Afford Anything - Ask Paula: I'm 48 and Retiring Next Year. Should I Buy More Rentals?

Episode Date: January 28, 2019

#174: Should a 48-year-old New Yorker who’s retiring next year buy more rental properties? Should a Michigan-based first-time homebuyer use an FHA loan to buy a duplex for $135,000 that rents for $1,800 per month? Should a 40-year-old music professor who owns a duplex transfer his property into an LLC? Should a New Jersey condo owner sell her unit as For Sale by Owner? And should a woman who’s anxious about owning her own rental properties dive into real estate crowdfunding deals instead? I answer these five rental property questions in today’s podcast episode. For more information, visit the show notes at https://affordanything.com/episode174 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a trade-off against something else, and that doesn't just apply to your money. It applies to your time, your focus, your energy, your attention. It applies to anything in your life that's a scarce or limited resource. And so the questions are twofold. Number one, what matters most in your life? And number two, how do you align your daily decisions in accordance? Answering these two questions is a lifetime practice, and that's what this podcast is

here to explore. My name is Paula Pant. I'm the host of the Afford Anything podcast. Every other week, I answer questions that come from you, the audience. Of the episodes in which I answer questions, half of them are questions about anything related to personal finance or financial independence, investing, productivity, self-improvement. The other half are questions that are specifically about real estate investing. This is that one in four episodes. episode that's specific to real estate. So if you're interested in the topic of real estate investing, keep listening. But if you're not, don't worry, three out of four of our episodes have nothing to do with real estate whatsoever. So check out our archives, listen to the vast majority of any of our

other episodes, because there is a lot there that you can choose from. If you're interested in rental property investing, listen on because our first question comes from Matt. Hi, Paula. I recently turned 40 and found the fire. movement just over a year ago. I'm part of a family of four with two young children. My wife is a part-time worker and a full-time mom. I am a college professor of music and spent many years in grad school. Therefore, I was a little late to retirement savings and specifically compound interest. However, I've been in my current position for 10 years. We have paid off all our debts, including student loans. We have a little left on our mortgage. I fully fund my

401, we max out our IRAs, I contribute to a 457, and to our kids 529s. I also this fall decided to close on a duplex, and here in lies my questions. I bought the duplex before we started an LLC, therefore the property is under my name instead of the business. I think it will be fairly simple to change. I've looked into a quick claim deed, but I've heard there may be complications with the mortgage lender. Can you give any advice when it comes to transferring a rental property into an LLC? In the interim, I've also purchased a $1 million umbrella policy. I've heard that some people will use an umbrella policy instead of an LLC for rental properties. Would you advise for or against this. Finally, if the rental investment is not under an LLC, will I still have the same

tax advantages for owning a rental property? Thanks in advance for answering these questions. By the way, you and Choose FI are my favorite podcasts ever, and I was thrilled when you finally made appearances on one another shows. Thanks for all you do. First of all, congratulations for being on track and doing so well. You've got great savings. You're putting away money for retirement. You said you only have a little bit left over on the mortgage on your personal residence. I mean, just thing after thing after thing that I'm hearing is that you are doing an amazing job of setting yourself up for a rock solid financial future.

So congratulations. You're well on your way to fire. Now, to your question, should you put your rental property in an LLC? Here's the deal. It's possible, in theory, for you to use what is called a quit claim deed to transfer the ownership of the property from your own personal name into the name of your LLC. The deed is referred to as a quit claim rather than a quick claim because you are quitting your claim to the property. you as an individual are quitting your claim to it, and now your LLC is the entity that holds claim to it. But there is one major problem with transferring this ownership, and that is that many mortgages have what's referred to as a due-on-sale clause.

Now, a do-on-sale clause specifies that if the ownership of the property is transferred, which is what would happen if you transferred the ownership into the name of your LLC, then in theory, the entire mortgage balance could become due. So if your mortgage lender finds out that you've transferred the ownership of the property, then they could enforce the due on sale clause, which means you have to pay back the entire mortgage balance immediately. Now, there are two questions that arise. Number one, does your mortgage have a due on sale clause? You'd have to check your documents, but if you have an institution,

loan, meaning a loan from a bank or a credit union, then there's a pretty good chance that you've got to do on sale clause. And when I say pretty good chance, I mean, I'd be shocked if you didn't. So that's question number one. Question number two is what are the chances that your lender will actually enforce the due on sale clause? This is a clause that they have the right to enforce at any time, but they rarely do. And so this creates this kind of awkward situation in which the letter of the law is the letter of the law. If you transfer that property

and they want to enforce the due-on-sale clause, they have every right to do so. And if they did, that would put you in a bad news bear situation. That being said, banks typically don't enforce the due-on-sale clause. it's not commonly enforced. And so this leads to a judgment call. Because one way or another, you are exposing yourself to risk. If you keep the property in your own name, you're exposing yourself to a certain level of risk

by virtue of holding it in your own name rather than in the name of a business. But if you use a quick claim deed to transfer the property into an LLC, while you still have an institutional loan that contains a due on sale clause, then you're exposing yourself to a completely different kind of risk. So one way or the other, you face a risk. It's damned if you do, damned if you don't. The question then becomes, which risk would you rather take? And this is the reason why many real estate investors look to liability umbrella policies

rather than LLCs as a way of protecting themselves. Getting a solid insurance policy for the property, as you have, is a slam-dunk good idea. These insurance policies are relatively inexpensive, and they don't come with the baggage of their own risks. The way that transferring your property into an LLC comes with this baggage of a major risk. So for the sake of liability protection,

getting an umbrella policy, which you've already done, is the absolute number one thing that I would recommend to anybody listening who's also wondering how to protect their properties. In terms of tax treatment, an LLC is a pass-through entity. And what that means is that all of the income and the expenses of your LLC gets passed through to you on your own personal taxes. So it's not going to make a difference. There would be a difference if it was an LLC that was taxed as an S-Corp, but that's not what you're dealing with here. With a rental property, a rental property for tax purposes is considered passive income. So when I say that rentals are passive income, that's not just my opinion. From an IRS perspective, rental properties are Schedule E income rather than Schedule C income.

Now, what does that mean? If you run a business, like a blog or a podcast, you would fill out what's called a Schedule C on your taxes. Schedule C is where you report income or losses from a business that you run as a sole proprietor. And so if you have a single member LLC, which you use to run a business like selling shoes on Amazon or selling candles on Etsy or running a podcast, for a business, like that, you would fill out Schedule C when you file your taxes. And even if you were organized as an LLC, all of the income and the losses would be passed through to you personally. Now, rental properties from a tax point of view are regarded differently. When you file taxes on a rental property, you fill out what's called a Schedule E. Schedule E is where you report income and losses from rental real estate, which the IRS regards as passive income. and therefore treats differently from the active income that you would earn from running your own business. And regardless of whether your rental properties are in an LLC or are held in your name personally, doesn't matter, you're still going to be filling out this Schedule E.

Now, what's cool about rental properties is that you can depreciate a big portion of the property every year. So even in years in which you don't have to make major cash outlays on your property, you can still offset a lot of the rental income that you earn through depreciation, which means that you may not have a very big tax bill on the income that you make from rental properties. That's one of the many reasons that rental property investing is super cool. It's very possible, in fact common, for people to have positive cash flow and yet report a loss on their taxes due to the depreciation. One of the consequences of rentals being reported separately from any other active business that you might run

is that passive losses can only offset passive gains. So if you report a loss on your rental property, say due to depreciation, that loss cannot offset money that you've made by selling candles on Etsy. In terms of tax treatment, those are two-suitments. separate buckets. But I feel like I'm straying a little far from your question. Your original question was, is it going to make a difference whether the properties are held in an LLC versus in your own name with regard to tax treatment? And the answer is no. It's not going to matter. In your case, we're talking about a single member LLC. You're going to have pass-through taxation.

Thank you so much for asking that question. And congratulations on all of your accomplishments. You've done a lot to put yourself on a really solid track. Our next question comes from Julie. Hi, Paula. My name is Julie. Love the podcast. I have a couple of quick questions. My husband and I are 48 years old, and we earn a pretty comfortable upper-middle-class living.

We have a 23-year-old daughter from his first marriage, and we have over $2.4 million between equity in a four-unit property that I purchased 11 years ago and our primary residence, which we house hack through Airbnb, it's a two-family, and retirement savings. I plan to retire when my boss does in spring of 2020. I love being a landlord, and we are constantly looking at properties to purchase and invest in in less expensive markets. We live in New York City. So my questions are, our actual cash position isn't the greatest.

So I'm wondering whether we should actually buy additional rental properties now, and if so, where, and that would be using equity in the rental property. Or is that kind of too risky now, given my plan to retire? Should we maybe sock away more cash and wait until we have more cash on hand rather than tapping into our equity? Please let me know what you think. Thanks again. Thank you for asking that question, Julie. This is a really interesting question. Now, I don't have all the numbers, but let me tell you what I think I heard from your question.

Number one, you're 48 years old. You plan on retiring in the year 2020, which means that you will be 49 or 50 years old at the time that you retire. Let's say that you're 50 when you retire. If you plan on taking money out of a 401k, you can start doing so at the age of 59.5. And I say that because you mentioned that the majority of your net worth is in your personal residence, your rental property, and retirement accounts. So you'll need when you retire some way to draw on your net worth. So what I'm hearing, as this is laid out, is that you plan on retiring at the age of 50. And what I know in terms of 401K rules is that you can start drawing down on that 401k without penalties, start starting.

starting at the age of 59 and a half. So that leaves a nine and a half year gap in between. Now, what I don't know is if you plan on drawing down your 401k at the age of 59.5 or if you plan on leaving it intact and letting it continue to grow. But at least we've established what that piece of the situation looks like. So let's take that. We'll put it on a shelf. And let's move on to some other aspects of your personal financial situation. So the other thing that you've said is that you have a four-unit rental property that you purchased 11 years ago.

And that this four-unit property also accounts for a major portion of your net worth. Now, what I don't know is how much equity you have in the property, what the remaining mortgage balance on the property is, and how well the property is cash flowing. If you bought it, let's just make some hypothetical assumptions here, if you bought it 11 years ago on a 15-year mortgage, then you're pretty darn close to having it paid off. By contrast, if you bought it on a 30-year mortgage, assuming that you haven't made additional payments on it to accelerate the principal paydown, then you're still pretty far away from having it paid off, but the lower monthly payments on it through a 30-year mortgage might result in you having higher cash flow on it right now. And then you've got your primary residence, which you Airbnb. And again, a couple missing pieces of the puzzle here are, does the income from the Airbnb come? all of the expenses of your personal residence, including mortgage as well as repairs and maintenance. How close are you to having the mortgage paid off? Is it positively cash flowing? There's

some missing data here that I'm just going to have to make some guesses about. But overall, the impression that I carry from the question that you've asked is it sounds to me, and I may be wrong, but it sounds as though you have a significant amount of equity. and net worth, but not necessarily good cash flow. And again, I don't know any of the numbers other than total net worth. That's just the impression that I carry from the way that you've asked that question. It seems that your equity is solid, but your cash flow from your various properties. I'm not picking up the idea that these are cash flowing very well.

If my assumption is correct, and if that is the case, then as you approach retirement, what I would want to see first and foremost is for you to put yourself in a position in which these properties create stronger cash flow so that that cash flow can at least partially offset the income that you will be losing when you depart from your primary day job. In other words, optimizing for cash flow rather than optimizing for return on equity is the approach that I would take as you are two years away from retirement. Now, here's an approach that I think could very much help. So you mentioned that your goal is to retire in the year 2020. Start doing a test run of that right now. And what I mean by that is start adjusting your household budget, start adjusting the way in which you live in such a way that it mimics you not receiving a paycheck. It mimics you retiring from your job as you plan on doing in two years. For example, if right now the combined income between yourself and your husband is that,

joint pool of money that's used to pay the bills, start gradually decreasing the portion of that pool of money that comes from your paycheck. Maybe start by decreasing 10% of your pay and siphon that 10% of your pay into a completely brand new separate savings account. And then a few months later, ratchet that up to 20% and 30% and 40%. And eventually you want to get to point where you are living entirely on his income alone. And by doing so, you are participating in a dress rehearsal, a dry run of what it will be like to not have an income that's coming from you. You'll be participating in a test run of what this is actually going to feel like when you've retired. And so by doing a dress rehearsal of that, by mimicking that experience,

while you still have a paycheck coming in, you do two things. Number one, you get to test to see whether or not you're ready for it, whether or not your daily household budget can accommodate that type of lifestyle. And number two, because you're doing this test run, you are naturally saving huge amounts of cash because you are secretly still earning money. You still do have your paycheck. and all of that is getting dumped into a savings account, which is rapidly accumulating. And then what I would do with all of those savings that you're accumulating is twofold.

Number one, I would hold a portion of it as emergency savings, keep around enough emergency savings to cover between three to six months of living expenses, plus three to six months of rental property expenses. So my first step with it would be to hold a portion of it as emergency savings. and then after that, the rest of that money, I'd like to see you use in a way that will improve your cash flow, one year from now or one and a half years from now, when you retire. At that point, cash flow is going to be paramount. So once you have the emergency fund set aside,

then with the rest of that money, I would apply it towards whichever mortgage balance has the smallest remaining balance because the best way to improve cash flow is by wiping out a mortgage balance. And so regardless of whether that's the mortgage on your personal home or the mortgage on that fourplex, whichever one you can wipe out, that's going to dramatically increase the cash flow that you receive from either that Airbnb income or that rental. And so given your proximity to retirement, that's the direction that I would go. And one of the benefits to having this additional cash flow is that between the ages of 50 to 59 and a half,

you and your family will be pretty well adapted to living on your spouse's income plus the cash flow from the rentals. And so what that means is that when you're 59 and a half and you become eligible to withdraw money from your 401k, you may find that you don't need to do so. Unless your spouse retires, there may not be a pressing need to do. draw down on that money. And so that is an additional benefit because that gives it more years to continue to accumulate. So, Julie, that is the approach that I would take, and that might not have been the answer that you wanted to hear. Admittedly, it is a conservative approach. But given that you are on the brink of retirement, this is not the time that I would be borrowing

against equity in homes that I have in order to expand my rental property portfolio. If you think of two phases of wealth, there's the wealth accumulation phase and then the wealth preservation phase. When you are far away from retirement, you're in the wealth accumulation phase. But in your case, you're one to two years away from retirement. At this point, I would move to that wealth preservation phase. And for that reason, I wouldn't be looking to expand. And I would be looking to optimize for cash above all else and wealth preservation rather than wealth accumulation above all else. Thank you, Julie, for asking that question. We'll come back to this episode after this word from our sponsors.

If you're a small business owner, you're juggling a lot. And while some of these things that you're juggling are great, some things like filing taxes and running payroll, man, kind of boring. That's where Gusto comes in. Gusto makes payroll taxes and HR easy for small businesses. Gusto automatically pays and files your federal, state, and local taxes so that you don't have to worry about it. They'll automatically create 1099s for your contractors. Plus, they make it easy to add on health benefits and even 401Ks for your team. And you get direct access to certified HR experts.

So you get the HR help that you need for your small business. and that's a pretty awesome way to kick off 2019 for your business, right? Deadlines for the new year creep up earlier than you think, and you're going to want to get started now because tax season's coming up, so don't wait, let Gusto make things easier on you, and as a bonus, listeners get three months free when they run their first payroll. Try a demo and see for yourself at gusto.com slash Paula. That's gusto.com slash paula, g-u-st-o.

So have you heard about this company that makes shoes from recycled plastic water bottles? They're environmentally friendly. They've recycled more than 20 million water bottles. And they're shoes that look great and are super comfortable. They're called Rothies and they make these shoes in lots of different styles like the flat, the point, the loafer, and the sneaker. The shoes are for women and girls. They've got lots of different patterns and colors. I got a pair that's sort of a grayish color, and it's a flat.

And I wore it every single day during FinCon, the Financial Bloggers Conference. They're professional looking. They're conference appropriate, workplace appropriate. They're stylish. They're super comfortable. And they're environmentally sustainable. They're made from recycled plastic water bottles. Oh, they're also machine washable because, you know, feet sweat.

So I love my Rothies, and I know you will too. And right now, Rothies has an amazing deal for my listeners. You can use code Paula to get free shipping with no minimum. Get free shipping and free returns and exchanges on your Rothies shoe. And trust me, you won't return them. Go to rothies.com, R-O-T-H-Y-S dot com, and enter Paula to get your new favorite flats and free shipping. So it's a no-brainer. There's shoes that are comfortable, stylish, and sustainable, and free shipping.

Go get yourself a pair today. Rothes.com promo Paula P-A-U-L-A. Get this deal while it lasts. Our next question comes from Brienne. Hi, Paula. I'm interested in investing in real estate. I want to know your thoughts on syndicated real estate deals. I would like to be as passive as possible.

And I get really anxious thinking about everything that goes into owning a unit individually. So I'm just going to. curious about your thoughts on syndicated deals in general. Brian, thanks for asking that question. So first of all, real estate syndication is basically another way of saying crowdfunding. Essentially the way that it works is that a group of investors get together, pool their money together, and purchase a large property, a piece of commercial real estate. At the highest level, your responsibility as an investor is to perform due diligence on a property. And what I mean by due diligence is that you want to make sure that a given

property is a good deal. And this is true regardless of whether you are going into crowdfunding, syndication, or whether you are buying your own property, such as a single family home or a duplex, regardless of which of those two strategies you use. As an investor, your primary job is to make sure that you are buying a good investment. And one of the issues that I see with some people who are attracted to real estate crowdfunding is some people believe the fact that there are so many other players in the game, the fact that they are contributing their money into a much bigger pool and the fact that that pool is managed by some other person who has taken the leadership role, some people believe that that absolve that. them of due diligence. And that is simply not the case. So if you are one of many investors who is buying a 32-unit complex in Albuquerque, New Mexico, or if you are one of a bunch of investors who's buying 120-unit condo building in Kansas City, then before you go into that deal,

it is still up to you to make sure that that is a deal. You know, that is a deal. deal worth going into? How much do you know about Albuquerque or Kansas City? Is it smart to have a condo complex or an apartment complex in that location? What type of tenants does it attract? What are the prospects for that neighborhood? Let's talk about the decision making of the sponsor or the leader of that project. Are they plan on having a Class B property in a Class C area? or are they planning on having a class A property in a class B neighborhood? Or are they planning on having a class B property in a class B neighborhood? And do you or do you not agree with their decision?

Are you aligned with their strategic vision for the level at which they want to renovate that property and the positioning that they want to take on that property? Is that something that you want to put your money towards? When you purchase your own property, a big part of the value that you get from it is that you are able to make decisions about the management of that property. And when you participate in crowdfunding, you forego the benefit of being able to make decisions. You essentially are outsourcing your decision-making capabilities to somebody else. And in my view, that means that you lose a big part of what gives you the ability. to bring value to the deal.

In crowdfunding, the only value that you're bringing to the deal is your money. You're not bringing your vision. You're not bringing your creativity. You're not bringing your knowledge. You're not bringing any of those other elements of value to the deal. You're bringing money and that's it. And if you choose to go that route, which is fine. I absolutely see many cases in which you might want to go that route.

But if you choose to go that route in which you bring money but not vision or creativity to the deal, then you want to be absolutely sure that the people whom you are entrusting to make those decisions are people who are worthy of that trust. And how do you make sure of that? Well, it's up to you to do the legwork, to research the property, to research the neighborhood, to research the sponsors of the project. And so if you do that research and you agree with this project, you like the vision, you like the area, you like the sponsors and their track record.

then by all means go for it. But don't for a moment think that the fact that there are other investors involved in any way lessens your workload. There is no reduction of workload here, particularly in the due diligence phase. Sure, two, three years down the line when it comes to ongoing operations and maintenance of the property. Yeah, absolutely, there's a reduction of workload there. But the bulk of effort when it comes to a rental property investing happens before you buy. The bulk of that effort comes from the analysis of the deal that you're going into.

And that does not diminish when you are buying in a crowdsourced setting. You still have to analyze the deal. You still have to make sure that you are getting a good deal. Zooming out a little bit, Brienne, the question that I want to ask you is, why are you interested in real estate? I mean, you've stated that the idea of owning your own home directly does not appeal to you. So why specifically are you interested in real estate at all? I'm not saying that you shouldn't get into it, but it is a question that I want you to reflect on because you don't, need to invest in real estate. You can have a perfectly healthy portfolio without it.

Plenty of people have made fortunes sticking with a mix of equities and bonds, sticking with the broad index fund stock market and a broad bond market. So there's no reason, really, to hold real estate in your portfolio. The beauty of owning rental properties is that you have some competitive advantage that puts you ahead of the larger economic market. So with a rental property, if you are extremely knowledgeable about a local geographic area, let's say that you become hyper knowledgeable about a six block radius or a 10 block radius located somewhere such that you can look at the properties for sale and you know what's a good deal, what's a bad deal, and what's, uh, me,

Okay, middle of the road, right? When you have that level of specialized local area knowledge, regardless of whether you live there or not, that level of specialized knowledge is a form of competitive advantage. Likewise, if you can look at a property and you can see a way to add additional value to that property, perhaps you see a laundry room that can be converted into a half bath, or perhaps you see that the living room is extremely large. And with the addition of a partition wall, you can actually form an additional bedroom in some of this space and make better use of the existing footprint of the home. When you see things like that and you find ways to add new or additional value to a rental property, well, there's your competitive advantage. that's how you increase the equity and the rental income and the cash flow and you lower the vacancy.

It's how you force appreciation on a property. And that's why owning rental real estate is this really cool hybrid between running your own business and having an investment. Because in any business that you run, whether that business is owning rental properties or selling your own brand of moisturizing cream or selling. phone cases, in any business that you run, there is something that becomes your differentiator. And that differentiator, that uniqueness is where your value exists. The reason, in part, that I love rental property investing is that it gives you that opportunity to differentiate, to be unique, and to create value in that way. It gives you the opportunity to exercise your creativity and your vision.

When you go into a syndication deal, when you go into that crowdfunding situation, you give all of that up. You put your money into the deal, and that's it. That's that. And again, I don't say that to discourage syndication. I absolutely see its value. But it does make me wonder, why is it that you're attracted to rental properties or to real estate in the first place? If the answer is that you feel as though you need it because society pressures you to think that you should have some real estate holdings, well, you really don't need it. But on the other hand, if the thing that draws you to real estate is that you've been looking up some of these project sponsors and there are a few that you really like.

And you like their vision, you like some of their previous projects, you think that what they're doing is really cool. And they have a certain project that they are undertaking. Maybe they're building new office space in this growing part of Boise, Idaho. Or maybe they're building new grocery and retail space in this thriving section of Chattanooga, Tennessee. And you think that that location is great. You've been following it for a while. The population growth in the area is good. The economy is broad and diversified.

Job growth in that area looks solid. You see this as a really smart project as being in the right place at the right time and you trust the vision of these sponsors who are leading it. In that case, crowdfunding is a fantastic way to become, part of that deal. And if that's what's motivating you to get into real estate investing, those are the right motivations. So that is the final question that I will leave you with.

Why do you want to get into real estate investing? Is it an enthusiasm for real estate? Or is it that you think you're supposed to? Those are two very different reasons. And your answer to that question, more than anything, will guide whether or not I think that real estate crowdfunding is right for you. Thank you, Brienne, for asking that question. We'll come back to the show in just a second, but first, so if you're like me, there's probably a long list of books that you want to read, and there's just not realistically enough time to read them all.

Fortunately, this app has solved that problem. It's called Blinkist, and it has titles from authors like Gary Vaynerchuk, Tim Ferriss, Seth Godin, really popular books. They've condensed these books. down to their best key takeaways, the need-to-know information that you can learn in about 15 minutes. There are more than 8 million people who use Blinkist in order to get information, main points from these books. I like using Blinkist when I'm running errands. If I'm just on my way from point A to point B, I've got 15 minutes to listen to something. That's not enough time

to make any progress in a book. But I can listen to something on Blinkist, a summary of one book, 15 minutes. So some of the books that they have are The Lean Startup, Rich Dad Poor Dad, Four Hour Work Week, Seven Habits of Highly Effective People, they've got some great books there. Right now, for a limited time, Blinkist has a special offer just for our audience. Go to Blinkist.com slash Paula to start your free seven-day trial. That's Blinkist, spelled B-L-I-N-K-I-S-T. Blinkist.com slash Paula to start your free seven-day trial. Blinkist.com slash Paula.

Life insurance is one of those topics that everybody knows a little bit about, but do you understand it well enough to feel comfortable buying it? Regardless of whether you're an insurance expert or a total newbie, policy genius has created a website that makes it easy for you to compare quotes, get advice, and get covered. Policy genius is an easy way to get life insurance. In minutes, you can compare quotes from top insurers to find the coverage you need, and you need. at a price you can afford. And from there, just apply online. And the advisors at PolicyGenius will handle all the red tape. They'll even negotiate your rate with the insurance company.

There are no extra fees and no commission sales agents. Just helpful advice and personalized service. And you can shop for disability insurance, homeowners insurance, or auto insurance in addition to life insurance. So no matter how much or how little you know about life insurance, you can find the right policy in minutes at policy. PolicyGenius.com. PolicyGenius, the easy way to compare and buy life insurance. Our next question comes from Shannon.

Hi, Paula. I am a first-time homeowner of a small condominium in the thriving city of Jersey City, New Jersey. My condo is one of six units total in the building, which is run by a small HOA comprised of each unit owner. I have served as HOA president for two of the three years. I've lived. here and have remained one of the most active members on the board to this day. I have coordinated and managed a variety of large projects, including installation of new sewer lines, gas lines, sun pumps, structural support beams, upgraded fire alarm and sprinkler systems, just to name a few. This building was a true fixer-upper, and I have spent countless time and energy nurturing it back to a stable and safe condition. In addition to overseeing all of the buildings upgrades, I also completed a total

gut renovation of my unit, which was completed in December of last year. Therefore, everything from the walls to the wood floors and even major appliances, such as hot water heater, furnace, and AC condenser are literally brand new. Despite all of the time and energy I've put into fixing this building and creating my ideal home, I've decided that this spring is probably the best time to sell. Jersey City homes are booming in value at the moment, and I would like to relocate closer to my family in Florida. I have never sold a home before, but I am confident that I have the most accurate and valuable knowledge about both my unit, as well as the building itself, giving the fact that I've served as president and main coordinator of all HOA projects

and oversaw my own unit's renovation. With all of the upgrades made to the building and the fact that everything in my unit is only one year old, I'm in a strong position as a seller. I also do not have a timeline that I need to sell by as I plan on continuing to live here until I'm able to sell it for the price point I'm looking for. given these factors, I am strongly considering selling my condo on my own, rather than paying a seller's relitur commission of about 3%, which I anticipate would end up costing approximately $8,000. I would greatly appreciate any feedback or suggestions you might be able to share with regards to the pros versus cons, risks versus benefits of pursuing a for sale by owner of your home. Thank you for your time, and I just love your podcast. Wow, Shannon, first of all, that is impressive.

Congratulations on everything that you've done. You've worked incredibly hard improving both your own unit and your condo at large. So thank you for the condo community. I mean, for all of the work that you've done for your building as a whole, I think it's amazing that you've been such an active member of the community that you've done so much for your condo community, that you've completely renovated your home. Everything you've done is incredibly impressive. Steve, can we get a round of applause here? So, congratulations, Shannon.

I think selling this for sale by owner is a fantastic idea. And if I were in your shoes, I would do exactly the same thing. For the sake of everybody who's listening, we'll walk through the pros and the cons of selling a property for sale by owner. But, Shannon, especially in your case, I would absolutely sell this yourself. So, first of all, as background for the sake of everybody who's listening, selling a property for sale by owner, the acronym is FSBO, and people in the real estate industry often use the shorthand FISBO to refer to that. So if you're talking to an agent and the agent says that such and such is for sale FISBO, that's what it means. Now, being on the seller side, the benefit of FISBOing your property is, number one, that you don't have to pay a commission to the listing agent on a property. Now, a little bit of additional background here.

So when a real estate transaction happens, there are two agents. the listing agent is the person who represents the seller. And confusingly, the selling agent is the person who represents the buyer. The person who represents the buyer is referred to as a selling agent because they are selling a property to a buyer. But it's super confusing. So for the sake of simplicity, I'm going to refer to these two agents as the listing agent, which is the person who lists the property for sale, and then the buyer's agent. So when you sell a property, there's two agents who will refer to as the listing agent and the buyer's agent.

And even though the commission that gets paid to agents is negotiable, it is often around a total of 6%. And this approximate 6% gets split basically 50-50 between the two agents. Sometimes one agent will take 3.2% while the other will take 2.8%. But for the most part, these two agents each get approximately 3% of the sale value, the transaction value, of the home. So if you have a home that sells for $400,000, well, 6% of that is $24,000, with each agent getting approximately $12,000. Now, if you're the owner of a property and you want to sell this property on your own, you will still need to pay the fee to the agent representing the buyer. That part is unavoidable unless you have a buyer who comes in unrepresented.

But at a minimum, you can at least save the money that you otherwise would have spent paying an agent who would represent you on the selling side. Now, of course, this is not free money. This is work that you will have to do yourself. So what does that mean? Well, first of all, one of the major advantages that a real estate agent has, a licensed agent, is that they have access to what's called the Multiple Listing Service, or MLS. This is the database that other real estate agents look at when they are finding out what homes are for sale.

And all of these public-facing websites that people often check, like Zilla, Trulia, Redfin, These all pull data from the NLS. So if you are listing a property for sale, you want that property to be listed on the MLS. That is the central repository of publicly listed properties for sale. However, if you don't have an agent's license, you can't list a property for sale on the MLS in your state. So if you are selling a property as an owner, if you are FISBOPO, a property, you will need to find an agent who is willing to list your property on the MLS. Now, this cottage industry has emerged of agents who are willing to do that.

There's enough interest in selling properties yourself that this industry has emerged of real estate agents who will list a property for you on the MLS. They won't do any other work for you. And they'll usually charge either a flat fee or they'll charge 1%. instead of that 3%. If you are selling a property yourself, if you're Fisboing a property, I would 100% absolutely recommend making sure that you get this property listed on the MLS, even if it's going to cost you a few thousand dollars to do it.

That is where and how your listing will be seen. The second thing that I would encourage you to do is get incredibly good photos of this property and pay a professional photographer to come take pictures of this property. Listings sell based on the strength of the photos. So it is 100% worth every single penny to hire a photographer who has experience with interior shots. A professional photographer with experience specifically taking real estate photos, hire one to come take photos of your property. Now, the other thing that I would do is make sure that you spend a good amount of time decluttering the property and staging the property so that the photos that you display in your listing show a property that looks lived in but not too much. So make sure that the bedrooms, the bathrooms, the kitchen, everything is staged in such a way that the home looks warm and inviting and yet depersonalized such that prospective buyers.

could imagine themselves living there. Now, back to the topic of pros and cons of selling your property yourself, one of the big advantages of selling your own property is that you are going to give your own property. It's full attention. Your attention isn't split between a dozen listings that you have. You're giving every morsel of attention to your own property. And there is something to be said for that. However, the drawback is you also have the demands of your day job.

And if due to your day job, you, and it depends on what your day job is, but if due to your day job, you can't answer the phone right away. You can't set up showings with prospective buyers. Well, and normally the buyer's agent will be the one who comes with the buyer to do the showing. But still, you still need to be able to talk to the buyer's agent to be able to make sure that that's set up. or be around to greet any unrepresented buyers who might want to take a peek at the place. If you, based on your day job, aren't able to answer the phone quickly enough or call people back quickly enough, if you don't have the flexibility to put in the time that an agent would put into showing the place, well, that would be one of the drawbacks.

So make sure that if you are going to sell your property on your own, that you have the time to do so and the flexibility to do so. Shannon, it sounds like you will be living in the unit at the same time that showings are taking place. But if you go out of town, you'll want to make sure that you have a lockbox there so that a buyer with a buyer's agent can come tour your unit while you're out of town.

You don't want your absence to cause a delay. Let's talk about some various drawbacks of the for sale by owner model. I've already mentioned the importance of making sure that you have the time to dedicate to it, the flexibility to dedicate to it. And I've talked about the importance of making sure that the property does get listed on the MLS. That's extremely important, as well as the importance of making sure that the property is decluttered, staged properly, and photographed professionally.

Now, with that being said, some other things that you want to be cognizant of when you are selling your own property. Number one is make sure that you're pricing it correctly. It can sometimes be common for an owner-occupant to over-priced their home because they have an emotional connection to this place. So if you are going to sell your own property, there may be value in hiring an appraiser to give a professional opinion of the value of the home. If you come out the gate mispricing the property, if the listing price is wrong in the beginning, that can sometimes be hard to recover from. You know, sometimes if the listing price is wrong, then you've got to pull the listing and wait and then relist it. And so if you are going to FISBO your property, take great care in making sure that you price it correctly at the start.

do make sure that you offer a commission to the buyer's agent. If you don't offer a commission to the buyer's agent, then the buyer's agent isn't going to want to work with you. So even if you are selling the property on your own, you will save money on paying a listing agent, but make sure that the buyer's agent still gets the money that he or she otherwise would have gotten if this had been a sale with two agents. finally, when it comes to the negotiations going under contract on a property, negotiating for repairs after an inspection is done, things of that nature. When you are an unrepresented seller, you don't have somebody else to bounce ideas off of. So during that negotiation stage, when you are negotiating with a buyer who submits an offer, or a buyer who goes under contract and then gets an inspection done and comes back for a second round of negotiation. during those stages, make sure that you're being reasonable.

And if need be, bounce ideas off of somebody else who is familiar with the real estate industry so that you can make sure that the decisions that you're making and the ways in which you negotiate with that buyer are within reason. But that being said, I would absolutely sell it myself if I were in your shoes. Price it right, photograph it well, stage it well, and list of a lot. on the MLS. Oh, and one more thing. Be prepared for the fact that you are going to be attracting some bargain hunters because there are some buyers who are bargain hunters who see properties that are FISBO

and they think, oh, I can negotiate harder for that one because I'm not dealing with an agent. So you will attract a certain type of buyer who is specifically looking for FISBO properties. just be prepared mentally and emotionally be prepared for the fact that you're going to have to deal with that. Thank you so much for asking that question and best of luck selling your home. I'm excited for you. Speaking of for sale by owner, our final question comes from Eric. Hey, Paula. My name's Eric. I live in Lansing, Michigan. I've spent the last two years paying off about $40,000 in student loan debt and have just about $5,000 and so I'm completely debt-free. An opportunity presented itself recently to purchase the duplex that I currently occupy one side of. I temporarily decreased my debt payments in order to save up for the 3.5% I would need for an FHA loan, as well as the closing costs, and still leaving a reasonable amount in my emergency fund.

The purchase price of the duplex is going to be $135,000. I'll be renting the other side out for approximately 800 to the person who currently rents there. My girlfriend lives with me and will also be paying. $400 to $500 in rent. When we move out in a couple of years, I would anticipate being able to get at least $1,000 in rent for the side we currently occupy, as well as a gradual increase on the other side. A bonus is that a local hospital is building a huge development right down the street, which should be good for the overall neighborhood outlook. The current owner of the property is a good friend, so we will be doing a for sale by owner arrangement. My questions, do you think this sounds like a good deal? When I run some of the

numbers and different figures, it seems like it looks good to me, but you're the expert. Are there alternatives that you would suggest other than the FHA route? I'm primarily interested in finding a way to stop paying PMI at some point down the road. Do you have any suggestions related to the for sale by owner process? This is my first home purchase, so I want to make sure I've thought everything through. Thanks for everything that you do. I appreciate it. Eric, first of all, congratulations. You've paid off almost $40,000 in student loans. That's incredible. and you have an emergency fund, and you're about to buy your first rental property, and this sounds like a fantastic deal. So let's talk through this.

All right, first of all, as you mentioned, this property costs $135,000, and the fair market value of this property as a rental is $1,800 per month, which is $1,000 as the fair market rental of the side that you and your girlfriend are occupying. plus another $800 for the other side of the duplex. So you're buying a property for $135,000 that has a fair market rental value of a total of $1,800. Not only does this meet the 1% rule, this far exceeds the 1% rule. This is a dream property. Now, I haven't looked specifically at the operating expenses on the property. I don't know what the utilities are. I don't know what the history of this property looks like with regard to water and sewer and trash and property taxes and homeowners insurance. But I can just tell you right away that a property that costs $135,000 and that rents for $1,800 a month,

people search for a year plus sometimes to find. something that's that good. So in terms of the proportion between the price of the property versus the rent that you collect, those numbers look beautiful. They look spot on awesome. And how cool is it that this is your personal residence so you can take out an FHA loan? That's awesome. This is like great thing stacked on top of great thing. So a handful of comments that I'll make here. First of all, you had three questions. You asked, is this a good deal? Yes. Do I recommend financing other than an FHA loan? It sounds to me like based on the money that you have for a down payment, an FHA loan is the best possible option for you.

You've got enough money to put the 3.5% down plus have closing costs. You've got enough money that you have a modest emergency fund for yourself. So you don't want any loan other than an FHA loan because any other loan is going to, unless you qualify for a visa loan. VA loan, which it doesn't sound like you do, any other loan is going to require you to put down a much bigger down payment. And you just don't have the money for that. So stick with an FHA loan. You mentioned that you want to stop paying PMI as quickly as possible. Or in the case of an FHA loan, technically PMI is referred to as MIP, but you have six or one, half a dozen of the other. It's the same idea. It's mortgage insurance. You mentioned that. And I get that. Like I, I,

get that you don't want to pay this additional fee for any longer than you have to, but that's really not your primary concern right now. Your primary concern, as I see it, is beefing up the size of both your personal emergency fund as well as your cash reserves. It sounds as though you have a modest emergency fund, but not one that's particularly robust. I want to see that get a little bit stronger. I want to hear you speak with confidence in your voice when you talk about the size of your personal emergency fund. And the other thing that I want you to do is to save a separate emergency fund that is specific to this rental property. And the rule is that your emergency fund for a rental property should be at a minimum three months of gross rent. And when I say gross rent, I'm referring to

fair market value. So math must always be identity agnostic, meaning that if you are occupying the space that another renter would take, then you have to run the numbers as though some other renter is taking it. So gross rent on that property is $1,800 per month. Three months of gross rent, therefore is $5,400. So I'd like to see you save cash reserves of at least $5,400 specifically for this rental property in addition to the personal emergency fund that you have. Should you get an FHA loan? Yes, but don't make your first priority paying down the equity in that property so that you can get rid of MIP.

That can come later. First, make sure that you have adequate reserves because at the end of the day, if there's a big repair, if there's some major capital expense that you need to make, you want to make sure that you've got the cash for that. You don't want that to become the trigger for a debt emergency that you might have to go into later. Finally, you asked about the FISBO process, the for sale by owner process. You want to make sure that you have a real estate attorney representing you who looks over all of your paperwork. The owner will be able to be a for sale by owner. The owner will be a real estate attorney representing you. The owner will probably also hire a real estate attorney as well, but you want an attorney on your side who has a client relationship with you, who looks over all of your paperwork and makes sure that everything is solid. Now, because you're getting an FHA loan, the FHA is going to require an appraisal. So awesome. You'll have an appraisal done on the property. That'll be taken care of. You'll want to make sure that your attorney runs a title search and that you get title insurance. The

FHA is almost certainly going to require that. So make sure that that happens, but your lender almost certainly is going to require that. And you'll want to make sure that you hire an inspector to do a walkthrough of the property. Right now, I don't know what your current status with the seller is. So you may or may not be currently under contract for the property. Don't hire an inspector until you're under contract first. So get an attorney. Get an attorney. Get a contract signed for the property. So enter that due diligence phase in which you are under contract for the property. And then once you're under contract for the property and you're within your window of the buyer's general right to terminate, then at that point, that's when you

bring in an inspector, have an inspection done. And if there's anything that causes you to raise an eyebrow with regard to the condition of the property, then go back to the owner and say, hey, can you either repair this or can you give me a credit for it? If the owner agrees to repair it, then extend out the buyer's general right to terminate, the due diligence period, for at least five days, ideally 10 days, but at least five, after the repair is completed. That way you'll have enough time to make sure that if there are any repairs that need to be done before you purchase the property, that those are done in accordance with what you and the owner agree to. But for the most part, I mean, for sale by owner, transactions go very smoothly.

Just make sure that you as the buyer have representation on your side. It sounds like you probably don't have an agent, which is fine. Just at least get a real estate attorney on your side. And again, congratulations, because it sounds like you scored an amazing deal. We have a handful of comments that I want to share with you. First of all, thank you to the. Many people who have downloaded our free ebook. It's called one tweak a week.

You can download it if you haven't yet at Afford Anything.com slash 2019. That's Afford Anything.com slash 2019. And it's an ebook in which we describe one small tweak that you can make to your finances every week for the first six months of 2019. And there's one thing that I said in the ebook that I got wrong. and somebody called in and corrected us, and I want to play that for you right now. So here's David.

Hey, Paula, this is Dave from Illinois. I really love your podcast. Currently, I'm listening to your One Tweak a Week podcast, and while listening to it on Tweak 11, checking your tire pressures, I had a comment. The maximum tire pressure is usually what's stamped on the side of the tire, not the recommended tire pressure. Usually the recommended tire pressure is stamped on the,

inside of a door jam like the driver's door. The maximum tire pressure, which is stamped on the side of the tire, is usually 10 to 15 pounds higher than the recommended pressure, which may increase your fuel mileage, but it'll also increase the likelihood of the tire wearing out prematurely. You'll wear out the center of the tire, and the tire may not perform as well. If you can't find the recommended tire pressure on the car somewhere, the general rule of 32 pounds or 32 PSI still works on most cars, SUVs, and small trucks. Again, really love the content and keep it up. David, thank you so much.

I have gone through and we have updated the e-book to correct it to say what you've said. We've also updated the free email series that people receive once a week so that when we get to that tweak, tweak number 11, which is the one about inflating your tires. It reflects that. So thank you so much for calling in, for sharing that. We've made sure that everything is updated. And I'm so excited that the community is so on board with the one tweak a week and that so many of you, thousands of you, are taking part in this project that will help you make small improvements, little tweaks every single week for the next six months. So again, if you haven't downloaded that ebook, you can do so for free at afford anything.com slash 2019. We also have a comment from Samantha, who left us a bit of a cliffhanger. Check it out. Hi, Paula. Samantha here.

I live with my husband and five-year-old son in Portland, Oregon. I just finished listening to your podcast, number 161, and thought I'd share my financial independence story. My husband and I met in 2005, bought our first property together in 2006, and by February 2017, we were both retired and stay-at-home parents. Along the way, we made two major, major mistakes, and we're now grappling with one very challenging financial independence issue. Wow, that's a cliffhanger. Dun, done, done. I wonder what it is. So I am going to email this person and see what I can find out.

And stay tuned because if I find anything out, I will encourage her to call back in with an update voicemail. So my curiosity is peaked. We also have another call that is absolutely amazing. This is one of my favorites. It comes from a woman who has achieved financial independence. And she doesn't blog about it. She doesn't podcast about it. She just quietly lives a financially independent life in anonymity.

And that's a story that we don't hear about enough. So let's hear that story right now. Hi, Paula. My name is Lynn. I am a nurse who lives in Baffle, Washington. You wanted to hear from members of the fire community who don't have a blog or a book or a podcast. And so I'm calling in. I definitely have reasons that I think you don't hear from folks.

like us, one of them is selection bias. You only hear from those who are talking about it, which there are so many millions of people who have achieved this and they don't talk about it. They don't monetize it. I can absolutely see why people decide to later is because I'm getting questions every day, five, six, seven people who want to know the perhaps 300 different things that I did to be able to get to this place and to stop working. I stopped working full time at 37. My husband stopped working later that year. And now I'm in the last 20-ish days of my current job. So I'm here and there are so many other people here. Basically, you might see us in the community, but you won't know who we are because we'll call ourselves self-employed or independent contractors

or stay-at-home parents or consultants because there's so many questions that we get that are weird and people can't conceptualize it. We donate to causes and call ourselves anonymous sometimes. We are here. We're just quiet because sometimes it's hard to put yourself out there and to be vulnerable personally and financially. So I just wanted to put that out there. We had some things working against us. I had my own brain tumor, which wiped us out of everything about nine, 10 years ago. We have two kids, high cost of living area, no windfalls that I can ever think of. I've worked part time most of the last 10 years. My husband's a chef or cook and the last 10 years has been his roles. And we've been able to achieve this. So also wanted to encourage folks who are feeling like it's not possible that

there are possibilities, even if you have many things working against you. Thank you so much for everything you do. Keep it up and we'll be in touch. Bye. That is amazing. Thank you so much for calling in. Thank you so much for sharing that. These are the stories that I want to tell. more. These are the stories that people need to hear because the vast majority of people who are financially independent or who have just bought their first rental property or who have just paid off their student loan. The vast majority of people who are doing these amazing things don't have a blog, don't have a podcast. They're not the people who are doing the podcast rounds. These are not the stories that people are hearing enough. And that's why I'm so grateful to you for calling in

and sharing your story, because this is exactly what I want this podcast to spread. This is what it's all about. And that story is so, your story is so important in showing people that it can be done, that it is being done, and that it's not just bloggers and podcasters who are doing it. It's thousands upon thousands of people like you who go about saying that you're self-employed or saying that you're a freelancer because the general broader world doesn't necessarily understand what it means to have enough investment income that you could live on that investment income alone. That doesn't mean that you have to. It doesn't mean that you draw down your investment income necessarily. You could or you could not. But the beauty of FI is that once you know that that option is there, it changes everything.

It changes the way that you think. So thank you for sharing that story. And anybody else who wants to share their story with this community, whether you've reached financial independence or paid off debt or bought your first rental. property, whatever it is that you've done, or whatever it is that you're working towards doing, please call in and share it because this whole community benefits from hearing these stories. So affordat anything.com slash voicemail is where you can call in and share your story. And by the way, if you have a question also that you want answered on an upcoming episode,

that's also where you call in to leave your question. So leave a question or share your story or both. afford anything.com slash voicemail. That's affordanything.com slash voicemail. Thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast. If you enjoyed today's episode,

please hit subscribe in your favorite podcast playing app so that you don't miss any of our upcoming episodes. We were supposed to have Dan Pink on next week's episode, but there was a little bit, I should never announce names before I actually. actually record the interview. I keep learning this lesson the hard way. A little bit of a hiccup with regard to the scheduling of that interview. Anyway, he may or may not be next week's interview. So we'll see who next week's interview is. It's a surprise. But make sure you hit the

subscribe button so that you can find out. That's the subscribe button on whatever app it is that you use to listen to podcasts. Thank you so much for tuning in. My name is Paula Pant. You can find me on Instagram at Paula Pantt. P-A-U-L-A-P-A-N-T. I'll catch you next week.