Afford Anything - Ask Paula: How to Make Smarter Real Estate Decisions

Episode Date: October 4, 2021

#342: Russell is a busy professional who’d like to invest passively in real estate. Is there data he can use to compare this approach to owning and managing their own properties? Laura wants to purchase her first investment property in Miami. Should she cash out some RSUs and stock from her company to use as a down payment? And what type of mortgage is she eligible for since she already owns a home? Jordan and his wife own three properties and are under contract on a new house since they have a new baby on the way. Should he sell any of his existing properties to be in a stronger cash position, thus mitigating the risk of future fluctuations in his income as a real estate broker? Or should he keep his rental properties since his goal is to reach financial independence through rental income? Do you have a question on business, money, trade-offs, financial independence strategies, travel, or investing? Leave it here and we’ll answer them in a future episode. For more information, visit the show notes at https://affordanything.com/episode342 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to any limited resource that you need to manage, like your time, your energy, your focus, your attention, saying yes to something implicitly means, saying no to all other opportunities. And that opens up two questions. First, what matters most? Second, how do you align your decision-making around that which matters most? Answering these two questions is a lifetime practice, and that is what this podcast is here to explore and facilitate. My name is Paula Pan.

I am the host of the Afford Anything podcast. Every other episode, we answer questions that come from you, the Afford Anything community. Today, as with every one of these episodes, my buddy, former financial planner Joe Saul Seahy, joins me to answer these questions. What's up, Joe? Does it make us money nerds that this is like one of my favorite times of the week? It's like an hour-long party with Paula and a couple microphones and some great financial planning questions. Could anything be better? Ah, well.

Could it? No. No, not it. Well, I mean, I guess there are a couple of things that could be better. If there were like brownie Sundays involved. Or we did this like from a beach somewhere maybe. Exactly. Exactly.

Yes. But we've 80-20ed it. We've 80-20ed it right here. So here's what we're going to chat about. in today's episode, we're going to start with a question from Jordan. And on the surface, it sounds as though Jordan has a real estate question, but when you peek under the hood, he really has a financial planning question. So we're going to start with helping Jordan figure out the strategy and approach, not just for his properties, but for his big picture finances for the coming

decades of his life. After that, we're going to hear from Laura, who's who's thinking about cashing out some restricted stock units or RSUs in order to come up with a down payment. And we're going to hear from Russell, who's busy and is looking for passive investments. We're going to answer questions from Jordan, Laura, and Russell in today's episode, starting with Jordan. Hey, Paula and hopefully Joe. This is Jordan, and this is actually my second time calling in. Thank you for all you guys do for the financial world. You've made a huge impact on my financial life.

So here's my dilemma. I currently own three real estate properties. One is my primary residence and the other two are rentals. One rental is a single family home and the other is a duplex. We live in the West Georgia area and that's where the properties are all located as well. My wife and I are currently expecting our second baby that should be here around February. This has caused us to speed up our plans of moving to a more functional home for our family. We are currently under contract on a $500,000 new construction home. It's supposed to be completed. around November or December of this year. I'm debating on whether or not I should sell one, two, or even three of our properties. I'm in a position where I do not have to sell our primary residents in order to purchase this new home. I've considered turning our primary residence into a rental property. However, I think that I have decided to go ahead and plan on selling our primary residence since I wouldn't have to pay any capital gains on it. And we have anywhere from $100 to $150,000 in equity in our home. Also, I'm concerned, I may be purchasing a house in an inflated market, so I'd like to wash out that potential risk,

some by selling my house. About the rentals. The single-family home I'm currently collecting $875 a month in rent, and the monthly mortgage on it, including taxes and insurance is $535. The duplex I collect $1,315 a month, and my monthly mortgage on it is $637. Only combined regular expenses I have with the rentals are $100 per month in landscaping, and about a $30 per month water bill. I purchased both of these rentals one to two years ago, and currently if I were to sell them,

I would profit approximately $25,000 each above what I paid for them a year or two ago, and that's likely on the low side. After talking to my CPA and taking into account the capital gains tax I would pay and paying off the mortgages, I would have about $100,000 that I could put back in my pocket off selling these two properties. Additional background info for you. I'm a real estate broker and make anywhere from $150,000 to $200,000 a year as a real estate. estate agent. I typically have a pretty conservative approach to my finances because real estate income can be so up and down. Now with the second baby on the way, purchasing a $500,000 home

and the current housing market where it feels like everyone is holding their breath to see if it's going to crash or at the very least have a strong correction, I think I'm becoming even more conservative, maybe too conservative. After selling our primary residence and purchasing our new home with a 5% down payment, 2.75% interest rate, 30-year loan, and all of the cost, upgrades, etc. associated with purchasing a new home, I'm estimating having around $200,000 in cash left over. I have no other debt other than the mortgages. So this is where the question finally comes in. Should I sell the two rentals? Because with the amount I can profit off of them right now, it would take so many years to actually make that through collecting monthly rent and debt

payoff. Selling them would put me into a much higher cash position and I can potentially save up enough to sort of mock pay off my home. And I just mean whatever I owe on our home, I invest that amount of cash and let the return off the investments, pay my monthly mortgage payment that I have only a 2.75% interest rate on. Or should I just continue to hold on to my rentals since I hopefully will not need that cash anyway? I do have a goal to own five or so rentals that are all paid off, so that way passive rental income can pay all or most of our living expenses. But at the same time, I do like the idea of being in a higher cash position to safeguard myself against any crazy downturn, of the housing market, which in that case, my income would likely go down some.

And the higher cash position may allow me to acquire some properties at a discount when foreclosure start happening again, but then this sounds like I'm trying to market time. I know you usually do not tell people what to do, but I'm very interested to hear yours and Joe's opinions on this. I'm sure they might be different. Thank you again for answering my questions. Jordan, thank you so much for that question, and thank you for being a long-time listener, for calling in twice. I'm glad that you are a dedicated member of this community. Let's talk about your question. What I find fascinating about it is that this is not just a real estate question. It may look like that on the surface. But this is a question about comprehensive financial planning. And that's why you had to include so many details. It's why you had to talk about the nature of income that you have, the fact that you make between 150 to 200,000 annually, but you make it in the type of profession in which your income can be volatile. You talked about the size of your family. You talked about other debts that you hold. hold or don't hold. You talked about your long-term goal of owning five rental properties and supplementing

or replacing your income with the cash flow from those properties. So the fact that you included all of those details in the question points to the fact that this is not a question about how to manage a piece of real estate. This is a question about how to manage the financial strategy for the coming decades of your life. So a few thoughts right off the bat. First of all, I think your instinct about selling your primary residence so that you don't have to pay capital gains tax, and taking the cash that comes from the sale, which you estimate to be about $200,000, taking that cash and using it to offset some of these coming expenses, pay down your debt, invest in other ways.

I think that sounds like a sound instinct. Oftentimes, a person's primary residence does not tend to make for a rental property that has good returns, because, as I'm sure you know, being a real estate broker, when people buy primary residences, they're buying that property based on personal preference, not based on a rigorous analysis of the numbers. And so oftentimes, a primary residence ends up being an underperforming rental property. So I like the idea of selling this primary residence, taking $200,000 in cash, and then having that stronger cash position, which would allow you a variety of options. The idea that I don't like is selling off

the rentals that you hold, the ones that were purposely purchased as rental properties, because the numbers on them sound solid, and your goal is to eventually own five rentals that generate strong cash flow, and it sounds as though these two rentals that you currently hold are good candidates for that portfolio. The cash flow is already strong, and it sounds as though these two rentals that you currently hold, are good candidates for that portfolio. The cash flow is already strong, and it sounds as though that cash flow will eventually only become stronger once the mortgages on these properties are paid down. And with your goal specifically, your goal is five rentals that generate enough income to cover your living expenses, which means you want a small portfolio of highly cash flowing rentals,

which is great. There are other people, and I support different people, have different goals for different reasons, but there are other people who might say that their goal is to have 20 properties or 30 properties. And there are sound reasons for having a goal like that, and that's great for the people who choose that goal. But given that your goal is to have the highest amount of cash flow from the fewest amount of rentals, it sounds as though the ones that you're currently holding are good candidates for that criteria. So I don't see any compelling reason to sell assets that are performing well for you and that stand to continue to perform well for decades to come. The only thing I question that you mentioned is selling the house and improving the cash position.

Don't get me wrong, Paula, I get that. And I think that that cures something that you can hear in Jordan's voice that he's really worried about the bigger family, about his income stream, where that money's going to come from. I just know that when you take money that's in investment now and you move it into a cash position, that there is a behavioral tendency to leave it in cash. And so we're taking an asset that isn't performing well. You talk about how a primary residence is not a great investment, and I totally agree.

but cash is a rotten investment that gets beaten by inflation. And so when I hear taking money and moving into cash, it solves his angst around short-term issues in his cash flow. But it also works directly against you when it comes to solving long-term goals. So the first thing that I would want to know, is how much does Jordan need in investments to get where he wants to go? Because if you can do that and it doesn't hurt the long-term goal, then by all means, you're right on. Take that money, put it in cash, and relax. But I think there's also more of a short-term challenge here that I'm

hearing. And I'm not sure he does have enough to get where he wants to go. And if he doesn't, then the challenge is, how can I either create streams of income, or how do I shore up my current income streams to not have that worry? And I feel like often we throw money against a problem if we have it available. Well, I have this primary residence. I'll take that money. I'll put it in cash. That'll solve the problem.

When our brains are absolutely amazing and we can solve some of these issues just by thinking a little more critically about are there different ways that I can do this and leave my money invested. So don't give me wrong. I like the part about sell the house. I don't know that taking that money and shoring up the cash position would be the best thing because I don't know if he's ahead or behind. The second piece, I am right there with you when it comes to the two rental properties. If his state of goal is to own five and he's at two and to your point, the numbers sound great. I don't know what that does really well for him. He talks. He talks about, well, that will give me more cash. And again, I look at the, I look at the downside of having

cash. If I have cash, the propensity to take that cash and turn it into a non-performing asset, i.e. my lifestyle, gets much bigger, right? Turn an asset into a liability. Yeah, I'm going to touch it just a little bit, right? I'm, well, I just have this one little thing. I have this one little thing. I've got this. It's amazing when I was a financial planner how often I would have clients that would call me and go, Joe, we were just thinking, you know, I know we don't want to touch this, but I saw this thing that I really need to do now. And there always is a problem du jour. There's a daily issue. There's a daily scrape. There's something that I have to do right now that once I'm past this thing, everything's going to be better. But then there's another one.

And there's another one. And by the way, Jordan, this isn't you. And I don't know you. I'm just saying this, this is just life. This happens with so many people. And when I think about taking that money and put it in cash where a lot of people see safety, I see danger. I see a lot of danger of that, of that going by-bye. Also, you have a different mentality when you're in cash. Let's switch investments for a second. Let's talk instead of real estate about a place where people do this a lot, which is with their stock market-based investments, Paula. I know there's people listening to this that have said at one time or another. The market seems really high. So here's what I'm going to do. I'm going to take my money out. And I'm going to. I'm going to take my money out. And I'm

going to put it in cash and then I'm going to wait for the market to come down and everybody says you shouldn't do that right people people people do it all the time do it all the time and notice you think in your head before you go to cash that you're going to feel better you're going to feel way better with that money cash you're going to feel safer but you know what's funny you don't I've yet to meet a person and I'm sure there probably is somebody out there that does feel better with it in cash but when the money's sitting in cash, now you have to hope for the market to go down, something none of us really want to have happen, right?

In the big scheme of things. I'm hoping for this contrary thing to happen. I'm worried every day the market goes up and I'm not in it. Now FOMO starts hitting big time because now I'm sitting on the sideline. The market's kicking my butt. And most of the time people have reported to me that they feel worse when they move it to cash,

when they expect to feel safer. So the cool thing, that he's got. And when he talked about the rental houses, Jordan talked about how well, then I have the safety of having this money sitting in cash. It's already Jordan in your net worth statement. You say that you'll be able to capture X amount of money. You already have that money. Don't get me wrong. I get it. It's locked in the house, but it's not like you don't have it. You do have it. It's just in a performing asset, and I don't want to see you move a performing asset into a non-performing asset, which is cash. A couple of things that strike me. One, Joe, two,

the example that you gave about people who sell out of their stock positions because they think the market is high, move to cash, telling themselves that they will buy that stock again or they'll buy those index funds again once the market drops, there are a million different ways that that goes wrong. Like you said, sometimes the market continues to rise and then they fomo and then they buy in again, but at a higher price. Sometimes the market drops, but they assume that it will drop further, and so they don't get in, and they miss the drop, and then boom, they're still buying at a higher price. Or sometimes the market rises, and then when it does drop, it drops to a level that is ahead of the level at which they sold. We see that happen too.

So I think for a lot of the people listening, it's easy to think of examples like that when we're talking about the world of stocks, the reality is the same thing happens in real estate. People love to make guesses about where the real estate market is going. And certainly, we can look at data. We can look at housing supply. We can look at new construction permits and population growth in a given area. We can look at number of days on market. We can follow those trends and look at the data and try to surmise, is there a bunch of speculative building going on or easy lending, which might be indicative of a bubble? Or is it simply the case that new household formation is outpacing new housing starts, which may be indicative of a supply demand

imbalance that's triggering a price run up? We can gather data and answer that question, but at the end of the day, selling an asset because we hope that that asset may drop in the future is, statistically speaking, likely to be a bad decision. To put it simply, in both stocks and real estate, over a long-term aggregate average, the value of those assets rise on more days than they fall. And so, staying in the market, staying in the game over the long-term is likely to do better. Do you want to apply some numbers to that, Paula? Yeah.

In an average year, the stock market hits new highs on around just less than one-third of the day. So let's call it 100, right? I mean, I know there's weekends in there that the market's not open. But even on those days, the market closes at a high, right? So we can say around 100 days. So one out of every 3.65 days, the market, the stock market is at, a high. And so my entire career I hear, the market seems high right now. Yes. And it usually is. One out of every 3.65 days, the market is at a high. And that is good. And it's happened for a long time.

And you will always feel like it's high. And that does not denote the problem that it seems to imply it's out there. Right. Exactly. Oftentimes people have a fear of heights. I do. But and that's interesting, right? There's this great phrase that Nike had a long time ago before that is frankly personal mantra of mine, which was before Just Do It. And I understand why they got rid of it because it's not as sexy sounding as Just Do It, but it was feel the fear and do it anyway. And I think it's okay to feel fearful. And frankly, in the stock market, you should feel a little fearful. I think that that gives you a healthy respect for the markets and how small we are in these gigantic markets. I sometimes feel like when people are deciding when to get out or when to get in,

that our little brains can wrap our heads around all the huge things going on in these people that make moves that we can never know. Like we can never know what's really going on in the financial markets, our little brain. And when we say, well, I'm going to buy it when it goes down to X number, right? I'm going to wait till the market gets to X. We're implying that we do know that we have some sort of genius that the market's going to collapse until it gets to the point that we think it's going to rock again. And because we thought it to be, it will move it into existence. Like all of a sudden, all of a sudden, this abundance, the crappiness will stop and the abundance will begin because I deemed it so. We're sadly not as smart as we hope we are.

So do you think that that creates an illusion of control that we find comforting? Absolutely. Yes. Which I think being uncomfortable and really, realizing how we are not in control will help create the wind that you really can get if you say, you know what, the market's going to beat me most of the time, which is where, you know, you and I agree about 85, 90% of the time on passive investing being the way to go. Right. Exactly. And that fear, that fear is an expression of loss aversion. We feel the pain of losses far more viscerally than we feel the,

joy of gains. And so our brains are wired to not want to lose money, more than they're wired to want to grow our wealth. And if you stop and ponder that for just a moment, how incredibly sad that is. I'm thinking that we can have, I mean, this translates to other areas of your life, right? That we can have abundance all around us. And yet my brain, anyway, focuses on that one little negative thing going on. Not on the 900 great things. And I think there's a clear correlation here to just how we're wired in general. I mean, we are wired to say, oh, it would stink for this to go horribly when there's 5,000 great things happening. We dwell on that little bit of negativity. Right. The negativity bias. You know, Jordan, one thing that strikes me about your question is

that when you talk about what you would do if you had a stronger cash position, you introduce a couple of different options, but these options are wildly disparate. So you mentioned that if you had a strong cash position, you might be able to invest that money, i.e., in the market, such as index funds, and pay your new mortgage with the earnings that come from it, given that you could arbitrage the interest rate on your mortgage against the long-term returns that come from an index fund position. So you mention that as an

option, but then you also mention that you'd like to purchase foreclosures if and when they start becoming more abundantly available again. Those are two very different approaches. If the intention is to purchase foreclosures, then that money really should be kept in cash, because that is a goal that has a timeline of less than three years. But if the goal is to put it in, you know, to put it into an index fund and arbitrage the difference between index fund returns and your mortgage rate, that's a long-term approach. So the ideas that you've introduced in terms of what you would do if you had this cash position are ideas that reflect strategies with incredibly different timelines, and those timelines inform whether this money would literally be in cash, which it would have to be

if you want to use it to purchase foreclosures, or in an asset that has a longer timeline. And so I certainly think that no matter what, before you sell anything, including your primary residence, you'll want to get very clear on exactly what you're going to do with these proceeds. And that is why this is a planning question right there.

What do you want? Elaborate on that, Joe. Do you mean it's a planning question because we're asking, does he want to arbitrage his mortgage interest rate versus does he want to stack up on foreclosures? Because I feel like there's something broader than just that. No, I think those are the tactical things. I think more strategically, where do you want to be ultimately, how much money and how much saving is it going to take you to get there? And then those tactics that you're talking about will either inform that strategy and are the right tactic.

or you'll out them as being inadequate for that strategy. So once we know where you want to go, we have this simple equation. I need to save X amount of money and have Y return on that money to get the goal. And then I know strategies historically that have done that and other ones that haven't. And to your point where some things are going to be great for short-term positions like cash, right, having cash, you get more aggressive. on your strategies as you raise that rate of return that you'd like to receive. And then, by the way, also the chance of not meeting that goal, the deviation, the standard deviation on being able to meet that goal goes up. So I think that instead of starting with tactics,

which are, do I sell this property? Do I take this cash? Do I, where is this all headed? I think when you start with where is this headed, a lot of these questions begin to answer them. It strikes me, as I hear you say that, that there are really three concepts. There's objective, then there's strategy, then there's tactic. So we start with Jordan's objectives, and from that, we can then narrow to what strategies are likely to be able to fulfill that objective. And then the specific questions that he's asking, do I arbitrage the interest rate on my mortgage, do I buy foreclosures? Both of those are examples. of tactics that fit under the broader umbrella of strategy, strategy being, in this case,

real estate versus index funds, and both of those strategies are potential routes to solving a given objective. So there's three layers that we need to solve for. Jordan, some of the other things to consider, particularly when it comes to that top level of those three concepts, the objectives that you're setting, a few other things. to consider include, number one, you mentioned that your income fluctuates, and now that baby number two is on the way, this fluctuating income is more of a concern than ever. Given that set of circumstances, how large of an emergency fund do you want to set aside for yourself and for your

family? That's a core question that you need to answer that fits under the category of objectives, which is what anchors all of the rest of this. The same thing. The same thing. The same thing. The same thing, second question, what is your college saving strategy for both of your children? The third question, do you anticipate any other big ticket expenses for your family, such as health care costs? And even if you don't anticipate them, in the event that something were to happen, what contingency plans do you have? How could you deal with a big ticket black swan? And then the fourth question, you mentioned that your goal is to own five rentals that generate enough income to cover your living expenses.

Timeline that. By when do you want to own those five rentals? And how does that fit in to everything, all of the tactics that we've just discussed? So those are some other questions to consider as you become clear on the objectives. And I think the more clear you become on the objectives, the more that both strategy and tactics will start to work themselves out. So thank you, Jordan, for asking that question. We'll return to the show in just a moment.

Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in-payments technology, built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the FinTech hustle that got them named one of America's most innovative companies

by Fortune Magazine. That's what being a fifth-third better is all about. It's about not being just one thing, but many things for our customers. Big Bank Muscle, FinTech Hustle. That's your commercial payments, a fifth-third better. The holidays are right around the corner, and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need servware and cookware.

And, of course, holiday decor, all the stuff to make your home a great place to host during the holidays. you can get up to 70% off during Wayfair's Black Friday sale. Wayfair has Can't Miss Black Friday deals all month long. I use Wayfair to get lots of storage type of items for my home, so I got tons of shelving that's in the entryway, in the bathroom, very space-saving. I have a daybed from them that's multi-purpose. You can use it as a couch, but you can sleep on it as a bed. It's got shelving. It's got drawers underneath for storage.

But you can get whatever it is you want, no matter your style, No matter your budget, Wayfair has something for everyone, plus they have a loyalty program, 5% back on every item across Wayfair's family of brands, free shipping, members-only sales, and more, terms apply. Don't miss out on early Black Friday deals. Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W-A-Y-F-A-I-R.com. Sale ends December 7th.

Our next question comes from Laura. Hey, Paula. I'm looking to get into real estate investing for the first time, and I've been binging all of your episodes on this topic. I have a few questions. One is I'm currently located in Texas, but the prices here have gone up so much. And I'm interested in maybe making the first investment property in Miami. They're just condos there, not single family homes. But the prices are lower, easier to get into.

I will have HOA, and I would like to live there part of the time. So that's question number one. What do you think about the Miami market? Number two is I have some RSUs and stocks from my company. What are your thoughts about cashing some of those out to use as liquidity for a down payment? And number three is what type of mortgage is the best one for this situation since I'll be living there, but I already own a home in Texas. Thank you.

Laura, thank you so much for the question and congratulations on deciding to buy your first investment property. I have a question back to you. You mentioned that you would be living in this property for a portion of the time. Is it that you want to buy an investment property or is it that you want to buy a property for the sake of your own personal enjoyment and you'd like to monetize that property during the times of the year when you're not physically there. The reason that I make that distinction is because those are two completely different paths that have different approaches, different strategies, different numbers. On the surface, they may appear to be the same. In either case, you would hypothetically be buying a property in Miami,

but buying something as a pure investment versus buying something for your personal use that you then monetize are apples and oranges. To you. Use a simple example, because sometimes when you talk about real estate, it becomes easier to understand concepts when you relate it to different fields. Let's say that you were to buy a car and you were to then rent that car out on Turo, which is like, it's like the Airbnb of car rentals. If you were buying a car for yourself and just renting it out on Turo when you're not using it, then that car isn't an investment. It's just this thing that you own and you're making some extra money from it whenever you're not using it. If by contrast, you wanted to become a car investor,

you could do that. You could own a whole fleet of cars that you rent out on tour. But your approach would be different. The type of car that you buy would be different, that the age and make and model of the car that you buy would be informed by the potential returns that you could get. The location, the days of the week that the car is available. I mean, your entire approach, If what you wanted to do was essentially run a mom-and-pop car rental service by virtue of owning a fleet of cars that you're renting out on Turo, you're going to be making very different decisions than you would be if you just had a car and you monetized it whenever it wasn't in use. I think it's easier to see the distinction in that example, and the same thing applies to a home. And so that's my first question back to you. what is your true objective when it comes to this home in Miami?

Because if what you want is a second home, and by the way, this relates to the third question that you asked, what type of mortgage should you get? I mean, it sounds as though it might be a second home loan, depending on how you want to use this property. If what you want is a second home, and you have the money for it, great, get a second home and rent it out when you're not using it.

But know that the numbers that apply to rental properties, the analysis of cap rate, the 1% rule, the cash on cash return, the internal rate of return, none of those formulas apply when you're buying something for your personal enjoyment and monetizing it. Yeah, you still want to make a good investment decision, but it's less of an investment, right? It's more of a personal lifestyle decision. I think of it as like the Venn diagram between personal and investment.

Oh, the little middle part. Yeah, exactly. It's that Venn diagram intersection. I was like, wait a minute, not the whole diagram, the middle part of the Venn diagram. Exactly, exactly. Yes, yes. Because you still do want to make a good investment decision. I mean, you want to be prudent and you want to get a good price for it.

But still, and what do you think about the Miami market, though, versus Texas market? So first of all, there is no Texas market. There are only many, many. Texarkana and Austin equally as exciting to real estate people. See, Joe, you're proving my point. You're proving my point. You're not supposed to laugh there, Paula. There is no Texas market.

There are only many, many, many markets inside of Texas. People don't know that. I live in Texarkana, Texas, so which was the point. Which I just discovered there was the Texarkana massacre, the chainsaw. There was like some serial killer in Texarkana. I just learned that by watching Riverdale. Way back. There's also a horrible movie.

from the, I think the 1960s you can watch about it, which is not great. Anyway, Joe, to your point, Texarkana versus Austin versus San Antonio versus Lubbock. Different things. Right? Different things. Completely different markets. And so that's the first comment that I would make is there is no such thing as the Texas market.

There are only tens of thousands of micro markets inside of that state. So if we take Miami though, like when she said, well, Miami will be less of a hot market. My first thought was, what part of Texas are we comparing it to? Because I don't think Miami is on sale. Right, right. And again, Miami, like any major city, is going to have certain neighborhoods that offer better investment returns than others. So it very much depends on what part of Miami we're discussing. Yeah, I don't know that I can help any more there.

I can talk about RSUs for people that may have RSUs and about selling RSUs. The cool thing about restricted stock units are that the tax damage has already been done. And what I mean by that is, and it might be helpful, Paula, for me to go into just a very short history of RSUs because tech companies more are using restricted stock instead of what they used to use and a lot of companies use, which are non-qualified stock options, right? So people used to get stock options. Now a lot of especially in the tech business, a lot of people going toward RSUs instead. And the reason for that I can illustrate just based on what I used to do, which was work with a bunch of Microsoft people. A bunch of my clients were Microsoftees. And from 2000 through the Ballmer, Steve Ballmer era, Microsoft stock did nothing, did absolutely nothing.

And Microsoft is a company that pays well, but they're really known for great benefits. And the way I think personally that they held on to people was they gave them all these cool benefits and they'd throw these non-qualified stock options at them. Well, but if the stock does nothing and they're underwater forever, that's not really a benefit. So companies started getting away from, and Microsoft included started to get away from stock options and instead gave you restricted stock units. And what that means is your gifted stock, you have to still vest, meaning you have to stay for a number of years before the stock is really yours.

When it comes to paying the tax, the time that that restriction, that vesting schedule is gone and you are now free to sell the stock, you will pay tax on those, whether you want to or not. So with a stock option, we can control the taxation by deciding when we exercise the option. With an RSU, we're just going to get hit with the stock the day that that that vesting period ends. Now, and the amount that you have to pay is what the stock's worth minus any amount that the company makes you pay for it. So, so they might say, okay, that's trading at $70 a share to pay $30 for or $40, whatever the rest of it is, is considered then taxable to you. So the first thing that I like

about RSUs, Paula, when it comes to her question is, I don't like accumulating. stock in a current company, and RSUs will pile up and more pile up and more pile up. So certainly as you're gifted new ones by the company or you earn new ones or whatever the process is that you are incentivized, when you receive these new units, I would on the other end of the conveyor belt be selling units so I'm not accumulating the stock. So yes. And then I think what you do with that money goes back to the discussion that you, just had about this particular investment, begin with the end of mind, decide if this is the

investment for you, and then move it toward the appropriate investment to reach your goal. What strikes me about the question about selling RSUs and stocks in order to come up with the money for a down payment, is that on the surface, it sounds like a question about comparing one type of return to another. Could she make higher returns with this money invested in RSUs and stocks, or could she make higher returns with this money invested in this investment property, assuming that she intends to use it as an investment property? But beyond that, because as you know, Joe, it's a sound strategy to have a diverse array of assets that have different risk and reward characteristics.

So it's not a cut and dry which one's going to make the higher return. It's what characteristics does your basket of assets hold? and how do you diversify? And so to answer Laura's question about whether or not she should sell off some RSUs and stocks, company stock, how much does she have? And how big of a slice of her overall portfolio does that take up? Yeah, that's a great point. Owning RSUs, owning some stock in the company you work for can be okay. But loading up on a company that you work for, not okay.

So if there's new ones coming in, and that's why I wanted to be clear about that, if there's new ones coming in and you like the company, keeping five, maybe at the most 10% of your net worth in a single company stock that you work for, great. Keeping 30% of the money that you have in RSUs or company stock, not great. And what I like about using percentages, Paula, by the way, is the larger your net worth gets, the more it's always. okay to hold on to bigger numbers. Because if it's 5% of a $5 million portfolio, you're going to hold on to a lot more than someone that has their first $50,000. And they're just starting out, holding on to 5%. And think about that too. The person with a $5 million net worth probably has the ability to withstand a blow of 5% of their portfolio. Something bad happened to it that they didn't know was going to happen. And I know there's people that are thinking, well, what bad could

happen in my company? At Enron, there were maybe five people that knew what was going on in this huge company. And I was devastated. I didn't have any Enron clients, but I was just devastated reading the news of all these frontline workers who lost their jobs and lost their livelihood, lost their entire portfolio because they had everything invested in this one company stock. You never know. You just, you can't know unless you're the person that actually is controlling the books. So, Laura, those are our thoughts on the question that you posed. To summarize, if what you want is to live part-time in Miami, have a condo in Miami that's

a second home, and then monetize that condo when you're not there. If that's what you want to do and you have the ability to afford that, I think that's fantastic. But I want to make clear that that's different than buying an investment property. And the good news for you is that if you are trying to buy something that's at that then-diagram intersection between personal enjoyment and investment, that frees you from having to hold to the same rigorous financial analysis that someone who's buying a pure investment would want. And so that gives you more flexibility when it comes to the 1% rule, the cap rate, all of the formulas that I've talked about on previous episodes.

It gives you a lot more flexibility because you're not necessarily looking for something that's an investment with the greatest risk-adjusted returns. You're looking for something that lives at that then-diagram intersection. And if that's what you want, I support that. I'm all for that. Yes, Miami is nice, but I think second home in beautiful Texarkana, where I can see right across the Arkansas border. Just imagine sunrise over the Arkansas border, Paula. We get that goodness here. You're speechless. I am. I'm speechless.

I don't know how to respond to that, Joe. It took a breath away. Yes, it did. It did take my breath away. I just can't even imagine. All right. Second home in either Miami or Texarkana, Texas. Yes. And we know which one's probably better.

So, Laura, thank you for asking that question. We'll come back to this episode after this word from our sponsors. Our final question today comes from Russell. Hi, Paula. This is Russell from Connecticut. I wanted to take the opportunity to ask a question about real estate investing. Specifically, I was wondering if there are any sense. significant differences in return one might expect over the long term when you invest actively

by, let's say, owning your own rental units and managing them versus investing passively through syndications or crowdfunding platforms. I'm a busy professional, so I certainly prefer the passive routes, but I was just wondering if over the long term I would be sacrificing any significant returns by going that route versus, you know, owning some of my own properties. I understand that, of course, returns will depend on the specifics of the properties and the deals and the operators, but I was just wondering if there are any data indicating any sort of consistent trends in those different ways of investing.

Thank you so much. I've been actually following your work for quite some time and found what you do immensely beneficial. So thank you again. Russell, thank you for that question. I'm not going to be a lot of help. Paula will be. But Paula, I've got a question too on Russell's question. Just syndications and crowdfunding real estate investments in general. I would love it if you and I could have a little segue here. And Russell, I apologize, we're going to get to your question. But I think there's this, I just want to know in general your thoughts about those because I have some fairly strong thoughts, I think. Interesting. Okay. So I'll start by saying that when I listen to Russell's question, I hear two different questions in there or I hear two different conversations that we can have.

One is exactly what you just asked, Joe. It's a question about syndications and crowdfunding platforms themselves. Is that a route worth pursuing? And that's the segue conversation. or one of the two conversations that Russell's question opens up. The second component of Russell's question is a comparison between taking a more active hands-on approach to real estate investing versus taking a more passive approach to real estate investing. Forget the syndication. Forget the crowdfunding. Let's just think conceptually about more active versus more passive.

Is there a difference in the type of returns that you, you might be able to expect, all else being equal. Which I'm glad you brought that up because even when it comes to passive real estate investing, I think there's an assumption built into Russell's question that I'd like to get to on that part. But anyway, go ahead. Exactly. Exactly. So I think we're thinking along the same line. So the assumption that's built into Russell's question is that syndications and crowdfunding platforms would be along the passive side of that active to passive spectrum.

And that underlying premise is a premise that I disagree with. Me too. That is exactly where I was hoping you. I'm so happy. Excellent. Excellent. Okay, yes. So, Joe, the reason that I disagree with that underlying premise is because so many

people use syndications, crowdfunding, turnkey companies. So many people approach this as a get. out of due diligence free card. And it is not. If you are going to do adequate due diligence on a property, if you are really going to check out the crowdfunding platform, the syndication deal, the turnkey property, the level of due diligence that you are performing is going to be as much work, if not more, than buying a property yourself without any of that noise. If you're doing it right. Now, there are some people who take the e-me-me-me-mini-mo approach and they do only a very cursory level of pseudo-due diligence. And sometimes they get lucky.

And that's great. In a bull market, everyone thinks they're a genius. But great results in the short term are not indicative of a great process. And a great process means doing adequate due diligence. And adequate due diligence is a massive time suck. I think many money nerds have bought. into the lie that syndication and crowdfunding is a better way to kind of passively reet up, right? It's reet plus, which to your point is a complete, complete lie. There's so much due diligence

that needs to go into these platforms. And I'll give you just two personal examples. And I'm not a big real estate investor. I've owned one house as a rental property. I own. I own. it for a long time. It's not for me. I recommend people do it all the time. It just isn't something that I'm personally interested in. I had an experience with a potential company that wanted to advertise on the show. I won't say who they are, but they're a company that many of the money nerds in our community have heard of. And their front page of this company's crowdfunding platform where you put money in and they buy real estate said, engineered for, superior growth.

And they're going out and they're buying the same real estate that people, professionals have bought for a long time. Engineer for superior growth. And then they had a chart that showed starts low and left and goes up to the right. And by the way, it was it was future results. It was future return. If we do what we're engineered for, here's traditional real estate. And then here's us.

It was such baloney. First of all, a forward-looking graph. If it were a mutual fund or an exchange traded fund. Second is, real estate's been around forever, and there's so many people that have spent so much time in here, and you're some tech people out in Silicon Valley, wherever the hell you are, and you think that you finally pick the lock on something people have done for all these years.

But even worse than that is the number of people that still talk about this stupid company and how great they are. And you know what's funny is every person I know that has invested in that company when I asked them if they've had superior returns. No, they've had pretty mediocre returns. The same returns you get with other real estate companies. That on top of the fact that the fees that they're paying in this crowdfunding platform are far superior. And by superior, I don't mean for you. I mean for them. And sorry, I'm getting angry, but it makes me so angry. The fees are so much bigger to get a return that's just like a reet, just like if you bought the Vanguard REIT. And of the two,

the Vanguard reet is so much safer and you've a company that's been around forever and you have these professionals that aren't lying to you to your face and yet I never hear people ask should I buy the Vanguard reed. I have people ask should I buy this BS company that that's lying to your face. No, you shouldn't. And then second thing I had, and this is when we got better at interviewing people on the stacking Benjamin's podcast and not the interview but doing due diligence. I had a reputable person recommends somebody that had a syndicated platform to buy real estate, to come on my show. The person was somebody I respected.

I didn't know this particular syndication. I took their word for it. This is maybe seven years ago. The person came on my show was a wonderful guest. Just before we published the interview, the day before, my producer, Richie, went and did something we should have done ahead of time, which we do very diligently now. we looked at this person's track record. Holy cow, there were so many

Better Business Bureau complaints about them. There were people actively that had worked for this particular gentleman talking about what a horrible person he was and about how he'd stolen from his employees. And it was such a nightmare. And by the way, this fund is still around. This syndication is still around

and I have heard this gentleman on other platforms, and he sounds wonderful. And if you look at the track record versus what they're peddling, oh, I am so with you. Like, I learned the hard way. And not that I'd invest in my money, just that I would have the person on my podcast, right? I mean, having a person on my podcast is bad for my reputation doesn't cost me money, but definitely can cost me trust, which is what you and I have to have with our listeners. But if I had put money with this person, oh, oh, man, man, you have to do your due diligence on these platforms. And it's, it isn't anywhere near as passive as people think that

they want it to be. Exactly. Sorry to blow my fuse there, but Russell, that has nothing to do with you at all. That has to do with the real estate space and how many slimy, slimy, slimy, salespeople, there are peddling shortcuts that don't work. Really engineered for superior growth, a forward-looking graph going with literally one line going mediocre and the other one going to the moon. I'm like, really? And then anybody that does it and they would even say 10 to 12 percent. Everybody I know that bought it's doing between six and eight.

Everybody doing between six and eight. And if you just said six to eight, instead of this, we're going to do phenomenal. Remember how we told Laura that sometimes in the world of real estate, it's hard to see how a given concept applies. But if you take that same concept and you put it onto a different industry, it becomes more clear. With Laura, we use the example of owning a car and just renting it out on tourer when you're not driving it versus because, because, becoming an investor in a fleet of cars that you rent out? So, Russell, when it comes to syndications, crowdfunding platforms, turnkey companies, think of those in the way that you would think of taking a very aggressive approach about investing in actively managed mutual funds.

If there are people who want to invest in actively managed mutual funds, if you want to do that well, you do a ton of due diligence. There are financial professionals who's job, their full-time job, their full-time job after getting an MBA is to go into a fancy office every day and research actively managed funds. Not to run the funds, just to research the funds that are out there and try to make a decision about which funds their pool of money should go into. There are people whose entire full-time job is to research not just the funds, but the fund managers, choosing a manager itself is a skill set. That's how involved due diligence is in the world of stock investing. And yet people don't seem to think that that same model

applies when the asset becomes real estate. The reality is, if you want to invest in that manner, you know what, think of it this way. Imagine that you weren't investing your own money. imagine that you were investing a pool of other people's money and you had to submit to them a detailed report that justified precisely why you chose that particular syndication, that particular crowdfunding platform, that particular turnkey company. Imagine that you had to do that and you had to justify why you chose that one instead of all of the others. If that's what you had to do as a job, you can imagine how rigorous that would be. So why would you do any less than that when it's your own money on the line rather than your client's money.

I think there's also another way to look at this, Paula, which is not from a return standpoint, which is the sexier thing to talk about, but from a risk standpoint. And I think when it comes to risk versus reward and professional management, I think for a busy professional, sticking with a publicly traded REIT exchange traded fund is not a bad idea. I would say if you're a busy professional and you want to own properties yourself, if you want to do something outside of REITs, then buy a class A property in a class A neighborhood, buy something that is not a fixer upper and that has low tenant risk and then stick a property manager on it. That's how you make your rental as passive as possible. And actually, that relates, Russell, to the

first part of your question, the part of your question in which you asked conceptually, can I expect different returns if I'm taking a passive approach versus an active approach? Let's talk about that for a second. Imagine in your head a horizontal line. This line is the X axis. Now imagine that on one side of that line, you are finding deals that already exist, which means that you're working with a real estate agent looking for deals that are publicly listed on the MLS. and you're looking for deals that are publicly listed on the MLS.

On the other, the far right side of that line, you are creating deals that don't exist yet. So you're driving for dollars, you're doing direct mail campaigns, you are aggressively looking for off-market deals. Right. So I refer to this as the find-to-create spectrum. Are you finding a deal or are you creating a deal? And along this spectrum, along this horizontal line, you will expend less effort, but most likely get lower returns at the left-hand side of this horizontal line, the find side, and you will likely have higher returns, but also expend higher effort on the right-hand side of this horizontal line,

the create-the-create-side, right? So now, this line, this horizontal line, find to create the finding versus creating spectrum. This is the x-axis. Now, I want you to bisect this in your head with a vertical line. This line is your y-axis, and this is also a spectrum of find to create. At the bottom of the y-axis, you've got properties that are totally moving ready. They don't require any work at all. At the top of this y-axis, you've got properties that are complete gut jobs.

They need literally everything and the kitchen sink. And then along the spectrum, you've got the whole game. in the middle in terms of how much of a fixer upper it is. Again, this is the find to create spectrum in terms of finding a move-in-ready property versus creating a property that will eventually be moving-ready after you do a ton of work to it. And again, on the find side of the spectrum, the returns are likely to be lower, but the effort is also commensurately lower. And at the top, returns higher, effort higher. All right? So now you've got this graph, Draw a diagonal line through the graph with the low point at the bottom left quadrant and the high point at the top right quadrant.

This diagonal line is what I refer to as the effort reward spectrum, where simply stated, the more effort you put into a deal, the higher the rewards are likely to be. What I teach the students in my rental property course, in your first rental property, is to figure out which quadrant of this graph you want to be in. And there's no wrong answer. There are viable reasons to decide to be in that bottom left quadrant towards the downward sloping side of the effort-reward spectrum. There are very viable reasons to be there. And yes, you're trading off some money. But you know what?

In exchange for that, you get to spend your time in other ways while also owning rental properties and diversifying your portfolio into the world of real estate. You get to, in that sense, don't think of it as something. sacrificing returns, think of it as being able to balance both in a way that works comprehensively in your life. Likewise, there are other people who are really excited about being in that top right quadrant. They want to put in maximum effort for maximum returns. If that's your jam, awesome. The trade-off is that means you're probably not putting a bunch of effort into other types of side hustles or putting a bunch of effort into a very demanding primary career,

but that's cool. If that's the way that you want to approach your financial and business and career life, do it. Decide where along that effort reward spectrum you want to be and be there. I love that, Paula, because it brings up a danger, I think that many of us have faced before, especially in the creative fields, which is you look at someone that's in a different quadrant than you. They're really after something different and they're having different results. And you compare and it sucks all the fun out of what you're doing, sucks all of the joy out of your progress because you think, man, if I were only them, but you can't see inside what they're doing. And they may be in a totally different quadrant doing something way

different with different motivation than you have. And I think it's a great reminder as I heard you talking that comparing yourself to someone else's results versus experiencing your own journey is a big mistake. Exactly. So Russell, to answer your question, yes, there are differences in returns between an active versus a passive strategy, but syndications and crowdfunding platforms are not examples of passive strategy. So thank you, Russell, for asking that question. Joe, we've done it again. I can't believe we finished, and I only had one rant.

I apologize. Oh, don't apologize. Don't apologize for being passionate about the thing you care about, which is that other people don't get ripped off. Yes. It'd be way worse if you were blasé about people getting screwed. Oh, that line going up and right. That forward-looking graph.

We're going to perform great. Trust us. It's going to be fantastic. Oh, man. But it was wonderful. I love how Laura and Russell and Jordan all ostensibly had real estate questions and all to some degree had framing questions, had financial planning questions, had strategy versus objective versus tactic questions.

That's some of my favorite stuff, people leading with tactics instead of with the objective and then the strategy. I love that. And really, overall, thinking about how to think about these issues is a great part of winning, great part of why I like doing this. Yeah, exactly, exactly. I very much have designed this podcast and the Afford Anything brand to be thinking about how to think. We have a new newsletter.

It's called First Principles. And it's all about thinking about how to think, how to think from first principles. In what I refer to as the four verticals of fire, F financial psychology, I investing, our real estate, e-entrepreneurship. So in our newsletter, which you can subscribe to at Affordanithing.com slash newsletter, on the surface, it sounds like we're talking about these four talks. But underneath it, we're talking about how to think about these four topics. And that's really what money management is all about. Money management is a practical application of decision making. And as an offshoot on that, I think that these ways of thinking about money and these money decisions, that framework is not just money.

It's about your career, about your relationships, about, I mean, setting up the same framework. What do I want out of this relationship, right? What do I want out of this? It's always a, it's a fine place to start. Right. Right. What do I want out of life? And it's hard, by the way.

It is not easy, not easy questions. But I find that when you start with the difficult questions, and I think it's also okay to come out of those discussions with, I don't know, where your end result of some of this action. actualization quest is to just come out with a narrowing of, well, I know what I don't want. And that's okay. And I remember in my 20s, I feel like I struggled far too much with, what do I want? And when I change that around to, well, I know what I don't want, I began to move forward because I'm okay, directionally, things are headed this way. I'm not sure exactly where yet, and that's okay. But I know I don't want to go this other way.

No, there's no way I want to go that other way. Right. Exactly. Well, Joe, where can people find you if they would like to hear more of your ideas? Oh, well, thank you, Paula. If people want to find my ideas, you can find me at the Stacking Benjamin Show, which is every Monday, Wednesday, and Fridays with Paula. We also, by the way, perform the Friday show now on this cool app called FireSide.

And it's a fun place if you can hang out with us live when we make the show. sometimes listeners even join us on the show. We record those Monday at 5 o'clock Eastern. If you just follow me on Twitter, Average Joe Money on Twitter, you'll get a notice that we're going live and you can hopefully come and join us and watch it being made or listen to it being made,

which sometimes Paula is an adventure, as you know. A hundred percent. Yes. We have a good time making it, and sometimes it goes a little sideways. Sometimes. Easy. Most of the time it's brilliant.

We are mostly brilliant. 60% of the time we're brilliant every time. Which you know why, Paula, we are the talent. That's why. Well, thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast. Y'all are awesome.

I'm so happy that you're part of the Afford Anything community. Make sure you're following this podcast on your favorite podcast playing app. And I will catch you in the next episode.