BiggerPockets Money Podcast - 322: Finance Friday: Living Paycheck-to-Paycheck with 9 Rental Properties

Episode Date: July 29, 2022

Rental property cash flow is one of the most important metrics to calculate when analyzing real estate. Your cash flow not only helps you make a little extra money every month but also keeps your property afloat during months of heavy expenses or when large repairs need to take place. If you don’t do the correct cash flow calculations, you could find yourself with a cash-hemorrhaging property. This is why running (and re-running) your “true cash flow” number is so important. It’s also what Pam, today’s guest, might need to do to figure out which rentals to sell and which to keep in her portfolio. Pam owns nine rental properties, which is doubly impressive since she declared bankruptcy just a decade ago. She’s been able to rebuild a financial position that many would envy. And even though Pam and her husband make a great income, they’re struggling to figure out where it’s going every month. As six-figure earners, they’re barely breaking even on some months and overspending on others. Is Pam being too relaxed with some of her budget categories, or is there another cash flow leak coming from somewhere she isn’t looking? Scott and Mindy go through Pam’s current financial situation and quite quickly come up with a solution that could save her thousands every month. In This Episode We Cover How to calculate “true cash flow” for your rental properties so you know what actually comes in every month Selling vs. refinancing vs. holding and which choice to pick for which property Why so many six-figure earners feel like they’re living paycheck to paycheck  Capital expenditure (CapEx) costs and why every rental property investor must anticipate them Climbing out of bankruptcy and finding financial success after starting from zero Using private money lending to grow a rental portfolio quickly And So Much More! Links from the Show BiggerPockets Money Facebook Group BiggerPockets Forums Finance Review Guest Onboarding Scott's Instagram Mindy's Twitter Listen to All Your Favorite BiggerPockets Podcasts in One Place Apply to Be a Guest on The Money Show Podcast Talent Search! Subscribe to The “On The Market” YouTube Channel Listen to The “On The Market” Podcast: Spotify, Apple Podcasts, BiggerPockets Check Out Mindy’s 2022 Live Spending Tracker and Budget Finance Friday: How to Get to Early Retirement Even Faster Finance Friday: Sell (Don’t Rent) Your Primary Residence When You Move Out Interested in learning more about today's sponsors or becoming a BiggerPockets partner yourself? Check out our sponsor page! Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the Bigger Pockets Money podcast show number 32, Finance Friday edition, where we interview Pam and talk about taking a deep look at the true cash flow scenario of your rental portfolio. My husband and I, we talk a lot about, well, do we want to do the cash out or do we want to keep them paid off for increased cash flow? We do have four properties paid off right now. We were toying with the idea of refinancing two or three of them to help pay off the private lender. Hello, hello, hello. My name is Mindy Jensen. And with me as always is my sunshine on a cloudy day co-host, Scott Trench.

That's me beaming, Mindy. Scott and I are here to make financial independence less scary, less just for somebody else. To introduce you to every money story, because we truly believe 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 analyze your portfolio and consider selling some of that real estate. We'll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams. Scott, today we are talking to Pam and she has a very interesting set of circumstances with regards to her investment portfolio. She has been investing over the last three years, gathering, collecting real estate properties. And now it's time. to analyze those and see if they are worth holding onto. That's right. Pam has a very, I would imagine a very common situation for investors who have been using

variations of the Burr methodology where they've got built up a lot of equity, but it's a little hard to cash flow in some situations. And maybe some of the properties don't cash flow because we haven't been doing enough of a rigorous analysis on that cash flow and really accounting for things that are phantom expenses that don't show up every month, but you have to plan for, like vacancy, like maintenance. like CAPEX, run those numbers all the way through on every property in your existing portfolio and any property you're considering buying and make sure that your cash flow positive. You don't have to get a 10 or 20% cash on cash return, but you have to be positive in order

to sustain it in this business, according to conservative assumptions over the long term, in my opinion. Yes, and you said the V words got vacancy. We didn't even talk about vacancy on this episode because she has really great. rate properties that don't have any vacancy. She said that she's got people that have been there since 2015. But that is something that we forgot to talk about. Vacancy should be estimated at 8%.

A lot of people will say 5%. It should be estimated at 8% because 12 divided by 1 is, or 1 divided by 12 is 8. I don't know. A whole month's vacancy is 8%. And hey, if you estimate high and then you come in a little bit lower, you win. Yeah. If you estimate low, then you lose. And what do you do if you don't, if you can't get the numbers to work on a cash flow

basis with conservative assumptions, you use less leverage or you wait, or you pick your different market or different strategy with that. You don't have to make, again, 10, 15, 20% cash flow each month to get into this game. There are appreciation and amortization benefits, but you can't cash flow negative because it'll just suck money out of your life and make things miserable in the downturns, the handful of downturns. we are going to experience over the next 50 years.

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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. You just said the G word, Scott. You said this game to get you. into this game. Real estate investing is not a game. It is a business. And if you treat it as a game, you will lose every single time. But you're not the only person who calls it a game. Everybody calls it a game. And it's a huge pet peeve- I call it a game. I just am so competitive. I take my games very seriously, Bindy. Okay. You, okay, that, you know what? I will give you that. But everybody else does not get a pass on this. You cannot call it a game. It's a business and you have to treat it as such.

All right. Now, before we get into Pam, 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. Pam is a real estate investor who's been focused on increasing her real estate holdings the past three years. She and her husband have a great income and have been reinvesting their cash flow back into their real estate portfolio, along with using a hard money lender to fund more purchases. But now they're at a

crossroads. Continue with the Burr strategy in single-family homes or pivot to multifamily. Pam, welcome to the Bigger Pockets Money podcast. I'm so excited to talk to you today. Hi. Thank you for having me. Thank you for coming on. Welcome. This is going to be so much fun because we're going to talk about our favorite topic, money and real estate. So let's jump right in. What do you make? Where does it go? Then let's talk real estate. Okay. Well, I have a couple of businesses. I used to teach writing lessons, so I still have a little bit of that going on.

So it brings in a little money, play money every month. I have a bookkeeping business that brings in net about $18, $1,900 a month. My husband and I work for a property management company. He does the maintenance. He's maintenance director. I'm the CFO, so I do a lot of numbers. So together, and both, let's see, he's a 1099 pay. And then with my net, that totals roughly $12,000 a month.

The average of the rental income, as it stands now, is about 7,500 a month. That increased, we just signed a lease, so maybe $8,500 a month. And then just sales, if we've decided to sell one over some time, I just averaged that out to be about $4,800 a month. Oh, you're saying when you redeploy the proceeds, you might be able to generate an industrial $4,500. Well, maybe I didn't explain that well enough.

Okay, so for the house sale that was initially supposed to be a rental, but five months later, it not being rented the best strategy with the way the prices were, we decided to sell. So we made some money there, and I just averaged that out to be about $4,800 a month. Oh, okay. What's the lump amount of that sale proceeds? Is that sitting in your bank account? Some of it is. We paid off, we paid a big chunk to our private lender, about $50,000. We walked away with 108.

We bought another house, I'm sorry. We bought a rental. Turnkey had a tenant. That was $33,000. Paid our private lender, 50. And then we paid a credit card off. The business credit card was maybe $10,000. And then we still have 20 left of it,

which we are planning to purchase another property that will be a little bit, a pretty big renovation project to be a rental. So if I were to summarize your monthly income, excluding the sale, I could say that your wage income, the dollars you're earning is $12,000 a month, your bookkeeping business is bringing in $2,000 a month, and your rental business is bringing in $8,500 per month once you get that next place up with the new tenant. And that's a net cash. flow. That's not gross rent. That's in the cash flow you're able to spend on an average basis from the rental property portfolio. I believe so, yes. Okay, that's awesome. That's $22, $23,000 per month pre-tax. That's phenomenal. So big incomes.

Yes, but I feel like we're paycheck to paycheck. Well, that's why we're here. Yes, exactly. I just want to point out before we go any further, if you're spending every dime that comes in, you are paycheck to paycheck. It doesn't matter how much of that is coming in. let's look at where that's going and see I saw something. So we do get your numbers ahead of time. And I did see something that I'd like to maybe reframe as we are, as we're going through your numbers. So let's look at your numbers the way that you've shared them and see if they still are how I'm thinking about it. So what do your expenses look like? So I separated a category like personal and business because that's where it gets a little confusing. We usually always have some sort of remodel going on, which is where a big chunk of all that money goes.

And like I said, we just recently finished one remodel. We have a signed lease. We did receive our first rent check from them that is through a management company. So I feel like the business miscellaneous category that I have will trim down quite a bit. So for personal side, our mortgage for our primary home is $1,400, and that's taxes insurance. Our insurance bills every month are $1475, and that's big one is health insurance because I'm a W-2, but they don't have medical. So my husband is the 1099 side, so he doesn't have medical. So that's about a thousand.

And the rest is life insurance, which we have the term policies. And that's in car. Awesome. Travel's a big one for us. I just averaged that out for the year. And that was about 800 a month, mainly because we have properties. in out of state. So we do go a few times a year. My general category needs to slim down. General merchandise and clothing, 86. Yes, it does include some Amazon. Also, you know,

like trips to, I don't know if we have to go get a card or just general items needed for the house. There's just, that's my big lump category. We do have a boat that we own, and part of that boat money is where we house it at the marina. It's called the docaminium. I don't know if you guys have heard of that, but it's like a condo for the boat. So that monthly payment is in there. That includes dues. It includes property tax.

our payment to the docamidium we bought that on land contract that ends in September. So that's roughly about $750 a month for a year. It also includes like other maintenance with it. It's basically our cottage. How much? So we were trying to tally this up, but we're, how much is this coming out to per month? 9,500. 9,500 per month.

Okay. And you're bringing in $22,000 per month. So while there's a lot there, and there are things to cut. You should be not living paycheck to paycheck based in that spending and your income, which is what we're going to investigate today with that. So you should be able to accumulate a lot of those things. And many of the things you said there are perfect.

Like this is not a, oh, cut your boat thing. You know, with that, you earn enough income to pay for some of these luxuries with that because you guys are doing so well. Let's go through your net worth and balance sheet here. And let's start with cash. How much cash do you guys have? Personal cash, 12,000. And I know we have about 18 to 20 in the business account, in the real estate account. And then what's the biggest, is the biggest portion of net worth, the real estate? Yes. Let's walk through that. What does that look like? We have nine rental properties, valuing 1.5 in today's equity. I have three, we have three in

Scottsdale, two condos in a house that are Airbnb's. And then we have properties in Flint, Michigan that we use for long-term rentals. And those are six properties there? Yeah, and counting. We are under contract for another one and just signed another contract today for a quick wholesale flip. So it looks like we've got about $175, about $200,000 in retirement accounts and then maybe another $5,000 to $10,000 in after-tax brokerage accounts there. So that sound about right? Yeah, we use, I use personal capital. So I have everything in there.

And yes, that sounds right. Before we get into what's the best way we can help you today, I'd love to hear a quick story about how you got into this position. Can we do a quick background on your journey with money? We grew up not poor, but lower middle class. And my dad was dealing with layoffs. I worked for the big three. So there were times where we had to pinch quite a bit.

And then fast forward college, I went to college, student loans, that kind of thing, got married quickly after school. And then that didn't end very well. I did have a 401k at that time that I lost after the marriage. So I was starting over basically at 28. I did have my horse training business, which paid for my lifestyle, but I wasn't able to put anything away. Then my husband and I met, and he has a very similar money background as I. So we got along great. And we decided we'd be a great team to do some real estate because he was a builder.

So we loved all those shows that came out in 2005 and 6. So we thought flipping was it. This was great. Then the market crashed. So we kind of lost that. Got some very bad advice from our real estate agent that. said, just let them go back to the bank like everybody else, because I can't sell them, had no clue about renting, no clue, no clue that there was even property managers that could

handle everything for you. So that kind of was a harsh learning lesson. We had to file bankruptcy in 2011, but it's kind of been the best thing that's happened and we've learned from that. We lived with cash for forever, gosh, probably until 2018. So we went seven years just if we didn't have the cash, we didn't buy it. We had no credit. We had no loans. We had nothing. We did start building from there with a prepaid credit card.

We each had a $300 prepaid credit card. And we lived off of that. surprisingly. But he had done some car sales at that time. All his remodeling kind of was going under with the economy the way it was during that time. And then fast forward 2018, we decided, actually, let me back up,

when we were going through that bankruptcy, we couldn't get, like we lost all of our properties, with our primary home. I had a condo that went back to the bank. And we have this private lender who my husband had done some business with before. And he was our saving grace. We were able to buy a home with him on land contract. So he paid cash for it.

So we found a nice home and fixed it up, that kind of thing. We stayed there for three and a half years, sold in 2013. had a nice lump sum, walked away with some money. So like our first live-in flip, I suppose. And then we found this great property 2014-2015. Also, our plan was a live-in flip because we did well with that other one. We had a five-year plan for that house. And we stuck to it pretty well.

We used that chunk from the first house, did the remodel, lived there for six years, sold that in. in 2020. And then 2018, 19 was when we started buying real estate. So I learned about a thing called cash out refi. Had no idea what that even was. I had no idea if we could even qualify for a mortgage. And they qualified us. And we walked away with a check of $230-some thousand. We're like, I can't believe that just happened. So we paid our private lender on. and we had money left over to buy our first rental. And we bought a turnkey rental.

It was a wonderful first property. And that's, you know, that's how we got going. Our private lender said, why did you pay me off? Do you want more money? So we borrowed more money and did it again. We bought some more turnkey rentals. And that's where we ended up here. Awesome. And has most of that, most of the rentals been financed with cash out refinances, or have you been accumulating cash in a substantial way over the last three, four, five years as well from your saving and incomes and job?

I would say yes to both of that. Yes, to both of that. We did get a line of credit on those three properties because, like, on paper, we looked like we owned them all. And we bought some more properties, paid him off again. So a bit of the birth strategy. Okay. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch.

It helps you see exactly where your money is going. And more importantly, where your tax refund can make the biggest impact. Because the goal isn't just to look backward. It's to actually make progress. Simplify your finances with Monarch. Monarch is the all-in-one personal finance tool designed to make your life easier. It brings your entire financial life, including budgeting, accounts and investments, net worth, and future planning together in one dashboard on your phone or your laptop.

Feel aware and in control of your finances this tax season and get 50% off your Monarch subscription with the code pockets. What I personally like is that Monarch keeps you 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.

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Well, great. Let's unpack this. And I think that we have, that background was really helpful. I think we'll have some clues in that background as to, opportunity areas that we can begin attacking. My belief is that your situation that you articulated to us is one where you've got a really strong income, you're building, you have all these rental properties, you're living paycheck to paycheck, and you can't figure out why cash is leaking out of the system instead of depositing into the system on a regular basis. And I think I've got some hunches about why that may be happening.

And let me start with the real estate portfolio. Let's talk about the types of properties you own. Are these properties in good condition when you buy them? Most of them know, which is why I think we had been leaking so much money into the renovations. For instance, the one we just finished, we paid 40. We put, I think we only put maybe 15 or 20 into it. I don't even think that much, 13 to 15. And we're in the process of refinancing that right now, and it appraised for $101,000.

And what would $101,000 property rent for in that area? This is Flint, Michigan, right? Yes, 1,000. We just signed in the lease. Near Detroit? It's an hour 20 north. So you're getting close to 1% rule property here. How do you think about expenses on that property?

What are you paying on a monthly basis? So before the refinance, all of my Flint properties are usually about $285 a month. That's insurance and tax and utilities because I had to pay the water and electrical. Maybe at the most in the summer, $350,000, actually the winter because that's with the heat. So $285 to $350. Do you have a mortgage on these properties? When we do the cash out, yes, that payment will be $6.12, and that includes everything. Okay, great. And that includes everything that principal interest taxes and insurance. Correct. And then utilities and water come on top of that. What are utilities and water? Well, that will be covered by the tenant. We'll pay that. But previously, winter is usually the most expensive at 130 a month. And most of these properties don't have a lot of insulation, so they leak hot air. So you pay for that. The water we generally don't even use,

but there's a service fee. So our bill is always $57 a month. Any other expenses that go along with that property? 612 in Pity. Insurance goes to the tenant and then the $57 per month for water. I'm sorry, utilities go to the tenant. And then the water is $57 per month. So my expenses will just be the mortgage pity, 612. Great. And then what do you pay your property manager? 10%. 10%. So we have $100 a month a month for the property manager. And what's the placement fee on that?

A half a month rent. Okay. So you're going to place $500. I'm pretty sure. That's only every two years. Actually, what's interesting about this area, it's so popular for rent that nobody moves. We have tenants that have been in those turnkey houses we bought. They've lived there since 2015, 2016. So knock on wood, we haven't had a turnover yet, which is pretty amazing.

So that hats off to our property managers for finding great tenants as well because I think that has a lot to do with it. Okay, great. What do you budget for maintenance expenses? Well, I have a live-in maintenance guy. So that's my husband. So it's just time, really, maybe materials. Okay, let's, I would recommend you put 5% away for maintenance at the minimum, maybe 10%.

Go ahead, Mindy. I was just going to say, with a move planned in the next year or so, you're going to need to have maintenance scheduled or accounted for. And also, I would start looking for maintenance people now so you can have them working on your properties in conjunction with your husband so you can test them out because things will break. Things will break more frequently when your husband isn't there to fix them. It will seem.

And you'll be like, why is this so expensive all the time? because on paper $1,000 in rent and $612 in mortgage payment is almost $400 in my pocket. But it's not. It is now you're $100 for the property manager. Okay, now it's $300 in my pocket. Well, now you've got $100 for maintenance. Now it's $200 in my pocket. And you've got these were rehabbed, right?

These return key. What is the state of the roof, the big system? the like if everything's brand new, you need a whole lot less in CAP-X. But if the roof was 15 years old when you bought it, you're going to have to budget for a roof a lot faster. Yeah. Correct. So that's a good thought exercise here.

So we have maintenance, which is costing you something. It's not nothing because you have materials that you have to pay for, but you will have to budget for the maintenance person when you move. And then the other part of this is CAP-X. And this is what's going to kill your cash flow when we go, when I'm a, I tell you this, this is not going to be good news. With this, on a property in Denver, Colorado, I would not estimate less than about $250 per month per month is a CAPEX allocation because every year I'm going to have some problem

with one of my units across my portfolio. And that problem is not going to be $3,000. It's going to be $5 to $10,000, right? When I got to turn a unit because the tenants trashed it, it's $10,000 to get to fix the floor and the walls or whatever with that. And that's going to happen every, in your case, let's call it every five years, because you have a long tenant, but you're still going to have to plan for the 10 grand each unit every five years,

you know, at the minimum, which will come out to $250 a month. And that, I believe, is what's killing your cash flow here and why your business is not actually spitting out cash into your bank account on a regular basis and the way that you're anticipating with it. Do you have a reserve for that? Do you account for that cap-x piece in the cash flow? I do have a reserve as far as we do have a line of credit that has 45,000 available if we need to tap into that. I do have my private lender, and we do have some cash.

But I do feel like I need a whole bunch more sitting aside for that kind of stuff. I agree with that, and we'll come back to the cash position in a second. But right now, I'm trying to point out the cash flow on this unit. So let's go through the numbers that we just put in place, right? We have $1,000 in rent. We have $612 in your principal interest taxes and insurance. So now you have $388 in cash flow per month, right? $100 of that is going to the property manager. So now you have $288 per month. And I would bet that between KAPEX and maintenance, you should be budgeting $300 per month because I don't think you can get away with less than that over the long term. So right now, your cash flow is not positive on this property on an average basis over a three to five year period. You're going to have many months where it will be positive and will deposit money in your bank account.

But you'll also have those big turns where $5,000 is going into that property and that wipes out all of that. overall. And so that's that's the major problem here. And I would estimate that this the same situation could be going on in other of your properties with that. Do you think that is that a fair? What's your reaction to that? Well, and that's a very good observation because my husband and I, we talk a lot about, well, do we want to do the cash out or do we want to keep them paid off for increased cash flow. We do have four properties paid off right now. We were toying with the idea of refinancing two or three of them

to help pay off the private lender. So that comes into play, I would think, based on the cash flow on the other properties. So do I start analyze, do I just start analyzing it, one like this and or do we do it as a whole? I would analyze each one like this and I would go a little bit further and say because the numbers that you shared with us were personal and business altogether, I'm wondering if your personal income of $12,000 a month is subsidizing your rental properties and that also making you feel like you're living paycheck to paycheck because

$12,000 a month in a rent. relatively low cost of area living should be, I don't want to say knocking it out of the park, but it should be really, really comfortable. And I think that each individual property should be, I don't want to argue with Scott and totally derail this conversation, but I would challenge you to figure out CAPEX for each one of your properties. What is one, two, three main streets, roof age and systems age and appliances and see, oh, okay, a roof is $15,000 and I have 10 years left on this roof. So 10 times 12 months is 120 months.

15,000 divided by 120 is 125 bucks a month. Yeah. So you need to save $125 a month for the roof. If the furnace is about to go out, that's $5,000. Let's say you have a year left on that. Now you have $5,000 divided by $12. You need to save $416 a month to rule. replace the furnace. And I don't know if you can get a $5,000 furnace because do you have to have AC where you're at? I'm not sure. I mean, you need it. Are you required? The furnace with most of our houses, they're in really good shape. Okay. We do have a few that need a roof maybe in five years, like you're saying. Several. We put in AC units. Those were 1600 new. Um, So those are good for a while as part of our remodels.

Also, most of the furnaces are in great shape, but there are several properties that we need to start thinking about that in the future. But we can get a new furnace in them for, they're not giant houses, so maybe 2,000, 2,400 is what I would start thinking about. I think it's a good thought exercise to see. I have nine rentals, six of them are awesome and three of them aren't. Dump those three or think about dumping those three and looking at different properties that would be better for your bottom line. There is an investor out there who will think that those three are amazing properties. Yeah, so that's funny you mention that because there's one condo in Arizona that we use.

it could really use a remodel to really be attractive. But, I mean, it's a little workhorse, but I feel like it is negative cash flow. And with the values where they are in Scottsdale, I was thinking about maybe listing that one. We do have some of our private lender money wrapped into that one at 10% interest only. So it's very hefty,

which is why we were toying with refinancing some of our paid-off rentals in Flint to pay him down because of the interest rate. So let's, I think, I think that what the homework assignment, Mindy and I would have for you is to, one, analyze each of your properties for cash flow right now. Pretend you're buying it and go through the exercise. And when we go through that exercise, make an estimation for vacancy. I would recommend you estimate 5 to 10% vacancy or 5 to 7% if you think your market's really good. Because that's one month of vacancy per year with that. And I think that that's a good conservative estimate. I would put in $1,000 a year at minimum for the home maintenance.

These are not CAPEX. This is like problems you're fixing, ant infestation, AC broke, fridge, ice machine broke, whatever with that, right? You're going to have to send somebody there once a year per year. unit, maybe once or twice a year to fix things up. And then I would do the cap exercise that Mindy just suggested. Think about all the things you might have to replace in the property and back into them. It will probably come out to well over $100, $200 per month on the property for that. And that will inform you. So when you get that, and let's just use those numbers, you know, we've got $1,000

in rent. We've got $612 in principal interest taxes and insurance. I think you're going to be underwater from a negative cash flow perspective on at least this property and maybe some other ones. And that's a really good thing to think about, okay, I want to own the property free and clear and not have a debt on it. And then that will improve my cash flow. That's one way to resolve that. Or I can sell it and try to redeploy into a property that will cash flow on a standalone basis. But I think this is a root cause of why you're feeling like cash is never filling up the coffers. on a monthly basis. And this property, you know, during the refinance, which was recent, I got hit with the interest rate going up.

What I was usually getting these cashouts for five and a half to six percent, they were tolerable for business loans. Now that one was seven. In my mind, it's still cheaper than the 10 I'm paying. So it was, you know, worth paying him a chunk. But we haven't closed on that yet. So, but that is in underwriting. Yeah. Well, it sounds like you have some, I mean, the financing situation is also a concern.

So how much do you have in total outstanding debt across your portfolio to the private money lender? 200. $200,000 at 10% interest. You're going to pay $20,000 in interest per year on that. Correct. Yes. Our payment to him. is 1600 right now.

Great. And how much you said the asset value is 1.6 million? Yeah. Of those, yes, of those nine, yes, 1.5, then some change. How do you feel about that valuation? Are you being spot on? Are you a little conservative? Are you a little aggressive?

A little conservative because I try to be conservative when it comes to that. But I don't want to be over. leveraged. I think the last I looked, that puts us at about 50% equity based on the liabilities that we have. Okay. And you total, so you have 200,000 in private, private and this private load. And then you have how much in mortgages against those properties? 690. Okay. So you've got $900,000 in debt, $890,000 in debt and $1.5 million portfolios. You have $600,000. Yeah, that's not 50%. Well, it's a little over 50%, but it's in that you have hundreds of thousands of dollars in equity.

Yeah. Yeah. Okay. So when you said that your business is generating $8,500 per month, how did you derive that number? I took my, I think it's in my income statement, and I did, divided that out per month. So for the year, like for 2021, gross rents were 77,000. Okay, so you divided that by 12. Yeah, and then I was thinking more about, I think with that number I originally gave you on the spreadsheet,

was the rents coming in, like our net coming in from property management. Okay. So you have a certain amount of rent coming in each month. And then your property manager is taking a chunk 10% out of that and then distributing the balance to you on a monthly basis. And that's what you're calling the 8500 a month. Yes. Yes. That's after property management, correct.

Okay. Great. So here's the issue with that. You're not generating $20,000 a month in profit. You're generating $12,000 a month from your jobs. And then you're generating perhaps even a negative balance on these rental properties. because we talked about how, you know, that $690,000 in debt that you have will easily be costing you $4,000 to $5,000 per month in the principal interest taxes and insurance payments. And then you also have $1,600 on top of that going to the private lender.

So that leaves you with $6,000 or so in total expenses. And then you have $2,500 to cover the maintenance and CAPEX and vacancy expenses on your nine property portfolio. So I think that my hunch here is that this portfolio is costing you money on a monthly basis, not putting money into your pocket on a monthly basis. That's what I'm feeling. Yep. So what do we do about that, right? Well, what we do, the first thing is go through the exercise that Mindy just described

and get the CAPX allocation on each one of these properties. Then we will give you a free pro membership for the bigger pockets, for bigger pockets. use the calculator. You can keep using your own spreadsheet, whatever, but use our calculator and run the numbers on each one of those properties using with those KAPX assumptions and determine which ones are going to be cash flow positive and which ones are killing you. Because I bet you you have two or three that are killing you and a handful that are cash flow positive. So I can do that in my accounting software per property. Okay. I can run a P&L on.

each one and then just add that CAP-X. So I could do that as my exercise. I'd also encourage you to do it in the calculator because the calculator will be forward-looking. It'll allow you to make assumptions about that. And you can ask people about it. But you can do it in both, but it'll be easy there. And I think that will help you say, forget about what the numbers are telling me. Experienced investors say, this is what it should be on a go-forward basis, right?

Okay. And that will allow you to then take a, okay, I know, that's what I'm probably going to average, is that driving with the reality that I'm getting in my accounting software downstream here with that over time? I think that will be helpful. And that will give you a sell, refinance, or hold decision on each of your properties. And I bet you you will sell several of them with that. Yeah, we have a lot of our own capital into the Arizona properties based on selling some. We had a few flips sold a rental, and then deployed that into the Arizona properties. So I liked the idea of maybe selling the one condo, getting that money back, and paying down that lender to get rid of that

large payment. Because really, they only performed really well in February and March. The rest I thought was break-even, but I don't think they were break-even when we add the portion that we pay our private lender. And they're short-term. We were underwater. Yeah. I ain't going to Scottsdale in July. Exactly. There's three very slow months.

So another thing that I would challenge you to do is to completely separate your personal finances and your business finances. So your W-2 income, your husband's 1099 income, and all of the personal finances come out of your one bank account. And then all the business loans, the business expenses, the business, everything, run those completely separate and see, you do, okay, and I'm just getting the numbers that you shared and it's like all at once. But it, like Scott said, I really think. that these properties aren't doing you many favors, and we're still in a position with the real

estate market that you could sell them to someone else and find a different property. If you purchase them as a rental, you could use a 1031 exchange to find a better property. You had talked about continuing on with single families or transitioning into multifamilies. Maybe there's a really awesome multifamily out there waiting for you to buy it that will cash flow, that will be closer to where you want to live, that will be, even with all of the numbers, work for you in a much better capacity. But I'm wondering, and you don't have to sell all of your properties. If you've got one or two that are amazing or six that are amazing, keep the ones that really work well. But if they don't work, get rid of them. You don't have to keep a property just because you own it.

Right. And I think the other flip side to that, we have a little internal debate. My husband and I, he thinks, well, even if they're not really making much money, the mortgage is getting paid down and it's our retirement plan. So is there truth to that. Yeah, it's a true statement, but it's, that's not a good way to live your life, in my opinion, over the next five to 10 years because this, this portfolio is going to be sucking money out of your life. and if you have a problem from a market perspective, you're going to be sucking even more money out of your life on an ongoing basis. Like the way I would totally reframe the approach and say, guys, we're doing great. We're making $12,000 a year, a month from our jobs here. We've got a couple of side hustles.

We've got some properties. We've got some assets. We can play this game, right? Let's sell off all the properties that are sucking cash out of our life and say, period. The property must, with conservative assumptions, put cash into our pockets on a monthly basis. We're not going to lever up past the point that allows for that. We're not going to take more debt against that property.

If it doesn't at least conservatively put a few dollars in our months, our pockets every month on an ongoing basis. Let's sell off a couple of these properties. Pay off this private money lender, which is killing us. This is a great deal for your private money lender. He's loving life right now. He has $1,600 in passive income. You don't.

Right. So let's pay him off. with this, let's build a cash reserve. You don't have enough cash, in my opinion, to capitalize your personal situation or your business in a comfortable way. You're going to be very stressed month to month because you're spending $9,500 a month, but you only have $12,000 in personal cash. And your business is spending $8,500 a month, and you only have two months of reserve there with $18,000, $2.5 months. So I would pile those up and I'd say, I want to have three to six, in your case probably six months of expenses because you have so much going on in cash.

That's an absurd amount of money right now. That'll be like $120,000. So now how do we fix that problem? We've got to cut expenses. One way you cut expenses is unloading a couple of your cash flow negative properties. So that will reduce that amount required to get to six months reserve substantially. The other way is to go into the personal life and groom the personal budget. So earlier I was saying, you guys make good money, no need to cut these things.

Well, I think we've said, you're making good money, but you're not making $22,000 a month. You're making closer to $12,000 per month because the portfolio is not actually putting that cash flow into your pocket. So let's accept that reality and say, what's a reasonable spending amount on a $12,000 per month? Is that pre-tax or post-tax for $12,000? So my salary is post-tax, but my husband's is pre-tax. Okay, how much do you think you're bringing in after-tax between the two of you per month? Well, I'm not, we have, we changed to a really great accountant that got us a nice tax return, maybe because we've been moving properties around.

So it's hard to say on his income, what to budget for tax, because he could also qualify as the real estate professional. Yeah, you have real losses that are going into the rental property business. That's why you probably had a great tax return. Okay. So think about, just be careful around planning around that because you're probably putting a lot of cash into the properties and your accountant's able to either immediately depreciate all of that for some of those repairs or he's able to do that. And your income, your AGI, based on that, will probably be below 150. So you were able to you're probably able to claim that all is losses against your ordinary incomes. Don't count on that. You count on getting rich and say, what's my aftertax income in that situation? Real estate's

separate. And then I'll take those benefits downstream. Okay. Pam, you just said that he qualified as a real estate professional. Yes. I, but then he also has a 1099. Well, in the real estate world, yeah, which is what I think they told me that he was able to do. I only know enough to be dangerous, but in general, if you have a full-time job, you're not going to qualify to be a real estate professional. Now, you said it's in the real estate world, but is he working basically for himself as a 1099? Is that how that works? Yep. Okay.

I'm just, I'm going to, you know what? I'm going to check in with one of my real estate focused CPA friends and just double check that this sounds cool. because the real estate professional designation is awesome, but it's so hard to qualify for. And that is one of the things that flags your tax return is when you qualify for that. You could... Let's assume that he is. I think Mindy's wise. Yes, I want to assume that he is.

Minnie's wise to put a caution and go in there and get a second opinion. That would be probably wise to make sure that you're not doing that. But it sounds like your husband is doing a lot of work on the properties and doing some of these things. So you may be fine with that. But the reason you're getting a huge tax break is because you are generating real losses that you are having to fund from your cash flow from your jobs, right? And so that's not good strategy. That's good. Like the accountant should absolutely do that. The accountant did their job, it sounds like. Because not only are you losing money on your P&L, you're also getting benefits from depreciation on these properties that are offsetting that.

And because your husband's a real estate professional, that's helping you net all of that, even if you were above the AGI threshold against Dizzy. And we had several sales last year. And I think that's on the income statement where that was the gain on sales was 154,000 for 21. But again, yeah, it's offsetting the negative cash flow that you. see. So let's do some, let's do some takeaways here and then go see if there's any other issues you want to, you want us to help with. So first, the take, first takeaway is you guys are generating $12,000 a month, give or take, post tax. You're spending $9,500 per month. And you have to ask yourself,

is that an acceptable savings rate? It could be. That's not, that's not bad. You're saving, you could be saving more than 10% of your income, excluding your real estate or other activities with that, with the spending you share with us. And that's, and that's not that's not. That's not, that's not that's could be fine. If you want to save more, you know, and kind of approach that 50% savings rate, you might need to groom the budget on your personal expense side. And there are items there that appear like they could be cut if you wanted to make some changes. So you can afford many of the things you want in there, but you can't afford all of the things that you have in that list if you want to save a huge chunk of your income each month. Your real estate business is not

generating $8,500 a month in cash flow. It's probably sucking money. out on a net net basis. And we can detect that by just doing very simple math with the pity on a $690,000 mortgage. If we just assumed that it was one big mortgage and you did pity on it, it'd probably be like a $4,000-ish plus per month mortgage on that, even at a 3 or 4% rate. And then you have the $1,600 on the debt on top of that plus. That's pretty good because I think it was $4,600, actually, with all the mortgage payments. Yeah, I'm a nerd. I'm sorry. So 4,600 plus 1,600 would be 6,200.

That lays you with 22,000 before you even get to any other expenses, and you know you have a ton to unpack there and that. And so that's the big problem there is go unpack that property by property, cabex by capx. It could be most of your properties are sell situations at this point in time. And if so, that's great. You guys just won. properties the last couple of years, market appreciated a ton, you're going to, you can cash out on those properties. It's probably not your, the plan that you and your husband were like initially coming in with. But guess what? Take your $600,000 in winnings and use that to be the seed for

the financial foundation that will help you move towards your real long-term goals. So let's assume that you were able to cash out 300 grand from that. I'm making this up. I would take that 300 grand and I'd use a chunk of it to fortify your financial position and get to a six-month cash reserve on that. Maybe that's 50 to 100 grand. You'll feel way better if you just have that sitting in the bank ready to be used for your personal life and those types of things. And now you'll also have a business that is hopefully cash flowing positive on an average

monthly basis. Now we've got to figure out what to do with the other $200,000 plus the $25,000 to $50,000, per year that you're generating from cash flow from your jobs and your business. That's the question that I think we'll have to leave dangling, well, dangling here or come back to maybe another time because I think we're running up on time here today. How does that feel? I rambled for a while there. So, yeah, that's, we've tried a couple of local lenders and they say we don't cash flow.

And I'm like, I don't understand why we have. they're seeing something I'm not seeing and they don't explain it at all. So hence why I filled out my application. I would also go back to the personal spending. I have been publicly tracking my spending and I track it very granularly because I want to know all these different categories. I have basically necessary categories and frivolous categories. And some people say the travel is necessary and some people say the travel is frivolous and Maslow's hierarchy of needs. I don't think travel appears at all, but you do have $800 a month in travel expenses. Those are business expenses if you're visiting your properties. So of course, I'm not a CPA, talk to your CPA

to make sure that you can write them off and that you are planning them properly so that they are write-offs. But you have general as a general as at 86. I would challenge you to go in and see what exactly are you throwing in that general category. The last thing I want to bring up is the boat that we didn't talk about. I used to live on a lake. I had a boat in my backyard and we never used it. The two happiest days in a boat owner's life are the day they buy and the day they sell. And I don't have any judgment if you want to keep your boat because you use it all the time. But keep track of how frequently you use your boat. And at $750 a month, could you go and rent it like on a weekend if you're just doing it like once a week or like once a

month, could you rent it for less than that and not have your very own boat? Well, the plan with the ultimate five plan was that we will be living on the boat back in Michigan in the summers. Oh, how big is it? It's got two births, they call him, like bedrooms. So it's like 35 foot. Okay. It's a cabin cruiser. It's our mobile cottage.

Yeah. Okay. And with the docaminium, that's the summer home, the ultimate goal. And then Arizona for eight or nine months. Okay. So then that is a conscious expense. Great. Perfect.

It will go down as of September by $500. So then it'll be $250 a month. Yes. Okay. Yeah, I don't know about the boat specifically with that, but I agree with everything Mindy just said there. I think that fundamentals, I think that the reality of your situation is you need to go back to fundamental analysis on each one of those rental properties and then your personal P&L, which is even more important. It actually generates way more, you can generate way more cash flow from your personal PNL than you can't, rental property portfolio right now. So that's that's the cash flow situation. And when you're sitting on

$50,000, if in a few months, you're sitting on $50,000 to $50,000 to $100,000 in cash in your bank account, and you're like, I'm confident that I'm generating $4,000 to $5,000 a month in free cash flow, I guarantee you things will be much better from overall perspective. You'll be like, okay, I have a path to doing this. I don't have to get to FI tomorrow and live on the boat, but like if this will automatically happen and life is good. But that will be, there will be a lot of analytical homework that I think you should do this week because the market is turning right now, right? Like some properties are going up and down. Do it now. Figure out those properties. This is not going to be a fun 40 hour week for you. Put your 80 hours or 100 hours in and get this done and then make,

make some plans. Get your husband on the same page with that and say, we're not going to hold cash flow negative assets. That is not a good plan. That's a good plan if you can hold on for 30 years, but who knows what's going to happen in 30 years. You know you can hold on to a cash flow positive asset for 30 years. Right. And I think one big thing that you pointed out, we weren't considering the cap X in the future, because what if we do reach our phi, but then five years in, we have thousands of dollars worth of expenses on these houses. So I, I, that was a good eye-opener. As a real estate investor, your business is your properties,

your, you know, the debts, the assets and liabilities in that portfolio, the cash flow they're producing, and your reserve, right? Cash is the asset that is negatively correlated with real estate, right? When real estate prices are plunging, the value of your cash is going up in that case. So you got to capitalize the business conservatively. And I think a good rule of thumb, everyone disagrees with this. So, you know, you go in the forums and you'll, get 50 different people saying 50 different things. But my rule of thumb would be $15 to $20,000

for that first property in reserve and adding on a buffer of $5 to $10,000 for each additional property that sits in that business bank account. That's comfortable capitalization for a rental property portfolio. Go on bigger pockets right now and ask, where can I find a he lock on my rental properties? Nobody can find one because the market is not there. So all these people who are like, oh, I'm going to capitalize my investment portfolio with a rental property helock. Nobody can find one. If anyone who has a lender that can do a helock on investment portfolio, please send it to me at Scott at biggerpockus.com. We're going to make them rich because we don't, no one can find a solution. So you need the cash because it's when the market is, like,

that was all dry up when the market is not, when interest rates are rising with this. So that, that would be, and that's just part of your plan. So your five plan is, I've got a hundred, thousand dollars in cash across my 15 units. And then they produce as much cash flow. And I take the cash out whenever it gets above $100,000. And that's how I'm cash flow in my life. Gotcha. Okay. Gotcha. Awesome. Well, Pam, this was a lot of fun. I think this is going to be helpful for a lot of people. I think there's multiple people in a similar position where they think that their property is a rock star property. And yet they can't really figure out why it's not quite as rock starry in real life.

And, you know, it's, I think you're in a great position to sell. And 1031, I want to give you some words of caution, get a qualified intermediary ahead of time. Do not close on the first property until you have found the second property. It's still a hot property. It's still a hot market. But, you know, really make intelligent choices with your 1031 because there's very strict timelines. if you miss a timeline, if you take possession of the money yourself, like there's so many ways to blow a 1031 exchange and then you're paying capital gains taxes, long-term capital gains

on the ones you've held for more than two years, shorter term capital, or more than a year, is it more than a year? It's more than a year. Short-term capital gains on the ones that you have held for less than a year. And just if you can avoid those taxes and just kick that can down the road, do that instead. So, yeah, lots of great people. And I'd advise doing this quickly. This is overwhelming. You're going to have a long week, maybe two, of this figuring this out. Analyze those properties. Mindy's absolutely right, and I completely forgot about that. There are tax consequences of that. The tax and 1031 stuff should not wag the tax tail does not wag the business dog. Plus buyback depreciation I have to

consider as well. That's right. The 1031 exchange will help you avoid that. Oh, good. Okay. I see. Or at least defer it. So, but that should not affect your decision whether to sell or not. The decision whether to sell or not comes from your analysis. If it's cash flow negative and it's going to take significant money out of your life every month for the next 1010 years, I would recommend selling that property, regardless of whether you're able to complete a 1031 exchange, but talk to the accountant to see if the 1031 exchange can be a beneficial way to defer those taxes. Okay, yes, and he's amazing. Awesome. Well, thank you, Pam. Thank you so much for your world of advice here. Yeah, hopefully this was helpful. I know it was overwhelming. There's a lot going on here.

We were trying to be as valuable as possible with that. And I know there's big changes there. We'd be interested to see. Yeah, no, it's super helpful. And I, you know, the bigger pockets community is buy more, buy more, buy more. And well, now what? We bought a bunch. Now what do we do? And it's exactly that analyze. You want to buy more when your finance position is strong. You've got a really good foundation with that, plenty of cash. You can hold on to the asset for the long term and it produces.

There's an argument about whether it should cash flow or appreciation is more important. I invest in Denver because I believe that appreciation is more important over the long term. But none of my properties negatively cash flow. They just produce less cash flow than I would get in a market like Detroit, perhaps, or or the Midwest in a general sense. Okay, Pam, thank you so much. We'll talk to you soon. Thank you.

Bye. Okay, Scott, that was Pam. I thought you gave her some really excellent advice on just going through and making sure that the properties are actually cash flowing. I think people see the rent and the mortgage payment and think that what's left over is their cash flow. And really diving deep into the numbers is so important to make sure that you've got a really great rental property.

Yeah, I can't stress enough that Pam 1 here, right, the market has carried up the value of those properties, hundreds of thousands of dollars in wealth has been created, equity has been created due to their activities. But the fundamentals are not, in my opinion, strong enough in that business where I would want to hold on to it for the next five to 10 years. I think that I would want to hold on to a business where I believe in the value of that property going up over time and where I believe that it will put money into my pocket on average every month for the next several years with a strong capital, capitalized position with a cash reserve that can hold the buffers for when I inevitably will have that, you know, that roof is supposed to last me 15 more

years. It may only last me eight. I need to have that cash ready ahead of time to be prepared for that event, right? It may go out tomorrow. I may have a leak tomorrow and have to fix it. So I think that's really, really important when we go through this. To recap the overall situation, Pam and her husband are making $12,000 a month and they're spending $9,500. So there may be puts and takes before and after tax. So on average, they're probably only accumulating $1,000, $2,000 per month, which would be fine, except for their rental business is probably taking that out of their position because of the negative cash flow.

We said just from the debt, we're spending $6,200 a month in debt service, principal interest, taxes, insurance, and then interest payments on the private loan. and that doesn't even account for the vacancy, CAPEX, maintenance, utilities when the properties aren't rented, those types of expenses that are definitely hitting them and sucking cash out of their lives. So the way we solve that is we do a unit analysis by each property and say, what's this property performing like today? What's it going to perform like over the next couple of years?

And that will tell me to buy, hold, or refinance each one of those properties. and I believe just at the highest level that they're going to have work to do. And then lastly, I think it's important to have that framework in mind about what I want to do and what a strong financial position looks like and then move quickly to get to it. Not because we're terrified of the market or anything like that, but because that market volatility, they're all dependent on, I guess because of the market, right? Because they're dependent on the market to produce wealth gains or decreases, that's a position that's very volatile compared to the investor is going to hold for 20 years

a cash flowing asset. So I think it should move very quickly. I think there's a lot of homework to be done there. And I'm excited to see how it turns out for them. So again, all in the context of a big win, don't want to overshadow that. Yes, I think we didn't do enough to celebrate the fact that she has done really well so far, but now is the time to reevaluate what she's got. I will say that I think my advice might have been a little bit different if she was investing in a different market, but Michigan is not known to be a rapidly appreciating market.

And the advice would be different if she had already refinanced those properties at low interest rates. So if she had gotten, if these were on 30-year fixed rate mortgages at 3.5% because she refinanced or bought them in 2016, 2015, and we're cash flowing, no way we'd be selling right now. Like, I'm not selling property. that's how my portfolio looks with that. I'm not selling that. But because she has to refinance the properties at probably six and a half, seven percent interest rates at this point in time to pay off her 10 percent private loan, that's where the sell decision, I think, becomes that much more of a factor.

Okay, Scott, should we get out of here? Let's do it. From episode 32 of the Bigger Pockets Money podcast, he is Scott Trench, and I am Minnie Jensen saying stay out of trouble.