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What if My Career Gets Phased Out? Finance Friday with Mike

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Mindy and Scott don’t often get stumped on the Money Show, but it happens once in a great while. What do you do when you have a multi-million dollar net worth, appreciating properties, a maxed out 401(k), and a solid safety reserve? That’s exactly the question that today’s guest, Mike, has.

Mike has worked in the music industry for years, moving all around the US to do his job. As technology has evolved, Mike is predicting an end to his specific role over the next decade, and is wondering what he should do next. He doesn’t have a lot of interest in starting a business or buying more real estate, but wants to squeeze out more money or savings if he can.

He has rental properties that have highly appreciated, but are having cash flow problems due to COVID-19. One, located in San Francisco, has netted close to $700k in equity since its purchase 12 years ago. That’s massive! Mindy and Scott go through Mike’s options, such as selling and putting the leftover profit into cash-flowing assets, or 1031 exchanging into a more diverse real estate investment.

Mike is one of the best examples of smart investing we’ve seen on the show, but there’s always more room for improvement with finances!

Mindy:
Welcome to the BiggerPockets Money podcast, show number 182, Finance Friday edition, where we interview Mike, a music industry executive and talk about preparing to leave a job, potentially not on your own terms.

Mike:
In the community, you always hear about people who want to retire early. I’m not looking to retire early. I love what I do, love it. But I also know that technology and consumers chase are changing my career and what I do and I’ll still be in the music business, but I probably won’t be at the capacity that I am in now. And who knows if I’ll make the money that I’m making now. So, that’s what I’m planning for.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is my can’t carry a tune in a bucket cohost, Scott Trench.

Scott:
The only way to respond appropriately here is to sing, and not going to do it. Moving on.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else. To introduce you to every money story, because we truly believe that financial freedom is attainable for everyone, no matter when or where you’re starting.

Scott:
That’s right, whether you want to retire early and travel the world, go on to make big time investments or make huge half of your net worth game changing decisions in real estate, start your own business, or do whatever else you want with retiring really, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Today, we are speaking with Mike, who is a music industry executive. But changes in listener habits are threatening his job. Is that the right way to say that, Scott? Do you think threatening his job. I think his job is going to have a lot of changes in the next seven to 10 years. And more importantly, Mike thinks his job is going to have a lot of changes. So, I love that he is thinking ahead and making plans now, while he can calmly prepare for the next chapter of his life, as opposed to putting his head in the sand, ignoring potential changes, and then frantically having to figure out something in seven years.

Scott:
Yeah, I think Mike was a great guest. I think he has made a lot of really good decisions over his lifetime. I think he is more healthfully paranoid than he needs to be, with respect to his job. But I think that, hey, if he did lose his job, the worst case that happens is he basically is able to retire right now. So, I really thought this was a helpful Finance Friday because I know a lot of people are going through similar thought processes to Mike.
I think that his situation, to me, is highly likely to be reflective of other people who have been really doing good financial habits and making good quality decisions over a 20, 25 year period. Because when you do that, make investments, you’re going to have a couple of weird winners, which skew your financial position. And that weird winner is half of his net worth right now in a San Francisco condo.
And so, that’s not like a weird … That just happens I think if you invest over a long period of time. You’re likely to hit a good deal or a good winner, Tesla stock or whatever it is, that you’re doing over a long period of time. So, I think it’s a really interesting discussion. And I think he set himself up in a really healthy way.

Mindy:
Yes, and I just love that he’s looking forward. I mean, so many people get into a job that they love, and he clearly loves his job. I mean, how could he not? What a fun job. But people get into this position where, “Oh, I love my job, therefore, I’m never going to quit, so I don’t have to make plans.” And what is the saying, life is what happens when you’re making other plans? Have you ever heard that? Is that a romantic comedy that I just made up?

Scott:
I heard a man plans, God laughs.

Mindy:
Oh, that. Yeah, true. Life laughs, too. Just in general, you can make all the best plans, but what you really need to do is plan your finances out so that you are prepared for life coming up and slapping you and saying, hahaha, this is what you’re going to do instead. So, I think there’s a lot of things that people can take away from this episode and I’m super excited to share it with everybody.
Before we bring in Mike, let’s go back to the part that my attorney makes me read. The contents of this podcast are informational in nature and are not legal or tax advice and neither Scott nor I nor BiggerPockets is engaged with the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate.
Okay, let’s bring in Mike and tell him what to do with his money. Mike works in the music industry, but changes to consumer habits means his job might change dramatically in the next three to five years. He’s looking for options so he can make calm decisions instead of frantic emotional decisions out of panic. Mike, welcome to the show. Let’s start off with your financial backstory. Can you remind people what area of the world you live in? And then let’s recap your income and expenses and debts.

Mike:
Okay, I live in Nashville and debt is simple. When I first started in the music business, I sold my house, Pennsylvania, moved to California, and completely paid off all credit cards, student loans, and whatever. So, the only debt I technically have is my mortgage on my Nashville house, and then I have a rental property, which is covered by my tenants.
So, I know some people say, “Well, you’re not debt free until you have the mortgage paid off.” But essentially, I’m debt free because the mortgage is so cheap at this point after refinancing. So, the salary is 135 base. And then we get a bonus every year and that fluctuates, but typically it’s around 25 to $30,000 if we do very well. And then, I don’t know if this should be countered or not, but I lot of times count the company match for the 401(k) because it’s a substantial amount of money. It’s seven, $8,000 per year. So, to me, that’s found money. So, I throw that in there, too.

Mindy:
I love that. Absolutely.

Scott:
And are there any other sources of income outside of the base bonus and 401(k) match?

Mike:
I used to, this is the keyword, bring in around 41, $4200 a year with the condo that I own in San Francisco. However, times have radically changed in the last year. And I’m still fortunate that I do have one of the three tenants left. But I am now subsidizing that. So, beginning this past January, a couple of months ago, I’m subsidizing it. So, up until January, I hadn’t lost any money. But I certainly was not bringing in the 41, $4200 profit after all expenses paid as I was the last few years.

Scott:
So, you’re bringing in a 4000 a month in cash flow from the property prior to the pandemic?

Mike:
Actually 5300, 5300 is what I was collecting.

Scott:
5300 a month.

Mike:
Correct, and then paying the mortgage, taxes, HOA fee, all that.

Scott:
Real estate sounds like it’s a part of it. Could you walk us through the major components of your net worth, maybe starting with largest assets and living your way down?

Mike:
The largest asset outside of the condo?

Scott:
So, let’s talk about the condo, how much is it worth?

Mike:
It bounces between 1.4 and 1.6.

Scott:
Million. Okay. Wow. And what’s your debt on that?

Mike:
Just about $600,000 now. It’s like 606, 604. It’s very low.

Scott:
Fantastic. So, you don’t need much else and you’re already pretty much a millionaire just with this one.

Mike:
Correct. Yes. It’s a nice little padding. I mean, I know Sacramento, California will take their cut in taxes if I ever sold it. But yes, it’s pretty good.

Mindy:
Yes, they will.

Scott:
There’s always people that trash California real estate. That’s not a good place. All right, you made a one deal here and you’re wealthier than people have been buying cash flow rentals in the Midwest for years. Sorry, I got off on a tangent with this.

Mindy:
Yeah, let’s get back on track, Scott.

Mike:
I purchased it I think in 2009. It’s brand new and I paid 760 for it.

Scott:
There you go.

Mindy:
Wow. So, you’ve seen some appreciation, and that will trigger a nice capital gains tax bill if you choose to sell it. So, let’s put that on the backburner right now and go through your expenses. And then that is something I want to revisit down in a little bit.

Scott:
Hold on, because this is largest asset. I think there’s a couple more questions about here about this. Kind of walk us through what rents were and what they are now and then where you expect them to be in a year or two.

Mike:
For what I used to get for the condo or what’s in the neighbor, what the city is bearing?

Scott:
Yeah, what do you use to get and then what do you think is the current reality?

Mike:
So, I used to get 5300 a month for the last two years. Now, when I look in the neighborhood … Well, okay, there’s a sidebar to this. This just came about in the last few years, there’s a heavy rent control now in San Francisco. And so, I keep up on the news every week in San Francisco. And some of the landlords, if I understood these news stories correct, are not raising the rents because I look on different rental sites and I’ll be like, “Okay, what’s going on in the neighborhood.” And rents are still 4000, 4500, something like that, 5000 I’ve even seen. And I have a three bedroom.
So, what I kind of heard on the news when they were interviewing landlords, they’re like, “We’re going to ride this out. Because if we get someone in there for say, $3,000, we can only raise it 1% or whatever it is per year, and it’ll take us a decade to get back to regular market rate from a year ago, 2019.”
So, that I think, that was very eye opening when I saw that. I don’t want to go in and say, “Well, just get a tenant in there, I’ll take 3000.” And then all of a sudden, they stay, which is good. There’s nothing wrong with staying, but I’m going to be subsidizing that along the way for several years until they move out because of the laws.

Scott:
That’s fascinating.

Mindy:
That is super important. We don’t have rent control. Do we have any rent control in Denver, Scott?

Scott:
I do not believe so.

Mindy:
Yeah. So, that is something that I have never even considered. But absolutely, you can only raise your rent a certain amount per month if you’re in a rent controlled area. Wow, that gives you yet something else to think about before you start renting out your properties.

Mike:
Yeah, I mean, they had some of these landlords in the South Bay down towards San Jose, Google, Mountain View. And they’re just like, “Yeah, they’re empty. But, gosh, all right, we’re going to ride it out like that.” And it was very eye opening a couple weeks ago when I saw that news story. So, I would have never thought of that.

Scott:
The current status is vacant?

Mike:
No. I had three guys in there. And one guy married, one left to work out of town, and the other guy actually is moving, he got a new job, too. But until the pandemic is lifted, he asked if I could make a deal with him. And I said yes. And so, basically, I’m charging 2455 for it. And my thought, after talking with some former coworkers and friends in the Bay Area, it’s better to have some money than no money coming in.
A friend of mine has two condos in Oakland, she hasn’t had a look in probably six months because there’s so much inventory. So, that’s where I was just like, you know what? Stabilization is better than nothing. And I don’t mind … I mean, not that I like throwing in some cash every month, but I’d rather do just a few dollars than pay the whole nut.

Scott:
Thank you for this context. So, we’ve got a fantastic winner of a real estate deal here where you’ve made three quarters of million dollars, but some problems in the current and murky go forward look here, where the current game seems to be wait and see and not do anything that would lock you in and kill your options right now. Is that right?

Mike:
Yes. But there’s one more caveat that I should tell you. And that is that three blocks from my condo, this is arguably one of the hottest neighborhoods in the city. They just built the new Chase Center three blocks from there were the Golden State Warriors, well, they were supposed to move. I mean, they’ve moved, but no one could go to the games just yet.
But I mean, this neighborhood for the next decade, once things get back to normal is it’s going to be poppin’. So, that’s kind of like, well, it’s not just an ordinary condo in an ordinary neighborhood. There’s so much promise there. You have the San Francisco Children’s Hospital three blocks away. Uber’s headquarters were there. I think they probably scaled it back. I mean, there’s a lot going on. So, in the long game, there’s a lot to consider.

Scott:
So, I refer to this somewhat morbidly as bleeding in the short run, but you’re bleeding in this condo because you’re paying, what’s the mortgage payment and what is your…

Mike:
Mortgage payment is to round it up, it’s 4000 a month.

Scott:
Okay. And you’re receiving 2500, so you’re putting $1500 in cash in when there are no maintenance issues.

Mike:
No, I’m putting about 1900 in. Because HOAs are 650, then I have the insurance, all that on it. But the taxes are folded in with the 4000 mortgage payments. So, I mean, they were more than covering everything prior to this.

Scott:
Okay. Okay, great.

Mindy:
One last question about the condo, are short-term rentals allowed in San Francisco? And are they allowed in this building?

Mike:
I don’t know the answer to that. I would have to find out.

Mindy:
Yeah, that would be something to consider. Episode 131 of the BiggerPockets Real Estate podcast talks to Serge Shukhat, and he has an apartment building that is around the corner from a cancer center. And you mentioned the, is it the children’s hospital is-

Mike:
Yes.

Mindy:
… nearby. So, he has a lot of people coming in to his units to stay during cancer treatment. I’m wondering if there is a short term or even like a longer short term option. Some cities have limited it to 30 days or more. But if you’re coming in for treatment at the children’s hospital, maybe you would be there for 30 days or more. So, that’s an option going forward if short-term rentals are allowed in the unit.

Mike:
Yeah, it’s actually UCSF, so it’s a college children’s hospital.

Mindy:
Okay, yeah.

Mike:
But I mean, it’s also on the main subway line and they built the Chinatown subway extension and then they’re doing the high speed rail, the kind of like are in Europe and Asia that’s going through there and the train station is a mile away. I mean, the economy and once everything opens back up, I mean, the next decade could be paved with gold in this neighborhood, but it’s just going to take time for that to go.

Mindy:
Okay. And I guess I do have one more, one last question.

Mike:
Sure.

Mindy:
How long can you afford to subsidize this condo?

Mike:
I mean, indefinitely. I have more than a cushion, which-

Mindy:
Okay, that’s good.

Mike:
… my other net worth, you’ll see if I have to dig in to this bucket or that bucket, I can more than do it.

Mindy:
Okay, I love that answer. I love that you didn’t buy seven of these condos and then you’re barely scraping by and you can’t afford to keep them. Okay, well, let’s look at your expenses. We’ve covered income and debts. Where is your money going?

Scott:
Wait. Before we move to expenses, can we keep walking through the net worth statements so we’re just doing one thing here. What’s the next largest asset after the condo?

Mike:
My company 401(k). There is about 546,000 in it.

Scott:
Nice. That’s awesome. And you need to take the match every year?

Mike:
I max it out every year, correct.

Scott:
Max out every year, okay. Great.

Mike:
Yeah. Then there is the company stock plan that we are offered, which we get to buy our stock at a reduced rate. It matures after five years. There’s 10,500 in that, and yet last year was the first year paid off. So, continually now, it continues to roll every year. I get paid off from the five years previous.
Next would be just general stocks. I have about $76,000 there. I have 7000 in certificate of deposits at the bank. I have a brokerage account, which I just have index funds investments. That’s a 307,000. I’ve a Roth at 44,000, an IRA at 84,000. Last, or not last year, but 2019, I got into the REITs, like an online REIT investment. That’s 54,000. I have a personal investment with someone for 10,000. I have an emergency fund of cash in my savings account of 22,000. And then the condo is approximately 800,000 equity.

Scott:
What about a primary residence?

Mike:
I owe 206,000 on the primary residence. The value swings between 450 and 500,000. However, I don’t count the house that I live in in my net worth because, look it, if I really ran into financial straits and had to sell it, I got probably 200, 250,000 equity. However, I need a place to live. So, that’s why I don’t count that.

Scott:
No, absolutely. It makes perfect sense. I just wanted to point out that I had suspected something like that because you keep moving to like the most happening city at the perfect time and buying property there.

Mike:
[crosstalk 00:18:06] Yeah.

Scott:
And it sounds like Sacramento.

Mike:
When I talked to my friends from San Francisco when I moved here and I bought it and the first number was three. It was 318 I think. And they were like, “What? You should have bought two more.” And I should have because the same house today, there’s no more twos and threes anymore. Everything now begins with a four or five or better.

Scott:
No, I’d be like keep buying in, in San Francisco in 2009, looks genius and buying in, in Nashville, I don’t know, I’m guessing four or five years ago, somewhere around that point-

Mike:
Seven years ago I bought.

Scott:
Yeah, that’s perfect. Nashville is one of the hottest markets in the entire country over the last five, six, seven years.

Mike:
Yeah, there’s no office workers or tourists downtown. But there are a lot of cement trucks and cranes and construction workers, pandemic or no. It’s just that they keep building

Mindy:
Well, I don’t know where you’re moving next so that I can go buy a house there, too.

Scott:
So, we’re looking at a net worth position between, let’s call it two and two and a half million dollars between all these assets. Is that about in the right ballpark?

Mike:
Correct.

Mindy:
Yeah.

Scott:
[inaudible 00:19:14] whether we count the house, that number can move toward the higher end or lower end of that range.

Mindy:
Yeah, so I’m going to jump in here and say, I would count the equity in the home as part of your net worth because that’s something that you own, the 200-ish. That you already have an equity I believe should count towards your net worth. And that’s how I estimate my own net worth is by the equity, not how much I could get for it if I sold it today because you don’t own all 450,000 in purchase price. You still have the mortgage on it. So, that’s what I would do.
It’s your finances. And if you want to estimate low, that’s always better than estimating high on the net worth scale because then you’re just pleasantly surprised. You’re like, “Oh, it’s 2.6 not 2.4,” and that’s just better.

Mike:
Thank you. Good advice, good advice.

Scott:
Now, let’s talk about the expense side of this. Can you walk us through your living expenses and exclude the condo, any payment or payments [crosstalk 00:20:13].

Mike:
So, just like me living in my house and what goes through. So, I think I sent you guys 2019 and then I sent you 2020. I have a spreadsheet and I got very addicted to this. I don’t expect anyone to be like this. If I used to find a dollar on the subway platform or 50 cents on the sidewalk, I pick it up and I count it on my spreadsheet. I know it’s crazy. But I have a friend that does that with her food, she weighs everything out. So, it’s like, I think Liz from Frugalwoods said this one time, “It’s a game,” and I’ve gotten addicted to the game. But I don’t expect anyone to do this.

Mindy:
I love your personal budget and how precise you are. And that’s really important. Because when you’re trying to figure out what levers can I pull to make the most change in my life, you look and you’re like, “Oh, spending a lot of time on this makes no sense. Spending a lot of time on this makes a lot more sense.” So, I think it’s great. And like I keep saying all the time, personal finances personal.

Mike:
You guys started about 12 or 13 years ago for tax purposes because we used to be able to ride a lot off and the business that I did, but those have gone away, but I just kept doing it. And it is. I mean, I’ve heard this on the podcast before, it’s very eye opening when you see it.
But I mean, I guess what I want to say is if you look at my 2019 and then you look at 2020, everything stopped. So, the spending stopped. And I think I literally lived off of my bonus last year and literally invested and saved my entire base salary because I didn’t go out to eat or cocktail or go on vacation or anything.

Scott:
I’m here.

Mike:
I’ll give you two things that I just think are just, they’re fun. So, I want to say that there was Wall Street Journal article that I’d read in April about calling your insurance company and reducing the insurance rate. And truly, a lot of the cars of people out there were just sitting in their driveways all year. So, I mean, again, I got the insurance for two cars down to $40 a month. And then I think I spent an hour, because I didn’t really drive them, but maybe once a week, it costs me $70 a month for each car and gas.
And one of them I have is a hybrid, so…

Scott:
There you go.

Mike:
Who spends that? Who spends $70 a month in gas for a car? Nobody.

Mindy:
Me last day.

Mike:
Yeah. But yeah, I think I love craft cocktails. I like really nice wine. I really like really nice coffee, but that’s kind of what I spend things. And then, look it-

Scott:
That’s where my budget goes too.

Mike:
I’m very fortunate because of my job, my wife’s job, some things are paid for. So, I don’t pay for my internet. I don’t pay for my cell phone. That’s paid for the by the company. Her job allows us to get this craft coffee subscription. And we don’t have kids. We’re doing well, but we don’t have a lot of the expenses a lot of other people have. And I totally understand that. People could say that’s impossible. How could you only spend $500 a month? Well, there’s added in that.

Mindy:
That’s a perk of where you work and that is-

Mike:
Yes, a great perk.

Mindy:
Don’t apologize for these awesome things that you get. I get some awesome things because of my job, too. And that’s okay.

Scott:
I think we got a really good picture of this. You said, “I have 31,000 a year in annual expenses. I got two to two and a half million dollars in assets.” And what I love about your story is that about half of that is reflective of the grind of good habits over a long period of time, the 401(k), the after-tax brokerage accounts, those types of things, long-term investing philosophy. And the other half of it is phenomenal real estate outcomes of that net worth.

Mike:
So, you can say right place, right time, sometimes.

Scott:
Yeah.

Mike:
Yeah.

Scott:
What I like to point out that is regardless of whether you got right place, right time or whatever, I think lucky is too strong a word. I invested in Denver, which has some of those same profile of appreciation. But regardless of that, you still would be a very wealthy, self-made millionaire with just the 401(k), the good long-term habits and the focus on the low expenses there. So, that’s supposed to be a compliment, but I’m butchering this, but it is.

Mike:
Thank you.

Scott:
What’s your goal right now, Mike, and what would be the best way we can help you?

Mike:
So, I absolutely love my career. But the truth be told is that consumer habits have changed. And I was saying this probably four or five years ago, we would see it where people are listening less and less to the radio and more and more to streaming services, podcasting, and so forth. And that’s great. But what my sole job depends on is promoting our artists to radio.
And I think probably in the next three to five to seven years, maybe 10, I don’t know that it will go that long, but because of this past year with the pandemic, a lot of radio companies have been more than strapped. Thank God, it was an election year. It actually helped some radio and television and newspaper stations because there was so much political advertising to spend.
But these companies have been very hurt. And they’ve had to cut beyond the bone. And they’ve started to do what is called central programming. And so, you might have the station in Phoenix or Austin, Texas, all programmed out to Denver. And so, that’s less managers of the radio stations for me to call and promote to because one person in another city far away might be dictating what you’re hearing on the Boston radio station.
That, look it, I’m seeing the writing on the wall, it’s changing. And with radio listening, any more, it’s kind of not that people don’t listen at home or in their office or workplace. But the most place that people listen to the radio is in their car. And if people are at home, they’re not commuting to work. And the other problem is, is that we’ve been in this for a year now, and who knows how much longer it’s going to go. And so, it’s very difficult to get someone out of their habit that they’ve adapted.
So, if they used to get up and get in their car and drive to a downtown area to their workplace, and listen to their radio station for music, and being at home now, they get up and maybe they listen to the Today Show or a podcast or maybe they’re just listening to Spotify or Pandora, well, when they get in the car and we start opening up again, are they going to go back to the radio station?
Or are they just going to plug their phone in to the radio in the vehicle they’re driving and not turn on the local radio station? I mean, I don’t know. But people, it’s hard to get them out of a habit once they get into it. And that’s where I see a lot of this going.
I see this, in the community, you always hear about people that want to retire early. I’m not looking to retire early. I love what I do, love it. But I also know that technology and consumers chase are changing my career and what I do. And I’ll still be in the music business, but I probably won’t be at the capacity that I am in now. And who knows if I’ll make the money that I’m making now. So, that’s what I’m planning for.

Scott:
Well, so, at the highest level, it sounds like the challenge here is that, “Hey, my career may be at my current role may be phased out over the next three, four or five years, maybe sooner, who knows with that? And I’ll lose that current thing.” But it doesn’t sound like you’d be unwilling to work for a significant pay cut if it wasn’t a very similar thing working for the next thing.
So, I mean, I guess what I’m asking is what can we help you with, with regards to the financial side of this? Do you want to redesign your portfolio to produce income for a more defensive position? Or I guess, what’s the challenge?

Mike:
The challenge? I don’t know if challenge is the right word. I was hoping to see if you guys could take a look at it and say, “You’re kind of doing a lot of things right. But here’s one thing maybe you could modify that would help you.”
I remember my accountant last year said, “Well, you could start a business or you could buy more real estate.” And I’m like, “Well, I’m really not interested in doing either right now.” But those are the only two pieces of advice that he had for me to lower my taxable income or to modify my investment strategy. You know what I mean? So, I’m kind of like, “Well, okay, that’s all that you have, maybe that could be a good thing, but I’m doing everything right or maybe I need to ask a few different people and see if they see it a different way.”
I mean, if real estate wasn’t out of control like it is now, I might consider buying another condo. But everything is so overpriced right now. So, that’s not an option for me. And I’m not interested in starting a business.

Scott:
Let me just spew some thoughts about your situation and see if any of this is helpful.

Mike:
Sure.

Scott:
What I’m hearing is I’m hearing a guy who is pretty frugal, likes his craft cocktails, which is a very wise thing to spend your money on, in my opinion. But you spent in one quarter of your annual income in an after-tax basis, at least, not counting any of your investments and those types of things. You could take a pay cut in half. You could drive Uber for 30 hours a week and still be able to cash flow your living situation the way that I … Maybe 40 to 45 hours a week.
But you do not have an expensive lifestyle and you’ve got a substantial amount of assets. Your portfolio is reflective of really good habits conducted over a very long period of time with a pretty sound underlying philosophy there. And then again, these two huge winners in real estate. You’re overindexed in real estate or overweighted in real estate because you had a gigantic freaking winner in the San Francisco property. So, it’s not like that’s a mistake or anything with your portfolio.
Easily, you have this bleed on your San Francisco property, but you can sustain it indefinitely your current rate, and you could probably sustain it even if you lost 30, 40% of your salary. If you lost half your salary, now all of a sudden, you have to figure out another way to make up some of that income.
But you have an extremely defensive financial position, I think it’s just fantastic and liberating with that. But if you were to retire tomorrow, then you would have to make some changes to your portfolio in order for it to produce more income directly related … That would enable you to actually spend that income. So, I don’t know that branch over there. Any reactions to what I just said with that?

Mike:
I mean, I think I am unique. I think when a lot of this started, and I started reading and listening to everything in the community, the common thing was tech workers that just hated a cubicle and wanted to get out early. That’s not my case at all. I mean, I absolutely loved my career and what I do. I mean, we always joke, especially when you’re at a concert having a couple of beers with your clients, it’s like, this is like college with an expense account.
So, I’m not looking to change that. It’s fantastic. I mean, movies, music, television, fashion, tech, sports, create, pop culture, that’s what I’m a part of, and I just love it. So, I’m not looking to just do something different. But I do know, it’s coming quick. It’s going to change, not this year, I don’t think, not even maybe next year, but it’s common.
And I think to use a pun, when the music stops, I want a chair, I want a comfortable one. And then what do they always say? It’s like, so now you have options? What are your options going to be? Do you work for a specific artist, a management company, a touring company, to store for another record label? I don’t know. I mean, you’re open to all of it, but it will change. So, that’s what I’m trying to plan for, immensely.

Scott:
Yeah, yeah. And I think you’re 100% wise to do so. I think often what we’ll see, and I’ll give you examples of people who are not you to help you see my perspective on some of this. But suppose we had somebody who had a 400,000 in home equity and 500,000 in retirement account and 22,000 in savings that way you have, that person’s in big trouble in your situation. And they need to real quick begin figuring out how to create assets outside of that retirement account, outside of the home equity, because they’re screwed if they lose the job. They’ve only got a couple months runway.
You’ve got half a million in assets, maybe 600, 700,000 in assets outside of the retirement accounts that you could borrow against, that you could liquidate to sell, I mean, for many years, perhaps close to it perhaps, all the way potentially through to traditional retirement age when you can begin accessing the money in the 401(k) through work and those types of things.
On top of that, you got another $750,000 in equity in the condo with that which you can again borrow against or liquidate if you had needed any cash there. And because you spend so much less than you earn, you could take a year and figure this out and think through it and then figure out, okay, I’m going to do this on a consulting basis. I’m going to start my own business here. I’m going to whatever it is in the event that I lost my job.
It also sounds like you’re super passionate about your job. So, I am a little suspect about whether you’re not very, very good at your job and unlikely to be on the chopping block in the early rounds of this in the event that your company is forced to make hard decisions, so these are just more compliments headed your way. Again, I don’t know if this is helpful.

Mindy:
Oh, that was a compliment? How good are you at your job, that’s a real compliment. I’m so glad we don’t-

Scott:
I suspect he’s really good at his job because he loves it so much. Right?

Mike:
I do.

Scott:
That’s why I’m saying like, I don’t know how much I change about your portfolio with the exception of I think that there needs to be … And I think you’re thinking that … You even brought up great questions with your San Francisco condo, right? I mean, again, that’s the biggest piece of the pie here. And we can talk about that. But it seems you’ve got your outlook on that pretty good. You think it’s going to go up in value. And you can sustain it in the short run to see what your options are going to look like in a year or two from now with that.
That’s where I’m struggling to come up with good advice here because I think, you’re pretty smart and doing a lot of things intelligently with this. It’s a little complex, but it’s great overall.

Mike:
Thank you. Okay, okay. Let’s ask about the condo. Is there a point where certain … I know people that hold on to everything for their whole life and then I know people that get out of them after 10 years. I mean, it’s approximately 13 years old now. I mean, does there come a point where it’s really time to exit a property like that, especially after a certain amount of time the HOA fee probably will go up, so that you’re going to need a new roof, you’re going to need a new elevator in the building.
I mean, you could replace a dishwasher and a stove any time. But I mean, there’s capital expenses that will come up with a condo, and really, you should be exiting it after X amount of years or I don’t know. So, this is my first entry into having a rental property. I’ve never had one before.

Mindy:
Yeah, so the condo is really building specific. You could have a condo association that is doing a really great job of running the association. The dues are $600 a month because they really only need $200 a month, and the 400 goes into the capex for the entire building so that when they do need a new roof, they already have the money in the reserves to pay for the roof. They don’t have to issue what’s called a special assessment.
I never lived in a condo like that. I always lived in the condo where the association is $200 a month. And that’s the bare bones. And when they need a new roof, oops, now we have to double that association fee on everybody because we have nothing in reserves. So, I would look into their reserve fund.
And I think you’re asking all the right questions. I love that you have these such great problems because it does make it now like Scott, I’m struggling to come up with some good advice. But I also want to note that your good problems are because of great past practices.
So, back to the condo, I would look into their reserve fund. How much is in there? How much is the new roof? It’s not $1,000. A new roof on a condo is on a condo building, how tall is the building?

Mike:
Four stories, four or five stories.

Mindy:
Okay, so $100,000. A roof lasts between what 15 and 25 years, depending on well, and that’s residential. I don’t know how long a condo building roof lasts.

Scott:
When you have an HOA, it lasts about 15 years. When you don’t, it’s about 30 years I’ve heard.

Mindy:
There you go. So, it’s a 13-year-old building. Do you have $100,000 in reserves? And do you pay your own heating bill? Or is it a boiler that heats the entire building, routine maintenance on … Is it brick?

Mike:
Well, it’s only 12, 13 years old. So, it was under the new California Code for earthquake and I mean, there’s a lot of…

Mindy:
Perfect.

Mike:
I mean, just the bathrooms in it, I’d never seen bathrooms and they had the, what do you call it, the electrical outlets for … I mean, there’s codes that were state California codes I’d never even seen before in building. So, it’s good but again, everything ages.

Mindy:
Yeah, everything ages and I would look into the HOA reserve fund and ask. Nobody ever goes to the HOA meetings. Ask them what are you paying for? What is the extra going into? Do they have plans for a new roof, like repaving the parking lot or the boiler is what did it on my property. We had a pool, so they had to fix the pool. There were all these little things that add up. And when you don’t have anything in reserves, then you have to issue a special assessment. So, if there’s a special assessment coming, that’s probably going to stink.

Scott:
Well, I would just zoom out here for a second and say, look, this asset is $1.4 million, 1.2 to 1.4, somewhere in that ballpark I think is what you said. Is that right?

Mike:
1.4, 1.6.

Scott:
Okay, sorry, I’m way off, 1.4, 1.6. And we’ve got a $600,000 mortgage on the property. It’s costing 4000 a month and it should be bringing in 5300 a month in income. Right?

Mike:
It was for two years. It was bringing in 5300 a month. Yeah.

Scott:
Yeah. So, this is not a cash flowing asset. If you took that 700 in equity or I guess, eight or $900,000 in equity, seven, or whatever it is after the city takes their cut and the closing costs, that type of wealth could generate substantially different levels of free cash flow in another area. It may not appreciate the same way that you’re expecting this property to appreciate. But it’s not an income generator. So, the holding on to the property has to be predicated on the assumption that you’re either going to change that cash flow profile or that it’s going to continue to accrete in value over time.
Now, you asked about, like timing issues. I don’t see any big ones. HOA could be there. But what, they’re going to [inaudible 00:41:26] $10,000. Okay, that’s what, like 1.5% of the wealth you have in this thing. It’s just not material to the decision about when the next HOA event is going to happen, unless I’m misjudging that it’s going to be much, much larger than a $10,000 ahead or something like that.
The question I think is whether it’s going to go up in value. And then again, I don’t think there’s any timing things other than like, you lose the depreciation benefit after 27 and a half years, or another 14 and a half years, then you may be losing some of that offset to your passive income there and some of the tax advantages.
But I think that’s what it boils down to for me is can you change that cash flow profile, short-term rentals. You already do rent by the room, which is a pretty good way to increase rent for a lot of ways. or how confident are you that the market, local market conditions are going to continue to carry this property up in value. This is your largest asset, and the biggest stakes in here.
But the great news about your position in the first place is you don’t even need this asset in order to sustain what you got on here because of the other good stuff you’ve got going on.

Mike:
I mean, there’s another asset with the condo, and that’s the parking spot. You could get $300 a month for that. So, if the new tenant doesn’t have a car, I could rent the parking spot out to someone else in the building for 300 a month.

Mindy:
Oh, yes.

Scott:
Yeah, that’s awesome.

Mindy:
So, that’s important, too. So, I was going to get to that as well, the market of San Francisco. You just mentioned that your friend in Oakland hasn’t even had anybody looking at her property in six months. I have friends who live in San Francisco, and a couple of years ago, there would be a line for the opportunity to put money down on a rental in San Francisco, it was so hot.
With COVID happening, all of these companies have said, “Oh, we’re not going to expand into the city anymore. All of our employees can go live someplace else because they’re all working from home anyway.” And why pay these super high rents in the Bay Area when you can go live in Iowa where you’re from, and pay $1,000 and have a palace with super high speed internet and get all this as well.
So, Scott said, “How confident are you in the market?” San Francisco has been hot. I used to live in Turlock. San Francisco has been hot since I lived there in second grade, which was a couple of years ago. So, I don’t know that it will never be hot again. But I’ve heard a lot of people saying that the market has gone down. And it is much more difficult to find a tenant. So, how long do you think that’s going to last?

Mike:
Yeah, I don’t know. I mean, I remember, Manhattan used to be like that, too. When I was growing up, just did … And then you think I’m like, boy, 15 years ago, if you bought something in Manhattan now, it’s amazing. I don’t know. I wondered it’s gone through my mind is, do you cash out and then put this into index funds and maybe make a better profit over the long run in the stock market? Or hang on to the condo and hope for more appreciation? That’s kind of where my … I don’t know if there’s a right or wrong answer in that.

Scott:
No, absolutely. The challenge with that is it’s always more difficult to exit in real estate investment than to enter it because of the closing cost with those types of things. So, if you were to zero base your portfolio and you had to … Let’s say, it’s 800 in equity in the property. And if you sell it, it will be 750 after closing costs, I’m making this up. But somewhere, there’ll be less than that, let’s call it 700 in after closing costs. That’s very conservative with a closing cost estimate.
But, okay, I’ve got 700K in cash. What do I do with that right now? And so, that’s one question to go about asking. But then you also have to recognize, hey, the problem is that I’ve got 800 locked up in this property. And so, the only way I’m going to get to that 700 is by paying the taxes, the closing costs, the whatever. I mean, the after tax is going to be even less than that. I mean, we’ve got a huge gain that we’re going to be declaring on this property.
So, I think that’s where the challenge is going to come from. And I think it’s probably helpful to construct the portfolio from the ground up and say, if I was zero basing it, I converted everything to cash and restarted, how does that look? And then, how does that change now that I’ve got … Due to the circumstances of me having this money in this property, how do I think through some of those things? Do I 1031 exchange?
If I would, in a tax free world, convert that into index funds, but I can’t because my tax situation and the gain I’m going to receive, do I do a 1031 exchange? Is that something that I’m interested in? Is now the right time? Do I feel like I should just pay the $2,000 a month to get better optionality in a year or two, or at least have a clear line of sight and be more certain after this pandemic is over, if that’s the thing? Those are some questions to begin asking about making the right decision for the condo, I think.

Mike:
Does this also make me less diversified? Because then, I don’t know, just hypothetically, that would give me what, 80, 90% more in equities rather than spread around real estate the way my portfolio is balanced now, I have a million in equities and I have a million in real estate.

Scott:
Yeah.

Mike:
I don’t know. So, if Wall Street just goes to pot, then all of a sudden, I have nothing to fall back on necessarily, where now, there’s a balance. It’s like, well, like a real estate and I got Wall Street in our index funds.

Scott:
Absolutely. I think that’s certainly a question that comes up. You can always diversify that back by putting that into REITs or something like that with those. But I would imagine, and I’m not a CPA, but I would imagine if you talk to your CPA, they tell you to 1031 or something to that effect, because that would be much better from a tax perspective than liquidating, paying the tax and then sitting on the cash and figuring out what to do with it from there.
You’re also now, if you do that, you’re going to run to the same problem. I got a pile of cash. Do I dump it all into the market right now? And we’ve talked a million times about how mathematically the correct thing to do is to dump it all in the market at once rather than dollar cost average every time.
But that is very difficult for me personally, and I don’t know how difficult it would be for you in that situation, but depending on your mentality around that. Do you want to dump in three quarters of a million dollars into the … Even VTSAX right now, that’s a hard one, too, right?

Mike:
Yeah, yeah. It’s expensive. This was back in March or April, it was like $60 a share. That’d be one thing. But I think it’s 100 now.

Scott:
Yeah. You should go back in time, just right before the pandemic hit, and then dump it right into the stock market in March. That’s my [crosstalk 00:48:33].

Mike:
The 1031 though, is that’s the when you buy another property, you have a couple of months to turn the profit over into another property. Correct?

Scott:
You could defer the gain. Right.

Mindy:
Yes.

Mike:
Got it.

Mindy:
But he’s talking about the timeline. Yes, there is a very tight timeline. If you decide down the road to sell the property, definitely speak to a qualified intermediary, which is the 1031 person. Because there are timelines you have to hit. There are ways that you have to structure the deal. You can’t take possession of the money when you sell it.
If you do, your 1031 is out the window. You have to identify three properties within 45 days. If you don’t, your 1031 is out the window. So, making these decisions consciously before you put the house on the market helps you have a really smooth 1031 exchange, as opposed to the panicky, oh my goodness, I have to buy any property because I don’t want to lose all this tax money. You’re paying short, or long-term capital gains on this, what, 800,000 that is appreciated. So, that’s no small potatoes 15, 20% tax on $800,000 or putting that into a new property, which is better.

Scott:
Yeah.

Mike:
The property is everything is very, very expensive now. There’s not a lot of deals.

Mindy:
Exactly. So, if you’ve already got this expensive property, maybe continue to hold it and start to look at different markets and let me know what market you’re in so I can jump in there with you, Mr. Kreskin.

Scott:
If you don’t go into this very intentionally, my belief, and I have not done a 1031 exchange personally, but I’ve talked to a lot of people who have, and I remember being at a conference with Brandon Turner, when he was doing his first 1031 exchange. And he was running up against the deadline and just making offers left and right on anything and everything because he’s going to lose so much in tax money by doing that. That’s I think the situation we want to avoid with the 1031 exchange where we’re doing that kind of stuff. I’m sure he hit a winner because it’s Brandon.
But I would think, if that’s the plan, what market do I want to get into? What do I want out of my portfolio? Do I want the next appreciating market? And where is that? Where do I think about that? Is it Nashville? Is it somewhere else? Do I want more cash flow? Do I want a hybrid? And really think that through. Is it somewhere local or somewhere long distance?
And I think you’ll have options being in Tennessee for all of the above. But I think if you can think through that, have your framework and really know the market and one piece of advice here would be go look at the sold listings in whatever market that you’re interested in and say, what are 10, 15 properties that I would have bought that would put all my equity to work. Because you have to put all of the equity to work. Otherwise, you’re not going to be deferring the gains on some of that.
Okay, what I have bought 5, 10, 15 of these properties, great, that tells me that I’ve got a really good shot if there’s 15 that have sold the last 90 days of another one hitting the market in the timeframe that I’m going to have for my 1031 exchange. If it’s just two properties in the last 90 days, now you’re really risking it. So, you have to be really comfortable I think that what you’re looking for will come on the market and you’ll be able to transact on it in that time bound window as part of that. And that’s going to take some research.
So, I think that in order to pull off, even to have a really good option for a 1031 exchange, you have a lot of homework to do to figure out what market you want to invest in and where you’d wanted to play that equity and what kinds of deals you can expect to come on the market reasonably, because you’re not going to have the luxury of going fishing for a very long period of time if you decide to exercise the 1031 option.

Mike:
Got it. Thank you. Thank you for that.

Scott:
Absolutely.

Mike:
There’s nothing else. No other meat off the bone to pick up.

Scott:
I mean, I think, yeah, I really think the summary here is, yeah, sure, your position is complex. You could probably consolidate a couple of those investments. But that’s just I think the nature of having a career and investing over a long period of time is you pick up these little assets, like the 10 grand to your friend, or the portion in that stock that happened to do really well, even though I shouldn’t be investing in specific stocks.
So, that’s what it sounds like your portfolio is. I don’t think there’s anything to beat up there. And you get that tax consequences for moving on different parts of that portfolio to different places.
So, you spend one quarter of what you earn. You’ve got these big winners in real estate. I think that, sorry, I know we’re being disappointing and boring with this, we don’t really have … I don’t at least have too much for you on this. I think you’ve got a really strong situation. And I think you’re probably right to be worried about the music industry outlook, but you’re probably overconservative on your own role. And even if you aren’t, you could be just fine. You can rejigger your portfolio at a future date if you need to for income generation if that’s what you end up wanting.
To recap, Mike came in hoping that we would be able to really show up his CPA and give them a lot of clear-cut financial advice on what to do with his condo and these types of things. And, sorry, your CPA is probably reasonable with that because we think you have a really strong position, Mike, and you do a lot of things right. And that’s reflective again of a couple of right place, right time as you like to call it, or smart real estate decisions, as the rest of us, Mike, refer to them, and then a lot of really good long-term habits.
And I think you’re correct to be conservative about your financial position and what the outlook on your career could be with consumer behaviors changing and those types of things. But I don’t think there’s a lot more really you can or you can really be doing to put up more defense against that. Worst case scenario, they eliminate your position one day and you retire.

Mike:
I might take a sabbatical and then I’ll figure out what I’m going to do.

Scott:
But I think that’s the worst case. That’s pretty good. And I think you’ve got a lot of creative things you can do to leverage your unique talents and strengths to either postpone that day, as long as you enjoy what you’re doing, or find alternatives in the event. You work for yourself for something like that in the event that that were to happen.

Mike:
Yeah, I mean, I can’t change what’s going to happen with radio. So, in fact, we’re even seeing it with the people that are in radio. I mean, there’s more and more being put on their plate because the budgets are so tight. But you’re right. I guess when that change is for good, I’ll just look for what’s next. I know that. It’s just, I could see it coming at some point.

Mindy:
Yeah. Being aware of it is really important. And I love that you’re even thinking of it. And yeah, like Scott said, I don’t have a ton of suggestions to make to change what you’re doing. We didn’t really talk how much you’re putting into your Roth IRA. If you’re not maxing it out, I would think that that’s a good place to like-

Mike:
So, side note of this, I just after literally 20 years of having a financial advisor, I moved everything to Vanguard because that’s where my 401(k) is based and I start a brokerage account there a year and a half ago. Obviously, the fees are a big part of that. It took me two years to really … I’m like, “Okay, I understand this, but let me kind of really dive into this and see.”
But because of what I make financially, I was not able to put anything in the Roth. Every year, I would have the financial advisor check and be like, “Well, maybe you could put 800, but I could never do the $6,000 or something.” So, that’s where I just basically … I mean, I’m not saying I won’t go back to the Roth at some point. But in my financial position now, I can’t contribute to it.
I know there’s the backdoor Roth, but I think that I asked my accountant about that. And again, because of the financial salary that I make, I can’t really do the, not the mega backdoor Roth, but the ladder, the Roth conversion ladder.

Mindy:
Oh, yeah, right now, you can’t do a Roth conversion ladder because you make too much income.

Mike:
Yes.

Mindy:
Having too high of income to be able to contribute to a Roth IRA problem is a really great problem to have.

Mike:
I’ve heard you say that before.

Mindy:
Yeah.

Mike:
And I’ll swim in those waters. That’s fine. Yeah.

Mindy:
Should you be able to in the future, even if it’s just $800, I would, because that grows tax free? And why pay taxes when you don’t have to?

Mike:
Yes.

Scott:
Yeah, that would be a good move for like a sabbatical year, for example, if that were to come up in the future.

Mindy:
Absolutely.

Mike:
To take, say, $40,000 out of the 401(k) and then move it to do a Roth conversion with it.

Scott:
That’s right, yes.

Mike:
And then small amount of tax.

Scott:
If you’re going to have a year where you’re going to have low taxable income, that would be a good year to do that. And, for example, if in a situation, well, I’m getting really complex here, but for example, if you were to get more involved in real estate and become a real estate professional, I bet you have a large taxable loss on your San Francisco property. That is currently not … I don’t think you’re currently able to offset your income for that.
You might be, depending on where the specifics of things lie. But there’s potentially something there with leveraging the loss in that property, and a sabbatical year for a Roth conversion ladder, but we’re getting really technical if we get to that point.

Mindy:
Yeah, but just things to think about.

Mike:
Yeah. No, thank you. This has been great. I really love it. And it’s a good position to be.

Mindy:
I really love it, too. Yes, yes.

Scott:
Absolutely.

Mindy:
You’re in a very enviable position. You’ve been doing everything right. But I do want to say, you didn’t just start this yesterday. You didn’t start this last year.

Mike:
No.

Mindy:
Personal finance and financial independence is a journey. It isn’t just, “Oh, I’m going to be financially dependent. Boom, there I am.”

Scott:
You’re an overnight success after a decade or two of a lot of discipline.

Mike:
Now, it’s been a good decade in the making at least.

Mindy:
Yeah, it has been.

Mike:
At this level, I would say.

Mindy:
I would just continue what you’re doing. I think you’re really cranking it out and just be cognizant of the options in the job and see looking forward as you seem to be doing is going to be the best, what is that, the best defense is the best offense or offense is the best defense. I can’t … Scott’s a sports guy.

Scott:
Best defense is a good offense.

Mindy:
The best defense is a good offense. So, your best defense is your great offense.

Scott:
Yeah.

Mike:
That’s the word, the word of the day.

Scott:
Alrighty. Well, we really appreciate you coming on and sharing this all with us, Mike. I think we learned a lot from it, even though maybe you were coming in hoping for more advice. I think a lot of people will just learn a lot by saying like, here’s an example of I think what good looks like and natural problems that will come out of the course of becoming wealthy.
If you do in this game and you make a couple of bets, one or two of them are bound to pay off in ways you couldn’t have predicted, like the San Francisco condo, and give you some of those interesting challenges. That won’t happen for everybody, but will happen for a lot of people over the course of their journey. So, thank you for coming in and sharing the story with us. We really appreciate it and think a lot of people will learn from it.

Mike:
Thank you for the advice and for the review. I appreciate it.

Mindy:
Yeah, this was awesome, Mike. I really, really, really appreciate your time. And we’ll talk to you soon.

Mike:
Thank you very much, guys.

Mindy:
Okay, that was Mike. Scott, what did you think of Mike’s story?

Scott:
Yeah, I thought it was great. And I mentioned this in the intro as well, but I feel like his story is likely to be reflective of that of many other people across a 25 year period of consistently investing, whether that be in your personal home, in markets like San Francisco, or in stocks or in other assets.
You’re probably going to have a few winners or a few large piles of money that are outside of the textbook that we’d like to, that some folks like to kind of get to with this, like, “Oh, I’m 100% index funds, and across several different multifamily properties and real estate.” That seems to be what a lot of people are striving for. But that doesn’t really happen in real life as we can kind of see from Mike’s story here over a long period of time with the ups and downs of markets and the realities of moving and coming and going.
And I think that far from kind of like dismissing it as a lucky event, I think lots of people are probably in his situation, and wondering what to do with three quarters of a million dollars or a million dollars in equity in what is effectively half of your portfolio. If you get this question [inaudible 01:01:54] the money group as well, “Hey, I got this one stock I invested in Tesla or Apple or Microsoft or whatever, years and years ago, and now I’ve got uber amounts of money in it. What do I do from a tax perspective?”
It’s a scary situation. And it’s something that is a real deal and something to look forward to as a set of problems if you’re starting this journey younger in life and have those 25 years to hit a few of those random winners you can’t predict right now.

Mindy:
Right. Some of these problems are, they are things that you need to be thinking about, but there are some really good problems to have. And Mike is hitting all of those things. He’s got the really great problems to have and I think we came up with some pretty good solutions for him.

Scott:
Absolutely.

Mindy:
Should we get out of here, Scott?

Scott:
Let’s do it.

Mindy:
From Episode 182 of the BiggerPockets Money podcast, he is Scott Trench and I am Mindy Jensen saying, be sweet, parakeet.

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