BiggerPockets Money Podcast - 268: Finance Friday: Why You Should Focus on ‘Hitting Singles’ for Early Retirement

Episode Date: January 21, 2022

Expats and rental portfolios go together like peanut butter and jelly. It’s no surprise that a fair amount of retired globetrotters owe their freedom to real estate investing. While many real estate investors are looking to retire themselves and their families in the US, today’s guest Paul has other plans. Paul thoroughly enjoys his full-time job in Utah. He gets paid well, has access to some phenomenal benefits, and isn’t planning on quitting anytime soon. That being said, Paul has had the itch to live as an expatriate abroad, hopping from country to country, enjoying world travel. But, in order to do this, Paul has to create an income stream that can support him and his partner along their travels. Of course, as a smart investor, Paul has already been building this extra income in the background. Since starting his rental property investing journey only a year and a half ago, Paul is already at five doors, with a sixth closing soon. He needs to be at ten doors to have enough rental income to cover his expenses in the US, but how much farther could that money go abroad?  In This Episode We Cover Why rental properties are perfect for those planning on retiring abroad Keeping your expenses low as your income grows so you can retire early When to transition from traditional retirement accounts to real estate investing  Roth conversion ladders and turning pre-tax retirement accounts into post-tax savings  Out-of-state investing and leveraging your high income to invest in low-cost areas Using a HELOC (home equity line of credit) to fund real estate purchases  And So Much More! Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey there, before we get to the show, I wanted to mention BiggerPockets is hiring a full-time supervising producer for our podcast network. This is a remote position, and it's a great opportunity if you have the right skill set. We're looking for someone with at least a couple of years' experience managing production teams and someone who will feel confident taking the lead when launching new podcasts. So, would you or someone you know be a great fit? You can find the full job description at BiggerPockets.com slash jobs. That's biggerpockets.com slash jobs. That's biggerpockets.com jobs to apply for our open podcast supervising producer job. Okay, now enjoy the show.

Welcome to the Bigger Pockets Money podcast show number 268, Finance Friday edition, where we talk to Paul about where to focus your investing. I don't have the goal of working to 65 and just, you know, piling up a huge pile of money to then, you know, use in the last, you know, quarter of my life. I would love to like, you know, kind of trim back on my W-2 work and have more time to travel. And then, you know, I would love to like expat and, you know, go live somewhere for a few years, pick up, move somewhere else for a few years and just kind of travel around to various places. Hello, hello, hello. My name is Mindy Jensen. And with me, as always, is my refreshing perspective co-host, Scott Trench.

Always great to be here with my Green co-host. That's not the right one, but Mindy Jensen. Green makes me sound like I'm new. You're my green co-host. Gott 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 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, start your own business, or sustain a long-term investing strategy, hitting a bunch of singles, will help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams. Scott, I am excited to bring in Paul today because Paul is in a pretty good situation financially and he's wondering where he should go next. Should he continue to contribute to his retirement accounts and his pre-tax tax-advantaged investment accounts or should he continue to grow his real estate portfolio?

And I think this is a question that comes up frequently for a lot of our listeners. And I think we have a pretty good discussion around the pros and cons of both today. Yeah. I think Paul is doing a lot of his fundamentals are extremely strong, which allow us to get into more advanced and tactical changes to his plan because he's doing, he's got a very consistent, very high probability approach to investing here. It's not flashy. It's not going to, you know, make anybody rich overnight with that. But he is, I think, very likely to achieve his goals over the next five to ten years with his approach. And the suggestions we had were items of degree or nuance that not really any fundamental changes to what he's doing.

Before we bring in Paul, my attorney makes me 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 advice. including lawyers and accountants regarding the legal, tax and financial implications of any financial decision you contemplate. 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.

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Audible has been a core part of my routine for more than a decade. I started listening years ago to make better use of drive time and workouts, and it stuck. At this point, I've logged over 229 audio book completions on Audible alone, and I still regularly re-listen to the highest impact titles. Lately, I've been listening to Bigger Liener 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. Paul works full-time as a specialist of poison information at the Utah

Poison Control Center. In the last year, Paul decided to take the next step in his five journey and buy his very first rental property. Everything went so well with that property that he has increased his holdings to five doors as of right now when we're recording, but in a couple more days, he will have yet another door. He's now trying to decide if further expansion of residential properties is the right way to go, or if traditional stock market investments makes a better move for his long-term goal of becoming an expat. Paul, welcome to the Bigger Pockets Money podcast. I can't wait to jump into your numbers.

Yeah, super happy to be here and nerd out on financial stuff. Well, you're in the right place because you got two nerds right here. Let's look at your numbers really quickly. What is your income and where's it going? So from my W-2 work, right now I make about 116, and after tax, my take-home pay is about $6K a month. My rental properties right now gross about $3,600 and net after debt servicing about $1,500 a month. And those are my income there. And then expenses. I don't keep a very strict budget.

I've never really had a problem with overspending. So I looked back at my personal capital account over the last two years and just kind of averaged out, what am I spending after taking out what I consider my business expenses. And that came to about 3,000, maybe some 3,300 a month, where that goes, about 1,300 of that goes to, my primary, like just housing expenses, mortgage, utilities, etc. Groceries, about $3.85 a month on average. Restaurants, $130 a month. Gas, about $165. That comes about $2,000 or so,

so about another $1,000 into just miscellaneous other expenses, insurance, et cetera, that I pay, like, bigger, like, you know, six months at a time to get a better rate on my insurance. and stuff like that. So having two years of expenses average out to about $3,000 a month seems like your expenses is not a place that we're going to be focusing on to cut. No, I've never really had a problem with managing my expenses. I'm pretty frugal that got instilled in me pretty young.

Well, nice. And so we're collecting about $4,000 to $4,000 a month in cash, is what I'm when I'm gathering here, on average, over the long term? Yeah, give or take. Okay, awesome. And then so where's that going? Let's go through your net worth statement and where your assets are today.

Yeah. So with the majority of my assets are mostly pre-tax accounts, how I'm employed is pretty lucky for the access that I get because I'm employed technically through a state university So I get access to like professor like benefits. So with that, I have a 401A account. And my employer puts 14.2% in. And I don't have to do anything for that. That's just automatic.

Awesome. And then I get access to a 403B and a 457B. And so I technically can and use to max both of those. accounts. So my 401A currently has about 152,000. My 403B has about 59,000. My 457 has 52,000. And so that's mostly pre-tax. I do have the option for Roth on those accounts. And I do have a little bit of my 457 in a Roth contributions and trying to decide how to balance that out, what going forward. And then I have my Roth IRA right now has about 37,000 in it. I just finished maxing it out for the year a couple days ago and plan to keep maxing that out every year. And I have an

HSA account that I started a couple years ago that has 13,000 in it right now and plan to just keep that growing and not touch it if I can avoid it. Awesome. So what's the total between all these on different accounts? Right now, total is about 313,000. Great. What else do you have? What other assets do you have outside of these? So outside of that, it's real estate. So my primary residence, which I don't try to count too much into my net worth statement, but I do have roughly 200,000 in equity in that. And then I have the rental properties. So in those, I probably have about 130,000 in equity right now across my five of my doors, and then I'm going to be adding one here shortly. Great.

Any other assets like cash or anything else? Yeah, so I have roughly 22,000 in cash. And so that's about half of that is kind of like my personal emergency fund. And then the other half of that is in accounts for my rental properties. They're each individual emergency funds for each of those accounts and properties. Well, great. I mean, it sounds like we have a really strong financial position here, although there's definitely a tendency of where it's going.

All your, most of your net worth is in these, in these retirement accounts with these types of things. What can we help you with today? So the biggest thing is just kind of like knowing where to focus. I tend to have a tendency. of like picking a goal and just going after it and kind of letting other things fall to the side. So like, you know, I went through school. That was my big goal. I came out. I had my student loan debt. I focused on that and got rid of my student loan debt in three, little over three years. And then I was like, all right, now it's retirement accounts. And I was maxing those out. And then I

decided, okay, now I need to do real estate and kind of like let everything else fall aside. So I'm like, continually making, I think, good progress and not making any terrible decisions, but am I trying to find that balance of where to best direct my efforts and find that right heading to head off in? Great. Well, I think the first part is kind of to understand what you want. Your current approach is likely to give you an enormous pile of money inside of these various retirement accounts, you know, 20, 30, 40 years down the road with that. So it's definitely

not a wrong approach. If you sustain this and build that, build that wealth. But what is your goal that we can help you with? So despite loving my job and what I do, I have other passions and interests. So I don't have the goal of working to 65 and just, you know, piling up a huge pile of money to then, you know, use in the last, you know, quarter of my life. I would love to like, you know, kind of trim back on my W-2 work and have more time to travel. And then, you know, I would love to like expat and, you know, go live somewhere for a few years, pick up, move somewhere else for a few years and just kind of travel around to various places. Awesome. And when do you want to achieve that by?

So if it was just me, I would say sooner rather than later. but I do have a partner and we're like in different places financially. And so she's not at a place where she could like pick up and leave. So probably the soonest seven to 10 years, but realistically probably maybe 10 to 15 years. Okay, great. Well, the first thing that I would observe with this is you're funneling. Well, let me ask you. I'm asking this question.

How much are you funneling into these retirement accounts, inclusive of the benefits that you're getting? You got what sounds like 14 and a half or 15% of your annual salary getting placed in by your employer into a tax deferred retirement plan, right? Mm-hmm. What else? How much else is going in cumulatively? So, yeah, that from my employer, that's about 16.2,000 a year right now going in. And then because I started working on real estate, right now my contributions that I put into the pre-tax accounts is like a couple hundred bucks a month, just because I kind of went hard on real estate and just needed more cash flow to acquire more properties. How long has that been going on for?

How many years have you been diverting more of the cash away from these? retirement accounts and towards real estate. So I purchased my first property August 2022. So like 15 months is when I started this real estate stuff. August 2020? Yeah. Okay. So through 20, because what your retirement accounts balances say is that you've

been contributing heavily for many, many years with that. So the first thing I was going to say is, yeah, you should probably consider shifting away some of that spend from those retirement accounts to real estate. You're already doing that. And what do you kind of? cumulatively going to set aside on an annual basis for real estate or other after tax investments? So I'm trying to like figure that out. My, uh, my property manager will drop my property management fees from 10% to 8% if I get 10 doors. And so like cut with that incentive, I set that

goal of getting 10 doors. And so that's kind of why I've been pretty aggressive in acquiring properties is to try to get to that and get the cheaper management fees. Where do you invest? I invest in Kansas. So you invest out of state from Utah in Kansas? Yes. Okay. And then how much cash do you need to purchase one of these properties?

What are the asset values and down payments? So the bulk of my properties are single family homes. And the ones that I try to shoe for, I acquire them for, 80 to 85,000. So all set and done to purchase a property with the like 30 year mortgages, about 22 to 25,000 cash to close on them. So you need about $100,000 more cash to get to 10 doors. Yeah. Do you, this might be a silly question because your employer gives you 14% in the 401A. Do they give any sort of matching to the 403B or the 457 or the HSA? No, they don't. It's just you get this and then you have access to these other accounts. Okay, I just want to make sure we're not leaving any money on

the table. I did some math really quickly before we started and Paul is 33 years old. The rule of 72 says that approximately every seven to eight years, your investments will double assuming a 10% return or something like that. At age 40, he will have $626,000 at age 47, $1.2 million at age 54, 2.5 million, at age 61, 5 million, at age 68, 10 million. Of course, this is approximate. Past performance is not indicative of future gains. I am not guaranteeing that this will be your balance in those years, Paul. But. And that's the balance inside of retirement, the cumulative amount, the cumulative retirement accounts that he has. If he doesn't even contribute anything else going forward. So in my opinion, you're doing pretty okay. You'll probably be able to squeak by in retirement on what you've got saved currently. I would agree with you that, and I will always say that you should continue maxing out your Roth IRA for as long as you are able to because that grows. tax-free and why pay taxes if you don't have to? Because I bet you can do a better job than the

government can. So continue maxing out your Roth IRA, continue maxing out your HSA is what I would do if I was in your position. I may start pulling back on the 401k, the 403B, the 457, and all the options that you have to focus more on real estate because your real estate is getting a good return your rental property. What are you renting it out for and what is your purchase price? What is your mortgage? I mean, I think you're getting pretty good numbers on these these deals. Yeah, so they all pretty much reach the 1% rule and they rent for 1% of what I acquire them for roughly. And my, let's see, my cap rate on most of them is, you know, 7 to 7.5 percent. And they all rent for a little more than double what the mortgage is.

You know, so my mortgages, a couple of them are around 400 and they rent for 900. I have a triplex that the mortgage is $875 and it rents for $1,800. So they all are self-sufficient. I mean, it sounds to me like if you'd come in three years ago and said, what do I do here? I would have said probably do exactly what you're doing here. Begin shifting a lot of the cat. You have a good income. You've got a good savings rate.

You've got a strong financial position. All the fundamentals are there in place with it. your goal is optionality in 10 years. And you know that you can't, you don't have enough income to do everything down the checklist, right? You can't max every single one of those nice accounts that you've listed there and invest in after-tax wealth that you can spend during your future as an expat traveling the world with all of that. So you need to begin shifting that over. You've done that. You need about 100 grand.

And that'll take you about two and a half years to save up in cash at the current rate based on my back of the napkin, maybe three. And that will buy you incrementally more of these properties. Maybe take you three, three and a half years if inflation picks up on any of these things. But you might get a raise in the meantime to offset that. And then it's kind of just, you know, keep adding more onto it until you have that margin of safety that you and your partner feel comfortable making that switch over to being. an expat with this. So you're doing all the right things from my perspective. I think it's just a

matter of time. I do want to caveat that, though, that I'm not an expert on some of these these different accounts that you have access to. I know the 401k and the Roth IRA and the HSA, you know, not being involved in an education or nonprofit or government institution. Is there any nuance we should be aware of with some of those accounts that would make them valuable tools in accelerating your, you know, that future financial state for you. Yeah. So as I was prepping, I pulled everything for this, I was reminded of something that I think could be really key for my goal of, you know, expatting before normal retirement age. And that's the 457B. So with that one, as soon as I separate from my employer,

there are no penalties to access that money. I would just pay taxes on it. And I have the option to wroth that as well. And I can put, as of next year, it's like, what, $20,500 is the maximum? So, I mean, I could potentially Roth $20,000 a year into that account, and then as soon as I leave my employer, access that penalty free. Okay. So I'm glad I asked there because those are, there's always some funny stuff going

on with some of these accounts and it's hard to keep them all straight if you're not, if it's not something that's directly benefiting, you are tied to your position with that. So that's very interesting to me. And I think, let me just kind of think aloud through a couple of scenarios with that. So you have a 457, you can withdraw the funds penalty free. You have the Roth and the 401K options. So you can defer that. Your plan is to become an expat and travel the world.

with that. That means that you'll have several years where you earn very little income, most likely. So to me, that is actually an interesting case. It's the Roth or the 401k, except you don't have to wait until you reach traditional retirement age. How does that change the math in the game here? Well, to me, that says that's a really advantageous account to max out on the tax deferred side, the 401k equivalent for those listening. then withdraw the funds as you need it, paying ordinary income in a lower tax year while you're traveling or maybe earning very little income, if that is in fact your plan. So that makes that an attractive strategy. If you think it's truly going to be 10 years off and you're going to be buying rental properties the whole time, then you might consider just putting it into a Roth equivalent instead of

trying to play the game I just discussed there, placing some into the tax deferred account and transitioning it over because you might find that your income grows pretty substantially from other sources over that period of time, making that impact of arbitraging the tax benefits less valuable to you. I'm going to stop there and see. What's your reaction to that thought process? Yeah. So it's kind of all these things is like the nebulous, what's my future tax?

and so, you know, it's how big am I going to grow my rental properties, you know, so how much income is going to be coming in from that, but then it's, you know, treated differently tax-wise from W-2 income. So, and I haven't been in the rental game long enough to fully wrap my head around all of the tax on that income. And, you know, so. So ideally, these are long-term buy and hold. So I'll have income from that coming in.

I'll have my retirement accounts for my W-2 employer, and it's just playing that balancing game of supplementing my rental income with my retirement account incomes and how much should be Roth, how much should be traditional tax deferred. And it's a big question that I haven't questioned. I have something to think about. Do you know how many rental properties you want to own? Like if here's a whole pile of money, you can buy as many as you want, what is enough? What is the most you want? What is the minimum you want? I am not one of those people that wants to have 10,000 rental properties. I think that would just be a full-time job that I don't want to

deal with. But I'm in a different financial position than some people who, maybe want to take that on. It just sounds like awfulness to me. You have mentioned 10, because that's when your property management fee drops. Is 10 something that you want? Is 10 a level of income that you will be comfortable with? Do you want 25? Yeah. So with that, you know, 10 got thrown up there because of that incentive from the property manager. And I think it's a good goal when looking at the income that'll come off of that. It's not a huge income because where they are, they aren't like renting for several thousand a month.

They're renting for less than a thousand a month per door. So it's not a giant amount of money coming in from them. I think, you know, 10-ish is probably, because I like how passive it is and I think if I grow it too big, it's not going to be as passive. And, you know, if I'm out expatting around the world, I don't want it to be distracting me from what I'm doing, especially from that far away. Okay. So it sounds like 10 is a good number, 10-ish, not 10 plus another 50 more.

I like Scott's thought process with the 457 as a way to either reduce your current tax. income or as a way to grow tax-free and take that money out later, but the more money that you're putting into the 457 plan is less actual cash you can use right now to invest in your rental properties. Do you have the opportunity to borrow from your 401A or your 403B or your 457 to take a loan out from them? There were like some options. for withdrawal, but they weren't very, I don't think I would qualify. Not withdrawal. It's a loan.

Oh, I guess loans. I haven't specifically looked into loans on those. I mean, what I have done, because I have acquired the five, almost six properties so quickly, is that I did tap my primary home equity and got a he lock. And so I do have a he lock that I have been using to get down payments for some of these properties. Okay. And how are you paying back the HELOC? With that extra $3,000 a month that I don't spend on my regular income.

So, Scott, what would you do in this position? Would you contribute to the 457 traditional to reduce your income? Or would you save the cash to buy more rent? What's the market like where you're buying? I'm assuming you're buying all near each other or in the same city or the same very close to each other area? Yeah, they're all in the same city because I need to keep them all in the same property manager. So they're all pretty close. The markets, it's kind of funny.

Like some things will come and go really fast, but everything that I've picked up is stuff that for some reason just has sat for a month or two on the market. So like those are out there. Everything I bought is off the MLS. I'm not out there like sending letters or doing anything. unique or, you know, exciting in how I acquire them, I just, you know, scour for deals off the MLS. I mean, I think, I think that the changes I would make would be very minor with this and would, and maybe, maybe there wouldn't be very many.

Paul's got a strategy here that is very likely to win. It's an aggregation of singles. There's no, there's no home runs. There's nothing fancy about what, what he's doing with any of this stuff. He's saving 30, 40, 50 grand a year on his income, spending very low. little, maxing out his retirement accounts and buying singles from a rental property perspective with a long-term focus in all in one area in a pretty passive and sustainable way. So what's not to like about that?

If your goal is to have a very passive sustainable level of wealth 10 years down the road, you're doing all the right things, in my opinion. And I think it's going to work most likely. You never know, but I don't see how you can. go that. I do want to call out, hey, you're using a HELOC for the down payment, right? I don't like that for folks that are not in your situation. If that's your only access to capital, I don't think that's a good call. You're doing it to modestly accelerate by eight to 10 months each of these purchases, and then paying off the HELOC with that. So you're viewing it as a short-term loan from what I'm hearing,

and paying it off with cash flow that you can reasonably sustain. I think if you were to go bigger and pull out from your 401k, or not your 457 and all the, all the equivalence of the 401k that you listed earlier, that you're probably increasing things by about two to two and a half years, which may not be really sustainable. It might put a little bit of stress on you if things don't go according to plans. I don't really love the idea of using more short-term debt to accelerate your purchase timeline with that. I think that that's not incongruent with the strategy of hitting singles that I think you've pulled here. I think the Helock is fine with that. But I so I love everything about this. And I think it's going to work. I think you're going to do really well. You might consider with a

10-year time horizon diversifying a little bit at some point, you're buying all in Kansas. I don't know that market specifically well. But my instinct is to think that's not going to be a highly appreciating market. It's going to be a cash cow for some of these things. And there is opportunity for upside and maybe some markets that maybe have that that appreciation potential at some point in your journey with that you might you might find that you might want that that mix but i i like what you're doing there i think that you do have a very minor um challenge that that has no real right answer about whether i want to max out the 401k portion of the 547 the pre-tax tax deferred uh retirement account portion or go into the roth all that

alternative. I always have a bias towards the Roth, but in this case, if you do think you're going to have lower taxable income in a few years, if you travel the world or get a new job, and you really want to plan around that, the Roth conversion ladder that has been discussed in a lot of things, maybe there may be a really, really good option for that for you with this account that may be more advanced and you might have to do some exploration there. So I'd learn about that, and that may tweak your allocation a little bit. But, I mean, there's not much to change here at the end of the day. I think it's a really strong position, and it seems like it's very sustainable and likely

to get you to where you want to get to. How's that for rent? I don't think we really covered the fact that his rental properties right now are grossing $3,600 and netting about $1,500 with the five that he has. He's got a goal of 10. I think it's safe to assume that your future numbers will mimic your current numbers. So you're spending $3,000 a month with your current income. You have $1,500 coming in from your rentals.

Doubling your rentals will effectively double your income. Now you've got income to replace your W2. And when you're off expadding around the world, I'm guessing you're going to travel to some places that are less expensive than America, which is pretty much everywhere. Not everywhere, but most everywhere. I mean, there, and you know, you can also kind of game the system like the millennial revolution couple. When the markets, you know, are high, they can go to the more expensive locations.

And when the markets are kind of tanking a little bit, they do this geographic arbitrage where they're visiting places in Southeast Asia where it's way less expensive to live for a week or a month or a year. So, you know, there's ways to kind of game the system, but it seems like what you're doing is going to get you to your goal very quickly. I did mention the loan from the retirement accounts, and I didn't clarify that. That would be a short-term option,

like maybe some amazing deal came up. And you're like, ooh, if only I had $50,000 more dollars, you can take this loan out by the property and then, you know, figure out a way to repay the loan. But, yeah, I don't like the idea of taking out a 401k loan for an extended period of time or using that as the way to fund your property purchases all the time, but as an opportunity to take advantage of a really great opportunity. Yeah, and I think part of the reason I've been so aggressive in acquiring properties is like, you know, interest rates have been great. And so I figure get well, the getting's good. And, you know,

just kind of every time I close on one, I'm like, all right, I'm good. I need to give a little bit of time. I need to pay off this HELOC. And then before I get done paying off the HELOC, I see another deal. And it just looks too good to pass up. So the loan is, I guess, another potential option. If I decide the, the HELOC route doesn't work very well. And all of my accounts are with fidelity, so I am sure there's a way to do it. Like, I just haven't explored that option. Yes, some plans will allow you to take out a loan

and some plans won't. The max that you can borrow is 50% of the value or $50,000, whichever is lower. So I think, yeah, the, I mean, there's options. And I don't know that you can do both the 401A and the 403B loan. But that is just a research opportunity for you. Yeah. Tax season is one of the only times all year when most people actually look at their full financial picture,

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privacy by default is their pledge to all customers. Visit Northwest Registeredagent.com slash money free and start building something amazing. Get more with Northwest Registered Agent at Northwest Registeredagent.com slash money free. Some of the questions that you had asked us ahead of time, are you going too fast acquiring properties? I think that you're not because you have, for you specifically, I think that you're not because you have a good cash position. If somebody else were coming in and saying, I only have $11,000 in my personal savings account or my emergency fund and I only have $11,000 for my five doors, I would be like,

ooh, let's talk about that a little bit. So I am going to ask you a little bit about that. Well, but you've got the huge delta between what you're bringing in every month and what your spending, which will allow you to cover an expense. So let's look at the condition of your properties. Let's talk about those really quick. Yeah, so they're all old or homes. One of my properties, I think, just past 100 years old. But other ones are about 50 to 60 years old. But they've all had like, you know, fairly good upkeep. None of them were, in disastrous states as I acquired them.

The one I'm acquiring next week was just flipped. So it's got a new water heater, a new roof, new paint, new carpet, all of that stuff. You know, so with them being older houses, there's little things that, you know, obviously could age out and need to be replaced. but right now, probably the closest thing to needing to be done would be like AC units. The rest of them, all of my inspections were pretty good, that everything was in decent condition. Okay. And that is, this is more towards people who are listening, who are thinking about getting into real estate and thinking, oh, he's got $11,000 in his reserves. That's great.

Scott, when he first started, he had $10,000 in his reserve fund for his first property, which was a duplex. So two doors, $10,000. And then he bought another two doors, another $10,000. So he had $20,000 because he was investing in a different way than you are. He had a different job. He was in a different position and he wanted to be secure. You are in a different financial state.

I mean, if you had to, let's say every AC unit breaks in. every single one of your properties, you could find a way to cover that. You have credit cards. You have a he lock. You have income from your job. You have 401k that you could borrow from. You've got a lot of different pots. You could stick your fingers into to come up with the funds for this. You could finance it. I mean, there's a lot of different options available to you because I think one of the best reasons is because of the delta between what you're bringing in and what you're spending. Yeah, you make $116,000 a year. Plus, you make $116,000 a year. Plus, you get $16,000 contributed into your 401K, plus you've got your rental income with that. And you spend

$36,000 a year, give or take with that. So I mean, that in a, you know, in a little bit of a paradox there allows you to, like, you're, I'm not concerned with your capitalization at all with that. You have $22,000 in cash. You've got a HELOC available. You probably have loans against the retirement accounts, as Mindy mentioned there. And you generate. $40,000 to $60,000 per year in cash or could with very minor tweaks to your retirement allocations with that because of the way you spend with that. So I just think that there's not a lot of big risks in your position that you're taking. Again, I think you're on a path towards hitting a large number of singles over the years

with that. And it seems pretty sustainable to me to buy two of these products. properties per year, if that's how you were to choose to allocate your cash generation for this. I mean, coming up with 40 grand should not be a huge issue for you, depending on, again, how you allocate that towards these investments. And that'll begin to snowball subtly over the next couple of years as you buy more and get the cash flow generation from them. I do think you're overestimating your cash flow from the properties a little bit because

there is probably some Cappex reserve and turnover events that you probably haven't experienced quite the same way as like a landlord with five, 10 years. So I might cut that cash flow number in half and assume like another 500 to 750 per month for some of those things until you have reason not to with a couple more years. But the fundamentals are I think really good. Yeah. And I, you know, with the numbers as they've worked out so far, that's what it's about. But I like, I do kind of like factor in like, all right, what am I realistically like calling profit from these? He's like, as I would say, probably around 900 or so after estimations for, you know, future vacancies and CAPEX expenses.

And, you know, they're all, right now I'm not pulling any money off of them. The money is just building up the reserve accounts for them right now. And, as everything's worked so far, like, it's all worked out, luckily. and I haven't had to really dip into any personal funds since the very beginning of acquiring the first properties. Yeah, I'm not worried about your capitalization with that at all. I think you've got a really good grasp on that. Where you get worried is when somebody has, you know, makes your income saves $7,000 a year

and has three helocks going where they're pulling cash out of one property to buy the next one, by the next one. That's a chain reaction that is waiting to happen in a down market with that. I don't think that's something that you're at risk of. Yes. That's the point that I wanted to make. I want to make it clear that Paul's doing great because he has a lot of different options. Have a lot of options in that.

I mean, this sounds so stupid to say, but when you have all these options available, you have so many more options available. When you just have the one source of income, when you just have the one source of cash, your options are very limited, but you've got money everywhere, Paul. Your fundamentals are so strong that it allows you to take a little bit more risk with that because you're saving 60, 70, 80% if your overall income. And one thing that also kind of popped into my mind is like I'm probably getting close to reaching the limit for Roth IRA contributions.

So I probably need to put some pre-tax money into account. to lower my adjusted gross income? 2022 Roth limits are 144,000. Okay. So I've got a little way. So you still have a little bit of room. Yeah, I would imagine your rental properties are going to create a passive loss for you or be very, very close to no net income.

I don't know that. You have to talk to your CPA with that, but I don't think you're close on that front. Well, maybe in a few years, but. Ooh. And since you have five rentals that you have acquired this year, I really really, hope that you have a CPA that you've been working with who can help you with all of your fun new tax deductions and depreciation and all the things that come with owning rental properties. Definitely. Yeah, the second I got at my first property, I was like, I'm not trying to

figure out this tax game. So I got a CPA immediately. And, you know, I know I acquired my first ones like fairly late in the year. And so they had initial expenses and almost no income. for the year. And so there's, I believe, quite a store of like, roll forward deductions that we have just ready to utilize. Nice. Well, may you pay nothing in taxes because that's the way the tax code was written. Well, what else can we help you with today? What, any other questions you had or areas you want us to touch on? And I think we've kind of covered the bulk of it here. It's just good to think it out and know that what I'm doing doesn't seem crazy to other people. Not crazy to us. Not crazy to a lot of the people that are listening. Crazy to some of the

people who are listening. There's some people who are listening who'll be like, oh, I don't want to invest in real estate. Then don't. That's fine. You don't have to invest in real estate. But what you're doing, like Scott said, is solid investing. You're not doing anything crazy. Are you able to sleep at night based on the way that you're investing? Usually. When I got a new closing happening, I get kind of excited. But you're not staying up late. Like, oh, how am I going to pay my mortgage tomorrow?

Yeah. I mean, like, I just kind of like focus on like, all right, I've really got to buckle down and get this HELOC paid off because I don't like unnecessary debt. Like, I just, I try to, you know, for a long time, I didn't like any debt when I graduated school and had 100, of debt. I wanted to get rid of it as fast as I could. Yeah, I hear you. But I've become better with real estate debt because I've seen now what it can gain. Yeah. I think you're doing a great job. I think that in two years, you should call us back and check in and we'll be like, oh, look at all that amazing sweet cash flow that you have. and look at you were able to quit your job eight years earlier than you thought you would.

I like it. So I might stick around a little bit longer than that. Okay, Paul, this has been a lot of fun. This has been fun. I think, I think, look, I can't compliment your situation enough with that. I think you've got a wonderful set of financial fundamentals in place here. You're hitting a lot of singles with this. I can't argue with the approach to buying for, you know, solid cash. flow in the Midwest, like what you're doing there. This is not a get-rich-quick plan, but I think it will very high probability to carry you towards your goals. I don't think you

have any problem with, you know, your He-Lock or other debts. They're all six months or less payoff period for you if you choose to do anything on any of that on the short-term debt, and you're using them pretty intelligently. You have a question about the 457B. That depends on how you think your income and tax situation is going to evolve over the next 10 to 50 years. Good luck with that one. And yeah, I think it was a good discussion. And I think a lot of people should be trying to emulate a lot of the things you're doing. Thanks.

I appreciate that. It's good to know that, yeah, I'm in a good spot. You're in a very good spot. I'm excited for your real estate portfolio. And I text me when you're, or email me when you, get the final closings and then keep me up to date on your next properties. I will. Okay, Paul, it is time for the famous four questions.

Are you ready? I am ready. Okay, Paul, what is your favorite finance book? So we briefly mentioned Bryce and Christy. So I did really like their book, quit like a millionaire, despite their disdain for rental properties or property ownership. The concepts I thought were really great. I also really like the millionaire next door and the next millionaire next door.

Those are great books. In Bryce and Christie's defense, they're Canadian. What was your, I love all of those books, by the way. So I highly recommend. What was your biggest money mistake? The biggest one is probably when I was in my early 20s and still in school, I thought it was a good idea to get talked into setting up an IUL policy. or a whole life insurance policy that I totally didn't need and it was just kind of a waste of money that I could have been putting into a Roth IRA instead.

Can you give us a little bit more detail on that? Because I was just thinking that it would be it's about time to get somebody on who has a regret story or a success story from a whole life insurance policy. Yeah. So, I mean, I someone that I really kind of like admired as far as like I thought they were really rich had, you know, kind of talked me into it, sold it to me. And so, you know, it was just like the whole use life insurance as an investment. And then I learned later on that those shouldn't mix and better idea to keep them separately. And so I was paying like, you know, probably two,

50 or so a month for this policy. And by the time I figured out it wasn't good and canceled it. I think I got back like $1,200 after like three and a half years. Yeah. And so for $250 bucks a month, you probably had $250,000 policy or something like that? I think it was actually a million dollar policy because I was 20 and really healthy. But, you know, one that just I really had no use having. I didn't have any dependence. I didn't need life insurance. And then if you contribute to these things over the course of, you know, several years, that they don't tell you is the equity balance doesn't really begin building up in a meaningful way until about 10 years down the road with that.

And then you cancel the policy and you're left with nothing or in your case, $1,500. So love it. Thank you for sharing that. Yeah. Life insurance has a place, but when you're 20 with no dependence, that's probably not the right place. Yeah. Okay. What is your best piece of advice for people who are just starting out?

I think that there's just so much information out there in general that trying to consume it all is like trying to drink from a fire hose. So rather than trying to figure out everything, find something that interests you and learn about that. It's much more manageable and I think you'll gain a lot more in that doing that. What most important question of the famous four here? What is your favorite joke to tell at parties? How much does a roof cost? Oh, how much does the roof cost? Oh, sorry, I screwed that up.

How much does a chimney? 20,000 shingle dollar bills? No, I messed that up. How much does a chimney cost? How much does it chimney cost? Nothing. It's on the house. I love it.

We were having a fire sale of roof jokes. Or if by chance they say that it's on the house, you say, nope, it's through the roof. So either way, they're wrong. I like that. I like the twist ending. Okay, Paul, where can people find out more about you? So I don't have a very big social media presence, but I do participate in the Bigger Pockets Money Facebook group or if you want to reach out to me, we can put my email in the show notes.

Oh, go ahead. Yeah, we'll put the email in the show notes. Yep. And the Bigger Pockets Money Facebook group is at Facebook.com slash groups slash BP Money. And the show notes can be found at biggerpockets.com slash money. Show 268. Okay, Paul, this was super fun. Thank you so much for your time today, and we'll talk to you soon.

Okay, thanks. Okay, Scott, that was Paul. That was an amazing story. And something you mentioned several times in this episode, Scott was singles, the concept of a single as like a base hit as opposed to a home run phenomenal deal. And Paul is making really great investments, but they're not these sexy, amazing, oh my goodness, I have to tell you about this amazing deal that I just found deal. They are singles, base hits, and that's okay. That's perfect, actually, because that follows in with his investment

strategy. He's not trying to retire tomorrow. He's trying to retire in eight to 10 years or 10 to 15 years. And that's fine. These are great investments that are going to yield solid cash flow for 10 or 15 years. And we'll see what happens, you know, down the road. But he's, He's doing really well. And I think that we don't focus enough on the boring investments, the basic investments. There's a lot of talk in real estate about these flashy and amazing deals. And right now, those really aren't out there. I bought it for a dollar and it cash flows $12 million a minute.

Like that doesn't happen right now in this market and that's okay. But, you know, looking for solid deals is there's still solid deals out there. Just maybe not in your specific market. So, you know, he's going outside of, he's in Utah. And Utah is a hot, hot, hot market. So he's looking at another market that he's familiar with. Yeah, and I don't want to discount the notion of home runs and those types of things. We talked to Charlotte from Charlotte a few weeks ago.

And she's hitting home runs with her short-term rental empire that she's starting to build. But she can afford to be a lot more actively involved in her properties because she's a work full-time with some of those things. And so that, I think, it just depends on your strategy. I wouldn't like the idea of building a short-term rental, very active, I think, short-term rental portfolio for Paul based on the fact that he works full-time at this job and he's investing out-of-state. That could certainly change for a lot of things, but it just depends on your situation, right? You know, and it's spend less, earn more, invest, or create. And, you know, Paul is not playing the create card or he's not pulling that lever right now. And that's totally fine.

his approach is going to be very successful. And I think for many people earning in that middle, upper middle class range that I would put Paul smack in the middle of from an income standpoint, this is a great approach. And I think a really, really stress-free path to financial freedom over a moderate period of years. Yeah. And like we said in the show, his specific situation is, you know, we're okay with the way that he's purchasing these properties because of his.

specific financial situation. And if he had a different situation where maybe he's not making as much money, where he's spending almost everything that comes in, we'd have different advice. So I wanted to just reiterate that. I love the way that he's safely investing. And safe isn't the right word when you discuss investments because, of course, you know, nothing is guaranteed. But he is. Sustainably investing. Sustainably not very risk. investing to build wealth and cash flow down the road. So I think he's doing a great job. And I was very delighted to talk to him today. One quick call out before we go. I think I would be interested in hearing from folks who have used whole life or universal life insurance policies

in the past and have either horror stories or success stories with that. I think there's a very small use case for those. And so I'd be interested from hearing anybody who has been happy with their plan. One rule, though, you can't reach out to us if you sell or have sold the whole life insurance policies on that, unless we disclose that and learn about that because we get some very enthusiastic people from these policies who, after we do a little digging, we find have some incentive to promote them. Well, great. Should we get out of here on that, on that note? Super a happy note, yes. From episode 268 of the Bigger Pockets Money podcast, he is Scott Trench and I am Mindy Jensen saying be sweet, parakeet.