Rich Habits Podcast - 2: Debunking the "Financial Tips" that Keep You Poor

Episode Date: March 7, 2023

In this episode of the Rich Habits Podcast, Robert Croak and Austin Hankwitz debunk three "financial tips" they believe keep people poor: becoming fixated on a primary residence, avoiding debt, and quitting your 9-5 job to pursue a side hustle or passion. ---Be sure to check out Public's new ⁠⁠⁠High Yield Cash Account paying 5.1% APY.⁠⁠⁠ This is higher than anything else on the market and is FDIC insured up to $5M. ---Earn 5.1% APY using a Public HYCA, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Opt-in and share your email, ⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠Learn more about our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠4-module video course!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Download our FREE Budget Template, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠To learn more about Robert: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://stan.store/RobertJCroak⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠To learn more about Austin: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://stan.store/austinhankwitz⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Contact: [e-mail] ---Hankwitz Group LLC has an existing business relationship with NEOS Investment Management LLC. The opinions expressed are those of the author, and the author owns several NEOS ETFs.

Hey everyone and welcome back to the Rich Habits podcast. My name is Austin Hankwitz and I'm joined by my co-host, Robert Kroke. Robert is a seasoned entrepreneur in his 50s with more than $200 million in company exits under his belt while I'm just a 20-something-year-old trying to figure it all out. As the show name might suggest, every episode, we talk about rich habits as they relate to business, finance, and mindset. However, we try to bring you two unique perspectives along the way. one from an industry veteran, Robert, and the other myself, someone just trying to figure it all out.

So, Robert, why don't we jump into things? What are we going to be talking about today? Absolutely. In this episode, we're going to be talking about three financial tips people here every single day that I think are complete bullshit, specifically owning a primary home as the end goal, using credit cards and debt is bad, and that everyone should quit their nine to five to pursue their side hustle or passion. Now, don't get me wrong, these are controversial topics, but I really want to encourage you all to hear us out, listen to our perspectives, and open your mind. Okay. So the first one I heard there was talking about getting a primary home and having that be the end goal.

You think it's bullshit. So what's really the end goal here for people trying to get into real estate? Give me your perspective, Robert. Yeah, I just think that it's just not a good idea to make your first purchase in real estate your primary home. We've been taught for decades that, you know, owning your own home and with the white picket fence is the way to go. But from a mathematical investing perspective, it just doesn't add up. You know, your primary residence, if you're going to buy that as your first option, I just think is a bad idea because you're tying up so much capital and credit.

And your house generally in most markets isn't going to appreciate enough to keep up with inflation and the expenses. So overall, you're really just tying up your capital and your time. tying up your resources when they'd be better suited in buying a duplex or a fourplex as your first home, your first property, and wait on the primary home for maybe a later purchase. Okay. So that to me was really interesting. So what you're saying is that it's totally fine to have a primary home. It is great to have that as a later in life purchase. That should still be an end goal. But as it relates to your first residence, your first investment property, You should not go for this cool white picket fence single family home.

It should instead be a duplex or a triplex or even a fourplex. And I would imagine you say that because of house hacking. Am I correct? Yeah, I mean, that's part of it. But also if you just do the math, I mean, if you're living in a market where the capital appreciation of a home is two or three percent a year and inflation is seven or eight percent a year, plus you tack on all the expenses, most people just don't take a macro view of what their house really costs them and what it does in tying up their credit and their capital

to try and do other projects in the real estate or investing world. Okay, okay. So what I hear is taxes, repairs, interest, all this, you know, down payments themselves, all these big, big things. So what would you then say to the person right now who is, you know, they're out in like year four, year five of renting an apartment? It feels like the money that they're paying towards rent is going to waste. they just don't feel great about their housing situation and they're just really, really excited to buy

something of their own. Is it to then instead set money aside and really dive into this duplex? Would you tell that person? Well, I think it goes both ways. If you're someone that's 25 or 30 years old and you're married and you have kids and you want to be in a specific school district, sure, buy a primary home. But if you're someone that's really trying to build wealth and you're really trying to get into the real estate industry and grow a portfolio, then I think you should work.

wait and really have, you know, delayed gratification in buying a new home and use those funds that you would tie up in a down payment and use them as a down payment on a rental or a flip or a quad, a quadplex or a duplex, just because it's going to give you cash flow for later on. And with that delayed gratification of a primary home, you'd be in a lot better financial situation in the next five to 10 years. Where were you five years ago when I mistakenly, quote unquote, bought my primary residents as a town home here in Nashville, Tennessee. I wish I knew about the idea of house hacking and just how much money this place was going to tie up for me. No, I love this advice. How does someone go about maybe sourcing a duplex or whenever you apply for a mortgage with a duplex or a triplex or a

quadplex? Is there a different sort of process, Robert? What's kind of the play-by-play that maybe some considerations that these people should keep in mind in that process? Yeah, that's a great question. And yes, there's a lot of programs out there. There's FHA. there's just so many different programs you can look at when buying your first property. And I would recommend everyone, every one of us knows realtors. Find a realtor you like. Start doing the research ahead of getting the retailer involved. Because if you're doing the research, figuring out the areas, looking at what the rental rates are,

what are the best places to go. I think it's a really great strategy so you're not rushing. Then get a realtor involved because they might be able to find you some pocket deals or some stuff that's new to the MLS because you can get on their database, which is updated every day. I'm going to jump in here right quick. You said pocket deals and you said MLML. What is that? So pocket deals are when you find a deal before it hits the MLS or Zillow.

And what that means is you might have a friend that's a realtor. She knows exactly or he knows exactly what you're looking for. And then what they will do then is they might bring you a deal. It happens for me frequently where it's not on the market yet. So they'll bring it to you and maybe two other people and say, hey, this goes live in 24 hours. Are you interested? And it gives you a head start. So that's an interesting strategy that works very well once you're known in the industry or if you

have good friends that will show you those deals before they hit the market. Got it. Okay. Cool. And one other thing I would add on this topic too is if you're, let's say you're in a relationship and you're thinking about getting married in a year or two and your things are really going well. Another really big wealth-building strategy in this same kind of sector of what we're talking about for primary homes is for the couple to each go buy a quadplex or a duplex themselves. They can then

get an FHA loan each one of them so they're doubling their buying power, still getting the same benefits of an FHA. They live in those respective duplexes or quadplexes for a year to qualify and make sure they follow the rules. Then when they get married, then that second unit or the fourth unit then becomes rented. Now they have four to eight doors collectively and they did it before they were married because once you get married, all of the mortgage lenders and banks look at you as one entity. So you lose that ability to have the double buying power prior to marriage. So that's another key insight that's really, really cool for people if they're getting into real estate and they're listening and they're like, wow, I had no idea we could use double buying power here and both

qualify for an FHA. That is really interesting. And as someone who is in a committed relationship at 26 years old, I think I'm going to take that advice, Robert. I want to keep this conversation rolling on to the second topic. You mentioned using credit cards and debt is bad in general. You disagree with that. And I'm on the same boat as you with that. But there might be a bunch of people listening right now that who might be in that Dave Ramsey boat, right? The boat of no debt, no credit cards, no nothing, no leverage. Let me buy everything in cash. And I empathize with those people.

I think that's a great way for you to live your life if you are 90% of the population and you are irresponsible with debt, right? I think the credit card debt in the United States recently hit an all-time high. It did. Yep. We're approaching $1 trillion. The APR on these credit cards are 22, $20. 25, 28%. So I totally understand why those people have those mindsets. But you think it's bullshit. Yep. So I want to hear your perspective as to why using credit cards and debt is bad and why you think

that's not the case. It's just people understanding what the power of credit is and the no-noes of credit. If you're using your credit cards, let's say, for consumer debt, then it's a bad idea. Because if you're not paying those credit cards off and you're wasting all of that money on interest, that's just suicide for your financial future. But if you're taking that same credit and you're using it for business funding, business loans to buy other businesses or real estate, mortgages to buy rental properties, then it's a fantastic way to do business. Because at the end of the day, I know Dave Ramsey, you know, he's always trumpeting, no debt, no credit. But the problem is you have no leverage that. And leverage to build wealth is 100% full stop. One of the smartest thing you can do.

do, and it is what all of the ultra wealthy and wealthy people do, is they leverage debt to continue to build their portfolios and their wealth. If they didn't, why do all of the richest people in the world and the wealthiest people I know finance their cars and they have mortgages on their home? Because at the end of the day, if you can borrow money cheaper than what you can make with it, then you're winning. And a lot of people don't understand that with leverage and arbitrage of your money, that's how you build wealth. Because let's look at simple terms of the current markets of the last, let's say, five years. If you can go to a banker or a mortgage lender, borrow the money for 4%, and then you can turn around and take your cash that you have,

put it into a group of index funds and make 8%. You're already 8% to the good. So you should always have your cash working for you rather than using it when you can borrow for cheaper than what you can with your money. Okay, so just to recap what I'm hearing here, if for example, you're able to get some sort of, and obviously interest rates are kind of high right now, so let's use kind of past term as this example. If you can borrow a mortgage at 4%, and you're able to somehow rent it for cash on cash returns at the end of the year annualized coming in at 12, 15, 18%, then that 12, 15, 18% is obviously in the good and then you subtract that 4% interest. And so the arbitrage there, that 8, 10 to 12% arbitrage is what you're talking about,

right? The ability to generate more money than what it costs to acquire that money. And this is a big problem in the people that I deal with and some of the people that I'm helping and consulting for is I have a client right now who has $100,000 cash in a savings account. But she also has $80,000 in credit card debt. and the question was, what should I do to invest with my $100,000? And so it's crazy to think that that would even be a question because the credit card debt, the consumer debt is probably at 18 or 20 percent.

And there's no real investment vehicle right now where we can tell somebody, hey, our opinion is put your money here. So I told her, I said, look, the first thing you should do from the $100,000, is pay off the recurring consumer debt, the credit card debt, because then you're essentially making the 18 or $20,000. because that's just going to keep going and eat up your savings. And it's a terrible situation. And so she didn't understand that. She was like, well, shouldn't I invest the $100K to pay off the credit card debt? And I'm like, no, you're not going to make 20%. So even if you make 10%, you're

still 10% to the bad. So it's getting people to understand the difference between bad debt and good debt and trying to make sure they understand. You need to pay off that consumer debt. And it doesn't have to be just credit cards. A lot of times people don't realize they'll have hospital bills and other bills that are bad debt because they have high interest on them. And those are what you should be getting rid of first. What are the pitfalls of using debt? One, how do you know if you're over leveraged? And two, what should you do if you kind of realize that you are over leveraged? Yeah, I think that's a fantastic question. And I'm glad you've got back to that. Over leverage is a real problem. Like if you look at it right now, how it relates to like the Airbnb business. Over the last two years, we've been watching all of the

gurus tell everyone to go out and they can arbitrage an Airbnb by renting a property and Airbnb being it out. And a lot of those people are over leveraged because at the end of the day, when some of that Airbnb traffic dries up, they still have to pay the mortgage. So that works in both ways too if you're out there buying properties and using leverage. And let's say you were in the commercial real estate business five years ago and COVID hits and then all of a sudden people don't go back to work and you have all these buildings that are sitting empty and you have leverage against them. So over leverage is a problem and that's why you need to make sure that you really know what you're doing and study the markets and learn the markets before you go all in and over

leverage yourself because I've seen so many people go bankrupt because they had what they thought were good properties, but there was just bad timing and you never know what's going to happen. So over leverage definitely can be a problem. So you just have to be careful and make sure you have a good selective process and you use all the tools that are out there for you to help you make the right decisions. I love it. Okay. Let's now move on to this third insight that you had, which was quitting your nine to five

to pursue the side hustle, the passion. You think that's not a good idea. I agree with you. And so I'm going to kick us off here. I think a lot of people, unfortunately, they might buy a course. They might watch some sort of influencer or YouTuber or content creator talk about. This is no shade to Cody Sanchez. I think she's amazing.

But all of my friends follow her and they get so excited thinking about the vending machine businesses or the ice bag businesses or the laundromat businesses, right? And they see this passive income. They see these side hustles, which are very legitimate side hustles that Cody does a wonderful job explaining. But they get sort of mesmerized by the side of. idea of, wow, I can make all this money. I should just quit my nine to five. I should double down on these side hustles and I should do it all. It's what I'm going to focus on and I'm leaving

everything behind. But unfortunately, but the people who follow through with that, forget about three main things. The first thing they forget about is the stability that their nine to five job provides them. Right. Every two weeks, you get that paycheck. Every single two weeks, that is stability. You can pay your rent with that. You can pay your car bill. You can pay your groceries. Everything as it relates to living your life, assuming you live on a budget like most of us here do, that's stability. And that to me is very, very valuable, especially as we potentially head into a recession. The second thing that I think people forget about is the health insurance aspect. As someone who is a full-time content creator, health insurance has kicked my ass. I'm

over here paying $500, $600 a month just to have my health insurance, where before I was a full-time self-employed solopreneur, as some might say, And while I was working my 9 to 5 job at a healthcare company out of college, my health insurance was like 80 bucks, right? Because my employer paid for that. And then third here, the last point I think people unfortunately forget about when they quit that job and get so mesmerized by this side hustle passion is the retirement account. When you're at a job, not only are you able to double dip with your retirement. So let me explain on that. The first way of sort of this double dipping idea is you have your 401k through your employer, right? That is, you're, you

matched by your employer free money, but then you also have the ability to contribute to your individual retirement account through a Roth IRA. So that's the double dip, right? You can do both at the same time. Now, sure, as a solopreneur, you can also double dip, but it's one way more expensive. And two, it's all of your money. There's no free money to be had here. So if you didn't quit your job, you would still have this great 401k, which probably has a three, four, five percent match. Maybe you don't even have a match. You still have this awesome retirement vehicle and you can, again, double dip into that Roth IRA. So if you are someone who is seeing the cool passive income, the cool people saying, wow, look at all the money I'm making with my ATM business or my,

I don't know, insert side hustle here, just really want to encourage you to slow down and take a couple steps back and say, what is the right path for me? Now, as someone who did quit their actual nine to five job to pursue content creation and be a solopreneur, here's the one step I really took to understand how all this came together. What I did is I sat down with my dad, because he's much older and smarter than me, and I said, dad, if I want to quit my job, what are things as it relates to expenses and other considerations that I'm not yet thinking about, right? And he's the one that said, well, you got the stability, the insurance, the retirement. You got to think about all this larger cost that you're kind of foregoing and you're betting on

yourself to generate. Yep. So what I essentially did is I said, okay, if I'm able to generate this number on a monthly basis, that number would then outperform however much money and some as it relates to my nine to five job and say, okay, I'm now better off quitting my job if I can consistently generate X number. So, Robert, I know I kind of got into a lot of the weeds here, but I want to hear your perspective. I mean, I'm sure it's someone who's now on TikTok and Instagram absolutely crushing it and people are saying, hey, this is a cool thing. I want to do this. I want to do that. What are some pitfalls you're sort of warning people about? What's your take on this specific insight? We could spend all night, but I'll try to condense it down. So yeah,

this is one of my biggest struggles that I see on Instagram and TikTok from a lot of the gurus. And Cody does a good job, Cody Sanchez, she does a good job with this. But the other part of it is, you know, she's in the business to make money and she's not talking about, first, let's talk about passive income. It's not passive. If you own a laundromat, I don't care how much you automate it. There's going to be someone that forgets to lock the door at night. There's going to be a breakdown.

There's going to be a flood. There's going to be issues with needing more change. and you might have a manager in place, but they're not always going to be able to do the things you need them to do. So almost none of these businesses, boring or otherwise, are truly passive. So I think that's one of the misnomer's that are kind of tossed around the markets all the time from people. But some of the other things, too, that are really tough is people don't realize when you go out on your own and you're a solopreneur or you're starting these side hustles. If you don't have a lot of savings and you don't have that stability, you're not going to last.

you're going to give up a nine to five that might be pretty good. And then you're going to start over and in three, four months when you go months without a paycheck, and you're going to really struggle with that. So one of the things that I try to get people to understand is keep the nine to five job for the stability for now. Get yourself to a base in your investing. Let's call it $50 or $100,000 in your index fund account through your Roth IRA. and then once you get to a base where you have a few months worth of everything, then you can start to think about, okay, now I'm ready to start a side hustle. Then you start the side hustle, one or two side hustles, depending on what your skill set is, you start building up some more income.

And then when you have your number, let's say your number every month is your cost of living is $4,000 a month. Well, once your side hustles exceed your nine to five and it's consistent, then you can start thinking about getting rid of the nine to five. Because at the end of the day, so many people that don't have a budget, and they don't look at this at a macro level. Because every day I see some fake guru on Instagram or TikTok saying, quit your nine to five, start this side hustle,

make $50,000 a week doing 10 minutes of work. Guys, if it were that easy, everyone would be rich. At the end of the day, you have to have protection. You have to have a nest egg as you're building your side hustles, because you don't want to be in a situation where you can't pay your car payment, you can't pay your rent, and you're really, really struggling, all because you listen to a guru that told you the highlights and not the reality. So just keep that in mind, guys. I like that. Told you the highlights, but not the reality. That's a quote right there, Robert.

There you go. Well, let's get it going because it's important for everyone listening. I've been there. I've made millions. I've lost millions. And trust me, I've built projects that were $10 million that everyone were salivating at the mouth of how much money they were going to make and two years goes by and another $500,000 had to be put in to keep it open, keep it alive while you're trying to figure out how to make it profitable. So everyone wants to talk about the rainbows and unicorns. And that's why I enjoy our talks, Austin, because we give people the real deal. We give them the good, the bad, and the ugly. So they can make really good choices on this stuff. 100%. So let's hit him with a recap, Robert.

one owning a primary home as your first real estate, maybe not the best idea, right? Consider a duplex, a triplex or a quadplex. The second thing is, you know, using credit cards and debt in general is bad. Well, not always, right? It's all about how much do that debt cost you? And can you make more money with that money? Yeah. Then you're paying on interest in that debt, right? And the third one here is don't be too fast to quit that stable, awesome nine to five job just to pursue some side hustle that an online guru taught you because you paid $900 for their course. Yeah, that's it. So yeah, I mean, I'm just excited that we can do this every week and really just put a lot of great information out for people and utilize my experience and your knowledge to give people some guidance so they can

really just get out there and do the right things and make really good financial decisions. You know, guys, that's why we named it rich habits because we want to teach you the right habits that are tried and true for decades so you guys can, move on towards financial security. Absolutely. If you have enjoyed this episode of the Rich Habits podcast, please leave us a review. And whenever you leave that review, perhaps leave a comment, let us know what you liked, what you didn't like.

This podcast is your podcast. And to that point, we're also experimenting with the idea of taking questions from you all. So essentially what we would do is we'd have some sort of email address or phone number. You guys give us maybe three or four questions and we'd answer them live here on the podcast. So if you want that, also let us know via D.E. or rating review or anything in between, let us know. Everyone, thanks so much for hanging out.

Be sure to come back next Monday because we're going to be talking all about how to prepare yourself for a potential recession, specifically as it relates to your career, your investments, and your money. Figuring out the budget, making sure that your resume polished up as well as, you know, stock market. It's kind of crazy right now. What should you be looking at? What should you not be looking at?

All that fun stuff. Yes, thanks, guys, for stopping by. We really appreciate it, and we'll see you next Monday.