413: Finance Friday: How to Use Your Home to Retire YEARS Earlier

29:18Yeah. Yeah. Okay. So this, this, so I, I agree that we should, So there's things to look at in the expenses. And this month would be a really good month before you return to work full time to really kind of put in some systems for keeping those types of expenses low. But now we've got a whole different problem of we're not. So what are we going to do with all this money? You're going to by the end of the year, if you don't have a settlement problem that comes out of the ongoing legal situation that you described earlier, you're going to have one hundred thousand dollars in cash in the bank. so what do you what do you want to do with that hundred thousand dollars by this this time next year that's one way to put the problem the question yeah i think that's uh that's the big question something something we wanted to get some advice or maybe you know brainstorming session on because when danielle left her job that they really forced us to think about our money situation and now we're kind of turning it around when she gets a job we're gonna have all this extra money that we don't want to spend like we previously did.

30:19But where do we put it? So let's go through, what are the top options you've been considering? Well, we've considered real estate. We're both really interested in it. Danielle's been wanting to run her own Airbnb. And out here where we live in Temple, it's a big medical community, big veteran community. And we think that our house that we live in now could be a great medium-term rental, possibly. So that's something we've considered putting some of it into low-cost index funds. But we haven't really figured out what our best bet is. I have another idea as well, too, with the layout of our home.

31:06You know, we're in like a classic, maybe you would call it ranch-style home from the 80s. And the way it's built out is that you could split our home by building a door between our kitchen and our laundry room hallway and garage area. We built a door there. We could literally rent out that as a side of the house, as a living space for a family. they would have access to one master bedroom, a laundry room that doesn't come without some renovations as we would have to fully close in the garage and put in a kitchen and insulation and make that space livable. But my idea is to house hack in that way by putting in some renovations and being able to actually rent out part of our house now and put that towards our mortgage payment here.

32:02But that does require some renovations and we don't know what we're looking at cost-wise with that. Okay. I would look at getting a quote. Talk to a contractor and see what that would cost. Are we looking at$20 ,000? Are we looking at$200 ,000? I'm thinking off the top of my head, it's going to be$30 ,000,$35 ,000. But I don't live in Temple. I don't have contacts there and I don't know what your situation is. But for$35 ,000, what could it rent out for? If you could rent that out for$1 ,000 a month, you've got three years of payback before you start generating income. Could you do any of the work yourself?

32:42If you moved out of this property and rented it as it is today, how much would it rent for? Probably around$2 ,000 a month. Conservatively, maybe$2 ,200. And tenants would pay utilities in this place? So you would be clearing$2 ,000 minus minus your$1450 mortgage payment? Yuck. Yeah, so I think you've got at least a break-even, if not a slightly positive rental here, especially if that number is conservative, on a standalone basis. Is your property zoned to have multiple units? Would you be legally allowed to separate it into two units, or would you be operating a kind of illegal duplex if you did that reservation?

33:17Well, we looked into zoning for adding a tiny house in the backyard or something like that, and it seems like it's zoned for that, but I don't know if it's the same rules for converting a garage into a living unit. Okay. I would evaluate that because you don't want to spend, because if you can rationalize the investment as a standalone rental property, that makes it much easier, right? Imagine you're not living in it and you're like, hey, I own this place. Would I put in$35 ,000 to separate into two units? Would that add value to the property? And then what would the cashflow and returns be? That will give you a very clear answer about whether to do this.

33:53And I think it without understanding if it's legal, if it will be a legal duplex when you exit or whether you can rent it out this way. And if you only run it on the income while you're living in the property that it will produce, I think that'll make the ROI of this a lot harder. Also, the official advice, of course, is to abide by all laws and do everything above the books. Yes, that goes without saying. However, something to consider is if you do turn this into a rental, where are you going to live? Your housing costs are almost assuredly going to go up because I'm assuming that you have a lower interest rate on this property.

34:29We have a fairly high interest rate. We just put a lot of money down. Our interest rate is 5.625%. Oh, okay. And all the equity we have in the house is just money we put into it when we bought it. Okay. When did you buy this house? We bought it in September. We sold our previous house and we were lucky enough where we got a big chunk of money out of that and we just rolled it all into this new house. So one of the things that a 5.6%, you said 5.6 %? 5.625. 5.625, okay. At that interest rate, that brings up another option here, which is just pay the thing off, right? You'd be completely done in two years if you took your current cash position and the savings that you'll generate over the next two years to pay it off.

35:19Is that like the math that's super awesome and crazy here? No. Um, you know, the spreadsheet might model out some other things, but that then chunks you down to, you know, that, that completely solves the spending issue here, uh, and allows you to have a very stable position that you can grow from the other side. So I won't necessarily push you down that route. It's just one to consider. And it's a very simple and freeing choice if you choose to go. Yeah. Okay. And the other option, but, but I think the fact that you're willing to use this house as an asset is why you're going to be successful one, whichever direction you, you, you go in.

35:52Um, you can hold this property as a rental and put down another down payment on a new property. You can sell this thing, uh, and take your, your, your proceeds out and move into a true house hack, like a duplex, a legal duplex, for example, that would have, have those, those items or one that's zoned for that type of project. Uh, you can go down the Mindy route of a live-in flip, which is perhaps the most powerful option available, right? Because over two years, you'll have to, you don't have to do it. You can do it as fast as you'd like. But if you stay there for two years, you'll get the tax benefits of being able to sell the property for a tax-free capital gain.

36:30And I don't know, but I think doing that with kids might show a lot of value creation to them. It might be a very valuable life lesson to see the property actually getting fixed up over time and improving if that's work that you can do yourselves or do some of the work yourselves and hire it out. So, I mean, that's your biggest asset and allocation decision here is this house. And I think you're thinking about it the right way in racing towards financial freedom. So any reaction to any of those ideas or thoughts? Yeah, I agree with that. It's something we've talked about a lot. It is a valuable asset and it's really close, like he said, to the hospitals.

37:10And I think it would rent very well. I think we have to definitely give it a lot more consideration. But I'll be researching, you know, the legality of blocking it off, like just putting that dividing line between, you know, even if we do that, we still have so much house left, which is really awesome. so we could definitely get away with that I think but yeah it's also I think we would both be willing to sacrifice if we see the returns the results a couple years down the line yeah it sounds like we have a lot of good options we just really have to pick one and go with it which is a good problem to have I guess my question would be is which one would make us get to financial independence faster.

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42:06Indeed.com slash BiggerPockets. Terms and conditions apply. Hiring Indeed is all you need. Winning the lottery, but we haven't discussed that one yet. So that one aside, I like the furnished rental idea. And just because you decide to furnish the rental and rent it out medium term doesn't mean you can't do some short term, of course, of making sure that the local laws allow for it. So I think your first homework assignment is to go to the planning department or the permit department and just talk to them. This is where I live. This is what I would like to do. What are my options? What is the house zoned for?

42:51And what does that mean? And keep asking them questions until you understand what they're saying. The permit people aren't trying to be obtuse and opaque. They're trying to be helpful, but they use a lot of language. that they use in their everyday day-to-day that may not make sense. So keep asking questions. Oh, you can do this with it. Well, what does that mean? Well, you can do this or this. Well, what does that mean? It's zoned A4. I don't know what zoned A4 means or whatever their zoning is. I'm not from Texas, so I don't know what any of their zoning is. But just ask them what they're talking about and keep asking until you understand.

43:28If they say that it's not currently zoned for this. Ask if you can get a variance. What is the process for getting a variance? What is the probability of getting a variance? I went to my own local permit office and they said, there is no way we would ever grant a variance for this. So the seller was telling me, oh, you could build this huge apartment complex on this property. And I went to the zoning department and they're like, there's no chance you will ever be able to build on this property what you think you can build on here. It doesn't matter what the seller's telling you. It doesn't matter what you want to do.

44:05It's your property, but only to a certain point. So talk to the permit office first. But medium term is, I like medium term a lot because it's still the furnished rental. So you're bringing in more income than a traditional long-term rental that's vacant. You can swap it out with the short term if you don't have anybody right now for the medium term. Oh, July's coming up and nobody wants to rent it for July. Maybe I'll throw it up on Airbnb. Again, according to the short-term rental laws in your city, which I hope are very lenient. And you can hopefully flip-flop back and forth. I have a medium-term rental right now that is not allowed to be a short-term rental because of my HOA rules.

44:47So that's another thing. I don't think you have an HOA. Just make sure that you are reading all of the laws. So if you're asking, what should we do to get to financial freedom as fast as possible? And I'm willing to use my housing, have both of us work full time and spend additional time after that arranging projects in real estate. Okay, great. I love this. I think you're thinking about it the correct way. The first thing is, can you turn this house into more of an asset? Right? I think we've already exhausted that discussion. You need to figure out if that's feasible. If it is, check. That's your first option.

45:22Right? That's a great thing. You spend a few tens of thousands of dollars and you're able to generate$1 ,500, whatever it is in rent per month. I mean, that's going to be a killer return that will subsidize your housing dramatically and make a big difference in your financial position. Absolutely. It'll probably also add value to your property in a material way in a short term. If you can't do that, if you do your analysis and that becomes not feasible, then I think that's where we have to say, okay, how do we tap the equity? most of your wealth is now in this property, right? And so you have to either release that equity and put it to something that's going to be more useful or more powerful for you by selling the property and moving into another property, perhaps a house hack.

46:08I think that one of the biggest opportunities in your situation, if you don't want to have roommates, of course, is a live-in flip, right? Because that's a way to add hundreds of thousands of dollars in value to your property if you're able to find the right opportunities and really think about it like a business while you're living in there. It'll also allow you to live a luxurious life. If you can finish the flip in six months, you live in it for a year and a half and you enjoy all the benefits of your nice new home that you've created while sitting in a pile of equity that you can potentially redeploy or refinance or whatever with that.

46:41So I think that's a great option to go looking for. if you're going to house hack again, you are in, you said, an area with a lot of military presence. Is that correct? Yes. VA loans are assumable. So you may be able to find, you could be in the weird position in a 2023 setting where if you find that your current house hack isn't going to be, isn't feasible because of the zoning or whatever with that, you could sell this current house, pull out$180 ,000, have your 60 ,000 for 240, and probably take down any property in your local area, assuming a VA loan, perhaps one at a 2 % or 3 % interest rate.

47:24That changes the game for you from a cash flow perspective, if you're looking for rentals in the area, right? And military people move all the time. They get new orders and they're gone, right? So you're going to have opportunities from a VA perspective if you have a large military presence. So those would be the areas that I would go fishing or sniffing around in to find great housing or real estate investing opportunities if you're willing to go all out with your housing as the key tool, which I think is correct, but most people aren't willing to consider it. So kudos to you guys for being so clear about your intent to use housing as the big leverage point.

48:05Yeah, I think David always was. And I just more recently came around once I read your book, That for Life. And then I came around and I was like, okay. And I'm just dove right into like, we have to do this. That's the pathway I see to financial independence. Well, thank you for reading it. And I agree. I think most people are not willing to go there, but if you are, then it becomes clearly the biggest lever in that. And then, you know, I bet you that after you do one of those moves, either dealing with your current house hack, which by the way, if you're able to add value to the place and turn it into a legal duplex, for example, you're probably going to jump the value from what, 340 you said?

48:45310. 310. 310 to something higher than that. And you can probably refinance at that point. Your interest rate's not going to be that much higher than the one that you currently have. So adding value and then cash out refinancing, if you want to use the equity again, is not the same deal breaker for you guys as it is for most people in America today. So you actually still have that advantage. That's the silver lining for your very high mortgage rate that you got in September of this year, is that the costs to refinance it for you guys are not nearly as bad as for other folks. So that's all. And then again, you'll have, if you do that, whichever one of those paths you choose, you'll probably still have six figures in cash,$150 ,000 to do another project.

49:31I wouldn't do them twice at once, but you could conceivably have two projects done by this time next year in 18 to 24 months, which would be a pretty sizable leap forward on your journey to financial freedom. In addition to the$35 ,000 in cash you'll accumulate over the next 12 months from your jobs, minus your regular spending. How's that sound as the beginnings of a potential plan? It sounds life-changing. Sounds amazing. Amazing, very exciting and hard to imagine. It just seems a little difficult. It seems very difficult getting started, but I feel like it might be like a snowball effect. Like once you do the first one, then you learn from that and then you can definitely have some more ammo to go for the next one.

50:18But this is all positive news, things that we're learning that we did not know about, like the VA loans being assumable, had no idea. And yeah, I think it's really helpful just to have it broken down so clearly because we kind of had an idea of these possible scenarios, but they were just floating around in our head and we couldn't really put a finger on like, okay, these are three best options or something. Let's just pick. It was like, should we do this? Should we do that? Like, it was a lot of talk without much clarity, really, on what's a tangible option for us to pick. Well, great. And just to kind of go one half step deeper on a couple of those, right?

51:02The house hack, you should be able to rule that out within a rule, either say yay or nay on that within the next month, right? That would be very achievable, right? You need to do some research with your city to understand the zoning and do that. Ask questions if you need to, set appointments. And you need to get a quote or maybe several quotes from contractors if it is, in fact, illegal for you to separate the units there and do something permanent that would add value. If it's not, then you have some other decisions to make around whether you want to proceed with some variation of that, a tiny home or whatever.

51:34But that should be something you could be clear on whether to do that or not by the end of May. We're recording this May 2nd. right this on the flipping side it doesn't matter what the what the financing is for a flip right like it doesn't matter if the loan's assumable or not because you're gonna have to add a ton of value most like i mean it could matter if it's habitable but you're not really looking for a va loan on a property like that where you're looking for a va or fha loan an assumable mortgage is if you're willing to move into the property you have to live in the property in order to send the mortgage.

52:08And if it would work as a long-term rental, because you lose the advantage of that assumable mortgage if you refinance out of it. You don't want to take a 3 % mortgage over, and then a few years later, refinance it to 6%. That defeats half the value of that particular purchase. So that would be one where you'd want to not have to do a ton of work on the property, most likely, or if you do not, not put yourself, understand that you probably won't be refinancing and extracting the cash for a long time. This would be a long-term hold. That would probably be a cashflow deal after you move out of that future hypothetical house hack.

52:47Great. Awesome. Thank you. I agree with all of that. And I'm thinking, oh, I do this live and flip all the time. Why didn't I go on that rant my own self? Well, David and Danielle, thank you for reaching out to us and thank you for coming on the show today. I really enjoyed talking to you. Thank you both so much. Thank you guys. Okay. We'll talk to you soon. Bye. All right, Scott, that was David and Danielle. That was a fun little twist. I think I should have asked them if Danielle was planning on going back to work before we jumped into their finances. But I think that that brings up a bit of an interesting point.

53:25When you are planning on quitting your job, I would say if you're planning on going back to work, if you want to leave a job and go to another job, start looking for the next job. If I had spoken with Danielle before she left, I would have given her that advice. Take your time, find a new job before you quit. I have worked some terrible jobs. I know that it can be so soul crushing to walk into work every day and be like, I don't want to be here. But it's a lot easier to find a job when you have a job. Yeah. And I also think if you're working a job that is soul crushing, then just take a small pay cut.

54:05I feel like people don't move jobs unless they get a raise. But if you just go from 60 to 56 or something like that in annual income and the job is less terrible, that's a huge win. And I think that that's the way that you can escape something that's sucking your soul out if you're working all those hours. It'll be hard to stomach the loss of$4 ,000, but it's nothing compared to taking several months off the job. I do want to point out, though, that what's awesome about David and Danielle is that once she returns to work, they're going to earn... These are two people who are making median incomes.

54:38The median income in this country is$64 ,000 a year. So both of them make less than that with their base. David may make a little bit more than that if he has a good year. He has potential to make much more than that, Um, but on average, I'll make a little bit more than that. So this is nothing, this is nothing unrepeatable about this. A long history of good financial decisions, um, uh, uh, uh, uh, got them to a place where they had cash to put down on a, on a property here. Um, so they had a stable base and the path to financial freedom for them though. Um, what I think is fascinating is it has to be done through housing if they want to get aggressive about it, right?

55:14Because we looked at it and we can zoom out and say, you're going to accumulate$36 ,000 a year, that's 360 grand over 10 years. It's not enough. It'll get you halfway to a million, $500 ,000, but it's not enough. The best way to get to a large amount of personal net worth in a short period of time is start a business. That's not really an option that presented itself as immediately actionable for David and Daniel. They could always go down that path. The next best one is housing. And most middle-class Americans who are earning these median incomes are not willing to chunk out their home equity and reimagine how they're going to do it.

55:49House hack. Cut their house in half, literally, and rent it out to somebody. And if you're willing to do that, that's the cheat code. If you're not an entrepreneur and you don't earn a six-figure income or have two six-figure income earners in your household, I think you have to go to housing and use it as a key strategy in your journey to financial independence if you're a middle-class American. Especially now with interest rates so high and housing prices so expensive, changing the way that you look at housing is going to be the key lever that you can pull to change your financial situation.

56:32I don't want to be like Debbie Downer and be like, it's going to be impossible, but it's going to be really, really hard to buy a brand new, beautiful, perfect house and still reach financial independence without having extraordinary financial circumstances already. Yeah. You have to earn high income. You have to have some other very fortunate situation come about. You have to have like you invested in Tesla 10 years ago, like Carl here, or you start a business. I don't know how you do it. And I think that it's sad that a lot of people are not like David and Danielle and willing to say, you know what?

57:07But I do need to evaluate my housing. This is not going to be the place where my kids go to high school or college. It's going to be the place that pays for my kids' college and our retirements after that. So I think that that's a harsh reality. And I don't have advice for David and Danielle to get to financial independence in less than 10 years or very close to it without using this. And I'm so glad that they brought it up and wanted to use it. I could not agree more, Scott. All right, should we get out of here? Let's do it. That wraps up this episode of the BiggerPocketsMoney podcast. He is Scott Trench, and I am Mindy Jensen saying bye-bye, apple pie.

57:50BiggerPocketsMoney was created by Mindy Jensen and Scott Trench, produced by Kaylin Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.

58:19We'll see you next time.