THE MIRROR OF MEDIA

I Want to Cash Out My 401k Early, Should I?


“Should I cash out my 401k?” That’s a question you never want to ask in an online financial independence forum. It’s been a well-known rule to never cash out retirement accounts due to withdrawal penalties, tax implications, and the possibility of throwing away your retirement plans. But, what if you had a substantially larger amount in real estate and other assets, what would you think then?

Kate is in this exact predicament and has done a phenomenal job at growing her wealth over the past decade. Kate and her husband have acquired $1.8 million in rental properties, bringing in gross rents of over $10,000 per month! She’s currently sitting on half a million dollars in rental property debt and is wondering whether cashing out her 401k to pay off the debt would make sense.

Because Kate is in such a high cash flow position, she may be asking a question that’s not so obvious. Mindy and Scott spend time walking through calculations that allow Kate to visualize what her life would look like with paid-off rentals as opposed to a fully-funded 401k account.

Mindy Jensen:
Welcome to the BiggerPockets Money podcast, show number 246, finance Friday edition, where we interview Kate and talk about cash flowing rentals, 401k contributions and calculating your actual retirement date.

Kate:
I met a mentor who had 100 single family residences. And from a small town girl, I lived in a very rural community, that blew my mind. It absolutely … I mean we went from thinking, hey, this is a nice supplemental income once we retire when we’re 65 we’ll have a nest egg to, wait a second, this might actually change our entire life, we can do this. We can make the cash flow and we’re smart enough, we work hard enough, we can make this happen and that completely changed everything.

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

Scott Trench:
We’re really running out of net new intros, aren’t we Mindy?

Mindy Jensen:
The fountain is full.

Scott Trench:
Here’s a-

Mindy Jensen:
Scott an 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 Trench:
That’s right, whether you want to retire early and travel the world, go on to make big time investments and assets like real estate, start your own business, or reallocate your capital and figure out if you can retire right now, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy Jensen:
Scott I am super excited to bring Kate in today because she has done it. She’s way past wherever she needs to be in her retirement plans, in her single family rental portfolio. And she’s really, really, really doing great. But, she needs a second set of eyes, or I guess two second sets of eyes on her numbers to help her really solidify her plans. And I love her numbers. She’s got a great salary, she’s got 23 rental properties, and she’s really just crushing it.

Scott Trench:
Yeah. And we get a chance to hear a little bit of background to that story, it would have been a great Money Story Show as well to hear how she got to this position because she is so successful with it. But what I think was really fun about this episode is, she’s so in command of her finances, with a couple of things, but with a couple of tweaks on a couple of key assumptions, I think she can make a huge difference and realize her goals potentially much sooner than the four year, five year timeline we had discussed as her goal at the beginning of the episode. So, I think it was a really fun discussion and it was cool to see a couple of light bulbs potentially going off. I’m interested to see what happens next for her.

Mindy Jensen:
Yeah, I really like these shows, the Finance Friday episodes that we do and release every Friday because, this episode just embodies what we’re trying to do. She has it in her mind that this is her plan. And that’s great, it’s a great plan. But when you come in and you look at it from a slightly different angle, one of not in the exact middle of it, you can see different ways to look at things. And that’s something that I think you excel at Scott is just hey, what about if you thought of it this way? And you could see that light bulb go off in her head she’s like, Oh. I think she had several moments like that. And her plan, her original plan that she came in with today was fantastic and absolutely viable. But these other plans, the the new ideas that we gave her to think about are just, I think is going to help her realize her goals even quicker.

Scott Trench:
Absolutely. Well should we bring her in?

Mindy Jensen:
We need to hear from our attorney Scott. The contents of this podcast are informational in nature, and are not legal or tax advice, and neither Scott nor I, nor BiggerPockets 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, tax and financial implications of any financial decision you contemplate. I think that it actually comes … is really highlighted today. I think that she could benefit from a session with a tax planner or a CPA to look at the different options that she has.
Kate makes a great salary. She owns 23 single family properties in her Midwestern hometown, and moved to the east coast to increase her income. A prospect that paid off for her very well. Her goal is to retire in the next four to five years, completely living off her rental income back in her hometown. She is looking for a review of where she’s at and some of her potentially controversial investment choices. Kate, welcome to the show, I cannot wait to jump into this episode.

Kate:
Thank you so much. I’m so excited to be here.

Mindy Jensen:
Well let’s start off with your income. What are you making and where do you put it?

Kate:
Sure. So my current salary is right at 180k, and I am also in a bonus pool for 15% bonus each year.

Mindy Jensen:
Okay, that’s not bad at all. I like that very much.

Scott Trench:
Any other sources of income for you guys?

Kate:
So my husband and I do have these rental properties, and my husband worked for quite a few years but now he manages our investment properties. So from W-2 income, it’s my income plus our rental income.

Scott Trench:
Okay. And then what’s the rental income?

Kate:
So rental income averages, I think around 11,000 a month, but that’s minus management fees and management expenses that go through the management company. So it’s a little bit, it’s probably more like 14,000 a month, something in that.

Scott Trench:
How about net cash flow? Just I’m sure we’ll dive into the portfolio at some point.

Kate:
Of course. So net cash flow from rental properties, like I said, that rental income minus the management fees, the management expenses that go through the management company, that nets 11,000 a month. And then beyond that, we have other expenses, for instance, taxes and insurance, and mortgage payments, and those equate to about 7,000 a month. And so, current net net cash flow from the rentals is around 3,600 a month.

Scott Trench:
3,600, okay. Awesome. And how much do you spend per month after all that income?

Kate:
Yeah, sure. So we have a few expenses. So right now we rent and we do not own, and so our rent is 1,800 a month. And so with rent and utilities the average is about 2,100 a month. We spend around $460 a month in groceries, and we have a family of five, so it’s myself, my husband and three kids. We usually eat out on about $100 a month, and then on average for two used vehicles for gas and insurance, et cetera that averages around 380 a month. We do have charitable donations that we do contribute to and that’s about 100 a month. And then we have kind of an other category, a vacation, our kids’ stuff and doctors and that’s about 300 a month. So monthly expenses total would be around 4,000 a month.

Scott Trench:
Awesome. How long have you been tracking this? And how comfortable do you feel about that number?

Kate:
So I have been tracking this hardcore for the last three years, and I have a spreadsheet literally going every month and I have a Mint account and so we keep track of it there, and then I log it in Mint, and then on my spreadsheet each month, so I’m pretty comfortable. Yeah, pretty comfortable.

Scott Trench:
Let’s go through your net worth, what are your investments and liabilities against those?

Kate:
Okay, sure. So, we do not, like I said, we do not currently own our primary residence, we do have 23 single family rentals and so, those are worth approximately 1.8 million today. We have two used vehicles that’s like 22k. We have long term care policies and life insurance policies with surrender of around 150k, which I’m sure that seems so high and I’m happy to chat about those too. I also max out my health savings account each year and so we have approximately 30,000 in there right now. We have a cash position of 75k. And then we have 90k in a Roth, 400k and 401k, 90k in a rollover IRA. We have 529 plans for our kids with 26k. And then a very small balance on a credit card we pay off for liabilities each month, and rental debt currently at 550k. So that’s about net worth of 2.1.

Scott Trench:
Awesome. So you’re crushing it here with this. And you have essentially no consumer debt, very clean financial profile here, very diligently track expenses, significant net worth, heavy real estate allocation, love it, that’s BiggerPockets style, and things seem to be going pretty well, I think.

Kate:
Yeah, it is. And it’s been a lot of learning through the years to get to this point but, we’ve done a lot of research, we spend a lot of time, my husband and I talking about it and planning for our futures, and it’s feeling like we’re in pretty good shape right now.

Scott Trench:
Can I pivot from the way we usually do Finance Fridays here for just a second? And could we do a five minute or a seven minute overview of your money journey to how you became … how you got to this position and got to this net worth?

Kate:
Yeah, happy to. So, my husband and I met around, I don’t know 2008, and at that time he was just finishing grad school and I did not have very much school debt, I had maybe 10,000 when I got out of school and so I paid that off fairly quickly. And then when my husband and I got married, we had around, I want to say 90,000 total in school debt and so we lived very small and put everything we could towards paying off that debt. And we paid that off in two or three years, between my income at the time, which I made 50,000 coming out of school and my husband was somewhere around 60,000. So between the two of us, we just lived very small and paid it all off.
And then after that, we bought our first rental property in 2014, and our goal at the time was to buy 10 properties total, one property each year for the next 10 years.

Scott Trench:
Where was this property located? And where were you living at that time?

Kate:
Yep. So we were at … when we first found the property, we were living in the Midwest and the property is in the Midwest.

Scott Trench:
Okay, great.

Kate:
And so we had this goal of buying, like I said, 10 total, one per year for 10 years, and among that … part of it with buying rentals is you have to have the cash. And so, for me to maximize my salary, we made the conscious decision to move our family. And so when we did that my salary went up from, I had been making a 5% or so increase each year, but I made a 30% raise when I made that decision to move from the Midwest to a different state. And so when we did that, we bought our first two properties over a period of two years, and I met a mentor who had 100 single family residences. And from a small town girl, I lived in a very rare rural community, that blew my mind.
It absolutely … I mean, we went from thinking, hey, this is a nice, supplemental income, once we retire when we’re 65 we’ll have a nest egg to, wait a second, this might actually change our entire life, like we can do this. We can make the cash flow, and we’re smart enough, we work hard enough, we can make this happen. And that completely changed everything. So we went from, we bought our first couple in 2014 and then we bought one in 2015, and then after that it was like three or four per year, just hacking at it when a good deal would come on the market. We were ready, we had financing ready, I shot financing really, really hard. But before you knew it, we had acquired these properties. So it’s been a lot of fun, but it was definitely not the plan from the beginning.

Scott Trench:
How long ago did your husband leave work to manage the portfolio?

Kate:
So that’s a great question. That was in 2016. So we were married in 2011, so about five years of us both working when we could, working on the rentals when we would be back in the Midwest, et cetera. And then in 2016 we were starting to have children and we made the conscious decision that, he could manage those rentals and we could live on my W2 income per se and start working harder on the rental side of our business.

Mindy Jensen:
I want to take a moment here to just highlight the fact that you have an enormous income, and you choose specifically to live in a high cost of living area, you choose specifically to rent instead of own in that high cost of living area, and you choose to still invest in real estate. I get a lot of people in the BiggerPockets forums, and in our Facebook groups that are asking, “Is it okay that I rent, and I want to start buying properties?” Yes, it’s okay if you rent, it doesn’t always make sense to own a home in every single city.” You live on the east coast, which is notoriously expensive, if you lived in San Francisco, owning your own home would probably not be the most financially advantageous decision for you, when you could rent for significantly less per month.
I’m assuming that you have what $2,100 for rent and utilities, you’re not going to get a mortgage on a house out on the east coast for $2,100 a month, that’s just not going to happen. So if your goal is to not stay there forever, this is a great choice for you. So if you’re listening and you live in a high cost of living area, and you do want to invest in rentals, especially not in that high cost of living area, it’s totally fine. Kate says it’s fine. Kate gives her approval.

Kate:
I sure do. And it’s been exceptional for us.

Mindy Jensen:
I also really like that you moved to a high cost of living area that had a higher salary, specifically to make more money. I have moved my whole life. I’ve never lived in a house for more than six years ever. And it would be kind of a no brainer to go and generate a ton of income if I had the opportunity simply by moving. And it can be scary to move, you lived, it sounds like you lived in the same hometown your whole life and then you moved. You’re making a ton of money when you finish your financial journey, you can move back. They have planes to everywhere in America, so you can go visit whenever you want. It doesn’t have to be this, oh well I don’t live in my home town anymore, I guess I can’t talk to anybody. we have phones now, we have the internet, we have video calls, it’s amazing, technology who’d have thought?

Scott Trench:
I also just want to continue the several minutes of compliments that we’re now in here on your financial journey. Clearly a great money story, nothing unrepeatable about your money story that’s happening there. Lots of folks can kind of replicate a lot of the elements of what we just heard there, and we hear on Finance Fridays here, a ton of people at various stages along that journey. I like to think that, where you’re at may be an inevitable outcome for a lot of folks who are willing to take a lot of the steps that you’ve taken there. You have complete command over your spending. Three years hardcore tracking of those numbers, I’m sure that the tracking or the control of those expenses lasted long before that as well, to some degree with this.
You’ve got great incomes, or you have a great income and it sounds like a conscious decision was made for your husband to begin building assets, while you live off of essentially one income, in that move. A lot of decisions here that are going to give you a tremendous amount of optionality in your life. So I guess the $1 million question is, or I guess $2 million question in this case is, how can we possibly help you from here? But all of this is going so well.

Kate:
Well I sure appreciate all that feedback, it’s been a lot of hard work but to your point, it’s something anybody can replicate. I think you do need some sound principles to start with where you understand what your strategy is. Like we almost bought one in cash in the beginning and that would have been a really poor decision for us because we wouldn’t have had cash flow to then put a 20% down payment and buy our second, third home. So, you do have to have some basics, I think to start, and put something together on paper to say, how can we create the cash flow to get started? Because then it becomes this engine that turns. And the longer it goes you start snowballing and paying them off, which is what’s happening now, and you see that upside five to 10 years later.
So to your point, Scott, on what help do I need, or what advice would I request? I have a couple crazy ideas. And I think you guys are the perfect sounding board to either confirm I’m crazy or potentially give me some advice. And so the first question I really have is, I’m thinking about cashing out my 401k.

Mindy Jensen:
Nope, that’s crazy.

Scott Trench:
It depends.

Mindy Jensen:
It depends [crosstalk 00:17:31]. Okay, so you, first I want to caveat this with, you have 23 rentals that are more than paying for their expenses and kicking off a significant amount of cash every month. With that caveat I will say, I will listen to why you want to cash in your 401k.

Kate:
Yeah, so it’s crazy. So back to the numbers, I think I have right around 400k invested in index funds in my 401k. And we also have Roth worth 90k. So the Roth we could cash out the the proceeds, I think, without paying any tax. So we’ve contemplated, I want to say there’s like 40 or 50k there that we could take out technically and with no tax consequences. So we’ve contemplated that, but the big bogey is really this 400k sitting in my 401k that right now, it feels that I can’t access it until I’m 65 or older and that seems like a life time away, if I plan to retire when I turn 40 years old. I’ve done some research, I’m definitely not an expert here but I understand when you cash it out, you do have to pay a penalty potentially, and then you have tax consequences.
But, I really just, a good portion of those proceeds were company match dollars, so I don’t know if it’s the right way to think about it, but in my head it’s kind of free money that I’d be potentially losing from taxes for that portion. And then for the remainder, I just think about, if we could either apply, let’s say, two thirds of that to additional rental properties, the cash flow from that could really significantly affect our lives for the next 30 years versus waiting until we’re 65 to see any of it.

Scott Trench:
So before we get into the answer to this, what are the specifics of your goals, in a broader sense, outside of this 401k decision? Where do you want to get to going forward?

Kate:
So that’s completely fair. I am not trying to, and my family, we are not trying to maximize lifetime earnings, that is not our intent. So, what we’re really trying to do is, at 40 give time back to my family and my kids while they’re at home and while we have that ability to spend more time together. So, our main goal is at 40 to have no more W2 income for the rest of my life unless I choose to. I don’t think I’m going to choose to but, I don’t know maybe it’s something we’ll change in the future. So no more W2-

Scott Trench:
And that’s four years away?

Kate:
That is four years away, yes.

Scott Trench:
Okay, awesome. And so the bigger question is, how do we get to make sure that we’re in that position in four years? And then I think that that’s where you focus on the 401k? And the 401k is the 20 of the 80/20 in answering that question at this point in time, is that right?

Kate:
Sorry, I’m not checking your 80/20.

Scott Trench:
80/20 is 80/20 rule. What’s the 80% of my situation that matters, or the 20% of the activities I can do that will have 80% of the outcome? It looks to me like 80% of your net worth, or roughly 70, 60, 70, 80% is in this real estate portfolio, and 20, 30, 40 is in this 401k or taxable accounts, is that right?

Kate:
That’s exactly correct, yes. And so we’ve also thrown around keeping it in the index funds, but then once I retire, do a, what’s it called? Self directed. Do a self directed and maybe take that 400k and go apply it to a whole bunch more rental property, keep 100k in cash reserves and grow your portfolio that way. But the problem there, when we think about it, that would be if I want to maximize lifetime earnings, we cannot touch any of that cash flow until we’re 65. And so that’s where it just doesn’t-

Scott Trench:
If you can achieve the goal of retiring at 40, why wouldn’t you want to then maximize lifetime earnings in a mostly semi passive state? Is there an aversion to that? Or is it, it can’t come at the cost of being able to retire at 40?

Kate:
It cannot come at the cost of retiring at 40, and I think where I struggle is, based on our rental debt of 550k, we’re also going to purchase a primary house when I retire, with the intent of living there for 30 years. So, assuming we move back to the Midwest, that’s going to cost approximately 300k. So we will not be debt free, completely debt free when I turn 40, and I struggle with, am I okay with that? As long as the cash flow pays for everything. Or would I prefer to just be debt free and not worry about it?

Scott Trench:
So here’s my suggestion for framing the discussion, I think we should start with the real estate portfolio, and back into various ways to get that to where you want it to be, and then discuss the 401k. And I’ll give one mental model for that going in, and why I think that’s the case. And I’m going to use maximizing lifetime earnings, which is not your goal, but I want to start there anyways. Because, if you have a paid off rental portfolio in the Midwest, I think you’re going to average seven to 8% returns annualized on that property portfolio. And I think you’re going to get eight to 10% in the stock market over a 30 year period in index funds. At least those are the assumptions I apply to my own life in making these decisions. The return profile increases from real estate when you’re using leverage. That’s not your goal with … you’re doing that.
But I think if you can get your rental portfolio to a place where you’re going to be able to retire comfortably on it without the 401k at all, leaving that money in the 401k or that type of … you may find that that actually compounds really nicely. And a lifetime away today is going to be reality in that one lifetime for you when retirement age hits. And so that’s just where I’m framing the reluctance on there. Now, if the math works out differently and we got to hit the back end of the goal four years from now, because that is the stated goal, then we can figure out how to apply it, we can figure out how you create it from there. But the easiest option is to solve it without that, and then go back to that if we need it. Does that make sense how I’m framing the thought process on that?

Kate:
Yes, I think it absolutely does. And I think something that we need to consider is, this doesn’t have to be a one time decision either. So, let’s say the cash flow makes sense when I retire, everything’s fine for a year or two but a couple years, there’s a hiccup and we need something, you can also incrementally take some of those 401k proceeds out at that time, if we needed to in a worst case scenario, similar to the Roth that’s sitting there-

Scott Trench:
Exactly. And there’s a Roth conversion ladder component as well that you can also get into if you want to do that. Because for the real estate business, when you do a big acquisition one year, or 1031, or whatever it is, there’s a chance you’re going to have heavy losses, and that’s going to enable you to do that conversion ladder or pull it out with that. So I think that’s another really good point with with thinking about it with that. But let’s go into your your portfolio right now. If you, and let me ask you this question, let’s use a present day scenario, and then let’s project into the future. You have a $1.8 million asset value on that portfolio with 550k in debt, is that right?

Kate:
That’s correct.

Scott Trench:
If you sold a portion of that portfolio today, and paid off, used the proceeds of that to pay off the remaining debt, how much cash flow would you generate?

Kate:
I don’t know. How would you do that math? Is it simply the … I feel like the generation would go the other way, wouldn’t it? Because you’d sell properties so your cash flow would go down.

Scott Trench:
But you’d pay off your remaining 550k in rental debt so your immediate cash flow would jump on a net basis because you’d pay off … you’d no longer have any principal on interest payments. Does that makes sense?

Kate:
Yeah, it does. I don’t know, I don’t know.

Scott Trench:
I think that would be a good exercise to go through. Because the reason your portfolio is not paid off is because you’re choosing to allocate the capital towards growth mode. In four years, you will have that decision about whether you want to deleverage the portfolio or not as well, and at that time you don’t have to necessarily pay off the whole portfolio or not via your job income or the cash flow that you’re stacking from the portfolio. You can choose at that point to sell or reallocate the capital, if you’d like to become debt free on your portfolio at that time. And it will boost your cash flow because you won’t have any debt. It will hurt your returns to a certain degree long term, but that’s your stated goal. So, I just want to point that out as another framework for that.

Kate:
Yeah [crosstalk 00:26:10].

Scott Trench:
… to kind of trigger the discussion with that. And then so with that, what is your portfolio going to look like in four years on your current track? What is your math telling you?

Kate:
So rough math is, right now we apply about 10,000 of additional cash flow to paying down that 550k of debt. So that would be approximately 120,000 a year, three more years would be 360,000, so we’re looking at maybe a rental debt balance of around 200k. One thing that’s really cool about our investment strategy is we refinanced a good portion, maybe, I can’t think exactly of the number but a pretty good amount of that loan within one to one mortgage company, and we have an agreement with them that if we pay down a large lump sum, that they will reallocate the mortgage payments to make them smaller over time versus just paying the same to rental debt.
So like if we pay 70,000 or 100,000 against that loan, the mortgage payment the following month goes down by let’s say, 600 a month something like that.

Scott Trench:
That’s awesome. So they reset the amortization table every time you make a large, one time payment or a periodically?

Kate:
Yes. So-

Scott Trench:
Awesome.

Kate:
… like we’re talking about, if we pay down 320,000 in debt, let’s say, those mortgage payments, which now we pay around 4,600 a month, that may only be, I don’t know, 2,000 a month or 1,500 a month by the time I’m at retirement age. So cash flow is going to change dramatically that way as well, Scott.

Scott Trench:
Okay, awesome. So what is the current cost of the principal interest portion of that debt on a monthly basis, or annually?

Kate:
I’d have to go run the numbers. I know our current mortgage payment’s around 4,600 a month, but that includes taxes and insurance for some of those properties. So it’s something less than 4,600, maybe 3,500 a month, something like that.

Mindy Jensen:
$3,500 a month on 23 loans?

Kate:
So we do not currently have 23 loans. So we have three loans, I think with particular loan companies, and then one loan for some of the debt. The remainder of them, Mindy, we paid off over time. So, when we first started we did Freddie Mac loans, up to six or seven for each, my husband and myself. And so when we started paying down debt, we picked the highest interest rate or the lowest balance, we kind of flip flopped on strategy to be honest, and started paying those down dramatically. So, we do not have 23 mortgages today, we just have, like I said, maybe three or four with mortgage companies, and then one where we’ve consolidated the remainder of the debt, many of them are paid off debt free.

Mindy Jensen:
Okay.

Scott Trench:
I just want to point, so we don’t know the specifics, but you have a mortgage, a principal interest portion of your mortgage that’s between 3,000 and 3,500 a month right now. And if you pay that off, your cash flow, net net jumps from that $3,600 number to 66 to 7,000 a month.

Kate:
That’s exactly right.

Scott Trench:
And that’s probably what you’re backing into as game over with that, because you only need 4,000 a month to live with that, and that’s assuming you have a mortgage payment that is about that 2,100 level with that. Which could be, that may not even be the case, you may be able to buy a house for cash, depending on how things play out with this. So what I, again, what I wanted to point out again, with my thought exercise earlier is that, the game is over when you get to 4,000, and you’re at 3,600 right now, essentially, right? Now you want to buffer, that’s not enough margin of safety to be at that level, I’m sure. But-

Kate:
We need a buffer plus we have to pay for health insurance out of pocket. And so, I literally went on healthcare.gov and figured out for a family of five, what our premiums are going to be between now and my husband being 65 and myself being 65, and it averages pretty closely between the premium plus the deductible around 30,000 a year. So, that averages an additional 2,500 a month to think about as well, assuming you have to pay that full premium. And what’s weird is, when you go on healthcare.gov it talks about additional qualified premiums you may be able to achieve that would reduce that total premium and deductible. But to be honest, I don’t know enough about it, so I just put in worst case for everything. And that means I need to get to about 5,200 a month cash flow to be able to cover everything.

Scott Trench:
Right, 5,200 a month in cash flow. I think that if you do the math and you sold a portion of your portfolio today, and redid and paid off that balance, you’d be very close. You may not be quite where you want to be to it, but you’d be very, very close. And so again, that framework, I think will be really helpful as you back into your four year plan with that. You don’t have to sell off any other portfolios, you’ll be close enough anyways because you’re, especially since you get to reset the amortization table with this, with this creative loan structure, that’s awesome, but yeah. Okay, so with that context-

Mindy Jensen:
I want to-

Scott Trench:
I will-

Mindy Jensen:
I want to jump in there, Scott, sorry, I want to jump in and say, we can make up the rest of that by taking your 401k, leaving it where it is right now, and then once you no longer have income, you can do a Roth conversion ladder, which will allow you to convert up to, and don’t quote me on this, I’m going to give you a research opportunity, I believe it’s $40,000, that you’re not paying any capital gains taxes on. Wait a second, I think I’m mixing up my things. So you take $40,000 out of your 401k, you pay the taxes on it, and you’re converting it to a Roth IRA, so now all of the taxes are paid, and there’s no penalty because you’re not taking possession of the money yourself.
That goes into a plan that you can then withdraw in five years. And you do that again the next year with another 40,000, and I’m stuck on 40,000 and I can’t remember why. You can do it with however much you want.

Scott Trench:
You’re just going to move up the income tax bracket as you realize more income with that. And I think careful tax planning could be, and the Roth conversion ladder could be a really viable option for this strategy because, you’re certainly going to produce taxable income on this rental property portfolio, at least if things are going reasonably well with that. So I don’t think you’re going to get around … I would imagine you’re probably going to have some realized income, especially with a paid off portfolio of this size. But, it may be very low and there may be years, again, when you have major rehabs that can be fully depreciated in year, those kinds of things, that you’ll be able to have very low income and do that strategy.
And that would be a very good way to bridge the gap. I think Mindy’s spot on with that thought process [crosstalk 00:33:26] at the end of that, so.

Mindy Jensen:
Yeah. And that is, there’s an article from the Mad scientist called How to Access Retirement Funds Early. If you Google Mad scientist Access Retirement Funds, it pops right up, he’s really good with the SEO. There’s three different methods that he highlights here. He makes sure that you know that there is a 10% early withdrawal penalty. He talks about the Roth conversion ladder in much more detail than I just went into. The 72t method is substantially equal periodic payments, you basically just determine for, oh when you leave your job immediately roll your 401k into a traditional IRA, determine how much you think you’ll want to withdraw from your retirement accounts every year until you turn 59 and a half, which is when you can start to access them early, it doesn’t have to be 65. So now we’ve only got 19 and a half years to cover instead of 25 years.

Scott Trench:
Certainly that’s the one lifetime.

Mindy Jensen:
Yeah. So he’s got a lot of information there about that. And his third option is, just pay the penalty. I don’t like that option so I’m going to disagree with him on that and figure out ways to do this. So once you do the Roth conversion letter, you take the money, you convert it into your Roth IRA, you pay the taxes now, which will be significantly less because now you don’t have your high income job. And then you wait five years, you can withdraw the amount that you put in there. So let’s call it 40,000 because I’m stuck on that number. You can withdraw all 40,000 and pay no penalties and no taxes because you already paid the taxes. Now, when you withdraw that money, you can only withdraw the 40, but maybe that 40 has grown to 45 or 500, whatever it has, that still continues to grow in that account.
I’m not sure when you can access that part. But it doesn’t matter because you already have that 40,000 that you already did. And you can do this every single year for … and then for five years you’ve got another buffer of income. So, and I say five years, you can do this forever. I like that option a lot. Your 401k comes with a 50% match, I can’t remember if we said that on the show. up to 10%. So you’re making 50% return on every dollar you put in there. I’m a big fan of the 401k, I don’t know if you have a Roth 401k option. Can you make the same contribution? You’re shaking your head so I guess there is no Roth 401k option. I would still I mean, you’ve … now we’re in that case where does really reducing your income, your taxable income by $20,000 do anything for you on the taxable income front? No, I’m talking about the match.
And I would continue to contribute to get the maximum match until you found another way to make that kind of money. Because you’re only going to be there for four more years, what is that? 10% of your income is-

Kate:
18. 18,000 a year.

Mindy Jensen:
18,000, so you’re already almost maxed out anyway, that’s another $9,000 a year. So I mean, in the whole course of $180,000 a year, what’s another $9,000? But hey, if you don’t want it, I’ll take it. 9,000 is still 9,000 and that’s just another bunch of money you can contribute to your 401k. I really like that, until you can figure out a different … if you’ve got a rental property that you really want to hardcore pay down, maybe that would work. But you’ve got a big buffer between your monthly income and your expenses right now, so you could already pay that down. I don’t know [crosstalk 00:37:16].

Kate:
Yeah. I think what you both have really been able to help me see a lot better is that, it’s okay to have options, we don’t have to act on those options now. So, we have good planning in place between the HSA, so we max that out every year, and I keep a spreadsheet, keeping track of those expenses, there’s cash accessible there if we need to get to it. There’s cash within the principal towards the Roth if we need to get to it. To Mindy’s point, do a conversion into the Roth so you have more cash accessible, you can’t tell like … the thing on the top of my mind is, do we have enough cash? Is cashflow going to be okay because we don’t have W2 income.
And I think maybe it’s enough to have a plan and continue to put yourself in a good situation where you have accessibility to cash, but keep it in vehicles where it can maximize its earnings potential, and in some ways at least it is differentiating away from real estate a little bit because it’s in index funds versus being 100% in real estate, I think that’s probably a benefit as well to think through.

Scott Trench:
I’m nodding vigorously. Yeah, these are all … I completely agree with everything you’re saying there, I think that if you need cash, the obvious place to go for that cash is a line of credit against your rental property portfolio. So, that’s where, if you need to cash early in the next four years, that’s where you want to get to. I hear you that your goal is game over by 40 with those types of things. I think you’ll be close enough just by following your current strategy and continuing what you’re doing here. I think you’ve got a huge margin of safety probably built into that, that’s hidden in numbers we can’t see. I bet you’re not projecting your salary, increasing a ton, or rents increasing and your portfolio or like stock returns being a certain way or whatever with that.
So, I think there’s probably a very reasonable margin of safety built in, you can always pull that money out and pay that penalty later, but I like, in your case, I think that you’re actually going to get a higher return potentially in the stock market, historically, over a long term average. Anything could happen next four years and everyone has an opinion about that. But, over long term average I’d be betting that the averages in that 401k will actually surpass the portfolio return in the real estate, all things considered with that. We could see with a deleveraged portfolio. And then I just want to chime in on the real estate concept inside the 401k.
I don’t like real estate investing inside of the 401k as a rule. If you’re going to invest in notes, or debt, or those types of things, that can be a good vehicle for it, because you’re going to generate a lot of taxable income from the interest and that kind of stuff. But real estate is inherently tax advantaged. And, one, a paid off rental property portfolio is not likely to produce a very strong return relative to some other asset classes like stocks or other types of businesses. With that it’s a leverage component that we can more reasonably use leverage that drives a lot of that, and I think that you’re going to miss out on a lot of the tax benefits, and it’s going to be a lot more complicated to manage that with a self directed plan.
You can do it, I just, as a rule, like that with the after tax stuff, and then the pre tax or tax deferred investments, those I like for the … personally I put those into index funds and those types of things. Or if interest rates were to rise, I would be put a lot of fixed … I would get a lot of that type of stuff in my retirement accounts as well.

Mindy Jensen:
[crosstalk 00:41:02] I have a question about your job. So do you have the kind of job where you could go back and do some sort of consulting if things got really tight? Or do you have the kind of job where you need to be there constantly to keep up on the day to day in order to be effective to go back?

Kate:
I think had you asked me this question two years ago the answer would have adamantly been no, I need to be in the office. But I do think that industries are changing. And though my current job does require me to be in the office, I think there would be the ability to do consulting if I needed to in the future, and do some of that remotely.

Mindy Jensen:
So you have a job that pays you your base salary of 180, pays you 45 months of expenses every year. So if there’s some sort of … let’s say you’re a CPA and in April it’s really, really busy, is there any sort of cyclical thing in your job where you could come in for a month or two, and these are more like just planting seeds because maybe there’s a project you can help consult on that your experience and expertise is uniquely qualified to generate $180,000 over three months. That’s the kind of trade off that I think would be worth looking into, especially if you could do it from your Midwestern hometown, instead of being in the place where you’re at now.
After four years, and you’ve completely retired, and they’re like, “Hey, Kate, come back, we want you to consult on this one project for three months.” You know what, this could be interesting. Or hey, I’m done, I’m out completely. So, I think keeping your options open is always really the best course of action.

Kate:
Yeah. I think that’s a great thing to keep in mind.

Scott Trench:
I like where Mindy is going with this as well with the thought process is, if we use the 4% rule, and we’re not … this is not going to apply specifically to a real estate portfolio with this, but if we use that, you’d say, I need to spend $60,000 a year. So that’s a $1.5 million net worth, 5,200 with that. So, 1.5 to $1.6 million net worth, you soared past that from a net worth perspective. And so you, and again, I bet that you’re conservatively valuing your portfolio to a certain degree, is that fair?

Kate:
I think the value of 1.8 is probably accurate, but I think the cash flow and the expenses are for sure ultra, ultra conservative compared to what it would be like if we could manage them ourselves.

Scott Trench:
So if you were to move there and manage yourself, that would completely change the profile, I’m sure. You’d increase your rents by at least 10%, which should flow right down to the bottom line. Of course, you have to work to manage that, but I assume you got to do something once you retire from this, and move out there. So that would make sense. Is that right? Is that how you’re thinking about it?

Kate:
Yeah, somewhat. So right now we do have a management company and because we have a larger portfolio, we negotiated several management companies against themselves. We were able to get a 7% versus the 10% rate. But there’s also a one time a year, a resigning kind of with the management company, that there’s an additional fee there that’s pretty hefty. So I think what we would do is renegotiate again, I don’t know if we can do better than 7%, I’m pretty happy with that, and I like the ability to have a management company doing the any sort of rental tenant communication, it’s worth it to me for 7% to not have to manage that piece. But we do pay right now, if something breaks, we have to pay someone significantly to go fix it.
And my husband and I love that aspect of the job. I dream about summers, putting up gutters on all of our properties, this is my dream. To take our kids to school, and go build decks and gutters. That is like my dream job. And so I feel like, we pay a significant amount of expenses right now that my husband and I will be able to be able to reduce. And Mindy to your point, it’s kind of like having a part time job if we choose to, only we can invest it back in our own company potentially, versus going back to some sort of W2 type employment.

Scott Trench:
So I love it. Everyone has a different dream. I don’t want to build decks with that but, no, that’s awesome. And so here’s what I want to point out is where, I think Mindy was heading with some of those questions or where I think that’s going is, you’re way past the finish line for all this kind of stuff. You make a couple of tweaks to the way you capitalize your portfolio, you don’t have to wait until 2024 to go do this. And if you’re going to go and build decks on your rental properties in the summers, you’re probably going to stack another 100, 50 to $100,000 in net worth every year on top of that, in addition to the cash flow. So, that would be the framing, I would reorient the conversation away from, I don’t think you need to move the 401k out of there.
I think, it might be too aggressive, it’s, everyone needs the margin of safety that they’re comfortable with. And yours might be another few years down the road. But I think a lot of people would feel really comfortable, and I would say they’re very reasonable to turn it right now and go and do that kind of stuff. Especially if you’re going to manage the property yourself, and add value on a part time basis to these properties with construction work, which is incredibly high value work in 2021 in particular, with it. So, what’s your reaction to that thought process?

Kate:
My mind is blown, actually. So, I think because we’re so risk averse and because other than the one mentor I mentioned who has 100 doors, I don’t have a lot of folks to run this by to say, are we crazy? This math, it’s snowballing, it’s making sense as we’re paying down this debt. So, I’m just really thankful to be here today to talk it through and to think about the various options for us.

Scott Trench:
You got to be sure that you’re going to be happy on that $4,000 a month in spending, that’s a … or 5,200 when you include that. But if you are, then I think that’s the key assumption in this, I think that is … it needs to be tested with that. And then what’s the management stuff going to turn out, how are those rehab or maintenance costs going to come down with that? Those are those are all things to consider but I think … and then, does that tweak slightly if I pay down the property with that? If your goal is to get there as fast as possible, I think you could do it a lot sooner than four years depending on what your comfort level is.

Kate:
That’d be amazing.

Mindy Jensen:
Yeah, that’s my thought too after we started talking, I’m like, why are we waiting four years? So here’s something to think about. My husband was very risk averse, he didn’t want to leave his job. He was making a very good salary, and he had grown up financially insecure, several years of his life. And he’s like, why would I walk away from such a great job? That’s so silly. And it helped him sleep at night that I had a job, that covered all of our expenses. It helped him get the confidence to go into his boss’s office and say, “I want to work three days a week.” And his boss was like, “Fine.”
He was building it up and building it up ad his boss is like, “Yeah, that’s great. I don’t care. We want you to do this much.” So instead of working full time for the next four years, what would it look like if you went to four days a week and you had Fridays off? Or you went down to three days a week and you had Mondays and Fridays off? Would that-

Scott Trench:
And can you go back to full time work at a similar salary, with the worst case being like a 10% or a 15%, cut and pay if you took a year and then try to come back to the same field? I don’t know, but what would that worst case be from a job planning perspective with that?

Kate:
I think given my current situation, the most probable thing that could happen is I need to rethink about the math, and maybe I’m two years out and not four from thinking about flipping the switch. And maybe there’s opportunity to do it before I turn 40, which is just, it’s hard to even say it out loud, to be honest, but maybe there’s opportunity there and we need to think about it.

Mindy Jensen:
So I’m coming from this sort of fairly unique perspective in that, I am slightly over 40, and I watched my husband go through this same thought process that you’re going through, it’s a few more years, it’s a few more years, it’s a few more years. And I’m sitting here having spoken to 50 people about their finances and I’m thinking, yeah, you could pull the trigger. If I was in your position with the 23 rentals that we’re kicking off, let’s look at this, if you paid off all of your mortgages, that’s giving you $14,000 a month. And yes there’s expenses and whatever, but you only need five. So, I’m not saying quit your job today, I’m saying this is … if you’ve listened to the show, you’ve heard me say this a lot, personal finance is personal, and you have to be able to sleep at night once you go in and give your notice.
We hit our fine number and he still worked for three more years. And it was just this, or maybe two more years, I don’t remember. No I think was three years. And it was just this like, “I’m not ready, I’m not ready.” And he stepped down to part time and he was like, “Okay, I can do this.” And then he quit. And two weeks later, two weeks after his last day, his whole project got shut down. And I am so glad that he quit on his terms, instead of, “I’ll just do one more year,” and then the project gets shut down and he would constantly be waiting for, “Should I get another job? Was I really ready to go?” And as soon as he quit, he’s like, “Oh my God, I should have done this years ago.”

Scott Trench:
And Mindy how is your family’s position advanced are declined since that departure date?

Mindy Jensen:
I think it’s either two or two and a half times. Our net worth has increased 200 or 250% since then. And the stock market’s been on a tear, we sold a house and made a lot of money off of it tax free because we lived in it for two years. He was always really nervous and once he cut the cord, after he came to the realization himself, once he cut the cord he was like, should have done this years ago. So I’m just sharing that I think your numbers are awesome.

Kate:
Thank you, I appreciate that. And I think we do have other grand plans for our family, I think travel, vacation, those kinds of expenses are going to go up but not so much that I think it will offset what our future income is going to be.

Scott Trench:
Yeah and that brings us back to, you got to be really clear on that 4,000 or 5,200 number, because, if that number goes to 10,000 with that, that’s 120, now you’re going to need three million in order to hit that number on a monthly basis. And a lot of people would reasonably want a $10,000 a month spending threshold for those types of things in that. So, your number’s reasonable, 6,000, 8,000 is reasonable, 10,000 is reasonable, but whatever that is for you, that’s a key assumption for a lot of this stuff. Now the good news is that, if you work part time or something like that, you could easily snowball this … that brings me back to the earlier point that I was trying to discuss when we were first getting started is you say, “I’m not interested in lifetime wealth, and that kind of stuff.”
But I think that if you set this up correctly with this, there’s almost, if you do part time work building decks for your rental properties, again, you’re going to increase your net worth by another incremental 50 to 100k, probably per year, by doing that kind of work, or that’s going to be the savings that’s not baked into your model completely here, and your other assets are going to continue to grow. And so, I think that’s what you want, you want to be retired with a safe margin of safety. And that margin of safety means that your purchasing power and wealth should, on average, recessions and depressions excluded from this, increase over time giving you even more and more options way beyond what you thought you needed.
Probably most folks who leave their job are doing it way too late because they could have done it with that [inaudible 00:53:54] but you can’t live your life necessarily with that, it won’t help you sleep at night. But it’s just a model to think about.

Kate:
Where we left out was, early we paid off our debt as quickly as possible and then we maxed … we put a lot of money towards 401k and that has been able to start compounding. So, to be 36 and to have 400k between myself and my husband, of course, rule of 72, even if it’s 7% interest in the stock market, it’s going to double three more times, I think maybe, if it doubles every 10 years. And so, if it’s possible to maintain our lifestyle within the rentals that we already have, and leave the 401k, then to your point, there’s legacy planning, there’s other things for our kids that will hopefully be intact later on for our family.

Scott Trench:
And to Mindy’s point, even if that’s not enough, for whatever reason with it, it’s going to be so close that even some part time income is going to cover it with it. So that’s, I think, where … I think the biggest takeaway is, I don’t think you need the 401k in order to achieve it all and all good news all around, you might have the option to do it sooner than the four years, inclusive of not touching that if some of those assumptions play out.

Kate:
That would be amazing. And I think lifestyle wise, we’re so ingrained in how we live our life now, that I don’t see a lot of lifestyle change happening. I think travel will go up a little bit, but then I thought about, we can still offset that with doing some side hustles or maybe we flip a house for cash once every couple years or, we know we have the skills to do this, I think we will be able to be creative and come up with it if we need to, for a little bit here or there to go do some grand adventures. Spending wise, I really don’t see us changing. So most, almost all of the, I would say clothes or shopping type things, we acquire through rental property or through, sorry, garage sales. So, almost every Saturday I go garage saleing, and that’s kind of like my favorite hobby in life, honestly.
So sometimes we’ll bring the kids with us and we have those money talks with them now about, do you want one toy at the store, or do you want 10 toys at garage sales that you can pick out? And so they enjoy doing that and so we’ve been able to get most of our clothes and needs like that. I expect when the kids get older, our kids are six, four, and three. So, as they get older I’m sure that will probably change when needs change, but of course, I’ve baked in extra money in the budget to cover that eventually. But right now, or even once our kids are gone, I don’t see our lifestyle changing beyond much of what it is today.

Mindy Jensen:
I have a couple of points to add. So you want to travel, let me introduce you to travel hacking and credit card, opening those up and getting all the bonus points. Right now there’s not a ton of super, super lucrative ones, but you can still find good travel hacking credit cards. We have one with Southwest because we only fly Southwest. We have one with Hyatt Hotels, I have something like, because we didn’t travel at all last year, I have something like 30 free hotel nights. And they don’t expire. And I’m staying … the Hyatts are nice hotels, I mean for me they’re nice, not for Remit but that’s okay, I’m not going on any vacations with Remit.
He was on a couple of weeks ago and he was talking about, “I like to stay in $500 hotels.” Like, that’s not me at all. I mean it’s nice when BiggerPockets is paying the bill, but it’s never me that’s paying that bill. But anyway, I digress. So find a hotel chain that you like, get their credit card and start … that’s your credit card. That’s for all the business expenses, that’s for all the personal expenses, rack them all up, unless you have an LLC and you need to keep them perfectly separate but then, have a business credit card and a personal credit card. Find the airline that you’d like to go to, that you’d like to fly, or that goes to the destinations you want to go to. Get their credit card and with 23 houses, you have a fair amount of expenses that you can put on credit cards and generate income. You’re going to spend the money anyway, you might as well get reward points for it.
And the second point I would like to make is, if you’re going to buy a primary residence, I would recommend buying it with a mortgage because rates are so low right now. All the money that would be sitting in your property could be used to invest in other properties, or to invest in the stock market, and that’s what I do. I got a mortgage on my house, even though I paid for cash, I refinanced as soon as I could, pull all the money that I could out, and then put it into the stock market. And if you are going to go this route, and again, a research opportunity, you have to be able to sleep at night, and if you can’t sleep with a mortgage on your house, then buy it for cash. But if you’re going to get a mortgage, get it before you give notice at your job.

Kate:
That’s an exceptional point. And we have thought about that. And part of the reason why we thought about doing it is because really that’s the only time that we’re going to be able to keep, not to say my credits going to be tarnished, I don’t really know what happens once I don’t have a W2 job anymore. But, for references, for everything else, we can lock it in while I’m working and then maximize cash flow that way too where, maybe our cash nest egg, which we keep about 75,000 in cash reserves, maybe that number grows for a couple of years just to make sure everything is going to be okay. With the option of, you can either pay down your primary mortgage later if you want to, or just continue to let it ride on your 30 year fixed loan.

Scott Trench:
You have to talk to a lender about this, but I bet that, we always give the advice, get the mortgage before you leave the job with that kind of stuff. I actually doubt that will actually fully apply in your situation because you have enough rental income, that I think you’ll be able to qualify for-

Kate:
Interesting.

Scott Trench:
… that mortgage. Without that, you should talk to a lender before that happens, but based on when we had the discussion today, I don’t think you’re going to pull out a $600,000 mortgage on a property with this. It’s probably going to be much lower, and so that may not be an actual concern for you guys since you have so much landlording history.

Kate:
Yeah, we’re hoping to buy our primary house for around 300k, again moving from east coast back to Midwest small town and be able to do it that way. So that’s a really good point about talking to the lenders. I do think the only thing that could hurt us is, I think they request copies of your tax returns, and if you look at our rental properties on its own, because of depreciation, because of other expenses that come off, right now we do make money, but not very much, it’s almost breakeven.

Scott Trench:
That’s every landlord though, and they’ll do it based on a percentage of the total gross rents that you either have, and if you’re buying a new property, they’ll actually allow you to include a percentage of the gross rents of the new property, even if it’s vacant, the estimated gross rents. So, I think you’re going to find your purchasing power is significantly, I bet you it’s probably the equivalent of 120 or $1,000, or something like that if your gross rents are 14,000, 10,000 a month is what you may find you have credit for, talk to a lender though, before you bank on that, of course.

Kate:
Excellent advice.

Mindy Jensen:
Yeah that is really good advice Scott, I didn’t think about that. And I was just remembering the time that we tried to get a loan while we were self employed, and it was a horrible disaster. And that was with income. My husband worked for the government as a contractor, and then, but as a W2 employee for a contracting company and then they said, “Hey, we’ll pay you a lot more if you go contract with us.” So he did, same job he’d been at for 12 years, actually increased in income, I wasn’t working at the time and the lender was like, “We’re not giving you a loan, you’re self employed.” He’s like, “What do you mean I’m self employed? I work for the same company for 10 years.” So just something to think about. But yeah, definitely talk to a lender. I’m trying to text my lender right now, “Hey, can we do this?” But he’s not getting back to me. He should just have his phone in front of him so I could ask him questions while we’re recording.

Kate:
Yes, I think there’s a lot to think about, about what we’d end up doing with our primary and how that’s going to work out. We’ve also, this sounds crazy, but we thought about buying it now potentially and putting a renter in there for two years, and just start. That way we don’t have to build up our cash reserves, if we wanted to, we could apply it to our mortgage or not, and let someone else start paying down that mortgage of even our primary. Generally, so we bought a few houses together for primaries through the years, and we have this tendency to buy the worst house on a nice street and then fix it up ourselves. We’ve done this like over and over and over again.
So part of it is, if we’re going to go buy a primary maybe we just don’t fix it up right now. And we let someone else live there for a few years, make sure it’s a nice home, in a nice area, whatnot. And then that way it’s already secured. The only thing that we throw around in our head is, you’re not really maximizing interest rate potentially, because we’d have to buy it as an investment property versus a primary residence. And so there’s a couple points of interest potentially at stake there between doing that. So we’ve gone back and forth about thinking that through as well. Do you guys have any thoughts on that?

Mindy Jensen:
My thought is, it’s going to be a lot easier to get a loan right now than when you no longer have a job. Interest rates are so ridiculously low. I’m seeing people getting three, three and a half, 4% interest on investor loans.

Kate:
Yeah so when we consolidated quite a few of the rental debt in March of 2021, we locked in 389, which is crazy for investment, that’s investment properties.

Mindy Jensen:
Yeah.

Kate:
So that’s a good point. Yeah. So maybe-

Scott Trench:
And it’s a portfolio loan.

Kate:
… maybe a way to think about it then is, yeah, it might be a couple points higher, but by the time we buy in a couple years, it’ll probably be a couple points higher anyway, potentially.

Mindy Jensen:
In theory.

Scott Trench:
I also just want to observe that like your situation is … if you’re saying how do I boil into the best number in four years? We’ll be going a totally different route. It’d be, let’s pull out a bunch of this cash and put it into more rental properties with that kind of stuff. So a few basis points in interest rate are not going to make or break any part of this decision on this, and I think that, if you’re just trying to de risk the event in two to four years, now that we’ve got it down to potentially two, which I’m very happy about, then it makes perfect sense to do something like that, even though it’s not going to generate a ton of return it just de-risking that future event.

Mindy Jensen:
Okay, Kate, this is a super fun episode but, we’re not done yet. You have answers to our famous four questions, is that correct?

Kate:
Yes, ma’am.

Mindy Jensen:
Okay, well, we’re going to just jump right into it. What is your favorite finance book?

Kate:
Your Money or Your Life.

Mindy Jensen:
Great book. Great book. We had Vicki Robin on the show a few months ago, I think it was episode 99. She was fabulous.

Kate:
Yeah, it was amazing. Just the idea about thinking about your [crosstalk 01:05:24] thinking about how to think about your freedom and what work really is, it really changed our lives.

Scott Trench:
And we heard on the show, we discovered that she is a fellow house hacker. What was your biggest money mistake Kate?

Kate:
So I’ve had two. One was I bought a Mercedes convertible, to then find out a month later I was pregnant and we couldn’t fit three people in a two seat car. And then the second one was, we just lifestyle inflation, at one time we had a 4,500 square foot house, and life was good. And then when we came across Your Money or Your Life, when we came across BiggerPockets and a lot of other great forums and communities, we realized that wasn’t the life for us, and then had to downsize all of it happily.

Mindy Jensen:
Vicki’s episode was number 98, not 99. Number 99 was Scott Trench live at Camp Phi. Okay, anyway. What is your best piece of advice for people who are just starting out?

Kate:
Ask a lot of questions and find mentors. So, I actually ended up becoming friends with some of the mortgage brokers out there to learn how to get loans, how to price loans. And the more questions you ask, as long as you’re friendly about it, a lot of people in this community are more than happy to answer your questions.

Mindy Jensen:
That’s awesome advice.

Scott Trench:
Yeah that’s awesome. What is your favorite joke to tell at parties?

Kate:
Okay so I’m not good party joke person, but I do have a little comic strip that I absolutely love to retell at parties. And so you have to envision a little girl in her bed, and her dad’s reading her a story at night. And the little girl says to the dad, can you skip to the part where the princess creates multiple streams of income, builds wealth and invest it all and path in cash flowing assets? So instead of the princess story it’s this little girl where she’s dreaming of cash flowing assets. And I love, love that mental picture.

Mindy Jensen:
And you sent that to us so we are going to-

Scott Trench:
I love it, that sounds like a BiggerPockets book.

Mindy Jensen:
You sent that picture to us and we will include it in our show notes, which can be found at biggerpockets.com/moneyshow246. Kate, thank you so much for your time today. This was wonderful. When you quit in two years, not four, or whenever it works out for your timeline, please reach out so we can give an update.

Kate:
I would love to come back. Thank you so much, this has changed our life. I’m so appreciative of your time.

Mindy Jensen:
Yay, I’m so excited.

Scott Trench:
Yeah thank you so much [crosstalk 01:07:53] this is a wonderful episode, and really fun. So we appreciate you coming on Kate.

Mindy Jensen:
Okay, we’ll talk to you soon. Okay that was Kate and her fantastic story, and her amazing projections and your really great ideas for ways to look at things differently. Scott, what did you think of her story?

Scott Trench:
I thought it was really fun. This is the type of situation where, I think the strategy of how we handle our personal finances can really come into play. And everybody’s different, right? If we were trying to maximize returns on the current portfolio, I have a completely different approach. We’d be leveraging that portfolio to a large degree, buying a lot more property, thinking about some sort of entrepreneurial venture with that, that can tie into that business, but, no, Kate’s goal is, I want to be done in four years, I want to be simple, I want a paid off portfolio or very close to it, and I want to realize the vision of, Your Money or Your Life with this, which is, obviously her book recommendation with that, and I think one that everyone should read.
And it’s perfect. It’s such a winning formula. The paradox, though, that I want everyone to be careful of is that, by achieving that goal, she’s going to have a rock solid financial position that’s probably going to be able to sustain her for the rest of her life, and she’s going to get wealthy anyways, on top of that. And so failing to at least plan or acknowledge around that being a possibility, which I think is where that discussion from the 401k happened, or maybe grounded in is, I think, a mistake that you can think through. Just because I don’t care to win big downstream doesn’t mean that I shouldn’t acknowledge the high probability likelihood that reasonable stewardship of my 401k assets or other investments, once I’m financially free, will probably just balloon throughout my life if I’m operating with a margin of safety with it.
So I think it’s a good problem, I probably used way too much jargon in there and lost myself in thought, but that’s my highest level takeaway from today’s show.

Mindy Jensen:
Wow, I have nothing as close to that, but listeners of this show know that you are going to lose yourself in jargon and I’m going to come in with a really happy, I agree. But I do agree. She’s got a great story. She’s definitely going … you don’t get to her position of a $2 million plus net worth at age 36 and making $180,000 a year, and without having some sort of momentum behind you. I really don’t think that she’s going to be able to quit her job and just not make any more money. I think another rental property is going to pop up in her hometown, and she’s going to jump on it, because it’s going to be a great deal. And I think that’s just going to continue to happen for her.
So at 36 she has 23 properties, by 40, she’s probably going to have 25, maybe 30. Maybe somebody comes to her and says, “Hey, I’ve got a whole portfolio of properties that I want to sell to somebody who’s going to take care of my tenants the way that you take your care of your tenants.” And there’s just a lot of opportunities and, what’s the phrase? The rich get richer. And I just see her net worth continuing to balloon. And like you said, if you don’t plan for those tax implications down the road, she could have, I mean it’s a good problem to have, now I have to pay a lot in taxes. Well, you have to pay a lot of taxes when you make a lot of money, it’s like you’re paying your fair share.
So when you have to pay a lot in taxes, that’s another good problem to have, but if there are ways around it, that’s when you could benefit from a conversation with a tax pro, who can help you with the ins and outs that you and I just don’t really know. But again, I think this was a great story and I had a lot of fun with her.

Scott Trench:
Yeah, she’s crushing it. I hope we hear from her in a year or two and see how things are going. I wonder how things will turn out, we’ll see.

Mindy Jensen:
Yeah, yeah, maybe even in a year. That would be great. Okay. I would like to ask our listeners a question. We love doing these finance reviews and we love it when you apply to be on the show. We are looking for anybody to apply who has an interesting money story. We’ve had a lot of recent guests who are very successful in their finances, but that doesn’t mean that if you have debt, you can’t apply. We would love to talk to anybody about their finances, and you can apply to be a guest on the show at www.biggerpockets.com/financereview. Thank you.

Scott Trench:
I want to echo that real quick. Because I know Mindy was about to say goodbye to everyone but, I just want to be like super clear about that. There’s a lot of folks that come on and we’ll hear from them and they’re like, “No, I want to I want to fix my financial position before coming on the Money podcast.” Well, if you’re struggling in debt and don’t know exactly what to do next, this is the perfect place, the perfect time. If you know what you need to do, and you’re going on it, that’s one thing. But if you’re wondering, we want to hear every money story and I think we don’t get enough applicants from folks that are struggling and need to build the basic building blocks of the financial position. So you’re going to help a lot of people as well-

Mindy Jensen:
Absolutely.

Scott Trench:
… with that.

Mindy Jensen:
Absolutely. I hear from people every single episode. “I learned so much from this episode.” Every single episode I hear from people. So, I would love to hear your feedback, but also I would love to hear your story. Please apply. Scott, should we get out of here?

Scott Trench:
Let’s do it.

Mindy Jensen:
From episode 246 of the BiggerPockets Money podcast, he is Scott Trench and I am Mindy Jensen. Thanks. See you later alligator.

 

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