Afford Anything - Q&A: We Saved $1.2 Million But We’re Still Renting. Should We Buy?

Episode Date: June 10, 2025

#615: Emily is nervous that buying their first home will derail her family’s journey to financial independence. What’s the smartest way to deploy their savings and stay on track? Based on cap rate calculations, Paul’s real estate investments have appreciated beyond their sensible holding point. Should he sell his assets, or is there more to consider here? Mike is recently retired while his wife still works. With a paid-off home and healthcare already taken care of, what are best practices for drawing down an investment portfolio?   Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! P.S. Got a question? Leave it here. For more information, visit the show notes at https://affordanything.com/episode615https://affordanything.com/episode615 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Hey, Joe, you're doing a big renovation on your house, right? Yeah, like the back of my house has been torn off. And I'm guessing that has thrown a wrench, no pun intended, in your financial plans. Yeah, we put long-term stuff on hold because of that. Yeah. Well, you know what? We're going to field a question today from someone who long-term wants to build financial independence, short-term wants to buy a home.

And the thing is, sometimes those goals feel a little incompatible because, man, the money that you spend on the down payment, the repairs, to all of the costs of buying a home can really take a chunk out of that portfolio balance that you're trying to grow. Don't I know. Yeah. Welcome to the Afford Anything podcast, the show that knows you can afford anything, but not everything. This show covers five pillars.

Financial Psychology, increasing your income, investing, real estate and entrepreneurship. It's double eye fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia, every other episode, ish. I answer questions from you. And I do so with my buddy, the former financial planner, Joe Salci. Hi. What's up, Joe?

Oh, I am so excited for these questions. We got some great financial planning questions today. Incredible questions. The first one comes from Emily. Hi, Paula. I was so happy to hear your rant in defensive renting on episode 599. My wife and I have really taken this perspective to heart and have been renting in a high-cost East Coast metro area with great tenant protections for 15 years.

However, we are ready to make a big move and buy a house. How should we approach this decision at this stage of our lives? We are married in our early 40s with two kids, a three-year-old and an almost one-year-old. We really want to move to the Midwest to be near family and put down roots in a great school district by the time our oldest is in kindergarten. We're also at or approaching Coast-Fi and would like to be work-optional in a decade. We currently have $1.2 million in invested assets plus an additional $120,000 set aside in a high-yield savings as a down payment fund. This is in addition to about $85,000 we keep in high-yield savings as an emergency fund. Depending on if we move this year or next year, we might be able to save a bit

more. We also might rent for a year in the Midwest before buying. In our current area, we spend an eye watering $11,000 a month due to high rent and child care costs, but should be able to cut that down to more like $6,000 a month by the time both kids are in school. And of course, depending on the size of our mortgage. Our estimated housing budget is $500,000, which should get us into a great school district near good jobs, but the final price could be a bit lower or higher. given our ages, our net worth, and desire to be work optional, should we be putting down a huge down payment? Should we consider a 15-year mortgage? Or should we get comfortable with the idea of paying a mortgage into our 70s? Thanks for everything you do.

Emily, I absolutely love this question. What an exciting time, Paula, for Emily and her family to be making this move. Yeah, I'm very excited for you. When she said East Coast, high cost, great tenant protection. I was like, oh, she lives in New York City. But she's moving to the Midwest, which is where I'm from. I'm from Cincinnati, so I really hope you're moving there. No, she's got to move to Kalamazoo, which is where I'm from. Oh, that's right. I forgot you and I have that Michigan, Ohio rivalry. How did I forget about our rivalry, Joe? And I'm off the show. Oh, got to go. Wouldn't want a Michigander on the show anyway. As long as you're not in Columbus, I think we're fine, Paula. You know, I'm not a football fan, but if I were, I'd be OSU. Oh. And I thought Paula was so cool before that.

Emily, as you can hear from the conversation Joe and I are having, you're going to love the Midwest. It's going to be a lot of fun. But let's get you into this house. I've got a couple of scattered thoughts. But Joe, you know, I know you've got a few as well. Well, I just want to draw attention, Paula, to one thing that I think is really important that Emily said, this idea that she might rent before she buys.

Emily, I'm 190,9 million percent in favor of that. And the reason is your first impression of any city, any area could be 100% wrong. Even if things look good for the area that you decide to buy, you often have a ton of blind spots, meaning there might be areas you like even better that are across town that had you'd known they even existed, you might have bought there instead. So this idea of renting first before you buy, I really, really super like. Yeah, I agree with that. And to be clear, it's not for financial reasons. It's purely for you finding a place that fits you reasons. Even if you just rent for six months, it doesn't necessarily have to be anything long term. I'll tell you a quick story.

I lived in Atlanta from 2010 to 2015. And when I first moved there, I knew nothing about the city. I went to an outlet mall on the outskirts of town and walked up to the cashier. And I was like, hey, what neighborhoods here are good? And the cashier gave me really good advice. Really? Yeah, great advice. He was like, what I recommend you do is just get a sublet for like two or three months and try a neighborhood.

and see if you like it and then get another sublet for another couple of months and try a neighborhood. Now, Emily, now you may or may not be able to do that depending on school districts and needing to be wanting to be a bit more stable and grounded. But the ethos behind that, which is minimize your commitments and spend that initial time exploring, like the ethos of that in whichever way you can most practically apply it to your own life, I think is very valuable when you're, getting to know a new city for the first time. Websites now like Redfin and Zillow also will inside of a town, they will show you the data on the school district as well. They'll give you some data on crime in an area. So you can dive into those stats as well as you're exploring online where you want to go.

Emily, for a $500,000 home, you've got a 20% down payment. And I don't see any reason not to put the full 20% percent. down, given that you also have a great emergency fund. You also have plenty of investments and you're going to be rapidly, rapidly building more since your cost of living is going to drop from 11,000 down to about 6,000. And by virtue of making the full 20% down payment, you get to avoid PMI or MIP. You get to avoid the added costs that come from having that smaller down payment. So I don't see any reason not to put the full 20% down. Well, in fact, Paula, can we enlarge this just for a second before you go further down the rabbit hole?

Yeah. Do you think this is going to be a problem for Emily at all? No. Me neither. Me neither. I think Emily, you lived in a high-cost living area. I think when you move to the Midwest and lower-cost living area, I think this is going to be easy-peasy. This is going to be so, so, so easy.

Actually, you know what, though, can I caveat that with the one thing that might be a worry or a threat? Sure. She mentioned that the homes that she was looking at, you know, in a good school district, were a reasonable distance from jobs. The implication, and I'm kind of reading between the lines a little bit, is that she or her wife might have to look for new jobs once they reach this new location. If that's the case, and if they're unable to find a job or unable to find the type of job that would pay them what they used to be making, right? If it's the case that either of them, has to transfer jobs, then there's a bit of uncertainty there. But that's more of a logistical wrench, you know what I mean, than a monetary wrench? Well, I mean, let's say they're expecting that it would take three months to find a job, and they're budgeting for that, but it ends up taking nine months to find a job. Oh, I see what you mean, sure, in that way, right?

Yeah, exactly. Yeah. That's the one area. And I don't even know that they necessarily need to find new jobs. I'm just kind of making an inference from the fact that she mentioned that the neighborhoods she was looking at were a reasonable distance from where jobs would be located. You know, it's funny is that I don't think that the goal is to not have a mortgage if she's built her coast-fied numbers on a reasonable rental expectation.

So I'd love to hear what number she's using to be coast-fi because if it includes Paula an amount of money that she was going to spend on rent every month, then all she has to do is going to be to figure out how to make up the difference between what the mortgage amount is and what that rental number is that she's been using in her expense chart for her cost fine number. Right. Which is another reason to make the full 20% down payment because it also is going to lower the monthly mortgage cost.

Bridge that gap, absolutely. Yeah, exactly. Not only in terms of borrowing less, but also in terms of, again, not having that PMI. That is a reason why. I would use Emily a 30-year mortgage if the interest rate between the 30 and a shorter term mortgage are fairly close. I looked a couple weeks ago at a couple institutions and they looked to be fairly close then. So I like the 30-year because that lowers your monthly payment by a ton. Yeah.

And then what I like to do is go to the institution, figure out how much I want to pay, set up an automatic payment of the amount that I want to pay, which is going to be more than that 30 years. And in that way, I'm getting the best terms I can get from the bank. And I've set up my own repayment based on what I want to do. Right. Right. Yeah, exactly. And I wanted to highlight that as well because Emily, in your question, you asked, you know, should we be okay with the idea of holding a mortgage into our 70s? Just because you take out a 30-year mortgage doesn't mean that you have to pay it off in 30 years. You can take out a 30-year mortgage and pay it off in 30 days if you're.

want, or you could pay it off in 22 years or in 27 years or in 19 years, right? The beauty of a 30 year mortgage is that you have that flexibility, you have that grace, you have that lower monthly payment, so you can take the full 30 years to pay it off if that's what you end up choosing to do, but if you want to pay it off faster, there's nothing is stopping you from doing it. And my suspicion, so right now you mentioned that child care is a major expense. You highlighted currently, your kids are three and one. But when your kids are seven and five, child care will stop being this level of expense. And so it makes a lot of sense to me that right now, while you still have heavy child care expenses, you might want the flexibility of making a lower housing

payment. But later, when those child care expenses start to diminish, you then might want to throw more money at the mortgage. So the beauty of a 30 years that you have the flexibility to adjust the amount that you pay to your lifestyle and to your other financial obligations. Yeah, the child care number. There were two big times, Paula, when I saw a cost drop dramatically. Number one was diapers. Oh, my goodness. Diapers for two kids. I felt like I was buying gold. That would just, oh. And then second when the cost of child care went down significantly because they spent part of the day in school in kindergarten and then even more dramatically the next year in first grade, all of a sudden there was money in my wallet that I didn't have.

Big, big change. And then they went to college. Right. That's what I lost my hair. Then it was completely gone. You know, it's funny. We have in prior episodes talked about different facets of people's lives where I've used the analogy, think like an investor, think like a CFO.

This is another area, Paula, when it comes to taking on debt, when you want to think like a chief financial officer of a company because the average person walks into a bank and they say, what are the terms of your loans? And they think that because the bank offers them term X, Y, and Z, I have to repay that loan according to those terms exactly. What a CFO will do is find the best terms the bank will give them for their situation. They will separately calculate what they want to do, which is going to be something completely different, and then they will create a repayment process based on their plan, not based on what the bank dictates. You should be thinking about your debt and what's your debt strategy and how does this help me get closer to financial independence. For some

people, it's stretching the debt out. For other people, it's giving the flexibility, which I think is in this case. If for some reason the two of you don't have jobs for a while, and Paul had, your point, you, you have already own your home and you're between jobs, well, that 30-year payment, that minimum payment's going to be a lot less than a 15-year loan payment would be. So there's going to be a lot less stress in your life. But if you're gamefully employed, you can then jack that number up to pay it off much like a 15 or to your point of 12 or a 10 or whatever time frame you want it to be. Right. Ooh. So I don't know the job situation, but one thing that I will say is you'll want to game out. I know Joe and I have previously recommended renting when you first get there so

that you can learn the neighborhoods a little bit better. But you'll want to game that out alongside whatever you think your employment situation is going to be. Because if one person, for example, loses their job and then doesn't get one for a while, that's going to affect your ability to qualify for a mortgage. So you're going to want to game that out in terms of if somebody's planning on quitting or transferring. Again, I don't know what your employment situation is, but the root question of will I qualify for a mortgage will play a role in the timing of when you buy this home. I also like the idea of while you are renting, if that ends up being less expensive

than what you think your mortgage is going to be, to also try to put away the difference to get used to that lifestyle expense. So ahead of time, let's say that your rent and your rent and your new place is $1,000 a month and your mortgage is going to be all in, it's going to be $1,500, take the extra $500 and have that go into a savings account so that not only do you have this money available for furnishings, for fix-ups of the inevitable Home Depot or Lowe's visits that are way beyond what I would, every single time I forget, Paula, how many trips to Lowe's I have whenever I buy a house.

Yeah. I know I've said this before on a previous podcast, but there's a period of a few months where I'm like, why do I bother to get paychecks? Why not just send it directly to Home Depot? I know. Just cut the middle. Why am I the middleman here? Just cut the middleman. Send the paycheck directly to Home Depot because that's where it's all going. Actor George Wendt died a few weeks ago. He played Norm on the old show Cheers, where whenever Norm would come in the door, everybody in the bar would go, Norm, I feel like every time I have to buy a house, I walk into Lowe's and everybody goes,

Joe, you're back. This idea of playtesting, there's a certified financial planner in North Dakota who I just love his work. His name's Benjamin Brandt. And Benjamin talks a lot about tying the future, what your goal is for the future, Paula, into what you're doing today. So somebody who wants to geo-arbitrage, let's say, go live there for a month and see what it's like. I love this idea.

It's very similar to your idea of the checkout clerk telling you, go rent for a month, get used to the different neighborhoods that you're in. If you think that your expenses are going to change in the future, playtest it by putting extra money into a savings account every month to playtest what the new budget is. The more you can tie what happens today to your goal in the future, the easier that transitions, going to be. And how often if you and I answered questions for people around the topic of change and how hard it is to make a change, right? I mean, those pivots can be really difficult. So by playtesting ahead of time and making the future equal what you're doing today, or at least on a glide path toward that, the easier life's going to be. And historically, the better that change is going to be in your lifestyle. A frustrating thing for me, especially when people retire, is

they think they want to live in some place where they don't know anybody. They move there. They've been hoping it's great forever. And they get there and guess what? They don't have any community. They don't know anyone. They end up not liking the people there. And it is this huge frustration that this thing that you built up in your mind for years and

years ends up not being the thing that you truly wanted. Actually, I just talked to somebody the other day who told me that she and her husband, they have four kids and they have been living in their current location. for a couple of years, she was like, we still haven't made any friends. We pretty much just hang out with each other. For the first three months, six months, we thought, okay, fine, it takes some time to make friends. She's like, but now it's been years. Yeah, that's not good.

Yeah, exactly. Yeah, so now they're thinking about moving. Then kids are going to have to transfer schools and it's a whole thing. So, yeah. Yeah, I love this idea. All that, Emily, wasn't for you. Part of that was for you, though. idea of play testing, though, which is really, really the point that I think we both wanted to make is that mortgage, have it be the most flexible terms possible before you buy go rent and check out different parts of the area where you're thinking about moving. And I think you're going to be a heck of a lot happier.

Yeah. So I think of it as a test drive. It's super. Super great. Take it for a test drive. Any life change, take it for a test drive. You know, the science behind that, Paula, is if you get really set in one spot and it turns out that you're wrong, the science behind being wrong and then defending yourself, you will often defend yourself forever going, no, no, no, no, no, and your brain will try to prove to you that you're not wrong. Your friend who is in a neighborhood that they don't necessarily think might be a fit, their brain in the background goes, well, maybe we even tried hard enough. Maybe there's something. we could do. Maybe there's something that we, because I wasn't wrong to make this move. But what I love about the signs behind flipping that and instead playtesting, now you're a lab rat. Now we're doing what Carol Dweck calls having a growth mentality. And now I'm not trying to prove that I was right all long. My whole premise is I think I probably will be wrong. So I need to prove myself right. And that's a whole different set of brain functions that happen when I'm trying to discover what could possibly be wrong.

Where am I wrong? Where's the flaw in my thinking versus defending what might be a false premise? Right. We've strayed from Emily's question at this point. But if nothing else, where it ties back is in any assumptions that she is making about what her budget will look like, I'd say at two separate points. there's what I consider the transition to the Midwest, and then there's once they've settled in the Midwest. Roots.

Yeah, exactly. So if you think of the transition bucket as the time when you're renting for a little while, you may or may not be looking for a new job, you're covering all of the moving expenses, you can't find your pots and pans so you're eating out more, you don't know where your socks are, so you have to buy new, you know, like there are all of those expenses that come with moving. And so there's there's the budget at the time of transition, which has a lot of anomalies and a lot of one-offs and a lot of uncertainty. And so there's probably a set of assumptions around that. And then there's also the budget around once they've purchased the home, they're in it,

they're settled, they've unpacked, they know where their pots and pans are so they can cook at home now. They know where their socks are, so they don't have to go out and buy an emergency pair. Everything is running smoothly. And then there's a certain cost of living that associated with that and that cost of living is relatively stable. Right. And so we're kind of working on these, anytime that anybody moves, we're working on these two separate sets of assumptions, the assumption around what the transition costs will be and the assumptions around what the once I'm settled costs will be. So, Joe, to your point, whatever you think, that those costs are going to be, the more that you can set aside bits of money for the event

that you're wrong, like set aside bits of money for margin of error, the better. That being said, I don't think Emily's going to have any problem. I don't think so either. Yeah, given that she's got the $85,000 emergency fund. Yeah, her flexibility and her planning and the fact that it's a much lower cost living areas she's moving. It's going to be really, really fun. Yeah, exactly. And lower cost of living, by the way, is it's not just the cost of housing. It permeates to the cost of groceries, the cost of Ubers, a lot of the things that

you spend on at the day-to-day level. I noticed that a couple weekends ago, Paula, we went to visit my daughter in Boston again and just, you know, we went to a coffee shop, had a couple of fufu drinks. and sandwiches for lunch, three of us, and it was $70. Welcome to Boston. Versus Texarkana, that might be 25. Yeah, and in Boston, you not only have to deal with the higher prices, but also you have to own a car so you don't even get a break there.

In New York City, you don't have to own a car. In fact, it's actually easier to not. So we took the train in Boston In quite a few places. You're right. It doesn't permeate as many places as New York. Right. But I was surprised how much I got around on the train this last time I was there.

You can, but depending on your lifestyle in Boston, oftentimes a lot of people find that they'll need to own a car. Behoves you to have a car more sure. Exactly. Whereas in New York, sure, there's a higher cost of living. But because you don't own a car, not having a car, not having a car, not having the cost of insurance and gas and repairs and maintenance and all of the expenses associated with car ownership, being able to just eliminate that whole category offsets some of

the higher expenses that you'll pay in other arenas. That's nice. But Emily, in conclusion, for your question, love that you have a strong emergency fund. I totally think you can make a 20% down payment on the home and take out a 30-year mortgage and pay it off at whatever pace you would like to pay it. off, but give yourself the flexibility of having 30 years as an option. Thank you, Emily, for the question. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and

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That's your commercial payments, a fifth-third better. The holidays are right around the corner, and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need servware and cookware. And, of course, holiday decor, all the stuff to make your home a great place to host during the holidays. you can get up to 70% off during Wayfair's Black Friday sale.

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mental health by creating a future where Canadians can get the help they need when they need it, no matter who or where they are. From November 25th to December 2nd, your donation will be doubled. That means every dollar goes twice as far to help build a future where no one's seeking help is left behind. Donate today at camh.ca.ca.givings Tuesday. Our next question comes from Paul. Hey, Paula and Joe, love the show. I'm trying to evaluate a 4% withdrawal. guideline versus a CAPEX return rate on a rental property. Here's the backstory. I bought a 3,300 square foot primary residence in 2011 as a short sale in a highly desirable neighborhood. After a year of fighting to get permitting, I was authorized to build the perfect for me second home, which is 1,800 square

feet on the same one third acre. I moved into this 1,800 square foot home in 2017 and have leased the larger home since. The lot cannot be divided, and if I were to sell it, have to sell both properties at the same time as one property, one lot. Here's the numbers. I purchased the 3,300 square foot house for $645,000, currently valued at approximately $2.3 million. I built the 1,800 square foot house for $450,000 currently valued at about $2 million. If I separate, I separated the current value so that you could do the cap-x rate calculation on the rental, but the total value of the property, if I were to sell somewhere around $4.3 million and I owe $350,000.000. I owe $350,000. at 2.75 interest on a 15-year loan with about six years to go.

So I rent a larger home for 10,000 a month and live in the smaller. I love my neighborhood that I live in, and the house that I built is perfect for me, but I'm not thrilled with being a landlord, even though it doesn't take up a lot of my time. It's not like I could really turn it over to a property manager because I live in the adjacent property, and I'm sure the tenants would always look for me to resolve their problems. I also feel like that at $10,000 a month,

I'm not able to track very long-term multi-year tenants because at that price, they're interested in a shorter-term solution while they look to purchase their own home. Vacant months have been almost zero. I know that the cap-x rate on the 3,300 square foot rental home is not good based on the $2.3 million current market value, but the rental income is $120,000 annually.

However, if I were to use a withdrawal rate guideline of 4% on the same $2.3 million, that would equal $92,000. annually. I'm not really sure how to figure out how to apply long-term capital gains taxes and real estate commissions to this decision since I don't know very much on the total property in relation to its value. So is it better to collect $120,000 in rent or withdraw 4% equaling $92,000 if I sold and invested the proceeds, less long-term capital gains in the total stock market index? Of course, if I did this, I'd have to find someplace new to live myself and probably

would spend around $1.75 million on a smaller home in the same neighborhood. I have a well-diversified investment portfolio of about $3.5 million separate of this property that generates more than enough for my lifestyle. I look forward to your debate about this situation. Paul, thank you for the question. First of all, that's quite impressive appreciation. You bought this property for $645,000, and it's now worth 2.3 million. And the other property, you built for 450,000, and it's now worth 2 million. You're in a neighborhood that has appreciated like gangbusters.

That is some serious, fast appreciation. He mentioned getting a distressed property. Yeah. Man, if you can find those distressed properties, it's very, very, very, very hard. But if you were able to, I mean, that's a big life-changing moment. It's a huge life-changer. What I often tell my students in our course, your first rental property, is there's a matrix that I'll show them.

And it is what I call the effort reward spectrum. If you are looking for move-in ready homes on the MLS, that's the easiest way to buy a home. It's the way that most owner-occupants or retail buyers purchase their home. It's the lowest amount of effort, but it's also the lowest level of reward. Now, if you've got more money than time and you just want to do something quick, but you don't want a lot of your time to be taken up, that's a perfectly fine place to be, right? But if you just think of this as a spectrum, if you want to be further along on that spectrum where you are going into higher effort, higher reward situations such as looking for off market deals, which might mean having a direct mail campaign or driving for dollars, you know, buying those off market properties and particularly buying distressed off market properties, that's where you have the opportunity to have massive, massive, massive. value add. And so the appreciation that he has seen, and there are two types of appreciation. There's forced appreciation, which is through repairs, through renovations, through upgrades, improves the property, such that every dollar you spend on it yields far more than that dollar that you put in, right? That's forced appreciation. And then there's market appreciation,

which is completely outside of your locus of control. And so the appreciation that he has seen, and I have to assume that this is a combination of two, and I have to assume that the market appreciation in that area must have been incredible. And also, given that he has indicated that he spent a year fighting with the permitting authorities, that he has put a ton of work into the forced appreciation on this property. But wow, those numbers. I mean, in total, he's in for a little over 1.1 million. With that investment of 1.1 million, those two homes on the same lot are now worth about 4.3 million. That's life-changing. Well, let's open up then and talk about answering his question because, Paula, I will pose this. I don't know that this is a financial question. I think this is a

different type of question with a strong financial component. Because if you run the numbers, on both of these. I think it's going to be a little difficult to run the numbers. I think it's probably going to be better to run the numbers on the one that you want to do. Because here is the crux of the question that I really heard. Paul wants to keep his house because he likes where he lives, but he doesn't want to be a landlord. That's a pain in the ass. So he doesn't want that.

So then the question is, which one is more painful to Paul? Is it moving and having to accept this? this much, much higher cost, right? There's going to be a big cost because he's in this place where he's had a ton of appreciation. Now he's going to get out of his current situation. He's going to get a big old bag of money, which is fantastic. But his housing cost to purchase the new properties can be way more than what it was here. Is that pain better or staying and putting up with being a landlord better?

I think this is a question of what does Paul really want to do? Because both those options have clear downsides. So my first question when I was a financial planner was, before we get to doing the math on each of these, which one do you want to do, Paul? Do you want to move and not be a landlord? Is this a big enough pain in the butt that you want away from that? Or is the thought of actually moving and picking up and paying more every year the issue? Now, this would be much more of a financial question, I think,

Paula, if he hadn't remarked that he's good, he has enough money to do either thing. He's going to be able to live his lifestyle in either spot. So if lifestyle is going to be fine either way, I think the best way to answer this is what do you want to do? Paul, I want to challenge the assumption that you wouldn't be able to have a property manager just handle it for you. Because I think any property manager worth their salt is going to love taking on this home and is going to love taking on you as a client.

And there's no reason that your tenants need to know that you're the owner. In fact, that was my question. Right. Was do they need to know? Right. Yeah. The tenants don't need to know that. If they were long-term renters, there would be a better chance that, you know,

going around in the neighborhood after a long period of time, they discover that you are the owner. And even if they do discover that you're the owner. I think then just the act of saying no, not me. There's actually this business in between us that as a property manager. You can't call me to come over and fix your toilet. Sorry. Oftentimes when it's a small business, people like to conflate you yourself personally with the business.

And so there was this one time I was doing a photo shoot for the business, which requires hiring a photographer. It requires a lot of planning because you're planning different outfits, you're planning different settings. You are coordinating it typically with a website designer or a thumbnail designer around how these pictures are going to be used. It's a core part of your business. And I had this friend who was like, I want to come along. I want to come along. I want to be part of the photo. You know, like she was treating it like this is just something fun that I was doing and that she could just like butt in and join in.

Unfortunately, I let her. In hindsight, I was unable. to say no, because I was afraid of disappointing her, but the crux of the problem and the crux of her request was that she didn't recognize that there was a distinction between me and my business. And the way that I handle that these days is when I get requests like that from friends who want to butt in on something, like they want to use the cameras that we have, I can just say, no, that doesn't belong to me. That belongs to the business. And I think when you really insist on that distinction, no, it doesn't belong to me. It belongs to the business. Whether that's for a rental

property or whether that's for a small business that you run, it's a way of really separating out a person's perception of you, the individual, versus a person's perception of what the business owns and operates. And I think with Afford Anything Now, it's different because we, we have employees. And because more broadly, I think there's greater social recognition these days that online jobs are jobs. I don't think that recognition was there 10 years ago in the way that it is today. Right. All Cheryl's friends thought I was napping at home all day. Yeah. Yeah. Yeah. I think there's greater recognition that remote work is work. So I think that helps. Now I can say, look, we have employees. If you try to take resources from us,

You're not just taking it from me personally. You're taking it from our entire team. Well, the analogy is do you go to Mary Barra, the CEO of General Motors, and say, hey, can I borrow a car? Right. You know, just because she's a CEO doesn't mean you get to go borrow a car from GM. Right, yeah. But this happens so often with small businesses where people really fail to recognize the

distinction between the individual and the business. Paul, I think that insisting, no, I'm not the owner. This business is the owner. And this business has contracted with a team of people who manage it. It requires that confidence and that certainty, but it requires like really, really delineating that line such that you yourself don't get conflated with the business that exists to run this operation. Right? Because your business also, it has managers, it has contractors. Like your business has a team. your business hires plumbers and electricians and hvac technicians and painters and power washers

like your business provides a lot of jobs to a lot of people it's not you it's not just your house it truly is your business's property to bring this back around i think paul there might be the middle ground that you're looking for which is if you can't divide the property you might be able to separate church and state by just being a neighbor at nethering not being officially, as far as they're concerned, the landlord, you still can put a third party between you. The hard part would be if they ever learn. You just have to be able to say, not me. Go talk to my team. Yeah. I think that you do that once, maybe twice. People will learn. And you don't have to say it like you're some kind of jerk, you know, you say, I'm sorry,

I don't handle any of that stuff. I hired all that stuff out. Yeah. But I think you do need to be assertive about it because people will tread that boundary. Sure. That's happened to me a thousand times. But if somebody has a clogged toilet and you just say, yeah, I can't help you. I'm sorry. I heard that all that. I don't even know how to do it. There's no way you want me doing that. If their number one goal is to get something done, I think you can very quickly dissuade them from coming to you. Yeah, but it's not the clogged toilet. It's they're going to come to you with can you lower the rent. Can you this? Can you do that?

Again, still not me. I just go, you know, I've still not me. I'm sorry. Did you talk to Bill or Linda or whoever my, you know, property? Did you talk to Linda? Because I don't know anything about that. Yeah. So frankly, not my deal.

And then I would just actually, I wouldn't even give an opportunity to reply. I'd just turn around leave, you know? I just go, yeah, I'm sorry. I don't deal with that any of that. Listen, I got to get back. I'm sorry. Yep. Yeah.

I'd be very insistent. Like, look, don't think of this as mine. Think of this as belonging to the business. business. The business hires a team and the business has processes and the business has systems. Go through our process. Go through our systems. Not my department. Yeah, exactly. And then by the way, Paul, they may think then that you're a much bigger landlords than you are. Because assuming this is your only rental property. Because if you say, no, I have a team for that. I heard people to take care of that. That's fine too. That's great. Yeah. Or I would just say I'm not in

charge of any of that. Even if they ask about a fee or a whatever, look, I'm not in charge of any of that. My manager is. Did you talk to Linda? Yeah, exactly. You know, that's what I should have said when that friend was asking if she could like come along on this photo shoot. You know, I was reflecting on it. I was like, man, if I had an employee who did that, I would fire them immediately. If I had an employee who just let somebody tag along and take half of the resources for something that we had allocated for a day. If I had an employee who did that, I'd fire them instantly. But I let myself get talked into doing that. Why? Because I let my friend pressure me because she couldn't see the difference between me and the business. And I didn't have the fortitude to insist on that

delineating line, you know? Well, that thing I was going to ask you about, Paula, we can ignore that then. Oh, wait, what were you going to ask? If the next photo shoot, I could come along. I just, I need to stab some new pictures. You told me ahead of time. You need some new pictures. Well, actually, I mean, Joe, if you and I did it, there would actually be a business purpose to it.

Oh, there we go. Right? See, figure out you're in, people. That's it. Just be on the Afford Anything show for a long, long time. and maybe you'll get to be on the photo shoot. But yeah, no, what a, yeah, horrible. Did she get some nice shots for free, by the way?

She did, yeah. She got lots of nice shots for quote unquote free to her, but it was actually at company expense. It's horrible. Yeah. Yeah. Yeah, she's actually charging you. Yeah.

Yeah, exactly. Exactly. So I think about that a lot. Like, I reflect on that a lot as to where I should have been more assertive and should have laid down boundaries. And I should have said to her, if one of my employees did this, I would fire them. So what makes you think it's okay for me to do it?

I should have had that thought at that time. Or at the very least, say, oh, you want to split the cost with me? Right. I would be steaming while I'm paying for a photographer and they're taking pictures of somebody else. I would be steaming. Yeah. Just stay in there going, okay. Because that is, to your point, if you had had an employee do that, it would be stealing from the company.

You'd be stealing company resources. Exactly. Exactly. Exactly. Yeah. Yeah. And that's the thing is they'll ask the owner to do things that they would never ask an employee to do. Because if you ask an employee to do it, it's just brazenly wrong. But if you're the owner, then they're like, well, you can do it, right? Come on. Yeah. Exactly. As if it's free to you. Right. Yeah. Paul, I know that doesn't answer your question. But yeah, it goes back to I really question the premise of not being. able to get a manager. I really think that you can get a manager. And I think that will solve all of

these problems. Get a manager. Have the manager handle it. And insist both to your tenants as well as internally to yourself, that you're not the owner. You're the guy who set up the LLC and put the management in place. And if you decide not to do that, then I think we go back to my question, which of the two pains is less? Is it less pain to move and pay more? And pay more? to live in the new place so that you're not a landlord anymore, or is it less painful to continue being the landlord and continue in the same spot? Yeah. The other thing I'll say, you know, in terms of the cap rate that you're getting on this property, sure, measured against its current value, it's not great, but measured against what you put into the deal, the $645,000

that you purchased that main home for, the cap rate is absolutely astonishing. It's a fantastic cap rate. So the returns that you're getting on the property, relative to your investment in it, the returns are phenomenal. But at the end of the day, for the purpose of paying for your lifestyle and for the purposes of cash flow, we're looking at two amounts that are actually pretty similar. Because that $120,000 a year, minus what you'd pay the property manager, works out to ballpark pretty close. to what you would pull out of the market after paying taxes and fees and everything else at a 4% rate. So in either scenario, we're talking about very similar amounts of money, which is why I concur with

what Joe said. Financially, the effect on you is going to be pretty much the same regardless of which one you choose. So then it's just a matter of which one is it that you want to do more. But I will add, Paul, I always calculate the cap rate based on the money that you yourself put into the deal. And based on that, your cap rate is astonishing. And the reason that I calculate the cap rate based on what you have invested is because you're looking at your own return numbers. You're not looking at what some hypothetical person who bought the deal today would

be getting. Right? You're looking at your own return numbers. You're assessing the cap rate from that. And then if you have this increased equity, which you do, if you wanted to, you could tap that equity and pull it out and put it into another deal. So the fact that you have this additional equity that has grown from that just increases your options. But it doesn't change the basic fact that the cap rate that you're making

for the money that you put into the deal is so great. So thank you, Paul, for the question. We know you love the thought of a vacation to Europe. But this time, why not look a little further? To Dubai, a city that every talks about and has absolutely everything you could want from a vacation destination. From world-class hotels, record-breaking skyscrapers, and epic desert adventures, to museums that showcase the future, not just the past.

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IKEA, bring home to life. It's week two of Canadian tires early Black Friday sale. These prices won't go lower this year. So you're lying on the floor? Save up the 50% November 13th to 20th. Conditions apply, details online. Our final question today comes from Mike. Hello, Paul and Joe.

My name is Mike. I live in California. I am 61 years old. Married. My wife is 54. She has a W-2 employee, and she makes about 100K a year. I am recently retired. My wife and I have a home that we have paid off worth about $1.5 million.

My health care is fully covered by my former employer. I have about $5 million in investable assets. About half million dollars in cash, about 1.5 million in Schwab dividend ETF, fees around 4%. About a million and a half in SCHG, that's their growth ETF, and about 1.5 million in their S&P 500 fund. These are spread across a low-level IRA, Roth IRA, and Taxable Brokers account. And I'd like to draw about $100,000 a year. The question is, what assets do I spend down first? Mike, thank you for the question.

You've done a heck of a Java saving. Nice work. And I love this question, Paula, because we covered this a few episodes ago when I talked about a bucket strategy and this is kind of what you are going to want to create. But for people that didn't hear that, let's just dive into it a little bit here

so people, Paula, can see Mike's case study. We're going to do a case study. Case study. Case study time. So the false premise people fall into is that taking maybe the brokerage account first is best or maybe the pre-tax money out first is best or the Roth out first is best. We don't want to do that. The reason we don't want to do that is because it's going to be better to maximize your tax brackets as much as you can along the way. So if you want to live on $100,000, let's say in an arbitrary year in the future, we've got a tax bracket line that's at $75,000. We take out of the pre-tax bucket up to $75,000.

And then the rest of it comes out of either the taxable brokerage because of the fact that you're going to pay different tax. You're going to pay a capital gains tax. but that's going to be income tax agnostic because you've already paid income taxes on that money or take it out of the Roth where you're going to pay no income tax on that money. You're not going to pay any tax on that money. You're going to just spend it out of that. So using these three different tax treatments together, I like much better than picking one to go first, one to go second, one to go third.

So that said, it becomes then, how do we do this cleanly, right? Because if I'm taking money out of two or three different places every year, how do I do that in a clean structure? Well, the way to do it is to think about buckets. And the first bucket is money you're going to spend in the next couple of years. Now, Mike has half a million dollars in cash. At $100,000 a year, he only needs $200,000 in cash. So he's got that bucket full. And Mike, what I would do if I'm you then is I would take all of your money from that cash bucket for the next couple years.

In fact, you're doing so well. You could actually keep taking that out for five years, which is you're creating this plan. It's going to make it easier to implement because you're slowly implementing it over time instead of having to move a bunch of assets to be in the right place, which could cause some consternation around taxes, right? capital gains taxes. If it's in the non-qualified brokerage account, you might, to get in the right place, have to move some money around. Then for money from year three to year 10, we're going to begin creating that bucket for you, because you've given us a very simple answer of, I've got $500,000 sitting in cash. I now have years one through five sitting in cash, which means six through 10, I want to create an asset,

that's in two of my accounts. What's going to be the pre-tax account, which might be an old 401k or an IRA. I'll get back to that in a second, why that's kind of the cornerstone of this. And then you're also going to want to choose another one of your accounts. This is going to depend on a lot of things. But if you said you're married,

if your wife has X amount of money that will fill that bill, that's great to then call her Roth, the middle bucket Roth, your bucket, the middle bucket, Roth. But I like choosing a second account that works there. So I can look at an account and I go, Mike's Roth, that is middle bucket, Roth money. Boom, got it. And then the rest, we're going to manage for the long term.

Pretty much doing it sounds like what you've been doing if you're happy with that asset allocation. So what this does is it makes it so that you're not as worried about the market when you take money out. if you take money out of your S&P 500 fund and it was early April this year, Paula, that would be a painful place to take money from. So we want to create a spot where we're not that worried about where we come up with money.

As you may know, if you've listened to us for a while, I like then picking a spot on the efficient frontier that's around 7%. That's going to give you a mix of low risk stocks and a collection of bonds, which is being managed for maybe a six or seven percent return. And then we are taking money out of that. And the way you do that is when it comes time to rebalance your money, instead of rebalancing the money by moving money that is access from a spot over to a spot you need to fill in, selling from the spots that have done really well. And is that rotates, you're always skimming the best performing stuff at that time from this low-risk place anyway.

Then from your long-term asset allocation, you're filling in the middle-term bucket, again, using the same approach. So that means, by the way, that once that Roth IRA gets used, there will come a time when maybe you'll have that second Roth IRA, part of its midterm money and part of it is long-term money. and then part of its short-term money and part of its mid-term money. And so what some people will do is they'll have that in two different custodians. They will break up, let's say it's yours, Mike.

You will move part of your Roth IRA over to Vanguard and leave part of it at Fidelity. So I can very easily remember the Vanguard money is my short-term money and the Fidelity money is my long-term money. It just makes it really, it makes it cleaner to do it that way, cleaner to manage. versus in your head, you got to remember these two different asset allocations and say it's at the same account that can get messy when it comes to keeping track of your dollars. When I do this, the reason why the crux of this is your pre-tax money is because every year you're going to want to spend up to whatever that tax bracket line is out of the pre-tax money. The reason we want to be diligent about that is, is that.

is if you delay taking the pre-tax money now, you're going to create a bigger issue when you get to require minimum distribution age. That'll be when you reach age 73. You're going to have to take money out of your account. And you're going to be forced to take that out. And if you haven't been taking some money out of there, it may create an income stream that's way bigger out of there than you actually need. And if that's the case, you're going to end up paying what's called Irma, which is really a tax. It's a fee on your Medicare Part B and Part D that you wouldn't have to take if you had taken some money early. So I do like beginning to tap those pre-tax accounts early so that I don't run into required minimum distribution challenges later where the government's

forcing me to take a lot more out than I truly want to. How does he determine up to which tax bracket line he should use, right? When he's calculating that pre-tax portion. No, great question, Paul. And that's going to depend on balances, right? That's going to depend on. So if he's got, if most of his tax triangle is in that pre-tax bucket, I'm going to take more out every year because of the fact that I'm going to have to continue sucking money out of this account

at a fairly high rate. But it sounds like he said it's pretty balanced. He then can look at maybe the tax bracket below. I think this is where using some good calculators to figure out the timeline of spending down these assets, like model that out. I can see it in my head. I hope a lot of other people can see it in their head, but I can see these models of if I do tax bracket X, that's going to skim money out of this account at this rate based on, you know, whatever the rate of return assumption is that I'm going to use. If I use this tax bracket, then it's going to spend it down at this rate. So the tax bracket you choose is going to be based, I think, on the amount of money that's

in that particular pot. But in his case, it sounds like he's pretty even. distributed amongst all three points of the tax triangle. So he's definitely going to be wanting to prioritize that pre-tax bucket, but he's got two-thirds, if he is evenly distributed amongst all three, he's got two-thirds of his net worth in places that won't be subject to RMD, which is the good news. And if we say that we're embarking on this journey this year, this is a year where if he's trying to live on $100,000, the 12% bracket goes up to $96,000.

thousand nine hundred and fifty for married filing jointly and then 22 percent bracket goes up to 250,000. So for him, I'm not going to stop at 238 so I get a 10 percent tax versus a 12 percent tax, Paula. What I would do in his case, I also wouldn't take out 96,950. He can choose a spot them between 23, 850 and 96, 950, because for what he's looking to do, the tax bracket mirrors very closely where he's at anyway. So this is going to involve then a little bit of modeling his spend down. I want to spend down so that requirement of distributions, again, at 73, are not going to affect him as adversely later on. And he's not going to get hit with Irma, which is that tax on Medicare in the future in his modeling. So I want to try to take those off the table earlier.

So maybe that means I spend the first 70,000 or 60,000 out of the 401k. And then the rest comes from either Roth or from taxable brokerage. But for him, because the line is really almost at 100,000, it kind of means his strategy can really be much more around how am I keeping balanced in those three different buckets that he has, pre-tax, Roth, aka tax-free bucket, and taxable bucket. Taxable bucket. So actually, Mike, while the strategy itself, hopefully in your head, that is straightforward. This is why I like the three buckets because I can keep it clean. It's also why I like the just two different asset allocations plus cash for the next

couple of years, makes it really easy to implement. Setting that up is a little bit of a pain and some of the modeling to decide how much needs to come out is going to be a little bit of work. But I got to tell you, Paula, just a little bit of work up front is going to save a ton of pain later on. Right. Because if he decides not to take pre-tax right away, goes with taxable because it feels easier or burns the tax free, which a lot of people, never do. They wait too long to do that. It's far worse than balancing the three different tax buckets. Joe, what strikes me is this entire conversation has been about asset location, meaning the tax treatment of the buckets of his investments. And we have not addressed the

composition of the actual investments that he's holding. That's actually intentional. It's by design, but do you want to address, I guess, for the sake of the broader audience, why we are so focused on asset location rather than asset composition. Yeah, well, and I am worried about asset composition, but to your point, I skirt it around that. Because frankly, if you have, let's say you're the average person, Paula, you have a Roth IRA, a 401k or a pre-tax IRA, and then you have a taxable brokerage account, you have three accounts. Now let's say that like Mike, he's married, now he has maybe five accounts. Then he has possibly a couple different employers each.

And if they had pre-tax accounts with a couple employers each, he may have seven accounts. He may have nine accounts. So first, bucketing these into the tax ramifications is going to make it easier to manage. then second deciding whether you're going to use it short term, midterm, or long term is going to be important. And for that, that's why we got into the discussion of staying balanced tax-wise. Once you have that framework, then we go, this account is my midterm account. This is a long-term account. Once I've done that, then we go to the part that you and I didn't talk about, which is, okay,

based on the fact that I know I'm not spending this money until year 10, how would I allocate that resource? And then now that we know the growing season of the investment, said the farm boy from Michigan, right? Everything has a growing season. So once I know the growing season, I'm like, okay, I can plant these seeds knowing that I'm not going to touch this for 15 years. I could easily be in the S&P 500 fun he's talking about.

It fits very well. If I find out that he's got the S&P 500 fun, in a bucket he's going to need to harvest in year three or year four. You and I know, Paula, it's a horrible place to have money. Right. So by starting off with the bucket and then lining up the tax consequence of that bucket, then I can then look and see what's inside of this particular account and match up the time frame with the investment to make sure it fits.

But the theme that we've heard between all three of these questions today is that everyone, Emily, Paul, and Mike have all set themselves up very, very well. Oh, yeah. Yeah, they've done a great job of saving. In Paul's case, taking advantage of the opportunity on the distressed asset, right? Right, yeah. Yeah, nice job. Yeah, absolutely. Everyone's done an incredible job of saving and of preparation.

And so... That makes these funer questions to answer. Yeah, exactly. Right? Yeah, it's, hey, I'm in a good situation and how do I make sure that I really optimize this good situation? Right? That's the overarching theme of the questions that we've answered today. So, and that is a testament to the strength of the people in this community.

So thank you, Joe, for the bucket breakdown of retirement drawdown. And we've done several episodes, several deep dives on retirement drawdown and retirement decumulation. So we will link in the show notes to some of the previous episodes that we've done on decumulation. That's probably the single hardest topic in personal finance. Accumulation is the fun part. The decumulation can get a lot more complicated. Yeah, and rightfully so. I mean, now you're actually spending money.

I think a lot of people when they're young, they needlessly make it complicated when it doesn't have to be. And then when people get older, they make themselves more. comfortable with the fact that it shouldn't be that complicated when truly it maybe needs to be a little more scientific. Yeah, exactly. With accumulation, so long as you're making contributions and so long as you're in broad market index funds, you really can't go wrong. So in the accumulation phase, you're just trying to be more right. But as long as you're contributing money to tax advantaged accounts and you're putting that into broad market index funds, you're good, right? Like, sure, you could be better, but you're good.

Whereas decumulation or drawdown, you really can get it wrong, and then you don't have the benefit of time to recoup from that, which is why drawdown is so much more complicated, and which is why we've done several deep dives recently on the complexities of drawdown, including episode 609, which was an ultra deep dive into this topic. So again, we'll link to that for anyone who wants to explore that topic further. Joe, we've done it again. It was so fun. I love these financial planning questions.

Same. Absolutely. Joe, where can people find you if they would like to know more? Man, this week over at the Stacky Benjamin show, Paula, we are doing consumerism deep dive week. So on Monday, OG and Doug and I are going to talk about. the cost of consumerism about just what we buy into. And the episode starts with, oh, gee, really and I having a fight about what is consumerism and what is not consumerism. He doesn't buy the fact that if you buy great seats to a college football game, that's participating in consumerism.

And I go, nay, nay, nay, no, he's like, no, that's an experience. Well, an experience could still be consumerism. And it doesn't make it bad. It just means you've bought into the construct that this is important. And so when you spend money, realize you bought into the construct. We followed up on Wednesday with a woman who talks about consumerism a lot in her new book, Katie Gatty Tesson from Money with Katie joins us. I love her hot girl hamster wheel discussion on consumerism. And Katie's going to join us tomorrow to talk to us about a level of consumerism, which is cloaked in, quote, feminism, which truly isn't. It's a, people getting more money out of your wallet than maybe you should be letting them take out.

Well, Katie is a great, great guest. She's been on this show a couple of times. I blurbed her book. So I'm very excited to hear that interview. She's a great mind. I enjoy talking to Katie. So you'll hear that tomorrow or you'll hear our deep dive on consumerism leading up to that on yesterday show. Excellent. Well, thank you, Joe. And thank you to all of you for being an afforder. If you enjoyed today's episode, please do three things. First, Share this with all of the people in your life. Your babysitter, your dog walker, your... Joe, who else should they share it with?

Your renter next door. Oh, your renter. Yeah. Share it with the renter next door who doesn't actually know that you're the owner of the LLC that owns the property. Yes. Yeah. Yeah.

Share it with them. Also with your property manager, with your plumber, your HVAC technician, your electrician. Share it with the movers who help you move from your high-cost East Coast City to the Midwest. share this with all the people in your life. That's the single most important way that you can spread the message of F-A-I-R-E. So that's number one. Number two, make sure you are subscribed to our newsletter, afford-anything.com slash newsletter. That's afford-anything.com slash newsletter. And number three, make sure you're following us on your favorite podcast playing platform. And while you're there, please leave us up to a five-star review and write a few words talking about what you enjoyed about the show. Oh, you can also hang out with the community at afford anything.com slash community completely free and a great place to discuss these episodes.

Affordanything.com slash community. So that's number four. So thank you so much for spending this time with us. I'm Paula Pan. I'm Josal-Chi. And we'll meet you in the next episode.