PODCAST EPISODE 228: Real People Getting Real Advice



      • 00:00 – Paul welcomes listeners, and introduces guests.
      • 02:15 – Kevin and Jennifer’s plan.
      • 04:50 – Savings strategy.
      • 07:20 – Financing strategies.
      • 15:00 – Diagnosing risk.
      • 20:35 – Historical and future real estate investing
      • 25:25 – Next steps.
      • 28:21 – Episode ends, thank you for listening.

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PODCAST EPISODE 209: We Think They Should Build a Vacation Home, The Wall Street Journal Doesn’t

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Full Episode Transcription


Paul 0:00

Well, right from Episode 209 of our podcast and the pages of The Wall Street Journal I have with us, Kevin and Jennifer Baskin, so glad you guys could join us.

Unknown Speaker 0:11

Yeah. Thanks for having us.

Paul 0:13

Now, you guys, how did this come about? Initially, like? Well, I guess I’ve already shared with the audience you guys reached, you know, reached, you didn’t reach out to us. I had sent you a little LinkedIn note letting you know, we had put you in the podcast. But I’m super curious. We didn’t get a chance to talk about how did you ever get connected with the Wall Street Journal article?

Unknown Speaker 0:35

I just sent them an email. I mean, we read the Wall Street Journal, and we, there’s sections in there where they talk about financial advice. And you know, they had the game changers article that we’re in, but then they also have another one where they do you know, a yes or no, and people get their advice if you should do it, or you should not do it. And that’s what we were kind of hoping to be in. So when I sent out the information to the Wall Street Journal, I said, Hey, this is the idea we have about our vacation home. Do we build one? Do we build two? Do we do it now? Do we do it later? You know, kind of take it with it and play with a story. And they just connected us with Lisa. And we got into the game changers one?

Paul 1:18

Okay. Right on, right on. And so you you kind of went through it? How long ago? Just give people a sense of the timeline. How long ago did you guys interview for that article. And then when it was published, and then of course, here we are now, right near the end of February, which is a very special day. I don’t know why it’s special. But it is February 22 2022. Which looks really cool when I write it down on a piece of paper. So when I go sign some stuff today.

Unknown Speaker 1:45

Now there’s probably a lot of people getting married today. There you go. Yeah, this I guess we wonder we reached out Kevin, I think around June or July of 2021.

Unknown Speaker 1:58

Yeah, I think that’s when you sent the email to Lisa. And then we probably interviewed with her over the course of like a month or two. They published in September. And so yeah, they’re I mean, it’s been about, you know, six or eight months since we kick this off with them.

Paul 2:16

Right on. And while kind of their overarching advice in the article kind of lent itself toward a, you know, you should save up a lot more money and do more traditional financial vehicles before doing this. Buying a vacation property. And one thing you guys probably heard when you heard the episode, where we talked about your article, Corey said, I bet you they’re moving forward with this, regardless of what the advices and no. And so what we’re just in because of the way the advice was given was not at all about your property, but a lot about traditional financial products and cores, like I think they’re gonna build it.

Unknown Speaker 2:57

Core is right,

Paul 2:59

yeah. So you guys, you guys are moving ahead with it. How does that project stand now, say versus September when you talk to them.

Unknown Speaker 3:09

So when we got the advice from the Wall Street Journal, I had a feeling we were going to get that type of like boilerplate financial advice. After like reading that specific column, it’s it’s really geared towards, you know, sometimes people that don’t always make the best, like financial decisions. But I also felt like we were somewhat prepared to move forward with this. There was obviously risk involved, but it wasn’t the type of investment that would, you know, greatly, like impede our future financial success. So where we are now is we’re planning on interviewing builders over the summer, with the hopes of like, starting construction next spring, we determined like what we need to save between now and then so that we can get the 25% down payment, take out a construction loan. And then given where we are now in our current mortgage, we feel that amount of debt load will be reasonable given our incomes and current assets.

Paul 4:16

Yep, yep. Well, and I, I think you’re, I think you’re, you’re well informed both to be moved forward with real estate, not just sort of default back to the traditional financial product situation. But I think what’s also super smart, that is uncommon, and I don’t know if it’s uncommon in the group of people that you’re around, but it’s not like we see every single day that people are just chunking away, saving a significant portion of their income. Because what is have you guys done the math on what percentage you save of your gross household income?

Unknown Speaker 4:52

Yeah, we actually calculated that out when we were interviewing for the for the article, The Wall Street Journal. And it’s about I would say this was about six months ago, we calculated it to be 35%. And that’s, you know, we took our pre, what are that? Yeah, that’s just our annual savings rate. So,

Paul 5:16

and that includes the cash you say plus what you put in the 401k accounts, all that.

Unknown Speaker 5:21

Correct all of that. And so that’s just the extra cash we have. And then it does, but it doesn’t, you know, have anything about what our employer puts into our 401k or anything, it’s just like our money.

Paul 5:32

Perfect. And that that right there, just setting aside 34% of your income, regardless of the amount of income being made is rare. I don’t know if it does that feel like it’s rare given the people that you surround yourself with? Or is it not something that comes up? I’m just curious.

Unknown Speaker 5:49

Well, we’re just gonna say, I think we’re we’re minimalists. We were savers. So we don’t we don’t spend lavishly, but where we, you know, do spend some things like this and a second property, you know, where we can get rental income. And when we have kids in the future, we can spend vacations at this property. So we we choose our investments wisely.

Unknown Speaker 6:19

You know, less on clothes and shoes and more on experiences and you know, long term investments.

Paul 6:25

Right on? Well, let me if I may, one thing that you, thank you for the note that You sent Me, Jennifer, not only that feel great that you guys mentioned that our podcast was super helpful to you. Which it wasn’t necessarily our intention that we thought it’d be helpful to the two of you, but man, am I thankful it was I was just hopeful it was, you know, helpful to all the people reading that article, who it’d be very easy to read that go, I guess I shouldn’t build a piece of real estate. I mean, heck, they’re saying those people shouldn’t build a piece of real estate when they have next to no mortgage, when they have a lot of extra money set aside, when they’re really financially responsible. They’re telling those people don’t go develop your own property? Well, I definitely shouldn’t. So that’s what I was hoping I’d reach. And I’m just super thankful it reached the two of you. What I’m thinking we should do is talk a little bit about the financing bit. You know, how do you go about financing this property? Do you take any out of your home all of that good stuff that sounds like be a good user will kind of sketched it out today? And then hopefully, at some point in the future, we’ll have you guys back and we can discuss some different concepts, etc. No obligation or anything on your guys’s part, just fun content for the world, as long as it’s fun for you guys.

Unknown Speaker 7:42

For helpful, I would say and Jen, let me know if you agree. But that’s like the biggest questions we have. You know, do we do a cash out? Refinance? Do we do a construction loan? I’m sure there’s other alternatives. But that’s the piece we can’t really like figure out at this point.

Unknown Speaker 7:59

Yeah. And that we don’t have obviously any experience with it or know people who have experience. So you know, sometimes you need help guiding in the right direction before you make a mistake.

Paul 8:09

Yes, yes. So as you guys are considering, Well, should we do a cash out? refi? Should we refinance our primary residence? Where’s the best place to get money all that? It probably helps if we go back to a more 30,000 foot view? on just how is it banks make money? Okay, now, you think everybody’s generally familiar with this is we’ll look at today’s rates of interest. Let’s say you can get half a percent on $100,000. If you deposit it at a bank, right, so the bank has to send away from them. half a percent on $100,000 to keep that money deposited. So far, so good. Yep. Okay. Yeah. And then, when a bank lends money, do they lend it from their coffers? Or do they lend to other people’s money?

Unknown Speaker 9:10

Is that a question? They got other people’s money?

Paul 9:13

You got it? Yes. Now, the funny thing is, is that almost entirely articulate that way almost feels like they’re lending their money until somebody asks a question, and then you have to pause and go, Yeah, I guess you’re right. So then let’s say that they can turn that around and just for the sake of conversation, they can put it out on the street at three and a half percent. So now they have money coming in on that 100,000 at three and a half percent. Now, what not to put you guys on the spot, so I won’t. But what many people do is look at what we just did here and say see, the banks making 3% return. They must have to do a ton of these to be able to pay their bills and build all these buildings. Now all these employees making 3% Sending every transaction because that’s just how it feels the difference between half a percent and 1%. But that’s not the full story of how banks are making money in this instance. They’re sending out $500 a year to keep the half a million that is their cost. And what they have coming back in is $3,500. That’s a $3,000 return on a $500 investment. That is not 3%. But 600%. Does that make sense?

Unknown Speaker 10:41

So because the concept of net interest income for banks,

Paul 10:45

yep. That that there, because they’re not lending it on their money. They’re lending it on using your money. These are so good. Yep. Okay. So now, let’s take that I’m going to take a little bit of extreme degree of an example here. But I think it’ll work. So let’s say you have $100,000. And it’s your $100,000. What is the cost for you to put $100,000 into the new home? It’s full 100. Right? Because you guys, it’s all your money. Right? It doesn’t end up being long, like the bank’s money, anybody else’s money. It’s only your money that’s going in to the deal. And so it’s all your return 3% or four or whatever return you get on the property. Yeah. So just one time use of money. That’s it. That’s not bad. It’s just a one time use of money. But now, if we jump back, and now let’s look at what happens here. If you get, say, 6% return on this property. Now the reason that you six is it’s something that’s slightly higher than the the interest rate that you’d pay, obviously, you would not want to go through the trouble you’re going through a buying and building developing this property if all you were going to get was six, but we’re going to use six for now. So if you get 6%, and it’s your money, you make 6000. And that’s it one time turned on your money. But if you do what the banks do, and let’s say that this $100,000 is not your money, this $100,000 is money that you borrow. Now, for now, we can leave off whether you refinance your first mortgage, etc, or just just get a home equity line of credit that produces this extra 100. But that $100,000, you’re going to pay to us. So you don’t just make the 6%, you’re gonna pay, let’s say three and a half for that money, which is going to cost you 3500. That $3,500 is going to earn you even at the same return that we just did above 6%. And that’s gonna be 6000. Do either of you have just a simple calculator

Unknown Speaker 13:24

there? It’s 25. Are you just talking about the difference?

Paul 13:28

Yep, the 2500 and then divide that by the 3500. Because that’s our cost. This is, by the way, nothing fancy here. Anybody who’s watching it’s ever run a profit loss statement. This is exactly how you check the profit and loss of any business you just have, what are our costs? And what did we make? It just kind of gets blown up and seems more complicated? Because it’s financial? So what did you get when you divided 2500 by 30 571% 71%.

So each time we could be on that side of the ledger, we’d want to be because that’s our money now earning a higher rate of return than it would have been otherwise. Now, last but not least, what this doesn’t account for is in this scenario here, where we borrowed the money. This version of you, in our hypothetical future, also has the $100,000 you guys are working on saving up right now. Right? So now this person has 100,000 of cash or investments on the sidelines that they can get to whenever they want it. Which allows them to either do another project have more emergency funds, have additional cash leftover to furnish the vacation side of the property or furnish your side for that matter.

Unknown Speaker 15:00

Yeah, and that’s the question we always have, right is you’re gonna have that cash on the sidelines. So what are you going to do with it, you’re gonna put it in the market, you can get higher returns if it’s a good market, right. Other than that we don’t have any use for the cash. And that’s why we’re proposing putting so much down, because then you can avoid that much interest on the 100,000. The 3.5%.

Paul 15:30

Totally, totally agree and that, but that’s the key is that all we’re avoiding is three and a half percent in cost.

Unknown Speaker 15:37

Yeah. So if the markets earning 10%, it’s better to pay that three and a half, earn the 10%. And your net is the 6.5%, I totally get that. We’re, I’d say we’re probably more risk averse. And I feel like we already have a decent amount in the market. And then once, once we make these, you know, these big lump sum payments, that’s when we’ll start stepping up our contributions to 401 K’s. I,

Paul 16:10

I’m so glad you said that. Yep. Because what what I would say is that what what I hear there, Kevin is there’s almost like a collapse between specific investment risk and systemic risk. And this will just be something for, for you guys to be able to reflect on, think about, you know, try it on, see if it works for you, is that, yes, there might be more risk that we have some money in the market, and some money paid down on a mortgage, if you’re just comparing those two things. But the real risk comes when we have a job loss or an economic downturn. And we’re partway through that real estate project. And now we’re nervous. And we’re not doing making the best decisions we can. And if we have 100,000, on the sidelines, that’s a little less the risk is going through a weird time. I mean, heck, we just went through a very weird to your time board, maybe people don’t do Airbnb, or don’t want to rent vacation rentals for whatever reason. And having 100 grand on the sidelines, makes sense that and last but not least, it’s just thinking through. And if you do the math on the two, of if I keep $100,000 invested, versus having a very, very small additional loan 100,000 against a property that’s gonna be worth, say, 500,000, do you think at least when it’s built, it would be worth what you paid for it? And maybe much more? We hope much more.

Unknown Speaker 17:40

Yet, yeah. And we completely agree. And that’s why another one of our goals is building up our emergency reserves. So like you just said, job loss, or unforeseen circumstances, you know, to cause us to overspend in a certain area. That’s why we’re thinking, yeah, we’d like to carry like, I don’t know, at least 80,000, probably, in emergency reserves. I think we’ll be at that level, by the time we make this investment. Because if, if we if we lump this into that emergency reserve, we’re now talking 180. And to me, that’s just like too much to carry. Like that’s, that’s an unnecessary amount. We don’t work in fields where, you know, we may be out of work for like, years at a time, I feel like we could, you know, move into another job if something ever came up. Totally.

Paul 18:38

Jobs, totally. And

Unknown Speaker 18:40

I hear what you’re saying. And I totally get the concept of, you know, the net interest income here, it makes complete sense, you’re boosting your return. But we know that also by paying down 100,000 on the down payment, that’s a guaranteed three and a half percent that you’re making, because you’re avoiding that interest versus in the market and elsewhere. It’s not guaranteed. Now, historical returns, yeah, we’re probably gonna make like 10% on average. But if it’s like a year or two, we don’t feel like that’s going to set us back to much.

Paul 19:13

And this this is the part where I would I would offer the be worth assessing. Have you guys ever seen that example where somebody says, somebody makes a little Ira contribution for like, the first 10 years of their career from when they’re 20 to 30. And then they stop and then the other person in the article from ages 31 to 65 for 35 years funds their IRA every single year.

Unknown Speaker 19:39

And the one that it’s benefiting the the first person for you got that? Yeah,

Paul 19:44

you got it. So this is what I would I would just throw out to you guys to try on it and maybe model before we talk again, would just be what happens if you leave that $100,000 You pay down the mortgage, and it’ll give you that extra 3500 If you will have cash flow each year. Because 3500 is the approximate cost of money for $100,000. And that that’ll take some amount of years, till you’ve gotten the extra $3,500 A month cash flow. Versus if you just took a home equity line of credit from your house, and then kept all of that money invested, I’m not saying super aggressive, just put it in the spreadsheet like seven. And, and, and what I would throw out to you that I think you’ll notice when you do that is that the investment money preserves the real estate investments. Now I went through 2008 in a bad way, in Las Vegas, I watched people lose everything. And yet, even in the hardest hit real estate market in the entire country, which was Las Vegas, those people would have still made money on their horrible real estate investments. If they didn’t have to sell them. Today, they would have had a significant positive outcome to those real estate investments even made back in 2007. But they had to sell. And so the thing that I’ve thrown out to real estate investors, both those that teach other people how to professionally real estate invest and professional real estate investors was this, if what we can do is move through time continue to do real estate investing, but just paying attention that are not our 401k stuff. But our stuff outside 401 K’s, which we refer to generally as non qualified, that non qualified investments, if those are half of our investment mortgages, we’re going to be just fine. No matter what the market throws at us. We’ll just have enough money set aside that we can weather any of the stuff going on. And it’s the exact same kind of investments, we got to keep in our 401k. Anyway, so we’re gonna have them. And just make think of it, I heard the guy in the Wall Street Journal article, say something effective, you should have the same amount investments as real estate values. But that didn’t make sense to me, because that’s more of an asset allocation decision, what I want is a risk aversion decision, which is the ability to access capital, which includes your emergency fund for sure. So you have your emergency fund for part of it, once you have enough non qualified assets, maybe as much doesn’t have to stay in the pure emergency fund, maybe I don’t have to keep 40 in the emergency fund, and put the other 40 on top of the 400,000 in my investment portfolio. Because I’m not as worried about needing to access the entire 80 When I have 402nd access. So I would just throw that out to you guys as a little bit of an experiment or something put into a spreadsheet before we talk at some point in the future here. And and this idea of at least at a minimum, if I’m asked did you have you guys just open a home equity line of credit? So it’s available to you?

Unknown Speaker 22:44

No, no, we haven’t done anything like that.

Paul 22:47

That that would be a great first thing to do like this week, because it also supplements if the if an emergency, quote unquote, occurred. Banks don’t want to lend you money after the emergency occurs. They want to approve you of borrowing the money when everybody’s fully employed when everything’s going good when nobody’s recently changed jobs, all of that good stuff. And so you secure the home equity line of credit, when you have a lot of equity, like you guys do in your home, and you just get like 150,000 home equity line of credit, you do it with a local credit union, they probably will not charge you a thing. They’ll just give you a checkbook, you can drop in your file cabinet, or you’re safe, and then should anything unforeseen happen, you have access to it. And in many cases, it may even improve credit scores for when you go for the other stuff, because it appears you have more, you have a lot of credit that is unused. So

Unknown Speaker 23:44

yeah, I didn’t even consider doing anything like that, I didn’t really know you could do something like that. So yeah, and

Paul 23:49

most little credit unions or even big banks, they love how secure that is on their books, you know, as a place that they can collect interest from so many times they’ll charge little to nothing for you to be able to get it. So you just keep it on their books. And it’ll be you know, three and a half 4% It won’t be much. And you can access 70 80% of your home equity just in case something happens. Or just in case, another huge opportunity comes along. Over the next two years, your neighbor decides they need to sell their piece of land right away. Or in the time it takes you to build maybe three more pieces of land come up because we have an economic downturn. And you go up now I know exactly where we can template the next two or three of these homes and you can move quickly because of the access to cash. So I mean,

Unknown Speaker 24:36

you bring up an interesting perspective because we are thinking to be less risk averse. It’s and Kevin, you might disagree with me. But to be less risk averse. It’s how much have you paid off on your mortgage? How much do you not owe instead of having the extra cash set aside besides your nest egg, but that makes sense and you know certain situations you want to have access to cash stashed. And I suppose we is the real estate. I know it’s an investment property for our second the vacation home, but I was still thinking about it as your primary mortgage of okay, every interest payment you pay is you’re not getting anything back on that. So you just want to pay it off. So yeah, this is, you know, food for thought. And the Kevin, you’ve probably already, you know, Mattis thought about this, but for, for me, it’s new.

Paul 25:23

Yeah, good. Well, I’m, I’m glad that it’s helpful. Guys, please do not hesitate to reach out if anything else bubbles up. Or if you throw this into a spreadsheet and want to just test your assumptions, send it on back to me, I love that you guys got a chance to enjoy the episode that we did on you in your article in the Wall Street Journal. And, you know, we hope that this will keep being helpful this podcast. In fact, we did one not long ago on the different ways to buy a home that deals with return on equity versus return on investment. 15 versus 30 year mortgages. And I’ll just send you those two episodes. And and hopefully they kind of contribute to what we talked about today.

Unknown Speaker 26:02

Yeah, and I think you know, our other question today, and I know we’re ending, but is the, you know, is it better to do the cash out refinance just on our primary homes. So we don’t have a construction loan, because I know there’s additional fees and costs with the construction loan that we could potentially avoid. If we do that, so that’s something else that we, you know, we’re looking into.

Paul 26:22

Yeah, and, and I, and I noticed from your note that you’d sent me, Jennifer’s you guys are digging in now rental studies, meeting with General contractor’s getting some of those facts gathered in. Because once you have all those facts, what I want you guys do is not take my opinion, don’t take my opinion on, you know, use 100,000 leverage instead of using 100,000 of cash. Just consider it, test it. That’s it. So same with this, you’re going to test oh, what does it cost for the rental studies was it look like if it’s one nicer home or a duplex, all that stuff. And then we could totally dig back in on the difference between doing cash out refi because the primary residence, which then means and this is key, if you do that you need to work with your CPA to make sure they allocate a portion of the interest as and this would be good to write down investment interest expense, because your home mortgage can usually only be deducted as $100,000 above your original acquisition indebtedness. So if you did much more of a cashout refi to get the more beneficial interest rates or primary residence, which I’m 100% behind, and I know Cory would be too. But you just got to make sure you can still deduct it. But now you’re going to deduct it not only against your income, a portion of it will be against your income like a regular mortgage payment. And your CPA will carve out the other chunk to make sure it can be deducted against the profit from where you invested it in the rental property. Okay, okay. Cool. Well, it’s so good having you guys today. Again, I look forward to chatting with you guys sometime again in the future I know are on behalf of our audience. And Cory, thank you so much for being willing to come on the show this morning and a little bit of our technical difficulties before we went on air. But, but I’m glad you guys stuck it out. And Kevin, thank you so much for coming up with the solution we used today. So look forward to see you guys again soon.

Unknown Speaker 28:16

This was fun. Thank you.

Paul 28:17

Thanks. Bye

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