The “Middle Class Trap” That’s Keeping You in Debt

Mindy:
Welcome everyone to the BiggerPockets Money Podcast where we are answering your tough questions today. We are going to talk about losing a job, being in the cycle of debt, syndications, and house repairs. Hello, hello, hello, my name is Mindy Jensen and with me as always is my smarty-pants co-host Scott Trench.

Scott:
Thanks Mindy, it’s great to be here with my only-wears-digital-shorts co-host, Mindy Jensen.

Mindy:
I don’t even understand that one.

Scott:
Me neither, but I thought it sounded fun.

Mindy:
That’s the best. All right, 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 recover from a financial setback, like many of the folks asking questions today have, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.

Mindy:
Scott, today’s money moment is stop buying fast fashion. Fast fashion is super trendy. It’s quick to come into the design studio and quick to get out the door. They’re using cheap fabrics, they’re using things that aren’t going to stick around for a long time because they don’t need to because you’re just going to jump to the next garment. Instead, think about buying some classic pieces. Some more expensive pieces that are built from quality materials that will last you a lot longer. Your clothing budget will thank you in the long run because you’re buying one sweater and wearing it for multiple seasons. I’ve got some sweaters that I’ve had for decades. I don’t know that they’re necessarily super high quality, but they’re my favorites. So I’ve had them for a super long time. And then when you already have them, you’re not buying more and more. You’re also not contributing to a bunch of junk in the landfill. So from an environmental standpoint, this is a one-two punch. Stop buying fast fashion.

Scott:
And the best place if you are going to buy fast fashion is Costco. Costco always has the latest fashions in there. It’s like 10 bucks, you get 15 new pairs of fashionable socks, and those lead to networking opportunities. The other day I was looking at a property with my wife and I took off my shoes, of course, because it’s a nice house. And as I was on the way out, another investor looking at the house, commented on my nice Puma Costco brand socks. And so it led to networking opportunities, classic long-term look there, and a great conversation starter. So Costco, for those latest fashion statements. You have a money tip for us, email us at [email protected].
All right, today we’ve got our third episode called Ask Mindy and Scott here, a new kind of Finance Friday. And as a reminder, if you’ve got a question for us, please feel free to submit a written question or voice memo to www.biggerpockets.com/moneyquestion. And with that, let’s kick it off. Mindy, do you want to read the first one here?

Mindy:
“Dear Mindy and Scott, I think I may lose my job. My company was recently bought by a private equity firm and there have been quite a few red flags. My boss put a meeting on my calendar next week with no context. I’m afraid that I’m going to be let go. I have been applying for jobs, but I haven’t been getting any interviews due to how competitive my industry is with all the recent layoffs. What should I do? How do most companies do severance? I have an emergency fund with eight months of expenses, and equity in my house, but I’d rather not touch that. Do I try to freelance? Help. Thank you. Scared.” So Scott, do you want to tackle that first? I’ve got a lot of thoughts.

Scott:
Sure. I think there’s a real fear here. This is not something to just brush off, this is something you got to tackle head-on. And I think first we have to stand back and acknowledge reality. Maybe there’s a real chance, maybe there’s a 50% or greater chance that there’s going to be a layoff coming in this particular scenario here. We’re not getting other interviews for new jobs. We do have a good financial position with an emergency reserve. And to their point, they should expect some level of severance. That severance can range anywhere from two weeks to eight weeks. If you’ve been there a long time, maybe you get even longer than that in terms of severance pay. And there’ll be some unemployment benefits as well. So I think the first thing here is to acknowledge the reality of maybe if there is a layoff, I’m not going to be able to get the same level of pay in the near term at this new job or in the same industry.
What is my worst case realistic scenario that I would have to cut back down to in this situation? And what would be the job that I could go out and find, even if it’s in an unrelated industry here? And then I’m going to have to reset and think through what am I going to do in order to make that happen as soon as possible or to have that option on the table in the event that this is happening? So I don’t think that is anything to do here from an activity standpoint other than react to the news, which may or may not be any better. This person has already been getting interviews, but I think it’s about looking at their household budget and being ready to potentially scale back and to accept the reality of a new lower paying job here, it is just terrible news and I don’t have a magic bullet for this person.

Mindy:
So I like what you say about thinking about accepting a lower paying job because a lower paying job is still paying more than $0, which you will be getting if you lose your job. So I think a lot of people have this, maybe this block, “Oh well I was making a hundred thousand and this other company only offered me 80. That’s a pay cut.” Well, it’s a huge pay raise from the zero that you’ll be getting if you don’t accept it. So I think that’s a really great point, Scott. Going from these questions, what should I do? I once lost my job. I didn’t lose it on purpose, but they absolutely should have fired me because I was a terrible employee. Learned my lesson, now I’m the best employee ever anybody has ever had, right Scott? But once I lost my job. I lost it on a Friday and I had a pity party the whole weekend, and starting Monday, I went to the unemployment office and filed for unemployment.
At the time there was a week of lag before you could start getting unemployment. So you want to apply for unemployment as soon as you possibly can. Then I made it my job to apply for jobs, and we don’t have a gender assigned to this person asking this question, but there is some statistic like 90% of men will apply to a job that they’re only like 40% qualified for, but women won’t apply to a job unless they’re closer to 90% qualified or a hundred percent qualified for. My thought is, if it sounds even remotely interesting to you, apply for the job because they’re not going to call you up and say, “Hey Bob, are you looking for a job by any chance?” They’re only going to be responding to the people that are applying. So when you start looking for a job, apply for anything that seems even remotely like you could get the position and let them say no to you, don’t say no to them before you even start.
Another thing to consider, if you have been applying for jobs but haven’t been getting any interviews due to how competitive the industry is, how does your resume read? Does your resume read full of great things? Or does it say, “Hey, I used to work at this one company one time.” There’s a real art to writing a resume and there are resume services out there that can take what you have done, and not lie about it, but embellish or make it sound even better than the way that you have written it, and you are wanting to stand out in a crowd. And the resume readers are going through the resumes and just saying, “Nope, nope, yes, maybe.” And they’re just sorting through really, really quickly. So you want your resume to be the best that it can possibly be, and if you have to drop a couple hundred dollars on a resume writer to get a really great job, it’s totally worth it.
How do most companies do severance? I don’t think there’s any particular formula that they do. They just kind of figure it out and give it to you, so I don’t really want to spend a lot of time on that question. I have an emergency fund with eight months of expenses. This is what your emergency fund is for. Just because you don’t want to touch that doesn’t mean that you shouldn’t touch that. So I would absolutely be the best employee that you can be right now, get your resume in front of every single person that you can, get a great resume out there and it could just take some time and that kind of stinks. But don’t be afraid to take a lower paying job than where you’re at right now just to tide you over. And just because you take a lower paying job doesn’t mean you have to stop looking for a better job.

Scott:
I think, Mindy, your advice here has been fantastic. I completely agree with your framework there. Control what you can control, get your resume updated. Go hire somebody to take a look at it and polish it. Make sure there’s no typos. Make sure that it shows metrics that showcase your success at your previous roles there. I took this part of the business from this to this, I did this to this. You’re already trying to get other interviews. Make sure that that effort is very robust, to Mindy’s point, begin expanding the scope of those things. And then let’s say that your fear comes true and you’re in the room and you’re getting let go, as we fear in this question here. How do we handle that situation? Because that’s a big moment. Getting fired is something you’ll never forget for the rest of your life. It can be surreal, I imagine. I imagine it’s a terrible time. But come into that, you have the potential here to know that it’s coming, and how you handle that can make a difference.
So maybe you come in and you say, “I have a list of questions here. What are the severance?” That will probably be explained to you, but, “How much severance will I get? Will I be eligible for COBRA? Is this a termination for cause or is it a layoff? In which case I’m available for unemployment.” And then, if it’s a layoff because the company’s restructuring, whatever, ask your boss in that meeting professionally, look them in the eye, confront the situation, understand their position. They’re probably not thrilled to be having to give you that news. It’s probably not their decision in this particular case, but ask them, “Hey, I’ve worked really hard for you. Here’s what I’ve done. Will you be a reference for me for my next employer? When I come in, can I give them the reason for the termination and can I list you as a reference in there and give them your number to call?” That would be a way to handle the moment in the way to your maximum advantage in a relative sense in this situation. So I think that’s one thing to think about as well.
And then to Mindy’s point, you go down the path in increasing your odds. And then fundamentally, I’m going back to the highest level point here, the issue here is the employer has way too much power over your life in this situation because of the industry dynamics here. We come back to the financial foundation, really, really focusing on that budget, building up this even bigger emergency reserve, building up an investment-base outside of your home equity and that emergency reserve so that you have other streams of income because you never want an employer to have this power over you again.
You want the next conversation in 10 years, if it ever comes, to be one where, “Well, I’ve got a real estate portfolio and a stock portfolio and I’m [inaudible 00:12:53] here, and I’m going to hang out and go on a trip for six months.” And that needs to be a consuming aspiration for you on a go-forward basis when you are able to get back on your feet and get things going because that’s the power dynamic that I think is much more healthy in this country and I think a lot of people unfortunately are in the situation you are in where that power is in the hands of the employer.

Mindy:
Yep, absolutely. One last comment. They said that they do have equity in their house. It might be a good idea to go to the bank now and get a home equity line of credit. You’re opening a line of credit, you don’t have to take any money out, but the bank doesn’t want to give it to you if you don’t have a job. So if you do have a job and you go into this meeting and you don’t get fired, open that line of credit so you have access to it should the next meeting be the one that you don’t want to have. Then you just have another opportunity to access cash in an emergency.

Scott:
Okay, “I’m in my mid-forties and live in a house with dual income. We bring home $200,000 pre-tax. We have a robust 401(k) but are stuck in the cycle of debt. We can’t seem to get ahead to save enough for an emergency fund, so every time an emergency happens, we charge the credit card. I feel like every dime goes to the mortgage, cars, IRS, creditors, groceries, et cetera, and there isn’t much left to save. I have no idea where to start. Any advice would be helpful.”

Mindy:
I love this question because the answer is so simple. They don’t have an income problem. Their income is going to be what, 140, 150 after tax? That is livable. This seems so silly to say, you can live off of that in any city in America. It’s going to be tighter in New York City and San Francisco, it’s going to be way easier in Iowa, but it’s a livable income. This is a debt problem, this is a spending problem, not a debt problem, a spending problem. And I am willing to bet large sums of money that they have no idea where their money is going. It says, “We feel like every dime goes to the mortgage, cars, IRS, creditors, groceries, et cetera.” The key is that et cetera, they don’t know where the money’s going. So I’m going to go all the way back to the beginning of 2022 biggerpockets.com/mindysbudget. Go check out my line-by-line spending tracker that I did for five months in the beginning of 2022.
The fact that it was last year is irrelevant. It’ll show you how I did my budget and how I blew my budget because I didn’t know how much I was spending in each category, and it’ll also show you a lot of different categories. I have categories like parties, because I have a swimming pool in my backyard and I host a lot of backyard parties. If I’m suddenly feeling a pinch, I can stop spending in that category altogether and still have a good life. I also have categories for tap rooms because I live in a city that has a lot of breweries and I go to tap rooms with my friends. I can cut that out really quickly, and still have a great life.
There’s a lot of things that I track very granularly because then I know where I can cut and still have a great life. And I think if they started tracking their spending, they would discover almost instantly, where these holes in their budget are and they could close those down, close them down a little at a time, close them down a lot at a time, and quickly discovered that it is in fact easy to save when you’re making 200,000 pretax.

Scott:
Mindy, I am going to have a slightly different take here. I agree with everything you said, and I think that what you described is 20% of their problem, and there’s another 80% of the problem which I refer to as the Middle Class Trap. This is a classic example of the middle, or in this case, upper middle class, American trap. I believe that this individual and their spouse purchased a house that was at the limit of their purchasing power not too long ago, and so 30 to 40% of their income goes to mortgage payments, interest taxes and insurance. The principal interest taxes and insurance plus other home upkeep. I believe that they have at least two financed newer vehicles. I believe that they have borrowed in the past for various other expenses and typically spend most of what they earn, in a general sense.
And so I agree with your point that there’s probably money leaking through, but I think that the painful reality of their situation is that even though they have a good 401(k) and probably a lot of home equity, their fixed overhead is going to be so suffocating, if you will, for their financial position. Even if they were to cut back on everything in this credit card creditors and groceries and et cetera category, I think it’s going to make a tiny impact on their overall ability to get ahead. I bet you it’s a 12 to 18 to 24 month slog even with their high incomes to pay off the car loans, the personal debt and the other types of things. And it’s really the root cause of their problem is their house and their cars. And so I completely agree that a great place to start is keeping that budget and really getting cost conscious on everything. They’re going to be miserable with that and they’re going to have to keep it up for several years.
If they want to actually escape this trap, I would encourage them to really take the hard look and say, “What is my house doing for me right now? Should I just sell this thing and should we just downsize by half?” In terms of square footage or price. “Should we rent a much smaller place? Should I sell a bunch of the crap I’ve accumulated around this house and kind of just start over with a new lifestyle? Should I sell both of these cars?” I’m assuming there’s two cars at least in this scenario because I’ve seen this before, not this person, but this type of question. “Should I sell both of those cars and should I buy paid-off used economy vehicles on Facebook Marketplace in the three to $10,000 range? And should I live like I’m making $40,000 a year or 50,000 or $60,000 a year to truly get ahead.”
Within three years of making that choice, those hard choices, at the highest level, I believe this couple would essentially emerge with zero consumer debt, be accumulating 50 to $100,000 dollars a year in liquidity, and have the ability to make really big investments. And within five to seven years, I bet you they could buy back everything they have today with the passive income generated by their portfolio given their exceptionally high incomes. So they won’t do that, that’s crazy land. They’ll probably have to take your advice, Mindy. But I think that’s really their root-cause problem here, and how to get out of it.

Mindy:
Yeah, you know, Scott, I agree with absolutely everything you said with one caveat, the house payment. I would encourage them to look at what their current house payment is. If they bought it a couple of years ago, they could be in a very low interest rate mortgage that even trading a smaller house could increase their costs. So definitely run those numbers before you just put your house on the market and buy something smaller and make the situation worse. That’s the only caveat I would say to any of what you just said.

Scott:
And that’s the trap.

Mindy:
Yeah.

Scott:
They’re trapped in this house, would be my guess. Without knowing anything about their financial position, I bet you that they’re trapped in this house because of that low interest rate mortgage, and they see no alternative. And the alternative is right there, it’s just so unpleasant on a relative standpoint, and it’s selling the house and significantly downgrading to offset that problem that you just described.

Mindy:
But even if the house can’t be sold because maybe their house payment is $2,000 now and to downsize would get them another $2,000 house payment, that’s silly to go through all of that for the same thing. There’s a lot of other things that you suggested that they could do. Sell the cars is a great one. They did say cars plural, so I bet your guess is pretty spot on.

Scott:
I bet you though that it’s the house and the cars are the meat of their problem here in terms of fixed overhead and cash outlay, and I bet you that if they don’t sell the house and redo that car situation in a pretty intense way, like I just outlined, that they’ve got a five to seven to 10 year journey before they actually go on to pay off all of this debt and accumulate any type of meaningful emergency reserve and maybe a real investment or two. That’s the difference, is they got to make those extreme moves if they want to actually get ahead in a reasonable period of time.
But yes, time will be their friend. In 20 years, their mortgage will be mostly paid off, these cars will get paid off and if they don’t buy brand new ones, and let the current cars that they have be paid off and all that, their problems will slowly melt away, that we just heard here. The couple earns enough income to do all that stuff, and if they stop accumulating debt that will. If they want to get ahead fast though, they got to make much bigger, bolder changes.

Mindy:
Yep, exactly. That’s the key there. How fast do you want to make these changes and how bold are you willing to go?
Okay, Scott, let’s move on to syndications, “Dear Mindy and Scott, how do I find non-accredited syndications and how do I properly vet syndications? Thanks, Nicole.” So Scott, I’m going to jump in here first because I’m very opinionated about this one. First, how do you properly vet? You go and take some time and listen to episode 219 of the BiggerPockets Money Podcast where Jay Scott, who knows everything, shares an enormous amount of information about syndications; how to vet them, how to choose them, what to look for, what to not look for, how-to anything about syndications. It’s a two-hour-long episode and it is not boring in any part of that. It’s absolutely packed with information about syndications.
Now, how do you find non-accredited syndications? I don’t know, and you shouldn’t. If you are not an accredited investor, you should not be investing in syndications at this time. There is a percolating issue with commercial real estate and that’s what syndications are investing in, for the most part, is commercial real estate. That’s what I’m focusing on. And there’s a lot of things coming up. The rising interest rates have a big effect on commercial real estate because commercial real estate is not secured with a fixed rate mortgage for 30 years. It is secured for a fixed rate of a short amount of time; three to five years depending on the mortgage. And then it reamortizes, so all of these loans that have just been had at three to 5% are about to come due. We’ve got, in the next two to four years, we’ve got a lot of loans that are going to be going from making money to most likely not making money.
And what this means for your new syndication is that there’s a lot of properties coming on the market, overpriced or not cash flowing, or the people selling them are trying to get money back and I think it’s going to be a mess. I think you should absolutely put your energy into learning about syndications. Listen to that episode, do everything that Jay suggests, but then also put your energies into investing in different ways right now because I don’t think it’s the right space for non-accredited investors.

Scott:
Mindy, I think those are all great points here. Just to frame it out for this person. How does one vet the syndications? Well, you go through a long list of questions that seek to understand who the sponsor is and what the deal is. So if it’s an apartment complex, who’s the sponsor? How long have you been in the business? What’s your team like? How long they’ve been in the business? What’s your track record? How long have you known this market? What qualifies you to be an expert in this place? What are you going to do with this pile of money? How long do you intend to hold it? How much of your own money are you putting in the deal? How are you getting paid? Are you getting paid just to buy the property with an acquisition fee? Are you getting paid to manage the assets over time or are you getting most of your compensation on the upside?
I would personally look for someone that’s getting paid a modest salary, not a big acquisition fee, and has most of their interest on the come with the carried interest in the profits of the deal longterm. And I’d love to see somebody who invests a significant portion of their personal net worth in the deal and who has satisfactory answers to the expertise questions longterm, and ideally has a healthy fear of the market. It’s not just some syndicator who’s going to tell you a bunch of arrogant surefire, “I know this is going to work,” crap. Someone who has a healthy fear of the market is going to get my respect much more than somebody else. Okay, that’s the sponsor. That’s a very brief list. We have a two-hour deep dive into this with Jay Scott, as Mindy said.

Mindy:
No, I want to just highlight what you said, Scott. Beware. Be very wary of the syndicators who are glossing over issues who are saying, “Oh, it’s totally fine. There’s no problem in commercial real estate.” I’m telling you that there is a percolating problem. It’s interesting to watch all of these moving parts going on and saying, “Wow, I didn’t realize that could be an issue.”

Scott:
A syndicator is a salesperson. They’re selling you in giving you their money because they’re going to make money. If they buy a hundred million dollars complex, just for easy math, big number, about a hundred million dollar complex, they’re going to raise 30, $35 million in equity. They’re going to make 1% of the a hundred million dollars, a million dollars, to buy the thing. Then they’re going to make 2%, 600, 700 grand a year, 2% of the 35 million a year, to manage the asset over time, which does not include the property management. It just includes their salary and the staff on their team that will do the analysis. And then they’ll get 20% of the profits. So if they move that property from a hundred million to 130 million, investors double their money, they may get 20% of that over a five-year period. That’s $6 million. So if we’re counting, we have a million on the first part of it, five times $600,000 is another 3 million over a five-year hold, and then we’ve got 6 million, in this example, with a 20% carried interest spread on the downside.
So they’re very interested in selling you and a lot of other people in raising their money. Okay, that’s great. It’s a healthy business model. Healthy is the wrong word, but this is a proven business model, it aligns interests. But I want to know that that person’s not just getting all this upside, they’re also putting in five, $10 million of their own money, in this particular example, at that scale. I would love to see that in that situation. I’d love to see a healthy fear, that’s a meaningful percentage of their net worth. This person’s not a billionaire putting in 5 million, they’re worth 25 million and putting a quarter of their net worth into the deal. That gives me a lot of reassurance that this person believes strongly in the opportunity. So those would be things on the syndicator side.
On the deal side, I’d really want to understand exactly what I’m getting into. What is the market like? What are rents projected to grow? What’s supply coming on? If someone’s telling me that rents are going to skyrocket in Austin, Texas over the next two or three years, or I’ll pick Florida for example, I’m not going to believe them. There’s too much supply coming online and there’s a lot of puts and takes there. I want a more conservative approach where they’re going to actually add value. Every deal is a value add because every syndication deal is a sales pitch. We love our syndicators. It’s great, they’re trying to make money like anybody else, and they often produce great returns for investors, but understand that not every deal is actually a value add play. You have to really understand, are they going to put in $20,000 of work per unit to truly upgrade it? And there’s a stunning before and after picture, that’s value add, that’s going to drive rents up.
I want to know all about the market, the plan, the property that they’re purchasing, how they’re financing it, where is the debt coming from? Are they using a bank debt? What’s the interest rate? What are the terms on that? Is it fixed rate? Is it variable? What kind of things are they assuming there? Who’s guaranteeing the debt? A lot of these loans are not non-recourse and somebody’s guaranteeing it. Sometimes that’s a really prominent investor, someone bringing in 10 million on the LP side who has particularly favorable terms with the investor, and sometimes it’s a sponsor personally guaranteeing the debt. A sponsor personally guaranteeing the debt is a good sign, that means they’re taking additional risk on the deal in a lot of cases, and something that gives me a little bit more confidence.
So those are all questions. You are entering the Wild West. If you have a fund, now you got to do the same diligence on 10 deals in the fund. The history of what’s happened before and what’s going to happen next. So you really need a lot of information to do this with a high level of confidence over time, I think. And I think that a lot of LPs in the last five to 10 years haven’t really put in this level of work in a lot of cases, and trust that other LPs are doing that. You’re starting to see some Wall Street Journal articles. There was one a few months ago about a guy who lost a lot of investor capital. We’ll see how that plays out, whether that was mismanagement, bad luck, other factors that went into play here. But just making sure that the syndicator isn’t going to run off with your money to another country is one factor you have to consider. Then there’s the actual extreme difficulty of driving excellent returns in this space.
So listen to episode 219. That’s just a teaser that I just gave you right there, and go through it. And that’ll give you a good framework. And then to your second broader point, “How do I invest in non-accredited syndications?” Let’s unpack that question. Why would a syndicator be reaching out to non-accredited investors? That needs a good answer. One thing you got to be looking out for is the syndicator may say a lot of things to answer that question appropriately, and the good answer to that question is, “I want empower non-millionaires or the non-rich to be able to invest in my investment as well. So I’m willing to do all this extra effort.” That’s the right answer technically in my opinion. But you got to be careful because one has to worry that the reason that they’re going to all that trouble to market to non-accredited investors is because they can’t raise enough capital for the deal from accredited investors. That’s a concern that you’ve got to understand and go into with your eyes wide open. It’s harder for non-accredited investors in this space.
Usually the minimums are 25 to $50,000 because it is a pain in the rear to manage a $10 million pool of capital in a hundred dollars increments, it’s much easier to do it in 50 to a hundred thousand dollars increments from that. There’s a thousand more people that are investing a hundred dollars increments. So these are all things that you need to understand here, and I think the right answer sadly for you is to go get accredited. Now, the good news is you don’t have to be a millionaire and you don’t have to earn a 200, $300,000 income anymore. You can pass a test. There’s a Series 65 exam, I believe it’s 180 minutes to complete the exam. I don’t know the cost for it. I should probably go and find it and take it myself. Oh, it’s 187 bucks on this particular site, finra.org. I don’t know if that’s a good site or not. It’s just something I googled in response to this question. And if you take the test, then you’re an accredited investor, so then you have access to all the accredited deals.
So long rant over there. Hopefully that was helpful to folks that are considering syndications. We at BiggerPockets hope to solve this problem in a more thorough way in 2024 by introducing content that begins doing that analysis. Who are you? What’s your deal? What’s your background? How are you making money? What are the prospects for the deal? How have your last three turned out? And all that kind of stuff. So we’re excited about that. If you’re interested in that, you can email me at [email protected]. I was hoping to get that up earlier in 2023. It’s taken me a lot longer. You can tell I’m passionate about the subject though and want to explore it.

Mindy:
No, Scott, we couldn’t tell that you’re passionate about this subject. You hid it very well.

Scott:
How’d I do, Mindy? Any reaction to all that?

Mindy:
I understand what you’re saying. I would be curious how somebody could pass that exam but still doesn’t have the either 250k in salary or the million dollars in net worth, and would still feel comfortable investing in syndication. So I’m going to stick by my assertion. If you are not an accredited investor, I don’t think you should be investing in syndications. However, Scott gave you a different way to think.

Scott:
I would just say to that, the price of entry into most legitimate syndications is 25 to $100,000. So if you earn $180,000 a year, have been very frugal and have a $600,000 net worth, and 150 of that is liquid, perfectly reasonable for you to plop $50,000 in a syndication. Accredited investor cutoff is arbitrary and I think it’s bad policy, frankly at the highest level. That’s a conversation for another day. I love the little guy. But yeah, you got to have the liquidity. And if $50,000 is all you have and you’re putting it into syndication, you got to really be asking yourself, “Why am I putting that at risk in what is likely to be a highly leveraged investment where I could lose all my principle?”

Mindy:
Yeah, don’t do that. If you only have $50,000, don’t be investing in syndications. All right, Scott, moving on.

Scott:
“Dear Mindy and Scott, my unemployment isn’t covering everything. I lost my job during all the tech layoffs. If I need to skip a bill, loan or credit card payment, which is the least detrimental to skip? Sincerely, TJ.”

Mindy:
Well, unemployment isn’t covering everything. I hope that you are, just like I said in the first question, I hope that you have made finding a job your new job. I would encourage you to get a job at one of the many places that is always hiring like Starbucks or a restaurant or the grocery store. I’m seeing a lot of really, really big dollars that they’re throwing out there, like $20 an hour, $35 an hour to do these jobs that are unskilled. And I say unskilled as you don’t have to have a college degree to do the job, not that the job doesn’t require some level of skill. But if that is not an opportunity for you, the question says, “If I need to skip a bill, loan or credit card payment, which is the least detrimental to skip?” The least detrimental is going to be the loans from family members, if there’s anything that you have out there.
Of course you want to say to your Uncle Bob, “Hey Uncle Bob, I’m really in a pinch right now. I’m not going to be able to make these loan payments to you. I’m going to put those on the back burner and add them on at the end. Of course, I will continue to make these payments once I get a job again.” What bills can you skip? Utility bills, and I don’t recommend skipping any of this, but if you have to skip something, I think utility bills have to go for a really long time before they can be cut off, and I think depending on what area of the country you’re in, in the really cold months, I don’t think they can turn off your heat or your gas or your electric or however it’s powering your house, your heating. So that would be the one that I would skip.
I wouldn’t skip a credit card payment if at all possible, but I would also be calling up every single one of these lenders and credit extenders and saying, “I am having a problem paying my bill. Is there anything that I can do to reduce the amount that I owe you or reduce the payment that I am making on a monthly basis until I get a new job?” I would absolutely not skip your mortgage payment because they will start foreclosing on you and you don’t want to lose your home. Scott, do you have anything to add to that?

Scott:
Yeah, I think I still am struggling with the first sentence, “My unemployment isn’t covering everything.” I would have much more confidence in this question if it said, “My unemployment and my side income from my scrappy activities as an Uber driver or driving for DoorDash or cleaning houses or mowing lawns or working at Taco Bell or packing groceries at King Soopers, or whatever your local grocery store is, isn’t covering everything.” “I lost my job during all the tech layoffs.” I understand that those jobs are not going to pay the same as a tech job does here, but this person is not being able to pay all of their bills, and I think they need additional income on that. And if they’re a tech worker, they’re clearly capable of also taking on some of these other types of work. So I think that’s really important. First point here is, that needs to be addressed.
After that I think, okay, if we’re working full-time or as close to full-time as we possibly can in a gig economy while we’re looking for a replacement job and that income and the unemployment isn’t covering everything and we’ve sold the car and downgraded to a much more affordable option in the three to $10,000 range, and we are not going out to dinner and not ordering out any type of food, cooking our own meals and have cut back on essentially everything, and we’re still in this position where we’re not able to cover all the bills. Okay, now I agree with your point. If I have to cut out something, it’s just not going far enough. Okay, utility bills would be the first place to potentially lay off for a little bit. And you got to be really, really uncomfortable with that game and then begin thinking about selling the house if that doesn’t change pretty abruptly.

Mindy:
Yeah, and that’s a good point, Scott. It’s been a long time since I collected unemployment. I believe the unemployment and then any income you get takes away from the unemployment. But again, if you’re making money to come in, you can always generate more income by doing more gig stuff, more Uber, more DoorDash, more all of this stuff. But yeah, if you’re in tech, you need to cut your expenses to the bare bones and then also make it your job to get a new job while you’re doing all of these other things. I like your answer, Scott.

Scott:
I agree with that. And there’s probably a cutoff there, but you got to do that. Maybe you turn to waiting tables or tending bar or mowing lawns, like you mentioned earlier, something that will have a lot of tips in cash. We’re not loving the situation. We got to rectify the root cause there, but I’m not hearing about the fight in this question, first and foremost. I’m hearing about, “I lost my job and my unemployment’s not covering everything.” It’d be great to hear about the fight that the person is putting in place to do it because this is a tough time.

Mindy:
That’s a good point. All right, our last question. “Dear Mindy and Scott, I feel like I bought too much house. My original budget was 250,000 and my house purchase was 310,000. My house now needs repairs and I’m not sure what to do. My take home pay is 5,500 and my mortgage alone is 2,600. I haven’t had trouble paying any bills, but I’m now worried because I have student loans kicking in and my house needs $24,000 worth of work. What should I do?”

Scott:
I think we have a similar framework to some of the other questions we’ve heard here on BiggerPockets Money where I would really like to hear the answer to say, “My take home pay plus my evening job or my weekend side hustle is $5,500 and the mortgage alone is 2,600. I haven’t had any trouble paying the bills because I worry about student loans kicking in and the house needs $24,000 of work. I’ve pushed that down to $8,000 because I’m going to do it myself now and not hire out any of the work on that.” Okay, now we’ve got a different problem. So I think there needs to be reframing here of this situation is not going to resolve itself. There’s not going to be a magical change to the numbers here. There are two ways out of this situation.
First, is hustle and sweat and hard work and the old back to foundation stuff, getting the evening job, tending bar on the weekends, mowing lawns, whatever it is, earning more income, and when they’re not doing that, doing the work that their house needs themselves, watching YouTube videos as their new hobby, going to Home Depot to buy the deck replacement materials, whatever it is, for their house. You can do all of this work yourself in a lot of cases if you have the skillset to make, what is it, 70, 80, a hundred thousand dollars a year, a $5,500 take home pay, depending on where you live and your tax rate. If you have the skills to make close to six figures, you have the skills to watch YouTube videos and do a big chunk of that housework yourself over a long weekend. That would be my first approach to this.
And if we pencil all that stuff out and it just doesn’t work, all the Netflix in their life is kicked out, all of the eating out and it’s replaced with either extra work or work on their house, then you got to sell the house and you got to think about relocating or moving here. Maybe renting, and again, downgrading the position. I imagine that they can get a roommate or live somewhere that is much cheaper than $2,600 a month in rent for example, and that would remove their $24,000 worth of work that the house needs and the cash outflow problem that they’ve got from their mortgage.

Mindy:
Scott, I love all that what you said. I’m going back to the very beginning of this question. “Dear Mindy and Scott, I feel like I bought too much house.” I want to be very kind, but they did buy too much house. Their original budget was 250 and they bought 310. They went over budget by $60,000, and that was a choice. And now they have to live with that choice. In some regards, I think that maybe selling the house might be an option. Although, remember it costs between 10 and 12% of the sales price of the home to sell the house. As the seller, you’re footing the bill for the seller’s agent and the buyer’s agent unless you have negotiated something else, that is traditionally how it works right now. Although you’re not responsible for that, that is how it has been for a very long time. There’s currently a lawsuit winding its way through the court system, challenging that. You don’t have to do that, but it does make it more difficult if you’re not paying the agent on both sides of the transaction.
And you just bought this house, you stand to lose a lot of money if you do sell. Are there any opportunities, like Scott said, to DIY the work? I can tell you, you can learn anything on YouTube, $24,000 worth of work. What is that comprised of? And how can you get that price down? If you can’t DIY it, if it’s something like HVAC system, which is really a large amount of DIY knowledge to jump into, can you barter with the service provider? Have you gotten multiple quotes? Is the first guy saying 24,000 because he doesn’t really want to do it, but if you’re going to pay 24,000, he’ll find time to do it. That’s also something that you’ll hit up with contractors is that they don’t want to say no, so they’ll just throw an outrageous price out there and if you say yes, then they’ll figure out how to do it for that price.
Student loans kicking in. That’s going to be something to contend with. And if selling isn’t truly in your best interest or just financially unfeasible, how urgent is this $24,000 worth of work? Is it just cosmetic? Push it to the side, who cares if your kitchen’s ugly? But if it’s raining inside your house because the roof has a hole, then that’s more urgent. And then are there any opportunities to get a HELOC? Which isn’t my favorite opportunity to pay for this work. A lone from your 401(k). Again, not my favorite, but there are ways to be creative when you are financing some of these repairs.

Scott:
Mindy, I think this kind of brings up, I think those are all great points to add in there, but I think what we’ve seen in a number of questions here brings up kind of a philosophical question that we’ve touched on in the past here. And in the past two, three months, we’ve had a couple of millionaires on the platform, on the show here, including yourself and Carl, who have struggled with being too frugal in some ways and not being able to enjoy the wealth that they’ve accumulated and spent to a certain degree. After years or decades of spending 50% of your income probably, or less, in order to get to those points. And I hear the arguments against that from some folks like Ramit Sethi saying, “Hey, that’s way too much. We’re not enjoying life or whatever here.”
But we’ve had a number of questions today on the podcast that fundamentally boil down to systems that do not have enough slack in them. And if these folks have targeted or spent a couple of years, the first couple of years, of the journey targeting a 50% savings rate, an extreme savings rate with that and the sacrifice and the discomfort and the tough challenges that produces, the reduced lifestyle that’s way below what you could live. The type of decisions that you made and Carl made, that I’ve made, and that many of the folks that we’ve had on the show have made. We don’t have these problems to a large degree here. And I would much rather be confronted with the challenge that you and Carl have of trying to figure out how to optimize the spend on a lifetime amount of wealth that you’ve got in place, then the pain and lifestyle reduction and forced to reset, that at least three of the questions we had today are going to face. And so I think that’s the key thing here is.
I’m all for the all-out pretty extreme approach in the first couple of years in the wealth building journey because it just removes the possibility of having the challenges that some of the folks that we’ve talked to today have in their lives. And I think that’s really the root cause answer here and the advice that I’ve really given throughout the show is, go back to that mentality. It ain’t that bad living in the half duplex, that’s too bed, one bath for a couple of years that pays for itself and generates a ton of wealth. It ain’t that bad driving a Corolla. I still do, to this day, even though I talked about buying the much nicer car and easily could. It’s just not that bad, it’s got Bluetooth, it gets great gas mileage, it gets me from point A to point B and in all but the most snowy or severe weather patterns, it doesn’t have that problem.
And I get it, I’m a high horse with the CEO job and all that kind of stuff, but even if I wasn’t, I think that that paid-off Corolla and those types of things would be able to prevent a lot of potential problems downstream. And of course it’s not pleasant having all these things happen or losing the job, but I think that that mentality can protect you and give power to you instead of your employer or to the federal government bringing back student loans in this example or the unemployment benefit program and the rules regarding that. And that’s what we’re here about for BiggerPockets Money is, solve the root problem today, go back to basics, get way on the positive side from a cashflow perspective and layer in the goodies and the nicer house and the nicer cars and the nicer stuff over the next couple of years as you generate passive income and alternative sources of income from other assets.

Mindy:
I think that’s a great perspective, Scott. And I was going to say, “Yeah, and you can always just spend the money later.” But clearly you can’t always just spend it later. That’s a muscle you have to learn how to flex as well. But that’s the better problem to have, in my opinion. But yeah, I like what you have to say, Scott. I think you’re pretty smart.

Scott:
Well, I think you’re very smart, Mindy. And I think you had great advice and answers to questions today. Should we get out of here?

Mindy:
That does wrap up this episode of the BiggerPockets Money Podcast, and if you have a question for us, you can submit it at biggerpockets.com/moneyquestion. All right, he is Scott Trench and I am Mindy Jensen saying till then, penguin.

Scott:
If you enjoyed today’s episode, please give us a five star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Mindy:
BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Kailyn Bennett, editing by Exodus Media, Copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.