BiggerPockets Money Podcast - 182: What if My Career Gets Phased Out? Finance Friday with Mike

Episode Date: March 26, 2021

Mindy and Scott don’t often get stumped on the Money Show, but it happens once in a great while. What do you do when you have a multi-million dollar net worth, appreciating properties, a maxed out 401(k), and a solid safety reserve? That’s exactly the question that today’s guest, Mike, has.  Mike has worked in the music industry for years, moving all around the US to do his job. As technology has evolved, Mike is predicting an end to his specific role over the next decade, and is wondering what he should do next. He doesn’t have a lot of interest in starting a business or buying more real estate, but wants to squeeze out more money or savings if he can. He has rental properties that have highly appreciated, but are having cash flow problems due to COVID-19. One, located in San Francisco, has netted close to $700k in equity since its purchase 12 years ago. That’s massive! Mindy and Scott go through Mike’s options, such as selling and putting the leftover profit into cash-flowing assets, or 1031 exchanging into a more diverse real estate investment. Mike is one of the best examples of smart investing we’ve seen on the show, but there’s always more room for improvement with finances! In This Episode We Cover What to do after a real estate investment has grown significantly in equity  HOA fees and being prepared for a large cost when owning a condo Looking forward in your career to see when your industry may go through changes 1031 exchanges and using them to get more cash flow Keeping your expenses low even if you make a substantial amount of money And So Much More! Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the Bigger Pockets Money podcast show number 176, Finance Friday edition, where we interview Mike, a music industry executive, and talk about preparing to leave a job potentially not on your own terms. You know, in the community, you always hear about people that want to retire early. I'm not looking to retire early. I love what I do. Love it. But I also know that technology and consumers chase are changing my career and what I do.

And I'll still be in the music business, but I probably won't be at the capacity. that I am in now, and who knows if I'll make the money that I'm making now. So that's what I'm planning for. Hello, hello, hello. My name is Mindy Jensen, and with me as always is my can't carry a tune in a bucket, co-host Scott Trench. The only way to respond appropriately here is to sing and... Not going to do it.

Moving on. Scott and I are here to make financial independence less scary, less just for somebody else. To introduce you to every money story, because we truly believe that financial freedom is attainable for everyone, no matter when or where you're starting. That's right. Whether you want to retire early and travel the world, go on to make big time investments, or make huge half of your net worth game-changing decisions in real estate, start your own business or do whatever else you want with for retiring early.

We'll help you reach your financial goals and get money out of the way so that you can launch yourself towards those dreams. Today we are speaking with Mike, who is a music industry executive, but changes in listener habits are threatening his job. Is that the right way to say that, Scott? Do you think threatening his job? I think his job is going to have a lot of changes in the next seven to ten years. And more importantly, Mike thinks his job's going to have a lot of changes.

So I love that he is thinking ahead and making plans now while he can calmly prepare for the next chapter of his life, as opposed to putting his head in the sand, ignoring potential changes, and then frantically having to figure out something in seven years. Yeah, I think Mike was a great guest. I think he has made a lot of really good decisions over his lifetime. I think he is more healthily paranoid than he needs to be with respect to his job. But I think that, hey, if he did lose his job, the worst case that happens is he basically is able to retire right now. So I really thought this was a helpful Finance Friday because I think a lot of people are going through similar thought processes to Mike. I think that his situation to me is highly likely to be reflected. of other people who have been really doing good financial habits and making good quality decisions over a 20, 25 year period. Because when you do that and make investments, you're going to have a couple of weird winners which skew your financial position. And that weird winner is half of his net worth right now in a San Francisco condo. And so that's not like a weird, like that just happens, I think, if you invest over a long period of time, you're likely to hit a good deal or a good winner, you know, Tesla stock or whatever it is that you're doing

over a long period of time. So I think it's a really interesting discussion and I think he's set himself up in a really healthy way. Yes. And I just love that he's looking forward. I mean, so many people get into a job that they love and he clearly loves his job. I mean, how could he not? What a fun job. But people get into this position where, oh, I love my job, therefore I'm never going to quit so I don't have to make plans. And what is this thing? Life is what happens when you're making other plans. Have you ever heard that? Is that a romantic comedy that I just made up? I've heard, I've heard man plans God laughs. Oh, that, yeah, true. Life laughs too. Just in general, you can make all the best plans, but what you really need to do is plan your finances out so that you are prepared

for life coming up and slapping you and saying, ha ha ha, ha, this is what you're going to do instead. So I just, I think there's a lot of things that people can take away from this episode, and I'm super excited to share it with everybody. Before we bring in Mike, let's go back to the part that my attorney makes me read. The contents of this podcast are informational in nature and are not legal or tax advice and neither Scott nor I nor Bigger Pockets is engaged in the provision of legal tax or any other advice.

You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate. Okay, let's bring in Mike and tell him what to do. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going, and more importantly, where your tax refund can make the biggest impact. Because the goal isn't just to look backward. It's to actually make progress. Simplify your finances

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With his money. Mike works in the music industry, but changes to consumer habits means his job might change dramatically in the next three to five years. He's looking for options so he can make calm decisions instead of frantic emotional decisions out of panic. Mike, welcome to the show. Let's start off with your financial backstory. Can you remind people what area of the world you live in? And then let's recap your income and expenses and debts. Okay.

I live in Nashville and debt is simple. When I first started in the music business, I sold my house, Pennsylvania, moved to California, and completely paid off all credit cards, student loans, and whatever. So the only debt I technically have is my mortgage and my Nashville house. And then I have a rental property, which is covered by my money. my tenants. So, you know, I know some people say, well, you're not debt-free until you have the mortgage paid off, but essentially I'm debt-free because the mortgage is so cheap at this point after refinancing. So the salary is 135 base, and then we get a bonus every year, and that fluctuates,

but typically it's around $25,000 to $30,000 if we do very well. And then I don't know if this should be counted or not, but I a lot of times count the company match for the 401k because it's a substantial about a money. It's $7 to $8,000 per year. So to me, that's found money. So I throw that in there too. I love that. Absolutely. And are there any other sources of income outside of the base bonus in 401k match? I used to, this is the keyword, bring it around $41, $4,200 a year with the condo that I own in San Francisco. However, times have radically changed in the last year, and I'm still fortunate that I do have one of the three tenants left, but I am now subsidizing that. So beginning this past January, a couple of months ago, I'm subsidizing it. So up until January, I hadn't lost any money,

but I certainly was not bringing in the $41, $4,200 profit after all expenses paid as I was the last few years. So you're bringing in a $44,000 a month in cash flow from the property prior to the pandemic? Actually, $5,300. $5,300 a month. Correct. And then paying the mortgage, taxes, HOA fee, all that. Real estate sounds like it's a part of it. Could you walk us through the major components of your net worth, maybe starting with the largest assets and moving your way down? The largest asset outside of the content. So, yeah, let's talk about the condo. How much is it worth? It bounces between 1.4 and 1.6.

Million. Okay, wow. And what's your debt on that? Just about $600,000 now. It's like 606, 604. It's very low. Fantastic. So you don't need much else and you're already pretty much a millionaire just with this one. Correct. Yes, it's a nice little padding. I mean, I know Sacramento, California will take their cut in taxes if I ever sold it. But yes, it's pretty good. Yes, they will. There's all these people that trash California real estate. It's not a good place.

You make one deal here and you're wealthier than people have been buying, you know, cash flow rentals in the Midwest for years. Sorry, I've got off an tangent with this. I bought the, I purchased it, I think of 2009. It's brand new. And I paid $760 for it. There you go. Oh, wow.

So you've seen some appreciation and that will trigger a nice capital. gains tax bill if you choose to sell it. So let's put that on the back burner right now and go through your expenses. And then that is something I want to revisit down the, a little bit. Hold on, because this is the largest asset. I think there's a couple more questions to hear about this. Can you walk us through what rents were and what they are now and then where you expect them to be in a year or two? For what I used to get for the condo or what's in the neighbor, what the city is bearing? What do you, yeah, what did you used to get? And then what do you think is the current reality? So I used to get $5,300 a month for the last two years.

Now, when I look in the neighborhood, well, okay, there's a sidebar to this. There is, this just came about in the last few years. There's heavy rent control now in San Francisco. And so I keep up on the news every week in San Francisco. And some of the landlords, if I understood these news stories correct, are not raising the rents because I'll look I'll look on you know different you know rental sites and I'll be like okay what's going on in the neighborhood and rents are still you know 40 4,000 4,000 if we've been seen and I have a three bedroom so what I kind of heard on the news when they were interviewing landlords

is they're like we're going to ride this out because if we get someone in there for say $3,000 we can only raise it 1% or whatever it is per year, and it'll take as a decade to get back to regular market rate from a year ago, 2019. So that I think, that was very eye-opening when I saw that.

I don't want to go in and say, well, just to get a tenant in there, I'll take $3,000, and then all of a sudden, you know, they stay, which is good. There's nothing wrong with staying, but I'm going to be subsidizing that along the way for several years

until they move out because of the laws. That's fascinating. That is super important. We don't have rent control. Do we have any rent? control in Denver, Scott? I do not believe so. Yeah, so that is something that I have never even considered, but absolutely, you can only

raise your rent a certain amount per month. If you're in a rent-controlled area, wow, that gives you yet something else to think about before you start renting out your properties. Yeah, I mean, they had some of these landlords in the South Bay down towards, you know, San Jose, Google, Mountain View, and, you know, they're just like, yeah, they're empty, but that's all right. We're going to ride it out like that. And it was very eye-opening a couple weeks ago when I saw that news story. So I would have never thought of that. What is the current status is vacant? No. I had three guys in there. And one got married, one left to work out of town. And the other guy actually is moving. He got a new job too. But until the pandemic is lifted, he asked if I could make a deal with him. And I said yes. And so basically I'm charging. 2004-55 for it.

And my thought, after talking with some former coworkers and friends in the Bay Area, it's better to have some money than no money coming in. A friend of mine has two condos in Oakland. She hasn't had a look in probably six months because there's so much inventory. So that's where I was just like, you know what? Stabilization is better than nothing. And I don't mind, I mean, not that I like throwing in some cash every month, but I'd rather do you just a few dollars than pay the whole nut. So,

thank you for this context. So we've got a fantastic winner of a real estate deal here where you've made three quarters of a million dollars, but some problems in the current and a murky go forward look here where the current game seems to be wait and see and not do anything that would lock you in and kill your options right now. Is that right? Yes, but there's one more caveat that I should tell you, and that is, is that three blocks from my condo, this is arguably one of the hottest neighborhoods in the city. They just built the new Chase Center, three blocks from there, where the Golden State Warriors, well, they were supposed to move.

I mean, they've moved, but no one could go to the games just yet. But, I mean, this neighborhood for the next decade, once things get back to normal, is it's going to be popping. So that's kind of like, well, it's not just an ordinary condo in an ordinary neighborhood. There's so much promise there. You have the San Francisco Children's Hospital three blocks away. Uber's headquarters were there. I think they probably scaled it back. I mean, there's just, there's a lot going on.

So in the long game, there's a lot to consider. So I refer to this somewhat morbidly as bleeding in the short run. But you're bleeding in this condo because you're paying. what's the mortgage payment and what is your income? The mortgage payment is to round it up. It's $4,000 a month. Okay. And then you're receiving $2,500.

So you're putting $1,500 in cash in when there are no maintenance issues. No, I'm putting about $1,900 in because HOAs are $650. Then I have the insurance, all that on it. But the taxes are folded in with the $4,000 mortgage payment. So, I mean, they were more than covering. everything prior to this. Okay. Okay, great.

One last question about the condo. Are short-term rentals allowed in San Francisco, and are they allowed in this building? I don't know the answer to that. I would have to find out. Yeah, that would be something to consider. Episode 131 of the Bigger Pockets Real Estate podcast talks to Serge Shukot, and he has an apartment building that is around the corner from a cancer center. And you mentioned the, is it the Children's Hospital?

is nearby. So he has a lot of people coming into his units to stay during cancer treatment. I'm wondering if there is a short-term or even like a longer short-term option. Some cities have limited it to 30 days or more. But if you're coming in for treatment at the Children's Hospital, maybe you would be there for 30 days or more. So that's an option going forward if short-term rentals are allowed in the unit. Yeah, it's actually UCSF. So it's a college. Children's Hospital. Okay, yeah. But I mean, you know, it's also on the main subway line, and they built the Chinatown subway

extension, and then they're doing the high-speed rail, kind of like are in Europe and Asia that's going through there, and the train station is a mile away. I mean, it's the economy, and once everything opens back up, I mean, the next decade could be paved with gold in this neighborhood, but it's just going to take time for that to go. Okay. And I guess I do have one more, one last question. How long can you afford to subsidize this condo? I mean, indefinitely, I have more than a cushion, which when we go through my other, like, you know, net worth, you'll see if I have to dig into this bucket or that bucket, I can more than do it.

Okay, I love that answer. I love that you are, you didn't buy seven of these condos, and then you're barely scraping by and you can't afford to keep them. Okay, well, let's look at your expenses. We've covered income and debts. Where is your money going every month? Wait, wait, wait. Before we get to expenses, can we keep walking through the net worth statement? So we're just doing one thing here.

What's the next largest asset after the condo? My company 401K, there's about $546,000 in it. Nice. That's awesome. And you just take the match every year? I max it out every year, correct. You max it out every year. Okay, great. Then there is the company stock plan that we are offered,

which we get to buy our stock at a reduced rate. It matures after five years. There's $10,500 in that. And yet last year was the first year, it paid off. So continually now, it continues to roll every year I get paid off from the five years previous. Next would be just general stocks. I have about $76,000 there. I have $7,000 in certificate of deposits at the bank.

I have a brokerage account, which I just, have index funds investments that's at 307,000 I have a Roth at 44,000 an IRA at 84,000 last or not last year but 2019 I got into the REITs like an online REIT investment that's 54,000 I have a personal investment with someone for 10,000 I have an emergency fund of cash in my savings account of 22,000, and then the condo is approximately 800,000 equity. What about a primary residence? I owe $206,000 on the primary residence. The value swings between $450,000 and $500,000. However, I don't count the house that I live in in my net worth because look, if I really ran into financial straits and had to sell it, I got probably 200, 250,000 equity.

However, I need a place to live. So that's why I don't count that. No, absolutely. It makes perfect sense. I just wanted to point out that, you know, I had suspected something like that because you keep moving to like the most happening city at the perfect time and buying property there. I think I got in. Yeah.

It sounds like Sacramento. When I talked to my friends from San Francisco when I moved here and I bought it and the first number was three. It was 318, I think. And they were like, what? You should have bought two more. And I should have because the same house today, there's no more twos and threes anymore. Everything now begins with a four or five or better. No, I mean, like buying in San Francisco in 2009 looks genius.

And buying in Nashville, you know, four or five, I'm guessing four or five years ago, somewhere around that point, you know. Seven years ago I bought. Yeah, that's perfect. I mean, that it's just like Nashville is one of the hottest markets in the entire country over the last five, six, seven years. So, yeah, there's no office workers or tourists downtown, but there are a lot of cement trucks and cranes and construction workers.

Pandemic or no, it's just that they keep building. Well, I want to know where you're moving next so that I can go buy a house there too. So we're looking at a net worth position between, let's call it, two and two and a half million dollars between all these assets. Is that about in the right park? Correct. Between whether we count the house, we know that number can move toward the higher end or lower end of that range. Yeah.

So I'm going to jump in here and say, I would count the equity in the home as part of your net worth because that's something that you own. The 200-ish that you already have an equity, I believe, should count towards your net worth. And that's how I estimate my own net worth is by the equity, not how much I could get for it if I sold it today because you don't own all 450. in purchase price. You still have the mortgage on it. So that's what I would do. It's your finances. And if you want to estimate low, that's always better than estimating high on the net worth scale. Because then you're just pleasantly surprised. You're like, oh, it's 2.6, not 2.4. That's just better. Thank you. Good advice. Good advice. Now, let's talk about the expense side of this. Can you walk us through your living expenses and

exclude the condo? Any payment or payments. So just like, you know, me living. in my house and what goes through. So I think I sent you guys 2019 and then I sent you 2020. I have a spreadsheet and I got very addicted to this. I don't expect anyone to be like this. You know, if I used to find a dollar on the subway platform or, you know, 50 cents at sidewalk, I pick it up and I'd, you know, I'd count it on my spreadsheet. I know it's crazy, but I have a friend that does that with her food.

She weighs everything out. So it's like, you know, I think Liz from Frugalwood said this one time, it's a game. And that's, I've gotten addicted to the game, but I don't expect anyone to do this. I love your personal budget and how precise you are. And that's, that's really important because when you're trying to figure out what levers can I pull to make the most change in my, in my life, you look and you're like, oh, spending a lot of time on this makes no sense. spending a lot of time on this makes a lot more sense. So I think it's great. And like I keep saying all the time, personal finance is personal.

I think I started it about 12 or 13 years ago for tax purposes because we used to be able to write a lot off in the business that I did. But those have gone away. But I just kept doing it. And it is. I mean, I've heard this on the podcast before. It's very eye-opening when you see it. But, I mean, I guess what I want to say is if you look at my 2019 and then you look at

2020, everything stopped. So the spending stopped. And I want to, I think I literally lived off of my bonus last year and literally invested and saved my entire base salary because I didn't, I didn't go out to eat or cocktail or, you know, go on vacation or anything. So I, you know, I'll, I'll give you two things that I just think are just, they're, they're fun. So I want to say that there was Wall Street journal article that I'd read in April about calling your insurance company and reducing the insurance rate. And truly, you know, a lot of the cars that people were just sitting in their driveways all year. So, I mean, again, I got it down, I got the insurance for two cars down to $40 a month. And then I think I spent an hour, because I didn't really drive them, but maybe

once a week, it cost me $17 a month for each car and gas. And one of them I have is a hybrid. So, you know. There you go. Who spends that? Who spends $70 a month in gas for a car? Nobody. Me last April.

Yeah. So, but yeah, my, I think, you know, I love craft cocktails. I like really nice wine. I really like really nice coffee. But that's kind of what I spend things. And then, you know, look at it, I'll say this to. That's where my budget goes to. I'm very fortunate because of my job and my wife's job.

Some things are paid for. So I don't pay for my internet. I don't pay for my cell phone. That's paid for the company. You know, her job allows us to get this craft coffee subscription. So we're doing well, but we don't have a lot of the expenses a lot of other people have.

And I totally understand that. People could say, that's impossible. How could you only spend $500 a month? Well, there's added in that. But that's a perk of where you work. A great perk. Yes, a great perk. Don't apologize for these awesome things that you get.

I get some awesome things because of my job, too, and that's, you know, that's okay. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is. going and more importantly where your tax refund can make the biggest impact. Because the goal isn't just to look backward, it's to actually make progress. Simplify your finances with Monarch. Monarch is the all-in-one personal finance tool designed to make your life easier. It brings your entire financial

life, including budgeting, accounts and investments, net worth, and future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch subscription with the code pockets. What I personally like is that Monarch keeps you focus on achieving, not just tracking. You can see your budgets, debt payoff, savings goals, and net worth all in one place. So every decision actually moves the needle. Achieve your financial goals for good with Monarch, the all-in-one tool that makes money management simple. Use the code pockets at Monarch.com for half off your first year. That's 50% off at Monarch.com code pockets. You just realized your business needed to hire someone yesterday. How can you find

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Learn more at aboutamazon.ca. I think we've got a really good picture of this. We've had $31,000 a year in annual expenses. We've got $2.2.2 million dollars in assets. And what I love about your story is that about half of that is reflective of the grind of good habits over a long period of time, the 401K, the after-tax brokerage accounts, those types of things, long-term investing philosophy. And the other half of it is phenomenal real estate outcomes, right, of that net worth. What do they say right place, right time sometimes? Yeah.

What I want to point out is regardless of whether you got right place, right time or whatever, I think Lucky is too strong a word. I invested in Denver, which has some of those same profiles of appreciation. But regardless of that, you still would be a very wealthy self-made millionaire with just the 401K, the good long-term habits and the focus on the low expenses there. So that's supposed to be a compliment, but I'm butchering this. But anyways, what's your goal right now, Mike? And what would be the best way we could help you? So I absolutely love my career.

But, you know, the truth be told is that, you know, consumer habits have changed. And, you know, I was saying this probably four or five years ago, we would see it where people are listening less and less to the radio and more and more to streaming services, podcasting, and so forth. And that's great. But what my sole job depends on is promoting our artists to radio. And I think probably in the next three to five to seven years, maybe 10, I don't know that it'll go that long. But, you know, because of this past year with the pandemic, a lot of radio companies have been more than strapped. Thank God it was an election year. It actually helped some radio and television and newspaper stations, you know, because there was so much political advertising to spend.

But these companies have been very hurt and they've had to cut beyond the bone. And they've started to do what is called central programming. And so you might have, you know, the station in Phoenix or Austin, Texas, all programmed out of Denver. And so that's less managers of the radio stations for me to call and promote to because one person in another city far away might be, you know, dictating what you're hearing, you know, on the Boston radio station. That if you look at it, I'm seeing the writing on the wall. It's just, it's changing. And with the radio listening, it's any more. it's kind of not that people don't listen at home or in their office or workplace, but the most

place that people listen to the radio is in their car. And if people are at home, they're not commuting to work. And the other problem is, is that we've been in this for a year now and who knows how much longer it's going to go. And so it's very difficult to get someone out of their habit that they've adopted. So if they used to get up and get in their car and drive to a downtown area to their work, workplace and listen to, you know, their radio station for music. And being at home now, they get up and maybe they listen to the Today Show or, you know, a podcast or maybe they're just listening to Spotify or Pandora. Well, when they get in the car and we start opening up again, are they going to go back to the radio station or are they just going to plug their phone in to the radio in the vehicle they're

driving and not turn on the local radio station? I mean, I don't know. But it's hard to get them out of a habit once they get into it. And that's where I see a lot of this going. You know, in the community, you always hear about people that want to retire early. I'm not looking to retire early. I love what I do. Love it. But I also know that technology and consumers chase are changing my career and what I do. And I'll still be in the music business, but I probably won't be at the capacity that I am in now. And who knows if I'll make the money that I'm making now. So that's what I'm planning for. Well, so at the highest level, it sounds like the challenge here is that, hey, my career may be, and my current role may be phased out over the next three, four, five years. Maybe sooner, who knows with that. And I'll lose that current thing. But it doesn't sound like, it doesn't sound like you'd be unwilling to work for a significant pay cut if it wasn't a very similar thing working for the next thing. So, I mean, I guess what I'm asking is what can we help? you with with regards to the financial side of this?

Do you want to redesign your portfolio to produce income for a more defensive position? Or I guess what's the challenge? The challenge, I don't know if it's the challenge. I don't know if challenge is the right word. I was hoping to see if you guys could take a look at it and say you're kind of doing a lot of things right. But here's one thing maybe you could modify that would help you. I remember my accountant.

and last year said, well, you could start a business or you could buy more real estate. And I'm like, well, I'm really not interested in doing either right now. But those were the only two pieces of advice that he had for me to lower my, you know, taxable income or to modify my investment strategy. You know what I mean? So I'm kind of like, well, okay, that's all that you have. Maybe that could be a good thing, but I'm doing everything right. Or maybe I need to ask a few different people and see if they see it a different way. I mean, if real estate wasn't out of control like it is now, I might consider buying another condo, but everything is so overpriced right now. So that's not an option for me. And I'm not interested in starting a business. Let me just, let me just like

spew some thoughts about your situation and see if any of this is helpful. What I'm hearing is I'm hearing a guy who's pretty frugal, likes his craft cocktails, which which is a very wise thing to spend your money on, in my opinion. But you spend in one quarter of your annual income, you know, on an after-tax basis at least, you know, not counting any of your investments in those types of things. You could take a pay cut in half. You could drive Uber for 30 hours a week and still be able to cash flow your living situation the way that I made 40 to 45 hours a week. But, you know, you could, you do not have an expensive lifestyle and you've got a substantial amount of assets. Your portfolio is reflective of really good habits over.

conducted over a very long period of time with a pretty sound underlying philosophy there. And then again, these two huge winners in real estate, you're over-indexed in real estate or overweighted in real estate because you had a gigantic freaking winner in the San Francisco property, right? So it's not like that's a mistake or anything with your portfolio. You can easily, you have this bleed on your San Francisco property, but you can sustain it indefinitely your current rate, and you could probably sustain it even if you lost 30, 40% of your salary. If you lost half your salary, now all of a sudden you have to figure out another way to make up some of that income. But like you have an extremely defensive financial position, I think is

just fantastic and liberating with that. But if you were to retire tomorrow, then you would have to make some changes to your portfolio in order to, for it to produce more income directly really that would enable you to actually spend that income. So that would, I don't know, that rant over there. Any reactions to what I just said with that? I mean, I think I am unique. I think when a lot of this started and I started reading and listening to everything in the community, it was, you know, the common thing was tech workers that just hated a cubicle and wanted to get out early. That's not my case at all. I mean, I absolutely love my career in what I do. I mean, we always joke, especially when you're at a concert, having a couple of beers with your clients. It's like, this is like college

with an expense account. So I'm not looking to, you know, change that. It's, it's fantastic. I mean, movies, music, television, fashion, tech, sports, create pop culture. That's what I'm a part of, and I just love it. So I'm not looking to, you know, just do something different, but I do know it's coming quick. It's going to change, you know, not, not this year, I don't think, not even maybe next year, but it's coming. And I think I, to use a pun, when the music stops, I want a chair. I want a comfortable one. And then what do they always say?

It's like, so now you have options. What are your options going to be? Do you work for a specific artist, a management company, a touring company, just to work for another record label? I don't know. I mean, you're open to all of it, but it will change. So that's what I'm trying to plan for immensely. Yeah.

And I think you're 100% wise to do so. I think like what I would often what we'll see and I'll give you examples of people who are not you to help you think about the see my perspective on some of this. But like suppose we had somebody who had a, you know, 400,000 in home equity and 500,000 in retirement account and 22,000 in savings the way you have. That person's in big trouble in your situation, right? And they need to real quick begin figuring out how to create assets outside of that retirement account outside of the home equity because they're screwed. if they lose the job. They've only got a couple months runway. You've got half a million in assets, maybe 600,000 and 700,000 in assets outside of the retirement accounts that you could borrow against, that you could liquidate to sell, I mean, for many years, perhaps close to it, perhaps all the way

potentially through to traditional retirement age when you can begin accessing the money in the 401k through work and those types of things. On top of that, you got another $750,000 in equity in the condo with that, which you can again borrow against or liquidate if you had need of any cash there. And because you spend so much less than you earn, you could take a year and figure this out and think through it and then figure out, okay, I'm going to do this on a consulting basis. I'm going to start my own business here. I'm going to do whatever it is in the event that I lost my job. It also sounds like you're super passionate about your job. So I am a little suspect about whether you're not very, very good at your job and unlikely to be on the chopping block in the early rounds of this

in the event that your company is forced to make hard decisions. So these are just more compliments heading your way. Again, I don't know if this is helpful. Oh, that was a compliment? How good are you at your job? That's a real compliment. I'm so glad we don't have those. I suspect he's really good at his job because he loves it so much, right? So I do. I think, I think that that's, It's just like, that's where I'm saying, like, I don't know how much I'd change about your portfolio, with the exception of. And I think you're thinking, you've brought up great questions with your San Francisco condo, right? I mean, again, that's the biggest piece of the pie here. And we can talk about that.

But it seems like you've got your outlook on that pretty good. You think it's going to go up in value and you can sustain it in the short run to see what your options are going to look like in a year or two from now with that. But that's where I'm struggling to come up with, like, good advice here because I think you're something. pretty smart and doing a lot of things intelligently with this. It's a little complex, but it's great overall. Thank you. Okay, let's ask about the condo.

Is there a point where certain, you know, I know people that hold on to everything for their whole life, and then I know people that, you know, get out of them after 10 years. I mean, it's approximately 13 years old now. I mean, does there come a point where

it's really time to exit a property like that, especially after a certain amount of time, the HOA fee probably will go up so that, you know, you're going to need a new roof, you're going to need a new elevator in the building. You're, you could replace a dishwasher and a stove any time. But I mean, there's capital expenses that will come up with a condo and really you should be exiting it after X amount of years or, or I don't know, but this is my first entry into having a rental property. I've never had one before. Yeah. So the condo is really building specific. You could have a condo association that is doing a really great job of running the association.

The dues are $600 a month because they really only need $200 a month and the 400 goes into the Kappex for the entire building so that when they do need a new roof, they already have the money in the reserves to pay for the roof. They don't have to issue what's called a special assessment. I never lived in a condo like that. I always lived in the condo where the association is $200 a month and that's the bare bones. And when they need a new roof, oops, now we have to double that association fee on everybody because we have nothing in reserves. So I would look into their reserve fund.

And I think you're asking all the right questions. I love that you have these such great problems because it does make it, you know, now, like Scott, I'm struggling to come up with some good advice. But I also want to note that, you know, your good problems are because. of great past practices. So back to the condo, I would look into their reserve fund. How much is in there? How much is a new roof? It's not $1,000. A new roof on a condo is on a condo building. How tall is the building? 100,000, four stories, four or five stories. Okay, so $100,000. A roof lasts between what, 15 and 25 years, depending on, well, and that's residential. I don't know how long a condo

building roof lasts. When you have an HOA, it lasts about 15 years. When you don't, it's about 30 years, I've heard. There you go. So it's a 13-year-old building. Do you have $100,000 in reserves? And do you pay your own heating bill, or is it a boiler that heats the entire building,

routine maintenance on, is it brick? Well, it was like it's only 12. 13 years old. So it was under the new California code for earthquake and all. I mean, there's a lot of, I mean, just the hand, just the bathrooms in it. I'd never seen bathrooms. And they had the, what do you call it? You know, the electrical outlets were high. I mean, there's codes that were state California codes. I'd never even seen before in buildings. So it's good. But again, everything ages. Yeah, everything ages. And I would look into the HOA reserve fund and see if, ask, nobody ever goes to the HOA meetings.

Ask them, what are you paying for? What is the extra going into? Do they have plans for a new roof, a new, like repaving the parking lot or the boiler is what did it on my property? We had a pool, so they had to fix the pool. There were all these little things that add up. And when you don't have anything in reserves, then you have to issue a special assessment. So if there's a special assessment coming, that's probably going to stink. Well, I would just zoom out here for a second and say the asset is $1.4 million, right?

1.2 to $1.4.4. I think is what you said. Is that right? 1.4.4.1. Okay. Sorry, I'm way off. 1.4 and we've got a $600,000 mortgage on the property. it's costing $4,000 a month, and it should be bringing in $5,300 a month at income, right? It was for two years it was bringing in $5,300 a month. Yeah. Yeah. So this is not a cash flowing asset, right? You know, if you took that $700 in equity, or I guess $8,000 or $900,000 in equity,

whatever it is after the city takes their cut and the closing costs, you know, that type of wealth could generate substantially different levels of. free cash flow in another area. It may not appreciate the same way that you're expecting this property to appreciate, but it's not an income generator. So the holding, holding onto the property has to be predicated on the assumption that you're either going to change that cash flow profile or that it's going to continue to accrete in value over time. Now, you asked about like timing issues. I don't see any big ones. HOA could be there, but what are they going to, they're going to dig your $10,000? Okay, that's what, like 1.5% of the wealthy?

you have in this thing. So it's just not material to the decision about whether the next, when the next HOA event is going to happen, unless I'm misjudging that, it's going to be much larger than a $10,000 hit or something like that. The question, I think, is whether it's going to go up in value. And then, again, I don't think there's any timing things other than like, you lose the depreciation benefit after 27 and a half years. So another 14 and a half years, you know, then you might have, then you might be losing some of that offset to your, your passive income there and some of the tax advantages. But I think that's, that's, that's what it boils down to for me is can you change that cash flow profile short-term rentals you

already do rent by the room which is a pretty good way to increase rent in a lot of ways but or how confident are you that the market local market conditions are going to continue to carry this property up in value this is your largest asset than the biggest the biggest stakes thing here but the great news about your position in the first place is that you don't even need this asset in in order to sustain what you're going on here because of the other good stuff you've got going on I mean there's another asset with the condo, and that's the parking spot. You could get $300 a month for that. So if the new tenant doesn't have a car, I could rent the parking spot out to someone else in the building for $300 a month. Oh, yeah, that's awesome. So that's important, too. So I was going to get to that as well, the market of San Francisco.

You just mentioned that your friend in Oakland hasn't even had anybody looking at her property in six months. I have friends who live in San Francisco and a couple of years ago, there would be a line for the opportunity to put money down on a rental in San Francisco. It was so hot with COVID happening. All of these companies have said, oh, we're not going to expand into the city anymore. All of our employees can go live someplace else because they're all working from home anyway. And why pay these super high rents in the Bay Area when you can go live in Iowa where you're from and pay $1,000 and have a palace with super high speed internet and get all this as well?

So Scott said, how confident are you in the market? San Francisco has been hot. I used to live in Turlock since. San Francisco's been hot since I lived there in second grade, which was a couple of years ago. So I don't know that it will never be hot again, but I've heard a lot of people saying that the market has gone down. And it is much more difficult to find a tenant. So, you know, how long do you think that's going to last? I don't know.

I mean, I remember Manhattan used to be like that, too. You know, when I was growing up, it was, you did just it. And then you think, I'm like, boy, 15 years ago, if you bought something, you know, in Manhattan now, it's amazing. I don't know. I wonder, you know, what's gone through my mind is, do you cash out and then put this into index funds and maybe make a better profit over the long run in the stock market or hang on to the condo and hope for more appreciation? That's kind of where my, you know, I don't know if there's a right or a wrong answer in that. No, absolutely. The challenge with that is, you know, it's always more difficult to exit in real estate investment than to enter it because of the closing costs with those types of things, right?

So when you, like, when you, if you were to zero base your portfolio and you had the, let's say, let's say it's 800 inequity in the property. And if you sell it, it will be $750 after closing costs. I'm making this up. But somewhere, no, it'll be less. Like, it's called 700 in after closing costs. That's way high. That's very conservative with the closing cost estimate. But, okay, I've got 700K in cash.

What do I do with that right now? And so that's one question to go about asking. But then you also have to recognize, like, hey, the problem is, though, I've got 800 locked up in this property. And so the only way I'm going to get to that 700 is by paying the taxes, the closing costs, the whatever. I mean, the after tax is going to be even less than that, right? I mean, we've got a huge gain that we're going to be declaring on this property.

So I think that's where the challenge is going to come from. And I think it's probably helpful to construct the portfolio from the ground up and say, if I was zero basing and it was all, I converted everything to cash and restarted, how does that look? And then what, how does that change now that I've got, due to the circumstances of me having this money in this property? How do I think through some of those things? do I 1031 exchange? Does that make it, if I would in a tax-free world, convert that into

index funds, but I can't because my tax situation and the gain I'm going to receive, do I do a 1031 exchange? Is that something that I'm interested in? Is now the right time? Do I feel like I should just pay the $2,000 a month to get better optionality in a year or two or at least have a line of sight and be more certain after this pandemic is over, if that's a thing? Those are some questions to begin asking about making the right decision for the condo, I think. Does this also make me less diversified? Because then, I don't know, just hypothetically, that would give me what, 80, 90 percent more in equities rather than spread around in real estate, the way the, you know, my portfolio is balanced now. I have a million in equities and

I have a million in real estate. Yeah. I don't know. So if Wall Street just, goes to pot, then all of a sudden I have nothing to fall back on necessarily. Where now there's a balance, you know, it's like, well, I got real estate and I got, I got Wall Street, you know, are your index funds? Absolutely. I think that's, that's certainly a question that comes up. You can always diversify that back by putting that into REITs or something like that with those. But I would, I would imagine, and I'm not a CPA, but I imagine when you, if you talk to your CPA, they'd tell you to 1031 or something to that effect, because that would be,

much better from a tax perspective than liquidating, paying the tax, and then sitting on the cash and figuring out what to do with it from there. You're also now, like, if you do that, you're going to run into the same problem. I've got a pile of cash. Do I dump it all into the market right now? And like, we've talked a million times about how mathematically the correct thing to do is to dump it all into the market at once rather than dollar cost average over time. But that is very difficult for me personally. And I don't know how difficult it would be for you in that situation, but depending on your mentality around that. Do what to dump in $3 quarters of a million into the, even VTSAX right now,

that's a hard one too, right? Yeah. Yeah, it's expensive. This was back in March or April and it was like, you know, $60 a share. That'd be one thing. But I think it's 100 now. Yeah, you should go back in time. You should sell it right before the pandemic hit and then dump it right into the stock market in March.

That's my advice. The 1031, though, is that. When you buy another property, you have a couple of months to turn the profit over into another property, correct? You could defer the gain. Okay. Yes. But he's talking about the timeline.

Yes, there is a very tight timeline. If you decide down the road to sell the property, definitely speak to a qualified intermediary, which is the 1031 person, because there are timelines you have to hit. There are ways that you have to structure the deal. you can't take possession of the money when you sell it if you do, your 1031's out the window. You have to identify three properties within 45 days. If you don't, your 1031's out the window. So making these decisions consciously before you put the house on the market helps you have a really smooth 1031 exchange as opposed to the panicky. Oh, my goodness, I have to buy any property because I don't want to lose all this tax money.

Like you're paying short or long term capital gains on this, what's 800,000 that it's a appreciated. So that's no small potatoes, 15, 20 percent tax on $800,000 or putting that into a new property, which is better. The only problem with the property is everything is very, very expensive now. There's not a lot of deals out there. Yeah. Exactly. So if you've already got this expensive property, maybe, you know, continue to hold it and start to look at different markets. And let me know what market you're in so I can jump in there with you, Mr. Kreskin. If you don't go into this very intentionally, my belief, and I have not done a 1031 exchange personally, but I've talked to a lot of people who have, and I remember being at a conference

with Brandon Turner when he was doing his first 1031 exchange, and he was like running up against the deadline and just like making offers left and right on anything at everything because he was going to lose so much in tax money by doing that. That's, I think, the situation we want to avoid with the 1031 exchange where we're doing that kind of stuff. I'm sure he hit a winner because Brandon. But the next, but like I would, I would think if that's the plan, what market do I want to get into? What do I want out of my portfolio? Do I want the next appreciating market? And where is that? What do I think about that? Is it Nashville? Is it somewhere else? Do I want more cash flow? Do I want a hybrid? And really think that through. Is it somewhere local, you know, or somewhere long distance?

And I think you'll have options being in Tennessee for all of the above. But I think, when If you can think through that, have your framework and really know the market. And one piece of advice here would be look at the sold listings and whatever market that you're interested in and say, what are 10, 15 properties that I would have bought that would put all of my equity to work? Because if you don't, you have to, I think you have to put all of the equity to work. Otherwise, you're not going to be deferring the gains on some of that. So would I have bought 5, 10, 15 of these properties?

Great. That tells me that I've got a really good shot. if there's 15 that have sold the last 90 days of another one hitting the market in the time frame that I'm going to have for my 1031 exchange. If it's just two properties in the last 90 days, now you're really risking it. So you have to be really comfortable. I think that what you're looking for will come on the market and you'll be able to transact on it in that time bound window as part of that. And that's going to take some research. So I think that in order to pull off, even to have a really good option for a 1031 exchange.

You have a lot of homework to do to figure out what market you want to invest in where you'd wanted to deploy that equity and what kind of deals you can expect to come on the market reasonably because you're not going to have the luxury of going fishing for a very long period of time if you decide to exercise the 1031 option. Got it. Thank you. Thank you for that. Absolutely.

There's nothing else that, huh? There's nothing, no other bone to meet off the bone to pick on this. I mean, I think, yeah, I really, I really think the summary here is like, yeah, Sure. Like your position's complex. You could probably consolidate a couple of those investments. But like that's just, I think, the nature of having a career and investing over a long period of time is you pick up these little assets, like the 10 grand to your friend or, you know, the portion in that stock that happened to do really well, even though I shouldn't be investing in specific stocks. You know, so like that's what it sounds like your portfolio is I don't think there's anything to like beat up there and you've got tax consequences for moving. different parts of that portfolio to different places. So you spend one quarter of what you earn. You've got these big winners in real estate. I think that, you know, sorry I don't or be disappointing and boring with this. We don't really have, I don't at least have too much for you on this. I think you've got a really strong situation. And, you know, I think you're probably right to

be worried about the music industry outlook, but you're probably over conservative on your own roll. And even if you aren't, you'd be just fine. You can rejigger your portfolio at a future date if you need to for income generation, if that's what you end up wanting. To recap, Mike came in, hoping that we would be able to really show up his CPA and give him a lot of clear, to cut financial advice on what to do with his condo and these are types of things. And sorry, your CPA is probably reasonable with that, because we think you have a really strong position, Mike, and you're doing a lot of things right. And, that's reflective, again, of a couple of right place, right time, as you like to call it,

or smart real estate decisions, as the rest of us might refer to them. And then a lot of really good long-term habits. And, you know, I think you're correct to be conservative about your financial position and what the outlook on your career could be with, you know, consumer behaviors changing and those types of things. But I don't think there's a lot more, really. you can or you can really be doing to put up more defense against that. You know, worst case scenario, they eliminate your position one day and you retire.

So I think that's a sabbatical and then I'll figure out what I'm going to do. So I think I think that if that's the worst case, that's pretty good. And I think you've got a lot of creative things you can do to leverage your unique talents and strengths to either postpone that day as long as you enjoy what you're doing or find alternatives. in the event, you know, you work for yourself or something like that, in the event that were to happen. Yeah, I mean, I can't change what's going to happen with the radio. So, in fact, we're even seeing it with the people that are in radio. I mean, you know, there's just, there's more and more being put on their plate because the

budgets are so tight. But you're right. When, I guess, you know, when that changes for good, I'll just look for what's next. I know that. It's just, I can see it coming at some point. Yeah, being aware of it's really important. And I love that you're even thinking of it. And yeah, like Scott said, I don't have a ton of suggestions to make to change what you're doing.

We didn't really talk how much you're putting into your Roth IRA. If you're not maxing it out, I would think that that's a good place to like. So I just, side note of this, I just, after literally 20 years of having a financial advisor, I moved everything to Vanguard because that's where my 401K is based and I started a brokerage account there like a year and a half ago. Obviously, the fees are a big part of that. It took me two years to really, I'm like, okay, I understand this, but let me kind of really dive into this and see. But because of what I make financially, I was not able to put anything in the Roth. every year I would have the financial advisor check and be like, well, maybe you could put $800,

but I could never do the $6,000 or something. So that's where I just basically, I mean, I'm not saying I won't go back to the Roth at some point, but in my financial position now, I can't contribute to it. I know there's the backdoor Roth, but I think that I asked my accountant about that. And again, because of the financial, you know, salary that I make, I can't really do the, not the mega backdoor Roth, but the ladder, the Roth conversion ladder. Oh, yeah. Right now you can't do a Roth conversion letter because you make too much income. Having the too high of income to be able to contribute to a Roth IRA problem is a really great problem to have.

I've heard you say that before. Yeah. And I'll swim in those waters. That's fine. Yeah. Yeah. Should you be able to in the future, even if it's just $800, I would because that grows tax-free. And why pay taxes when you don't have to? Yeah. That would be a good move for like a sabbatical year, for example, if that were to come up in the future.

Absolutely. To take, say, $40,000 out of the 401K and then move it to do a Roth conversion with it and then pay a small amount of tax. That's right. Yes. If you're going to have a, if you're going to have a year where you're going to have a, have low taxable income, that would be a good year to do that. And for example, if in a situation, well, I'm getting really complex here, but for example, if you were to get more involved in real estate and become a real estate professional, I bet you have a large taxable loss on your San Francisco property that is currently not, I don't think you're currently able to offset your income for that. You might be, depending on where specifics of things lie. But there's something, there's potentially

something there with leveraging the loss in that property and a sabbatical year for a Roth conversion ladder. But we're getting really technical if we get to that point. Yeah, but just, you know, things to think about. Yeah. No, thank you. This has been great. I really love it. And it's a good position to be in. Yes, yes. You are a very enviable position. You've been doing everything right. But I do want to, I do want to say, you didn't just start this yesterday. You didn't start this last year. personal finance and financial independence is a journey. It isn't just, oh, I'm going to be financially independent. Boom, there I am.

Yeah, you're an overnight success after a decade or two of really a lot of discipline. No, it's been a good decade in the making, at least. Yeah, it has been. At this level, I would say. So I would just continue what you're doing. I think you're really cranking it out and just, you know, be cognizant of the options in the job. and see, you know, looking forward as you seem to be doing is going to be the best. What is that the best offense is the best offense?

Defense is the best offense. I can't. Scott's a sports guy. Best defense is a good offense. The best defense is a good offense. So you are, your best defense is your great offense. Yeah. That's the word.

The word of the day. All right. Well, we really appreciate you coming on and sharing this all with us, Mike. we really, you know, I think we learned a lot from it, even though, you know, maybe you were coming in hoping for more advice. I think a lot of people will just learn a lot by saying, like, here's, here's an example of, I think, what good looks like and natural problems that will come out of the course of becoming wealthy, right? If you do in this game and you make a couple of bets, one or two of them are bound to pay off in ways you couldn't have predicted,

like the San Francisco condo, and give you some of those interesting challenges. That won't happen for everybody, but will happen for a lot of people over the course of their journeys. So, thank you for coming in and sharing this story with us. We really appreciate it and think a lot of people will learn from it. Thank you for the advice and for the review. I appreciate it. Yeah, this was awesome, Mike. I really, really, really appreciate your time. And we'll talk to you soon. Thank you very much, guys. Okay, that was Mike. Scott. What did you think of Mike's story? Yeah, I thought it was great. And, you know, I mentioned this in the intro as well, but I feel like his his story is likely to be reflective of that of many other people across a 25-year period of

consistently investing, whether that be in your personal home in markets like San Francisco or in stocks or in other assets, you're probably going to have a few winners or a few large piles of money that are outside of the textbook that we like to, you know, that some folks like to kind of get to with this like, oh, I'm 100% an index funds and across several different multifamily properties and real estate. That seems to be like what a lot of people are striving for, but that doesn't really happen in real life, as we can kind of see from Mike's story here over a long period of time with the ups and downs of markets and the realities of moving and coming and going. And I think that far from kind of like

dismissing it as a lucky event, I think lots of people are probably in his situation and wondering what to do with three quarters of a million dollars or million dollars in Equipers. in what is effectively half of your portfolio. We get this question for nine times in the money group as well. Hey, I've got this one stock. I invested in Tesla or Apple or Microsoft or whatever years and years ago. And now I've got Uber amounts of money in it. What do I do from a tax perspective?

It's a scary situation. And it's something that is a real deal and something to look forward to as a set of problems. If you're starting this journey younger in life and have those 25 years to hit a few of those random winners you can't predict right now. Right. Some of these problems are, you know, they are things that you need to be thinking about, but they're also really good problems to have. And Mike is hitting all of those things. He's got the really great problems to have.

And I think we came up with some pretty good solutions for him. Absolutely. Should we get out of here, Scott? Let's do it. From episode 176 of the Bigger Pockets Money podcast, he is Scott Trench and I am Mindy Jensen saying be sweet, parakeet.