Rich Habits Podcast - Q&A: Assuming a 2.5% Mortgage, Stock Lending, & Buying vs Leasing

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Starting point is 00:00:43 Hey, everyone, and welcome back to the Rich Habits Podcast question and answer edition. These are our Thursday episodes where Robert and I answer your questions. You can ask us questions via email at richhabitspodcast at gmail.com or maybe in the Instagram DMs at Rich Habits Podcast. or you can ask us questions inside of the Rich Habits Network. We have seven incredible questions to answer in this episode. And as you guys know, Robert and I answered these questions as if we were in your own shoes. Off the dome, just real time, quick reactions.

Starting point is 00:01:16 Like, we don't really kind of script any of this. It's just us sharing our thoughts in real time as to what we would do if we were in your predicament. I don't know how long we've been doing the Q&A episodes. I think about a year and a half of how many people reach out to me and say that the Q&A episodes, even if it's not their question or their information, it's just so life-changing for them and they love these episodes. So it's so fun to make them because we're taking it right from our audience, all of you, the followers, and trying to help each and every one of you through your journey because, as Austin always says, personal finances, personal. So I love filming these episodes.

Starting point is 00:01:54 Now before we jump into our first question, got to give a major shout out to public.com. As you all know, they are the title sponsor of the Rich Habits podcast, and we are big believers in their platform. If you are a serious investor, you need to be using public.com. Because on public, you can invest in everything, stocks, options, bonds, and cryptocurrency. They even offer some of the highest yields in the industry with their bond account that offers a 6% or higher yield, and I think right now, Robert, it pays 7.1%. And that 7.1% remains locked in, even if the Fed continues to cut interest rates. We didn't see a rate cut from the Fed last week, but who knows what's around the corner. Now, what sets public apart is how they give you the tools you need to make informed investment decisions.

Starting point is 00:02:38 They have a built-in AI tool called Alpha that tells you why an asset in your portfolio is moving up, down, left, or right, or in circles, so you understand what's actually driving your portfolio's performance every single day. Public is a FINRA registered SIPC-insured U.S.-based company with a customer support team that actually cares. So bottom line, your investments deserve a platform that takes them as seriously as you do. Fund your account in five minutes or less at public.com front slash rich habits and get up to $10,000 when you transfer your old portfolio. That's public.com front slash rich habits paid for by public investing full disclosures in the podcast description. So our first question comes from Michael G. And this is actually from inside the rich habits network.

Starting point is 00:03:26 We saw this question asked last night and we're like, dude, we got to answer this on the show. So Michael says, hello, Rich Habits Network. I'm seeking some advice as to what to do with an opportunity. I'm currently renting at $4,300 a month. My wife and I have three kids and we want to buy a property in San Diego, California for about $1.25 million. Now here's the kicker. The seller is willing to offer an assumable loan at a 2.5 interest rate. I just have to cash him out for the difference.

Starting point is 00:03:56 and that difference is half a million dollars with 750,000 remaining on the loan. Now here's my dilemma. How do I cash them out? My monthly payment would be over $7,700. Unfortunately, I make only $10,000 a month, and my wife is a stay-at-home mom taking care of our three children. She is looking to do some part-time work, though, as a physical therapist. We have about $300,000 invested, $330,000 in a high-yield savings account that we're waiting

Starting point is 00:04:21 to use as a down payment on our dream home, and half a million dollars in timepiece. investments, mostly for buying and selling purposes. I also do a little bit of real estate on the side as I'm active duty military. I'd appreciate all your input. First off, Michael, thank you so much for your service. Man, what a crazy question this is, Robert. So just to like give everyone the quick one, two, three here, Michael has the opportunity to assume a loan, a mortgage at a 2.5% interest rate from someone here that's selling their house for 1.25 million. But the thing is, if you're the seller in that situation and you let someone else assume your loan, the only way that makes sense is if that person can sort of pay you back on all the equity that you've accumulated in your house

Starting point is 00:05:07 while you've lived there. So that's where Michael's trying to figure this out. He's like, I got to pay this guy half a million dollars to have the right to assume his loan of the other $750,000. And that half a million dollars in this situation is $4,400 a month to cash him out and then to borrow another $750 on top of that. The numbers don't really seem to be working out here. It seems like Michael would be paying $7,000, $9,000 a month in his monthly mortgage cost, making only $10,000, which is a recipe for disaster. But Robert, I wanted to include this question because this idea that we've been talking about a little bit of like, assumable mortgages. Can you walk the audience through what an assumable mortgage is? Why some people are trying to finagle it and figure out

Starting point is 00:05:50 how to use them right now and maybe share a different scenario for Michael to consider as it relates to his specific situation. Yeah, this is a tough one because I understand Michael's objective, but the numbers just don't add up. If Michael had this situation presented to him and he had a $3, $4 million net worth and could just pop that $500K down to get the buyer whole and assume the mortgage with that, you know, really low interest rate, then it makes sense. But, let's back up a second. Michael doesn't have three, four million dollars in that worth. Single income family. So this is a recipe, like you said, for disaster to be house broke and be stuck. So I don't like this situation at all. What I do love about it for our audience, though, is if you find

Starting point is 00:06:38 yourself in a situation where you can do this assumable mortgage on a property that you can't afford and the numbers make sense for you, then I think it's a great opportunity. The numbers just don't work on this one. And what is an assumable mortgage? You're going to agree to terms with the owner. You're going to then take over the property, take over the payments, take over living in the property or doing whatever you want with it, but you're just not going to move the deed into your name just yet because of the fact that you are assuming a mortgage that they're still on. Now, sometimes the banks will allow you to assume it and migrate it over to your name, which then you can transfer the deed, but you have to be careful because you want to make sure there's not a due

Starting point is 00:07:23 on sale clause because a lot of people get this wrong. They think they're assuming a house, they're assuming a mortgage, and then all of a sudden the bank calls in a due on sale clause, and you have to buy it out completely and cash out the bank on that mortgage. So be very careful out there. I love the idea of transferable mortgages. I love owner financing. All of that helps people be able to make financial moves that are beneficial to them and save them a lot of money. But in this instance, I believe Michael is wrong for doing this. It's too much house, too much debt to income ratio disparity, not in their favor. And I think it's a bad idea. So what perspective can you add from Michael, right? He's making 10K a month. At the moment, he's paying $4,300 in rent. That's definitely

Starting point is 00:08:11 above our threshold, right? I would argue that alone is being house poor. What additional perspective or advice could you give him onto how to just better his situation here when it comes to wanting to buy a house? He's got $330,000 in a savings account. So, you know, how does he use that money in the most cost-effective manner to set him and his family up for a nice place to live? Yeah, you either have an income problem or a spending problem. And in this instance, you have a spending problem. So I would look at it that having $300,000 set aside is an awesome situation. I would look to say, okay, I've got $200, $250,000 to work with here, but I think they're looking at too much house. I just believe that if you're paying $4,300 now, so let's assume that's a 43% of their

Starting point is 00:08:59 income, their debt to income is already high and above what banks want to see. So I would look at it that you need to find a way to get to that $3,500 a month, including of your down payment, to put you in a situation where you wouldn't be considered house broke. And you can buy quite a nice house in most areas for $3,500 a month. Maybe not San Diego, but outside of San Diego, they could certainly find something that is more cost effective to work within their budget.

Starting point is 00:09:33 Otherwise, Michael's got to go out and find more income. That could be a side hustle that could be investing $100,000 of the $300,000 into a business that's already operational and making profits. But you can't spend $4,300 on a payment if you're only making $10,000 and expect to continue growing your net worth because that's just the payment at $4,300 right now. That doesn't include everything else if you switch this payment from a rental situation to a home ownership. because on top of that, you're going to have upkeep, you're going to have HOA, you're going to have all of these lawn care, all of these other expenses. So Michael's done a great job when it comes to putting away money and saving money and investing money, but it's just when you get into that housebroke situation, it's a hard one to get out of. 100% agree. I'm on Zillow right now looking at San Diego homes. I found one here. It is four bedrooms, three bathrooms, so enough for you and your family. it's listed at $730,000.

Starting point is 00:10:34 So way below that $1.25 million sort of budget you gave yourself. Into Robert's point, yeah, if you put $200,000, $300,000 down on something like this, you're only borrowing now $400,000, which a mortgage on $400,000 is much more reasonable than a mortgage on a million dollars. So I totally agree, right? Find a way to put enough money down on a property that's going to allow you some breathing room, some margin in your monthly budget. And this isn't just for Michael's situation.

Starting point is 00:11:02 This is for everybody. If you're trying to buy a home or rent an apartment or whatever that housing expense looks like for you, being house broke, house poor is unfortunately very common. Everyone's eyeballs get so big and excited. Oh, I'm going to go buy this beautiful home, my monthly payment. Oh, I can figure it out. It'll be fine. And then you do the math that it now makes up 40, 50, 60 percent of your take home pay. As a quick general rule, you want your monthly housing.

Starting point is 00:11:30 expense to be anywhere between 25 and 35, maybe 38% of your take home pay. If you can get it down to 25, I would consider myself very lucky, but 30, 35, sometimes up to about 40% is where a lot of people land. But if it's 50% or more, I mean, you really are in a bad situation. So Michael, thanks again for your question inside the Rich Habits Network. We hope we were able to add some color here for you. It just doesn't seem like the $1.25 million house at a two and a half percent interest rate, assumable mortgage is in your cards for the future, but do not get discouraged. Just, again, I'm on Zillow here for five minutes. I found some really good opportunities for you, man. So you guys are going to figure this out. And keep in mind for all of you out there thinking about getting that first

Starting point is 00:12:14 home, you shouldn't be looking at buying a home based on what they'll lend you. You should be looking at buying a home based on what you can afford. There is a big, big difference there. There is a big difference there and so many people don't realize that they're like, oh, even when buying a car, people like, oh, you know, I can buy up to a $70,000 car. That doesn't mean you should do it. Having that understanding of the difference is so key in people not being house broke. And that's why so many people in so many households making six figures are living beyond their means and one, two paychecks away from being, you know, homeless. So just keep that in mind. I hope this helps because I know it's not the news Michael's looking for, but it's just the truth. The numbers aren't mathing, and we need to

Starting point is 00:12:59 fix that. So our next question comes from Justin S. Justin says, hey guys, I love the show. I'm 47 years old with a corporate job. I have 45,000 in my emergency fund, 75,000 in a brokerage account, 150,000 in my Roth IRA, and 330,000 in a traditional 401k that's all invested correctly into the index funds and ETFs you talk about. Every year, I max out my Roth and my 401K. I have no debt except my mortgage. In the next few years, I really want to move away from my corporate job and work in a field that means more to me, which will likely result in making less money and just having less to invest and save in general. I feel like I might be having too much sitting in my tax-deferred bucket.

Starting point is 00:13:44 What are your thoughts on this hopeful lifestyle for myself in the future and what investing and saving looks like during that period of time? So I'll take a first stab at this. Justin, just to like make sure we're all on the same page here. You have about $530,000 invested. You're 47 years old. And if you only continue to max out your Roth IRA at $583 a month or $7,000 a year, from 47 to 65, your $535,000, assuming an 8.5% annual return will turn into about $2.7 million in retirement. So, like, you could, again, just do the bare minimum of maxing out the Roth IRA and still have nearly $3 million ready for you in retirement.

Starting point is 00:14:31 Now, of course, some of this money is going to be taxed because it's in that 401K. Other money because it's in the Roth IRA will not be. So there's kind of some things to consider there. But regardless of the tax situation, $2.7 million is a lot of money. So I want you to just like take a deep breath and realize you've done a great job for your age and you're going to retire with millions of dollars. Now, how to approach kind of taking a step back from an earnings perspective, taking a step back from a savings and investing, and really beginning to live a life full of purpose and meaning. The first thing I'd encourage you to do is to listen to Monday's episode of the podcast.

Starting point is 00:15:06 Robert and I, in that episode, I think, did a good job of helping people navigate what it means to be rich and how people spend as their identity or they spend because they think it's who they are or what's going on there. So, like, just take a listen to that episode. I think it can really help you from a mindset perspective as to you. to like maybe what this new chapter of your life turns into. But as I enter this new chapter of my life, I would focus on two or three major things. The first one is stay out of that high interest debt. No matter what you're doing when it comes to your new meaningful life,

Starting point is 00:15:35 make sure it pays you enough where you can still make ends meet on a monthly basis, right? You're not in the negative. Your bare minimum spending of like, let's call it, four, five, six thousand dollars a month, whatever that looks like for you, you're making more than that so you don't have to go backwards and go into debt. That's the biggest thing we want to avoid. The second thing is make sure you have enough margin in your budget every month to continue to invest at least to max out the Roth IRA at $7,000 a year. $583 a month is all we're looking for there. And make sure you're making enough money in this new purpose-driven chapter of your life where you're not dipping into your retirement accounts early draining them to help supplement your lifestyle, considering you're making less money now

Starting point is 00:16:18 doing this new thing. So those are my just like quick ideas. But Robert, what's your perspective on Justin's situation? Yeah, I think it's a great situation and I think you killed the response. The only thing I would like to add is, you know, when you look at the traditional, you know, we call it the bridge account, the 75,000 he's got in the bridge account. I think he should be building that up more along the way. Because like he said, tax deferred, he's afraid of having, you know, too much tax deferred. and we don't want to be in a situation in a few years when he makes this migration from the corporate world into, let's say, consulting, owning his own business or doing whatever. We don't want to see a situation where he can't get to the funds needed during that migration, that transition. So I'd like to see if a few years is three or four or five years, see more going into the bridge account like we always talk about.

Starting point is 00:17:10 So then that way there are funds that are accessible without penalty. and easy to get to in case he has to go backwards in order to go forwards. I love the situation, 47 years old, plenty of time horizon to make a lot of money. But like you said, Austin, I don't want to see him go backwards to go forwards too much, because then that's where it's that proverbial problem where you're on the hamster wheel and you can't get off. So I just really love your answer, but want to make sure. And I think he's on to what to do and how to do it and just needs that little netherly.

Starting point is 00:17:45 nudge to make sure that there's enough building in the brokerage account that he can get to during the transition phase. And don't forget, the most important thing here to consider, in my opinion, is that you don't want to stop investing, right? Just because you are trying to live now this purpose-driven chapter of your life doesn't mean that you're going to go live in poverty or like go live like a monk. We want you to still do something that earns you money so much so that you can continue to invest, max out that Roth IRA very specifically, and just continue to rock and roll that way. If you really want to just stop investing, I'm sure you have enough here to somehow end up with a decent chunk in retirement, but I wouldn't want to bet on that.

Starting point is 00:18:30 I would really want to continue to invest if I were in your shoes. Definitely. I agree totally. So our next question comes from MG. M.G says, hi, Austin and Robert. What is your opinion on stock lending. Freck is offering a new feature that I'd like to understand better with your help. With the current market volatility, it seems to be beneficial to receive extra dividends for stock lending, but I'm not sure about the tax implications or performance toward long-term gains. What are your thoughts, and would you lend your stocks? This is a really great question, Robert. Do you lend your stocks right now? I don't. I have never done lending on my stocks. I do stake my crypto, and that has done very well for me. I probably make, you know, an extra $9 to $1,100 a month for that.

Starting point is 00:19:13 You know, I mean, I guess the way to look at it is stock lending does offer kind of a low risk situation to allow people to earn extra income because you already own the stock and you're just lending it out into this batched pool to be able to gain income from it. And you still retain the ownership. I've just never done it. I've never studied it enough to know if there's advantages or disadvantages. You know, I just know that you get the returns still if the stock goes up and you get some extra income, but I've never done it myself. What about you, Austin?

Starting point is 00:19:46 No, I've not done stock lending. And just so we're on the same page, right? Stock lending is, let's say I have 100 shares of Tesla stock or whatever stock really that exists out there. And someone wants to borrow my shares of stock for their own benefit to perhaps hedge their portfolio or maybe they want to go be a short seller, like something that they, want to do sophisticated with their own money in their portfolio. And so that involves borrowing shares of someone else's stock. It's completely normal. It actually happens all the time. And if you use, I think it's Robin Hood, Fidelity, Schwab, E-Trade, like, you're probably automatically enrolled in stock lending. It's something you, you know, might be doing right now that you're not even aware of.

Starting point is 00:20:27 And what happens here, again, as someone borrows your stock from you, they give it back, of course, it's completely fine. But in return, they pay you a fee. So you earn a little bit of a fee. So you earn a little bit of a fee here for lending out your stock. And that's sort of what M.G here mentioned when it comes to the extra dividends for stock lending. That fee that you earn from a tax perspective is actually taxed as ordinary income because that fee is compensation for the use of your property. Right. So that's kind of how you should think about that. You own the stock. It's your property. They're going to borrow it. Hey, I'm going to borrow this for two weeks. Here's a couple hundred bucks. I'll be back. I'll give it back in a little bit of time here. So I don't do this. Probably something I should look further

Starting point is 00:21:07 into to be honest with you, but it's not something that is, I think this kind of comes back to this idea, Robert, that a lot of people feel like they can outsmart the system. Oh, let me do some stock lending. Let me do some infinite banking. Let me do like all these crazy, cool terms and ideas. When in actuality, the most important thing you can be doing is investing a couple hundred dollars a month toward the S&P 500 for the next 40 years. Like, that's how you get rich. You don't get rich by, you know, stock lending or covered calls or infinite banking or whatever else, you know, these crazy schemes and ideas are that people can come up with. Not saying it's a bad thing to do stock lending or covered calls, infinite banking sucks. Don't do that. But what I'm saying is the best way

Starting point is 00:21:47 to build wealth is to invest consistently over a long period of time. Yeah, I think this really lends to, and we see it every single day, where people like you said, they want to outsmart the system. To me, it feels like the shiny ball syndrome, where instead of just learning how to make more money, invest well, and increase their level of education, they're trying every hot new thing that's out in the market of how to make extra money. And I'm all about that. I'm always trying to find ways to accelerate the growth of my money. But I don't think everyone needs to go that route, especially in the beginning. If you don't have a couple million dollars invested right now and making you money while you sleep, I don't think you should be looking at every little new trick in the trade

Starting point is 00:22:36 to try and make extra money, you should focus on getting really good at understanding the markets and where to invest in having diversity. 100%. And I'm looking a little bit further right now into stock lending as well. Here's something to consider. If you are doing stock lending and you do not have ownership of that stock when that company pays a dividend, you do not receive the dividend. The person who's borrowing the stock receives the dividend. So if you're a dividend investor, if you're trying to look for income. Like just there's a lot of little things that you guys need to keep in mind when it comes to some of these strategies that might just kind of go over your head in the beginning,

Starting point is 00:23:12 which is of course why we love the Rich Abbots podcast because Robert and I love sharing them with you and digging deep into those situations. But at the end of the day, the most important thing to do is not stock lending, not of all these crazy things. It's to invest consistently over a long period of time. That's how you build wealth. Yep. One hundred percent. So our next question comes from Ina V via Instagram DMs. Enna says, hi Austin and Robert. I'm a big fan of your podcast and I've made some lifestyle changes based on your advice. I'm in my mid-40s with three children and I really wish this podcast was around when I was in my 20s. My parents immigrated to the U.S. and weren't able to provide me with financial guidance when I needed it,

Starting point is 00:23:48 so I'm still learning and I'm grateful for what you guys do. Now, my oldest son is a high school senior and needs to decide on a college to attend by May 1st. His top choice right now is Indiana University's Kelly School of Business, but attending would require a significant amount of debt. Alternatively, he could go to FSU or Rutgers with very minimal loans. I want to give him solid financial advice. So do you think the potential debt is worth the prestige of the school? Any advice would be appreciated. Thank you, I know. I don't want anyone from Indiana. We love B-town, right? I love Indiana. Y'all having fun over there to take this in a mean way, but I don't think that the prestige you're talking about. I just don't think Indiana is like a crazy

Starting point is 00:24:32 prestigious school that you should pay all this money to go into debt to attend right if we're thinking about prestigious schools i think like ivy league schools right things of that nature not like indiana public university so my short answer is no if they have to go into significant debt which is your words take on significant debt please do not put them in that situation the worst thing you can do is to encourage your child in my humble opinion to go into 60 80 hundred 200 thousand dollars of debt to go get a bachelor's degree in finance or a bachelor's degree in accounting and now you graduate with a quarter million dollars of debt go to the rutgers go to the fs u go to any other public university at a much cheaper rate and i guarantee you there's going to be a 90% overlay of

Starting point is 00:25:17 whatever the outcome of your child will be like they're going to make the same friends they're going to have the same network they're going to make you know likely the same type of career opportunities are going to come from it i mean it's really really rare to see a public university. And like, for example, I went to the University of Tennessee. If I went to the University of Indiana, I'd argue that I would have got a very similar job out of college. I would have had very similar grades, very similar outcomes. It's like, it's just the exact same thing. It's just the school and the debt is what you have to consider here. So I would say, go save the money, go get the degree somewhere else. But Robert, what's your perspective? Yeah, I'm going to go even

Starting point is 00:25:51 wider than that. If this question were asked 20 years ago, maybe the extra debt would be worth it. But moving to where we are in society now, AI, humanoid robotics, everything is changing so drastically and so quickly, we don't even know in five or six years when the sun graduates if that degree is going to be meaningful at all. So in my opinion, moving forward with college, if you feel college is good and needed if it's an engineering degree or a law degree or something like that, then I say go for it, but I agree 100% with Austin. You don't need an Ivy League degree. A degree is a degree in most instances,

Starting point is 00:26:37 and they're becoming less and less valuable over time because of where the world is moving. You hear all the time people saying, I would rather have someone that's tenacious and trains in our systems than has a college degree from 10 years ago. So just keep that in mind. I don't think a prestigious degree means as much as it used to, to and I don't think that extra debt makes sense, especially because the world is moving at such

Starting point is 00:27:03 a crazy pace that we don't even know if that degree, whatever it may be, will be worth it in five or six years when he's ready to go get a job in that field. So keep that in mind, if you decide to go the route of the expensive school, make sure it's a degree that you're looking at the future of, not what that degree has meant now, because you need to make sure that that field is not going to be overcome due to technology, AI, and humanoid robotics. And something else to do here. I'm doing some quick research on GROC. I asked it, what is the average salary of a recent graduate from the Kelly School of Business from Indiana, as well as Florida State University's College of Business and Rutgers Business School?

Starting point is 00:27:45 You're looking at about $78,000 a year from Indiana, the same $78,000, $79,000 a year from Rutgers, and about $65,000 to $70,000 a year coming from FSU. but I'd argue that that is because of maybe where they are, right, Florida has a lower cost of living, so lower salary. But yeah, I mean, if you're going to a college and you're going into debt to go to that college, you want to make sure that you're doing it for a good reason. And it seems like there are other alternatives, like a Rutgers, like an FSU, like literally anywhere else, that's also going to offer this child a wonderful college experience with a ton of knowledge and business acumen and opportunities for a much cheaper price. because again, do not go into significant debt to get a business degree just to go make $70,000, $80,000 a year.

Starting point is 00:28:32 Not a good idea. I totally agree. And before we get into our next question, listen up, folks. Time could be running out to lock in a 6% or higher yield at public.com. You can lock in a 6% or higher yield with a bond account. But remember, your yield isn't locked in until the time of purchase so you might want to act fast. lock in a 6% or higher yield with a diversified portfolio of high yield and investment grade corporate bonds only at public.com forward slash rich habits. And what are these at right now, Austin? I think you said 7.1% or something crazy. Yeah, 7.1% is what these bond accounts are paying right now, which is absolutely wild. Love it, love it. Yes. Everyone needs to definitely keep an eye on the bonds right now, especially while we're in these uncertain times with all this volatility.

Starting point is 00:29:23 I think it's a great place to hedge against some of the volatility. So our next question comes from AG inside of the Rich Habits Network. AG says, I'm looking to buy a multi-family property and want to understand the specific benefits of using Fannie Mae's three and a half percent down option compared to a traditional mortgage. I know I can put three and a half percent down, but couldn't I also do that with a conventional loan if I'm willing to pay PMI? I'm curious if the Fannie Mae route offers lower interest rates or any other.

Starting point is 00:29:53 the key advantages. Overall, I'd just like to know the main pros and cons of choosing a Fannie Mae backed loan over a standard mortgage. Robert, you're the real estate guy, so lay out the pros and cons of Fannie Mae versus a traditional mortgage. So to look at why I really like the Fannie Mae 5% down mortgage AG, it's 5% and not 3.5% is the fact that you can borrow up to $1.4 million and do up to four doors. So think duplex, triplex, or quadplex. remember, I'm speaking to a broader audience of people that are just getting started in real estate. And a couple of the reasons I love this mortgage program is because, A, you might not qualify for what you're looking to buy because of your income, but with these Fannie Mae 5%

Starting point is 00:30:41 down mortgages, they allow you to use the proposed rental income, what they believe it will rent for for the other units you're not living in to help you qualify for the mortgage. so that's one of them. And also having this reduced down payment, I think is a godsend because, again, we're always talking about it's not what you make, it's what you keep. And I don't like seeing people tie up a ton of money

Starting point is 00:31:05 into a mortgage or into a property, especially if it's one of their first properties. So when you think about like a three and a half percent down mortgage, you could do that, but you have to add PMI in so you end up being at a higher payment amount. So just, Keep that in mind, but I don't know of any cons of the Fannie Mae 5% down mortgage, but also one of the other pros is it's easier to get approved than many other loan programs.

Starting point is 00:31:34 That's why I always talk about it for those of you just getting started. I think you did a great job explaining that, Robert. I hope that someone out there has tried to use this Fannie Mae 5% down multifamily loan to go buy a duplex, a triplex or a quadplex after listening to this. podcast and is now house hacking and making the most of it. I think that is just like the coolest thing ever. And maybe I should do it. Robert, who knows? Yeah, I agree. I mean, if you think about it, someone like yourself, 5% down up to 1.375 million, I believe it is. But the only problem is for someone they have to realize to use this program, you have to live in one of the units for one year.

Starting point is 00:32:14 But that's like that with almost any of these programs because they're trying to help people get into real estate ownership. That's why I love these programs for beginners and people that are just now looking to get started. And I think one of the super hacks would be is if you're thinking about getting married, but you're a couple years out and you're not living together, each of you go buy one, buy that quadplex, get the loan, live in the unit, and then when you get married and you're looked at it as one unit, then you have possibly eight doors, and then you rent out the two doors you were living into, you buy the forever home, then those eight doors are paying for the forever home. So it's a really, really good strategy if you're forward looking and really

Starting point is 00:32:58 preparing in advance for your future. I think that's a great strategy. And God, could you imagine having eight doors of like rental property income? I mean, that's just, that'd be so cool. So our next question comes from Sophie J. from the Instagram DMs. Sophie says, I got a question for the pod. I'm 27 and in my final year of grad school. I want to save up and buy a car when I graduate. I currently have $17,000 in a Roth IRA, $10,000 in a diversified investment account on public.com, $6,000 in an emergency fund in my high-yield savings,

Starting point is 00:33:30 and with my income in side hustles, I can save about $2,000 a month. Previously, I was contributing monthly to my Roth IRA, but now that I have a purchase goal, I'm wondering if I should adjust my approach this year. Where should I put the $2,000 per month I plan to put toward buying a car? Should I still contribute to my Roth IRA this year? I haven't decided exactly how much I want to spend on the car, but I'm thinking about $24,000.

Starting point is 00:33:55 Really good question, Sophie. Let me just answer this first and foremost. Do not stop investing in your Roth IRA. Do not stop. You are 27. Every dollar that you contribute and invest in your Roth IRA will turn into $10, $20, $30, $40 in retirement over the next 30, 35 years. Like, it is so important to put as much money as possible into these retirement accounts as

Starting point is 00:34:19 early and young as possible. So to answer your question, how would you approach this? If you can save about $2,000 a month, I would carve out $583 of that to make sure I'm still maxing out my Roth IRA, right, contributing and investing everything along that, which leaves you with about $1,400 every month to now put aside in. save for the car. $1,400 over the course of 12 months is about $17,000. Over the course of 18 months is about $25,000. So let's say over the next 12 to 18 months, you're saving up some cash to go buy this cool new car. Congratulations on not going into 9, 10, 12, 15% interest on buying something like

Starting point is 00:35:01 this. I think it's a great idea to pay cash considering how high the interest rates are right now in used vehicles. And you're doing it in a way that doesn't rob you of your future. You're still investing. You're still doing everything right while also saving up for a big purchase. So kudos to you, Sophie. We're rooting for you. And just the biggest thing to remember here is to not stop investing. But I'm going to take a different approach. I would not pay cash for a car. I would lease a car. I love your approach of getting as much money as early as possible invested. So I'd have to like think through the math. But in my opinion, I would find an affordable lease. There are all kinds of really good lease deals right now for three, four hundred, five hundred a month. And then I would take the

Starting point is 00:35:43 24,000 you're looking to put into that depreciating asset. I would keep investing as much as possible. And for now, I would look to lease a car. I know there's a payment versus paying cash, but I feel like it's the better move because A, you're not going to have to pay for upkeep on the car. B, for $24,000. I don't know what you're looking to buy, but I just think it's a better move to go get a new car and lease it for a low payment and then see getting as much money as vested as possible, I think is the better play. That's just me. I don't like to have to worry about cars breaking down and upkeep and everything else.

Starting point is 00:36:22 But my general rule when it comes to cars is if you're going to buy it and drive it to the wheels fall off, go ahead and buy it. But if you're going to keep it for two, three years and you want something that you can afford but that is going to stay running and be in good shape, lease because you can do that for zero money out of pocket. That's my takeaway, but I like what you said, Austin, and that is make sure you keep investing. Don't ever stop investing so you can go buy a car. That is a terrible, terrible idea. Yeah, I'm going to double down on my answer. I think, Sophie, it'd be so foolish for you to go lease a new car. You're 27. You don't need to lease a new car.

Starting point is 00:37:03 You should absolutely buy a used car for 18, 20, 25,000 interest rates right now on used vehicles or anywhere between 9 and 14%. So buying cash is smart because you will not have to pay high interest debt on this. And then now you're also completely getting rid of a car payment. The average lease payment right now in America is $683 a month. So by buying this car in cash, you're now getting rid of a $700 a month payment. And then you pay this for the next. next three years and you still don't have a vehicle at the end of it where at least when you go buy a car you can have this car for the next 10 however many years you want to keep it. I don't think you should lease it at all. I don't think you should be driving a new car at 27. I think you're doing the

Starting point is 00:37:45 right thing by buying it used and not going into high interest debt to do it. There you go. Two sides of the fence always works. So our last question comes from MV via Instagram DMs. MV says, Hi, Austin and Robert. I want to take a moment to express my sincere gratitude for the valuable information you've been sharing on your podcast. Your episode on structuring rental property ownership was especially informative. It's inspired me to take action and set up an LLC for my rental property. However, I'm now facing a question about insurance coverage for this new arrangement. I was wondering if you can provide some guidance on what types of insurance are essential for a rental property owned under an LLC. Specifically, what are the must-have insurance

Starting point is 00:38:26 policies for protecting both the property and the LLC. Are there any special considerations or additional coverages that are needed when the property is owned by an LLC rather than a person? And is umbrella insurance policy a good idea? And if so, is it possible to have a single policy for my primary home and a rental property? Any insights you guys can share on this topic would be appreciated. Thank you again for your dedication to educating your listeners and for the wealth of knowledge you provide through your podcast. Robert, what are the insurance policies that you use for your rental properties. Well, let's back up first and really talk about why we want an LLC for our rental properties.

Starting point is 00:39:03 It's all about reducing liability to put yourself out of harm's way. We call it layering. You want to have as many layers as you can in your world of building wealth from someone that's trying to take your money or sue you to the actual property ownership. So that is why LLCs are important, even if you're starting out. Now, what does that do to the insurance? It makes everything a little more difficult in the beginning, but once you get the hang of it and you start doing this more and more, it gets really easy.

Starting point is 00:39:34 Number one, you're going to need a commercial property insurance policy. That's really important to understand. And what this is, is it just is more gauge towards companies and LLC's owning the property. But the key here is you want to have the LLC and this commercial insurance because it gives you more protection against lives. both from an inside and an outside attack. Remember, somebody from UPS could slip off your balcony or your patio or your stairs and try to sue you. And when they come after you personally, it is harder to have that separation to make sure you're safe. Number two on this, general liability.

Starting point is 00:40:15 Let's say it's a 15 unit property. You're probably going to want to add general liability just to give you a little more blanketed coverage. And then thirdly, like you mentioned, the umbrella policy. I like having an umbrella policy in case something tragic happens because umbrella policies are pretty affordable. And it gives you that extra layer, that umbrella over everything else to make sure you're okay in the situation. So in a perfect world, you'd have every property in an LLC. Then a holding company would hold all of the assets of each LLC. and then a revocable trust would sit on top, and that would own all of the assets in the holding

Starting point is 00:40:58 company, which holds all the assets of the LLCs. That's the perfect world. But getting started, do the LLC, do the commercial insurance policy, have the umbrella policy, and you'll be in great shape. So are there any specific or special coverages or considerations that you like to add to your policies? I mean, is there anything to add there that's like special? or specific that you're like, oh yeah, every time I get a new insurance policy, I always make sure it has this specific coverage in it. Yeah, I would say not really, but it is location dependent.

Starting point is 00:41:30 When you think about Florida and you think about flood zones and you think about heavy storm areas near the coast, a lot of people get the minimum because insurance is so expensive these days and then they get wrecked financially because they don't have flood insurance on top of homeowners insurance or they don't have the right type of insurance for an area that this property is in. But generally, you're going to be able to find an insurance company that's regionally or nationally that is going to give you the right coverage. Just make sure you understand what you're signing up for to make sure you have the right coverage because the last thing you want to do is pay on a policy for five years and then you have a flood and realize you're not properly

Starting point is 00:42:13 covered. And that is why insurance is so tough for the average person because they don't understand the language. It's like reading a legal document for a reason because the insurance companies love to make billions of dollars a year. So make sure you understand the terms and you have the right coverages for that property. Robert, you had a great job explaining that. I don't think I've got anything to add myself, but I definitely agree, right? Having the right insurance in place location specific is really, really important. Everyone, thank you so much for tuning into this week's episode of the Rich Habits podcast, Question and Answer Edition.

Starting point is 00:42:49 And if you want to do us a favor, you can go to the show notes below and click the link that says vote now, and you can vote for Robert and I to be the Stocktwits financial content creators of the year. We are nominated at the Cash Tag Awards, which is kind of cool. And if you want to vote for us, that'd be great. We'd really appreciate it. And don't forget, also, we've got a seven-day free trial running right now to join the Rich Habits Network. We've had over 80 people join the Rich Habits Network since we started this free trial.

Starting point is 00:43:16 People are loving it. It is so much fun. You guys get to watch some live stream recordings. You get to join us on a weekly live stream. You get to watch some videos, questions answered, all the cool stuff. It's a blast over there. You have nothing to lose. It's literally a seven-day free trial. If you don't like it, you can cancel no hard feelings. It's all good. Just give it a try. And if you like it, stick around and let us know what you think. Yeah, I love the free trial promotion. Just because he gives everyone a full understanding of what all of the members and the Rich Habits Network get every single week. So this free trial is really cool because people can come in, like you said, see the live streams, check out the video coursework, and really get a taste for what's to come.

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Starting point is 00:44:47 and we wish you a great rest of your week.

Rich Habits Podcast - Q&A: Assuming a 2.5% Mortgage, Stock Lending, & Buying vs Leasing

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