Rich Habits Podcast Episode Summary: Q&A Edition Release Date: October 31, 2024
In this special Halloween-themed episode of the Rich Habits Podcast, hosts Austin Hankwitz and Robert Croak delve into a series of listener-submitted questions, offering expert financial advice across various topics. The episode covers everything from investment strategies and life insurance to real estate and retirement planning. Below is a comprehensive summary of the key discussions, insights, and conclusions from the episode.
1. Airbnb Arbitrage
Question by Brock P.
Brock inquires about the viability of Airbnb arbitrage as an entry point into short-term rentals.
Robert's Perspective: Robert explains that Airbnb arbitrage involves leasing a property and then subleasing it on platforms like Airbnb or VRBO. While the strategy can yield significant returns (e.g., earning $3,000 net on a $3,000 lease by generating $6,000 in rental income), he highlights several challenges:
- Market Saturation: The rise in courses and gurus has flooded the market, making it harder to find profitable opportunities.
- Regulatory Risks: Local governments and HOA regulations can change, potentially prohibiting short-term rentals and leaving arbitragers stuck with long-term leases.
- Operational Risks: Unforeseen expenses and management issues can erode profits.
Notable Quote (02:51):
"...the markets are flooded. Number two, you have to be very, very careful and get in the know locally as to what the local governments are doing..."
Austin's Experience: Austin shares a negative customer experience with Airbnb arbitrage, emphasizing the unpredictability and potential for poor customer satisfaction. He suggests that owning the entire rental process may mitigate some of these issues but acknowledges the inherent risks.
2. Determining Life Insurance Needs
Question by Victoria F.
Victoria seeks guidance on calculating the appropriate amount of life insurance to purchase.
Austin's Explanation: Austin breaks down the process by focusing on the primary purpose of term life insurance: providing income replacement for beneficiaries in the event of death. He suggests multiplying the household income by 15 to 20 times to determine the necessary coverage. For example, a $150,000 annual income would necessitate a $3 million policy to sustain the household through investments.
Notable Quote (08:25):
"...if you wanted to generate $150,000 of annual income at a 5% withdrawal rate, your portfolio would need to be about $3 million in value."
Robert's Addition: Robert advises on selecting the right policy type and emphasizes working with reputable firms. He warns against gimmicky policies like IULs and whole life insurance, stressing the importance of understanding associated costs and benefits.
3. Home Renovation Tips and Contractor Selection
Question by Esperanza M.
Esperanza seeks advice on managing expenses and finding reliable contractors for significant home renovations.
Robert's Tips:
- Draw Schedule: Implement a payment plan based on project milestones to prevent contractors from absconding with large upfront payments.
- Stick to the Schedule: Avoid overpaying outside the agreed milestones to ensure consistent progress.
- Material Purchases: Let contractors handle material sourcing to benefit from their bulk discounts and avoid personal logistical headaches.
- Paint Testing: Always test paint colors in different lighting conditions before committing to large purchases.
- Inventory Management: Monitor material usage to prevent contractors from inflating costs or redirecting unused materials to other projects.
- Quality Over Cost: Invest in high-quality fixtures and materials to ensure longevity and reduce future replacement costs.
Notable Quote (09:49):
"Don't fall for anything where they ask for half percent down... you might give five thousand dollars down. Then when they reach a certain milestone you give another five and so on."
Austin's Experience: Austin recounts a negative experience with an unreliable contractor found via Craigslist, underscoring the importance of vetting professionals through reviews and referrals to avoid subpar work and potential scams.
4. Roth IRA Strategy: UPRO vs. VOO
Question by Charles J.
Charles seeks advice on whether to shift his Roth IRA investments from VOO (Vanguard S&P 500 ETF) to UPRO (a leveraged version of VOO) given his long investment horizon.
Austin's Analysis: Austin explains that while UPRO offers leveraged exposure to the S&P 500 (3x the daily returns), it also magnifies losses similarly. He warns of the significant volatility and potential for substantial declines, which could jeopardize the retirement nest egg if the ETF ceases to exist in the future.
Notable Quote (19:52):
"UPRO is a levered position on Voo, which means that the gains you see in Voo... are magnified to the upside and magnified to the downside."
Robert's Insights: Robert emphasizes the importance of diversification, cautioning against overly concentrated investments in leveraged ETFs like UPRO. He suggests maintaining a balanced portfolio to mitigate risks associated with market downturns.
Notable Quote (23:19):
"...I like to be diversified so I can never go broke... I would keep it a small percentage of your portfolio."
Recommendation: A balanced approach is advised, such as a 70/30 split between VOO and UPRO, allowing for participation in UPRO's higher returns while maintaining the stability of VOO.
5. Investing Small Amounts in High-Cost ETFs
Question by Hasina X.
Hasina has $300 per month to invest but finds that some ETFs like QQQ cost around $500 per share. She seeks guidance on how to invest within her budget.
Robert's Solution: Robert introduces the concept of fractional shares, allowing investors to purchase portions of ETF shares. Platforms like Schwab offer slice programs where users can buy up to 30 slices at as low as $5 each, enabling investment in expensive ETFs without the need for full share purchases.
Notable Quote (25:45):
"You're buying a slice of a total share, and you can buy up to 30 slices for as low as $5 per slice."
Austin's Addition: Austin recommends exploring various investment platforms beyond Schwab, such as Robinhood, M1 Finance, and Public.com, which offer fractional investing starting at as low as $1, providing more flexibility for small investors.
6. Retirement Contributions vs. Bridge Account
Question by Kurt B.
Kurt, aged 53, is contemplating whether to reduce his 401k contributions from 19% to the minimum to redirect 13% into a Bridge account, aiming to retire at 59 and a half.
Robert's Advice: Robert presents both options:
- Bridge Account: Offers more autonomy and potential for higher returns over the remaining six and a half years.
- Maintain 401k Contributions: Provides stability and automatic investment growth within target date funds.
He emphasizes evaluating personal risk tolerance and the current performance of existing investments to decide the best path forward.
Austin's Mathematical Breakdown: Austin provides a detailed projection, highlighting that with continued 401k contributions and reasonable growth assumptions, Kurt and his wife could amass approximately $1.2 million combined by retirement. He suggests consulting a fiduciary investment advisor to tailor strategies based on individual needs and timelines.
Notable Quote (28:52):
"But the last thing I want to mention... you got this awesome pension waiting on you. No debt, no mortgage, no nothing. You guys are going to be enjoying your retirement to the fullest and we're super, super excited for you."
7. Using Savings for Stock Investments and Covered Calls
Question by Mike G.
Mike considers using a portion of his $83,000 in a high-yield savings account to invest in Tesla stock and sell covered calls, aiming to boost his savings rate before purchasing a house in two years.
Austin's Response: Austin strongly advises against using funds earmarked for a near-term goal like buying a house for aggressive stock strategies. He underscores the risks associated with stock market volatility and the potential loss of principal, which could jeopardize his home-buying plans.
Notable Quote (34:47):
"I do not think that you need to take any of this 83,000 and roll the dice by putting it into single stocks and trying to sell covered calls against them to make more income."
Robert's Counterpoint: While agreeing with Austin's caution, Robert suggests a moderated approach by allocating a small portion of the savings (e.g., $33,000) to more stable investments like VOO to seek additional gains without taking on excessive risk. This hybrid strategy allows for some growth potential while preserving the majority of the funds for the house purchase.
Notable Quote (36:10):
"...taking on the risk for an extra $6,000, which in my conservative brain is like if you're trying to save for a house, like $6,000."
8. Investing in Private Equity Opportunities
Question by Carson D.
Carson, a 22-year-old college graduate with a solid financial foundation, is considering investing $20-25,000 from his $225,000 net worth into a private equity fund through his employer, which would lock up his money for five to eight years.
Robert's Guidance: Robert commends Carson's financial acumen but advises caution. He recommends allocating only a small portion (e.g., 10%) of his net investable capital to private equity to mitigate potential losses, as many such investments can fail.
Notable Quote (38:40):
"...this is the key that I would use is when you're thinking about this strategy, just write smaller checks over more investments because if you hit a big winner, it's going to be a great windfall anyway."
Austin's Insights: Austin echoes Robert's caution, sharing personal regrets over aggressive investments in startups that resulted in significant losses. He emphasizes the importance of maintaining liquidity and diversifying investments to safeguard financial stability.
Notable Quote (43:00):
"You knew your risks. But I think to Robert's point... If you make too many big investments or make the wrong investments, all of this 250,000, 220,000 that you've got right here could easily turn into 46,000 because you got too risky."
Recommendation: Both hosts advocate for a balanced investment approach, suggesting that Carson continues to invest in reliable index funds and maintains a diversified portfolio while cautiously exploring private equity opportunities within safe limits.
Closing Remarks
As the episode wraps up, Austin and Robert encourage listeners to engage with the Rich Habits Network, share episodes with friends, and continue their journey toward financial literacy and wealth-building. They emphasize the importance of informed decision-making, diversification, and cautious optimism in personal finance endeavors.
Final Quote (44:41):
"Just don't forget to share the episode with a friend. We love it when you share it with a friend... have a great Halloween night."
Key Takeaways:
- Diversification is crucial across all investment strategies to mitigate risks.
- Caution and Due Diligence are essential when venturing into specialized investment areas like Airbnb arbitrage, leveraged ETFs, and private equity.
- Fractional Investing offers opportunities for individuals with limited funds to participate in high-cost ETFs.
- Balanced Financial Planning involves evaluating personal risk tolerance, investment horizons, and financial goals to make informed decisions.
For more detailed discussions and personalized advice, consider joining the Rich Habits Network and accessing their exclusive resources.