Q&A: My Dad Gifted Me A House, Closing Credit Cards, & Mortgage Worries

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0:57hey everyone and welcome back to the rich habits podcast question and answer edition these are our thursday episodes where we answer your questions you can ask us questions via instagram dms at rich habits podcast email us your questions at rich habits podcast at gmail.com or if you want to get your question answered 100 of the time join the rich habits network post a question dm us a question. Ask us a question during our weekly two-hour live streams. It'll definitely get answered then. But Robert, before we get started, we had Ilya Posen on the podcast this week. It was so funny. Some people in the comments section of that episode on Spotify were like, is this real?

1:34Is this guy really giving away TVs? Are you guys peddling something? Nope. Totally real. He is partnered with the biggest manufacturers in the world, the biggest advertiser, you know, all these cool things going on. I've got one. It's at my dad's house here. It's really, really cool. The tele-tvs are legit. They have a crazy long wait list, unfortunately. So if you've been on there for a while, like that's the unfortunate reality, but it was a great interview. If you've not yet listened to our conversation with Ilya from Monday, he literally wants to give every American a free television, which I think is a pretty ambitious, but also cool thing to do.

2:05Yeah. I like the episode because, you know, we're here to talk about finances, but also business mindset and entrepreneurship. And he just is the quintessential entrepreneur where I think he said something like he got turned down 93 times for one project and then finally got his first investor. So I love episodes like that because personal finance is personal, but so is building a business and entrepreneurship. Everyone's journey is different, and it's really cool to hear stories from someone who has made it over the years and really speaks to the tenacity and all that goes on to make something successful because I remember when silly bands blew up and became this big worldwide phenomenon.

2:47Everyone made it sound like I crawled out from underneath a rock and it happened overnight. They didn't talk about the two, three years of struggles and toil to build it. So I love the episode and I think everyone should check it out. Now, Robert, before we jump into the episode, I think it's important to remind everyone that the name of our podcast is called Rich Habits for a reason, because the behavior that we have with our money is the most important aspect when it comes to building wealth. GetSequence.io is a platform that takes behavior to the next level. On GetSequence.io, you essentially create rules for your money, and when a specific event happens, like a payday on a Friday, that rule is executed upon.

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4:49All right, Robert, let's now jump to our first question. So Robert, our first question comes from Nicole R. Nicole says, thank you so much for what you do to spread financial literacy by sharing your knowledge and experience. I've been following your podcast for almost a year. I've binged all the episodes from the beginning. You've helped me learn things I doubt I would have learned any other way. Robert, that's cool to hear. Shout out Nicole R. Nicole says, here's my question. I've been saving up for my first home for several years. I'm 40 and I finally feel I'm there financially having saved for a good down payment.

5:19I live in Southern California and it's expensive to buy a starter home slash condo. Think two or three bedrooms. But I'm also not too far from the city and most of the ones I've seen that are in my$5 ,000 to$650 ,000 budget are these older homes built in the 70s and 80s that often require upgrades, fixes, or might have a high HOA. So with a 30-year fixed mortgage, estimates for a monthly payment range between$3 ,900 to$4 ,500. But recently, I saw a new home construction loan that's offering an adjustable rate mortgage with the 2-1 buy-down that makes$730 ,000 borrowing for a three-bed condo seem pretty affordable to me.

6:04It's spacious and in a really good school community, when again compared to a fixed rate to a$600 ,000 mortgage versus a seven-year arm on this$740 ,000 mortgage. So again, I'm getting more home for a lower monthly payment. My realtor helped lay out the numbers for me. Despite this price of the home being higher, it's still a lower monthly payment. The new construction builder, who's very reputable, is motivated to sell so they may also consider helping me on the closing costs. I'm still on the fence with such a huge financial decision as it will be my biggest purchase ever. Robert, walk us through before any of us answer this question, what is an adjustable rate mortgage?

6:45What is this 2-1 buy down that she's alluding to? How can people like myself who've never used an adjustable rate mortgage better understand the situation that Nicole R is in right now. Yes, an adjustable rate mortgage is exactly what it says. The rate adjusts accordingly along the way versus a fixed rate mortgage. And here's why it makes sense in this situation, especially given the two for one buy down. And that is she could go in, buy this house, give her more buying power with this adjustable rate mortgage. Although we got to be careful. We don't want to buy too much home because of it. But what it does is it gives you more buying power out of the gate.

7:24And then you have time, one, two, three years to be able to refinance to a fixed rate mortgage when hopefully the rates come back down. So that's the bonus of having this adjustable rate mortgage. The other thing that's cool is if they're offering this two to one buy down, two dash one buy down, she's going to save 2 % on the interest rate for year one and 1 % on year two. And then in year three, it will go back to the original rate. So there's a lot of room here to get more house and really have a lower rate and more buying power while still being able to refinance when hopefully rates come back down into that 5 % or 6 % range in the next two or three years, which I expect they will do.

8:10So I think this is a good situation. A lot of builders are doing it right now because they have to move inventory. Because remember, when they started building all these homes two, three years ago, we weren't in this freeze for real estate and we didn't have such high rates. So I think it's a really good situation. A lot of people should really look at this because on top of it, if she can get closing cost assistance as well, she could be buying a really great deal and have the affordability in the payment that she wouldn't have without this buy down and without the adjustable rate mortgage. So just we're on the same page, an adjustable rate mortgage is a mortgage where the interest rate moves up and down on a monthly, quarterly, annualized basis here with pretty much the 10-year yield, right?

8:58Because that's what mortgages track. So as the 10-year yield goes up, the interest rate on your mortgage will go up, which means higher monthly payments, as the 10-year yield goes down, the interest rate on your mortgage will go down as well, which means lower monthly payments. And on average, the interest rates for these adjustable rate mortgages are lower than a fixed rate, which is why you were saying that you kind of can save some money there with more buying power. So if she has a 2-1 buy down, essentially what you're saying is not only will the interest rate be lower because it's an arm versus a fixed, but she's also now at 2 % lower interest rate than where the arm would be in the first place for the first year, and then 1 % lower interest rate from where the arm would be in the second year, and then back to the normal where the arm would be.

9:44Fingers crossed it's not higher in the future than where it is today, because again, they can go up just like they can come down. And to your point, I would also agree that mortgage rates will continue to tick lower in the coming 12, 24, 36 months. But again, none of that's guaranteed. So here's what I would do, I would likely go ahead with the arm and the motivated seller closing costs, right? Because I think that if you can get them to pay for some of the closing costs, plus you're able to save it, like, you could be sitting in a really interesting situation, where you are saving a lot of money, your interest rates like relatively low compared to the 30-year fix.

10:29But the thing is, your goal is to be in a 30-year fixed in the next 12, 18, 24, 36 months, right? The goal is not to go through all seven years now with this arm because what happens if it goes up and all the crazy stuff that who knows could be around the corner. So by having a fixed lower interest rate, hopefully as interest rates continue to come down, and Robert, let's just look here on the 30-year fixed mortgage rates at the moment, The 15-year fixed mortgage rate is at 5.5%. The 30-year fixed mortgage rate is at 6.3%. That's up slightly week over week from 6.26. And that's down dramatically year over year from 7 % plus.

11:12So actually, we were up at 7.8 % back in October of 2023. So from 7.8 % fixed, now down to about 6.2, 6.3. So I think this will continue to trend lower. I think to your point, I would agree with you that the 30-year fixed will hopefully be in the fives sometime in 2026. And maybe in 2026 or 2027, Nicole R., that is when you refinance out of this adjustable rate mortgage and you are now at a fixed, call it 5.5 % or 5 % interest rate mortgage, depending on what happens to mortgage Yeah, I love that breakdown. And it's really all about understanding the improved buying power with these options. And also, if you're buying new construction, which is the case here, you can find yourself in a higher, quick capital appreciation situation, especially if it's in a growing area.

12:02So there's a lot of good things about this proposed deal that you brought to us. And I think I love it because you have options to get you to a payment you want in a house that you want. Whereas right now, or at least a year ago or six months ago, rates were so high that payments were$1 ,000,$2 ,000 more for the same house from a few years ago. And that's what's really stifled the real estate market is the payments are pricing people out from buying, making this a renter nation. So I love this deal and I wish you the best. So our next question comes from Sophie T. Sophie says, Dear Rich Habits podcast hosts, I came across your show and I've learned a lot.

12:42Thank you. I would like to know how you decide whether to sell a mortgage-free home that has significantly increased in value or if I should rent it out for a few years, maybe consider a 1031 exchange or just simply keep it and live inside of it. My single W-2 job pays me$60 ,000 a year. I could retire in the next one or two years. And in retirement, I envision splitting my time between three different states throughout the year. I own a mortgage-free home with$1 million in gains. $1 million is in my IRA slash 457B. I have 400K in my Roth IRA. I have 120K in a brokerage account. And my annual expenses are about$70 ,000 a year.

13:24Thank you so much, Sophie. Wonderful situation to be in, Sophie. Congratulations on being a net worth millionaire. Very well deserved. I have no idea how old you are, but you did say that you could retire in the next couple of years. So I'm going to say you might be in your 50s or 60s. Here's the framework I would use. Just so we're on the same page, what it means to retire again is that your portfolio income, your passive income is growing for you on an annualized basis more than your expenses are on an annualized basis. So you said you're spending$70 ,000 a year, which means if your portfolio income generates $70 ,000 a year or more, you're technically financially free and you can retire, right?

14:03So you've got a million dollars in an IRA, 400. So you have$1.5 million invested in the stock market right now. On that 1.5, if you wanted to do the 4 % rule, which is super conservative, Trinity study, we talked about this on so many shows. Essentially, that just means you take out 4 % of your total portfolio on an annualized basis, assuming the portfolio is invested 60 % in equities, 40 % in bonds, which should be what people do in retirement. According to the Trinity study, you can take out 4 % for the next 30 years and quote unquote, never run out of money. Okay. That's 60 ,000 a year at this 1.5 million you have invested right under your$70 ,000 threshold.

14:43If you wanted to bump that up to 5%, now you're there, you're going to be fine. You can do that, you know, 70 ,000 expenses. In my humble opinion, I think people make the mistake of retiring with a mortgage. I don't think that people should retire having a$2 ,800 a month payment every single month that they're going to keep around for the next 15, 20 years because they've got another 22 years on their mortgage. While also having$2 million invested or so much equity in the home that it's like, well, you just sell the home, use some of that, go buy something that's reasonable for you in retirement and do that instead.

15:16So my framework is as follows. One, am I retired? And if yes, probably not going to have a mortgage. Is it the most financially advantageous way to live? Maybe not. Is it the most secure way to live in retirement? Yes. No one's ever going to kick you out of your house. Another framework to think about is like, okay, what is my opportunity cost of having this mortgage? And do I need the money if this was invested elsewhere to supplement my life? So for example, of this$1 million, let's say that you sold it for 1 million, you took half a million, use that to go buy your next home that you lived in, if it was a condo, if it was, you know, something going on over there, you put the other $500 ,000 in the markets at that same 4 % that we talked about, that's$20 ,000 a year of buying power, right?

16:02So that could get you theoretically from that 60 ,000 a year to 80 ,000 a year while following the 4 % rule. So if you need that, maybe you need that, maybe you don't. Again, I'm not too sure what's going on here with your own situation, but that's how I'd approach it. I would think about, okay, how much money do I need? Do I have a nest egg that can help me generate that money? And then think about it like this too, Sophie, which is really important. If you had a mortgage, how much now of that$70 ,000 in annual expenses will increase, right? If you had a$3 ,000 a month mortgage, that$70 ,000 is now$106 ,000, right?

16:34So now your whole financial situation's out of whack with your nest egg and the 4 % rule, you need much more invested, right? You just have to figure out like, where's that sort of sweet spot between I've got a lot of equity. I don't have a mortgage. I'm happy. I'm retired. I'm hanging out versus I need a larger nest egg. I need more portfolio income. I need to figure out how to split up this$1 million in gains. Again, if I were you, I would probably hang out with the$1 million house. If you like living there and it's like, you know, you want to retire there. Like everyone has their own personal preferences.

17:06That's amazing. You have a big enough portfolio, in my opinion, to supplement the$70 ,000 a year. But if you did need more money, I would sell the house, use half of it to go buy something perfect that you like. The other half could go and get invested and generate about another$20 ,000 a year of income for you. That was an incredible breakdown. And I'm going to add a little bit more to it because I'm doing almost exactly the same thing. I have a smaller house that I downsized to in Ohio, which I own free and clear. I have my place here in Florida. And then And I'm also looking at a third place in Idaho where we're building a lot of real estate.

17:42So in my opinion, I think everything Austin said is spot on. The only thing I would consider, because you're still going to have some taxes, is maybe you downsize the million dollar home. Use a 1031 exchange like you alluded to. That way it will reduce some of your tax burden. Take some of that money, downsize to a$500 ,000 home. You'll have some money to work with. that could go towards your other homes or properties, depending on if you're gonna rent or buy. But also then as Austin stated, put that money into your accounts to help you earn more to get to that$70 ,000 a year. But I think you're crushing it.

18:18I think Austin's breakdown was incredible because at the end of the day, at 1.5 million now, and you still have years of compounding, you're already there. You're already there to meet that$70 ,000 a year. And so I would just be smart with this. I personally going into retirement would want my own home, even if it's a downsized home that's paid off versus jumping right back into a mortgage. So that's my take. But I think you're in a great spot. Let's say she has a really low interest rate on this house. Does that change anything for you? For me personally, if I am retiring and I'm in my 50s or 60s and I'm ready to like, this is my forever home, I'm paying it off.

18:54I don't care about the interest rate. I want to own the grass. You know what I'm saying? I think it can go either way, Austin, because if they do, in someone's instance, have a really low interest rate mortgage, then I think it's okay to take that mortgage into retirement, especially if you have a lot of equity. But on the flip side of that, in this instance with Sophie, I think it's okay either way to either keep it, ride it out, you own it, you own the grass like you said, or do a downsize, use a 1031 exchange, invest the difference, and be able to free up some capital for the other living places that she's looking to do.

19:31Because she did mention having three different living quarters in three different states. So that would be my take. So our next question comes from Clarissa B. Clarissa says, thank you so much for the Rich Habits podcast. It's given me the right mindset to start my financial journey as a 22-year-old recent college grad. So here's the deal. I recently had to buy a new car after I graduated back in May because my old car was always breaking down. I traded my old car in and paid$27 ,000 for it. I put$7 ,000 down and took out a$20 ,000 loan from a credit union at 6 % interest. My new car is a used 2021 Tesla, although I would have liked to buy a beater car, pay for it in cash, all the fun stuff that you guys say.

20:13I just couldn't justify buying another gas guzzler that would break down again because I live in a city with a ton of hills and it's just I've got scar tissue because of it. As a current college graduate with an electrical engineering degree, I take home$2 ,000 every paycheck after taxes and 401k contributions. With every paycheck I've been paying the car off with$1 ,000 toward the principal, the car now has a$15 ,000 balance on it, but I feel like I'm falling behind investing in my Roth, my brokerage, and saving for travel. I try to invest about$100 a week into each of these accounts, but I'm worried it's not enough and I'm just living off of the scraps.

20:51Do you think I should continue doing this and stick it out for 7 more months until it's paid off, or should I allocate that$1 ,000 a paycheck to investing now? Thank you guys for all you do. Clarissa. Robert, I'll let you take this one off. Yeah, you break these down really well, but I think no matter what, the Roth always comes first. $583 a month, you max it out instead of paying down a car that has a decent interest rate at 6.15%. So in my opinion, I would max out the Roth first. I would make sure that I have that emergency fund and then anything that's left, if you feel like paying down the car, go for it.

21:30But always remember, a vehicle is a depreciating asset. So when you're over here putting all this money to get it paid off because you want to get it paid down so quickly, just remember it's depreciating right along with those payments. So that's why we would rather see, at least in my opinion, the Roth IRA gets maxed out first and foremost because that's compounding over time, tax-free into retirement, and the growth is going to be fantastic through the Roth IRA. That's my take on it. I'm right there with you, Robert. here's what our friend clarissa could consider doing max out the roth ira every month at that 583 congrats you now have essentially 1400 bucks left over if you wanted to go pay down that car quicker so now you go from paying your car off in seven months at a again this is like decently high interest rate six seven ish you're starting to get to that you know high single digit range so instead of paying it off in seven months you pay it off in 11 months right so that you now have this, call it$1 ,400 a month to pay off$15 ,000.

22:30And now you have no car payment and also nothing for this money to go to. Now the all$2 ,000 a month, not just 583, but all 2000 is getting invested into your bridge account, the Roth, the HSA, maybe you're doing some 401k action. You've got autonomy over there, right? Now you are in your twenties, call it 23, 24, investing 2000 a month. How quickly do you think you're going to become a millionaire investing 24 ,000 a year? The answer is very quickly, right? So I would do that. I would get the Roth rocking and rolling first and foremost, make sure that's above everything else, especially at your age, because$1 invested turns into 70 in retirement.

23:07So again, that$5.83 a month turns into$41 ,000. Every month you max out your Roth IRA at your age is another$41 ,000 in retirement. So like, yes, you should be doing that. But on the flip side, I hear you want to pay the car off. I get that, do the Roth, bare minimum. Once the car's paid off, double down on your investing, maybe double down on, you know, just saving and investing. Maybe you want to buy a house soon, like who knows what your goals are, but that's sort of the framework I would use in the process of building wealth at your age and your situation. Our next question comes from Tim S.

23:40Tim says, hi, gentlemen. Thank you for all your knowledge. I wish I had learned it years ago. I'm very new to investing, but since finding you guys, I've completely changed my mindset from a consumer to an investor. Let's go, Tim. Tim says, here are my details. I'm 40 years old, I'm single, and I earn an annual income of$130 ,000 a year. I currently have$60 ,000 in a Roth 401k. I invest weekly up to the company match. I have$7 ,000 in my Roth IRA, which is automatically set to reach$7 ,000 annually, and$90 ,000 in a high-yield savings account. I'm in an opportunity where, while my father is overseas building his retirement home, I'm taking over the family house here with the rent-to-own option.

24:19I pay myself rent monthly, which goes into the savings account. This money can be used as a down payment. The family friend price is at$450 ,000 with two doors down just selling for$650 ,000 cash. So here's my question. The house overseas is delayed and my father isn't in any hurry for the cash. I thought it would be a good idea to get my foot in the door with this$90 ,000 investment in real estate as a rental property to potentially generate some cash flow and start my real estate investing journey. In the meantime, what would you recommend? Should I save some money? Should I buy this house? Do I invest in other options?

24:56What do I do in my situation? Robert, what's your take on this situation for Tim? Yeah, I like it. Just make sure I know it's your father, but make sure you have proper documentation and paperwork because you never know what can happen with your father being in another country. And you don't want a situation where you have a rent to own contract, but maybe the probate courts see it differently if something were to happen to your father. And then you invest the$90 ,000, you're doing a bunch of improvements, but then you have to go through probate court to get real ownership of the property. So it starts right there by getting the right documentation.

25:28Make sure you have a land contract agreement. You have everything spelled out of the terms to make sure that everything goes well there. And I like it if you're getting this friendly friends and family discount, because that gives you this built-in equity already if you have comps that are selling for 650 ,000, 660 ,000. So that's another kind of forced appreciation situation where you're walking in with equity in the home, which I love because normally when you're buying a property, you don't have all this type of equity up front. So I like that as well. So overall, I don't see anything wrong with this situation because the number one thing I don't wanna see is you having$90 ,000 sitting idly in high-yield savings.

26:12At least it's in high-yield savings, but that's a lot to have in high-yield savings. Personally, I'd rather see you, maybe since you're buying the house at a discount, put 10 % down, which would be$45 ,000, take some of the rest of the money, get it invested into the markets, into some of these low-cost ETFs we talk about, crypto or whatever, and then leave a smaller emergency fund in the high-yield savings. But I think any way you do this is a good proposition for your future financially. So I really, really like it. I agree. Have these conversations. Have these conversations. Robert talked about documentation.