Q&A: UPRO vs. VOO, Short-Term Rental Arbitrage, & Covered Calls in an Emergency Fund

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0:45The Beast and Me is a riveting psychological cat and mouse story about guilt, justice and doubt. You will not want to miss this. The Beast and Me is now playing only on Netflix. Hey everyone and welcome back to the Rich Habits Podcast, a top 10 business podcast on Spotify. This is our question and answer edition episodes. They come out every Thursday. Today is not just a day that our episode comes out, but it's also Halloween. So happy Halloween to everyone listening. I decided to dress up as a football player and Robert decided to dress up as a multi-millionaire, uber successful entrepreneur by the name of Robert Croke.

1:23So I think he did a pretty good job. What do you think, Robert? I love it. Yes, I'm so sorry. I did not have anything here in Florida for a costume. Even went to a couple stores. They didn't really have anything left. So this is what you get. You get the real me. But just a quick heads up, folks. Interest rates are falling, but you can still lock in 6 % or higher yield with a bond account at public.com. That's a pretty big deal because when rates drop, so can the interest you earn on your investment. Robert, I'm right there with you. A bond account allows you to lock in in a 6 % or higher yield with a diversified portfolio of high return and investment grade corporate bonds.

2:01So while other people are watching their returns shrink as the Fed continues to cut interest rates, you can sit back with regular interest payments. Yes, but you might want to act fast because your yield is not locked in until you invest. The good news, it only takes a couple minutes to sign up at public.com and lock in that 6 % or higher yield with a bond account. only at public.com forward slash rich habits. This was brought to you by Public Investing. They are a member of FINRA and SIPC. These numbers are as of October 28th, 2024. The average annualized yield to worst across the bond account is greater than 6%.

2:38The yield to worst is not guaranteed. This is not an investment recommendation. All investing involves risk. Please visit public.com slash disclosures slash bond dash account for more information about those risks. All right, Robert, I'm really excited about this Q &A episode. We've got literally, I think, seven or eight questions teed up here, and they're not just from the Rich Habits Network, which, by the way, is the easiest way to get your questions answered, right? We have over 485 people inside the Rich Habits Network right now sending us DMs, joining our weekly live streams, watching the four hours of video coursework that we've created for them, adding continual modules over time.

3:13There's a ton of cool reasons why you should join the Rich Habits Network, and if you've not joined or wanted to even just check it out, this is a great opportunity to do so. So our first question from inside of the Rich Habits Network comes from Brock P. Brock says, hey, everyone, I've seen some people utilize Airbnb arbitrage. To me, this sounds like a great and affordable way to get into short-term rentals. Now, assuming you can get the proper approval from the landlord, I'd love to hear everyone's experience or opinions on this. Robert, one, explain what Airbnb arbitrage is so our listeners can understand that.

3:46Then two, give them your perspective on it. Love it. Great question, Brock. And I'm going to take a little bit of leeway here and really kind of explain this thoroughly. So what Airbnb arbitrage is, is when you don't own the property, you actually go lease the property that have a separate contract with the owner of the property for them to allow you to arbitrage the property and rent it out to Vrbo and Airbnb sites like that. So that's what arbitrage is. You would go lease this property, say for$3 ,000 a month. You think it could be a good Airbnb. So then you decorate it, you put the furniture in it, you get it looking nice and fun.

4:26And then you go out and put it on these sites with the hopes that you can arbitrage the difference of the money. Say you bring in 6 ,000 a month, you're paying out 3 ,000, you would make a$3 ,000 net amount. So why do I not like this as much now as I did two, three years ago? A, the market is saturated. There are so many courses and so many gurus out there teaching this arbitrage strategy in Airbnb so the markets are flooded. Number two, you have to be very, very careful and get in the know locally as to what the local governments are doing, maybe the HOA. There's all kinds of people you're going to have to report to and make sure that they even allow Airbnb, especially arbitrage.

5:10Because at the drop of a hat, they could be already in the process of changing their jurisdictional codes and not allowing it in which then you'd be stuck with a long-term lease on this property. You would have already purchased your furniture and all of your stuff. And then all of a sudden you have to go try to find somebody to lease it for more than what you're leasing it for, which is highly unlikely you'd be able to break even. So those are the good and the bads of it all. So I would say the best way to approach it, if you really like this model, find someone local that's an expert in the field.

5:42Get with them, talk to them, because they're gonna be in the know of what is going on from a jurisdictional standpoint and a rules standpoint to make sure that they're not gonna outlaw it anytime soon. And then number two on that aspect is understand the numbers. Make sure you're using a site like AirDNA so you know what is the average occupancy rate in that area for a home such as that. What is the average nightly rental for a home such as that? because many times the numbers won't make sense like you think, and it's not all rainbows and unicorns. And the last thing you wanna do is have another house payment that is draining your money instead of helping you build wealth.

6:21Robert, what an awesome and thorough breakdown. The only experience I have with short-term rental Airbnb arbitrage here is being a customer. It was so weird actually, which is maybe a deterrent for people who wanna try it. Your customers don't really have that great of an experience. I was going to the Bitcoin conference in Miami a couple years ago, and to our surprise, it was actually inside of an apartment complex. And to get the key, I kid you not, it was the weirdest process. You know how normally you check into an Airbnb, they got the little lockbox or something you can click on and you walk right in.

6:52This key to this apartment was on a bike lock, like three blocks down from the apartment. It was so weird. So I had to find the right lockbox. I had to type in the code and I had to walk back to the apartment that I had to go in get questioned by security. Hey, what are you guys doing here? Do you live here? We're like, uh, maybe, yeah, I don't know. Like we're just trying to figure it out. So I'll tell you what, man, if you want to get in the Airbnb game, in my opinion, it's probably a better idea to own the entire process yourself, where you can really get rid of those discrepancies and the unpredictability that comes with the arbitrage, you know, specifically if you have an apartment.

7:28Now, maybe if you were, you know, a customer experience perspective, it's not something that I enjoy doing. But really, really great breakdown there from Robert. Now our next question comes from Victoria F. Victoria says, when figuring out how much life insurance to purchase, what are the specific factors that I should consider? So this question is super, super simple, Victoria. And I love that you asked it because it's a very easy concept for a lot of people to understand, but they have to be sort of shown how to think about the math here. So if we take a step back and think about why do we have term life insurance at all, it's to provide income to our beneficiaries in case we die.

8:10So for example, if you are a family of four, and your household income is$150 ,000, and the breadwinner of that family died, and now no one is making any money, but that breadwinner had a term life insurance policy on them, you would then take the death benefit of that life insurance policy, invest it into the S &P 500 and then withdraw a annual four, five, six percent off of that to supplement income for the household. So in this example, if you wanted to generate$150 ,000 of annual income at a five percent withdrawal rate, your portfolio would need to be about three million dollars in value.

8:48So that's sort of how I like to think about it. So let's call it 15 to 20 times your annual income, you take that out as the death benefit amount for the policy. And then after that gets paid to your beneficiaries, the beneficiary would then take that money, invest it in the S &P 500 and withdraw four or five, 6 % if they need to annually on that to supplement and generate that income for you. So the only factor to really consider is how much you're making as a household that will need to be replaced in case of death in the family, whatever that number is, multiply it by 15, maybe 20. And then that is how much life insurance you need to take out.

9:23Yeah, that's a great explanation. And I think my only ad here is understanding what type of policy you're getting and understanding why you want to get it. Because there are a lot of people out there pushing these IULs and whole life policies and all these different gimmicky types of policies right now. So understand why you need it, what the benefits are, and make sure that you get with a reputable firm to give you the options within your buy box of what you're looking to do because the most important thing is understanding the costs related to owning that policy and the benefits to make sure it's the right fit for you.

10:00That's all I can really add to this. No, I love that. And if you've not yet done this and you're someone who's married and someone, you know, there are people in your family that depend on your income for their livelihood, go check out the link in the show notes below. Shuriance is our preferred provider of life insurance. They are crushing it right now. Russ McBride's a really great guy. So definitely go check them out in the show notes below. Victoria, we wish you the best of luck. Now, our next question comes from Esperanza M. Esperanza says, does anyone have recommendations for home renovations and tips on getting the best deals?

10:33I need to redo both my front and my backyard, and these are major expenses I want to handle wisely. I'd appreciate any advice on finding reputable contractors or just different ways to save on such a big project. Robert, you want to kick this one off? I would love to, and I'll just give you a breakdown of some of my favorite tips and tricks, hacks, if you will, to make sure that you do it right and you get treated properly because contracting, big or small, can be a nightmare, especially if you don't have a friend or a trusted family member that's in the business. So number one for me is once you find that suitable contractor, make sure you work on a draw schedule.

11:12Don't fall for anything where they ask for half percent down. Let's say it's a $30 ,000 project and they say, give us 15 down. And then you're going to give us payments after a certain time. You want to make sure that you work on what's a draw schedule. You can Google that and really figure out what is a fair and reasonable draw schedule. And all that means is on that$30 ,000 project is you might give$5 ,000 down. Then when they reach a certain milestone, you give another five and so on and so on. Because the biggest problem in contracting is that people get these big deposits from people and then they don't show up for weeks at a time or they'll go get started and then run out of money because they're constantly working off of customer cashflow and they don't show up.

11:58So number two, relative to that, is stick to the draw schedule because once you get ahead of them, you will be in a situation like I alluded to. It's very tough to get them to come back unless you give them more money. Trust me on this. It happens every day and twice on Sunday. in the contracting world. And then number three is make sure that you understand it's not always a good idea for you to buy the materials. A lot of customers say, well, I'm gonna buy all my materials, what's the labor gonna be? And the problem there a lot of times is you end up paying more and then you have the headache and the heartache of you didn't get enough tile, then Home Depot ran out, then you gotta wait for more to come and all of these things come into play because you're trying to save a little bit of money.

12:44I look at it this way. Most reputable contractors get such a big discount on flooring and paint and lighting and all of the things they provide, landscaping materials, that it saves you all the headache of sourcing it and pricing it and trying to figure out how much you need. You know, how many truckloads of mulch do you need versus letting them handle it all? Because most contractors are going to have their markup on the materials, but that markup is going to still be able to save you money or be about the same cost wise. And you don't have to do all the work because you don't want to buy yourself another job just trying to save a little money.

13:22So one thing to go along with that would be also when you do your paint, if you're doing a lot of painting, don't buy all the paint at once. I promise you what you want to do is pick let's say two or three paint colors that you love go buy a test sample go buy a pint or a quart of each color and paint them in neat little squares on three different walls or two different walls and see them in all different lighting so many people will buy a paint color put it on the brightest wall with the most sun and be like I love it they buy it all they paint it and then on the walls that don't get direct light it's very dark or they don't like how the hue changes so it's very important to understand do samples first it'll cost you an extra hour and maybe 30 40 bucks but you will get colors that you love and make sure that they work well with your house's lighting and i would say the last couple things would be inventory many times what contractors will do when they're buying your materials they will add extra materials in it might just be an extra couple cases of caulk it might be an extra 200 square foot of floor tile, et cetera, et cetera.

14:30It could be any mix of different materials. So keep an eye on your inventory and understand what you need, because what they'll do is they'll say, well, the tile to do the kitchen renovation is going to cost you$3 ,800. And you say, great, you approve it. They go buy the 3 ,800, but they only needed 3 ,200. They take the$600 of materials. They use it on another job and you paid all the profits for another job for them. So keep an idea on your material know your square footage and that'll help you a lot in making sure that you maintain a budget that is actually your budget because trust me they all want to sneak in extra materials that they can load up their trucks with and you won't know the difference and then i would say lastly is don't skimp on big ticket items so many people will do a kitchen or a bath renovation and they'll think it's okay to go to home depot and buy their vanities or they'll buy the cheapest vanity on Wayfair and wonder why that vanity doesn't last more than two or three years.

15:31So don't skimp on those items because usually you can buy high quality items, whether it's vanities or flooring tile or lighting, you can buy the higher quality versions that'll last forever for very little difference in money. So just keep an eye on that. And I would say those are the things that I think would help you the most on any project, big or small. You know, those are really great tips, Robert. and I mean as someone who's made the mistake of working with people that I both found on Craigslist and working with people that I'm like actually friends with those are two very different people right for example I paid a guy I found on Craigslist to help paint some you know sort of outdoor gazebo that I have at my house here he showed up I paid him for half the amount of work he did because he did do half the amount of work there I had the paint and stuff hanging out myself he did a pretty bad job on it and then I said hey man like come back again tomorrow and he never came back, right?

16:22So luckily, he only got paid for half there, which was good. I didn't get scammed. But just make sure you're working with people that are actual, you know, vetted contractors, probably insured, right? There's a lot of really cool things to look out there. Yelp reviews are a great place to start when it comes to finding really great people around you. Facebook groups, maybe, you know, check your neighborhood Facebook group. I'm sure there's a lot of other people who've had contractors come and help them remodel their front yards or their backyards. Robert, do you have any perspective on how the payment gets sent?

16:51Do you think cash is the way to go? Do you do credit card? Do you do Zelle? How do you think in a perfect world someone should pay a contractor? Yeah, you just want to have trackability. So you don't want to use cash because then they can say you didn't give it to them. You didn't do this. And for everything you do in this contractor world, and I've been a contractor on and off for 20 some years, and I've seen it all. Even two weeks ago, I dealt with it after the hurricane. We hired a contractor to do the roof, signed the paperwork, even downloaded their app. It was so official. And then the price changed two different times.

17:23They didn't show up when they were supposed to. We got another contractor involved. They were super reputable. They came to me as a reference from a friend of mine. They didn't show up. So you have to understand that many of these contracting companies are not what they appear. They might have fancy trucks and fancy logos and nice polos, But at the end of the day, there's still a small business that is always going to be strapped for cash flow. So just be careful with yours. That's why the draw schedule is important. Ask them how they like their payments to be made. Work off of a draw schedule.

17:56And like I said, if it's a$30 ,000 project, you don't want to give them half down. You maybe want to say, okay, when you show up, we'll give you X, Y, or Z. It might be$5 ,000. It might be$7 ,500. I don't know. But just keep it as low as you can. because you want to make sure that they actually show up with the materials, they start the work, and they're moving it along quickly because what they'll do, a lot of them, they'll show up, do a chunk of work, get a chunk of money, and then not come back for three weeks. And then you're stuck holding the ball. So just keep in mind and be careful because they are usually very good salesmen and not necessarily as good at running their business as they are closing the deal.

18:35So be careful. Yeah, I'm right there with you. Back to this craigslist guy i mean it was just so annoying it's just it's crazy folks listen up time could be running out to lock in that six percent or higher yield at public.com you can lock in that six percent or higher yield with a bond account remember your yield is not locked in until the time of purchase so you might want to act fast lock in a six percent or higher yield with a diversified portfolio of high yield and investment grade corporate bonds only at public.com forward forward slash rich habits. Again, that is public.com forward slash rich habits.

19:11Now our next question comes from Charles J. Charles says, Hey Austin and Robert, I have a question about my Roth IRA strategy. For context, I'm a realtor in Tennessee, go Vols. I'm 27 years old and I have$120 ,000 worth of stocks and cryptocurrency in my bridge account. I have four rental units, which I've slowly built up through house hacking and about$16 ,000 in my Roth IRA, which I'm maxing out every year. I also have a solid emergency fund equal to three months of expenses. Now my Roth IRA question is this. My allocation is being split between the five index funds you guys always talk about.

19:44VOO, VGT, QQQ, Moat, and AIQ. As well as two smaller allocations toward Bitcoin and Ethereum. My question is though about VOO and maybe even UPRO. I know UPRO is a levered VOO position that you guys have spoken about in the past. Now, since this is a Roth IRA account, I definitely won't be able to touch it for at least 30 years or until I'm 59 and a half years old. So wouldn't it be wise to just move all of my VOO into UPRO just in my Roth account? I understand that this is riskier for a bridge account where I might want to move some of the money around before this 30-year time frame, but if our assumption is correct that the S &P 500 will continue to move up into the right for years to come, aren't I technically leaving money on the table with an allocation in VOO instead of UPRO?

20:35I have a very high risk tolerance, but for a 30-year time frame, this doesn't even feel that risky to me. Any insight would be appreciated. I'm extremely grateful for the Rich Habits podcast and this awesome community that you guys have built. Robert, what a great question. Fantastic. I can't wait to dig into this one. So Charles, you're 100 % correct. UPRO is a levered position on VOO, which means that the The gains you see in VOO, right, the S &P 500 on an annualized basis, daily basis, weekly basis, they are magnified to the upside and magnified to the downside no matter what happens, right?

21:09So for example, the S &P 500 this year is up 22%, which means that UPRO is up 62%, right? We're talking about a 3x leverage on the upside, but also that means 3x leverage on the downside. Another example of that was when we had that bear market in 2022. UPRO shares fell by 65 % compared to the S &P 500's 20-ish percent. Now, additionally, year to date, UPRO has fallen 25 % in some instances, which happened late July, early August when we sort of had that flash crash. So, I mean, that is a 25 % two-week decline in your portfolio. Now, to your point, Charles, I understand what you're saying, right?

21:52You think that as long as we assume that American capitalism is going to be here for the next 30 years, which is correct, and the S &P 500 should continue to trend up into the right, which is correct. If we put leverage on that upside, we should have a bigger gain in our portfolio. That is a correct assumption. I mean, we've talked about this before on the podcast, Robert, I still can't find a way or figure out, you know, sort of even to steel man the opposite side of that, as how to bet against URPO. I mean, it's a way to bet on American capitalism for a long period of time. The only reason this does not make sense, and which Charles alluded to here, which is if it's in a bridge account and you need that money for the next 30 years.

22:31But since it's tied up in a Roth IRA and Charles won't be able to touch it for at least 30 years, 30 years is well a long enough time where whatever volatility UPRO experiences, I'm positive it's going to be higher in 30 years than it is today. Now, the only downside risk I could possibly think of right now with this UPRO ETF is that the ETF doesn't exist in 30 years. That's it. And let me explain that, right? So with VOO, VOO is the Vanguard S &P 500 ETF. It is arguably the most popular S &P 500 ETF on the market. It has over$1.3 trillion of assets invested inside of it. Vanguard is never going to get rid of this ETF.

23:13Because remember, ETFs are a business. These companies have to have the listing fees. They need management. They need to make sure that the strategy is actually getting implemented, compliance, right? There's a lot of things that go into making an ETF and they cost money every single year to run. Now, UPRO only has$4 billion in assets under management, right? 4 billion, 1.3 trillion, right? So just think about the difference there. So is UPRO theoretically going to perform well over the next 30 years? Yeah, totally could. and theoretically it should continue to perform very well. But will the ETF be here in 30 years?

23:47I don't know. Maybe it loses assets under management. Maybe it just doesn't make sense for them as a business to have it anymore. Maybe ProShares goes out of business, right? I have no idea. Maybe they get acquired, right, by someone else and they don't want UPRO. So I'm all for it, Charles. Just be careful that UPRO is a ETF that maintains its integrity, its existence, and that if it ever does get liquidated into cash, you immediately reinvest that cash back into your portfolio. I love this question and your breakdown. And the only thing that really comes to mind for me is diversity. People ask me all the time, you love Bitcoin.

24:25Why are you not just all in on Bitcoin? Take all of your money and put it on Bitcoin. One side of me says, I probably should do that because I believe one Bitcoin will be worth$250 ,000 to$500 ,000 in the coming years. And it's the same thing when we talk about the S &P 500. You know, every single day you have to ask yourself the question, is this the best place to put my money? So in this instance, the only reason I don't love this strategy in question is I like to be diversified so I can never go broke. And my fear is if you go too heavy in this, and let's say the S &P 500 and JPMorgan Chase is right, and the S &P 500 does go flat for years and years, because remember there was an article, I think last week where they said the average return for the next 10 years was gonna be 3%.

25:14Well, then that would mean you would be only making, what would that be? 9 % on your money while there would be better places to make more money. So I like it. I would do it with a small portion. I own it, but I wouldn't go all in on you pro because you just don't wanna be in a situation where there is two or three bad years and it wipes out 60 % of your gains for the last 10 years. And then all of a sudden that happens to be the timeframe when you're getting your money out. So that's why I like diversity. I love you pro, but I would keep it a small percentage of your portfolio. Yeah, maybe there's a world, Robert, where Charles here could split it up 70, 30, right?

25:54So let's say you have a$10 ,000 of that, I think it was 16 ,000 that he had mentioned here in his S &P 500. Let's say 10 ,000 of that was invested into VOO. well, maybe here's an opportunity to put 7 ,000 in VOO and the other 3 ,000 in UPRO, right? It's sort of a 70-30 split there, allowing you to have some of this UPRO upside as well as continue to have the VOO diversification that just comes with the S &P 500. So really great question, Charles, and thank you so much for being a part of the Rich Habits Network. Our next question comes from Hasina X. Hasina says, I only have$300 a month to invest.