Afford Anything - Ask Paula: The Market Might Drop. Should I Sell?

Episode Date: July 4, 2016

#32: Should you sell your stocks, given that we might be heading for a possible downturn? Also, what are the downsides of index funds? Should you invest in out-of-state rental properties, and if so, how can you figure out where to look? These are just a few of the many questions Paula answers in this week's Q&A episode. Enjoy. For more information, visit http://podcast.affordanything.com Learn more about your ad choices. Visit podcastchoices.com/adchoices

Welcome to the Afford Anything podcast. This is the podcast that understands that you can afford anything, but not everything. So our job is to be incredibly deliberate about how we spend our most limited resources, our time, our money, and our life. I'm your host, Paula Pant, and today is the first Monday of the month, which means we're going to do an Ask Paula episode where I answer questions that you've sent in. If anyone listening wants to send in a question for a future episode, you can do so at afford anything.com slash voicemail.

Our first question comes from David. Hey, Paula Pee, Steve. I haven't had my coffee yet, but I wanted to kind of keep it real because I know that's what you like to do, Paula, on your website. Let me give you some details about my life. I'm in medical field, and it's a very stressful job. I'd like to retire as soon as I can because I don't know how much longer I can keep doing what I'm doing.

In 2007, I inherited $120,000 when my mom passed away. And all that money was invested in Edward Jones stocks. So far, that stock portfolio has not been performing as well as I'd like. Took a big dive in 2008. And to this date, I've only made $30,000. So I'm contemplating about selling that stock and getting into real estate. So far, what I have is two real estate properties that I love. It's a little difficult to manage them.

but I think they're pretty good real estate. What do you think I should do? Do you think I should sell the stock portfolio, stay in stock to be well diversified, or go into real estate? The hesitancy that I have is that I have all Class A funds, and I paid a premium to get into these stocks. I hate to lose all that money.

Plus, there's high charges if I cash out now. Should I stick it out? I value your opinion, Paula. Thanks for your time. First, index funds will take up almost none of your time. They're the easiest, simplest investment that you can make. Rental properties will take up a little bit more of your time. Not a huge amount.

I have seven rental units and I spend about five hours a month in total on all of that. But five hours a month is more than zero. And zero is what I spend on my index funds. So that's one element that you want to consider. That being said, real estate gives you. you more creative control. If something isn't working well in one of your investments, you have the option to renovate a property, hire and fire property managers, to change your business model. Real estate is kind of that hybrid between a business and an investment. That's something that you

don't have with index funds. If you don't like the way a company is running, you can't really do anything to change it. The third element that I want you to consider is money, specifically as it relates to early retirement. You mentioned that you're frustrated with your job. You'd like to be able to leave and maybe do something else, something different. So let's talk about how much money that would require. Now, this is going to get a little numerical, but just hang with me for a second. First of all, for the sake of all the listeners, there are a few rules of thumb that I want to cover before I go into this. The first rule of thumb is called the 4% withdrawal rule of thumb. It states that when you retire, you can safely withdraw about 4% of your retirement portfolio per year and still have a pretty good chance that that portfolio will sustain itself over the long term.

So if you have a million dollars in your retirement portfolio, you can withdraw $40,000 in year one and $40,000 adjusted for inflation every following year. That's one rule of thumb that I just want you to file in your mind right now. The other rule of thumb that I want you to file in your mind is what's called the 1% rule of which states that when you buy a rental property, that property should generate at least 1% of its value in revenue every month. So $1 million worth of real estate should generate at least $10,000 per month in revenue. That's another rule of thumb. File that in your back pocket. We're going to move on to the third. And this third rule of thumb is called the 50% rule of thumb. And it states that approximately 50% or half of the revenue that you

collect from rental property investments will get spent on operating overhead, repairs, maintenance, all of those bills that you have to pay. So file those three rules of thumbs in your back pocket. And now let's dive into the explanation on the financial implications of choosing between index funds versus rental properties. How much money do you need in order to retire in order to quit your job? For the sake of example, let's say you need 40 grand per year. Now, I know that some of the listeners are going to be thinking, that sounds like too little.

And some people are going to be thinking, whoa, that's way more than I need. So let's just use that as an example. If you need 40,000 per year in order to quit your crummy nine to five and you invested in index funds, you'd need a million dollars. If you needed $40,000 per year and you invested in rental properties, you would need only $660,000 worth of free and clear real estate. And for those of you who are driving, who can't double-check my math with a calculator, the quick rundown of that is $660,000 worth of real estate, brings in $6,600 a month, top-line revenue, which is $3,300 a month, in bottom-line cash flow after spending the other half on expenses. And that is the equivalent of 40 grand per year. So you can retire early faster or with less money if you invested in rental properties.

But, and here's the but, it's going to require about, I'd say, as a ballpark, at least one hour per month per property. And that's after you do all of the initial work of finding the property, renovating it, getting the right property management in place. And so again, it becomes a lifestyle choice. What do you want to do? Do you want to stay in your job for a couple of extra years? Or do you want to take on this project that's going to require more of your time and energy, but also give you more creative control? Now, I can't answer that question for you. That's something only you can answer for yourself, because this is not about money. At this point, this is about the type of

life that you want to lead. And neither answer is right or wrong. Now there's one last thing that I'll say. You mentioned that you're sticking around in an expensive fund because you already paid a load in order to get into it. My recommendation is to think about something that's called the sunk cost fallacy. And what that means is that people often make decisions based on an emotional attachment to something that happened in the past rather than rational thinking about what's going on in the present or the future. So don't get too mired in sunk cost fallacy.

Instead, ask yourself, would I buy this today? And if the answer is no, then why are you still holding it? Every day that you hold it, you're renewing your commitment to buying it. And if you wouldn't buy it today, then, well, I think that's your answer. Our next question comes from Mike.

Hi, Paul. My name is Mike. Thanks so much for your incredible content. You've definitely helped to shape my approach to money and investing. So I've been starting to invest in index funds, and I'm planning to invest several hundred dollars each month. I understand that your recommendation is to buy index funds and hold them for the long term. My question is whether there might be circumstances when you would sell your index funds if you suspect that a downturn or slow down is highly likely to come. For example, let's say that if over the past five years or so the market gains have been through the roof, and it's likely that things will settle down soon based on past trends

and cycles over the last hundred years or so. When it makes sense to sell, wait for the prices to become more reasonable, and then use your cash to buy on the cheap and get much greater returns in the long run. I understand no one knows what's going to happen, but if we do know the index funds historically returned around 7%, and over a recent span that the returns have been much, much higher, it seems logical that a correction will happen. Thanks so much for your thoughts. So, Mike, it's true that the stock market tends to run in cycles, meaning that a long, awesome period, which is what we've just had, tends to be followed by a downturn, which is what a lot of people suspect we might be going into, maybe, or maybe not. The truth is nobody knows the future. That's what's so frustrating. So it's true. On one hand, the stock market does tend to move in cycles. On the other hand, it's also true that people who try to time the market, statistically speaking, do worse than people who don't. So now we have these two truths, both of which feel a little at odds with one another. How do we square these? Well, here's how I deal with it. First, I have a certain amount of money. that I always put into the market regularly, no matter what.

I don't pay attention to what's happening out there in the big, wide, scary world. I just turn off all the financial news media and that money goes in. But then anything in excess of that I can make decisions about based on, you know, what's going on and what seems to be more likely. If I have a reason to suspect that, you know, things might be stagnating in the general economy or maybe we're heading for a downturn. I wouldn't sell my holdings, but I would take any of that excess money and use it for a different purpose. So new cash that I have, I might use as an extra payment towards my mortgage, for example, rather than putting it in the market. In other words,

I'm not selling anything. I'm just not buying as much as I otherwise could be. And likewise, if I think that the market is really cheap, if I suspect that things are on sale, I'll pile a little bit more money into it than I normally otherwise would. But again, I'm talking about just tinkering with the margins. The core of what you do should really be ignoring market timing. Because, well, let me put it this way. If you try to time the market, you've got to be right twice. You've got to be right when you buy and you've got to be right when you sell.

That's why people who try to time the market, statistically speaking, end up doing worse. So I hope that helps. And remember, you don't have to sell. You can always just not buy as much. Our next question comes from Philip. Hello. My name is Phil. I live in Seattle.

And I've just started listening to your podcast, been enjoying it a lot. So my situation is, with the exception of my mortgage, I've been debt free for the last two years. I've recently just been able to back-stop my 401K contribution. and right now I've got about $500 to $800 that I can put towards savings and investing. Right now I'm playing around with Lending Club, wealth front, and then putting a majority of my money into an online savings account to try to build up to three months. But I want to get involved in stocks. So I opened up a Robin Hood account and I was thinking of starting out by investing $200

bucks a month until like maybe eight stocks. So every month, I would end up being like probably a couple shares of a company and then kind of slowly build up until I can get kind of a nice portfolio. I'm wondering, is that a decent or smart way to get started or should I consider some other options? All right, Phil, you're investing in Robin Hood. Now, for the listeners who aren't familiar with that, Robin Hood is an app that lets you buy individual stocks without any fees. It's awesome that you're not paying fees for it, but let me warn you. Individual stocks are the beer and nachos of the investing world. Great and small doses, but you don't want that to be the cornerstone of your diet.

You say you're saving about between 500 to 800 a month. I would suggest that you put 10% of this between 50 to 80 bucks a month gambling at the high stakes individual stock table because it's fun and it's beer and it's nachos. But the other 450 through $720 per month, the other 90%, stick with the type of asset that has a very strong chance of getting you awesome returns with minimal fees and manageable risk. And what is this asset? Drum roll, please. Funds. I know, I know. Index funds are like the quino on broccoli and salmon. They're They're not as sexy as stock picking, but the sexy part can come later when you spend the money, not when you make it. So I would recommend that you shy away from the individual stock picking, which is pretty volatile, and stick with a healthier menu.

Now, that being said, I'm going to say one more thing. You've maxed out your 401K, which is awesome. I would check to see if you can load up on any other type of tax-advantaged fund. For example, if your health insurance is HSA compatible, focus on maxing that out. Also, I noticed that you didn't mention anything about an IRA. Now, I don't know how soon you need to tap this money. You might want to tap it at an earlier age than in your 60s. But if these are long-term investments that you're not going to tap until later,

you can put that money into an IRA. And actually, if you put the money in a Roth IRA, you can still withdraw the principal penalty-free at any time. So best of both worlds there. Final tip, build your emergency fund. That is top priority. All right, thank you, Phil. Our next question comes from Ellie, and it's a three-parter.

Hi, Paula. My name is Ellie. Thank you for your wonderful podcast. I've been an ardent fan and listener since day one. I've just started thinking and reading about financial independence. So I have lots of questions, but I'd like to ask you the three most first. questions. First is about HSA. It is one of the most highly recommended in the financial blogs,

but for me it is very hard to find. My husband and I are self-employed, so we've got our insurance through the marketplace or the Obamacare. But after learning about the HSA, I looked for the plans that allow HSA, but I couldn't find any. Nothing in the marketplace for New York. state nor out of marketplace. Any idea where I should look into? I know it sounds too good to be true. I'm trying to get an advanced tax credit and tax deferred savings, but I know you're good at achieving what others might think too good to be true. So I thought to ask. Hi, Ellie. Thanks for asking that question. First of all, for the sake of any listeners who aren't familiar with what this question is talking about, an HSA is a health savings account.

and it's a very tax-advantaged type of account that you can have if you have a health insurance plan that is HSA-compatible. So, Ellie, I was surprised to hear that you weren't able to find an HSA-compatible plan because those are supposed to exist in every state. And so I actually looked it up. I ran a search as a 32-year-old female for health plans in New York State. The first time I ran the search, I ran it based on the idea that I was living in the 100003 zip code, which is the zip code for the West Village in Manhattan. And I couldn't find any HSA compatible plans. And so then I tried the same search, but this time I based it out of living in Westchester County in the 105-1 zip code.

And in that county, if I were a resident of that county, I actually found four choices, four HSA-compatible health plans, all of which are offered by a company called MVP Healthcare Incorporated. So then I repeated that same search based on being a 32-year-old female living in Rochester, New York, in the 14603 zip code. And again, I found the same four plans offered by that same company. So then what I did was I went to the MVP healthcare company website, and I looked up the coverage map. for that company. And what I discovered in this research is that the state of New York has 62 counties, and the company that has HSA-compatible plans serves 59 out of those 62 counties in New York. So they serve all of New York State except for Chautauqua County, Allegheny County,

and Catarougas County, I hope I'm pronouncing that correctly. All of those are in the southwestern part of the state. So if you live in any of the other 59 counties, you may be able to get coverage. However, within those counties, there are certain zip codes that are excluded, the West Village in Manhattan, for example. So it's possible that the exclusion you're seeing isn't based on your state or your county, but rather your specific zip code. And that's what's so, frankly, rather arbitrary about our health care system.

If you live in the West Village, you're out of luck, but if you live in Westchester County, you're set. Here's what I'd recommend you do. Since all of the results for New York came from the same health insurance provider, I would recommend calling that company directly that's MVP Healthcare Incorporated in New York. Talk to one of their salespeople

because their job is to sell, so if there's any way that they can cover you based on your zip code, they'll find a way to do it. Their website is MVPhealthcare.com. For the rest of the listeners out there, if you're wondering how to find health insurance, Check out either health care.gov or ehealthinsurance.com.

Both of those websites are aggregators that will pull up different health insurance plans that you can look through and you can sort the results based on HSA compatibility. All right, Ellie, what's your second question? My second question is, what would be a good way to keep the emergency fund, let's say living expenses for six months or so? I'm trying to find something that I can access fairly easily in case something happens. but something that still gives back fairly good returns as an investment or saving. Any suggestions?

Your emergency fund is not an investment. It's not supposed to produce returns. It's supposed to be a safety net. Keep this emergency fund in cash. Keep it in a savings account. You can choose an account that has a decent interest rate like smartypig.com or everbank.com. But bear in mind, that interest rate is like that interest rate is. going to lose out to inflation. That's the price of keeping money and savings, and that's fine.

Think of it as the price of insurance. Now, that being said, let's rethink the emergency fund in two stages. Your basic emergency fund should cover three to six months of expenses, and this part you always keep in cash. Never risk it. But anything beyond three to six months' worth of expenses is kind of a supplemental emergency fund. So let's say, for example, that you have an emergency fund that covers a year's worth of expenses. You can divide this in half. Half of it you keep in cash. That's enough to cover six months of your costs.

And the other half, you can put into a taxable brokerage account that's conservatively invested. If I were to do something like that, I'd pick something like a Vanguard bond index funds, since bond funds tend to have lower volatility than stock funds. All right, that being said, what's your third question? My third question that I sent through email originally was towards Paula, but overnight I thought of something equally burning. That is, what is the downside of index fund? I've been reading a few blogs and the little book of common sense investing by John Bulgle.

all sounds that the index fund or Vanguard index fund to be specific is pretty much foolproof. Is that right? Also, what is the tax advantage of index fund? I heard it's very tax efficient, but I just couldn't really understand how and why. The downside of index funds, I like this. First, there is a downside to putting everything in just one index fund. So, even if that fund covers the broadest of broad markets, like the entire S&P 500, that doesn't necessarily mean that you're diversified. Now, we just had Jim Collins as a guest on the show, and I know he would disagree with that. But I would argue that the downside of index funds is still that even the broadest of broad funds isn't adequately going to diversify you. So you're responsible for creating your own diversification.

and you can do this by investing in multiple index funds, plural, funds, such as one large-cap fund, one small-cap fund, and maybe two international funds, one that tracks developed nations and one that tracks emerging nations. And for dessert, throw in a bond fund or two. That's where you get that diversification from. Now, as far as tax implications, first of all, let me clear something up for any listener who might need to know this.

first let me just make it clear you have an account and you have the asset so the account is like the coffee mug and the asset is the coffee itself the mug holds the coffee but the mug is not the coffee the mug is the mug so in terms of index funds you'll hold the fund in an account like a 401k or an IRA or an hSA all of these are mugs and the index fund itself is the coffee that's inside of that mug. So with that background established, let's talk about tax implications. Now, you're dealing with two layers of taxes. There are the taxes that happen inside the fund and the taxes on the outside. In other words, there are the taxes on the coffee and then there are the taxes on the mug. Now, inside of the index fund, the coffee itself, the index fund itself, is super, super, super tax efficient.

And that's because there are no fund managers buying and selling, which means that the inner workings of the fund are not getting taxed to the hill based on all of the buys and the sales, or really based on the sales. That is a huge tax benefit of index funds as compared to actively manage mutual funds. Now on the outside layer, are you holding your index funds in a tax-deferred account like a traditional 401K?

Are you holding your index funds in a tax-exempt account like a Roth 401K or a Roth IRA? Or are you using the MacDady of all tax-advantaged accounts, the HSA? That totally depends on the way that you structure your holdings. So moral of the story,

index funds themselves internally are super tax efficient. You don't need to worry about the taxes on the coffee. Your job is to focus externally on the taxes that are charged based on the mug that you use, the type of account that you use, to hold that fund. Now, there are a few more downsides to index funds that you should be aware of. First of all, you're going to be subject to the same volatility as the rest of the market, which means that sometimes you're going to live through 2008 when everything went, and that just happens sometimes.

You're going to have to live through those messy, ugly periods. So that's a reality. Another downside to index funds is that the index is weighted. And what that means is that the bigger a company is, the more it's represented within that index. So, for example, Home Depot, Coca-Cola, General Electric, Goldman Sachs, IBM, those companies are going to hug a much bigger share of that portfolio than smaller companies like GoPro or Papa John's Pizza. And so what that means is that if a stock becomes overvalued, then that overvalued stock ends up carrying more weight in the index. And that kind of sucks.

You know, that has a serious downside. So the way that you adjust for that is by putting a share of your portfolio in small-cap funds, a small-cap index fund. So basically this goes back to what I said earlier about diversification. I personally think that you should split your money between a broad market index fund that covers the entire U.S. stock market, but also give yourself some small-cap exposure. So thanks for that question. Now, warning, warning. All of the questions from this point forward are going to be related to real estate. So if you're not into that game, you can stop listening now.

Thank you so much for joining us. I really appreciate it. And if you want to listen to real estate related questions, keep on charging. Our next question comes from Brandon. Hey, guys, I'm looking to get into the real estate side of investing. I just recently completed graduate school and took a job in the Washington, D.C., I'm looking for something a little bit more low cost for my first few properties as a way to keep the financial risk a little bit lower as I learned the trade and we'll make a few mistakes along the way. The problem is living in the Washington, D.C. area, there's not really any any cheaper properties.

However, where I went to graduate school was in a small college town in the south. I know the area well and know that I can find a house that's close to the school for around 55 to 75,000. Additionally, because that's where I went to graduate school, I have relationship with professors that are there, students as well as people from within the community to help me keep an eye on the property and to find a tenant as well. The question I have is what are your thoughts, whether or not it's a good idea to buy and rent homes in an area that's a distance away from me that I would rarely, if ever, be able to visit? And just kind of your thoughts on that as well as any tips or anything that you have that might be able to help me be more successful. Thank you. Yeah, absolutely.

Go where the money is. I don't understand why people get hung up on the idea that your rental property needs to be in the same town as, the place that you live, why? You're not turning the wrench yourself. If you own a business, let's say that you own a manufacturing plant and it's a large plant and you've got managers who run it and so you're an investor in it, you're an owner in it, but you're not handling the day-to-day operations. That manufacturing plant doesn't need to be where you live. You might own a plant in Oklahoma or Iowa and move to D.C. And people, when you do that, people aren't going to say, well, are you going to sell your business? Are you going to sell your manufacturing plant?

But for some reason, when it comes to businesses, society generally understands that businesses are run by teams and that the owner doesn't do the wrench turning himself. But for whatever reason, people project their own understanding of a personal residence onto a business residence, an investment property. Those two are not the same thing. So long story short, yes, own out-of-state rentals. My rentals are located 2,000 miles away from where I live. Think about that. 2,000 miles away.

I am not driving there every time there's a freaking leaking gutter. You know, I've got a team that manages that. That's what being an investor is. So that's a very long way of saying, yes, go for it. Thanks so much for your question and good luck. It sounds like you've got a great opportunity in front of you. Our next question comes from Bethany. Hi, Paula, this is Bethany. Any chance you could put together a list or roadmap for how to figure out where to buy an investment property? We currently live in the Middle East and we don't know where we will end up once we move back to the U.S.

It depends on where my husband gets a job. We have family in Southern California and the suburbs of both Chicago and San Antonio. My husband and I already own a duplex in Oregon, like you, we lived on one side and rented the other for about two years. Then we moved to the Middle East for work. We are happy with our investment overall. We have an awesome property manager, but we feel like we could get a better return elsewhere. We did not know your 1% rule when we bought in 2012. We are making money tax free here abroad and want to use that to our advantage. We want to do exactly what you are doing, buy and hold residential rentals.

When we eventually move back to the states, could be in two years, could be in 10 years, who knows, I would like our rental investment, air quotes, business to be my thing, while my husband will maintain his 9 to 5 job. Unless we are super awesome like you and have amassed enough passive income for him to explore another side hustle. So, since we can invest anywhere, where should we? Or more realistically, how do I go about figuring out where to invest? Thanks in advance. Bethany, that's a great question. Here are a couple of things I would invite you to ask yourself.

First of all, do you have any area of the United States that really fascinates you? Any place that you'd like to learn more about? And the reason that I ask that is because I can sit here and say, you need to do due diligence on a city. And that sounds so boring. because learning about a city, learning its nuances, learning its pace and its culture and its lifestyle and its layout, you know, that's part of learning about the place where you're going to invest.

And if there's a particular city or region that fascinates you, you're going to be more interested in learning about it and therefore you're going to do a better job of it. For example, if you've always been fascinated by the Southwest or if you've always been fascinated by the Rockies, then I would go where your interests are because that's where you're going to get the best performance out of yourself. Now, that being said, of course, only invest in places where it makes financial sense, only invest in places where you can find properties that meet the 1% rule of thumb.

I'll tell you a couple of cities that I personally find interesting. In the Western U.S., I think Boise, Missoula, Bozeman, and Helena are, are all fascinating places. Boise in particular is just, wow. So much is happening there. The city is growing. It's just, it's incredible. In the southwestern U.S., I don't know very much about Arizona. I don't know much about Phoenix, but I can tell you Vegas has amazing opportunities if you're interested in Vegas rental properties from a cash flow point of view. It's like the year 2011 here. The Rocky Mountain region, Durango, Ure, Pueblo, all of them are smaller towns in Colorado. Could be interesting, could be worth looking into. In the south, Atlanta, of course,

that's where all of my properties are, and I love Atlanta, I'm partial to it. Birmingham, Huntsville, Charlotte, Nashville. There's so much growth happening right now in the south that, yeah, there are just great places there. Cincinnati also. has some incredible growth and new developments that are happening. There are, and I know that there's a ton of places that I'm leaving out of this list. So what fascinates you enough to immerse yourself in learning about its nuances? Start with that and then build out from there. One last thing I'll say is that while you don't need to physically go to the property on a maintenance basis,

I really believe you should physically visit the property before you buy it in order to see it yourself and see the neighborhood yourself. So wherever you go, I would recommend flying out there after that property is under contract so that you can tour it before you buy it. And if you're doing a major renovation and an upfront renovation, like say you're gutting the whole kitchen and remodeling it, I would recommend that you're on site for that as well. All right, thank you so much for that question. and for our final question of the episode, let's hear from a guy named Sick Long from Virginia. This is Sick Long from Virginia. Love your show. Thanks for doing it. I'm actually curious about what Paula thinks about condos and townhomes as rental properties, especially how that HOA fee and condo fee factors into that 1% rule that she has. Most single family homes and duplexes all the way up to quadplexes in my area are price way out of the 1% rule. unless they're in what plow at terms is war zones or like I say ghettos, townhomes and condos in the okay neighborhoods are actually still viable as far as the upfront acquisition costs, but for some reason, they're so widely available and within that 1% rule, it makes me nervous.

Am I missing something? for example, there are units going for $40,000, two-bedroom, one bath, around 1,000 square feet, with $200 per month condo fees, and the rents and the comparable units are around $750 a month. So it seems like a no-brainer, and the units are located near like a Starbucks and the new mall, but the number of units that are available kind of scares me. I figure someone else would have already picked them up. So unless I'm missing something, you know, I would appreciate your opinions and insight on this. Thanks a lot. So there are two things that I'll talk about here. First of all, the 1% rule of thumb is purely a rule of thumb that relates to the gross revenue relative to the value of the asset.

In other words, it is not a rule of thumb that considers what your expenses are going to be. And your question was, how does the HOA factor into it? It doesn't. None of the expenses factor into it. The 1% rule of thumb strictly looks at the revenue that you get, the top line revenue that you get, relative to the value of that property. Now, I am not philosophically against HOA fees because those fees cover expenses that you would otherwise have to pay for out of pocket. In a condo, for example, an HOA fee is going to cover all of the exterior maintenance. You're not going to have to replace the roof, replace the gutters, replace the siding, put on new house wrap, deal with sheathing,

deal with termites. All of those get taken care of for you, and those are expenses that people, single-family homeowners who may not have an HOA fee have to pay out-of-pocket for. Thousands of dollars. We're going to be spending some serious money on a new roof on one of our houses pretty soon, probably this year. So I have no philosophical objection to paying an HOA fee. That's just paying your long-term expenses in a different form. Personally, I would refrain from buying a condo, because of the lack of control. Remember what I said at the beginning of this episode? There are three factors you want to consider.

Time, money, and creative control. And in a condo, the HOA has the right to decree the only owner occupants are allowed to live in their residences. They can just decide that you cannot rent out that unit any longer. And that's a risk that I would not want to subject myself to. Now, that's a personal decision. There are many landlords and many investors who do own condos. So I'm not going to say that that's the decision you ought to make. But one of the reasons that other investors might not be snapping up those condos is because there might be some long-term investors who, like me, don't want the risk of a condo association deciding that one day they're just not going to be allowed to rent it out anymore.

Now there's something else that you should be aware of as well. If more than 15% of the units are 30 or more days delinquent on their HOA dues, then the HOA becomes known as what's called in arrears. So with 15% of the units in that condo are a month overdue on paying the HOA fee, then the HOA goes into arrears and what that means is that it no longer quality, for FHA-backed loans. And so, if buyers can't get into those condo units because the FHA won't back the mortgage loans, then that could possibly have a negative impact on the value of those units. Now, this can go two ways. It might be the case that this particular condo that you're looking at has an HOA that's currently in arrears. And once that rectifies itself, the value of the units might climb. So, Maybe this is an opportunity if your goal is, you know, that blend of cash flow and possible value. But again, I would never encourage you to make a speculative six-figure decision.

In fact, I would actually caution you the other way around. You also, in addition to holding the risk that the HOA might decide that you're not allowed to rent it out anymore, you hold the additional risk that the HOA could fall into arrears. and now not only do you lose the cash flow from that unit, you also get stuck with a unit that's harder to sell. So long story short, condos come with a lot more risk than homes in which you have creative control. So I hope that answers your question.

Thank you so much for asking. That's it for this week's episode. If you would like to submit a question, please go to afford anything.com slash voicemail and leave a question for a future episode. Also, if you enjoy this show, please do me a huge favor. Head to iTunes and leave us a review.

I really appreciate it. Thank you so much. And see you next time. Ooh, here's one that's perfectly aligned. If you did not need the money, what would you do for work? I would have a blog and a podcast. What song motivates you when you're exercising?

I listen to a podcast of DJ spinning electronic tunes. Do you really? I do, yeah, the Opulent Temple podcast. Podcast? So, yeah, it's a podcast, but it's totally music, which confused me until I realized that a podcast is simply a mechanism by which audio is transmitted, so people don't actually have to talk. Interesting. I want back on the show, Paula. I play music in the back. Anytime you do something, I'll put an insert in a musical charm. You'll come back in as DJJ. J.J.J. Money.