Finance Friday: How to Use Your Home to Retire YEARS Earlier

Mindy:
Welcome to the Bigger Pockets Money podcast, Finance Friday edition, where we interview David and Danielle and talk about aggressively pursuing financial freedom and setting yourself up for financial success through big life changes. Hello, hello, hello. My name is Mindy Jensen and with me as always is my back to house hacking co-host Scott Trench.

Scott:
That’s right, Mindy, and I am here as always with my serial live-in, flipping awesome co-host Mindy Jensen.

Mindy:
I love that. Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story because we truly believe financial freedom is attainable for everyone no matter when or where you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business or deploy the equity in what is likely your biggest asset, your housing, to the pursuit of financial freedom, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.

Mindy:
Speaking of getting things out of the way, Scott, I am going to blast through this disclaimer that says the contents of this podcast are informational in nature and are not legal or tax advice and neither Scott nor I nor Bigger pockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants, regarding the legal texts and financial implications of any financial decision you contemplate so that I can get to this big announcement. You’re house hacking again? I thought you were a renter, Scott.

Scott:
That’s right. On April 30th, I moved back into a house hack over the property I own.

Mindy:
What’s going on?

Scott:
We enjoyed our time living in a rental in the wash park, a nice kind of posh area here in Denver where there’s a beautiful park and we decided we want a little bit more space. I think in 2019 or 2020, I with a partner bought a duplex out in Lakewood about 20 minutes west of Denver, just nestled right close to the mountains here. Anyways, this is a big duplex. Each side is five beds, three baths, so that’s 10 beds, six baths total. It’s got a nice yard on each side, a garage, all that kind of stuff. The mortgage in the property is 3,200 and the other side pays 2,700. So I’ll pay rent, this is a slightly smaller side of just slightly less than that, to my own business that I own with a partner right in there, and that will recycle pretty nicely and allow it to be a pretty cost-effective way to live with a little bit more space and really good financial decision.
I was a little apprehensive. “Would I really like it?” and I’m like, “I love living there.” So yes, I would absolutely live in the rental properties that I own. I have lived in multiple of them to this point.

Mindy:
Nice.

Scott:
We’re loving it so far. We’re a couple days in and still unpacking and unboxing or whatever, but I’m excited.

Mindy:
Well, that’s great, and then the baby has a little running around room when she starts to run around.

Scott:
Oh, she has tons of space. It’s so great. We’ve got our master, we’ve got the baby’s room, we’ve got a nice living room area with a fireplace. Then downstairs we have a main area with our very non Bigger Pockets money friendly 77 inch flat screen, and then my wife’s office in a guest bedroom, which will double as my office. It’s perfect. We’re thrilled with it and it’s luxury living for sure. Luxury house hacking, I guess, if you want to still call it house hacking. But we’re back.

Mindy:
I’m coming to your house for the Super Bowl next year, Scott.

Scott:
Go Birds. My Eagles will be back. They just had a fantastic NFL draft.

Mindy:
I was going to say congratulations to the Philadelphia Eagles on their amazing draft success. As always, the Bears disappointed.

Scott:
The only one I’m happy with this move is our cat Fred. He’s not really enjoying the new place quite so much. He’ll probably take another week or two.

Mindy:
He has more space. Come on Fred, get with the program.

Scott:
He’ll eventually come around.

Mindy:
All right, well today, Scott, we are speaking with David and Danielle who are considering a big move just like yours. They are looking into ways to use their primary residents to further their financial position. In the beginning of this show, I run through their numbers and it looks like they have a deficit of spending. We find out a little bit later that that might not totally be the case. So stay tuned to this episode and before we bring in David and Danielle, let’s get to our money moment. This is the new segment of the show where we share a money hack, tip or trick to help you on your financial journey. Today’s money moment is are you paying for a gym membership? Check your health insurance policy. Some health insurance plans will reimburse you for gym memberships and other fitness related expenses. Do you have a money tip for us? Email [email protected].
All right, before we bring in David and Danielle, let’s take a quick break. David and Danielle have three kids and are interested in figuring out their path to FI. Last October, Danielle left her job, which has put a bit of a strain on their finances. They are currently overspending by almost a thousand dollars a month. Danielle and David, welcome to the Bigger Pockets Money podcast. I’m super excited to talk to you guys today.

Danielle:
Thank you so much for having us. We’re excited to be here.

Mindy:
Let’s dive into your money snapshot. I’m showing a salary of $5,000 a month with bonus potential up to $30,000 a year depending on performance. On average, about $5,000 net every three months. Monthly expenses, I’m showing 5,800, so overspending by about $800 a month. And overspending, I mean more than what you’re bringing in. We’re going to look at these expenses a little more closely than we might in a different episode. Mortgage, $1,400 a month. That’s property tax and insurance. There’s no HOA. I think that’s a great mortgage payment. Utilities 371, gasoline 200. Oh, groceries 1200, restaurants 500. Guess what I’m going to talk to you guys about? Dun, dun, dun. Subscriptions 25, gym 60, car 70, daycare 800. But Danielle doesn’t have a job. I see another topic of conversation. Gifts $50, entertainment $85, travel $220. Miscellaneous. I’ve got medical 200, home maintenance 200 and pets 80. I did call out a few things that we will talk about later.

Scott:
Quick question on that. Those are allocations. You are estimating for those types of expenses, not those are not actuals, right?

David:
Those are based on the past four months. We just averaged out the cost and that’s what it kind of is.

Mindy:
Let’s look at where that money is going. We’ve got investments of $62,000 in cash, $15,000 in a brokerage account, $25,000 in a traditional IRA and $9,000 in a Roth IRA, and the only debt is 130 on a mortgage.

David:
Yep, that’s right.

Mindy:
Well, that’s awesome. Let’s celebrate that. There’s no outstanding debt except the mortgage, which in my opinion doesn’t count because you got to live somewhere, so that’s good.

Scott:
What’s the home equity house value?

David:
The house value is about 310,000.

Scott:
Awesome. So we got 180 grand in the house inequity.

Mindy:
Danielle, why don’t you give us a bit of an overview of your money story?

Danielle:
I started working at a young age when I was 16 in the restaurant industry, busing tables. At 18 I went into banking, so I’ve always wanted to earn my own money. However I spent it, I spent it quite easily. My parents didn’t really teach us about savings, more than, I always heard, save 10% of every paycheck. But I guess occasionally, not too often and it wasn’t shown to me. They would say that, but maybe I didn’t trust it. I just never really thought about financial independence. It wasn’t really something that I was aware of. I grew up here in Texas and my granddad worked until his last day on earth. I literally have been shown that you work until either retirement at a very late age or until you die, and that’s just the mindset I had with you can enjoy your life and spend or save slowly over time.
I began saving up through the bank that I worked at. I had a little retirement account going and a 401k and over time that grew to about 15 grand, and then in my previous marriage I wound up with someone who had made very unhealthy financial decisions, is used to taking out loans and things like that, and I kind of had this decision that we went through for me to stay home with our kids for a year that I needed to cash in my 401k of 15 grand to live off of. That was a very unwise decision, I later learned. I didn’t really think about it at the time how detrimental that would be to my future financial life. So cashed that in and then from there it was really a life of financial strife, living off payday loans and it was really hard.
I eventually became a single mom, I had to stay at home for a little while and then start out on my own and literally build back and get into a career. I went down the road of getting into sales and working really hard and I finally saw that I could have a really good income, I could make a really good living with sales. So met David and we were doing really great until last year when I reached a point of burnout in my career and I ended up not planning it but giving up and just for my mental health, just saying, “I can’t do this anymore, unfortunately,” and without thinking about the repercussions of that. That put us in a really difficult place and ever since we’ve been struggling, we’ve been having the issues come up. It’s been really tough.
I met David and he really changed my way of thinking and taught me about financial independence and how that could be a life for us one day that we could reach FI at a young age and really enjoy our life and travel and I became fully on board and that’s kind of where we are today.

Scott:
David, can we hear a quick little bit about your money story?

David:
I think mine starts back in Hungary. That’s where I grew up in Europe. I started working in 2015 and I discovered the concept of financial independence and I was reading the blogs of Mr. Money Mustache and Rockstar Finance and all these different things. I knew about index funds and I knew about real estate investing, but in Hungary there was no platform to do that. I had it in my mind, but I wasn’t able to do it, so I put it aside. But even back then, I was lucky enough to live in an apartment that my parents bought so I didn’t have rent payment and I thought to myself, “Oh, if I just moved to Nepal, I could rent out my apartment and basically live off the income.” I always wanted that. I just didn’t really have … it didn’t seem realistic to move to Nepal. It’s not something I wanted to do.
But then I moved to the US and after we got married with Danielle, it really became a whole different ballgame because previously I had a backup plan. I thought if everything goes sideways, I’ll just move to Nepal and live off my rental income. But when we got married and we had kids, that wasn’t an option anymore because we had to be here. The struggle got real where we realized if we’re going to live here, we have to start making more money and saving more money and just be able to cover our expenses.

Scott:
Awesome. Walk us through what you’re doing currently for work.

David:
I work in recruiting. I’m a talent sourcer. That’s a level below a recruiter or people call it a head hunter. I go and identify talent, I message them and try to give them a job.

Scott:
That comes with a large amount of upside potential. Whenever you place a candidate, you get a large bonus. Is that correct? Or as you place more candidates?

David:
Typically that’s how it works. For me, I get a base salary though of $80,000 and then there’s a on target earnings component. A quarterly commission. If I hit my targets, I get paid out the quarterly commission.

Scott:
What I’m observing about your situation when I combine this is whatever the past decisions here, you have, again, zero debt, you’ve got tens of thousands of dollars in liquidity and tens of thousands more in investments, 180 grand in home equity, and this situation of being cashflow negative clearly hasn’t been going on for a long time. This is a new situation, at least in the sense of the combined finances. Is that right? Is that driving with reality?

David:
That makes me very nervous, especially given the fact that with the ex-husband, we’ve been going to court every year spending about $20,000 a year in legal fees and so it’s uncertain whether that’s going to keep happening and when a big expense might come up. Even if we’re just running out of $500 a month, if all of a sudden we get a $10,000 check from the attorney, then that scares me a lot.

Scott:
You have reason to believe or at least reason to worry that a liability that does not exist in the debts that … anywhere on your financial statements exists and you’ll have to shell out cash and this coupled with a very slowly declining, I imagine, savings account are the two primary concerns in the near term.

Danielle:
Yes.

David:
I would say so.

Danielle:
We’ve had some issues with the home that’s come up that we dip into a few thousand here, a few thousand there. We live in an older home, it was built in the ’80s and these issues are unforeseeable as to when they’ll occur next. It kind of feels like it’s one thing every month that pops up. Along with the attorney who charges us not every single month but about every other month or so and it’s thousands of dollars at a time, so our court should be ending at the end of this month, our whole case, but we would be happy to walk away, but we don’t know if they file something again if they don’t get their way, and so in a year from now, we’ll be in this situation again. That’s what we don’t want.

Scott:
Well, we’ve done a lot of BP money episodes here and whatever irresponsible is, your current situation is not that. You’re doing great here, but we are, we’re going to attack the root of the problem here and brainstorm some ideas to solve it nonetheless.

Mindy:
I have an idea. Let’s start with food. I’m showing $1,700 a month in food. What does a typical grocery shopping excursion look like?

Danielle:
Well, part of it is a bunch of baby diapers and wipes, to be honest, and baby necessities. I almost feel like we should budget that in a separate area, maybe miscellaneous or something. Start putting that there because the baby requires that every week. David’s gluten-free, so his needs from the grocery store, everything is hiked up for gluten-free products. We buy gluten-free in addition to regular products as well. We’re both pretty good eaters ourself. I like to cook. I like to cook a lot a bunch of family meals at home, but typically at the grocery store, I would say the cheapest we could get out of there for is about 120 bucks. That’s I did good. I feel like I did well-

Scott:
For a week?

David:
No.

Danielle:
Would you say? Or three days, four days?

David:
Well, I think the problem is that whenever we go shopping we always miss something that we might need or we forgot to buy snacks for the kids to go to school, so then we go back to the store and end up coming home with another a hundred dollars worth of items.

Mindy:
Yes, I live that same exact life because I always just get one thing and then you don’t just get one thing, you get 15 things and if that was once a month, it’s not a big deal, but when it’s every week or several times a week, it gets to be a very big deal very quickly. I would challenge you to take time and sit down and make an inventory of what you’ve got and make a shopping list. I read this book by Steve and Annette Economides, America’s Frugal Family Go Shopping or something where they go shopping once a month and that’s it. If they forget it, they just don’t go back for it. That was huge in changing my mindset about going to the grocery store. I would challenge you to give yourself a couple of weeks to really get used to this, but shop when you are not hungry, when you don’t have the children with you and when you have time to make sure you have everything on your list. Make a list before you go, only get what you need and then leave.
Another way to do this if time is an issue is do ordering online and curbside pickup so that you’re not going in, you’re not tempted to get this one thing. You can shop on your computer and then hold it for a little bit. Come back, “Oh, I forgot the bananas. I forgot the fruit snacks. I forgot the strawberries,” and shop the sales. We have had several episodes over the course of our existence where we talked about ways to save money on groceries. Episode three with Erin Chase from $5 Dinners, she recommends shopping the sales. “Oh, chicken legs are on sale this week.” That’s what you’re going to eat this week. You’re not going to go for the steak even though you have a hunger for it because it’s $10 a pound and chicken legs are 69 cents a pound.
Now let’s talk about restaurants. How frequently are you going out to restaurants?

David:
I would say on average about once a week maybe. When we go out with the whole family, it easily goes to $130 or so, if we all five of us go. So around once a week, sometimes twice a week, but we get a lot of coffee to go.

Mindy:
I would just look into making coffee at home. I know this is not a huge deal every once in a while, but when we’re trying to reduce our spending, you can get really, really great beans and figure out how to do it at home and then your entire expenses for one month is on the espresso machine. I’ve got a great … I can’t remember the name of the espresso machine, but it’s like $99 and it makes … I’m not a espresso connoisseur, but it makes really good espresso. I pour it on top of my regular coffee and it’s fantastic and that was … now I don’t go out and get coffee out, I can make it at home and it’s the exact way I want it. That could be a way to cut down some expenses. You have an additional cost at the beginning, but then now you can make it at home all the time without feeling so guilty.
I would encourage you to cut back on that restaurant spending just because right now you do have the deficit, but look for ways to cut out the spending so that you can continue to have the things in your life without spending full price or retail price for it. Something we haven’t talked about, Danielle, is do you plan to go back to work?

Danielle:
Yes, yes, definitely. Quitting my job wasn’t something that I’ve planned. Definitely was a heat of the moment thing, which was terrible that it got to that point, but I have been interviewing tirelessly and I do actually have … finally, I have two offers on the table, so I’m actually reviewing an offer today, later this evening, with one company. Yes, I’ve always planned to go back to work and I just never thought … I thought that I would snag something right away, just kind of transition into another role immediately. I didn’t even plan on taking a break, but it was as soon as I think a lot of the … I work in tech and the layoffs started happening and the job market became flooded and the competition is fierce. For a lot of the roles, there were over 50 applicants that they had through the whole interview process. It was just really tough. I’ve been doing interviews weekly for months now. So finally I do, I have multiple offers to consider, so I’m really excited about that. It looks like I’ll be starting at the end of May on the 30th.

Mindy:
Oh, that’s fantastic. What sort of income are we looking at here?

Danielle:
It looks like it would be no less than a base salary of 55,000 per year. Trying to get that up a little bit. Then there’s some salary, some commission potential in addition to that, roughly averaging about 2000 a month possibly.

Mindy:
Your plans for that will be to replenish the emergency fund, and then what?

Danielle:
That’s really what brings us here. Another thing that brings us to this conversation is we don’t want to make the same mistake again because where I was at previously, I felt like we were kind of living life large. Our kids want for nothing, but we were not taking advantage of that additional … we could have been saving 5,000 a month when I had my previous job and we weren’t really saving anything. It was just all kind of going out the window. We want to be very careful now to decide where can we put our savings, where can we invest to help us along in our journey to financial independence.

Scott:
I have a bunch of questions here. This is the whole game. We’re going to have $55,000 in annual income above what we thought. This completely eradicates the overspending by $800 issue that we came in with. What is going to happen for childcare, what’s happening currently and what will happen after you return to work?

David:
Right now we still pay daycare $800 a month and we’re planning to keep that because we both work from home and it’s very difficult working with a screaming baby in the background.

Scott:
That’s excellent from a price plan perspective, you got to get hook me up because we’re going to pay much more than that.

David:
Yes.

Scott:
Do you keep that in place, Danielle, while you’re not working because it’s hard to get into that same program or what was the rationale for that?

Danielle:
Yeah. Well, here’s what actually happened. When we moved from the Austin area up north a little bit to Temple, the cost of living is slightly less than where we were and so we were really excited about the cost of daycare and signed him up immediately, planning for myself to return to work and to be able to have that ability to interview without the interruption. However, in January we did realize that, well, nothing’s coming along, I’ve been interviewing for a few months, maybe we should remove him from the program so that we can take that $800 off David’s plate and I can contribute in some way. Though not financially, I can contribute with childcare.
Well, the daycare was amazing and very gracious and they offered us half off of the tuition, which was amazing. They offered us $400 a month moving forward only temporarily until I returned to work. I know, and so we were really excited about that and decided okay, now I should really ramp up the interviewing process and take advantage of this less of price we’ll be paying. That cost has gone back up now, so the 800, as of last month and luckily I have a job that I’m about to start. So that was the rationale there with keeping him in daycare and keeping our sanity at home during the day.

Scott:
This is wonderful. Now let’s say that we didn’t just have this whole conversation on groceries and restaurants. As soon as you return to work starting June 1st, so month of June we’re going to bring in another at least $2,000 to $3,000 a month, let’s call it $3,000 a month after tax, that you can deploy towards whatever you want at $36,000 annualized. Is that right?

Danielle:
Yeah.

Scott:
I agree that there’s things to look at in the expenses and this month would be a really good month before you return to work full-time to really kind of put in some systems for keeping those types of expenses low. But now we’ve got a whole different problem of we’re not … so what are we going to do with all this money? By the end of the year if you don’t have a settlement problem that comes out of the ongoing legal situation that you described earlier, you’re going to have $100,000 in cash in the bank. What do you want to do with that a hundred thousand dollars by this time next year? That’s one way to put the question.

David:
I think that’s the big question. Something we wanted to get some advice or maybe brainstorming session on because when Danielle left her job, that really forced us to think about our money situation and now we’re kind of turning it around. When she gets a job, we’re going to have all this extra money that we don’t want to spend like we previously did, but where do we put it?

Scott:
Let’s go through what are the top options you’ve been considering?

David:
Well, we’ve considered real estate. We’re both really interested in it. Danielle’s been wanting to run her own Airbnb and out here where we live in Temple, it’s a big medical community, big veteran community, and we think that our house that we live in now could be a great medium term rental possibly. That’s something we’ve considered putting some of it into low cost index funds, but we haven’t really figured out what our best bet is.

Danielle:
What direction we want to go. I have another idea as well too. With the layout of our home, we’re in a classic … maybe you would call it ranch style home from the ’80s, and the way it’s builds out is that you could split our home by building a door between our kitchen and our laundry room hallway and garage area. We built a door there. We could literally rent out that as a side of the house as a living space for a family. They would have access to one master bedroom, a laundry room. That doesn’t come without some renovations as we would have to fully close in the garage and put in a kitchen and insulation and make that space livable. But my idea is to house hack in that way by putting in some renovations and being able to actually rinse out part of our house now and put that towards our mortgage payment here, but that does require some renovations and we don’t know what we’re looking at cost-wise with that.

Mindy:
I would look at getting a quote. Talk to a contractor and see what that would cost. Are we looking at $20,000? Are we looking at $200,000? I’m thinking off the top of my head it’s going to be $30,000, $35,000, but I don’t live in Temple, I don’t have any contacts there and I don’t know what your situation is. But for 35,000, what could it rent out for? If you could rent that out for a thousand dollars a month, you’ve got three years of payback before you start generating income. Could you do any of the work yourself?

Scott:
If you moved out of this property and rented it as it is today, how much would it rent for?

David:
Hopefully around 2000 a month. Conservatively, maybe 2,200.

Scott:
And tenants would pay utilities in this place, so you would be clear in 2000 minus your 1450 mortgage payment?

David:
Yeah.

Scott:
I think you’ve got at least a break even, if not a slightly positive rental here, especially if that number is conservative on a standalone basis, is your property zoned to have multiple units? Would you be illegally allowed to separate it into two units or would you be operating a kind of illegal duplex if you did that renovation?

David:
Well, we looked into zoning for adding a tiny house in the backyard or something like that and it seems like it’s zoned for that, but I don’t know if it’s the same rules for converting a garage into a living unit.

Scott:
I would evaluate that because you don’t want to spend … because if you can rationalize the investment as a standalone rental property, that makes this much easier. Imagine you’re not living in it and you’re like, “Hey, I own this place. Would I put in $35,000 to separate into two units? Would that add value to the property? And then what would the cash flow and returns be?” That will give you a very clear answer about whether to do this and I think it’ll be much more murky if you do it without understanding if it’s legal, if it’ll be a legal duplex when you exit or whether you can rent it out this way, and if you only run it on the income while you’re living in the property that it will produce. I think that’ll make the ROI of this a lot harder. Also, the official advice of course is to abide by all laws and do everything above the books anyway.

Mindy:
Yes. That goes without saying. However, something to consider is if you do turn this into a rental, where are you going to live? Your housing costs are almost assuredly going to go up because I’m assuming that you have a lower interest rate on this property.

David:
We have a fairly high interest rate. We just put a lot of money down. Our interest rate is 5.625%.

Mindy:
Oh, okay.

David:
All the equity we have in the house is just money we put into it when we bought it.

Mindy:
When did you buy this house?

David:
We bought it when? October, September?

Danielle:
September.

David:
We sold our previous house and we were lucky enough where we got a big chunk of money out of that and we just rolled it all into this new house.

Scott:
One of the things that a 5.6% … I thought you said 5.6%?

David:
5.625.

Scott:
.625. At that interest rate, that brings up another option here, which is just pay the thing off. You’d be completely done in two years if you took your current cash position and the savings that you’ll generate over the next two years to pay it off. Is that like the math that’s super, super awesome and crazy here? No, the spreadsheet might model out some other things, but that then chunks you down to … that completely solves the spending issue here and allows you to have a very stable position that you can grow from the other side. I won’t necessarily push you down that route. It’s just one to consider and it’s a very simple and freeing choice if you choose to go.
The other option, but I think the fact that you’re willing to use this house as an asset is why you’re going to be successful whichever direction you go in. You can hold this property as a rental and put down another down payment on a new property. You can sell this thing and take your proceeds out and move into a true house hack, like a legal duplex for example, that would have those items or one that’s zoned for that type of project. You can go down the Mindy route of a live-in flip, which is perhaps the most powerful option available, because over two years, you can do it as fast as you like, but if you stay there for two years, you’ll get the tax benefits of being able to sell the property for a tax-free capital gain. I don’t know, but I think doing that with kids might show a lot of value creation to them, might be a very valuable life lesson to see the property actually getting fixed up over time and improving if that’s work that you can do yourselves or do some of the work yourselves and hire it out.
I mean, that’s your biggest asset and allocation decision here is this house and I think you’re thinking about it the right way in racing towards financial freedom. Any reaction to any of those ideas or thoughts?

Danielle:
I agree with that. It’s something we’ve talked about a lot. It is a valuable asset and it’s really close, like he said, to the hospitals and I think it would rent very well. I think we have to definitely give it a lot more consideration, but I’ll be researching the legality of blocking it off, just putting that dividing line between even if we do that, we still have so much house left, which is really awesome, so we could definitely get away with that I think. I think we would both be willing to sacrifice if we see the returns, the results a couple years down the line.

David:
It sounds like we have a lot of good options. We just really have to pick one and go with it, which is a good problem to have. I guess my question would be is which one would make us get to financial independence faster?

Mindy:
Winning the lottery, but we haven’t discussed that one yet. That one aside, I like the furnished rental idea and just because you decide to furnish the rental and rent it out medium term doesn’t mean you can’t do some short term, of course making sure that the local laws allow for it. I think your first homework assignment is to go to the planning department or the permit department and just talk to them. “This is where I live, this is what I would like to do. What are my options? What is the house zoned for and what does that mean?” Keep asking them questions until you understand what they’re saying. The permit people aren’t trying to be obtuse and opaque, they’re trying to be helpful, but they use a lot of language that they use in their everyday day-to-day that may not make sense.
So keep asking questions. “Oh, you can do this with it.” “Well what does that mean?” “Well, you can do this or this.” “Well, what does that mean?” “It’s zoned A4.” “I don’t know what zoned 44 means,” or whatever their zoning is. I’m not from Texas so I don’t know what any of their zoning is, but just ask them what they’re talking about and keep asking until you understand. If they say that it’s not currently zoned for this, ask if you can get a variance. What is the process for getting a variance? What is the probability of getting a variance? I went to my own local permit office and they said there is no way we would ever grant a variance for this. The seller was telling me, “Oh, you could build this huge apartment complex on this property”, and I went to the zoning department and they’re like, “There’s no chance you will ever be able to build on this property what you think you can build on here.”
It doesn’t matter what the seller’s telling you, it doesn’t matter what you want to do, it’s your property, but only to a certain point. So talk to the permit office first, but medium term is … I like medium term a lot because it’s still the furnace rental, so you’re bringing in more income than a traditional long-term rental that’s vacant. You can swap it out with the short term if you don’t have anybody right now for the medium term. Oh, July’s coming up and nobody wants to rent it for July. Maybe I’ll throw it up on Airbnb, again, according to the short term rental laws in your city, which I hope are very lenient and you can hopefully flip-flop back and forth. I have a medium term rental right now that is not allowed to be short term rental because of my HOA rules. So that’s another thing. I don’t think you have an HOA. Just make sure that you are reading all of the laws.

Scott:
If you’re asking what should we do to get the financial freedom as fast as possible and I’m willing to use my housing, have both of us work full-time and spend additional time after that arranging projects in real estate, okay, great. I love this. I think you’re thinking about the correct way. The first thing is can you turn this house into more of an asset? I think we’ve already exhausted that discussion. You need to figure out if that’s feasible. If it is, check that’s your first option. That’s a great thing. You spend a few tens of thousands of dollars and you’re able to generate 1500 whatever it is in rent per month. I mean, that’s going to be a killer return that will subsidize your housing dramatically and make a big difference in your financial position. Absolutely. It’ll probably also add value to your property in a material way in a short term.
If you can’t do that, if do your analysis and that becomes not feasible, then I think that’s where we have to say, okay, how do we tap the equity? Most of your wealth is now in this property, and so you have to either release that equity and put it to something that’s going to be more useful or more powerful for you by selling the property and moving into another property, perhaps a house hack. I think that one of the biggest opportunities in your situation if you don’t want to have roommates, of course, is a live and flip. Because that’s a way to add hundreds of thousands of dollars in value to your property if you’re able to find the right opportunities and really think about it like a business while you’re living in there. It’ll also allow you to live a luxurious life. If you can finish the flip in six months, you live in it for a year and a half and you enjoy all the benefits of your nice new home that you’ve created while sitting in a pile of equity that you can potentially redeploy or refinance or whatever with that.
I think that’s a great option to go looking for. If you’re going to house hack again, you are in, you said, an area with a lot of military presence, is that correct?

Danielle:
Yes.

Scott:
VA loans are assumable, so you may be able to find … you could be in the weird position in a 2023 setting where if you find that your current house hack isn’t feasible because of the zoning or whatever with that, you could sell this current house, pull out $180,000, have your 60,000 for 240, and probably take down any property in your local area assuming a VA loan, perhaps one at a 2% or 3% interest rate. That changes the game for you from a cash flow perspective if you’re looking for rentals in the area and military people move all the time, they get new orders and they’re gone. You’re going to have opportunities from a VA perspective if you have a large military presence. Those would be the areas that I would go fishing or sniffing around in to find great housing or real estate investing opportunities if you’re willing to go all out with your housing as the key tool, which I think is correct, but most people aren’t willing to consider it, so kudos to you guys for being so clear about your intent to use housing as the big leverage point.

Danielle:
I think David always was, and I just more recently came around once I read your book Set For Life, and then I came around and I was like, “Okay”, and I just dove right into, “We have to do this.” That’s the pathway I see to financial independence.

Scott:
Well, thank you for reading it and I agree. I think most people are not willing to go there, but if you are, then it becomes clearly the biggest lever in that. Then I bet you that after you do one of those moves, either dealing with your current house hack, which by the way, if you’re able to add value to the place and turn it into a legal duplex for example, you’re probably going to jump the value from what? 340 you said?

David:
310?

Danielle:
310.

Scott:
310 To something higher than that, and you can probably refinance at that point. Your interest rate’s not going to be that much higher than the one that you currently have, so adding value and then cash out refinancing if you want to use the equity again is not the same deal breaker for you guys as it is for most people in America today. You actually still have that … that’s the silver lining for your very high mortgage rate that you got in September of this year is that the cost to refinance it for you guys are not nearly as bad as for other folks. Then again, if you do that, whichever one of those paths you choose, you’ll probably still have six figures in cash to 150,000 to do another project. I wouldn’t do them twice at once, but you could conceivably have two projects done by this time next year or in 18 to 24 months, which would be a pretty sizable leap forward on your journey to financial freedom in addition to the 35,000 in cash you’ll accumulate over the next 12 months from your jobs, minus your regular spending.
How’s that sound as the beginnings of a potential plan?

Danielle:
It sounds life changing.

Mindy:
Sounds amazing.

Danielle:
Amazing, very exciting and hard to imagine. It just seems very difficult getting started, but I feel like it might be a snowball effect, like once you do the first one, then you learn from that, and then you can definitely have some more ammo to go for the next one. But this is all positive news. Things that we’re learning that we did not know about, like the VA loans being a assumable, had no idea.

David:
I think it’s really helpful just to have it broken down so clearly because we kind of had an idea of these possible scenarios, but they were just floating around in our head and we couldn’t really put a finger on, okay, these are three best options or something. Let’s just pick. It was like, “Should we do this? Should we do that?” It was a lot of talk without much clarity really on what’s a tangible option for us to pay.

Scott:
Well, great, and just to go one half step deeper on a couple of those, the house hack, you should be able to rule that out, either say yay or nay on that within the next month. That would be very achievable. You need to do some research with your city to understand the zoning and do that. Ask questions if you need to, set appointments and you need to get a quote or maybe several quotes from contractors if it is in fact legal for you to separate the units there and do something permanent that would add value. If it’s not, then you have some other decisions to make around whether you want to proceed with some variation of that, a tiny home or whatever, but that should be something … you could be clear on whether to do that or not by the end of May. We’re recording this May 2nd.
This on the flipping side, it doesn’t matter what the financing is for a flip. It doesn’t matter if the loan’s assumable or not because you’re going to have to add a ton of value. I mean, it could matter if it’s habitable, but you’re not really looking for a VA loan on a property like that. Where you’re looking for a VA or FHA loan, an assumable mortgage, is if you’re willing to move into the property, you have to live in the property in order to assume the mortgage, and it would work as a long-term rental, because you lose the advantage of that assumable mortgage if you refinance out of it. You don’t want to take a 3% mortgage over and then a few years later refinance it to 6%. That defeats half the value of that particular purchase.
That would be one where you’d want to not have to do a ton of work on the property most likely, or if you do, understand that you probably won’t be refinancing and extracting the cash for a long time. This will be a long term hold that would probably be a cash flow deal after you move out of that future hypothetical house hack.

Danielle:
Great. Thank you.

Mindy:
Awesome. I agree with all of that and I’m thinking, “Oh, I do this live and flip all the time. Why didn’t I go on that rant my own self?” Well, David and Danielle, thank you for reaching out to us and thank you for coming on this show today. I really enjoyed talking to you.

Danielle:
Thank you both so much. It was great.

David:
Thanks for having us on.

Scott:
Thank you, buy.

Mindy:
Okay, we’ll talk to you soon.

Danielle:
Bye.

Mindy:
All right, Scott, that was David and Danielle. That was a fun little twist. I think I should have asked them if Danielle was planning on going back to work before we jumped into their finances, but I think that that brings up a bit of a interesting point when you are planning on quitting your job. I would say if you’re planning on going back to work, if you want to leave a job and go to another job, start looking for the next job. If I had spoken with Danielle before she’d left, I would’ve given her that advice. Take your time, find a new job before you quit. I have worked some terrible jobs. I know that it can be so soul crushing to walk into work every day and be like, “Eh, I don’t want to be here.” But it’s a lot easier to find a job when you have a job.

Scott:
I also think if you’re working a job that is soul crushing, then just take a small pay cut. I feel like people don’t move jobs unless they get a raise, but if you just go from 60 to 56 or something like that in annual income and the job is less terrible, that’s a huge win and I think that that’s the way that you can escape something that’s sucking your soul out if you’re working all those hours. It’ll be hard to stomach the loss of four grand, but it’s nothing compared to taking several months off the job. I do want to point out, though, that what’s awesome about David and Danielle is that once she returns to work, they’re going to earn … these are two people who are making median incomes. The median income in this country is $64,000 a year. Both of them make less than that with their base.
David may make a little bit more than that if he has a good year, he has potential to make much more than that, but on average he’ll make a little bit more than that. This is nothing unrepeatable about this. A long history of good financial decisions got them to a place where they had cash to put down on a property here, so they had a stable base and the path to financial freedom for them, though, what I think is fascinating is it has to be done through housing if they want to get aggressive about it. Because we looked at it and we can zoom out and say, “You’re going to accumulate $36,000 a year, that’s 360 grand over 10 years. It’s not enough. It’ll get you halfway to a million, $500,000, but it’s not enough.” The best way to get to a large amount of personal net worth in a short period of time is start a business.
That’s not really an option that presented itself as immediately actionable for David and Danielle. They could always go down that path. This next best one is housing and most middle class Americans who are earning these median incomes are not willing to chunk out their home equity and reimagine how they’re going to do it. House hack, cut their house in half literally and rent it out to somebody. If you’re willing to do that, that’s the cheat code. If you’re not an entrepreneur and you don’t earn a six figure income or have two six figure income earners in your household, I think you have to go to housing and use it as a key strategy in your journey to financial independence if you’re a middle class American.

Mindy:
Especially now with interest rates so high and housing prices so expensive, changing the way that you look at housing is going to be the key lever that you can pull to change your financial situation. I don’t want to be like Debbie Downer and be like, “Oh, it’s going to be impossible”, but it’s going to be really, really hard to buy a brand new, beautiful, perfect house and still reach financial independence without having extraordinary financial circumstances already.

Scott:
You have to earn a high income, you have to have some other very fortunate situation come about, if you invested in Tesla 10 years ago like Carl here, or you start a business. I don’t know how you do it. I think that it’s sad that a lot of people are not like David and Danielle and willing to say, “You know what? I do need to evaluate my housing. This is not going to be the place where my kids go to high school or college. It’s going to be the place that pays for my kids’ college and our retirements after that.” I think that’s a harsh reality and I don’t have advice for somebody. I don’t have advice for David and Danielle to get to financial independence in less than 10 years or very close to it without using this, and I’m so glad that they brought it up and wanted to use it.

Mindy:
I could not agree more, Scott. All right, should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this episode at the Bigger Pockets Money podcast. He is Scott Trench and I am Mindy Jensen saying bye-bye, apple pie. Bigger Pockets Money was created by Mindy Jensen and Scott Trench. Produced by Kaylin Bennett. Editing by Exodus Media. Copywriting by Nate Weintraub. Lastly, a big thank you to the Bigger Pockets team for making this show possible.