Q&A: NACA Loans, Co-Signing Student Loans, and Depreciating Real Estate

0:28Shopping is hard, right? and welcome back to this week's episode of the Rich Habits Podcast Question and Answer Edition. Before we jump into things, we have a quick word from Public.com. As you might know, Public.com is the all-in-one investing platform. Now they've launched options trading and with it, they're doing something no other brokerage has done before. Public is sharing 50 % of their options trading revenue directly with you, the customer. So whenever you trade options on Public, you get something back. And of course, there are no commissions or per contract fees either. By sharing 50 % of their options revenue, you'll know exactly how much they make from your options trades because public is literally giving you half of it.

1:13In other words, it's a more transparent approach to options with no fees and you'll get something back on each and every trade. So go to public.com and activate options trading by March 31st to lock in your lifetime rebate. We could not be more excited about this. Go check them out. Seriously, it is going to be a game changer for y 'all who are doing covered calls, any option trading. I mean, this is so transparent. It is super, super important. And as a quick disclosure, this was paid for by public investing. You must activate your options account by March 31st to get that revenue share. And remember, options might not be suitable for all investors and do carry significant risk.

1:52If you wanna read the full disclosures, that's gonna be in the description of this podcast. and this is for US members only. Now, before we jump into these questions, I have a massive reminder I want to share. Robert and I are going to be hosting a webinar all about covered call option contracts, right? Seriously, this is a way that I've been able to generate$4 ,050 in completely passive income all by myself since September 12th, I believe was the date I started doing this. But it's so simple. It's so straightforward. Robert and I are going to breakdown everything for you. So all you have to do is attend the webinar and just pay attention.

2:26It's really that simple. There's going to be a link in the show notes below to register. We'll bold it. We'll highlight it. We'll do whatever we can to make sure that you see this. And remember, the first thousand people are the only ones who are able to join. Right now, we're around the 700 people mark. So we've got a week now until February 7th. So make sure you're one of those next 300 folks before we hit our limit. And remember, it's free. What better way to get education from two guys like us and the guests that we have coming in rather than free. You can't get any better than that. So our first question comes from Anna.

2:57She says, I want a house hack and I want to know what is best, a NACA loan or an FHA loan. Robert, what the heck is Anna talking about? So Anna, great question. And a lot of people ask this question of what is the best thing for them? So a NACA loan is a Neighborhood Assistance Corp of Americas. And what that means is it's part of the housing HUD program in most jurisdictions. And these are pretty good loans. They have a lot of paperwork to get them done, but I'm gonna read off a couple of things for you. And what this means for the NACA loan is the lower your income, the better rate you get. So that can help people that are sometimes in need.

3:37So they are much lower interest rates than a traditional mortgage. Number two, they do not go off of your credit score for a NACA loan. they do what is called a character-based lending. So this is very important. So if you have a good job, you haven't had a lot of trouble with the law, et cetera, et cetera, you can get approved even if you have a very low credit score or no credit. And then the other part of that is, is they go off of your debt to income ratio. And in this instance, they generally want the house that you're trying to get to be 33 % or less of your total debt to income ratio. So with that being said, the NACA program is good.

4:16Lots of criteria to meet, but also easier for many people to get the loan. But another one I want to make sure everyone listening and you included take a look at is the Fannie Mae 5 % mortgage. This is a great program for someone that might have a better credit score because I think the criteria is 650, but you get a 5 % down rate on this and you can buy up to four doors and up to$1.3 million. So keep an eye on the Fannie Mae program as well. And if the NACA program is for you, I hope that breakdown helps you understand it a little bit better. Wow. Okay. I'd never heard of this. This is really interesting.

4:54So the three things again, Robert, one was like the debt to income ratio. And another one was the good character, right? Good employment, no trouble with the law. And then also the rate varies depending on how much money you make. Is that it? Yeah. And basically how it works is like right now, let's say you had a 550 credit score, but you have this good, what they call the character based lending. If you have a lower credit score and a lower income level, you can actually get a mortgage right now for five and a half percent if you're below the average household median income. But then if your income was above the average household, then the rate would be six and a half percent, still lower than a traditional mortgage.

5:34And the reason being is these programs are meant to help kind of these neighborhoods that need help and that they're looking for gentrification and they want to see renovations and some of these older homes brought back to life. These are great programs. What a good question by Anna. I mean, this is what it's all about, right? Asking questions. I get to learn. Robert, you're coming in here schooling me. And hopefully we both here can answer Thomas's question up next. Thomas says, good morning, Robert and Austin. I hope you're having a nice week. And I really appreciate all the work and advice you give.

6:03Thomas, we appreciate the kind words. Here's my question. I've got$25 ,000 in my 401k for my previous employer. I recently switched jobs and I'm thinking of rolling over my 401k into a Roth IRA with Vanguard. The catch is there's a 6 % match with my new employer after 12 months. Which one should I prioritize? Really, really good question, Thomas. And Robert, we talk about this all the time. And this is sort of our investing playbook, as you might. Match beats Roth beats taxable, right? So what does that actually mean? Every new dollar you make and every new dollar that you're able to deploy and invest toward your future should be in that order.

6:40So if you have a 401k at work, Thomas, and you're able to now get that 6 % match, assuming you've been there for at least 12 months, you can then invest that money up to the match into your 401k at your employer and get your free money. Because I don't know about you, Robert, but I like free money. The second line item there is the Roth IRA. We want to make sure we're always maxing out our Roth IRA every year. For the year of 2024, that's$7 ,000. Last year, it was$6 ,500. I believe until April 10 or April 15, you can still invest back retroactively to 2023, Thomas. So be sure to do that as well.

7:14But the reason we have that and why that's so important is because you have autonomy over the Roth IRA. You can choose the index funds. You can choose the single stocks. You can choose the ETFs that you are investing into ensuring good market performance. And if you still have money left over that you need to invest, that's what the taxable account is on public.com. That's the crypto. That's the other ETFs we talk about, the other single stocks, maybe some collectibles, maybe that's artwork or money on Fundrise, whatever you want that taxable to be. But it's really, really important to follow that framework, free money, autonomy, and everything else.

7:48And remember, Thomas, I know you said thinking about rolling over the 25K of the 401K over to the Roth. Just remember that that is a taxable event. So make sure that you are willing and you're able and ready to set aside the money for those taxes. And as we always say, we'd rather get the tax man out of the way now and have that tax-free income for life over kicking the can down the road. So just make sure you take that into consideration when making this move. Great question, Thomas. Thanks so much for asking it. Now, our next question comes from Brody. Brody says, I'm taking out student loans later in May and my total cost for college to get my RN will be about$50 ,000.

8:26I plan to specialize in anesthesiology. Do you have any advice for what I should do regarding my loan? Is there anything I should avoid here? I'm co-signing with my mom. She's got a great credit score. Just looking for an extra push in the right direction. Brody, this is a great question. And in this instance, I think it's a great investment spending that 50K. You've already predetermined what your job is going to be. So you have a really good idea what the outcome is and what the income from that outcome will be. So this puts you in a really, really good spot. And I think it's totally fine if your mother is willing to help you with that co-signing situation and help you get these student loans so you can get this degree.

9:06I just always say, if you don't know what the outcome is for a college degree and it's just generalized, it's not a good time probably to invest that much money because you don't know what the outcome is going to be. And in this instance, you really do know, and you'll have a very good idea day one what you'll be making in that field. So I think it's a great move. Yeah, good question, Brody. And just for some added resources here, Robert and I are friends with a guy named Harrison. And Harrison founded a company called Sparify. And what Sparify does is essentially they allow you to find student loans, like Google Flights allows you to find the cheapest flight to your next vacation, right?

9:45It's like Google Flights for student loans. I'm going to leave a link in the show notes below for you, Brody, to go check out Sparify. No pressure to use it or not, but if you do end up using it, it's going to do a lot of good for you. It's going to show you exactly what you're going to pay throughout the life of the loan. It's going to show you different rates. It's a really, really cool platform. So go check that out for sure. And anyone else now with student loans or looking to find student loan providers, Sparify might be a good solution for you. Again, there's going to be a link in the description below to go check that out.

10:10So our next question comes from Leanna. She says, hey, y 'all, I love the podcast. I've learned so much about finance and I'm really excited to keep learning from you. A friend recently told me about the SPXX ETF. Are there benefits in investing into SPXX over the S &P 500? Thanks in advance. So here's the deal. SPXX is essentially a competitor to SPYI, except they're doing a very bad job of competing. So remember, SPYI aims to deliver the total performance of the S &P 500 to their investors while focusing on tax-efficient monthly income. SPXX essentially doing the same thing, but they have underperformed SPYI by at least 50%, maybe even 60 % just looking at these numbers.

11:00So here's some context. SPYI delivered a total return last year of 19%. SPXX was only 7.5. I don't know about you, but I would much rather take 19 over 7.5 any day of the week. Now, is there any benefits to answer your question here, Leanna, directly? Not to this fund, no, but to investing into SPYI, yes. And those benefits are specifically, if you are looking like myself to generate passive income in your portfolio, passive income that you can withdraw from your brokerage, take it straight to your checking account and use that to pay bills, fill up your gas tank, like whatever you want to do, which is how I spend my money, then SPYI might be a really, really good ETF to add to your diversified portfolio.

11:43And something else, Leanna, great question. And I don't know if you should keep that person as your friend, maybe put them off as the more distant friend. But also when you're looking at these types of investments, also look at the expense ratio. SPXX is infinitely more expensive from an expense ratio part than SPYI. So that also is kind of a red flag for me because when we invest and we talk about investments that we like, we want the lion's share of the money and the profits to go to us. And quick announcement, Robert, Neos Funds launched a new ETF as of January 30th called QQQI, which is the same thing as SPYI, same tax efficiencies, same monthly income, all the good stuff we love about the ETF.

12:27But it aims to track the total performance of the NASDAQ. Yeah, we're talking about the NASDAQ, that thing that delivered like 40 % last year. Well, now you can have exposure through that in a tax efficient, passive income focused way in your portfolio with QQQI. I went out and bought$3 ,000 of it today. I am so excited about this ETF, Robert. It is going to be a game changer for a lot of people. I know. I'm so excited to get some money in on it. I just have to transfer some money around and get in now. So I'm excited for that one as well. Before we jump into our next question, I just want to remind everyone that public is officially the cheapest way to trade options.

13:03That's because they're doing something no other brokerage has done before. They're sharing 50 % of their options revenue directly with you, the customer. This is amazing. Whenever you trade options on public, you get something back. So go to public.com and activate your options trading before March 31st to lock in your lifetime rebate. Public.com, the cheapest way to trade options. And it really should say, go to public.com and activate your options trading before February 7th's webinar, where we're going to talk about covered calls, all the fun options and all the cool stuff during that. So yeah, definitely do that by February 7th.

13:40If you're not yet registered for the webinar, this is us reminding you to do that. You're going to love it. I am literally so excited about this webinar because I cannot wait to show you every single transaction I made in 2023, specifically between September 12 and the end of the year, and show you how I generated over$4 ,000 for my portfolio, right? That's$4 ,000 I took out of my account and I put into my bank account and I spent it on other fun things, right? That's what we want to show you all how to do with covered calls, owning stocks you love. It's going to be a lot, a lot of fun. So our next question comes from Sean.

14:14Sean says, thank you so much for the amazing podcast and all the information you share. So here's my question. I want to divert money from my 401k after match, which only provides target date funds to a brokerage account, either public.com, M1 Finance or Fidelity. So over the long run, what's going to cost me more? The small transaction fees on buying some of these ETFs and stocks or the payment for order flow fees by using these platforms? That is a great question. And it really comes down to getting you to look at the macro view of what you're trying to accomplish in your wealth building journey and not worrying, tripping over pennies while dollars fly by.

14:51Now, Austin and I talk about all the time of maximizing the amount of money that comes to us versus the platforms and the people that provide these investment opportunities to us. But in this instance, I don't think it matters as much because the PFOF fees versus the M1 finance or the public fees are gonna be so nominal in relation to how much money you're investing over time and your gains that I don't think you should worry about it maybe as much as you're looking at now. Now, when I look at something like if it's the difference between VOO and another S &P 500 fund, let's say, I always say VOO just because I always want the lowest expense ratio.

15:33So there might be another fund that performs exactly the same way. But if I can save money on those fees overall in the larger dollar amounts that I'm investing, then it's going to add up. But in the general sense of things, I don't think you should bog yourself down in the minutia of worrying about these smaller fees. And you know, Sean, I was right there with you at some point, right? I'm a math nerd. I love to nerd out on stuff and figure out how I can best optimize every little penny I have. But it really reminded me of a quote from one of my friends. It wasn't really a quote, it was just a conversation we had, but we're talking about investing.

16:05And I was telling him how I was trying to invest this and get this yield here and do this and that. He's like, you know what the biggest indicator of wealth is? And I was like, well, I don't know. Of course. Well, what are you going to say? And he's like, the biggest indicator of wealth is actually investing the money. It's not over analyzing where it's getting invested. It's just doing it, right? It's just automating the process, taking emotion out of it, and just simply doing the chore of investing, which shouldn't even be a chore. It's actually kind of fun. But you know, Sean, that's just where I want to help you kind of make that mindset shift of the little transaction fees you might experience if it's 20 cents here, 30 cents here by buying an ETF or, you know, an option contract or something like that, right?

16:45All of these little fees, do they add up to maybe 10 or 20 bucks over a couple of years? Sure. But 10 or$20 isn't going to be the, you know, differentiator between you becoming a millionaire in retirement or not, right? It's just 10 or 20 bucks. Like I'll Venmo you 20 bucks, Sean. It's not that big of a deal, man. So our next question comes from Sonia. Sonia says, hi, guys. I absolutely love the podcast. I have a question regarding when to stop losses versus waiting it out. I purchased a stock a couple months ago and it has since plummeted, didn't even seem to recover. I'm now down 33%. Would you recommend to wait for it to maybe recover or would you recommend taking the loss and reinvesting that money somewhere else that might be more promising?

17:28Thanks in advance. Robert, you want to take this one? My thesis on this is pretty simple. If you believe in the company and you've done your research and you're down 33%, but you think it's going to recover, then it's up to you and your risk tolerance and what rolls around in your brain to decide what to do. But just always keep in mind that you can't forget in investing of opportunity cost. It's so, so incredibly important that you understand that if you put$5 ,000 somewhere else and you're down 30 % and you just keep waiting and waiting and hoping and hoping, what would that money that's left over do somewhere else more promising?

18:03Because also remember, those losses aren't really realized losses until you sell, but also even if you do sell with a 30 % loss, you can recover those losses as a write-off against your gains elsewhere. So just always keep that in mind that it's not like that just goes away. You can write it off against other gains. So keep that in mind, but you just have to understand your risk tolerance and what is the best move for you and then decide from there. Yeah, Robert, you really alluded to this in the beginning of your answer, which is correct portfolio allocation. That's the name of the game. We always talk about, Robert, building your base, right?

18:42Everyone needs to have a portfolio whose core holdings, the foundation of that portfolio, are index funds. S &P 500, NASDAQ, Dow Jones, Russell 2000, whatever you want, but notably the S &P. And the reason being is we know that a well-diversified portfolio who has these index funds inside of it is going to perform well over a long period of time. Now, if Sonia, you want to go out and roll the dice on buying a single stock like you did here, that's totally fine. I've rolled the dice and lost plenty of times myself. However, you need to do it in a responsible manner. Now, for some people, that might mean 2 % or 3 % of their portfolio.

19:24For others, it might mean 5%, 6%, or 7%. I would be very scared myself to put more than 5 % of my own portfolio, like my total invested capital, into a single stock. I've done it a couple times and it's worked out fingers crossed, but it's not something I'm very comfortable with. I want to have between two, three, maybe 4 % in a single stock kind of throughout my whole portfolio here with a handful of those. They're not the core. It's only a handful that I really, really believe in, right? Now to answer your question more specifically, Sonia, should you sell the stock? It's totally up to you because what's really important to think about here, however, is the opportunity cost of not selling the stock.

19:59By not selling the stock every day that your money is in this specific stock that's down 33%, that's one more day of perhaps the S &P 500 or Bitcoin or, you know, NVIDIA or any of the other names, Tesla, who knows, right? But any of the other investments you can make with your money, another day goes by that you're not earning money with them or, you know, going up and down with the markets in general. So it really just depends on your specific financial situation. If it were me, I would probably cut my losses, perhaps write them off my taxes if it was that big of a loss. And at the end of the day, Sonia, you lost a little bit of money.

20:31It's okay. Just call it your learning tax, move on, and don't make the mistake in the future. Now, our last question comes from Luis. Luis says, I'm 32, married, and I have a one-year-old. I work in big tech in Seattle. I bought a condo back in 2020 with a 2.8 % interest rate, and I put$115 ,000 down on the purchase. The condo is being rented out, and I'm breaking even from a cash flow perspective every month. According to Redfin, property value has decreased by about 10 % over the last few years. I want to buy more cash flowing properties in cheaper parts of the country, but I'm not sure what I should do.

21:06Get a HELOC on the dead money at 9.2 % interest right now, or just save the money in a more traditional fashion. Okay, Louis, great question. And thank you for the detail on this. Without knowing how much you paid for the home and assuming the amount you talked about is accurate for the HELOC, here's my takeaway. I think the HELOC at 9.2 % is just too expensive. We would consider that high interest debt. So I don't think that's a good idea. So I think you have a couple options here. You save up for that next property and you get aggressive to get the down payment money, because also I would hate to see you get a HELOC on a property in a market that is depreciating in value because you might find yourself in a negative equity situation here in the next couple of years if that market doesn't recover.

21:51And then secondarily, I think you could look at what is called a DSCR loan. That would be a way for you to look at. You'd still need the down payment, but you wouldn't be trying to take money out of the home like we discussed. So look up a DSCR loan, see if that works for you, because there are other ways to do this and find that way to get the next property while still dealing with where you're at on this one. And Louis, as someone who's not a professional in real estate, but just an outsider looking in here. I would be curious if you're renting out your condo at current market rates. You're saying you're breaking even on cash flow every month on this half a million,$600 ,000-ish condo that you're alluding to here.

22:35And assuming your mortgage is probably, call it maybe$400 ,000 because you put$115 ,000 down on the purchase, at 2.8%, your monthly payment should be probably around$2 ,000, maybe a little bit less than that. I would imagine you can rent out a condo that's worth$600 ,000, a little bit more than what you're doing right now to start cash flowing at least a couple hundred dollars a month, not even just break even. Right. So definitely try and re up on the market rates. If that's something you can do in anything above that. Right. That could perhaps be new money to now deploy or save into some of the options that Robert talked about.

23:09And also, Louis, thank you for presenting the question. Keep in mind that with this real estate, cash flow isn't everything. You have capital appreciation. I'm sure in that area, from what I presume in Seattle, is pretty high. So you have to look at it that way. So in the future, you should see that rebound. And then secondarily to that, you have depreciation, which you can use some of that as well. So there are other positives to this. I know you're probably not happy that it's depreciating, and that's just because you probably bought at the top of the market in 2020. So just keep that in mind, it's not all gloom and doom, but there are other ways to skin the cat here.

23:45Really good question, Lewis. And also just to wrap this up, dude, you work in big tech. You're probably making several hundred thousand dollars a year anyway. Just save some money, save it for three years, go use that as a down payment. Now you got a property, do that every three years. You're going to have 20 houses before you know it. Everyone, thank you so much for listening to this episode of the Rich Habits Podcast. Friendly reminder, go check out our covered call webinar. It's going to be a blast. We're going to talk about passive income. We're going to tell you stocks that we personally like and use.

24:13We're going to have Wall Street experts from the Neos team join us. It's going to be so much fun. We've got 700 people who've already joined us. We can only take 300 more. So be in the first 1000 and don't miss out. And again, thank you all for joining us each and every Monday and Thursday here at the Rich Habits Podcast. If you love it, please share it with a friend. Give us a five-star review. Keep growing with us as we build more and more great educational tools and channels and communities around the Rich Habits brand. We thank you all each and every week. And don't forget to follow us on Instagram at Rich Habits Podcast.

24:48We post social cutdowns of some of our favorite questions from these episodes on the Instagram channel. So to always stay up to date on what our answers are on some of your amazing questions, go follow the Instagram account. It's going to be a lot of fun. Thanks everyone and have a great rest. The holidays mean more travel, more shopping, more time online, and more personal info in more places that could expose you more to identity theft. But LifeLock monitors millions of data points per second. If your identity is stolen, our U.S.-based restoration specialists will fix it, guaranteed, or your money back.