Finance Friday: Middle-Class Trap on Steroids ($3.8M but CAN'T Retire!)
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Today's finance friday guess is hoping to retire at the age of forty seven, but he feels like she's stuck in the middle house trap. Will SHE be able to retire, given how much of her current portfolio is tied up in retirement accounts? Stick around for scotland to wrap up at the end, because we want to hear from you our bigger pockets, ts, money community, because ally has a lot of options.

Titus from hello, hello, hello. Welcome to the bigger pockets, money pockets. My name is mindy Jenny, and with me, as always, is my photoshop, the coho sattar at things.

mini. Great to be here and looking forward to creating a complete picture of alley's many different situation here. Bigger pockets has A O of creating one million million ears.

You're in the right place if you want to get your financial houses in order because we truly believe financial freedoms attainable for everyone matter win or where you're starting before we bring in only we want to think this episode sponsor connected, invest, real state investing, simplified and within your reach. Now let's get into the show, ali. We're so excited to have you on bigger pocket money today. welcome.

Thank you for having me excited to be here.

And we can you share where your journey with money began .

my journey with money. So I came from my parents were very frugal. I was one of four um an example of my dad's fragility would be we would go to go out to lunch windies and he would order one large so that no ice and six cups so that is a sort of background that I came from.

He always said no debt. He pay for everything in cash, everything. You know, we always were saving money from a Young age, and that Carried on as i've become an adult.

I, you know, right now I have a ninety ninety nine car. Always been savings since I was little. My first car, I bought only one in reverse. So we were able to get a good deal on that.

Did you fix that or did you just drive backwards? I feel like, I feel like that's inviting my dex.

Like, yeah, my dad was an engineer. He fixed, we ve got to for four hundred dollars. That was a bmw, only one in reverse.

So yes, lots of fun stories like that, but made IT interesting. I was always very embarrassed, but now today I understand why he taught us that. Well.

I think we have the same dad. I was also always very embarrassed about the cars that we drove, although we didn't have when they just went in reverse. My dad was always working on them because they were so old and so breaking down.

Um so I am I am right there we are soul sisters. Where are you based? And let's talk about your career.

So I reside in the lovely legua beach in orange county, so it's a very expensive place to live. I was fortunate to be able to get a house here when everything was half off in two thousand and eleven. So I was able to, with the money I had saved since I was little, put the down payment and buy a house where I could never afford that. Right now my job is I do sourcing for facilities management company for a big tech client. So I do find cost for a living.

Do you enjoy that?

Yes, very much. So yeah. Now I really enjoy my my job and my job as a lot of benefits, like they let me work from home since two thousand and eight. So I was able to raise my children and and i've never had an expensive can you or had to investing clothing or anything like that. So I think that's really helped me save a lot of my money.

Ali, let's jump in and look at a copy of your numbers. I have a total net worth of three point eight million dollars, which is awesome. I've got income of approximately two hundred and ninety eight thousand expenses of nine thousand nine hundred a month.

So I don't think that's where we're GTA see a lot of savings. Uh, debts are just a six hundred thousand dollar mortgage at two point seven five percent. I considered that to be good debt um and that he looked for four hundred and forty thousand and eight percent, which will talk about in a bit. I see that you are are being being your property, your primary residents for two months out of the year. Is that every year that you do .

that we can only do in the summer because I have two children. So when they're out of school, we put IT up every summer and we're never expecting to run IT. But I always rents and its we get I think last year someone paid forty six gram for two months.

Holy cats, yeah, I would do that again. I mean, is that like your entire more burgage payment for the whole year.

our mortgage is twenty six.

fifty a month? yeah. So I do a quick math.

Is that just P I?

Yes, she's in california. That's not taxes or insurance.

Yeah, that doesn't include. So everything all summed up with our mortgagees are in fourth thousand four thousand total with taxim .

home insurance and I C A small pension and those security options for you. Um what is your retirement goal numbers timeline at .

SATA last month? Looking good like universe, nobody talks about retirement. Everyone has like a bently or you know for ori or cyber truck and leg, it's just unheard of, right? So I never really thought about retiring early until we used to have a financial planner creative planning that would meet with us once a year.

And they'd say, when do you went to retire? And they had a little spreading, they put up. And I remember saying, when I move that number up, how much more money do I have to save? And and the difference wasn't that much, so was just like a couple hundred bugs of month.

So that's what I got me really excited about. Like way, could I retire early if I just save more money now? So you know, I never really had I just always thought I would work too, no sixty or sixty five, but then retire then.

But I mean, do we? But then I started, I found a mister money mustache, and Scott, read your book, and I was like, you know, I don't have any of these. Yes, nice little pack set for life. That was a good one. And I realized that, you know, I don't.

You had mentioned three expenses are at the housing which I cover with the arb in bay, the transportation which um I don't really have and food which my husband cook so we always eat in it's Better eating and and eat IT out. So um I was like, well, maybe I could do this and then anyone I talked to about IT told me like what you talking about like that's just silly. Nobody was even interested in hearing about itself. That's how I feel like i've really resonated with this podcast.

Why would you want to work until you're sixty five, when that's the only option, versus giving yourself the option to work for as long as you want to but you don't have to work anymore?

I know. And if they would let me, short term, rent my house in the gun at which they don't, I could have been retired so long ago. So that's a bomb for me. So sometimes I think about buying a short term rental. I can see in the ega or something like that, and pursuing that as well.

But I think the most important thick thing here is so glaring. The audience is the problem that you came with us, you know him to us. But today I think is the you know this concept of like the middle class trap with, you know, your network is three billion lion dollars.

You're rich. I feel so poor.

The house is three million dollars with a six hundred thousand dollar mortgage baLance giver take left on and the rest of your assets are essentially all in the four one k or I R A setting for that for the other one point four million, right? And that's essentially the entirety of your financial position.

Is that is that correct? Yes, that's correct. And it's like how can I access those funds or how can I leverage them? Or what can I do like without having to sell my house, which I could also do.

And this is starting to come out of the woodwork like I don't think I ve talked to a lot of people that had this problem know in past years and all the sudden last month or two, I I must come across a couple dozen people with a problem that's similar to this, right? How do you feel about and what have you thought about in the context of this housing decision um or how to how to access this housing um as you were put all the these numbers together and thinking about coming on the show here.

I mean, I always kind of torn between O, I, we have about a quarter acre so could build an eighty u in the backyard, run at A A ae party, all cash. I could. One thing we've pursued, but we haven't actually been successful, that is buying another house in legua that's kind of not as nice or smaller, moving my hoenir re family and because my kids are in school here and then renting out our primary.

And then the other idea is just buying some, really state back where i'm from, which is phildee pa area worth a lot cheaper, you can get a lot more. But then managing IT so far away would be difficult. Sometimes I think about two, like cashing out some of my four one k to do that. But then, you know, had this financial planner, uh, who really said, no, you you don't want tap in about four a one co.

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welcome back to the show. Have you read the mad fantis article called how to access retirement funds early? Guess that is one of the best, most comprehensive art s for accessing your retirement funds early so you can tap into your four one k without paying penalties. I am assuming that you have a traditional foreign. There's no way that I know of to get around paying taxes on this unless you only pull out a little bit.

But what's the point of pulling out a little bit? You can even be able to live off of IT um and this would be after you uh leave your job because if you do IT while you're at your job, you're paying in the highest tax break IT possible to access these retirement funds early uh but there is the a rough conversion letter. There is the seventy two t there is the uh just taking IT in paying the penalty although I would do that um after I stop working because you will still be paying taxes on IT no matter what so I would suggest you give that article another read.

Um building the at in the backyard is interesting. You said you could pay for IT with cash. How much would that generate an income? Like how big of an A D U. Can you build?

Yeah this is the issue. So when I have like a contract or come out and bid me, they say it's gonna be minimum million box to build in adu. But then you see these pre build ones online, right that are like eighty thousand dollars, like hundred and fifty thousand. So I think I go for the the pre fad one, right, paying cash, and then I could probably get three thousand a months, something like that. But I would have people living in my garden.

which i'm not sure I would probably .

go up a million bucks, I would guess. I mean, IT would go up more if IT was like a cost, if I was a custom. M, if I spend a million dollars on that would probably go up significantly more than if I bought a prefab.

That would be a truly amazing statement. If you could add one hundred and fifty thousand dollars prev. E, D, U to this property and increased the value of the property by million box.

But I think that's like that's a good homework. Is I is anybody done that in the local area? And how did their property translate? Because like you know, there is a rent in cash low at income stuff. Like if you can spend a hundred fifty men and make a million back in one year, then there is no, there is no other that's the best opportunity you're ever going to get in your life. I'm sceptical that, that will happen with that, but if I can that's the first that would be the first avenue I explore um from this and in that case then I would be like, guess how do we finance how do we finance that is that you lock is IT um something else because you'll be you you be able to justify almost any source of capital for that investment. But what's your conviction in that in that that I mean.

most people around here have a tunny money, right? So they're getting the customer you that matches our house is beautiful, right? I don't see a lot of just like drop in, right? So I don't know that I be able to fine like something like that to compare, but I do see the the people that build the customer eighty years and their value is there was one there was a house down the road for me, I think I was sold for three million. They built at eighty, and they sold of for six. Because the property value here so much, right?

Rather spend been a million to mate too, with which to you, rather increased by the property by three million dollars, with a million dollar alway then one hundred and fifty thousand dollars out. Way to get a million box. That's another one point wet, seven, five million. That's an enormous.

And there's the possibility of doing like A J D U, A D U. So you can do to, you can do to ads here in lagoa. So a junior, A D, U, and in a regular atto, so you could actually do IT twice.

Let me ask you this though, why? What is do you want to be in the good a beach? The goal is not to retire early, is to retire early in the good beach, right, and live something close. To realized that maybe in a slightly smaller nearby is right.

yes. I.

what is the ideal future hope home? yeah. What is your future living condition look like?

Well, I have two kids that are aged ten in almost twelve, so I think for now I need at least the three bedroom home office. IT doesn't need to be big, but I do think people need their own space. You know, when they go off to college or move out, I don't IT could be much smaller, just a one bed.

Another trap that you're in is the I don't have a cute name for IT you bought a long time ago and interest rates have since gone up. Property values have since gone up. I can see you starting to look for another house in legua beach and finding a smaller house that ultimately costs you more per month out of pocket, which isn't going to be beneficial to your goal unless you keep them both and then rent this one out. Do you have any plans to sell this house? Or do you want to keep IT as a rental?

I like to keep IT as a rental.

What's IT costs to rent the house that you want to live for the next couple years in the good beach?

You know, that's another thing. We fell them out too. Like should we just rent somewhere else? Because you can. They range right? They range anywhere from.

I've seen rentals for a three bedroom house for like forty eight hundred up in like a certain area of legua. And then you know they go all way up to fifty thousand, I would think like a like a Normal three bedroom nice hand. So prime around twelve thousand dollars a month.

five thousand, okay, that's higher the hard territory here. That's one hundred and four hundred and fifty years. And to buy the place, how much would one of the places you're thinking about buying cost?

They're usually around fourteen or fifteen thousand a month.

That's the mortgage payment.

How much is the Price point? You can't get anything under two mail here. So what i've been doing so say the houses up for a long time, i'll sort of by length then then i'd offer one and every once in a while it'll say OK and then they get a couple of their bids and somebody outbids me. I mean, that's kind of what's been happening. I wouldn't pay more than one point eight, but you're getting a uh, not a very nice house at all yeah .

I don't see a lot of one point eight million dollar property.

You have to create the one point point eight million.

I'm not seen anything for less than or here's one for seventy nine hundred dollars a months, five beds, five athas. And if you rented out your place, could you rent out your place for ten thousand? And that looks like you could IT out for a lot more.

So long term, like if I was to do an annual least, like I could get ten or eleven or twelve, maybe. But on airbnb, like in the summer, I can always get two. So I think if I did furnished alban, be a lot of people are remodelling their house. They want a place for like six months, so people will write me because I used to just have IT up my house up all the time on airbnb and so people would say, hey, can I rent your house starting to for six months and i'm like, you know, maybe if you could bring IT in two weeks, we could do that. And then i'd be frantically searching on their .

band bay for a rental. I mean, if you could do that and get what twenty thousand a month for your property and you're renting a property for, let's say, ten thousand a month then and you're paying four thousand for your expenses for your house, you're still making six thousand dollars a month and your expenses are nine thousand dollars a month so you just need to cover three thousand a month which you can do um by accessing your retirement funds early. Scott, do you think that three point eight could get her some uh some three thousand dollars a month?

I think that the big question here is, is should you yet like if you're going to move out of the house to do seller keep the house here? And I think that's the that's the fundamental decision and we're Operating into the paradise of keeping the house. And how do we use that to drive income? And I think that that's a question that needs to be posed here as there is two point four million dollars, probably conservatively, inequity in this house. And with two point four million dollars in cash or after tax, i've accused the equity you would realize to one point eat six, three, nine um on this uh at least um that if you could sell there like we can generate a lot of cash flow um with one point eight million dollars in cash um and number of buckets. I think that the big that's the big question here is, is what we do like how does IT feel to even talk about selling the place?

You know, i'm open to IT because if that means that I could be work optional and, you know, have more freedom and still live a life in legua beach, travelling and doing all these nice things yeah, I mean, i'm open to IT and I don't want to just have this house with a tn equity and A B, A B. You know what I mean.

let's let's walk through the long term and low case. Roque K. I I am, I learned that out, and I did a spread sheet here.

Right now, Scott is using his should I sell or rent spread sheet to run the numbers for ali, go over to our youtube channel, youtube duck com, slash bigger pockets money to see Scott in action.

fascinating. And i'd love to just kind of walk through and see how this feels at the highest level and say, like here's this is the value. You think it's about three million dollars today? Yes, we don't have to worry about the original precious Price. And well, actually, yeah.

what was the original precious Price for this .

IT was nine forty, nine forty. okay. And you bought that ten years ago, but we don't need that date right now. What is the more when did you get your current mortgage?

You know, I refinance back when everything was really cheap. So I would say during covered so like .

probably around this time, september twenty.

twenty one can do yeah that's perfect.

And your mortgage baLance for six, fifty years.

you know, we did a remodel. So we got a lot of work done on our house and then we took that money and rolled IT into the refinance when we did our refinancing that number.

So I need this number to the population. But what was IT was IT is that is a close to six fifty? yes. Okay, great. And then this is just like reasonably close. We have twenty four hundred and p ni, twelve thousand and in your property taxes and twenty two hundred and any other shots, yes, thirty six hundred a month in mortgage and mortality .

it's around four thousand. Yeah okay.

i'm not bumped this up to three percent then. Uh, that's pride. What is the industry in the mortgage? Two point seven five.

Thank all right. So i'm getting close here, right? We're not exactly, but would pretty close with .

the thirty yeah yeah uh.

I said if you sold the place, you have a five and half percent agent fee, one percent closing and title insurance and that would meet yet two point once seven one million dollars after paying off that mortgage and paying those fees and have to give you net sale proceeds to one point eight million dollars. Come you are qualify for primary take capital gain tax decisions to the first five hundred thousand of that are not text.

After that you're you going to own twenty percent in federal capital gains. And do you know the capital gains rate for california? No, i'm going to put that at nine percent, probably high. How about point of all eight percent in percent sound right now?

I just been to say a lot, if IT is california.

I mean pay two, six, seven ish in federal and potentially about one hundred and twenty in california. Taxes to be verified here leaves you with this number in terms of what you could invest in the next day. Either this is this model was built around the playing that toward your next house, but you could also invest in stocks or something else there.

Um and then so what comes down to is what do you believe the stock markets gonna do over the next twenty years? If you think it's can return ten either than ten percent, you can be conservative put at nine. But what would you say what do you feel about what what do you think as a stock margin investors .

think a little IT? I'd probably be conservative and say eight or nine.

so put eight percent. And then then I have some assumptions here around rents. I played in eleven thousand. You said ten and eleven, twelve. So I put a little i'm on this sometimes around vacancy, all that stuff get to cash for fifty, five hundred months. If you keep IT. What do you think of going to gates, which can appreciate terms? Rent and Price is going to be historical average or higher or lower.

higher. I mean, I think I have heard some steps that house Prices double every eight .

years that's close to an eight year one. So that's a very aggressive assumption. But a that if you believe these things, you're likely to want to keep the place and you think that the same theme same is true for a rent growth.

yes. And i'm going to put expense growth lagging a little bit behind that. Um hopefully because you can still buy a roof shingles from kansas city even as runs go up and we are good at beach. That feels yes.

that feels right. Yes, it's all what you believe.

Here you're onna. See that keeping IT is onna produce a lot of cash and is something get about seventy five thousand dollars in the first year. And that's going to continue to accelerate very rapidly if you believe that growth is going to grow at that Price range.

And I can tell you already that you're gna think you're gonna believe that the wealth you're gonna build by holding onto this property is going to be much higher than if you invest in the stock market here. So to me, this says you are on right track for keeping IT. If you believe these days, I would caution now that I am much more conservative with my assumptions for real state.

And I would put, I put, I plugged in a default of three point four percent. Never knows going to happen in the future there in california's are high, and I would put in ten percent for the stock market. This is how I onyx a denver property, but it's completely based what you believe. And in that area, you're going to see that selling IT and putting the money into the stock market would generate significantly more wealth about timely and incremental dollars over keeping IT in that scenario. So I encourage you to play around with this, but that's the big bet you're making.

The good news is you really reach either way, if you hold on the disaster and the stock market depending on the of these things, because you ve got a great problem here is just that's the that's the tool I can help you think through IT 啊。 And then one other consideration I D disposed for yet that I was reacting in is you going na be very heavily waited to real estate if you hold listening, especially you buy more compared to the stock market because of your starting position. Um so just those are the things that popped into my head.

But I think if you believe what you said there around that, there is a no question this is a key property and we're were on the right track. And I just side track this unnecessarily. But hopeful ly.

that was at least a little helpful. Stay tuned after one final break, and we'll be back with ali after this at navy federal credit union every day as veterans day. Maybe federal union is proud to serve the military community for over ninety years.

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Navy veal is focused on helping veterans every day and is dedicated to being a foundation in their transition to civilian life and supports not for profits. Focus on veterans like the mission continues at navy federal credit union. Our members are the mission.

If you're active duty of veteran or their families learn becoming a navy federal member today, visit navy federal dot org e slash veterans. Navy federal is ensured by N, C, U, A. Every dollar you invest should work hard, just like you do connect.

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Let's jump back in an ali.

I don't think that's an unnecessary a cytec got. I'm really glad that you did that spread because that's really helpful. You put a lot of time in to that spread sheet before you brought IT up. But then you just like throw all these numbers in and IT shows like how you can manipulate them.

I think that's great. yeah.

So you can start playing with IT too and you know throw in different numbers and see what happens. But I think that there is a lot of opportunity for researching your local market with more solid numbers. And unless your numbers are super solid, I i'm always a little leary about counting on appreciation, but then I looked up where the good a beaches and i'm like, oh yeah, that's probably gonna a .

safe look good to be just awesome I I I like I been married and come is like, oh my god, you can live anywhere in the world one of those two places write i'm from filled .

off so I can appreciate yeah the beauty in the weather and everything but yeah, no, it's it's an amazing spot. Yeah, it's gorgeous yeah. People from texas, the ones that always went my house.

So another question you had was about your pension. And should you be cashing that out right now? It's twenty seven thousand dollars if you cash IT out and you'd get four hundred and seventy seven a month if you waited until twenty forty two to start taking your pension. Ah that I did the math really quickly. That's like just four and a half years, almost five years of break even before if you took out that four hundred and seventy seven versus taking the twenty seven right now, what would you do with that twenty seven?

If you pulled IT out but IT towards my house in ligon a beach, my second house. What i'd like to do is just buy another house in legua V I just don't know. It's so crazy and I want to tap whatever of funds I have. So like I I do have a lot of rough in my foo one key and can I use that? Yeah.

you've already paid taxes on that. I don't know how you access your is that in your current four one k or in the previous, so you would have to separate from your company before you could access those funds. Scot, how do you access rough for win k funds?

Well, if it's the principle, you should be able to withdraw the fans. The the gains will be subject to a penalty from the from the rough. So you pay you'll pay IT, uh, uh, uh, penalty for withdrawing those early on your rough position.

I me to go back to us what rough position is in total two hundred and forty three thousand. And you actually put out for us the contributions of one hundred and sixty so you can pull one hundred and sixty i'm to use for that purpose. I am so a little hung up though here on the should we right? Because what you what you're doing and and this is fine.

I just I just see my head around IT because i'm not i'm not there yet is we're saying, okay, we have three million dollars in magna beach real estate and one point four million dollars in equities. And our plan is to buy another three, two million dollars in the gun beach real estate by using the stock market funds, which which is which is a like maybe you win. I look like maybe if you believe I can appreciate six percent year.

And you ever up on the gonna batra al state, hold on, for a few decades you going to get a real rich. But I already have you projected to a twenty plus million dollar networks over the next thirty years, whether you keep yourself the first the first home um the risk you know at at some point for me the plan becomes about risk mitigation and making sure that you can just cultural lifestyle in place there. When would that number? When would that come in there? Like what network level if I just send you a pilot cash would feel we be like, okay.

i'm there. I think that's a question, right. Can I just be done? The point of buying the second in legua is to say that I could be done because I think IT my mind if I IT now and I work hard and I moved in this smaller house and I house in five years, could I sell IT, make a profit, and then I have that extra money to retire on, right? I don't think I need a lot of money to retire.

I would look into, I would start like finding agent that can help you in legua beach and start looking for an amazing property, a dump y property that you can make beautiful. Or you know start really learning the market and looking and seeing what's available because the best time to make an offer on a property is what you are absolutely sure that is a great deal.

Get another contract and then have a super tight home inspection, see what's going on with this property. Do you really wanna tackle IT if you could buy this other property and rent out your current property for ten twenty thousand dollars a month? A kinder doesn't make a whole I A sense to say, no, you shouldn't do that.

Um I I don't know enough about lugano beach real estate to be able to make a determination what the market is like right there. But over here in colorado, it's kind of slow. Ah there is all this uncertainty with the election. And now that the election is over, there's all this uncertainty with will rates continue to come down or will they not come down anymore and people are just a little hesitant to jump in. So if you could find a smoke and hot deal right now because nobody else is out there buying houses, then I mean, you've got such a rockstar of a property that you're sitting in right now.

My concern here though is just like were already at three hundred million in that worth and it's so heavily exposed, delegate beach real state to doubled down again could be a winner IT could be a winter like there's no you you that could absolutely be the right choice. But then then it's like why like what is that instate portal you're onna look like in five years as your plan to sell the property that you just purchased and then rent somewhere else, move back into the first place like what is the long term, what is the retirement listy le look like um from there and that's what that's from I continue to get hung up here um this is like i'm not i'm not sure how that how that translates into the goal of retiring early um quite as clearly. Could you may be explained that me what the help like maybe there well.

I think I just go back in tween two. Take IT easy, retire early and i'm good to go. Or would IT be helpful if I had another revenue stream to kind of help? Because right now i'm stuck.

So I I have till I retire. I really don't have that much cash. I is all tied up either in my house or my four on k. My cash can't get me throw if I were to retire right now. So how do I bridge that that between where I am right now at age forty seven and you know that that next thirteen years, right with the cash that I have? So I guess in my mind, I think what I need, like another property or something providing income for me or another property I could sell that would provide income and to get me to that retirement.

yes. okay. So the the the issue for your retirement, if i'm looking i'm zimmer out, is you spend very reasonably for your income level here and relative overall asset this. But that's an illusion because to live a lifestyle that you want to live in legua beach is twelve thousand dollars a month between rent, utilities that is being masked right now because you bought your house so long ago and have such a late mortgage on that. So to live in your house, that's the cost right now.

I and you need to generate, you need something else to generate one hundred and twenty thousand dollars per year that you spent, right? Uh, some other some other asset situation to do that. But what's happening in reality is your spent you have a two point six million dollars in assets locked up in order to in order to have this expense profile.

I'm right here. So you're really like in some ways we can think about IT is like what's six that um you you you're locking up two point six million dollars to keep your expenses seventy five hundred to you know nine thousand dollars below what they would otherwise be for your housing. And and that's the fundamental problem that we're working through here.

And i'm trying to figure out OK, if you move, you're going to be and you read a red, you'd be spending that amount money or you'd need about two million at least in a paid off property um a very lately levered property to have the same expense profile. And that brings me back to how do we unlock this two point as I two point four million in equity in the house and use IT to fund retirement or what else can we used to get? One other question we haven't talked about in that concept is you make two hundred and ninety eight thousand dollars a year and you spend ten thousand net of taxes. How much are we actually accumulating on an annual basis from your job? Like that's another asset, if you will, that we haven't bought about over the next five years where you community fifty .

eight year or hundred k year, I think before you know, was filling out your spread cheat and things like that. What i've always done in the past, as i've paid myself first by maxing out my four OK, maxing out my H I say, maxing out a depending care, things like that. But once I started filling this out, realizing that I need more cash, that and I did your little budget exercise, I was like, okay, why don't I start putting away?

I think i'm trying to save right now, like eight thousand a month, but this is just brand new. But that's what I can probably work to save. Eight thousand between seven and eight thousand.

Are you also contributing somewhat down that stack of retirement, four N K dependence of the stuff.

So I just had to do my enrollment, and I what I did was my company matches the first five percent. So I did five percent. My four one K H sa, I heard mondy say you always should max out the the health savings if you have .

a high deductable plan. Yes, because you can either use IT to have tax free expenses for your uh, medical expenses in the current year or you can save your receipts and cash, low your expenses and go down the road and cash them out later.

Yeah, so that's what I did. So I just signed up last friday, but that's what I did. So I I think I put eight thousand and that and then five percent, my four one k but I it's not what i'm used to.

I used to like total maxing that out. So like I was a little buncomb table lowering that. I think i've changed IT like three times since come back up and down. But I think I want more cash.

It's a good answer to the question of how do you find answer at you, for example, is to let this to let that after tax equity deposition pile up instead of paying a penalty on the the four one care of in my view. So I like, I like that answer. That's one hundred and year giver. Take many thousand months times well, but think ninety eight, so they will get close to hundred thousand thousand years in liquidity that will begin piling up there.

Um and that's that's a piece of the puzzle over five years at five hundred k over ten thirty minutes they can fig about that in in those big chunk and say, okay, we got another pile of assets there depending on how long um you want to work that's gonna ly to this plus you probably got another thirty forty on annualize basis. When I all set in done, you'll be going into your pretext or text deferred accounts like the agc before one came matched those kinds of things. So that sound about right.

That's a that's a considerable part of the position you has going to more than, you know a couple percentage points. I think that I don't think get changes the fundamental math about what to do with the house, but it's I I don't I am uncomfortable and reacting emotively as maybe not logically here of pulling out the money from the the stock market to double down in legua beach. I mean, that's that's a play.

But the play is i'm going to put seventy percent of my network on the line for the rest, you know, for the next ten years and in the rest my life in this legua beach real state territory. And that just needs to be a conscious decision that you are saying that's the pie chart I would draw if I had five, six, seven million dollars in ten years. If I had to you cash, I I would recreate that portfolio. How does that feel? Does that feel right to you?

yeah. I mean, I think it's always good to have diversification, right? I mean, having everything in one basket, especially with all the fires and everything happening, you know, IT is that is scary. So IT is good to diversify portfolio, I think, and I appreciate that viewpoint because, you know, I so i'm in legato with love. So like .

sometimes focus more on the train of next house and rented out there. And what what do you think about this? A about the situation?

Well, i'm thinking that if he can rent her house, which costs her four thousand dollars a month, if you can rent IT out for twenty, twenty two, twenty four thousand dollars month, that makes a lot of sense because that that that covers that money covers her expenses for the current house plus the expenses. If he runs a house at twelve thousand dollars a month and he still has money left over for functions IT covers.

I didn't run numbers on a mortgage payment on two point eight. And that's a that's a thing to think about. Where would you get the data payment for that? That's going to be, uh uh I have to down payment even if you're just putting down ten percent.

Remember again, the twenty thousand dollars for two months of short term tals, right, which is which is the limit of the community. Is that correct?

down. So legua reach has a minimum thirty one day and we got forty six thousand for two months, twenty three thousand a month OK.

Do you think and you think you're around, you can sustain ish a mid term rental cash while in that level like that is that is the reality you think that could good?

No, I don't think that. I think those are the summer months. You can get probably a lot more. I think if I were to red my house out just in a Normal, not buried or anything I thought I could, I get ten or eleven in, or twelve maybe. And then if I did, alban be furnished mid terreno, probably be run IT out, I would say maybe seventy percent at the time, at probably fifteen .

month OK. Fifteen is a more realistic number for year round rents with some of these creative strategies and that still I mean, these are huge lovers and we got a range here that we've heard for rent for this property of nine up to really what i'm hearing is fifteen and annualized basis um for for this that's a big spread and probably A A big piece of the answer here.

If that numbers close your to nine or ten, then your net cash load on this thing is gonna be like five thousand a months, which sounds awesome for one property and IT is but it's not awesome relative to the one point eight million dollars in realizable equity that you've got tied up into the property. And that would be but I would be more incline to sell at that level. But if you can get fifty, if you can get pushing close to fifteen upwards of that within the simplicity of just having a local own rental property in one asset might be worth IT um to a large degree like that time month you're game over. Um you know you spend danger and that's IT and you want to touch the rest your portfolio. So I think that that's where that's why I keep going back and forth on IT well.

And the thing is it's different, right? So if you did the long term less and you need brand IT out fast, that would be anger and unfurnished.

But if you want to do the extra work, put IT on your bnb furnish IT, which is already all done, already have all that done, right? But the problem with the fifteen a month that you're not going have to run IT out the whole time is someone to try run IT out for six months for remodel, then will be a month and have a you know then another three months. So in the end, if you average IT out IT will probably be you i'll lab in.

But there's different strategies that all create that. There is different numbers. That's why there's such a difference between the numbers.

The how do you feel about this was if if the annual rents, if if the average month rn is going to be eleven thousand dollars, what do you think is that change things for you?

Uh yeah kind of because eleven thousand her expenses are going to be four thousand just for the house. So now we're down to seven, and she's got to she's going to have to find a rental for seven thousand dollars a month or less in order to break even. And that's gonna difficult in launa beach based on my very quick, very cursy zillow search while we're talking. But I mean, I do you think you can find something for a less than seven thousand .

dollars if I was renting? Yes, I do. If I was buying, no. I mean, when we've done the spreadsheet for buying another house, I was like, okay, my husband always like, okay, so we're going to move in at this horrible little house that needs a ton of work. And we stop debate eight thousand years a month.

Where are we're getting that? Yes, my husband's a bit more skeptical than I am. I'm a little more gun. How well and then .

you could after you've lived in this other house, let's say you buy another house. You've lived in IT for a few years. Your kids are continuing to go to school.

You're continuing to make a ton of money off of this current house. You can move back into the current house if you don't sell IT, have your four thousand dollar expenses so you move out and try IT. I mean, if IT doesn't work out, maybe you do that for the first year.

If IT doesn't work out, you just move back in. Oh, IT was really hard to get rentals all the time or oh my goodness, I have twenty seven people that are looking for a rental at any one time. So it's super easy to to charge twenty thousand a month. A and a was a good idea that you go in and buy yeah.

that's a good idea, kind of experiment with running before I risk my entire everything.

What I see from Scott running his spread sheet is that there's no clear, absolutely sell IT. This is a terrible idea to keep IT answer, which is good. Because if there was, then that would be like, okay, don't even bother, just sell IT to move on. But there is the .

opportunity to work for. The answer is super clear. It's if you believe the assumptions I had for the stock market at ten percent and long term appreciation is a three cent three and half percent for Prices and runs is an absolute sell decision of ten million dollar network's decision of the next couple of decades.

If you believe what ali believes that we're going to be just going to appreciate at six percent year in twenty six percent is an absolute uh, key decision. I think we would have very different viewpoints on those assumptions, but that's the point of the models you can now. Now you know what? If you believe those things, you have a clear answer around IT. But I think that's the that's the fun that's the fun part about financial models as there is assumptions makes such a difference terms of what to do.

But you are assuming denver appreciation and she's saying this is what we're going going to be. Appreciation is so I like running the numbers of different places. Um this I think this is a great homework opportunity for ally because ah what I meant was there's no it's it's like when you run the numbers according to her numbers, IT says keep IT.

So if both ways set cell, then we wouldn't be having this conversation. So now is a great time to go and really dive deep into what is the historic appreciation rates in the good a beach, what is the historic, uh, rent appreciation in legua beach and what is the historic returns in the stock market. It's ten point something percent I close the tab but ten percent historic from the time you all the way back to the beginning.

But there's also some years that IT went negative. So you know there's I I would be more in line with Scott, ten percent on the stock market, but i'm also not bedding that. I can you know I can say that from here.

Um but I I think that you should be really comfortable with the numbers that you're putting in ally, and I think that you should be uh, comfortable with them because they're the historic average and past performance is not addictive. future. Again, we should always say that, but I do think that um there's an opportunity there as opposed to both types we run at as as no salad.

Another component is that makes IT is so complex in such a great chAllenge. Thank you for bringing this today. I made some people going to be struggling with this is, if you just want to simplify, move back the other way, A A complete different way. Look at this.

You say, okay, the Price of of retiring comfortable ly in laguna beach is tying up three million dollars in house uh and having the expense for the portland ge payment be zero because your taxes and insurance are nothing on a property that size um for so if this mortgage is paid off, which is something we've talked about the past, you is two and two, one point seven five be hard so but the order is paid off. Then your expenses go from ten to nine nine hundred months to seventy three hundred month on there and you're pretty you're with the stones thrown of seven hundred hundred dollars a month from your current portfolio. If you can give you a little bit cash outside of that and bridge to traditional retirement age, you not that far off on that front either.

And so that's an option to think about here is like, you know, do you keep this place run out for a couple of years? Do a live in flip or two? I love the live in flip in areas like allega beach. Because of the tax free capital gain um that tie up some money, but you're paying interest on a much lower interest in your flipping competitors and you get the first five hundred thousand tax rate.

If you want to do that two or three times between now and time your kids go up to college or leave the house, that would probably completely in the game um for you and that you have you you can you can think about IT much simple terms. I have paid off property that I can live in and live in a beach. And about two and a half three million dollars in the portfolio outside of that from these living flow capitalize.

How's that one for a complete different spin on this situation? Let us go all and I just pay in the thing off and tie up for three million in. Agree.

I like the idea paying off. My husband would like that because he likes not having any debt. But now are you saying now go back out and buy some houses in ligon and flip on. Is that what you are saying?

I'm saying moving into the next house in the goal, which like moving in the next time. Diet yeah in and but treated as a living flow. You hit for two days a slow flood.

You're order for two years and then you gna fly IT and then you going to sell IT. Like what indy does this here. And I imagine the spreads are super higher. And because imagine super people, people back three million other homes do not want to spend six months referring the place.

I see a lot of success with people doing that. Theyll buy of her, you know, under two male football for four and a half was a year.

Then you're gonna have to pay time if you do that. So.

no, no, no, no, no. Put both kids on title when you buy IT and then they're there for two years. It's their primary residents to. Then you get a million dollars of tax free capital gates.

Yeah I would have to live in IT because we'd have to run out my house to pay for IT.

It's two hundred and fifty thousand dollars per person on title, not just two fifty of your single and five hundred if you're married so that you get a million dollars of tax free capital cades.

And there is like rules involved of course five hundred of which doesn't go to your retire to the kids bent.

Um no but I think that you know if if if you if you take that matter, if you say, okay, i'm going to do a live in flood um to buy one of these properties for one point seven or whatever whatever that is that really bad shape we're going to fix IT up, whether by ourselves now you rent out the primary and if you can get that twelve to fifteen range, you're probably gonna cover the the lion and share of the new mortgage. Ge, why you live in there? I'll be slightly more expensive, safe, slightly less. But that's not a that is a that is an approach that would be reasonable in your situation since you have eight thousand of months in savings um on top of your expenses right now.

I like that idea. Just got to talk my husband kids.

I would find a related agent if you don't have when that you ve been working with in the past, bigger pockets, stock comp flash agents is a great place to find an investor friendly agent. And even though you're going to be moving into IT, you're looking for an agent who understands investments as well. So they can say, hey, this one is going. If you fix this one up, it's going held more than this .

one for the same Price. I mean, can finito is that worry the plan to go all in on the good beach real day, uh, in your situation, but that there is a good way, is a significant d risky of the investment process.

if you do on a partner with me that would help, uh, medicate the risk to know we can .

go third seas hard money lenders love california. We get their big loans on these properties and they make a lot of a lot of interesting points. So you have no trouble find as you can bring some series, you can bring a material and and a cash down.

Good to know.

Okay, only this was a really fun set of circumstances and interesting financial. I don't want to see problems because these are all really great problems to have. I have so much money, but it's set up in my retirement accounts. Yeah but you have so much money um but this this was a fun exercise and I am super excited to see where all your research leads youtube so please keep us up to date IT might even be fun to have you come back after you've determined what you wanted do and we can we can run through some different numbers in scenario .

that yeah I thank you. This has been super helpful and I really appreciate your feedback. I listening your show all the time.

so very happy. Thank you much for coming on and congratulations on your awesome problems of be really interested to C A and tangle and really tRicky situation and a good thing like congratulating. So I hope you're like you, very excited about the future.

yes. Well, thank you again.

They give a, we will take to you soon, 拜拜。 All right, sy, that was ali, and that was a really interesting set of problems. And I wish I was a little more knowledgeable about the legal beach area just because, uh, you and SHE had different assumptions on the returns, the historic returns and the not the historic returns, the forward facing returns for luga beach. And I like I can see both of you being right, but only one of you will be right. I it's really .

hard for me to wrap my mind on this problem, and i'd love to get input in the bigger pockets money community on this because this is the middle class trap on steroid right here. I also just responding to, I thought something after we finish recording. I I thought of IT when we were there around the ten thirty one exchange applies here because i'm so used to dealing with so many such smaller dollar values on primary residences um where the capital against exclusion applies. But when you have a two point two million dollar gain and knowing the first five hundred thousand is excluded, well, now we get to talk about how to shout to the other three or four hundred thousand dollars.

An option I throw out there for ali is to to consider at ten thirty one exchange can SHE sell that property and move that into other higher yielding cash walling investments somewhere else um as part of that portfolio because that's gona be more you know that that that may be a way to shut to that tax benefit issue. Decides to sell the property SHE kind of bust of my model with how big the numbers are on this property. And I have to go every visit a few assumptions, and there are making that those are tailor to these states situations.

Well, at ten thirty one is for investment properties. So he would have to turn this into a rental for a while. I believe in what I don't know about the ten thirty one exchange is quite a lot um but I do know that it's for a rental property. Um so i'm wondering how that would how that would work. I think that that's that's .

a great accounting question for our community. Actually, I believe you can do IT if you out for two years, but lets see, hear from the community and ask that question out there. How can you tend thirty one of primary residents if you turn IT into a rental? I believe the answer is yes.

Yeah and if that's the case, then absolutely that would make so much sense because kick that tax can down the road and she's saving, uh, what did you say? Three hundred thousand dollars on taxes, almost four hundred thousand dollars on, uh, capital gave taxes if he does that yeah painting .

on what the california marginal rate will be for that which should be in a high tax break up between our income in the game. On this one I calculate my crude math is certainly rect. But ball park hundred and eighty seven thousand catalans, that's the material apart of the decision here.

You can get on a four hundred grand by deferring IT into real state and planned to keep real ate the long the long term. That could be pretty powerful there. You are giving up the primary resident exclusion though. So there's there's a tax angle to this that should definitely be explored. And SHE should try to talk to a real state friendly C.

B, I. Probably SHE should definitely talk to a real estate friendly tax provider or tax planner who can help her figure out what is her best play. They can run these numbers for her. But yeah, this was fun problem to try and and figure out.

We've love your thoughts on that. This is a new problem for me. D N.

I. At the scale. So any feedback, thoughts are appreciated.

Hear from you. What advice would you have given to ally that differs from what Scott and I said we would love to hear from you below? We should got that rap up this episode, the bigger pockets of money podcast. He has got trench. I am Johnson saying cherie muscle toe.