Afford Anything - Should I Raid My Retirement Plan to Buy Real Estate? 

Episode Date: June 26, 2024

#517: Kimiko is dismayed that the asset allocation books she’s read led her down a path to an underperforming portfolio heavy in ex-US stock investments. Where should she go from here? Julie and her husband dream of owning a vacation rental in the Denver area even though the math doesn’t add up. It seems like everyone around can make it work though. What’s missing?  Casey is excited to build his real estate portfolio and purchase his third rental property. He’s also worried that his plan to fund the purchase with his 457 Plan is flawed. What should he do? Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail For more information, visit the show notes at https://affordanything.com/episode517 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, when you were a financial advisor, did people ever ask you about taking money out of a retirement plan in order to buy a home? This was one of the biggest, most often asked questions I received. I would go speak at companies, Paula. It wasn't always just for a home. It was to buy a car, to fund my vacation, to do whatever, because I pay myself back with interest, right? What could go wrong? Well, we're going to tackle that question at the end of today's episode. Oh.

Welcome to the Afford Anything podcast, the show that understands that you can afford anything, but not everything. Every choice that you make carries a tradeoff. So if you're putting money towards retirement, then you are necessarily not putting that money towards other goals. Or are you? Is there a way to do both? This is a show that's really all about allocating your limited resources, making decisions about tradeoffs, embracing opportunity, understanding that there are opportunity costs, and being deliberate. about what you're willing to swap out in order to live your best life.

My name is Paula Pant. I trained in economic reporting at Columbia and I am the host of the show. Every other episode, we answer questions from you. And my buddy, the former financial planner, Joe Sal C-high, joins me. What's up, Joe? I am super happy to be here. How are you, Paula? I'm great.

I'm fantastic. I'm looking forward to the questions that we're going to answer today because before we get to the question that we've just discussed, we are going to hear from two other callers. One is someone who wants to buy a vacation home but can't seem to make the numbers work. And the other is from someone who, I think, is a similar question to what's on everyone's mind right now, which is, wait a minute, why are only my U.S. stocks doing well? And why are only large caps doing well? And what should I be doing in my investment portfolio, given the way that the markets are performing?

Well, sounds like we should all strap in, Paula. Absolutely. We've got a big show ahead. We're going to kick off with our first call, which comes from Kimiko. Hi, Paula. This is longtime listener and huge fan Kimiko Miyashito. And I'd love for you to have that, quote, entire podcast you said you could have on, I think it was podcast 501, on the differences between the U.S. and the XUS stock. markets since 2008. I was stunned and dismayed to discover this year that my ex-US stock index fund

in which I had placed a significant fraction of my life savings from reading several books on asset allocation recommendations had only gone up about 25% since 2010. In particular, I was wondering what your recommendations are regarding foreign asset allocations, especially in light of projected growth due to AI. My financial institution recommends 35 to 55% for an index funds. And I know that asset categories that underperform for a while have a history of doing much better than other asset categories at some point, but I'm feeling burned from the history of the past 15-ish years. I know you are not a financial advisor, but I'd like some concrete numbers here for what you recommend regarding foreign asset allocation today. If you are willing to share,

I would love to know what your approach is, and if not, what others in the personal finance community who understand the shift in market dynamics since 2008 and the potential of AI are doing with their holdings. Thank you so much. Kamiko, thank you so much for your question. The reason that I wanted to lead with this is because you ask the question that I think a lot of people are thinking, which is given how stocks are performing right now and given how stocks have performed over the last 15 years, am I misallocated? And given what's going to happen with AI, how do I prepare? So your question is incredibly important because I think a lot of people are grappling with the same thing. Now, before we launch into the answer, for the sake of everyone listening,

particularly those of you who are new to this community, I want to define some of the words that were in Camico's question because not everyone listening is familiar with what an XUS fund means. So when you invest in a global index fund or ETF or mutual fund, you have a choice between two different types. There are global funds that represent all of the countries around the world, including the U.S., and there are global funds that represent most of the countries around the world excluding the U.S. And the reason that X U.S. funds exist, excluding the U.S., is because you don't want to be accidentally overallocated towards U.S. stocks. So by having an index that's composed of non-U.S. equities from around the world, you can be sure that the global portion of your portfolio isn't accidentally overweighted towards your own. domestic stocks. So that, for the sake of everybody listening, is what Camico is referring to

when she's talking about ex-US funds. And Camico, just as you said, they have lagged significantly over the last 15 years. And I'm going to be blunt, the U.S. is poised to benefit from AI more than any other nation, at least for now. Now, you look at chipmaker in Vindivida, you look at the companies like meta and Amazon and alphabet that are best positioned to be able to have some dramatic efficiencies and growth. The U.S. and U.S. large cap companies in particular are better positioned than any other country, at least at the moment. Where this could get tricky is we don't know what regulators are going to do. If regulators hamstring innovation, then innovation will go elsewhere. And that, as investors, is something that we need to watch

because that could change where the piece is on the board fall. But as of now, based on current regulations and based on current circumstances, I'd wager my chips on the U.S. I'd take a whole wider, longer view because I don't want to play that game. I don't want to bet on what's going to happen next. And I look at in the market, there's always a story. There's always a theme that happens to be the theme of the day. And if I look back from the time that I was a financial planner to today, the theme has gone from the emergence of the World Wide Web in the 90s. And everybody was all about that until that collapsed. In 2001, 2002 were just a freaking disaster. I remember having a client that fired me because his portfolio only did 47%. And his friends were doubling their money

because they were all loaded up. And we stayed diversified and we only got 47. And I felt like the little mean part, the passive aggressive part of Joe wanted to call him in 2002 and go, how's that working for you? My best like Dr. Phil Voice. But I restrained. myself because that didn't work well for him at all, I'm sure, because the story ended. And then there was another story, which was the S&P 500 doing nothing for many of the years between that collapse and 2007. Of course, then the theme also was real estate. Everybody's in real estate. You've got to be in real estate. Real estate's awesome. Real estate's huge. Real estate gains from the late 90s through the early 2006, we're just explosive, we're amazing.

And then, of course, that theme ended. And then we had to pick up the pieces from that. And we've had then smaller themes along the way. Of course, we had marijuana stocks. I don't know if people remember that when that was. Oh, yeah. That was huge for a while. Everybody wanted to become a cannabis billionaire.

And that's not anywhere near what AI is going to do. I totally agree, Paula, with your prognosis on AI. But I want to make a bigger point that we had that. Then it was crypto, crypto, crypto, crypto all the time. NFTs. What was the theme? So there's always a theme. There's always a story. And I think if you are a long-term investor, you're better to stay away from the story because you don't know when the story is going to break and hit the market and has it already hit the market. Or when's it going to break the other way? When's the story going to go against you? And all those stories that I talked about have gone against you if you held on too long to that theme. So playing what I call sector bets

doing sector betting is not something I'm a fan of. I'm going to push back here, Joe, for a couple of reasons. Number one, when we talk about something like housing from 2000 to 2007 or when we talk about cannabis or any of these other new market opportunities or investing fads, those cannot be compared to technological developments that fundamentally reshape the way that we work. I think the accurate comparison is the advent of the World Wide Web and the Information Super Highway in the late 90s. That's the accurate comparison because the advent of the internet fundamentally changed everything about how we live and work in every industry across the board in ways that we're very, difficult to foresee back in the late 90s. Well, there's no reason.

There's no reason to push back because even when I said cannabis, I said, that's not at all the same thing. I mean, I even qualified at that point. That is not the same thing. But, Joel, I love disagreeing with you. Well, I love disagreeing with you too, but I don't think we disagree there. My point was less comparison than there is always a theme. There is always a story.

And if you're following that one story and you get very, very myopically focused on this story, you may miss the bigger picture. And we often do, right? When I decide that I'm going to call a story the thing, then I have to get into the thing. I got to decide how I get into the thing. And then I have to decide how the hell later on when it's not a thing anymore or the thing changes, which it will change. To your point, we don't know what regulars are going to do. We also don't know. We don't know what the next move is that somebody's planning in some building in some place that we don't know anything about. We don't know. It is impossible to predict news.

And so there are two things that really affect the market. You've got fundamental analysis on a company or on a broad market in general. And then you have news. Fundamental analysis, I think, is a driver that we can all not just appreciate, but that we can do a bunch of research on. News hits you over the head in the middle of the day. All of a sudden, hey, guess what? Something new happened.

And when I'm playing the story game, I really get worried. I super get worried about people playing any story game. What I also get worried about was some advice that Camico got. Anybody saying to put 50 to 60 percent, I think I heard that right, 50, 55 percent of your money in international investments? Yeah, that sounded like a lot to me too. I've been in this arena for over 30 years, Paula. That is bat crazy. I know that never, ever, ever, ever have.

I heard that. That is a horrible piece of advice. I wouldn't even just talk about people in the fire community or people maybe playing the story game. I've never heard people say more than 30. Right. Yeah. I've never heard that. And by the way, and that's two different areas, right? You have developed countries and then you have have one of my favorite areas, which is emerging markets. I just happen to love it. I love the excitement. I love the roller coaster ride. I love seeing what's new that's happening in Southeast Asia as an example. I think it's fascinating. to follow. I have to actually guard against that though, Paula, because if it were me and my excitement over emerging markets, I'd do like 120% of my money there. I would put everything in Southeast Asia,

which would be dumb. So here's what I do. If I'm creating, if I'm looking at the efficient frontier and just to get a little bit nerdy, and I'm trying to find the most efficient path, I am also putting caps on anything that the efficient frontier tells me, especially in portfolio visualizer, which is a tool a lot of people use in the commercial realm like the average person uses, that program has a problem with recency bias because of the fact that it only has tracked some data for a short amount of time. And so what you'll find is that the efficient Frontier and Portfolio Visualizer will go, dude, S&P 500, 100%. And so what I have to do to help combat recency bias is I do cap how much I'm going to put

in a certain asset class. So I will go to large cap stocks and decide how much I want in large companies. I will put a cap on that. And I'll say portfolio visualizer, let's make that 50. if you want to go and play the theme more, let's make that 70. Let's make that a number that's not going to kick my butt later. Because the problem isn't that Camico is paying attention now. The problem is that things are going to happen in five years when Camico's not paying any attention.

And this happened all the time when I was in Pfizer, right? Somebody plays the sector game. They're paying attention all the time. And they're like, nope, I'm going to catch it. Then things get busy at work. I get relocated. I move halfway across the country. I have this job.

I have a new family. I get whatever's happening in my life. It all changes. And then I go look at it for the first time in eight months. And I go, oh, crap. The story's changed and I'm not on top of it. And I think by capping your exposure to a story, even if you decide you want to play the story, capping your exposure to that is always, always a good thing to do.

It's the reason why advisors will tell you don't have more than, you know, depending on your level of risk, five to 10% in your company stock or any single company stock. To Camico's question, I also, when she started talking about investing up to 55%, she said, between 35 to 55% in international funds, that just seems incredibly high, absolutely incredibly high. Because with international funds, and Camico, I'm sure you know this, but I'm saying it for the sake of everyone listening, you face additional risks that you do not hold when you are invested in your own country. One of the biggest being currency conversion risk. Yeah, exchange rate. Yeah, exactly. You're not just betting on the performance of the companies that exist in other countries.

you're also betting on the U.S. dollar relative to those foreign currencies. That is inherent within any type of foreign investment. I remember, Paul, the first time I saw this, I was a fairly new advisor. I remember a client that wanted to invest directly into not just developed countries, but wanted to do a strategy where we just take one country. And I don't even remember what it was, but I think it was, it might have been wanted Scandinavia. But it was wild. This was maybe 96 or 97. And I remember that the way that the, the currency stuff went, I remember looking at the returns for Scandinavia being all excited. And then I remember looking at my client's portfolio and going, what the hell happened? Well, the problem was because the dollar moved the opposite way against Scandinavian currencies. We ended up not making any money while that market did really, really well.

Right. It went totally good example. Perfect example. And the bad news is I had to get hit in the head with it. And then I had to explain it to my client what happened. Hey, guess what? That did great. But because of the Forex Exchange, because of a monetary exchange.

we didn't do as well. Right. That's a perfect example. And given that level of risk, A, and then B, given the fact that by virtue of investing in U.S. companies, so many U.S. companies have a footprint in countries around the world. The performance of McDonald's or Nike or Coca-Cola is going to heavily depend on their sales globally. So it isn't as though when you're investing in U.S. companies, you're investing inside of a U.S. vacuum. U.S. companies, especially large-cap companies, are global in nature.

But you get to make those bets with the U.S. dollar when you invest domestically. And so for all of those reasons, Joe, similar to you, I've never heard of any recommendation that exceeds 30% at the absolute. absolute max, closer to 20. Yeah, that's exactly what I was going to say. And of that 20, 15 developed markets, five emerging markets, if you're going to do emerging markets at all, which, because that adds additional complexity and risk. I will say one thing about AI, which is there are certain areas. You look at Riyadh. You look at Dubai. There are certain areas that have gotten ahead of the curve in terms of developing their nascent tech sector to the best of their abilities. And I think that Riyadh and Dubai in particular are going to emerge as much bigger players

over the span of the next decade. Can we do a quick case study on this? Yeah. Because I think there's two industries that everyone knows that are closer to home that are making the same case that you're making because I'm with you. If you have an emerging market that doesn't already have infrastructure in place, it's easy for them to add the latest infrastructure. And I'll give you an example. A lot of expats go to Portugal, right? And the reason they go to Portugal was Portugal was late to the game when it came to the World Wide Web. And so Portugal

has more fiber and has faster Internet than most other Western European countries. which is why digital nomads love heading to Portugal because I can work from Portugal easily while I'm in this gorgeous, ancient, you know, old, old time, beautiful place at the same time. Bali is very similar. People go to Bali because they added internet later. Bali has very fast internet. So these places that don't have this legacy wiring, quote unquote, in place, it's easier for them to adopt the new. thing. Heck, you look at monetary transactions in Africa. It blows you away. The speed of money in Africa is amazing and is, wow, like the stuff that we do in America and how slow it is because of the

existing stuff. But I'll give you two industries where this has also been the case. Back in the early 2000s, when you saw companies like JetBlue or even before that Southwest come into the airlines game, They didn't have these huge contracts with the unions yet, so they were able to start off with their human capital costing a lot less. They had all new technology, so it was bright and shiny. And so they could enter the market in a way that American and United and Delta couldn't initially compete with. Now, look at what's happened to those companies over time. Southwest just had a huge problem because their technology is getting old, right? They locked all their computers locked up.

And you've seen JetBlue pricing really now has moved toward what everybody else is doing. But when they first moved in, they were able to get competitive in a hurry. You also saw that with Tesla because Tesla didn't have this supplier network of third-party people making a huge amount of the car. Tesla controlled things from the beginning to the end, the whole process. It's very easy for Elon Musk and company to change out the technology inside. a car to do just hit a button do a program update and the car performs better than it did six months ago. Ford can't do that because Ford has this legacy with the suppliers that they have to would have to get out of and have to get everybody. It would be so much harder for General Motors and

Ford to do what Tesla has done. But there will come a day, Paula, when Tesla then is the legacy, right? And a new company's going to come in and they're going to be able to be fast and brilliant because Tesla now has all this money invested in these factories and these systems, and it's going to cost a hell of a lot more to change it over than it is to continue to use the legacy system. So that's why I like emerging markets is because of what you're talking about with Dubai. I think they're exciting. I think there's so much promise there. It's why I said I'd have 100% of my portfolio there if I was an idiot. But I stick to 10.

And now, and that's aggressive. financial planners listening to show goes 10's a pretty big number. If you look at the huge swings, yes, it is. Yes. But I'm willing to to play that game because that's A, on my efficient frontier. And B, it is also, it's also something I'm very passionate about. So I'll overexpose myself to that part of the market. Over expose is a weird word. Oh, keep it in. Keep it in. We're keeping that part in. Awkward. And the podcast. It gets strange.

Sorry, everybody. While Joe is over exposing himself. Oh, man. People not watching the video. Look at my face. Look at a red I am. But so, really for me, in closing, if you want to focus on AI and developments in AI, I would do it more incrementally, which is instead of, let's say, half of your

money being in where does most AI live right now in the United States, mid-cap growth, which is mid-sized companies growth oriented, right? Well, I mean, large cap, though. InVIA has a monopoly on semiconductors. Sure, sure. But the downstream of that is often where you find the returns. Don't get me wrong, you found the returns in Nvidia in Microsoft, right? You found them at the top edge.

But as that bleeds out, it's the, the, the mid-cap game, I think, is where I would be looking. And so maybe you go, if you want to play the large-cap piece, maybe go five to 10% more than you would normally. If you want to do the mid-size game, five to 10% more than you would normally. And then I think you're, quote, making your bet without bearing yourself when the trend changes. Right. There's one other thing that I would say about emerging markets, which is the nations that are poised to do,

best are the ones that have, and I'm talking specifically about outside of the U.S. right now, the emerging markets that are poised to do best are the ones that have a base layer of infrastructure that is already there that they can build upon. So you look at a country like Sri Lanka, it has enormous human talent, but it doesn't have the infrastructure in place to capitalize on that, unfortunately. And so, no, it doesn't have the shackles of legacy like Joe was talking about, but it also doesn't have the foundation upon which a new sector can grow. Yeah. Contrast that with Saudi Arabia where there's already good infrastructure. There's already a lot of money where, where, you know,

the leadership is laser focused on investment. Investment. Of that money. Yeah. Right. Look at the emergence polo of Jetta just as a case in point. Exactly. Like 20 years ago, who had heard of Jetta?

Right. If you really want to have fun, take a small portion of your portfolio and make some country-specific bets. But keep that to an incredibly small portion of your portfolio. the country-specific portion, I would keep to 5% or less. Oh, yeah. Yeah. And beyond that, the big winner in AI is still the United States. We have the most innovators.

We have the most entrepreneurs. We have the biggest tech companies. We have Nvidia and Microsoft and Apple and Amazon and Alphabet. They are all U.S. companies. It's incredible. The talent and innovation that we've amassed in the United States blows me away that one country could have so much. We are poised to do the best. I feel like I should start chanting.

USA, USA. With the Olympics coming? Oh, that's right. USA. It's truly an impressive nation in terms of the innovation that we've produced. And that was true in the development of the World Wide Web, and it's true in the development of AI. There is a lot of wisdom in continuing to bet on the U.S. And that, for me personally, is where the bulk of my assets are focused.

Well, thank you, Kamiko, for asking that question. Next, we're going to talk to a caller who wants to buy a vacation home, but can't quite figure out how to make the numbers work. But first, we'd like to thank the sponsors who allow us to bring you great financial information at no cost to you. 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 serveware 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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Shop now at IKEA.ca.ca. Black Friday. Ikea. Bring home to life. Our next question comes from Julie. Hi, Paula and Joe. I am calling you. to you from the Denver area. I'm 42. My husband's 45. We have three kids, ages 15, 14, and 10. And we are curious through perspective on mountain house vacation rentals or even beach rentals

as potential sources of income. We have been trying to justify this purchase and make it a wise financial investment for us for about 10 years now. And every time we run the math, the figures just don't come out right. The part that's holding us back the most is the HOA fees in these places. So the HOA fees are in the Denver area. I'm going to say range anywhere from 500 upwards to probably 1,500. Who knows, maybe even they're higher for some of these condos per month. Obviously, that includes trash and probably cable heating, things like that. This also does not include special assessments that might be done on the condos and other things like that. However, we know a lot of families and our age and about 10 years older who own these kinds of places. And obviously, we imagine

somebody has to be making money. So we're wondering if you can help us understand how that would look. Are these people paying cash potentially for these properties? And so they're able to pay the HOA fees just using their rental income. I mean, we've ran all the figures. And I do think you could probably break even, but I don't know if there is a special assessment or if there's repairs or HOA fees go up. Anyhow, we're trying to decide if it would be a good investment for us. Obviously, we would love to be able to use the place a couple weekends out of the year or a couple weeks in the summer and just curious if you can offer any guidance into something like this. Oh, one additional piece of information is that at this point in our lives, we don't have $500,000 to put in cash

towards a property like this, nor do we think that that's a sound financial decision for us. So we would have to take out a mortgage on an investment property as of now. If for some reason we run into money in the future, would that, you know, just taking out a mortgage on a place like this make a difference, obviously, in your calculation or whether or not it's a good investment. I guess we're mostly concerned about the HOA's and the special assessments, which I think applies to a lot of people in rental property. Have a great day. And thank you guys for everything you posted. We really appreciate it. Bye. Julie, thank you so much for that question. I'm so glad that you're a part of this community. All right, there are a few red flags that I heard when I heard your question. First of all,

when you say that you're trying to justify this purchase, what I hear is that you've presupposed the outcome and now you're trying to work backwards to make the facts fit a predetermined conclusion. And that's not a good decision-making process for any type of investment. And now, before I elaborate on that further, I want to take a step back and really, define the distinction between an investment versus something that you're buying for personal consumption that you're also monetizing. Because it sounds to me like this is the latter. An investment is something that you buy because the present value of future dollars makes it attractive to do so. You buy an investment because it is an asset that provides a better,

alternative as a use of your money in a risk-adjusted manner than any other competing asset. So in the case of buying a home, a property as an investment, you buy that property because you expect that its rate of appreciation and its cap rate, which is its unleveraged dividend stream, you expect that the two of those will perform better. than anything else that you're considering in its risk-adjusted context. So in the context of the age and condition of the property, the location, etc. Right. Even if you never set foot in that property, this is the optimal use of your capital.

And as a capital allocator, you buy that investment. You're comparing it to any other investment. Like if I were buying a stock, a bond, if I were buying crypto, or I buy rental property. Exactly. It's just another thing. Exactly. And optimal for my goal.

Precisely. Precisely. That's the decision-making process when you're purchasing something that is an investment. Now, by contrast, you might buy something for personal consumption that you want to monetize. That's fine, but it's not an investment. It's something that you enjoy. And when you're not using it, you'll make some money. off of it. So for example, let's say that you bought a car, but you only drive your car on the weekends.

You don't need it during the week. So during the week, you put your car on touro to URO and rent it out so that other people can use it during the week. Great. You're monetizing a thing that you purchased for personal consumption, but that doesn't make it an investment. But that does. I mean, it doesn't mean it doesn't have monetary value. It just isn't the same decision-making structure because now what you've done, what you're essentially trying to do is just decrease the carrying cost. Exactly. You're trying to make it so it's not as big and negative on the balance sheet. Exactly, exactly. And that's the distinction between you're looking for a return versus your decrease in carrying costs.

It's, is this an investment or is this personal consumption that you're trying to make cheaper for yourself? Yes, which a lot of people in the vacation rental space, that's exactly what they're trying to do. Yeah. They want to. And frankly, you know what, Paula, I've told you on a past episode, I've been looking at the other mountains, the mountains out east and the mountains of North Carolina. And I am specifically looking for a vacation property in a place that I want to go. And I want the carrying cost to be zero. Right.

But it's not an investment. It's a lifestyle. Exactly. Exactly. And that's the distinction here. So the red flag that I hear in Julie's question is she's using the word investment in a context where I don't think she's actually talking about an investment. Because if she were talking about an investment, then she wouldn't have started with the conclusion and then tried to work

backwards. If you're approaching something as an investment, you start with the question and work forwards, not with the conclusion and work backwards. As an example, earlier when we were talking about Camico's situation, and I brought up the efficient frontier, which means a diversified collection of assets. You're going to begin with a goal. It's going to tell you what collection of asset classes will get you there. Then maybe real estate is one. And then inside of real estate, then you decide to make your best purchasing decision. Correct. She's beginning with vacation rental property in Denver. Right. Exactly. And then working the opposite way. Exactly. Julie, the other thing that I heard in your question is, I heard some assumptions there.

Other people own this. They must be making money on it, right? Not necessarily. People own properties for a wide variety of reasons, and the majority of people who own properties do so for personal consumption. They're just hoping, like we just said, to decrease their carrying costs. Exactly. So they're not necessarily making any money on it.

People own properties because they enjoy the lifestyle that it provides. Well, and there is a bigger piece, I think, that Julie, I think that's a huge piece of the market, Paula. I think there's another huge piece of the market that a lot of especially new real estate investors discount, which is the size of some of the companies that are investing in these properties. And they're able to take a razor thin margin. They make it work on a razor thin margin level. And they're able to get, because they're going to finance a lot of these properties at once, they're able to get from a bank who has experience with this company, with this corporate corporation that's going in and gobbling up a ton of them, they're giving them a preferred

rate and a preferred deal structure that you and I wouldn't be able to get anyway that creates this hairline fracture of a gain that doesn't make sense to you and I, but because they can do it at a scale that you and I can't do it at, they're playing a completely different game than we are. Right. So saying somebody else is making money, yes, but it's not the dude or the woman down the street. it is this company that owns thousands and thousands and thousands and thousands of these. Right, exactly. And to paraphrase Morgan Housel, people often are misled when you take cues from someone playing a different game.

An individual investor, a mom and pop investor or a mom and pop buyer, is playing a different game than BlackRock. So don't take your cues from Black Rock because their deal structure is necessarily different. The other piece that I think a lot of beginners can often discount are foreign investors and the motivations that foreign investors would have. Many times foreign investors want to park their money in tangible U.S. assets because it provides relative safety and security. So if you are based in Islamabad or Karachi and you are a Pakistani multi-millioner, but you're looking at the inflation rate of the Pakistani rupee, you want to protect your assets. So it would make sense to pay cash for some real estate in the United States where we have a

relatively stable currency and where that cash is being held in a tangible asset like real estate, which is an inflation hedge, even if you never rented it out, even if you just parked your money into that property and let it sit empty, that would still provide relative security for that money when your home currency is subject to massive, massive amounts of inflation. As of February of this year, the inflation rate in Pakistan, as measured by the consumer price index, the CPI, was 23.1%. Yeah. Oh. Yeah. And in May of 2023, inflation there hit an all-time high of 37.9%. Oh. So when your home currency has an inflation rate of between 23% to 37% over the span of the last year, convert it to U.S. dollars and put it in a piece of property. Who cares if it's rented out or not, right? We're playing the same game we talked to.

to Camico about earlier. Yeah. We're playing the Forex. We're playing the currency game. Yeah, exactly. Exactly. I'm making money just by parking it in dollars. Exactly.

Park it in dollars, put it into a tangible asset. If you're looking for an inflation hedge, real estate or any tangible asset like art, those are inflation hedges. So I think a lot of investors would discount the impact of foreign investors who are simply looking for inflation. protection. I think that, though, doesn't mean, Julie, that if your true goal is, like mine is, in the mountains of North Carolina, yours in the Rockies, to buy a vacation home that largely

pays for itself, that you can't do it. I think, I do think, though, there's some other things, Paula, we can talk about, which is, if the math doesn't work, I think you need to look at the fundamental reasons why. And frankly, people look at Denver, lots of attention to a big city like Denver. It doesn't surprise me that vacation rentals around Denver, the math is incredibly difficult. If there are phenomenal deals, there are people with pockets deeper than yours, with information advantages more than yours, that are probably going to win that battle. It's the same for Breckenridge, for Tell You Ride, for Vail. Like think of all the big resort areas.

I think that's difficult. I think you have to be more of an emerging markets investor. Like we were talking about, like, where are some of the areas that you love, specifically you and not a ton of other people yet? And in fact, it's funny, I did just a very quick Google search. I know nothing about these towns, but I just looked up some information on, different up and coming towns in Colorado. Once again,

I haven't even begun to work this down my funnel of are these phenomenal opportunities. There are still towns I would put in at the top of the funnel. Divide and Florissant, these cities, Paula? Divide and Florissant. 45 minutes northwest of Colorado Springs. I've never heard of it. Well, think about 45 minutes northwest.

That's got to be beautiful. But tiny, wheat ridge, Conifer, Bailey, Fairplay, Cripple Creek. I think I've heard a Cripple Creek because I know the song. But just some of these places that still could be beautiful places. And there are people not just you that want to go to a little bit more off the beaten path. And again, if this is for your consumption, it has to fit what you really want, which is, is this a place I really want to go? Is this where I want my place? Joe, here's where I'm going to disagree with you. I think that if what you want is personal consumpt, Put your money in a place that's going to provide an amazing return.

Use those returns to just rent a place for your own personal consumption. It depends on what they want. I mean, there's two different types of people. There are people that really want their own spot. I'm with you. I'm not generally a buy it person, this one area I really like in North Carolina that I could see myself doing that. But generally, I'm an explorer. I prefer to go someplace different all the time.

so I'm going to do, I'm going to do that. And if I go back to the same place, I'll rent a place each time. But I think because this is more of an emotional decision, Paula, anyway, and we're working from a place of what I want, I think purchasing a house in one of these communities, I look at the guy who's engineering this podcast for us, Steve Stewart, how small is that town Steve lives in? And Steve didn't start there.

Steve started with a whole different set of criteria and ended up in this place where he's looking at the mountains while he's editing this podcast. I think it's a lot like Rick Steve's taking people to Europe. He talks about when he first took people to Europe and there were these towns that were not yet discovered. And now, of course, they've been discovered. And going to some of these cities he took people to in the 1970s are now big time places

where a lot of people go that weren't before. I think we're going to see things continue to evolve. evolve, but you don't feel the same. No, not at all. I completely disagree. I think that... Well, there we go. We finally hit it, people. It's about time. Julie, I got your back. Come on, Paula. I think if you're calling a financial podcast, you want to make a sound financial decision. And the sound financial decision is invest your money where it's going to provide a return. Use those returns to pay for the consumption that you want. If you try to make something a hybrid. If you try to make it a hybrid between personal consumption and an investment,

you end up doing neither well. You end up compromising so much on both that the property doesn't do. It neither provides a good return, nor is it what you want for personal consumption. The only case in which I think it makes sense to do a hybrid approach is when you're house hacking, because when you're house hacking, you get access to a primary residence mortgage. And so because you can access a debt instrument that has much more attractive terms than any other investor can access, that debt instrument, that primary residence mortgage does justify the Venn diagram intersection of personal consumption and investment in a house hacking context. outside of a house hacking context, however, if you're using an investor loan, you're using the same debt instrument as any other investor, then use that instrument to buy the asset that will provide the best return in a risk-adjusted context. We agree on one piece of this, which is if this is a property that is meant to be used to reach your financial goal, which is a third-party goal, it's a different goal, then this is just a bad idea. all together. However, if the goal is to have this property and then you want to rent it out,

I'm all for that. But then, Paula, I'm not as worried about optimal rate of return. I'm worried about optimal life lifestyle. And if my goal is to visit a place two or three times a year, I have the money to do that and reach my financial goals in another way. I don't care what you do with your money. I'm not going to disagree with Julie there. I think the base question, I think where our disagreement is coming from is I'm coming from the position of this is an investment. And Joe, I think you're coming from the position of this is personal consumption. So I think the base question for Julie is, Julie, which one is this for you? Yeah, I think if you start with the goal and you work backward, when this is you can afford anything, just not everything, right? And taking the guy that I like

to quote all the time, Stephen Covey, when you pick up one end of the stick, the other end of the stick comes with it. So if I devote a bunch of money to this goal, what's the other end of the stick? To your point, this is a dead asset, underperforming asset. My end of that stick is if all your other bases are covered, who the hell cares? It doesn't matter. So we got to know what the other end of that stick is, Julie, because if you're going to put money in an ill-performing asset, which is also where Paul and I agree, and you don't have enough money for a retirement goal, let's say, that is super important to you, then this could affect the status of a goal that might be more important than this, which we never want to do. Well, Julie, there's your answer in the form of a question.

It is. It is. The question is, what is the person? What is the person? purpose of this purchase. Do you want to buy it for your own personal consumption and decrease the carrying costs? Or do you want an investment? Or maybe Julie actually lives in Islamabad and is trying to protect her. Maybe Julie works for Goldman Sachs. And she's buying up all the property in the Denver area. Can't figure out why the HOA fees are so high. And she called afford anything. That would make sense. Totally makes sense to me. She lives in Islamabad, but she works for Black Rock. And she's looking to actually get her bonus by nailing this. The single condo unit. All right. Well, thank you, Julie, for the question. We are about to tackle the big question that comes up a lot, which is should you raid your

retirement account in order to buy property or in order to buy anything else like a car or a whatever. But specifically in this question, it's should you raid your retirement account in order to buy a rental property? Ooh, what will we say, Paula? We're going to answer that in just a moment. But first, hack the holidays with the PC Holiday Insiders Report. Try this PC Porchetta, crackling, craveworthy. You're going to eat that? Who are you? The voice for the next ad, car commercial, but I noticed that show-stopping roast and... Help yourself.

Mmm, designed for indulgence. Precision crafted to navigate every corner of my mouth. All for just $18. Okay, okay. Try the season's hottest flavors from the PC Holiday Insiders Report. Please feast responsibly. Our final question today comes from Casey. Hi, Paula and Joe.

My name is Casey. I'm a longtime listener of Aboard Anything, and I want to thank you. you all so much for giving me and everyone such great advice over the last few years. First of all, I also want to thank you for answering a question for me a few months ago about public service loan forgiveness. If you remember, your advice was that if I liked the work I was doing and found it meaningful, I should continue to use the opportunity to apply for PSLF in a few years. To follow that up, I'm very happy with the work that I do in the community that I serve and have decided to commit to 10 years of service. Anyways, I have another question. I am currently full-time employment. I am currently

full-time employed at my 501c3 company, which I will use to apply for public service loan forgiveness in a few years. Like I said, I really love the work I do, but I do not see myself doing it for the next 20 to 25 years. I have been getting my foot into real estate over the past five years or so. I currently househacked my condo and essentially have a roommate who pays my mortgage each month. About a year ago, I purchased my first single-family rental property. It's a long-term rental with a solid tenant so far. The rent on the property easily pays the mortgage and then so. I have recently had the itch to buy a third property. I'm considering buying a vacation home instead of a full rental on the coast in Florida. I could use the property for myself, but be able to use it

as a short-term rental when I did not occupy it. I've looked online at a few condos and they are in the range of $150 to $200,000, the ones I'm interested in buying. Here's my question. I have access to $50,000 in line of credit on my primary residency and about $50,000 in a 457 plan through my current employer. My parents have also been great entrepreneurial role models for me, and they told me they would be willing to lend me anywhere from $50,000 to $100,000, which would give me about $150,000 to $200,000 to purchase a property in cash. I would then get a mortgage on the property afterwards to pay off my he-log and pay back my parents. The dilemma I have is should I use the $50,000 in my $457 plan to accomplish this goal. 457 plans are not common, but it's essentially a 401k offered by some employers that I can put up to

$23,000 per year in pre-tax in addition to a 401k. The difference in a 457 versus a 401k is that there are no penalties for withdrawing from the 457 plan before 59 and a half years of age. I had made pre-tax contributions to this account and would have to pay taxes on it if I do withdraw. A marginal tax bracket is about 35%, which would take a large chunk of the contributions away. I will have to pay taxes on it whenever it is used, whether that's today or in the next 10 to 20 years. Should I withdraw the money and pay the taxes now to buy the third property? I have not really been saving the 457 money for retirement. I didn't have a clear purpose for it aside from general investment opportunities. What do you all think about this idea? Casey, first of all, I just have to say this, Paula. Casey, I love the fact

that you define 457s for us so we didn't have to. So nice job there. Thank you. I will make one correction. 401K plans, if you were retiring, you may be able to get the money out before 59.5. There as well.

So if you have a 401k plan, look at your plan document, but it is very possible that you can take that money out without penalty as long as you're retiring pre 59.5. It's IRA. that have the 59 and a half rule, not 401Ks, but 457 is still a little more flexible poll. Right. And we will, in the show notes, we'll put in the IRS.gov page that describes a 457 plan.

But Casey, thank you for defining it. As you said, it's a tax deferred plan for people who work for 501C3 organizations, which actually leads me to the other thing I was going to say, which is I'm so happy to hear that you called in on a previous episode. Yeah. And that we talked through public service loan forgiveness and your career options and that you've taken what we've said and used it to have a career and a financial structure that you're happy with.

That's like wonderful to hear. Joe and I answer so many of these questions and we often don't know the follow-up. We don't know what happened in the future. So I love when people call and tell us, hey, you answered my question and here's what's happened since. But it's super. I love that decision. And I remember that question. I did.

Our answer was make a decision about where you're going first and then the public service loan forgiveness program will follow. Exactly. Your decision there will follow. Exactly. But start off with what your heart wants to do. Right. Excellent.

Let the heart lead and the mind execute. Yes. I don't like this plan, Paula. Let's talk about this plan. I don't like it one bit. Joe, why did I suspect you would say that? I also don't like it, but I'm wondering if it's for the same reasons. Joe, what are your reasons? Well, if you look just over long periods of time at asset classes, and this has a little bit

of the relationship of what we talked to Julie about, which was beginning with the question, not with the asset class. Now, he is purchasing it for investment purposes. He wants the real estate as an investment. However, beginning with this is what I want to do versus what's the optimal path to the end goal of if it is more money, then I become wary of this move for a couple reasons. The first one is if we look at investments, we always have to know what the Achilles heel is of that investment. But even before we do that, I'm taking money out of the stock market and I'm placing it into the real estate market. And what's the difference in return that I'm going to get over broad pieces of real estate,

broad stock market. Individual properties are going to vary, individual communities are going to vary. So I understand that if I pick the right stock versus the wrong stock or if I pick one property versus the North American real estate index, it's going to change. However, given the big broad picture, Paula, over long periods of time, the North American Real Estate Index and the U.S. stock market end up in about the same place. So I'm taking money out of my right hand and I'm putting it into my left hand. I do like leading between those two with the asset class that you're more

comfortable with and you're more likely to track. Behavior is going to be a huge part of your win. And if you're going to track this and you're going to stay on top of it and you're going to, this is going to be more sticky toward your goals, I do like that better. But the Achilles heel of real estate is the fact that it's an ill-liquid investment, and especially when you're not in a reed, which is like a mutual fund of real estate, and you own a bunch of them and you can get out of it right away, but you're in one property. I can't sell off the bathroom if I have a liquidity event where I need money. So you're taking money. There's got to be a pun there about bathroom and liquidity event. You can watch the situation go down the toilet. I don't know. I don't

I don't know. I don't know. But I do think that taking money that is liquid and moving it to illiquid inside of a tax shelter now and you're removing it from the tax shelter to do that. Paula, there's too many things that could go wrong and we're making our our portfolio to illiquid for me. So Casey, I would at the very least leave that, leave that money in the 457 alone, even if it's just as a diversifier, I would leave it alone.

Okay, so we have similar reasons for disliking this because... Mine's probably better. I like to start with what percentage of your overall portfolio do you want to put towards real estate and what percentage of your overall portfolio do you want to put towards market-based investments such as stocks, bonds, equity index funds, et cetera. And it seems to me, you know, and it's not my place to tell you what that asset allocation should be. I will tell you that mine is around.

around 50-50. So about 50% of my assets of my total net worth excluding the value of private businesses. About 50% of that total net worth is in real estate. About 50% ballpark is in market-based investments. I haven't calculated the numbers in a long time, but that's just my rough sense of where that ballpark is. That doesn't mean that should be your split. Some people are going to choose a 70-30 split. Some people are going to choose a 60-40. your mileage may vary, but start with figuring out what you want that split to be. I would hesitate to have that split go 90-10 or even 80-20 in either direction. You want to put some guardrails in place so that it doesn't get too tilted.

Casey, while I don't know how this move would impact that split, my sense is that it might tilt your portfolio a little too heavily towards the property side, such that you wouldn't be adequately diversified across the whole span. So that would be my first concern. Yeah, absolutely agree. There's another issue, Paula, which is if things change in the future, sure you're allowed to put $23,000 this year into the $457, but all that money coming out, if you decide that you want to back in, that's a gatekeeper. I'm putting it back.

But you know what I mean? I can't put all of it back. I really don't like, and don't get me wrong, there are tax shelters that become tax traps, right? Where we're like, I don't want to take that out because I'm in this tax shelter and it's nice. And if I take the money out, then I have less money in the tax shelter. But in this case, where he's potentially taking all the money out of this tax shelter. And he decides that he wants flexibility later on.

This is where the stock market gives him an event. advantage is freedom of flexibility. I can sell my stuff. I can have the money in a short amount of time. Can't do that with a real estate investment if I've invested in a single property or even two or three single properties. I can take a loan against it. And if I have like a home equity line of credit that's already established, I can then borrow against it. But you can already see the negatives there borrowing against my home versus just taking my money. What I don't want to do, though, Casey is dissuade you from this property. I want to be clear that my objection is not around the property. My objection is around using the 457 money for the property. I agree. Ding, ding,

ding, ding, ding, yes. Yeah. Though I am curious. So it's a condo in Florida that he would use as a short-term rental. Florida obviously is a massive state. So I'm curious to know where and if there are any particular ones that you've identified. There are a lot of condos in Florida that have restrictions around short-term rentals. Of course, that's going to depend on what municipality you're in. But there are a lot of places that do have short-term rental restrictions defined as anything that is less than 30 days. So in your search for that, that's something you're going to want to be very aware of. Florida, of course, is very seasonal when it comes to short-term rentals. So make sure that you project out vacancy and occupancy across all 12 months and you have a plan

for seasonal variation. Of course, in Florida, the big topic that everyone is talking about is insurance costs. Those have gone up substantially. But where there's fear, there's opportunity. A lot of people hesitate to invest in Florida or think about selling their holdings in Florida because of the fact that they can't predict rising insurance costs. But that could also be your edge, right? Someone else's Achilles heel could be your edge. I think also, Paula, you have to be aware of some of the very, very current news going on. You may think you're getting a great deal and you might be stepping in it.

I'll give you an example, some recent news in just the last few weeks in Miami because of that condominium that collapsed. MAPS, Miami is really upping the game on their inspections. Right. Not a shock, right? Yeah. And so because of that, yes, because of that, though, what we're seeing are these sometimes huge special assessments that the HOAs are doing to cover the increased cost of problems that have happened in the building or just the fact that the inspector cost is being pushed onto them. In fact, one recent story talked about a condominium that had a $100,000 special assessment. Because of that, we've seen in some buildings mass people and say, and forget it.

I'm selling it. And one story in the news just a couple of weeks ago, a guy sold his house for $150,000 less than he bought it for just a few years ago. Right, because what happens is when everybody decides to sell all at once, that, of course, negative. impacts the prices of those condos because all of a sudden the market gets flooded with inventory. Absolutely. And if you don't know that special assessment is coming, you may have $100,000. Now, the special assessment has to be listed on the document, right? It has to be, hey, I know this is coming there. It has to be disclosed on your purchase, your purchase document. But I think you also have to be aware of that that's happening all over the Miami area right now. But,

There could be similar things in other communities going on. Yeah. Yeah. I know that there are special assessments happening in the Tampa St. Pete Clearwater area. Mm-hmm. Yeah. But to your point, Paula, if everybody's selling and you factor that in.

Right. It could be a phenomenal opportunity. Exactly. Zig and other zag. Where there's fear. Right. There's opportunity. Yes.

So yeah, I'm with you, Joe. I don't want to discourage you from buying this property. I just don't like tapping the 457 to do it. I do, by the way, Casey, love the fact that you househacked your first one. I'm a massive, massive proponent of house hacking. And as I said in the answer to Julie's question, house hacking is the one time where that then diagram intersection of personal consumption and investment, it works because now you've got, as you know, a primary residence mortgage.

that is funding something that really functions as an investment. If you are someone who's new to the area of real estate investing, this is a fantastic way to, quote, dip your foot in the pool, as they say. I think it's a, it is a great starting point. The risk is incredibly low. The gains are huge.

Right. Which are the type of investments that I love, right? Yeah. It is it rocket science, although I did see one influencer say that recently, but she put it all technically. You know the types of things that I like are things where there's a huge upside and almost no downside. Well, no. Yes.

And I'll tell you offline, Paula, who this was. Okay. No need to disparage people here. But still, you're like, come on. Really? We're all looking for that. But house hacking, Paula, is that thing. Now, it doesn't mean it doesn't come with downsides.

You now have a roommate. You now have a renter where you're collecting the check. but you can learn a lot of those lessons, those valuable real estate lessons about how to deal with a tenant while still really having the security of your own house. Yeah. So Casey, I love that you've done that. And I love that you're continuing to expand because house hacking is a wonderful first step, but a lot of people never move past that first step. So the fact that you have the second, you're looking for the third. You're directionally doing all the right things. So Casey, keep the tax shelter of the 457. You get a tax shelter. You get increased diversification. I know you don't plan on using this money for retirement.

But remember, these quote unquote retirement accounts, 457, 401K, 403B, these are not retirement accounts in the sense of retirement as an occupational status. These are simply deals that you make with the government in which you get a tax advantage in exchange for putting your money there. So don't think of it as a retirement account. Just think of it as a tax advantaged account and keep the market-based portion of your portfolio in tax-advantaged accounts.

So thank you, Casey, for the question. Best of luck with this purchase because I know you're going to find another way to make it happen. All right, Joe, we have done it again. We did. We had a through line, again, unexpected, asset allocation.

Yeah. And even adding to the asset allocation, what represents an investment and what doesn't? Yes. Double through line. Look at that. Yeah. It's really, really interesting how these groupings happen and we don't plan them. Not at all.

It's like there's something like everybody's eating the same food on one day and goes, you know, I should call polo about this. Or we find a pattern in the noise, perhaps. We are able to see commonalities in disparate. questions? I think there is truth to that, but I also think it is pretty weird how there seem to be themes that emerge in most of these episodes. Well, all right, so today's two through lines. One is asset allocation. It's how are you going to slice the pie? And the other is, what's an investment in what's personal consumption? What's an investment and what's not? All right.

Joe, where can people find you if they'd like to hear more of your through lines? Wow. That's a nice transition. Thank you. Thank you. The Stackin Benjamin show is your confidence builder three days a week. And if you're really looking for just the lighter, lighter, lighter side. And Paula, you know, our show can be very, very light and fun and lots of laughter. We have one of the funnest, funniest shows that happened last Friday. You want to hear Paula and my co-host, OG, and our good friend, Doc G, from

earn and invest as they mix it up on one of our game show episodes. Our game shows are always fun. So what happens is we take a list that some blogger made somewhere on the internet. I don't tell Paula or OG or Doc G what is on the list. And then we ask them. And what's cool about these game shows is Paula, you know the things you guys come up with that aren't on the list are often some great things, some fantastic things.

So we get the benefit of the blogger's list and we get the benefit of your expertise. And so we're talking about those things in your budget that are a surprise that don't make your budget. And then all of a sudden it blindsides you. What are those? One blogger put together a list of 15 items that blindside people's budget. And we have Paula go head to head with OG and Doc. And as Paula knows, we get into some fun conversation. And maybe about cats wearing masks.

Yeah, that was the episode where OG was saluting the cat. And we won't tell people why or how because it is disturbing. All nearly is disturbing. No, maybe a little more disturbing than the story Paula tells on Friday about some of the veterinary treatments she's had with her feline friend. Oh, I don't think that's disturbing at all. I think it's inspiring. It is inspiring. It is a wild episode.

It's really, really funny. And I think you'll learn a lot about budget. So that's last Friday on the Stacky and Benjamin show. And that was a fun one to record. Well, thank you so much for tuning in. If you enjoyed today's episode, please do three things. First and foremost, share it with a friend, a family member, a colleague, a neighbor, share this with the people in your life.

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I'm Joss. I'll see hi. And I'll meet you in the next episode. Why are only large caps doing well? And what should I be doing in my investment? portfolio given the way that the markets are performing. Ooh, sounds salacious. No.

Is that too far? I'm not sure. I'm not sure salacious is the right descriptor. Well, maybe that. Just trying to keep the ratings high.