Q&A: Young & In Debt, Maximizing Cash Flow, & Buying Real Estate w/ Friends

0:28You're about to make a trade.

0:44Hey everyone, and welcome back to the Rich Habits Podcast, question and answer edition brought to you by Public.com. If you're new around here and you're not too sure what these Thursday episodes are about, we'll break it down for you. Every single Thursday, Robert and I sit down and answer six, seven, sometimes eight questions straight from you all. You all send us questions via Instagram DMs, via email at richhabitspodcast at gmail.com, or you ask us questions inside of the Rich Habits Network, which is our community for our biggest fans. I think we've got seven questions, Robert, and these are some good ones, right?

1:20Some guys trying to buy an assisted living facility. Someone else is trying to sell a condo. Side hustle ideas for dental hygienists. story. There's a lot of really cool questions in this. So if you have a question to ask us, be sure to DM us on Instagram at rich habits podcast, or email us at rich habits, podcast at gmail.com. And don't forget, we have a network. We have a private community of all of our listeners that really want to go deeper with their finances, their mindset, their business, all of the above. And we have a seven day free trial running. So if you want to get closer to us, learn more and be right in the thick of things investing alongside of us, you should definitely check it out.

1:58You deserve it for the holidays. And there's a seven day free trial. Now, before we jump into the first question, we got to give a shout out to Public, the investing platform for those who take it seriously. Because on Public, you can build a multi-asset portfolio of stocks, bonds, options, crypto, and now generated assets, which allows you to turn any idea into an investable index with artificial intelligence. I love this for public because I feel like they always have the sauce. They come out with all this cool stuff. And Austin, you and I played around with it a couple weeks ago when it launched, and it was so cool.

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3:14That's public.com forward slash rich habits. Paid for by public investing. Full disclosure in the podcast description. All right, Robert, let's now jump into our first question coming from Nestor C. Nestor does a wonderful job of hitting us with all of this information that is actually not that pertinent to the actual questions. We're going to skip a lot of it. we're going to jump straight to the question here because we'd be sitting here for 10 minutes reading this whole email, which we appreciate. We appreciate when you guys give us the breakdown, not taking that for granted, but in Nestor's situation, we're just going to jump to the question, which is my goal is to buy one property by the end of 2026 with some of my friends.

3:53How would that work with four of us investing into this one property? I'm thinking of everyone bringing about$15 ,000 to the deal. So a total of$60 ,000 will be used to purchase it as a As a down payment, we live close to each other and could definitely rehab the property if needed. But what is the best way to limit risk, maximize profit, and limit confusion come tax time with a group of participants? Robert, you are a real estate guy, so I will let you kick this one off. Yeah, I like this idea, especially starting out because you are spreading out the risk among you two or three friends and make it simple.

4:30So let's keep the math plain and easy. I would say get that LLC up and running. If you have the three, four, two, whatever it is, friends are going to participate, figure out what they are going to do. Are they bringing in just capital? Are they going to have a day-to-day operational role in this company and then spell all of that out in the operating agreement? So let's assume you have you plus three friends. You each put in that$15 ,000. so that's$60 ,000 total and you own 25 % each of the property and of that LLC. Because remember, in most instances, you're going to want to have a separate LLC for every property so you can define what is going on and define the roles.

5:14So with the operating agreement, you're going to have that set in stone that says each person owns 25 % or you can adapt that depending on who is doing what. So for instance, if you, Nestor, are gonna take on a larger role, and let's say you're gonna be, you're gonna act as the general partner, then you might wanna say, hey guys, I'm doing extra work, so I should get an extra 10 % of the equity in this project. But to keep it simple, we're gonna split it evenly, then you all get your pro rata share of those taxes and the benefits of it and the income by doing it this way. I think it's very smart of how you're looking to do it, but make sure you have everything covered.

5:55You wanna have the LLC, you wanna have the operating agreement with everything spelled out because at the end of the day, you wanna make sure you're protected. So if somebody moves away and just doesn't help or somebody doesn't put in the additional money, let's say there's a capital call and you each have to put in$2 ,500 and that person does not do that, you wanna make sure you're covered because you don't wanna be in a situation where you're doing all the work and taking the risk, but you don't have equal duties to make sure that the project goes well. So that's how I do it. That's how I would recommend anyone listening does it, is make sure you dot your I's and cross your T's to make sure you're covered long-term from a liability standpoint, but that you also enjoy the tax benefits and the income benefits from owning real estate.

6:41Yeah, let's talk about how you do it. I think that's a really good segue, right? So you've done flips before. You're doing a flip right now with a dozen investors or something like that, right? So when it comes to limiting risk, let's do this step by step. Whenever you created that operating agreement and that LLC, did you work with a lawyer? What kind of verbiage did you make sure to include to ensure that if there was a capital call, how did you sort of structure your operating agreement knowing that a dozen or so investors were going to be participating in this flip with you? Yeah, when it comes to me, I've been doing this for 25 years.

7:17I always am going to be the operator. So it's very easy from an operating agreement standpoint. They are passive investors. They write a check. They don't have any day-to-day operational duties and they don't have to partake in anything else. Now, that's how it works for me. But someone starting out, I would definitely use a lawyer. But I would do a lot of the pre-work myself. I would spell it all out in ChatGPT or Grok or Perplexity, whatever you use. And I would really get a handle on how to lay all that out. Get all the language in order so it works for you. Because every deal might be different.

7:53You might have somebody that is a contractor that hears what you're doing and says, Hey, I don't have any cash, but I'll come in and manage the project. So you might have them and you say, well, this is great. We put up all the money. He does all the work. We're gonna give him 10 % of the total project just for putting up some sweat equity. That's what it's called. So that's how I do it, but that's how you should also do it as well is just really figure out the language. And I would definitely use a lawyer for the first two or three of these because then you're gonna have documentation built up.

8:25So a lawyer can then just copy and rinse and repeat with the same documents, changing the names, changing a few of the operating agreement stipulations. But then it gets really easy. And it's that way for me because I've had the same lawyer for 20 years and I have documents on top of documents to help make sure everything goes well for me and my partners. But also you're not starting from zero every single time. Now talk about the tax implications, right? So how I understand it is, say there's$100 ,000 of profits on this real estate endeavor that our friend Nestor's doing. I would imagine that the LLC that owns the real estate that realized this$100 ,000 of profits, they would then distribute those profits to the owners and the owners have to realize that as 1099 income or some sort of income there.

9:11But I'm curious, what if they don't do a flip? And what if they do some sort of, you know, rental duplex, triplex, quadplex, and it's like a consistent cash flow thing? How often do you think that they should be paying out their sort of owners? Is it a monthly payout? Is it a quarterly, a semi-annual? How have you navigated that in the past? Yeah, it's different every time. Definitely, you don't want to be getting in a situation where you're paying out monthly. I don't do that. I don't think it's necessary. I think it's quarterly at minimum, but generally, you want to be in a situation where you're doing it biannually or annually, paying out those funds.

9:48So what I like to do, especially if it's going to be a long-term hold, is try to set a base. how much money do we want to have in the LLC's bank account to make sure we don't do a capital call? Because what a lot of new investors do in startups and real estate is they start making money and it just all goes out to the investors. Then something happens and you're like, wait a minute, we need money to go back in. So I like to set a base where maybe you keep 10 ,000. Let's say it's a duplex or something you buy. Keep$10 ,000 in there as your emergency fund, if you will. So then that way, if anything does come up that is a larger than normal expense that wasn't budgeted, you've got the money there so you're not doing capital calls.

10:28That's how I would do it because you want to make sure that you have that safety net without putting people in harm's way. But you also don't want to be paying out monthly because it's just more work you're adding, especially because real estate in most instances, especially this one, aren't going to be cash flowing that much each month. that you're going to do all this extra labor in, you know, doing the cash out and the distributions and the accounting for it and all of that. So that's how I do it. Nestor, we hope that this just kind of Q &A conversation between Robert and myself helped you and you're able to get this done.

11:02And we're rooting for you, man. So our next question comes from V. V says, Hey, Robert and Austin, hope you both are doing well. I'm a big fan of the podcast for the last two years and always wait for your new episodes, just like I waited for the new episodes of suits back in my 20s. That's hilarious. I'm doing that right now actually with Landman, Robert. I'm watching Landman with Ireland and every Sunday we're like, oh, I can't wait for the new episode of Landman. So V, I appreciate you. That is, that's so cool to hear. V says, what's up guys? I'm V. I want to stay anonymous, but I'm 38 years old.

11:31I live in the Philly suburbs and I make about 110 ,000 a year. I'm married and I have a child. My wife makes about 45 ,000 annually. My main question is when someone says they need to have an emergency fund of six months of expenses, should I also consider my monthly mortgage inside of that? That's a good question, V. So let's walk through it. We always encourage people to do a couple things. Part of that for us is having an emergency fund that is, let's call it three, four, five, up to six months of expenses. Now, what does expenses mean? Because in this situation, you seem like you get a little confused.

12:07Does that include the mortgage? Is it groceries? What is expenses? Robert, my goal, if I ever lost my job, if my income disappeared, my goal is for my monthly spending to stay pretty much the same, right? And so as someone listening to the show right now, when we talk about that emergency fund, we want to ensure that if you ever do lose your job and you have to go through sort of a period of drought financially, you're not running for the hills and having to sell your retirement and having to cash out your car and you're doing all these crazy things to keep things moving and kind of staying afloat here until you find that next opportunity.

12:43That emergency fund is going to cover you for that three, four, five, six months. And so when you ask, hey, does it include my monthly mortgage payments? V, it includes everything, right? So let's say, for example, my name's Austin. I spend, this is my real number, I spend about$7 ,000 a month living my life. I can be super comfortable at$7 ,000 a month in spending, which means three months of expenses for me is $7 ,000 multiplied by three or$21 ,000. Four months is$28 ,000. Five months is$35 ,000. Six months is $42 ,000. And this is money that's not sitting in my brokerage account. This is money that's not invested into the index funds.

13:22This is money not in my 401k. This is money sitting in a high yield cash account on public.com. And so for me, personally, right, I've got 30k, four months, plus a little bit more, essentially, I keep 30 ,000 at all times sitting in a high yield cash account on public, rocking and rolling. So if anything crazy happens, I've got that to lean on to. Now, what happens when there is a drought, V, let's say you lose your job, and you got to spend some of this money, you spend it, let's say you are going, let's say you have the same thing I do, you keep four months at 28 ,000. Let's say you go through two months of a drought.

13:56Now you've got 14 ,000 left in your emergency fund. But now you've got this new job, you're moving up to the right again, you're having fun. So you need to now go from that 14 ,000 in your emergency fund back up to 28 where you were, right? Because you don't want to be in a spot where, oh, I've got 14, but it would be okay. It's a little less than normal, right? Only two months of expenses, but I'll be just fine. That's not, you know, how you build wealth over a long period of time. You you've got your three, four, five, up to six months if you have a really volatile sales job that's unpredictable income.

14:28I think four is a cool sweet spot. But Robert, what's your take on the emergency fund and how do you approach it? I think four months all in expenses is the best sweet spot there is. I think six months is too much, especially for people nowadays. It's always easy to find new jobs and side hustles and ways to supplement income or loss of income. I love four months, but I want to back this up to the beginning. For anyone that doesn't understand and doesn't have their emergency fund built up, the first thing I want you to do is go download our honest budget document. Fill it all out completely. Include the makeup, the dog treats, the$9 lattes.

15:09Include it all so you know where you're at so you can calculate and build this emergency fund. And the emergency fund is not part of your investments because a lot of people get that mixed up. They're like, oh, well, I have 60 grand in my IRA. So that's part of my emergency fund. No, the emergency fund is for emergencies. So when something happens, you don't have to go to the credit card, run up the credit cards, and then worry about paying them back down. So I agree. I keep three or four months. That is the sweet spot for me because I want my money working as hard for me as I work to get it. So I love your breakdown, Austin.

15:46I think three or four months is perfect, but just make sure you understand it is the total of all of your bills per month. That is what you want to save to be able to calculate that to three or four months. Yeah. Let me just also reiterate something Robert said, right? The definition, how we see it of an emergency fund is it's insurance against your investments. It is not an investment. It is insurance against your existing investments, right? So let's say to Robert's point, you've got 60, 80, 100 ,000 in your 401k or your Roth IRA or whatever, and you have no emergency fund. Oh my gosh, I lost my job.

16:20I now need to, you know, float my lifestyle for the next three months and come up with 20 grand. So what am I going to do? I can either one, go$20 ,000 in credit card debt, not a great idea, not a great idea at all, right? Or two, I can cash out my retirement, also a terrible idea, both terrible situations to be in. You got to choose between a rock and a hard place. And so by having this 20, 30,$40 ,000 in your own emergency fund, you now get to say, I get to ensure that that money stays invested. I don't have to endure penalties or taxes unnecessarily or anything that's going to derail my wealth building journey from a retirement perspective.

16:56I get to lean on this emergency fund that I built many moons ago, hopefully, because of a couple of guys on the internet named Austin and Robert. I love that, Austin. And I want to say one more quick thing and then we can move on. The emergency fund doesn't mean we want it sitting in your checking account. Austin alluded to public.com. They have a great high yield cash account. So make sure you do that because keep in mind, these high yield cash accounts are going to make you money by having that emergency fund. So you're ready to go if something does happen, but you're still making money on it.

17:27You're not going to make as much as you would in the S &P 500. But don't just leave these emergency funds, sit in a savings or a checking account, get them into a high yield cash account on public. Very important. And so what's so important about having it not just sitting in a checking account, but also growing for you, making three, three and a half, four percent because you're earning on T-bills and the treasuries and stuff that they do behind the scenes. September's personal consumption expenditures price index, right? The PCE, a.k.a. inflation, right? Think about it like that. 2.8 percent year over year.

17:59So things are 2.8 % more expensive this September than they were last September, right? Think things like gasoline, housing, healthcare, food services, transportation, right? I'm reading all the way through here. 2.8 % more expensive this year than they were last year. And so if your money is sitting in a checking account, you just lost 2.8 % buying power. Where if it's sitting on Publix high yield cash account, you're earning 3.5 % or 4 % on it. Well, congrats. You're keeping up with inflation, right? So that's why it's important to not just sit in a checking account, but actually, you know, moving and shaking for you in the right ways.

18:32Now, our next question comes from Vicky F. Vicky says, Hi, Robert and Austin. Thank you for all of your valuable information. I'm selling a condo that I've had for 25 years, and it's been a rental for about 16 of those years. I live in California. The condo is located in Colorado, and it's just been harder and harder to manage and maintain. It's only about 500 square feet, and rent has actually gone down the last couple of years. Also, the last few years it was riddled with maintenance issues both in the unit and the building. I paid$105 ,000 for it in 2000 and unfortunately I'm only going to walk away with about$83 ,000 when I sell it after closing costs and paying off the mortgage and things like that.

19:09I'm hoping to reinvest this money in the next year or two into what will be my retirement home here in California. I currently own a condo and that has appreciated nicely over the last eight years. So between the two property sales, I could get something that would actually be better as I approach my older age. So my question is, what do I do with this$83 ,000 until I'm actually ready to buy my home that I want to retire in? I can keep it in a high yield savings, but I feel like I'm not earning enough. I could put it in the markets, but it's kind of volatile right now. For reference, I'm 51, single, make about$100 ,000 a year.

19:41I have half a million in a Roth 401k,$40 ,000 in a traditional IRA,$100 ,000 in a Roth IRA, $26 ,000 in my bridge account, and I have a small crypto account. I also have a fully funded pension that will be over half a million when I retire in 15 years. Interesting situation here, Vicky. Robert, I'll let you pick this one off. Yeah, I think Vicky's in a great situation. I like where her head's at. Here's where my brain goes. 51 years old, plenty of time. The markets are a little shaky right now. I think it's a buyer's market, so that's something to consider. But if you were going to put this off for one to three years, I like the idea of the high yield savings.

20:18You might leave a little bit of money on the table as far as growth and gains, but you're going to be safe because it's not going to go down in a volatile market. If you're going to push this off to three, four, five, six, seven years before you buy the retirement home, I would definitely get these funds invested into that basket of index funds we talk about and get some income too because you already own SPYI, QQQI. I like those two as well if you want to produce some income, but you don't necessarily need the income right now because you're doing so well. So for me, I would invest them if the timeline is further out to purchase the home, let's say past three years, because then I think you'd be leaving too much on the table just in high yield savings for that long.

21:04That's exactly what I was going to say, right? Because if your timeline is three, four, five, six, seven years to buy this forever retirement dream home, then yeah, park it in the S &P 500, maybe split it up 50-50 between the S &P and the NASDAQ, or maybe get some international, whatever you want to do there, and just have this money growing for you at 6, 7, 8, 9, 10, 12 % per year on average over that 3, 4, 5, 6, 7, 8, 9, you know, period of time. And that's going to allow you to say, okay, cool. My 83 is now worth about 150. Rock and roll. I now have a bigger down payment. Or, hey, this 83 is now worth 106.

21:38That's better than if it was earning 3 % in a high yield savings. And now again, the key here is that three-year time horizon because we have no idea what the S &P is going to do week to week, month to month, year to year. No one knows, right? But over a long period of time, three years, four years, five years, I'm pretty certain the S &P 500 is going to be trading higher in five years from now than where it is today. And so Vicky, if you have that horizon of time where you can say, yeah, I'm cool having my money invested for three, four, five years as I sort of save up for this down payment, you know, rock and roll.

22:10Now, the thing you might be thinking about too, Vicky, is wait a second, guys, what about taxes? What if I have this account that grows from 83 to 150? Aren't I going to owe taxes on those profits of about 70 grand? Yes, you will. But there'll be long term capital gains. They'll be taxed at probably around 15%, depending on how much money you make. You'll probably owe the state of California a little bit something as well. But I think people forget that owing taxes on an investment means that you made money on that investment. It's okay to pay taxes on an investment because congrats, you made money, right?

22:41Pay your taxes, take those profits and deploy them as a down payment into this forever retirement dream home that you're excited to purchase in the next Let's call it three, four, five years. Our next question comes from Pete. Pete says, hi, please keep me anonymous by calling me Pete. All right, Pete, how's it going, Pete? I'm a big fan of your show. Love how you tackle financing and investing topics. I'm under contract to buy an assisted living property for$3.75 million. The seller is carrying$750 ,000 of that via a loan. My bank will finance 80 % at about a 7 % interest rate. I have a brokerage account with$2.5 million invested and another$500 ,000 in cash.

23:22To increase the cash flow of this assisted living property, does it make sense to put down$1 million against this loan by using$500 ,000 of cash plus$500 ,000 from a line of credit on my brokerage, which I can repay in a flexible manner? This will reduce my bank loan to$2 million with a cash flow of about$22 ,000 a month. If I don't put down any extra payment and I'm fully leveraged, my cash flow drops to about$15 ,000 a month. Given these options, what would you recommend to maximize cash flow and liquidity? What a good question. So let's talk through the math, Pete. All right. So I've got my calculator pulled up here.

24:00Pete's saying, hey, I could make an extra$7 ,000 a month if I essentially get rid of a million dollars out of my universe, right? So$7 ,000 a month turns into$84 ,000 a year in pre-tax cash flow. But to do that, you're going to have to put down$500 ,000 of cash, which if that$500 ,000 was invested earning 7, 8, 9, 10%, it's about$50 ,000 a year. So I think, okay, cool, we can talk about that. And take on$500 ,000 of a line of credit from your brokerage. You're going to have a little margin loan, a loan against your investments of$500 ,000. So all in now, we're talking about a million dollars of liquidity out of your universe that's going to be used to make an extra$84 ,000 a year.