450: The “Middle Class Trap” That’s Keeping You in Debt

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28:16Build your brand and get your complete business identity in just 10 clicks and 10 minutes. Visit NorthwestRegisteredAgent.com slash moneyfree and start building something amazing. Get more with Northwest Registered Agent at NorthwestRegisteredAgent.com slash moneyfree. When I think back on past holidays, the gift I remember most wasn't expensive at all. It was this lumberjack-looking plaid winter coat my grandmother gave me when I was little. It smelled like her house. Mothballs. It was a little too big and it made me feel safe in a way I didn't understand yet. I wore it everywhere. Until the fabric wore thin and the zipper gave out, I always wished it had lasted a little longer.

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29:19With PolicyGenius, real users have gotten 20-year$2 million policies for just$53 a month. Don't wait until next year. Give your family the gift of security today with PolicyGenius. Head to policygenius.com. Okay, Scott, let's move on to syndications. Dear Mindy and Scott, how do I find non-accredited syndications and how do I properly vet syndications? Thanks, Nicole. So Scott, I'm going to jump in here first because I'm very opinionated about this one. First, how do you properly vet? You go and take some time and listen to episode 219 of the Bigger Pockets Money podcast, where Jay Scott, who knows everything, shares an enormous amount of information about syndications, how to vet them, how to choose them, what to look for, what to not look for, how to anything about syndications.

30:13It's a two-hour long episode and it is not boring in any part of that. It's absolutely packed with information about syndications. Now, how do you find non-accredited syndications? I don't know and you shouldn't. If you are not an accredited investor, you should not be investing in syndications at this time. There is a percolating issue with commercial real estate. And that's what syndications are investing in for the most part is commercial real estate. That's what I'm focusing on. And there's a lot of things coming up. The rising interest rates have a big effect on commercial real estate because commercial real estate is not secured with a fixed rate mortgage for 30 years.

31:02It is secured for a fixed rate of a short amount of time, three to five years, depending on the mortgage. And then it re-amortizes. So all of these loans that have just been had at three to 5 % are about to come due. We've got in the next two to four years, we've got a lot of loans that are going to be going from making money to most likely not making money. And what this means for your new syndication is that there's a lot of properties coming on the market overpriced or not cash flowing or the people selling them are trying to get money back. And I think it's going to be a mess. I think you should absolutely put your energy into learning about syndications.

31:50Listen to that episode, do everything that Jay suggests, but then also put your energies into investing in different ways right now, because I don't think it's the right space for non-accredited investors. Yeah. Mindy, I think those are all great points here. Just to frame it out for this person, right? How does one vet syndications? Well, you go through a long list of questions that seek to understand who the sponsor is and what the deal is, right? So if it's like, it's, if it's an apartment complex, right? Who's the sponsor? How long you've been in the business? What's your team like? How long they've been in the business?

32:28What's your track record? How long have you known this market? What qualifies you to be an expert in this place? What are you going to do with this, with this pile of money? Like how, how long do you intend to hold it? How much of your own money are you putting in the deal? How are you getting paid? Are you getting paid just to buy the property with an acquisition fee? Are you getting paid to manage the assets over time? Are you getting most of your compensation on the upside? I would personally look for someone that's getting paid a modest salary, not a big acquisition fee, and has most of their interest on the come with the carried interest in the profits of the deal long-term.

33:01And I'd love to see somebody who invests a significant portion of their personal net worth in the deal and who has satisfactory answers to the expertise questions long-term and ideally has a healthy fear of the market. It's not just some syndicator who's going to tell you a bunch of arrogant, surefire, I know this is going to work crap, right? Like someone who has a healthy fear of the market is going to get my respect much more than somebody else. Okay. That's the sponsor. That's a very brief list. We have a two-hour deep dive into this with Jay Scott, right? Yeah. No, I want to just highlight what you said, Scott.

33:35Beware. be very wary of the syndicators who are glossing over issues, who are saying, oh, it's totally fine. There's no problem in commercial real estate. I'm telling you that there is a percolating problem. It's interesting to watch, to watch all of these moving parts going on and saying, wow, I didn't realize that could be an issue. A syndicator is a salesperson. they're selling you and giving them, giving you their money because they're going to make money. If they buy a hundred million dollar complex, just for easy math, big number, right? About a hundred million dollar complex, they're going to raise 30,$35 million in equity.

34:14They're going to make 1 % of the hundred million dollars, a million dollars to buy the thing. Then they're going to make 2%, 600, 700 grand a year, 2 % of the three, 35 million a year to manage the asset over time, right? Which does not include the property management. It just includes their salary and the staff on their team that will do the analysis. And then they'll get 20 % of the profits. So if they move that property from 100 million to 130 million, investors double their money, they may get 20 % of that over a five-year period, right? That's$6 million. So if we're counting, we have a million on the first part of it.

34:49Five times$600 ,000 is another 3 million over a five-year hold. And then we've got 6 million, if you believe, in this example with a 20 % carried interest spread on the downside. So they are very interested in selling you and a lot of other people and raising their money. Okay. That's great. It's a healthy business model. There's a line of alignment with, healthy is the wrong word, but this is a proven business model. It aligns interests, right? But I want to know that that person's not just getting all this upside. They're also putting in five,$10 million of their own money in this particular example at that scale.

35:26I would love to see that in that situation. I'd love to see a healthy fear. That's a meaningful percentage of their net worth. This person's not a billionaire putting in 5 million. They're worth 25 million and putting a quarter of their net worth into the deal. That gives me a lot of reassurance that this person believes strongly in the opportunity. So those would be things on the syndicator side. On the deal side, I really want to understand exactly what I'm getting into. What is the market like? What are rents projected to grow? What's supply coming on? If someone's telling me that rents are going to skyrocket in Austin, Texas over the next two or three years, or I'll pick Florida, for example, I'm not going to believe them.

36:03There's too much supply coming online. And there's a lot of puts and takes there. I want a more conservative approach where they're going to actually add value. Every deal is a value add because every syndication deal is a sales pitch. We love our syndicators. It's great. They're trying to make money like anybody else. And they often produce great returns for investors. But understand that not every deal is actually a value-add play. You have to really understand, are they going to put in$20 ,000 of work per unit to truly upgrade it? And there's a stunning before and after picture. That's value-add.

36:32That's going to drive rents up. I want to know about the market, the plan, the property that they're purchasing, how they're financing it, where is the debt coming from? Are they using a bank debt? What's the interest rate? What are the terms on that? Is it a fixed rate? Is it variable? What kind of things are they assuming there? Who's guaranteeing the debt, right? A lot of these loans are not non-recourse and somebody's guaranteeing it. Sometimes that's a really prominent investor, someone bringing in 10 million on the LP side who has particularly favorable terms with the investor. And sometimes it's a sponsor personally guaranteeing the debt.

37:10A sponsor personally guaranteeing the debt is a good sign, right? That means they're taking additional risk on the deal in a lot of cases. and something that gives me a little bit more confidence. So those are all questions you're entering the Wild West. If you have a fund, now you got to do the same diligence on 10 deals in the fund, the history of what's been happened before and what's going to happen next. So you really need a lot of information to do this with a high level of confidence over time, I think. And I think that a lot of LPs in the last five to 10 years haven't really put in this level of work in a lot of cases and trust that other LPs are doing that.

37:48You're starting to see some Wall Street Journal articles. There was one a few months ago about a guy who lost a lot of investor capital. We'll see how that plays out, whether that was mismanagement, bad luck, other factors that went into play here. But just making sure that the syndicator isn't going to run off with your money to another country is one factor you have to consider. Then there's the actual extreme difficulty of driving excellent returns in this space. So listen to episode 219. That's just a teaser that I just gave you right there and go through it. And that'll give you a good framework.

38:19And then to your second broader point, how do I invest in non-accredited syndications? Let's unpack that question. Why would a syndicator be reaching out to non-accredited investors? That needs a good question answered. One thing you got to be looking out for is the syndicator may say a lot of things to answer that question appropriately. And the good answer to that question is, I want to empower non-millionaires or the non-rich to be able to invest in my investment as well. So I'm willing to do all this extra effort. That's the right answer, technically, in my opinion. But you got to be careful because one has to worry that the reason that they're going to all that trouble to market to non-accredited investors is because they can't raise enough capital for the deal from accredited investors.

39:08Okay. That's a concern that you got to understand and go into with your eyes wide open. It's harder for non-accredited investors in this space. Okay. Usually the minimums are 25 to$50 ,000 because it is a pain in the rear to manage $10 million pool of capital and a hundred million, a hundred dollar increments, right? It's much easier to do it in 50 to a hundred thousand dollar increments, right? From that, right. You got to raise, there's a thousand more people that are investing a hundred dollar income. So these are all things that you need to understand here. And I think the right answer, sadly for you is to go get accredited.

39:42Now, the good news is you don't have to be a millionaire and you don't have to earn a 200 or$300 ,000 income anymore. You can like pass a test. There's a series 65 exam. I believe it's 180 minutes to complete the exam. I don't know the cost for it. I should probably go and find it and take it myself. It's 187.vucks on this particular site, finra.org. I don't know if that's a good site or not. It's just something I Googled in response to this question. And if you take the test, then you're an accredited investor. So then you have access to all the accredited deals. So long rant over there. Hopefully that was helpful to folks that are considering syndications.

40:16We at BiggerPockets hope to solve this problem in a more thorough way in 2024 by introducing content that begins doing that analysis. Who are you? What's your deal? What's your background? How are you making money? What are the prospects for the deal? How have your last three turned out? And all that kind of stuff. So we're excited about that. If you're interested in that, you can email me at scottatbiggerpockets.com. I was hoping to get that up earlier in 2023. It's taken me a lot longer. You can tell I'm passionate about the subject though and want to explore. No, Scott, we couldn't tell that you're passionate about this subject.

40:48You hit it very well. How do I do, Mindy? Any reaction to all that? I understand what you're saying. I would be curious how somebody could pass that exam, but still doesn't have the either$250K in salary or the million dollars in net worth and would still feel comfortable investing in syndication. So I'm going to stick by my assertion. If you are not an accredited investor, I don't think you should be investing in syndications. However, Scott gave you a different way to think. I would just say to that, the price of entry into most legitimate syndications is$25 ,000 to$100 ,000. So if you earn$180 ,000 a year, have been very frugal and have a$600 ,000 net worth, and$150 ,000 of that is liquid, perfectly reasonable for you to plop$50 ,000 in a syndication.

41:47The accredited investor cutoff is arbitrary. And I think it's bad policy, frankly, at the highest level. That's a conversation for another day. I would love the little guy. But yeah, you got to have the liquidity. And if$50 ,000 is all you have and you're putting it in syndication, you got to really be asking yourself, why am I putting that at risk in what is likely to be a highly leveraged investment where I could lose all my principal? Yeah, don't do that. If you only have$50 ,000, don't be investing in syndications. All right, Scott, moving on. Dear Mindy and Scott, my unemployment isn't covering everything.

42:21I lost my job during all the tech layoffs. If I need to skip a bill, loan, or credit card payment, which is the least detrimental to skip? Sincerely, TJ. Well, unemployment isn't covering everything. I hope that you are, just like I said in the first question, I hope that you have made finding a job your new job. I would encourage you to get a job at one of the many places that is always hiring like Starbucks or a restaurant or the grocery store. I'm seeing a lot of really, really big dollars that they're throwing out there, like$20 an hour,$35 an hour to do these jobs that are unskilled. And I say unskilled as like you don't have to have a college degree to do the job.

43:07Not that the job doesn't require some level of skill. But if that is not an opportunity for you. The question says, if I need to skip a bill, loan, or credit card payment, which is the least detrimental to skip. The least detrimental is going to be the loans from family members. If there's anything that you have out there, of course, you want to say to your Uncle Bob, hey, Uncle Bob, I'm really in a pinch right now. I'm not going to be able to make these loan payments to you. I'm going to put those on the back burner and add them on at the end. Of course, I will continue to make these payments once I get a job again.

43:46What bills can you skip? Utility bills. And I don't recommend skipping any of this, but if you have to skip something, I think utility bills have to go for a really long time before they can be cut off. And I think depending on what area of the country you're in, in the really cold months, I don't think they can turn off your heat or your gas or your electric or however it's powering your house, your heating. So that would be the one that I would skip. I wouldn't skip a credit card payment if at all possible, but I would also be calling up every single one of these lenders and credit extenders and saying, I am having a problem paying my bill.

44:26Is there anything that I can do to reduce the amount that I owe you or reduce the payment that I am making on a monthly basis until I get a new job? I would absolutely not skip your mortgage payment because they will start foreclosing on you and you don't want to lose your home. Scott, do you have anything to add to that? Yeah, I think I still am struggling with the first sentence. My unemployment isn't covering everything. I would have much more confidence in this question if it said my unemployment and my side income from my scrappy activities as an Uber driver or driving for DoorDash or cleaning houses or mowing lawns or working at Taco Bell or packing groceries at King Soopers or whatever your local grocery store is, isn't covering everything.

45:18I lost my job during all the tech layoffs. I understand that those jobs are not going to pay the same as a tech job does here. But this This person is not being able to pay all of their bills, and I think they need additional income on that. And if they're a tech worker, they're clearly capable of also taking on some of these other types of work. So I think that's a really important first point here is that needs to be addressed. Um, after that, I, I, I think, okay, if we're working full time or as close to full time as we possibly can in the gig economy while we're, while we're looking for a replacement job and that income and the unemployment isn't covering everything.

46:04and we've sold the car and downgraded to a, you know, a much more affordable option in the three to$10 ,000 range. And we, we, we, we're not going out to dinner and not ordering out on any type of food, cooking our own meals and have, have, have, have cut back on essentially everything. And we're still in this position, you know, where, where we need to, where we're not able to cover all the bills. Okay. Now I agree with your point. If I have to cut out something, it's just, there's just not going far enough. Okay. Utility bills would be the first place to potentially lay off for a little bit.

46:44And you got to be really, really uncomfortable with that game and then begin thinking about selling the house. If that doesn't change pretty abruptly. Yeah. And that's a good point, Scott. I do. It's been a long time since I collected unemployment. I believe the unemployment and then any income you get takes away from the unemployment. But again, if you're making money to come in, you can always generate more income by doing more gig stuff, more Uber, more DoorDash, more all of this stuff. So, but yeah, if you're in tech, you need to cut your expenses to the bare bones and then also make it your job to get a new job while you're doing all of these other things.

47:38I like your answer, Scott. I agree with that. And there's probably a cutoff there, but like, but you got to do that. Maybe, maybe you turn to waiting tables or tending bar or mowing lawns, like you mentioned earlier, something that will have a lot of tips and cash. Right. We're not loving the situation. We got to rectify the root cause there. But I don't I'm not I'm not hearing about the fight in this question. First and foremost, I'm hearing about. I lost my job and I my unemployment is not covering everything. It'd be great to hear about the fight that I'm that the person is putting in place to do it, because this is a tough time.

48:17That's a good point. All right, our last question. Dear Mindy and Scott, I feel like I bought too much house. My original budget was 250 ,000 and my house purchase was 310 ,000. My house now needs repairs and I'm not sure what to do. My take-home pay is 5 ,500 and my mortgage alone is 2 ,600. I haven't had trouble paying any bills, but I'm now worried because I have student loans kicking in and my house needs$24 ,000 worth of work. What should I do? I think we have a similar framework to some of the other questions we've heard here on BiggerPocketsMoney where I would really like to hear the answer to say my take-home pay plus my evening job or my weekend side hustle is$5 ,500 and the mortgage alone is 2 ,600.

49:12I haven't had any trouble paying the bills because I worry about student loans kicking in and the house needs$24 ,000 of work. I've pushed that down to$8 ,000 because I'm going to do it myself now and not hire out any of the work on that. Okay. Now we've got a different problem. So I think, I think that needs to be, there needs to be reframing here of this situation is not going to resolve itself. There's not going to be a magical change to the numbers here. The, the, there, there are two ways out of this situation. First is hustle and sweat and hard work and the old back to foundation stuff, getting the evening job, tending bar on the weekends, mowing lawns, whatever it is, say earning more income.

49:55And when they're not doing that, doing the work that their house needs themselves, watching YouTube videos as their new hobby, going to Home Depot to buy the deck replacement, the deck replacement materials, whatever it is for their house. Um, right. You can do all of this work yourself in a lot of cases. Um, if you're, if you have the skill set to make, what is it? 70, 80, a hundred thousand dollars a year at$5 ,500 take home pay, depending on where you live and your tax rate. If you have the skills to make close to six figures, you have the skills to watch YouTube videos and, and do a lot, a big chunk of that housework yourself over a long weekend.

50:34That would be my first approach to this. And if we pencil all that stuff out and it just doesn't work, right? All the Netflix in their life is kicked out, all of the eating out and it's replaced with either extra work or work on their house, then you got to sell the house and you got to think about relocating or moving here, maybe renting and again, downgrading the position. I imagine that they can get a roommate or live somewhere that is much cheaper than$2 ,600 a month in rent, for example, and that would remove their$24 ,000 worth of work that the house needs and the cash outflow problem that they've got from their mortgage.

51:14Scott, I love all that what you said. I'm going back to the very beginning of this question. Dear Mindy and Scott, I feel like I bought too much house. I want to be very kind, but they did buy too much house. Their original budget was$250 ,000 and they bought $310 ,000. They went over budget by$60 ,000 and that was a choice. And now they have to live with that choice. In some regards, I think that maybe selling the house might be an option. Although, remember, it costs between 10 % and 12 % of the sales price of the home to sell the house. As the seller, you're footing the bill for the seller's agent and the buyer's agent, unless you have negotiated something else.

52:04That is traditionally how it works right now. Although you're not responsible for that, that is how it has been for a very long time. There's currently a lawsuit wending its way through the court system challenging that. You don't have to do that, but it does make it more difficult if you're not paying the agent on both sides of the transaction. And you just bought this house. You stand to lose a lot of money if you do sell. Are there any opportunities, like Scott said, to DIY the work? I can tell you, you can learn anything on YouTube. $24 ,000 worth of work? What is that comprised of? And how can you get that price down?

52:52If you can't DIY it, if it's something like HVAC system, which is really a large amount of DIY knowledge to jump into, can you barter with the service provider? Have you gotten multiple quotes? Is the first guy saying$24 ,000 because he doesn't really want to do it, but if you're going to pay$24 ,000, he'll find time to do it. Um, that's also something that you'll, you'll hit up with, uh, contractors is that they don't want to say no. So they'll just throw an outrageous price out there. And if that's, if you say yes, then they'll figure out how to do it for that price. Um, student loans kicking in, that's going to be, that's going to be something to contend with.

53:37And if selling isn't truly in your best interest or just financially unfeasible, how urgent is this$24 ,000 worth of work? Is it just cosmetic? Push it to the side. Who cares if your kitchen's ugly? But if it's raining inside your house because the roof has a hole, then that's more urgent. And then are there any opportunities to get a HELOC, which isn't my favorite opportunity to pay for this work? A loan from your 401k, again, not my favorite, but there are ways to be creative when you are financing some of these repairs. Mindy, I think this kind of brings up – I think those are all great points to add in there.

54:21But I think what we've seen in a number of questions here brings up kind of a philosophical question that we've touched on in the past here. And in the past two, three months, we've had a couple of millionaires on the platform or on the show here, including yourself and Carl, who have struggled with being too frugal in some ways and not being able to enjoy the wealth that they've accumulated and spent to a certain degree after years or decades of spending 50 % of your income probably or less in order to get to those points. And, you know, I hear the arguments against that from some folks like Ramit Sethi, you know, saying, hey, that's way too much.

55:10Like we're not enjoying life or whatever here. But we've had a number of questions today on the podcast that fundamentally boil down to systems that do not have enough slack in them. And if these folks have targeted or spent a couple of years, the first couple of years of the journey targeting a 50 % savings rate, an extreme savings rate with that, and the sacrifice and the discomfort and the tough challenges that that produces, like the reduced lifestyle that's way below what you could live. the type of decisions that you made and Carl made that I've made and that many of the folks that we've had on the show have made, we don't have these problems to a large degree here.

55:57And I would much rather be confronted with the challenge that you and Carl have of trying to figure out how to optimize the spend on the lifetime amount of wealth that you've got in place than the pain in lifestyle reduction and forced to reset that at least three of the questions we had today are going to face. And so I think that's the key thing here is I think we should, I'm all for the all out pretty extreme approach in the first couple of years in the wealth building journey, because it just removes the possibility of having the challenges that some of the folks that we've talked to today have in their lives.

56:35And I think that's really the root cause answer here and the advice that I've really given throughout the show is go back to that mentality and look, it ain't that bad living in the half duplex. That's two bed, one bath for a couple of years that pays for itself and generates a ton of wealth, right? It ain't that bad driving a Corolla. I still do to this day, even though I talked about buying the much nicer car and easily could, right? It's just not that bad. It's got Bluetooth. It gets great gas mileage. It gets me from point A to point B and all, but the most snowy or severe weather patterns, it doesn't, it doesn't have that problem.

57:12And, and, you know, I get it. I'm on my high horse with the CEO job and all that kind of stuff. But even if, even if like I wasn't, I think that that paid off Corolla and those types of things would, would be able to prevent a lot of potential problems downstream. And of course it's not pleasant having all these things happen or, or losing the job. But, you know, I think that that mentality can protect you and give power to you instead of your employer or to the federal government bringing back student loans in this example or the unemployment benefit program and the rules regarding that. And that's what we're here about for BiggerPocketsMoney is solve the root problem today, go back to basics, get way on the positive side from a cashflow perspective and layer in the goodies and the nicer house and the nicer cars and the nicer stuff over the next couple of years as you generate passive income and alternative sources of income from other assets.

58:12I think that's a great perspective, Scott. And I was going to say, yeah, and you can always just spend the money later, but clearly you can't always just spend it later. That's a muscle you have to learn how to flex as well. But that's the better problem to have, in my opinion. But yeah, I like what you have to say, Scott. I think you're pretty smart. I think you're very smart, Mindy. And I think you have great advice and answers to questions today. Should we get out of here? That does wrap up this episode of the BiggerPocketsMoney podcast. And if you have a question for us, you can submit it at biggerpockets.com slash money question.

58:50All right. He is Scott Trench and I am Mindy Jensen saying till then, Penguin. If you enjoyed today's episode, please give us a five star review on Spotify or Apple. And if you're looking for even more money content, feel free to visit our YouTube channel at youtube.com slash BiggerPocketsMoney. BiggerPocketsMoney 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.

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