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How This 20-Something Grad Student Mastered Money: Investing, House Hacking & More!
190 Plays10 months ago
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🎙️ Today, we're joined by Alex, a young graduate student who's got his financial game on point!
💼💰 This episode is a must-watch for anyone navigating money in their twenties.
🌟 What's on the agenda:
House Hacking: David and Mindy break down the pros and cons of this popular strategy. Is it the key to financial freedom for young adults?
Paying Off Student Loans: To pay or not to pay? We explore the impact of student debt on financial planning.
Wanderlust vs Work: Balancing the dream of travel with career ambitions. Alex shares his plans.
Work-Life Harmony: How does a 20-something achieve it while building wealth?
🤔 Despite his young age, Alex seems to have it all figured out.
Mindy and David offer their feedback, but really, it looks like Alex just needs to keep doing what he's doing!
👥 Join the Conversation: Share your thoughts and experiences in the comments.
Are you in your twenties trying to make smart money moves? Let's discuss!
👉 Remember to like, share, and subscribe for more insightful episodes.
🔔 Turn on notifications for the latest tips and tricks on managing money smartly in your twenties.
Hashtags: #MoneyInYourTwenties #FinancialFreedom #InvestingYoung #HouseHacking #StudentLoanTips #WanderlustBudget #WorkLifeBalance #ForgetAboutMoneyPodcast #GradStudentFinance #SmartMoneyMoves #FinancialLiteracy #MillennialMoney
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Transcript
Alex's Background and Interests
00:00:00
Speaker
Gripped by wanderlust at a passion for financial independence, 25 year old grad student, Alex joins us to discuss travel, student loans, retirement accounts, and house hacking. Here we go. Welcome to forget about money, where we encourage you to take action today so you can focus on what matters to you today. David and I are joined by Alex. Alex, welcome to the podcast. Hi there. Good morning.
00:00:25
Speaker
Alex, let's jump into your backstory. Tell us about yourself besides the fact that you're 25 and in grad school.
00:00:33
Speaker
Yeah, of course. So I grew up in Indiana and I've lived there a fair amount of my life, but I also like to travel frequently too. So been to 49 states. I still got one left to go. So we'll see if that's happening in January or not. I don't know. We're still trying to get those plans in order. But yeah, just grew up as the the oldest child or as I like to say, the premier child.
00:01:03
Speaker
And so I feel a sense of responsibility to do things and do them right and hopefully enjoy myself in the process. What's the missing state? Hawaii. What? That's like the best state. It's not the best state Colorado, it's the best state. But how do you miss Hawaii? Go! Which island are you going to? It's far away. You know what they have planes. And boats.
00:01:30
Speaker
many ways to get there. You can't drive, but planes and boats. Yes, that's the problem. I've done road trips to all the other states and it's like I only understand the road trip sort of a deal, right? And so, yeah, Hawaii has just been that enigma for me. But now hoping to see if I can get out to Oahu and then do a little bit of island hopping, if at all possible.
00:01:50
Speaker
It is possible. They have planes there too and boats. So you're 25 years old and you started traveling the world or
Adventure and Travel Stories
00:01:58
Speaker
traveling the country at what age? And what is the coolest story that you've got from all of those travels? Oh goodness gracious.
00:02:06
Speaker
The first trip I went on, I think I was allegedly, so my mom tells me I was about six months old, and she put me on an airplane. So not all road trips all the time. But yeah, I went out to California as a six-month-old, and then it's been consistent trips all around the country, every couple of months, ever since.
00:02:29
Speaker
I guess in terms of what the most interesting or fun travel story would be. Oh, goodness, there's a whole whole heap of them. Let me think back. I think a fun one recently was in September. I was up in Minnesota. So one of the things I'm trying to do as I travel the country, first off, is I'm trying to visit all of the counties in the United States. So stopping by each and every everyone get my picture by the county sign, touch the grass sort of thing so that I've touched all the counties.
00:02:57
Speaker
And so I was up in Minnesota getting some of the counties up near Lake Superior. And when I'm in a county that contains the county high point, I like to try and go and summit that high point. And so it was up in, up in, oh, goodness, I forget the name of the county up there. Maybe it's Lake County, up in, up in Minnesota. And we, or I,
00:03:19
Speaker
Started my hike my ascent up the mountain and clouds started coming in and I was like ah it'll be fine the forecast said that you know we weren't supposed to get any precipitation for You know until at least after sunset should be good to go I've got you know another four hours of daylight It's an hour and a half up to the summit and so I'm like three hours And I get that gives me an hour of cushion to get out of there before the storm while I make it to the base of the mountain you know it's about a
00:03:46
Speaker
Three mile hike into the base and the skies open up the heavens open up thunder lightning all over the place big proper Midwestern thunderstorm rolling across and
00:04:01
Speaker
I got drenched to the bone and just completely soaked. And so it was a three mile slog back through the wind and pouring rain and there are trees falling in the forest and it was super dark. And so I would say that was probably probably an interesting or harrowing story. I eventually made it back to back to my truck and, you know, it was like ringing out my socks and and all that. But yeah, that was my first like serious solo hike.
00:04:31
Speaker
as well. And so just being out of cell service range, being on my own, and what do you know, God decides to test me and throw some fun thunderstorms my way. So yeah, that was my most harrowing adventure story, I think. Were you the only adventurous soul on that mountain that day? I was.
00:04:55
Speaker
Of course he was, he was the only one who was like, it's not gonna rain. So I live in Colorado where if you see the thunderstorms rolling in, you high tail it out as soon as you can because you do not wanna get caught in a thunderstorm. At elevation, you can get in a lot of trouble really quickly. Have you done Mount Whitney in California?
00:05:20
Speaker
I have looked at Mount Whitney longingly. So the we're focusing more on the eastern states now. So like, for instance, I just made the most arduous journey of Britain Hill, which is Florida's highest point. It's a wonderful three hundred and fifty four feet above sea level. So I am, you know, starting with the with the with the low high points and kind of working my way up. But yeah, I'm out with these on there. And then, of course, not so.
00:05:50
Speaker
So I did Mount Whitney, not all the way to the top, I'm not crazy. I did Mount Whitney just to the first, you need a permit to climb all the way to the top. And my husband was climbing all the way to the top with his friends. I happened to be newly pregnant at the time, it was a minute ago. And I went up to the first level that you don't need a permit for, like everybody can climb up to here and then after that you need a permit. And it was beautiful.
00:06:16
Speaker
But yeah, heed all the warnings with the the bear ball, the bear bells and all of that, because, yeah, there's a lot of wildlife there. But it's a beautiful and if you're going to go like the lowest point in California is like 100 miles away in Death Valley. So yeah.
00:06:36
Speaker
You've got the lowest point and the highest point. They used to have a race, a marathon from the lowest point to the highest point. And they had to stop it. I don't remember why you can look it up if you're interested, but that would be a really cool hike just several days from the lowest to the highest point. It's just right there. Yeah, it is. It is. That's the I've been in. I was in Death Valley in May. And so, yeah, it was amazing how hot it was down there. I was like, this is ridiculous.
00:07:06
Speaker
Yeah, that is the, that's the real test is or the real balancing act. You're like, I don't want to be so hot in death Valley, but I also have to go Mount Whitney when it's not snowing. I don't think you get one or the other.
00:07:21
Speaker
How are you going to celebrate getting that number 50? Ooh, how am I going to celebrate the number 50? That's a good question. Like what after that? What after that? Is it going to start going to countries? Yeah. Yeah. Or I figured, you know, I could go to all the states, right? States meaning like, you know, go to the Mexican states and the Brazilian states and, you know.
00:07:41
Speaker
find all of the subnational polities that are called states and start visiting those. But yeah, I don't really know what the next mountain to climb will be after completing that goal. Ooh, that was a good joke. Well, I don't know what the stats are as far as how many people your age have actually traversed and visited all 50 American states.
00:08:07
Speaker
But that's a pretty big accomplishment. I know I have not done that, and I'm slightly older than you are. And so congratulations, and I look forward to hearing about more of your adventures. And you did all this while going to grad school. Yes, sir. Yes, sir. Thank you. I opened up a map to look,
Remote Work and Financial Strategies
00:08:23
Speaker
and I was like, I think there's maybe five I haven't done. I am also slightly older than you, Alex.
00:08:30
Speaker
Well, come on. What do you got left, Mindy? Where are we going? North Dakota, Alabama, Louisiana. I just closed out the map. Alaska. There was one other one. West Virginia. All right. Tell you what, Mindy. I'll stop by Colorado, come pick you up. We'll go right up to North Dakota. So I'll take you to North Dakota if you take me to Hawaii. How's that sound? Oh, that sounds great. That's a totally fair trade.
00:08:59
Speaker
You're going to love Hawaii. I was just there for three weeks this summer and it was amazing. Kauai is our favorite island.
00:09:09
Speaker
I've only been to Oahu, but I've been there a number of times because in the Navy, when you leave out of San Diego, you usually stop in Hawaii for a couple of days. So I've gone on a couple of Hawaii trips that way, probably five or six, and then another two or three just for personal vacationing. But I've only gone to Oahu, so I know there's a lot more to explore in Hawaii. So in your one trip there, you probably see more than I have experienced. Don't feel bad, David.
00:09:39
Speaker
And what are you studying in grad school? Yes, sir. So I'm working on my doctorate in plant health. So looking at basically different production methods, right, and getting a better understanding of modern agriculture and sort of the inputs that we use to produce the produce that helps feed the world. Is weed legal in Indiana? Is weed legal? Hemp is. But no, we are a god here. But that's not the same thing.
00:10:07
Speaker
That's not the same thing, Mr. Plant Man. Those are two very separate.
00:10:14
Speaker
So I'm in Colorado, we were the first day to legalize it. It's not my thing, but I don't care if other people do it. Like decriminalizing it was great because now we don't have to deal with all that stuff. But yeah, hemp being legal is fabulous. It should never have not been legal just because it looks like something doesn't mean it is something. It doesn't make you high. And there are so many awesome uses for hemp.
00:10:41
Speaker
100% now, but I think it's gonna be a little while before the great state of Indiana takes any of those steps because it was just a couple of years ago that we legalized alcohol sales on Sunday. So it's gonna be a little bit. That is not the subject of this podcast, so I'm just going to skip my thoughts. When will you graduate?
00:11:06
Speaker
Yeah, so right now I'm anticipating graduation in December of 2025. Now, of course, it could go a little bit faster than that, or it could go a little bit longer, but at most my program should take three years. So, you know, I have very worst be completed in 2026. And where will you live after graduation?
00:11:27
Speaker
That's a that's a great question. So ideally, I'm trying to find work opportunities that are more location independent, right? So I would prefer to be living somewhere in the Upper Midwest, in the Great Lakes, somewhere like that. But with the understanding that when working in international trade, and working in more large scale projects with agricultural policy, I might have to be in Washington, DC, or in some global city of that
00:11:56
Speaker
that nature. So not exactly sure where I'll end up, but striving to live near my Great Lakes because they're great for a reason.
00:12:04
Speaker
They are great for a reason. So the reason that I ask where you are going to live after graduation is that is going to significantly impact your ability to generate savings, which can lead to investing, which can lead to wealth and knowing that you wanted to get into policymaking. That's a Washington DC thing.
00:12:28
Speaker
We have a form for people to fill out if they'd like to be on the podcast. And one of the things that you said you wanted to do was purchase a multifamily home to eliminate your monthly housing expense. This is called house hacking. And essentially you buy a property that has more space than you need and you rent out the extra space.
00:12:52
Speaker
If you're living in Indiana, you have a lot of opportunities for this. There's a lot more small multifamily properties. If you're living in Washington, DC, there's almost no opportunity for this. Not saying there isn't any opportunity for this. And if you do live in Washington, DC, I have a rock star agent to recommend for you.
00:13:12
Speaker
But washington dc is also a high cost of living area indiana is more of a low or medium cost of living area so your money is gonna go further if you could be location independent even if you had a job.
00:13:29
Speaker
in Washington DC, but you didn't have to go into the office all the time. You could technically live in Indiana, the lower cost of living area, while every once in a while flying to DC if you had to. That gives you the DC paycheck with the Indiana cost of living.
00:13:46
Speaker
So that is something to keep in the back of your mind once you're graduating and looking at job offers. I think a lot of people get kind of sucked into the, oh, Washington DC is way more exciting than Indianapolis. Well, maybe, but you know what? It's also way more expensive. Indianapolis has a lot to offer.
00:14:07
Speaker
I've got a friend in Indianapolis that I will introduce you to as well who is a real estate investor there and she can help you find a great agent, connect you with contractors, and really give you the lay of the land if that's where you end up, unless you already know about Indianapolis and then never mind. But there are a lot of
00:14:30
Speaker
benefits to working remote if you can do that, if you can, you know, choose a job that allows you to work remote. So keeping that in mind in the back of your head once you graduate is something I want you to do. Uh, let's look at your money situation right now. What are your, what is your income? Do you have any income and what are your expenses? Cause I know you have expenses, even if you don't have any income.
Financial Insights and Student Loans
00:14:58
Speaker
Yeah, so right now, just doing a little bit of part time work, so making about $1,500 a month. And right now, my expenses, when I added them up over the last couple of months, an averaged amount are about $2,100 a month. So there's a little bit of a delta in there, but should be changing here in a couple of weeks when I start working a new job here.
00:15:25
Speaker
Okay, so what I like, I don't love these numbers because you should never have expenses that are more than your income. However, you're in grad school and it doesn't make any sense to work full time and let your studies suffer. So what I like about this is you said,
00:15:43
Speaker
my expenses, I added them up and then I averaged them out. That means you're keeping track. That means you're conscious of at least where your money's going, even if you can't really control it so much because it, I mean, you have to pay rent, you have to eat, you have to keep the lights on. So I like that you are keeping track and are conscious of what's going on. What about your net worth? Do you have any money?
00:16:11
Speaker
Yes, so thankfully not all months are like this month and I have been able to accumulate some savings. So, you know, I've got about 20 grand in cash saved up and I have an additional 23, 25 grand in retirement accounts. That's awesome. What kind of retirement accounts are those?
00:16:37
Speaker
So, it's a Roth 403B in a mix of international and domestic large cap index funds. International? Wow. Okay, I'm impressed. This is awesome. David, do you want to jump in here with any questions? Do you have any questions? I'm kind of hogging him. No. And as far as debts, student loans, Annie?
00:17:02
Speaker
Currently, I've got roughly $16,000 in one student loan out from the federal government. Are you going to be one of the lucky 10% who's going to benefit from whatever just passed? Probably not. A lot of people who think that if you don't know, I don't know if it's actually passed or about to pass, but Biden tried to get a much larger sum earlier in his
00:17:27
Speaker
office, but that got shut down. So I think they just passed something where a fraction of the original amount is actually more likely to get approved or is already approved, where if you worked for a government job and paid your loans for 10 years, it would get
00:17:45
Speaker
the rest would get paid off, and that's one of the group. There's a few other groups that it affects, so it's probably not likely that it's going to affect you, but definitely look into it. Maybe it will. I think you said 403b, so I'm thinking teacher or teaching. Is that how you earned that money? Yeah, so that was in my capacity as an instructor at the university and as a researcher.
00:18:08
Speaker
So maybe there is something there you can benefit from whatever laws or whatever is being signed. But we'll see. But either way, even if it's not, $16,000 in student loan debt is not that great. Do you expect to incur additional debt through your remaining
00:18:25
Speaker
Whoa, whoa, whoa. Not that great meaning he's not doing a good job or not that great meaning not that great. Oh, no. I meant that if I said not that great, I mean, it's not that bad. Sorry. Yes. I think 16,000 is not a whole lot compared to some stories we do here. Yes. You're already in grad school. So you've come undergrad and now you're in grad school and you've done all that. And I know I'm saying only, ideally zero, but only $16,000 in debt. It's not a bad deal.
00:18:53
Speaker
Plus the $20,000 in cash to cover that if he wanted, like he doesn't have any debts, essentially. He could just wipe that out and still have $4,000 in cash and the $23,000 in the Roth 403B. And it's a Roth 403B, meaning he already paid taxes on it.
00:19:10
Speaker
at his current low income level. So right, which is probably no taxes. So right now he's putting in money that's already taxed. It's going to grow tax free. And when he starts taking it out at whatever age he decides to take it out at, he's not paying any taxes on that. It's like, you know what you're doing, Alex, why are you calling us?
00:19:33
Speaker
I think it's good to get additional perspectives on financial plans and I figured y'all would have some great wisdom and so it would be good to talk about some of the things that I'm doing and see if there's any shortcomings that I could overcome.
00:19:49
Speaker
Can you tell us your thoughts about whether or not you would pay, use your cash to pay that off? Or do you have any, I mean, clearly you see those two numbers, ones in the plus and one in the negative. And if you're a numbers person, you always like, okay, what if I did just pay it off? What are the pros and cons? Tell us how you thought about that or how you continue to think about that.
00:20:07
Speaker
Yeah, so I strive for simplicity whenever possible, right? So it does take a little bit of extra cognitive bandwidth to maintain that I still have an outstanding debt. However, it is worth it for me to keep that debt around because currently that debt is financed at about five point two percent.
00:20:27
Speaker
I've got most of my cash in a high-yield savings account that's at about 4.2%. There's a 1% annual difference between the two of those. In effect, I'm paying $160 annually in an opportunity cost money to have access to that $16,000.
00:20:46
Speaker
And when I think about the rates of credit currently, high interest rates with mortgages, with credit cards, what have you, for me, I'm comfortable paying that $160 insurance premium, if you will, to keep that cash on hand to deploy towards whatever I need. So if my car ends up breaking down and I got to send it to the scrapper, no problem. I can just pay cash out of that.
00:21:12
Speaker
Use that, no issue. Or if an opportunity arises for me to maybe get into some sort of an investment property, do that house hack a little bit earlier than anticipating. It's a lot easier to take the cash that I already have sitting in my bank account than wait another six months of savings while trying to work and build that up. And so I am willing to take that little bit of interest rate hit to maintain that additional cash reserve at the moment.
00:21:40
Speaker
Now, if I were to get a full paying job that, you know, big bucks start rolling in. Yeah, sure. I'll take that out in a heartbeat. But right now where I'm at in grad school, it just makes a lot of sense for me to keep that big cash cushion available for any opportunities that may arise.
Career and Retirement Planning
00:21:58
Speaker
Yeah, so right now that's effectively serving as your emergency fund, I would imagine, correct? Yes, sir. Okay, yeah. I think your thinking is spot on. What do you think, Mindy? I think that you're using the word think. He has thought about this. He has given this some thought, obviously, which is the most important part. I love that. And you're not just
00:22:22
Speaker
doing whatever. You're not just letting life drag you along or making decisions on the spur of the moment. You're giving them a lot of thought and that's going to be very important in your financial future. What is your income trajectory?
00:22:38
Speaker
Yeah, so here in the next couple of months, I'm anticipating my monthly income should come up to roughly $4,000 a month when we include income from teaching. In addition, I may pick up some tutoring as well. And then I've got some scholarship funds that should be coming through as well. But then when we think more large scale, sort of going through the pipeline, that's where things get a little bit more ambiguous for me.
00:23:05
Speaker
because I'm not on a traditional career path, if you will. There's not a lot of people doing the sort of things that I'm interested in doing with my life, but if I were to take a guess, I would anticipate my salary being somewhere in that low six-figure range to start out just because of the technical knowledge and expertise that I could provide to a potential employer on completion of my graduate studies.
00:23:31
Speaker
Ooh, so when you complete your graduate studies and you start looking at job opportunities, I want you to look at the benefits offered and look at the 457 plan. This is a retirement account for government workers, teachers, public servants sort of thing, and not every public servant has this plan available.
00:23:59
Speaker
the millionaire educator has made this 457 plan his life. And he has a whole series of articles about it. Essentially, a 457 plan is similar to the 403b or the 401k. It has the same contribution limits of, I think in 2023, it's
00:24:23
Speaker
$2,500, and in 2024 it's $23,000. But the 457 is also available in conjunction with the 403b or the 401k, which means you can contribute $22,500 to the one plan, the 403b,
00:24:42
Speaker
and $225,000 to the 457 plan for a grand total of, David, can you do the math? I cannot. $46,000. That's a lot of money. That's a lot of money. But wait, there's more. The 457 plan
00:25:02
Speaker
It comes with a Roth option and a traditional option, so you're either paying taxes going in or not paying taxes going in. If you're not paying taxes going in, you are reducing your taxable income, which is awesome, not paying taxes on it, or you're paying taxes going in with the idea that your income is going to get greater.
00:25:24
Speaker
should you separate from that job, you have access to the 457 money, only paying the taxes on it if it was a tax-free account. You don't pay fees. So if you withdraw early from your 401k, you have to pay a penalty of 10% plus the taxes on whatever you pull out. With the 457 plan, you're only paying the taxes if you go the non-Roth option.
00:25:50
Speaker
So when you are looking at jobs and talking to you, you're going to have multiple opportunities available to you. You're going to go in an interview and they're going to be like, yeah, we want to hire you. Like, hold up. I've got 47 more interviews. So you'll get 46 job opportunities because the one person's going to pass because they're morons. And then you're going to have to sort through them. It's not just salary.
00:26:14
Speaker
there's also benefits available. And if you have a 457 plan available, you're used to living on less money, significantly less money than this low six figures you're talking about. Having the availability, having the opportunity to throw money into the 457 and the 401k could blast you into the wealth stratosphere.
00:26:37
Speaker
Now, you only can spend a dollar once, so you can't invest in the 457 plan and invest in the 403B and then also use that money to buy a house. So you have to pick where you want your money to go, but that 457 plan, you can pull that money out once you separate and go buy a house.
00:26:59
Speaker
There's a lot of opportunities for the 457 plan. What the millionaire educator does is he contributes to the 457 to reduce his taxable income. He maxes that plan out first and then puts it into the 403b because the 403b is like a 401k. You pull the money out, you have to pay taxes and fees.
00:27:22
Speaker
So he pulls, he puts all his money in the 457 and the 403B that he can. And then when he leaves that teaching job, he'll pull the money out of the 457 to live off of. So now he's paying a lot less in taxes because he's only paying what he needs to. He's only pulling out what he needs to, to, to live off of. So that could be a fun little hack as well. And that, let me look up his website. I don't know if it's the millionaire.
00:27:50
Speaker
He spelled that educator. He is millionaireeducator.com. I would like to commend you because you are 25 and you've already set yourself on a path. You're saving, you already have savings. So you already have that habit down. You're thinking about the future and this is in a much better situation than if you waited until you were 30 or 35 or 40 or 45 to get going.
00:28:13
Speaker
You don't have that big of a hole to dig out of, which you probably would statistically if you did wait much longer to get those good habits. And you said you mentioned your $4,000 a month, that's roughly 50 grand a year. And even on that, starting when you're starting is, let's say you never did, if you never got a
00:28:32
Speaker
More income is always better, but if you never got that increase in income that you very likely will and then in the next few years That's still a good chunk of change and because you're starting so early You can you can do big things in your retirement accounts and shave years and years off of that Traditional 65 year old retirement date. So congratulations
00:28:54
Speaker
Thank you. Now, what kind of house hacking are you looking at? And with the market the way it is right now, would you buy a house right
House Hacking and Real Estate Decisions
00:29:01
Speaker
now? Mindy, this is since you're a realtor and you're knees deep in this housing market. As a buyer, I have a lot of hesitation about buying a whole house in this market. I rent right now in California, in San Diego. I know every market is local.
00:29:16
Speaker
But there's a lot of headwinds I see in the housing market right now where numbers just don't add up, whether to be by a rental property or to a house hack maybe. So what are you thinking? Are you waiting for certain things to happen in the housing market to check all the blocks for you to actually make a purchase? So in terms, this is what I'm thinking about when it comes to the purchase of a primary residence.
00:29:41
Speaker
So, in the Midwest, we still have some properties that, believe it or not, still hit the 1% rule on face value, even with the horrendous interest rate environment. And so when I hear people complaining or sort of coming up with ideas that, oh, houses aren't affordable or we can't get into this,
00:30:01
Speaker
I'm going okay this looks like a good opportunity for me to get in here while there's people who are stepping out of the market themselves with the acknowledgement that it is slightly more difficult than it was when money was basically free three years ago.
00:30:16
Speaker
And so sort of my thought going into this is so I'm paying a certain amount of in rent, OK, every month. And that's that's money, money out the door. But for that, I get a guarantee that that's the highest that my housing expenses is going to be. And I get a sort of freedom from responsibility for taking care of the physical environment. However, I've noticed in all the properties I've rented, I've usually returned the property to the
00:30:45
Speaker
landlord in better condition than when they gave it to me just because I like things to be nice and put in their proper place. And so when it comes to doing touch-up paint jobs, when it comes to deep cleaning, when it comes to working on some of the facilities and doing the maintenance on the properties that I've rented, I'm starting to go, hey, wait a second.
00:31:07
Speaker
I'm putting in more love, care, time, and attention into these properties, and I would appreciate if I were the owner of these properties so that I could reap some of the benefits of taking care of those. And so when I'm looking at properties near me, I'm seeing some houses go on the market in the 130s to 160s range for a 31, sometimes a 32, but those are getting kind of sketchy.
00:31:34
Speaker
And housing laws are such that you can have three different last names within a property. And so my thought being purchase the home, get two roommates in there with me in the single unit.
00:31:50
Speaker
where this starts to get more complicated for me and where I would like some of y'all's insight is when thinking about multifamily properties and qualifying for loans specifically. So with my more limited income now, I anticipate that it will be difficult convincing a bank that they should lend me money despite my
00:32:13
Speaker
as comfort and ability to manage my finances. I feel like it will still be a little bit difficult to convince them without the W-2 income because they've got their formulas and they've got to sell their loans on to Fannie Mae or whatever. And so they got to check the box. And so I need to help them check the box.
00:32:30
Speaker
And so one of the things I wanted to ask you about was with multifamily, how much could I use the projected rental income either from potential roommates in a single family home, right? Just one address per plat.
00:32:47
Speaker
Or in a multifamily, say we're talking about fourplex, so the three other units, if I can't count my own renters, how much of that can I use to count as my anticipated income as a first time a home buyer?
00:33:02
Speaker
Well, those are a lot of questions. First of all, three different last names in a property, buy a five bedroom house and change your last name to Smith and only rent to people whose last name is Smith. Problem solved.
00:33:17
Speaker
you can typically take 75% of the rent. So you're renting $1,000, $750 of the rent and count that towards income to help you qualify for the loan. There are different
00:33:36
Speaker
rules around multifamily versus your own property. So there's a couple of different ways to house hack. One is to buy a larger house than you need, a five bedroom house, live in one bedroom, and rent out the other bedrooms. Another way is to buy a small multifamily, a duplex, a triplex, a fourplex,
00:33:57
Speaker
All of these properties can be purchased with a residential as opposed to a commercial loan. So anything under four units and under is a residential loan. So you buy that and then you live in one unit and you rent out the remaining units.
00:34:16
Speaker
So if you rent out the one house and you're renting out rooms, I think you have to have them rented out for a year. That's called stabilizing the property before you can count those rents.
00:34:30
Speaker
But again you check with the lender, they'll be able to tell you exactly what they're looking for. With the multifamily properties, I believe you only have to have a signed lease. So that's a different amount of commitment.
00:34:46
Speaker
So there's that. I would absolutely encourage you to call up a lender because right now demand is down. We are recording this in the middle of November. We're getting ready to hit Thanksgiving and Christmas. This is literally the slowest time of the year.
00:35:08
Speaker
find a lender local to you and call them up and pick their brain. Ask them a bunch of questions. Tell them I'm just getting started with my house search. This is where I'm at. What do I need to do to qualify for a loan? They might just look at you and say, there's no way we'll give you a loan.
00:35:29
Speaker
Great. What would change that outcome? Because I'm going to be honest with you. You're 25 years old. That's a check against you. You because you don't have the income history, you don't have any income history because you're still in grad school, which doesn't make you a bad person. It makes you a risk in the bank's eyes.
00:35:49
Speaker
if you don't have a job that makes you a risk in the lender's eyes, which is so stupid because don't even get me started on that. I'll just say it's stupid to be done with it. If you have the money to pay back the loan, what does it matter if you have a job or not? Anyway,
00:36:05
Speaker
There is a phrase right now that I'm hearing from a lot of real estate agents. It's marry the house and date the rate. And I think it's so stupid. But what it means is buy the house now, commit to the house now.
00:36:21
Speaker
But don't commit to the rate. You get a rate. And then when rates start dropping, you look at what makes sense to refinance. So if you think about it, we have a housing shortage. In 2008, we stopped building houses. 2009, 10, 11, 12, 13.
00:36:41
Speaker
even into 14 in some places, 15. We weren't building houses. So there's a huge shortage over several years of not building. It's not going away anytime soon. I was just at the Bigger Pockets conference and Dave Meyer, the data analyst, gave this awesome slide. He said the impact of higher rates has demand down 40%. 40%, that's huge. But
00:37:10
Speaker
Supply is at all-time low. Supply is down 45%, which means the prices are up 4%. This is based on data. This isn't based on just his gut. We are 50% down on home sales from July of 2021.
00:37:30
Speaker
This is huge. What this is saying is there's going to be pent up demand. It's, it's pending up right now. Penting up right now. I don't know how to say that. It's accumulating. What a better way to say that, Alex.
00:37:46
Speaker
Thanks for showing me up, Alex. It's gurgling right now. People who don't want to have a 7% mortgage rate, people who can't get over the fact that interest rates are 7% or can't afford a 7% mortgage rate payment aren't buying houses right now. So if you could swing it,
00:38:11
Speaker
Maybe you could get a co-signer. Maybe you could get a job that pays more. Maybe you can find a lender who will lend on 75% of rents. There's a lot of maybes out there that could allow you to get into a house now. Once you own the house, you're the only person that is bidding on that house when it comes to refinancing.
00:38:36
Speaker
But once rates come down, and there's a lot of talk that around 5% is when demand is going to skyrocket again. So once rates come down 2 percentage points, demand is going to go through the roof.
00:38:53
Speaker
But demand, the law of supply and demand says that when supply is low and demand is high, prices go up. So we're still in a low supply situation where that's not going to change for years because it takes a long time to build houses, to get a development approved. And not only did they stop building, they stopped planning. So now we're just started planning again.
00:39:17
Speaker
all of those houses are already sold. I mean, you go to a new build and right now there's still houses available. But once those rates come down, they're all sold again. So if you can get yourself into a house now, when the rates come down, you're going to be able to refinance without the bidding war. But if you can't get into a house until rates come down,
00:39:42
Speaker
If they come down, there's no guarantee they're going to come down. But if you can't get in until rates come down, when they come down, if they come down, you're going to be competing with all these people who have been waiting because they didn't want to, couldn't get over themselves, or simply couldn't afford it. So that's what marry the house, date the rate means. Do you have any opportunities to get a cosigner?
00:40:06
Speaker
Um, that's something I haven't quite explored yet. There's some people I would be comfortable in asking and talking to about that. Um, but my question, I guess is more on the risk perspective, right? Because it's going to take for me to put a down payment on a house, right? So let's say, you know, I get a, uh, like a conventional loan with the 5% down sort of a conventional loan.
00:40:29
Speaker
So on a $150,000 house, that'll take most of my cash savings, right? And that'll have to go in and with closing costs and all that, most of that's going to be deployed. Most of that buffer that I have currently is going to be deployed there, leaving me with just my Roth accounts as sort of a cash cushion.
00:40:50
Speaker
But then also my roughly four thousand dollars a month in income plus the additional rental income that I anticipate getting for a risk perspective. Mindy and David, what are your thoughts on, you know, the purchase of a home with that capital with the understanding that that would be eliminating my housing expense and taking about eight hundred dollars for my monthly expenses off the ledger line or moving that towards a an asset that I can recoup some value on.
00:41:17
Speaker
Well, I think that everything has pros and cons and that's why you're asking this question. So once you put your money there, then you're not putting it into you. Maybe you're not maxing out based on your income. Maybe you're not maxing out your 403b or 401k or whatever it ends up being that you have. That's the opportunity cost. So not like that. You're mid twenties. When you get through grad school, you'll be 28.
00:41:38
Speaker
Are you really going to be wanting to live with two or three other people that I would say is much bigger than people realize because you just can't leave. I look at my home is like my domicile like it's like.
00:41:53
Speaker
That's where I want to feel the most comfortable. And if there's a visitor or if there's whatever it is, it seems to be magnified. And then I don't want any potential negatives in my home because that's supposed to be where I feel the most comfortable and expect to be because it's my home and I'm paying for it. And that's where you spend a lot of your time. But if you have roommates who aren't ideal,
00:42:18
Speaker
Or even if they are ideal, you still have roommates. It's a distraction. It's a consideration. It's mental bandwidth and maybe even emotional bandwidth that you've got to worry about. Those are all the costs that people just don't assume before they make these decisions. So I would say absolutely give it more consideration. Now, if the numbers are overwhelmingly in favor and you have an out, what's your out plan? You can do this for five years and then round or two or three years or whatever the maybe minimum requirement for your loan agreement is.
00:42:48
Speaker
and then go buy a primary residence just for you and potentially a growing family who knows what your future holds. Or maybe you decide you want to travel more because that seems to be in your blood and your spirit. And if that's the case, then maybe house hacking in this way would be a good thing for you because you might be gone often, especially if you find a job that you can work remote.
00:43:09
Speaker
So all of those considerations, I would say, do not downplay living with other people at a particular age because I don't find it that fun. And they're definitely pros and cons. But when you have enough money and when you know you're on the right trajectory to get to your financial goals, sometimes it's not worth certain things in your life to put up with because you know you're going to make your goal. Who cares if it's one more year? Who cares if it's six more months? Who cares if it's two more years? If it costs your happiness now, just don't do it.
00:43:38
Speaker
That's an interesting thought. My thought is the other way. Do you have roommates right now, Alex? Yes.
00:43:52
Speaker
What a definitive answer. I'm in between housing, so I'm not in a fixed place right now, but I have had roommates for the last seven years. I like having a lot of people in my home. I like having a lively house, though it comes with the negatives. I grew up in a big family, and so having lots of people all around all the time is something that I enjoy. So I prefer having roommates when possible.
00:44:18
Speaker
So I anticipate here when I move into a new place in the new year that I will have roommates. Okay. So you have a different outlook on sharing your space than David does. And that is a positive for you and your house hacking aspirations because you
00:44:42
Speaker
have never lived alone.
Roommates and Financial Independence
00:44:44
Speaker
And David's right, solitude is fabulous. But if you don't know about that, you can really jumpstart your wealth building journey by having roommates and taking that giant expense off the table. And just because you have roommates now,
00:45:02
Speaker
and the first couple of years after you graduate doesn't mean you have to have roommates forever. You can have roommates for a few years, really pay down that mortgage or pay off your student loans, save up a huge nest egg, whatever it is that you want to do. Stay there for a year, bounce out of that house into another year, turn that into a totally rental, and do it again and again and again and build up a rental portfolio
00:45:28
Speaker
and then decide that I'm going to buy my own primary residence and have some solitude. There's a lot of opportunities, but when you have low expenses and you've taken this giant expense off the table, you just open up so many more opportunities for you. I think it is totally
00:45:49
Speaker
doable to have roommates for a few years. I think it's a great idea. Don't listen to what David said about having his own space. David's an old man, grumpy old man. I would just caution you to not purchase any property that you can't afford to foot the entire mortgage by yourself for multiple months.
00:46:15
Speaker
If you're renting out rooms and all of a sudden your roommates flake and you only can pay the mortgage when you have roommates, you're putting yourself in a precarious financial position. But if you can afford to do it all by yourself and then the roommates just happen to do it for you, that's a better position to be in.
00:46:38
Speaker
I don't think that that's more of a cautionary tale for people who are listening. I don't think you would ever put yourself in precarious financial position, mostly because you're thoughtful about your money. You're thinking ahead. You're not just thinking about today. Just what makes you so awesome. Alex. Thank you. Awesome. Alex. Hey Alex. Thank you so much for talking with us today. I think if you just keep doing what you're doing, man, you're going to be just fine and feel free to reach out.
00:47:08
Speaker
if you ever think we can help out. Yes, sir. Of course. Thank you. Alex, this was super fun talking to you. I really appreciate your time. Thank you very much. Have a great day. Thanks. You too. All right. Thank you for listening to forget about money and we look forward to talking to you again soon.