C (4:29)

I think if you asked me 10 years in the future, I would regret not keeping it. And I say that because even though we didn't necessarily go into it, it being our primary with it being a rental there is the numbers actually pencil out where we could rent it if we needed to. Where some of the concern is is because we do have the desire to move in the short term, two to three years, we want to be able to do that without putting ourselves at great risk. And so if we're not able to use the equity in order to get kind of what we want for the next stage of life, we may be too high on the fixed expenses for us to feel comfortable.

B (5:20)

I think that's a really important factor in this and there's a number of qualifier considerations that go into that. Mindy, what are some of the things that you would look for most as, as you know, in addition to Sean's, you know, bias here to potentially keep it that he should be thinking about to, to round out that bias?

A (5:38)

Well, my first question is how are you going to put money down on a new property if you've got all this money tied up in your equity? Because I believe you have $20,000 in expenses. I'm sorry, $20,000 in cash. So how are we funding the next house?

C (5:54)

Yeah, so it would just push our timeline back. To be honest, our two to three year timeline would probably be a five to six because we'd wait till kids are, you know, in between elementary and middle. Really what that would look like is more aggressive saving. Right now we've kept a relatively light cash position because we have the equity and outside of Random House expenditures like we don't have very many large expenses that we couldn't cash flow with our current income.

B (6:27)

We're going to alt tab for a few moments here and be right back after this. When I evaluate debt funds, I look for things like first position loans, personal guarantees, deep experience by the fund operator, low fund leverage, fast liquidity and consistent returns. These are some of the reasons why I'm excited to partner with Pine Financial Group. Their Fund 6 offers investors exposure to real estate credit, largely for construction and rehabilitation, largely here in Colorado. With loans originated by an experienced originator. With over $1 billion in origination volume, 75% of their borrowers have been repeat customers over 17 years. They offer investors an 8% preferred return paid monthly and a 70, 30 LP GP split of everything over 10% paid annually. The lockup period is nine months with liquidity available within 90 days. After that nine month commitment, the fund is open to accredited investors only. The fund's minimum investment is typically $100,000, but Pine Financial is able to reduce that minimum for some investors and have agreed to do so for BiggerPockets Money listeners to a minimum of $25,000. Full disclosure. I am personally invested in this fund through my self directed ira and of course Pine Financial is sponsoring this message and our podcast. If you'd like to invest or check out their Prospectus, go to biggerpocketsmoney.com pine today that's biggerpocketsmoney.com pine Please note that returns are not guaranteed and may Vary based on fund performance.

A (7:55)

AutoTrader is powered by Auto Intelligence, the hyper personalized way to buy a car. Autotrader's tools sync with your exact budget and preferences to tailor the online car shopping experience totally to you. Budgeting lets you input your info to see listings in your price range. Search and inventory helps zero in on your dream car. You can choose from new or pre owned, the style of the car and features like engine size, color all the way down to whether you want a trailer hitch. Go ahead and get picky. Don't worry about scrolling endlessly. Autotrader powered by Auto Intelligence only shows you vehicles based on what you can afford and what you want. And pricing shows you which listings are the best deals. So you can feel like you're winning the negotiation without negotiating. You can even choose how to close the deal online at the dealership or. Or a little bit of both. Autotrader Powered by Auto Intelligence makes the process of buying a car less of a process. Try it today. Visit autotrader.com to buy your perfect ride.

B (8:52)

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A (9:14)

Adventure with all of you.

B (9:15)

May the best idea win on Brand with Jimmy Fallon. Friday on NBC.

A (9:22)

Thank you for jumping back in with us. I don't know what that computer code is.

B (9:26)

Let's go through the analysis and look at this based on what we believe. These are going to be assumptions here. Right? Every financial model you have to guess at what thing is going to happen in the future. But let's think about some things that we believe in. Let's see how accurate my guesses were here about the inputs before talking to you on this. So we've got the current value at about $320,000. Is that fair for you, Sean?

C (9:45)

Yep, right on the money.

B (9:47)

Awesome. The original purchase price, I have 258, is that correct?

C (9:50)

A little bit lower than that. It was like $205,000. We ended up refinancing financing it shortly after we got it.

B (9:55)

Awesome. This will not matter in our analysis in your situation for a while because you've lived in the property for the next couple of for the last couple of years. So there's a number of inputs here around do capital gains taxes apply? They will not in this situation, but many people we talk to are on the coasts, for example, and they might have a 250 or 500 or even higher gain. And so capital gain taxes will begin to apply in some of those cases here, which is why I need that input to do this analysis. Is that around the time you purchase the home in June 2019?

C (10:31)

Correct.

B (10:32)

Okay, awesome. And then I played around with some things here and I'll admit I cheated in preparation for this with a couple of things. The model here calculates a few of these. I know Your balance is 175,000 left, so I guessed at about 197 when you refinanced the property. This is the current mortgage here around September of 2021. And I needed that so I could get your monthly P and I payment and the amortization schedule of where you are against that loan. Is that about right, do you think?

C (11:00)

Yeah, ballpark.

B (11:01)

Awesome. And it's a 30 year mortgage with 3.75% interest.

C (11:04)

Correct.

B (11:05)

That gives us our monthly P and I payment at 915 bucks. You gave me property taxes. I guessed at your insurance premium here to get this. 1839. Does that look all correct to you? Property taxes, 7200 and annual insurance about 3800 a year.

C (11:21)

The insurance premiums are more like 25. We're currently. So in Texas you have like an escrow account and they underpaid. So right now our monthly payment is 1800, but prior to the escrow adjustment, it was actually 1500.

B (11:41)

Okay, so you're going to get some money back. Your payment is 1830, which is what I was backing into. But you're going to get some money back from your escrow at some point. So your payment is really closer to 1728amonth. Is that fair? Correct.

C (11:53)

Yeah.

B (11:54)

Awesome. You can see why this is so painful to do this analysis. Right? How can most people do this analysis without thinking through all this stuff? It's like ridiculously hard. So then we have to figure out what would happen if you sold this property. So that's what we're trying to do here. And that involves the sales expenses and then taxes if they apply. Taxes do not apply in your situation. Almost certainly they will apply if you hold the property for a few years. And that is factored into this from an investment standpoint, but they do not apply if you sell it immediately. So we have our brokerage fees here. I have estimated 5.5% to sell the property. Does that seem reasonable? Or would you want to see that bumped up a little bit? Some places each broker can charge as much as 3%.

C (12:36)

I would actually reduce that. So I still have my real estate license from when I used to do it full time.

B (12:41)

Awesome.

C (12:41)

And that was eight or so years ago. I've kept it all this time, and it's. It's what actually helped us do renovations on our current house.

B (12:49)

Okay, what would you reduce it to?

C (12:51)

We can do 3%.

B (12:52)

Buyer will pay. You'll pay a buyer agent about 3% to sell this place. I've estimated closing costs and title insurance at about 1%. That might be a hair low in your area. It would be a hair high in my area here in Colorado, but maybe. Maybe bump this to 1.2%.

C (13:09)

Yeah, it would be a little higher.

B (13:11)

Do you think even higher than that? Or would you like those?

C (13:13)

Let's stick with that for now.

B (13:14)

Okay, great. So after you sell this property for $320,000 and pay off your mortgage balance, remaining balance of $175,000, and after you pay the buyer agent and other closing costs, you'll be left with $127,000, of which 97,000 are a capital gain. Again, because this is less than $500,000 for a married couple that has lived in a property for two years. There will be no capital gains taxes or anything that do apply. But if for some reason that was to change or this number was to be higher, you could simply toggle this on and it would default to putting the. To computing the long term capital gains taxes. And I've defaulted this to the tax rate in Colorado. You can easily put in the state tax rate there. Now I got to think about what we assume for the alternative investment returns. I've assumed a 10% long term nominal stock market return with a dividend yield of 1.36%. Do you agree with these assumptions, or do you. Are you a little bit more conservative with your stock market assumption or a little bit more aggressive?

C (14:15)

No, we'd probably stay at the 10%. Normally when we do our projections, we ignore things like Social Security and all that. So in terms of retirement and reaching fi, like the 10% assumes, we'll have more.

B (14:31)

Awesome. We had a lady from California come on the show and she wanted to assume 5 or, you know, 3 to 5% appreciation or something like that in her area. 5 to 7%. Remember that, Mindy? And so everyone believes different things. And that's the point of this, right? You got to invest based on what you believe for these things. So, and by the way, I'll sneak preview here. So we'll end up with a graph of what's going to happen with our cash flow and what's going to happen with our net worth. And I'll explain all the quirks on this once we get to the end output here. Okay, so let's talk about what are. What we can do with the proceeds. So the first and most obvious use of the proceeds is to use it for the sale, the down payment on the next property. That's important because that will reduce the mortgage balance at what is likely to be a very expensive new mortgage. Not quite 7.5%, but it'll be. It'll be something there. What do we think mortgage rates are going to be right now? Maybe, Mindy, that's a good question for you. What do you. What do you think is a good assumption?

A (15:27)

30 year is 6.16%.

B (15:30)

6.16%. Okay. And is this about the mortgage you'd want to get on a new house, Sean?

C (15:35)

Yeah, we'd be looking after the before or after the down payment?

B (15:41)

After the down payment. What would be the mortgage balance of the new home, you'd assume?

C (15:44)

Yeah, it'd be around 360, I think, is what we're looking at right now.

B (15:48)

Okay, so this is going to be a negative number, 360. Okay. And we're going to have a 6.16%. That's going to give us monthly P and I of 2,100. Abby, if you didn't sell your house and didn't use the proceeds, you take on a $360,000 balance. But if you do use these proceeds instead, you're going to take on this amount, $232,000 mortgage, and that's going to reduce your payment to 1400 from 2,200, which is what, like $800 a month difference? That's the question. Right. That's what bugs everybody here about this decision. So that we know we have that one. Okay. And we'll model out how that's going to impact your finances over the next couple years. For sure. Next is going to be, let's say you keep this thing as a rental. What would this rent for be?

C (16:28)

25, 2500? 25, 24.

B (16:31)

So it's close. 2,600 bucks on there. Okay. And then we've got our pity payment here of 1728. This is just continuing what we've got. Right. And I've got a vacancy allowance of 200 bucks here. That's a maybe I'll put bump that up to 250. 10% vacancy is high, but that's a, you know, you're, you'll be, you're not a landlord right now. So maybe the first year or two it's a little harder and maybe that, maybe that goes down in future years. Does that seem reasonable?

C (16:58)

Yes. And I want to pause here just to. I don't know if this is the best time in the. The podcast to do this, but one of the other considerations that we have is we know in the next five years. So short term we'll have roof fence and half the other half of the windows, which if you add that all up is around 20,000 that we anticipate within the next like five years.

B (17:29)

Okay, that's a great, this is a great time to bring that up. Right. This is exactly where we're at. Right. This is it. So we have a, I'm saying 5% vacancy allowance. That 10% is way too high for vacancy allowance on this. Your maintenance expenses will be about 200 bucks a month, which sounds reasonable, but you're saying, hey, I'm going to have 20 grand in known CapEx over the next five years. So let's just assume that that's going to be. Let's just put that in here to plug it and let's say that that number. So that's going to be 5,000 a year, 4,000 a year here. So we're going to need to put 400 bucks probably for the CapEx component on a monthly basis, that'll be 4800 a year. Over the next four years, I'll be able about 20 grand. So that's a very conservative way to model in capex on this property based on what you just said here. Is that right?

C (18:12)

Yep, that's it.

B (18:13)

Awesome. Will you pay the utilities in this property?

C (18:15)

Probably not.

B (18:16)

Okay, so we'll have zero utilities. So you're going to eke out a small amount of positive cash flow for the next couple years and then it will bump up later. My model does not allow us to easily plug in. There will be capex at this point. I could build that in the future, but it does not do that today in this particular spreadsheet. Okay. So do we agree with these assumptions for the rental?

C (18:37)

Yeah, definitely. I'm actually glad to see that it cash flows positive. I haven't actually done like the projecting out the capex, so that's great.

B (18:46)

I would wonder if that would be reasonably conservative on this for the CapEx component. And I think these are reasonable on this end here. You might also, depending on how things go, see this grow. I don't know. I think that the rents have been compressed for the last couple of years. And I personally this is an aggressive assumption and I think of people might disagree with it or want to put in there, but I believe that rents are likely to grow pretty substantially in the next couple of years in many parts of the country because they've been depressed by a large inflow of new supply. That may not be true in your area. New supply and multifamily construction which is ceasing. So the next couple of years will not see as many new units come on the market. And therefore I think there could be some rent growth in a lot of markets. But those are just little nuances to think about when we model this out. You may also have some utility expenses if you're between tenants, for example, for any of those projects. Okay, let's talk about passive. The passive. So this is a DIY assumption. So this assumes that you will self manage the property. And I had to make it its own case because property management is expensive and I have property management here as a 10% of rents additional cost. And if you were to hire this out with property management, you would be cash flow negative in this situation. Right, because we'd add in another, we'd take 10% of the rents out and that would leave you with this number. Now you also have to guess at what you think appreciation is going to look like for this place both in home price, rent growth and expense growth. I've plugged them at the historical average as a 3.4% for the case Shiller index for this, which I think is a reasonable base case consumption. But again, our California guest believed that these were going to be in the 7% range for rent and home price appreciation. Maybe that, maybe that'll that'll play out. What would you want to see for these assumptions here?

C (20:41)

Yeah, I anticipate the appreciation. I'm really unsure on the rent growth and the expense growth. Home price appreciation though, I would put closer like four, just like slightly higher than the average.

A (20:54)

Okay, before we look at how this all shakes out, Scott, I have a couple of comments. Sean, if you sell, your mortgage will be about 500 more than your current mortgage. So that is a lot easier to stomach. If you don't sell, your mortgage will be eleven hundred dollars more than your current mortgage. And that could be a big difference, a big pill to swallow.

B (21:21)

Just a P and I. Yeah, that's.

A (21:23)

Just the P and I your known capex leaves you with 40$700 a month and as somebody who has had rental properties before, the only capex that you can really count on is known. But I can guarantee you there's going to be more than that. So I'm concerned that your positive is going to very quickly turn to negative and every state is different. I know that Texas has significantly lower costs than my home state of Colorado, but you would only get the roof for that $20,000 that you're predicting. It'd be another $4,000 for the fence, another 10 to 15 for those windows. And I like 8% vacancy because that's a one month gap between tenants and planning for vacancy allows you to to have this this expectation. If you get the next tenant right away or your tenant renews clearly then you're making more. But I really like to run numbers conservatively just to make sure that it makes sense to rent the property. I love your 3.75% mortgage, but based on what Scott is showing here, I'm really curious to see what those numbers are going to say.

B (22:39)

All right, we'll be charting out Sean's financial decisions I guess here in a few moments. Bear with us. When I evaluate debt funds, I look for things like first position loans, personal guarantees, deep experience by the fund operator, low fund leverage, fast liquidity and consistent returns. These are some of the reasons why I'm excited to partner with Pine Financial Group. Their Fund 6 offers investors exposure to real estate credit, largely for construction and rehab, largely here in Colorado. With loans originated by an experienced originator. With over $1 billion in origination volume, 75% of their borrowers have been repeat customers over 17 years. They offer investors an 8% preferred return paid monthly and a 7030 LP GP split of everything over 10% paid annually. The lockup period is nine months with liquidity available within 90 days. After that nine month commitment, the fund is open to accredited investors only. The fund's minimum investment is typically $100,000, but Pine Financial is able to reduce that minimum for some investors and have agreed to do so for BiggerPockets Money listeners to a minimum of $25,000. Full disclosure I am personally invested in this fund through my self directed ira and of course Pine Financial is sponsoring this message and our podcast. If you'd like to invest or check out their Prospectus, go to biggerpocketsmoney.com pine today that's biggerpocketsmoney.com pine Please note that returns are not guaranteed and may vary based on fund performance.

A (24:10)

AutoTrader is powered by Auto Intelligence, the hyper personalized way to buy a car. AutoTrader's tools sync with your exact budget and preferences to tailor the online car shopping experience totally to you. Budgeting lets you input your info to see listings in your price range. Search and inventory helps zero in on your dream car. You can choose from new or pre owned, the style of the car and features like engine size, color, all the way down to whether you want a trailer hitch. Go ahead and get picky. Don't worry about scrolling endlessly. AutoTrader powered by auto Intelligence only shows you vehicles based on what you can afford and what you want and pricing shows you which listings are the best deals so you can feel like you're winning the negotiation without negotiating. You can even choose how to close the deal online at the dealership or a little bit of both. AutoTrader powered by auto Intelligence makes the process of buying a car less of a process. Try it today. Visit autotrader.com to buy your perfect ride. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast? Easy. Just use Indeed. When it comes to hiring, Indeed is all you need. That means you can stop struggling to get your job notice on other job sites. Indeed's sponsored Jobs helps you stand out and hire the right people quickly. Your job post jumps straight to the top of the page where your ideal candidates are looking. And it works. Sponsored jobs on indeed get 45% more applications than non sponsored posts. The best part? No monthly subscriptions or long term contracts. You only pay for results. And speaking of results, in the minute I've been talking to you. 23 people just got hired through Indeed worldwide. There's no need to wait any longer. Speed up your hiring right now with Indeed and listeners of this show will get a $75 sponsored job credit. To get jobs more visibility at indeed.com biggerpockets just go to indeed.com biggerpockets right now and support our show by saying you heard about Indeed on this podcast. Indeed.com biggerpockets terms and conditions apply. Hiring Indeed is all you need. When did making plans get this complicated? It's time to streamline with WhatsApp, the secure messaging app that brings the whole group together. Use polls to settle dinner plans, send event invites and pin messages so no one forgets mom's 60th and never miss a meme or milestone. All protected with end to end encryption. It's time for WhatsApp message privately with everyone. Learn more@WhatsApp.com. so you're about to make a trade based on a friend's text, but which u do you listen to is it we could buy a house in Tulum.

B (26:48)

Get optioning those options.

A (26:52)

We could lose everything. Or let's do a little research, get your head in the trade and make the investment decision that's right for you. Learn more@finra.org TradeSmart and let's jump back into these numbers.

B (27:09)

The great thing about this is you can tweak all these, right? So you say one number, Mindy says another. We'll come back and we'll tweak it and see how it impacts our result here. We're going to look at two things on this. One is how is this decision going to affect the cash coming into your life? Right? So you're going to have a lot less cash coming into your life every year if you don't sell the property and use the proceeds toward the new mortgage. Right. It's an obvious assumption. It's an obvious conclusion. Right. Because what we just said, this is like almost $1200 more a month. Yeah, this is, this is almost $1200 more a month or well over $1000 more a month than your current mortgage in terms of cash that you have to pay out for your p and I alone. Right. Which is that, which is the decision. Right. You might have higher insurance or taxes at that point, but you'd have them no matter what in the new decision on this. So that's a really important thing here. The other component is what's going to happen to your net worth. Right. And these are often in conflict. This is the balance that we have to kind of think about in this analysis. Right. And you're going to have more net worth at least in the first couple of years if you DIY landlord the property than you are if you sell and use the proceeds towards the new home mortgage. So that's kind of the decision here. This is a really complicated analysis. This is an everyday decision people make and it's got really deep underlying assumptions into it. This is almost 50 lines of inputs in order to get to this output, to make this help Sean make this decision, which is a very high stakes one for a lot of people. This again spits out two things which I think are important to the average person who's asking this question. They're important to Sean. One, which one's going to make me wealthier over time and the second is how's it going to impact my cash flow? Cash flow in the near term is flexibility and freedom. Net worth is obviously the long term goal for most folks in building wealth. And what we've got here is a remarkably closest start with net worth. We got a remarkably close set of outputs here from a net worth perspective. Okay, now what are we looking at on this chart? We have four different cases. We have the first, blue is we sell the property and invest passively in an index fund at 10%. The second is we're going to sell and use the proceeds towards the new home mortgage, which is a return of about 6% per year because we're not paying that 6% on that, that in that mortgage. By the way, this is not factor in taxes on there. So this can get even more complicated than what's in the model here. The gray line is going to be our DIY landlord and the yellow line is our passive landlord. Right? Now let's notice something funky about the chart here. In the first couple of years, the first two years, you will have more wealth if you keep the property as a rental than if you sell it. And the reason for this is because capital gains taxes do not apply to most people who have lived in this property for those two years. Right? So I've modeled in where, hey, you're not, you're going to be able to net those proceeds for up to the beginning of year three, if you know, the very first day of year three in there, if you do not sell the property and keep it for a year or two. I think that that's really important here because in a lot of close models like this one, right, which is what millions, tens of millions of Americans are dealing with right now, the keep it for a year decision can be a pretty reasonable one, right in that first little bit because you can just take a look at this and kind of wait and see and you still have that tax advantage which is the section 121. Is that right, Mindy? 121Exclusion where you can exclude property capital gains taxes, when that goes away, all of a sudden, the selling and using the proceeds towards the new home or selling and passively selling and passively investing in the index fund begin to jump ahead for a little bit. Then in this case, with the assumptions that we believe selling and investing in the index fund take off under the set of assumptions that we just said that we believe in the model here, we'd probably have to bump up our appreciation or rent estimates in this particular case in order to keep this property on a long term basis. So that's what the net Worth estimate is telling us. Right. The second really important consideration is going to be our cash flow. Right. And this is a wild, this is a really, this is so important that I felt I had to model it separately. Even though many people claim to care about net worth, you know, if you, if you do not, if, if you use the proceeds for the new mortgage, you're going to have a difference of like what, what is that, 6,000 more dollars hitting your bank account after tax every year for a number of years here. It's going to be a huge gap. You're going to feel way less well off, way less flexible if you invest in the alternatives. And I think that's important because if it's close like this one is, that's a heavy consideration towards prepaying the mortgage. Yeah, there's a net worth difference, but it's not that big after 10 years in this particular model on, on, on a, on this basis. And this may for many people trump the analysis about what the, what, what's going to happen to my net worth over time. Go ahead, Mindy. You know you want to react here.

A (32:15)

I just thought of something. Right now we are in more of a buyer's market than a seller's market in much of the United States. So I'm wondering if, since you have these known capex issues coming up in the next five years, are you going to have to give a credit at closing when you sell this house?

C (32:35)

More than likely we've actually explored like a cash purchase, like even taking a reduced amount. One of the things that we've noticed is when the markets are shifting, sometimes the quick close catch cash purchases are higher than after fees and everything that you would get if you went and listed directly.

B (33:01)

Let's take that out of the purchase price. That's the simplest way to do this. So what do we think this thing is going to sell for in a worst case scenario? What's a more conservative estimate?

C (33:09)

Worst case scenario we'd probably be looking at 300 or $300,000 sell instead of a 320.

B (33:16)

Okay, this is going to have an interesting output right when we do this. This is going to give us more weight. Not that interesting here. It would give us more weight, a little bit more weight typically towards keeping the property. But in this case it's not really making a big difference. Where the, the model really begins to talk about the, the value of doing this is when there's a very high amount of leverage at a low interest rate. So if this is at 3, if this was at like 3.75%. And we were saying we're only going to get like 205 from this sale and we're really going to net like 5,000 or maybe, maybe we'll do a little bit more here, like 220. Because after the sale prices you have 22,000. Yep. Only as good as the inputs here. So you know, in this case you only net like 33 grand on the sale. Now all of a sudden we're going to have a really strong case for keeping the property overselling it. Yeah, because that leverage is going to be that leverage and that low interest rate is going to make such a big difference. That, and that's the, that's the fun part about modeling this all out is there's so many different scenarios and we'll probably follow up this up with a couple of like here's a high cost of living. Think high leverage property and low leverage kind of, and play around with those and we'll see a lot of, a lot of pretty staggering differences. In many cases the decision's very obvious. Yours is so great because it's not obvious. Yours is so great in the sense of a case study because it's so close and I think we knew it would be close coming in. And that's why you wanted help with the decision here.

C (34:45)

Yeah. One of the things that this doesn't take into account is if you look at the cash flow chart, right. We said there's a six thousand dollar difference annually and that was the case.

B (34:56)

At three hundred twenty. Right. We have the three hundred twenty sale price.

C (34:59)

Yeah.

B (35:00)

So let's go back to that. Right.

C (35:01)

In terms of our lifestyle and what that looks like, the difference of that I guess is only roughly 500, 500amonth.

B (35:11)

But.

C (35:15)

There'S certain benefits of at that point in time, it's. We're looking at new builds in particular for our situation. So it would be new home, new neighborhood, nicer school. There's kind of these sort of soft benefits that aren't reflected. That for $500 a month difference, like.

B (35:36)

Sorry, there's a point of confusion I think here then. Right. This is. If you buy the new home, your mortgage P and I will go up by 21, you know, by 800 bucks. I'm sorry, by 1200. 1300 bucks. Right. I'll go from 915 to 2196. So that will take out 12 to 14, 12 to $15,000. Plus whatever the incremental is from the taxes and insurance. It will be more expensive no matter what and it will Be worth it. That's something you want to buy for your life. The question that we're answering with this spreadsheet is if you take this 127 grand and pre pay down this mortgage aggressively, you'll have an incremental 800 bucks. What is this, 600, 700, 800 bucks in P and I that you'll be saving each month over there. And there's a little bit of an adjustment for over the zero mark here. That's what we're seeing here on this.

C (36:29)

Yeah, so maybe I didn't quite word that correctly then. So the, the $800, I guess, instead of the, the 500. What I'm saying is the difference in that, I don't think outweighs the lifestyle change that would occur if we were to sell the home. I guess we're making the assumption, right, that we, we, if we kept it as a rental, we would still get the new home as well.

B (36:55)

So this is saying, what should we do? You're going to get the new home. Right. That, that's, that's almost, that's almost like irrelevant in part to the analysis. We're not questioning that decision. We're saying, what do we do with the old home?

C (37:05)

Yeah, okay.

B (37:06)

Right. Yeah. The old, the old home. Do we keep it or do we apply it to the new mortgage? Right. And so incrementally, so if, if you keep the old home and you keep it as a rental, a passive rental, you're going to generate like a couple grand, maybe with our base case assumptions in cash flow. If you have a property manager, you're going to have negative cash flow. If you invest in the index fund, $127,000 in the index fund, you're going to generate like two or three grand in cash flow from the dividends. And if you prepay the mortgage, you're going to save $9,400 a year that you can spend over the zero mark right. On this. Like that's all going to be savings to you. It's going to be an incremental 6, $7,000 over what you'd have coming into your life from dividends from stocks, for example, if you were to prepay the mortgage by that amount. Is that making sense?

C (37:59)

Yeah, yeah, that. Appreciate the clarity on that.

B (38:02)

I can see why that's confusing. Yeah. Because it's not, it's not debating whether you should buy the new home or not. It's debating what do we do with the old home? Because many people need to move. Right. It's not like oh, financial decision to move. It's no. My kids are about to go to school and I'm moving into the good school district or I got a new job or my parents got sick and I need to move home, back, you know, back to where I grew up on that or whatever it is, right? Like that's, that's the decision tens of millions of people are grappling with. And then what do I do with the old one? Right? Because no, most people don't want to move right now. That's why we have so few transaction volume. It's because people are in your situation. You got this 3.75% mortgage. That's a really powerful incentive to stay. And this is a real killer to switch to. But life happens, life goes on. We must move. We must move. Go to, go to the next, the next place. Many of us here in America. And this decision now becomes very difficult because the property is worth more on average to the current owner than it is to the new buyer because the mortgage is so low. And that's, that's a fundamental problem. That's, that's, that's trapping the market right now.

A (39:02)

So, Scott, based on all of this, what would you recommend Sean do with this property?

B (39:07)

My bias, I'd say I think, I think that the reason I built this this way is because if it's close, take the proceeds and pay off the new mortgage. Right? And yeah, you'll be a little less wealthy after 10 years on that, but you'll have all this flexibility in the meantime that I think is so powerful for a lot of folks. So opt so many options that that brings in. And I think that that's what I would, I would probably do in this particular situation. This is, this would be a sell it and use the proceeds to pay off the mortgage on there or to sell it and invest in the index funds. But I'd rank them in the sell and prepay and then invest in the index fund. What would you do, Mindy Bell?

A (39:45)

Because of the cash flow, the projected cash flow, if you scroll up to the top, is $47 a month. And in my very long time as the community manager for BiggerPockets, my main job was to be in the forums and I would see people comment about how they were cash flow, negative cash flow. Like I was, I projected and I got a hundred dollars a month in cash flow and I thought this was going to be amazing. And then I had repair that I hadn't accounted for and it wiped out my cash flow for years. I would Say sell even with this $47 in positive cash flow. That would be my recommendation. Sean, what do you think about what we're saying?

C (40:29)

I agree with you, Mindy, in that I think it's going to be a lot closer than even in the analysis that we did, which obviously this is like, way more thorough than what we were doing. We were doing more napkin math for ours, but that being so close and then the differences in cash flow. You know, I think our risk profile in those first three years because of that difference in cash flow. Yeah, it's. You're one big situation away from things sort of spiraling downward.

B (41:10)

So I think that in this case, it's, it's, it's a, it's a pretty good lean towards sell unless you have really high hopes for your appreciation in this particular case.

C (41:19)

Yeah, we, we didn't even touch on this, but yeah, income wise, probably in the next five years, the 130 should be in the low twos just for mine. Um, and we don't know what, what my spouse is going to do after our kids are in school more full time. So, yeah, we, hopefully I could be back in a couple years and we'll have a completely different set of questions to go over.

B (41:49)

Yeah, that's the big, that's the big one to go after. I think there is, is. Is. I think that would be a great kind of next step here is, hey, we can really do whatever we want with the house. Doesn't. Doesn't really matter. Kind of slightly lean towards maybe selling it based on these assumptions, but really what's going to make a difference for us is going to be the income front. How can we set things up so that I have a great shot at that 200k income in the next couple of years? And what do you want to start thinking about once the kiddos are in school in terms of that? What is, what is. What does it happy and good situation look like? That will be a million or 2 to 2 million dollars discussion or analysis in your household compared to the decision we talked about today, which I think is surprising. Actually. I actually was thinking would be a little higher stakes when I set out for the model today. On your, on your particular decision.

C (42:37)

Yeah, I appreciate it. Thank you guys so much for the, for the time. It's, it's been great. Thank you.

A (42:41)

John, thank you so much for sharing your numbers with us. We really appreciate it and we will talk to you soon. And when you have a big change in your situation, please reach back out.

C (42:53)

Yeah, yeah, definitely will do. Thank you, guys.

A (42:55)

Okay. And thank you so much. We'll talk to you soon. Bye. Bye. Scott, I think this was a super fun episode, and I think this question of should I sell or keep my house is something that truly is weighing on many of our listeners. So I super appreciate you taking the time to make this really, really detailed spreadsheet. What did you think of the episode?

B (43:16)

I knew it would be close. I didn't know it'd be that close in the discussion. And I think that the power of the tool in this particular case is showing how close the decision really is and how it's not really a decision. Some people separate over these things because they think they're high stakes decisions, and they are. But if you can model it out and be like, well, this job pays 120 and has a little more upside than this one at 125, who knows? Those decisions actually aren't that high stakes in the end. And there are actually other things, I think, in Sean's financial journey that are going to be more important, like his career choices, how they think about spending and the house that they purchase in the future and what type of housing arrangement they live there in the first place that are going to be more consequential than this. But don't take that to mean that for many Americans, this isn't an enormous choice that they're at risk of making a wrong decision on that could make them better or worse off by hundreds of thousands of dollars. And so I'll preview a couple of points. We'll do another episode, I'm sure, in the future on this in more detail. But if you are highly leveraged, if you have a very low interest rate mortgage, like 3%, and you have a high amount of leverage, so let's say your house is worth 350 and your mortgage is 325, you're almost certainly going to be way wealthier in 20 years in a case like Sean's today by keeping the property right now. All that depends on your cash flow and rent assumptions, but that's generally a rule there because that properties were so much more to you than it is to anybody else. And that low interest rate and that high leverage should compound really nicely over time. On the flip side, if you're in a very high cost living area and you have like an 8 or $900,000 house with like 3 or $400,000 mortgage, which is a lot of people as well in that type of situation, the math for selling the property and getting out of it is overwhelmingly is overwhelming. The challenge for those people is typically, do I then take those proceeds and invest them in the stock market or take them and apply them to my next mortgage, which is often also in a high cost living environment. And that one's really interesting because you make a lot more wealth if you invest the money in the stock market. But some of these people, that six or seven hundred thousand dollars can make like a five or six dollars a month difference in their mortgage payment on the new property, which is like, that's an, that's almost like a, an American household income alone will need to be earned to generate just the P and I difference on that decision. So that's what this tool comes really helpful is these are really high stakes decisions and sometimes there's a trade off. There's not really a right answer in it. And I think that the, the, the, the two graphs will hopefully show those trade offs reasonably well. And I like to think like, if it's close on one and a, on the other, you, then it's easy. Right? Then you, then you go, then you go with that one. That's what we had today. Right. It was close on the net worth one and it was a blowout way. He was way better off from a cash flow perspective from the, from the mortgage position. And that, that made the decision relatively easy for me as an outsider to kind of say, like, that'd be my bias.

A (46:30)

Yeah, you said you knew it would be close and, but Scott, for many people this decision isn't close. And the best way to determine that is to run the numbers. So if you find yourself in the same position as Sean is struggling with these Should I keep my house or should I sell my house? Go download Scott's spreadsheet@biggerpockets.com sell or keep. And sell or keep is all one word. And we of course will link to it in the show notes as well. All right, Scott, I had a great time talking real estate today with you, but it's time to go. Should we get out of here?

B (47:03)

Let's do it.

A (47:03)

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