Afford Anything - Ask Paula: I Make $50,000; How Can I Buy a House?

Episode Date: June 28, 2021

#324: Rob and his fiancé are grappling with what to do about her $400,000 of federal student loan debt. Should they pay it off immediately, or bank on a 20-year dismissal? “Nurse Dreaming of FI” isn’t sure what her family’s next financial move should be. She’s torn between investing extra money into index funds, or using it to buy a fix-and-flip. Her goal is to make work optional. Which path will lead her there? Daniel recently discovered the financial independence retire early (FIRE) movement and got a job earning $50,000 per year. He wants to househack a duplex to get closer to FIRE, but how the heck can he find anything in this seller’s market? Anonymous and her husband have 457s with the City of Chicago. However, they found out that Illinois has a horrible credit rating. How can they - and should they - protect their funds? How much should they rely on their pensions? Nick is curious: how have my views on wholesalers changed over the years, and why? My friend and former financial planner, Joe Saul-Sehy, joins me to answer these questions today. For more information, visit the show notes at https://affordanything.com/episode324 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 your time, your focus, your energy, your attention, anything in your life that's a scarce or limited resource. Saying yes to something implicitly means that you're saying no to all other opportunities. And that opens up two questions. First, what truly matters?

Second, how do you align your decision-making to reflect that which truly matters? Answering those two questions is a lifetime practice, and that is what this podcast is here to explore. My name is Paula Pant. I am the host of the Afford Anything podcast. Every other episode, I answer questions that come from you, the community, and I do so with my buddy, the former financial planner, Joe Saul C-high. What's up, Joe? Paula, I'm about to get into my happy place. Well, I think it's your happy place, too, isn't it?

We get to talk with your community, answer some questions, do a group hug, make some people some money, help them avoid some traps. Yes, exactly, exactly. We get together and talk to people about financial literacy, about building wealth, about making money, saving money, using their money better, not getting ripped off. In fact, the first question that we're going to tackle, yeah, look at that segue. First question that we're going to tackle comes from a guy named Nick who is wondering in the world of real estate investing how to not get ripped off. And here are the specifics of his question. Hey Paula, this is Nick from Virginia. Love this show and keep it up. I was wondering about your opinion of wholesalers. I was jumping around between some of your earlier episodes and then some of your newer episodes. I noticed that you have two different opinions.

In your earlier episodes, you said that you have never been offered a good deal from a wholesaler. And when caller asked about them, you did not recommend them. Recently, however, you have mentioned them a couple times. It seems to be in more of a positive light. you recommended them for people who wanted to look off the market for better deals. I was just wondering, what is your opinion on wholesalers? Should we look into them as real estate investors? And have you ever bought a property from a wholesaler?

Thanks. Have a great day. Nick, this is definitely a question far more for Paul of them for me. But I'll say this. My son, Nick, also, and you don't have the same voice. Great names. Yes. It was Nick in Washington being like, why are you call him Paula? Not dad. Come on. But Nick, my son, Nick, is 25, also a young investor. He owns four rental properties, but he's also

tried to put together his tribe of people that he works with on deals. And Paula, this is pretty interesting and timely question because my son, Nick, when he first looked into wholesalers, the first person he worked with ripped him off. And I wish I had the specifics in front of me. I've been trying to get a hold of my son all day, Nick, knowing that you had this question, but he got ripped off. And I remember it was a couple thousand bucks that he got ripped off before my son learned his lesson. The second wholesaler he worked with, he continued to have a relationship with, but Paula, the house this wholesaler was trying to sell him.

My son went out and had an inspection done. And the inspector said, this was the worst property he'd ever seen. In fact, the house was literally on cinder blocks. The foundation was horrible. And if you hadn't peered under the house and just looked at the house itself, it looked like halfway decent house that you could fix up until you looked under the house. And then you realized that this thing was just a nightmare. The third wholesaler, though, was fantastic.

And he had a great relationship with him. They've already worked on of the four houses, Nick Owens. He bought one of those houses through the whole. sailor, they continue to talk quite a bit. In fact, they share horror stories back and forth about things to avoid and people in the industry to avoid. But it seems like anything else here, Paul, and I'm going to ask you the question. Do you also think it's like anything else where you just got to keep interviewing people and that this can be a bad spot, but it also might be a good spot. So it's not as black and white as Nick might be asking. Correct. Wholesailing like any other

field is a field in which you will find practitioners who have a wide spectrum of competencies and also a wide spectrum of ethics, morals, integrity. And so like in any field, you will find, if you think of this as a two by two matrix, right? On one, let's say the X axis is competency and then the Y axis is integrity, right? And then you draw like an is a zyx. and how are matrix there, you know, you'll find people in all four of those quadrants. You'll find people who are high integrity, high competency, and that's who you ideally hope to find. You'll also find people who are high integrity, low competency, which all else being equal, I would prefer to find people on that end of the spectrum. You'll also find people who are low competency,

low integrity. Those are the worst. And then you'll find people who are low competency. No, high competency, low integrity, those are the people that scare me the most because they know they're ripping you off. They're not just incompetent. They are very competently ripping you off. Those are the people you most need to watch out for. And I feel like the second guy that my son dealt with with the house that didn't work out was low competency because as I talked to my son more about that, this guy had only been in wholesaling also for a short time and I think just stepped in it. Right, right. And so think from the perspective of a wholesaler, if you're talking to a mom and pop wholesaler. I'm not talking about a big company now. Like if you're talking to an

individual or a couple that has just gotten into the wholesaling game, a lot of people who first get into real estate are drawn to the wholesaling game because of the fact that it's a way to get involved in real estate without having to have a lot of money up front. If you're interested in investing in real estate, but you want to flip houses, or you want to buy and hold, or even if you want to invest in tax liens, you need some amount of money. If you want to provide seller financing or be a hard money lender, all of these different roles in the world of real estate, all require some initial upfront investment. Wholesailing does not. Wholesailing, you hit the streets, you pound the pavement, you knock on doors, you get properties, off-market deals under contract,

and then you flip the contract. So it requires a huge upfront investment of time, but not any or very much money. And so it's a way for people to get, you. involved in real estate without needing to have an initial investment. And because you don't need an initial investment to get started, and also because you don't need a license or a certification, you know, unlike being a real estate agent, unlike being a property manager, those are licensed regulated fields. So you neither need an initial investment nor do you need a license. and as a result, there are almost no barriers to entry. If I can jump in right there, Paula,

because I think to widen this for a bunch of people that are listening that aren't worried about wholesalers, but are definitely worried about getting ripped off, I think you make a good point here about barriers of entry because the lower the barrier of entry, the more you're going to have people involved in that industry, that you're going to be, if you're in the industry, you're going to be fighting against them.

And I'll give you an example. On its own, multi-level marketing sales systems are not bad. You think about it, it's a referral type system where if I know you and I can have you be a part of the sales organization and it's a good product, it can be fantastic. It's a way for a company without a lot of marketing dollars to quickly spread the word about a product. The bad news is because companies make the barrier of entry so small to be part of that sales organization, what do people sell? They don't sell being a part of a business and working your butt off to get ahead like every successful business owner. They start selling you lies. And the lie, the big lie in MLM, I don't hate MLMs.

I hate the lie that some people spread in MLMs that are part of this low barrier entry you're talking about, which is this. you can have something for nothing. Because you can never have something for nothing. As an example, you go to a meeting. It's a Wednesday night. There's somebody who drives up in a nice car, an expensive looking suit that's telling you about their phenomenal lifestyle. That phenomenal lifestyle involves them being in your living room on Wednesday night at 7.30.

Who wants that job? I don't want that job where I'm just going from house to house selling people to be in my downline. Like you're selling me on this stuff and you're not even living it. So I think that barrier of entry is something that's so, so important. You know, our mutual friend Roger Whitney, a good CFP, says that one problem with financial planners is that there's a very low barrier of entry to calling yourself a financial planner, right? Which is why you have to ask questions.

Are you a certified financial planner? What licenses have you received? But for me to just put out a shingle and say, I'm a financial planner and I'll help you, very few barriers of entry, which is a certified financial planner, which is a license. is why we'll get some complaints here on the show about people that have worked with financial planners, which means that your interview skills, I think, getting back to you and what you're saying in Nick, which is why if you're going to deal with wholesalers, I think, based on what you're saying, financial planners, MLMs, whatever it might be, you have to have some pretty good interview

skills. Right. And the reason that I often caution new investors away from working with wholesalers is that new investors often operate in the realm of unconscious incompetence, meaning that they don't know what they don't know. And so they often do not have the judgment to be able to discern the needle from the haystack, the smoke from the mirrors, the signal from the noise. And so, Nick, to answer your question directly, if you have heard a different,

in the way that I talk about wholesalers across the span of this show, I tend to err on the side of being more conservative. All else being equal, I would rather not lead people into harm's way, even if that means that they have to miss a few opportunities. And so the first thing that I will say about wholesalers whenever the topic comes up is be careful, be incredibly cautious, and know that they are not a fiduciary, they do not have your best interests at heart. They're not even a licensed real estate agent, which is also not a fiduciary, but at least a licensed real estate agent is representing you in a more formalized capacity. And at least a licensed real estate agent is governed by the state real estate commission

and is governed by a set of requirements that come with the fact that it is a licensed field. you don't get any of that when you work with a wholesaler. And so all else being equal, especially if you're a newbie and you don't know what you're doing, the safest thing would not be to swim in shark-infested waters. However, if you're a surfer and you want to catch the best waves, sometimes the best waves are in shark-infested waters, but you've got to be a skilled surfer to be able to go out there. Reminds me in one of my favorite books about business, Paula, which is the e-myth.

By Michael Gerber. I just listened to that on your advice. Just listen to the audiobook. Yeah. And I got the advice from Ken Chen Ault, who was the longtime CEO of American Express. And I thought if the CEO of a big company like American Express loved this book about small businesses and thought it applied to his big business, American Express, then it must be a very good book. And I'm hoping you liked it. I did.

I think that it comes down to a lesson in that book, which is if you're going to learn to bake a cake, learn to bake it by the numbers exactly right and get graded it, which is I think what you're saying, Paula, because there are specific rules for a reason. And it's the same when it comes to investing, building your financial plan, right? These things that are rules. But everybody wants to break the rule before they really understand the application of the rule. Like you have to learn grammar before you can break it. Yes. So you look at these phenomenal people that are great at baking cakes and they bake them in all these bizarre ways or you and I go out there and try to do the same thing and we'll wreck it because we don't fully understand what the rules are and then we don't know how to break them. And I love that advice. Stick to the numbers first. Understand the waves that you're the pool you're swimming in or the ocean you're swimming in, I guess. Ocean you're surfing in. I don't know. We've really mixed metaphors here. Whatever the analogy is. and then break it later. It'll be okay to break it later, but then you'll know what rules you're breaking. Absolutely. And wholesalers can be good sources of deals, but wholesalers can also be

terrible sources of deals. Both statements are equally true. The other thing is wholesalers interact not just with members of the general public. They also interact with licensed agents. And so some deals come to agents through wholesalers. You know, I'm on wholesaler mailing. lists, email lists, where they'll say, hey, look, we've got this property at 123 Main Street. These are the facts about it. This is what we're asking for it. And then they'll say, hey, if you're an agent, feel free to stick your own, like, you know, if you're an agent, we'll work with you too. And so the agent might be sourcing some of their deals from wholesalers as well. The difference is, if you get a deal that an agent has sourced from a wholesaler, I mean, the

bad news for you as the buyer is that there's an additional markup on it. The good news for you is the buyer is that if the agent is good and if the agent is doing their job, they will provide a layer of judgment and discernment that separates you from the wholesaler. But not every agent is good. Again, we go back to that Eisenhower matrix of competency versus integrity. you might be working with an agent who, even in the best case scenario, is high integrity, but low competency. And so even if you're working with an agent who has scruples, that agent might not be able to provide the judgment and discernment that you require. Which is another way of saying that you can never outsource your judgment. You can outsource tasks, you can outsource work, but you can never outsource judgment.

decision-making, thinking. That is the single most important skill that all of us as investors must develop and continually own. So thank you, Nick, for asking that question. Our next question comes from Rob. Hi, Paula, big fan of the show in your approach to money and financial independence. My future wife and I have very different attitudes towards money. She's more of the debt-free mindset, and I'm more about modeling assumptions in spreadsheet and picking whatever the spreadsheet spits out. In general, this doesn't affect us much, but we are disagreeing about how to handle her student loans. My fiancé is becoming a pediatrician and went to one of the most expensive public programs in the country. She has $400,000 in federal student loans at an average rate of 6.7%.

She will likely earn $200 to $250,000 a year post-residency as a pediatric. As you probably know, federal student loans have a minimum payment of 10% of your pre-tax discretionary income and that they are dismissed after 20 years. I say dismissed, not forgiven, because my understanding is that forgiveness programs consist of a conditional payment from one federal body to another, whereas the 20-year dismissal is a stipulation of the loan itself. At its extremes, we have two options. Pay off the loans as quickly as pause. or pay the minimum balance of the loans until dismissal kicks in. While I hate the idea of letting debt accrue at 6.7%, I believe that this option has the best

on-paper financial impact to us. I have modeled the present value of the total loan payments with an opportunity cost of 2 to 7% and have included a tax rate of 40% of the forgiveness balance at the end, which is treated as a one-time increase in income. I have also estimated reasonable salary increases. My modeling suggests a range of $250,000 to $425,000 for the present value of the loan payments plus forgiveness tax hit, meaning that if we had $400,000 to pay off the loans immediately, it would be between a $25,000 benefit and a $150,000 loss to play off the loans immediately. So, Paula, what should we do? Pay off the balance as soon as possible or bank on dismissal later for better expected value in most cases, given my assumptions. Some side notes that are of less

interest. I've been in the workforce much longer, so we have plenty of savings in both normal brokerage accounts and retirement accounts. So we have plenty of liquidity for major life purchases like a house in the coming years. Paying off the loans early or refinancing them privately would make public loan forgiveness not an option. While this program has been a pain to those who have attempted it and didn't have full documentation of 10 years of public work, we're considering trying to document that and going for it. Thanks. Rob, thank you for calling and asking that question. And first of all, I am impressed by how much thought you've given this and the modeling that you've done.

Assuming that your modeling is correct, then from a purely mathematical perspective, from a expected value or EV perspective, then assuming that you're modeling is correct, then speaking purely from an expected value point of view or an EV point of view, then you are correct in the conclusion that paying this off as quickly as possible is perhaps a negative EV decision. And for people who are listening, who are wondering what we're talking about, if you listen to some of our podcast episodes with professional poker players, such as when we interviewed professional poker player Annie Duke or when we interviewed professional poker player Billy Murphy, we will link to both of those episodes in the show notes. But if you listen back to the episodes in which we talk to poker players about how they think through strategy, they discuss a concept called EV. And that, Rob, is what you are talking about when you run through the modeling and come to the EV of rapid payoff versus other alternatives. So assuming that your modeling is correct, then I think you already have your answer.

However, there are other factors at play taking a holistic view of this question. There are other factors at play beyond just the EV of this decision. I think a couple factors that I think about with regard to this really interesting question is two things. I think first about, and it's funny, Rob, you talk about spreadsheets and your future spouse really likes debt-free. I think it's funny. Statistics will show you that spreadsheets are great. And don't get me wrong, I love spreadsheets. Paul and I talking about spreadsheets earlier today.

But behavior is really the win. And it's funny, the number of times that I worked with pretty wealthy people that got there, first generation wealth didn't have any money handed to them, that got there in a way that would seem incredibly suboptimal. they pay off low interest debt. They'd work on some projects that at first blush don't look like they have the highest return on investment. And they still found away. And that's when I realized that while the spreadsheet is fantastic, and I'm with you there, by the same token, don't underestimate the value of just getting it gone.

Which brings up the second thing for me, which is more of an ethical piece. And I know that these loans are designed, Paula, that they can be dismissed. But I really, in my head, I feel like it's a contract. Your future spouse knew when she signed up for the loans, how much money she was borrowing. She made a decision that it was X amount of money for Y value that would provide her a future income. There is something, and this may just be me, that makes me not even want. to go through the computation of how do I ensure that I write off as much of this as possible. So it isn't my problem.

Because when you signed up, it was your problem. And not you. When she signed up, it was her problem. So my feeling in this case will always be, and I understand the computations will always be, pay back the money. Pay it back. So what you're saying, Joe, is you borrowed the money. So pay it back.

That's exactly it. I say this also partially from personal experience because my spouse, Cheryl, is also in health care and had big student loans. A lot of the way that you can write these off, and you talked about, Rob, working in public places of employment, so there are some basic places you have to work. What if that also doesn't jive later on with your worldview? And you end up wasting 20 years to get these dismissed of your life, doing some something to avoid these loans instead of moving ahead and living toward your dreams.

So what you're saying is don't lock yourself down for the next 20 years? Yeah. In some ways, yes. I mean, that's not my primary message is you borrowed the money payback. But my second is also, why would I jump through a bunch of hoops to have this dismissed? Don't get me wrong. If that is her goal is to do that, then that's fine. But if that's not her goal or your shared goal, and I've seen people do this, they will waste time to save dollars.

And the older I get, the more I realize you can't get back that time. You know, I'm glad you brought that up, Joe, because that raises a few points. Number one is that even if right now you think, yeah, I can commit to this for the next 20 years, 20 years is a long freaking time. And what you want 20 years from now will be very different from what you want today. I'm not even going to say might be. It will be. Always. Always. Always. 100% of the time,

what you're going to want and how you're going to think and what you're going to feel in 20 years is going to be entirely different from what you want, think, and feel today. So Rob, that doesn't necessarily mean that your wife's career trajectory is going to change. It just means that something will change, values, perspectives, priorities, these will change in ways that you cannot predict.

If you take the plus EV route of locking yourself into a 20-year plan, you deprive yourself of future flexibility. That's the cost that you pay. And that's why I say this is more than just a plus EV minus EV decision. I mean, you are correct. If your modeling is accurate, then it is negative EV to pay this off. as soon as possible. But this decision goes beyond that. This isn't playing a hand at a poker table. This is a 20-year decision. And the further that you go into it, the less room you have to escape.

If you are 15 years into a 20-year plan, at that point you have so much sunk cost behind you that you won't want to change horses midstream to mix metaphors. There's the math, there's the behavior, and there's the emotion. mathematically, assuming that your modeling is correct, it may be a negative EV decision. However, behaviorally, there is an argument to be made that perhaps, and I'm not here to tell you what to do, but perhaps if you borrowed the money, you should pay it back. That is at least what some people believe, but I'm not here to tell you to believe that. I'm here to simply introduce that idea and see how it lands with you.

And if you think about that and do some deep soul searching and come to the conclusion that you disagree, I respect that so long as it is a thoughtful decision. So there's the math component, there's the behavioral component, and then there's the emotional component, which is the psychological advantage that comes from repaying that debt. And then there's the lifestyle component, which is the flexibility that you gain from repaying that debt. So there are four components, math, behavior, emotion, lifestyle. And you need to weigh your decision against all four of those components. So thank you, Rob, for asking that question.

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

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and it has been a whirlwind of a journey since then learning how to achieve financial independence. I discovered your podcast from listening to the Mad Scientist, and I've loved listening to the Afford Anything podcast since. I recently got a new job working for the state of Utah, and I'm already on track with my 401K-4-57 and H-S-S-C-E-S-C-5-7 and H-S-C. accounts. My question for you is how I can possibly take that next step into the real estate market. I would like to start house hacking by buying a duplex or something similar than living in half and renting half. However, I don't know how much you've heard about the state of the housing

market in Salt Lake City, but a recent study said that Utah tops the housing heat index. My sister recently offered $125,000 over the asking price for a house since she was out bed. As a single guy in his 20s, I don't need a lot of house, but would ideally like at least two bedrooms in each unit. I don't make a lot of money as a government employee only around 50,000 per year, but would like to increase my income through real estate investments. I would love to hear any advice you have on making a purchase in a total soldier's market. Finally, I am also a first-time home buyer, so I'd love to hear your recommendations on the best avenues to take advantage of the programs available to first-time buyers. Thanks so much. Daniel, thank you so much for asking that question.

And congratulations on finding the fire movement and on embracing it. I mean, you are, if you found this in January of 2021, you are relatively new to the fire movement. So welcome, welcome to the community. We're super glad to have you here. And I know that you are going to do and build great things in the years to come as you walk the fire path. So let's talk about your question. My first question back to you, I'm going to question to question the premise of your question. Because you said that you wanted to increase your earnings through real estate, you did not say specifically that you would like to buy a home for yourself, to buy a personal residence, and to offset some of that cost by virtue of house hacking. And so my question back to you is, do you need to buy a personal residence? And so, do you need to buy a personal residence? And to ask me. And to offer some of that cost by virtue of house hacking. And so my question back to asking. And so my question back to buy a property in Salt Lake City. Let's talk through why I've asked that question. There are two motivations that a person has for buying a piece of real estate. Either it's a personal residence

or it's an investment. Now, oftentimes people who are buying personal residences might think that they are in the investor category because they want to offset some of the cost of their personal residence by virtue of buying a duplex in house hacking or by virtue of buying something that has a mother-in-law unit or a casito or a guest house. And so because they are monetizing that residence, they think that they're buying an investment when those people, the reality is their motivation is that they want to buy a place for themselves and they want to offset some of the cost of ownership by virtue of monetizing it. And if that's the objective, then that's a different conversation and a very different objective than a person who purely wants to buy an

investment. If truly you want to buy an investment and there's no personal preference associated with this whatsoever, then you're buying something based entirely on the numbers. You're buying based on a rigorous, cold spreadsheet analysis. And your personal preferences don't play into the picture. To use maybe a somewhat funny metaphor, if I prefer Coca-Cola. Coca-Cola, but I think Pepsi is a better stock, then I will personally drink Coca-Cola and buy the Pepsi stock or vice versa. My personal preferences don't play a role in what stock I buy. The same applies when you're buying a home as an investor, but only if you're buying it purely as an investment. So if that is what you're doing, if that's the goal, then here's how I would recommend thinking about it.

First, think of risk when it comes to all of the various risk dimensions. So you have leverage risk, which is the amount that you're borrowing. And think of each of these along a spectrum, right? Leverage risk, there's a spectrum of low to high. Then there's risk associated with the age of the property. Again, along a spectrum, new to old. Risk associated with the condition of the property at the time of purchase. Spectrum, excellent to terrible.

risk associated with the number of units in the property, fewer units actually has higher risk because when you have a greater number of units, you have diversification among many doors. So number of units in that first property also exists along a risk spectrum of low to high, which in this case inversely correlates to the number of units in that property. You have risk associated with distance. If a property is within a five-mile radius of where you live, then all else being equal, sure, something closer probably has diminished risk. If a property is within 200 miles of where you live, meaning that you could drive there on a weekend, but you wouldn't be driving there every weekend, then it has a different degree of risk. And if the property is 2,000 miles from where you live, meaning you might just buy this thing sight unseen,

then that's an even higher degree of risk. So if you imagine risk along all of its different spectrums and then think to yourself, where along each of these spectrums do I want to be? And once you ask that question, and once you figure out exactly where you want to be along all of those risk dials, you can then zoom out and ask the question,

what city or town has characteristics that reflect where I want to be along all of these different risk charts? And specifically what you're looking for are returns that are commensurate with the various types of risk that you're taking on. And that may not exist in Salt Lake City, but it might exist in a different town in Utah or it might exist in Wyoming. But those places become considerations only when first and foremost you establish that what you're interested in doing is buying an investment and not buying a personal residence that you seek to monetize. because those are completely different goals with completely different approaches. In our course, in your first rental property, one of the first things that we do with our students

is we walk them through the exercise of do you want to buy a personal residence that you're monetizing or do you want to buy an investment? And we teach them to think differently depending on which of those two tracks they're going down. So that's my question back to you. And again, I'm very excited that you're along the fire path. best of luck in whichever way you approach your real estate journey. Thank you, Daniel, for asking that question. Our next question comes from Nurse Dreaming of FI.

Hi, Paula. I have a question about our next financial move. We are a family of four. I'm 39 and my husband is 47. Our kids are 16 and 2 and we live in Massachusetts. We recently became debt-free besides our mortgage, which we recently refinanced to 2.5% and reset it to 30 years. We owe $300,000 in the house is worth about $5.50 right now.

My husband has a disability retirement from a government job, approximately $2873,73 take home after health insurance is deducted. He has done some side hustles here and there for extra money, but with a toddler at home, he is currently a stay-at-home dad. I work as a public school nurse on a teacher's contract, so I have a pension, but it isn't that great. I'm currently in my seventh year. I'll be vested after year 10. I have $45,000 in investment accounts, and I'm currently contributing $500 a month to my Roth IRA and $13,000, which is $500 per biweekly paycheck to my 403B. I do not have access to $457. We have an emergency fund of $10,000 set aside. We have about $20,000 in another savings account earmarked for investing in real estate and access to a $75,000 HELOC.

and after all of our monthly expenses, we have about between 1,500 and 1,500 extra monthly to save on top of this. My thoughts are to buy a fix and flip as my husband is skilled and has the time to renovate a small property if we buy locally. However, we are in a very high cost of living area. I'm just not sure it's in the cards for us, but I would also love a cash flowing rental property. I plan to sign up for your rental property course. My husband's pension is stable and I feel that I am so behind and save. for my own retirement. With all of this being said, although I like my job and I love having the summers off, my goal is to make work optional as soon as I possibly can or at least cut down to

per diem or part time. So my question is that at our age, with these numbers I've laid out, would you dump this extra money into index funds now or save it and try to find the right first real estate investment? Thank you for your podcast and for being a powerful female voice in this community. Thank you for that question, Nurse. And I agree. I want to applaud Paula for all the work that she's done in the community. So, uh, nurse and I both big fans of Paula Pant. Aw. Well, I'm a big fan of everyone who's listening to this. You know why, Joe? Oh, boy. Because they have great taste in podcasts. Of course. That sure. Yes. Absolutely. Well, and I know, I know Paula, this question is directed at you. And I think, though, there's a great discussion here.

I think that needs a little more. I love the fact that you have done a great job of savings. I love the emergency fund being in place. I love that you refinance the mortgage down to a low number. I'm not in love with the fact that you reset it to a 30 year and that you've got now 30 years on that mortgage. But you can solve that. I mean, that doesn't mean you have to do it over 30 years, right? part of me does like it, Paula, as a banker, meaning I'm going to take the bank for the best terms

that I can get. Who cares about 30, 15, whatever the bank says, I'll take the best terms I can get and I'll pay it off whenever I want to. So if you reset it and you're going to have a loan for another 30 years, I don't like it. But I do like the fact that that bought you some flexibility. I'm not sure what you meant by 1,000 to 1,500 that additionally that you can save. Are you saving it now? or is it money you've identified that you can save in the future?

Because if you are saving that now, I'm wondering where things are going to lead in two different ways. Number one is, I think there has to be some research done. And I know, Paula, you have some fairly easy equations that you use to decide if a property is worth buying or not. And so I think that even in a high cost of living area, I would do some homework first around what really is, reasonable because if your husband can do the work, if he enjoys doing the work, I think that's a real possibility myself. The thing that excites me about that is as I heard you talking, this idea of

a side gig together, you and your husband, and I have no idea why that came to mine. And maybe it's because you said that he will sometimes do some odd jobs, but sometimes cannot. But maybe there is a little more either hands-off business or a business that you do together. And maybe him being the person that rehabs a small house to get it ready would be great. But I haven't done the math in that area. And I think that's super important. There's another thing in your quest for financial independence that you want to remember. Putting money into a single property can be a great thing. However, it isn't diversification.

It's actually much less diversification than if you go with the index fund. So the two things to me are diametrically opposed. And by the way, they don't make them good or bad. It just one property in one town in Massachusetts is going to give you either more of a swing up or more of a swing down over long periods of time. time, then something like the S&P 500 where you're invested in 500 separate companies scattered around the United States and doing business around the globe. So those are some of my random thoughts, Paula, before you nail this one. Well, thank you, Joe. So here's what comes to

mind when I hear your question. First, you've outlined three options. One is you could buy a fix and flip locally. The second is that you can buy and hold a cash flow positive rental, and the third is index funds. And of course, you could always take a hybrid of those options. For example, you could buy a fix and flip, flip it, and then put the money into index funds. Or conversely, you could buy a cash flow positive rental property and then put the cash flow into index funds. So certainly these could be done in combination with one another. It would be hard to do them in parallel, but you could do them in series. So let's talk about how to make this decision. As Joe mentioned, I do have some equations, most notably the cap rate equation,

to assess whether or not a property provides a good return as a buy and hold long-term investment. And so if a property has an attractive cap rate, and remember the cap rate is the unleveraged dividend on that property. So it's not the total return. It's purely the dividend payout of the property. If a property has an attractive cap rate, I tend to like it as a cash flow positive rental. And you can search through the archives on afford anything.com to find my explanation as to how to calculate the cap rate. So you can apply that formula to an analysis of any rental properties anywhere in the nation that you might be looking at, because if it's purely an investment, like we talked about in my earlier answer when I was answering Daniel's question, if this is

purely an investment, then this investment could be anywhere nationwide. And so applying that formula, the cap rate formula to any buy and hold that you're looking at, that will give you a snapshot of what type of returns relative to the effort and relative to the risk you could reasonably expect or project to see from an investment like that. So that's job number one. And then job number two, in no particular order, is to apply a different set of formulas to evaluating a fix-and-flip situation.

Because if you are buying a home that you are flipping, you apply a completely different set of formulas to the evaluation of that home. When you're flipping a home, you're incredibly concerned with what's referred to as the ARV, the after repair value. When you're buying something that's a buy and hold rental, you're not worried about calculating ARV.

And so the challenge of finding local properties that are selling at below market rate, buying them at a discount, being able to project what your holding costs are going to be, being able to project what the renovation costs are going to be. And remember, you need to project both renovation costs and holding costs. A lot of new investors forget to think about the holding costs,

and that's a big mistake. So projecting those costs and then projecting what you can sell it for, what the ARV of this property will be, and then subtracting the transaction cost from there. That's the math that you apply when you are studying fix and flips. And so it's a completely different set of equations that you're applying to a property that you're purchasing for that purpose. And that math, I think, is exactly where she needs to start before she decides which of these three she pursues. Exactly, exactly. So, yeah, job one is to apply the math to a rental, job two, apply the math to a fix and flip, and then job three, compare both of those options to what she could reasonably expect from an index fund. And it's funny because on the surface to somebody who's new to this sounds like work, but what I've found is that the more you get used to these equations, the easier they are. It's a little like, you know, this is such a tire. phrase, but it's like riding a bike.

Right? Once you ride a bike, it's automatic. You drive your car, it's automatic. A lot of these equations in your head are automatic. Like the rule 72 to me is automatic. It's just your head thinks in these ways. It's a muscle. And it becomes really exciting and fun to apply the math, even though to some people, math at first is a dirty word.

Apply the math. Because it gives you so much power though, Paula. It gives you so much power. Absolutely. And you're right that it becomes automatic. At this stage in the game, I will walk into a property and instantly start making estimates in my head. And it's funny because I do that with financial plans. Somebody starts explaining what they have and what they don't have. I have this grid laid out in my head and I put things on the grid and then I know where the holes are. Right. And this all relates back to the very first question, Nick's question, where we talked about the Eisenhower-M. matrix of integrity and competency, the more you do this, the more competent you become. And so,

like any skill, it sounds scary and intimidating at the beginning. You know, when we sit here and say, all right, here are these formulas that you've got to use. Like, that sounds terrifying in the beginning. But the more you do it, the easier it gets. And that's true of any skill. I mean, baking a souffle using a DSLR camera. We've baked a cake. We've baked a camera. We've baked a camera. We've worked a camera.

We've gone surfing today. Oh, wow. We have done so much on this podcast. I'm exhausted from all the cool stuff we've done. You know, I love Paula, the idea also of surrounding yourself with good people. And I know I've mentioned that before. And the cool thing is, is that a lot of the time, people will say, they're like, well, I can do this myself. And sure you can. And you should.

But still, surrounding yourself with smart people, I think is so important because there's always holes in your logic. When you're shorthanding things, you forget things. But the more you can apply this math and do the things that you're talking about, the more competent that you are, the more competent you will be at finding those smart people instead of people that just talk like they're competent. So those people that scare me the most when we talk during the first, first question with Nick about wholesalers, those people that are incredibly competent and have very low integrity, it's hard to spot those people when you don't know the game. But when you're competent and somebody throws out some rando phrase that they think is going to impress you

and impresses people a lot, it's easier for you to parse that. So I think being competent, it gives you so much power. Right. And to people who are wondering, how do I develop that competency, part of it is getting a very robust spreadsheet and applying these formulas over and over and over to house after house after house until it becomes second nature, until it becomes a muscle, and until your brain can start walking into places and instantly start sizing up those places. And you can make an automatic guess without very much effort that ends up being in roughly the right ballpark. And I love this topic. And I can. can't help but think, Paula, that no matter what it is that you're trying to do for the first time,

just realize ahead of time you're going to suck at it. It's going to be frustrating. It's going to take you a long time. But it's the same thing with any muscle that you're trying to develop. It's going to be absolutely difficult. But that's why you do it is because at first it's difficult. I love this phrase that to do things that other people can't do, you have to practice in a way that other people don't practice. I heard that from Michael Phelps. Oh. Speaking of swimming, or we were talking about surfing.

I don't know what we're talking about. We were talking about swimming in shark-infested waters, so you are correct. We were talking about swimming. And now we have Michael Phelps swimming in shark-infested waters. You're welcome. And nurse dreaming of I is wondering what that is to do with her? We don't know. Actually, you know, a couple of episodes ago, you made a joke where we were like,

So to answer your question, we don't know, but here's how you can know. And the same thing applies with Nurse streaming a phi. So, Nurse, your question is, do you fix and flip? Do you buy and hold or do you index fund? And the answer is, there's no way for us to be able to tell you that. But here's how you can discover this information for yourself. The path is pretty exciting. Yeah.

The path is formulas and spreadsheets. But we hope that we've just sold formulas and spreadsheets in a way that makes it sound far more appealing. Yeah, because when I said the way is pretty fun and exciting and you said it's formulas and spreadsheets, I'm like, I don't know if those two go together. Even me, and I love this stuff. It might be a bridge too far, Paula. If you color code the spreadsheet, it's a lot more fun. There you go. There it is.

Yes. So thank you, Nurse, and best of luck with whichever decision you make. We'll come back to this episode in just a minute. But first, our final question today comes from an anonymous caller. in Chicago. And Joe, we give every anonymous caller a nickname. What should we call this one? I forgot you were going to ask me that. I completely forgot. Have you watched anything? I haven't watched anything since we named the last person Tiffany. After I saw Tiffany Haddish in that new movie. Okay. So I have not yet watched this, but I plan to watch the Friends reunion.

Oh, well, there you go. Yeah, I'm very excited about watching that. I haven't seen it yet, but It's on my bucket list. It's in the cards. Okay, so which one is she? My favorite, Phoebe. Well, there you go. So our next question comes from Phoebe. Hi, Paula.

I love your show, and I want to thank you for all the encouragement and excellent advice you've given to so many. You've made a huge impact on my life, and I'm so appreciative. There's something that I've been mulling over for some time, and I'd love to get your perspective. Both my husband and myself work for the city of Chicago. we have 457s through our jobs. The investment options within them are good, and we have contributed to them over the years. However, after listening to the interview with Ed Slot,

I realized that we have most of our money in tax-deferred retirement accounts and hardly any in our Roths. So we have decreased our deferred comp contributions and are instead putting that money into our Roth accounts at Vanguard in order to save on taxes in the future. To zoom out of Ed, I'm 44, my husband is 47.

We currently have a total of 196,000 in our traditional IRAs at Vanguard, 19,000 in our Roth accounts, and 113,000 in our 457 accounts combined. The way our pension scale works, we need to work until age 62, and at that point we would get a percentage of our income for life. In my husband's case, that would be 44,000, and mine would be 34,000. After hearing Joe's response to another caller about looking into the credit ratings of cities and states, I looked it up, and it was quite disturbing to see how badly our state fares in comparison to the rest of the country. I'm now questioning the wisdom of having so much

of our retirement income connected to a city that has such a poor track record. I'm trying to figure out how worried I should be. So I guess I have two questions. One is about the pension, and the other is about the 457s. How much, if at all, should we factor in our pension income into our retirement planning. We are in a unique position in that we will have no social security income. We don't pay into it. We instead pay into the pension fund. My second question is, should we stop contributing altogether to our 457s and roll them over to our traditional IRAs at Vanguard in order to protect these investments? Is it possible that these 457s could be at risk along with the pension, even though from what I can tell they aren't managed directly by the city

but by a firm called Nationwide. Thanks again, Paula and Joe, for everything. Phoebe, thank you so much for asking that question. Congratulations on everything that you have saved for retirement so far. And also, kudos to you for all the work that you're doing in thinking, proactively, about the risks that your portfolio and your retirement might be subject to. So, let's talk about your question. First, I'm going to address the part in the question.

which you mentioned that after listening to the Ed Slot interview, you realized that most of your money is in tax deferred accounts. And since realizing that, you've decreased some of those deferred contributions and moved that money instead into your Roth IRAs. I think that is an absolutely fantastic move. And I applaud you for that. And that's for two reasons. One is for all of the reasons that Ed Slott outlined when he made the case for Roth accounts. And the second reason is because it builds out that tax triangle. And the tax triangle is the notion of wanting to have a mix of tax deferred investments, tax exempt investments, and taxable investments. And so if you have most of your money in tax deferred retirement accounts, by virtue of funneling, funnought,

some of that, some of those new contributions into Roth accounts, you are building out another corner of that triangle. And so both for the diversification reason, as well as for the inherent benefit of the Roth structure, for both of those reasons, I think that's a great way to go. When it comes to the rest of the question, there is a lot to unpack here, Paula. So let's start off with the pension piece, which is looking at a pension, what would happen to your pension if the city declares bankruptcy. And there is some precedent that there have been cities that have declared bankruptcy before. However, there is some good news here. And that is that there's something called the Pension Benefit Guarantee Corporation, PBGC, which will guarantee a

portion, not all of your pension, but a portion of your pension. So assuming that the PBGC is applicable when it comes to the city, and I think it is, but you'll want to verify that for yourself, then there is at least a portion of your pension that you, I think, can count on. I also know just historically looking at bankruptcies when it comes to government entities that, The pension is one of the last bastions that goes after everything else. So the city, the public that you serve serves also to protect you. So do I like the fact that you know that risk? Absolutely.

I love it. Am I super worried about that risk in this current environment? Not especially. Not not especially. And I'm with you. Things in the state of Illinois and the city of Chicago? not phenomenal, but I still think that there's a lot of room for optimism here. What I love about the fact that we're discussing this is that this is a low probability high

magnitude event. So I agree with you that there's room for optimism. The likelihood that the city of Chicago will declare bankruptcy is low, but if it happens, it could be devastating. And so this discussion of low probability but high magnitude events, this is fundamentally a discussion about black swan events. And what we know historically is that those black swan events, the Great Depression, the Great Recession, the pandemic, those Black Swan events have often been the thing that have caused a lot of people a lot of hurt. And so to the extent that we can anticipate Black Swans, I think that's an incredibly worthwhile conversation. to have. And I'm saying that for the sake of anyone who's listening to this, who's kind of rolling their eyes and going, wait, why are we talking about this? This is probably not going to happen. Exactly. The things that are probably not going to happen are exactly the things we should be talking

about. A pandemic probably wasn't going to happen until it did. Here is what I've found as a trait that phenomenal investors share, Paula, is their understanding of and partaking in a risk management strategy. I love risk discussions because then you know what you're getting into. I've seen some fantastic investors score some huge wins because of the fact that they went into areas of the universe that other people thought were really risky, but then they thought about the fear versus the actual risk. And then they made a bet in that area and they came out far ahead. And as an example, we talked about this on a recent show about why you and I like Ginny Mays. The reason I like Jenny Mays is because of the fact that you get a higher interest rate on your money than treasuries, but you get most of the same benefits of government shelter that the treasury gets.

You don't get all of them, but you still get most of them and the risk or reward between a treasury and a Jenny Mae for a lot of goals, I will take that difference, knowing the risk, right? Same thing, same thing applies here. So knowing that risk, I think is fantastic. And then thinking about if that does happen, what do I do with it? By the way, it is exactly the same with the 457. And I will, Paula, give you a piece fromgov info.gov, which is a discussion in Congress about public pensions and 457 plans that is about a discussion on this very, topic, which is that 457 plans pose a greater risk than other supplemental plans to their employees. They are subject to creditors if the institution goes bankrupt.

So once again, would I use a 457? Sure, I would. I'm much more likely to want to use a 457, though, if two conditions exist. Condition number one is I'm working for an institution that has a pretty good, credit rating or a city or a state, a hospital, whatever it might be, that's a good credit rating. And then number two, so there's a low probability of bankruptcy. And then number two, I also like it if there is a mechanism by which I can remove some of that money and move it over to a different type of plan. And what's frustrating as an example is if you have a 457 and then

you go to work for another institution, they have a 403B. Moving a 457 to a 403B is only permitted under some conditions, not always. So if your 457 is a nonprofit versus a government employer, there's all kinds of difficulty. So you've got to know what your options are to get out of the 457 if the writing ends up being on the wall. Because I can't think of a bankruptcy that I've seen that you can't see coming at least to some degree from a long ways away. I'm thinking of one bankruptcy.

And I was in Detroit. So there were a lot of bankruptcies. I remember being on television talking about Kmart's bankruptcy, which took forever and you could see it coming. But there were some automotive suppliers where they were saying up until the day before that the government would bail them out, right? Remember that whole thing back in 2007? The government's going to bail.

Hey, it's the autos. The government's going to bail them out. And the government did not bail them out. and they went through a bankruptcy process. My dad, by the way, worked for General Motors and kept his pension. So talking about how pensions work, he was able to keep his pension. And part of that's the pension benefit guarantee corporation that I was talking about earlier. So I think with the 457, what I want to know, Phoebe, is what are my options to move the money I have there out?

Can I roll that somehow to a Vanguard IRA? Is there, do I have to separate from service to do that? There is something I've talked about here before, which is called an in-service withdrawal. Not available all the time. You have to ask whatever entity you work for if that's available. So it's called in-service withdrawal, or you can take the money you have, take it out of that plan, put it in your IRA instead. Maybe. Solid, solid, maybe.

Once again, we can't tell Phoebe what to do, but we can. paint the path right so the pension not much you can do about it just realize if this low probability high impact event happens think to yourself and have a contingency plan what what am i going to do maybe in your financial plan you don't count on the pension for as much money as you did uh before you knew that the pension might not be the same so maybe instead of taking the number they give you and thinking about that number maybe use a number like 60 or 70 percent of that number in case it ends up with a PBGC. If that's the case, you might only get 60 or 70 percent.

So that's a solid number. And then what's cool is, Paula, if you can do, if your financial plan works on 60 or 70 percent of that pension and then you get all of it and it doesn't happen, how great is that? Exactly. Hope for the best, plan for the worst. Just one more thing for a lot of people when they hear this stuff. and I can hear a little bit of fear in Phoebe's voice.

It's great to have a risk management strategy. Don't let the, and I'm sure it won't for Phoebe, but don't let the fear paralyze you. Don't let it paralyze you. There are plenty of things that can potentially stink, but it is much, much better to develop a plan that if that happens and continue rolling, then it is to be paralyzed by it.

And often, Paul, The reason I say that is when I was a financial planner, I would see fear paralyzed so many people, and you can't let that happen. And Joe, on the topic of not allowing yourself to get paralyzed by fear, action is often the antidote to fear paralysis. The fact that Phoebe is already proactively taking steps to diversify her tax triangle, put more money into a Roth, the fact that she is proactively listening to podcasts about financial management and wealth building, the fact that she is, is calling in with questions that specifically relate to how to safeguard against a black spawn event. Those are all examples of being proactive and taking action as the antidote to fear. And actually, I'm going to play devil's advocate on myself because there are cases where you don't want to take action.

So, for example, if there's a market decline, the best thing to do is to ignore it and not cave to your bias to war. action. So this is again where judgment comes in. There's the judgment or the discernment to know when you are taking action for action's sake, where fear is motivating the action, such as people panicking during a decline and converting paper losses into real losses. And conversely, there is the judgment to know when action is appropriate. I love watching you work through the if then scenarios. If then. Remember? those. Joe can see it in my face. You can totally see it. As I think through these questions. Whatever we do this or the roundtable, you can see her working through if, well, then,

but if, then, but if then, it is cool. I have an analytical brain. It's a great way to think. Mixed with, I hope, a dash of empathy, but just a dash. A splash. So thank you, Phoebe, for asking that question. I can't wait to see you on the Friends Reunion. Joe, we did it. I can't believe it. Another fun, another fun episode where we mixed a ton of metaphors together. We swam with sharks. We played poker.

We baked some cakes. Yes, and we baked a camera. Yeah, we all, in a souffle. We swam with Michael Phelps with sharks in the water. We found the signal in the noise, the needle in the haystack. We did it all on this episode. Oh, I'm excited. And there's more to come.

And you can subscribe to the show notes for free for more to come, Affordanything.com slash show notes so that you'll never miss any of the synopsies of our upcoming episodes. Joe, where can people find you if they want to hear more of your thoughtful slash wacky ideas? You can find the, we call it the greatest money show on earth. The stacking Benjamin show every Monday, Wednesday, Friday. The same place you're listening to the Afford. podcast. And on Fridays, most Fridays, you will hear Paula Pant mixing it up with award-winning blogger Len Penzo. And a lot of the time, we'll have other award-winning guests that join us to mix it up

and have some great conversations about everything from weddings to the fact that people cry about their money. Sometimes it's deep. Sometimes it's airy light. So three days a week. And you can download the stacking Benjamin's podcast anywhere where finer podcasts are downloaded. Only the finer. Well, thank you so much for tuning in. If you enjoyed today's episode, please do three things. Number one, share it with a friend or a family member. That's a single most important thing that you can do to spread the message of financial independence. Number two, make sure that you hit follow in whatever app you're using to listen to this show. And number three, while you are in that app, please leave us a review. We have some excellent,

hilarious reviews. I love reading them. So please leave a review. Share with the world. how much you love this show, at least I hope you do. And if I can throw in a fourth, don't forget to subscribe to the show notes, afford anything.com slash show notes. Thanks again for tuning in, and I will catch you in the next episode. Here is an important disclaimer. There's a distinction between financial media and financial advice. Financial media includes everything that you read on the internet, hear on a podcast, see on social media that relates to finance.

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That means anytime you make a financial decision or a tax decision or a business decision, anytime you make any type of decision, you should be consulting with licensed credential experts, including but not limited to attorneys, tax professionals, certified financial planners or certified financial advisors. Always, always, always, always consult with them before you make any decision. Never use anything in the financial media. and that includes this show, and that includes everything that I say and do, never use the financial media as a substitute for actual professional advice. All right, there's your disclaimer. Have a great day. Hey, Joe called me on Skype. I picked up the phone. Here's what I heard next. Wow, it's nice to get a cheer every time I pick up the phone. Apparently, your fans are here too.

Wow, that is some positive reinforcement. you showed up for work. I love how my finger accidentally hit that one instead of this one. That would have been better. Hey, Paula. Like, hey, you too, Joe.