Afford Anything - Ask Paula: Which House Should I Pay Off First?

Episode Date: July 1, 2019

#201: Ross and his wife are both in the Navy. They bought a home while they were stationed in Hawaii. Then the Navy sent them to Virginia, where they currently live; they’ve purchased a home there, too. They kept the Hawaii home as a rental property, and they’d like to move back into it when they retire. Which home should they repay first? Mike is 33, debt-free except for his mortgage, and earns more than $200,000 per year. He saves half of his income. What should he do with his savings? Pay off his mortgage? Invest? Josh has a nervous habit of checking his investment account balances daily. How can he break this habit? Amanda and her husband live in a duplex. They have $115,000 in equity in their home, and another $115,000 remaining on the mortgage. They’d like to move. Should they hold the duplex as a rental? Or should they sell and use the proceeds to buy a cheaper home, with a goal of being mortgage-free? Christy wants to know how to compete with other aggressive real estate investors who are bidding on homes. I answer these five questions in today’s episode. Enjoy! For more information, visit the show notes at https://affordanything.com/episode201 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a trade-off against something else, and that doesn't just apply to your money. It applies to your time, your focus, your energy, your attention, anything in your life that's a scarce or limited resource. And that leads to two questions. First, what matters most to you? And second, how do you align your day-to-day decisions around money, time, energy, focus? How do you align those decisions around those things which matter most? Answering these two questions is a lifetime practice.

and that's what this podcast is here to explore. My name is Paula Pan. I'm the host of the Afford Anything podcast. Every other week, I answer questions that come from you, the community. This week, here's what we're going to cover. Ross is in the Navy, and he currently owns two homes. One is his current primary residence, and the other is a rental property. Which of these two should he pay off first?

Mike is wondering whether he should focus on paying off his mortgage or investing in index funds. Josh has developed. a habit of checking his account balances multiple times a day. What should he do? Amanda lives in a duplex and is wondering if she should keep it or sell it and use the equity to put towards a new or different home. Christy wants to know how to compete with the very aggressive real estate investors who are out there, the ones who are high volume and who make this their full-time job. And at the end of the episode, we're going to hear a story from Greg Willnow, who's going to describe how he transitioned from a nine to five to a digital nomad lifestyle.

Two quick announcements before we get started. Number one, normally my buddy, former financial planner Joe Saul See-high, would be joining me on today's episode in order to answer questions. He joins us every other Q&A episode. But he's on vacation, chilling on a beach somewhere. So I'm doing today's episode solo. You will see him again in two weeks at episode 203 when he will rejoin us. That's announcement number one. Announcement number two. I've decided. I'm excited to leave today's episode as an intentionally unsponsored episode. There will be no sponsors, no ad breaks in today's episode, which means I'm losing money on it.

I'm paying all the production costs out of pocket. And instead, what I was hoping I could do, if you'll allow me, instead of having any ad breaks, I'd like to take a couple of minutes in the middle of the episode to give you a recap on the course that I've rolled out, your first rental property. We just wrapped up 10 weeks of classes with the first rental. first cohort of students. So I want to take literally just three minutes mid-show. It'll have the same

musical transitions as any other sponsored spot so you can feel free to skip over it if it's not your jam. But for anyone interested, that's what we'll chat about for just three minutes mid-show today. So thank you so much. And on with today's show. Our first question comes from Ross. Hi, Paula. Ross here with one of those pay off this one or that one questions regarding two houses. My wife and I are both in the Navy, which means we move pretty often. We bought our first house together in May of 2016 when we were stationed in Hawaii. The Navy moved us to Virginia Beach last June, and we decided to become landlords with the house we had to leave behind in Hawaii. That house, once all the operating costs are calculated, actually ends up costing us $450 a month to keep.

But the reason we were hanging on to it is because we want to eventually move back into it. When we retire in probably 10 years, or if we're lucky, the Navy sends us back. So here we are in Virginia and we are closing on a new house here, which will be our primary residence. Inevitably, the Navy will move us away anywhere between two and five years. When that happens, though, we plan to keep it and convert it to a rental property. We have our finances set up so that we could either pay off the Hawaii house in nine and a half years or pay off the Virginia house in four and a half years. Do you see a benefit of choosing to pay off one before the other?

My initial thought is to pay off the Virginia home so that by the time we'd leave Virginia, the cost of owning it as a rental will only be insurance tax and maintenance. However, thinking of having the house we plan to retire and paid off in nine and a half years sounds appealing as well. What things should I be considering when making the decision? And what do you think? Thanks for your thoughtful insight. Talk soon. Ross, this is a great question. First of all, congratulations on both of your properties.

I love the idea of holding onto a property. If you know that this is where you want to live, this is where you want to move back into and you want to retire in this property, love the idea of holding on to it, and I would absolutely do the same thing in your shoes. In fact, oftentimes when people are moving out of a property and they ask me the question, should I sell it or should I hold it, the first question that I ask back to them is, is there a chance that you might want to move back into that property later? Because if the answer is yes, then hold it. So to your question of which mortgage should you pay off first, there are two things that I typically look at. One is the interest rate. The other is cash flow. And when I talk about cash flow, I don't just mean within the narrow framework of that home in particular, I mean within the broader framework of your overall budget and your overall finances. Now, you bought both of these homes as primary residences, so I'm going to assume that the interest rate on both homes is comparable. If the spread was vast, if you're paying a 3% interest rate on one of them and a 7% interest rate on the other, that would be a different story. But if there's a narrow spread, which I'm going to assume there is,

then we can remove that from the table. And so then let's look at cash flow. If you were to pay off that home in Hawaii, then from now through the next nine and a half years, you would be paying out of pocket on your primary residence mortgage and paying an extra $450 a month towards this home in Hawaii and making additional payments towards this home in Hawaii. And if you end up moving from Virginia within the next two to five years,

but you're not retiring for another 10 years, then you would need to come up with even more money to purchase the next place that you live two to five years from now. And the Virginia property would, in theory, be cash flowing. I don't know how much. Maybe it would cash flow enough to pay off the $450 a month on the Hawaii property. Maybe not. Maybe it would pay a portion of that. But I can see cash becoming a little bit tight

if you were to cover all of those bills. the Virginia property plus the $450 a month on Hawaii, plus saving for a down payment if necessary, or paying the rent on wherever you live next after you leave Virginia. By contrast, if you were to focus on paying off the Virginia property, think of it kind of like the debt snowball method, that's the debt that you can wipe out the fastest. So you focus on paying off the Virginia property. You get that property paid free and clear within the next four and a half years. And then what happens to your cash flow?

The minute that that's paid off, you don't have to pay out of pocket for that cost anymore. You don't have to pay out of pocket other than homeowners insurance, property taxes, repairs and maintenance for the cost of your own personal residence. And what that means is that starting four and a half years from now, you can take all of the money that you're currently paying out of pocket on your primary residence mortgage and use those savings. to make additional payments on the Hawaii property, or use that money in order to put yourself into a really solid position for wherever you move next, regardless of whether you'll be renting in your next spot or buying in your next spot. In other words, if you were to pay off the Virginia property within four and a half years, your cash flow would significantly increase because, boom, that's one less bill that you have to pay.

So what I like about the option of paying off the Virginia property is that you simultaneously lower your bills quickly, put yourself into a better cash flow position quickly, preserve your options, preserve your flexibility, and wipe out a debt. And you do all of that within the next four and a half years. And then once that Virginia property is paid off, the savings that comes from not having to pay a mortgage for your personal residence and or the additional cash flow that comes from rent that you would be collecting on. that residence, that pot of money can be used to accelerate the paydown on the Hawaii property. So given that the Virginia property has a smaller balance and a shorter timeline to pay off, I would focus there first. Because the faster that you can eliminate one debt, the faster that triggers a chain reaction that frees up the cash flow that you can then throw cash at either eliminating another debt or buying another home or whatever it is that you want to do with that cash that's freed up. So thank you, Ross, for asking that question. And best of luck with both properties. Our next question comes from Josh. Hey, Paula, my name is Josh, and I'm a high school teacher

in Los Angeles. I'm new to the world of personal finance, and I've been binging your podcasts and other FI resources. In the past couple months, I've started investing in index funds and some real estate crowdfunding. I've increased my savings rate, and I'm looking for side hustles to boost my income. I noticed last week that I checked my account balances, which include my bank account, my Vanguard account, crowdsource investment account, et cetera, every day, sometimes multiple times per day. It turned into a bit of a nervous tick, and it brought on some anxiety. I didn't really have a reason for checking. I mean, if the accounts go down one day, I'm not going to panic and sell. I'm in this for the long term, not for a quick buck. I know about portfolio rebalancing,

but that shouldn't be done on a daily basis, right? maybe once a month, once a quarter. I'm not really sure. My question is, how often do you check your accounts and for what purpose? Thanks for being a part of my transformation. You've helped me more than you know. Josh, that's a great question. First of all, congratulations on setting yourself up for a strong financial life. You're investing in a wide variety of different types of opportunities. You're setting yourself up in a really good way. So congratulations on doing that. In terms of checking your accounts, the optimum strategy is rarely, almost never. For most of my life, up until this year, I have checked my accounts on average about twice a year. And the purpose

of checking my accounts is to update my net worth spreadsheet. So I have a net worth spreadsheet and typically, this year's been a little bit different. I'll explain why in a minute. But typically I update my net worth spreadsheet twice a year, usually in approximately January and July. It's not total clockwork that's more like once in the winter and once in the summer. But that's the only time that I log into my accounts. And the reason for that is that the more that you check your accounts, the more tempted you will be to mess with it and messing with it is the worst thing that you can do. In fact, Fidelity Investments did a study of all of their account holders to see who were the best performing investors. And you know what they found? The best performing investors,

they found the common thread. The best performing investors were dead. They found that dead people outperform living people. The second best performers were people who forgot that they had an account at fidelity. And the reason for that is the common thread there is that people who are either dead or who forgot that they hold an account are people who don't mess with their portfolios. And not messing with it is the key to having the best performance. And so by contrast, checking your portfolio balance, even if you tell yourself, oh, I'm just looking, I'm not actually going to touch it, it's akin to just looking at a tray of desserts while telling yourself that you're not actually going to have that cupcake or that bowl of ice cream.

The more time that you spend looking at the tray of desserts, the more likely you are to eventually grab the cupcake, grab the slice of cake or the tub of ice cream. Now, in terms of rebalancing, because you asked how often a person should rebalance. Personally, I like a rebalancing schedule of once a year. The reason for that is because, number one, you're not tinkering too much. And number two, if you hold an asset for one year or less, then any gains that you enjoy on it are taxed at your ordinary income tax rate. Those are called short-term capital gains, and they're taxed at the same rate as your ordinary income. But if you hold an asset for longer than one year, then it's taxed at the long-term capital gains tax rate. So I typically like to wait for a little longer than one year before I rebalance a portfolio.

That way, when I'm selling out of my winning holdings and using that money to buy more of the losing holdings, I can harvest those gains at a long-term capital gains tax rate. That's particularly important in taxable brokerage accounts, but generally a good practice everywhere. And again, a one-year schedule is rare enough that you're not going to overcheck your account balance and then risk eating the dessert off the dessert tray. Now, if you want to rebalance more frequently, then once a quarter, I think would be fine, but no more often than once a quarter. Quarterly is the most frequently that I would do it.

and I think even that is perhaps a little much, but that's the most frequent of the boundary line. Thank you, Josh, for asking that question, and congratulations again on setting yourself up in such a great way. Our next question comes from Mike. Hi, Paula. My name is Mike, and I have a question. I am currently 33 years old and own a home with $322,000 remaining on the mortgage with an interest rate of 3.6%.

This is my only debt and my salary is $205,000 a year. At the moment, I save about 45 to 50% of my take-home income while maxing out my retirement contributions. My question is, with my cash, is it smarter to pay down my mortgage or invest my cash with index funds? My goal in the next five years is to have a rental property and hopefully be financially independent by 50. Thank you for your time and thank you for this podcast. Mike, thank you for your question. That is awesome. So first of all, congratulations.

You're 33 years old. You make an awesome salary to more than $200,000 a year. You're saving around 50% of your take home income after also making retirement contributions. And your only debt is a very reasonable mortgage. Your remaining mortgage balance relative to your income is super reasonable. And the interest rate on it is about the level of historic inflation. The interest rate on your mortgage is 3.6%. So you're in a great spot. You're earning good money. You're doing a great job of saving. You're maxing out your retirement accounts. You have a reasonable mortgage relative to

your income. At the risk of being prescriptive, I would not pay off that mortgage. I mean, if your mortgage has a 3.6% interest rate, why would you pay that off? Historic inflation is about 3%, which means that as the years move forward, you will be paying down that mortgage in cheaper and cheaper dollars over time. Historically, I mean, there were times when it was not unusual for mortgage interest rates on a primary residence to be 7%, 8%. So the fact that you've got a 3.6% interest rate, and saying this really for all of us who are listening, interest rates right now are historically increasingly, incredibly low, and it's very easy to look at today's interest rates and compare them to what they were two years ago or three years ago or even five years ago. But that's a relatively short time frame in the history of the United States. And when we look back on some of the interest

rates that our parents experienced in the 1970s or the 1980s, I mean, wow, we're in a great situation today. So what we know, and of course we never know if the future is going to perform the same as the past, but what we know is that historically inflation has been around 3 percent, and we know that historically the stock market over a long-term aggregate average has performed at somewhere between 7 to 9 percent, depending on what years you cherry pick on either end of that range. We also know, of course, that there's a risk that the future might not be as good as the past, but even if you were to take the more conservative end of that range and assume that the stock market, as reflected by broad market index funds in the future, will grow at a long-term annualized

average of, let's say, conservatively, 7%. there's still a significant spread between what you would expect to collect through index fund investing and the interest rate that you're paying on your mortgage. In addition to that, if your goal is to buy a rental property within the next five years, which you also mentioned, then I would especially not pay down your primary residence because if you buy a rental property, and if you take out an investor loan for that property, that investor loan is going to have a significantly higher interest rate than the one that's on your primary residence mortgage. Like, we're talking 200 basis points.

Now, I don't know if you're going to buy that rental property with an investor mortgage. You might, if you buy locally, then you might choose to buy another property with a primary residence mortgage and either use your current property as a rental or buy another property with a primary residence mortgage, live there for one year, either as a house hack or as your own singular residence, and then move out and turn it into a rental. That's a common practice that people who buy locally do. But if it's the case that you're going to buy that rental property out of town or out of state, then you might need to buy it with an investor loan. And if that's the case, then that investor loan with its higher interest rate, that's the one that you want to pay down as fast as possible. And or that's the one for which you want to have a bunch of money accumulated to make a huge down payment so that you're taking out as little of a loan as possible, because that's going to be the more expensive mortgage. Or maybe, and I don't know what price point of rental property you're looking for, maybe you want to buy a rental property in cash, in which case I would spend the next few years saving up enough cash that you could just write a check for a rental property and buy it free and clear. I think that would be a much better use of your funds than paying down a mortgage with a 3.6% interest rate on your primary residence. So thank you for asking that question. Our next question comes from Amanda. Hi, Paula. Thanks for your podcast and really appreciate your advice.

My question is regarding the 1% rule on a home that you're currently living in when you're trying to decide whether or not to sell or rent. My husband and I live in a duplex in a really desirable part of town where the homes are selling for about $230,000 conservatively and also renting for $1,700 a month. We have about $15,000 left on our mortgage, so I'm just not sure how to apply the numbers to figure out the 1% rule and the cap rate. I really like the idea of keeping this home as a rental property as we move forward, though my husband would rather sell it and take all that equity into our new home.

We both agree we would like to be debt-free and mortgage-free as soon as possible, but I'd like to think that keeping this home would do us better. in the long run for cash flow and also diversifying our portfolio. Thanks for any advice you have. Amanda, first of all, it sounds as though you're in a great position. You have a home that is worth about $230,000 and you have $115,000 left on the mortgage, which means you own 50% of that home. Like the debt to equity ratio that you've got is 50, 50, 15 left on the mortgage and

15 that's equity. and that is an awesome position to be in. And it's a duplex. You say if you were to move out of it, you could rent it out for about $1,700 per month. I'm assuming that means the total between both sides. It's a desirable part of town, so you'll get probably really high-quality tenants. I mean, it sounds like a great situation to be in. So should you hold it?

Fundamentally, your question is should you hold it or should you sell it? You frame the question around the 1% rule. I would challenge the framing of that. To me, when I hear your question, it sounds as though this is not a math question. This is a goal question. Because what I hear within your question are two separate, distinct, and slightly opposing goals. On one hand, what you said within your question is that you and your husband share the goal of being debt-free, including mortgage-free, as quick-end. as possible. Now, if I were to take that statement at face value, if you meant that in the most

firm and literal manner possible, well, then there wouldn't be any question. If your goal truly is, be debt-free as fast as possible, then selling this place, capturing that equity that you would get from selling the place, and using that equity to buy a house in cash, or to buy a house in all cash to buy a house with 80% down and only a 20% financed, that would be the fastest way to be completely debt-free. You mentioned that this duplex right now is in a highly desirable part of town, and it's $230,000. So I would assume if you can buy a duplex in a desirable part of town for $230,000, then that would indicate that you could probably get a pretty good single-family home in maybe a slightly less desirable part of town for, I'm guessing, somewhere in the neighborhood

of $150,000. And if you have $15,000 in equity, of course, when you sell the property, you're going to be paying some transaction costs on it. You'll be paying real estate agent fees and closing costs. But let's say that at the end of all of that, you walk away with $100,000, or heck, we'll even be conservative in, say, $90,000. If you were to buy a home that cost $150,000 and you were to spend $90,000 buying that home if you were to put $90,000 down on $150,000 home, well, then your remaining mortgage balance would only be $60,000 and you would be able to pay that off relatively quickly. So if that is truly your goal, then that would be the thing to do. But I'm not sure that it is because what I hear within your question is I hear two competing

goals. You say that you want to be debt-free and mortgage-free as fast as possible, but on the other hand, you also say that this would be a great rental that could provide some good cash flow and some passive income. And intrinsic to that statement is a separate goal. It's the goal of holding onto cash-flowing rental properties that produce good passive income. And you can certainly pursue both goals. But if you were to pursue a blend of both, then that would slow down your timeline for debt payoff. So the first question that I want you to ask yourself is, is my goal? A, to be debt-free as fast as possible.

B, to be debt-free eventually, while also maintaining assets that help produce a stream of passive income, or C, to maximize my streams of passive income. which of those three resonates with you the most? And I'm guessing it's probably not C. I'm guessing it's either A or B. But I think that the crux of your question is not a math question. It's not a question about the 1% rule. It's a question of between A and B, which of those two are truly your goal?

And this conversation that you've described between you and your husband, again, I don't think that this is a math conversation that you're having. I suspect, based on the question that you've asked, that your husband's goal might be A and your goal might be B. It seems as though his goal might be reached debt freedom as fast as possible, and your goal might be reach debt freedom in a reasonable time frame while also building income-producing assets. Now, to your original question, which is,

how do you apply the 1% rule to this situation? The answer is you don't. The 1% rule is a rule that governs deciding whether or not to purchase a property. it is not a rule that governs deciding whether or not to hold a property. And the reason for that is that in the world of stock investing or index fund investing, it's very easy to say, if you wouldn't buy a stock right now, then don't hold it. If you wouldn't buy a share of Coca-Cola or Nike or Tesla right now, then why would you hold it? But that logic does not apply to the world of real estate investing because stock investing,

stocks are very easy and cheap to buy and sell. You can trade stocks for free on apps like Robin Hood, or at worst, you know, worst case scenario, you might be on a platform that charges you $10 per trade. So the relative ease and the cheapness of trading stocks makes it easy to apply that framework or that philosophy. That does not apply in the world of real estate investing where the transaction fees are very high. Whenever you sell a property, you are likely to have about a 7% haircut, which is 6% in real estate agent fees and then maybe another 1% even 1.5% for various other closing costs. Now, it might be the case that you're a good negotiator and the buyer decide to split the agent fees. Maybe that would be great. But even still, you're going to take a haircut of thousands upon thousands upon thousands of dollars every time that you transact a piece of real estate,

time you sell a property. In addition to that, knowledge in the world of real estate is a competitive advantage, and all real estate is local. So the fact that you know not only your neighborhood, you know it intimately because you live there, and you also know the specifics of that particular property, you can anticipate what type of repairs, maintenance, major capital expenditures it's going to need in the next five years. Sure, it's possible that you might get unlucky and the water heater bursts and you just didn't see that coming. But for the most part, once you're very familiar with a particular property, you know whether those windows need to be replaced in the next five years or in the next 25 years, right?

You know how new those windows are. You know how new that roof is. You know that sometimes when you flush the toilet, the pipes hum in the background. You know that the deck has recently been stained, and that's great. but by contrast, you also know that if you're really being honest, you haven't actually kept up with your gutter cleaning the way that you should have been, which means that there's a reasonable chance that the fascia boards behind it might have some type of water damage. You know, you know all of that about a property when you live there.

And that level of knowledge and that ability to budget for and anticipate the major expenses that are coming up, there's something to be said for that. That is valuable. So for all of those reasons and more, I wouldn't apply the 1% rule to holding a property. I would only use it when deciding whether or not to purchase a property. Now, if I were in your shoes, what I would look at with the home that you're currently living in this duplex is I would look at the cap rate. And in order to calculate the cap rate, you look at how much money you could collect in rent per month, multiply that by 12. that's your potential gross rent, then subtract out a reasonable vacancy estimate, let's say maybe 5% or 7%, and that is your effective gross rent. It's effectively the rent that you could gross on the property in a year,

the annual rent that you could reasonably collect minus vacancies. Once you've calculated that, then add in any other rental income that you might collect, such as pet fees, laundry fees, If you have a storage unit on site and you want to charge them extra storage fees, parking fees, any other revenue that you could collect from that property, you add in that other income. And the total is what's called your gross operating income. So then, once you have that total, then subtract out operating overhead. And these are the expenses associated with running the property like utilities, water, trash, repairs, management, maintenance. It doesn't include the principal and the interest on your mortgage, but it does include your insurance and your property. property taxes. So take that gross operating income, subtract out the operating overhead,

and what you're left with is called the net operating income. And then to find the cap rate, divide that net operating income by the price at which you acquired the home. So whatever it was that you paid for this home, divide the net operating income by that acquisition price, and that is your cap rate. Now, that cap rate is going to be expressed as a decimal, so multiply it by 100 in order to convert the decimal into a percentage. And so when you, you're going to you see that cap rate, remember, that is not your total return. That is instead, the dividend stream that the home pays. An asset, any asset, gains value in two ways. One is capital gains or capital appreciation, and the other is the dividend or the income stream. So a share of Coca-Cola,

for example, may or may not go up in value, and it also may or may not pay a dividend to its shareholders. A house is the same. A house may or may not go up in value and also if it's used as a rental would pay an income stream to the people who hold it. When you're calculating cap rate, what you're looking at is what is the dividend that this home pays to somebody who holds this free and clear. So that is what you're calculating when you calculate the cap rate. So when you look at the cap rate of this duplex, you'll see the dividend that it's going to pay you. And if you want to calculate your total return absent of any leverage, your absent of

any financing, so you're not calculating a cash on cash return here. But if you want to calculate your total unleveraged return, then it's that dividend, meaning that cap rate, plus some reasonable estimate for how much you think it will go up in value. I typically like to assume that homes will keep pace with inflation, but nothing more. I think that's a fairly conservative estimate. And so since inflation historically has been around 3%, I will add that to the cap rate. So, for example, if I've got a cap rate of 4%, and then I add in an inflationary increase of 3%. That means the total return on the home would be about 7%. And then the question becomes, do I want to use my cash to hold a property that is relatively stable?

It's relatively low risk. You said yourself that this property is in a desirable neighborhood, where I would assume you would have very well-qualified tenants with good credit score, good income, good job history, low crime rate in the area. The home itself is probably in pretty good condition. So would I be willing to accept a 7% total return on an investment that is in a pretty stable, pretty desirable area? For me personally, that answer would be yes, absolutely. But that's because my goal is to build income-producing assets. And that is, at its core, a very different goal than having the goal of being debt-free as quickly as possible. And so, again, this goes back to what I said at the very beginning of this answer, which is it's not ultimately a math question.

It's a what is your goal question? And what are each of your goals in case they might be different? Thank you, Amanda, for asking that question. luck with whatever you decide. Oh, and by the way, if you want a worksheet that helps you calculate cap rate, you can download that for free at affordanything.com slash cap rate. That's afford anything.com slash C-A-P-R-A-T-E. Affordanthing.com slash cap rate. Hey there. All right. So today we don't have any sponsors in today's episode. Instead, I'd like to take three minutes to talk to you about the course. So the course.

The course that I built, I spent three years building it, it's called Your First Rental Property. It's an online training course about how to buy your first rental property. The course is 10 weeks long, and the way that it's styled is that you can go through it at your own pace if you want to. But we have one week of enrollment so that everybody enrolls during that time, and then everybody can go through it together as a group over the span of the next 10 weeks. That way, the whole group is processing through lessons together. there are accountability teams, there are forums, like everyone can discuss the lesson with one another as a community as you're moving through it together. And so we just wrapped up, we opened for

enrollment in April and then commenced with our 10 weeks of classes. We just wrapped up. Graduation was June 21st for the first cohort of students. It went super, super well. The topics that we covered included how to analyze a rental property, which is the most, I think it's my favorite. It's the most important topic. I know you're not supposed to have a favorite course module, but that one's my favorite. And then after we talked about how to analyze a property in depth, then we went into how to find a rental property. The course is designed with the assumption that you're living and investing in the United States, but it makes no assumptions about whether you're investing locally or whether you're investing out of state. So in terms of finding a property,

The students all went through these quizzes to find out what property finding method worked best for them, for their personality, for their style, for their timeline. We talked about how to find properties out of state. We talked about house hacking and specifics around that. So we went from analyzing a property to finding a property to financing a property. We covered renovating a property. We covered the actual process of negotiating for and purchasing a property. We covered the various ways that you can protect your assets through LLCs and umbrella insurance. We talked about how to advertise your property to tenants and then how to screen those tenants and manage them.

And the whole course included a bunch of checklists so that you have your business right there, just checklists where you can check off exactly what you're supposed to be doing. You know that you've got everything right there in that list that you can reference at any time. We have quizzes at the end of a lot of our lessons to test. your knowledge of the material. We have flow charts to give you a big picture overview of how all of these separate components fit together into a more cohesive timeline. We have fill in the blank worksheets where you can come up with a business model and a goal for yourself. Since everyone's rental property strategy is going to be personalized, we talk about how to figure out your personal

risk tolerance. We talk about the effort reward spectrum. We discuss red flags to look out for warning signs, mistakes, things that you should be cognizant of. Where are the opportunities? Where are the risks? We cover all of that. It's a very, like, A to Z of how to buy a residential rental property in the United States, regardless of whether it's local or out of state. So now that we have wrapped up with the first class, my team, Aaron and Zach and I are going through and making revisions and updates and iterations based on all the feedback that we got from our

first cohort. And we're going to open for re-enrollment the week of September 23rd through September 27th, 2019. So if you're interested in the course, that is the week during which you can enroll, September 23rd through September 27th, 2019. After that, we close our doors. And then the whole group goes through this material together. If you want to learn more about it, you can sign you. up for more information at afford anything.com slash VIP list. That's afford anything.com slash VIP list. Thank you for letting me take these four minutes to chat about the course. And now back to our regularly scheduled episode already in progress. I look forward to seeing you in class. Our next question comes from Christy.

Hi, Paula. I just listened to your podcast where you were talking about why you don't want to talk about real estate so much anymore. And I wanted to let you know that the reason I love your real estate stuff is precisely because it's only part of your portfolio, which is the position I would like to be in. It seems to me that the other resources I've found about real estate investing are all about leverage and risk and creating an empire and doing this hustle and getting super lucky and working really hard. And that is not what I want to do. I just want to buy a few properties over the next few years and diversify my income streams without losing my shirt and without doing anything stupid.

So what resources would you recommend for someone like me? Is there another podcast where people speak about real estate the way you do and talk about it as only part of your total portfolio and talk about doing it in a more careful and measured way? Obviously, I'm looking into your course and I'm excited about that, but I do love a podcast. And so if there is one or if there is another resource, I would like to know about it. And also kind of more generally, how do you succeed in that kind of overheated environment where people are talking about leverage and 1031 exchanges and all these things that are just not kind of right for me as an investor?

I don't like the idea of walking into a room where everyone is trying to outdeal me or out hustle me or out real estate empire me. So if you could answer that question, that would be great. but mostly I just wanted to know why I love it when you talk about real estate so much. Totally respect your decision to take a step back. But it's not just because you've sold yourself that way. It's because nobody else is doing the same thing you're doing. And I wish more people were.

Thanks very much. Christy, thank you. That is really sweet. I really appreciate hearing that. I appreciate that compliment and that description because you nailed it. You got it. Like you get me. So I want to clarify.

And I'm afraid that I said it wrong. in that last podcast, what I really meant was that in these episodes that are just me solo, like today's episode, where I'm by myself without Joe Sal C. High, the former financial planner who joins me on every other episode, every other Q&A episode, on these episodes where I'm just solo, I want to answer questions about all kinds of topics. So it isn't that I'm not doing real estate. It's just that I'm not limiting it or segregating it to only that. I'll still answer any question that you've got about real estate, I'm just also going to include questions about traveling and entrepreneurship and side hustles. Everything's going to get all mixed together.

Because I think that the signal that I was sending previously was that when other people got on the show, if I were to interview a guest or if I were to bring Josal See High on the show, when those other people come on the show, then we talk about other topics. But when it's just me alone, then the only thing that I talk about is real estate. And that wasn't really really the signal that I wanted to send. I wanted to send the signal, hey, I'll talk about all of these topics that tie under the umbrella of financial independence and personal development and leading a good life. So whether that's real estate investing or becoming a digital nomad or starting a side hustle or whatever topic that is, I will talk about all of it when I host these solo shows

like Today's show. Now, to answer your question about how do you succeed in a world in which a lot of other real estate investors are incredibly aggressive and they're using a lot of leverage and they're trying to outcompete and outbid everybody and this is what they do full-time. It's more than their full-time job. It's their full-time obsession. Fortunately, a lot of people who are in that world are not looking for long-term buy-and-hold rental properties.

The very aggressive, high-leverage real estate investors, they tend to be high-volume investors, high volume in terms of the deals that they do. And so a lot of them tend to be people who are interested in either flipping houses or in going into lease options. They don't tend to be the people who want to buy a home and hold it for the next 30 years. And if you think about it from the perspective of people who are really enthusiastic about flipping houses, from their point of view, if they have, let's say, $50,000 in order to get started, well, they could put that $50 grand as a down payment on a property and then hold that property for a very long time, cash flowing maybe a few thousand dollars in their first year. And they can take that slow and steady approach. But that interests me. That doesn't interest them. What they want to do is pull that $50,000 out of the deal and recycle it over and over and over again.

And if you want to recycle the money that's inside of a deal, there are two ways to do that. You can either sell the home or you can refinance it. Now, if you refinance the amount of money that you pull out of the home isn't that full $50,000 that you put into it. it's a smaller portion of that based on the after-repair value of the home. Now, if you do everything right and you buy the home undervalued so that you have instant equity at the closing table and then you add forced depreciation through renovations, then maybe you can get the ARV to be high enough that you can withdraw all of your original 50,000, or heck, in a perfect scenario, even more, because you've gained even more equity, right?

That's the ideal. But that doesn't always happen. And when it doesn't, then every successive cycle of refying houses ends up bringing you the investor a diminished amount of money. So, for example, it might be the case that you put $50,000 into your first deal, you renovate the property, you reappraise it, you borrow against it, you are able to pull out $45,000. And you recycle that into your second deal. And then you go through all of that again. You renovate it. You borrow against it. You're able to pull out this time maybe 30,000, right? And so the the amount that you can recycle gets smaller and smaller. And then eventually, if you're only using institutional lending, eventually you tap out of the amount of loans that they're willing to give you anyway. And so the process of buying and holding contains natural limitations that tend to attest to a attract people who are more of a long-term buy-and-hold constitution, like people who are not quite as worried about recycling their money into multiple deals. They're not looking at this from a framework of how can I be as aggressive as possible. They're looking at this from a framework of how can I

lay a stable foundation. By comparison, if you, the type of investors who really do want to take that same 50 grand and recycle it over and over and over and over, and they don't want that pot of money to get diminished. They want it to grow. They are often the ones who will buy that property at an undervalued price. They get that instant equity at the closing table. They renovate the property. They sell it. And by selling it, they're able to pull all of their money out of the deal. And then they end up with 60,000 or 70,000 that they can put into the next deal. And then they repeat that process again, and then this time they end up with 70,000 or 80,000 that they can put into the next deal and so on and so forth. They're investing in a way in which their goal is business growth and expansion rather than long-term stable income.

The analogy, it's not a perfect analogy, but the analogy in the stock market world might be a growth stock versus a fixed income bond. one is optimized for growth and the other is optimized for a fixed income stream or a dividend. Essentially what I'm saying is I don't think that you need to worry about competing with the very aggressive real estate investors who are out there because they are, by definition, going to be interested in different types of deals that you're interested in. And even if it is the case that you find yourself competing with a house flipper on some fixer-upper property, remember, as a buy-and-hold investor, you only need to buy, what, one property per year, maybe two properties per year. And so the volume of deals that you need is significantly smaller than the volume of deals that some of these other investors are are playing in, which means that even if you do miss out or get outbid on a property by a different real estate investor, you know what? You've got an entire year to buy one property, whereas they

might be buying a property a month. So I wouldn't worry about competition from other more aggressive investors. As long as you stick to the fundamentals, and if property number one, you happen to get outbid by a different investor, that happens. You're not trying to buy a property a month. You're trying to buy a property a year. That means you have time on your side, and that is your competitive advantage. Thank you for asking that question. Again, if you have any other real estate questions, please feel free to ask. I'm happy to talk about this topic. I just want to make sure that I'm also including questions about travel and entrepreneurship and side hustles and the psychology of money. I want that to also be included

in the conversation as well. So thank you. So we're going to try something new. This is an experiment. I'm thinking that at the end of these Ask Paula Solo episodes, these episodes that I host by myself, I might cap. off the end of each episode with a short 10 to 15 minute interview with somebody just as an end piece for the episode. And so two weeks ago in episode 199, we capped off that episode with about a 15 minute interview with J Money from the blog Budgets Are Sexy. Today, we're going to do the same thing. We're going to cap off today's episode with just a short 15 minute interview to round things out. I don't know if this is a format that we're going to stick to long term,

but I figured I'd experiment with it for a few episodes and see how it goes. And so I thought that today we could do that. We could cap off today's episode with this short 15-minute interview with Greg Wilnow. Now, Greg is one of the two people on my design team. He is the guy who redesigned Afford Anything.com. He and his wife, Hannah, are digital nomads. They went from working nine to five jobs in Florida to having this all. awesome and very enviable life.

So let's hear from Greg how he did it. Here's Greg Will now. Hi, Greg. Hey, Paula. How are you? I'm great. How are you doing? I am doing awesome. You have a pretty awesome life. You are exemplifying the entrepreneurial laptop lifestyle, globetrotting life.

So let's talk about how you got there. Yeah, sure. So about five years ago, I was a construction worker, crawling around in attic, installing air conditioning in Florida. And I kind of had this revelation when I was in the attic in the middle of summer in Florida. And I was like, man, this is terrible. At the time, I was also a musician on the side. And I made a decision that I was going to start earning income doing my music and what I loved and performing live gigs.

And then a month after that, I started earning income from my live performances. It started out small, you know, like $800 the first month. but then it turned into a thousand the next and then it kind of grew from there. And that kind of gave me a realization and that the only reason I wasn't earning income doing what I loved was because I had never tried. You know, I just assumed it was always just destined to be a dream. So it's just amazing what happens when, you know, you make a decision and stick with it. This is fascinating. Let's go through this piece by piece. First of all, how old are you?

I'm 31. 31. So five years ago, you were 26 years old. no college degree working as a construction worker. How long had you been in that job? Had you been doing that since you were 18? Yep. And what was it that created that turning point? I think that what it was is I had always known that I was meant for something more.

I just didn't believe that I had what it took to do it. And I think I got to the point where I was just so fed up with my situation and my that it motivated me to just stop waiting for the perfect moment and just jump right in. I read seven habits of highly effective people by Stephen Covey, and the first chapter in that book just blew my mind. The first habit is, you know, be proactive. And it's that, you know, I'm responsible for how I respond to situations in life. And the revelation for me was I had always thought that things outside of me controlled my

situation instead of how I chose to respond to them. And I thought that I couldn't make that decision. I thought that I couldn't change my situation and get a different response. If you think the problem exists outside of you in others or in the world, then that thought is your problem. And as soon as I kind of realized that, it just changed my thinking. And I think that was the first thing that had to change was the way that I thought about what to do. And from there, my life totally changed. I went from thinking like a victim and that I couldn't make decisions and do things for myself and pursue my own path to realizing that I could do anything that I wanted. And that was definitely the turning point in my life in that attic. Wow. If anybody ever doubts the power

of changing the way you think about and your mentality, that's a perfect example. Five years I went from that to this. It's pretty cool. Seven Habits of Highly Effective People is one of those books that changed my life so much that I try to go back and reread it once a year. Absolutely. As your mindset shifted and as you decided, all right, I don't want to work construction in Florida in the summers anymore, you initially started taking control of your career and your income by leaning into your music career. How did you make that happen?

How did you get that first $800? I started thinking about ways that I could bootstrap things. So I started asking people for money at my live performances actually. I started asking for tips and donations. And that was the biggest thing that I did to start making money. But it was, you know, it really wasn't that as much as it was learning how to do things on the internet and leverage the internet and the scalability of the internet that I was able to kind of compound that because you know you're limited as an individual you're limited to your time and energy you know you can only do you know so much with your time as you know paula so the benefit of the internet is it creates leverage and scalability

so the internet allowed me to use my life performances to acquire leads and grow my audience and then earn incompatively on the back end leveraging the attention that i was getting at my live performances because when you're online, you know, it's kind of hard to stand out. But when you're on stage as a musician, people are paying attention. So I was able to leverage that attention to acquire leads and then follow up with them automatically. And that was my first discovery of using the internet as a way to earn income. Yeah. And then while you were playing, how would you gather the audience's contact information? What I started doing is announce a song and say, hey, if you want this song for free, go to this website, and enter your information, I'll email it to you.

And then I start playing the song. And that's how I would acquire leads. In any given night, how many leads would you get? How many email addresses would come out of something like that? The first time I did it, I got 50. Wow. But it depended. It depended on how many people were there. And the more I did it, the better I got at making a compelling offer. So it varied from 50 to 75 to 125 sometimes at the most. but yeah, it really worked well. How big did that list get and what did you do with it? It got pretty big. A few thousand, I started working out deals with venue owners in that,

typically what I would do before, what most musicians do is they promote a gig or a performance saying, hey, come see my show, come see us play. And that's a really, like, lame value proposition, you know? Nobody really cares. Right. I'd start working out deals with venue owners, like buy one, get one free. So instead of saying, hey, come see his play, it'd be like, hey, come see us play and have a free drink. And then I would announce that deal to my email list.

So that's what I would start doing at first. Like, I didn't have an auto responder or anything like that. I just had that. And that alone made an amazing difference in getting more people to come out to gigs. And by doing that, you were able to pack venues. Exactly. Wow. Yeah, so I started creating leverage for myself.

Instead of the venue owner doing me a favor, I was giving me the opportunity to play on his stage. I was doing him a favor or her a favor. And it became like it's perpetual growth, you know what I mean? Because I was able to get more people out. More people would bite their friends, obviously, because if you're getting a free drink, you know, that's pretty compelling to another person.

So I had to do a lot less work in trying to convince people to come out. I was being ignored on social media for Facebook. You know, most musicians are. So instead of using Facebook to announce the show, I'd use the email list. And so it was a pretty drastic shift in what happened, you know, and I kind of stumbled on that. So this is a fantastic example of how growth builds upon itself. Because you're packing venues and the more you pack venues, the more popular something gets, the more popular it gets. How did that affect you financially?

As your crowds grew at performances, what impacted that have on your actual income? The big thing that changed is that it inspired me. You know what I mean? I started to believe that this really was possible. And a lot of the income went back into my business, you know, buying merchandise to then resell, investing in more infrastructure, better websites, the ability to acquire leads and then follow up with them automatically via auto responder. So the income grew slowly and steadily.

And then through that, it kind of gave me the inspiration. to start my website, musician monster.com, and then teach musicians what I was doing on that website. And so then I made a course on musician monster.com. And that turned into more income and help, more importantly, serving more musicians and teaching them what I was doing. So, you know, it just grew on itself because I was getting inspired. I was getting excited. And I was like, I went from being like, oh my gosh, starving artists, right? Like, we expect that to be like, no, it's, Screw that. I'm not going to think that way anymore. I'm going to put it in my own hands, the ability to earn income in my own hands, and I'm really going to do this thing. And I just did it.

Wow. So at this point, were you still also working construction as a day job? Like, were you balancing a full-time, a very demanding full-time job with this? Yeah, so I was. So it was about a year and a half after I started making income with my music that I decided to just take the leap and quit. How did you balance all of this? I started getting pretty selfish with my time, I think is the best answer. I stopped investing as much energy into other people and growing their business and invested more into growing my own. So I started saying no more and I started investing at the time that I was investing

growing somebody else's business into growing my own. And that compounded over a period of 12 to 18 months, and it gave me the momentum that I needed to quit my job because I started believing it was possible. You know, it wasn't so much that my income was totally replaced yet, more so that I believed that I knew that I could do it. And it was almost me saying to the universe, I'm doing this. At the time that you quit your construction job, your income that you were making as a musician hadn't replaced your construction income yet, but, was it close? Yeah, it was close. It was like 75%. Nice. It created a lot of pressure for me to deliver. And I did that on purpose. I wanted to create that urgency. So I burned the boats, if that makes sense. You know, I made it so that I had

to earn more income. Yeah. There's a certain drive that happens when you're hungry. Yes, absolutely. There was no plan B anymore. After you quit your day job, how long did it take before the money that you began making as a musician and as a self-employed person replaced what you had been making within your day job? It was about eight to 12 months. What were some ways in which you changed the way that you were doing business after you quit your day job? How did life change and business change once you no longer had the day job distracting you? I was able to transition from just using live performances.

to earn income, to learning more about how to leverage the power of the internet to scale what I was doing and my live performances. And how were you learning more? I was learning about copywriting. I was learning about internet marketing. I think how to, instead of thinking like a scammy internet marketer, I started to learn how to be an individual who is more focused on adding value and earning trust instead of trying to trick somebody. to doing something, I suppose. And you were applying these lessons to building your brand as a musician and selling your course for other musicians, right? Right.

So it was a combination of learning how to leverage the internet from my live performances to follow up with people through an auto responder, sell merchandise online, and also take that information that I was learning into my music education business where I was teaching musicians how to do some of the things that I was doing as a musician myself. So that required me to learn things like, I think I said earlier, copyrighting, email marketing. I had to become a developer, right? Because I didn't have the budget to do all those things to hire somebody to do that. So I had to do all those things myself. I started a podcast. So I had to learn how to become an audio editor. I had to learn how to design featured images. You know, I had to learn to learn a lot.

And it was all hands-on. Quitting my job gave me the ability to do that because I had additional time to do so. And so that's where my additional time went. How did you learn these skills? Free content. I learned a lot from Pat Flynn, Derek Halper. I think those were my two biggest influences in learning. And I had also hired a financial coach to kind of help me learn some of these things,

but also to kind of point me in the right direction to make sure that I was on track. And what was going on within your marriage at this time? Your wife was working as a graphic designer, right? My wife was working as a graphic designer, and she wasn't totally 100% on board with me yet, and that she was still thinking about climbing the corporate ladder. But my wife is, you know, she's very supportive. So she believed to me and supported me through it, but she wasn't 100% on board with the whole thing. So when you say not on board, you mean she supported you becoming self-employed, but she herself did not want to? Exactly. So at this point, it probably seemed as though you would continue to grow as a self-employed musician, and your wife would keep her stable W-2 income.

Was that what you'd imagined at that time? I was starting to realize that I wanted my wife and I to be on board with this because it was. starting to create tension. It was creating tension because we had a different mindset. And I really wanted us to be on the same page with this. So I started to kind of talk about it with her, I suppose, and see kind of where she was at. Because we just got married, like less than a year before that. So what we did is one day, I went into one room and she went into one room. And we both wrote down what we wanted the end of our lives together to look like. And then we came back together and then reviewed them and they were the same thing. So what we did is we clarified what we both wanted

together and then we then decided how best we would get there. And the things that she wanted the most had absolutely nothing to do with a corporate life and what she thought she wanted. It was all about family and free time and how we could spend more time with each other and influence and help other people and our children and leave a legacy of financial independence and wealth. And that was exactly what mine was. And that really created unity with us. And we then realized that, you know, the corporate path that she was on wasn't what she wanted. That ended up being kind of the catalyst to plant the idea in, in my wife's mind, where maybe this could be the thing that helps me break free from my day job and transition to going into business for myself. From there, at what point

did you decide, hey, let's go overseas. Let's run these businesses from different countries. So when we first got married, we purchased a house. We went to Lowe's to get some, I don't know, some hardware or something for our kitchen cabinets or something. We were sitting in Lowe's, the parking lot, talking about the fact that we were now, I guess, self-employed. We had made the leap. and it was about six to ten months after my wife left her job that we were sitting in the parking lot at Lowe's. I kind of just said to my wife, if we really wanted to travel, we could. There's nothing stopping us.

Like, we don't have to go to work every day. So what if we just did it? And my wife kind of looked at me blinked a few times and was like, oh my gosh, you're right. Because that was always something that was just like a pipe dream, you know? And I said to my wife, if we decide not to do it now, will we give ourselves permission to feel okay about it knowing that we could have down the road and we didn't take the opportunity? Could we live with ourselves? And the answer to that question was no.

And so how long after you made the decision, how long did it take between making the decision and selling the house and landing in your first country? 12 months almost to the day. So we were in Europe for 12 months and then we went back to the States for the holidays, 2018. And then we flew out again a few months ago, beginning of 2019. We were in New Zealand for two months, and now we're in Bali. And we're heading to a few more Asian countries before going back to the States in July of this year. And then we're going to do the whole RV thing. So we're going to do the Great American Road trip when we get back. And other than that, I'm not sure. But yeah.

What have been the biggest challenges about working for? overseas? The time zones, but in all seriousness, I think always needing an internet connection, that's really it. Other than that, there really haven't been that many challenges. Traveling has become comfortable to us now. So you tend to get comfortable with being uncomfortable and really get good at kind of just problem solving on the fly.

But the two consistent things are the time zone differences and making sure that we always have internet connection. Yeah, absolutely. Well, thank you so much, Greg. Where can people find you if they'd like to learn more about you? So you can check out our design website, willnauddesign.com, W-I-L-N-A-U-D-Dign.com, and musician-monster.com. Those are our design website and mine musician website. Thank you, Greg, for sharing your story with us. That's our show for today. If you enjoyed today's episode, please do three things. First and most importantly, Share today's episode with a friend, a colleague, a family member, anyone whom you know who you think would enjoy learning about money and life improvement and how to become a better, more developed, more self-mastered version of themselves. Sharing this episode with your friends, family, coworkers, that's the single best way that you can support this show, not just the show, but this whole movement, the fire movement, this enthusiasm that is resurging in which people are really paying attention to their money.

and taking control over their lives. Let's grow this movement. So thank you so much in advance for sharing it with your friends and your family. That's the biggest thing that you can do. Don't forget to hit the subscribe button or the follow button in whatever app you're using to listen to podcasts. And please leave us a rating and a review in the app that you're using the listener podcasts. If you go to Afford Anything.com slash iTunes,

that'll take you to the page on Apple Podcasts where you can leave us a review. Coming up on future episodes, Nomadic Matt, who is famous for having traveled full-time for more than a decade, joins us to talk about traveling full-time for more than a decade. Also, Gabriel Weinberg and Lauren McCann, the authors of the book Super Thinking, join us to talk about mental models and how to improve the skill of thinking, the frameworks through which we ask and answer questions and look at the world. And New York Times bestselling author David Epstein joins us to talk about why generalists thrive in an increasingly specialized world. All of that is coming up within the next month here on the Afford Anything podcast, so make sure that you are subscribed to this podcast so that you don't miss any updates. We have a free ebook. It's called Seven Expensive Rental Property Mistakes to Avoid. You can download it for free at Afford Anything.com slash real estate.

If you want to say hi to other people within the Afford Anything community, just head to Afford Anything.com slash Facebook. That's where you can find our Facebook group. And if you'd like to say hi to me, best way to reach me is on Instagram. You can follow me there at Paula Pant. That's P-A-U-L-A, P-A-A-N-T. Thank you so much for tuning in. My name is Paula Pant, and I will catch you in the next episode.