Frank Advice on What to Do When a Real Estate Investment Goes Wrong

Mindy:
Welcome to the BiggerPockets Money Podcast, Finance Friday Edition, where we interview Shane and talk about cutting expenses.

Scott:
If you’re asking from a financial standpoint, I think you’re in trouble here, frankly, and I think that’s why you probably came on the show. You have a huge amount of debt here. You’re not generating any cash flow, although we will get to the cash flow. It’s clear you’re not racking up cash that you can then use to prepay this debt. Is that right?

Shane:
Right.

Scott:
And I’m wondering if a big reset might not be the answer here to do this, and you just sell both of those properties, take that cash and wipe out significant chunks of this debt.

Mindy:
Hello, hello, hello. My name is Mindy Jensen, and with me as always is my charming co-host Scott Trench.

Scott:
And with me as always is my throat tickling co-host Mindy Jensen.

Mindy:
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 are 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 completely reset your financial position, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I am very excited to talk to Shane today because he doesn’t have a perfect situation, but he does have some easy wins and some hard decisions to make. I think that having a discussion with his wife is going to be the number one recommendation for him. I think that there’s a lot of things to think about. I do want to reiterate that when we make suggestions, these are just suggestions and our suggestions should not be jumped into with both feet. I think you should take these into consideration and really weigh the pros and cons before making your decision, but then make your decision and follow through with it.

Scott:
Yeah. And I have pretty extreme thoughts on how to reconcile some of the issues that I found in Shane’s position. I address those throughout the episode, but I will also address those in the outro to kind of wrap those thoughts together. I stand by those thoughts. I think that that is the approach that I would take if I were swapping places with Shane.

Mindy:
That’s valid. Okay. Before we dive into today’s show, let’s take a quick break.
Okay, we’re back. Scott, what is up with you? How is the dad life treating you?

Scott:
It’s wonderful. Our baby girl is beautiful, snugly, warm, loud and just wonderful. We’re so thrilled.

Mindy:
Sleeping through the night, right?

Scott:
Not sleeping through the night. Yeah, I’m a little tired.

Mindy:
That only lasts…

Scott:
Two years.

Mindy:
Well, we’re going on 15 years. I’ll let you know when they sleep through the night. Okay, let’s bring in Shane. Today we’re talking with Shane who has a great salary, but also some pretty significant expenses. In fact, during his application to be on the show, he noted that his biggest pain point is blowing through the budget. Shane, welcome to the BiggerPockets Money Podcast.

Shane:
Thanks so much. Appreciate that, Mindy and Scott. It’s an honor to be on the show. Longtime listener, first time caller.

Mindy:
I love that. Well, let’s jump into your numbers. First we have a salary of $8800 a month, which is quite nice. I’ll take that, thank you very much. With a bonus of $10,000, which is paid out over quarter. So approximately up to 2500 is the potential per quarter. The expenses is where I am going to focus some time on because I think there are some wins, some easy wins, here for you. We have a mortgage of $1799, which is at a 2.99% interest rate, hooray. $23 monthly HOA. $300 for utilities, which are water, gas, and electric. Gasoline is 50 to $150 a month. Groceries are $1200. Restaurants are $750. Household, you have between 650 and 700. Solar panels, $80. Subscriptions, $224. The gym is 120. Shopping and entertainment is four to $500 a month. Car is $357. Phone bill is $292. Student loans $1,500 a month. We will come back to this one.
Miscellaneous $500 to a $1000. We’re also going to come back to this one. Charity, about a $100 a month. Travel, 500 to 1000, yearly. And then you had some expenses that weren’t separated out into business expenses, but I did that for you. Agency, which is real estate agency, $200 a month. Mortgage number two, 1836. HOA number two… Holy cow, I’m sorry I didn’t read this until just now, $720 a month. Utilities 150 a month. I’m wondering if the HOA covers some of those utilities, and a HELOC of $400 a month. Those are the expenses. Then we have debts.
We talked about the student loans just a moment ago. The student loans total $141,000 with variable interest rates from 4.25% all the way up to 8.5%. And there’s a mix of federal loans and private loans. You have a primary mortgage at of 321,000 at 2.99% a second mortgage at 275,000. It’s on a different house, I’m sorry, not a second mortgage of 275,000 at 3.86%. Another great rate. A HELOC of 81,000 at 5%. A car of 15,000 at 2.9%. Solar panels, $15,000 at 1%. Couches, $2000 at 0% for 60 months. Family credit card, 9000 at 24%.
I really want to stop right here and tell you do everything you can to pay this off immediately. Business card number one, $6000, and business card number two $1,000. And then we have investments of $80,000 in the 401k, $4000 in savings, $27,000 in the short term rental bank account to help pay for bills and cover the low spots when there’s a short, slow period. The second property, we have $12,000 invested and then Fundrise, in quotes, “play stocks”, $1500. So Shane, where can Scott and I help you most? What is your biggest pain point?

Shane:
Yeah, my biggest pain point is, like you said in the beginning, is really overspending on our monthly expenses. I had an original budget in plan, it just we’re having a tough time sticking to that particular budget.

Scott:
Who’s we?

Shane:
My wife and I.

Scott:
Awesome. And does that income include both your incomes?

Shane:
It does, yep.

Scott:
And that’s all pre 8,800 pretax with 10K pretax?

Shane:
Pretax, correct.

Scott:
Okay. So 8,800 a month. Let me do this quick math. So that’s 105 a year between the two of you plus 40, so $145,000 annually.

Shane:
Yep.

Scott:
You’re probably bringing home give or take a hundred grand after healthcare and taxes and other deductions. Does that sound about right?

Shane:
Sounds about right.

Scott:
Well, great. I think there’s two themes here that I want to dig into. One is what Mindy said, the expense side, and the other is the consumer debt. You have a lot of things that are financed right now, sucking cash out of your position on a monthly basis. And I think that combining that, it sounds like there’s a lack of control over the discretionary expenses that are coming out on a monthly basis. Do those sound like they’re in the right ballpark?

Shane:
Yeah, sounds pretty good. And I want to add to that too, of kind of controlling our monthly budget, I think adding to that as well as I want to take the projection of I guess my life path with money, but also entrepreneurship. I have my W2 workload right now, but I have my real estate license. I started following BiggerPockets because I am learning a lot more in this past couple years about real estate investing. I have been spending some time and money towards those different ventures of let’s call it direct mail, those sort of things that are in that credit card budget we’ll say, that are growing over time. My plan is where do I, I guess, spend time and money to grow maybe my other side of this venture that I want to take, this journey that I want to take in life to entrepreneurship.

Scott:
All right, Shane, one of the first things that pops out here is a large amount of consumer debt. We’ve got $15,000, $16,000 in credit cards. We got $2000 on top of that. That’s $18,000 for couches. We’ve got $15,000 on solar panels, so now we’re at, what, $33,000? We’ve got a car at 15,000, that’s $48,000 in consumer debt. We’ve got the HELOC, which I would consider consumer debt, although it may have been used to purchase second home. I want to hear about what of that is consumer debt and what of that was used for investment purposes. Walk me through those things, because if my read on that is true, then we’re actually spending a lot more than what you listed in this monthly expense. We’re substantially negative if that worry is founded.

Shane:
Right. And I think the 6000 that’s in the credit cards does need to be paid off from some of the savings account for the short term rental. That one is a little bit of my… I would call it my business account. I guess my personal account to pay off some of the short term debts that I haven’t paid off yet, as well as the stuff that I pay for my agency ventures. And then the other credit card is just one that, with the 9000 right now, that did get away from us slowly over time. We have in the budget to pay it off every month, but then we get stuck with maybe $1000 or $2000 every month. And then it just kind of keeps climbing. We’ve been in that cycle for the past six months now, trying to figure out where that came from.
And in the past month, I would say I probably saved a couple thousand. I’m sorry, what was the question in terms of how I got with all those debts and then where I calculated them from?

Scott:
Yeah, how’d you rack up this a $115,000 in debt, give or take?

Shane:
Including student loans and the mortgage and all that kind of stuff?

Scott:
This actually does not include the student loans. So the HELOC is 81, the car is 15, the solar panels are another 15, the couches are 2000, and then the credit cards are another six 16.

Shane:
So the couch we got when we purchased the house three years ago. The other couch does go for the short term rental. The $80,000 is what we used for the short term rental. We used about $30,000 of that for the renovation of the condo that we have currently. And then another 20,000 for furnishings, so that puts us at roughly 50. And then we spent another 10 or so thousand of that through the… We bought it in January. We didn’t start renting it out until April through the renovations, so paying back the mortgage through that fund as well. And then I think I still have about $10,000 of it sitting in the account.

Scott:
Great. So did you have this other credit card debt and these student loans, and these other types of things… I’m sure you have the student loans. Why did you decide to buy the short term rental instead of paying off that debt?

Shane:
So why we bought the short term rental, it’s kind of a long story. But to make the long story short, I wanted to get into real estate investing. We had our primary house already and I know that our house, through the past couple years, like most markets, have grown in equity substantially. I knew that I had a source there and then I left my job previously and then I took the same job back with this company where I could access a loan through my 401K, and realized that I could use that money to find an asset that could make me money so I could use that income down the line or in the future to pay off my other debts. I would only use the income to pay off my debts versus using my house debt to pay off my other debts. Because I did lock in such a low interest rate when we did buy it.

Scott:
Great. Do we have a 401K loan as well to know that we should know about?

Shane:
I do. I don’t know if that’s on there or not. That isn’t a part of the $8000 income.

Mindy:
It’s not.

Shane:
Okay. I might have left that one out.

Scott:
How much have you got?

Shane:
That one’s about 40,000. 40,000 for the down payment on the condo and that is at 4.5%.

Scott:
All right. Walk me through the numbers on this. How much is the Airbnb worth right now? The debt balance is 275. What is the income that you’re generating from the property, and how do you calculate that?

Shane:
Yeah, so we owe about 275. We’ll go to that $700 HOA fee. That includes everything besides the electricity on the property. So it includes water, sewage, garbage, maintenance of the property. It’s kind of tough to break it down. Right now my expenses are about $3,000 a month with the HOA on top of the mortgage for the property, and then the expenses. Plus, if you want to include the loan that I took against the 401k that I pay back into the 401k, that adds probably another $700 on top of it. I calculated it to be around was that $40,000, $45,000 a year for expenses on the property. And since running since April, we’ve grossed 50.

Scott:
Okay, so April. Where’s the property located?

Shane:
In North Myrtle Beach, South Carolina.

Scott:
That 50 is great through since April, but you’re not going to get anywhere near that for the other six, seven months of the year. That’s going to be the big income. Those are going to be the income months. What do you anticipate for November through March, through April, for the next six months?

Shane:
Yeah, so November, December, January are typically slow. There are usually long-term renters in the area. We have a long-term renter scheduled for… Well, I guess more a midterm rental for January, February of next year that already locked in. But they’re doing it for about 3000 bucks for the months versus that’s probably what we make a week in the summertime.

Scott:
Is that per month or $1500 per month?

Shane:
It’s 1500 per month. Yeah.

Scott:
So I think it’s reasonable to assume a $1500 for six of the months of the year. What is that 3000, 6000, 9000 plus 50,000 for the other six months of the year to reflect the seasonality of the business. Is that a reasonable assumption you think 59,000 in total annual income?

Shane:
I would say that’s close to the projections what it’s looking at right now.

Scott:
Yeah. Okay. And what is this property worth?

Shane:
So we did renovations on it. Some of the units are selling unrenovated closer to the 400,000 mark. The ones that are more renovated on the ocean front side of the building, ours is kind of adjacent ocean front, are selling into the mid fours.

Scott:
So what you think a 400 is reasonable?

Shane:
Yeah, I would say that’s a safe bet.

Scott:
Okay. I like how you broke up those expenses. We have $60,000 in income, we’ll round up to 60. And we’ve got $45,000 in annual expenses including your mortgage payment, HOA, utilities, so on and so forth. That leaves you with 15,000 at income and you’ve got $125,000 invested in the property and equity in the property right now. I do think you’ll have some items on top of that, so we need a cushion of about $200 a month to take off that, but that’s reasonably close there. I think that my instincts before I went through those numbers were that you should sell the Airbnb, and that would greatly simplify the position. I know that you just bought it in April with that and just renovated it. But my instinct… And I think that’s not changing here. I think that there are some advantages. You could argue that you’re scraping out of return there, but we got to look at your whole position here.
You’ve got 141,000 in student loan debt, you’ve got a $275,000 second mortgage, you’ve got $81,000 HELOC on your primary, $40,000. I mean just excluding the mortgages, you’ve got 120 plus 140 is $260,000 in non-mortgage debt there, which you can really make a significant dent in. And then you’ve got another 30, $45,000 in debt that is really bad debt. And to be frank, in a couple of cases like the credit card debt, the car loan… I guess the solar panels and car loan are at low interest rates, but they’re still consumer debt. They’re not helping your situation here. And that’s really a lot of debt against the income that the property is generating and your primary position with this.
Let me ask you about your primary home as well. What’s that worth? How long have you been living there?

Shane:
So we bought it in 2020 for 368. I put about 35,000 down on it, so that’s what brings us to roughly the 320 that it’s worth, or the 320 left on the loan. In homes in the area are selling, I would say we’re in a fluctuating market. Things have sold for 640, I want to say four or five months ago, and now homes are sitting, so I think they’re selling closer to six now in my neighborhood.

Scott:
Okay, so that one we have a lot of equity in. I’m wondering, and I know this is really hard and we’re talking about a big, big thing here.

Shane:
You’re going to crush my wife’s heart.

Scott:
Yeah. If you’re asking from a financial standpoint, I think you’re in trouble here, frankly, and that’s why you probably came on the show. You have a huge amount of debt here. You’re not generating any cash flow, although we will get to the cash flow situation in your life. It’s clear that you’re not racking up cash that you can then use to prepay this debt. Is that right?

Shane:
Right.

Scott:
And I’m wondering if a big reset might not be the answer here to do this. You just sell both of those properties, take that cash and wipe out significant chunks of this debt and get set up in a new scenario that enables you to save a lot of cash. I’m going to hold that thought for now and we’ll come back to that because that’s the biggest change I’ve ever recommended on the show here. But that’s where my instinct is frankly, in your situation, because of what I think is a crushing amount of debt that’s coming against your position here. That’s really going to limit your flexibility. And if you do that, you’d free up close to $350,000, which would really dig you out after paying off the mortgages, the two mortgages, which will put you in a nice positive situation to then begin thinking about next steps here.
You could make an investment out of that that’s more sustainable given your situation and you’ll probably be able to clear out a lot of the… You’ll probably be able to move or something that in a way that would enable you to spend less on your housing on a regular basis and cut expenses. Go ahead, Mindy.

Mindy:
The only thing that makes me not want to agree with you is the fact that he has an investment loan on this property at 3.86%, which is not coming around again for a while.

Scott:
I agree with that and that pains me. But here’s the thing is you’re stuck in this. Even when we go through the advice that Mindy’s going to talk about with your personal financial situation, you are going to be grinding it out for five years, in my opinion, easily, before your position materially changes, where you’re able to then stop that grind and you’ll begin having free cashflow with which to invest or do some of the things you might want to do to enjoy your life. So I agree that that’s a huge deal, to exit these loans at these low interest rates. But I mean it’s all compounded against you at this point and you have this huge… I mean, how much do I want to add up here? We said a hundred and… I’ll do the math here and come back to that, but go ahead Mindy, finish your point.

Mindy:
Okay, then I’ll talk for a minute because I can hear people listening saying, “But he’s got such a low rate.” Yes, he does have a low rate. And if we go into the expense side, we can find some quick wins to pay down a couple of these credit cards. And just because we suggest something doesn’t mean you have to do it. These are just suggestions. But this is time to have a conversation with your spouse and talk about what you want for the future, what you want for the next five years, what’s worth giving up and what’s worth keeping in your life. The Airbnb is on up for discussion with the worth keeping versus worth getting rid of.
But back into your expenses, your primary residence, I see nothing to discuss with your mortgage, your HOA or your utilities. Gasoline being 50 to 150 bucks a month, nothing to discuss. Groceries and restaurants, you’re at almost $2000 for your small family every month for food. I’m wondering why this is so high. I’m thinking that there is some sort of organic food all the time or Whole Foods is the only place you shop, or perhaps there’s some dietary restrictions or allergies. I mean I’ve got some cousins who have some pretty significant allergies and groceries is just always going to be expensive for them. But if that isn’t the case, then I would encourage you to look for ways to cut your expenses at the groceries.
There’s the, what is it, the dirty dozen where you should always buy these fruits organic because they spray so much pesticides on them if they’re not organic. And then there’s other fruits like… Avocados do not need to be organic. That skin is tough as leather. They’re not putting any pesticides on the avocado. Same with coconuts. You don’t need organic coconuts. They’re literally covered in wood. No pests are getting in there. I always think that’s the dumbest thing when I see-

Scott:
What’s your coconut budget, Shane?

Shane:
Coconuts are currently not in the budget, but I like the shredded ones that go on cakes and stuff.

Mindy:
Okay, well when you do have coconuts in your line item, make sure that you’re not buying organic because you don’t need to. Also, that brings up another point. We’re joking about line items for coconuts, but your miscellaneous category is $500 to a $1000. I think that that means that you have items in there that could be categorized someplace else and they’re just kind of being lumped into miscellaneous. And miscellaneous is a really double-edged sword, great and awful category because if you, “I don’t know what this is. That’s just miscellaneous.” But then it adds up really, really quickly.
I think miscellaneous is a $50 to a $100 category. If it’s costing more money, then it needs its own category. So you can see this, “Wow, I was putting coffee in miscellaneous, but I’m spending so much on it needs its own category. I really do value coffee enough so I’m going to take something else out of my budget so that I can afford this,” or whatever it is that’s in there right now. Questions about the subscriptions. You have $224 in monthly subscriptions. What are these subscriptions and do you really need all of them?

Shane:
That’s a great question. Right now it’s our cable and internet. I think also that includes our phone bill. I’m pretty sure that includes the phone bill. Phone bill is about $200 for AT&T, for just my wife and I, unlimited package. It includes Hulu TV, so that’s $70 for the TV package. And then I think that all comes with the Disney package, which is another $12. Trying to think of what other subscriptions we have. I go to the tennis, so being a part of this association, there’s a tennis club with the pool that we have. So the pool is $79 a month and then I go to a couple tennis classes a month, so another 20 to $30 for the classes.

Mindy:
I would challenge you to look at your usage of each one of those things. You’re paying $70 for Hulu TV. How much are you actually watching it and could you be spending your time in a different way? We’ve alluded to education, real estate education. Maybe if you take that line item out of your budget and put it towards education, you’re spending your time in a different way. You’re not watching TV. And I don’t mean to be preachy, but TV is just going to rot your brain. And some of those other ones, are you really using your tennis membership? Is there a way to pay for drop-in classes that’s less expensive? Are you really using your pool membership or is it all lumped in together? You do have a phone bill here of $292 that’s separate from the subscriptions. I’m going to introduce you to Mint Mobile.
Mint Mobile is my own cell phone provider and it’s something like 15 or $25 a month for four gigs and then another $10 a month for another gig or another four gigs or whatever. I never use all of it, so I don’t care how much it is. I would encourage you to look at how much you’re using your phone. Do you really need the unlimited package? Are you using just a bajillion gigs or are you using two or three, and you could get by with at $25 a month phone bill for each of you. That’s a huge savings. I mean let’s look at your phone bill right here. $292 versus my $50 a month. Now you have $242 to throw at your credit cards. You’ve paid off one of them in four months and then you’ve got all that money to spend on something. It just keeps going when you’re pulling these little bits out.
The same with the groceries and the restaurant. If you could get that 750 out of the restaurant budget. Don’t go out to restaurants at all this next month, your grocery bill might go up a little bit but your restaurant budget will go down so much. $750, that’s almost one entire credit card down here, plus the 242 that I just found you in your phone bill and you’ve paid off an entire credit card. Student loans, we already talked about. Shopping and entertainment, you’ve got four to $500. How much of this do you really need to spend? Could you cut that out in one month and make a dent in another credit card? Could you cut that back so that you’re still enjoying your life but not spending so much money? I think that this is just an opportunity to have a conversation with your spouse and have what really brings us joy.
We had Liz Frugalwoods on way back on episode 10, and she discussed when she and her husband first discovered financial independence, they got rid of everything. They cut out absolutely everything that wasn’t totally essential to their budget. And for a month they lived as frugally as possible and then they’re like, “Okay, well wasn’t great, let’s start adding things back in.” And they discovered that when they added things back in, they were like making a game out of it. How can I add this back in but cheaply? A conversation to have with your spouse, because it’s not going to work if you tell her, “Hey we’re going to just get rid of everything.” Her answer is not going to be, “Oh sure, that’s going to be great.”

Scott:
On that point, let me ask you this, what is the relationship with money in your household? Is this a positive one? Do you guys typically get along with that? Is it a source of stress? Is it something that you guys are aligned on?

Mindy:
Good question.

Shane:
Yeah, it’s a great question. We are and we aren’t. We definitely both talk about it from time to time. I’m the one that more or so runs the books, and my wife, she has access to obviously all the accounts that we have so she sees where all the dollars are coming from. Honestly, she’s always had the greater credit score and stuff like that. So the one that has the largest, I want to say budget on it, is her original credit card and I was added to it. She’s always had the good credit score and I’ve always been the one that… with my student loans and everything I think kind of depleted my credit score. So she definitely lifted me up there.
But it’s something that I try to monitor and incorporate and figure out, I guess, a game plan on how we can tackle it. But I just never had a good strategy on how to exactly… Not necessarily have that conversation, but really to… Other than spend less money at the grocery store, which it seems to be a big, big handle, I don’t really exactly know where to take it and be less extreme or be more extreme.

Scott:
What’s the emotion you feel when we talk about your financial position?

Shane:
I think my thoughts on my financial situation, it took a big toll. I was doing sales position in New Jersey three years ago, right before the pandemic when I moved down to North Carolina to be closer to family and to start a family. I was making closer to $157,000 a year, and took probably to start a new position, and this is where I took the position to think there was going to be future growth and it just never really got there. I feel a little frustrated in the position because I was doing so well before and we were saving substantially in 2020 and 2019, that now it’s kind of like a snowball effect of… I think income creep is a good portion of it, from when we were in New Jersey and we had the extra cash and we were able to spend a little bit extra.
I think our habits just never really came to fruition when obviously we took the new role and new roles came in, hence why I got my real estate license and I’m trying to figure out new ways to increase my income.

Mindy:
Do you sell many properties?

Shane:
I’m purely referral just because of the W2. Not necessarily takes up all my time but it is a big portion of the day. To answer your question, what I’m selling is it just covers my cost. I’ll maybe make $2000 $4000 at the end of the year.

Mindy:
Okay, how many referrals are you doing a month or a year?

Shane:
Two to three a year.

Mindy:
Okay.

Scott:
I did some math here while you guys were going over the numbers. And when I add it all up, you have $907,200 in total debt. That includes both your mortgages. That includes your student loans. That includes the HELOC. That includes the 401K loan, all that kind of stuff. Another headline number here is you generate $8800 per month in income, pre-tax. I taxed you at a 25% rate, that puts you at $6600. That’s your take home pay per month. Your spending $7900 per month, and the budget you provided us does not include one timers, so couches or whatever that I think you should budget for. And I would put that in the ballpark of 500 to 1000 a month on top of that.
The emotion I would be feeling here is extreme anxiety, frankly, looking at your position. I think you nailed it in the diagonalis of it sounds like you were making more a year or two ago, a few years ago, and you’re not making that today. The numbers do not work. The result of that is debt, after debt, after debt, after debt, after debt that you’re taken out in order to finance both your lifestyle and these investments. This is not a sustainable position.
I think that you are likely going to need to… You’re either going to do it now, or you’re going to do it in a few months when things are really bad. Right now, you have the control to do this. You’re going to have to have a very unpleasant conversation with your wife that outlines these things and says, “This is not sustainable. We don’t have an option here. We must make some materially large changes.” Those can either be on the expense side, and I can cut out significantly. We can go line by line and just cut, cut, cut, cut, cut. I don’t really love that approach because even if you do that, you’re going to get back to break even and then you’re going to be treading water for 10 years is how I’m reading the situation. Unless you get some gifts handed to you on the income front, like a new opportunity. That’s not a gift. Unless you go out and find a way to earn significantly… You get lucky to a certain extent. Opportunity comes your way with that.
If these properties decline in value, that’s going to put you in even more of a hole at some points. And BiggerPockets, Dave Meyer, I agree with him, is predicting a six to 10 percent decline in housing prices over the next 12 months. That should increase the anxiety level here to a certain degree. My read on the situation is because of those headlines, I would do two very significant resets in your positions, or I would seriously consider them. I’d seriously consider selling both properties, clearing that million bucks, minus transaction costs and paying off substantial amounts of the debt, maybe even just starting fresh and trying to get as much cash as possible.
You might be left with some debt, probably the student loan. I would consider two things. One, selling both of those properties, paying off the mortgages and paying off as much debt, even though a lot of it’s at low interest rates as possible, to get just a clean slate here. And maybe consider renting for a while, or consider a house hack with that. You’re also going to go through the budget here and go line by line and say, “What is a necessity here?” I love the fact that you play tennis at this club. That’s a great use of funds if you’re playing tennis with that. But you can’t have the tennis and the car payment and the shopping budget here, and the travel budget, and the significant groceries and restaurants budget. You’re going to have a pick a few of those things.
You’re not in a position where you earn so little income that you can’t afford to have a few luxuries, but you can’t have the amount of luxuries you have currently because it’s bleeding your position. And so neither of those discussions is going to be pleasant with your wife here. But you’re either going to have them now, or I will be you that you’re going to have them within six to 12 months and they’re going to be very, very unpleasant because you’re going to be taking on yet more very unpleasant debt or forced to make decisions on someone else’s timeline. That’s really harsh, but that’s frankly how I’m reading your situation. What’s your reaction to that?

Shane:
It’s kind of half of what I expected. I guess half of maybe some optimism on my side of maybe a way to figure my way. I guess my thoughts were fight fire with fire, mostly because I walked out of college… I went to an engineering school, lots of debt. I didn’t have any help to pay off any of my college student loans. I already knew that when I took my first job in New Jersey… I incrementally made steps to increase my income. I was making $60,000 starting out and then I stepped it up over year after year, probably 20% or more growth in my income. It went from, we literally bought an HBO to subscription when we first moved to New Jersey and we didn’t go out with friends, we didn’t do anything. We were maybe making… probably breaking even if not at all with a $1400 rent. We had $1400 in student loans. We were just literally sat home on the weekend and caught up on Game of Thrones, and did that for a year until I was able to increase my income.
Been there before, and I think that’s a big case of maybe why we’re in the situation that we’re in now of we’ve felt the pain, we don’t want to go back to the pain. But it looks like now we’re in the situation, we’re kind of blind to our situation, and we probably have to feel the pain a little bit more, especially with inflation going up and the grocery bills going up and really feeling all these extra different little things that have impacted, I guess, the way we do things. In terms of selling our properties, I don’t mind… Obviously it’s going to hurt the heart a little bit, right? We’ve been going to Myrtle Beach with our family for… We’re from Upstate New York. We’ve been going to Myrtle Beach for over 15 years. It wasn’t just like we bought a place as an investment, which it feels like it’s doing well, but obviously it’s a piece of who we are as well.

Scott:
One thing just to put the nail on the coffin on your vacation rental here is we talked about those expenses at 45,000 and I’d add a few. I’d add a little bit more padding. You do have a cash flow positive property here with that. It’s not like you’re getting crushed here. But the problem is the way you financed it. You’ve got $81,000 in a HELOC, and you’ve got $40,000 in your 401K loan. That’s $120,000 in debt, right? Yep. Now I think you should never assume that a HELOC is anything longer than a five year payback. This is not a 30-year loan that you’re getting, this is a variable interest rate loan. That interest is going to increase.
If you agree with me that you should pay back your HELOC within five years, that is £2,000 a month that you need to pay back, not including the interest payments on the HELOC and 401K loan, which I’ll combine as a single loan product in this. That’s what is killing this investment. It’s not the fact that it… You probably bought a good property. It probably does reasonable well from a cash flow perspective, but the $120,000 from your 401K and HELOC, that’s what crushing your… That’s why this property’s going to suck cash out of your life for at least the next five years, in a really meaningful way, on top of the fact that you already cashflow negative before we even get to those early premium payments.

Mindy:
Okay, because Scott feels that you are cashflow negative, super negative on this property, I’m going to give you a research opportunity to look into what other short-term rental owners in the area are doing with their properties while in the down season. Is there any other opportunity for you to generate more income? January, February in Myrtle Beach is going to be not amazing, but perhaps in March you could rent it out higher, or there’s parties or specific things like Christmas is big or Thanksgiving or whatever. What other people are doing will help you make some decisions as well. Also, episode 299 of our show, we interviewed Beth from BudgetBytes.com, that’s B-Y-T-E-S. And she makes some amazing recipes. I’ve never made a recipe from her that was terrible. They’re all delicious and they’re all very inexpensive. If you’re looking for ways to cut down on going out to eat last minute, if you’re looking for ways to cut down on your grocery budget, that’s a fantastic website and it’s a great episode. It’s called BudgetBytes.com, B-Y-T-E-S.
Those are two opportunities for you. But I think that one of the best things you can do is just sit down with your wife and see what are some opportunities for us to cut money out of our spending? Where could we look for more income? Could you get a different job? Could she get a different job? Could you go back to your New Jersey salary? Are they still hiring? Could it be a work from home situation? Are there opportunities for weekend gigs that generate income? There’s no shortage of ways to make money, it’s just what… There’s also a limited amount of time in the day.

Scott:
I would say I love those questions. You should ask all of them. I am operating under the assumption that if you could make significantly more money, you would be doing that. And so I think that that should factor into your discussion there, where it’s like, “No, income is not going to save us in the short run here.” Because again, this is about happiness in your life and flexibility and financial freedom. And you are at least five to seven years, probably closer to 10 years, away from muscling through this situation before you’re really able to accumulate any type of runway, like an emergency reserve. I wouldn’t really accumulate an emergency reserve of any material amount until you paid off the 400,000 of the $900,000 in debt that you have here. That’s just so far away, that I think that’s where the really big discussions around your capital allocation, particularly these two properties and how much of that debt you have. And then really cleaning up the… making sure you get to a point where you have a 2000 at least monthly surplus in cashflow from your expenses. That will require significant changes.
And again, I think if you don’t have that conversation, you have a very real risk of having that conversation in a much less healthy way six months to a year down the road. Again, that’s not good news. I’m really emphasizing this point, and I feel very bad about it. But I also feel like I’d be doing you a disservice if I said anything different.

Shane:
Yeah. No, you guys have been great in terms of the realistic expectations. And so I want to say that this being the first time going into real estate venture, gaining a new skill, that was kind of more the game plan. It was more so a long-term approach and like I said, I wanted to kind of fight fire with fire. And to your point, this is maybe more an analytical approach of we need to look more internally, shorter term than longer term and figure out a way to either increase that income, whether it’s a different W2 or different business venture that’s going to bring in a little bit more money than the way I have with real estate. But I still now have that knowledge with real estate that I can chase in the interim.
And I think that’s a good point and I think it’s a good tough conversation that I’m going to have to have with my wife. I think she’s okay with letting go of the property, it’s more me that’s tied to the property just because it is my first real estate kind of venture, so obviously feel very tied to it.

Scott:
Selling the short term rental gets you moderately out of some of the trouble that you’re in, because you’ve got 125,000 in equity on that and you’re going to send 10% of that 40K in transaction costs. Now you are an agent, so you can sell the property, especially if you do the work to get licensed there to shave off a couple of those points. But you’re not going to clear 125,000, you’re going to clear a hundred grand on that property, and that’s not even enough to pay off your HELOC or your 401K balance plus the mortgage, so that that’s part of it.
The big thing I think you should consider is selling your primary home where you unlock $300,000 and all that. And that’s really hard, because you have a great interest rate on that property. But I think again, that you are in a hole and that those two properties combined are a huge contributor with that. And if you do that, you wipe out almost all your debt and now you can begin accumulating cash. You can then go back into Dave Ramsey baby steps here. All the debt is paid off, you’ve got cash, now you can begin investing. And if you want to re-attack real estate investing in two years when you’ve got $60,000 no debt and really strong credit score, and you want to put that down on a property as your down payment instead of a HELOC, then you’re golden. There’s no reason not to get back into it from position of financial strength. You just have so much more digging to do before you begin actually exiting this hole with the way things are set up.

Shane:
Right. And I was going to add to that, but I think you have the right point of… I was like, “What if I take that money out of there, put it back, pay off my HELOC, and then use my HELOC, since I do have my license here locally and I have some good relationships that I’ve built over the past year with contractors, different vendors. Would it be wise to use that money to start doing flipping of homes?” But maybe with the consideration of what you are saying that the market is kind of sliding, so what do we want to-

Scott:
Regardless what the market is doing, your financial position is not in a position that is conducive to flipping homes or buying real estate right now. You have no cash and you have multiple times of your income in consumer debt, and then multiple more times your income in mortgage debt right now, and properties that really do not generate meaningful cash flow at this point. You cannot buy more real estate until that position is in a strong position or you’re taking significant… You will then begin taking very real risks, very real steps towards bankruptcy at that point in time, in my opinion, if you begin flipping houses, for example, or buying additional real estate with this.
You’ve really got to do the grind work of getting the financial position, in my position, set. You can work on the income front for sure. Side hustles, or a business if you want to do that, for sure are good. I would start with capital allocation, your budget, and then yes, use some of that free time to go after income opportunities like selling homes. Great, love that. Use your license, go make some money on the side on weekends and evenings for sure.

Shane:
Great.

Mindy:
The flipping, I am going to give you a different answer for that. I’m going to say no as well, but I’m going to say the market is softening. I’m not sure what it is at your location, but interest rates are rising and you could get yourself into a big pickle flipping houses by buying a house and then holding onto it, being stuck holding onto it because nobody will buy it from you. I don’t love Scott’s advice to sell your primary residence, but I see where he’s coming from. I don’t know where you’re going to live if you sell that property,

Scott:
If you don’t sell the primary residence, you’ve got to make major cuts to your day-to-day lifestyle on the budget front. You’ve got to go even more extreme. That’s the only reason, is if you sell your primary residence and rent somewhere, then you won’t have to make quite as severe cuts on the other side of that, if you’re able to find something creative or downsized to a certain degree. But you don’t have to sell your primary, you’ll then spend three to five years paying off your consumer debt at your current accumulation rate. So sorry, Mindy.

Mindy:
No, that’s fine. And that’s what I would do first. That’s personally what I would do, because 2.99% is locked in for what, 30 years? I would be surprised if we ever see rates that low again, they were too low for too long. And to give that up shouldn’t be the first choice in my opinion. That’s why I would look at ways to cut expenses. But again, this needs to be a team effort. You and your wife need to have a conversation, have a money date. I’m going to reference yet another episode, episode number 157 from the BiggerPockets Money Podcast, where Scott and I talk about how to have a money date with your spouse, more from the angle of where one of you has no interest in having a money date.
If the two of you talk about money from time to time, maybe listening to that episode together would be beneficial just to see how to have the conversation and, “Oh, we can skip over this because we already do that. We should focus on this.” And just look at where you’re spending your money and what is really worth it in your life and what you can live without for a month and see, “Oh, I can live without this for a lot longer.” Or, “Hey, you know what? I really struggled. I would like to add that back in.” If you cut 90 things and you add back three, that’s a huge win.

Shane:
Yeah.

Mindy:
Okay. Well, I really appreciate your time today, Shane. I think this was very interesting and I hope that we gave you some things to think about and some tax to take with your finances to get you on the right track.

Shane:
Yeah, I really appreciate all your guys’ advice and that’s why I jumped on this call. This is really put a fine tone on obviously our expenses. And I know the past, I want to say, couple months have gotten a little bit away from us. The expenses that I shared were from the previous month, and they aren’t like that every month, but they are obviously starting to slide. So really understanding, using that price point that I’m in. And my other side is I really want to get into real estate, so obviously taking your advice really honestly and clearly. And I really appreciate your honest opinion on my venture with that, because that’s clearly where I want to go, but I obviously need to make some corrections on my side from the sounds of it. And I wholeheartedly agree.

Scott:
Love it. Well really appreciate the time. Thank you so much, and hope to hear from you about what you end up deciding over the next couple months.

Shane:
Yeah. Awesome. Yeah, definitely going to be thinking about it pretty hard.

Mindy:
Awesome. Well thank you so much, Shane. We’ll talk to you soon.

Shane:
All right, thank you.

Mindy:
All right, Scott, you’re a little… I don’t want to say harsh because that’s a mean word, and I don’t think you were mean in your assessment of his situation. I think you were frank and I think you were honest, but it was probably a little eye opening to hear somebody say, “Not only should you sell your rental property, you should sell your primary home too.” Let’s talk about that, Scott.

Scott:
Yeah. The word I would try to use to describe it is realistic, and sometimes reality is harsh in some of these situations. I think that what I’m seeing here is there’s a lot of debt. $900,000 in debt is a lot for somebody who makes a combined $140,000, when earning of the bonuses that are due. That is a huge amount of debt. That is six times annual income. Not all of it is mortgage debt either. And so I think that’s a completely unsustainable position and I think it’s a major issue. I completely understand the argument that, “Hey, a lot of that’s financed at low interest rates.” That matters when we’ve got a cash flow positive situation, and we’re wondering about some puts and takes in a minor way about investing versus paying off debt. But in this case, this debt could very easily consume the financial position of Shane and his wife. And so me, that throws out…
The interest rates are a distant consideration to, “How do I get to a path of sustainability here?” And I frankly did not see one. Even if they start saving $2000 a month, which is cutting $4000 of their monthly spend out. That’s more than half of their monthly spend. That’s an extraordinary changing in your lifestyle if you do not move, for example. Even if they do that, they are 10 years… That’s 24,000 times 10 is 240,000. 10 years away from really cleaning up a lot of their debt in their financial position on that. I think that’s unacceptably long.
Yes, if they made it through that 10, 15, 20 year stretch, they could conceivably have paid off that debt, gotten the cash flow out of the property, maybe benefited from appreciation and mortgage amortization. And maybe, maybe there’s a way to mathematically run a model where you end up with more wealth than just resetting, and then beginning to build wealth by investing in stocks or a house hack or whatever it is, from a position of zero debt, maybe a few hundred thousand dollars in assets. But I think that the personal cost and life cost and freedom cost in that time period is going to be unacceptably high. They’re going to have to grind it that entire time.
For those reasons, I think that this situation calls for a total reset of selling everything, becoming a renter again, cutting the expenses, cleaning up the phone bill, cutting out those subscriptions, starting to make a lot of things at home, really re-orienting the life around something that is sustainable and then building from there in a way that has an emergency reserve and that can sustain responsible investing in long-term assets. That was my thoughts on the situation and I just don’t see a way to do it in a reasonable way that doesn’t take 10 years, without making really big changes in the primary residence piece in this scenario.

Mindy:
Yeah. And I really appreciate you coming in and sharing that. I didn’t see that, and I think a lot more people think like me than think like you. And for you to point that out, it is going to take 10 years of really grinding it out to get back to zero.

Scott:
Yeah.

Mindy:
That’s kind of a really, really long time, and a lot can happen in 10 years. I’m glad that you are here to provide a different outlook than what I’m seeing, because that while stark, and frank, and honest, and realistic, it’s also something that he needs to hear so he can look at what he’s doing. Maybe he chooses to keep the primary mortgage, gets rid of the second home, which wipes out a large portion of this, which is the HELOC. He would pay down the off the HELOC, pay down the 401k loan. He would still have some other debt, but then he’s got $27,000 in his short term rental. I mean, he could conceivably with paying off the second house, pay off the HELOC, and pay off the 401k loan, and now we’re down to like $45,000 in debt, which is a lot more manageable.

Scott:
And by the way, I’d sell the car too. Sorry.

Mindy:
Nobody’s ever going to apply to be on this show anymore, Scott.

Scott:
Yeah.

Mindy:
So speaking of which, if you would love for Scott to be realistic with your finances, you can apply to be on the show at BiggerPockets.com/financereview. We are looking for all scenarios because we truly believe financial freedom is attainable for everyone, even Shane in his situation. We believe everybody can achieve financial freedom. So let us help you see where you can make cuts and changes in your finances to get to your financial freedom as well.

Scott:
I would love feedback on these thoughts. This is the most extreme position I’ve ever taken on a Finance Friday episode here at BiggerPockets Money. So I’d love feedback and the comments if you’re watching this on YouTube, or in our Facebook group at Facebook.com/groups/BPMoney. Please let me know. Maybe there’s a solution that I’m not seeing here that you’d prefer or that you’d have given, and I would love to get that feedback.

Mindy:
Yes. And our Facebook group is found at Facebook.com/groups/BPMoney, and I’m going to go in there and start a thread this morning to ask about comments for Scott on this show and comments about Shane’s position. Okay, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From this episode of the BiggerPockets Money Podcast, he is Scott Trench, and I am Mindy Jensen saying we’ve got to scoot, Newt.