BiggerPockets Money Podcast - How to Make Your FIRE Portfolio Even MORE Passive (Finance Friday)

Episode Date: September 5, 2025

Today on the BiggerPockets Money Podcast, we're diving into an incredible success story. Meet Beau, a retired military professional who built a massive real estate empire and achieved financial independence in his thirties. But here's the twist: even with a winning formula, Beau wants his investments to work even HARDER while he works even LESS. In this Finance Friday episode, Beau opens up his entire financial playbook with hosts Mindy Jensen and Scott Trench. We're talking rental properties generating serious cash flow, private lending deals that most investors don't even know exist, and tax strategies so advanced they'll make your accountant jealous. This isn't your typical "I bought a duplex" story—this is next-level wealth building. If you're serious about real estate investing and want to see what's possible with the right strategy and execution, this episode is packed with actionable insights. In this episode, you'll discover: Beau's complete real estate portfolio breakdown and current cash flow numbers Advanced private lending strategies that generate consistent returns Tax optimization techniques for real estate heavy portfolios How to transition from active to passive real estate investing Strategic property sale timing and 1031 exchange considerations The pros and cons of private money lending versus traditional investments Portfolio diversification strategies for real estate investors How military discipline translated into investment success Specific steps to make your real estate investments more hands-off Risk management strategies for high-net-worth real estate portfolios And SO much more! 00:00 Beau’s FIRE Journey 02:43 Beau’s FI Number 04:52 Exploring Passive Income Options 09:53 Private Lending and Real Estate Portfolio Analysis 19:17 Evaluating Property Performance and Future Plans 28:54 Exploring Arbitrage in Real Estate Lending 33:32 Amortization and Long-Term Financial Planning 36:34 Balancing Private Lending and Real Estate Investments 44:32 Tax Strategies and Portfolio Diversification 54:51 Connect with Beau! Learn more about your ad choices. Visit megaphone.fm/adchoices

Beau retired early in his 30s because of the rental income from his real estate portfolio. However, Bo has two kids and is looking to make his life more passive. What are his options? We're going to be breaking all of that down today in this episode of Finance Friday. Hello, hello, hello, and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen. And with me, as always, is my holding on to his real estate portfolio co-host, Scott Trench. Thanks, Mindy.

Great to be here and looking forward to discussing what the FUD F-U-D fee or uncertainty and doubt, guys. That's not a bad word. Bo should do with his rental property portfolio. Bo was on the podcast a few weeks ago, and if you missed his first episode where we discussed his fire story at length, you can hear it all in episode 667. Bo, excited to have you back here on Bigger Pockets Money. And before we get into the discussion, I do want to heavily caveat this. This is a highly complex, real estate-heavy financial position.

The strategy about what Bo should consider doing with his financial future is heavily dependent on tax strategy in a way that is not common in most of our episodes because he's actually a full-time real estate investor who likely, but not as a given, qualifies for real estate professional status, which allows him to declare real estate passive income and passive losses against, active income in many cases. That creates numerous opportunities and challenges in creating a playbook. Furthermore, we also have a couple of unclear or conflicting goals that we're still figuring out. So that's going to lead to a lot of analysis that's grounded in guesswork on what a professional tax strategy will end up looking like in practice, which involves details we don't have today, and will involve the direction that Boe wants to go with his life. and his businesses that he wants to move in place. So this is going to be a really complicated one.

We're going to talk about very complex subjects. We look forward to learning more about this and getting feedback from Bose tax professional, perhaps in a future episode. And in the meantime, if you have any suggestions or thoughts or comments, please brainstorm them here in the YouTube comment section or in our Facebook group. We'd love to learn alongside you about how to master complex real estate situations like this.

Bo, welcome back to bigger pockets money. And thank you for all the preparation work to get a perfect. personal financial statement ready for us. Thank you, Scott. Mindy's super happy to be here. And if you're a real estate investor, you always have to keep a personal financial statement ready to send to the bank. So it wasn't too much work for me. Well, can you just give us a quick reminder, maybe 60 second overview of your kind of money story? We talked about it at length and again on episode 667, but for those who didn't listen, let's just do a very quick refresher on it so that people have context before Mindy reads off the numbers here. Sure. Yeah. So I went to West Point and then joined

the Army is a Black Hawk pilot. And as I was progressing in my career, I kind of was looking for ways to build passive income so that I could give myself the option to leave the military in the future if I chose to do that. So real estate became kind of my avenue for doing that. I used my VA loan and an FHA loan and some primary residence loans and then shifted to seller financing as a strategy to buy a bunch of properties with kind of low money down. And in all. ultimately created some good cash flow for myself. Experienced some good appreciation and kind of the COVID time frame, which wasn't expected and really had a big impact on me.

And over about five years, built up cash flow from the portfolio enough to sustain my life and my family's life. I ultimately left the military about a year ago, and I've been living off of that cash flow since then and looking for other ways to kind of spread out my investments into things, potentially outside of real estate. Awesome. And not to give too much away here, but you are, again, a financially independent self-made multimillionaire with $3 million approximately in net worth, a little over $3 million in net worth. With plenty of cash flow, your Tuesday is spent jumping into rivers, I believe, we recalled last

time. You work from home and have a lot of great things. There's a sauna right there in the background. Awesome. Love that. And so life is good, but we're trying to make it even better and untangle a little bit of a spaghetti pool of assets that have built up one by one over the years and frame that together into a more coherent, cohesive strategy with maybe better concentration in the rental portfolio and more diversification into other asset classes. Is that the right way to understand the objective of today's call? Yeah, that's a great way to understand it. Awesome. Well, congratulations on the good problem. Let's make it even better problems in the future. This will be fun. And you want to make your portfolio more passive. Why is that? When I talk about wanting to make it more passive,

I'm really referring to like future purchases or future investments. Currently my portfolio, my real estate portfolio is actually pretty passive. Thankfully, I have great property management in the different states that I own real estate. And that kind of is like a hour long call per week, kind of to check on operations and check on things. I currently manage my commercial properties. Commercial tenants, I call built-in property managers. They kind of have the same incentives you do to keep the property in good shape. So I manage those. But overall, my current real estate portfolio is pretty passive. However,

anytime you buy a property, at least in my experience, new properties are not passive, at least for the first year or so, the types of properties I buy. A lot of the time, there's value add and renovations and maybe inherited tenants that don't stick around for the long term. As I look to continue investing in certain ways, buying more real estate as a direct owner is not very appealing to me because of the time requirement that comes with that. So I'm really looking into and trying to consider other types of real estate investing or otherwise where I can be more passive, but continue to create cash flow and invest for growth in the future without taking on too much risk or too much of a time commitment. When I hear you say that you really aren't that interested in buying more real

estate, the simple answer is, well, then don't buy real estate. There are other ways to invest. There's lots of other ways to invest that can still generate cash flow. without the, for lack of a better word, headaches of a new property. So that right there is my advice, don't buy any more real estate. But let's look at your numbers and see where we can make some suggestions. So we're starting off, like Scott said, we've got a net worth of approximately $3.1 million. There's a significant portion in cash, which I am assuming is to run your business and just have like cash for regular business expenses.

Is that where that cash is coming from? Yeah, it is. It's a portion of that, a portion of reserves. It's not the only place that I house reserves, but a portion of that. And another kind of explanation is I'm only a year into this living off of exclusively kind of real estate income journey. So in preparation for that, I kind of stockpiled cash.

I wanted to feel comfortable leaving all. all W-2 income. So I felt more comfortable having having cash set aside to help me make that transition. Okay. And looking at your expenses, it's a little bit more than a year of cash. I just wanted to make sure that wasn't business because business belongs on the business spreadsheet and this is the personal spreadsheet. Well, you know, some of it is a little bit of reserves in the business side. Okay. No worries. I would just encourage you to separate out completely. This is business and this is Bo. I will say, Mindy, I'm going to, I'm going to, I'm going to, This will be the first debate point we have here.

My situation is more like Bose than many in terms of the way I structure my portfolio. And I've recently begun saying, like, why am I keeping all of this cash in my rentals and I'm comfortable with a large personal reserve? So I moved all of my bank accounts to one bank, a well-known major bank with branches. And I just keep one big cash pile in that bank. and then the minimum necessary for each of my rental properties. And that one pile is like clearly a large enough number. But if I built it up for each property or each business, then I would have way more cash sitting there

and it would kind of aggregate to a silly number, even though no individual decision was bad. So just like a nuance of these more complicated real estate portfolios, maybe, I don't know, but what do you think? Yeah, that's kind of how I think about it as well. the more properties that I bought, the less per property I felt like I needed to keep on hand as reserves. Because they kind of canceled each other out. I might have a bad month with one property, but five or six other properties did well. If I wanted to keep six months reserves initially,

I may have shifted that down to maybe three months reserves in total. And similar to Scott, a year or so ago, when I realized that the high-eal savings accounts actually paid a decent interest rate currently or the past couple of years, I wanted to find a way to not just have a ton of reserves sitting in these business checking accounts and instead funnel that to the personal side or funneled that to a place where I could easily put that in a high-old savings account, which is kind of what my situation is. I also have lines of credit on the real estate that I own. So that has drastically changed the amount of in-cash reserves. I feel like I need to keep for any individual property. Okay. I think that's fair. Although, Scott, I am going to give you.

that same advice that I gave Bo, here's business and here's Scott. But you do you. Now you have the information you can do with it as you please. Let's get back to Bo. Bo has 50,000 in a 401k, which seems low except then we go to its Roth IRA and there's $421,000 in there. So that makes up for it. Bo, how'd you get so much in your Roth? So I've always contributed to my Ross IRA ever since I was, you know, an 18 year old in high school. That's something that my parents taught me, and I'm glad they did. My wife separately did the same, and when we met, we've continued doing that. So that's always the first of the year, you know, we maxed out our Roth IRAs.

But really, the explanation for how it's so high within that account is while I was in the military in the Army, I contributed to my TSP. Always at a minimum, I contributed 5% to get the agency match. but there were also many years that I maxed it out before I left the military. And when I did leave the military, I rolled a significant portion of the funds from my TSP into my Roth IRA. And most of those funds within the TSP were Roth anyways because you have the option to choose between Roth and traditional contributions. So I rolled all my Roth funds into my Roth IRA just kind of to have it in one place. And because I opened a self-directed IRA to do some lending type investments.

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Thanks for sticking with us. We have no traditional IRA. That's fine. 66,000 in a taxable brokerage. 200,000 in Bitcoin, I will reserve comment. 500,000 in notes payable. Now, that is people, you have lent out that money and they're paying you back. That's correct.

Okay. Awesome. $15,000 negative in credit cards. I'm assuming you pay those off every month. And if you don't, you should, you've got the cash to do so. assets we've got rental properties 4.4 million with 2.7 million in mortgages. So that's a $1.7 million equity. Your primary residence is 578 with a $5.7,000 mortgage. So about $70,000 in assets there, assuming you use that sweet VA loan to buy that with almost no money down. And then notes do

negative $75,000. So that's money that you owe other people. That's right. Let's look at your income. All right. So we have $50,000 in interest from private lending. This is an annual basis. 15,000, your partner's job, $5,000 your job, $24,000 for VA disability. Is that money, like they just write you a check every year for $24,000? No, it's a monthly payment. So it's about $2,000 a month. Okay, but that's like, that's actual cash coming in. That's not a tax deduction at the end of the year. It's actual cash coming in and it's tax-free cash coming in. It's a huge benefit to military members. Yeah, that is really nice. I mean, you have to be disabled to get it, so it's not awesome, but it's, at least you're being compensated. I see $92,000 a year in rentals and $18,000 income from a

mobile home park partnership for a total of $204,000. I see current expenses at $147,000, including 10% giving and a $3,200 mortgage payment, $1,500 in groceries. I don't see anything for household expenses or child care and activities. So I just want to make sure that that is, in fact, all rolled into something else. It is. Yeah. So property taxes, for example, or rolled into my mortgage payment, household expenses, I rolled that into grocery or entertainment or some other things.

So, yes, it's all accounted for as you go. Okay. So sometimes it can be helpful if you have a spending issue. Sometimes it can be helpful to like break those out into smaller categories just so you can see, oh, wow, I really am spending way too much at XYZ category. But I don't think you have a spending issue. I don't think that's any sort of issue for you. You have $56,000 excess annually.

So where are you putting that? You guys tell me. That's the purpose of this. Just joking. So on the expense front, first, what are you doing for health care? For health care, I use crowd health. It's a health sharing company. It's not exactly health insurance.

But I use that for my family. It suits us well. And then as far as my personal health care, as, you know, along with the VA disability, I receive VA health insurance and health care myself. And then the big one here is taxes. Most of the time we talk to folks with regular jobs. and the taxes are taken out of the paycheck. But you're only a year into this new world, and it does not look like the math has been done on the tax front in this spreadsheet.

Is that correct? That is correct. That's correct. I am working pretty closely with my CPA and kind of tax strategist, and I am a real estate professional this year going forward. So there's obviously some depreciation and things on the rental side that help me come tax time and kind of deducting from my from my active income. And then have you done any cost segregation analysis on your portfolio to this point? I have done one cost segregation study and

it's yet to kind of be seen how that will affect me for for 2024 taxes, if I'll an extension. But for the other properties, I have not. It's something that I'm trying to get smart on and look into to see if there's some opportunity there. Okay. So I'm going to assume no tax. liability for a while, frankly. I don't know how that's going to be, how that's going to play out for you and your family, depending on how things go to the CFP, but I count 32 properties valued at $4.4 million in your portfolio, none of which have seen a cost segregation against income of $200,000, give or take. This is where this world is going to get really interesting, right? I'm not aware of professional financial planners who do this for a living.

who have really good grasp on convoluted real estate professional status, 32-person portfolios. So correct us if we're wrong on that assumption in the YouTube comments. The YouTube commenters are so nice to tell us about areas for opportunities for improvement. But let us know where those folks exist. But we're going to be making some guesses here, and it's probably going to be a team to put together to verify many of those guesses on this. Full disclosure and disclaimer on this.

I don't know if you've both come across people who know how to think. through all of these different ramifications for all these moves in this setting. I have some people that I work with kind of professionally that help me with those things, but I wouldn't say it's a one-stop shop. It's kind of a group effort and pooling kind of knowledge and advice from different professionals. A tax professional is certainly going to know what those are going to look like here, but they may not know how, let's put together, a broader overall strategy to go from point A to point B using a variety of different asset classes and thinking about how that's going to impact our short-term

moves in the next year versus, you know, in a year or two, how that mixes with the potential business or those types of things. That's where this is going to get fun and be a journey for everybody here. We've got that income. We're going to assume no tax liability, and we've got $50,000 a year to play with in the context of investing to some degree. And does not want to add any more real estate properties. I would imagine if a slam dunk home run came your way, you might consider adding it, but for the most part, that's not what you're interested in. For sure. Yeah, I'm still actively kind of looking, like analyzing deals and looking for cash flow, which is even harder today than it was yesterday to find. And yeah, if I find a slam dunk property or even a,

you know, a double or a triple, I think I'd be interested. But I'm really trying to be selective on what I say yes to if it's going to require a lot of time. from me, and especially if it comes with any risk of me, you know, going backwards in my journey. I'm trying to be very careful about that. Okay. So what are your goals? What questions can Scott and I answer for you? My financial situation has changed a lot over the last five or six years. So of my goals in some ways. I kind of went from five years ago having nothing to lose and everything to gain. So I kind of shaped the way I made moves and maybe took on debt or took on risk. And now I feel like I do have a lot to lose, not just in terms of net worth, but I'm supporting a family of four. And we have a very good

lifestyle with a lot of freedom, which we're very grateful for. So now kind of my goals are centered, or many of my goals are centered around maintaining lifestyle, maintaining the cash flow we have. So a lot of the questions I ask are, where am I exposed or over exposed to risk? Am I too concentrated in real estate? Not just direct ownership real estate, but let's say with this $50,000 annually that I'm saving if I pour that into private lending or private debt funds, private credit funds. That's still real estate. And am I taking on more risk than I should when I really don't want to chance losing kind of our income situation and what we've built? That's kind of where my thoughts have been focused the past year or so. So if we tally up your real estate exposure,

you got $5 million in real estate investment exposure against a $3 million network. That's between your rentals and your primary on there. Your lever, you've got about $3.2 million in debt. Sorry, you have $5.5 million because the notes payable are also against real estate. Yes. One way to frame the risk you're talking about is real estate is a third of the CPI right now. You have to believe, if you're going to have this portfolio, that real estate is going to continue to be about the same percentage of American income to buy or rent over the next 30 years, right?

I'm very comfortable with that assumption, which is why I would say close to two-thirds of my portfolio is allocated to real estate these days, and about one-third to everything else. So I don't think there's anything wrong with that. The question then is, how are you going to weather any of these storms or what is that appropriate allocation. Your total asset base is like six and a quarter million. So you're about 90% allocated to real estate versus what, you know, two thirds or whatever. I think a big part of the question here is what feels good. Like if, again, if I handed you five million dollars, which you'll probably have in seven years or so, um, around there. And I'm asking that intentionally,

because I think it will take a while. I think that the right approach will likely evolve moving slowly towards a future state. What if I gave you $5 million, how would you want that allocated? Yeah, I agree with you that now I think my growth will probably be more slow and steady as I, as I kind of shift the way that I'm investing. Yeah, I think if I'm considering $5 million, I definitely will always lean towards real estate as the largest percentage, most likely, of my portfolio. But I could see myself shifting, potentially selling some properties that I own and shifting of the real estate that I'm exposed to, my activity more towards private lending and potentially partnering with other active real estate investors in different ways

to where my efforts are not tied directly to the property's performance. Let's dive into that one. Why private lending? Why is that so attractive to you? Yeah, private lending is attractive to me because the way that I lend, it's the people that I've known for many years. and it's in geographic locations that I've either lived or invested myself in asset classes or or with strategies that I'm very familiar with. So I believe that I kind of have advantages when it

comes to underwriting a specific deal in those areas or evaluating a borrower. So I like spreading out money to people that quite frankly may be doing it better than I could myself. Once I've made that decision to lend to them, it takes virtually no effort or no time from me. The downside is there's there's no upside above the kind of the fixed agreed upon terms, which is not bad. I'm getting around 13 or 14% total returns from my lending activity. And I'm pretty happy with those returns if I can keep that consistent. But there's no upside above that. And I don't participate in anything like property appreciation.

I don't have any tax benefits like direct ownership, real estate does. There's no potential for it to be like a moonshot. It's just kind of best case or expected case scenario. 12 to 15% returns. But I do know the amount of effort that it requires of me. And it's very little other than kind of just always underwriting deals and being aware of the market and the borrowers that I'm lending to. So how much time does your private notes take up on a monthly basis? Let's say you're going to underwrite deals. And like how much, how much time are you spending on underwriting a deal? Because I think after a while, you know what you're doing. You look at the number

and you're like, yeah, this is a great deal. Or Bob always brings me great deals. Yep, he's another great deal. Like, I flip houses and I walk through a house. I'm not like adding everything up. I'll walk through and be like, this is a $75,000 flip or this is a $150,000 flip and I'm not interested in that or like whatever. So I'm just wondering how much time are you really spending on these private notes. Right. Yeah. Actually, very little time. I mean, underwriting the specific deals and making the decision to lend or not land on it, on a given deal. That's not very time intensive once you've had a little practice out and you kind of know what you're looking for and you have relationships already established with these people that that you're lending to, at least I do. I do probably spend a little bit more time maybe

kind of secretly looking for other potential borrowers or other potential people to lend to. Just always kind of watching, you know, whether it be social media or from talking to people are getting to know people at meetups, looking for people that look like they're, you know, they really know what they're doing and they have a track record and they have the character that I want to work with. That requires some time, but that's just something I do naturally and happy to continue doing it. So I'm looking at your properties on the spreadsheet that you shared with us, which are too numerous to rattle off these numbers for, but I noticed that there are five properties that cash flow less than $100 a month.

There's one that cash flows $43 a month, one that cash flows $66 a month, and then three that are negative cash flow. So without even looking at anything else, I would suggest you sell five properties and plow that money into your private note lending. Yeah, why do you hold those properties? Yeah, maybe a little explanation for the cash flow values that I put here. That's the last two years, kind of the average for those properties. So yeah, over two years, truly some of them have returned negative cash flow.

And then that certainly makes me dig into that property's performance. And I see some of them, you know, some big expenses like replacing sewer lines or or replacing, you know, a roof or HVAC. And that kind of explains the negative cash flow for the last two years or so. What I'm hoping for from this exercise is more of like, what's Bose estimate for what future monthly cash flow will be from each of these. properties. And if you were to redo that exercise, what would be the properties that you'd estimate will produce the least future cash flow for the foreseeable future? Yeah, that's a great exercise.

And for me, it's easier for me to estimate the overall cash flow of the portfolio because I've found in my five years of owning real estate, five or six years, that it is very difficult to predict a property's true monthly performance. Cash flow is not steady, which is one of the reasons. that I'm trying to increase my cash flow because I do feel comfortable with my my averages, my totals, but I still do see the volatility and have experienced how a property can be a heavy hitter for three or four years. And then you can have a tenant that runs into a bad situation or situations can change very quickly. And all of a sudden, there goes the last three years or so of your cash flow. But to answer your question, Scott, yes. Unfortunately,

some of the properties that probably I expect the cash flow the least on are the also the properties that are the least amount of headache and have the highest potential for future growth in terms of values or being in a good area. So that's kind of one of the factors I try to consider when we're thinking about which properties I would keep for long term versus sell. But I do think that there are a few properties that stick out that have low cash flow that do have some good equity. So yeah, Mindy, your recommendation to look at just selling those properties and rolling that into private lending or some other type of investment is probably a pretty good advice. I mean, one you've held since 2021, it makes $43 a month. And you own it 100%. You're not in it

with a partner, which makes it a lot easier to sell. Have you had any big expenses on this property, or is it just one of those that isn't the best property now that you've had a few years? Here's some more nuance for you. And this is an interesting story, but this property that you're talking about is one of 10 properties that I bought seller financed from an individual. When I bought them, once they got stabilized, you know, put some money into them and raised rounds and things like that, the cash flow for each property was much higher. That was back in 2019, 2020. Those properties experienced some good appreciation and as a kind of creative way to pull out some of that equity, I approached the seller that I sold these properties to. And I talked about this on the last episode a little bit.

But I actually asked him if he would consider doing a seller finance to refinance on these properties. He was of means he had money at his disposal and he felt comfortable with me and he felt comfortable with these properties. And there was about $300,000 in equity gain. So he did a $250,000 cash out refinanced with me, which essentially looked like me increasing the debt load on these properties. And I also adjusted the interest rate to be more favorable for the seller. So my cash flow and all these properties went down. And this is one of them that you're talking about, probably went down by about $150 per property. And that's just an estimate. But it gave me $250,000 that I now, let's say I lend that $250,000. That turns end to, you know, potentially around $25,000 a year

from that interest income on lending that money out. So sorry if I'm getting way too in the weeds on this. All right. We're going to take one final ad break and we'll be back with Bo and more reps. evaluating a financial position after this. 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

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normally, you know, I'd say if you had a W-2 job bringing $200,000 a year in, and that was your income which is most of the people we talk to by and large here at BP money, you know, then I would say even that arbitrage, like I don't really love it. You probably make a little bit because you're borrowing at six and lending out at 10, you know, I think is what you use as your base assumption, even though I know you sometimes get more on there. But that's great, but you're going to pay taxes on all that incremental interest. And so your effective arbitrage is only a couple hundred, maybe 150 basis points once you factor in federal and state taxes. But in your situation, I believe after you talk to your accountant, you have multiple years or the option for multiple

years of losses or very low federal income tax liability in your situation. So you truly are getting 400 to 800 basis points of arbitrage on this private loan that you borrowed against to lend out on the other side. And you can do it responsibly. So that really is an interesting situation and I think one of the power of being retired, self-employed, whatever, you know, full-time real estate investor, part-time private lender. How do you describe yourself? What's the right adjective that we should use here? Really, you just described it probably better than I can. It's tough for me to do. So, you know, but like, like that really is an advantage here. So I would kind of be at all right, oh, we should pay off the high interest rate debt. I don't know in this particular

situation. When you start getting into some of these properties that have seven and three quarters or eight and three quarters percent interest rate debt on them. That makes me uncomfortable on there. You know, I'd rather be on the other side of that risk equation and be able to foreclose on somebody who's borrowing on that, I think, just at that high level of interest. But you're still getting arbitrage every time you do this private lending. So I can see why you're attracted to it. It also probably feels good to be able to spend that simple interest that those loans generate on your lifestyle. I can see the problem here on why this is hard for you. Yes. Thank you. But yeah, Mindy, I think both of you, what you were just talking about with that specific property,

even though I do have a backstory for why maybe a cash flow is less now, it really doesn't change the current situation, which is looking at its current cash flow versus its current equity. And you may have a point that these properties I should revisit regardless of the history and make a decision about selling or keeping. If they're owner financed, how easy is it for you to sell that property? just as easy if not easier as any other property. When I say if not easier, there's the potential for me to sell some of these owner finance properties on wraps, meaning I would find a qualified buyer except a down payment from them. And essentially, it's kind of like a subject to purchase for them. You know, they'd be making a payment to me and I'd be making a payment to the previous seller. I'm not saying I'm going to do that, but it's just another kind of option to look at. But as far as just selling it on the, on the the market, it's no different. I do actually think that there's even the potential, if I did approach some of these sellers that sold these properties to me, that they may consider, if I were to sell

a given property, may consider me not paying them off right then. And instead of giving them potentially new collateral on the outstanding loan, so I could keep their loan and invest it elsewhere, as long as I can find equity or maybe another property that's paid off that I can give them as collateral, they may consider allowing me to do that. You know, that's another avenue to explore, are any of these properties difficult properties? You know, every once in a while you buy a property, you're like, wow, on paper, it's great. But I hate dealing with the tenants. And it only seems to attract tenants that want to call me every day and complain. Or it only seems to, you know, all the neighbors are like all up in my business calling me all the time. Do you have any difficulties

with any of these properties? I do. Yeah. And some specific properties come to mind. And thankfully, I've handed those off to property management in the past couple of years. That's certainly made it feel lighter on my shoulders, but it doesn't make it disappear in terms of kind of the high-maintenance nature of those properties. And if mismanaged by property management or by me, it could end poorly. So, yeah, I definitely have some of those properties. And they probably should be some of the ones I consider first based off their, you know,

whether or not they have equity or not, if I'm going to sell any. Well, based on your goal of wanting to have. a more passive life, any of the difficult properties, in my opinion, would move to the top of the sell list. Yeah, that's a great point. One other observation here is, or a question, I guess, is what are the amortization schedules for all these loans? Are they essentially all 30-year loans? Yeah, almost every one of them, except for maybe one or two, are 30-year amortized loans. Okay. So I think that there's a very basic amortization exercise to do here, because the most obvious answer that's coming out of this conversation so far as, yeah, we can sell property here

or there. But really, by and large, we're going to end the conversation with you having still north of $4 million in rental real estate, most likely, levered with $2.5 million in debt. And that's just going to coast, I think, is going to be some of that, that's, that's, that's becoming apparent to me out of this conversation. And so over a seven to 10 year period, which I think is a good outlook to do things, the reason I like seven years is because a good, investment averaging 10% a year will double every 7.2 years nominally. This makes just for easy math there. A leverage portfolio like this should easily do that, right? Otherwise, you know, why are we doing that instead of stocks? So that's going to change the equity value in your portfolio, hopefully,

by about that amount. And that's going to be a combination of appreciation and loan amortization over that time period. And something's going to happen to your cash flow in that same time period. it should dramatically ramp in your model over those seven to ten years because your rent and other expenses will increase with inflation, whatever you assume for your inflation, but your payments will stay static for the debt service. That should have a very large increase in your cash flood that just happens to you. And there's nothing to do. You already set it up. You knew that going in. That's probably why you got into real estate in the first place. And that's just going to happen. So how's that going to look? The next most important thing that we have to discuss, which is so secondary,

It's literally 10% of the story here is the $50,000 a year in discretionary cash flow that you can begin reallocating, right? If we look at your whole financial position, you have this $4.5 million, $5 million in real estate, including your house, and $3.2 million in debt against it. And then everything else in your portfolio is what another million for in there? So we can reallocate some of that. But you're also, because you're not working, you're not going to accumulate a lot of cash. So usually when I talk to somebody about what should we do next, you know, the bigger story or one of the biggest pieces is all this incoming cash flow that we can begin allocating. Say I'm 100% stocks and I want to be 30% in real estate. Great.

Let's just allocate all the new cash to that and that will naturally take care of the problem. You will have to reallocate the rest of the portfolio at least at some point over time tax efficiently in order to get to a desired future estate. Most obvious answer we have here is do largely do nothing with your rental portfolio. sell the ones with the highest Pita score. That's pain in the ass. That's another column in your spreadsheet. Can we say ass on the show, Mindy? Is that family-friendly enough?

I don't know. We don't want to lose our non-explicit license here. But I think there's a score there that you can put in that's subjective. And we're there. That leaves us with the rest of the portfolio. And I hear private lending, you want that to be a big part of your portfolio. How big? I guess I'm still wondering, like, what does that desired future portfolio look like?

excluding the growth that we know is likely going to happen to us in the rental side. That's a question I'm trying to answer. I feel myself drawn to it as in I like how passive it is and I'm happy with the returns that I've gotten thus far. And I just enjoy getting to lend and help investors that I know like and trust and kind of can see what they're doing with it. But I feel that there's certainly a point of being oversposed to kind of these short-term deals where, let's say there's a large market downturn, which has happened in the past before. That's going to affect these short-term operators and it could potentially affect a lot of my different loans, even as I try to spread them out across operators and deals all at the same time.

So I'm kind of trying to balance those two ideas between really enjoying the passivity of it and the returns with not wanting too much money to be out on these short-term loans. So I work in progress for me to figure out that exact number. But I do think that by growing the percentage of private lending, if I ever choose to do it, it will be through selling real estate that I currently own. So kind of a swap from real estate to real estate. So I'm not increasing my real estate exposure. And really the question for me is, I do think there's probably some properties to consider selling.

And the question for me is how much of that to allocate to private lending and how much that to allocate towards like a taxable brokerage, putting money in the stock market and participating in some of that market upside. So looking at your income tab on your spreadsheet that you sent over, your income is 204 and your current expenses are 147. In that income, you've got 50 in interest from private lending. So that could go away completely and you still cover all of your expenses. And looking at your expenses, I don't think that, expenses are something you should be focused on cutting, but there's certainly things you could

cut if for some reason several of your units stopped paying or you had an extended period of vacancy or you had to drop the rent to get somebody in there. So I love the private lending for you because you're so good at choosing. Like, have you ever had a default? I have one. I have one I'm working through right now, but I think they just, it was it was the one time that I broke my rules on lending in second position and lending on a big expensive property. And I've learned so much from this loan. But I do think that we've worked it out and we're about to be at the end of that. Well, fingers crossed for that. But one default is not bad. I have not done nearly as much private lending as you have. I have done some. And I led to somebody had a great experience.

I lent to him again, had a great experience. Then he's like, hey, I've got this friend. And I'm like, oh, how much different could a friend be? I only now lend to people that I know because your friends can be very different from you. So, yeah, don't break your rules. Determine what it is you want to lend at and then don't deviate from that. I think here's what I'm struggling with. And I've been trying to articulate it for most of the conversation here. If the goal is, I want to be a private lender.

Like, you're certainly qualified to be a private lender. You can certainly free up cash from other parts of your portfolio to be a private lender. But it's that goal, and there's nothing wrong with that, right? Didn't you assume that risk? There's not going to be like some historical body of research that we can give you that suggests you can spend at this rate. You know, you're most of the time going to get your interest and occasionally going to have a default and lose some of your principal. You know your principal balance is not going to grow relative to inflation. So you have to have a spread of margin of safety in there. And there's no academic theory I can point you to which is going to be your practice,

your business of private lending in a general sense. Now, bringing that back into like the long-term goal of fire, right? Like you could private lend for five years, ten years, twenty years. I believe that private lending is going to be particularly advantageous to you, Bo, for a couple of years because I believe that after you talk to your tax professional and begin costing these properties and understanding your losses on the depreciation side, you're going to have no taxable income. So while that lows losses exist, while you're in this very low tax environment or a loss

environment, right? Like, let's arbitrage rates all day long. That makes a ton of sense on there. It's a good skill set in there, you know, maybe don't keep a reasonable balance in there. But it's just, there's some good math there that allows you to, with leverage, arbitrage these rates and these things and make some money. The question is, I think at some point in the future, and again, I keep using that seven-year mark here, because I think that certainly by then things will have played out.

I would be surprised if you're going to want to continue to be doing private lending without making it into more of like a traditional hard money lending business, making some kind of fund out of it where there's real profit involved. Not that there's not real profit, but like where there's a big business potential. And then we have to get back to portfolio theory overall, which is like what is actually going to be moving in the background to build my wealth and consistently make sure that there's always enough in a more traditional, you know, construct here to keep things going. And I'll give me an example, right? So let's say that in

seven years, you run out of these big tax advantages. Things are going well, and your net worth has mushroomed to $5 to $6 million, which is not an unreasonable assumption, given that you're reasonably active with your portfolio here. At that point, you're in a higher income tax bracket. These loans are going to look less attractive to you because you're going to be paying 30-ish percent marginal taxes at that point. So you buy one of these rental properties and your portfolio today generates a 5.2 percent cash flow yield on equity, right? That's what you're saying. When you say return on equity, you're not counting the appreciation or the principal emmerization or tax advantages. You're just counting your 5.2 percent cash flow across your portfolio. Well,

that cash flow is adjusting for inflation each year by definition. Rent and housing cost are a third of the CPI. And that property is appreciating at two or three percent a year. Hard money note looks a lot less attractive at that point in time than it does today. And so I think that's what I've been struggling with this whole time is like, you don't need our permission to go out in private money lend. That's going to work. But you just got to have in the back of your mind that that is working so well because of your tax situation right now, I think. And I think that will go away at some point unless you figure out a way to keep the game going by 1031ing and buying new properties or otherwise making enough income that there's something to offset with the purchase of additional

rental properties and additional cost segregation. So I think that's going to be a challenge for you that I'm starting to come in here. I think that's too complicated. I think that will require detailed tax planning assessment where we really go out and say, here's the structural value of every one of these properties, how far it's been depreciated now, and what can be accelerated through a cost segregation analysis? What is your timing going to look like on new properties, assuming you do buy at least a few rentals over future years? It's just too complicated. So we can just round out some part of the future. So in that context, let's say that we set aside $800,000 for private lending, which you can easily do, right, between selling a couple of properties or

selling your Bitcoin or whatever. Ah, we can take it to that later. But what else do you want the portfolio to look like? What are the other components of it that you, I think you had some questions around around the rest of it that you wanted to talk through. Is that right? That's a great point and you've given me a lot to think about. I think one of the other things that I'm trying to get after with kind of my portfolio allocation is not only diversification, meaning, you know, not being too much in real estate or too much in any given thing, but also kind of like diversification in access to liquidity. I really value optionality. I really value like being able to make moves and be strategic. And the less liquid your investments are, for sure, the less options you have in the

short term. So that's maybe part of the reason I'd value private lending over direct ownership real estate in some ways, because it is more liquid than owning an individual property myself in some ways. There's other things that I also look at in terms of access to the liquidity that I think fit well or kind of interact with other parts of my portfolio. And that can be money within a taxable brokerage. That can be money in Bitcoin. You know, y'all's favorite asset, money and whole life insurance. Another one of yours favorite investments or non-investments. One idea that I would offer, if I'm not living off of the interest income from private lending, something that I'm actively kind of working towards, currently I have all my money within my Roth IRA,

is it's mostly in the total stock market, total stock market indexes. I'm considering shifting my lending kind of to doing it within my Roth IRA so that it's sheltered and then shifting my stock ownership outside of my Roth IRA into a taxable brokeries. I see Scott shaking his head, so excited to hear your thoughts. I would love some shimon from our YouTube audience here. You guys are never, again, like I said, never shy about this. But my instincts are saying definitely not. Don't do that. And here's why. Again, the advantage in your situation is what I believe is likely to be a very low tax liability with a good tax strategist.

So in this situation, I think the earned income is going to suit you better from your private lending business for the next few years, for the next couple of years. you can have way less administrative burden on that. And I think that your Roth in this situation, which is where your money is, you want to invest it very aggressively. I think it's very unlikely you'll be touching that money for a long period of time. And I wouldn't even consider it highly liquid in your situation in this setup, unless things go very, very poorly for you. And I think you have other ways of mitigating that. The driver of growth in this portfolio is going to be your leveraged, traditional rental portfolio that we've got here.

Like, we can't forget that that is the beating heart of this portfolio. The side project that is going to become more important is your private lending business, which is extremely attractive for the next several years because of your tax situation, your ability to arbitrage rates and generate a lot of simple interest with very low tax liability for some period of time as a real estate professional. So the rest of the portfolio, I would imagine, in that context, I would hypothesize for your consideration, ought to be a fairly conservative, maybe even more traditional retiree portfolio. And we did an example of this with Frank Vasquez, not a few weeks ago, with this gold

ratio portfolio that has an allotment to stocks and allotment to bonds, an allotment to manage futures, an allotment to gold, an allotment to international in there. That might be something for you to consider. And you would want to put the high growth components of that in your Roth IRA and have the more conservative components of that, I believe in your taxable, given the rest of your situation, because this is a hedge, this is a place to store liquidity, we get better returns than what you can get from the, you know, a money market or something like that, but have that diversified balance portfolio. And that, you can almost think of that as like a coastfire portfolio.

Probably won't have to touch it very much. You could withdraw from it at a few percentage points. There's ways to withdraw the contributions to that Roth, for example, or whatever, but I bet you're not going to ever touch it until traditional retirement age will be my guess. And you want all that growth happening in your Roth, and you want the more conservative balance portions in there to not be in that Roth. Because one day the tax man will come for you in there. And that can be a longer term investment. What do you think, Mindy? I'm struggling to articulate how I disagree with you, Scott. If he wants to lend money in his Roth IRA, that's tax-free growth. That's just an investment. So what I want to know is,

do you have any employees outside of your spouse? Any full-time employees? Okay. So what you could do, if you have income and rental property is not income, I'm not sure if lending, private lending is income, it might not be, so this might not actually work. But let's say you had income, you could open up a self-directed solo 401K, make that a Roth option, transfer your current Roth IRA money into that Roth option, not a taxable event. Lend that out. And the reason you do it in a 401k and not an IRA is because the 401k is not subject to UBIT or UDFI, whereas the IRA can be. And this is where my area of expertise ends and I just get into the the category of I know enough to be dangerous. So I'm going to send you down a rabbit hole. If you, UDFI and Ubit are only, well, UDFI is when

you've got a debt financed. So that's unrelated debt financed income. And I don't know if you are financing somebody else's property, then there's no debt in there. I'm going to send you to your CPA to have them give you the ins and outs of this. I have wanted to ask, though, do you have a real estate focused CPA or tax professional? Or are you just, does your tax professional say, oh, yeah, I could do real estate too? No, I do. They're very real estate focused and they're real estate investors themselves. Okay, good, because those are the types of people you want giving you the tax planning advice for all of this because there's a lot of moving parts. And if somebody has the level of understanding that I do, they might send you down a rabbit hole that gets you a nice big tax bill.

But I would talk to them about cost segregation. I think that's a great point. Because you have real estate professional status, which is an IRS designation, you can write off all of your losses, their losses on paper. So then you might want to keep those real estate properties that aren't necessarily bringing in a lot of cash flow. if you can cost seg and throw that against your income this year and those cost segregation carry over. They carry forward. And I can't remember how long they carry forward. But you could

effectively have zero dollars in income, taxable income for a really long time. I would not necessarily do the cost segregations all at once, maybe do them, you know, one or two depending on how much you're going to be able to write off. I think that is the place to start. And And can you get reps status, Scott? Can you be real estate professional with private lending? Or do you have to continue to have all of these real estate properties? I believe you can get it with private lending. Okay.

That's another question for your CPA. Can you get real estate professional status with being a private lender? Well, I don't see a world where I don't qualify for real estate professional in the next decade, as long as I hold on to my real estate and maintain an active involvement in it. If you're operating as a mortgage broker, hard money lender, or in a loan origination business where you actively manage in source deals, then those activities might count towards reps because you are in the business of brokering or financing real estate. So I would talk to your, like this is where the advanced tax components are.

All of this is based on how your tax treatment is going to be, right? So like that's where Mindy and I are having the disagreement here, if you will. And so depending on how that's, what's going to shake out for your short, medium, and long-term tax situation, that's where you want. the various components of the portfolio in there. My guess, before you talk to your CPA or your tax strategist, is that you are going to have, you're going to have, again, large losses for the foreseeable future that you can at your option declare. I believe that you will qualify as a real estate professional. I believe that because of that dynamic, much of your income from

hard money lending, a real estate activity and your active involvement in that business will be taxed either at not at all or in a very low income tax bracket. And therefore, I would bias, you know, for the next several years to doing that after tax, because there is no, there is no tax benefit. And to having principal growth that will be taxed one day happen in your Roth IRA. If for some reason that is not true, then that would change how I would be thinking about things. But it doesn't change the fact that I believe that outside of your lending and your rental property. The point of the rest of your portfolio, in my view, is I bias towards being a relatively stable, well-rounded, not heavy, growthy portfolio because that growth is going

to be generated from much higher risk lending and levered real estate investments over the next couple of years. And that would call for something that is more conservative, like a 64-year-sock bond portfolio or a DeFranfascas golden ratio portfolio. And then from there, we would allocate in the right places. So if my guess is correct, then I would put the growth stuff in the Roth and I declare income outside of it until your losses, I might flip them at that point in the future whenever you start paying a higher marginal income tax rate. Thank you.

Yeah, that makes sense to me. I agree with you that I value kind of outside of my real estate, I levered real estate portfolio in other things. I appreciate something that's lower risk and kind of just helps me, helps me write it out for as long as I can. I think a good next step here would be once you talk to your tax planner, you say, what's that going to look like? You model out where your portfolio is going to be in seven years, right, and say, here's my

rental portfolio. It's going to be worth this much. It's likely going to be with this level of loan amortization, and it's likely going to be reducing this much cash flow at that point in the same. future. You assume you're going to double over at some point in the future the amount you have allocated the private lending and you assume the rest of your portfolio is going to be this conservative-ish portfolio with allocations to a well-diversified, you know, portfolio there. That would be where I'd bias the start of the next steps of homework and that would give you

something tangible to work around that seems to fit the goals that you stated here. Awesome. Thank you. What do you think, Randy? I think you have a number of homework assignments and DPA conversations to have a chat with them. I do. And not that much work, though, right? Like, it's like that conversation, maybe selling a handful of properties and repositioning a few assets. And it's probably really not that much to do here.

I mean, you're so strong already. Like, that's the headline is everything's good. The vast majority of this just needs to sit. I've heard of a lot of people, you know, just from stories and books and lessons learned of people who didn't take a knee when they probably should have taken. taken a knee and they wish they would have. So I'm trying to learn from other people's, other people's lessons there. Well, learn from your own lesson and don't deviate from your rules when lending to someone, especially someone you don't know. But was this helpful? Was this what you're looking for today?

This was extremely helpful. Yeah, I really, really value getting to hear y'all's advice relative to my portfolio. I'll just say, I bet you that we're going to talk to you in a couple years and you'd be like, yeah, I started a hard money lending business. That's my guess on it. Why not? You seem to like doing it and it will make a lot more money on there and obviate some of these other problems and you'll just be able to throw cash at more of those issues. So it's not really that hard to do a lot more loans if you truly get good at it on there and you don't ever get over your skis too levered. But we'll see. We'll see. We'll see. We'll see. All right, Bo. Thank you so much for sharing your numbers with us. And thank you for bringing a

really, really organized spreadsheet. For anybody listening, if you would like to be a guest on the finance Friday episodes, please reach out to Blake at biggerpocketsmoney.com. All right, Scott, that was a whole lot of numbers and a whole lot of higher level strategies that are specific to Bose's experience, but I don't think that they're specific to our audience. What did you think of the show? I know you got really into it. I think this is the fun, like the kind of the most fun side of finance, right?

And this is where I'm, you know, correct me if I'm wrong. folks, but I'm not aware of folks who you even hire beyond a tax professional, of course, to help out with navigating the complexities of like, what do I really want now that I've got a sprawling rental property portfolio? And how do I consider the tax ramifications of those moves in the context of what I want in the future? And how is that going to impact my ability to contribute to solo 401k? Am I self-employed? Do those things count? I mean, there's a whole bunch there that I think is really, really complex and important, and I would love to learn more about. So if anyone who has any suggestions for where to go, for learning more about those intricacies of

those details, I'd love to learn them. And if any tax professionals have any suggestions, those would be most welcome. Scott at biggerpocketsmoney.com. Yeah, I think that anybody in a similar position or wanting to be in a similar position really needs to make sure that their tax planning professional is real estate focused, meaning that is the bulk of what they're doing. Any tax professional can do your real estate taxes, but if they're not really focused on all the ins and outs, you could be missing some big things. I have several real estate focused tax professional friends, and they say, oh, I'll get a new tax return from a new client. I'll get a return from last year, and I'll be like, whoa, they miss this, they miss this, they

miss this. You don't want to miss these things. You don't want your real estate professional to miss these things. You're hiring them on purpose. So make sure they are real estate focused. Yeah. And you can find these tax professionals over at BiggerPockets.Beges. BiggerPockets.com slash tax pros. That's a great place to go check them out. What I'm particularly fascinated is that cross section between, once you know what the tax situation is like, how do you also, in real time, brainstorming the bridge between a real estate heavy portfolio, maybe something that's different than real estate over the next couple of years tax efficiently. That's really fascinating stuff too. And there are some tax pros are able to do that and some focus on really just saying here's where the reality of the

situation is and here are some options for the near term future. So I find this stuff fascinating. And I think there's a lot of options here that are very exciting and very fun, but also required to be very careful because there's hundreds of thousands of dollars in a situation, maybe millions and long-term wealth that are at stake based on both choices. Yes. And I think that he is going to do his due diligence and he already has a real estate focus CPA and he's going to do it right. I just want to make sure all of our listeners are also doing it right. All right, Scott, should we get out of here? Let's do it.

That wraps up this episode at the Bigger Pockets Money podcast. I am Indy Jensen. He is Scott Trench saying, see you later, alligator.