Finance Friday: Can I Comfortably Retire by 50 with My Current Portfolio?

This story was originally published at BiggerPockets.com

Want to retire early? You don’t have to wait until age sixty-five. With a few cash-flowing assets and smart money moves, you could accelerate your path to retirement and enjoy your riches much sooner than you thought possible!

Welcome back to the BiggerPockets Money podcast! Derek has worked hard to build a $1.7 million net worth and a portfolio of six rental properties. The only problem? He wants to retire at age fifty. In this episode, Mindy and expert investor David Greene from the BiggerPockets Real Estate podcast work together to get Derek on the fastest path to early retirement. If he plays his cards right—redeploying some of his “lazy” home equity, increasing his cash flow, and starting a profitable business or side hustle—he could reach FIRE in just seven years!

Are you wary of today’s sky-high mortgage rates? We share an investing strategy that allows you to buy real estate notes at a deep discount and potentially acquire properties that are worth so much more! You’ll also learn how to use your 401(k) retirement funds today without incurring tax penalties. Finally, you’ll hear about the power of starting a business and reinvesting your profits!

Support today’s show sponsor, BAM Capital, your path to generational wealth with premier real estate investment opportunities! 

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Mindy:
I’m Kofi. How can I shave 24 years off of my retirement? Am I on track? Let’s find out. Hello, hello, hello, and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen and in the back half of this episode, I am going to be joined by David Green, the host of the BiggerPockets Real Estate podcast. Today’s guest has a solid foundation with some questions about how to handle his real estate portfolio, hence David Green. Here at BiggerPockets, we have a goal of creating 1 million millionaires, which means you are in the right place if you want to get your financial house in order, because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting. Today we’re speaking with Derek who is Coast Fi and looking for some advice for shortening his time to retirement before we get into Derek’s Finance Friday. A special thanks to our show sponsor, BAM Capital, your path to generational wealth with premier real estate opportunities. See why more than 1000 investors have invested with BAM capital at biggerpockets.com/bam. That’s biggerpockets.com/bm. Derek, welcome to the BiggerPockets Money podcast. I am so excited to talk to you today.

Derek:
Thanks, likewise, I’m glad to be here.

Mindy:
So this episode comes out of our community and it shows the power of our community. I found Derek’s Facebook post asking this question, how do I get $80,000 annually with my current situation? And then he shared a bunch of numbers in our Facebook group. If you’re not a member of our Facebook group, please go join facebook.com/groups/bp money where you can ask questions, get answers, share your experience. You know how Facebook works. So Derek is a 43-year-old man with a family of six. He has four children with a current net worth of about $1.7 million. A little bit later in the show we’re going to bring in David Green from the Real Estate Podcast and have him give some of his own advice about Derek’s portfolio. So Derek, let’s look at your money story. How did you go from birth to $1.7 million net worth

Derek:
Happened overnight,

Mindy:
Bam?

Derek:
Yeah, no, I think at one point I know my mother, she was always self-employed, so I always saw her working hard and working hard in her business as a translator. And then I guess growing up at one point I ended up going to a free seminar that T Har Becker put together called Millionaire Mind, and when I went to that seminar, I met someone there who told me, oh, I just bought a duplex and how they love this new book called Rich Dad Poor Dad. I didn’t know what a duplex was at the time, but once I read that book, I definitely wanted duplex and lots of them because I wanted more passive income.

Mindy:
Okay, and what is your goal?

Derek:
I think my goal right now is to try and generate an 80,000 in passive income per year. I think that would be ideal. I mean, not looking to retire yet, but I think that would be great to have a sense of freedom and being able to spend more time with family and do what I want.

Mindy:
And where did you come up with this $80,000 number?

Derek:
I think just looking at our yearly expenses and what it would take in terms of budgeting and being able to live off that and that seemed like a comfortable number for us that we could make work.

Mindy:
Okay. So are you interested in increasing your rental property portfolio or are you looking more towards the stock market side or combination of both?

Derek:
I think a combination of both, but I’ve generally been more interested in being hands-on with real estate and the idea of the cashflow that can generate. I mean a lot of my, part of my equity is in my 401k, but I can’t really do much with that until I’m of traditional retirement age. So I’m looking at a way to bridge that gap and hopefully enjoy that a bit sooner.

Mindy:
Well, I am going to send you to the mad scientist and his article how to access retirement funds early because you can access your retirement funds early, there’s just taking money out, you’re going to pay an early penalty withdrawal, which is 10% plus you’re paying taxes on whatever you’re pulling out if it’s a traditional 401k. Another thing to do is the Roth conversion ladder. After you separate from service with this particular company, you can start rolling over your 401k funds into a Roth IRA and you will pay taxes on that. You will not pay penalties on that. I don’t really like to pay penalties. It’s my money and I want it now. Do you know that JG Wentworth commercial, is it just a local thing here?

Derek:
Probably local.

Mindy:
There’s also something called the 72 T, which is substantially equal periodic payments. So essentially you’re taking X number of dollars out. Now again, you’re paying taxes on it but not paying a penalty and you’re doing that every single year you can and there’s no age limit on that, you just have to repeat it every single year. So you don’t want to take out a hundred thousand this year if you know you’re only going to need 20 every other year, you’ll be taking a hundred thousand out every single year. And that it’s something I learned from my friend Eric Cooper, is that you can actually do more than 1 72 T. So you start off maybe on the lower side of what you’re looking at, oh, I want $10,000. Great. You start off with 10,000 and after a couple of years you’re like, Ooh, 10,000 doesn’t really do it.
I probably need another 10. Then you can either change it, but you can only change it once or you can just add another one. So I would reserve the change for if you need to dip down and add another one and just start taking out money that way so that I don’t want to dive down a complete different rabbit hole. But I did want to say that there is the opportunity to access your retirement funds early and Mr. Mad Scientist does a beautiful job talking about it, so I’m going to send that to you. I’ll also keep it in the show notes so that everybody can read that article. Let’s look at your real estate portfolio. You bought one property every three years to get to six properties with 12 units. That’s really impressive and you’re making $40,000 a year on that. That’s nothing to sneeze at.

Derek:
Yeah, it’s definitely, I’ve been slow and steady, I guess like the turtle. But yeah, trying to make a move every few years it seems, and it seems to have paid off. My first property I moved into, I was in a more expensive apartment renting a thousand a month, and then I spent a couple years moving to a cheaper apartment to help save up that money to buy that first fourplex, which I bought with a two or three KFHA loan, just three and a half percent down, which let me borrow some money to help fix up the place. And for me, that was what got things going for me and really helped me cover my living costs.

Mindy:
And how were you saving for your down payments

Derek:
Payment? I think at that point it was just saving into a traditional savings account. I think it was like ING direct back then or whatever it was called. And yeah, saving money there and while at the same time trying to save at least the minimum or 10% or so into my 401k.

Mindy:
Okay, that’s awesome. Having a 401k is a great opportunity for your retirement fund or for accessing, like I said, you can access that fund early. Did you live in all of your properties? Did you buy them as owner occupied?

Derek:
No, just the first one. So just the first one, the four unit I lived in, the first floor unit rented out the other ones that gave me some good experience of being a landlord and after that it was just buying mostly properties that I saw on the market. On the MLS,

Mindy:
I like to say the MLS is not dead yet, and if you take the initials from that, it’s spells out Mindy. So when you’re thinking of looking for properties, think Mindy, how did you fund your short-term rental

Derek:
Short-term rental? So I saw a property that came up on the market that was, I think it was only for like 50,000 and it was near a skier that we like to frequent pretty often. And then at that time, well we had for, I didn’t have that much I think in cash to buy, but we had our contributions and our Roth IRA at the time, which would help us cover to buy this property in cash. So it took money from our contributions and our Roth IRA and use that to buy this property

Mindy:
And that makes me a little nervous. How do you feel about that decision after you have made it?

Derek:
Well, we took on a property that was a lot of work to begin with, so just that alone was kind of made us weary of are we doing the right thing or not? And also seeing how the market’s been climbing recently has also made me second guess, but I think we’re feeling better with it and I’ll let you know more once we see how it performs once the ski season starts, because that’s what we’re hoping on.

Mindy:
Yeah, there’s this idea that you can pull the principle from your Roth IRA in order to fund certain purchases like buying a house or paying for college or I think medical expenses are one of them, but there’s a payoff. I mean it sounds really awesome. Oh, I’m going to do this. But then there’s the opportunity cost of your money. That money is no longer in the stock market. All the gains from however long you’ve had your money in your Roth IRA are still in your Roth ira. You can’t actually withdraw those. So I do like this experiment because you were able to purchase this property for $50,000, it’s now worth $150,000, so that’s a good amount of gain, but we all make these decisions, oh, I’m going to sell this stock to buy that stock or I’m going to sell this ETF to buy that index fund.
And sometimes it works out and sometimes it doesn’t, and you make the best decision with the information you have at the time. I’ve done the same thing and hindsight is always 2020, but you don’t have that luxury right now, which is fine. It’s not like you just pulled it all out to go gamble on red at the roulette table. You bought another asset, you sold one investment to buy another investment, which is that’s an interesting problem to be facing. You had money and now you have money in a different place. So we’ll see what happens. This shows the power of taking small incremental steps and when we come back, I want to hear more about your life currently and some of your numbers. Welcome back. Before we get into some actionable advice, we want to help our listeners understand more of your situation. So what does your life look like currently?

Derek:
So right now I’m living in Canada. We recently moved a couple years ago from Vermont during the pandemic because we wanted to be closer to my wife’s family here, so we made that move. So adapting to life in Canada has been interesting, but it’s also been good too. There’s ups and downs I guess with any move. One thing that I liked about moving here was that education is, the costs are a lot more affordable than they are in the us so I didn’t really have to worry too much about how are we going to afford my child’s education if they’re going to go to college. And also healthcare too. I don’t have to worry about the rising healthcare costs because that’s covered here. So three of my youngest children, my older children, they were born in the US but when we moved to Canada, we had my youngest child, he was born in Canada, so that was nice to see the healthcare system working there and not to have any out-of-pocket costs.

Mindy:
Kids are very expensive, especially right at the very beginning. So one thing that you’re trading off in Canada for their amazing healthcare and their, for the ability to get amazing healthcare and amazing money for college or college costs is you don’t have fixed interest rates on your mortgage. Is that right?

Derek:
Right. Yeah. So that was something that when we first moved in here, variable interest rate is something that everyone was doing here. Rates were low around one and a half something percent, so you can only lock it in for or five years if they do a fixed rate and then you have to get a new mortgage. So they do 25 year terms here and then every five years you have to either renegotiate or something like that. So that’s been an adaptation here on our side.

Mindy:
Yeah. How does that feel? Do you think you’re going to stay in Canada long term, even with this trade off? What are interest rates right now in Canada?

Derek:
I’m not sure. I think they’re kind of similar to where they are in the states. Maybe they around six, 7% depending on where. But yeah, I think that’s what they’re right now,

Mindy:
But then they go up, if rates go up, your interest rate goes up on your house. You mentioned that you have four kids, let’s look at your finances, what’s your income?

Derek:
So right now our household income is around a little over a hundred thousand between my wife and I and we’re working a full-time job myself and my wife has a self-employment income, and I have some self-employment income as well.

Mindy:
Ooh. Is any of that American self-employment income or is it all Canadian?

Derek:
Yeah, most of our clients are still based in the US so it is I guess US based. Okay,

Mindy:
So I’m going to give you a homework assignment to look into the self-directed solo 401k, you have to have self-employment income in order to qualify for that, but that could be a way to invest in real estate. It’s not going to help with your cashflow goal because everything, it’s like a traditional investment. Let’s say in your 401k, you invest in Apple, all the gains in Apple go back into your 401k. So the same with real estate. It’s owned by your 401k, you invest and all the money comes back into the 401k, but it could boost your 401k balance. So that’s something to, like I said, it’s a homework assignment. You can go ahead and dive into that a little bit more. What are your annual expenses?

Derek:
Right now they’re about around 80 to 90,000 a year. Big one I guess is grocery because my kids eat a lot and it doesn’t look like that’s stopping anytime soon.

Mindy:
It’s not. No,

Derek:
No. They all eat like truckers. But yeah, our mortgage payments is around 15,000 annually, children and childcare and activities around 5,000 restaurants and entertainment around 5,000. But yeah, we try to keep our expenses as low as possible where we can, but I think that’s kind of where I was looking to try and generate that 80,000 in passive income. I think that’s something that’d be manageable and would cover our expenses.

Mindy:
Yeah, looking at your expenses, the only thing that really jumps out to me is the business miscellaneous, the tax payment. I don’t know if that is related to the business or related to your income. If it’s related to the business, I would like to see business expenses separated from your personal expenses because they’re business expenses, they’re not personal expenses. There was one other office expenses, so office expenses at 3000, business expenses at 7,000, there’s 10,000 that we’re pulling out and now you’re back down to that 80,000 that you were talking about, which makes sense that that’s your goal. I have spoken to some people who are like, oh yeah, I currently spend 40, but I want 80,000 in passive income. Okay, well that’s great. So I But also maybe you’re chasing more money than you need, but this makes a lot of sense. And I mean you have four kids, you’re going to have more expenses than somebody that has two kids. So what does your asset

Derek:
Right now, the majority of it is tied up in real estate. I think about two or 300 is in our primary residence and then about 300 or so in retirement accounts. And then the remaining is in small multifamilies for the most part in Connecticut and Vermont. I also wondering maybe your thoughts about I’m Coast Phi or not, or do I need to contribute more to my 401k at this point or what your thoughts are on portfolio where it stands?

Mindy:
Yeah, so what I like about what you have, you’re 43 and you have $300,000 in a 401k. This is an American 401k, right? Okay. So you can estimate based on the rule of 72, which has nothing to do with 72 T, you can estimate that your portfolio will double approximately every eight ish years. So at age 51, you should have about 600,000 in your 401k. At age 59 you’re going to be looking at about 1.2. Of course, past performance is not indicative of future gains. However, the 4% rule says that if you have a million dollars in net worth, you will be comfortable pulling out $40,000 a year. So that right there could be at age 59, your additional $40,000. There’s a lot of different options for you, and that’s if you don’t put any more money into your 401k. I love the 401k because it reduces my taxable income.
I’m a little bit older than you and my taxable income is something I want to pull down right now. So I’m contributing to a traditional 401k. If that’s not really a big concern for you, you could contribute to a Roth 401k if your company offers it, which allows for the same contribution limits, which is approximately $23,000 in, well, it is $23,000 in 2024, and it typically goes up every year or every other year. So if you’re contributing that much to a Roth product, then you’re paying taxes now at your income. So that’s something to take into consideration. But you’re paying taxes now and then it’s growing tax free. So when you pull it out at age 59, you are not paying any taxes on that. So I love a good Roth product, but my current goals are a little different. That’s me personally. You’re not living my same life.
So you can make your own decisions, but I think that that’s something to keep in mind and whatever you choose, it’s still 59 and a half or at age 59, you’re going to be looking at about 1.6 million. Again, past performance is not indicative of future gain and don’t call me back in 16 years and be like you said, well, we’ve heard some really great things already. Let’s see if we can shave off 16 years by gaining an additional $40,000 in annual income. Alright, welcome back to the show. So our goal here is to reach fire in about seven years, and to do that we would need to generate approximately another $40,000. Let’s see what we can optimize to cut retirement down from 24 years to seven. Derek, you posted in our Facebook group that you wanted to get to early retirement and $80,000 in cashflow a lot sooner than traditional retirement age. What is it that’s driving you to do this?

Derek:
I guess seeing my kids grow up in times kind of flying by and they’re not getting any smaller and I’m getting older. That’s why I’d rather like to see myself in a place where I can retire if I want to earlier at least be financially independent where I can decide on my own terms if I can I work or decide to travel with them or try and enjoy things a little more.

Mindy:
And you have a small amount of your net worth in a 401k. You’ve got a little bit in a Roth IRA sub cash, which is awesome, but the bulk of your retirement plan or your assets is in real estate. And we have brought on my best friend David Green from the BiggerPockets Real Estate podcast to talk specifically about your portfolio. So David, thank you for joining me today. It is my pleasure. Thanks for calling me in. So let’s start off, Derek. Your first question was, what are my best options to get $80,000 a year in passive income by age 50 or sooner? So my first thought is well buy more rental properties, but we are in a market where prices have gone up, interest rates have gone up, and fighting a great cash flowing deal can be difficult. And with cashflow being your primary driver, I want to go in and look at your portfolio itself to see if there’s anything that maybe not be the best use of your money. David, what do you think about his portfolio? He has six properties with 13 total units including one short-term rental.

David:
First question, Derek. Well actually my first question before my first question, I see you have a family of six. We could tackle these expenses first. Are you willing to auction off any of these children because they’re expensive

Derek:
At times? Yes, but I think I’ll hold onto them.

David:
That’s going to make things a little tougher, but that’s okay. That’s why you got Mindy here. Alright, your short-term rental, do you enjoy managing it? Do you hate managing it? Are you willing to have more of those?

Derek:
That I’m still getting into that process. We kind of rushed to get it up and running for the eclipse. It was kind of right in line for the eclipse of a popular weekend, vary in demand, but now it’s the slow season in Vermont, so I’m kind of waiting to see how things pick up once ski season starts here for Vermont.

David:
Okay. The reason I ask is you can increase cashflow by moving equity from traditional rentals to short-term rentals in most cases, but you’re increasing workload also. So if the goal is to have zero work, we don’t want to take that road. If the goal is to have more flexible work where you don’t want to be committing to an office, you want to be able to stay home, you can manage a short-term rental from your house. So first, when we talk about it from that perspective, are you open to managing short-term rentals or hiring an assistant who could help you manage short-term rentals?

Derek:
Yeah, I think that’s something that I’m open to. I mean, I’m not looking to retire and do nothing but some more flexibility in my life is kind of what I’m getting at and I’m thinking that more cashflow would be the obvious answer. But yeah, another STR could be another option.

David:
Okay. But the SDR you have now, it’s newer, so you don’t have a lot of experience with it, right,

Derek:
Right. Yeah, yeah. It’s new to me. I’m used to long-term rentals for the small multifamilies.

David:
And are you managing those yourself as

Derek:
Well? Managed the one in Vermont where we used to live there. It has an in-law apartment, so I manage that one myself using Hem Lane, which has been great so far. And then I’ve got four rental properties in Connecticut that I grew that portfolio when I used to live there and I put that under property management.

David:
Here’s what we’re looking to do. We want to take your property that has the most equity or the properties that have the most equity and look at your return on equity and compare that to a return on investment. Have you done that yet?

Derek:
Not specifically, but I have been looking at possibly getting a HELOC on the STR that I recently bought since we bought that with cash. And so that has no mortgage on it right now.

David:
But you are familiar with the concept of return on equity,

Derek:
Right? Yeah, yeah, definitely.

David:
Okay. So for the audience, when we want to figure out how efficient an investment opportunity looks like, we calculate the return on investment. So we take the cash flow it would make in a year. We divide that by the money we’d have to put into it, which is usually the down payment, the closing costs and rehab or furniture or whatever you’re going to do. And the number that you get is a percentage of the total number you put in and obviously the higher that percentage is, the better. So if you get a 10% cash on cash return, we use that metric to compare this investment versus another one that might produce a 14% cash on cash return. So we know the money will be more efficiently used with the higher number From a cashflow perspective. Well one thing investors don’t do once they’ve owned a property for 5, 6, 7, 8 years is they don’t think about the fact that the equity might have grown at a faster rate than what the cashflow did.
So rents go up, but they may not be going up at the same speed or pace that the equity in the property is. So you buy a property for $200,000, it gets you a 10% cash on cash return, five years of rent increases later you’re at a 20% cash on cash return and you think you’re crushing it, but the property went from 200,000 to 500,000, you’ve got $300,000 of equity. If you divided that same amount of cashflow, you make it a year by the equity in the property, not by your initial investment. You often find you’re sitting in a one, two, 3% return on the equity, which means your current equity is lazy. It’s not working very hard for you. And Mindy, I know you like it too, the richest band in Babylon, one of our favorite books talks all the time. You want those little soldiers of yours working hard. You don’t want lazy equity that just sitting on your couch eating your Cheetos and drinking your mountain dew without getting out there and putting in a solid eight hours of work. So if we looked at your portfolio right now, do you have an idea which of your assets have the most equity and the least return?

Derek:
Yeah, I have a general idea. I know some of them are currently have rents that are below market, which some raising rents might get a better return, but I’m not sure if it’ll bring me all the way there to having an adequate return on equity, but it’s definitely a great point that you you’re mentioning and it’s something to reevaluate

David:
And it will also change the way that you look at your portfolio. So we all have our favorites. I don’t have any kids. I’m sure parents, maybe they have that favorite kid. This one gives me the least headache, but when you start to look at the return on equity, you start to get an idea of what property was your favorite. Now maybe it’s not, you’re like, oh, I love this charming little bungalow, mid-century modern property, and you have these memories that you made in that house and then you’re like this little lazy son of a gun isn’t doing anything right? I need to sell this one and move that $300,000 into other properties. Now we do traditionally talk on this podcast about increasing cashflow by increasing the properties. However, in practical terms, sometimes that does the opposite for your cashflow. And here’s why I say that. When you first buy a property, you tend to also be buying a lot of deferred maintenance. Nobody sells their car when it’s running amazing and it’s giving ’em no problems. Think about every time that you’ve ever had the thought, I want to sell this car. Taking out the fact maybe you had a kid, you need a bigger one. When’s the time that we think, Hey, I think I need to sell this car. Mindy.

Mindy:
Oh, I am not the right person to ask because I have the same car since 2003.

David:
Your car’s awesome by the way. You gave me a ride at that car and it’s super bitching. I really liked it. All right, Derek, have you ever had the thought I need to sell this car? What was going on?

Derek:
I think it was just getting too much maintenance and the cost was just too high.

David:
It’s a natural human response. Homes can work the same way. So when you first buy a house, you are often buying all the previous owners’ deferred maintenance, and then there’s some weird rule of real estate where that air conditioner that was on its last legs that they were barely hagging on, you get in the house, you start using it more than it was used to being used and boom, the thin craps out or that roof leak becomes a bigger problem and now two, three years of cashflow is gone as you have to dump it into stabilizing the asset. This is even worse if you buy a property that has tenants in it. So I just made it a rule in my own investing the first year I own a property, if I break even, I’m happy. That’s a win. I expect I’m going to lose money the first year that I own a property.
You’re just going to see all the stuff that slipped through the cracks of your due diligence, even the best due diligence. You can’t account for everything that can go wrong with a property. So scaling your portfolio in the short term will usually make you less cashflow, but in the long term it will make you more cashflow and it will make you more equity, which is why it’s going to build you Well. Part of what we’re also going to talk about is what’s your timeline? Are we talking about trying to get you out of not working in the next year, the next five years, the next 10 years? What’s your thoughts?

Derek:
Well, my thoughts conservatively, I think seven years 50 sounds like a good number to reach for. I’m 43 right now, but I’m sure my wife would say now, but I’d rather try and find somewhere in the middle

David:
If you could find a way. And what’s the current job you have right now?

Derek:
Right now I do SEO work. So SEO specialists.

David:
All right, so I don’t know if you’re open to this advice, but the advice I give a lot of people in your situation is sometimes when we say I don’t want to work, what we’re actually saying is, I don’t want to work this job. I don’t want to work under these circumstances. I don’t want to commute. I don’t like this boss. This is mind numbing, soul draining work. But we’re not saying I don’t want to labor, I don’t want to spend energy. It’s more just I would rather do it with something else. And I say this for you and everybody who’s listening, I am not a proponent of get a couple rentals, equate your W2 and just throw a middle finger to the world and say, look at me. I am a proponent of get a couple rentals, get some stability, get a little bit of a buffer and move your energy.
Just like we’re talking about moving your equity from a job you hate to a career, a job, a business, a something that you would enjoy or at least doesn’t suck super bad, and then maybe you do it again into something else, right? So for real estate investors that love real estate, I’m frequently telling them, do you love people? Get your real estate agent sales license. We need better agents in the world. There’s not very many. Do you like numbers? Become a CPA. Do you like solving problems? Become a loan officer. Do you like design? Do you like construction? Do you like bookkeeping? There are so many meetings within the world of real estate that you can get a 10 99 position, start your own business work for a real estate investor. It’s not full blown. W2, I’m a slave to someone else, but it’s also not complete lack of any stability at all.
It’s a more happy medium that exposes you to the things that you enjoy doing, which I’m assuming is real estate if we’re talking on BiggerPockets. So that’s another thing that doesn’t have anything to do with moving your equity around that. I’d like for you to think about. What if you started your own business and did SEO work for other people once we got you to that $80,000 a year right now if it fails, that’s okay. You’ve still got money coming in, but if you enjoy it, it could actually turn into where you make it $80,000 a year in your business and $80,000 a year from your rentals, and now we’re having better cooler conversations. But again, going to your portfolio, what we’re really looking at is what’s your laziest equity? So if you were to call out a couple properties, which ones do you think have the most equity that’s making you the least cashflow?

Derek:
Let’s say the property number two perhaps, and that’s a two family and let’s see what else? And property number four.

David:
Okay, so property two has about 110,000 in equity property four a hundred and eighty six, is that right?

Derek:
Right. Yep.

David:
Okay. And so we could sell those. That would give you around $250,000 of equity to redeploy. I’m trying to see what the cashflow is on those combined right now

Derek:
Those are the ones that are below market, so I could probably get another 500, 700 a month for each one of those if that changes anything.

David:
Do you have a market that you like where you could buy a fourplex or a small multifamily?

Derek:
The place where I bought those first four properties in Connecticut, it’s been pretty good. I mean it’s comfortable with it, but I just don’t know with the way things are with the market and rates, how to approach things any differently than what it was like.

Mindy:
Have you been looking at listings?

Derek:
Not really in that area. No, not lately.

Mindy:
If you have a real estate agent that you like in that area, I would reach out to them and just ask them to send you listings, broad spectrum, give them the very bare minimum requirements so you get the most listings in your inbox and then just start looking and seeing, oh, I didn’t know properties were now 4 million, nevermind. Or, Hey, properties are still $70,000. I can get in on this, or something in between. Obviously I’m making those numbers up, but having an idea of that market and then you can say, yes, I want to sell these properties where my equity is just sitting there kind of doing nothing or have you considered raising the rent and why are they so far below market? You said you could get another five or 700 for each of these properties. There’s two units in each of these properties. So is it raising the rent two 50 on each tenant? Is that realistic?

Derek:
Yeah, that’s kind of the route I’m going with one of the properties maybe not as high as that, but I’m going to see if I can raise rents and if it forces some tenants to leave, then maybe I’ll do a turnover and get potentially more.

David:
But what’s the reason they felt so low, Derek? Because you have a property manager in Connecticut, right?

Derek:
Just a long-term tenant that Yeah, I don’t think they’ve been raising rents every year,

David:
Bro. I just found out in Arizona I have five properties being managed by one person. I thought they were great. I never hear about it. He hasn’t raised the rent in five years
And it’s been a lot in Arizona of rents going up. So I found that out. He’s now fired. I hired a person to work for me to manage my own properties. She’s going to be managing those now and we’re going to make sure that that doesn’t happen again. But what I was just thinking with you is if you fired your property managers hired an in-house person to help oversee those and potential short-term rentals that you could be taking on, have you looked at the management fees that you’d be saving and if that would offset a virtual assistant or a part-time assistant that you could hire to help you manage your properties and then you could also take on more short-term rentals with this additional help?

Derek:
Yeah, that’s something like someone else mentioned in the comments in the forum, but I think yeah, it’s like lot on 11 or 12,000, maybe 10,000 potentially, and that’s not including leasing fees and that sort of thing, so that’s something I should definitely look at.

David:
Let’s say that with leasing fees, those are expensive. Let’s say you’re at like $15,000 for management and you bring someone on part-time that you could pay like 35 $40,000 or something. Half their salary almost is covered just by that. Now if you move that 250,000 in equity that we talked about into two or three short term rentals and you have this person screening calls from tenants before they get to you, you have this person helping to coordinate with the cleaners. You’re not taking on a ton of the work. We were just talking about this on Seeing Green the other day. It’s not necessarily the time spent that I think makes people not like work. It’s the type of work you make ’em do. I’ve noticed this. My employees that really like to do deep work on complicated problems, if you ask them to take phone calls from a person that can’t find the TV control in a short-term rental, they lose their mind.
But then there’s other people that only want to help them find TB controls. If you’re like, can you put something in a spreadsheet? Then they lose their mind, right? If we find the thing that we like doing, you often can find that work is enjoyable and you like doing it. So for you, I’m assuming if you’re working in SEO, you’re a deep work person, you like to look at complicated problems, you like to see the big picture and you like to really drill down on what’s going to make this whole thing move. Do you need to hire somebody that does shallow stuff? Like you go a inch wide and a mile deep, you need to find someone that goes a mile wide and an inch deep. They can handle all kinds of stuff going on. They’re answering emails, they’re taking phone calls. They’re shielding you from the little paper cuts that make you bothered, and then twice a day you check in with them and say, Hey, what’s going on? Here’s what I want you to do. They go back to work, they do it. You could probably move this equity and get three or four more short-term rentals, triple your cashflow from what they’re making right now, and you might find that you really enjoy doing short-term rentals as long as you’re doing it with leverage,

Derek:
Right? Yeah, that’s definitely a good point. I want to see how this short-term rental business goes and see if I can find a way to leverage it and earn more money without having to take up all of my time. But like you said, maybe hiring someone might be a good idea.

David:
You don’t need a full-time hire. I don’t think you have enough to need a full-time person.

Derek:
No, definitely not.

David:
So the main ways that you increase cashflow is going to be moving inefficient equity. So we’ve already talked about that. Where’s your return on equity the lowest and what could you buy moving from an inefficient asset class like long-term rentals where again, it’s only inefficient for cashflow. Long-term rentals may make you more money in the long-term if you buy in the right market, but in the short term, they’re going to make less cashflow than a short-term rental. So you want to move into more efficient way there and then paying off debt, that’s the other way you can increase cashflow. So another option we just haven’t talked about was what if you sold and you bought something in all cash? The reason I didn’t go there first is you’re going to have capital gains hits if you do that, and that is an inefficient way, you’re going to actually be losing some of the equity that we’ve talked about that you can’t redeploy into more real estate,

Mindy:
And since they are long-term rentals, you have depreciation recapture on top of your capital gains and you’ve made a lot of money on these properties. But I also agree that property number two and property number four are my least favorite of your portfolio just by looking at these numbers. So David is a fan of the short-term rental. Looking at the numbers, you’ve got a fourplex four units kicking off approximately the same cash as one unit. That’s a short-term rental. So I’m going to send you this book by Avery Carl short-term Rental genius. It’s called Short-Term Rental Long-Term Wealth. It’s by BiggerPockets Publishing, and we are going to send a copy of this so you can read through this book and get some tips on how you can make your short-term rental even better. I’m also going to encourage you to go into the BiggerPockets forums biggerpockets.com/forums to talk to other short-term rental operators and see what’s working for them.
Another option could be midterm rentals, medium-term rentals. I unfortunately don’t have that book at my fingertips to just show you, but it was written by Ziana McIntyre and Sarah Weaver, and it talks about the 30 day stays. A midterm rental can help you get around the short-term rental laws that some cities are starting to enforce more and more as well as generate more income than a long-term rental. So perhaps property two and property four could be reviewed to see if you could make more money as a midterm rental. Is there any opportunity for midterm rental? Is there any desire for midterm rental? So these are digital nomads. These are people who are traveling around but staying in a long time. Travel nurses was a big one for a while. Were corporate rentals. Some people really like to be in a house instead of in a hotel room if there’s no market for them in where property two and property four are. I really like the idea of potentially finding another property and 10 31 exchanging into that one. So you’re kicking the tax can down the road with the 10 31 David, do you still have depreciation recapture?

David:
No. If you do the 10 31, you basically just take what you would’ve had to pay back and move it into the next property and it rolls over.

Mindy:
Awesome. Okay, so now that is the best of all worlds. You have rules around your 10 31 first get a qualified intermediary. That’s the official name of the person who does the 10 31 for you and talk to them and follow every rule. There’s, what is it, 45 days to identify three properties and 180 days to buy close on that one of those three properties within that timeframe. And if you don’t, then your whole 10 31 is blown. So you definitely want to be confident in your ability to close before you sell your other property, but I think that’s a really great option for you because cashflow is what you are looking for. You could wrap both of these strategies in, take these two properties, 10 31 into a small multifamily or even a medium-sized multifamily, and then turn that whole thing into a short-term rental property that of course, it’s got to be near something where people want to go, but that could be a really interesting option as well.

David:
But that’s the reason I didn’t immediately go into, yeah, pay off some debt because those taxes can be so painful that it eliminates a lot of the benefit of paying off your debt. Another thing I thought of that I didn’t mention was some of the money that you have that’s not in real estate. So you’ve got some money in your 401k, I would look into seeing if you can take that money and buy discounted notes with it without getting a tax penalty. Now you’re not going to be able to touch that money. It’s probably going to go back into the 401k. I’m guessing you can pull that out at what’s the age, Mindy, you would know.

Mindy:
You can pull it out at any time, but you can pay no taxes. If your plan allows you to pull out at age 55, you could roll it all over to an IRA and then kind of do whatever you want with it. A self-directed IRA does allow you to invest in rental properties, although I do believe you’re subject to ubit, and this is where I fall out of my area of expertise, and I’m just remembering random little bits.

David:
You bita,

Mindy:
You bita. But if you have self-employment income, you could take your 401k and roll it into a self-directed solo 401k, and then you can invest in real estate. It’s not subject to ubit, but again, all of the money that you invest out, the money that comes back goes into the 401k. So that’s something to keep in mind.

David:
So if you could get your 401k into a self-directed diary, that’s ideal. But even if you can’t, you might be able to still do it as long as the money stays in the IRA, I would look at the return I was getting on whatever you’re using it for, and if it’s less than double digits, I’d look into buying discounted notes. This was something I did a couple years ago. So basically what you’re doing is you’re buying usually a second position lien. Sometimes their first position lien that at one point was underperforming, somebody else bought the right to collect the payment from a bank or a lender because the person wasn’t paying on it. So in a sense, the bank didn’t necessarily foreclose on the property. They just sold the right to foreclose on the property to somebody else. That person steps in and they get the person paying again, they renegotiate the terms of the note.
They find out what was going on. If the person doesn’t repay, then they would just foreclose on the property. But in this case, these are the people that did repay you then buy the note from them so they get their capital back that they spent on the note, but you’re buying the note for less than what the principal balance owed is. So I did this with Dave Van Horn’s company, PPR Note co. I believe he wrote a book for BiggerPockets as well. So for instance, I think I bought a note that was worth 90 something thousand dollars and I paid around like $65,000 for it. I can’t remember the exact numbers, but it was about that. And then the person makes a payment to me every single month if they ever stop making the payment. There’s state laws regarding when you can foreclose, but you would just foreclose and you would take the asset that was worth even more than the value of the note was, right?
So the note was worth 90 something thousand. The property was worth like 120,008 years of time later it appreciates to be worth $250,000. There’s a lot of equity in that property. Well, I just found out the person who owns the property that pays me the money is selling the house. So they’ve paid down what they owed me a degree. It was like 95,000. Maybe they paid it down to 80,000 or something, but I bought it for 65 and I’ve been getting years of payments on this. When they pay it off, they have to pay me the full amount that they owe. It’s like equity in a sense from the note you could do the money in your 401k is probably not working as hard as you could get if you bought notes with it. So you do that, you put it to work harder, you let the money from the notes go back into the self-directed IRA or the 401k, whatever it is.
You’re getting a better return when those properties do sell off or refinance or whatever the case would be. It’s like the jack in the pops. You get yourself a nice bump in equity. You use that to go buy more discounted notes and you just rolled over. We don’t talk about this on the podcast as often. I already know people are saying, why did nobody tell me about this? That sounds great because you have less control over the money. When you buy a rental property, you can improve the property, you can choose when to sell it. You can do it 10 31, you can refinance out of it. You can improve the performance. The rents are going up. When you buy a note like this, you’re actually exposed to inflation because that monthly payment I was getting was worth more seven or eight years ago when I bought it than it’s worth today, and I can’t do anything to fix that. You’re at the mercy of the person who owns the property choosing to pay the note off or choosing to refinance the property or sell their property.

Derek:
What are your thoughts on ways to get equity out of my portfolio? I know you said I have some lazy equity sitting there besides doing a 10 31. I know my rates are really low right now, but I know I’ve seen the rates lately and they just seem so high. So how would you approach that?

David:
Yeah, the problem is when you try to get equity out, you basically can, a 10 31 is the most efficient way. A sale without a 10 31 is another way. A cash out refinance is a third way and a HELOC is a fourth. Those are your main four ways to get into the equity you have. The problem with rates being high, like you just said, is that whatever you buy is going to cashflow less. And if you buy it with the equity from the property, you just took on additional debt at those same higher rates, that becomes a problem, right? And so the reason I didn’t bring this up is I don’t see very many investors in most markets that are able to pull equity out of a property through a HELOC and use it as a down payment on another property that worked when values were going up and rents were going up and interest rates were low, you had the perfect trifecta that allowed you to just get a property, build equity, take the equity out, get the next one, the snowball that we talked about.
It’s like a hill full of snow, very steep, easy to make that work. That hill ain’t going down at the degree that it was before. It is a straight shot in a lot of ways. And so you already have to have some snow to be able to play the game that we were before. And I see a lot of people just butting their head into the brick wall trying to use that strategy and complaining it doesn’t work well. It’s because you didn’t actually create new wealth. You’re just trying to recycle wealth that you had previously. And that’s why I don’t know. The only way I could see that possibly working is if you took the money out of a inefficient asset, like a long-term rental through a HELOC and put it into a short-term rental. And I don’t love you taking on the risk of doing that until you have a proven track record of managing short-term rentals and knowing that you do it well.

Derek:
Yeah, that’s a great point. I mean, it sounds like the easiest way to, well easy, but to try and get additional cashflow versus a traditional long-term rental, like you said.

David:
Yeah, that’s why I just said selling and redeploying is going to be your better option, and you’re going to want to start with the houses that have the lowest return on equity because you’re probably going from a low interest rate to a higher one. So to balance that out, you need to make sure that you have the laziest equity possible that you’re moving.

Mindy:
Derek, what did you think about that note investing that hold any interest for you?

Derek:
Well, it’s something I need to, I guess learn more about and wrap my head around to see how that would work. And I’ve heard some of the benefits of it before investing in notes. But yeah, it definitely sounds interesting. It’s not something I’d considered though in the past.

Mindy:
Okay. Well, I am also going to send you a copy of Dave Van Horn’s book. It’s called Real Estate Note Investing, using Mortgage Notes to Passively and massively increase your Income, which is something you’re looking at passively and massively increasing your income as well as you’ve got a hundred thousand dollars in cash. Is that your emergency fund or is that your, I don’t quite know where to put this yet fund.

Derek:
It sounds like the latter for the most part. I mean, we’re going to put some of that into education accounts for the kids, but that’s only a portion of it, but the rest of it’s kind of just sitting around for I guess, emergencies.

Mindy:
Have you ever considered lending that out? I do some private lending, and I think I’m charging like 12% right now. I’m only lending to people that I know that I know are going to pay me back who are doing super fun things with real estate on the East Coast because it actually exists. David and 12% comes into my bank account. They pay it off and then they borrow it again. And because I know them, I don’t feel like I am putting my money at risk because they then pay me back and want to borrow it again. I know that I now have a proven track record with them, and I can do it again with more confidence. Finding somebody to borrow money from you. That may be a little more difficult than I just blase recommended. Is that a word? Blase? Anyway, but once you make it known that you potentially have money to lend, people come and start asking you, oh, David Green wants to borrow money. I’m going to lend it to him. I know him and I know he’ll pay me back. But Rob Abbo wants to borrow money. Forget it, dude. Just kidding. Rob, I would lend to you too, but it can be a really great way to generate more income. And BiggerPockets also has a book about that. It’s called Lend to Live Earn hassle-free Passive Income in Real Estate with Private Money Lending by Alexandria Bashirs and Beth Pinkley Johnson. And I’m going to send you a copy of that book too.

Derek:
Awesome, thanks. Another question I had for you, Dave. I mean, I like the idea of a simple paid off portfolio when I retire. What are your thoughts on those people talk about maybe trying to pay it off with a snowball type of plan. What are your thoughts on that versus redeploying these equity?

David:
I’d love to see you start a business, like we talked about doing SEO work for other small businesses or something that you figure out a way to make that profitable and put that profit directly towards paying off your debt so that you don’t have to pay

Derek:
Taxes. Yeah, that’s a good point.

Mindy:
And I mean one of these properties, property number two, you paid $70,000 for, I don’t even know what your mortgage balance. You’ve obviously refinanced that.

Derek:
Yeah, I did a cash refinances on all my properties right before the mortgages climb, so I was lucky for that. But yeah, so that’s why,

Mindy:
And I think kind of the only way to tap into some of that equity is to cash out refi when rates are low, which isn’t an option right now. Hey David, can you write a mortgage for 3% for me?

David:
As soon as Derek here builds a time machine, we’ll go back a couple years and I’ll absolutely do that.

Mindy:
Alright. Derek, what do you think of what David has been sharing with the debt equity and potentially 10 31 or getting more short terms or things like that?

Derek:
Yeah, I think the idea of redeploying some of that equity and maybe getting another short term once I have some more experience with that sounds like a good strategy for getting more cash flow. But as you mentioned, I think starting or working on another business that I could use that cash to help pay off rentals is another way that sounds appealing to me.

Mindy:
I love that, especially because SEO is your JM right now and starting an SEO company is not that cash intensive. You could probably do it with everything you have now. You need to buy A URL like Derek’s s e.com or whatever, buy A URL and then just reach out to, I’m not even going to tell you how to get business because you’re the SEO guy. So you’ll figure it out your own self. Use those SEO skills to generate some business. But it’s such a low cash intensive process for you because you don’t really have to learn anything. You already know it and you don’t really need to buy anything because you already have it. It’s a computer and your brain, and I’m not trying to downplay what you have. I’m just saying it’s so easy to start this because if it doesn’t go anywhere, what is it like $8 on GoDaddy for a URL?

Derek:
I guess, what are the thoughts, do you guys have on side hustle ideas that maybe could be done remotely or things that you’ve seen that can be successful in generating cash that I can use towards rentals or paying off debt? Well,

Mindy:
I have a friend named Jaymo from Budgets are Sexy and he’s got a list of, I think more than 80 different side hustles that is going to be something that’s specific to you. What do you know you like to do? What skills do you have? What can you teach somebody else or what generates a lot of cash that you can just do quickly? So I will link to it in the show notes. The budgets are sexy blog post. We also have a friend of the show, Nick Loper from Side Hustle Nation. He has an entire podcast where every week he interviews another person about their specific side hustle. But hey, do you know anything about SEO? Does anybody else maybe look, take a course? Could you create an SEO course? How to do SEO selling courses? I can’t tell you how much money can be generated from selling courses that are engaging.
I mean, you have to put a lot of work into the course, but then once it’s done, you’ve put 40 or a hundred, I dunno, I’ve never made a course, but like 40 or a hundred hours into this course, then you’re done. And people just keep buying it over and over again. So it’s passive ish, meaning that you have the work upfront, but then it just keeps going and going forever. We were talking to Amanda Wolf earlier and she has a course that she has created and then she hosts a webinar that drives people to the course every week she’s hosting a webinar for new people. But then she went back and looked at all these people that have been in her funnel and have never ever purchased anything and she rebranded the same course and was able to generate more interest. So what do you know besides SEO? What can you teach a course on? I mean, including SEOI don’t know anything about SEO. So having somebody teach it in a way that speaks to somebody who doesn’t know what they’re doing or even two courses. Here’s the beginner SEO, here’s the next step, SEO course.
There’s a lot of opportunity out there just in what you already know. And it’s not limited to you. I’m assuming that you have a wife.

Derek:
Yeah, yeah, yeah, I do.

Mindy:
Okay. What does she know how to do?

Derek:
She does photography and video production. We both do that. So there’s something there potentially. Look

Mindy:
At that. You guys can have a collaborative event.

David:
Yeah. Derek, fingers crossed for you, man. It was good meeting you. Thanks

Mindy:
David. Thank you so much. This was awesome.

David:
My pleasure. Thanks

Mindy:
Guys. I see in Can Code BiggerPockets Money was created by Mindy Jensen and Scott Trench. This episode was produced by Eric Knutson, copywriting by Calico Content, post-production by Exodus Media and Chris McKen. Thanks for listening.

Watch the Episode Here

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In This Episode We Cover

  • Creative money strategies that will fast-track your path to early retirement
  • How to leverage your 401(k) retirement funds today without tax penalties
  • Boosting your cash flow by converting properties into short-term rentals
  • How to start a business with low money (and where to reinvest your profits!)
  • How to (potentially) acquire valuable rental properties at a HUGE discount
  • When you should hire someone to help manage your real estate portfolio
  • And So Much More!

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Books Mentioned in This Episode

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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