Afford Anything - Ask Paula: Should We Drain Our Brokerage to Make a HUGE Down Payment?

Episode Date: January 10, 2024

#482: A caller named “M” wonders if liquidating stocks for a larger down payment makes sense in a high-interest rate environment. An anonymous caller wants to take a pay cut to pursue his passions. But 75 percent of his net worth is in real estate. Is this too risky? Tiffanie hasn’t saved enough for early retirement, but she has a plan to use home equity to accelerate her goals. Is this going to work? Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail For more information, visit the show notes at https://affordanything.com/episode482 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, have you ever drained the money in your brokerage accounts for any reason? No, but, but back when I was really bad with money, I would have been happy to have had a bank account to drain. Instead, I just drained all my credit card limits. Oh, even worse, even worse. Okay, well, we're going to be answering some questions from this community today, kicking off with, I guess, someone who's in a better situation than you were. So we're going to start with that. Welcome to the Afford Anything podcast, the show that understands you can afford anything but not everything. So every choice that you make carries a trade-off.

And that applies to any limited resource that you need to manage, whether it's your time, your money, your focus, your energy. And so this is a show all about figuring out what matters most and how to make decisions accordingly. I'm your host, Paula Pant. Every other episode, we answer questions that come from you, the community, and my buddy, the former financial planner Joe Saul C-Hi joins me to answer these questions. What's up, Joe? I am ready to serve. I think we're going to have some fun with these. We're going to have an amazing time. So a little sneak peek of what's coming up. We've got our first caller who is thinking about draining her brokerage account in order to make a bigger

down payment on a very expensive property in today's high interest rate environment. We've got another caller who wants to take a pay cut in order to pursue his passions, but 75% of his net worth is in real estate. So is he ready to take a pay cut? We've got another caller who has not yet saved enough money for early retirement, but wants to accelerate that early retirement deadline. So we're going to be tackling all of those starting with M. Hi, Paula and Joe. This is M. This is M. and I want to thank you for putting together such a fantastic podcast. My question is around interest rates and down payments. My husband and I live in the Bay Area and we'd like to buy a house in the $1.4 to $1.8 million range in the next year.

We have $200,000 in cash and another $900,000 in a brokerage account, and our mortgage interest rate would be about 6.25% assuming a loan of $1.25 million. We'd initially planned to put 20% down. However, as interest rates have climbed, we're now considering liquidating most of our brokerage account and putting down around 50%, given that an interest rate of 6.25% isn't that different from an expected market return of 8%. There's several reasons why we'd like to put more down up front. The most important being that it would allow us to keep our monthly expenses lower, which is helpful since 40% percent of our income is derived from stocks and bonuses that only come a couple times a year, meaning that we don't have access to that money on a monthly basis. Further, we can only deduct

the mortgage interest for the first 750,000, so having a mortgage of over a million doesn't help us out tax-wise. A larger down payment could also help with securing the mortgage itself, but this shouldn't be an issue, as we've already been pre-approved for a higher amount. then we would take out. On the con side, I don't love the idea that almost all of our non-retirement funds would be tied up in home equity. However, keeping our monthly expenses lower would allow us to rebuild our brokerage fund over time. Is there anything else that we're missing or that we should consider here? Thanks again and look forward to hearing your thoughts. M, thank you for the question. The first thing that comes to mind, and I realize this is not the

overt question that you asked, but this is something that I would have on my radar. You mentioned that 40% of your income comes from stocks and bonuses that only pay out a few times per year. Now, I don't know the structure of your employment, but it sounds as though you may not necessarily have W-2 employment, or if you do, the nature of your compensation is a little bit different than usual. And that could have some implications when it comes to qualifying for this mortgage. And you sort of alluded to this within your question when you said that a larger down payment might help with securing the mortgage itself, which hints at at least the possibility that you are also wondering whether or not you would be able to qualify for this mortgage.

So before we even weighed into how to pay for this mortgage, how much of a down payment to put down, before we even get there, the first question is, will you be approved for a mortgage? And if so, under what conditions, how large of a mortgage will you be approved for? What interest rate will they charge? Are they going to charge something that's even beyond the 6.25% that you're quoting, which they sometimes do if it comes from a portfolio loan or if they identify you as a higher risk? So the first thing that I would do, and maybe you've already done this, but I'm saying this partially for you, partially for the benefit of anyone else who's in a similar situation, is Talk to a mortgage broker or a mortgage banker and get some type of pre-qualification or pre-approval so that you have a much clearer idea of what the terms of your mortgage will be. Because oftentimes if your compensation structure is non-traditional, then either it's more difficult to be approved or the approval will come from something like a portfolio loan. which means that you would be paying an even higher interest rate. So I would start there, start by just finding out what type of loan you can get. I like that just from a strategy perspective too, because often somebody who's a pro in that industry

might be able to point out a way to get the financing done that might be surprising. This is why there are tons of fantastic options to compare rates online and forego mortgage people, mortgage companies, sometimes they can be really annoying. But I have to tell you, Paula, man, when I was a planner, having that person, and even now, having that person who I trust in that business, who's a broker, so they're working with lots and lots of different companies, right, who can look at all different loan types and can tell me, well, if we did it this way versus if we did it this way. And they do it like very quickly, which always annoys me because they're so damn good at their job. But they help me cut to the chase very quick.

So part of my board of advisors is somebody who's in that industry, who knows that stuff that I can call very quickly and go, hey, her name was Linda. Linda, what do you think about? I want to do X, Y, Z. She would very quickly go, well, we could do it this way. We could do it this way. Cool thing is she also knew me, so she knew what else was going on in my life. So that was helpful as well. Joe, what do you think about her direct question of should she raid her brokerage account

and dwindle that brokerage account down to near zero for the sake of putting down a larger down payment on a property? I love the idea because she knows the heartbeat of her compensation, making the future less onerous for herself and not burdening her future with this house. So I love that. The thing that I would evaluate when she asked because she's missing. something is this. Believe it or not, Paul, I'm going to go to Stephen Covey for a second. I know you find that weird that I never do that. Stephen Covey is for those who have not heard Joe talk about him. The author, the late author of the book, Seven Habits of Highly Effective People.

I got to call up, we've had Stephen M.R. Covey, his son, on the show. I got to see if I can get some royalties from all these mentions. But Stephen famously wrote that when you pick up one end of the stick, you also pick up the other end. So we often evaluate the end that we're on right now. How do I make the house worth more? But in the future, realize only one dollar can have one use. So if I'm going to spend more money on the house, what other goal is that coming from? So here's what we don't know. We do know this goal doesn't exist in a vacuum that M has other things that she wants to do with her money in the future. I would list those out. I like, as you know, Paula, putting them on a timeline so I know which ones are further away, which

ones are closer. So I can see all these in spatial relation to each other. But then do a little bit of calculation about what those cost. Because if I take a dollar and I put it toward the house, I'm mortgaging some other thing. And I want to make sure that that's okay. My gut would be, it probably is. She probably has other money that she didn't mention that's for things like financial independence. But if this is going to hurt her ability to retire at X age, maybe she still does it, but I want to know that this might cost me five years or this might cost me three years. But that helps me when I make a decision to buy X, I want to know what it cost me with Y. And I don't know that. So I would just list out those other goals and see with all the money she has,

Where does this sit and how is it going to affect those other goals? That's all I do. But from a gut perspective, I love it directionally, Paula. If she is a huge mortgage payment, she may have to forego some big, huge, great things in her life just because she's got to make next month's payment. And you never want to be in that position. As a guy who's been in that position, you don't want to be there. You want to be able to think long term. Think clearly about what's best for M on a more spiritual,

level basis than just next week, next month. Right. And that's the question that popped into my mind is at the time that she made these contributions into her brokerage account, what was the purpose, what was the initial purpose of establishing this brokerage account? So, for example, was it supposed to be a de facto addendum to her other retirement accounts so that she's building out that tax triangle of tax deferred, tax exempt, and taxable? Was that the intention? was the intention simply to have some money that's available almost like a sort of an emergency fund, but not an emergency fund per se, you know, an ancillary secondary emergency fund that she really never plans on tapping.

And so she can put it into market investments. Or specifically for opportunities like this, right? I mean, this is a perfect use. Hey, I didn't know interest rates. We're going to be higher. So I have this money sitting here is the emergency. the Superman, superwoman coming to flying into the rescue. Yeah.

Yeah, exactly. Right. So what was the original intent of that money at the time that you put it in the brokerage account? And the reason that I want to know that is because any time that you're suggesting a new use of a bucket of money, the new use has a relationship to the original purpose, right? So is the new use of the money aligned with the original purpose of?

of the investment. Like, was the original purpose of the investment to form a flexibility fund? If so, then this use of it is aligned with the original purpose. But was the original purpose to be a supplemental retirement account? If so, then the new use of this is not directly aligned with that. And that doesn't mean don't do it, but it does mean that you need to be thinking carefully about the fact that you're changing the goal midstream. This is what I would caution not just M, but everybody on.

I saw this a lot with planning. I love this house. Here's what I'm going to do. It does affect my retirement. I don't want to change the goal, but here's what I'm going to do. I'm going to, quote, invest the money in this property. And then when I get to that financial independence line, I'm going to sell this house. And then I'll move someplace else that's cheaper and I will take the equity and I will then use it toward this goal that it was used for before.

I've been with people that have been in that situation. You often don't want to sell the house. If you're a real estate investor, you don't fall in love with your property that's so dangerous. Your primary residence truly is not an investment. It's a place where you live. It's comfortable. It's fun. I love my flipping house.

I love where I live, Paula. I just, I love coming home there. I've made some stupid investment decisions that are just for my pleasure that if it were a investment property, it would never do. But because I live there, it is super. fun. And when somebody gets to that line where their financial planner is like, okay, we said we'd sell the house. And they're like, but my memories are at this house. My life is at this house. It's a piece

of me. Like I would caution against it heavily. Yeah. A primary residence is a consumer purchase. It is not an investment. You know, it's a consumer purchase that you hope will one day be a positive on your personal net worth statement, but it is fundamentally a consumer purchase. So she is suggesting trading an investment, something that is truly an investment, money in a brokerage account, trading an investment for a consumer purchase. That said, I'm not against the idea. Well, no, ultimately, that's what we want to do with almost all our money, right? I mean, at some point, we want to trade it for joy. Exactly, right? Savings is simply deferred spending.

Money in a brokerage account is arguably spending that at the time she earned it, she deferred that spending into the future. That deferred period was the period of time in which that money was placed in the brokerage account. And now she is, you know, realizing that deferred spending. All savings is just deferred spending, whether you're deferring it to the purchase of a home or whether you're deferring it to retirement. So M, we like the plan. We like the suggestion of pulling money out of the brokerage in order to make a bigger down payment on this home, provided that it doesn't interfere with whatever the original goal of this money was. So, M, thank you for the question. Enjoy the new home. Yeah, absolutely.

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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 an anonymous caller. Don't point at me. Don't. Don't point at me. All right. It's my turn. I always do the heavy lifting at this part. And I'm, my, my contract says right here, Paula, my afford anything contract says that once out of every three or four, Paula should probably come up with one.

All right. Well, for people who are new here, we give every anonymous caller a name. Joe, every time you name a caller, you choose a name that's based out of a movie or a TV show. Well, I prefer to give callers names that are related to finance or economics. So as of the time that we are recording this, core inflation is expected to drop to 2%, which is the Fed's target rate in the next Bureau of Economic Analysis Report. And that is the six-month annualized rate. And what that means is that it looks as though, we've more or less won the war with inflation, that inflation is down to where we want it to be. And so in celebration of that, this next caller in honor of Jerome Powell, also named J.P.

the chair of the Federal Reserve. We call him Jay Dog. So our next caller is Jay. Hi, Paola. Hi, Joe. This is anonymous. My question to you is, am I ready for barista fai when 75% of my net worth is in residential real estate assets?

I have no after-tax brokerage assets, and I choose not to purchase a primary residence in the state of Florida. I'm concerned about the additional risk associated with houses. inflation, having a three-year-old son, a real estate heavy asset allocation, and of course, climate change and insurance in the state of Florida. I'm 46 years old, not married, no desire for additional kids, and two parents that are comfortably in retirement. I am exploring my passions for my next chapter so that I can shift and ideally earn some barista fire level of income in the $30,000 to $50,000 a year range. I plan to keep my current job part-time for one to two years,

which is currently a three-day version of my former full-time job at the same employer. The part-time job brings in $14,000 a month, and I still have access to health benefits, 401K contribution matches, HSAs, ESPPs, etc., all of which I continue to plan to take advantage of. My take-home after-tax is $12,000 a month. My expenses are about $8.6, driven primarily by my son, who makes up 40% of those. expenses. I earn about 9.2k in real estate income after OPEX and CAPEX reserves and taxes, and the average tenure of my door is fairly long, seven years old, but I do have three doors which need renovations, likely $25,000 a pop. On the balance sheet, the balance sheet itself,

as I mentioned before, it's heavy real estate, $3.2 million in net real estate assets, 4.1 million in real estate and 0.9 million in debt at 4.2% with 30-year fixed rates across all those mortgages. My retirement accounts are about $600,000 overall. 90% of those are pre-tax, and they're pretty much all equities, but diversified across different asset classes within equities. And no bonds. My cash reserves are about $200,000 total, about $100,000. cap-ex reserves for real estate, about $50,000 in cash that are essentially serving as my emergency fund and about $50,000 in prepaid assets for future expenses such as cars, etc. So again, my question to you is, am I ready? What are your recommendations?

Give me some perspective on what I'm missing potentially, as well as any interesting insights that you can provide. Thanks for your time and all you do. Have a great day. Jay, first of all, congratulations on everything you've built. So this is what I hear, right? You have, you've got $4.1 million in real estate with $900,000 worth of mortgage debt. So you've got $3.2 million worth of real estate equity, which is amazing. Not only that, Paula, what's amazing is also the interest rate on that debt that's not his primary residence. I love talking about CFOs because most people don't think about the fact they're the CFO of their personal. financial situation. CFO's main job is to structure the debt in a way. Not that you don't have debt, but that the debt does not hurt the long-term goals of the company and serves the company. So a lot of people, as an example, will choose a 30-year or 15-year loan and they'll

pay off the loan in that whatever the bank says. Don't do what the bank says. Take the bank for the best interest rate that they can give you, the best terms they can give you, and then pay it off however the hell you want. So having 4.2% on his rate, to your point, gives him a lot of flexibility. tons of flexibility. Exactly, right? So, Jay, you have no other debt besides a very, very reasonable mortgage at an incredibly reasonable rate. As Joe said, 4.2% for an investor loan is outstanding. Your expenses are $8,600 a month, and your cash flow after taxes and after

reserves is $9,200 a month. So just on your real estate cash flow alone, you would be able to cover all of your expenses. Plus, I can tell that you're setting aside very healthy reserves because you have 100,000 in CAPEX. You've got 50,000 emergency fund. You've got 50,000 for future expenses such as cars, right? So after setting aside a very good amount for reserves and for taxes, your cash flow from your real estate is sufficient to cover all of your expenses. On top of that, you would be, if you downshifted to an alternate level of income, you would also be making an additional between 30 to 50,000 on top of that. I see no reason why you couldn't retire right this moment, right,

barista fire style and shift to that $30,000 to $50,000 range of income that you're talking about. I was a little confused, Paul, what was the question about the current job and going to the three days a week in the current job? Yeah. Yeah, so he's currently doing work that brings in $14,000 per month, and he wants to downshift to work that would bring in between $30,000 to $50,000 per year. So essentially, he would like to take a massive pay cut, because at $14,000 per month, he's making $168,000 a year.

And so if he's downshifting to work that would pay him, we'll say the top end of that, 50,000 a year, he's cutting more than two-thirds of his pay. But given that the cash flow from his real estate can cover his expenses, I don't see any reason why he couldn't cut two-thirds of his pay. Given not only that the cash flow from his real estate covers his expenses, but also that he has very, very healthy cash reserves. He certainly has sufficient reserves to cover the upcoming renovations. And potentially looking at the lifespan of some of those current occupants, he might get a nice bump, as those people are. move out and he gets the next person in what he's looking for is is is is assurance and safety and I think he's built himself a lot of safety but we will

see a lot of people like Jay who will build themselves so much safety but the true thing I don't think is financial Paula for a lot of people like Jay and I don't know Jay but for a lot of people like Jay it's much more I just need one more push one more one more little to give me one more little thing and I think that there has never been a time in my life where there was something I knew I truly wanted to do and I waited for more assurance that I'm like man I wish I would have waited another six months right that's never happen I'm always regretful when I wait the next six months to go and even if I I know that financially I'm not ready, that I'm not there, there's no such thing as safety.

There just isn't. If I have a full-time job, we look at that as safety. Look at the number of people that get called into their boss's office every year and then get laid off. And they didn't know it. But we call that safety. We build mountains of money and we leave it in a bank account. And I've got FDIC insurance. I call that safety.

There's no safety if your bank accounts earning half a percent, one percent. hell, even four or five percent, you're safely not moving toward anything with that money sitting sitting in cash. Safety, I think, Paula, is in knowing where the risk is. It's in evaluating enough to know this could happen, this could happen, this could happen. You can't eliminate the risk, but you can mitigate it through strategies of if that happens, I know this could happen, and here's how I'm going to respond. In investing, we call that an investment policy.

statement, right? I'm not going to, everybody always asks people when they have a microphone in front, how do you react to that news? Well, the key if you're a great investor is to never react. If I can never react to the news and instead, I can respond based on policies I set during calm water times when I knew that I was looking at what all the risks were before I started building my empire, that's the place you want to be. risk is what you don't anticipate yeah so part of me thinks like at first i'm like oh okay jay's probably got some risk and then i hear what he's doing and i go mother dude what are you waiting for what are you waiting for yeah i mean his his numbers are so good just so good jay your numbers are

so strong you've you've clearly worked incredibly hard to build what you have. In fact, Steve, can we get to, we've done a round of applause many times. Can we get some sort of a celebration sound effect? We're going to ask Steve for some like bizarre celebration things just to, just to push this guy. I don't think Steve gets pushed enough. You know what I mean? I mean, this guy's amazing, but we should really like, Steve, here's what I want for your celebration noise. I want it to be one of those old-time car horns, like the Oga. I want one of those. I want one of those. Steve. If Steve doesn't get enough grief, just having to work with this anyway.

So here's what I like about Jay's question then. If Jay truly is, and like I said, I don't know Jay, but if Jay's doing what a lot of people do and he's just looking for more safety before he pulls it, I will tell him, Jay, you're looking in the right area because right now you have every dollar has a reason, every dollar, which is fantastic. The thing that I can hear in your question is you don't have any of this flexible money that if everything goes horribly, that you've got a place to go. Because every dollar already has a job and there's no, you know, I can't pull it from this fund because this is for my next car. When he mentioned he's even doing that, Paula, I'm like, that's fantastic.

So having most of your retirement assets locked up into pre-tax programs, is another weight because between real estate and IRS rules, you are a little bit chained up in how you get the money. There's consequences to taking any of those pots of money that you built. So if you're building anything in the future at all, build that non-IRA brokerage account. Because you can see with M, our last caller, M has this brokerage account that maybe,

We don't know, but we're thinking might be this money that is flexible. She might have to rearrange her goals and how she gets stuff, but it's in a spot where the tax consequences are not going to be onerous. For Jay, the tax consequence on that retirement bucket is going to be pretty onerous to get it. Right. So he, I mean, he's got $200,000 in cash reserves. But yes, I agree. The next move, Jay, is as you continue building your wealth, do build some brokerage assets.

Don't put everything into a tax advantaged account. Remember the tax triangle that we talked about. There's tax deferred. There's tax exempt. And there's taxable. Build out those taxable brokerage assets. For people that, that are wondering like how we think through this,

Paula knows this. We had to, Jay, I'd listen to your question twice. And the second time, I took out paper and I, did what I did as a financial planner. And Paula, if it's all right with you, I'd like to teach everybody this, because this is a nice tool. So I just drew what looks like a plus sign, just these four quadrants. And the top two quadrants, the quadrant on the left is reserves

and short-term assets. What happens if I get into trouble? It also is where my budget lives. So do I have positive cash flow? So that upper left quadrant is, this is my short-term health. Jay's very comfortable, very good short-term health. Now, upper right is my risk management. I didn't fill that in because this question didn't have anything to do with risk management. This is where I put my insurances. How much do I, if I pass away, how much does my son need, right? Jay talked about his son and his expenses. By the way, I feel like my kids are 90% of my expenses, Jay, not 40 like yours. So you're, you're doing well. The, um, do I have my state plan done? So all my risk stuff is upper right. Then I've got a quadrant for short term flexible money that I can

grab for anything that's coming up in the next, you know, five to 15 years, whatever shorter term non-IRA investments. And then I have locked up, have to have a have to have some, some really jump through some hoops to get at the money. And, uh, but it's good long term returns. Your real estate goes there. Your IRA goes there. Now, we said that upper right quadrant with risk management.

we didn't fill it in purpose. But what I didn't fill in, Paula, was anything in that flexible box. There's absolutely nothing there. And when I look at stuff as a financial planner and I'm looking for short-term wins, there's where it is, Jay. It's in that lower left hand. There's two boxes, which you grow by.

That lower left, you grow by by being able to be flexible and movable, having money in these brokerage accounts. The lower right is where I'm locked in. This is my financial independent stuff. And by the way, sometimes Paula, those locks are great because how many times have we seen people take money out of those for short term pretty stupid stuff? And then when I'm 70, I'm like, I wish I wouldn't have done that. Right. Yeah, sometimes locking money away from yourself can be a wise financial move, particularly if you know yourself.

Great behavioral thing. Right. And that's the beauty of the way that the retirement account system is structured, right? We've got 401Ks, 403Bs, Roth IRAs, we've got these accounts where we get a tax advantage for promising not to withdraw money from it until we reach a certain age. And if we break that promise, we have to pay some serious tax consequences. And that keeps the money in those accounts. So, Jay, I say if you. If you want to go barista fire, do it.

I don't see any reason why you shouldn't. And as you're thinking about how you direct your money from this point forward, have more of it available in flexible accounts that you can get at, particularly once you give yourself that pay cut and go to barista fire. But let's not bury the lead here. Great job. Yeah, amazing. Amazing job, Jay.

Well, thank you, Jay, for asking that question and for being such an incredible role model and inspiration for everyone who's listening. Our next question comes from Tiffany. Hi, Paula and Joe. I was hoping that you could help me with the plan I've been working on. I'm 40 years old, and lately I've been thinking a lot about what it's going to take to semi-retire in 10 years with a totally different, lower-paying part-time job. I was previously divorced, and I remarried about three years ago, but my current husband has worked from as a contractor and a plumber and he has no retirement saved. I have about 300,000 so far in a 4-3-B, which is obviously not going to be enough for retirement. The thing I have in my favor is the equity in my home. It's currently worth around $1.1 million and my remaining loan balance is around

$350,000. Instead of waiting until I semi-retire to downsize, I'd like to use the next 10 years to leverage what I have now so that I have what I need at retirement age. My current plan is to split the equity four ways if possible and then use loans to make up the difference. The first chunk would be for a place my husband and I to live. I'm thinking something with two or three bedrooms that will be a fixed rep or and we can utilize my husband's skills. The second is a rental property near the college that I anticipate two of my children attending. The third is a cash amount of around 100,000 that will go towards a side business that I've

wanted to start as well as renovations on the properties purchased. And finally, if it's possible, I would like to purchase an additional runner property. The problem I can't seem to work out is as follows. I want to retire a few hours south of where I'm currently living, where it's warmer. This means that the smaller home I purchased now will not be the home I end up in. However, once I leave my current job to semi-retire down south, I'll no longer be able to use my job in order to get a new loan. I had planned to take advantage of the primary home loan rate for the home we've moved into when we sell my current home, but this would mean eventually selling the home with the best rate in order to move south and leaving the higher rate investment loans in place.

I can't really move into the college location investment property for a while because it's a little too far from my job. and I kind of wanted the second investment property to be down south where I think that we would do better with short-term rentals and it would just be easier to manage because we'd be close to it. I would also need the bulk of the equity to be in the home we move into because I wouldn't be able to get a new loan for the final home. Having two investment properties with large loans and higher loan rates doesn't seem smart, but I can't figure out another way to handle it. Do you have any ideas of a better way to do things or a totally different plan to help me reach my retirement goals? For calculation purposes, my current income allows for around

450,000 in loans. Thanks in advance. Tiffany, thank you for the question. There are a lot of moving parts here. So let's break this down. You currently have $750,000 worth of equity. You have a home that's worth $1.1 million. It has a loan balance of $350,000. So if you were to it, you would get around 750,000 minus the transaction costs, realtor fees, all of that. We'll say 700,000. You would like to use that money plus an additional 450,000 that you would borrow for this series of goals. Now, let's talk about where that money would go because I have some concerns about some of the things that you've suggested.

Number one, you've mentioned that you'd like to sell your current home. move into a smaller home, which is a fixer-upper, which you could buy on a primary residence mortgage. I think that's where that $450,000 loan would come in. And then you would have lower housing payments. You would theoretically have a, potentially a smaller mortgage, which would free up some cash flow. And you could gain some forced appreciation through renovations and improvements made to your new, smaller primary residence. All of that. That is great. However, you've also mentioned that you don't plan on being this primary residence for a long time because you do in 10 years intend to move further down south. If, therefore, given that there are very high transaction fees on selling a property, if you were to go through with this plan and if you were to sell your current home and buy a smaller primary residence, I would encourage you to buy a primary residence that you plan on holding.

for decades and decades to come through your retirement. You know, plan on buying a primary residence that you never sell, that you still have when you're 100. Because that primary residence that you buy, A, you're going to ideally have forced appreciation on it based on the renovations that you do. B, you're going to have a primary residence mortgage on it. And so that's a mortgage that you can hold for the next 30 years. And a primary residence mortgage is going to be better than the terms that you could get on it. a investor loan and see the cost of transaction on a home is so high that you want to be quite careful about any time that you sell a home, given that you're taking at least a 6% haircut

each time that you make a sale. And that actually kind of leads me back to questioning the premise a little bit because I'm, there's part of me that wonders if selling your current home right now is the right move. I don't know what type of. of interest rate you have on this home, but if you bought it at any time within the last 10 years, I'm assuming that this interest rate is probably going to be quite favorable, more favorable than anything that you could get, meaning the delta, the difference of what you're paying for your current home and what you would be paying for your next home is probably, I mean, maybe you would save a little bit on your monthly payment, but probably not a huge amount.

That's interesting. And on top of that, given that you ultimately plan on moving 10 years from now anyway, there's part of me that wonders if perhaps the move might be to stay in your current home until you're ready to move into your next forever home, that retirement forever home, down south. You talked about wanting to buy a rental property near the college that you anticipate two of your children attending. That to me set off some red flags because going through the college application and admissions process, you know, I've gone through it for myself. Joe, you've gone through it not just for yourself, but for your two kids, for your twins. There's a lot of uncertainty around where somebody is going to go to college.

There's uncertainty around where they want to go, where they, what they want to study. and if that particular school has a good program for that particular major or field, there's a lot of uncertainty around whether or not they get accepted. And if they do get accepted, what type of financial aid package they get from that school, there's a huge amount of not knowing where somebody is going to ultimately end up going to college, and particularly two children, right? until you reach the point where they're sending in their deposit to kick off their freshman year, I think it's premature to buy a rental property in that area in anticipation of two of your children eventually going to college there.

If there was a comma in that sentence though, or even a semicolon in that sentence where she wants to buy property in, that in that town because she thinks it's a great opportunity. Right. And it doesn't matter that the kids go there, comma, semicolon. By the way, my kids might go there. You know what I mean? Which if they did, that makes it a better opportunity. If it doesn't, still a great opportunity, then that shouldn't cloud things.

Right. When you were talking about the primary residence and about this cost of transaction, which includes the huge difference in interest rates now versus just, 12 to 18 months ago. I think there may be, and I'll get into what I'm thinking later, but I think there may be for some of these shorter term things than home equity line of credit opportunity for structuring loans instead. Yeah.

And I think that would be a much better play. Minimize the number of buy-sell transactions, unless you are a professional home flipper, in which case that is baked into your spreadsheets, minimize the number of buy and sell, well, specifically minimize the number of sell transactions, buy all day. You know, to quote Nick Majuli, just keep buying. Buy homes all day long.

Buy homes until you're blue in the face. But minimize the number of times that you sell a home so that you can avoid that steep, steep haircut that comes with selling a home. And if you need to pull the cash out, some of that equity out in order to reinvest it, pull out what you can, but avoid the huge transaction fees unless there's a really good reason. And to me, when she moves down south in 10 years, that's going to be that really good reason.

But as long as she's staying in the same town, I don't see a great reason to sell her current home. I also have hesitations. You know, I've talked about my hesitations around buying a rental in the area where she anticipates to. children going to college because they may not end up going there. I also have hesitations around putting some of this money into a business venture, which she talked about doing. I, as you know, love side businesses. I love entrepreneurial ventures. However, I strongly believe that these should be bootstrapped. These should be self-funded. And what that means is that you don't sell a given asset such as your home and use that money to invest in an idea that you don't know is going

to work, instead what you do is you commit a very small amount of money. And by very small, I mean $1,000 or less, right? You commit a three-digit sum of money, a few hundred bucks to pre-validating an idea. And then you use the money that comes from that pre-validation to fund the business that you're trying to start. I like the idea of pre-validation and just to use the medium that we have that we're using right now podcasting. A lot of people are like, you know,

I've got a podcast I want to do. I've got a thing. I feel like everybody's got a podcast, right? The average number of episodes, the average podcast has, do you know the stat, Paula? Average number of seven?

It's seven. Seven. Ah, I do know the stat. Look at that. And the reason is, And it's not just podcasting. It's every time I talk to a would-be entrepreneur. There's an excitement level.

There is a, this is a phenomenal thing. And then you get past this original idea, which you thought was brilliant and life-sustaining. And you get seven episodes deep, six months deep, whatever it is. And you go, holy crap, this is a whole different thing that I thought that it was going to be. And then you shut it down. Right. And I think that overcoming the great idea. with play testing is so important. It's so important. I think a lot of said, sweat equity into the

business at first. And whenever an entrepreneur gives me an amount of time they think it's going to take for that business to be viable, I always recommend that you double it. You need to double that. Yeah. It's going to be way longer to get that runway moving than you think it's going to be. Well, and you know, not just that, but there's also the question of, does the market support this? Ultimately, the purpose of a business is to serve a base of customers or clients. So the reason that you prevalidate an idea is because ultimately the market does not care whether or not you like the idea. The market cares about whether or not your customers, your clients, whether or not the people

whom you serve like it enough that they're willing to pay for it. ultimately a business is an entity that solves a problem in exchange for compensation. And so if you approach it by validating it, by saying, hey, I see that this problem exists, here's my proposed solution. Do you like this proposal enough that you are willing to make a deposit on it? And I'll give you a discount. I'll give you some added bells and whistles, but are you willing to make a deposit on this idea? And if you get enough customers or clients or whoever, whoever you're trying to serve,

if you get enough people who do that, that's great. Now you validated the idea and now you have the initial seed money to develop it out. But selling a primary residence and putting that into an untested side business, I think that's a very dangerous idea. On that note, Paula, I looked at all these. and my ADD meter went off because it was four things. And in my head, they're all happening at once. And that's a lot of chaos to throw into your life.

So I think there's also an order of operations here. What am I going to do first? What am I going to do second, third, and fourth? And what was amazing to me, when I looked at the four things that Tiffany wants to do, none of those is the thing that I would do first. Because I think there's some, I think there's some hidden stuff. And this is going to be a little bit difficult, but I think the fact that her husband's business has produced no retirement assets is the place to begin. Tons of entrepreneurs always have another thing that needs to be fixed.

Another person needs to be hired, another vehicle that needs to be maintained, whatever it is, there's always another reason why you don't come first. So the first thing that I would do is you and your husband need to read a book. and I would write this down and I would audio book of it is great too. It's called profit first. And I would adopt. We'll put it in the show notes. We'll put a link to it in the show notes. And I would adopt for your husband's business a profit first mentality.

Before dime one gets spent on anything, he makes sure the business is working for him. This is not your husband. This is entrepreneurs all over the place. You build this business to work for you. And instead what ends up happening is you become. an employee of a business which is dictating everything. You're not dictating anything. Entrepreneurs in mass need to turn that around and need the business to serve you. And your profit is why he began that business in the first place. And so when I hear that he

doesn't have any money in retirement, it's because he needs to switch that around. And the author is Mike McCallowitz. Yeah, super guy. Very easy. easy read, easy to listen to. Great philosophy. When I talk to great entrepreneurs, Paula, by and large, they've read that book. And they've read another book called the E-Mith. Oh, you talk about the E-Mith all the time. Yeah. Those are two. Em-Mith is probably my number two talk about behind Stephen Covey, right? It is. It is. It's a good book. I've read it. I haven't read profit first, but I've read the e-myth. Yeah, profit first is, you can tell by the title what it's about, though.

And he's got a system of how to make that happen, which is a powerful thing. But I would start there. I would also then, Paula, begin playtesting this business when the stakes are low. Yeah. I love the idea of being able to bootstrap the business on the side while you're doing something else because, A, you've got time on your side now. You can tinker with it. You can build the website.

You can take your time. You can get your thoughts together. you can join communities. You can put a couple ideas out there and see what sticks, what doesn't. You can get an idea of what the tools are, the levers of the business. Because after that, when it goes to 11, and every business at some point goes to 11, you're not completely overwhelmed with. I don't understand WordPress.

I don't get what else going on on Facebook. I know I need a community. I know I need all these 50 million things. And if you at least know the levers and the priorities before you get to that point, I would begin that on your end. right now. You know, Tiffany, there was something else that you said that also raised a bit of a red flag for me. You said that you wanted the second investment property to be down south. That's great. But then you said that it's because you believe that you would do better with short-term rentals there. And that also raised a red flag because the short-term rentals are very different from long-term rentals. Long-term rentals, you have a commodity and you are exchanging. access to that commodity for limited periods of time, right? You've got a commodity and you're letting people have exclusive access to that particular commodity for one-year increments. With a short-term rental,

you are running a hospitality business that is competing with hotels, right? You are responsible for consumables such as dish detergent, trash bags, vacuum cleaner bags, toilet paper, having a plunger on site, right? Your tenants are never going to call you to say, we need more toilet paper. So a few things come to mind right away. Number one, the fact that you kind of just threw that in there. You were talking about rental properties and then you just kind of threw in the short term. That signal to me that I'm not sure, and this is just an assumption I'm making, I'm not sure that I'm hearing, at least in the way that you phrase the question that you have a really strong understanding of the vast difference between

long term versus short term. They are in no way the same field. They are in no way the same practice at all. That's the first thing. The second thing is, in the world of short term rentals, you have a completely different set of legislative risks. City councils can often change their policies around short-term rentals on a dime. Neighborhoods, if there's a neighborhood HOA, they can change their policies. There are, in all of those ways, different policy-related risks to your business model. On top of that, there's also a very different competitive structure in terms of occupancy, in terms of vacancy, in terms of the competition that you're facing from other not just short-term rental owners,

hosts, but also hotels, motels, other hospitality providers. So if you are going to go the short-term rental route, it needs to be with a property that could also function as a long-term rental. And finding that van diagram intersection of properties, something that would work both as a short-term and a long-term rental, is more challenging now. than it ever has been. So I'm not saying don't do short-term rentals. There are many, many people in this audience, many people who are listening to this right now, who have had enormous success with short-term rentals. But it requires a totally different level of market analysis, of risk analysis, of understanding the world of hospitality,

of understanding what's happening with the city council and what the debates are, what's happening with the HOA. It just requires a completely different skill set and it needs a plan B. That's why that the property in the worst case, if you can't use it as a short-term rental, you need multiple exit strategies. You can't just only have one plan for a property, right? And any good game plan has multiple exit strategies. When I look at real estate strategies across the board, on one hand, On one end is long-term rentals as more passive.

People talk about real estate is passive income. That's baloney. Go ahead and leave your real estate alone for five years and see what happens. There's no such thing, right? But on the passive... I'd call it residual income. You know, so much better. On the passive continuum, though, I see long-term rentals is the most passive or close to the most.

I see flippers as a full-time job, right? Oh, yeah. So I've got flipping as full-time job, and I've got long-term rental on the other side. I've got not even in the middle, but closer to flipper land is where a lot of the short-term rental people are. Now, you can create systems that mitigate that where you use automation for your benefit. You can use outsourcing your benefit, but that'll cost you money. The automation might not cost you much money, but outsourcing certainly does. but you have to have systems and processes.

You're not competing against a long-term market anymore. You're competing against Marriott and IHG and Hyatt. So, yeah. So you need to create this experience. Don't get me wrong. I think it can be really fun. I love creating experiences. But when you talk about doing that and doing a side business, I consider that to be a side

business. Right, right, exactly. And I say this as somebody who was an Airbnb super host. So super host is a designation to Airbnb. Airbnb didn't call Paula that. She called herself that. But anyway. No, Airbnb called me.

I know. I'm kidding. I had a thing on my page. Right? It's a designation. I call myself Paula super podcaster. I'm Joe Super podcaster. It's a designation awarded by Airbnb for hosts who have hosted a certain number of stays over a certain period of time with a something star, four star, five star, whatever.

Yeah. You know, they have their criteria. And so, you. You know, I was an Airbnb super host. I have been in this game long enough to understand, at a minimum, I certainly understand, there is no comparison between a short-term versus long-term rental. It is the difference between running a Hilton Hotel versus letting a stranger live in your house for a year for money. I would definitely put an order of operations on these, Tiffany. What's first?

what's second, what's third, what's fourth. That'll decrease the overwhelm, number one, which is cool. Number two is you can then really hone in and focus, which is the important thing when you're going after any goal this big, on getting the little things right because it's always the friction in the little things that make the difference. Not the big idea. It's the little implementation steps.

That said, we spent some time, Paula, maybe beating Tiffany up a little bit. not purposefully. And what I'll say that I love about your question, I love the fact that you're thinking about this 10 years ahead of time. Because these rocks that Paul and I are throwing, you've got tons of time. Time is right now your asset. And taking advantage of those 10 years, there's nothing you can't do. I mean, people overestimate what they can do in a day. You've heard this before. They've underestimated what they underestimate what they can do in a, in a year and a decade. If you're thinking about this with 10 years to go, that is monster

fantastic. Right. You know, I know we've, we sound negative because we're striking down a lot of ideas, or poking holes in a lot of ideas. But what you have right now is such a great asset, right? You have $750,000 worth of equity in your home. And, and you have $300,000 in a 4.3B. So you're a millionaire, right? You are a millionaire. And you're trying to figure out what you need to do in the next decade to be able to retire. And the bulk of your assets right now are in your primary residence. So the most important thing is to preserve what you have while growing in a thoughtful and sustainable way. And so the plan to sell your greatest asset and then divide it into a bunch of

untested assets, that makes me nervous. But it's just like what we told Jay earlier. There's no such thing as safety. Just knowing where the risk is is the key to success. Tiffany, congratulations on building what you have. Congratulations on the primary resident. that you own. Congratulations on building 300,000 in a 403B. And congrats on having the foresight to look 10 years out into the future and say, what is it that I need to do now to be able to be in a really good spot,

an even better spot in 10 years. Huge congrats to you on all of that. And as Joe said, your next steps do one thing at a time, just one thing at a time, and move with caution. Joe, we've done it again. We have. Wow, that was fun. You know, I love these, I love these questions where we're talking about big strategy, like putting it all out there and saying, how do these, how do these things affect each other?

It's so important because I think too often do we, we look at things to myopically. Exactly. Well, Joe, before we started recording, we made a decision. Do we want to announce it? Oh, well, that's up to you. After. Yeah, you know, I think we should announce it here. Oh. It's here and now. So this particular episode is episode 482, which means that Afford Anything's episode 500 is coming up relatively soon. Two episodes from now, we're going to be celebrating episode 500, and that episode is going to air on April 24th.

After episode 500, we have decided to go twice a week. A Ford Anything podcast is going to be a twice a week podcast. That's crazy. Two episodes a week starting after episode 500, which is starting after April 24. 2424, starting after 42424. We already get goodness. If you're from the UK, if you're from the UK, it would be 24-4-24.

You just doubled the goodness, Paula. Yeah, I do too. Yes. Yes, double the fun, double the fun. So, Joe, you're going to be joining me every week, once a week, every week. We're going to be answering these questions. It's amazing what happens when Paula takes my arm and pushes it. behind my back. It says, do it, do it. I'm like, okay, fine. Stop.

So, so yes, you've heard it here first. Starting, please, episode 500 is going to be amazing. It's going to be spectacular. Put it on your calendars right now to tune in for that. It's going to be an incredible episode. We're planning some big stuff. That episode is airing for 2424.24. And then after that, we're going to be a twice a week. week show. Fantastic. Yeah. Congratulations. So, well, Joe, thank you for joining me. Thank you for being a weekly fixture here and afford anything. My pleasure. These are always great fun. Well, Joe, in the meantime, where can people find you if they'd like to hear more of you? I'd like to shine a light on what we did over at stacking Benjamin's week number one of

24 because it was a fantastic week. An amazing human being named Eric Qualman joins us on New Year's Day to talk about focus. And I think if there's anything we can do with all the distractions, we have more distractions every year. If we can learn to focus in 2024, he did a deal called the Focus Project where every month he focused on one thing. By the way, a funny story, he tried to ramp up to this. initially said, I'm going to focus two hours a day, every single day on one thing. And during his

preamble where he was just trying to get the machinery together, he realized that two hours was going to be with all the commitments he has, like doing it for 30 minutes every day, Paula, was going to be super big, which is what he ended up doing. And I'll let him tell that story. But a story that I will tell you is that month of December where he tried to get the ball rolling, he was only able to do not 30 minutes, but only 18 minutes. But not 18 minutes a day. He was able to focus 18 minutes the entire month on that thing that he was going to focus on, which shows you how hard this is.

And this was his point was that it isn't just about willing yourself to do it. You have to have a system. We follow up that focus then on Wednesday with John Acuff, the amazing John Acuff talking about better goal setting. Everybody gets freaked out. We talk about purpose. He's got this neat way to think about purpose in a way that doesn't freak you out. Don't look forward and go,

what am I going to be when I grow up? That is so hard for so many of us. He's got a better way. So we go better goals, better focus in 2024 on stacking Benjamin's. Go join us. Fantastic. Well, thank you, Joe. And thank you to all of you who are listening to this, who are part of this community. Thank you for joining us. Please, if you have feedback, if you're listening on Spotify, you can leave a note in on every Spotify episode to talk about what you thought about this episode. You can also leave a comment in our community, afford anything.com slash community. And please make sure that you are subscribed to slash following this podcast and your favorite podcast player. And while you're there, please leave us a review. So thank you so much for being part of this community. I'm Paula Pant.

I'm Joe Salsi. Hi. And we will catch you in the next episode. And we will catch you weekly starting after 42424. Episode 500.