Q&A: Two Weeks Until My Tenants Move In And I Have Nowhere to Go

27:27And I learned it from you. So there we go. Wait, was that your only guess? Yeah. Well, that was where we start is that these are two separate decisions. Yes. Because then once we know the answer to that decision, then we can go out to Paula's convoluted answer that I won't understand about the rest of this. I will now smile and nod. Oh, yeah. Well, no joke. I think that that is an absolutely reasonable statement. It wasn't what I was going to say, but it is reasonable. Thank you. Thank you. That they can be viewed as independent and distinct decisions. And step one is to determine whether or not the property is worth holding.

28:08which would require calculating what the cap rate of the property is. And then that cap rate, remember, is equivalent to the dividend payment of the property. It's not the total return. It's just the unleveraged dividend. And that dividend plus the rate of appreciation is the unleveraged total return. So in general, that's a good metric to know about any property that you're holding. So yeah, I would absolutely agree with the spirit of the statement. I will sit down now. You are sitting down. Oh, I am. What I was actually going to say is, Janet, the thing that struck me about your question is that you mentioned that this is an inherited property.

28:50And the first thing that I think of when I hear the words inherited property is grief, because this property most likely was originally purchased and held by somebody that you loved. And that means that likely this property has some type of emotional significance. And that's the reason why I wasn't going to immediately go into that calculation of whether or not the property is worth holding. because oftentimes when you inherit something that has memories tied to it of loved ones who have passed on, there can be significant non-financial reasons to want to hold onto it, to want to keep it in the family, to want to pass it on to your children.

29:38And so when Janet said that she was inclined towards option two, she was inclined to hold, you can make a financial case for that. Absolutely. Because there are heavy transaction costs associated with selling. And particularly, you said the property is valued at somewhere between 2.25 million to 2.5 million. Let's take the higher end of that range, 2.5 million, and let's assume a 6 % haircut when you sell. Joe, what's 6 % of 2.5 million?

30:11Wait a minute. I'm trying to give you a reason to talk. Hold on a second. Let's take out the trusty calculator. No, we can do this in our heads. Hey, Siri, what's 6 % of 2.5 million? We can do this in our heads. Come on. Times 2 ,500 ,000 is 150 ,000. Ooh. Okay, well, that was not done in our heads. That was done by Siri. Which is my head. That is my head. I mean, let's be real. You've outsourced your head. Okay, so$150 ,000. That's probably the minimum haircut that you're going to take if you sold this property. And that's a significant amount of money. Now, if we were looking at this through the cold lens of only a spreadsheet, then absolutely, I'd say calculate the cap rate, make sure that it has a solid risk-adjusted return, blah, blah, blah.

31:04Exactly, Joe, what you predicted, I would say. But if we're looking at this through the lens of here's a property that likely has some type of emotional significance. And if I sold it, it would cost me $150 ,000. That would be a hit to my net worth just to get rid of this property. Those two things together, combined with her existing inclination to hold, all of that together, to me, paints a compelling case to go with her gut and hold this property. But I will concede that there are reasonable. What Joe said is very reasonable. So I think there are very reasonable arguments to make either way.

31:46Janet, there was another thing that struck me about your question. And it was when you said that you're not going to leverage any community property. You will leverage this particular home, which has a value of, let's say, 2.5 million. Plus you have another$100 ,000 in savings, which is good cash reserves for this property, that is the bucket of money that you're going to use when you leverage into future assets. The question that I have for you is those future assets that you acquire as a result of leveraging this existing asset, do you intend for those future assets to be separate property or to be community property?

32:33Whatever your answer to that question is, I would encourage you to meet with somebody who practices family law to make sure that the structures are set in place such that if you intend for those future assets to be separate property, they don't accidentally become community property. I interviewed a family law attorney. We're going to play that interview on Valentine's Day. And one of the points that he made is that many people accidentally end up turning separate property into community property without even realizing that they're doing it. Oh, man. Right. And so I would encourage you to meet with someone who practices family law to make sure that those accidents don't happen, that whatever property is community and whatever property is separate is done with intention.

33:25And that will become particularly important when you leverage against this inherited asset and use it to acquire new property. So that's the second point that I would make. The third point that I would make is that I absolutely agree with your inclination that whatever you buy next, that new property that you're going to purchase is likely going to be non-local because the better returns are going to be found in low cost of living or mid cost of living areas. The better returns are going to be found in geographic areas where the price rent ratio works in the landlord's favor. But the good news is because you can leverage against, we'll just take the lower end of that range, even at the low end, a$2.25 million property, because you can leverage against that, even if you were to only borrow 70 % of that equity, that would still be a significant enough amount of money that you could buy either a multi-unit property outright, free and clear somewhere else, or you could make a 25 % down payment on a couple of multi-unit properties.

34:35So you have a strong enough base to be able to take that money pretty far in a lower cost of living area. And I do know a little bit about this. There is the disparity in prices in real estate are so pronounced across the United States that I know it makes your eyes roll, Paula, makes my eyes roll whenever somebody talks about the U.S. quote real estate market, because it truly is a quilt of many, many, many, many, many, many different markets. And to say that properties in the USA are overpriced, well, in some communities, yes, but in other communities, not so much. Well, what is the definition of overpriced?

35:20Because I would argue that the price is an accurate reflection of - Current conditions. Current conditions, right? The cost of labor, the cost of materials, and the balance of supply to demand. I think overpriced is more based on your expectation of a rate of return that you're hoping for. And so if I were to answer that and I look at the North American real estate index, the NARED index, I'm expecting maybe a 10 % return for my real estate. And in some places, I might have a difficult time projecting that out where it's going to be much easier to do in other communities. Right. Which means that in some areas, the prices are high enough such that the returns just aren't there for investors, particularly for individual investors.

36:11Well, and your point too, they could be, it's just going to be difficult for us to model out a continued squeeze on the property value, right? Because that's where it's going to come from is from the literal lamb value, which as you know better than most that there's two other ways to make your best deal, which is through the rental income you have coming in. And then second, the leverage that you apply to the deal and how you apply that leverage. Those are two other ways to make money beside the base land value going up. Yeah, the base land value going up is where the appreciation comes from.

36:49And the actual structure that sits atop that land is where the income stream, the dividend, comes from. That's why multi-units tend to perform much better because you're consolidating multiple units of property onto the same singular piece of land. And if you really think of it from a framework in which you're prioritizing that dividend payout, the underlying land is overhead. You know, it's overhead that may appreciate over time, but fundamentally that underlying land is overhead and the structure is the income producing component. And that's why having multiple structures on that same singular piece of land is so powerful in real estate.

37:31That's why you'll get much better, generally speaking, much better returns with a four unit than you would with a single family home. I was actually so in our course, Your First Rental Property, we had office hours the other night and someone asked me, why do you have any single family homes, given that multifamily is so much better? Right. Exactly. Exactly. And my answer is, honestly, I never intended to buy single family homes. every single family home I've ever purchased. I went into the search with the intention of buying a multifamily, but because the deal flow is so much stronger in single family, that by virtue of searching for a multifamily home, I accidentally stumbled upon a single family deal that was so good that I just couldn't pass it up.

38:21And so every single family home that I've purchased was the result of looking for a multifamily, getting sidetracked by buying this single family, and then going back out into the market to look for another multifamily, getting sidetracked and purchasing another single fam, right? I've never set out to buy single fam. Welcome to real estate via ADD, everyone. Exactly. It's shiny object syndrome. Look at that. Look at that one. But it also shows something else. I mean, to take our joke and make it serious, which is you got to get out there and explore to even see the deals. You found these deals unintentionally because you were out looking for them.

39:02Like you ask the universe for a thing and it delivers. It's almost, you know, in that way, it's thematic with what we talked about with Todd, right? Like expand the question and go, what's possible? Do I have other relationships? Do I have other opportunities? Are there these ways I could solve this? in a non-traditional manner just by asking a bigger question. The fact that you are out there proves a big point that most of us, not most of us, I think a lot of the time, you know what, I'm going to use me as an example. A lot of the time, I'm afraid to go through the door because I'm sure if I go through this door, these five other doors are going to close, which by the way, is not not true.

39:40It is 100 % true that those doors will close if I go through this door. But I've always found that if I walk through that one opportunity door, five better deals open up versus the five doors that close that, frankly, I shouldn't have cared about in the first place. Walking through the door and getting out there on the thing that you're chasing is almost always, and by almost always, I would think 99 % of the time is the better option. Right. Janet, in summary, Joe's guess for what he thought I would say is an absolutely reasonable course of action. There's nothing wrong with calculating the unleveraged total return on the property that you hold, which is the cap rate plus a reasonable expected prediction of a market-based appreciation.

40:27So go ahead and do that because it's generally a good practice to know what that number is on any property that you hold. But I would add to that that if this property holds any emotional value to you, then I would hold it and leverage against it in order to expand that real estate portfolio. And that's what your inclination is anyway. And plus that'll save you the$150 ,000 haircut that comes from making the sale, that transaction cost. But the thing about real estate, the thing that makes it different from cash is that any stack of$100 ,000 bills could be interchangeable with any other stack of$100 ,000 bills.

41:14Whereas a home valued at$100 ,000 or valued at$1 million or valued at$2.5 million is not equally interchangeable with a different home of an equal value. And that's because real estate has unique attributes, which a stack of$2.5 million bills does not. I would weigh that as well while you're making the decision as to, you know, fundamentally your question is, do I sell or do I hold? So my answer is, if your gut says hold, then hold, because selling is irreversible. That's one component of my answer. The second component is meet with someone who practices family law. And then the third piece is it's time to start deciding what state and what city you want to target for your next rental property, which is a very exciting question.

42:06State of happiness. Oh, well, thank you, Janet, for the question. This Friday, the NBA on Prime tips off with their debut doubleheader. header. First up, Boston brings the action to the garden as the Celtics face the New York Knicks. Then out west, it's a battle of the superpowers as the Lakers try to poster the relentless pace of the Minnesota Timberwolves. The Celtics and Knicks, who has the most hustle in defense? This game will come down to who wants it more. And the Timberwolves and the Lakers, it's two Western Conference heavyweights going toe-to-toe. Buckle up, folks. This one's going to be electric.

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44:03Joe, we are a month into 2025. We've just had a presidential inauguration. I want to close this out by asking you, what do you see as you peer into the crystal ball, even though I know neither of us enjoy prognosticating, but what do you see coming up on the docket for the 11 months ahead, the 11 months remaining in this year? Well, there are things that are forecasted and there are things that are predicted. There's a big difference between the two predictions aren't any good. We've already been given some signals, Paul, especially from the Fed, because the Fed does not like the we change our mind very quickly thing.

44:40The Fed likes to tell you what it's going to do and then follow through on what it's going to do or signal that is going to change the way that it's going. So the idea that lower interest rates are coming with that jobs report that we ended up with in January, at least for the first half of the year, I don't think we can count on lower interest rates. Now, will mortgage rates and short-term rates that are affected by the treasury, will those finally go from this big gulf between the two and maybe closer, which historically has been the case more often? you could make a case for that if I'm planning.

45:23And when I was a financial planner, I would say, yeah, that might happen. However, I think it's best to plan on it not happening. Because if it does happen, I think we do a what if scenario. If it does happen that mortgage rates come down to more accurately reflect where more short-term rates are, car loan rates, short-term line of credit rates, things that are much more closely affected by the Fed versus the 10-year treasury. If those do come down, I run a bunch of what-if scenarios, right? If those come down, here's what I'm going to do. But if they don't come down, here is my strategy if all things stay the same.

46:03Okay. So I want to talk to you in a moment about what is your strategy in both scenarios. But the first thing that I want to ask you about, and this is actually something that we talked about So in our January 1st Friday episode, it's unusual that the Fed would lower interest rates and yet investors would signal that they are worried about inflation. Even when the Fed gives us another 25 basis point rate cut, which they did in December, investors would signal that they're worried about inflation. and based on the 10-year treasury yield, mortgage rates would go up. That's a very unusual circumstance.

46:45What do you make of that? Every Federal Reserve chairman you can look at a little differently. I think that Jerome Powell is different than Ben Bernanke, different than Alan Greenspan. You saw kind of a different reflection. But what we've seen from Powell so far is that it's highly based on data. What Powell and the Fed have reflected more, and certainly all Federal Reserve chairmen are going to use data. I feel like there's been less around tea leaves and much more around here are what the numbers reflect. And we're going to do this based on the numbers. Investors don't do that. Investors are looking at specifically what Donald Trump said about tariffs and what Donald Trump said about tariffs is I want to put tariffs in place on day one.

47:31Now, as this administration unfolds, and even when this comes out, Paula, we may have seen some of this tariff activity already happening. Right. I should say we are recording this episode prior to the inauguration. So we are recording this episode in mid-January. What the Federal Reserve was thinking at the time, also pre-inauguration, was here's the data. What investors thought at the time was Trump has spent a lot of time talking about, I want to oppose these tariffs. Tariffs create inflation, full stop. All the data shows the tariffs create inflation. And if that's the case, then we're going to see a higher interest rate environment, which is why investors in the 10-year treasury market that more accurately reflects mortgages have kept those rates high.

48:24Joe, to your point, that is why investors are unsure of how to price expectations around inflation into the market and are erring on the side of assuming that we're headed for greater inflation in 2025. Paula, it's the safer assumption. Because if I make moves and those moves are based on a higher inflationary environment and that doesn't come true, anything I put into place gets even better if there's less inflation. If I bet that inflation pressure continues to recede like it has, and I make investments based on that, and it doesn't happen, everything I would invest in gets worse. And I don't want that to be.

49:13I want to plan on the worst, hope for the best. It's a much better strategy to do things that way than to go the other way around. It's why even in an environment where historically we've seen rates of return on investments over long periods of time over 10%, a good financial planner will base their plan on seven or eight. Right. So the safer thing to do is to plan for high inflation in 2025. Yeah. Maybe not the worst, but plan on more of the same. Right. Plan on 2025 being another inflationary year. All right. In that case, to the people who are listening, what should the average person do in terms of planning for 2025 being a high inflation year?

49:55I think if you plan on that, we need to start from the income side of the equation because nobody begins there. And that frankly is where you should begin. I found that this is why so many people are getting behind is because companies are great at measuring inflation and looking at its effect on the bottom line. Individuals don't run their finances enough like a company. I think I may have said this specific example before, but do you think the people at Coca-Cola, when the price of sugar goes up, just goes, oh man, the price of sugar goes up, there goes everything. We can't, no, what do they do?

50:28They raise the price of Coca-Cola. That's what they do. They pass that on. If inflation is high, I need to figure out how to create more income for me. So whether that is negotiating with my boss for a pay raise at work, which statistically every stat shows you just don't ask. Your boss has other priorities. They're not, in most cases, they're not willfully not giving you a pay raise. You just have an ask and they have other priorities. They're just not thinking about you. Or do I create that side hustle finally that I've been thinking about? Or do I make a move to another company, which every study has also shown.

51:04If you move to a different company versus looking for the raise of the promotion, you're likely to find an opportunity that pays you more money. I have to look at the income chain first. I think that's the first thing I do in an inflationary environment. Right. And well, not to plug my own product, but I'm going to plug my own product here. If only you had a product. Well, it's still under development, but we are gearing up. In March, we're going to release beta round two. So we take our product development very seriously. We have a long product development roadmap. And right now we're still doing a final round of edits on videos.

51:40We're building out the learning management system. We custom build that. from scratch. So we have a team of developers who are working on that. But we have a course that's in the works. It's brewing. It's called Your Next Raise. And it's all about how to negotiate for a raise with your employer. So it's all about, Joe, what you just talked about, the income side of the equation. How do you get that raise? And to your point, that might mean talking to your boss and trying to figure out what the company is even capable of doing, right? And that's going to vary. Are you at a Fortune 500 company or are you at some tiny little mom and pop shop?

52:18Their capabilities are going to be quite different. Particularly if you're at a mom and pop shop and they sell a discretionary item and their sales have been harmed by inflation, you might be at a company that's actually performing worse than it did pre-pandemic. Well, that's important too. I mean, in any negotiation, I'm sure, Paula, this will be a part of your course, but reading the room and understanding, and we mentioned this earlier in the episode, understanding the other side of the cube, right? With Todd looking at his potential renters, well, they've already signed the contract. They are his renters looking at their point of view.

52:57How do they win? How do you look at your boss's point of view? I've been in the case as an employer before where an employee has come to me and did not read the situation at all and asked for stuff that I would have loved to have given them. They just apparently didn't pay attention to the last four meetings in a row where we talked about the reality of the situation we were in at the time. Right. And understanding that. And I will say this, you know, it isn't about not rocking the boat. And I know there have been studies done that show women especially, you know, don't want to rock the boat. And I think there's a lot of men that are in that same position.

53:36But it's not about not rocking the boat. It's about understanding what your boss can do and can't do. And in that case, I thought I'd made it very clear that I can't. And then my employee comes to me and goes, no, I think you really can. Did you think I've been lying to you? Like, why do you work here if you think I'm lying to you? You should probably go somewhere else. But I wouldn't be afraid of rocking the boat. If that's what you're worried about, that you're going to be this person that's asking for more. You need to be the person asking for more or you won't get it. Right. And then, Joe, to your other point, you talked about side hustles.

54:10I mean, rental properties are a side hustle and they're a great side hustle, particularly as we've seen over the last 15 years. Real estate is an asset class that continues to rise. And unfortunately, because we have an enormous supply crunch in the United States, we have a shortage that's estimated to be somewhere between 4 million to 7 million units of housing across the US. Because of that severe housing shortage that we're grappling with, it's an asset class that is only going to continue to rise. Now, I'm going to asterisk, that's a nationwide stat. So localities might be different. There might be a very specific town where the one factory in the town closed down and now jobs have fled the town, population has fled the town.

54:56So yes, there's going to be a distinction between Youngstown, Ohio versus Austin, Texas. But broadly speaking, at a nationwide level, we know that real estate is only going to continue going up. And that's why it's such a great side hustle to get into. So if you can't get that raise at your current company, then look to something like real estate to be able to build your income streams outside of just your W-2 paycheck. So Joe, we talked about this question began with what should the average individual do to prepare for 2025 being likely another year where we see rising inflation and higher prices?

55:40Look at your income stream, number one. And then number two, then that is to prepare yourself to be able to continue to save at the levels that you're saving toward your goals. You want to protect that ability. There was a Yahoo Finance Marist poll that just came out showing that a lot of people in 2024 didn't save as much as they did in 2023. You don't want to be that person. You want to be able to still achieve your goals. Because only the second thing then that you can do is cut. And we really don't want to cut our life. But I will say that it's a great time if you haven't thought about those expenses that are really important to me and add value to my life and ones that don't, it's a great year to do that if you expect high inflation, because then we can finally begin cutting out those things, those expenses we're paying for that we're not getting the most utility from.

56:33It's funny how the classic tenets of personal finance come up over and over in all of these disparate situations. Yeah, isn't that wild? Right. So in conclusion, earn more than you spend and spend less than you earn. We've never said that at the beginning of a year. Ta-da! That is all brand new. No. And this, Paula, makes a bigger point. I mean, this is maybe the second time today, or maybe even third time I've said, hey, we joked about that, but there is truth in the joke, which is what makes it funny, right? Right. How many times have you and I heard about the new, new thing, about the new, new reality, and this doesn't matter anymore.

57:11And there's these new set of terms and conditions that I need to pay attention to. And that has never proven to be true. We always come back to the same metrics, the same numbers. And what's the old phrase that my mom says that history doesn't repeat itself, but it rhymes. And I think understanding that what's old is the new new. And if you think there is a new new, it's not. It truly isn't. The same metrics still apply. Now, that doesn't mean that some things are going to take off without metrics. And increasingly over time, we're seeing emerging metrics around things like, and I'm talking specifically like crypto.

57:51I don't think crypto is the new new as much as we're getting our arms around what it is and how it actually works and dispelling the charlatans around this is the new new instead going, no, I don't think so. And I think there's something here, but we're establishing the data around how do we track it? How do we understand what its utility is, where we think it might go in the future, how it responds to different economic conditions? All that is being created as we go. Right. What have we seen so far from Bitcoin as an example? It doesn't act the same as gold, which is what the early people thought that, okay, this is our placeholder for gold.

58:33We have learned that's not the case. That's not the case at all. It acts much more like the stock market, much more like the growth engine piece of the stock market. Now, will that continue to be true? We still don't have enough data. But I know that there were a few people out there maybe going, Joe, I think the crypto is the new new. I don't think it is. I think it's a new device, but I think it still is. We're going to figure out how that responds to the same stimuli like we have with real estate, like we have gold, like we have in the stock market, like we have with, I mean, pick an asset class, right?

59:04So you're saying it's a new vehicle, but it plays by the same laws of physics. Same laws of physics. Yes. This doesn't defy gravity to quote wicked. That's a fantastic show and movie. Our new movie expert, Paula Pant. I do love musical theater, so I was first in line when Wicked came out as a movie. Should we do Afford Anything, the musical? Oh, I would love that. We sing the entire episode? There is actually a Financial Independence album that is coming out by Alan and Katie Donegan. That's fabulous. They're making an entire album about financial independence. So we'll talk more about that once we're ready to.

59:52But there is a financial independence musical in the works. How great is that? Well, Joe, thank you so much for your thoughts, for your wisdom, for your jokes. No, thank you, Paula, for the opportunity to share my jokes and my wisdom. Well, if people would like to hear more of that, where can they find you? You know, a great place to find us on Instagram. I've increasingly been on Instagram again. We have never left Instagram. You'll see clips from the shows where you'll see Paula Pant, among other people, and our wonderful videos there and some great lessons. But I'm going to be doing something I used to do more often, which are creating Instagram specific stuff.

1:00:40So come join us on Instagram, Stacking Benjamins. Just follow us, Stacking Benjamins podcast on Instagram. Nice. Well, thank you so much for tuning in. If you would like to leave a question for this podcast, something that we will answer on a future episode, go to affordanything.com slash voicemail. That's affordanything.com slash voicemail. If you enjoyed today's show, please do three things. First, share this with your family and friends. That's the single most important thing you can do to spread the message of financial independence. Second, open up your favorite podcast playing app, hit the follow button.

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1:02:00Thank you again for tuning in. I'm Paula Pant. I'm Joe Salcihai. And we'll meet you in the next episode. Thank you.