Why You Should Focus on ‘Hitting Singles’ for Early Retirement

Mindy:
Hey there. Before we get to the show, I wanted to mention BiggerPockets is hiring a full-time supervising producer for our podcast network. This is a remote position, and it’s a great opportunity if you have the right skillset. We’re looking for someone with at least a couple of years experience managing production teams and someone who will feel confident taking the lead when launching new podcasts. So would you or someone you know be a great fit? You can find the full job description at Biggerpockets.com/jobs. That’s Biggerpockets.com/jobs to apply for our open podcast supervising producer job. Okay. Now, enjoy the show.
Welcome to the BiggerPockets Money Podcast, show number 268, Finance Friday Edition, where we talk to Paul about where to focus your investing.

Paul:
I don’t have the goal of working to 65 and just piling up a huge pile of money to then use in the last quarter of my life. I would love to trim back on my W-2 work and have more time to travel. And then I would love to expat and go live somewhere for a few years, pick up, move somewhere else for a few years and just travel around to various places.

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and with me as always is my refreshing perspective co-host, Scott Trench.

Scott:
Always good to be here with my green co-host, that’s not the right one, but Mindy Jensen.

Mindy:
Green makes me sound like I’m new. You’re my green co-host. Scott and I are here to make financial independence less scary, less stress for somebody else, to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you 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 real estate, start your own business or sustain a long term investing strategy hitting a bunch of singles, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.

Mindy:
Scott, I am excited to bring in Paul today because Paul is in a pretty good situation financially and he’s wondering where he should go next. Should he continue to contribute to his retirement accounts and his pre-tax advantaged investment accounts? Or should he continue to grow his real estate portfolio? And I think this is a question that comes up frequently for a lot of our listeners and I think we have a pretty good discussion around the pros and cons of both today.

Scott:
Yeah, I think Paul is doing a lot of … His fundamentals are extremely strong, which allow us to get into more advanced and tactical changes to his plan because he’s got a very consistent, very high probability approach to investing here. It’s not flashy. It’s not going to make anybody rich overnight with that. But he is, I think, very likely to achieve his goals over the next 5 to 10 years with his approach. And the suggestions we had were items of degree or nuance, not really any fundamental changes to what he’s doing.

Mindy:
Before we bring in Paul, my attorney makes me say 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.
Paul works full-time as a specialist of poison information at the Utah Poison Control Center. In the last year, Paul decided to take the next step in his FI journey and buy his very first rental property. Everything went so well with that property that he has increased his holdings to five doors as of right now, when we’re recording, but in a couple more days, he will have yet another door. He’s now trying to decide if further expansion of residential properties is the right way to go, or if traditional stock market investments makes a better move for his long term goal of becoming an expat. Paul, welcome to the BiggerPockets Money Podcast. I can’t wait to jump into your numbers.

Paul:
Yeah, super happy to be here and nerd out on financial stuff.

Mindy:
Well, you’re in the right place because you got two nerds right here. Let’s look at your numbers really quickly. What is your income and where’s it going?

Paul:
So from my W-2 work right now, I make about 116,000. And after tax, my take home pay is about 6K a month. My rental properties right now gross about 3,600, and net, after debt servicing, about 1,500 a month. And those are my income there.
And then expenses, I don’t keep a very strict budget. I’ve never really had a problem with overspending. So I looked back at my personal capital account over the last two years and just averaged out what am I spending after taking out what I consider my business expenses. And that came to about 3,000, maybe some 3,300 a month. Where that goes, about 1,300 of that goes to my primary just housing expenses, mortgage, utilities, et cetera. Groceries, about 385 a month on average. Restaurants, 130 a month. Gas, about 165. That comes to about 2,000 or so. So about another 1,000 into just miscellaneous other expenses, insurance, et cetera, that I pay bigger, six month at a time to get a better rate on my insurance and stuff like that.

Mindy:
So having two years of expenses averaged out to about $3,000 a month, it seems like your expenses is not a place that we’re going to be focusing on to cut.

Paul:
No, I never really had a problem with managing my expenses. I’m pretty frugal. That got instilled in me pretty young.

Scott:
Well, nice. And so we’re collecting about $4,000 to $4,500 per month in cash is what I’m gathering here, on average, over the long term?

Paul:
Yeah, give or take.

Scott:
Okay, awesome. And then, so where’s that going? Let’s go through your net worth statement and where your assets are today.

Paul:
The majority of my assets are mostly pre-tax accounts. How I’m employed is pretty lucky for the access that I get, because I’m employed technically through a state university, so I get access to professor benefits. So with that I have a 401(a) account and my employer puts 14.2% in and I don’t have to do anything for that, that’s just automatic.

Scott:
Awesome.

Paul:
And then I get access to a 403(b) and a 457(b), and so I technically can and used to max both of those accounts. So my 401(a) currently has about 152,000. My 403(b) has about 59,000. My 457 has 52,000. And so that’s mostly pre-tax. I do have the option for Roth on those accounts and I do have a little bit of my 457 in a Roth contributions and trying to decide how to balance that out, what going forward. And then I have my Roth IRA right now has about 37,000 in it. I just finished maxing it out for the year, a couple days ago and plan to keep maxing that out every year. And I have an HSA account that I started a couple years ago that has 13,000 in it right now. And plan just keep that growing and not touch it if I can avoid it.

Scott:
Awesome. So what’s the total between all these different accounts?

Paul:
Right now, total is about 313,000.

Scott:
Great. What else do you have? What other assets do you have outside of these?

Paul:
So outside of that it’s real estate. So I have my primary residence, which I don’t try to count too much into my net worth statement, but I do have roughly 200,000 in equity in that, and then I have the rental properties. So in those I probably have about 130,000 in equity right now across five of my doors. And then I’m going to be adding one here shortly.

Scott:
Great. Any other assets, like cash or anything else?

Paul:
Yeah. So I have roughly 22,000 in cash. About half of that is my personal emergency fund, and then the other half of that is in accounts for my rental properties. There’re each individual emergency funds for each of those accounts are in properties.

Scott:
Well, great. I mean, it sounds like we have a really strong financial position here, although there’s definitely a tendency of where it’s going. Most of your net worth is in these retirement accounts with these types of things. What can we help you with today?

Paul:
So the biggest thing is just knowing where to focus. I tend to have a tendency of picking a goal and just going after it and letting other things fall to the side. So I went through school, that was my big goal. I came out, I had my student loan debt. I focused on that and got rid of my student loan debt in little over three years. And then I was like, all right, now it’s retirement accounts, and I was maxing those out. And then I decided, okay, now I need to do real estate and let everything else fall aside. So I’m continually making, I think good progress and not making any terrible decisions, but I’m trying to find that balance of where to best direct my efforts and find that right heading to head off in.

Scott:
Great. Well, I think the first part is to understand what you want. Your current approach is likely to give you an enormous pile of money inside of these various retirement accounts 20, 30, 40 years down the road with that. So it’s definitely not a wrong approach, if you sustain this and build that wealth. But what is your goal that we can help you with?

Paul:
So despite loving my job and what I do, I have other passions and interests. And so I don’t have the goal of working to 65 and just piling up a huge pile of money to then use in the last quarter of my life. I would love to trim back on my W-2 work and have more time to travel. And then I would love to expat and go live somewhere for a few years, pick up, move somewhere else for a few years and just travel around to various places.

Scott:
Awesome. And when do you want to achieve that by?

Paul:
So if it was just me, I would say sooner rather than later, but I do have a partner and we’re in different places financially. And so she’s not at a place where she could pick up and leave. So probably the soonest, 7 to 10 years, but realistically, probably maybe 10 to 15 years.

Scott:
Okay, great. Well, the first thing that I would observe with this is you’re funneling … Well, let me ask you. I’m going to ask you this question. How much are you funneling into these retirement accounts, inclusive of the benefits that you’re getting? You got what sounds like 14.5% or 15% of your annual salary getting placed in by your employer into a tax deferred retirement plan, right?

Paul:
Mm-hmm (affirmative).

Scott:
How much else is going in cumulatively?

Paul:
So yeah, from my employer, that’s about 16,200 a year right now going in. And then, because I started working on real estate, right now my contributions that I put into the pre-tax accounts is a couple hundred bucks a month just because I went hard on real estate and just needed more cashflow to acquire more properties.

Scott:
How long has that been going on for? How many years have you been diverting more of the cash away from these retirement accounts and towards real estate?

Paul:
So I purchased my first property, August 2022. So 15 months is when I started this real estate stuff.

Scott:
August 2020?

Paul:
Yeah.

Scott:
Okay. Because what your retirement accounts’ balances say is that you’ve been contributing heavily for many, many years with that. So the first thing I was going to say is yeah, you should probably consider shifting away some of that spend from those retirement accounts to real estate. You’re already doing that. And what are you cumulatively going to set aside on an annual basis for real estate or other after tax investments?

Paul:
So I’m trying to figure that out. My property manager will drop my property management fees from 10% to 8% if I get 10 doors. And so with that incentive, I set that goal of getting 10 doors. And so that’s why I’ve been pretty aggressive in acquiring properties is to try to get to that and get the cheaper management fees.

Scott:
Where do you invest?

Paul:
I invest in Kansas.

Scott:
So you invest out of state from Utah, in Kansas?

Paul:
Yes.

Scott:
Okay. And then how much cash do you need to purchase one of these properties? What are the asset values and down payments?

Paul:
So the bulk of my properties are single family homes. And the ones that I try to shoot for, I acquire them for 80,000 to 85,000. So all said and done to purchase a property with the 30 year mortgages, about 22,000 to 25,000 cash to close on them.

Mindy:
So you need about $100,000 more cash to get to 10 doors?

Paul:
Yeah.

Mindy:
This might be a silly question because your employer gives you 14% in the 401(a). Do they give any sort of matching to the 403(b) or the 457 or the HSA?

Paul:
No, they don’t.

Mindy:
Okay.

Paul:
It’s just, you get this and then you have access to these other accounts.

Mindy:
Okay. I just want to make sure we’re not leaving any money on the table. I did some math really quickly before we started. And Paul is 33 years old. The rule of 72 says that approximately every 7 to 8 years, your investments will double assuming a 10% return or something like that. At age 40, he will have $626,000. At age 47, $1.2 million. At age 54, $2.5 million. At age 61, $5 million. At age 68, $10 million. Of course this is approximate, past performance is not indicative of future gains. I am not guaranteeing that this will be your balance in those years, Paul, but-

Scott:
And that’s the balance inside of the cumulative retirement accounts that he has?

Mindy:
If he doesn’t even contribute anything else going forward. So in my opinion, you’re doing pretty okay. You’ll probably be able to squeak by in retirement on what you’ve got saved currently. I would agree with you, and I will always say that you should continue maxing out your Roth IRA for as long as you are able to, because that grows tax free and why pay taxes if you don’t have to, because I bet you can do a better job than the government can.
So continue maxing out your Roth IRA, continue maxing out your HSA is what I would do, if I was in your position. I may start pulling back on the 401k, the 403(b) the 457 and all the options that you have to focus more on real estate because your real estate is getting a good return. Your rental property, what are you renting it out for, and what is your purchase price? What is your mortgage? I mean, I think you’re getting pretty good numbers on these deals.

Paul:
Yeah, so they all pretty much reach the 1% rule and they rent for 1% of what I acquire them for roughly. Let’s see. My cap rate on most of them is 7% to 7.5%. And they all rent for a little more than double what the mortgage is. So my mortgages, a couple of them are around 400 and they rent for 900. I have a triplex that the mortgage is 875 and it rents for 1800. So they all are self-sufficient.

Scott:
It sounds to me like if you’d come in three years ago and said, what do I do here? I would’ve said, probably do exactly what you’re doing here, begin shifting a lot of the … You have a good income. You’ve got a good savings rate. You’ve got a strong financial position. All the fundamentals are there in place with this. Your goal is optionality in 10 years. And you know that you don’t have enough income to do everything down the checklist, right? You can’t max every single one of those nice accounts that you’ve listed there and invest in after tax wealth that you can spend during your future as an expat, traveling the world with all of that. So you need to begin shifting that over.
You’ve done that. You need about a hundred grand, that’ll take you about two and a half years to save up in cash at the current rate, based on my back of the napkin, maybe three, and that will buy you incrementally more of these properties. Maybe it’d take you three, three and a half years if inflation picks up on any these things, but you might get a raise in the meantime to offset that. And then it’s just keep adding more onto it until you have that margin of safety that you feel comfortable or you and your partner feel comfortable making that switch over to being an expat with this.
So you’re doing all the right things from my perspective, I think it’s just a matter of time. I do want to caveat that though, that I’m not an expert on some of these different accounts that you have access to. I know the 401k and the Roth IRA and the HSA, not being involved in a education or nonprofit or government institution. Is there any nuance we should be aware of with some of those accounts that would make them valuable tools in accelerating that future financial state for you?

Paul:
Yeah. So as I was prepping, pulling everything for this, I was reminded of something that I think could be really key for my goal of expatting before normal retirement age, and that’s the 457(b). So with that one, as soon as I separate from my employer, there are no penalties to access that money. I would just pay taxes on it. And I have the option to Roth that as well. And I can put as of next year, it’s like what, 20,500 is the maximum. So, I mean, I could potentially Roth 20,000 a year into that account, and then as soon as I leave my employer, access it penalty free.

Scott:
Okay, I’m glad I asked there, because there’s some funny stuff going on with some of these accounts and it’s hard to keep them all straight, if it’s not something that’s directly benefiting you or tied to your position with that. So that’s very interesting to me. Let me just think aloud through a couple of scenarios with that. You have a 457, you can withdraw the funds penalty free. You have the Roth and the 401k options, you can defer that. Your plan is to become an expat and travel the world with that. That means that you’ll have several years where you earn very little income, most likely.
So to me, that is actually an interesting case. It’s the Roth or the 401k, except you don’t have to wait until you reach traditional retirement age. How does that change the math in the game here? Well, to me that says, that’s a really advantageous account to max out on the tax deferred side, the 401k equivalent for those listening. And then withdraw the funds as you need it, paying ordinary income in a lower tax year while you’re traveling or maybe earning very little income, if that is in fact your plan. So that makes that an attractive strategy.
If you think it’s truly going to be 10 years off and you’re going to be buying rental properties the whole time, then you might consider just putting it into a Roth equivalent instead of trying to play the game I just discussed there, placing some into the tax deferred account and transitioning it over, because you might find that your income grows pretty substantially from other sources over that period of time making that impact of arbitraging the tax benefits less valuable to you. I’m going to stop there and see what’s your reaction to that thought process?

Paul:
Yeah. So, it’s kind of all these things are like the nebulous, what’s my future tax. And so it’s how big am I going to grow my rental properties? So how much income is going to be coming in from that? But then it’s treated differently tax wise from W-2 income. And I haven’t been in the rental game long enough to fully wrap my head around all of the tax on that income. So ideally these are long term buy and hold, so I’ll have income from that coming in. I’ll have my retirement accounts for my W-2 employer. And it’s just playing that balancing game of supplementing my rental income with my retirement account incomes and how much should be Roth, how much should be traditional tax deferred. It’s a big question that I haven’t quite wrapped my head around.

Mindy:
I have something to think about. Do you know how many rental properties you want to own? If here’s a whole pile of money, you can buy as many as you want, what is enough? What is the most you want? What is the minimum you want? I am not one of those people that wants to have 10,000 rental properties. I think that would just be a full-time job that I don’t want to deal with, but I’m in a different financial position than some people who maybe want to take that on. It just sounds like awfulness to me. You have mentioned 10 because that’s when your property management fee drops. Is 10 something that you want? Is 10 a level of income that you will be comfortable with? Do you want 25?

Paul:
Yeah. So with that, 10 got thrown up there because of that incentive from the property manager. And I think it’s a good goal. When looking at the income that’ll come off of that, it’s not a huge income because where they are, they aren’t renting for several thousand a month, they’re renting for less than a thousand a month per door. So it’s not a giant amount of money coming in from them. I think 10-ish is probably, because I like how passive it is, and I think if I grow it too big, it’s not going to be as passive. And if I’m out expatting around the world, I don’t want it to be distracting me from what I’m doing, especially from that far away.

Mindy:
Okay. So it sounds like 10 is a good number, 10-ish, not 10 plus another 50 more.

Paul:
Yeah.

Mindy:
I like Scott’s thought process with the 457 as a way to either reduce your current taxable income or as a way to grow tax free and take that money out later. But the more money that you’re putting into the 457 plan is less actual cash you can use right now to invest in your rental properties. Do you have the opportunity to borrow from your 401(a) or your 403(b) or your 457, to take a loan out from them?

Paul:
There were some options for withdrawal, but they weren’t very … I don’t think I would qualify. I think-

Mindy:
Not withdrawal, it’s a loan.

Paul:
Oh, I guess, loans. I haven’t specifically looked into loans on those. I mean, what I have done because I have acquired the five, almost six properties so quickly is that I did tap my primary home equity and got a HELOC. And so I do have a HELOC that I have been using to get down payments for some of these properties.

Mindy:
Okay. And how are you paying back the HELOC?

Paul:
With that extra 3,000 a month that I don’t spend on my regular income.

Mindy:
So, Scott, what would you do in this position? Would you contribute to the 457 traditional to reduce your income, or would you save the cash to buy more rental? What’s the market like where you’re buying? I’m assuming you’re buying all near each other or in the same city or the same, very close to each other area?

Paul:
Yeah, they’re all in the same city because I need to keep them all in the same property manager.

Mindy:
Okay.

Paul:
So they’re all pretty close. The market, it’s kind of funny. Some things will come and go really fast, but everything that I’ve picked up is stuff that for some reason just has sat for a month or two on the market. So those are out there. Everything I bought is off the MLS. I’m not out there sending letters or doing anything unique or exciting in how I acquire them. I just scour for deals off the MLS.

Scott:
I think that the changes I would make would be very minor with this and maybe there wouldn’t be very many. Paul’s got a strategy here that is very likely to win. It’s an aggregation of singles. There’s no home runs. There’s nothing fancy about what he’s doing with any of this stuff. He’s saving 30, 40, 50 grand a year on his income, spending very little, maxing out his retirement accounts and buying singles from a rental property perspective with a long term focus all in one area in a pretty passive and sustainable way. So what’s not to like about that? If your goal is to have a very passive, sustainable level of wealth, 10 years down the road, you’re doing all the right things in my opinion. And I think it’s going to work most likely. You ever know, but I don’t see how you can go there.
I do want to call out, hey, you’re using a HELOC for the down payment, right? I don’t like that for folks that are not in your situation. If that’s your only access to capital, I don’t think that’s a good call. You’re doing it to modestly accelerate by 8 to 10 months each of these purchases and then paying off the HELOC with that. So you’re viewing it as a short term loan from what I’m hearing and paying it off with cashflow that you can reasonably sustain.
I think if you were to go bigger and pull out from your 457 and all the equivalents of the 401k that you listed earlier, that you’re probably increasing things by about two to two and a half years, which may not be really sustainable. It might put a little bit of stress on you, if things don’t go according to plan. I don’t really love the idea of using more short term debt to accelerate your purchase timeline with that. I think that that’s not incongruent with the strategy of hitting singles that I think you’ve pulled here. I think the HELOC is fine with that. So I love everything about this and I think it’s going to work. I think you’re going to do really well.
You might consider with a 10 year time horizon diversifying a little bit at some point. You’re buying all in Kansas. I don’t know that market specifically well, but my instinct is to think that’s not going to be a highly appreciating market, it’s going to be a cash cow for some of these things. And there is opportunity for upside in maybe some markets that maybe have that appreciation potential at some point in your journey with that. You might find that you might want that mix, but I like what you’re doing there.
I think that you do have a very minor challenge that has no real right answer about whether I want to max out the 401k portion of the 457, the pre-tax, tax deferred retirement account portion, or go into the Roth alternative. I always have a bias towards the Roth, but in this case, if you do think you’re going to have lower taxable income in a few years, if you travel the world or get a new job, and you really want to plan around that, the Roth conversion ladder that that has been discussed in a lot of things, maybe there might be a really, really good option for that for you with this account that may be more advanced and you might have to do some exploration there.
So I’d learn about that and that may tweak your allocation a little bit. But I mean, there’s not much to change here at the end of the day. I think it’s a really strong position. And it seems like it’s very sustainable and likely to get you to where you want to get to. How’s that for a rant?

Mindy:
I don’t think we really covered the fact that his rental properties right now are grossing 3,600 and netting about 1,500 with the five that he has. He’s got a goal of 10. I think it’s safe to assume that your future numbers will mimic your current numbers. So you’re spending $3,000 a month with your current income, you have $1,500 coming in from your rentals. Doubling your rentals will effectively double your income. Now you’ve got income to replace your W-2. And when you’re off ex patting around the world, I’m guessing you’re going to travel to some places that are less expensive than America, which is pretty much everywhere. Not everywhere, but most everywhere.
You can also game the system like the Millennial Revolution couple. When the markets are high, they can go to the more expensive locations. And when the markets are tanking a little bit, they do this geographic arbitrage where they’re visiting places in Southeast Asia, where it’s way less expensive to live for a week or a month or a year. So there’s ways to game the system, but it seems like what you’re doing is going to get you to your goal very quickly.
I did mention the loan from the retirement accounts and I didn’t clarify that. That would be a short term option. Maybe some amazing deal came up and you’re like, “Ooh, if only I had 50,000 more dollars.” You can take this loan out, buy the property and then figure out a way to repay the loan. But yeah, I don’t like the idea of taking out a 401k loan for an extended period of time or using that as the way to fund your property purchases all the time, but as an opportunity to take advantage of a really great opportunity.

Paul:
Yeah. And I think part of the reason I’ve been so aggressive in acquiring properties is interest rates have been great, and so I figured get while the getting’s good. And just every time I close on one, I’m like, “All right, I’m good. I need to give it a little bit of time. I need to pay off this HELOC.” And then before I get done paying off the HELOC, I see another deal and it just looks too good to pass up. So the loan is, I guess, another potential option, if I decided that the HELOC route doesn’t work very well. And all of my accounts are with Fidelity, so I am sure there’s a way to do it. I just haven’t explored that option.

Mindy:
Yeah. Some plans will allow you to take out a loan and some plans won’t. The max that you can borrow is 50% of the value or $50,000, whichever is lower. I mean, there’s options and I don’t know that you can do both the 401(a) and the 403(b) loan, but that is just a research opportunity for you.

Paul:
Yeah.

Mindy:
Some of the questions that you had asked us ahead of time, are you going too fast acquiring properties? For you specifically, I think that you’re not because you have a good cash position. If somebody else were coming in and saying, I only have $11,000 in my personal savings account or my emergency fund, and I only have $11,000 for my five doors, I would be like, “Ooh, let’s talk about that a little bit.” So I am going to ask you a little bit about that. But you’ve got the huge delta between what you’re bringing in every month and what you’re spending, which will allow you to cover an expense. So let’s look at the condition of your properties. Let’s talk about those really quick.

Paul:
Yeah. So they’re all older homes. One of my properties, I think just passed 100 years old.

Mindy:
Oh.

Paul:
But other ones are about 50 to 60 years old, but they’ve all had fairly good upkeep. None of them were in disastrous states as I acquired them. The one I’m acquiring next week was just flipped. So it’s got a new water heater, a new roof, new paint, new carpet, all of that stuff. So with them being older houses, there’s little things that obviously could age out and need to be replaced. But right now, probably the closest thing to needing to be done would be AC units. The rest of them, all of my inspections were pretty good that everything was in decent condition.

Mindy:
Okay. This is more towards people who are listening, who are thinking about getting into real estate and thinking, oh, he’s got $11,000 in his reserve, that’s great. Scott, when he first started, he had $10,000 in his reserve fund for his first property, which was a duplex. So two doors, $10,000. And then he bought another two doors, another $10,000. So he had $20,000 because he was investing in a different way than you are. He had a different job. He was in a different position and he wanted to be secure.
You are in a different financial state. I mean, if you had to, let’s say every AC unit breaks in every single one of your properties, you could find a way to cover that. You have credit cards, you have a HELOC, you have income from your job. You have 401k that you could borrow from. You’ve got a lot of different pots you could stick your fingers into, to come up with the funds for this. You could finance it. I mean, there’s a lot of different options available to you. I think one of the best reasons is because of the delta between what you’re bringing in and what you’re spending.

Scott:
Yeah. You make $116,000 a year, plus you get $16,000 contributed into your 401k, plus you’ve got your rental income with that and you spend $36,000 a year give or take with that. So, I mean, that in a little bit of a paradox there allows you to … I’m not concerned with your capitalization at all with that. You have $22,000 in cash. You’ve got a HELOC available. You probably have loans against the retirement accounts, as Mindy mentioned there. And you generate $40,000 to $60,000 per year in cash or could with very minor tweaks to your retirement allocations with that because of the way you spend with that. So I just think that there’s not a lot of big risks in your position that you’re taking. Again, I think you’re on a path towards hitting a large number of singles over the years with that.
And it seems pretty sustainable to me to buy two of these properties per year, if that’s how you were to choose to allocate your cash generation for this. I mean, coming up with 40 grand should not be a huge issue for you, depending on again, how you allocate that towards these investments. And that’ll begin to snowball subtly over the next couple of years, as you buy more and get the cashflow generation from them.
I do think you’re overestimating your cashflow from the properties a little bit, because there is probably some capex reserve and turnover events that you probably haven’t experienced quite the same way as a landlord with 5, 10 years. So I might cut that cashflow number in half and assume another 500 to 750 per month for some of those things until you have reason not to with a couple more years. But the fundamentals are I think really good.

Paul:
With the numbers as they’ve worked out so far, that’s what it’s about, but I do factor in, all right, what am I realistically calling profit from these, is I would say, probably around 900 or so after estimations for future vacancies and capex expenses. Right now I’m not pulling any money off of them, the money’s just building up the reserve accounts for them right now. And as everything’s worked so far, it’s all worked out luckily, and I haven’t had to really dip into any personal funds since the very beginning of acquiring the first properties.

Scott:
Yeah. I’m not worried about your capitalization with that at all. I think you’ve got a really good grasp on that. Where you get worried is when somebody makes your income, saves $7,000 a year and has three HELOCs going where they’re pulling cash out of one property to buy the next one, buy the next one. That’s a chain reaction that is waiting to happen in a down market with that.

Mindy:
Yes.

Scott:
I don’t think that’s something that you’re at risk of.

Mindy:
Yes. That’s the point that I wanted to make. I want to make it clear that Paul’s doing great because he has a lot of different options. Have a lot of options in that. I mean, this sounds so stupid to say, but when you have all these options available, you have so many more options available. When you just have the one source of income, when you just have the one source of cash, your options are very limited. But you’ve got money everywhere, Paul.

Scott:
Your fundamentals are so strong that it allows you to take a little bit more risk with that because you’re saving 60%, 70%, 80% of your overall income.

Paul:
And one thing that also popped into my mind is, I’m probably getting close to reaching the limit for Roth IRA contributions. So I probably need to put some pre-tax money into accounts to lower my adjusted gross income.

Mindy:
2022 Roth limits are 144,000.

Paul:
Okay, so I’ve got a little wiggle room there.

Mindy:
[crosstalk 00:41:53] yeah, so you still have a little bit of room.

Scott:
Yeah. I would imagine your rental properties are going to create a passive loss for you, or be very, very close to no net income. I don’t know that, you have to talk to your CPA with that. But I don’t think you’re close on that front. Well, maybe in a few years.

Mindy:
Ooh. And since you have five rentals that you have acquired this year, I really hope that you have a CPA that you’ve been working with, who can help you with all of your fun, new tax deductions and depreciation and all the things that come with owning rental properties.

Paul:
Definitely. Yeah, the second I got my first property, I was like, “I’m not trying to figure out this tax game.” So I got a CPA immediately. And I know I acquired my first ones fairly late in the year, and so they had initial expenses and almost no income for the year. And so there’s, I believe quite a store of roll forward deductions that we have just ready to utilize.

Mindy:
Nice. Well, may you pay nothing in taxes because that’s the way the tax code was written.

Scott:
Paul, what else can we help you with today? Any other questions you had or areas you want us to touch on?

Paul:
I think we’ve covered the bulk of it here. It’s just good to think it out and know that what I’m doing doesn’t seem crazy to other people.

Mindy:
Not crazy to us. Not crazy to a lot of the people that are listening. Crazy to some of the people who are listening. There’s some people who are listening, who’ll be like, “Ooh, I don’t want to invest in real estate.” Then don’t, that’s fine. You don’t have to invest in real estate. But what you’re doing, like Scott said, is solid investing. You’re not doing anything crazy. Are you able to sleep at night based on the way that you’re investing?

Paul:
Usually. When I got a new closing happening, I get kind of excited.

Mindy:
But you’re not staying up late like, “Ooh, how am I going to pay my mortgage tomorrow?”

Paul:
Yeah. I mean, I just focus on, all right, I’ve really got to buckle down to get this HELOC paid off, because I don’t like unnecessary debt. For a long time, I didn’t like any debt. When I graduated school and had 100K of debt, I wanted to get rid of it as fast as I could. And so-

Mindy:
Yeah, I hear you.

Paul:
But I’ve become better with real estate debt because I’ve seen what it can gain.

Mindy:
Yeah, I think you’re doing a great job. I think that in two years you should call us back and check in and we’ll be like, “Ho ho, look at all that amazing sweet cashflow that you have, and look at you were able to quit your job eight years earlier than you thought you would.”

Paul:
I like it. So I might stick around a little bit longer than that, but …

Mindy:
Okay, Paul, this has been a lot of fun.

Scott:
No, this has been fun. Look, I can’t compliment your situation enough with that. I think you’ve got a wonderful set of financial fundamentals in place here. You’re hitting a lot of singles with this. I can’t argue with the approach to buying for solid cashflow in the Midwest, like what you’re doing there. This is not a get rich quick plan, but I think it will, very high probability to carry you towards your goals. I don’t think you have any problem with your HELOC or other debts. They’re all six months or less payoff period for you, if you choose to do any of that on the short term debt, and you’re using them pretty intelligently. You have a question about the 457(b) that depends on how you think your income and tax situation is going to evolve over the next 10 to 50 years. Good luck with that one. And yeah, I think it was a good discussion and I think a lot of people should be trying to emulate a lot of the things you’re doing.

Paul:
Well, thanks. I appreciate that. It’s good to know that I’m in a good spot.

Mindy:
You’re in a very good spot. I’m excited for your real estate portfolio. Text me or email me when you get the final closing and then keep me up to date on your next properties.

Paul:
I will.

Mindy:
Okay. Paul, it is time for the famous four questions. Are you ready?

Paul:
I am ready.

Mindy:
Okay. Paul, what is your favorite finance book?

Paul:
So we briefly mentioned Bryce and Kristy. So I did really like their book, Quit Like a Millionaire, despite their disdain for rental properties or property ownership. The concepts I thought were really great. But I also really like The Millionaire Next Door and The Next Millionaire Next Door. Those are great books.

Mindy:
In Bryce and Kristy’s defense, they’re Canadian.

Scott:
I love all of those books by the way, so highly recommend. What was your biggest money mistake?

Paul:
The biggest one is probably when I was in my early 20s and still in school. I thought it was a good idea to get talked into setting up an IUL policy or a whole life insurance policy that I totally didn’t need and was just a waste of money that I could have been putting into a Roth IRA instead.

Scott:
Can you give us a little bit more detail on that, because I was just thinking that it’s about time to get somebody on who has a regret story or a success story from a whole life insurance policy.

Paul:
Yeah. Someone that I really admired as far as I thought they were really rich had talked me into it, sold it to me. And so it was just like the whole use life insurance as an investment. And then I learned later on that those shouldn’t mix and better idea to keep them separately. So I was paying probably 250 or so a month for this policy. And by the time I figured out it wasn’t good and canceled it, I think I got back 1,200 bucks after three and a half years.

Scott:
And so for 250 bucks a month, you probably had $250,000 policy or something like that?

Paul:
I think it was actually a million dollar policy because I was 20 and really healthy.

Scott:
Okay.

Paul:
But one that just, I really had no use having. I didn’t have any dependents. I didn’t need life insurance.

Scott:
And then if you contribute to these things over the course of several years, what they don’t tell you is the equity balance doesn’t really begin building up in a meaningful way until about 10 years down the road with that.

Paul:
Yeah.

Scott:
And then you cancel the policy and you’re left with nothing or in your case, 1,500 bucks. So love it. Thank you for sharing that.

Paul:
Yeah.

Mindy:
Life insurance has a place, but when you’re 20 with no dependents, that’s probably not the right place.

Paul:
Yep.

Mindy:
Okay. What is your best piece of advice for people who are just starting out?

Paul:
I think that there’s just so much information out there in general that trying to consume it all is like trying to drink from a fire hose. So rather than trying to figure out everything, find something that interests you and learn about that. It’s much more manageable and I think you’ll gain a lot more in doing that.

Scott:
Most important question of the famous four here? What is your favorite joke to tell at parties?

Paul:
How much does a roof cost?

Mindy:
Oh, how much does a roof cost?

Paul:
Oh, sorry. I screwed that up. How much for the chimney?

Scott:
[crosstalk 00:49:35] thousand shingle dollar bills. Oh, okay.

Paul:
No, I messed that up. How much does a chimney cost?

Mindy:
How much does a chimney cost?

Paul:
Nothing, it’s on the house.

Scott:
I love it. We were having a fire sale of roof jokes.

Mindy:
Oh, this is terrible.

Paul:
Or if by chance they say that it’s on the house, you say, nope, it’s through the roof. So either way they’re wrong.

Mindy:
I like that. I like the twist ending. Okay. Paul, where can people find out more about you?

Paul:
So I don’t have a very big social media presence, but I do participate in the BiggerPockets Money Facebook group. Or if people want to reach out to me, we can put my email in the show notes.

Scott:
Well, go ahead. Yeah, we’ll put the email in the show notes. Yep.

Mindy:
Yep. And the BiggerPockets money Facebook group is at Facebook.com/groups/bpmoney. And the show notes can be found at Biggerpockets.com/moneyshow268. Okay. Paul, this was super fun. Thank you so much for your time today. And we’ll talk to you soon.

Paul:
Okay. Thanks.

Mindy:
Okay, Scott, that was Paul. That was an amazing story. And something you mentioned several times in this episode, Scott, was singles, the concept of a single as a base hit, as opposed to a home run phenomenal deal. And Paul is making really great investments, but they’re not these sexy, amazing, oh my goodness, I have to tell you about this amazing deal that I just found, deal. They are singles, base hits, and that’s okay. That’s perfect actually, because that follows in with his investment strategy. He’s not trying to retire tomorrow, he’s trying to retire in 8 to 10 years or 10 to 15 years, and that’s fine. These are great investments that are going to yield solid cashflow for 10 or 15 years. And we’ll see what happens down the road, but he’s doing really well.
And I think that we don’t focus enough on the boring investments, the basic investments. There’s a lot of talk in real estate about these flashy and amazing deals. And right now those really aren’t out there. The I bought it for a dollar and it cash-flows $12 million a minute, that doesn’t happen right now in this market, and that’s okay. But looking for solid deals, there’s still solid deals out there, just maybe not in your specific market. So he’s going outside of … He’s in Utah and Utah’s a hot, hot, hot market, so he’s looking at another market that he’s familiar with.

Scott:
Yeah. And I don’t want to discount the notion of home runs and those types of things. We talked to Charlotte from Charlotte a few weeks ago and she’s hitting home runs with her short term rental empire that she’s starting to build. But she can afford to be a lot more actively involved in her properties because she doesn’t work full-time with some of those things. And so that, I think it just depends on your strategy. I wouldn’t like the idea of building a very active, I think, short term rental portfolio for Paul based on the fact that he works full-time at this job and he’s investing out of state. That could certainly change for a lot of things, but it just depends on your situation, right?
And it’s spend less, earn more, invest, or create. And Paul is not playing the create card, or he’s not pulling that lever right now, and that’s totally fine. His approach is going to be very successful. And I think for many people earning in that middle, upper middle class range, that I would put Paul smack in the middle of, from an income standpoint, this is a great approach, and I think a really, really stress free path to financial freedom over a moderate period of years.

Mindy:
Yeah. And like we said in the show, his specific situation is, we’re okay with the way that he’s purchasing these properties because of his specific financial situation. And if he had a different situation where maybe he’s not making as much money, or he’s spending almost everything that comes in, we’d have different advice. So I wanted to just reiterate that I love the way that he’s safely investing. And safe isn’t the right word when you discuss investments, because of course nothing is guaranteed, but he is-

Scott:
Sustainably investing.

Mindy:
Sustainably, not very riskily investing to build wealth and cashflow down the road. So I think he’s doing a great job and I was very delighted to talk to him today.

Scott:
One quick call out before we go, I think I would be interested in hearing from folks who have used whole life or universal life insurance policies in the past, and have either horror stories or success stories with that. I think there’s a very small use case for those, and so I’d be interested from hearing anybody who has been happy with their plan. One rule though, you can’t reach out to us if you sell or have sold the whole life insurance policies on that, unless we disclose that and learn about that because we get some very enthusiastic people from these policies who, after we do a little digging, we find have some incentive to promote them.
Well, great. Should we get out of here on that fun note?

Mindy:
On that super happy note, yes. From episode 268 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying, be sweet, parakeet.