Financial Independence in 5 Years w/ Short-Term Rentals

Mindy:
Welcome to the BiggerPockets Money podcast show number 256, Finance Friday edition, where we interview Charlotte from Charlotte and talk about funding, a slow travel early retirement with short term rentals.

Charlotte:
I found FIRE just one year ago. In the couple there’s always the one action taker, that’s me. I’m the person who learns all the things and takes all the steps. But because I’m such an action taker, I think I’ve gotten a little over excited and I’ve made a lot of changes this past year. I think my husband’s head is spinning. And so one of the main questions I have is, now that you have our full picture, am I on the right path?

Mindy:
Hello, hello, hello. My name is Mindy Jensen, and with me today is my explosive growth co-host Scott Trench.

Scott:
All right. Well, happy to be here with my dynamite co-host, Mindy Jensen.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for absolutely everyone, no matter when or where you are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like a real estate or scale your Airbnb business. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I am so excited to bring this episode to our listeners today, because this is the story of a woman who discovered financial independence one year ago and has decided that she is going to retire in four years exactly. And she’s able to do it through real estate investing and short-term rentals. And her story is so repeatable for somebody who is looking for a way to fund their early retirement.

Scott:
This was a fun one. She has a very clear and specific goal that we can back date into with four years from now, good reasons for that, and the time inclination, skillset and ability to advance our Airbnb business. So it was really fun, really clear, and I think hopefully, folks will take some good nuggets from this.

Mindy:
If you’ve been thinking about investing in Airbnbs, this is the greatest episode for you to listen to. Now let’s make my lawyer happy by saying the contents of this podcast are informational in nature, and are not legal or tax advice. And neither Scott, nor I, nor BiggerPockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate.
Charlotte lives in Charlotte and is in the middle of a huge transition. She’s closing her travel business and recently moved to be closer to her daughter’s school. She’d like to retire in four years from now exactly to slow travel with her husband, and she’s wondering if she’s calculating her fine number correctly. She’s also looking for guidance on where to focus, and is she even doing all of this right. Charlotte, welcome to the BiggerPockets Money podcast. First I have to ask you, why four years from now exactly?

Charlotte:
Thank you so much for having me. I am freaking thrilled. Four years from now exactly. My husband’s birthday is next week, and four years from his birthday, he will be old enough to start getting a pension from work. And so it’s not a full pension as it would be in X number of years, but we can start getting a pension.And that is part of our obviously FIRE budget.

Mindy:
Okay. I have a really quick comment about the pensions because I am not super knowledgeable, but in two weeks from now, we are having Grumpus Maximus on episode 259 and he is a pension master.

Charlotte:
Yes.

Mindy:
so listen to his episode. I mean, you have four years, but listen to it before you make the decision on when to take the pension and how to take it. He had some really great advice for how to look at your different options depending on what kind of pension it is.

Charlotte:
Okay, great. Thank you.

Mindy:
Yeah, that’s a really great episode.

Scott:
Well, and before we get into learning more about your background, let’s dive into that pension for a moment here. What are you expecting? What does your husband do? What are the details around that?

Charlotte:
He is the IT director for a public health authority in the county just next to us. He’s been there for 20 years next year. He’s slow and steady, steady Eddie. He’s just happy doing the same thing. And so as part of the public health system, he’s the government employee here in North Carolina and will get a pension. So that pension will be about one third of our annual budgetary needs for FIRE. So we have one third of that taken care of, starting on his 50th birthday, which is why it’s four years from next week.

Scott:
Awesome. And what’s the a dollar amount of that pension?

Charlotte:
Per month, it is, gosh, I think it’s 33,000 per year, and we are estimating about a 100K per year during FIRE.

Scott:
Awesome. And will that change with inflation? These are all probably questions for Grumpus in a few weeks.

Charlotte:
That’s a question for Grumpus.

Scott:
Fair enough. Okay. So we got $3,000 per month in an income hitting in four years from-

Mindy:
And a government pension, which is a better type of pension, typically more stable than just a company pension.

Charlotte:
Totally.

Scott:
Yep. And we’re in North Carolina, which is not certain other states that maybe have much more poorly funded pension plans. Okay, great. So that’s a huge asset, thank you for bringing that up front and center because that’ll obviously impact things.

Charlotte:
Sure.

Scott:
Let’s go into the rest of it. Can we walk through your P&L, your income statement where your money is coming in and where it’s going, expenses?

Charlotte:
Absolutely. I have it already here. We are married and share all of our income, but for our purposes here, I thought it would be helpful to split our income because all of our house bills, our living expenses, everything like that comes from his paycheck and my paycheck from the Airbnb fluctuates. That’s a different story. Let’s focus on him first after taxes, 401K, contributions, healthcare, all of that good stuff, he brings home 6355 a month. And because we just moved, we moved to a house that costs about 500 more a month, unfortunately, than our last home. So we paid 1920 mortgage. That includes HOA.
Groceries, you all are going to bulk at this, but it’s between 1000 and 1200. We eat very healthy. Subscriptions, about 75. My husband goes to the gym, about 45. We use MIT Mobile. So it’s like pennies, right? 30 bucks a month. Bills like energy gas, all of those things run about 100 to 150. We have miscellaneous, going out, date night, whatever fund for like 300 to 500. And right now, we’re going through something with our family. So we have about a $1,200 a month medical expense. We hope that that won’t be for too much longer, but that’s part of it right now.

Scott:
Okay, great. And so what is that-

Charlotte:
That eats up pretty much his income.

Scott:
So that’s about 6,500 in total that we just slotted there.

Charlotte:
Probably.

Scott:
Okay, great. And then walk us through your income. You said your husband’s been steady Eddie, but you gave us his sneak peek that there’s been some changes going on from your situation in the past couple of months with that.

Charlotte:
And before I do that, I forgot to mention that out of his paycheck, also we save 550 for my stepdaughter’s college for 529 per month and we max out my IRA as well. So that’s 500 a month coming out of his paycheck. My income is from our Airbnb. We have a cabin near Chimney Rock, North Carolina, and we bring in revenue-wise between 4500 and 6000 a month. But after all of our bills, cleaning CapEx, all of those things, profit is between 2000, 3500, but it’s been more toward 3000. That’s only been running since February, March. So we don’t have a full year of data yet, but that’s what it’s been so far. And from that, that’s all savings. Go ahead.

Scott:
Well, great. We’ll get into that in a little bit, but we’ll come back and discuss the asset value and debts against that because obviously that’s going to be … I think there’s going to be part of that to your story here if that sounds pretty good on the surface with that. Is there any other, any other income that you’re bringing in or that you were bringing in or any background that we could get around what you’re doing?

Charlotte:
I used to own, and I still do technically, a travel business .because of COVID that is shutting down. That’s been, what? 19 months now, but prior to COVID, that was bringing in between 1000 and 3000 a month. Since COVID, it’s brought in almost nothing. So I’m closing that down and I’m toying with some Airbnb consulting, short term rental consulting. I’ve had a couple of clients so far, so I wouldn’t say that that’s really brought in much money yet, but as I transitioned travel to Airbnb, then there’s some hope that that could bring in some more.

Scott:
What is Airbnb consulting?

Charlotte:
If you are a new host, you have a property, and you’re thinking about getting started with Airbnb, what you need to do, will it make you any money? The changes you need to make, how you need to furnish it, all of those different things. There’s so much free information on the internet, but some people just really want their hand held. And so it’s a 30 minute chat one-on-one consultation, and then it can move into, this week I’m going to a couple’s home and I’m going to help them furnish. So it could be really anything people need that are new to hosting.

Scott:
Okay. Awesome. Well, great. Any other sources of income or expenses that we should be aware of before we move on to net worth?

Charlotte:
No.

Scott:
Great. Well, let’s walk through investments at your assets and liabilities, investments in your debts.

Charlotte:
Okay. We have our primary residence, which we just purchased in September. We have a mortgage on that for 337, and Mint tells me it’s worth 362. Our mortgage on that is 2.75 our rate. We have the same rate on our cabin mortgage, and we closed on that in January of this year. We owe 186 and Mint tells me it’s worth 244. We’re about to put a tiny cabin on that property as well, so it’ll be a double income producing property that will also carry a mortgage, but that’s not finalized yet.

Scott:
Great.

Charlotte:
We have an emergency fund, which has about four months in it right now. As we build our Airbnb portfolio, we will be building the emergency fund as well. We have short term rental savings fund of 75,000. That’s going to be for the next two properties. So the tiny cabin that we’re already building, and the next property, which I hope to have by next summer. In VTSAX, we have 95,000 and then retirement accounts. I have a Roth IRA of 63,000, a solo 401k, which I started with my travel business has 6,500 in it. So that’s just going to sit. I’m not contributing anymore to that. My husband has a 401K, excuse me, 202,000, a Roth IRA, 34,000, a traditional IRA, 6,600 and then his pension.

Scott:
Okay. And so what would you peg your net worth at after listing those assets?

Charlotte:
Mint says it’s around 400 to 500, so I trust that, I suppose.

Scott:
Absolutely. And then with a pension, and, and this is where I think Grumpus will be much more helpful than me, but I would, say, okay, if we’re going to use the 4% rule on that kind of stuff, you could maybe say that pension at 33,000 is worth 33 times 25, which would be an incremental $825,000 in net worth. That would be one way to potentially think about the pension as an asset on top of some of those things. Obviously, the pension is not an asset yet because you need to wait four more years, but something to think about with that.

Charlotte:
Great.

Scott:
Anything else we should know about from a debts and investment standpoint?

Charlotte:
No, we don’t have any more debt. We spend all of the profit from the Airbnb on various investments, savings, that’s pretty much the whole story and that’s the whole situation.

Scott:
What’s next? What I’m sensing based on this is, you’re going to go in and build more from your Airbnb business and that’s the game plan here and it seems like that’s pretty obvious and likely candidate for this discussion, but is there another direction you want to go first? Do you want to dive into that topic?

Charlotte:
There are two main questions that I have, and we can start with Airbnb is my favorite thing to talk about. But the biggest … Well twofold, I found FIRE just one year ago. In the couple, there’s always the one action taker, that’s me. I’m the person who learns all the things and takes all the steps. But because I’m such an action taker, I think I’ve gotten a little over excited and I’ve made a lot of changes this past year. I think my husband’s head is spinning. And so one of the main questions I have is, now that you have our full picture, am I on the right path? And also, separate from that, because we have this retirement situation that’s in stages, which is, he retires at 50. He can’t access retirement accounts for 10 years. I’m six years younger, so it’s going to be another six years beyond that before I can. How do you figure out a safe FIRE number with like a multi-stage retirement situation? So Airbnb and those two questions, if we could cover those things, that would be fabulous.

Scott:
Let’s start on number … Well, let’s start with the first one with that. Let’s start on number one. Can you give us a, a picture of how the last year has been, or a highlight of your money story, maybe with a snapshot of 18 months ago or a year ago, and leading up to the present and what you’ve done?

Charlotte:
Yes. So prior to finding out about FIRE, I was always very “good with money” which just means I was super frugal and would never go into debt. That wasn’t true of my husband although by the time I met him, he had cleaned all of that up. So we come from different places. Money mindset-wise, we come from very similar places from money values, I suppose. And so prior to finding out about FIRE, my main goal was once his daughter graduates, which is in two and a half years, we’re going to sell everything and he’s going to take a sabbatical and we’re going to go travel for a year because travel is the best thing. It’s my number one thing I love to do and we were going to do that. And we kept butting heads because he was thinking of the practicalities of doing that, of leaving his job that he’s been at for over 20 years. And I just wanted to travel and the two didn’t jive.
And so I found out about FIRE from Farnoosh Torabi’s podcast, So Money. She was interviewing the folks from Our Rich Journey, Amon and Christina, amazing. And I was like, this is how we do it. This is how we go and travel. And so it finally gave us a common language. Once he found out about it, I explained it to him. He was like, “This is how we make this happen. And we don’t have to go for just a year. We can go forever and ever, and ever.”
So all that being said, when we found out about FIRE, we were not tracking expenses, spending whatever, we were saving a little bit, but not really. I think we started off with 23,000 in VTSAX, and now we’re almost to a hundred. We’ve just been grinding this past year, changing all of our bills, checking out MIT Mobile, different house, like all the changes that people who get really into it make. And now here we are about to build on our Airbnb business and really be able to put a ton more into VTSAX. And I just want to know that I’m doing it right.

Scott:
Well, I love it and I think that I’m smiling because you’re clear really doing it right with this. I don’t think you could say you’re not doing things correctly with this. You’ve got command of your expenses. You spend less than you earn. You’ve got an investment approach that seems reasonably well organized with all this kind of stuff. You’ve got a winning formula at least with the first Airbnb, you have to think, how can I sustain that or what can scale with that? But there’s a lot I think that is going really well here with that and I think the biggest question mark, again, is this pension and how that relates into the plan and what can you create in the next four years from a wealth building standpoint.
But I think it looks like you’re doing a lot of things really, really well here and when you say you’re a bit over excited, it seems like you got a really healthy budget here and that’s not like, oh, I’ve cut back everything and now spend $1,500 a month. And we live like misers with … Doesn’t seem like that’s happened. It seems like we have just a pretty clean balance sheet and really good command of your income and expenses with that.

Charlotte:
I appreciate that if it were up to me, we would be living like misers, but I’m part of a duo. So there’s compromise that needs to be had.

Mindy:
Okay. I have some questions.

Charlotte:
Sure.

Mindy:
I have some questions. It sounds like in the beginning of your story, maybe he wasn’t so much on board with it. Is he more on board with it now? Is he excited about it, or is he still having a hard time coming to the realization that he’s going to stop working?

Charlotte:
He wasn’t having a hard time with FIRE. He was having a hard time with, let’s just leave and take a sabbatical and hopefully my job will be there when I get back. Before where we had FIRE before we had that common language, he was struggling. Now that we have the common language and we have a path, he’s on board and he’s excited. In fact, we had a conversation this weekend about like what that first year might look like and dreaming big and what activities we’re going to want to do. And so I think honestly, when it comes to it and it’s time for him to leave, it’s going to be a little hard. But I also think if we have a plan, not only financially, but now we get to go do really awesome things. He says he’s on board.

Mindy:
You are four years out, and Fritz from retirement manifesto has a plan in place for five years out, where when you’re five years out, you start with this and you start thinking about of the things you want to do. In four years out, you’re starting to plan your money and three years out and I can’t remember all of the steps, but I’m going to send you to our episode with him, which is episode 125.

Charlotte:
That sounds great.

Mindy:
He’s got a book. He has a series of posts on is website, which is either retirement manifesto or the retirement manifesto. I can’t remember which one, but that is a great episode to listen to, to start crafting your plan, because you do have four years. You do have time to do this. And side note, since you want to travel so much, what’s your favorite airline? What’s your favorite hotel? Get credit cards for both of those companies and start earning travel points for the next four years, every expense you have throw it on a card. And then all of a sudden you have 47 free nights at a hotel. And that makes it easier to jump into FIRE when you are not paying for a place to sleep for three months or whatever.

Charlotte:
Totally.

Mindy:
Which is not 47 days, but-

Charlotte:
Approximately.

Mindy:
Approximately

Scott:
I think that’s great advice with planning those things out with that. While you’re doing that, that’s going to bring in question number two, which is what is the safe number for this type of the situation? And the way that your situation is set up, I don’t think you’re going to be able to think about it in terms of the 4% rule or some of these other rules of thumb with that, because you’re just not going to immerse a pile of one to 1.5 million in a stock bond portfolio inside of four years, that you can then begin withdrawing if that’s your goal. So you have to say, okay, I’m going to add up each component of my portfolio. I’m going to say my stock and bond portfolio or however I’m going to invest that inside those 401Ks, that is worth 400 grand in four years, right? Making that up. And a 4% rule on that is 16 grand. So I’ve got a small slice of my needs mapped out from that component.
My Airbnb portfolio is going to contribute this much. The pension is going to contribute this much. And if there’s another asset or a side business that we’re going to put in there, that’s going to contribute this much. The difference, if there is any between your desired number and what you can safely conservatively predict from those assets need to be made up with part-time work or consulting or those types of things with that. So the goal I think is, how do you make that number zero, or as close as zero as possible with that at this point a few years out and feel really comfortable with that situation, is that right?

Charlotte:
Right, exactly.

Scott:
And that comes down to, you’re going to get sophisticated about how you analyze that pension and how you analyze your rental properties with that. And don’t ignore that pension one. Ask yourself those questions, does it increase with inflation over the next 10, 20, 30 years with that? Or is it a static amount? How well funded is it? Is there a 85% chance that it stays around a 95 or 100% chance with that? Or is it a 50% chance? Can I actually calculate those odds with the mind of a skeptic on those types of things? That would be helpful in I think assessing the probability of that pension.
And then same thing for the Airbnbs. Right now, I think it’s going to be the best time to be in the Airbnb business, maybe ever with this. So is that going to be the case in three, four, five years, if you’re making killer profits like $3,000 a month on 30,000 in equity? That’s a huge … it’s a hundred percent annualized ROI from a cashflow perspective on your cash down payment. That’s not going to last forever, but it could dwindle to where it’s a 25% annualized ROI over the next couple of years or something like that. Those are questions to begin poking around with, to beat up your plan, but I don’t see why you’re not in a reasonable position. You don’t have a realistic shot at achieving your goal instead of four years or getting very close to it.

Charlotte:
Cool. Thank you. The plan as it stands now is to make up the rest of that annual income with Airbnbs. And so I’m hoping to have five total by the time that we leave, and that plus the pension just pumps money to us and helps us reach FIRE and between now and then, all of that income is just getting funneled into VTSAX. So [crosstalk 00:25:44].

Mindy:
I have a couple of comments. I want to share are some numbers that I ran really quickly. You said your fine number is approximately a $100,000 a year. Divided by 12, that’s about 83 50 a month. So your Airbnb is bringing in currently $3,000 a month. Now you’re left with finding 5350 a month. And you said his pension is $30,000 annually, approximately?

Charlotte:
Yes.

Mindy:
So that’ll be $3,000 a month right there. So now we’re at 2350, and this is all these numbers are with your one Airbnb. So if you have four more units, I can’t see how … unless we get another global pandemic and everything gets shut down again, I can’t see how your monthly needs aren’t going to be met. Your numbers sound like you are taking care of the property now. Are you managing it, and are you doing the cleaning or are you outsourcing the cleaning?

Charlotte:
Outsource it. It’s two hours away.

Mindy:
Oh, okay. So you’re not totally hands on. When you’re traveling there’s … We were talking to Millennial Revolution, Bryce and Christie way back on episode 55 and 55 and a half. And one of the tips that they had was, hey, we’re watching the market. We’ve retired, we’re pull money out of our stock market or out of our stocks and retirement funds. And we’re watching what the market is doing. If it hits a sudden drop, we’re going to go travel to cheap places like the far east or places where it doesn’t cost them a lot of money to live as opposed to coming to America where we’ve also got the very expensive healthcare and they can do travel healthcare outside of America. Going to London is going to be a more expensive city than Bangladesh. And I actually am showing my ignorance. I don’t know if Bangladesh is a city or a country, because I’m a terrible person.

Charlotte:
You’re not a terrible person. It’s okay.

Mindy:
But these cheaper places are something to think about. Maybe this 100,000, because your cabin needs a new roof, ooh, now we need to scale back a little bit. So this year, we’re going to travel slowly through the places that aren’t that expensive.

Charlotte:
Totally. Yeah, geographic arbitrage. I’m all about it. And yep, I’ve mapped out the higher cost of living places and the lower cost of living places. Where I’m getting that four more units number from is, we will hire a property management company for all of our Airbnbs when we leave. They take 25%. And so if you take the lowest amount we’ve made, which is 2000 profit a month, and you take 25% off that 1500, it’s like, I’m not a conservative person, but I’m a fiscal conservative. I want to know that my numbers are safe. They’re locked in. And so do I expect to make more than that while we’re gone? I do, but I don’t want to pull the plug on my husband’s, excuse me, steady Eddie job until we’re locked in.

Scott:
Well, I guess from my seat, I don’t understand. It seems pretty clear, like the next four years it’s, how big of an Airbnb business can you build to build a very large margin of safety? How can you build a financial fortress with this Airbnb business that is scalable, that you’re in command of, that you feel really confident out, and that greatly exceeds this number? You will finish out the rest of this, with one incremental Airbnb purchase that’s identical to what you’ve got, and you’ve got the cash for that right now. And you just told me you’re going to build one and you have four years left on top of that, where you got to do something. You might as well expand the financial position with this and buy a handful more if you can with a reasonably conservative down payment and all that other kind of stuff with this.
Let’s walk through the current Airbnb business and just this first property, what do you expect to change? How much are you going to spend, who’s managing the process and what’s going to have happen when you finish putting on the second unit on this first property?

Charlotte:
What’s going to change as far as income?

Scott:
Yes.

Charlotte:
Okay. I expect it to double. It’s a pretty similar property in a lot of ways. It’s a bit smaller, but the way that I run my Airbnbs is super high quality. You’re going to want to come to my Airbnb even if you’re not trying to come to that area. The Airbnb itself attracts you. The tiny cabin is going to be the same way. It’s super cute, and so we expect to double our income. With the mortgage-

Scott:
Give us an overview of the business. Where are you located with this? You said it earlier, but what is the attraction of the area that the Airbnb is in in the first place, and then let’s go into your operating model for sure.

Charlotte:
Great question. The Airbnb is located in the mountains of Western North Carolina. Most people listening who are not from North Carolina have heard of Asheville and the Biltmore House. We are about 45 minutes from there. That’s not the main attraction, but we’re 10 minutes from a place called Chimney Rock State park, and Lake Lure, which is where Dirty Dancing was filmed. Those are both within 10 or 15 minutes of us. It’s really a popular place year round, lots of hiking, waterfalls lake in the summer, and we’re 20 minutes south of Black Mountain, which is a hipstery beer-centric cool place [crosstalk 00:31:33].

Scott:
Okay. Awesome. Perfect. And then you have a cabin out there and it’s got enough land to build a second property on it. We just talked to the financials that you’re going to bring in 2000 to 3000 a month in profit from that right now. How much is the second home construction going to cost you? And it sounds like you just said it’s going to double income essentially.

Charlotte:
It’s actually a tiny cabin that’s being built off site. It’s a modular home is what it’s billed as, but it’s a tiny cabin. It’s under 400 square feet, and that will be brought in to the property. The mortgage on that includes the septic and the well and the driveway and everything else. It’s 125,000, but because it’s a modular and because it’s an investment property, it’s a really stinky mortgage. It’s 10 years, at 6.5%. Stinky. So what we’re going to do is work our butts off to pay that off as quickly as possible, try to get that paid off before we leave in four years.

Scott:
And is it going to go on your current property? Is it going to be in sightline to the first one or is it-

Charlotte:
It’s on the property. It will not be in sightline unless you walk down the driveway and really crane your neck, but it’s still total privacy for both properties.

Scott:
Okay. It sounds like a great thing there. And you can’t wrap that new property into the overall mortgage on the lot or anything like that? You can’t get a two unit or anything like that? Walk us through why you had to get a different type of financing for that?

Charlotte:
I don’t know. I assumed this was the only thing I could do.

Mindy:
I believe modular properties are considered vehicles because they can drive away. They’re not considered actual real property. It’s not a house. So that could change if it goes on a permanent foundation.

Charlotte:
It will.

Mindy:
I would talk to-

Charlotte:
In North Carolina, it is not considered a vehicle. And I only know that because we tried to buy a tiny house on wheels and no one would finance us because it’s considered an RV. This type of modular will be on a permanent foundation. And so it will appreciate. It won’t depreciate and you can get just a normal mortgage for it.

Scott:
Well, that’s sounds like a good step here.

Charlotte:
Yes.

Scott:
Next step is to go and, and make a list of potential lenders and call them up and do some more discovery work on this, because if you can refinance out of that loan into a 30 year fixed that wraps both the properties into one mortgage or something similar, maybe it’s a conventional load. Maybe it’s what we call alternative to conventional with a lender. That’s going to do an asset, 30 year fixed mortgage. But I think some research there could be worth a lot, even if there’s a 50% chance that there actually is a product that’s better, that’s still really valuable, even if there isn’t one.

Mindy:
Yeah. And North Carolina lenders, if you have an idea that she can use to finance this property in a better way than 10% at 6.5%, email me [email protected] and I will pass your information along to Charlotte because it sounds like there’s got to be a better way to finance this. But again, I’m not a lender, so what do I know?

Charlotte:
Thank you so much. I would love any information around that. And if we need to roll that into the current mortgage on the property, then that’s fabulous.

Mindy:
Regarding this lot, you said it’s big enough to do a tiny home in addition to the existing cabin. Is it big enough to do other tiny homes?

Charlotte:
No.

Mindy:
Okay.

Charlotte:
No, not maintaining the integrity of the feeling of privacy. It’s a very weird shaped lot. It’s almost two acres, but no.

Mindy:
I’m just throwing this out there, but with this being 400 square feet, maybe there’s an opportunity to do two right next to each other, same septic system. Maybe you go a little bit bigger with the septic. And it’s four people who want to go on vacation together, but also don’t want to be in the same 400 square foot space.

Charlotte:
In the same spot.

Mindy:
I’d love to go on vacation with Scott, but I’m not staying in a 400 square foot house with him. And our spouses would also go with us. I’m not just going on vacation with Scott. That’d be weird.

Scott:
I would stay in the main house.

Charlotte:
No, that’s a cool idea. I like that there might be room in that little spot to do two of them. I’d have to see.

Mindy:
And I don’t know if there’s a market there, but if people are already traveling there with their friends, [crosstalk 00:36:13].

Charlotte:
There’s a for sure market. And we’re meeting with our general contractor on Monday at the space. So I could ask him that for sure.

Mindy:
Yeah. Throw that out there. I had a question about your company that is closing down. Are there any opportunities for taking any losses from the travel company against current income? Clearly I’m not a CPA because I am mangling this question, but do you have any losses? And if so, you should talk to a CPA about how you can adjust that. Okay. Well, yay that you don’t have any losses. That’s always better to not lose money than to lose money.

Charlotte:
The blessing of that company is that the overhead was almost nothing. So even through a pandemic, I could stay in the clear.

Mindy:
And one other thing I was taking notes as you were telling your story, is there any opportunity for your husband to do any sort of consulting while you guys are traveling? And I’m not talking like a three month 90 hour a week consulting job. I’m available for emails, I’ll check them on Monday is kind of consulting where 20 years of knowledge in the public sector is going to be worth so much more to the employer than trying to find somebody to take his place or 20 years of knowledge. And then somebody new comes in and they’re like, “Oh, I don’t know how to do that.” And well, here’s Bob. He can tell you.
My husband had a really hard time going from full-time to retired, so he stepped down to part-time and he was a little nervous about asking. And then once he did, his boss was like, “Sure, whatever, I don’t care.” So he stepped down to part-time and then he was able to walk away completely, and that helped him wrap his mind around leaving employment. So throwing out there, and maybe like four years out isn’t the right time to talk about potential consulting opportunities with your boss, but maybe a year out or six months out, “Hey, I’m thinking about retiring at the end of the year and I’d like to continue. Are there any consulting opportunities?”

Charlotte:
Totally. And I think he would love that for sure. He loves his job. I can’t imagine it, but he loves it.

Scott:
Going back to the Airbnb stuff here, how much cash do you need to bring to place this second home, the mobile or the manufactured house onto the lot?

Charlotte:
20%. So about 25,000.

Scott:
Okay. And you have $75,000 saved up exclusively for the purpose of purchasing more real estate. That’s an addition to your emergency fund. Are you also using that 75,000 as an operating reserve for the Airbnb business or is that-

Charlotte:
No. The goal with that money is, the next Airbnb, the tiny cabin plus furnishings, plus the next down payment plus furnishings. And the emergency fund is a catch all emergency fund. So including anything that could happen with Airbnbs.

Scott:
Okay, great. So you have 75,000 specifically for the purpose of purchasing more Airbnb real estate.

Charlotte:
Yes.

Scott:
And you are currently generating $3,000 a month on average from your property that’s net getting contributed to that account. And at what time do you expect this property to be finished being installed and generating revenue?

Charlotte:
Spring.

Scott:
Spring? Do you have a specific date or is it April?

Charlotte:
No, we’re in the process of working with the county right now to get it perked and all of those things. I’ve put a down payment of 8500 that will go to that 25,000 to get in the builder’s queue because they’re so booked out, but a lot depends on what the county comes back and says this next month. So I have no idea. I’m hoping by April.

Scott:
Okay, great. So we have April. By April, you will have piled up another 15 to 20 grand into this account from your Airbnb business with this. So you’ll be sitting at 85 or whatever with that, is that right?

Charlotte:
No. All of our profit goes into my husband’s Roth IRA, VTSAX and personal savings, which we both keep so that we can do our own hobbies. So we’re not pumping our profit back into Airbnb. That 75,000 came from the sale of our primary home two months ago.

Scott:
Okay. That’s helpful.

Charlotte:
That doesn’t mean we can’t save it for that. So I’d love to hear the rest of your thought.

Scott:
Let me think at this. What would the next property … let’s recreate your first purchase. How long have you owned this current Airbnb?

Charlotte:
Since January.

Scott:
Can you buy a similar property right now in the same area? Do you want to?

Charlotte:
We definitely want to. Because we have three mortgages going right now, including the modular that’s coming up, we’ve hit our limit on debt income to qualify for another mortgage. So we have to wait until we file our taxes for 2021. That includes this year’s Airbnb income so that we can get another mortgage.

Mindy:
Okay. But we are already at the end of the year.

Charlotte:
Yes.

Mindy:
You can file your taxes as soon as you can in January to start the process. So I don’t think there’s a huge lag there. I would definitely be looking for more properties in the area because your goal is to own more properties there. I’m assuming you’re working with an agent?

Charlotte:
Mm-hmm (affirmative).

Mindy:
Yeah. Continue seeing properties and … continue seeing them and running the numbers and if something makes sense, start looking for a portfolio lender. There are lenders out there. These are like local banks, like credit unions and things like that that will lend on the property and keep it within their portfolio. And it might be a higher interest rate, but if you’re able to get this property and start generating this income, then you can refinance it down the road.
Or maybe they will look at your portfolio that you have currently and say, “Oh, you’ve got your primary mortgage and this cabin mortgage. Let’s do a mortgage on this new property and wrap it in with the new cabin that’s being built, the tiny cabin.” They might offer something. When they keep it in their portfolio, they have the ability to do whatever they want. They’re not trying to sell it on the open market to Fannie Mae, so they don’t have to follow the Fannie Mae guidelines. So your debt to income may not matter so much.
Another thing to do is to start a relationship with a local bank that does these portfolio loans. When you are primary checking your credit cards, your savings accounts, when all of your stuff is there with them or some of your stuff is there with them. It shows that you’re interested in having a relationship with this business as opposed to just reaching out and saying, “Hey, can you give me this loan? And nobody else will give me?” Nope. We’re going to add our names to the list of people that aren’t going to lend you money either. So having a relationship can be really helpful in something like this off the wall … off the wall isn’t the right word. Unusual.

Scott:
Yeah. I completely agree with Mindy on this. The financing piece here, let’s talk about your bad mortgage. A 10 year balloon at six and a half percent interest, right? That’s a great financing relative to the return of the investment. It’s not great financing relative to what’s market or what I think you can get if you do some more shopping, potentially, hopefully if you’re able to get a 30 year fixed loan. But who cares if you’re paying five or percent interest in the context of this with that, if that’s what you need? You’re saying, “Hey, there are cabins out there that I can buy for $250,000. I can put down five to 15% on these as a second home, or as that to get started with this kind of stuff.” Let’s call it 15% down as an investment for a single family with this. And it’s going to generate three grand a month.
That means if you bring 50K or … I’m doing horrible mental math here. If I bring $30,000 down and I generate three grand a month in that, that’s 100% annualized returns. It’s more than a hundred percent annualized return because I’m making 36,000 on a $30,000 down payment with that. If what you’re saying is like, that’s the reality of this local market, oh, and by the way, I can bring on a manufacturer house for another 25K and then double that again. That’s ridiculous math. And I think that you should not be held back by the lenders. I don’t think you should go so far that you get in over your skis with a lot of this stuff.
But I think, why wait until April to do the next one? This is your full-time job, essentially with this, is to build this business. If you apply yourself and put and put your full attention to that and those numbers are directionally true, you might have to do a lot of work personally for the first couple of months, but I don’t see why you can be coming out of middle of next year with both this manufactured home on the lot operationalized and producing income, and a second property. And then from there, I think you’re going to pop up and say, either, this is working really well and it’s time to expand dramatically from here, or not. This is a hundred percent annualized ROI if the property doesn’t appreciate at all.

Charlotte:
Yeah. [crosstalk 00:46:14].

Scott:
Is what you’re saying from that. I agree with Mindy saying, don’t worry about the next conventional loan with this kind of stuff. Go look for other types of financing on this particular one. And the reason why I think that that’s appropriate potentially in your situation is because you are essentially distraction free from building an Airbnb business with this. You’re not doing on the side while working a full-time job. You’re not doing with those other stuff. Your side business beyond this is literally consulting other people on how to set up their Airbnbs with this. And so I think Wendy’s right. Again, you don’t want to go so far that you’re putting yourself into a position that you can’t sustain if things don’t go well, but I don’t think you need to wait for the conventional loan on this next property.

Charlotte:
I appreciate that because that was definitely a block that was getting in my way, because I was thinking, right, it’s November. I can wait four more months until my taxes come back and I send my taxes off to the CPA as soon as I can end of January and then they come back. I can wait those few months in order to get, fingers crossed, a similar kind of rate to the other ones. There are short term rental lenders who will lend based on what you’re currently making on your Airbnbs, not on your debt to income, but the rate is higher. It’s in the force. And so I really wanted to avoid that and it sounds like that was a block.

Scott:
You’re going to arbitrage a 100% annualized ROI for a 4% interest rate.

Charlotte:
That’s my frugality. I’m like, ugh.

Scott:
Yeah. That’s good math there if you believe in those numbers that you’re telling us what this kind of stuff and the prospects in that. I don’t think you can afford to wait for a 3% mortgage when a 4% mortgage is going to get you in six months to a year earlier. This business is either going to work really well or it’s not, and it’s not going to be because of the 3% versus the 4% mortgage rate on the property-

Charlotte:
Totally, yeah.

Scott:
… in my opinion.

Mindy:
And I would suggest running the numbers on a mortgage calculator. Sometimes it can seem like .. Your interest rate is 2.75%. Why would I pay four whole percent when I can only pay 2.75? But 2.75 might not come around again. If you run the numbers, you’ll see the difference is really not that much. Another unconventional way to fund, I am going to plant a seed. This is definitely a research opportunity. I only know enough to be dangerous, but on episode 151, Tony Robinson, the co-host of the Real Estate Rookie podcast casually mentioned that he does margin loans. He borrows against his stock portfolio. And I was like, wait, what? I’ve never heard of this. So I-

Charlotte:
That’s so scary.

Mindy:
Well, yeah, if you have $100,000 stock portfolio, they’re not lending you 100,000. They’re probably going to lend you 35 or 50. But that’s 35 or 50 that you didn’t have before. And the issue is, when the stocks start to go down, if the stocks start to go down, they may sell to cover your costs. I’m getting quotes at 1% for my margin loans. And I’m like, really? I can borrow money at 1%? That seems so-

Charlotte:
Wild.

Mindy:
… free. Yeah, that’s so wild. So definitely do research on this. If you’re contemplating this, there definitely are risks. If the stock goes down, they could sell your stock and then you wanted to own it, and now you don’t. So it’s much more risky than getting a portfolio loan. But if it’s a short term loan, if you are able to, once you season it for six months, then you can get a regular loan, that could be worth it. Again, weigh of your options and weigh the risks and the, can you sleep at night?

Scott:
If you bring down 15 to 25% on this property on the next purchase, there is no way in my mind that you’re not going to be able to find somebody to lend on that with a 30 year fixed rate mortgage. It may not be a conventional lender. It may be a four and a half percent interest rate. It may be even a little north of that, but that’s going to be immaterial to the return profile of this. And with a few more years and a little bit more scale, that financing problem will I think go away with. And you can mitigate that risk by being very hands on in your investment over the next year or two, to make sure that you get all those systems up there. You said it’s a two hour drive?

Charlotte:
Yep. Easy.

Scott:
You could go there every day, two hours there, two hours back, and that’s your work day for a month if you needed to, to set things up, right?

Charlotte:
I can.

Scott:
I’m not saying you should or have to with that, but that’s a workday with that. There’s ways you can mitigate the risk of the slightly higher cost of borrowing that you might have on this property to finance it with an alternative to a conventional loan with that. And you should be able to get a 30 year fixed rate mortgage that amortizes over 30 years. Not balloons or interest only or anything like that.

Charlotte:
No.

Mindy:
I want to jump in here and just say, Scott said 15 to 20% down. I think investment properties start at 20 to 25% down. So I just want … I want to correct you, Scott. I think 15.

Charlotte:
This would be a vacation home mortgage.

Mindy:
Oh, do you have the vacation home mortgage already?

Charlotte:
I have one. Yes.

Mindy:
Can you get more than one?

Charlotte:
Yes.

Mindy:
I thought you were limited to one. Oh, okay. Well then a vacation mortgage down payment is like 10 or 15%.

Charlotte:
10, mm-hmm (affirmative).

Mindy:
Yeah. Okay, oh.

Scott:
I think that for single family investment properties, you can put down 15%. That’s where I was getting that number. But if you’re going to use a portfolio lender that is not going to give you a 15% down option with a conventional lender, for example, they might require 25%. I would conservatively plan on bringing 25% down for the property like Mindy said, and stop using the 15% number that I’ve been throwing out for a single family investment with that. If you can get a second family or a vacation home loan from a conventional under, that’s great, but I think we’re discussing, don’t let that hold you back and think about these other options with that. Now, that also goes to the plan or the question that you had earlier, which is, should the profits be going into my down payment fund or should they be going to my Roth IRA and those types of things?
Well, I think we answered the question there. If you honestly believe that you can get 100% annualized cash on cash return from profit perspective, and your downside is like a 60% cash on cash ROI, then no, the Roth does it make sense compared to the business that you’re about to build and run if you believe that this … I think you should run those, but say like, do I believe these numbers? And stare at them and ask your husband as well. But if you do after that, then I don’t see why, when you have scarce resources, you can’t fund everything at once with all of that, but why wouldn’t you put it into something that could generate an incremental three grand a month?

Charlotte:
Fear of getting to four years and not having enough in Vanguard and various retirement accounts and I’m wanting to balance all of it so that we’re putting money everywhere, where it needs to go, but I hear you.

Scott:
Yeah. But if this goes well, your bigger fear should be, hey, my current path is maybe going to get me there or pretty close to it with that with some gap, two of these and I’m done.

Charlotte:
Yeah.

Mindy:
Well, let’s look at your worst case. Your worst case scenario was $2,000 a month. That’s actually 1500, And then you want to have five of these. So 1500 times five is 7,500 and you need 8350 to fund your lifestyle, and that’s not even including your husband’s pension. And you’re there and you still need to consider other things like taxes and health insurance and things like that. But if he’s a government employee, do you get government health insurance [crosstalk 00:54:52]?

Charlotte:
He gets government insurance for the rest of his life. We-

Mindy:
[crosstalk 00:54:56].

Charlotte:
I know. We need to figure out what we’re going to do for me and for his daughter because of course, she can stay on until she’s 26, she’s 15 now.

Mindy:
Well, and frankly, when she’s 26, she can start to foot that bill herself. So we really only have to think about you, which sounds so snotty. I don’t mean it like that, but at some point, they have to [crosstalk 00:55:18].

Charlotte:
I totally agree. I totally agree.

Scott:
I think that’s a money date topic with that. That’s hard for the three of us to talk through with that. But I think that that’s a … Well, if you want to have enough leftover to cover the health insurance, guess what, the answer is-

Charlotte:
Get another one.

Scott:
Get another Airbnb with this stuff. At least that’s what the answer is at present with this. And so I think the strategy is very clear. I think that the big takeaway from a planning standpoint or hopefully the one that I encourage you is if you believe that you’re going to get 100% cash on cash ROI from one of these properties or somewhere in the ballpark north of 50% cash on cash with these things, then the financing rate is not going to change that fundamentally, right?
It could, if the interest rate gets starts soaring, but it’s not going to move it into a place that I think is crazy with a lot of that. And your business, your full-time efforts can go towards building out this business, and you need the access to that cash and the access to the financing in order to make a move. Otherwise, you’re just going to be waiting around until spring to make the next move happen with this. And that four years of planning looks a lot easier if you’re entering in the summer of next year with two Airbnbs that are operating pretty nicely, and you’re using that as an engine to pile up a lot more cash for the next purchase.
You get this second unit on your first property, and buy a second unit. And each of those is producing two, $3,000 a month. You’re self managing, whatever. That’s nine grand a month. That’s $108,000 per year in cash that you’re going to be generating, which you can begin snowballing your business here with that. And kicking that back to do plenty of Roth contributions if that’s what you want. That’s one month you fund your Roth. That’s-

Charlotte:
Isn’t that crazy?

Scott:
That’s a best case scenario, but that is not absurd given the context you just gave us.

Charlotte:
No, it’s not absurd. It’s just wild to hear. I used to be a public school teacher in North Carolina, which is the 48th worst for teacher pay. I am making off of one cabin basically what I brought home from teaching and I’m here at home not having to deal with it. So the numbers are real and they make total sense to me and I know them, but hearing them from someone else is wild. Now I just have to get my husband on board with these higher interest rates and moving forward right now. [crosstalk 00:58:06].

Scott:
You can always refinance potentially in the future with that, but yeah, I think-

Mindy:
Yeah, with the higher interest rates, when you just look at the number, it can seem really daunting, but run the mortgage calculations and see the difference. It’s like 20 bucks. It’s not. I didn’t run the, but it’s really low. If we pay an extra $100 a month, we can generate another $2,000 a month. I will pay you $100 a month for you to give me $2,000 a month all day long.

Scott:
Got it.

Mindy:
In fact, Scott, I will give you $100 a month right now, one time offer, if you will send me $2,000 a month back.

Scott:
No.

Mindy:
Do it. Ugh.

Charlotte:
[crosstalk 00:58:50] negotiations.

Scott:
But you open a bank first and then we’ll start doing that. Well, great. Charlotte, has this answered some of your questions or do you feel like there’s other areas that we needed to talk about today?

Charlotte:
It has not only answered my questions. It has broadened of my mind and I needed that because I’ve been in these numbers for a long time. And so I really appreciate that. No, I don’t have any further questions. It’s time to get to work and find a lender. Mindy, whoever emails you, I’m so grateful for you putting that call out there. I would love to speak to them for sure.

Mindy:
Yeah. And please email me [email protected] if you have ideas for what she can do. If you are a lender in that area and have actual portfolio loans or other option for her ping me, and I will pass it along.

Scott:
I just want to point out that if you decide to buy another property and refinance out of this debt, that your blended interest rate is probably going to be lower than what you’re about to head into the spring with anyways, because you’re going to get a six and a half percent interest on this 125K. So it was like, you just put it all the whole portfolio against the 5% interest loan, and that’s probably at the higher end of that range that you’d go out and find when you go shopping for these. That’s an overall lower interest rate or about the same anyways with it. Probably lower risk, and I don’t know.

Charlotte:
For someone who knows nothing about portfolio investing mortgages, where would I go to find good info on that? Because I know nothing about that.

Mindy:
Ooh, that is a really good question. I will look for some articles on BiggerPockets. And if you are listening to this show, please post in the Facebook group episode or post that I am making to for today’s episode asking about portfolio loans and where to find more information about that.

Scott:
We have a starting place for this as well at biggerpockets.com/loans. Now, some of those … well, all of them will essentially be sponsors at BiggerPockets. So I want to acknowledge that with that, but that is one place to go. And we should email one of our members is in charge of the lender program here. We should email Joe and ask him for some recommendations.

Charlotte:
Thank you.

Mindy:
Yeah. I will send you all the information that I find and that people share with me. And then of course, you’re in our Facebook group, so I’ll tag you in that post as well.

Charlotte:
Wonderful. Thank you so much. It’s awesome.

Mindy:
Awesome. Well, I think this has been a super fun episode. I’ve learned a lot. I feel like we’ve given you that different direction to look. The whole point of the Finance Fridays is to have a third party coming in from a different perspective to see, oh, did you think about this? Did you think about this? And definitely a couple of research opportunities, but this was a lot of fun and now I’m renewed, excited for your Airbnb business that you are going to just crush.

Charlotte:
Thank you so much. Thank you, thank you, thank you so much. I really appreciate it.

Mindy:
Okay.

Scott:
Awesome.

Mindy:
Thank you, Charlotte, and we’ll talk to you soon. Holy cow, Scott, Charlotte from Charlotte has such a fun story. I’m so excited for her growth in the future. 2022 is going to be a huge year for her. What do you think of her show?

Scott:
I think she’s got some interesting financial decisions to contemplate. No, look, the biggest breakthrough I think was, she was mentally holding her obviously successful Airbnb business. Again, pending that she actually goes and reviews and feels very comfortable with those numbers. I’m always caveating everything I’m saying by, those numbers have to actually be real and believable on a go forward state. But if that’s the case, then she was holding back by thinking that she needs to wait for a certain type of financing on that particular business with that.
And again, that advice or my sentiments on using alternatives to conventional loans and those types of things would be different if she was saying, “I am a full-time employed worker making $56,000 a year doing this on the side.” I think that changes your risk profile. But the fact that she is within driving distance and can operate this and has a number of things that she could probably do as stop gaps and this can be her full-time job, makes those other sorts of financing a lot more appropriate in my opinion, especially in the short term, as she’s getting the business off the ground.

Mindy:
Yeah. She has the lot of opportunities ahead of her. And I think you hit the nail on the head. The blocker was this interest rate, and I’m excited for her to run the numbers with the mortgage calculator to see just how little of a difference that actually makes.

Scott:
Mm-hmm (affirmative).

Mindy:
Scott, this episode went a little bit long. Should we get out of here?

Scott:
Let’s do it.

Mindy:
Ooh, ooh, before we go, let’s invite our listeners. Would you like us to look at your finances? Would you like to have a third and I guess a second and third set of eyes on your money and where you’re going and how you can get there? Scott and I would love to talk to you. Please fill out the form. Apply at biggerpockets.com/financereview. Okay. Now, should we get out of here, Scott?

Scott:
Let’s do it.

Mindy:
Wow. Thanks for your enthusiasm. From episode 256 of the BiggerPockets Money podcast, here’s Scott Trench, and I am Mindy Jensen saying, catch you on the flip side.