Afford Anything - Ask Paula: Should I Invest During the Pandemic?

Episode Date: May 1, 2020

#254: Lydia earns income as both a 1099 contract worker and a part-time W2 employee. She filed for unemployment as a W2 worker, but can’t find information on how to file as a contractor. Is there a process contractors can follow to file for unemployment? Florina and her husband have $70,000 in cash to invest. Where should they put this money in light of the current market? Ali and his wife saved eight months of living expenses in their emergency fund in case they get laid off during the pandemic. Is this too excessive? Danielle wants to take advantage of pandemic stock prices - what should she invest in? Anonymous in Real Estate wants to buy a multifamily property with the equity in their first rental as a downpayment. Their husband doesn’t want three mortgages. Should they accelerate mortgage pay-down and be one mortgage down in four years? I answer these five questions in today’s episode. Enjoy! For more information, visit the show notes at https://affordanything.com/episode254 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 applies not just to your money, but to any limited resource that you have to manage, like your time, your focus, your energy, your attention. And that leads to two questions. Number one, what do you want to create in the world and in your life? What is most important to you?

What do you truly value? And number two, how do you align your daily decision-making to reflect that? Answering these two questions and living out those answers is a lifetime process. And that's what this podcast is here to explore. My name is Paula Pant. I'm the host of the Afford Anything podcast. Normally, we are a weekly show. We air every Monday morning, but once a month on the first Friday of the month, we air a

first Friday bonus episode. Welcome to the May 2020 first Friday bonus episode. Every other episode, we answer questions that come in from you, the community. Today, here's what we'll be covering. Lydia earns income both as a 1099 contract worker and also as a part-time W-2 employee. She's filed for unemployment as a W-2 worker, but she's wondering, in terms of the income loss that she's experiencing as a contractor, what can she do? Danielle is 25 and wants to take advantage of pandemic stock prices. So what should she invest in?

Anonymous wants to buy a multifamily property with the equity in their first. first rental property as a down payment for the multifamily. But her husband is concerned about mortgage debt. Should they accelerate their mortgage paydown? Allie and his wife have saved eight months' worth of living expenses in their emergency fund. Is this too much money and should they transition some of that into investments? Florina and her husband have $70,000 in cash to invest. Where should they put it in light of the current market? We're going to answer all of these Right now, starting with Danielle. Hey, Paula.

My name is Danielle. I'm 25. I have a question about taking advantage of the pandemic stock prices at this point in time. I just recently made a Robin Hood account, and I would like to have a profitable portfolio. So do you have any suggestions into which stocks exactly I should buy stock into and why? Thank you. Danielle, first of all, I love. love that you are 25 years old and you're already starting to think about how to build a

profitable portfolio. You're listening to Personal Finance Podcasts. You're educating yourself about investing. A lot of people don't do that until their 30s or 40s or 50s, and that puts them at a relative disadvantage. So huge congratulations to you for starting in your 20s. Now, in order to address your question, you know the classic added? If you give a person a fish, you'll feed them for a day, but show them how to fish and you feed them for a lifetime. I'm not going to tell you any individual stock recommendations. First of all, I'm not licensed or authorized to do so. Second of all, there's going to be nothing educational about that.

There's going to be extremely limited value, A, because I might be right or wrong, who knows. And B, because education, including listening to podcasts, in order to get, personal finance education is not about mindlessly following the leader and just like, yes, I'll buy whatever you tell me. You know, like I would never want to facilitate an environment of that. What I would much rather do and what I think is going to be much more valuable is to talk about how you can evaluate different individual stocks yourself so that for the next 40, 50, 60 years, you have a foundation for knowing what to look for when you are looking at a stock

and deciding whether or not to buy it. So let's talk about that. And before we begin that, I want to start with the disclaimer that investing in individual stocks carries a huge degree of risk. If you invest in an index fund, a broad market index fund, then you're betting on the economy as a whole. If you're in a total stock market index fund or an S&P 500 index fund, then regardless of the performance of any individual company, you will perform as well or as poorly as the overall economy. And you're not trying to take bets on which company is going to do better than which other company or which company is going to succeed and which one will fail. Oftentimes when we do try to take those bets, when we think that we can beat the market by concentrating our bets on just a handful of careful of careful. selected companies, oftentimes that doesn't work. And so what I teach is an investing philosophy

that is very much rooted in putting the vast majority, the overwhelming majority of your portfolio assets into broad market index funds, such as the total stock market index fund, the total bond market index fund, the total international market index fund. And if you want to asset allocate into some more specific categories, if you want to put a portion into an emerging market index fund, or divide up your money into some large cap versus small cap versus mid cap. You know, in the world of index funds, when you're spreading out your risk by buying this huge basket of stocks or bonds, you're going to have less volatility. in your portfolio. And historically, what we've seen is that people who don't try to beat the market typically end up being the ones who have the best long-term performance. So before we go into what I'm about to say next, before we go into how to evaluate individual stocks, I want to

start with the disclaimer that if you choose to invest in individual stocks, limit this. to less than 5% of your total portfolio. For every $100,000 that you have invested, put no more than $5,000 in individual stocks at the most. And be okay with the fact that that 5% or less of your portfolio is going to swing wildly. Because for every runaway success story that's out there, for every person who bought Apple stock in the year 2000

or who bought Tesla stock, when it was trading at $200 a share, for every runaway success story out there, there are also countless stories of people who bought Marathon Oil when it was $20 a share and then wrote it all the way down to $3 a share. There are countless stories of people who bought into companies

that they thought would never go under, companies like Blockbuster Video or Sears or Woolworths that were once giants and are now distant memories. And that's what being in a broad market index fund protects you from. So with that disclaimer established, if you do want to pick individual stocks, here are some factors to look for.

The most common metric that many investors use when they are looking at a stock, oftentimes the first metric that they look at, is what's called the company's PE ratio. PE stands for price to earnings. In order to calculate that, you take the share price and divide it by a company's annual net income. Now, I have great news for you. You're never going to have to actually calculate that manually because almost every trading platform, including Robin Hood, has the company's PE written there. So if you look up any company, Coca-Cola, Johnson & Johnson, you look up any individual company on the page within the app that gives you information about that company, the PE ratio will be written there.

Now, the reason that many investors look at the PE ratio first is because they want to know if this particular stock for this particular company is relatively expensive or relatively cheap. Is the current stock price expensive or cheap relative to the earnings of that company? Very broadly speaking, stocks that have PE ratios that are high. than the overall broad market are considered expensive, while stocks with lower PE ratios, lower than the overall broad market, are generally considered cheap. But what's considered a high or low PE ratio is also dependent on the sector. There are some sectors, some industries that tend to have higher PE ratios. And if you look at a handful of companies that are within the same sector,

If you look at a handful of companies within the consumer discretionary sector, you'll find, in many cases, a common range of PE ratios versus if you were to look at the tech sector, versus if you were to look at the utility sector. You know, different sectors have different PE ratios that investors are willing to tolerate. Now, unfortunately, stock picking is not as simple as just by the companies that have the lowest PE ratios. if it were that simple, then everybody would do that. But sometimes a company has a low PE ratio because it has certain fundamental characteristics that make investors not want to pay very much for it relative to its earnings. So cheap is not always good. So what are some of those fundamental factors?

What are other factors besides the PE ratio that might make a company either attractive or unattractive to an investor? Well, another one of those factors is what's called the economic moat of a company. An economic moat is that company's ability to maintain its competitive advantage within the industry. So, for example, if a company has a patent for a piece of technology or a drug or some type of invention, then they have an economic moat for as long as they have that patent. if they have a copyright to something that's very valuable and in demand, that copyright helps build that economic moat. If they have intangibles like brand recognition, Coca-Cola has so much brand recognition, so much goodwill, that builds part of its moat. If the company operates

the type of business that has high switching costs so that it's built-in customer base, gives them recurring revenue, and those customers would have to endure a lot of hassle or obstacles to switching out of their service, then the fact that they offer a recurring revenue service with high switching costs helps build that economic moat. If they have certain permits from the government that are difficult to obtain or that are limited in quantity, that builds the moat. size to a certain extent also does build that moat. You know, there are the companies that the giant companies that are considered to be very strong.

But watch out because even big companies fail. Again, blockbusters, Sears, Woolworths, Montgomery Ward, Kmart. So we've talked about the PE ratio. We've talked about the economic mode of a company. What are some other things that you might want to look at? many investors will compare the current stock price against other secondary metrics. So they might look at the price to book ratio or the price to sales ratio. And all of this information is publicly available.

But one of the more common metrics in addition to PE is what's called the dividend yield. And before we talk about dividend yield, let's zoom out for a second. because this conversation is not just about how to evaluate a stock. It's also a conversation about what are you looking for personally when you are trying to decide if purchasing a particular stock is right for you and for your portfolio. So what you want to ask yourself is, are you looking for growth? Are you looking for value or are you looking for high dividend? Now, here's what I mean by that. When a company makes profits, it can either distribute those profits to the shareholders in the form of a dividend, or it can aggressively reinvest those profits back into the business in order to expand the business. And if that goes well, then that will cause the share price to go up. So stocks make money in two ways.

There's capital appreciation, which is the rise in value of the share price, and then there is the dividend or income stream that is produced from that stock. So are you looking for a growth stock or a handful of growth stocks in which you are primarily focused on stocks that you think will rise in value over time? Or are you looking for dividend stocks or a handful of dividend stocks in which you are interested in the fact that, they have a high dividend yield, a high income stream. Typically, you will get higher dividend stocks from larger, more established companies. But that's not always the case. So when you're looking at a particular stock, especially if you are interested in a stock that pays a strong dividend, you'll want to check the dividend yield in addition to the PE ratio.

And in addition to your evaluation of the economic mode of the company, all of those factors will play into your evaluation of a stock. And with that being said, remember, if you are interested in getting a high dividend payout, you can also get that through index funds. So, for example, Vanguard has many index funds that are optimized for high dividend yielding stocks or stocks with steady dividend growth. And likewise, if you're not looking for a high dividend payout, if you're more interested in high growth, again, you can achieve that through index funds as well. there are growth index funds which are optimized for holding a large selection of companies, a large selection of stocks that are considered growth stocks. And think about what types of stocks you want to hold. Do you want high growth stocks?

Do you want high dividend stocks? Or the other option that I mentioned was do you want value stocks? We haven't talked about that yet. So let's discuss that. Value stock, quite simply, are stocks that investors might consider to be undervalued. So these are stocks that investors think have been unfairly beat up and are currently selling at a cheap price relative to the future potential of the stock. And again, if that is what you're looking for, you can also achieve that through a value index fund, which you can get

through Vanguard or Schwab or Fidelity or any of the major brokerages. But if you're looking at individual stocks, then that's another factor that you yourself want to consider. Before you start looking at individual stocks, do you want to find and choose individual value stocks, growth stocks, or dividend stocks? That's a question that you need to answer for yourself before you start looking at the metrics of all of these stocks, at their PE ratio or at their price to sales ratio, or at the type of management that they have. How good is the current CEO? Those are the questions that you ask yourself once you start looking at an individual stock. But again, you can't get to that point. You can't start evaluating individual stocks until first you decide what you want. So step one is

decide what you are looking for. And then step two is look for that thing. Thank you so much for asking that question, Danielle. And best of luck with your first foray into the world of individual stock picking. We'll come back to this episode after this word from our sponsors. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the fintech hustle that got them named one of America's most innovative companies by Fortune magazine. That's what being a fifth third better is all about.

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Don't miss out on early Black Friday deals. Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W-A-Y-F-A-I-R.com. Sale ends December 7th. Our next question comes from Lydia. Hey, Paula, this is Lydia from Michigan. I've been listening to your podcast for quite a while now, and I'm very grateful for all of the information that you share with all of your listeners. I'm sure that we're all very grateful to you.

especially with everything that's going on right now and all the uncertainty. As you know, the coronavirus has caused governments to expand unemployment benefits to contract workers, too. However, I make a large chunk of my income through W-2 part-time work, for which I've already applied for unemployment and I should be receiving benefits soon. But a little bit more than half I earn through 1099 contract work. I've been trying to figure out how to apply for unemployment for my contract, work, but the Michigan Unemployment Office is just completely swamped if I can't get through. So I was just wondering if this is an issue that other listeners might be experiencing,

and if so, if there are any solutions that you happen to be aware of, that could be of help to us. Thank you very much, and I hope that you recover quickly and can get back on your feet, so all of us can move forward and hopefully survive 2020 better than we started. Thanks so much. First of all, I'm sorry to hear that you've lost work, that you've lost income due to this coronavirus crisis, as have millions of people. The number of people who have filed for unemployment has reached 30 million. I'm glad that you have been able to apply for and make progress on your unemployment benefits through the W2 portion of your work. So let's talk about the other half of your income, the 1099 contractor portion.

Now, you have a few options. one, as you've mentioned, is unemployment. And here is the lowdown on that. Typically, in pre-coronavirus times, typically you had to have a W-2 employment in order to qualify for unemployment benefits. But the CARES Act, which was passed after the pandemic struck, expanded the unemployment insurance program so that self-employed people, including freelancers and contractors like yourself and gig economy workers, now qualify for unemployment. unemployment benefits. And that will be available from January 27th, 2020, through December 31st, 2020. So for the rest of this year, self-employed people can qualify for unemployment benefits. And that's under a program that's called the Pandemic Unemployment Assistance Program. Now, as a self-employed person or as a person who receives about half of your income through 1099 independent contractor work, your best documentation of that income will come from your previous tax returns. So despite the fact that the deadline for filing your 2019 tax returns has been extended until July, what I would recommend is go ahead and file

your 2019 taxes now if you haven't already done so, because that 2019 tax return is going to show all of the income that you've made as an independent contractor over the span of the past year. In addition to that, gather all of your 1099 forms that have come from the work that you've done as an independent contractor. And if you have clients or if you've done work for people who have not issued you 1099s, then gather any other official records of payment. So, for example, if you were an Uber driver, go to the app and download the records of what they've paid you in 2019. But again, the most important thing is going to be your 2019 tax filing because all, of the information that's contained in your 1099s and all of the income that you've received from clients or gigs that did not issue you a 1099, all of that will be reflected in your tax return.

Your tax return is that single consolidated report of all of your income, including all of your independent contractor income for 2019. and that documentation is the information that the state is going to want to see in order to verify what your earnings were. Now, off of the subject of unemployment insurance, you also have another very powerful and very promising option, but you need to act quickly. The SBA, the Small Business Administration, has two programs for small business owners, and as a self-employed person, you are a small business owner. So one of those programs, which we're not going to talk about very much, is called the Economic Injury Disaster Loan Program, or EIDL. Now, this program provides low-interest loans to self-employed people. And if you're thinking, well, I don't really want to take a loan, that's okay because the EIDL offers grants of up to $10,000 that doesn't have to be repaid.

Now I say up to $10,000 because the grant amount is related to the size of your small business. So if you are a solopreneur or an independent contractor, your grant that you receive will probably be much less than $10,000. But still, it's money that doesn't need to be repaid. The reason that I'm not going to talk about this for too long is because as of right now, as of April 30th, the SBA's website says that they are unable to accept new applications. at this time for EIDL loans or EIDL grants or advances. If you have already submitted an EIDL application, those applications will continue to be processed, but right now the SBA is not accepting new applicants into this program. The reason that I bring this up is because that might change.

So I would recommend that you continue checking the SBA's EIDL webpage to see whether or not they're accepting new applicants. and in the show notes, which will be available at afford anything.com slash episode 254, we will put a link to this page in the show notes. I would recommend checking it once a day. Now, the good news is that the SBA's other program, which is called the Paycheck Protection Program, is still accepting new applications. And as a self-employed person, you qualify to apply for a PPP loan. And that, I think, is going to be a fantastic opportunity, not just for you, but for anybody who's listening to this, who is self-employed, who's a freelancer, who's a solopreneur. So the Paycheck Protection Program is technically a loan, and this loan is designed to help small businesses keep their workers on the payroll.

So if you're self-employed, then you need to keep yourself on the payroll because you are a small business who is employing yourself. And even though it's technically a loan, the loan will be forgiven, meaning it does not need to be repaid, as long as all employees are kept on the payroll for eight weeks and as long as at least 75% of the money is used for payroll and the other no more than 25% is used for your office, rent or mortgage, interest, or utilities. To keep it simple, if you use 100% of the money to pay yourself at the same rate that you were paying yourself previously, you can't give yourself a raise, but if you pay yourself at the qualifying rate, this loan will be forgiven. So again, it's essentially a grant, even though it's not called a grant, it's called a loan,

but it's money that you won't have to pay back as long as you, as a small business owner, keep yourself on the payroll. And by the way, worst case scenario, because I was initially a little reluctant to apply for a PPP loan because I hesitate. whenever anything has the word loan associated with it. I'm fairly cautious about loans. In the absolute worst case scenario, if something goes wrong and this loan is not forgiven, if it needs to be paid back,

well, guess what the interest rate is? 1%. So the loan has a maturity of two years, which means it doesn't need to be paid back for two years, and it has a 1% interest rate, which is less than the rate of inflation historically. So in the worst case scenario, you have two years to essentially just give the money back.

But again, as long as the funds are used for payroll costs, then the loan will be fully forgiven. As a self-employed person who does not have any employees, regardless of whether or not you have filed a 2019 tax return with the IRS, you must provide the 2019 Form 1040 Schedule C when you submit your PPP application. This is the document that will determine how much money you qualify to receive. And here's how you calculate that. Look at line 31 of Form 1040 Schedule C from your 2019 numbers. If that number is greater than $100,000, then on step one of this calculation, you're going to use $100,000. That's the maximum number that you're allowed to use. If that number on line 31 is less than $100,000, then use that number that's reported on line 31.

So that is the number that we're starting with. Now, from that number, divide that by 12. That's going to be your average monthly payroll. And then multiply that number by 2.5, which will be two and a half months of your average monthly payroll. That is the amount that you could qualify to receive from the PPP as a 1099 contractor and independent contractor. So let's talk about how to apply. Now, the challenge with applying for a PPP loan is that you can't apply. You can't apply. directly with the Small Business Association, you have to go through a lender. And the issue is that right now, many lenders are backed up and they are not accepting new applications. So the SBA itself is accepting new applications from the lenders, but many lenders are no longer accepting new applications from the public. I'll tell you about my own experience with this. I have business accounts at Radius Bank and at Chase Bank. Radius Bank says that, quote, we have resumed processing PPP requests for those who have already submitted an application with us. At this time, we are no longer accepting new applications for PPP loans. Okay, so boom, that's a dead end.

And Chase Bank says the same thing. So on their website, they say, quote, at this time, we are not taking new applications, but we will keep monitoring the funding availability and may consider taking new applications in the future. So bummer, another dead end. And so what I did is I went to Gusto, which is my payroll processing company, and Gusto has partnered with a handful of lenders who are continuing to accept new applications. In fact, they have an extremely well-developed COVID-19 resource center that is tailored for solopreneurs, freelancer, small business owners, with easy ways to access every available opportunity. And so right now what they're doing is they're keeping a close watch on which lenders, including lenders that you've never heard of before, small community banks or digital banks that may not have a huge name or huge brand recognition and still have the capacity to accept and process new applications. They are partnering with those banks and working closely with them and consistently monitoring to make sure that those places. are still accepting applicants. And so that was how I did it. I went through Gusto. And, I mean, full disclosure, they're a sponsor of this podcast. So take that for what it's worth. But they saved my

butt when it came to applying for the PPP loan. I would not have been able to find a lender to process my application without them. Because I'd looked at everyone. I looked at Radius Bank. I looked at Chase Bank. I looked at my local credit union. I looked at the credit union back in my college town. Nobody was accepting applications. So they really, they came through. And again, they are not sponsoring this episode. They don't know that I'm saying any of this about them. None of this was pre-planned in any way, but I'm just throwing it out there in terms of how I was able to get through. If you want to set up an account with them, I have a link that will give you three months free. So you can use that link, get three months of an account with them for

free. And that will give you the free account that you need in order to be able to go through their portal to use anyone of a selection of partner lenders that they have who are currently accepting applicants. And so that link is gusto.com slash Paula. And that'll get you in for free for three months. And three months will be plenty of time to be able to process that PPP application. In fact, when I went through, I got approval within two days, which I was surprised that I got approved that quickly. I'm not saying that yours will get approved so soon, but three months will be Plenty, plenty, plenty of time. But if you are going to go that route, I would recommend doing so immediately because that program allocates funds on a first-come-first-served basis. And once they run out of money, they run out of money. And maybe Congress will give them more funding, but maybe not because that's already happened once. They already ran out of money once. Congress gave them more money. If they run out of money again, is Congress going to give them more money a third time? I wouldn't hold it. your breath. I mean, if they do, that would be great, but I wouldn't bank on it. So I would get on that

right away. So gusto.com slash Paula. And then as soon as you log in, you'll see a giant button that says COVID-19. And if you click on that, it gives you everything that you need. So Lydia, as someone who makes half of her income through self-employment, those are your three options. There's unemployment insurance benefits, which are now and through the rest of 2020, available to self-employed people. There's the SBA EIDL program if it starts accepting new applications, which it may or may not. And then there's the SBA PPP program if you can find a lender who is still accepting applicants. So thank you so much for calling in with that question. And best of luck as you pursue all of the opportunities that are available to.

you. And I love, just wanted to say, when I heard your voicemail, the positivity that I could hear in your voice, the optimism, the hope that 2020 will end with all of us being in a better place than we were when it began. I absolutely love and appreciate that you have, even in this difficult time, such a spirit of confidence and hope. And I hope that that spreads. So thank you. again, Lydia. Our next question comes from Florina. Hi, Paula. This is Florina. I'm calling because my husband and I recently sold the property and we have about 70,000 in cash. And we were wondering, since we are experiencing this Black Swan event, probably heading toward a recession, what's the best way to invest this money? You know, is it best to invest in real estate?

We don't know what we're looking at going forward. Will people be, able to pay their rent or, you know, should we just invest in the stock market? My husband and I are big title listeners to your podcast and we appreciate everything you do. Thank you. Florina, first of all, congratulations on the sale. You're in an excellent position. You've just sold a property. You've got $70,000 in cash. And you're choosing between multiple great options. There are so many opportunities in front of you. How do you decide how to invest this money? First and foremost, the question I would ask back at you is, how substantial is your emergency fund? Before you do anything else, make sure that your emergency fund represents between three to six months of your living expenses at a minimum.

Now, the second question that I would ask you is, what is the likelihood that either one or both of you might lose your jobs or experience a significant reduction in your income? do either of you work for an industry or for a company that has been hit hard by the coronavirus crisis? If so, and if you're facing an imminent threat to your income, then I would hold six to nine months worth of cash. Or if you wanted to play it extra safe, hold 12 months. Now, that's a very large amount, and that's not necessary for everybody. But if you are in an industry or work for a company that is particularly vulnerable right now, if there's an imminent threat to your income, or if you are a one-income household, that also increases your vulnerability. If you have dual incomes, then your income is not going to go from

100% down to 0% overnight. If you have two incomes and one of you loses your job, the other person still has a job which can help float you through. And granted, that one person who still has that job, it might not be enough money, but again, you're not going to go from 100% down to 0% in the span of a single pink slip. And that is the risk that single income households or single people take. That's another way of saying that dual income diversifies the risk. So before I do anything else, first assess your personal households risk profile and make sure that you have enough money in your emergency fund to reflect that.

Now, assuming that you're in a good position to invest, how do you evaluate the stock market versus real estate? Well, first, yesterday, on Thursday, April 30th, we released a PSA Thursday episode here on the Afford Anything podcast that did a deep dive into what's currently happening in the stock market. So listen to the PSA Thursday episode. The title of the episode is, how bad is the stock market crash? And that will provide some context around why the stock market is behaving so erratically, why investors are, expressing confidence, both in the market as well as in the overall economy, at least at the moment. It will broadly provide context around why the stock market is behaving in the way in which

it is. So with that context established for the stock market, let's talk about the housing market. Under normal circumstances, approximately 20% of people don't pay their rent on time. That stat comes from the National Multifamily Housing Council, which tracks more than 13 million units. So on average, in a year like 2017, 2018, 2019, in any given month, about 20% of people don't pay their rent on time. In the month of April 2020, that jumped to 31% of people. Now, is that a significant jump? Yes. But what that means is that seven out of 10 renters still paid rent on time and in full during that first week of April. Now, as of the time of this recording, we are still in the month of April, so it's too early to say what May 2020 is going to look like,

but we'll have that data in the span of a week. But what surprised me is that the difference between the number of people who don't pay rent under normal circumstances and the number of people who didn't pay rent in April of 2020 under pandemic circumstances, it surprised me that the delta between those two numbers isn't bigger. I mean, those two numbers are quite a bit closer to each other than I and many industry analysts assumed that they would be. And again, to provide some context around that, listen to the PSA Thursday episode because I talked about unemployment in the context of the current situation, much of the unemployment has been concentrated in sectors

such as food and beverage, hospitality, retail, transportation, and those are the sectors that have the highest amount of social interaction per unit of GDP, which means that while the people who are in those sectors who have gotten laid off or who have lost work are suffering and struggling right now, we have, through the shutdown, been able to decrease social interactions significantly without decreasing GDP proportionately.

And that's basically another way of saying that people who work in industries that do not have high levels of social interaction and or in industries that are considered essential, such as manufacturing, logistics, agriculture, health care, utilities, public services, those people still have jobs, but they're not as visible. We don't see them do their work, which is partially why they still have jobs. So with regard to investing in real estate, certainly I understand the hesitation around worrying about whether or not renters will be able to pay. But again, the data is the data. And what we know, at least from looking at the numbers from the month of April,

is that the situation is not as bad as many landlords. had feared. Now, that being said, I sent out an email about two weeks ago to the people who are on the VIP waitlist for the real estate investing course that I teach. And what I said in that email is that I expect, and again, it's hard to know what the future holds, but I expect that over-leveraged real estate investors may face foreclosure. And this is precisely why I always teach my students to take a conservative approach towards borrowing and financing. I teach my students to largely disregard metrics such as the cash on cash return and instead focus on cap rate because the cash on cash return formula is inherently designed to encourage over-leveraging.

And the investors who over-focused on cash on cash return and who over-leveraged and who right now have inadequate cash reserves, those are the ones who are sweating right now because the situation that we're currently in in the real estate market is that many governors across the nation, including here the governor in my home state of Nevada, have declared what's called an eviction moratorium for as long as a state of emergency is in effect. And the eviction moratorium prohibits landlords from evicting tenants for not paying the rent. If you have what's considered a dangerous tenant, such as a tenant who is conducting criminal activity on the property, if you have a tenant who's dealing cocaine from his living room, you can evict that tenant.

but right now there's a moratorium on evicting tenants for not paying their rent, as there should be. Because in my humble opinion, anyone who evicts somebody at this time is a d-a-so. So that's the situation on the tenant side. As far as homeowners are concerned, as far as mortgages are concerned, there's a patchwork of efforts to prevent foreclosures on primary residence homeowners and on borrowers who have federally backed loans. and most federally backed loans, such as FHA loans, VA loans, and USDA loans, are given to primary residents owner occupants. Now, some of those owner occupants later move out and use the property as a rental, but those federally backed loans, by and large, are used by primary residence homeowners.

So what that means is that the patchwork of efforts that are being put in place to shield homeowners from foreclosure, by and large, apply only to people. who are primary resident owner occupants. And there are some exceptions. Again, there's a patchwork of different efforts, but for the most part, most of the anti-foreclosure efforts benefit primary resident owner occupants. Essentially, the goal is don't kick people out on the street

in the middle of social distancing. And so that means that we have a situation in which there are landlords who are not collecting rent, but they don't enjoy the same anti-foreclosure protections that primary resident homeowners do. So they're not collecting rent or maybe they're collecting reduced rent, but they're still susceptible to foreclosure. And if an investor maintained a good emergency fund did not over leverage and grew slowly because they were focused on capri and slow growth strategies rather than drinking the cash on cash return cool, aid that so many of the other real estate investing platforms teach, those conservative investors are able to sail smoothly through this time of crisis. But the over-leveraged investors, the cash-on-cash return junkies, I think that we're going to start seeing a lot of those

people list their properties on the market at a massively reduced price in order to get a quick sale. There's a decent chance we're going to start seeing some investors unload cheap or heavily discounted properties because they borrowed too much money, they leveraged too hard, and now they're trying to reduce their debts. So I think, and again, nobody knows the future, but I think that within the next six to 12 months,

we're going to see some pretty great housing deals hit the market. There won't be a huge flood of them. It's not going to be 2008, because fortunately, primary resident owner occupants will be protected, let's hope. And it seems as though that's the way that the policies are going. So it's not going to be like 2008 where you could just throw a dart and hit a good deal.

But those great deals will be out there for people who are searching. Again, not in huge volume, not in huge deal flow. But the people who are searching for a deal, I think, will be able to find what they're looking for. And so that, coupled with the fact that 70% of renters are still paying the rent in full and on time, and in normal circumstances, that number is 80%. I think those two factors together make this a pretty good time to be in real estate, especially if you're thinking about buying. So to your question of should you go for real estate or should you go for stocks or index funds, I mean, the classic principles of personal finance, the classic principles of answering that question applies equally now as it always has. What's your level of interest and enthusiasm for each of those types of asset classes? does your risk tolerance fit each of those asset classes?

Are you looking to bias your returns towards capital appreciation, or are you looking to bias your returns towards having an income stream relative to the value of the asset? That's going to influence your decision since real estate typically tends to make most of its returns through that dividend, that income stream that the rent produces. It's not an appreciation play. So that question of what type of returns are you looking for, appreciation versus dividends, that's going to influence your answer. But that's always been true. That was true five years ago. That was true 15 years ago. You know, how does a given investment meet your goals, your interests, your risk tolerance, your timeline to withdrawal? Those basic staple questions are the same now as they always have been. The pandemic has not changed that. But in the same way, they're not. But in the same way, the current market volatility should not scare somebody into ceasing their 401K contributions. Despite the market volatility, maintain your 401K contributions or increase it if you can.

Similarly, the current unemployment situation should not scare people away from investing in rental properties because it's in times of crisis that opportunities emerge. So thank you for asking that question and best of luck with whichever you decide. We'll come back to this episode in just a minute. But first, our next question comes from Ali. Hey, Paula, this is Ali in Los Angeles. I've been listening to your show for a little over a year now, basically since I started biking into work. First and foremost, I'm glad that you've recovered from the coronavirus, and I am thankful that you're using your platform to encourage people to physically distance from early on. So this is a pandemic-related question.

Both my wife and I work in what we consider fairly safe industries. I work in local government, and she works in healthcare. On the administration side, not the front lines. However, for the first time in a really long time, both of our workplaces are announcing layoffs. Before I go into my question, I'll just give you a quick background of our situation so you could have a better understanding of the big picture. We have two children, one in second grade and one in daycare. We don't have any consumer debt. Both vehicles are paid off.

Our major debt is our home in which 60% is in equity, 40% is debt. It used to be 70% equity, but I pulled out 10% to reduce our interest rate and to start a passive side income, which is bringing in some steady cash flow. Our second largest expanse is our daughter's daycare. It's about $1,400 per month, but we did pull her out in February ahead of the stay-at-home order. because she was having some medical issues, so we just wanted to be extra safe. At both of our jobs,

we both have pensions under the CalPERS system, and we both have access to a 457 account in which I max out my pre-tax, the 19,500, and also my Roth. She recently increased her pre-tax to about 590 per check, which comes out to about $15,000 a year. We also contribute to a taxable brokerage account, about 5,000 per year. In the past two to three months, we worked really hard to increase our emergency

funds to eight months. So we cut a lot of expenses. In the event, both of us are laid off. I rarely hold this much cash on hand ever since I began the past five. So it does feel a little weird. So my question is, let's say in the event, we both somehow, God willing, make it through the layoffs unscathed, what would you recommend that we do? Should we keep an eight-month emergency fund? should we reduce it and invest the excess cash into our brokerage account, or perhaps an income property, or should we hold on to the extra cash and be as conservative as possible? Even in the event of one of us getting laid off, would we still need an eight-month cash fund considering the laid-off person would likely receive some sort of unemployment until

they found another job while the other one can cover most of the expenses with their income? I look forward to your answer. Thanks again, Paula. Ali, thank you for calling in. Thank you for that question. First of all, congratulations on everything that you've set up. I'm really glad that you provided all of that detail because that gives me the context to be able to create a more thorough and nuanced answer to your question. So thank you for all of that. And congratulations on being in such a strong place right now.

You're maxing out both your 457 and your Roth. Your wife is contributing another $15,000 to a pre-tax retirement account. plus you both have pensions, plus you hold 60% equity in your home, have no other debt, have an eight-month emergency fund, have a taxable brokerage account, and have a side hustle. So if you go down the financial checklist of like doing everything right, you're well set up. And that's great news because particularly in this time, in the time of a pandemic, in the time of what is almost certainly or a second, the fact that you're starting strong makes this so much easier. So based on everything you've told me, here are my recommendations. First of all, if both of you make it through the layoffs without losing your jobs,

there is still a risk that your employers could announce a second round of layoffs. Hopefully that won't happen, but it could. There is a non-zero chance of that happening. And so through this time of economic, uncertainty, I would continue to hold that eight-month emergency fund. As I'm sure you know, you know better than I do, local governments are seeing their budgets destroyed. They're not collecting the sales tax that they used to be able to. They're not collecting the hotel occupancy room tax that they used to be able to. And even after establishments reopen, it will most

likely take a long time for people to feel comfortable and confident enough to resume their old habits. It is ironic and very unfortunate that medical facilities that are canceling elective procedures are seeing their revenues get destroyed right now. And even once they start allowing elective procedures to take place again, it will be a while before people feel comfortable enough and feel safe enough to opt to go in for an elective procedure. And there are many, many more factors that indicate that even if everything reopens, the recovery will still be slow. And that might be the best case scenario because a worst case scenario is that everything

will reopen. We will slowly begin to recover and then a terrible and tragic second wave will hit which will be so bad that a second shutdown is unavoidable. And if that happens, that could trigger a depression, an economic depression. And so in the spirit of hope for the best but plan for the worst, maintaining eight months of emergency savings is a life raft in a sea of uncertainty. And I know if you're accustomed to optimizing every dollar, as many people in the fire movement are, it's difficult to wrap your head around the notion of cash just sitting there losing purchasing power to inflation. But if it's helpful, and this is something that I tell myself all the time whenever I get those ideas, think of the opportunity cost that you pay for keeping money in cash. think of that as the premium that you pay for security, for peace of mind, for having a better night's sleep.

Under normal circumstances, people pay a lot of money for the feeling of relaxation. People pay to go to spas. They go on vacations. They pay a lot to be able to purchase the feeling of de-stressing and relaxing. And you can get that same benefit, that reduction of stress, that boost of confidence from paying the opportunity cost premium that comes from keeping large cash reserves. So if it helps change the framing of it, rather than framing it as, wow, this is a lot of cash that could be working for me if I put it into an index fund or into a rental property. That's true.

But that's overfocusing on specific line items at the expense of the bigger picture. And so if it's helpful, reframe that into, hey, I'm paying a premium in the form of opportunity cost for the sake of peace of mind. And that peace of mind will allow me to make better investing decisions throughout the course of my life. Because if I am not panicking, I am likely to make wiser, sounder decisions. If I am sleeping well at night, if I am confident that myself and my family will be taken care of, then I will continue to be able to proceed forward from a foundation of strength, and that carries value in excess of the cost. And I understand the idea, as you said,

the eight months seems excessive in light of unemployment and in light of the likelihood that one of the two of you will continue to have an income and in light of the fact that you have a side hustle. So you've diversified your sources of income as well. But that said, number one, unemployment benefits can take a long time to reach people. You heard Lydia's question earlier in this episode. Notice how Lydia said that she applied for unemployment for her W-2 job, but she hasn't received it yet, and that she was trying to figure out how to apply for it from the independent contractor side of her work,

but she couldn't get through to the state unemployment office. So yes, unemployment is available, but it can be delayed. The offices are swamped right now. It's hard to get those applications in. The application could get rejected on a technicality or delayed on a technicality, and then you would have to go through the process of repealing if that is an option. So that's one facet. The other facet is that when we talk about having eight months' worth of savings,

while that's an excellent rule of thumb, that doesn't literally mean that that money will be used for precisely eight months' worth of normal living expenses. It might be the case that that money would be used for four months' worth of normal living expenses, plus covering a $5,000 emergency repair on your home when a tree crashes through your roof and you're forced to, at a minute, minimum, seal the giant hole in the roof that it creates so that water won't flood into your master bedroom. And your homeowner's insurance has a high deductible. And you've got to be able to cover that bill. And then one of you, let's hope this doesn't happen, but then what if one of you gets sick? And then you have to pay your entire health insurance deductible plus the health insurance's annual out-of-pocket maximum. it's possible that you might be hit with

unanticipated big-ticket expenses during that period of unemployment. And so eight months of living expenses isn't necessarily meant to literally cover eight months' worth of expenses, but it's a broad generalized rule that improves your chances of being able to cover three or four months of expenses plus other emergencies that could hit you,

you with some really tragic timing. I don't know if either you or your wife has family that lives either out of state or overseas, but imagine if a sibling or a parent or a grandparent who lives far away has a sudden health issue and in the middle of that unemployment you need to very suddenly buy a next day airline ticket to fly out there immediately. And perhaps for one reason or another, you can't stay with that person in their home, so you would need to find a place, a hotel or an Airbnb where you could stay while you're there for that family crisis. I mean, those are all of the things that it could happen at any point in a person's life and they don't stop happening just because a person is furloughed or unemployed. Now, with that said, after this crisis is over, when coronavirus

is a distant memory of the long-forgotten past, when the economy has recovered and we've all moved on and consumer sentiment is very confident, and we're back in a bull market. If at that time you want to reduce that emergency fund down to three to six months, that would, in my view, be the appropriate time to do it, but not in the middle of a crisis. The only other thing that I would say is you mentioned that you have a side hustle. If you have the time and the energy and the inclination to do so, think about how you could grow it. so that you can create a little more diversification. And if that side hustle grows, that could provide some additional income that you could use for additional investments.

So thank you for asking that question, Ali. Best of luck surviving the layoffs and best of luck on your journey to fire. Our final question of today comes from Anonymous. Hey, Paula, this is Anonymous. I love your show. I've been listening to all of the. episodes. And I have a question about paying off rental properties early. So just for some background, my husband and I are in our late 30s. And we got a little bit of a late start with our finances because

we both went to grad school. But we've been working really hard in the last several years to turn things around. We make about $270,000 a year combined, although that's been pretty variable because of my husband's work. We have about $400,000 in our combined retirement accounts. And no debt, except for a very low-interest loan that we took out to put solar panels on the house. We have about $40,000 in cash, and we're working on building that up a little bit more. We have our first property, which was our first home. It's a single-family home, and we owe about $100,000 on it. It's worth about $2.30 or $2.40, and we rent it currently for about $17.50 a month. The mortgage is about $1,400 a month.

So it doesn't generate a bunch of cash flow, but there's really no maintenance to do. We've had a great long-term tenant, and we only have about nine years left on the mortgage, so it'll be paid off when our daughter is thinking about college. She's five right now. We also have our current home that we live in. It's worth about 4.30, and we owe about 3.40 on it. So my question is, I would love to buy a two or three family home in the area, probably using some of the equity in our rental property. for a down payment. My husband feels really uncomfortable, I think, having three mortgages at the same time. He's super risk-averse. One of the things I was thinking about was just doubling up our payments on their first property, so maybe making another $1,500 a month in payments so that the mortgage will be paid off in four years, and then considering another property then. But I'd love to hear your thoughts on that approach. I know you don't usually give a yes or no answer. So I'd love to hear you think through some of that. Thanks so much.

I love everything you do. Anonymous. That's a fantastic question. First of all, congratulations on everything that you've set up. You're making a fantastic combined income. You're clearly saving and investing a significant portion of it. You have your first rental property already and you're looking at expanding. So congratulations on everything that you've done to get you to this point.

Now, you've asked a really interesting question. So first of all, you mentioned that your husband is uncomfortable. with the notion of having three mortgages. Let's engage in a little thought exercise. Imagine, hypothetically, that you had three mortgages, but the outstanding balance on each mortgage was $5,000. Would you feel uncomfortable? No, of course not, because the total combined balance of all three mortgages would be $15,000.

That would be very doable, very non-intimitating. Heck, imagine that you had 15,000. mortgages, but the outstanding balance on each one was $1,000. Again, no big deal. Not scary, not intimidating. It'd be a silly situation to be in, but you also wouldn't be in that situation for very long because the combined outstanding balance is so small that you know that you could wipe out those mortgages rather quickly.

And so I would invite a conversation around whether it's the number of mortgage. per se that is triggering this risk aversion or whether it's the outstanding balance and the total debt load. Now, with that being said, your total debt load will increase if you were to borrow against the equity that you have in that first property. But the same would be true four years from now if the amount that you borrow from that first property is greater than its current outstanding balance. So you mentioned you owe $100,000 on this property. Imagine that you pay it off over the span of the next four years, and then you borrow against it. If you were to do that, assuming that the loan amount is greater than $100,000, let's say you borrow $200,000 against the

equity of this paid off home, well, all right, now you've only got two mortgages, but the total amount of money that you have borrowed against this home is $200,000. Contrast that. Contrast that. to if you were to borrow against it right now, let's just say hypothetically, that right now you would qualify to borrow $100,000 against this property. You would be in the exact same boat. You would have $100,000 debt on this first rental property that you own. And then you would have an additional $100,000 that comes from borrowing against the equity that you hold in it. So the total debt load would be $200,000 in either case. But the difference is a four-year gap. The difference is that delta between housing prices now versus four years from now.

And we don't know what that gap will be. We don't know if housing prices will stay stagnant, will rise, will fall, anything could happen. We can never predict the future of the market. What we know is that four years from now, housing prices and interest rates will be whatever they are four years from now. What we also know is that interest rates currently are the lowest that they've been in a general. generation. And what we also know is that currently there are not many buyers on the market right now. Due to the pandemic, sellers are not receiving multiple offers right now in the way that some sellers have in the past. So we know those stats about our current landscape. And again,

we don't know what it's going to be like in four years. For all, we know, there might be another pandemic that's 10 times worse than this one. But what we know is, we know, we know, is that right now, the conditions for taking out a long-term loan at a fixed interest rate appear to be favorable relative to what they have been historically. And when I say historically, I mean, in our lifetime so far. So if you are thinking about taking out a long-term loan at a fixed rate, this is a good time. And four years from now, who knows? It might still be a good time. It might not. We have no idea. Now, with that being said, let's look at the rental home that you currently hold.

Because first of all, it sounds like it's playing a significant role in helping build your net worth. Because the returns that it's making are not just the cash flow that you are able to collect, but also the principal portion of the mortgage paydown. And given that you have only nine years left on the mortgage, and I don't know if it's a 15-year mortgage or a 30-year mortgage, that'll be significant in terms of where you are in the amortization schedule. But as bigger and bigger portions of that mortgage payment are consumed by the principal paydown portion, this rental property that you currently hold is contributing to your net worth in a fairly significant way. And it sounds as though from the way that you phrased, we have nine years left on the mortgage so it'll be paid off when our daughter is thinking about college.

She's five. My question to you is, is your plan to use this rental property as essentially the college fund for your daughter? So is your plan to pay for college through the cash flow that this property generates once it's paid off? She'll be 14 by the time it's paid off that gives you another four years to be able to use the cash flow to build a cash cushion, a mask, four years worth of savings from when she is between the ages of 14 through 18. You can save all of that money over the span of four years. And then when she's 18, she starts college, that monthly cash flow could cover a significant portion of her expenses. And so my question to you is, is that the plan that you have for this property? Or were you planning on not using

this property to pay for her college? Were you planning on creating a 529 plan? or a covered LESA. And the follow-up question to that is, if this home is going to be used for covering her college expenses, how would that be impacted by each of the two scenarios that you outlined, either borrowing against this property now or paying off this property over the span of the next four years and then borrowing against it four years from now? what impact would that have on the cash flow? And remember to include the cash flow from the new property as part of that calculation. So what impact would that have on both of those scenarios? How quickly could the new property also be paid off? And what would be the implications of each plan on the ability for these rentals to cover those educational costs?

Because the other thing that strikes me is that if you were to buy another property right now on a 15-year mortgage, then if it's a 15-year mortgage, certainly your monthly payments are going to be quite a bit higher, which means that during the life of that loan, your cash flow will be almost nothing. But due to that payoff acceleration, a property that you buy today will be paid off when your daughter is 20, which is still in time to pay for the second half of college, as well as to offer support through grad school or any other support that you might want to offer when she's 21, 22, 23. Zooming out a bit, the broader point here is that the decision of whether to buy a second

rental property now versus four years from now is not purely a financial decision. Certainly, housing prices and interest rates play a role in it, but that needs to fit the context of why you're doing this in the first place. What is the goal of that income? What are you trying to build? What are you trying to achieve? Because if these properties are meant to supplement your retirement, and if you don't plan on retiring until your 60s, well, then that's a different scenario than properties that are meant to cover educational costs that will begin in 13 years. And so as you run through the mathematical implications of each scenario, and again the math is the easy part, a few hours with a spreadsheet, and you can math out how changing a given variable will affect the numbers and timeline.

But what a spreadsheet can never tell you is how that fits into the overall scope of your long-term life planning. Thank you, Anonymous, for asking that question. That is our show for today. Thank you so much for tuning in. You're listening to the Afford Anything podcast. My name is Paula Pant. Thanks for being part of this incredible community. In the next episode, Dr. Sarah Stanley Fala joins us to talk about how to manage money during this pandemic.

Dr. Fala is the author of The Next Millionaire Next Door, which is the sequel to the book The Millionaire Next Door. She is the daughter of Dr. Thomas Stanley, the late Dr. Thomas Stanley. who is one of the co-authors of the millionaire next door. And we'll be chatting about the way that personality types influence how we handle our money during a pandemic. So make sure that you hit subscribe or follow in whatever app you're using to listen to this podcast so that you don't miss that incredible interview. Thanks again for tuning in. And I'll see you in the next episode.