Finance Friday: Middle-Class Trap on Steroids ($3.8M but CAN'T Retire!)

Summary

Podcast Summary: BiggerPockets Money Podcast Episode - "Finance Friday: Middle-Class Trap on Steroids ($3.8M but CAN'T Retire!)"

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Introduction

In this episode of the BiggerPockets Money Podcast, hosts Mindy Jensen and Scott Trench delve into the intricate financial predicament of Allie, a resident of the upscale Laguna Beach area. Despite boasting a substantial net worth of $3.8 million, Allie finds herself entangled in what the hosts describe as the "middle-class trap on steroids," preventing her from achieving early retirement. This comprehensive discussion explores the challenges of asset allocation, real estate investment strategies, and the complexities of leveraging retirement funds.

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Allie's Background and Financial Journey

Allie comes from a frugal background, instilled by her engineer father who emphasized living debt-free and saving diligently. Her upbringing in such an environment has significantly influenced her financial habits, leading to substantial savings and prudent investments from a young age.

Allie (00:01:03): "We always were saving money from a young age and that's carried on as I became an adult."

Residing in the picturesque yet expensive Laguna Beach, Allie capitalized on the 2011 real estate market by purchasing a home at a discounted rate. Her current occupation involves sourcing cost savings for a facilities management company serving a major tech client, a role that offers flexibility and a stable income, contributing to her substantial savings.

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Allie's Current Financial Situation

Allie's financial profile presents a paradox: a high net worth juxtaposed with significant financial constraints that hinder her retirement plans.

• Net Worth: $3.8 million
• Annual Income: Approximately $298,000
• Monthly Expenses: $9,900
• Debts:
  • Mortgage: $600,000 at 2.75% interest
  • HELOC: $440,000 at 8% interest

A notable aspect of Allie's finances is her reliance on Airbnb, renting out her primary residence for two months each year, generating about $46,000 annually. However, the primary residence alone doesn't cover her monthly mortgage and other expenses, necessitating strategic financial maneuvers.

Scott Trench (00:07:05): "The house is $3 million with a $600,000 mortgage balance... How can I access those funds or what can I do, like, without having to sell my house."

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Discussion: Renting vs. Selling the Primary Residence

A central theme of the episode revolves around whether Allie should continue renting out her primary residence or consider selling it to unlock equity for retirement.

Options Explored:

1. Building an Accessory Dwelling Unit (ADU):

   • Pros: Potential rental income of ~$3,000/month
   • Cons: High initial costs (prefab ADUs range from $80,000 to $150,000) and concerns about tenant privacy.

2. Purchasing a Second Property in Laguna Beach:

   • Pros: Allows Allie to downsize while retaining her current home as a rental.
   • Cons: High property prices ($2 million+) and increased monthly mortgage obligations (~$14,000-$15,000).

3. Investing in Real Estate Outside Laguna Beach:

   • Pros: More affordable properties, potential for higher rental yields.
   • Cons: Management challenges due to distance from primary residence.

4. Leveraging Retirement Accounts:

   • Pros: Accessing funds to invest elsewhere.
   • Cons: Potential penalties and taxes, reducing overall savings.

Allie (00:07:20): "Sometimes I think about buying a short-term rental like in San Diego or something like that, and pursuing that as well."

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Financial Analysis and Expert Advice

Scott and Mindy utilize financial models to assess the viability of Allie's options, weighing factors such as property appreciation rates, rental income, and potential stock market returns.

Key Insights:

• Real Estate Appreciation vs. Stock Market Returns:

  • Laguna Beach: Allie bullishly estimates a 6% annual appreciation.
  • Stock Market: Scott suggests a more conservative 8-10% return rate based on historical data.

• Tax Implications:

  • Selling the property could result in significant capital gains tax (~$387,000), which Scott recommends deferring via a 1031 exchange—a strategy allowing reinvestment into similar real estate to defer taxes.

• Diversification Concerns:

  • Allie's portfolio is heavily weighted in Laguna Beach real estate ($2.4 million in equity), posing risks if the market fluctuates.

• Potential Cash Flow Strategies:

  • Long-Term Rental: Estimated cash flow of ~$5,500/month.
  • Airbnb/Furnished Rentals: Potentially higher but inconsistent income (~$15,000/month with fluctuations).

Scott Trench (00:15:30): "If you believe those things [high appreciation rates], you're likely to want to keep the place."

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Conclusion and Recommendations

The hosts conclude that Allie's path to early retirement hinges on her belief in the continued appreciation and rental demand of Laguna Beach real estate versus the potential returns from the stock market. They emphasize the importance of diversification and cautious leveraging of assets to mitigate risks.

Final Recommendations:

1. Conduct In-Depth Market Research:

   • Verify historical and projected appreciation rates and rental income in Laguna Beach.

2. Consult with Financial and Tax Professionals:

   • Explore the feasibility of a 1031 exchange and other tax-efficient strategies.

3. Consider Diversification:

   • Balance real estate investments with other asset classes to reduce portfolio risk.

4. Evaluate Long-Term Rental Viability:

   • Assess the sustainability of steady rental income to cover expenses and fund retirement.

Mindy Jensen (00:58:42): "I think there's certainly a way to shelter that tax benefit if she decides to sell the property... She should talk to a real estate friendly CPA."

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Notable Quotes with Timestamps

• Allie on Early Savings:

  [01:03] "We've always been saving money from a young age and that's carried on as I became an adult."

• Scott on Middle-Class Trap:

  [07:36] "The house is $3 million with a $600,000 mortgage balance... How can I access those funds or what can I do, like, without having to sell my house."

• Allie on Retirement Realization:

  [05:12] "That's what got me really excited about, like, wait, could I retire early if I just save more money now?"

• Scott on Financial Modeling:

  [15:30] "I think if you believe what you said there around that there's no question this is a keep property and we're on the right track..."

• Mindy on Tax Strategies:

  [55:19] "It's $250,000 per person on title when you buy it and then you get a million dollars of tax free capital gains."

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Final Thoughts

Allie's situation underscores the complexities high-net-worth individuals may face when their assets are concentrated in specific sectors, such as real estate. The episode highlights the critical balance between leveraging existing assets for retirement and maintaining a diversified portfolio to mitigate risks. Mindy and Scott provide a nuanced analysis, offering actionable strategies while emphasizing the importance of personalized financial planning.

Listeners are encouraged to engage with the BiggerPockets Money community for additional insights and support, as Allie's journey illustrates the broader challenges and opportunities in achieving financial freedom.

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Transcript

[Mindy Jensen]

Today's Finance Friday guest is hoping to retire at the age of 47, but she feels like she's stuck in the middle class trap. Will she be able to retire given how much of her current portfolio is tied up in retirement accounts? Stick around for Scott and I to wrap up at the end because we want to hear from you, our BiggerPockets money community, because Allie has a lot of options to choose from. Hello, hello, hello and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen and with me, as always, is my photogenic co host, Scott Trench.

[Scott Trench]

Thanks, Mindy. Great to be here and looking forward to creating a complete picture of Allie's financial situation here. Biggerpockets has a goal of creating 1 million millionaires. You're in the right place if you want to get your financial house in order, because we truly believe financial freedom is attainable for everyone, no matter when or where you're starting. Before we bring in Ali, we want to thank this episode's sponsor, Connect Invest Real estate investing simplified and within your reach. Now let's get into the show. Allie, we're so excited to have you on BiggerPockets Money today. Welcome.

[Allie]

Thank you for having me. Excited to be here.

[Mindy Jensen]

Ali, can you share where your journey with money be?

[Allie]

My journey with money. So I came from, my parents were very frugal. I was one of four. An example of my dad's frugality would be we would go to go out to lunch at Wendy's and he would order one large soda, no ice and six cups. So that is the sort of background that I came from. He always said, no debt, you pay for everything in cash, everything. You know, we always were saving money from a young age and that's carried on as I become an adult. I, you know, right now I have a 1999 car. Always been saving since I was little. My first car I bought only went in reverse, so we were able to get a good deal on that.

[Mindy Jensen]

Did you fix it or did you just drive backwards? I feel like. I feel like that's inviting.

[Allie]

My dad fixed it. Yeah, my dad was an engineer. He fixed it. We got it for 400. It was a BMW, only one in reverse. So, yes, lots of fun stories like that, but made it interesting. I was always very embarrassed, but, you know, today I understand why he taught us that.

[Mindy Jensen]

Ali, I think we have the same dad. I was also always very embarrassed about the cars that we drove. Although we didn't have one that just went in reverse. My dad was always working on them. Because they were so old and so breaking down. So I am. I am right there. We are soul sisters. Where are you based? And let's talk about your career.

[Allie]

Sure. So I reside in the lovely Laguna beach in Orange county, so it's a very expensive place to live. I was fortunate to be able to get a house here when everything was half off in 2011. So I was able to, with the money I had saved since I was little, put a down payment and buy a house where I could never afford it. Right now my job is I do sourcing for a facilities management company for a big tech client. So I do find cost savings for a living.

[Mindy Jensen]

Do you enjoy that?

[Allie]

Yes, very much so. Yeah. No, I really enjoy my job. And my job has a lot of benefits. Like, they let me work from home since 2008, so I was able to raise my children. And I've never had an expensive commute or had to invest in clothing or anything like that. So I think that's really helped me save a lot of my money.

[Mindy Jensen]

Allie, let's jump in and look at a copy of your numbers. I have a total net worth of $3.8 million, which is awesome. I've got income of approximately 298,000, expenses of 9,900amonth. So I don't think that's where we're going to see a lot of savings. Debts are just a $600,000 mortgage at 2.75%. I consider that to be good debt and a HELOC for 440,000 at 8%, which we'll talk about in a bit. I see that you are Airbnb, your property, your primary residence for two months out of the year. Is that every year that you do that?

[Allie]

We can only do it in the summer because I have two children, so when they're out of school, we put it up every summer. And we're never expecting to rent it, but it always rents and it's. We get. I think last year, someone paid 46 grand for two months.

[Mindy Jensen]

Holy cats. Yeah, I would do that again. I mean, is that, like, your entire mortgage payment for the whole year?

[Allie]

Our mortgage is 2650amonth.

[Sponsor]

Yeah.

[Mindy Jensen]

So I'm doing quick math.

[Scott Trench]

Is that just P and I.

[Mindy Jensen]

Yes. She's in California. That's not taxes or insurance.

[Allie]

Yeah, that doesn't include. So everything all summed up with our mortgages. Around 4,000, 4,000 total with taxes and home insurance.

[Mindy Jensen]

And I see a small pension and Social Security options for you. What is your retirement goal? Numbers, timeline, et cetera last month.

[Allie]

Living in Laguna Beach. Nobody talks about retirement. Everyone has like a Bentley or a Ferrari or cybertruck. It's just unheard of, right? So I never really thought about retiring early until we used to have a financial planner, creative planning, that would meet with us once a year and they'd say, when do you want to retire? And they had a little spreadsheet they put up. And I remember saying, well, if I move that number up, how much more money do I have to save? And the. And the difference wasn't that much. It was just like a couple hundred bucks a month. So that's what got me really excited about, like, wait, could I retire early if I just save more money now? So, you know, I never really had. I just always thought I would work till, I don't know, 60 or 65 and then retire then. But, I mean, do we. But then I started, I found Mr. Money Mustache, and Scott, I read your book and I was like, you know what? I don't have any of these. Yes, nice little plug. Except for life. That was a good one. And I realized that, you know, I don't. You had mentioned three expenses, right? The housing, which I cover with the Airbnb, the. The transportation, which I don't really have, and food, which my husband cooks. So we always eat in. It's better eating in than eating out. So I was like, well, maybe I could do this. And then anyone I talked to about it told me, like, what are you talking about? Like, that's just silly. Nobody was even interested in hearing about it. So that's why I feel like I really resonated with this podcast.

[Mindy Jensen]

Why would you want to work until you're 65, when that's the only option, versus giving yourself the option to work for as long as you want to, but you don't have to work anymore.

[Allie]

I know. And if they would let me short term rent my house in Laguna, which they don't, I could have been retired so long ago. So that's a bummer for me. So sometimes I think about buying a short term rental like in San Diego or something like that, and pursuing that as well.

[Scott Trench]

But I think the most important thing here, it's so glaringly obvious and it's the problem that you came with us, you know, came to us with today, I think, is the, you know, this concept of like the middle class trap with, you know, your net worth is $3.8 million. You're rich.

[Allie]

I feel so poor.

[Scott Trench]

The house is $3 million with a $600,000 mortgage balance, give or take, left on it. And the rest of your assets are essentially all in the 401k or IRA setting for that, for the other 1.4 million. Right. And that's essentially the entirety of your financial position, Is that, is that correct?

[Allie]

Yes, that's correct. And it's like, how can I access those funds or how can I leverage them or what can I do, like, without having to sell my house, which I could also do.

[Scott Trench]

Yeah. And this problem is starting to come out of the woodwork. Like, I don't think I've talked to a lot of people that had this problem, you know, in past years. And then all of a sudden in the last month or two, I must have. I must have come across a couple dozen people with a problem that's similar to this. Right. How do you feel about it and what have you thought about in the context of this housing decision or how to, how to access this housing as you were putting all these numbers together and thinking about coming on the show here?

[Allie]

I mean, I'm always kind of torn between, okay, do I. We have about a quarter acre, so I could build an ADU in the backyard, rent it out. I could pay probably all cash. I could. One thing we've pursued but we haven't actually been successful at is buying another house in Laguna that's kind of not as nice or smaller, moving my whole entire family in because my kids are in school here, and then renting out our primary. And then the other idea is just buying some real estate back where I'm from, which is Philadelphia area, where it's a lot cheaper, you can get a lot more. But then managing it so far away would be difficult. Sometimes I think about too, like cashing out some of my 401k to do that. But then, you know, I had this financial planner who really said, you know, you don't want to tap into that 401k.

[Scott Trench]

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[Mindy Jensen]

To Invest in Real estate welcome back to the show. Have you read the Mad Scientist article called how to Access Retirement Funds Early? Yes, that is one of the best, most comprehensive articles for accessing your retirement funds early so you can tap into your 401k without paying penalties. I am assuming that you have a traditional 401k. There's no way that I know of to get around paying taxes on this unless you only pull out a little bit. But what's the point of pulling out a little bit? You're not going to even be able to live off of it. And this would be after you leave your job. Because if you do it while you're at your job, you're paying in the highest tax bracket possible to access these retirement funds early. Uh, but there is the Roth conversion ladder, There is the 72T. There is the just taking it and paying the penalty. Although I would do that after I stop working because you will still be paying taxes on it no matter what. So I would suggest you give that article another read. Um, building the ADU in the backyard is interesting. You said you could pay for it with cash. How much would that generate in income? Like how big of an ADU can you build?

[Allie]

Yeah, this is the issue. So when I have like a contractor come out and bid me, they say it's going to be minimum million bucks to build an adu. But then you see these pre built ones online, right, that are like $80,000, like 150,000. So I think I'd go for the prefabbed one, right. Pay in cash, and then I could probably get 3,000amonth, something like that. But I would have people living in my garden, which I'm not sure.

[Scott Trench]

What would that do to the value of your home?

[Allie]

Yeah, it would probably go up a million bucks, I would guess. I mean, it would go up more if it was like a custom. If it was a custom one, if I spent a million dollars on it, it would probably go up significantly more than if I bought a prefab.

[Scott Trench]

That would be a truly amazing statement if you could add $150,000 prefab edu to this property and increase the value of the property by a million bucks. But I think that's like, that's a good homework assignment. Has anybody done that in the local area and how did their property translate? Because, like, you know, there's always rent and cash flow and income stuff. Like if you could spend 150 grand and make a million back in one year, then there's no, there's no other. Like, that's the best opportunity you're ever going to get in your life. I'm skeptical that that will happen with that. But if it can, that's the first. That would be the first avenue I'd explore from this. And in that case, then I would be like, yes, how do we finance, how do we finance that? Is it an E lock? Is it something else? Because you'll be, you, you'll be able to justify almost any source of capital for that investment. But what's your conviction in that? In that, that value add?

[Allie]

I mean, most people around here have a ton of money, right? So they're getting the custom made ADU that matches our house. That's beautiful. Right. I don't see a lot of just like drop ins. Right. But so I don't know that I'd be able to find like something like that to compare. But I do see the, the people that build the custom ADUs and their value goes. There was one, there was a house down the road from me. I think it was sold for three million. They built an ADU and they sold it for six. Because the property value here is so much. Right.

[Scott Trench]

I'd rather do that than spend 150k to make a million. If that's true, like you'd rather spend a million to make two, you'd rather increase the value of the property by $3 million with $1 million outlay. Within $150,000 outlay to get a million bucks, that's another 1.75 million. That's an enormous play.

[Allie]

And there's a possibility of doing like a JDU adu. So you could do two, you can do two ads here in Laguna. So a junior ADU and a regular adu. So you could actually do it twice.

[Scott Trench]

Let me ask you this though. Why, what is. Do you want to be in Laguna Beach? The goal is not to retire early. It's to retire early in Laguna Beach. Right. And live something close to your lifestyle. Maybe in a slightly smaller home nearby. Is that right?

[Allie]

Yes.

[Scott Trench]

Ideally, what is the ideal future home?

[Allie]

Home?

[Scott Trench]

Yeah. Like what is, what is your future living condition look like?

[Allie]

Well, I have two kids that are aged 10 and almost 12. So I think for now I need at least a three bedroom home office. It doesn't need to be big, but I do think people need their own space, you know, when they go off to college or move out. I don't. It could be much smaller, just a one bed.

[Mindy Jensen]

Another trap that you're in is the I don't have a cute name for it. You bought a long time ago and interest rates have since gone up. Property values have since gone up. I can see you starting to look for another house in Laguna beach and finding a smaller house that ultimately costs you more per month out of pocket, which isn't going to be beneficial to your goal unless you keep them both and then rent this one out. Do you have any plans to sell this house or do you want to keep it as a rental?

[Allie]

Ideally, I'd like to keep it as a rental.

[Scott Trench]

What's it cost to rent the house that you want to live in for the next couple of years in Laguna Beach?

[Allie]

You know, that's another thing we've thought about too. Like, should we just rent somewhere else? Because you can. They range, right? They range anywhere from. I've seen rentals for a three bedroom house for like 4800 up in like a certain area of Laguna. And then, you know, they go all the way up to, I don't know, 50,000. But I would think like a, nor like a normal three bedroom, nice house would probably be around $12,000 a month.

[Scott Trench]

$12,000 a month. Okay, that's higher. So we're in hard territory here. That's 140, 150k a year in rent. And to buy the place, how much would one of the places you're thinking about buying cost?

[Allie]

They're usually around 14 or 15,000amonth.

[Scott Trench]

That's the mortgage payment. How much is the price point?

[Allie]

You can't get anything under 2 mil here. So what I've been doing. So say a house is up for a long time. I'll sort it by length. Then I'd offer 1 8. And every once in a while they'll say, okay, and then they get a couple other bids and somebody outbids me. I mean, that's kind of what's been happening. I wouldn't pay more than 1.8, but you're getting a. Not a very nice house at all.

[Scott Trench]

Yeah, I don't see a lot of $1.8 million property.

[Allie]

Yeah, you have to create the 1.8 million.

[Mindy Jensen]

I'm not seeing anything for less than, oh, here's one for $7,900 a month, five beds, five baths. And if you rented out your place, could you rent out Your place for 10,000amonth? It looks like you could rent it out for a lot more.

[Allie]

So long term, like if I was to do an annual lease, I probably could get 10 or 11 or 12 maybe. But on Airb, like in the summer I can always get 20. So I think if I did furnished Airbnb, a lot of people are remodeling their house. They want a place for like six months. So people will write me because I used to just have it up my house up all the time on Airbnb. And so people would say, hey, can I rent your house starting tomorrow for six months? And I'm like, you know, maybe if you could rent it in two weeks, we could do that. And then I'd be frantically searching on Airbnb for a rental.

[Mindy Jensen]

I mean, if you could do that and get what, 20,000amonth for your property and you're renting a property for let's say 10,000amonth then, and you're paying 4,000 for your expenses for your house, you're still making $6,000 a month and your expenses are $9,000 a month. So you just need to cover 3,000amonth, which you can do by accessing your retirement funds early. Scott, do you think that 3.8 could get her some, some, some $3,000 a month?

[Scott Trench]

I think that's the big question here is, is should you like, if you're going to move out of the house, should you sell or keep the house here? And I think that's the, like, that's the fundamental decision. And we're operating under the paradigm of keeping the house and how do we use that to drive income? And I think that that's a question that needs to be posed here is there's $2.4 million, probably conservatively in equity in this house. And with $2.4 million in cash or after tax, I've calculated the equity you would realize to 1.863 million on this @ least. If you could sell it there, we can generate a lot of cash flow with $1.8 million in cash in a number of buckets. I think that's the big, that's the big question here is what do we do? Like, how does it feel to even talk about selling the place?

[Allie]

You know, I'm open to it because if that means that I could be work optional and you know, have more freedom and still live a life in Laguna beach traveling and doing all these nice things, then yeah, I mean, I'm open to it. And I don't want to just have this house with a ton of equity and it be wasted. You know what I mean?

[Scott Trench]

Well, let's, let's walk through the long term rental case real quick. I nerded out and I did a spreadsheet here.

[Mindy Jensen]

Right now Scott is using his Should I sell or rent spreadsheet to run the numbers for Allie. Go over to our YouTube channel, YouTube.com bigger pockets money to see Scott in action.

[Scott Trench]

It's fascinating and I'd love to just kind of walk through and see how this feels at the highest level and say like, here's. This is a value. You think it's about $3 million today?

[Allie]

Yes.

[Scott Trench]

We don't have to worry about the original purchase price in. Well, actually, yeah. What was the original purchase price for this?

[Allie]

It was 949.

[Scott Trench]

40. Okay. And you bought that 10 years ago, but we don't need that date Right. Now, what is the more. When. When did you get your current mortgage?

[Allie]

You know, I refinanced back when everything was really cheap. So I would say during COVID So.

[Scott Trench]

Like probably around this time, September 2021 kind of deal.

[Allie]

Yeah, that sounds perfect.

[Scott Trench]

And your mortgage balance was 650ish.

[Allie]

You know, we did a remodel, so we got a lot of work done on our house, and then we took that money and rolled it into the refinance when we did our refinancing, that number.

[Scott Trench]

So I need this number to do the calculation. But what was it? Is it close to 650?

[Allie]

Yes.

[Scott Trench]

Okay, great. And then this. Is this look reasonably close. We have 2400 and P&I. 12,000 in annual property taxes and 2200 in annual insurance.

[Allie]

Yes.

[Scott Trench]

3600Amonth in mortgage and mortgage payments.

[Allie]

It's around 4000. Yeah.

[Scott Trench]

Okay. I'm going to bump this up to 3%, then. That's probably a little closer. What is the interest rate on the mortgage?

[Allie]

2.75, I think.

[Scott Trench]

All right, so I'm getting close here, right? We're not exactly right, but we're pretty close with the 30.

[Allie]

Yeah, yeah.

[Scott Trench]

I said if you sold the place, you'd have a 5 1/2% agent fee, 1% closing and title insurance, and that would net you $2.171 million after paying off that mortgage and paying those fees. And that would give you net sale proceeds of $1.8 million. You are qualified for primary capital gains tax exclusion. So the first 500,000 of that are not taxed. After that, you're going to owe 20% in federal capital gains. And do you know the capital gains rate for California?

[Allie]

No.

[Scott Trench]

All right, I'm going to put that at 9%, probably high. All right, how about 0.08%, 8% sound right?

[Allie]

No, I just mean it's probably a lot. If it's California, that means you're going.

[Scott Trench]

To pay 267ish in federal and potentially about 120 in California taxes to be verified here. And that leaves you with this number in terms of what you could invest in the next thing. Either this is. This model was built around deploying that towards your next house, but you could also invest it in stocks or something else there and then. So what comes down to is what do you believe the stock market's going to do over the next 20 years if you think it's going to return 10. I have it plugged in at 10%. You could be conservative and put at nine. But what would you say? What do you feel comfortable with? What do you think as a stock market investor? You think it'll do?

[Allie]

I'd probably be conservative and say 8 or 9.

[Scott Trench]

So let's put it at 8%. And then I have some assumptions here around rents. I plugged in 11,000. You said 10, 11, 12. So I put 11. I'm on this. I have assumptions around vacancy and all that stuff and gets you cash flow of 5,500amonth if you keep it. What do you think Laguna beach is going to appreciate in terms of rent and price growth? Do you think it's going to be historical average or higher or lower?

[Allie]

Higher. I mean, I think I heard some stat that house prices double every eight years.

[Scott Trench]

That's close to an eight year one. So that's a very aggressive assumption. But. And that that will, if you believe these things, you're likely to want to keep the place. And do you think that same same is true for rent growth?

[Allie]

Yes.

[Scott Trench]

And I'm going to put expense growth lagging a little bit behind that, hopefully because you can still buy your roof shingles from Kansas City even as rents go up in Laguna Beach. That. Does that feel right?

[Allie]

Yes, that feels right, yes.

[Scott Trench]

It's all what you believe here. You're going to see that keeping it is going to produce a lot of cash flow and these assumptions are going to get about $75,000 in the first year and that's going to continue to accelerate very rapidly if you believe that rent growth is going to grow at that price range. And I can tell you already that you're going to think you're going to believe that the wealth you're going to build by holding onto this property is going to be much higher than if you invest in the stock market here. So to me, this says you are on the right track for keeping it if you believe these things. I will caution though that I am much more conservative with my assumptions for real estate. And I plug in a default of 3.4% because you never know what's going to happen in the future there and California is already high. And I would put in 10% for the stock market. This is how I analyze a Denver property. But it's completely based on what you believe. And in that scenario you're going to see that selling it and putting the money into the stock market would generate significantly more wealth, about 10 million incremental dollars over keeping it in that scenario. So I'd encourage you to play around with this. But that's the big bet you're making. The good news is you're really rich either way if you hold onto this asset and the stock market depending on either one of these things, because you got a great problem here. It's just that's the tool that can help you think through it. And then one other consideration I posed for you that I was reacting in is you're going to be very heavily weighted to real estate if you hold this thing and especially if you buy more compared to the stock market because of your starting position. So just those are the things that popped into my head. But I think if you believe what you said there around that there's a no question this is a keep property and we're on the right track and I just sidetracked us unnecessarily. But hopefully that was at least a little helpful.

[Mindy Jensen]

Stay tuned after one final break and we'll be back with Allie after this.

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[Scott Trench]

Let's jump back in with Ali.

[Mindy Jensen]

I don't think that's an unnecessary sidetrack. Scott, I'm really glad that you did that spreadsheet because that's really helpful. You put a lot of time into that spreadsheet before you brought it up, but then you just like throw all these numbers in and it shows, like how you can manipulate them. I think that's great.

[Scott Trench]

Yeah. I'll send that to you, Ali, as well.

[Mindy Jensen]

Yeah. So you can start playing with it too and, you know, throw in different numbers and see what happens. But I think that there's a lot of opportunity for researching your local market with more solid numbers. And unless your numbers are super solid, I, I'm always a little leery about counting on appreciation. But then I looked up where Laguna beach is and I'm like, oh, yeah, that's probably going to be a safe bet.

[Scott Trench]

Laguna beach, awesome. I, like, I've been there. San Clemente. And it's like, oh my gosh, you can live anywhere in the world. One of those two places, you know is right is like somewhere along that, that coast. It's so awesome.

[Allie]

I'm from Philadelphia, so I can appreciate the beauty and the weather and everything. But yeah, no, it's been, it's, it's an amazing spot.

[Mindy Jensen]

Yeah, it's really gorgeous.

[Allie]

Yeah. People from Texas are the ones that always rent my house.

[Mindy Jensen]

Another question you had was about your pension and should you be cashing that out right now? It's $27,000. If you cashed it out and you'd get 477amonth. If you waited until 2042 to start taking your pension. That's. I did the math really quickly. That's like just what, four and a half years, Almost five years of break even before. If you took out that 477 versus taking the 27 right now. What would you do with that 27 if you pulled it out?

[Allie]

Put it towards my house in Laguna beach, my second house. What I'd like to do is just buy another house in Laguna Beach. I just don't know if it's so crazy and I want to tap into whatever funds I have. So, like, I, I do have a lot of roth in my 401k and can I use that?

[Mindy Jensen]

Yeah. You've already paid taxes on That I don't know how you access your. Is that in your current 401k or in the previous. So you would have to separate from your company before you could access those funds. Scott, how do you access Roth 401k funds?

[Scott Trench]

Well, if it's the principal, you should be able to withdraw the funds. The gains will be subject to penalty from the, from the Roth. So you'll pay attention for withdrawing those early. Your Roth position. Let me go back to Roth position is in total 243,000. And you actually put out for us the contributions of 160. So you could pull up 160 to use toward that purpose. I'm still a little hung up though here on the. Should we. Right. Because what you're doing, and this is fine. I just need to wrap my head around it because I'm not there yet is we're saying, okay, we have $3 million in Laguna beach real estate and $1.4 million in equities. And our plan is to buy another three, $2 million in Laguna beach real estate by using the stock market funds. Which, which is, which is a. Like maybe you win. I like, you know, maybe if you believe it's going to appreciate 6% a year and you lever up on Laguna beach real estate and hold on for a few decades, you're going to get real rich. But I already have you projected to a 20 plus million net worth over the next 30 years. Whether you keep or sell the first, the first home, the risk, you know, at some point for me, the plan becomes about risk mitigation and making sure that you can just couch your lifestyle in place there. When would that number, when would that come in there? Like what, what net worth level? If I just handed you a pile of cash, would, it would, would feel we'd be like, okay, I'm done.

[Allie]

Well, I think that's the question, right? Can I just be done? The point of buying the second house in Laguna is to say that I could be done. Because I think in my mind if I buy it now and I work hard and I move into this smaller house and I house hack in five years, could I sell it, make a profit and then I have that extra money to retire on, right. I don't think I need a lot of money to retire.

[Mindy Jensen]

I would look into like, I would start like find an agent that can help you in Laguna beach and start looking for an amazing property, a dumpy property that you can make beautiful or you know, start really learning the market and looking and seeing what's available because the best time to make an offer on a property is when you are absolutely sure that it is a great deal, get it under contract and then, you know, have the super tight home inspection, see what's going on with this property. Do you really want to tackle it if you could buy this other property and rent out your current property for 10, $20,000 a month? It kind of doesn't make a whole lot of sense to say no, you shouldn't do that. I, I don't know enough about Laguna beach real estate to be able to make a determination what the market is like right there. But over here in Colorado, it's kind of slow. There was all this uncertainty with the election, and now that the election is over, there's all this uncertainty with, with will rates continue to come down or will they not come down anymore and people are just a little hesitant to jump in. So if you could find a smoking hot deal right now because nobody else is out there buying houses, then I mean, you've got such a rock star of a property that you're sitting in right now.

[Scott Trench]

My concern here though is just like we're already at 3.8 million in net worth and it's so heavily exposed to Laguna beach real estate to double down again. Could be a winner. It could be a winner. Like there's no, there's you. That could absolutely be the right choice. But then it's like, why? Like, what is that in state portfolio going to look like in five years? Is your plan to sell the property that you just purchased and then rent somewhere else, move back into the first place? Like, what is the long term? Like, what does the retirement lifestyle look like from there? And that's where I continue to get hung up here on this is like, I'm not sure how that translates into the goal of retiring early quite as clearly. Could you maybe explain that to me, Ali? Maybe? Is that what I'm missing there?

[Allie]

Well, I think I just go back and forth right between those two. Do I just take it easy, retire early and I'm good to go? Or would it be helpful if I had another revenue stream to kind of help? Because right now I'm stuck. So I have till I retire. I really don't have that much cash. It's all tied up either in my house or my 401k. My cash can't get me through if I were to retire right now. So how do I bridge that gap between where I am right now at age 47 and that next 13 years right with the cash that I have. So I guess in my mind I think, well, I need like another property or something providing income for me or another property I could sell that would provide income to get me to that retirement.

[Scott Trench]

Yes. Okay, so the issue for your retirement, if I'm looking at, if I'm zooming out, is you spend very reasonably for your income level here and relative to your overall asset base. But that's an illusion because to live the lifestyle that you want to live in Laguna beach is $12,000 a month between rent and utilities. That is being masked right now because you bought your house so long ago and have such a light mortgage on that. So to live in your house, that's the cost right now. And you need to generate, you need something else to generate the $120,000 per year that you spend, right? Some other, some other asset situation to do that. But what's happening in reality is you have $2.6 million in assets locked up in order to, in order to have this expense profile right here. So you're really like, in some ways we could think about it as like, what's six? Like, that's, you're, you're locking up $2.6 million to keep your expenses 7,500 to, you know, $9,000 below what they would otherwise be for your housing. And that, and that's the fundamental problem that we're working through here. And I'm trying to figure out, okay, if you move, you're going to be, and you render rent, you'd be spending that amount of money or you'd need about 2 million at least in a paid off property or a very lightly levered property to have the same expense profile. And so that brings me back to how do we unlock this two point, sorry, it's 2.4 million in equity in the house and use it to fund retirement or what else can we use to get there? One other question we haven't talked about in that concept is you make $298,000 a year and you spend 10,000 net of taxes. How much are we actually accumulating on an annual basis from your job? Like that's another asset, if you will, that we haven't thought about. Over the next 5 years, will you accumulate 50k a year or 100k a year?

[Allie]

Well, I think before I was filling out your spreadsheet and things like that, what I've always done in the past is I've paid myself first by maxing out my 401k, maxing out my HSA maxing out dependent care, things like that. But once I started filling this out, realizing like I need more cash and I did your little budget exercise, I was like, okay, why don't I start putting away. I think I'm trying to save right now like 8,000amonth, but this is just brand new. But that's what I can probably work to save. 8,000 between 7 and 8,000amonth.

[Scott Trench]

Awesome. And are you also contributing somewhat down that stack of retirement, 401k, dependent care, FSA, all that kind of stuff.

[Allie]

So I just had to do my enrollment and I. So what I did was my company matches the first 5%. So I did 5%, my 401K HSA. I heard Mindy say you always should max out the health savings if you.

[Mindy Jensen]

Have a high deductible plan. Yes. Because you can either use it to have tax free expenses for your medical expenses in the current year, or you can save your receipts and cash flow your expenses and go down the road and cash them out later.

[Allie]

Yeah. So that's what I did. So I just signed up last Friday, but that's what I did. So I, I think I put 8,000 in that and then 5%, my 401k. But it's not what I'm used to. I'm used to totally maxing that out. So I was a little bit uncomfortable lowering that and I think I've changed it like three times since coming back up and down. But I think I want more cash.

[Scott Trench]

It's a good answer to the question of how do you finance your adu, for example, is to let this, let that after tax liquidity position pile up instead of paying a penalty on the 401k or Roth in my view. So I like, I like that answer. That's 100 grand a year, give or take 8,000amonth times 12, I think 96. Right. So that we're getting close to $100,000 a year in liquidity. That will begin piling up there. And that's, that's a piece of the puzzle. Over five years, that's 500k over tenants. And so you can think about that in those, in those big chunks and say, okay, we've got another pile of assets there. Depending on how long you want to work, that's going to apply to this. Plus you probably got another 30, 40 on an annualized basis. When all said and done, that will be going into your pre tax or tax deferred accounts like the HSA, 401k match those kinds of things. So does that sound about right? That's a, that's a considerable part of the position here. That's going to be more than, you know, a couple percentage points. So I think that's, I don't think it changes the fundamental math about what to do with the house, but it's, I don't, I'm uncomfortable, I'm reacting emotively as maybe not logically here of pulling out the money from the stock market to double down in Laguna Beach. I mean, that's a play, but the play is I'm going to put 70% of my net worth on the line for the rest, you know, for the next 10 years and maybe the rest of my life in this Laguna beach real estate territory. And that just needs to be a conscious decision that you're saying. That's the pie chart I would draw. If I had five, six, seven million dollars in 10 years, if I handed you cash, I would, I would recreate that portfolio. And how does that feel? Does that feel right to you?

[Allie]

Yeah, I mean, I think it's always good to have diversification, right? I mean, having everything in one basket, especially with all the fires and everything happening, you know, it's, it is, that is scary. So it is good to diversify portfolio, I think. And I appreciate that viewpoint because, you know, I'm so, I'm in Laguna Beach. I love Laguna Beach. So it's like sometimes you kind of get focused on it.

[Scott Trench]

Mindy, you seem, you seemed more on the, the train of, yeah, buy the next house and, and rent it out there. And what do you, what are you thinking about this, about the situation?

[Mindy Jensen]

Well, I'm thinking that if she can rent her house, which costs her $4,000 a month, if she can rent it out for 20, 22, $24,000 a month, that makes a lot of sense because that, then that covers, that money covers her expenses for the current house, plus the expenses. If she rents a house at $12,000 a month and she still has money left over for funsies, it covers. I didn't run numbers on a mortgage payment on 2.8, and that's a, that's a thing to think about. Where would you get the down payment for that? That's going to be a hefty down payment, even if you're just putting down 10%.

[Scott Trench]

Remind me again, though, the $20,000 is for two months of short term rentals, right? Which is, which is the limit of the community, is that correct? Ali?

[Allie]

So Laguna beach has a minimum 31 day, and we got 46,000 for two months or 23,000amonth.

[Scott Trench]

Okay. Do you think, and you think year round you can sustain a mid term rental cash flow in that level? Like that is. That is the reality. You think that could happen?

[Allie]

No, I don't think that. I think those are the summer months. You can get probably a lot more. I think if I were to rent my house out just on a normal, not furnished or anything like that, I could probably get 10 or 11 or 12 maybe. And then if I did Airbnb furnished midterm rental, probably be rented out, I would say maybe 70% of the time at probably 15 grand a month.

[Scott Trench]

Okay. So 15 grand is a more realistic number for year round rents with some of these creative strategies. And that's still, I mean, these are huge levers. And you know, we've got a range here that we've heard for rent for this property of, of 9 up to really what I'm hearing is 15 on an annualized basis for this. So that's a big spread and probably a big piece of the answer here. If that number is closer to 9 or 10, then your net cash flow on this thing is going to be like 5,000amonth, which sounds awesome for one property, and it is, but it's not awesome relative to the $1.8 million in realizable equity that you've got tied up into the property. And that would be a. I would be more inclined to sell at that level. But if you can get 15, if you can get pushing close to 15 or upwards of that, then the simplicity of just having a local owned rental property in one asset might be worth it to a large degree. Like that's, that's 10 grand a month, you're done, game over. You know, you spend 10 grand a month, that's it. And you don't have to touch the rest of your portfolio. So I think that that's where I keep going back and forth on it.

[Allie]

Well, and the thing is, it's different, right? So if you do the long term lease and you need to rent it out fast, that would be nine grand unfurnished. But if you want to do the extra work, put it on Airbnb, furnish it, which is already all done. We already have all that done. Right. But the problem with the 15 grand a month is you're not going to have it rented out the whole time. Right. Someone will probably rent it out for six months or a remodel, then there'll be a month and a half vacant, then, you know, then another three months. So in the end, if you averaged it out, it'll probably be, you know, 11. But there's different strategies that all create that. Those different numbers. That's why there's such a difference between the numbers.

[Scott Trench]

Mindy, how do you feel about this? Was if the annual rent. If the average monthly rent is going to be $11,000, what do you think? Does that change things for you?

[Mindy Jensen]

Yeah, kind of. Because 11,000. Her expenses are going to be 4,000 just for the house. So now we're down to seven, and she's got to have. She's going to have to find a rental for $7,000 a month or less in order to break even. And that's going to be difficult in Laguna beach, based on my very quick, very cursory Zillow search while we're talking. But, I mean, I. Do you think you can find something for less than $7,000?

[Allie]

If I was renting, yes, I do. If I was buying, no. I mean, when we've done the spreadsheets for buying another house, it was like, okay. My husband's always like, okay, so we're gonna move into this horrible little house that needs a ton of work, and we still have to pay $8,000 a month. Where are we getting that $8,000 a month? You know, so my husband's a bit more skeptical than I am. I'm a little more gung ho.

[Mindy Jensen]

Well, and then you could, you know, after you've lived in this other house, let's say you buy another house, you've lived in it for a few years, your kids are continuing to go to school, you're continuing to make a ton of money off of this current house. You could move back into the current house. If you don't sell it, have your $4,000 expenses, so you move out and try it. I mean, if it doesn't work out, maybe you do rent for the first year. If it doesn't work out, you just move back in. Oh, it was really hard to get renters all the time. Or, oh, my goodness, I have 27 people that are looking for a rental at any one time. So it's super easy to charge 20,000amonth. And it was a good idea. Then you go in and buy.

[Allie]

Yeah, that's a good idea. Kind of experiment with renting before I risk my entire everything.

[Mindy Jensen]

What I see from Scott running his spreadsheet is that there's no clear, absolutely, sell it. This is a terrible idea to keep it answer. Which is good, because if there was, then that would be like, okay, don't even bother. Just sell it and move on. But there is the opportunity to work.

[Scott Trench]

The answer is super clear though. The answer is super clear. It's if you believe the assumptions I had for the stock market at 10% and long term appreciation rates at 3 and a percent, 3 and a half percent for prices and rents, it's an absolute sell decision. It's a $10 million net worth decision over the next couple of decades. If you believe what Ali believes, that Laguna beach is going to appreciate at 6% a year and rents are going to go at 6%, it's an absolute keep decision. I think we would have very different viewpoints on those assumptions, but that's the point of the model now. You know what? If you believe those things, you have a clear answer around it. But I think that's the fun part about financial models is those assumptions make such a difference in terms of what to do.

[Mindy Jensen]

But you're assuming Denver appreciation and she's saying this is what Laguna beach appreciation is. So I like running the numbers at different places. This, I think this is a great homework opportunity for Ali. Because what I meant was there's no, it's like when you run the numbers according to her numbers, it says keep it. So if both ways said sell, then we wouldn't be having this cover conversation. So now is a great time to go and really dive deep into what is the historic appreciation rates in Laguna beach, what is the historic rent appreciation in Laguna beach and what is the historic returns in the stock market? It's 10 point something percent. I closed the tab. But it's 10% historic from the time, you know, all the way back to the beginning. But there's also some years that it went negative. So, you know, there's, I would, I would be more in line with Scott's 10% on the stock market. But I'm also not betting that I can, you know, I can say that from here, but I, I think that you should be really comfortable with the numbers that you're putting in Ali. And I think that you should be comfortable with them because they're the historic average and past performance is not indicative of future gain. We should always say that. But I do think that there's an opportunity there. As opposed to both times we run it, it says no, sell it.

[Scott Trench]

Another component to this that makes it so complex and such a great challenge. Thank you for bringing this today. I mean, it's just so many people are going to be struggling with this is if you just want to simplify it, go back the other way, you know, a completely different way of looking at this, you say, okay, the price of retiring comfortably in Laguna beach is tying up $3 million in a house and having the expense for the mortgage payment be zero because your taxes and insurance are nothing on a property that size. So if this mortgage is paid off, which is something we've talked about in the past, it's 2.75. So that's going to be hard pill to swallow. But if the mortgage is paid off, then your expenses go from 10,000, 9,900amonth to 7,300amonth. Month on there and you're pretty, you're within a stone's throw of $7,300 a month from your current portfolio. If you can accumulate a little bit of cash outside of that and bridge to traditional retirement age, you're not that far off on that front either. And so that's an option to think about here is like, do you keep this place, rent it out for a couple of years, do a live in flip or two? I love the live in flip in areas like a Laguna beach because of the tax free capital gain that ties up some money. But you're paying interest on a much lower interest than your flipping competitors and you get the first 500,000 tax free. If you want to do that two or three times between now and the time your kids go off to college or leave the house, that would probably completely end the game for you. And now you have, you can, you can have, you can think about it much simpler terms. I have a paid off property that I can live in in Laguna beach and about two and a half, $3 million in the portfolio outside of that from these live and flip capital gains. How's that one for a complete different spin on the situation that says go all in on just paying the thing off and tying up the 3 million in equity.

[Allie]

I like the idea of paying off. My husband would like that because he likes not having any debt. But now, are you saying now go back out and buy some houses in Laguna and flip them? Is that what you were saying there?

[Scott Trench]

I'm saying move into the next house in Laguna, which is like move into the next house, buy it. Yeah. In and. But treat it as a living flip. You're going to own it for two. It's a slow flip. You're going to own it for two years and then you're going to flip it and then you're going to sell it like what Mindy does here. And I imagine the spreads are super high on that front because I imagine super people buying $3 million homes do not want to spend six months refurbishing the place.

[Allie]

I see a lot of success with people doing that. They'll buy it for, you know, under two mil, flip it for four and a half within a year.

[Scott Trench]

Dang. Then you're gonna have to pay taxes if you do that.

[Mindy Jensen]

So no, no, no, no, no. Put both kids on title when you buy it and then they're there for two years. It's their primary residence too. Then you get a million dollars of tax free capital gains.

[Allie]

Yeah, I would have to live in it because I'd have to rent out my house to pay for it.

[Mindy Jensen]

It's $250,000 per person on title, not just 250 if you're single and 500 if you're married. So then you get a million dollars of tax free capital gains. And there's like rules involved, of course.

[Scott Trench]

500 of which doesn't go to your retirement. It goes to your, your, you know, the kids, Bentleys following that. But, but I think that, you know, if you, if you, if you take that math and you say, okay, I'm going to do a live and flip, I'm going to buy one of these properties for 1.7 or whatever, whatever that is, that's in really bad shape. We're going to fix it up with ourselves. Now you rent out the primary and if you can get that 12 to 15 range, you're probably going to cover the lion's share of the new mortgage while you live in there. It'll be slightly more expensive, you'll save slightly less. But that's not a, that is a, that is an approach that would be reasonable in your situation since you have 8,000amonth in savings on top of your expenses right now.

[Allie]

I like that idea. Just got to talk my husband and two kids or not.

[Mindy Jensen]

I would find a real estate agent. If you don't have one that you've been working with in the past. BiggerPockets.com Agents is a great place to find an investor friendly agent. And even though you're going to be moving into it, you're looking for an agent who understands investments as well. So they can say, hey, this one is going to, if you fix this one up, it's going to yield a whole lot more than this one for the same price.

[Scott Trench]

I mean you could definitely lose. And that's my, that's again my, my worry about the plan to go all in on Laguna beach real estate in your situation. But that's, there's a good way to. It's. It's a significant de risking of the investment process.

[Allie]

If you two want to partner with me, that would help mitigate the risk too. We can go thirdsies.

[Scott Trench]

Hard money lenders love California because they're big loans on these properties and they make a lot of, a lot of interesting points. So you'll have no trouble finding lenders if you can bring some serious. Bring a material amount of cash down.

[Allie]

Good to know.

[Mindy Jensen]

Okay, Allie, this was a really fun set of circumstances and interesting financial, I don't want to say problems because these are all really great problems to have. I have so much money, but it's tied up in my retirement accounts. Yeah, but you have so much money. But this was, this was a fun exercise and I am super excited to see where all your research leads you to. So please keep us up to date. It might even be fun to have you come back after you've determined what you want to do. And we can, we can run through some different numbers and scenarios that.

[Allie]

Yeah, no, thank you. This has been super helpful and I really appreciate your feedback. I listen to your show all the time, so I'm really happy.

[Scott Trench]

Thank you so much for coming on and congratulations on your awesome problems. I'll be really interested to see how you untangle them. It's a really tricky situation and a good thing like congratulations. I hope you're feeling, you know, very excited about the future.

[Allie]

Yes. Well, thank you again.

[Mindy Jensen]

Thank you, Allie, and we will talk to you soon.

[Allie]

Bye Bye.

[Mindy Jensen]

All right, Scott, that was Allie and that was a really interesting set of problems. And I wish I was a little more knowledgeable about the Laguna beach area. Just because you and she had different assumptions on the returns, the historic returns and the or not the historic returns, the forward facing returns for Laguna beach. And like I can see both of you being right, but only one of you will be right.

[Scott Trench]

I think it's really hard for me to wrap my mind around this problem and I'd love to get input from the bigger pockets money community on this because this is the middle class trap on steroids right here. I also, you know, just in responding to it, I thought of something after we finished recording. I wish I would have thought of it when we were there around the 1031 exchange applies here because I'm so used to dealing with so many such smaller dollar values on primary residences where the capital gains exclusion applies. But when you have a $2.2 million gain and only the first 500,000 is excluded, well, now we got to talk about how to shelter the other three or four hundred thousand dollars. Another option I throw out there for Allie is to consider a 1031 exchange. Can she sell that property and move that into other higher yielding cash flowing investments somewhere else as part of that portfolio? Because that's going to be more, you know, that, that may, that may be a way to shelter that tax benefit if she decides to sell the property. She kind of busted my model with how big the numbers are on this property and I have to go revisit a few assumptions and there and make sure that those are tailored to these types of situations.

[Mindy Jensen]

Well, a 1031 is for investment properties. So she would have to turn this into a rent rental for a while, I believe. And what I don't know about the 1031 exchange is quite a lot but I do know that it's for a rental property. So I'm wondering how that would, how that would work.

[Scott Trench]

I think that that's, that's a great accounting question for our community actually. I believe you can do it if you rent it out for two years. But let's hear from a community and ask that question out there. How can you 1031 a primary residence if you turn it into a rental? I believe the answer is yes.

[Mindy Jensen]

Yeah. And if that's the case, then absolutely that would make so much sense because then you can kick that tax can down the road and she's saving, what did you say, $300,000 on taxes? Almost $400,000 on capital gains taxes if she does that.

[Scott Trench]

Yeah. Depending on what the California marginal rate will be for that which she'll be in a high tax bracket between her income and the gain. On this one. I calculate my crude math, that's certainly incorrect, but ballpark of 387,000 in capital gains. So that's a material part of the decision here. You can get another 400 grand by deferring it into real estate and you plan to keep real estate for the long, the long term. That could be pretty powerful. There you are giving up the primary residence exclusion though. So something there's a, there's a tax angle to this that should definitely be explored. And she should probably talk to a real estate friendly cpa probably.

[Mindy Jensen]

She should definitely talk to a real estate friendly tax provider or tax planner who can help her figure out what is her best play. They can run these numbers for her. But yeah, this was fun problem to try and figure out.

[Scott Trench]

We'd love your thoughts on it. This is a new problem for Mindy and I at this scale, so any feedback or thoughts are appreciated.

[Mindy Jensen]

Scott and I want to hear from you. What advice would you have given to Ally that differs from what Scott and I said? We would love to hear from you below.

[Scott Trench]

We'll should we get out of here? Mindy we should.

[Mindy Jensen]

Scott. That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Mindy Jensen saying Cheerio Mistletoe.