BiggerPockets Money Podcast - 290: Finance FAQs: Renting vs. Buying, How to Pay Off Debt, & Creative Real Estate Closings

Episode Date: April 8, 2022

Renting vs. buying a home, debt payoff, and the best investments of 2022 are just a few of the topics discussed in this week’s Finance FAQs. That’s right, we’re here with a new segment where Scott and Mindy take your questions directly from the BiggerPockets Money Facebook group and give answers so you can make smarter investing, saving, and life-changing decisions. In this episode, we get into questions from a range of different financial situations. We have questions about debt payoff schedules, whether to sell stocks and invest in real estate, why “safe” investing may not be smart investing, and what to do when three-quarters of a million dollars are given to you. Scott and Mindy not only answer these questions the best they can, but they also give the “why” behind the financial decision so you can be better equipped when situations like this come up in your own life! If you want to ask a question or give us feedback about this new format, you can do so on the BiggerPockets Money Facebook Group or leave a comment on the BiggerPockets Money YouTube channel. We’ll try and round up the most commonly asked questions so Scott and Mindy can keep the wealth-building wisdom coming!  In This Episode We Cover The safest investment vehicle in 2022 (and why safest doesn’t always mean best) Whether to pay off student loans or invest in retirement and real estate  Which debt to pay off first so you can coast to debt-free freedom Renting vs. buying in today’s hot housing market and how to decide for yourself  Funding home renovation projects (even when contractor costs are high!)  House hacking and using it to lower your expenses, grow net worth, and build financial runway  And So Much More! Links from the Show BiggerPockets Money Facebook Group BiggerPockets Forums Finance Review Guest Onboarding Scott's Instagram Mindy's Twitter Apply to Be a Guest on The Money Show Podcast Talent Search! Follow Along Mindy’s Live Budget Tracking BiggerPockets Money Podcast 35 with Craig Curelop (House Hacking) BiggerPockets Money Podcast 267 with Robert Farrington (Student Loans) Does It Make More Sense to Rent or Buy in Today’s Real Estate Market? A Beginners Guide to Hack Your Housing and Live for Free Pay Off Debt or Invest? Check the full show notes here: https://www.biggerpockets.com/blog/money-290 Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the Bigger Pockets Money podcast show number 290, a different kind of finance Friday edition, where Scott and I answer your questions direct from our Facebook group. Personal finance is personal. And if you can live with having $81,000 in debt while you are choosing to pay the minimums and investing other ways or paying slightly above the minimums and growing your liquid savings account, then do that. But if it is weighing on you and making it So you can't even sleep at night because you have this massive student loan debt that you are just feeling is crushing your soul. Then pay them down as much as possible because your health, your well-being, your mental state is what's most important here. Hello, hello, hello.

My name is Mindy Jensen. And with me as always is my luminous co-host, Scott Trench. Thank you for such a glowing introduction, Mindy. Always appreciate it. Scott and I are here to make financial independence less scary, less job. 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 just get some frameworks to help make basic background decisions that affect your overall financial portfolio. We'll help you reach your financial goals

and get money out of the way so you can launch yourself towards those dreams. Today, Scott and I are looking at the questions you have been asking us in our Facebook group. If you're not a member of our Facebook group, you can join at facebook.com slash groups slash BP money and have delightful money conversations with your fellow frugal freaks or money nerds or discuss spreadsheets with those who truly love the spreadsheet game like Scott and all the rest of you in our group.

But there are some common threads that have been requested and asked in the group lately. And Scott and I wanted to speak at length about some of these questions that you have been having. Just to cover all of my legal bases, 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 advisors, including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate. Okay, now on with the show. Tax season is one of the only times all year when most people actually look at their full financial

picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going, and more importantly, where your tax refund can make the biggest impact. Because the goal isn't just to look backward, it's to actually make progress. Simplify your finances with Monarch. Monarch is the all-in-one personal finance tool designed to make your life easier. It brings your entire financial life, including budgeting, accounts and investments, net worth, and future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your

Monarch subscription with the code Pockets. What I personally like is that Monarch keeps you focused on achieving, not just tracking. You can see your budgets, debt payoff, savings goals, and net worth all in one place. So every decision actually moves the needle. Achieve your financial goals for good with Monarch, the all in one tool that makes money management simple. Use the code pockets at monarch.com for half off your first year. That's 50% off at monarch.com code pockets. I love Matt, said no one ever. Nobody starts a business thinking, you know what would make this more fun? Calculating quarterly estimate. taxes. But somehow every small business owner ends up doing it. Your dreams of creating, selling,

and growing get replaced by late nights chasing receipts, juggling invoices, and wondering if that bad sushi lunch with Scott counts as a write-off. Change all that with Found. Found is a business banking platform built to take the pain out of managing money. It automatically tracks expenses, organizes invoices, and even preps you for tax season without you doing the heavy lifting. You can set aside money for business goals, control spending with virtual cards, and find tax write-offs you didn't even know existed. It saves time, money, and probably a few years of life expectancy. Found has over 30,000 five-star reviews from owners who say, found makes everything easier, expenses, income, profits, taxes, invoices even. So reclaim your

time and your sanity. Open a found account for free at found.com. That's FODD.com. Found is a financial technology company, not a bank. Bank. Banking services are provided by lead bank, member FDIC. Don't put this one off. Join thousands of small business owners who have streamlined their finances with Found. 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 audiobook completions on Audible alone, and I still regularly re-listen to the highest impact titles. Lately, I've been listening to Bigger Leaner 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 video book. 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.

Scott, this first question I think is a lot of fun. The poster says, I have a friend who came into roughly $750,000. She has no interest in real estate. The horror. Wants to put it in an investment vehicle that is relatively safe, but that still allows her to access the funds without penalty should she decide to buy a car or pay her house off. So, Scott, where should she invest her money? Yeah, I mean, the question in 2022 is what's a safe investment?

And I think that if you can answer that question, you're going to get very, very wealthy, very, very quickly. So I don't think there is a true answer to this question. And it goes back to where should I invest in 2022, which I think is the question at the top of everyone's minds. And my kind of framework for answering that question has to do with just analyzing asset classes at the highest level, right? The stock market is still really close to all-time highs in terms of price to earnings ratios, right? Even with a little bit of a pullback in the first couple of months here in 2022. Real estate prices have jumped dramatically over the last couple of years, 20, 30 percent your appreciation.

with this and it's insane, right? Interest rates look like they're poised to rise, which makes bonds a really scary investment vehicle right now, right? Bond equity goes down when interest rates go up. We can have a whole show explaining about why that's the case if we want to do that in the future. Cash seems like a tough situation because, you know, if you're expecting significant inflation or for that to continue

over the course of this year and into next year, then putting the money in cash and sitting on it, is a big risk. So I think a lot of people are really uncomfortable, just like this person who posted this question right now in 2022 about where to put that money. So perhaps the best answer is to just spread the risk across a number of different cases. So one framework that might be the wheels spinning for this person would be, okay, stick a bunch of that into an index fund. Stick some of it into, you know, we're not interested in real estate. You could try a reet if you did want some exposure, as they call it, to the real estate asset class there. You could have

keep some in cash, and you could keep some in things like gold or commodities there that will hold their value. I mean, if your goal is to keep this liquid and not have it go down, that might be a way you're not going to get rich doing that, right? But the question here is not, how do I maximize my returns over 30 years and build the most wealth? It's how do I put this $750,000 into an investment vehicle that is relatively safe and still allows me to access the funds without penalty. And if you put it in multiple different asset classes like that, you might be able to see some wins and tradeoffs there as one or several of those asset classes are bumpy, but the other ones are bumpy in the opposite direction or remain stable.

Okay. I have a bit of a different take on this. And then I'm going to ask you, Scott, what you specifically are investing in. But my first comment is he asked or she asked that she wants to be allowed to access the funds without penalty. And when I hear penalty, I think pre-tax investments that you're withdrawing before the age limit that allows you to withdraw. So I just wanted to make a note that he says that the friend came into the money, I'm assuming an inheritance of some sort.

So this is an after-tax event and penalties wouldn't be assessed. But this person would almost assuredly pay taxes on any gain when they withdraw the funds. So this would be an after-tax account. Let's say that they're putting it all into the stock market. Anytime you withdraw from an after-tax account and have had a gain, you're going to pay taxes on that gain. So there's always going to be a penalty, and I'm doing that in. air quotes. But it's not really a penalty. It's just a tax. Another thing that I wanted to say is that safe equals low return. Higher returns come in exchange for a higher risk. And there was a lot of

chatter about the I bonds that were paying 7.2% for the first six months, starting in like November of 2021. But that was for the first six months. And I think it's a five year commitment. And you had to have them in for a year and then you could take it out before the five years early and there would be some sort of penalties which goes against her original request. But the max amount on that was only $10,000. So that's not really even going to make big dent in her $750,000 that she has. And again, if you've listened to the show before, you know, I'm not a big fan of bonds because they are so safe. Safe means there's not a lot of risk that you will lose the value of your money, but there's also not a lot of opportunity for huge returns. I like huge returns. I think there is a lot of risk in bonds

that you're going to lose a lot of money on paper right now, right? I mean, if interest rates go from like three, you know, mortgage rates are right now, four, four point seven percent, right? If interest rates go up, right, the equity value of those bond holdings is going to go down, right? And bondholders actually did really well over the last couple of years as interest rates plummeted, you know, because if interest rates go from three percent to two percent, that's a huge decrease in a percentage basis and the equity value those bonds goes way up. So bonds have not been the safe haven that is going to spread risk around the portfolio. I think that they once were right now. I think they're extremely volatile and there's a ton of leverage in bonds in bond markets right now.

They're affected dramatically by 25, 50 point basis point rate hikes, for example. I think we need to get somebody on to explain to us how bonds work exactly because I have a very loose understanding of how bonds work. I know enough to know that I don't really want to put my money in bonds, but maybe my loose understanding of bonds is preventing me from doing something that I should. I don't know. But yeah, I think that that would be, that's a good idea. We should get somebody on to talk at length about bonds and how they work.

But back to this woman, there's no information about income or the age of the person. So I'm just going to give general advice. $750,000 is a lot of money for almost anybody. I give the same basic advice over and over again because it's proven to work over and over again. She needs to know what her annual spending is. She could be financially independent right now with this $750,000. She could be spending $250,000 a year, in which case, the $750,000 is like nothing to her,

but she's not going to know unless she's tracking her spending. So she doesn't need to necessarily track it as, closely as I'm tracking it at biggerpockets.com slash Mindy's budget, where I am tracking all of my spending every dime that goes out of my pocket, because I truly want to know how much money I am spending. But she needs to have an overall idea of the money that's going out of her pocket on an annual basis. And then she needs to make a very loose budget based on that. Is she working? Does she plan to continue to work? And what is she investing in right now? If she's working, I would take the money that she's making her income right now and use that to max out her 401k and use that to

max out her Roth IRA if she is eligible for that. If she's younger, that's going to be even more important because the Roth IRA grows tax-free. So the more money she can put in now, the more opportunity she has to withdraw with no penalties, with no taxes, once she is of age. What is that? 59.5. Can you take out of that? the Roth IRA, all of a sudden I'm drawing a blank, which is awesome right as we record. But what I am doing in 2022 is the same thing that I have been doing all along is investing in VTSAX. I have my eye on the real estate market and I am keeping track of what's going on. If an attractive rental property pops up, if an attractive real estate opportunity pops up,

I will invest in it. I just invested in dry land. Stillers, a whiskey producer in my hometown because it was an attractive opportunity to invest in my local city. And I really like this. I like the product that they make. I like the people that are running it. I like the city that it's in. I want to invest in my city's future. So, you know, I'm looking for more opportunities like that. But I'm also doing a lot in VTSAX. Carl and his dumb Tesla. and now his favorite indexes, the QQQQs, the Qs. So we're just, we're basically, we're staying the course. We're doing what we were doing and we're not really changing our minds based on what's

going on in the market, in the interest rates, and in all of that, because we have a plan. We believe in the financial future of the stock market. we believe that the stock market tends to go up into the right. And that is where we are putting our money based on past performance. And past performance is not indicative of future gains. But it kind of is. I mean, I wouldn't continue to put my money in the stock market if I didn't believe that it was going to continue to go up. Yeah.

I think it's great. And I completely agree with your approach, right? I think that, you know, if I'm, you know, if we take this person's question and reframe it as what's the best thing to do over a long period of time, well, what I think and what I would do and what I have done when in because I've been fortunate enough to be in a similar position in past years to have a large sum of money that I'm coming into is great. My philosophy is that, you know, they're making more people, but not more land. The United States is likely to be a dominant global player and I'm going to invest in the United States and our economy long term. You can debate these assumptions, but these are like, fundamental, unprovable assumptions that you can debate with this. And that inflation is going to be a factor that I'm going to have to deal with across my investing lifetime. My time horizon is 75 years.

So what asset class is am I going to put that in, right? I don't think that I have any particular ability over a long period of time to pick the best stocks or even the best real estate necessarily. So I've got to have a strategy that allows me to pick, that allows me to win. with average investments in that asset class over a long period of time relative to other ones, right? And so great, I can go through and say bonds are not a good option for me in a scenario like this, right? Because bond rates are near historic all-time lows, and I think that over a long period of time, bond rates are going to increase, which means that I'm going to lose money

if I'm putting a lot of money into bonds on average in that asset class. That may change if bond yields ever start reaching a all-time highs or even the middling levels, relative to historical contexts. But that's just out for me. So, you know, real estate, I think, look, like I just said, they're not making more, they're making a lot more people and I'm not making a lot more land. And we're not making enough houses. So I'm going to continue to buy real estate as part of my portfolio and just be consistent. I would place portions of this money into real estate, maybe over a two or three year period, property by property, and cash flow and real estate. state and area I think has strong long-term appreciation prospects, and then I dump a lot into

index funds. I also love the idea of investing in local businesses or small businesses, especially services-based businesses. I think there's a lot of opportunity there. There's a lot of these businesses that are selling for one, two, three times cash flow, that especially if these small businesses are just getting started here that I think are a great opportunity. So I love the fact that you're investing in a local distillery. That's exactly the kind of that I'm going to start getting interested in, although I admit I have not done that very much in the past. So if I was, if I, if you're repeating what I did a few years ago when I had a similar opportunity, I put this money into real estate and index funds, dumped it all in there, had a cash

position. I should have put it in all at once. That's the mathematically strongest approach that Michael Kitsis came in and shared with us. But instead, I, I dollar cost averaged over a two or three-year period to put that money in there because I was too, too wimpy to put it all in at once and risk a big downturn right after I put it in. How's that? I think that's great. And I think that we both have the same plan. We have decided on our investment strategy and we are staying the course of our investment

strategy regardless of market conditions at this time. Yeah. Okay. Moving on to the next question. This person shares, I am wondering your thoughts on my financial situation. I have no consumer debt and no mortgages. My only debt is, emphasis is mine, a whopping $81,000 in federal student loans. The average interest rate for my loans is 4.4%.

I want to note that that's the average. He's earning wages of $47,000 per year right now, but working on increasing this and expect to be making $65,000 in about a year? What should he do with these student loans? Pay them down as much as possible. Pay the minimums until he has significant income from investments years from now, or pay slightly above minimum to make a dent but continue to build liquid savings? Or plan D, your other option. So Scott, where would you go first? First of all, no right answer here. It's going to depend on your risk tolerance and what you want to invest in.

You know, the, if you want to, you know, my, my approach, the way my mind works is I always have to play the odds, right? I could handle a bad outcome. I can't handle a bad bet. And so to me, I would look at it like, okay, at the very least, long-term average return of the stock market has been between 8% and 10%. Now, people can debate what they think is going to be going forward. I use that number somewhere in that range, 8 to 10%, to assume long-term returns in the stock

market from an index fund investment. So right there, I've got arbitrage of between, you know, 3.6 and 5.6 percent in terms of returns that I can put money into the stock market and earn likely over a long period of time more of a return than I can paying off the student loan debt. It's not guaranteed, and paying off student loan debt is a guaranteed 4.4% return because you're not going to pay that interest anymore. But what I'd really do, I would really then take that logic to the next level and do exactly what Craig Curlop did, which is house hack. Because when you house hack, what he did is he house hacked, he bought a duplex, rented out one side, lived in the other, in the kitchen, in the living room behind a curtain or whatever, and rented out the room.

That might be too extreme. But you can take that house hacking concept and understand, hey, there's a chance to get a 200% ROI on a house hack in the early years, right? You're putting down 5% on a property, it appreciates 3%. You're going to get a 20 to, you're going to get a 60% ROI just because of that leverage factor on appreciation in the first year. If things are average appreciation in that 3% range, you're going to pay down the mortgage and you're going to have somebody potentially helping you pay down the mortgage, which is going to reduce your cash outflows, right?

If I'm paying $2,000 a month in rent and I have a house hacking and I'm getting, my mortgage is $2,500, and I'm getting, $8,500, and I'm getting $8,000. $1,800 in rent to help me off set that mortgage. Now I'm only paying $700. And that cash flow can really add up and help you build a portfolio. That's an aggressive approach, right? You are taking substantial financial risk in that scenario. But frankly, I think that's what I would have done in this situation if I'd had student loan debt. I definitely house hacked without the student loan debt as my first major investment. But I would, I like the way that Craig thought about it. And it's just, it's something that you're going to have to grapple with and think through.

So you can lose on that. And you, and you are assuming substantial risk and more debt. But I think that it's, you know, that's, that's how I would be thinking about playing this game. And Craig told this story on episode 35 of our podcast. So go back and listen to episode 35 and hear him detail how he did this. He did a lot of things to generate side income and generate other streams of, income to help him pay off. I think he had like $85,000 in student loan debt. So it's, it's a similar amount. And he was, I think he was making more income, which allowed him to buy a

house to do the house hacking. But he was renting his car on tour. And he was basically, anytime he could make money, he was, he was making money. And he used, uh, the minimum of payments so that he could use the money to generate more money so that he could pay off the loans. But yeah, great, great episode from Craig. And I had the chance to watch his life firsthand in this, because he came here to work at Bigger Pockets and then graduated from Bigger Pockets a few years ago. We had a graduation party, which is, you know, an unusual turnover of it. But one that I'm very proud that we have here occasionally.

So, and he just, like the world's as oyster at this point, right? I mean, he's got all the options in the world. He's got a huge real estate portfolio and a booming agent. business. And so that's the reward piece of this that's possible from an aggressive approach like that, even from starting from a position of student loan debt. Of course, there is risk assumed and there is an all-out factor that allowed him to accelerate that quickly. Yeah. And, you know, he did things that other people weren't necessarily willing to do. He was living behind a screen. He was sleeping on the couch. Is that something that you want to do? Maybe, maybe not. I don't want to

rent portions of my house out on Airbnb because I have small children and I just don't want strangers in my house. But he didn't have kids and it was no big deal for him. So it's just, you know, what are you comfortable with and what are you willing to do to get rid of the loans? Another thing that I want to point out is on episode 267, we interviewed Robert Farrington from the college investor and he was talking about the federal student loans, not private student loans and not, this doesn't apply if you have refinanced your student loans. But if you have a federal student loan right now, there is a moratorium on your repayment. Your loan repayment is currently at 0%. And so it's basically on hold.

It is going through April 30th or May 1st or whatever and they are fully expecting it to be pushed back. But as of the date of this recording, they have not yet pushed that back. So there are other ways for you to use that money if you are in a federal student loan. And again, Robert is very well versed on this. And he shared a lot of information on episode 267 when we talked about the student loan and how to prepare. That episode was recorded right before they pushed that back.

And it was more of how to prepare for the student loans to be repaid. But, you know, Scott, another thing that I want to throw out there again, sounding like a broken record, is personal finance is personal. And if you can live with having $81,000 in debt while you are choosing to pay the minimums and investing other ways or paying slightly above the minimums and growing your liquid savings account, then do that. But if it is weighing on you and making it so you can't even sleep at night because you have this massive student loan debt that you are just feeling as well. crushing your soul, then pay them down as much as possible because your health, your well-being, your mental state is what's most important here. Absolutely. So that's where I'm going to, that's where I'm going to leave with that.

The next question is kind of an offshoot of this one. You know, I was actually, Scott, I'm going to ask you to make your comment about you have a less than when the interest rate is less than 4%. you leave it when it's more than 7%, you pay it off, and I can't remember your numbers ever. What is your mantra on that? Yeah, well, I think that when you have a low interest rate, and you can call it less than 4%, I generally wouldn't pay that off early, for the most part. In the kind of like 5 to 7% range, it's kind of a gray area.

Maybe you can arbitrage it, maybe you can. And if you're over 7 or 8%, okay, now you're getting a guaranteed 7% or 8% return. Right. So I think that the stock market is a risky 8 to 10% return over a long period of time. So, you know, and it's less certain. And so I would just start paying off the debt at that higher interest rate unless I was, unless I had a really great opportunity like a house hack, for example, that I might do before doing that. But there's a, you know, in that red zone, that's not where the red zone being, you know, 7, 8% plus on interest rate, I would be thinking about other things. By the way, that may move over time in a high inflation environment and rising interest rate environment, right? So that framework might not apply in two, three years if interest rates rise to, you know, six, seven, eight, nine, ten percent like they were a few decades ago, right? Then you'll have to make a different, we'll have to rebalance that.

I'll come back and ask you for your new opinion. Okay. So this next question is kind of an offshoot of that with different interest rates. She says, I'm in the interview process for a new job, and I'm super excited to have a 401k option. Should I wait to contribute to my 401k until I pay down all my debt? I will be debt free within seven to 12 months with my current plan if I put most of my savings toward debt. The debt is varying interest rates, a few credit cards with $2,500 total imbalances, and 22.99% plus interest.

rates. So that right there, I'm going to stop with the question and say, pay that off as soon as you can with whatever money you have in savings, pay off your 22% interest rate credit cards as soon as you can. Another card with $1,500 balance that is at 0% until July and then goes to 22%. So that one, because it's at 0%, I would leave it at 0%. Again, with credit cards, you want to make the minimum payment that you have to until the interest rate kicks up higher. But with the highest rates, pay those off as soon as you can. So another credit card that is at 0% until July and then goes up to 22%, a card at $500 at $7.99%. And the student loans, I'm not sure what the interest rates are on those. They are in forbearance and they are all 0% right now. I can't find out what it was before the forbearance,

but I don't think they are very high. Total debt is that. about $14,000. So I think, Scott, you're going to be in agreement with me. Absolutely knock out the $2,500 at the 22% interest right now. Then go after the $500 at 8%. And then you're probably going to be at the $1,500 balance and nearing July with the when it's going back up to the 22%. If you can crank that out before July when you're paying zero.

percent on that, I would do that. And again, back to the student loan comment, they're in forbearance right now. You don't have to pay anything on them. And back to episode 267 with Robert Farrington, he said, right now, I wouldn't suggest paying more on your student loans than you have to, which is currently $0 because they could continue to extend it out. And especially if you have other debt. If you don't have any other debt, if you want to crank, pay out these student loans now, you know, now is a great time to pay them off at zero percent. But if you do have a lot of other debt, focus on those first. Yeah, for me, for me, this is pretty clear cut. I would, I would pay off the credit card debt and not contribute to the 401k in this, in this particular

situation. A framework behind that is, you know, that that 22.99% interest rate against the $2,500, that's compounding directly against what I call financial runway, financial runway being the amount of time that you can survive without a paycheck, right? So if you spend $3,000 a month and you have $3,000 in the bank, you have one month of financial runway. If you have $30,000 in the bank and you spend $3,000 a month, you have 10 months of financial runway, right? And I like to get to, as a step in the process of building wealth, I had this drive to get

to a year of financial runway because I thought a lot of options would multiply before me. I think there's a really good return on that that you can't calculate in some ways. And this is compounding against the ability to accumulate that runway. And that runway has got to be accessible outside of these retirement accounts. Not everyone agrees with that, but that's how I viewed it for my journey getting started here. And I would pay off that credit card debt and then at a 22.99% then I'd pay off the other one that's going to go to 22.99% in July, and then I'd pay off the 8% as well because that's still a very high interest rate relative to the options on the 401K. Actually, let me say this.

I might start taking the match from my employer after I paid off the credit card debt at 22, 23%. When I had the next level of debt at 8%, I might start taking the match at that point, because the match is such a great return if your employer offers a 401k match. And I would continue to take that match while paying the remaining high interest rate debt down. If my student loans were in the 4% range, after I paid off the 23% debt and the 8% debt, I would then maybe not aggressively prepay the student loan debt and instead consider investing more in the 401k or $1. in other stock market index funds or a house hack or building runway. Yep, I agree with that.

I forgot the 401K part of the question. I was just focused on the 22% interest rate. You know, that should be illegal to charge 22% on a credit card. But nobody asked me. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch.

It helps you see exactly where your money is going, and more importantly, where your taxed refund can make the biggest impact. Because the goal isn't just to look backward, it's to actually make progress. Simplify your finances with Monarch. Monarch is the all-in-one personal finance tool designed to make your life easier. It brings your entire financial life, including budgeting, accounts and investments, net worth, and future planning, together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch subscription with the code pockets. What I personally like is that Monarch keeps you focused on achieving. not just tracking. You can see your budgets, debt payoff, savings goals, and net worth all in one

place. So every decision actually moves in a needle. Achieve your financial goals for good with Monarch, the all-in-one tool that makes money management simple. Use the code pockets at Monarch.com for half off your first year. That's 50% off at Monarch.com code pockets. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast? Easy. Just use Indeed. When it comes to hiring, Indeed is all you need. That means you can stop struggling to get your job notice on other job sites. Indeed's sponsored jobs helps you stand out and hire the right people quickly. Your job post jumps straight to the top of the page where your ideal candidates are looking. And it works. Sponsored jobs on Indeed get 45% more applications than

non-sponsored posts. The best part? No monthly subscriptions or long-term contracts. You only pay for results. And speaking of results, in the minute I've been talking to you, 23 people just got hired through Indeed worldwide. There's no need to wait any longer. Speed up your hiring right now with Indeed. And listeners of this show will get a $75 sponsored job credit to get your jobs more visibility at Indeed.com slash bigger pockets. Just go to Indeed.com slash bigger pockets right now and support our show by saying you heard about Indeed on this podcast.

Indeed.com slash bigger pockets. Terms and conditions apply. Hiring, Indeed is all you need. When you want more, start your business with Northwest registered agent and get access to thousands of free guides, tools, and legal forms to help you launch and protect your business all in one place. Build your complete business identity with Northwest Today. Northwest Registered Agent has been helping small business owners and entrepreneurs

launch and grow businesses for nearly 30 years. They're the largest registered agent and LLC service in the U.S. With over 1,500 corporate guides who are real people who know your local laws and can help you and your business every step of the way. Northwest makes life easy for business owners. They don't just help you form your business. They give you the free tools you need after you form it, like operating agreements, meeting minutes, and thousands of how-to guides

that explain the complicated ins and outs of running a business. And with Northwest, privacy is automatic. They never sell your data. And all services are handled in-house because 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. Okay. Moving on to real estate, because that is kind of our thing.

where I live in the D.C. metro area, rents are cheaper than buying. So I have decided to rent in the school district I wanted my daughter to attend. I have money saved for a good down payment for a house, but I'm debating if it's worth buying or just keep renting for much less. Buying a rental is an option that I've been contemplating, but it scares me a little not having a house of my own. Has anyone been in a similar situation and what did you do? And before I can hear your house hacking wheels turning, I know that the DC area doesn't have a ton of duplexes. So I don't think that that is an option for her. But I want to point out that renting is a valid option for your housing needs, especially in an area where rents are significantly cheaper than

buying. The problem is you run into these exponentially increasing housing prices. Rents will eventually catch up to housing prices. Rents will start to go up. There is a shortage of housing because we haven't been building since 2008. So rents will eventually start to go up. And a good way to hedge your bet on this is to buy a rental in a market that isn't your expensive home market. You don't have to own a home, own a rental in your current market.

And it's perfectly valid to buy a rental property. and own a rental property while being a renter yourself. In fact, Scott, do we know anybody who owns rental properties while being a renter themselves? Could it be the CEO of BiggerPockets.com? Yeah, exactly. I rent my primary residence due to essentially this conundrum here. I paradoxically also own lots of investment property here in Denver, Colorado. So I'm bullish on the market.

Why do I do that? Right. Well, with my primary residence, I view my, my housing as an expense, right? And so what's the cheapest way to live the lifestyle that I want to live? Right. And, you know, this person says, um, renting is cheaper than buying in my area. Well, let's dive into that. Why can renting be cheaper than buying, right? Let's suppose I buy a house for $500,000, right? When I, if I turn around and sell that house tomorrow, I've got to pay two agents, the listing agent, and the buyer agent. And I might have to pay them up to 6% of the proceeds of that purchase, right? I might have to spend another one to two percent of that $500,000 purchase price on other seller paid closing costs. And by the way, when I bought the property, I'm paying 1 to 2% of the property purchase price in buyer closing costs. So day one, even though technically I don't, I haven't lost all that equity, I'm really down $50,000 immediately after buying that property. if I were to attempt to turn around and sell it the next week, right?

That is one of the major expenses in buying a house. That expense is defrayed over a period of years as appreciation, on average, kicks in as I'm amortizing my loan with part of my mortgage payment, right? The principal portion of my mortgage payment, right? And over time, owning can become cheaper than renting. But to me, again, I go back to what's the right bet to make here? And in a year when home prices go up 30%, okay, buying a home was probably going to be better than renting for everyone who's bought in the last two years for the most part, right?

I probably should have bought if I'd known what the market was going to do two years ago instead of rented for the last two years. I would have been better off financially. But to me, that would have been the wrong bet. The long-term average appreciation rate is around 3.4. 4%. And that says that the break-even point between renting and buying is somewhere between five and seven years, on average, in many markets around the country. It's obviously going to depend on appreciation rates in your market, the spread between mortgage payments and rents in your

market, property taxes, all these other different types of things are going to come into that. But I, as a general rule of thumb, say, okay, if I'm planning to live in a property for more than seven years, I'm going to buy, not because it's going to be cheaper than renting. And I'm going to live in a property for less than five years, it's probably going to be better to rent than buy. And if I'm going to be in the middle, I've got that gray zone where it's just up to, it's kind of a preference and what you believe the housing market's going to do in that area with that. And so there's no right answer. That would be a general rule of thumb.

Lots of exceptions to that. So you've got to do your own research. But that's how I'd think about the situation. And I think it's perfectly fair in this person's situation to think that renting is cheaper than buying, especially if they don't plan to be there for a long period of time. Yep. I think that we are both in agreement here. It is, rental is a valid housing choice in a high priced market. Rental is a valid housing choice if you're not going to be there a long time. Rental is a valid housing choice if you just don't want to make the commitment. I mean,

there's a lot of costs involved in owning a house just as the owner that aren't there for you as the renter. asked me about my $700 furnace repair last year, last month. But one last thing, the reason why I can buy real estate, investment property, and rent, is because my strategy allows me to hold the rental property for 30 years, right? So I know I'm going to, because I'm going to hold for so long, I mean, I probably won't hold for 30 years, but because my strategy allows for me to do that on each property, then I'm able to defray those cost the way I just described there, right? So you don't have to live in the property. If I was going to buy a place, I would then rent out after I moved out and keep it. That would change my math.

But after house hacking for seven years, it's time for me to live in a place that I actually want to live in and like and enjoy with my wife. That's my privilege as I've now kind of built that wealth over, you know, the last seven to 10 years doing that investing. And so to get that lifestyle, I could, to get a lifestyle options that I wanted a house hack or a property that would make more sense as a rental wasn't an option at this point. And that's fair. You know, what I'm hearing you say, Scott, is that you looked at all the options. You didn't jump in with both feet without exploring the different possibilities.

You made a conscious decision based on the information you had at the time and what you wanted to do and what you could comfortably afford. And that's really what wealth allows you to do is make decisions based on what you want to do and what you can comfortably. afford instead of what you have to do based on the only options you have. Okay. Moving on, has anybody ever used a bridge loan to close on a new primary residence? We found a home we want, but would either have to sell stocks or use a bridge loan to get the

down payment prior to selling our current home. With the hot market, we don't think concurrent close or a selling contingency will work. What are the pros and cons between bridge loans? versus selling stocks at high long-term capital gains rates. Are there any other financing options right now? So I really want to stress this point with the hot market. We don't think concurrent close or a selling contingency will work. Right now, in the hottest market that the real estate world has ever, ever, ever, ever seen, you will have a near impossible time getting even your contract accepted. And your contract has to have basically no contingencies in it.

Having a selling contingency is going to almost never be accepted in this current market. So having alternate financing is a almost must. If you have not already sold your house, then you should. have other financing. Something that Carl and I did with this house that we're in right now is we had another house and we got a helock on that other house, which allowed us to, and we got a helock. We each borrowed $50,000 from our 401ks and we sold a collectible car to amass the cash to buy this house because those were the options available to us being able to close with cash, allowed us to get a super deal on this house. And it was a couple of years ago. We would never get this

deal now. But there's a lot of creative financing and a bridge loan is a loan that your lender extends to you knowing that you are going to sell your current house after you buy the first house. So it's, it bridges the gap between the two houses and it's kind of like a lien on both houses until you have sold the first house. Not every lender will offer this property. You definitely want to find somebody who is familiar with this and can work fast to get this. If selling your property and then finding another house is not an option for you, you want to start looking for a bridge lender right now who can do this for you. But with regards to a bridge loan versus selling stocks, I like the bridge loan a whole lot more.

Yes, it's going to have a higher interest rate, but it's a real short-term interest rate. And selling stocks means you're going to pay capital gains taxes, which is, you know, long-term capital gains, hovers around 15% depending on your income, but you're also losing the ability, like all that growth when you sell your stocks. You, I mean, you can go in and buy them back again, I guess, but at this, I mean, are your stocks even up right now? Maybe they're down. Maybe you're going to sell them at a loss. Maybe there's, you know, maybe there's some, there's a lot of things to consider, but I just don't like to sell stocks in general. When there's another option like a bridge loan, which is a short-term solution with a slightly higher interest rate.

I mean, what are you paying? Like, even if you're paying 8 or 10 percent, you're doing that for a couple of months while you're selling your house. And in this market, you buy the new house, you list your old house. It's instantly for sale. You might end up paying one month of interest on that bridge loan. So I had this issue. And, you know, I think I made a mistake here. But here's what my thought process was when I when I had this issue on trying to close into rental property I need to come up with the cash I sold the stocks and I incurred the capital gains tax and you know my rationale was hey it does I'm going to invest for the very long term if I pay the capital gains tax and then re-buy when I get my cash back out from that deal right which I did I was able to refinance out

shortly later from another property and repay that well I'm I'm just at a higher basis now with the new stocks that I purchased back. So I'm going to pay the taxes if they're in my after-tax brokerage account at some point in my life, right? So do I really care if it's now versus later at that point? You know, are capital gains tax going to be higher later from that point? So I think that as long as you're not going to have a liquidity crunch in the short term with that, you know, everyone talks about deferring taxes, deferring taxes, deferring taxes,

and all that, maybe there's a reason why it's kind of half, six of one and half a dozen of the other, as my mom used to say with that. It's the same thing for that. So I'm not sure if I made the right choice there. If you don't want to pay capital gains taxes, a bridge loans, a reasonable option, but I would encourage listeners to attempt to avoid this problem altogether with different avenues here. One is, as Mindy said, sell your home first, right? And When you're selling your home, because the market's so hot, there's an opportunity to have a lease back period that until you're able to find your new housing arrangement. A lot of folks I know are doing essentially that. That will make this problem go away because then you'll be able to sell your home, have the cash, buy the next one with everything in order, and then move out once you have purchased the next property and everybody's happy.

and you just bake that a part of your terms that you're asking for and the offers for the home of your listing. So that's one. The second option here would be a bridge loan, yes, could be a better option if you want to avoid capital gains taxes and avoid the decision that I went through. Or you can take out a loan against your stock portfolio for a temporary time period. Many of these brokerages like E-Trade and Robin Hood offer one, two, three percent loan programs. you can borrow up to 50% or some percentage of your stock portfolio, depending on what you own and how volatile it is and all that kind of stuff. But you own index funds, you're probably going to be able to get 40, 50% of your portfolio

and you're going to borrow that at 1, 2, 3% interest rates. That's a great option that I would go to before the bridge loan. I'd also try the HELOC, as Mindy mentioned, before the bridge loan, just their cheaper sources of debt. And if you're truly going to use it for a short period of time to bridge a gap, those might be better alternatives to save you a little bit of interest. Those are really great alternative, Scott. I actually have a line of credit against my stock portfolio, but I forgot about that option.

It's relatively new. But yeah, the capital gains, that's, you know, that's something to consider is, you know, where is the market at right now? And you can't predict where the market's going to be, but it would sure stink to sell it when it's down. And then by the time you get the money back out, you've refinanced your mortgage or whatever, the market is way high and you've missed out on that growth. Another thing I just didn't know, and this is something I should go and investigate now

for whenever a future situation arises is as if taking that bridge loan and or taking out another loan against your stock portfolio, whether that has some impact on your ability to borrow for the new home purchase and affects your debt to income ratio. So something to look into and talk to your lender that you're going to use to purchase the new home with about, right? having a mortgage on your primary that is not yet sold, and having a bridge loan and or a loan against your stock portfolio, a personal loan, and having a second mortgage, that may put you in some debt-to-income ratio trouble if you're not careful.

So something to talk about with your lender, and I did not want to disrupt the process and even go there with that because I was not fully informed. I decided, you know, maybe it's six of one, half a dozen another on just selling a portion of my stock portfolio, eating the capital gain this year, buying the property and rebuying. I'll just be at a higher basis and I'm paying the tax today instead of 10 years from now, or whatever it is, I would liquidate. Yeah, but if you have the time, if you're thinking about doing this, this may not work for the person actually asking the question, but if you're listening and you're thinking

about doing this, call up a lender. Have a conversation with them. Ask them these questions. Ask them, you know, another great question to ask your lender is, what am I not asking or what should I be asking or what information should I know about this program? And just you want to be the most informed that you can. What other options are out there for me because I don't want to put myself in this position where I have to scramble to buy a house.

Something I wanted to tag on to Scott is when you sell your house, you can put in there that you would like in Colorado. It's called a post-closing occupancy agreement or a rent back from your buyers. If the buyer is buying it as their primary residence, they have 60 days to move in per the terms of their mortgage. So you want to make sure that you have found your new home and have moved out within 60 days. And that can put some pressure on you in this market. So again, there's just a lot of things to consider. And what you want to avoid most of all is making a rash decision.

So if you're thinking about moving, start gathering information now. Really good perspective. Thanks, Mindy. Okay, I am thinking about pulling money out of my taxable vanguard to finish the basement on the house I just purchased in November to maximize the value to resale in two years. I'm thinking around $20,000 and it will add two bedrooms, a bath, and a large family room, an additional 1,450 finished square feet. Does this seem worth it?

I'll have to pay long-term gains on the money. However, I'm not extremely confident in the stock market currently. not that the housing market isn't also wild. Also, I do construction for a living and plan to do most of the work myself before everyone says 20,000 won't do it. So that was my first thought. It's $20,000 isn't even going to cover it because my friend just got a quote for $130,000 to do her basement. So this $20,000. Now, Carl and I did our basement. I want to say we're like 25 into the basement. We put a kitchen down there. We didn't do bathrooms. We didn't do bedrooms. We did a small bathroom, and it's not 1,400 square feet. But paying long-term capital gains on adding 1,450 spinach square feet. This one, I almost think that it's worth it unless he has another way to get the money,

simply because he has the ability to do the work himself. The market is going so bananas right now that it's, almost a sure bet that he's going to make money on this, as long as he does the work properly, and I'm assuming that he will. And it just seems like if he's putting in two bedrooms in a bath, he could almost use that, like rent that out now to generate income to maybe even cover the long-term capital gains

and then sell it for a profit in two years for an even larger profit it because he has more more square, uh, square, uh, obviously this individual will have to do the math on what they think the after repair value of their primary will be. But I, I really like,

um, the idea of, of a project like this, right? You work a full-time job and you're refinishing your house during that period. You could add, you know, you think that it's,

you'd like to think that it's very conceivable. You could add a minimum of $100,000 in value to a house by adding that, level of, that amount of value, depending on your market, I guess that's a too general. But in Denver, you know, you think that that would be a really good opportunity to do that. And that would all be essentially tax-free because of the person's living in the property and doing what is essentially a live-in flip. So I think a live-in flip or a house hack is generally going to be a stronger bet than putting money into the stock market. And so I'd be completely aligned with the approach of pulling the money out and doing this. I don't think that this person,

will, in reality, have to pull out 20K and do the project, I think that more likely there will be phases where they'll have to pull out several thousand dollar chunks if they're doing the work themselves for materials at various times. So you also could see a situation over a one to two year project where this person is actually just spent, you know, managing their budget and cash flow from their other sources of income like their job and able to essentially cash flow large amounts of the improvements here without having to make this choice. And then lastly, you also have the choice that we've outlined earlier of, in some cases, borrowing at a very small, low rate with those personal loans against portions of the stock

portfolio if there's a large stock balance. And then finally, one more point. I know I just said lastly, but I'm going to go and have a second lastly point on this. I think this is where we come back to the concept of financial runway. And so if you're building financial runway and have $20,000, $25,000, dollars built up before you kind of get commit to these long-term investing approaches, I think it helps make these choices that much more accessible, is you're not having to make tradeoffs between one investment versus the other.

No, the financial runway is for this purpose, right? This is a huge opportunity to potentially add a lot of value to their financial position, and that could come out of, you know, a cash savings account or money market account or something that's very liquid and intended to be used for something like this. That can be a really freeing way to, to build your financial position. I'm going to throw a couple of more options for paying for this out. So I also do construction for a living and plan to do most of the work myself.

I wonder if he could pick up a side job or 20 and pay for this because I don't know if you've tried to hire a contractor lately, Scott, but they're in short supply. So perhaps he could go do some side businesses or side jobs and generate the income without selling. somebody else's house before doing your own. Without selling the stock. Or something that I have done to fund my own rehabs, the big box stores like Home Depot and Lowe's will offer no payment, I'm sorry, no interest on credit card payments, their own store credit card payments up 6, 12, 18, 24 months, depending on how much you're spending.

So if you're going to be making the materials purchases anyway, plan around a promotion like that where you can either get a discount or get the no payments, you could potentially get no payments for up to two years. And then I'm sorry, not no payments. It's no interest. It's not no payments. You get the no interest for two years. It's a free loan.

You buy the materials. You do the work yourself. You make the minimum payments on the card. And then you do have to pay off the total amount before the last payment is due. Otherwise, you owe the entire amount of interest. on the entire amount for the entire time. So definitely read the fine print. But that could be a way to fund this deal so that you don't have to pull out the stocks.

I mean, there's a lot of options. Also, how much is the house worth? Has it increased in value so much that you could get a helock and pull from that as needed? There are, there's a lot of options available for funding. So, you know, look around and see what you can do. Okay. I think we have time for one more question before we wrap up. It says, we purchased our home for $435,000 almost 10 years ago and added a pool for $55,000. Right now, our Texas school district is highly

thought after and we could sell for about $800,000. We have no mortgage. We'd love to downsize and use the gains to purchase rentals. But there is nothing available in our school district for us to move into. Would you stick it out for the remaining 15 years we have left with our kids or sell while it's hot and hope we can move into a smaller house in the next few months or something else? And the reason I wanted to ask this question is because I think a lot of people are going to find themselves essentially stuck, and again, air quotes around stuck, in their current home because of housing prices. You buy a house thinking, oh, I'll move in a few years, I'll upsize in a few years, but all of a sudden the market has increased so much that you either can't afford the new house

or there's just it's such a hot market, there's nothing to buy, you're overpaying and people say there's no such thing as overpaying because it's worth whatever anybody will pay, blah, blah, blah. But they are in a real pickle right now because they have so much equity in this home. Oh, they have no mortgage, so they have total equity, $800,000, $800,000, they're I would recommend getting a helock and starting to look for a smaller house now so that they could take the money by the new house and then sell the house when they find it. They wouldn't need the bridge load because their equity is the bridge load. I would have never thought of that.

That's a great. I think that's a great move. Yeah, that's it. I love the idea to downsize. That's going to save them a lot of money. If they need the liquidity, they just take out a helock up to, you know, most of their properties LTV. Then when they buy the new place, sell that and they're able, they don't have that liquidity problem in between and they can buy the place and go from there.

So I think that's a perfect answer to that question, in my opinion. I love it. Then they can calmly look for a new house. They can calmly sell their house. And if it doesn't work out, they don't have to, you know, be frantic or be paying rent when they don't want to. They clearly value having no housing payment. because they have no mortgage after 10 years.

So that's what I would do. Okay. I would do the same thing. I would listen to Mindy on that one. Well, thanks, Scott. Okay, that brings us to the end of the questions that we grabbed from our Facebook group, but we invite you to join us in Facebook.com slash group slash BP money and chat with your fellow frugal weirdos and money nerds and money fanatics and five freaks.

and make it sound so weird, but it's just people who are like you who want to talk about money and optimizing their life or spending money on things that are important to them. And there is no wrong answer. We appreciate all commentary as long as it's nice. And if you're not nice, I'll kick you out. So if you want to be nice and talk about money, come on over. We'd love to have you. Yeah.

And please give us feedback on whether you think this format of just Q&A for audience questions is a good one. and you like it and you'd like us to do more of it. We would love to do more of this. We could even do a call-in show if you'd like to hear your voice on the radio. Oh, I guess it's a podcast, not a radio. I'm so old. Okay, Scott, should we get out of here? Let's do it.

From episode 290 of the Bigger Pockets Money podcast, here's Scott Trench and I am Indy Jensen saying, shine on, you bright stars.