Afford Anything Podcast Summary: Q&A Episode on Rental Properties, Sustainable Investing, and Entrepreneurial Growth

Episode Title: Q&A: Should We Ditch Rental Properties Entirely?
Host: Paula Pant
Co-Host: Joe Saul
Release Date: November 20, 2024

Introduction

In this insightful episode of the Afford Anything podcast, hosts Paula Pant and Joe Saul delve into three pressing questions from listeners. While the show primarily focuses on financial psychology, investing, real estate, and entrepreneurship, this episode bridges these pillars by addressing concerns about rental property investments, sustainable investing, and the nuances of growing a podcast-based business.

1. Should We Ditch Rental Properties Entirely?

Listener Scenario:

An anonymous caller, represented by an AI voice named Samantha, shares her family's predicament with two vacation rentals:

• First Property (Purchased in 2020): Nets $10,000 to $14,000 annually with around $80,000 in equity. Easy to maintain.
• Second Property (Purchased in 2023): More challenging with little to no equity due to a $60,000 HELOC. No anticipated profit for the next 2-3 years.

Key Issues:

• Financial Strain: Unexpected job termination and a spouse's career change have reduced their ability to manage and invest in these properties.
• Investment Goals: Initial plan to hold both properties long-term for passive income and portfolio growth is now under threat due to changing financial circumstances.

Discussion Highlights:

• Understanding Cap Rates: Paula emphasizes the importance of evaluating rental properties based on their cap rate, which measures the unleveraged income stream from the property. She explains, “The cap rate is essentially the unleveraged dividend or the income stream that you're getting from that property” (09:56).

• Capital vs. Dividend: The cap rate represents the property's income potential independent of financing costs, akin to a stock's dividend. The total return includes both cap rate and capital appreciation.

• Financial Strategy: Joe advises that in scenarios where properties strain cash flow, it may be pragmatic to sell the underperforming asset. “If I get rid of the second property, then I, at the very least, regardless of whether it's a great investment or not, I do have the first property, which is cash flowing that I could ostensibly keep” (16:05).

• Cash Reserves: Both hosts stress the importance of maintaining cash reserves to manage unexpected financial downturns. Joe remarks, “If they decide to raise the rate, the current tenant says no. And now for three months they have this vacancy. They could go from bad to worse in a hurry” (21:16).

Conclusion:
Paula and Joe suggest reassessing the second property's viability by analyzing its cap rate and considering selling it to alleviate financial pressure. They emphasize the necessity of adapting investment strategies in response to life changes and maintaining financial buffers.

2. Investing in Sustainable and Environmentally Friendly Ventures

Listener Question:

Tina, a committed environmental advocate and financial enthusiast, inquires about aligning her investments with her ecological values. She seeks guidance on selecting ETFs and mutual funds that prioritize sustainability, avoiding investments in industries contributing to climate change.

Key Concerns:

• Ethical Investing: Balancing financial growth with environmental consciousness.
• Available Options: Identifying funds that exclude coal, gas, and other polluting industries while promoting sustainable growth.

Discussion Highlights:

• Sustainable ETFs and Index Funds: Paula lists several options, such as the MSCI Sustainable Future ETF, Fidelity International Sustainability Index Fund, iShares Global Sustainable Development Goals ETF, among others (35:38).

• Standard Deviation and Risk: Joe points out that highly specialized funds can have higher volatility. “The standard deviation can go way up. Because if we're just going to look at green housing as an example, a green housing fund is going to have a standard deviation that's much higher than the S&P 500” (38:19).

• Cost Considerations: Specialized funds often come with higher fees. Joe explains, “I mean, there are tons of nuances to responsible investing... costs go up... but it's worth it if you want to put your money where your mouth is” (38:50).

• Investment Strategy: Paula recommends using a robust database to identify funds that align with specific values and ensuring proper asset allocation. She advises, “Look at where venture capital firms are allocating their capital towards accelerating climate solutions” (41:43).

• Balancing Portfolio: Joe likens a diversified portfolio to a sailboat, advocating for a majority in reliable assets with a smaller portion in specialized, high-growth areas like climate tech. “Have the hull of the ship toward your game plan, have your sail go toward your game plan and have a spinnaker” (42:52).

Conclusion:
Tina is encouraged to explore a variety of sustainable investment funds, consider the associated risks and costs, and maintain a balanced portfolio by allocating a portion to specialized sectors like climate tech. This dual approach ensures both ethical alignment and financial growth.

3. Investing in Entrepreneurial Growth: Scaling a Podcast Business

Listener Question:

Sarah, a spirituality-based podcaster with 2,300 subscribers, seeks advice on when to invest in the growth of her podcast. She aims to transition from her 9-to-5 job to full-time entrepreneurship but is cautious about ensuring her business can sustainably support her financially.

Key Concerns:

• Reinvestment vs. Personal Income: Determining whether to reinvest podcast earnings back into the business or use them for personal expenses.
• Scaling Operations: Building a team, creating standardized processes, and enhancing operational efficiency.

Discussion Highlights:

• Reinvestment Strategy: Paula advises Sarah to reinvest every penny from the podcast back into the business as she doesn’t currently need that income for personal expenses. “Your objective right now is not personal gain, it's not personal income growth. Your objective right now is the growth of the enterprise itself” (58:17).

• Building Operations: Joe emphasizes the importance of creating an organizational structure and standardized operating procedures (SOPs). He references Michael Gerber’s The E-Myth to illustrate building a business as a well-oiled machine (65:02).

• Specialization and Hiring: Paula recommends hiring specialists for specific areas like bookkeeping, marketing, and web development, allowing Sarah to focus on her unique talents such as podcasting and guest management. “Anything that you do more than once have clear operating guidelines, start hiring people, start plugging them in” (67:16).

• Avoiding Mediocrity: Both hosts caution against investing in mediocre coaching services. Paula notes, “There's so much variation in the quality of coaches... listening to the wrong voices can lead you astray” (60:37).

• Learning and Networking: Joe suggests participating in industry conferences and following specialized podcasts to gain actionable insights and build a network of reliable experts. “There are tons of podcasts talking about the issue” (69:05).

Conclusion:
Sarah is advised to prioritize reinvesting her podcast earnings into scaling and systematizing her business. By developing standardized processes and hiring specialized team members, she can focus on growth while ensuring operational efficiency. Additionally, she should seek out reliable information sources and avoid one-size-fits-all coaching, instead opting for targeted expertise.

Final Thoughts

Paula Pant and Joe Saul provide comprehensive, actionable advice across different facets of personal finance and entrepreneurship. Whether managing rental property investments, aligning investments with environmental values, or scaling a podcast business, the hosts emphasize strategic planning, reinvestment, diversification, and the importance of specialized knowledge. Their collaborative dynamic—combining Paula's optimism with Joe's cautious pragmatism—offers a balanced perspective that empowers listeners to make informed, thoughtful financial decisions.

For more in-depth discussions on these topics, listeners are encouraged to explore previous episodes and additional resources linked in the show notes.

Notable Quotes:

• “Your objective right now is not personal gain, it's not personal income growth. Your objective right now is the growth of the enterprise itself.”
  — Paula Pant (58:17)

• “The cap rate is essentially the unleveraged dividend or the income stream that you're getting from that property.”
  — Paula Pant (09:56)

• “Have the hull of the ship toward your game plan, have your sail go toward your game plan and have a spinnaker.”
  — Joe Saul (42:52)

• “There's so much variation in the quality of coaches... listening to the wrong voices can lead you astray.”
  — Paula Pant (60:37)

Note: All timestamps correspond to the positions in the provided transcript.