BiggerPockets Money Podcast - 204: Finance Friday: Single Mom Making 20% ROI on Detroit Rentals

Episode Date: June 11, 2021

We all know someone who hustles. Maybe it’s your sibling or your friend, or maybe you’re the hustler in your group. Those who hustle to make more money seem to always find new ways to bring in more cash, and that’s exactly what today’s guest, Alicia, is doing. Alicia jokes that she has 2-4 jobs, because in the day she’s working 65 hours a week at a media company, but is also a “saloon girl” and professional singer on the side. How many moms do you know that can ride a mechanical bull? Well, Alicia can! Alicia recently purchased a rental property in Detroit that is giving her a 20% return! This is far higher than most real estate investors anticipate, and for her, it’s a blessing on her path to hitting passive FI. She was able to buy this rental in cash with a 401(k) loan, but with some taxes looming on the horizon, Alicia is asking whether or not paying off the debt or buying another property is the best move to hit her financial freedom goals. In This Episode We Cover 401(k) loans and when (or when not) they’re appropriate to use for investment purposes Getting 20% ROI with section 8 tenants in Detroit Why side income streams are important for any new or established investor How live in flips still provide great returns even in a hot market Knowing which debts to pay off slowly and which debts to get rid of fast And So Much More! Links from the Show BiggerPockets Money Facebook Group BiggerPockets Forums Finance Review Guest Onboarding Scott's Instagram Mindy's Twitter Growing Your 401k vs. Liquidating It to Invest in Real Estate Is a Live In Flip Right for You? Here’s How to Tell Feline Good Social Club Check the full show notes here: https://www.biggerpockets.com/moneyshow204 Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the Bigger Pockets Money podcast show number 204, Finance Friday edition, where we interview Alicia, a single mom with a very average income, and a real estate investor who is looking for ways to speed up rental acquisition. I do tend to take a pretty conservative approach. One is knowing that I don't have a very large monthly income to be able to pull from if something goes wrong. Also, you know, as a single parent, I have. two people who depend on me, and I don't have anyone to depend on for myself. So in order for me to

be the most stable, I'm going to have to work harder and smarter and not necessarily faster. Hello, hello, hello. My name is Mindy Jensen, and with me as always is my kitty cat owning co-host, Scott Trench. Oh, I'm really feeling these new intros, Mindy. Thanks for coming up with that. 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 in assets like real estate or start your own business. We'll help you reach your

financial goals and get money out of the way so you can launch yourself towards those dreams. In the spirit of your kitty cat owning co-host, of my kitty cat owning co-host, I want to give a shout out to feline good social club in Long Beach, California. We were just there. My daughters wanted to adopt every single one of those cats. So if you're in Long Beach and need a cat, go to feline good. You can play with their cats for like $15 for an hour or something. It was money well worth it.

Anyway, okay, today's show is Finance Friday. And we're going to talk to Alicia. And Alicia is a single mom who has made some pretty big strides in the last few years. And her finances are in a good place. She's in that slog period. but she's getting to the very top of that slog period. And pretty soon, she's going to have a really, really great financial life. Yep.

I think she's doing a lot of right things. And she has chosen a path that's going to require her to hustle very hard for the next couple of years, but that may reap a lot of dividends over the next three to five years. And so we've had some interesting stuff here on Finance Fridays, where you probably have heard us in the past have discussions about how to simplify people's financial positions and make sure that they're able to have a simpler or lower stress environment. Not Alicia's choice on this show. She wants to be aggressive and go all out. And so we had a fun time crafting a strategy that I think gives her the best odds of realizing

that benefit. Not going to be the easiest path, but I think we'll be a pretty, I think she's got a good shot with this. I think so too. Before we bring in Alicia, should we talk about what our attorney makes us say? 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 go talk about Alicia's financial situation. Tax season is one of the only times all year when most people actually look at their full

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titles. Lately, I've been listening to Bigger Leen or Stronger for Fitness, the Anxious Generation for Parenting Perspective, and several Arthur Brooks' audiobooks that have been excellent for mental well-being. What makes Audible so powerful as its breadth. Beyond audiobooks, you also get Audible Originals, podcasts and a massive back catalog across business, health, parenting, and more, all accessible in one app. If you're looking to turn everyday moments into real progress, Audible has been indispensable for me over over 10 years. Kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at audible.com slash BP money. On today's show, we are joined by Alicia, who is a single mom who works two to four jobs,

including one that is a professional saloon girl. I'm super excited to hear more about that. She's also a real estate investor with a different look at financial independence. She doesn't have a FI savings number. She has a FI passive income number, which I think is a really important distinction. And she's doing it all, in her words, on a very average salary. Alicia, welcome to the Bigger Pockets Money podcast. I'm super excited to share your story today. Thanks for having you guys. I'm really excited to be here. This is going to be so awesome. First of all, what's a professional saloon girl? Because that sounds like a lot of fun. Okay. So I am based out of Fort Worth, Texas. And of course, lots of different conferences and meetings and

things, parties. And when people come to Texas, they want the Texas experience. So that also involves kind of the Old West kind of thing. And I got involved with a company having a theater and performance background as a professional saloon girl. So we do photo ops. I can run a mechanical bowl. We also teach line dancing, things like that, to help for corporate events and things. So if you've met me inside of my costume, my name is Ms. Demino. All right. That's awesome. Okay. So two to four jobs is not real specific. What does two to four jobs mean? So I have my main full-time job. I work for a dental media company in business development and partnerships. I also work part-time within the owner's personal dental practice,

handling anything from calls, marketing, things like that. Those are the two main jobs that I do. That typically takes anywhere from 60 to 65 hours a week. And then I also have supplemented both with the saloon girl, as well as professional singing in the area. Oh, wow. Okay, well, what do you need our help with? So my biggest thing is that right now I'm just getting started in real estate investing, and I'm investing in a market that a lot of people are scared of. They shy away from, and that is Detroit.

I know a lot of people are like, no way they think it's a war zone, but that's where I moved from whenever I moved back to Texas, which is my hometown here in Fort Worth. But I know where to look in Detroit, where the path of growth is, where those neighborhoods are that can be beneficial or not. And so for those people who know the opportunities, there's great cash flow. What I ended up doing in order to afford that was taking the money from the CARES Act that you had allowable up to $100,000, I took the maximum out and purchased a... From your 401K. Correct.

It was from the IRA. But I did that and took that draw on the CARES Act so that I could purchase in cash to get my real estate investing started. Okay. Well, great. And so the challenge is how do you kind of scale this? How do you continue to advance your real estate business and move towards your passive income number. Is that the challenge we're going to be thinking about today? Absolutely.

All right. Well, let's get, let's get some of the other information out before we, before we go and tackle that. So let's, let's build a profit and loss. What's your income and expenses and your monthly cash flow that you're able to, to generate? So salary one take home is about $4,000.80 per month. Then my second job within the dental office, I usually bring about $750 a month. So total take home is about 4930 per month. That's great. And what about your expenses? Regarding my expenses, my mortgage payment runs 705 per month.

I do my own taxes and insurance escrow myself. That's another $5.25 a month to $5.50. When you say mortgage and expenses, are you talking about your primary and treat your business as a completely separate entity, or is this including your business, your real portfolio? No, this business is completely separate. So this is just my my personal mortgage is the 705. Love that. Thank you. For food, I usually do about $5.50 a month. I do have two teenagers plus myself. So I'm essentially feeding three adults. That includes our dining out budget. I usually do $400 for groceries, household incidentals, and then another $150 for eating out.

We don't always use that. So lately it's gotten moved more towards our regular grocery budget. As far as the transportation, I only spend about $50 a month on gas because I'm working almost entirely from home now. So that's a nice savings there. I do is sinking funds for a lot of things. So if you're not familiar with sinking funds, I just set a little aside each month in a separate account so that whenever those things come up, I have the funds ready. I do that with both insurance and tolls. So I'm doing about $1.25 a month for insurance gas tolls, that kind of thing.

As far as my miscellaneous expenses, my doctor health insurance, things like that, because I don't get benefits through my work, runs about $4.40 a month. Life insurance of $20, hair, blow, money, miscellaneous usually accounts for about another 50 to 60 per month. And then I do ballroom dance as a hobby. And for exercise, and that's about 200 a month. All right. So how much, what's that, what does that total for the expenses come down? And how much are you able to save every month on average? So every month, I have about $1,000 a month left over. To me, based on what you just said there, you seem like you're a complete command and understanding of your expenses on an average basis. You really have those numbers

dialed in and seem to have a pretty solid budget here. Do you think that there's room in the expense category? Is that where you'd like us to focus? Or do you think that the opportunity to get that passive income is going to come from other areas? I feel like the passive income will be from other areas. I really, I do fine-tune my budget. I try to be really careful on those. One thing that I'm trying to strategize that I could definitely use your help with is whether or not to pay the CARES Act money back and then be able to use those funds or if I should take, I'm currently processing through a cash out refinance for that rental property now that I've had some months of rental income. And do I reinvest that money and continue to let it grow or do I pay that back so

I'm not getting the tax hit? And then I can take that $20,000 or so from taxes that I paid to apply to my next property instead. So you're saying you pulled out $100,000, penalty free, but you're going to owe taxes on the distribution of that $100 grand. And so now you have to make a choice. Do I pay back the $100,000 in my 401k? And let's call the taxes $30,000 on that. Do you cash out refi your rental properties and plow as much as you possibly can back into the 401K to avoid the tax bill with that?

Or do you pay the tax bill and continue on with the rental property investing? That's the question we're asking, right? Yes. Interesting. Let's keep thinking. Let's go get a little more information before we tackle that problem because I think it's a great question. And wow. But let's go to your assets and liabilities here.

So how much cash do you have? What other investments do you have? What kind of debts do you have, that kind of stuff? Okay. So as far as assets, I have the rental house, which I purchased for 105, but because of the market, it's now worth 135. That's great because I'm actually able to cash out the full amount that I had paid for that purchase price. So that one, like I said, is valued at 135. I have my personal home. I owe 170 on a 30 year. I just refinance that one back out in November. It's at 2.75.

I think current value is probably around 275. I'm not in a position because of DTI to be able to pull that out for a key lock to get into other rentals through that avenue. I do have an IRA worth a little over 55,000. That's after pulling that additional money out. And I, of course, have my emergency fund set aside that is about 21,000. Okay. Can you walk through the primary number one more time? And you said, you said a $175,000 mortgage at a $275 valuation? $170 on the mortgage and $275 on the voucher. Okay, and you said for some reason you're not able to get a HELOC as an option right now. Is that right?

Right. I wouldn't be able to pull much out because of my debt to income ratio. I don't have enough rental history because I just purchased this rental to be able to apply that to the additional finances. But you can get a mortgage on the rental. You could cash out refi. Correct. But you can't get a HELOC. Correct.

And do you expect that situation to continue for some time here? or do you think that that problem will go away with more rental history, like early next year? I'm hoping that will go away. So maybe not next year. I'm kind of projecting into the following year because I want to make sure that I have sufficient funds and that I'm really doing the best by my business first before I start trying to pull personal money into the business money as well. We didn't talk about the rental properties income, I don't think. How much is that producing right now? So the after expenses, cap X, all of those, it's going to bring about $1,100 per month. When it's all cash, without a mortgage?

No, this is after my mortgage. So what is it bringing in right now before you refi? It's bringing in $1,700. Okay, so you have $1,700 a month. And so your cash, is that, are you saying that you're saving $1,000 a month left over before this? So you're really bringing in $2,700 a month right now at cash flow. Correct. And after you refile, it will be $1,100, you think?

Mm-hmm. Okay. So you're saving, you're generating cash at a clip of $2,500, $25,000 a year, give or take, some of that on annualized basis. And you are, you have a net worth in the ballpark of 350, somewhere in that ballpark range across a number of these, these assets. Is that? Until you get to the debt. unfortunately. So that brings it down. As far as my debts, I have a credit card with about 5,600. 3,400 of that is at 0.99% until October. So I'm trying to channel more money to finish that one off. The remaining is at 0.99% until April. That was for some repairs on my house. I like Mindy, am doing the live and flip. So I've gotten the inside done, which was a challenge. But now I'm kind of at the point where, you know, as things are coming up. And that was one that I just wasn't ready to pull out money from

my emergency fund. And given the interest rate, I went that avenue. I do have a car that is I owe 15-8-57 on. Value is about $20,000. I bought it last year. And it's at 0%. Then I also have the clunker of a student loan. That one is 48,000, and that's at 4.6%. But right now, that's being in deferment. So my overall savings rate would decrease by about 375 a month when that kicks back in. All right. So you are a hustler here. You've got a lot going on. You're clearly, you're working for jobs. You're clearly, it sounds like listening and learning and absorbing real estate information to some degree. And you're thinking about using all your advantages that you have, the live and flip, the expertise of the Detroit market, all that kind of good stuff. I think this is great. And I don't think you're going to give us any

easy questions here. So let's get to the fun stuff. So the first, the biggest question you have right now is when do you have to pay back the $100,000 in order to avoid the tax penalty? Do you have a deadline? So yeah, with the taxes, you're able to spread it over three years. So I've already paid the first one, which was a painful bill. But because I also qualified for a lot of the stimulus program, it ended up being almost a wash. So that was kind of a blessing in disguise there. But what I can do is I can take that over the next three years to kind of space out that hit. But if I go back and pay any amount, I can always amend my return to collect the difference. So that's kind of where I could do it is I can spread it out over the three years.

and grow my business that way, or I could pay it all back and file an amended return. So I need a little bit more information first. You are in the process of a cash out refi on the rental property in Detroit. Correct. How much are you going to get from that? 105. 105. Okay. So you could pay this off completely. You could pay taxes or you could, there's a third option, you could pay some of it back and pay taxes on some of it that you have taken. And while you can spread it out over three years, you can also just push it to the farthest year if you want and pay taxes on $100,000 extra down that road, which is, you know, if you save for it, I don't know, maybe that's a good idea, maybe that's not.

This is really interesting. So what would you do with that $105,000 if you didn't pay it back? you would buy a new rental property. Correct. Possibly two, because I've found a commercial lender that I could work with that would be able to take 25%. So I've been looking at possibly a quadplex that could increase my cash flow or maybe doing two more duplexes, something along that line. Okay. And would that also be in Detroit?

At the moment, I'm also looking for some opportunities here in the Dallas-Fort Worth area. So Dallas-Fort Worth is a lot more. expensive than Detroit. And with your local knowledge of Detroit, you're right. You can make money in Detroit if you know where to look. And you can lose a lot of money if you have no idea and you're just, you know, going willy-nilly. I like the idea of buying another rental property, especially if the numbers are anything close to what you've got now. That's the big question. Would they be anywhere close to what you've got now? Because you have a duplex that's cashed. And flowing 1,700 after all expenses.

Or I'm sorry, 1,100 once you refinance. So, I mean, that's nothing to sneeze at. That's an extra $1,000 a month. I'll take that. That return, that's a 7, you know, you put down 100 grand on that place. You said you bought it for 105. Let's round to 100. If you're really bringing in 17,000 on, I'm sorry,

you're bringing in 17 times 10 to 17,000 plus another 34. you're bringing in $20,400 in cash flow on $100,000-ish investment. That's close to a 20% return without any appreciation, and you generated a 30% appreciation over the last year on this property with that. So if you think you can sustain that, that blows your 401 return completely out of the water. There's no way that you can reasonably expect that from the 401k in comparison. You may not be able to expect that type of return on future investments.

That sounds like a home run deal that you got on this one. So I think you're going to have to make that call. But if you think you can get in that ballpark, I don't see how a reasonable person could say that the 401k is better than that. If you think you've got additional opportunities that are close to that. What do you think of it? Remember about the tax hit that she's going to have. It doesn't sound like you're in a super high tax bracket right now. She will be if she keeps buying properties like this.

Well, yeah. Hey, that's a good problem to have. I like paying taxes. I like writing checks for my taxes. That means I'm making money. But, but, yeah, so if it's worth 135 now, are you able to find other ones that are, I mean, what is that? $70,000 a door? Mm-hmm. Can you get anywhere close to that in Texas? There's a few places that I could probably get closer, but even the 1% rule is really difficult. I live in kind of an upgraded starter neighborhood right now, and we just had one go for 35,000 over asking that, you know, it's just not realistic for even doing a good burr right now, which would be a different question that have. Yes. This is good news for you. This is not bad news. Yeah.

Absolutely. But I would like to look. My son's going to graduate from high school in two years. And so I've been kind of scoping out where my next live and flip is because I'll still have one more at home. And I would like to take those two years to do it again and rent this place out. I like what Scott's thinking about. You're not going to get a 20% return in the stock market. and even paying taxes on this $100,000, it still seems like investing in a rental that's kicking out that kind of cash would be the better option. And I wouldn't be real quick to pay down the to pay back the loan and may even push that tax bill to, what are we in, 2021? So you paid taxes on it for 2020. So don't pay taxes on it for 2021, pay taxes on it for 2022, which come due in

2023. That gives you a lot of option. And you're not paying any interest on that tax liability for the loan for $100,000 from the 401K, right? Correct. So I mean, that's... Yeah, I think I think the big thing is what's the spread between the investment alternatives, right? And for me, I think that I would not be comfortable. I do not believe that I would not liquidate my 401k and go and invest in real estate because I don't think that I can get enough of a spread to justify that risk profile for me personally. Sounds like you're at a completely different spot because you're willing to live and flip and you have markets that you think you can actually access and invest in reasonably based

in your circumstances where that spread is very, very large. And so that, I think, changes the math based on why I wouldn't be doing it, but maybe why you could or should potentially be doing that. I think that as far as paying the taxes, you're going to pay the taxes. Whether you pay them now or you pay them in 40 years, when you start withdrawing from this, you're going to pay the taxes on that. So it's about the after-tax liquidity regardless of how that's going to go at the end of the day. And it could be that you're in a lower income tax bracket based on what you're doing now, then you will be at retirement if you keep investing in real estate and thinking about how to stockpile a lot of assets with this. So it may still be good arbitrage at this point if you think tax rates are going to increase over 40 years or if you think you're going to be wealthy over the next 30, 30, 40 years with that.

So I think that that's where you've got a number of things going on with this. I don't know. What's your reaction to all of this? What's your lean and has anything we've said to help you or giving you some things to noodle on? Well, Scott, I would definitely say, yes, I expect my income to increase. That's kind of what I'm working towards. And yes, I also expect taxes to increase. So I've been leaning towards not paying it back unless, you know, I do, you know, if I were

to do a flip or something where I could have kind of a larger infusion of cash to do that. But I'm leaning more towards reinvesting that just because as you both. said, the returns that I'm getting, it would be much more valuable to use those funds to create more cash flow for myself than to put it back in and kind of rest on what the market is doing. Okay. So I think that that's a reasonable lien from my perspective. I mean, you know, the next challenge here, the next question is, if you take that, if you cash out refy your Detroit property and you take the $100,000, and you leverage that again, and you put that down as a 25% down on either one or multiple properties.

You're now creating a dramatically different risk profile for yourself and potentially hastening the passive cash flow because you're buying more properties and able to arbitrage that. I think the next question you've got to ask is how much risk you're willing to assume in order to move rapidly towards your goal. Right now, you're in a position where you're accumulating $25,000. annually with this. And if you put that down as 25%, you're going to go from about $175, $170,000 in debt to $470,000 in debt with the mortgages. And you're going to have an equity spread there. What's your comfort level and what's your, what's your kind of tolerance,

I'd say, for risk? Do you want to get there really quickly and be willing to kind of lever up? Or do you want a more sustained approach over a three to five year or, you know, five, seven year period? I've learned that patience is key for a lot of things. So while I would love to be able to scale quickly, I'm also going to be incredibly mindful of what I do and how I do it. I'm a big systems and processes person. So I want to make sure that with the first few rentals that I have great systems and processes in place, and also to make sure that I have enough emergency funds for my business as well. I don't want to over leverage myself to, you know, if we see 2020, happening again. I don't want to be on the short end of that one. And, you know, right now I have,

my duplex has half section eight rentals. So I do have that guaranteed income aspect, but that may not always be the case. So I want to make sure that if everything falls apart and in my life, I've seen that things will suddenly fall apart. So I want to make sure that I'm prepared for that as best as I can to not only be able to wait it out, but to put myself in an even better position for the people who didn't to snatch those deals up when they come. I think that's really wise. So that that says with you, if you're going to pull 100K out, what is your, Mindy, you have a question, I think. Yeah, I just typed in our notes. What does her business emergency fund look like? Because we have a personal emergency fund and you have very

intelligently and very deliberately separated personal from business. So do you have a business emergency fund at all? I have a small business emergency fund. It's got about $1,000 in there right now, mostly because I just started. The house was gutted from top to bottom new roof windows. So my cap-ex is really relatively low, and I've just started with new tenants back in March. So I really haven't had enough traction to be able to amass much of an emergency fund. Part of what I would be interested in doing is whenever I do that cash-out refinance is to, possibly get two more rentals, but setting aside a chunk of that to really have available as my business emergency fund so that that's, that that pot is full as well.

Yeah, I think that's really wise. I like that a lot. I think that's a great approach. I think if you're going to, remember, you're going to owe 30, 35 percent. I don't, I don't know what the, what the tax rate will be for you based on all that, but you're going to owe 30 grand, maybe it would be a reasonable ballpark assumption over the next three years and back taxes. So I wouldn't, I wouldn't forget about that with the cash out refi making sure that you have some of that set aside or that you're, you're somehow ready to take care of that overall. And then you take a little bit of that in addition to fund your business emergency fund and then invest.

I think that's a, that's an appropriate or conservative way to think about structuring this stuff with that. That will eke into your returns a little bit. But I think that if you're willing to set up, you're going to invest in building systems for scale here. that's 50 grand. If you save 30 for the taxes, 20 for the emergency fund, 50 to invest. And you're accumulating 25 a year, you think you will, based on the cash flow from this rental plus your personal saving.

That's a strong position over the next three to five years. You're going to be buying a property or two every year and getting into a pretty good flow there, I'd imagine. I do tend to take a pretty conservative approach. One is knowing that I don't have a very long. monthly income to be able to pull from if something goes wrong. Also, you know, as a single parent, I have two people who depend on me and I don't have anyone to depend on for myself. So in order for me to be the most stable, I'm going to have to work harder and smarter and not necessarily faster. So that's kind of been my strategy going forward is to not put my personal

liability at risk as I'm trying to to grow this business that will hopefully be able to get me out of the rat race. How are you going to qualify for the mortgages? Are you doing asset-based loans? Are you personally guaranteeing the mortgages like with a conventional loan? No. So it's a commercial loan. It's based on the asset itself.

So you structured this as an LLC and you're probably not getting the same terms that you would be getting with a 30-year conventional. Correct. That's kind of a disadvantage. But again, because of my DTI with the student loans versus my current income and not having that rental income available for most places to be able to add to the conventional loan, I felt like that was the best way to be able to pull my money out and be able to leverage myself a little bit. What's a good position for you three years from now or five years from now? What's what's like a target you'd like to be aiming for there? So overall, as Mindy said, my goal is not a number sitting in the bank. I'm focusing more on a

fine number that has to deal with cash flow. My cash flow number that I'm looking for is about $8,000 a month, which would be enough to give me kind of the lifestyle that I would like to have. Still, you know, I don't have to go over the top. The nice thing about having a mid-income is you don't have the persuasion of being part of keeping up with the Joneses. You know, I drive the carolet. I live in my live and flip. And that's totally fine for me. I would like to use it for travel or to be able to create more experiences for myself. Ultimately, I'm trying to buy some time freedom. So that 8,000 number would be kind of what would be able to do that for me as a single person. I think that that's a high number to attempt to strive for for three years. But

very realistic over more like five to seven plus years with that. But I think, you know, I, I, I, I maybe, maybe not with the Detroit properties and these kinds of things, if you really know that market. But at a, at a high level, it seems like that's a, probably a little bit of a long five year plus kind of, kind of, definitely five. I'm looking for more five to eight. Yeah. But I think, you know, what about other things like, um, your student loan dad and your car payments and those types of things. Like, do you, like, you're at the end of the, you know, you're four and a half years left in the car loan. I presume is there, is there like a goal to be without those debts? Or are you thinking about those as part of the process here as well?

I am. Initially, I was trying to go to school to become a dentist. That did not work out just kind of limited by, you know, only getting to apply for one school, which is kind of what led me into focusing more on real estate. But I do have additional student loans. I had to take out in order to do those prerequisite courses and things. So it's definitely something that I have a plan that I want to have everything paid off within three years, ideally. I do want to take some of what I'm earning from those rentals to be able to add to that

to hopefully speed that side up. And that would also help me with my DTI to be able to get out to do another live and flip. So I just need to be able to position myself well on the personal side as well as the business side. Well, I think you're positioned pretty well on the personal side. Every time we do these finance Fridays, I have, like, I want to just caveat this. This is suggestions to Alicia specifically because of her specific situation. But you have section 8 in half of your duplex. So what does that rent for versus what your mortgage payment is going to be?

Does that cover it or come really close? The Section 8 exceeds. So the duplexes that I've been looking at are three-bedroom one bath. So those get a lot more stable families that will stay longer. And it also means that the Section 8 rents increase fairly significantly between having a two-bedroom unit versus a three-bedroom unit. So even having half of it will more than pay for my mortgage itself. So that seems like a great way to mitigate your risk is buying duplexes or quadplexes where at least one of the units is paying the entire mortgage. Essentially, the other rent is gravy.

Having a fourplex with one or two section eight tenants who pay the entire mortgage gives you more like free space in your head, I believe. I don't have any section eight tenants. but I believe the government didn't miss any of their rental payments during COVID, whereas, I don't know how to say this, regular people missed some payments if they had lost their job or had COVID or, you know, all these extenuating circumstances. So that seems like a really safe way to to hedge your bets with these future rental purchases. I don't love the idea of 16 units and that starts to take up some of your time. Unless do you have a property management company in Detroit? I do. Okay.

Okay. So that's a little bit better. Yeah, lots to think about here. I like the idea of Section 8 housing. It does come with its own risks as well because typically you can't do a deposit or it's a smaller deposit. But that also means that I'm leaning more towards having a little bit higher capax for repairs and things afterwards knowing that that money is not sitting there available for me. So I do tend to be pretty low risk. I'm willing to take risks, but I make very calculated risks.

And my security level in finances, the threshold is pretty high. I need to really feel like my groundwork is really well laid in making those financial decisions. What does a well-funded emergency fund for the business side look like to you? I would say at minimum, I'm looking for three months' worth of expenses for every single property in there, just as a start. Ideally, six months, just like I do for myself on the personal side, plus an additional for, I would say, at least 10 to 15 as a slush fund for a major system breaking in one, something like that as kind of a baseline. So altogether, probably about 20 to 25,000, I think would be a good start for an emergency fund for my business. Okay. So I can see a $135,000 duplex 25% down and then another $135,000 duplex, 25% down and then another $135,000 duplex, 25% down and still having the ability to have that $25,000 emergency fund fully funded.

Well, and she's got a cold sum back for the tax liability. Well, so that's like, what, $30,000 for each property, that's $60, and then another $25, that's $85. And then you're saving $1,000 a month or bringing in $1,000 a month personally and $1,000 a month per duplex. So that would be $3,000 a month per duplex. I think the tax, I mean, that's all I would do right now, given your numbers. I think that's a nice, moderate level of risk with still making intelligent decisions based on these numbers here. If you can get a duplex similar. And again, you said your duplex was gutted completely.

These numbers will change if your duplex does not have a new roof and new systems and new appliances and all the things. Yeah, this is all, I agree with Mindy with the big caveat that that's all predicated on your ability to continue finding. these smoking deals in these areas that are generated at these great returns. If you feel like that is no longer true, that changes, I think, the approach to a certain degree. And, you know, comes back to a live and flip, maybe putting as much as possible back into the 401K, those types of things. But given that, if you think that the deals are this good, then I think that that I would completely agree with Mindy. Okay. And just to clarify, so I already paid one third of that tax bill in the 2020 taxes. So that was about 8,500 or so. So the remainder I would

have would be for those other two years. So if I choose not to pay it back, I have a little bit smaller amount due overall because I've already paid that first year. Okay. So you need 17 grand then to reserve for that. Yeah, I would say 17, 18 somewhere around there. Okay. I will say that materials costs have skyrocketed. And you're in the middle of the live in flip. You probably know this too. But I would not go by last year's numbers on material costs to estimate any rehab going forward. I would get actual quotes. And so when you're, you know, you find the $135,000 rental that is everything new except a roof. I used to get roofs for $5,000 and have like $15,000 or $20,000. So, you know, that's a big difference when you're really trying to keep it tight.

So I would continue to look for the duplexes and maybe a quadplex in the Detroit area with the caveat that they are similar to this one. I actually really like that and kind of wish I knew somebody in Detroit. They've got some new schools and things opening up trade schools in the area. So getting in, you know, within a few blocks of those. you have a constant influx of students moving into the area as well. So that's a great. If they need any free training on construction, they could, you know, work on your property. So.

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Well, I think we've really kind of gone deep into this area about the $100,000 and whether to repay or not. Do you feel like you have further questions there? Are there other topics you'd like us to kind of think about or cover? No, actually, you know, you guys, exactly what I was thinking as far as my next move, that's exactly what I saw for myself as well as using that to to kind of revamp and keep growing my business. Part of my reason for hesitation is because, you know, sometimes I feel a little bit unsure on my financial steps because I, you know, for many years, I did not have the opportunity to make financial decisions for myself or for my family. And so that can oftentimes put a lot of hesitation, second guessing myself, even though I know I'm smart, I know I'm capable, that making sure that I know that I can take those next steps with confidence and that I have people with additional experience who can come beside me and say, absolutely, you're on track, keep going. I will say, absolutely, you're on track, keep going.

You seem to have your expenses really dialed in. Your debts are what they are. Zero percent on the car, I wouldn't pay a dime of that early. The student loans fall into Scott's gray area of don't pay a dime early and pay it off as soon as possible. 48,000 or 45,000 at 4.6%. They are in deferment through October, September. Yeah, but she thinks, she thinks, I'm hearing you say that you, you can generate a 20% unlevered cash on cash return in rental properties in Detroit right now with your, with your money. With leverage, that might be even greater, right?

Assuming no appreciation with that. So that, that, there's no comparison between that and the student loans. if you believe that that's a anywhere close to that is realistic on a go forward basis, which again is the giant assumption that we're working with. That's against that's the backdrop of everything else we're discussing here. The moment that you feel that that's no longer true is the moment that this whole strategy changes, in my mind, to a different approach with some of those things. But yeah, like, why would you pay off the student loans when you could put the money into something like that's doing that?

that seems like a much more efficient use of capital than paying off a student loans. Yeah, I was going to say that 4.6% pushes it into Scots don't pay a dime early category, simply because you've got this other better investment. However, can you sleep comfortably knowing you have that debt? That's, I mean, this is where you say personal finance is personal. So to me, I have had college student loans since I was 17 years old. I didn't have a chance to pay off my undergrad and then went back for these additional classes. So for me, it would be the personal satisfaction.

But again, I'm not in a huge rush to pay it off. It's more to set that chapter of my life aside and feel like I have a completely fresh start. Okay. And that's something that's really, you know, that is the personal, really emotional attachment. Money can, I mean, we sound so detached here because we're not talking about our money. I'm perfectly fine with all the mortgage debt in the world, but any other debt, I want it out. I don't care what the interest rate is. I don't want to have it.

So I can understand wanting an absolutely perfect fresh start. I'm wondering what your live-in flip can do for the student loan debt. if you're going to make a significant of, boy, I'm at a loss for words today. Profit. Yes. You're welcome, Indy. Quit. If you're going to make a significant profit from the live-in flip, can you take some of that money and put it towards the next house.

Take some of that money and throw it at the student loans and finally wash your hands of that period of your life and get the fresh start that you're looking for. What is the time frame on your living flip? I don't remember what you said. When did you buy it? So I bought it December 2018. Okay. And now I refinanced it just this past November. I was trying back in February and of course, COVID shut things down and then I got furloughed. And so that mixed up my finances then as well. I'm trying to decide between selling it outright or renting it out. It's really hard to give up that low interest rate for, you know, even when I could rent it for today. So I'm leaning towards keeping it and hopefully finding my next flip that would have an ADU or something like that that I could use to help additional cash flow.

But if I could get that HELOC, you know, I don't think that I would use that towards paying off the student loans. just given the difference in interest rates either. So they may have to wait. Here's an option with that. Because the primary residence, a big thing, again, the tax tail should not wag the business dog. So you're not playing the tax game. But if you keep it as a rental, you still have a couple of years to make the decision.

But if you don't make it in the next couple of years, you may not be able to sell that property and realize the tax-free capital exclusion that Mindy is so fond of, that is a huge benefit of the live-in flip since you've lived there for two years. And that's not an option you're going to have with a rental property downstream in the same way. And so I often like the sell the primary residence rather than keep it because of that phenomena. And then it sounds like these properties in Detroit are way. better from a return perspective than what you're seeing in Texas. So you might have an option now or in the future to sell this place. Get a really great interest rate on a new primary,

which will be your next live-in flip, pay off some of that student loan debt, and have another 50-some-odd thousand to place towards that yet another rental property. That's a great point. I actually had not thought about that from the tax implications of holding it longer. You know, obviously, I'm looking at more of how to leverage what I have to get, you know, the next rung up the ladder. But that's definitely something worth considering as well. And that would really clean up your balance sheet, which would really help a lot of your, your net worth statement, your debts. If you were able to do that, where you now are clean. You've got no student loan debt. You've got all that kind of stuff. And so you could see a reality

in sometime next year or, and, during 2023, where you've now got the rental history as a landlord. You're able to use current and future potential rents towards your income profile, which will help you get access to a lot more financing. You have no other consumer debt besides maybe a little small credit card balance, maybe the card note with that, that are in there. And that would really kind of clean up your ability to get financing and sustain your investing approach there to a certain extent. Okay. Those are great things to think about. Where are you in the renovation process? Have you completed all the renovations on your live-in flip?

You had said you'd done the inside. No living-flipper ever completes them all until the day they move. That is the truth. I was just telling Mindy, my sod finally got delivered today. I've lived here two years and I tried to clean up the weeds. and so I did the inside prior to moving out of a rental. I got that livable. Mindy, I bet I can beat you on this. There was a lynx living in this house before I moved in. An animal.

Bobcat. Oh. And three squirrels in the attic. So that, yeah. They pay extra for that these days. Right. So yeah, it's, I had to clean up claw marks on a wall. So that was definitely new for a little.

live and flip for me. I've never cleaned up claw marks. Yeah, it was kind of a surprise. The links probably kept the raccoons out, right? Well, the squirrels, though, found a way into the attic. So I had to evict them first. So no moratorium for squirrels. But I did do almost everything inside to the level that I would feel comfortable as a rental. If I were doing a complete live and flip, I probably still need to do all three bathrooms to do a full upgrade, that kind of thing. But I kind of, from the things that I did, the end game being more of having it as a nice rental. Backyard, I've spent a whole lot of money on water. It was the standing water, then it was the gutters and now, you know, putting the water back with irrigation. So most of those things

are done. And now it's just kind of fine-tuning the little things that kind of pop up. Okay. So if you were to list it today or tomorrow after your sod done, what do you think you could sell it for? Do you think you could sell it for the 275? I feel pretty confident. I could do 265, 275 in that range. Can you find another house for less? That gets pretty difficult right now. I am, I'm locked into my. current county due to my children's school. So I'm up in one small corner of the county. I live in a large one, but really the only place I can look is within about a three-mile radius of where I am right now, maybe five miles. So that really limits the scope of what I can do. I would love to find a duplex or something and house hack that. There just aren't a lot of options in this area. So

I kind of scope things. That challenge, while real, is irrelevant to your strategy because you are going to consider doing another live and flip regardless of whether you keep this as a rental or if you sell it, right? So you're going to have to solve for that problem either way, it sounds like. Is that right? Yes. I like to keep an eye on the market and just see what's coming up.

And do you have an agent locally? I do. I haven't worked very closely with them because I've mostly been focused. on Detroit as the market that I know well and knowing that I'm priced out of the majority of this stuff in my area right now. Yeah, I would just continue to keep an eye on the local market because you never know when that awesome house is going to come on the market and you can act on it and maybe you haven't found anything in Detroit. So you can't act on that. And just keep options open. How long have you been intentionally pursuing building an investment portfolio and strong

financial position? So I've always been very financially focused. I've always been very good with money, good with financial strategies and much more conservative. I did not get the opportunity to do that so much until after my divorce, which it started in 2016, finished in 20, mid-2017, when I was finally able to make those kinds of decisions on my own. So I wasn't, I was in a situation where there's, it was an abusive situation. Financial abuse is a component of that. So for me to be able to make decisions for myself and to set my own financial picture, I always knew what to do. And now I have the freedom to do it.

No, thank you for sharing that. I'm sorry to hear that with this. That's awful. But when we, when I, what I'm kind of observing here is what appears to be an immense flurry of investing in asset allocation activity that has occurred. in the last two years, mostly, it seems. Is that, is that accurate? Yes. And, and so for me, for me, what that says some really good news is you're thinking about a lot of these different types of questions. And I think if you continue with that

mentality and approach, without kind of overextending yourself, you're going to see a lot of results relatively quickly. You know, the, the, you know, you look back in three years and be like, wow, that was an incredible amount of progress, even though it may feel like you're not making a ton of progress in the immediate short run. Your fundamentals are really strong here. I think you've got a lot of good options with this kind of stuff. And it seems like you're really still just getting started in the early stages of the big chess moves in your financial journey here, which I think is really exciting and

something to feel proud of and good about with that because I think you're going to be in a good position in a couple of years here. You're already in a good position. You're going to be in a really good position a couple of years. That's my hope. So it took me about, you know, the first two and a half years just to, you know, the first two and a half years just to have the financial stability to feel like I could make any moves rather than just kind of the survival strategy that I had been doing, you know, working 16 to 18 hour days for

three years. You know, my rental whenever I moved out was 47% of my take home pay. And it's really hard to get, yeah, it's really hard to get any kind of traction or feel like you get anywhere when you have to do that just to keep a roof over your head. So I was really thankful that even though I did not come anywhere close to that, you know, three times the income for a rental that that landlord happened to take a chance on me and, you know, never missed a payment. I was one of his best tenants. Just needed that opportunity to be able to start anew.

And as I did that, you know, I was starting to finally get some of those smaller just the smaller goals along the way to be able to improve my financial situation. So, you know, even to get my feet on solid footing still took me about two years of absolute grind. Yeah, I think you're nearing the top of this grind right now. You're still, you're not quite over the edge where you're ready to be comfortable with this based of what I'm hearing. You need to probably keep it up for another year or two with this kind of stuff.

but soon, somewhere in that ballpark in the next one to three years, you're not going to be the $8,000 quite there, but you're going to be over the hump where it's all going to be downhill, I think, if you keep this up for a little bit longer with this. I think you're doing all the right things, and it's awesome to see. And, man, you are just a hustler from all that I can gather with this and just crushing it with this. So congratulations on all that you've accomplished with this and all that you've overcome. and I'm really excited to see what the future brings for you. Thank you. I'm really excited as well.

Yeah, I see a lot of opportunity for you, and I would just continue to keep your options open. Now that you have options available, you don't have to just focus on one market. You can focus on or keep an eye on both markets and see what happens. And, you know, I just, I see a lot of, lot of millionaire status for you in the next, within 10 years. I will say within 10 years, you will come back and be a millionaire. I know, Scott, you're shaking your head. You're going to say

less than. Yeah, well, I think, I think you're right. It could be a little less than that. But I do want to say that based on what I'm seeing here, you still have the 48,000 in student loans. You still have the mortgage on the house. You have the tax liability here. You are not in a position to take it easy and rest right now, but you are doing all the right things where if you can grind through it, make a couple of these deals work, and then, you know, over the next, you know, figure out what you're going to do with this, what your current live and flip and your next live and flip, I believe within the next two or three years, you're going to look back and you're like, whoa, my position is dramatically different right now.

But the way you set things up is you have a lot of moving pieces, which is going to lead to a little bit of stress that you're going to have to hustle through, I think, you know, based on what I'm seeing from your overall approach here. But if you can keep pushing through that inflection point, you're going to be sitting really pretty in probably the next two to three years is what I'm I'm observing about your position. So I don't want to sugarcoat that about your, the way you've currently set things up. You're not in a bad spot. You have a good net worth.

You have access to liquidity. But you're setting yourself up in a way that there is a lot of moving pieces, a little bit of leverage and a couple of things there that it's going to require you to make sure that that, that state, that cash flow from your day job and your, your day jobs, your four day jobs, um, continues and that you're, you're continuing to spend very little. So that, that will be a little bit of stress for the next. probably two-ish years, I would imagine, with the way you've set things up. Would you agree with that observation, Mindy?

Or do you think I'm... No, I agree with that. I think that it now is, like Scott said, you're like almost over the crest. But now's the time where a lot of people get complacent. Oh, I'm doing great. I'm just going to sit back. And that's when lifestyle creep happens. That's when, oh, it's only a dollar happens.

And you start to slide back down. little bit. So the intensity that you have shown the last four years, keep that up. And that will continue to shove you over the edge. I don't even think you're going to creep over the edge. And yeah, I do not have to sustain it for 10 years, but you do have to sustain it for another two-ish, I think is what- Oh, no, I wasn't saying sustained it for 10 years. I was saying in 10 years, she will be a millionaire, not grind for 10 years and then you'll be a millionaire. I think that you have a very bright outlook. I do have a 10-year goal of being an accredited investor because kind of my end game is that I would

like to build a nice rental portfolio, but at the time when I no longer want to manage that or just feeling like I want to diversify myself a lot more, that I would like to look at more syndications and make it truly much more passive even than it is for me now. So that is a goal that I have in mind every day. I'm expecting to hit it before 10 years, but it is that 10 year goal for me. That's a good 10 year goal. We aspire to the same executive title in a 10 year period, that of limited partner. Exactly.

Okay. All right. Do you have any other questions for us? Did we answer? Did we answer everything? Did you get anything out of this? I did. I just wanted to make.

sure that, you know, the path that I'm setting myself on is the most logical path, the best strategy for me, and to make sure there were no other things that I had not previously considered given I love to learn and I will look up and learn anything, but sometimes it's much easier to ask from direct experience. Yeah. And I think that based on your goal, I think you're doing a lot of the right things. If you came in and said, I want to live a much less stressful lifestyle for the next two years, we would not be talking about these approaches.

We would be talking about cleaning up the debt, reducing some of those other areas. But if you're looking to back into a three-year, five-year approach that's going to maximize your passive income, this is a great approach. It's just going to require a lot of hustle from you for the next couple of years. So I think I love it. It's exactly how I would approach it, I think, or how I like to think I tried to approach some things, although with dramatically different more advantages and not being a single mom. It's a laughable to attempt to compare it, actually, with your situation. But, but, like, that's, I love that hustle and respect it. And I think it's awesome. Kids are good motivation.

Yeah. Yes, they are. Okay. Well, Alicia, thank you so much for your time today. And we will talk to you soon. All right. Thank you. Thank you. Okay, Scott, that was Alicia. And I like her strategy, but I do feel compelled to say that we talked about cashing out a 401K in this episode. And if we had talked to her before she had cashed out her 401K, I may have had different, well, I definitely would have had a different suggestion. I would have said, no, don't cash out your 401k. She has taken that and turned it into a really great situation for her specifically. But I want to reiterate that this can be a really big mistake if your choices aren't as good as, I mean, she's making, what, 20% cash on cash return?

I'm not getting that in the stock market, are you? Yeah, well, I think it's a, you know, it's a decision waiting or probability. what's the correct bet here with a couple of these different types of things, right? And how do you, how do you think about that from a risk-adjusted basis, right? That, you know, it liquidating your 401k, you know you're going to get a, I don't know, eight to 10 percent return. If you have an index fund investment, you know they're going to bleed you a little bit on the high fees that are inside a lot of those 401ks. You know you're going to get a slightly below average return inside of a 401k on a tax deferred basis.

tax, there's some tax advantage, you know, that you're at least able to defer those, those taxes. So I have a lot of, I don't know, it's hard with those types of decisions. There's probably no right answer, and you're making a guess as to what the future is going to be based on what you think that rental property might return versus the return inside that 401K. So I don't think there's a right answer, but I would agree with Mindy that my bias, in a general sense, is not to liquidate the 401K. I have very. not and probably would not liquidate the 401k. I'd probably leave it in there. I have a little bit in 401k. I mostly contribute to a Roth, as we've discussed ad nauseum in a couple of other episodes.

But I wouldn't do it personally for the most part. But I'm also in a different situation. And I would have the ability to execute on some of those deals with other sources of liquidity of my life, like cashing out or taking a little bit of debt against the rental property, dipping into my very large emergency reserve or even selling off a little bit of stocks. So I had other assets to redeploy towards that. When you're in a position of just getting started with these types of things, sometimes you have to take a risk or have to be willing to make one of those bets and you can lose. But it's all about whether you're willing to play the game and whether you think you're making the

best, you're taking the shot that has the best odds of success. And she did. And it seems to be working out great for her so far. Yes, she took an educated risk. She took an intelligent risk. She didn't just jump in with both feet blindly. She has ties to Detroit, which has very low cost of entry real estate market. So she's got an advantage there.

I would not have liquidated a 401k to go invest in Detroit because I can guarantee you I would have found the crappy house that, you know, loses money. She has different options, and this is where that personal finances personal comes back into play. With these Finance Fridays, I think our goal is to present a situation, present ideas and suggestions based on that specific situation. And maybe people who are listening have similar aspects of their own personal financial situation that they can take advantage of and take information. from and suggestions and say, oh, I can tweak my situation this way. So the underlying reason I want to just completely reiterate this is that I want you to make intelligent, thoughtful choices. And maybe liquidating your 401k is the best choice for you and your situation. But make sure that

you've considered all the options. We don't necessarily record these shows in order. And we have recorded a future show where the biggest money mistake she made was liquidating her 401. K, completely different situation, completely different setup. She didn't take that money and then invest into 20% cash on cash return rental properties in Detroit. So for her, that was a mistake for Alicia. I'm not really seeing it as a big mistake. Yeah. I mean, I think it's interesting because Mindy and I have a clear bias for things like 30 year versus 15 year mortgage or not paying your mortgage early and investing in other assets. Yet we had that couple a few weeks ago who, you know, have a pension and really stable income with those types of things. And the game for

them, I think, had there were some advantages to them potentially paying down the mortgage early. And so there's no rules in this game. There's only tools and when to apply those tools in different situations. And when you have, you know, a very stable pension and your goal is modest financial freedom, you're going to play by a different set of rules. When you have the goal of all-out aggression in the next three years, you're going to, you know, want a different playbook here, which may involve liquidating your 401k and investing in Detroit real estate, if that's the right thing, right? I mean, that's crazy, but that's what she believes is odds are successful for it. And I'm not one to tell her those aren't unreasonable. She seems to have

a very educated opinion on why she thinks that's possible and numbers to back it up that she's actually realizing right now. So there you go. That's the world, that's the world of crazy personal finance that we live in. I love it. Scott, should we get out of here? Let's do it. Okay. Oh, first before we do, if you would like to be a guest on the BiggerPockets Money podcast, please go to biggerpockets.com slash guest. If you would like to apply for your finances to be reviewed, please go to biggerpockets.com slash finance review. Okay, now Scott, should we get out of here? You already said yes.

From episode 204 of the Bigger Puckets Money podcast, he is Scott Trench, and I am Middy Jens, reminding you that there are no rules, there are only tools. You heard it here first.