair and maintenance costs?

No, not at all. So if you think about both of those rules, neither of them make any sense. Just pick one and go with it. Because at the end of the day, and this is something that I think most people who teach real estate are never going to say out loud. But really, at the end of the day,

we're kind of all just throwing darts in the dark. And we are trying as much as humanly possible to do an educated job of that. But projection is an educated guess. And that's the best it's ever going to be. Thank you so much for asking that question. We'll come back to this episode after this word from our sponsors. Do you want to work out more, but sometimes it's inconvenient to go to a gym? Or a gym membership is just kind of expensive?

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And when they ask, hey, how did you hear about us? mention to afford anything. Speaking of callers from the West Coast, our next question comes from a caller from Las Vegas. Hi, Paula. I currently own a paid off rental property in the southern part of Las Vegas. It was my primary residence until December 2017.

Property is currently rented out and the lease ends in January 2019. I bought the property in 2011 for $105,000. Las Vegas has had a nice appreciation around at of late, so it currently sell for approximately $235,000 to $240,000 before expenses. The property rents for $1,200 a month, which is a good return on investment, but not a good return on equity. Also, if I sell within three years of moving out, I can avoid capital gains tax, which

will be at least $15,000. I definitely want to invest more in real estate, but currently the Las Vegas housing market and does not provide very good returns on investment. If I sold the property, I would want to use all that money along with some additional funds. I have collected to invest in real estate in the new market. I love those rent checks. In addition, I am not a leveraged person, so I don't want to do a he lock or free five to buy additional properties. And honestly, I want to pay cash for my future properties when possible.

So the question is, should I continue to rent the property out and hope for continued appreciation or sell and invest in a new market with better returns. Since you are familiar with the Las Vegas market, I thought you would be a perfect person to ask. Thanks for your town. That's a great question. There are a few different ways that we can tackle this. Number one, as you said,

the property that you currently hold has a very good return on investment relative to what you paid. So the cap rate that you're getting on this property relative to what you paid for it is awesome. You're correct in that. the return on equity, the return on the current value of the property is want-want-want. But you may or may not choose to care about that. In real estate investing circles, there are a lot of people who really care about return on equity. And broadly speaking, I guess if you take a step back and you zoom out,

there are many metrics that you can look at. Return on equity is one of them. Cash on cash return is one of them. Cap rate is one of them. The first question that I want you you to ask yourself is of the many, many formulas and metrics that you can use to evaluate an investment, which one is your priority? Because you can't optimize for all of them. Sometimes optimizing for one means compromising on another. And the most obvious example of this is that you, obviously, you can't optimize for a high cash on cash return while also optimizing for being completely debt-free and leverage-free, right? Like, that's the most duh example.

And in your case, while there isn't necessarily a conflict of interest between optimizing for ROE versus for cap rate, I mean, if you were to sell this property and buy a different property and the cap rate on that property is less than what you're getting on your current property, again, based on what you paid for it, then you're giving up a little bit of something in order to get a little bit more of something else. And that's fine if that's what you choose to do. But is that what you choose to do? Are you trying to optimize for a metric that you don't necessarily need to optimize for because that's what the other voices are saying, other voices in the real estate investing community? Or do you genuinely prize ROE? And that's the metric that you absolutely want to optimize for. That is my question number one to you. And where I'm leading with that question is maybe you don't need to sell the property. at all. Not because of any speculation about what may or may not happen in the future markets of Las Vegas, but just for the more principled fundamental reason that if you're getting an amazing return on investment compared with the money that you invested, then why not leave good enough alone? So that's the first thing that I would say. Now, the second thing that I would say, you're correct in that because it was your personal residence, I'm assuming it was your personal residence for at least two out of the last five years, which if you bought it in 2011 and I presume you moved in right away, then yeah, you very easily meet that standard. Then you're correct in that if you sell it, you can avoid paying capital gains tax. However, since you stated that what you want to do with the proceeds from the sale is to put that money into another rental property, you also have the option to use a 1031 exchange. So even if you decide to sell this property, Later on down the line in the year 2022 or 2024, you can still use a 1031 exchange in order to indefinitely defer those capital gains taxes.

Now, that being said, I'll put a huge asterisk here in that people talk very flippantly about 1031 in houses. And the truth of the matter is it's sometimes not that easy. There are stringent requirements about the timeline in which you have to identify the next property that you're going to purchase and the timeline. in which you have to then close on said property. And if you don't meet that timeline, then you lose the 1031. Lucas and I talked about this in episode 148 of this podcast. So I would encourage you to go back to listen to that one, where Lucas and I both talked about how, sure, you can 1031 something,

but sometimes in order to meet that stringent timeline, there are investors who, in order to 1031, a property, have ended up kind of trading one mediocre property for another, and you don't want to find yourself in that boat. So all of that is to say that know that that option is out there, know that the 1031 option is out there, but simultaneously also know that there's nothing that beats the capital gains exemption as a personal residence, right?

That's the creme de la creme of capital gains exemptions when it comes to real estate. Okay, so that's the second thing that I would say. And then the third comment that I would make, you asked if you should hold on to it with the hopes that the law, Las Vegas market will continue to rise in the future. And I have to admit, I am of two different minds when I answer this question. There is my principal-centered approach, and then there is my shiny object syndrome approach, right? So my principal-centered approach is, as a matter of principle,

I do not believe in making decisions based on speculation about what the market may or may not do in the future because the truth is we don't know and we can make guesses all day long, but we don't know. So as a matter of principle, if you're going to make a decision, make it based on the factors that you can control, such as return on equity or cap rate, or heck, even a property with a great gross rent multiplier. Those are all things that are well inside of your circle of influence. So as a matter of principle, make decisions based on those factors which you can influence, you can control, and let the future play out how it does. Okay, so that's the principle-centered approach. That being said, shiny object syndrome, Paula, the side of me that does look at indicators in spite of my own admonitions to the contrary, I have to admit, Las Vegas looks like it's poised for a lot of growth.

We've got more tech companies coming here. We've got month over month, massive population growth. We've got the Raider Stadium that's getting built. We've got new hotels going up. There's loads of construction. I mean, look at the skyline, and it's just dotted with cranes. Or look at the ground level, and you'll see public notices for new building permits or special use permits or conditional variances. You see permitting for construction and renovation happening.

everywhere and a ton of activity happening here. Yes, I absolutely see all of that. And there is talk of a high-speed train that would allow you to get from close to L.A. to Las Vegas in less than two hours. And that will just bring more money, more people, more jobs. And all of that being said, yes, the indicators look awesome. But they also looked awesome in 2006. So my latency inner speculator is irrationally exuberant about Las Vegas. And yet my principal-centered approach is trying as hard as it can to exercise measured, rational judgment based on a foundation of what are the returns today. Thank you so much for asking that question.

Our final question of today comes from Anonymous, also from California. Hi, Paula. Great podcast. And I've been a long time listener. I got a wealth of knowledge from listening to your podcast and it helped me buy a rental property. I live in California and rental properties in Texas. I have a property manager take care of the property. Though I'm not profitable yet, I am expecting my rental income to cover my mortgage and other expenses and still have a net profit by next year. Okay, wait, quick time out here. Before we go on with the rest of your question, I want to comment. on this first. So you're not profitable yet, but you are expecting to be profitable next year. I have a lot of questions right here. I want to clarify what you mean when you say this. Scenario A, you currently are not making enough money to even cover your bills, and you are hoping that next year you would be able to raise the rent. And if you raise the rent, then that would provide enough money that at least you could break even. That's scenario A

of the interpretation of what you just said. Scenario B of the interpretation of what you just said is that the property would be cash flow positive, but you've chosen to reinvest that money back into making optional improvements in the property. And as a result, you have the perception that it's not profitable, even though if you were to look at it purely from an operating expenses perspective for what are the operating costs and then what is the net operating income, if you were to look at it purely from that lens, excluding the optional reinvestments that you made, it would be cash flow positive. So that's scenario B of the interpretation and that That's a much more favorable interpretation.

So what I want to know, first of all, is which of those scenarios, or is there an alternative scenario C that I have not yet outlined, which of those scenarios are we talking about? Because if you're talking about a property in which the net operating income is a negative number, then get the heck out as fast as you can. Run, run. You never want to hold a property that is negatively geared if we define that. negative gearing based on operating expenses and operating expenses only, right? And where a lot of people start conflating issues, where a lot of people mess this up. And I see this in my students, the beta testers, is that there are many people who, if they choose to make improvements to a property, then they will come back to me and they will say, oh, my property is not profitable.

or my property is negative cash flow. And they're saying that because they have chosen to take the profits from the property and use it to upgrade a bathroom or upgrade a kitchen or put up an additional partition wall so that they can convert a two-bedroom into a three-bedroom. And if that's the case, then I say to them, actually, you're doing really well. Your property is spitting off so much money. It is so positively cash-flowing that you're able to. to take this big chunk of money and reinvest it back into having a much nicer kitchen

because you know that that nicer kitchen is going to boost your likelihood of getting better tenants or lowering your vacancy rates or boosting your rent or some combination of all of the above. So anyway, I realize I've interrupted you mid-question, which is an impressive thing to do when that question is expressed in the form of a voicemail. But before you go on with the rest of your question, that is one thing that I want to say right off the bat. I don't know what you mean when you say that this property is not profitable. And that is either an indicator to run for the hills or not actually a big deal at all, perhaps even an indicator that your property is doing really well, depending on the lens that you are using to frame that interpretation.

Okay. That said, go on. Here's my situation. I'm an Indian citizen working here in USA on H-1B work visa. There's a possibility that my visa will not be renewed and I may not get a green card or US citizenship. I might or might not be able to secure a visitor visa to visit the property. I will neither be a citizen nor a resident of USA, but I would like to continue to hold the rental property for as long as I can. My minor children are US citizens and hoping they'll be able to take care of the property after they become adults in our 15 years. Here are my questions. Do you think there will be any issues after I move back?

India. I'm right now managing the property from out of shape. In future, I'll have to manage it from out of country. What are the things that I should consider doing before I leave the country for good? First of all, I am very impressed that you were able to get financing with an H-1B visa because the biggest problem that I have seen among people with H-1B visas who are trying to buy housing is that it's very, very hard to get a mortgage if you've got an H-1B visa. So congratulations on finding a lender who would lend to you on a home in your visa situation. That's rare and very fortunate that you were able to find that. Secondly, there are many foreign-based investors who own properties in the United States. That situation is not even remotely unusual. There

are many investors based in China, based in Malaysia, based in the Philippines. One of the first general contractors that I worked with actually specialized in the niche of specifically working with investors who were based in Japan. And he was the general contractor on many of their properties. So you had these Japanese investors who would buy single family homes in Atlanta, Georgia. He did the pre-inspection walkthroughs. He handled all the renovations. He coordinated closely with all of the subcontractors, the specialty subs, like the electrician, the plumber. So there are a lot of investors who are in the same boat, and there are a lot of people whose job is to serve those investors.

In fact, there are people who have formed entire businesses out of specializing in exactly that. What I would recommend that you do before you leave is to find those people, because in real estate, especially when you're managing real estate from a distance, the strength or weakness of this project is the team. It's the people working in it. And if you think about that from the perspective of any business, not just real estate, but absolutely any business at all, a business is only going to be as good as the people who work there. A business at its most basic level is comprised of humans who do things.

things. So find the right people. And you're fortunate in that you are here now to be able to meet them in person and hire them now and see how it goes. Test out those relationships. Do not be shy to fire quickly if you have a bad experience with anybody. They say hire slow and fire fast. But yeah, you're fortunate in that you can do that now so that by the time you leave your team will be in place. So that is my answer to that aspect of your question. All right, let's move on to the second half of your question. Question two. If there is no issue holding a rental property for a non-citizen, non-resident, non-dresident foreigner like me, do you recommend buying more rental properties in future before I leave the country? I would like to get a mortgage when

I still have a job here. Question three, can I buy rental properties in U.S. after I move back to India? Is there a way to get a mortgage for foreign investors? Thanks for answering my questions. Continue the great show. Thank you. My answer to question two and question three is all going to come down to lending. I know a lot of people who are here on H-1B visas who struggle even to get a mortgage for a primary personal residence. So if you can get the financing and if the numbers on the rental property makes sense, if the property has a good cap rate,

and if it's positively cash flowing, then, hey, that's fantastic. You know, as long as the math checks out and you have good cash reserves for it, you're getting a good return on investment, if the math checks out, then why not? As long as you have a good team in place and really, I realize I'm repeating myself, but all of this is going to boil down to that team. So if you were to buy another rental property, I would encourage you to buy it in a location that is close enough to your existing property that you can use the same team for all of your properties. And the reason for that is simply so that you don't end up duplicating your work. You can have the same electrician, the same plumber, the same general contractor, the same property manager.

you can have the same people handling your whole portfolio. And that's just going to be a lot easier to manage than it would be having one team located in location A and a different team located in location B and then you've got to manage two different sets of humans. So yeah, if you can get the financing and if the math checks out, then absolutely I would move forward with buying a property,

assuming, of course, that you get a good team in place. Thank you so much for asking that question. and best of luck with everything that you're doing. That is our show for today. Now, I want to thank everybody who made a contribution to our charity water campaign. We have broken the $13,000 mark. So we have fundraised more than $13,000 as the Afford Anything community. And we got a really cool voicemail about this.

From a woman who has not only donated to the charity water fundraising campaign, but is also getting an employer match. Here's the voicemail. Hi, Paula. I just wanted to call in and thank you for inspiring me to make a donation to Charity Water. I do think it's a worthwhile project. I do have a matching gifts program

through my W-2 employer, but I ran into a little hiccup, and I wanted to make you aware of this. After contacting Charity Water, I found out that we cannot process the matching gift through the charity. Water name, it has to be through charity global. And that is their corporate name on their W-9. So if anybody else runs into this type of problem, maybe this would be helpful. Thank you so much.

Thank you so much. Not just for supporting the campaign, but for also getting your employer involved, getting an employer match, and then finding out about the execution of it and then sharing that with the rest of us. Thank you so much for supporting this. We, as the afford Anything community have raised enough money that we will be able to be the official project sponsor on something like digging a well or building out a new pipe system, something like that. We don't know exactly what the water project is going to be, but we have raised enough money to be the official project sponsor on a water project. Thanks to you. Thank you for coming together as the Afford Anything community

and bringing safe, clean drinking water to some of the poorest communities on earth. If you would like to check out more about the campaign, affordanything.com slash water. That link will take you to the Afford Anything page on the charitywater.org website. And so far we've raised $13,252. You can also go to afford anything.com slash store

and buy your super awesome Afford Anything T-shirt, and 100% of the proceeds from the sale of that shirt will be given to Charity Water. I'd like to invite you to join our Facebook group. We had a number of people join after I mentioned it. I can't believe I haven't mentioned it before. How have I recorded 161 episodes of this podcast and just like, oops, I spaced on mentioning that we have a Facebook group.

Huge welcome to all of you who have joined. If you haven't joined yet, just search for the Afford Anything community on Facebook. or a pretty cool crowd, if I do say so myself. And in that community, you can ask lots of questions about anything and everything related to personal finance, money, investing, financial independence, anything that's on your mind. If you want to ask a question on this podcast, afford anything.com slash voicemail is how you call in to leave a question, and I would love to answer it on a future episode.

Speaking of future episodes, we're going to be doing an episode on AI, artificial intelligence, and the future of jobs. that is coming up on a future episode of the Afford Anything podcast. My name is Paula Pant. This is a weekly show. So if you want to hear from me on a daily basis, you can find me on Instagram where I post at least once a day. And that is Instagram at Paula Pant, P-A-U-L-A, P-A-N-T. Thank you so much for tuning in.

Thank you for being part of this community. I will catch you next week.