Afford Anything - Ask Paula -- Should I Loan Money to Friends? Stay Sane While Repaying Debt? ... and More

Episode Date: April 10, 2017

#72: Spaghetti is a major part of my life. I eat it, of course, as many people do. I also spill it all over my pants, despite the fact that I’m 33 and should’ve learned the rules of gravity by now. But most importantly, I use spaghetti as a metaphor for my business. If I’m not sure if something will work or not, but I want to experiment with an idea, I tell myself that I’m just “throwing spaghetti at the wall.” Maybe it’ll stick; maybe it won’t. Either way, I have permission to try, permission to fail, and permission to get pasta stains all over my drywall. This week, I’m starting a new spaghetti-throwing-experiment on the podcast: I’m going to broadcast “Ask Paula” episodes every-other-week, followed by interviews with guests every-other-week. This allows me to handle the awesome volume of questions that are flowing in (which I LOVE), while still enjoying intriguing conversations with fascinating people. This every-other-week thing is just an experiment; I’d love to hear what you think. Do you want more “Ask Paula” episodes? Or should I return that segment back to its original once-a-month placement? Or am I overthinking this and I should really just get on with the show notes for this week’s episode? Assuming you’re like, “Option C, Paula — get on with the show notes!,” here they are. ___________   Our first question comes from David, who asks: Could you ever find yourself in a situation in which you could justify helping a friend by paying off their credit card, and in exchange, they pay you a modest but respectable interest rate? Here’s his situation: His friend holds $6,000 in credit card debt, with carries an interest rate ranging between 11 to 17 percent. This friend also holds $30,000 in student loans. Yikes! David, however, is debt-free, maxes out his retirement accounts, and holds cash savings of $56,000. He’s thinking of loaning his friend around $3,000 of this money, which she could use to pay off the 17 percent loan. In exchange, David would get a decent-but-not-outrageous return, perhaps in the neighborhood of 7 percent-ish. Should he do this? If so, how? Should he sit down with a lawyer? Next, Amy asks: We’re carrying debt, although fortunately it's low-interest. We're paying it off, and we're doing the best we can; this debt will be gone in a few years. How do you stay patient and calm, when progress is happening at a snail's pace? Later, Alexa says: I’ve realized that I haven’t followed my true passions, which are travel and dance. I’d like to save money for a few years, and then pursue these twin goals. What should I do with the money that I’m saving for travel? Should I keep it liquid or in stocks? Should I put it in a taxable account or a retirement account? Lyra asks: I have 5 goals: repay debt, save an emergency fund, help my son pay for college, save for retirement, and buy a rental property. How do I split my money between these five goals? Next, Kim asks: What are the pro's and con's of portfolio lending for an investment property? I keep getting hung up on the "balloon payment," in which you need to repay the full loan after a particular period of time. How would you qualify for a refinance, given that you need a portfolio loan in the first place? Finally, Daan wants to know: I’m a Dutch citizen who moves to a different country every 2-3 years. Is real estate a viable option for me?   For more information, visit the show notes at https://affordanything.com/episode72 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make, every dollar that you spend, every hour that you spend, every ounce of energy that you spend on something inherently comes at the expense of something else. Every time you decide to do or buy X, you are inherently stating that that X is more important than A or B or C or D or Y or Z. And so once you realize that, once you realize the inherent tradeoffs and the inherent, and opportunity costs that comes with everything that we do. The question becomes, number one, what do you value? What do you prioritize? And number two, how do you align your day-to-day actions with those priorities? Because it's one thing to think that something is important to you,

and it's another thing to act accordingly. My name is Paula Pant, host of the Afford Anything podcast, where we explore these questions in depth. And if you've been listening to me for a while, you know that typically on the first Monday of the month, I answer questions that y'all have sent in in a segment that I call Ask Paula. Well, lately, I've been doing a bunch of these Ask Paula episodes. I did three of them in a row. There's some of my favorite episodes to record, and you all have been sending me a lot of questions. So I'm getting a ton of questions from you, which I love, and I've been answering them, and it's fun for me, and I hope it's good for you. And so anyway, my point is, to LDR, I'm going to try an experiment here. Throw on some spaghetti on the wall. I don't know if it'll stick or not, but I'm going to try doing this from this point forward.

Every other episode, I'll interview a guest, and then every other episode, every episode in between, I'll do an Ask Paula segment where I answer questions from you. So I'm going to try that. I don't know if I'll stick with it forever or maybe I'll just do it for a month or two months. I'd love to hear your feedback. But, you know, I've been thinking maybe that might be possibly a good way to structure the show. It's all an experiment. Anyway, that being said, let's jump right into our first question, which comes from David. Hey, Paula, this is David in Chicago. Okay, so I think you're going to say no, but I'll ask nonetheless. Could you ever find yourself in a situation where you could justify helping out a friend by paying off their credit card and in exchange, instead of them paying this bank at some drastic,

ridiculous 17% APR. They are paying you a modest, but respectable, 7% that you could be earning on an investment. Hear me out. I have a friend. She has about $6,000 in credit card debt. Her credit rating is pretty good. It's about $750. She also just got a new job, so that helps her. But she has about $30,000 in student loans. And she's really looking to get rid of this high interest. She has a two credit cards. One is 17%, the other is 11%. She really wants to get rid of the 17%. So she wondered if I could help her because I have a lot of extra cash on the side that I'm using to help pay for a down payment. Right now I have about $56,000, of which about $7 or $8,000 is my emergency fund. In addition, I've maxed out every year, my HSA, my 403B, and my Roth. So I really don't have a,

place that's tax advantage to be putting this money other than saving up for my first rental property. Long story short, I'm dealing with about $3,000, which is a short amount of, or a small amount of the grand total of my savings. Should I risk this? How would you go about negotiating, sitting down with a lawyer? Would you even attempt such a thing? Is this completely unheard of? I think you're going to say no, but maybe you'll surprise me. So, David, I think I think I'm totally going to surprise you, I've actually done this before. But, and here is the but, it's not alone and it's not an investment. It's a gift. And that's how you have to look at it. So it sounds like, first of all, to back up and give a little bit of context from everything that you've said, you know, you've got a

functionally an $8,000 emergency fund. You've got $48,000 that you're saving for a down payment on a property. You've got all of your various tax-advantaged accounts maxed out. You're in a great financial position. And we're talking about a total of $3,000, which is not a significant amount compared to the savings that you have. So you're in what seems to be a healthy position that you could give this away as a gift. And if you were to do this, this thing that you're proposing, which is give your friend the money that she needs in order to pay off her higher interest credit card, then view it as a gift because the fastest way to end a friendship is to give somebody a loan, frankly, because the moment that you give them alone, if they don't pay

it back according to the agreement that you've set out, kind of done. Trust ruined friendship over, you know, and it's not about the money. It's about the respect. It's about honoring the agreement. It's about everything that comes with that. And unfortunately, that happens a lot. You know, you'll give somebody a loan and then they won't pay it back. They'll say they don't have the money. And then the next thing you know, you see Facebook photos of them traveling to some exotic country. And you're like, wait a minute, really?

And I've had the experience I've been burned in the past where I've given somebody alone with a very, very clear agreement that it be paid back. I even created a spreadsheet in which they could record the payments, you know. And of course they didn't pay it back. And that was that. So my philosophy from that point forward has always been that if you are, if you feel compelled to do something for someone, do it as a gift and leave it at that. Because that gives you the highest probability of preserving the relationship. And the relationship is ultimately more important than the money itself. So that's my answer to you.

In any event, I think it's awesome that you're doing that. It's awesome that you care so much. And, oh, to the last thing that you said within your question, when you asked if you should hire a lawyer to set up the agreement, no, don't bother. I mean, like, do it as a gift. But if you, even if you tried to set up some sort of agreement, don't get a lawyer involved because we're talking about $3,000. That's a drop in the bucket. A lawyer is going to cost at least $100 an hour, if not more. And that's just, you know, given the amount of money that we're talking about, paying a lawyer just is. really worth it. You can get agreements if you really want one. You can get an agreement from nolo.com. I'll link to it in the show notes, which is available at afford anything.com slash episode 72. There you can download some legal forms that you can fill out. But again, grab the legal forms, fill that out, do all of that. But in your head, don't ever expect to get the money back. If you do, it's a pleasant surprise, but just, you know, let go of that expectation.

because a gift is, by definition, giving with no expectation of reciprocity, giving with no expectation of anything in return. And that's the spirit from which you need to approach this. Cool. I hope that helps. I think it's awesome that you care so much about your friend. And best of luck with whatever you decide. Speaking of debt, our next question comes from Amy. Hi, Paula. This is Amy in Maryland. I have been a stay-at-home mom for the last couple of years, and me and my wife have some debt that we're trying to pay off. Our problem is that it's, well, it's not a problem that all the debt is pretty low interest.

But my question for you is how to stay patient and not get super antsy when you're really trying to overcome a financial problem like paying down all of our debt. But you're in a place where, you know, paying the minimums every month is really the best you can do. And paying the minimums means that in a couple years, those debts will be gone. And in a couple years, I probably will be working and bringing in more income. So how do you stay patient and calm when the best you can do is just feeling like it's just moving at a snail's pace? Thanks so much. Love the show.

Hey, Amy and David, you should meet. I'm just kidding. In all seriousness, I sympathize with what you're going through because when you're playing the long game as you are, you know, when you've got a goal that where the achievement of that goal is years into the future, man, that's tough. It's tough because humans are not really wired for that type of long-term satisfaction. And so what I would encourage you to do is find short-term markers, short-term little hallmarks, small wins, in other words, that you can celebrate along the way, because that's one of the best ways to stay patient.

So rather than thinking of debt payoff or debt freedom as the win and waiting years and years and years into the future for that, find little hallmarks like, you know, when our debt gets down to X amount and that will be the win. And that win is coming up in only two or three months. Or, you know, you could find other hallmarks as well that aren't related to that debt. For example, if in conjunction with paying off the debt, you're also maybe building some savings, you might celebrate like when our savings. hits Y amount when our emergency fund hits this particular amount. You know, celebrate those small wins along the way because those are the tiny wins which, you know, accumulate on the way to the big win. When I was starting my blog, I, like when I was very, very first getting started and I had

nobody read it, I needed some sort of win because I was doing all of this work. And it felt it was frustrating to do so much work. with no payoff, no audience, no money, no nothing. There was absolutely nothing that I was getting as a reward for the work that I was doing. And so I found the smallest wins that I could. I remember the first time that somebody retweeted something that I wrote. I remember how happy I was, like dancing around my room celebrating that retweet, something so small, so simple. But it was a small win and it kept me motivated as I was working towards the bigger picture. Likewise, when I began buying rental properties, initially financial independence wasn't the goal. Initially, my goal was simply to diversify my income stream and build some passive income. And so I wasn't thinking about some big win that would exist years out into the future. I was thinking about the small wins of, hey, now I have an extra $500 a month in passive income. And it was those small wins which accumulated over time to get me to where I am today. So,

point of the story, and I feel like I'm being a little bit repetitive, is find any benchmarks that you can, no matter how small, and celebrate those. Focus your mind on those. Thanks for asking that question. I think it's a really good one. And I hope a lot of people benefit from hearing that answer. Because I encourage long-term thinking. And that's great. But the drawback of that kind of long-term thinking is that sometimes it can blind us to the glory of the short term. So thank you for bringing that up. And best of luck. everything. Our next question comes from Alexa. Hi Paula. My name's Alexa and I've been listening to your blog for a while and I absolutely love it. I recently graduated from college and started my job in engineering about four months ago. Throughout college and especially now that I'm working, I'm realizing that I'm really not passionate about engineering at all. What I'm really passionate about is traveling and dance. So my plan is to work for the next 10 months, save as much money as I can, and go on a one to two year long trip around the world to pursue dance.

My question for you is what is the best way to save up for my trip, and is there any good way to invest before I leave? Should I be saving all my money in liquid, or should I be using a retirement account like 401K as a way to invest my money? If so, what percent of my income should I be investing in retirement? What percent should I be investing outside of retirement? And what percent should I be keeping liquid? Thanks.

Alexa, since you're saving money for a short-term goal, which is travel, I would not put it in a retirement account or any other type of tax-advantaged account. Put it in a savings account so that you can access it. Furthermore, since you want to tap this money in a short period of time a couple of years from now, I wouldn't recommend putting it in any investments. Keep it in cash. And the reason for that is because investments over the investments over over the long term, over a 10, 15, 20 year time span historically have grown fairly well. But in the short term, and short term means one year, two years, three years, four years, five years. In the short term, there can be a lot of volatility.

And because you want to tap this money within that really short time span, you don't want to subject yourself to the risk of loss within that short time span. to kind of phrase this differently or to say it in maybe a little bit more of a punchy way, the stock market is not a high-yield savings account. And that's one of the lessons that I've learned the hard way as well. I totally treated the market like it was a high-yield savings account and, of course, got burned by doing so because I put money in there that I wanted to tap within the next couple of years and boom, then the market crashed and I couldn't tap the money and, you know, yada-a-y-y-a. It's the predictable ending of the story. So if you want to tap the money for travel, which I think is an awesome plan, just save the old-fashioned way, save the money that you make, you know, increase the gap between what you earn and what you spend, and put that gap into a traditional bank or credit union savings account. And if you ever start to get queasy about the, the quote-unquote opportunity cost that you're missing, because my brain can sometimes loop into that line of thinking as well, where, um,

You know, I put money in a savings account and then the market goes up and I'm like, look at all the money I could have made if I had just taken this inadvisable risk instead. If you ever find your brain like looping into that line of thinking, just remind yourself that any market gains that you quote unquote missed out on is the cost of insurance for knowing that that money is safe and that when you are ready to go travel, that money will be there for you to go travel. travel. Thanks for asking that question, and I'm really glad that you're doing, you're going to take this amazing trip. You're going to learn a lot about yourself. You're going to learn a lot about the rest of the world. And travel in my, and I realize I'm biased, but in my opinion is one of the best ways that a person can spend their money. So I'm really excited for you. I'm really happy that you've come to this decision and I'm glad that you're doing it in a financially smart manner. So awesome. Congrats, Alexa. And I can't wait to hear about the adventures

that lay ahead of you. Our next question comes from Lyra. Hi, Paula. My name is Lyra, and I am curious about what a good time in my financial journey would be to purchase a rental property. Currently, I make about $70,000 a year. $20,000 of that is child support that I receive for my son, who will be going off to college in about a year and a half. So that will be completely cut off at that time. So I am looking for away long term and short term to generate some more income to supplement that. I have about $11,000 in debt and it's interest-free debt, so I'm not too concerned about that right now. And I'm a home owner. I purchased my home at the bottom of the market on the coast in California. So it's doubled in equity in about five years. And so that's really piqued my interest in real estate as an investment.

And so my question is I'm loosely following Dave Ramsey's Baby Steps program. I've already achieved baby step number one. And I'm kind of skipping Baby Step 2 because like I said, my debt is interest free. But I'm kind of curious, should I build up three to six months worth of savings as an emergency fund, as an additional emergency fund and then start saving towards a down payment to purchase a rental property, which would probably be in the Central Valley where it's a lot more affordable and easier to get into the market. Or should I wait and I know you're not Dave Ramsey, but should I wait and continue to build up my son's college savings fund, continue to build up my retirement fund?

Yeah, so that's kind of where I'm not sure which direction I should head. I have about $5,000 for my son set aside, and I already know he's not going to receive any help from his father, unfortunately. And I do get my employer contributes to my retirement. It's not significant, but they do contribute in index fund. So that is my question. I'm really curious to hear your view on that. And I love your show. Thank you so much.

So here's what's interesting to me about this question. Here's what I hear when I hear you asking this question, Lyra. Even though on the surface, your initial question was, when is it the right time to buy a rental property? The question that I really hear you asking is, how do I prioritize among various financial goals? So you have all of these different financial goals, right? You want to save an emergency fund. You want to save some money for your son's college education. You want to contribute to retirement accounts.

And you want to buy a rental property. And so the question that I hear you asking is not a real estate question. It's a prioritization question. Oh, oh, and you want to pay off debt. How could I have forgotten that one? So yes. So it's those five things. College debt, emergency savings, rental property, and retirement accounts, market-based retirement accounts. You've got those five buckets. And the question that I hear you asking is, among those five buckets, how do I divide my money and time and energy and attention. Lyra, while I can't tell you what your priority should be, I'll offer a little bit of running commentary on each of those five buckets, which might help you form your own conclusions. So here we go. Number one, the debt that you have, it's $11,000, it's interest-free. I don't know the details of it, and particularly I don't know the details of why it's interest-free. So that's where my first question mark is. Is it interest-free because it's on a credit card that currently has no interest, but a year from now, it's going to kick

into a 17% interest rate. Is that the situation that you're in? Or is it interest free because it's a loan from a family member? It's a loan from David. Just kidding. Because it's a loan from a family member. And if so, is it harming your relationship with that family member? You know, even though it's interest free, does it have other non-financial costs associated? with it. So those are my questions about the debt that you have. It sounds to me, not knowing any of those details, it sounds to me like this debt is not keeping you up at night. So it sounds like there aren't any big psychological or emotional ramifications for you holding on to it. And if it is truly zero interest, meaning that it's not going to kick up into something higher in the future.

And if it's truly not harming a relationship that you have, then in that case, those would be reasons to not be too concerned about it for now. But again, I don't know the details. Those are just the initial thoughts that I had when I heard you describing that debt. Second, let's talk about the savings bucket. I do believe that prioritizing savings is a particularly good idea. And here's why. Number one, savings are the thing that will keep you out of future debt, out of credit card debt, in the event that something unexpected happens. Let's say your roof starts leaking and the engine on your car blows up and you get really sick and have to miss a bunch of work. And all of that happens in the same week. The fact that you have savings is the thing that will help pull you out of, pull you through that situation and keep you out of getting into a hole that you will then have to.

to work even harder to dig yourself. That analogy doesn't make any sense. A hole that you dig yourself out of. Why would you dig yourself out if you were in a hole? Wouldn't you like climb out of? You hear what I'm saying. So having savings on hand will, it's kind of a defensive maneuver. It keeps you from getting into a worse position. And in the event that you hit some kind of unexpected friction in your life, you'll be really glad that you have that. So whether you choose the three months, end of that three to six month spectrum or the six month end. That part is up to you and that part kind of depends on your what helps you sleep easier at night. But I would at the very least build up some emergency savings so that you can fall back on that when life happens.

All right. The third bucket that we want to talk about are college savings for your son. Here's the thing that I think a lot of people don't necessarily say out loud. You don't have to contribute to your son's higher education. If you choose to, if it's a priority for you to do so, that's up to you. But your son's an adult. He's going to be 18 or over. And he has the rest of his life ahead of him. He can take out student loans. When you retire, you cannot take out a retirement loan. He has 40 years of compounding growth ahead of him. You don't. Time is not on your side in the way that it is for somebody who's 18 years old. And so if you choose to help, number one, recognize that that's a choice and that choice comes at the expense of other choices

that you could be making. And number two, decide, and this is not necessarily a question that you can answer today, decide to what extent you want to help and also decide what that's going to come at the expense of, you know, what other financial decisions are you going to trade off in order to contribute to your son's college savings. Again, these are not questions that I can answer for you because they're very much values and priorities that you're going to have to assess for yourself. But I certainly would encourage you to not contribute to your son's higher education at the expense of your own retirement. And when I say retirement, I'm using that term broadly. I don't necessarily mean at the expense of your 401k.

I mean, at the expense of the way that you will support yourself when you are in your golden years, whether that way is through 401K and HSA and other market-based accounts or whether that's through rental properties and other forms of passive income. I'm using the term retirement broadly to refer to the support that you are going to live on when you are in your 70s and 80s. And the reason for that, again, at the risk of repeating myself, the reason that I say that is because, frankly, time is not on your side in the way that it is for him. And the greatest gift that you can give to your child is the gift of knowing, giving him the assurance of knowing that he's not going to have to take care of mom when she's in her 80s. That reassurance that he will have, you know, when he's in his 30s and he knows that, you know, mom's taken care of. I don't have to worry about her. I can focus on my own life. That's very, very important.

valuable. And that is arguably more valuable than some low-interest student loans that he'll end up carrying. You know, student loans are not the end of the world. But having a parent who is unprepared for retirement, that's stressful. So that's why I would encourage you to prioritize your own retirement above and beyond paying for his education expenses. But again, these are all value judgments, you're going to have to reach your own conclusions. So we've talked about debt payoff, we've talked about savings, we've talked about college education. That leaves us with the last two buckets, which are retirement savings and real estate investing. And in the spirit in which you are approaching this, at least the way that I'm hearing it, the way that I'm hearing you phrase your

question, these seem to be both pointed at the same goal, whether you're saving for retirement in a traditional market-based account or whether you're buying a rental property, what I'm hearing you say is that both of those are pathways that you're pursuing for the purpose of having financial stability when you are in your 60s and 70s and 80s. And so to that extent, I don't think that there's a strong argument for prioritizing one account versus another, like prioritizing your 401k versus saving for a down payment, assuming that you are getting your full employer match or your full employer benefit on the retirement accounts

that you have a benefit for, assuming that you're getting that, which it sounds like you are, then beyond that point, it's just a matter of where you think you're going to get the better returns. Do you think you'll get better returns by putting money into a broad market index fund and letting it ride for the next X amount of time

until you're ready to retire? Or do you think you'll get better returns by purchasing a rental property that has a great cap rate and strong cash flow? And again, at that point, it becomes a mathematical problem. Either way, the why or the purpose behind those two investments are, you know, the same or similar. And so really, you can't go wrong either way. So I hope that answers your question. I realize this isn't a clear answer. But again, if your question is fundamentally, I've got five different buckets, debt, savings, college, retirement, real estate. And of these five buckets, how should I prioritize them? And there is no clear answer to that. That's why I have an entire podcast dedicated to, as I say in the intro, exploring that question because it's not formulaic.

There is no right answer and a lot of it just depends on the values that you hold. There's the mathematical component to it, of course, you know, how good is the cap rate on the rental property that you would buy? That's definitely the mathematical portion of the question. But beyond that, what's going to help you sleep easiest at night and what is going to align your financial decisions with the vision that you have? Do you have a vision for being debt-free by a certain point in time? Do you have a vision for being prepared for retirement in such and such way? You know, what vision do you have and then how are you going to prioritize those five buckets in accordance with it? That's fundamentally the question that you have to answer for yourself. And I hope that the running commentary that I offered can help you do that. So thank you, Lyra, for asking that question because I think it's not just an important question. It is perhaps the most important question that anybody could ever ask themselves. Best of luck with everything, Lyra.

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Our next question comes from Kim. Hi, Paula. Kim here. 26 years old and I've been listening to you for. about two to three years now and I just wanted to quickly say thanks for all that you've done for me. I don't think I would honestly be where I am today without you. So thank you so much. My question today is about portfolio lending and I just want to get your thoughts on it because I'm not entirely sure what the real pros and the cons are portfolio lending. My main question would be I keep reading that it's a really great solution for people who have multiple properties. But the one thing

I keep getting hung up on is this balloon payment where you have to repay the entire loan after a certain amount of time. My question would really be, how would you qualify for refinance if people who usually come to portfolio lenders in the first place are typically people who don't fit within the boundaries or don't qualify for normal loans. So how do you really repay all of that by refinancing? Would love your thoughts here and just overall thoughts of portfolio lending. And if you think it's a viable solution or if you've used one before, thanks. Love the show. Kim, that's a great question. Now, first of all, for the sake of all of the other listeners, a portfolio loan, for those of you who aren't familiar with this concept, a portfolio loan,

is a loan in which the lender hangs on to that loan. So typically, financial institutions, if they issue a loan, like if they issue a mortgage, they will then package that with other loans and then sell that in the secondary market. In the cases in which the lender, an institutional lender, such as a bank, does not package and sell that loan on the secondary market, in cases in which the lender holds on, onto that loan within the lender's own portfolio. That is what's called a portfolio loan. And portfolio loans are often issued as a certain type of mortgage loan that, frankly,

they're typically from the consumer standpoint, from the standpoint of you and me, they're typically less desirable than a conventional loan. For example, typically the interest rate on a portfolio loan is going to be higher than the interest rate on an alternative type of loan that you could get. Also, the term of a portfolio loan is sometimes shorter. You know, sometimes it's a five-year or a 10-year loan with, as Kim, as you mentioned, with a balloon payment at the end, which means that you then have to pay the entire balance due at the end of that loan. So there are a lot of drawbacks to taking out a portfolio loan, which leads to the question,

and this is kind of a rhetorical question, and Kim, it's also kind of a question directed at you, which leads to the question, why would you take one out? A lot of times people will turn to portfolio loans if and when for some reason you can't qualify for a better loan. And so Kim, I assume that's a situation that you're in. I assume that for whatever reason you're having a hard time qualifying for a better alternative loan and a portfolio loan is the best option that the lender is issuing that's in front of you. And I think you're totally right to be wary of this balloon payment at the end because, you know, what lenders will tell you and what people in the real estate investing community will tell you is, yeah, take out an adjustable loan with a balloon payment, take out a portfolio loan with a balloon payment, take out whatever with a balloon. You can always refi it. That's what you hear people say over and over ad nauseum. And Kim, I think it's really smart of you to pause for a moment and say, well, hold on, what if I can't refi it? it? What then? What's my plan B? What is my alternative exit strategy? That's a really good question to be asking. Now, there are a few reasons that people in the real estate community tell you that you will be able to refi it. Number one, people often believe that the value of the home will rise, and then once that value rises, you'll have sufficient equity within it that you become a more attractive candidate for a refi loan. That's one reason. I wouldn't bank on that because I just,

I wouldn't bank on values rising. frankly. I don't think that, you know, as I've said on this podcast over and over, market appreciation should be icing on the cake because you cannot control the market. So if the values don't go up, there's nothing you can do about it. Stay within your circle of influence. Stay within your locus of control. There are definitely things you can do about improving the quality of the property, renovating the property, creating better rental ads, taking better pictures, getting a better tenant, there managing the tenants better. All of those things are within your circle of influence. They're under your direct control. You can't do jack about the broader economic market. So don't bank on the home value going up. If it does, that's awesome. It's icing on the cake. But don't base an investment strategy on something that is just that far outside of your control. And particularly don't base a refi, a short-term refi strategy on something that's that outside of your control. Now, that being said, If you plan on, for example, renovating the property and improving its value as a result of those renovations, that's referred to as forced appreciation.

That is within your control. So that's a different story altogether. But I guess zooming back, I'm getting a little bit in the weeds here, zooming back a little bit, pulling out and looking at this from a broader vantage point, I guess my question to you is, why are you interested in a portfolio loan? and under what criteria do you believe you would be able to refi the property in the future? Is it because you're banking on the value of the home going up? Is it because you think that you will be a better loan borrower candidate? You know, because of some job situation or some income situation, you know, like under what set of circumstances do you believe that you'll be eligible for a refi in the future, even though you're not eligible for that refi now? And if that set of circumstances is something that is very much within your control, then that's not a pure green light, but it's at least a yellow light, you know, because at least you're mentally you're staying within your circle of influence and that's where you want to be.

So that's kind of where I would start in terms of answering this question. The other thing that I would kind of encourage you to ask yourself is, what would you do if you can't refi the property? What's your plan B? what's your alternative. Would you sell it? And if you do plan on selling it, what if the value of the property is stagnant or worse, declines? Would you be okay with selling it at the same or less value if that's what you needed to do in order to avoid that balloon payment at the end? Could you renegotiate the loan? You know, how likely is that of a possibility? Are you dealing with an institutional lender or are you dealing with a private lender? Private lenders are often more

willing to negotiate, but not always. But you at least have a bit more leeway there. I suppose this would not be considered a portfolio loan if it was coming from a private lender. But my broader point is, you know, to ask yourself the question, what options do I have? What's my plan B and C and D? Can I renegotiate? You know, those are the questions that I'm kind of prompting you to think about. And I feel like this is turning into a long answer. And I hope it's not, you know, it's a little like, ping, ping, ping, I realize my brain is going a little bit all over the place in it. So, let me kind of dial this back and package it this way. Taking out a loan in which you have a balloon payment at the end is a scary proposition because

you are then on the hook for making a massive payment that you most likely will not have the funds to be able to make. So if you choose to do that, have not only a plan A but also a plan B, plan C, plan and D and plan Z, have multiple plans for how you are going to deal with that situation if and when it does arise. And if you have multiple plans for how to deal with that, then under that set of circumstances, I think it's totally okay to get a portfolio loan. In fact, to answer part of your question, I have gotten one myself. Unfortunately, I didn't want to get one, but it was the only option that I had at the time. And I had multiple exit

strategies, including a couple of like really Armageddon worse, worse, worse, worse, worst, worst case plans that I knew that I could fall back on if that balloon payment came due. And fortunately, that never happened. I took the portfolio loan. I refied after about a year and everybody lived happily ever after. So everything worked out. out, but the only reason that I was comfortable taking that portfolio loan, and the only reason that I was able to sleep at night, was because I had multiple exit strategies. So, Kim, that's the short answer to your question. Get the loan. If that loan is the best option that's in front of you, get it, but only if you know that there are multiple ways out. Thanks for asking, and best of luck.

Our final question for today comes from Dan. Hey Paula, my name is Dan. I'm a Dutch citizen currently working in Malaysia. So I was wondering how some of your teachings apply to people, to international people, and especially one like me who travels every two to three years, I'll change to a different country within the same industry just because that's my way of slow travel and I've loved to see different places. So that makes, you know, my real estate question a little bit more tricky because currently I'm investing in index funds and I'm wondering if there's any way that you could see real estate being a viable option. I'd like to have some passive income and I am of course able to look for a rental property where I'm staying at that point. But within two to three years, I'm going to leave and I'm not necessarily going to be able to stay much in that environment. Currently, I'm in, in Asia and there's a lot of uncertainty and not a lot of figures and details that you can find

about the different areas. So I was wondering if you have any tips for that or maybe if you know people that have podcasts or information that you think might be very relevant to somebody who travels for a living is not from the U.S. and is not necessarily staying in one place at a time. Thank you so much for your amazing job at the podcast. and Steve, thank you so much for editing. Bye, bye. That's a great question.

Now, first of all, I'm going to give the disclaimer that my area of knowledge is real estate investing in the United States. That's kind of what I specialize in. It's what I do. So I'm not familiar with investing in Europe or in Canada or in Australia or in any other markets outside of the U.S.

That being said, and of course, my answer is going to naturally reflect my bias towards U.S. investing. That being said, you could always invest in real estate in the U.S. You could always buy rental properties in the United States. And in fact, there are a lot of international investors who own properties here in the U.S. There was a guy. I featured an interview with him in the course, the real estate course that I'm building, a guy by the name of Rich Kerry. He is a U.S. citizen, but he's in the military. And he lives abroad. At the time that I interviewed him, he was living in Germany.

I think he's moving to South Korea. He either is moving or just recently moved to South Korea. So he's lived outside of the U.S. for many, many years. And he owns a number of rental properties, somewhere around ballpark, I think, like 17, 16, 17, something like that. Of rental properties all centralized in Montgomery, Alabama. And he's got his team there. He's got a property manager. He's got a real estate agent.

He's got contractors. He's got his whole team centralized there. And so, you know, he lives in Germany slash South Korea and his team is running his business in Alabama. Think of it very much as any example of a person who runs a business that is headquartered outside of where they live. That's essentially what you're doing when you are an out-of-state or out-of-country rental property investor. Now, the reason that I'm telling that story is to illustrate that not only is it possible, it's actually more common than you think. There are many people who live outside of the U.S. who invest in rental properties in the U.S. That being said, however, I will give a couple of caveats. Number one, obviously all of the money that you would be dealing with is U.S. dollars. You know, you'd be buying in U.S. dollars, you'd be spending in U.S. dollars.

and if you don't plan on ever living in the U.S., not even in retirement, you will eventually be converting those U.S. dollars into whatever currency you plan on spending that money in. So you do have an additional level of risk there in terms of currency fluctuation. Number two, in terms of qualifying for financing, that can get a little bit more complicated when you are an out-of-country investor. So that's just something to bear in mind. Your first couple of properties, access to capital, like money is going to be more expensive and harder to find. That's not to say it can't be done. It's just, again, the cost of doing business. Number three, as is common for many out of state or just long distance investors, it is helpful to centralize your activities in one geographic area.

you know, one particular city in one particular state, like Dayton, Ohio, or Indianapolis, Indiana, or Montgomery, Alabama, because that way you build one team. You've got one property manager. You've got one real estate agent. You've got one electrician. You've got one plumber. When I moved to Vegas, a lot of people were like, oh, are you going to start investing in properties there? And I'm like, dude, I already have my team like nailed in Atlanta, Georgia. So if I were to start investing in property, I would have to completely reinvent the wheel. I'd have to build a new team. I'd have to start a new business. That's not to say that I'm not going to do it. But it is to say that the flippant question, like every time I move somewhere, I'm not just going to start investing in properties because I happen to live there. Because, you know, people ask, people were asking me that question very casually, very flippantly. and it kind of struck me. My impression was that they weren't really thinking through the ramifications of, well, if you bought a property in this location,

that means that you would need to build a team in this location. So that's the other thing that I would say is if you are going to decide to become a long-distance investor, pick one spot and then really focus your energy on creating that team within that spot. You'll have to fly there from time to time. You'll have to visit, particularly as you're, learning the area as you're setting things up. So again, that's just part of doing business. I'll take it back to the analogy of imagine if you were starting a company that, let's say that you live in California and you want to start a company that deals with goods that are made in Bali,

Indonesia. You would have a leg of your company that's headquartered in Bali and you would have to occasionally, even though you live in California, you would have to occasionally fly to Bali in order to establish your company, to build your team, to meet with your suppliers. That's what you do when you live somewhere and you build a business somewhere else. And real estate in that regard is no different. So that is, again, my very long answer to your question is that if you want to, if it interests you, you are absolutely able to buy rental properties in the U.S. And functionally, what you would be doing if you did that is you would be starting a business

in the United States. And that business would be in the business of purchasing houses and then renting them out in one-year increments to people who wanted to live there. That's what your business does. And the team that you hire runs that business. And so that option is totally available to you. The question is not can you do it, but rather do you want to do it? Again, this goes back to like you can do pretty much anything, but you have to make the choice. You can totally do it. Is this what you want to do? Is this a path that you want to go down? If it is, as it was for Rich Carey and as it is for many, many, many people who live overseas and invest in the U.S., yeah, if it's what you want to do, go for it. I highly encourage that because we've got some great deals here. We've got some great opportunities here. And I encourage people to go where the money is if that's what you choose to do. So thank you so much for asking that question. That comes to the end of this Ask Paula episode. Next week, we are featuring an interview with

Steve Gossett. He's a former chess player. And he will be talking about what chess taught him about making smarter life decisions. If you enjoyed the show, please head to iTunes and leave us a review. And while you're there, upvote some of your other favorite reviews. That is super helpful for allowing us to grow and expand our audience and book new guests onto this show. If you could also please do me a favor, head to afforda anything.com slash who are you? And fill out our survey, letting us know who you are.

Those answers are going to be very helpful in allowing us to attract sponsors to the show. And if you want to access the show notes, you can do so at Afford Anything. com slash episode 72. That's slash episode 72. If you want to leave a question for an upcoming Ask Paula episode, you can do so at afford anything.com slash voicemail. Thank you so much for listening. My name is Paula Pan.

This is the Afford Anything podcast. I'll catch you next week.