Speaker 1: Welcome to How to Money. I'm Joel, and today I'm
Speaker 1: talking about avoiding the middle class trap with Scott Trench. Okay,
Speaker 1: so in the song rock in the Suburbs ben Folds,
Speaker 1: he pokes fun at the struggles of middle class life, angsty,
Speaker 1: a little whiny, but also tongue in cheek. It's killer
Speaker 1: piano rock that makes you laugh because deep down it's
Speaker 1: a little too relatable and that tension it's still alive today.
Speaker 1: A lot of Americans and plenty of How to Money
Speaker 1: listeners feel like they're doing all the right things. They're
Speaker 1: saving diligently, they're investing wisely, but at the cost of
Speaker 1: flexibility and maybe even some joy right now. So, how
Speaker 1: do you balance building wealth through the future without squeezing
Speaker 1: the life out of the present. That's what we're dying
Speaker 1: being into today with Scott Trench. He literally wrote the
Speaker 1: book on this set for life. He's helped thousands of
Speaker 1: people and I think the book has sold more than
Speaker 1: one hundred thousand copies chart their path the financial independence.
Speaker 1: So Scott, thank you for taking the time to join
Speaker 1: me today.
Speaker 2: My friend Joel, thank you for the very very kind
Speaker 2: intro your legend.
Speaker 1: Scott trench. You've been in this space, you're still pretty young.
Speaker 1: We're still went in the space for a long time,
Speaker 1: and you've helped a lot of people. You've done a
Speaker 1: lot of great work. So I'm thrilled to have you here.
Speaker 1: First question I ask everybody who comes on, though, is
Speaker 1: what do you like to splurge on? What's your craft
Speaker 1: beer equivalent?
Speaker 2: Okay, so this is this is a pretty embarrassing one
Speaker 2: for somebody who runs a podcast in personal financial responsibility,
Speaker 2: but have a I recently came purchased a golf cart
Speaker 2: which I used to get around the neighborhood and take
Speaker 2: my two little kids to the local park. I will
Speaker 2: use it to take them to school when they start
Speaker 2: attending school, and to the local pool. So that's my
Speaker 2: very big splurge. You know, seven rate grand somewhere in
Speaker 2: that range.
Speaker 1: Oh wow, Okay, it is a fancy golf cart.
Speaker 2: A nice little toy. Yeah that I got to take
Speaker 2: a the neighborhood here.
Speaker 1: Okay, is, so did you buy a brain new? Are
Speaker 1: you buying used on?
Speaker 2: I have bought it used, I should have bought it used,
Speaker 2: but I got it. I got it. I got a
Speaker 2: new one because the company that was selling them, was
Speaker 2: going out of business, so okay, I picked up a
Speaker 2: new one. There.
Speaker 1: I feel like golf carts are all the rage in
Speaker 1: the burbs these days. Is that Is that true?
Speaker 2: You? Is that's it? Yes? I just completely jumped on this,
Speaker 2: like tear you know, very basic trend. And I've really,
Speaker 2: I really enjoyed taking my golf cart to the little
Speaker 2: local coffee shop, yeah, or to the pool.
Speaker 1: See. For me, this was electric bikes, and so I
Speaker 1: have like a rad wagon that I still ride with
Speaker 1: my youngest. My oldest too, they're on their own bikes
Speaker 1: now and they don't wanna, they don't want to ride
Speaker 1: with me anymore. But I have so many fond memories
Speaker 1: and so many great pictures of like sticking them on
Speaker 1: the back of the bike and going wherever around town
Speaker 1: that we wanted to go. So that was my version
Speaker 1: of the golf cart. And I will say, well worth
Speaker 1: the money, You're gonna get a lot of joy out
Speaker 1: of it. Okay, let's let's get onto it. Man. What
Speaker 1: got you interested in the idea of early retirement to
Speaker 1: begin with? Was it the fact that you were working
Speaker 1: at one of America's worst companies and you just had
Speaker 1: to get out.
Speaker 2: Yeah, so that I actually what happened was I got
Speaker 2: before I graduated college, I had an internship at Dish Network,
Speaker 2: which at that year was ranked the worst company to
Speaker 2: work for in America. And I actually really enjoyed the internship.
Speaker 2: They put out a great show. It was a wonderful time.
Speaker 2: I have lifelong friends from that that summer between my
Speaker 2: junior and senior year of college, and then when I
Speaker 2: started in the real world. That's what I began to
Speaker 2: kind of get disillusioned with the idea of climbing the
Speaker 2: corporate ladder when I started the full time job at
Speaker 2: Dish the next year after I moved to Colorado, and
Speaker 2: I was like, you know, I'm going to badge in
Speaker 2: a bitch, badge out for forty years if I do
Speaker 2: this well, and I'll be one day climbing the ranks,
Speaker 2: and I'll make good money if I climbed the ranks.
Speaker 2: But I'll have that office over there instead of this one,
Speaker 2: this cubicle right here.
Speaker 1: The slightly bigger one with a slightly better view.
Speaker 2: Yeah, And that was that was kind of the That
Speaker 2: was that was wearing on me day to day early
Speaker 2: on in the career, and I was fortunate to have
Speaker 2: immediately stumbled across the foundational stuff in the financial independence world,
Speaker 2: like mister money Mustache, the mad Fientists, early retirement, extreme
Speaker 2: those kinds of things there, and having a working in
Speaker 2: finance and having a background in economics and all those
Speaker 2: kinds of things at school that really helped me. I
Speaker 2: resonated with that, and I could model out, Oh, if
Speaker 2: I just keep my expenses very low, I'll automatically become wealthy.
Speaker 2: And the best way to keep my expenses very low
Speaker 2: is to attack this huge line light them into my budget,
Speaker 2: which is housing. And so I got a roommate, live
Speaker 2: with a roommate, then began house hacking. You know. I
Speaker 2: bought a couple of small, multi family properties, moved into them,
Speaker 2: rented them out, used owner occupied occupied financing, and did
Speaker 2: that off and on for ten years, the better part
Speaker 2: of ten years. In a midpoint, like around year six
Speaker 2: or seven, my now wife and I moved into an apartment,
Speaker 2: got married in that apartment, and then moved back into
Speaker 2: one of our rental properties for a year with our
Speaker 2: little one before eventually getting our forever home here with
Speaker 2: the golf cart.
Speaker 1: So you were kind of tackling both and right you
Speaker 1: were saying, listen, we got to dial back on spending,
Speaker 1: we got to be more frugal, and then we got
Speaker 1: to thrust that money into income using assets. So fierce
Speaker 1: frugality was a part of your journey. And at one
Speaker 1: point I think I heard you talk about enduring a
Speaker 1: really cold winter with with no heat. Is that like,
Speaker 1: how how far did you go from a frugality perspective?
Speaker 2: Well, thanks for looking all this up yet, my my,
Speaker 2: what happened was I bought this place and uh, it
Speaker 2: was like April or something like that, and I was like,
Speaker 2: I can go until fall before I install heating my
Speaker 2: portion of the unit here. You know, I'm get by
Speaker 2: with this stuff. And then my my then my now
Speaker 2: wife moved, you know, started dating me around that time,
Speaker 2: and we, uh we eventually started contemplating moving in together.
Speaker 2: And that that only lasted a few weeks. Uh that
Speaker 2: that low heat there was there wasn't like.
Speaker 1: I'm not moving in there unless you get that heater repair.
Speaker 2: Yeah. I will also say that frugality was you know,
Speaker 2: there's a there's a in the world of personal finance.
Speaker 2: I think frugality is sometimes a virtue and to a
Speaker 2: lot of people. And I think that's a mistake, right,
Speaker 2: because I never saw frugality as this virtue, right. I
Speaker 2: saw it as there is there is something to it,
Speaker 2: there is something wonder you know, I good about it,
Speaker 2: and there's pride to be had in living living frugally there.
Speaker 2: But it was the tool that was right for the
Speaker 2: job in those early years, because I was already maximizing
Speaker 2: my income. I was already investing according to way reasonably
Speaker 2: well disciplined approach of cerial house hacking and then putting
Speaker 2: everything else in S and P five hundred index funds, right,
Speaker 2: you know, according to a tax advantaged retirement stack. So
Speaker 2: there wasn't much more to be done on those funds
Speaker 2: and those fronts, and so low spending was the main
Speaker 2: driver of getting ahead financially for me at that point
Speaker 2: in my life. It later transitioned to income generation or
Speaker 2: leading bigger pockets, right, And at that point, being frugal
Speaker 2: was a time and energy suck at that point, right,
Speaker 2: Like if I'm gonna I'm going to pay somebody else
Speaker 2: to mow my lawn, for example, at that point, because
Speaker 2: that's going to take me away from this very high
Speaker 2: paying job where I have a duty to customers, shareholders,
Speaker 2: and those other folks. And so that's been an interesting evolution.
Speaker 2: And now after stepping down, there's yet now, yet again,
Speaker 2: a more emphasis on controlling my expense. I don't have
Speaker 2: to be frugal the way I was at twenty three
Speaker 2: or twenty four, but I have to be back in
Speaker 2: control of those expenses in a way I didn't while
Speaker 2: I was CEO. And I think that's an interesting takeaway
Speaker 2: from this is there's a right tool for the job
Speaker 2: at various moments along the journey, and the mistake is
Speaker 2: using one the whole way through and not adapting or
Speaker 2: evolving as your situation changes. What is the eighty twenty
Speaker 2: of the situation as you move through your financial journey.
Speaker 1: I mean, I'm sure you've seen the headlines of stories
Speaker 1: about the janitor who dies and has eight million dollars
Speaker 1: in his retirement accountant to some people might laud that
Speaker 1: and say, incredible, right on a janitor's salary, that you
Speaker 1: could a masked that much money, And I think of
Speaker 1: it as like incredibly sad, right that someone would invest in,
Speaker 1: say for that long, and never get to enjoy the
Speaker 1: fruits of their labors. And you're right. I think that's
Speaker 1: probably the hyper frugality focus gone wrong, and there's just
Speaker 1: never an ability at least for that person to adjust,
Speaker 1: and you have to make adjustments over time.
Speaker 2: Yeah, I view it. I view finance as almost like
Speaker 2: an engineering problem. Right, here's exactly what I want my
Speaker 2: day to look like, in my life to look like
Speaker 2: in great detail. I can literally I literally have it
Speaker 2: written down on a page and a half. With my wife,
Speaker 2: we updated every quarter, and we did it in our honeymoon.
Speaker 2: That's how mardy I am about this. But I literally
Speaker 2: have that written down. We update it regularly, and we
Speaker 2: engineer for that, and that question is how do we
Speaker 2: do that most efficiently?
Speaker 1: And I think that's what Scott Trench's ideal day look like.
Speaker 2: All right, I pull it up here, you want to
Speaker 2: pull it up?
Speaker 1: Yeah, I'm so curious to know. And I love this
Speaker 1: because because you're right, like if if you have it
Speaker 1: mapped out to that extent, my guess is, my guess
Speaker 1: is before you start rattling things off that most of
Speaker 1: the things that are on there are inexpensive or free.
Speaker 2: No, not not necessarily, many of the things really are.
Speaker 2: But I specifically, like I live in Colorado. I want
Speaker 2: to see the mountains out of my house. I love that.
Speaker 2: I love like the mountain sunset. And that was not
Speaker 2: free or cheap, right, and that was a major investment.
Speaker 2: But I will I will say that, yes, there's a
Speaker 2: good chunk of that. So here, I'll pull this up.
Speaker 2: So here's the latest evolution right of this vision. It's
Speaker 2: not the most recent one. And they don't really move.
Speaker 2: It doesn't really move that much anymore. It used to
Speaker 2: move all the time. Wife and I would be like, Oh,
Speaker 2: we want to live in Hawaii. We want to live here. No, No,
Speaker 2: Now we've kind of settled in of this is what
Speaker 2: we want. But our home is bustling with our two kids,
Speaker 2: Katie and Taylor, and are very handsome Kitty Fred. We
Speaker 2: have an energetic, healthy, day to day lifestyle with lots
Speaker 2: of laughter and fun happening throughout the day. We put
Speaker 2: each other first, demonstrated by both of us making an
Speaker 2: effort every week to make the other person feel loved
Speaker 2: and appreciated during the week. Our work commitments EBB and
Speaker 2: flow according to our interests. We can be very flexible
Speaker 2: and maintain high autonomy over the trajectory of our work days.
Speaker 2: So we can work a ten or twelve hour shift
Speaker 2: on important deep work, or take off for three days
Speaker 2: in a row doing hike, ski and bike days. We
Speaker 2: can also take relaxing recovery days anytime. Virginia writes best
Speaker 2: selling books, and I continue my study of early retirement,
Speaker 2: pioneering ideas to accelerate it or make it more enjoyable.
Speaker 2: Here at Bigger Pockets Money, Taylor and Katie are I
Speaker 2: enrolled in high quality full time daycare. We have several
Speaker 2: wonderful babysitters. We take trips. We have a thriving local
Speaker 2: community of friends. I'm paraphrasing here. I've got a whole
Speaker 2: page and a half of this. We maintain high levels
Speaker 2: of physical fitness. Here's our diet and exercise regimens. Here,
Speaker 2: here's where Scott's competitive outlet is. You have your marathons.
Speaker 2: I need to find that for me. That's like one
Speaker 2: of my projects this year is like what do I
Speaker 2: want to compete in? Certainly not running for four hours straight.
Speaker 1: Or two hours, it is pretty psychotical.
Speaker 2: And then our financial houses in order. We have our
Speaker 2: paid off primary home, one year cash reserve, and a
Speaker 2: conservative primary investment portfolio that generates one hundred and fifty
Speaker 2: percent of our base living expenses. On top of that,
Speaker 2: we have substantial financial upsides with various projects that we're
Speaker 2: working on. And so that's it. And one particular point
Speaker 2: in there that I skipped over here is we see
Speaker 2: the mountains every day from our porch, like we broke
Speaker 2: that down years ago before we bought our house and
Speaker 2: get to watch a western facing sunset on most or
Speaker 2: every evening. And that was really important to us, for example,
Speaker 2: and was not a cheap item. That was something we
Speaker 2: had to work for and income and investment dollars to realize.
Speaker 1: Well, thanks for sharing that, and I know that's you've
Speaker 1: actually posted that on your website of Bigger Pockets, and
Speaker 1: so we'll look to that in the show notes. But
Speaker 1: I think that's like the kind of intentional introspection that
Speaker 1: most people don't do, and they don't get down to
Speaker 1: the nitty gritty of something as simple as like I
Speaker 1: want to be able to see the sunset every night
Speaker 1: right from from my porch, and which then influences I
Speaker 1: would imagine going back cascading. You know, different ways of
Speaker 1: living and ways of saving and ways of investing to
Speaker 1: help you pull that off. I'm curious too, Like you,
Speaker 1: you mentioned bigger pockets in real estate, and I want
Speaker 1: to talk to you about real estate. But index funds
Speaker 1: or traditionally have been seen as like the gospel of
Speaker 1: financial independence. Why did you believe that real estate investing
Speaker 1: would be the best best path for you to achieve it?
Speaker 2: So I think this is really funny because I agree
Speaker 2: with the index fund approach. The reason I got into
Speaker 2: real estate investing is because when I was following mister
Speaker 2: money Mustache in twenty thirteen, I was like, how do
Speaker 2: I become more frugal? And I was like, well, something's
Speaker 2: missing here? What about housing? Like that's that's pretty big
Speaker 2: expense and I want to eliminate that. And something on
Speaker 2: bigger pockets. I think Brandon Turner wrote an article at
Speaker 2: some point or another, one of the podcast hosts at
Speaker 2: the time, and he wrote about house hacking and was like, Oh,
Speaker 2: if you buy a multi unit property and then you
Speaker 2: get a mortgage and then the other side pays that mortgage,
Speaker 2: you can live for free or pretty close to it,
Speaker 2: after reasonable approximations for your maintenance, vacancy, capex, utilities and
Speaker 2: all that kind of good stuff. And so that seemed
Speaker 2: like an obvious way to keep my expenses low. And
Speaker 2: a byproduct of doing that, means of doing that well,
Speaker 2: means that you have to spend the time to research
Speaker 2: how to become a good real estate investor, because you're
Speaker 2: buying a rental property, fundamentally, you're analyzing it for cash flow.
Speaker 2: And so I put in the several hundred hours needed
Speaker 2: to think about how to make a quality real estate
Speaker 2: investment purchase, moved in, fixed it up, and then I
Speaker 2: had the skill. I knew exactly what to do, and
Speaker 2: I could just repeat it several times. And so over
Speaker 2: ten years you become very good at real estate investing,
Speaker 2: and I, of course I'm the CEO. I become the
Speaker 2: CEO of Bigger Pockets during this time. So I had
Speaker 2: lots of repetitions with a lot of real estate investors.
Speaker 2: But I like to think that even if I never
Speaker 2: went down that path and I had just gone down
Speaker 2: some completely different career, if I had serial house hacked
Speaker 2: like that, I would have acquired the skill of being
Speaker 2: a competent landlord over that time period. Anyways, and there
Speaker 2: are if you're willing to pay that price, real advantages
Speaker 2: that you can get, especially in the early days of
Speaker 2: a real estate investment when you're using leverage, which amplifies
Speaker 2: returns and also risk. There are real returns that can
Speaker 2: amplify that beyond what you can see in the in
Speaker 2: a stock market portfolio. And then the other side of
Speaker 2: that is as the years go by and your mortgage
Speaker 2: cost stays. If we stay back, real estate at its
Speaker 2: simplest form is a inflation adjusted store of value. Your
Speaker 2: property is probably going to pace inflation over thirty years.
Speaker 2: It's going to be ups and downs across that time,
Speaker 2: but that's a reasonable bed. If you don't believe that,
Speaker 2: you shouldn't buy real estate. The other thing is is
Speaker 2: it's an inflation adjusted income stream. The rents minus the
Speaker 2: expenses is going to compute to some amount of cash
Speaker 2: flow each year, relatively tax advantage cash flow, and that
Speaker 2: should also keep pace with inflation over very long periods
Speaker 2: of time, and stretches like the last five years, that
Speaker 2: can compress a little bit as rents don't grow much
Speaker 2: and expenses do grow, but over long periods of time
Speaker 2: you can believe it. And so once the property's paid
Speaker 2: off or getting close to being paid off, you have
Speaker 2: more cash flow, but diminishing returns because you're not getting
Speaker 2: the amplification effect of the leverage to the same degree
Speaker 2: at the beginning of it. And that's very appealing towards
Speaker 2: the end of your financial journey because it makes the
Speaker 2: math very simple. You can almost treat it like a
Speaker 2: pension to some degree. If you're conservative with your assumptions,
Speaker 2: you know there would be some volatility, some capecks and
Speaker 2: those types of things, and adding that to your fire number.
Speaker 2: So those are the reasons why I got into real estate.
Speaker 2: But if I hadn't been for house hacking and bigger
Speaker 2: pockets and I had some other very demanding career, I
Speaker 2: may have just gone in with the index fund approach
Speaker 2: the whole time. So I see real estate as a
Speaker 2: tool that's very powerful for certain folks that want to
Speaker 2: use that, that were willing to put in that education
Speaker 2: and take that extra risk, and they can get different returns,
Speaker 2: maybe better in the early days, maybe different styles of
Speaker 2: cash flow that they'll feel more comfortable with at the
Speaker 2: end of it. But it's not better than stocks. Different
Speaker 2: it's just a different approach.
Speaker 1: And I think house hacking in particular is like the
Speaker 1: real estate investing strategy that kind of trumps everything else
Speaker 1: because you can lower your housing costs significantly. There's you're
Speaker 1: kind of when you're comparing investing in the S and P.
Speaker 1: Five hundred to investing in a single family home or
Speaker 1: a duplex. Yes, you're talking about, you know, the use
Speaker 1: of leverage to be able to enhance that investment in
Speaker 1: real estate. And then as the better you get as
Speaker 1: a real estate investry, might be able to find significant
Speaker 1: deals right and and you might be able to get
Speaker 1: better returns overall because of leverage and because of your
Speaker 1: knack for solid real estate investing. But there's just nothing
Speaker 1: that compares to the financial return of house hacking, and
Speaker 1: so few people I think are willing to engage it.
Speaker 1: It's one of the things. Did you feel like you
Speaker 1: giving something up to engage in that act? Were you like, man,
Speaker 1: I'm really sluming it here for for six months, for
Speaker 1: two years or whatever. Some people talk about house hacking
Speaker 1: and it's just it sounds brutal, I guess to the
Speaker 1: average person listening to this podcast, like I've got to
Speaker 1: do that in order to secure financial independence? No way.
Speaker 1: What did it feel like for you?
Speaker 2: If things work out in my life as I hope
Speaker 2: that they will, I will go my entire life never
Speaker 2: living alone. I will have slept in the same bedroom
Speaker 2: as my brother growing up. I will have had roommates
Speaker 2: throughout college. The day I stopped having a roommate was
Speaker 2: the day my wife moved in with me into my house.
Speaker 2: Hack and I hope to go first in old age. Right,
Speaker 2: That's that's the that's it. And and most people, I
Speaker 2: think have time where they live alone, and that's wonderful, right.
Speaker 2: I never had that, and I never missed it. I
Speaker 2: don't know what it was, what it would have been like.
Speaker 2: I never missed it. I don't want it in my life.
Speaker 2: And that was a cheat code for me because I
Speaker 2: had roommates the entire way through and I never had
Speaker 2: the fancies, fancy apartment or house that was all to
Speaker 2: myself in there. And that just is such an extraordinary
Speaker 2: advantage in accumulation of wealth and then and and keeping
Speaker 2: costs slow, using housing to as an accelerant on my
Speaker 2: financial journey. I mean, it's just it's like a cheat code.
Speaker 2: It keeps everything low. And and other people that were
Speaker 2: having trouble. One of the things you wanted to talk about,
Speaker 2: I think was the middle class trap where folks are stuck.
Speaker 2: You know, middle class family has a has a mortgage payment,
Speaker 2: they've got their childcare, food expenses, they're contributing a little
Speaker 2: bit to the four oh one k, or maybe even
Speaker 2: a lot to the four oh one K, but they
Speaker 2: have to make a choice at some point. They cannot
Speaker 2: go through this entire retirement stack, maxing the four oh
Speaker 2: one K, maxing the WROTH, maxing the HSA, and maybe
Speaker 2: putting away some for college and having additional liquidity at
Speaker 2: the end of that stack because they don't save enough.
Speaker 2: But if your house hack when you're you know, young,
Speaker 2: you go through that whole stack, because you can max
Speaker 2: out your four oh one K and have plenty of
Speaker 2: cash left over after that each year to reinvest in
Speaker 2: other opportunities in there that provide that flexibility because your
Speaker 2: core expensive housing is so low that whatever you were saving,
Speaker 2: whatever you would have been saving on top, like you know,
Speaker 2: fifteen to twenty percent without house hacking, is then multiplied
Speaker 2: by that drastic drop off in that core expense. And
Speaker 2: so that's the cheat code that I think it is,
Speaker 2: and it just bypasses this problem of access to liquidity
Speaker 2: for your rest of your life. If you did it
Speaker 2: for a period of three to seven to ten years.
Speaker 1: Yes, I think you're right. I think it's a kind
Speaker 1: of a sacrifice you potentially make if you see this
Speaker 1: as a sacrifice or just a willing to live differently
Speaker 1: than your peers in a way that then just gives
Speaker 1: you an insane amount of freedom for the rest of
Speaker 1: your life. And I think it's a worthy trade off.
Speaker 1: When you think about the difference between investing in real
Speaker 1: estate and investing in stocks, how big of a factor
Speaker 1: is control? Right, you have? It seems like certain a
Speaker 1: lot more a lot more control in many ways over
Speaker 1: your real estate portfolio than you do over what happens
Speaker 1: in the stock market. And and even like thinking of
Speaker 1: sweat equity right, the opportunity to improve a property or
Speaker 1: add an adu in the back to to make it,
Speaker 1: you know, cash flow faster. How big of how big
Speaker 1: of a factor's control, and how you think about real.
Speaker 2: Estate that that control. There's this kind of argument about
Speaker 2: is it active or passive in real estate? Right the
Speaker 2: best answer is semi passiver. It depends, of course, which
Speaker 2: frustrates everybody all the time. But but I think that
Speaker 2: in the early days of real estate investing, when you
Speaker 2: can swing a hammer or do that work, and that's
Speaker 2: your you know, instead of side hustling driving for uber,
Speaker 2: I'm painting cabinets, staining cabinets, or painting walls or fixing
Speaker 2: up a rental property. That's a much much higher leverage
Speaker 2: return on my time than I would get for many reasons,
Speaker 2: not just because I'm defraying the contractor costs, but also
Speaker 2: I'm learning these skills that then translate or leave me
Speaker 2: less helpless and related tasks for the rest of my life.
Speaker 2: So that's a very powerful, I think advantage in more
Speaker 2: ways than one will. I will say that the question
Speaker 2: around control, I don't want to overstate it because I
Speaker 2: know a lot of people and I'm in this situation
Speaker 2: with some of my properties that are kind of trapped
Speaker 2: in their rentals. And this problem is across all these
Speaker 2: different asset classes. Right, you have four hundred thousand dollars
Speaker 2: in your four oh one k at age thirty five,
Speaker 2: and you have fifty thousand dollars outside of it in liquidity.
Speaker 2: That's a problem that liquidity is not really there in
Speaker 2: your life if you're still working, because to access it
Speaker 2: you'd have to do something preposterous like realize the income
Speaker 2: on a rough conversion in your current high income tax bracket,
Speaker 2: and then you'd have to know and or pay a
Speaker 2: penalty if you wanted to withdraw it. So it's really
Speaker 2: hard to access that well. Real estate investors are in
Speaker 2: the same position. Right. You have a property that you
Speaker 2: bought for three hundred grand in Denver ten years ago,
Speaker 2: you refinanced it in twenty twenty and got a really
Speaker 2: good low interest rate loan on it. You can't sell
Speaker 2: that thing to somebody else. You can, but you're gonna
Speaker 2: You're gonna take a big haircut on it. And what
Speaker 2: it's a deep buyer's market today, and that property is
Speaker 2: worth more to you. It's worth more to me than
Speaker 2: it is to the buyer because of that low interest
Speaker 2: rate debt that I have that's not transferable with the property.
Speaker 2: So that's a real challenge too, because that equity exists
Speaker 2: on paper, but it's hard to realize without making a
Speaker 2: pretty big sacrifice. So I would say that there's only
Speaker 2: there's only pros and cons or different flavors of challenges.
Speaker 2: There's no real free lunch in the world of investing.
Speaker 2: You can't have your liquidity and your control and your
Speaker 2: you know, all these different options, there's only different flavors
Speaker 2: of it that you can access.
Speaker 1: Yeah, and so I guess when it comes to real
Speaker 1: estate in wanting to enjoy more of Let's say that
Speaker 1: property you bought for three hundred thousand dollars ten years
Speaker 1: ago is worth what eight hundred thousand dollars in you know,
Speaker 1: maybe more that it might be worth more than that, Like,
Speaker 1: how does one think about the how do a protest situation?
Speaker 1: Are you?
Speaker 2: Like?
Speaker 1: Do I buy? Am I in the buying more units
Speaker 1: phase of my real estate investing life? Am I in
Speaker 1: the paying off debt phase of my real estate investing life?
Speaker 1: Am I even thinking about taking the tax smack and
Speaker 1: selling some of those properties off so I can enjoy
Speaker 1: more of the fruits of my labors? Yeah? What is
Speaker 1: a real estate investor to do in that conundrum?
Speaker 2: Well, this is a great question, and this is an
Speaker 2: intellectual challenge that I'm trying to figure out for myself
Speaker 2: right now. And I actually have not gone on discussed
Speaker 2: this live yet because I haven't fully finished it. So
Speaker 2: take my draft year for what you will. But I
Speaker 2: think there's three ways, Like what do you do with
Speaker 2: the rental property in the context of your financial freedom
Speaker 2: number that's in this stuck position. So I think there's
Speaker 2: three a three pronged approach to do in this analysis.
Speaker 2: One is you take a conservative estimate of the after tax,
Speaker 2: after sales, transaction costs, after debt payoff, liquidation value of
Speaker 2: the property. Right. So let's say that's two hundred grand. Right,
Speaker 2: you have your you know, three hundred thousand dollars mortgage,
Speaker 2: six hundred thousand dollars property, you know, five hundred and
Speaker 2: fifty five hundred and sixty thousand dollars property, and sixty
Speaker 2: thousand dollars in transaction costs plus depreciation. Can recapture all
Speaker 2: that kind of stuff that leaves you with a two
Speaker 2: hundred thousand dollars that you could theoretically within a few
Speaker 2: months sell and reposition into a traditional stock bond portfolio
Speaker 2: withdraw at four percent from right. So that's that's one
Speaker 2: way surely that should be factored into somebody's position. The
Speaker 2: second is at the end state, like if you just
Speaker 2: wiped out that mortgage and said twenty years have gone by,
Speaker 2: my income stream remains flat relative to inflation, right, Because
Speaker 2: that's all real estate investing is is, it's an inflation
Speaker 2: adjusted store of value and an inflation adjusted income stream
Speaker 2: that it would be x amount. Let's call it forty
Speaker 2: forty thousand dollars a year. I can add that as
Speaker 2: a pension to my twenty year number, and then the
Speaker 2: hardest part for me is this bridge, because there's some
Speaker 2: cash flow now, and there surely should be a slowly
Speaker 2: increasing stream of cash flow as your mortgage stays flatminally
Speaker 2: and the rents grow with inflations of the other costs.
Speaker 2: And that's the part that I'm stuck on of how
Speaker 2: to map that out. Honestly, in the meantime, I think
Speaker 2: a lot of investors are stuck that way, and so
Speaker 2: you can almost think of it as like, hey, I
Speaker 2: got a pension coming in twenty years, or I got
Speaker 2: a liquidation value today, and this bridge in the middle
Speaker 2: is something that I'm struggling with on how to map out. Intellectually,
Speaker 2: I kind of have the curve you can if you
Speaker 2: can follow my thinking here, but I haven't actually fully
Speaker 2: mapped that out. That's a project for later in the
Speaker 2: year to put this into some kind of spreadsheet or
Speaker 2: excel to help people with this kind of decision making.
Speaker 2: But that's where I'm map from a framework perspective for
Speaker 2: the properties, and I think it's it's a struggle for
Speaker 2: people to come to terms with that because they were
Speaker 2: hoping for maybe more more, more access to that rental
Speaker 2: property liquidity earlier on. So and again there's only trade
Speaker 2: offs with this. Right in the fire community. We also
Speaker 2: have a lot of people who have one hundred percent
Speaker 2: stock portfolios and think they're about to retire, and that's
Speaker 2: not what withdrawal research says. Right with all research says
Speaker 2: you have to have a diversified portfolio with bonds or
Speaker 2: uncorrelated asset and yet in order to turn a pile
Speaker 2: of money that his in equities into a reliable income
Speaker 2: stream that can be harvested for a long duration. So
Speaker 2: no free lunch. But that's that's my intellectual framework for
Speaker 2: the question you're asking.
Speaker 1: Yeah, alread, I got more I want to get to
Speaker 1: with with you, Scott, including I want to talk about
Speaker 1: why you never asked for a raise for your entire
Speaker 1: career working at bigger pockets. We'll get to that and
Speaker 1: more right after this. Yeah, I'm talking with Scott Trench.
Speaker 1: We're talking about avoiding the middle class trap. And I'm curious, Scott,
Speaker 1: like when you're heavy into the fire movement or are
Speaker 1: just really thinking long and harbor about achieving financial independence.
Speaker 1: So often we're talking about locking up money for long
Speaker 1: periods of time, right, and not being able to without
Speaker 1: the trade offs you mentioned of a big of a
Speaker 1: tax hit or a penalty being able to or really
Speaker 1: estate transaction costs to be able to get into some
Speaker 1: of that money. Let's say we wanted to take an
Speaker 1: extended break from away from work for a year or
Speaker 1: something like that. It feels impossible because the trade off
Speaker 1: of accessing that cash is too difficult, it's too costly.
Speaker 1: Do you do you think too many people are investing
Speaker 1: too heavily in their for their far off future and
Speaker 1: not enough for current flexibility.
Speaker 2: Yeah, I think the framework i'd approach responding you know,
Speaker 2: I'll respond to your question with another framework, which is
Speaker 2: optionality versus optimality. Right. So, there's an optimal approach to
Speaker 2: financial independence for a totally passive investor, and it looks
Speaker 2: something like this. You invest during your working years into
Speaker 2: pre tax retirement accounts like a traditional four oh one K,
Speaker 2: and that keeps your tax bill low. You're deferring this
Speaker 2: this income in high in high income tax years, you
Speaker 2: may need max out your HSA. You take your match,
Speaker 2: go as far as you can in that four oh
Speaker 2: one k, and then fifteen twenty years go by and
Speaker 2: you achieve your you hate your number, and you stop
Speaker 2: working entirely and your income drops to zero. And now
Speaker 2: there's a lot of really good options. If for someone
Speaker 2: who's spending forty eighty or even up to one hundred
Speaker 2: thousand dollars a year to get the money out of
Speaker 2: the four h one k tax efficiently, you can do
Speaker 2: a roth conversion ladder. Right, there's a thirty two two
Speaker 2: hundred standard deduction for married filing jointly couples, so you
Speaker 2: can just convert that every year at zero percent tax bracket. Right.
Speaker 2: Then there's another ten percent tax bracket and a twelve
Speaker 2: percent tax bracket. Then we get to the twenty twenty
Speaker 2: two percent tax bracket. So using that, use it, you
Speaker 2: can use so many people will argue you should go
Speaker 2: up to the top of the twelve percent tax bracket
Speaker 2: to do these roth conversions. You'll pay very minimal tax
Speaker 2: throughout your life, and that's an optimal approach if you
Speaker 2: know for fifteen to twenty years that you're gonna work
Speaker 2: you're gonna grind it out, you're gonna stop, and you're
Speaker 2: gonna be able to manage a very precise level of
Speaker 2: spending in your early retirement and move money through this
Speaker 2: conversion ladder. Or you can also use a tool called
Speaker 2: a seventy two T substantially equal periodic payments to harvest
Speaker 2: the money from a four oh one K. It's still
Speaker 2: income taxes ordinary income, but it's not subject to penalty
Speaker 2: for early withdrawals, and that's an optimal approach. You will
Speaker 2: likely pay less in lifetime taxes doing that approach than
Speaker 2: most other alternatives. The problem that I come back to
Speaker 2: is that life is not a smooth curve. So across
Speaker 2: thousands of these repetitions, with talking with bigger pockets, money listeners,
Speaker 2: real estate investors, people in the fire community, in forums
Speaker 2: and all this kind of stuff, you realize what's the
Speaker 2: unique outlier in the financial independence journey is the person
Speaker 2: who worked a job, put their money into the four
Speaker 2: oh one K and lives off the four percent rule
Speaker 2: of nothing else. I made a big stink about this
Speaker 2: a while back, and I was like, this person doesn't exist,
Speaker 2: their unicorn. And finally I got to meet a few
Speaker 2: people who reasonably close approximate that situation, but they're outliers.
Speaker 2: This almost never happens. It's so rare. Less than one percent,
Speaker 2: maybe less than one in one in five hundred people
Speaker 2: you meet in the financial independence community will meet this
Speaker 2: definition precisely. Almost everybody else has some kind of ace
Speaker 2: in the hole. They've got their rental property, they've got there,
Speaker 2: a small business, their wife works, wife FI. It's one
Speaker 2: of my favorites. It is. There's there's a there. They're military,
Speaker 2: so they have benefits covered for various things, or their
Speaker 2: National Guard, very common. Or they've got some weirdo tail
Speaker 2: situation which is unique to them but very common across
Speaker 2: an aggregation of people. You'll talk to, right, you talk
Speaker 2: to one hundred people, thirty of them are going to
Speaker 2: have this kind of weirdo tail wind that they do,
Speaker 2: like a horse farm where they trade horses, right. Or
Speaker 2: you know this a book that they've written, or a
Speaker 2: musical property. You know, it's just something weird that they
Speaker 2: did earlier in their life or that they've come into
Speaker 2: that is unique to their situation, but common across large samples.
Speaker 2: As a as a variable here or a pension comes
Speaker 2: into play and that's been the problem for me across
Speaker 2: this is if that's the reality for a lot of people,
Speaker 2: and income jumps over time, right, it's not a linear curve,
Speaker 2: it jumps. If you follow this plan of maximizing your
Speaker 2: four oh one K and putting all your money into
Speaker 2: deferred accounts, you're locked into that plan because all of
Speaker 2: your liquidity is going to be in your home equity
Speaker 2: or your four o one k, right, one hundred and
Speaker 2: fifty thousand dollars a year household income family who spends
Speaker 2: eighty ninety thousand dollars a year very reasonably cannot max
Speaker 2: out two four to oh one ks and their HSA
Speaker 2: and their wrath and save for college and build some liquidity.
Speaker 2: And I don't think the journey to financial independence is
Speaker 2: very fun or provides a lot of options. If you
Speaker 2: follow this plan precisely, you may optimally get to the
Speaker 2: endpoint a year sooner, six months sooner, may be less,
Speaker 2: but you're foregoing the optionality of the after time acts liquidity.
Speaker 2: One spouse can't stay home with the kids for a
Speaker 2: few years when they're young. One spouse can't start a
Speaker 2: business and try that out and have a runway for
Speaker 2: two or three years. Those can be very powerful investments.
Speaker 2: On one, you can't buy a rental property and live
Speaker 2: and flip it in the same way if you don't
Speaker 2: have a lot of access to liquidity, So that optimal
Speaker 2: approach actually compresses the option set and I think is
Speaker 2: less optimal. It ends up backfiring on you across the
Speaker 2: reality of the messy journey of.
Speaker 1: Life because it runs up against Yeah, the real life desires,
Speaker 1: hopes and dreams that people have, which is to take
Speaker 1: a flyer on a business that they want to get started,
Speaker 1: to get off the ground, which is to stay home
Speaker 1: with the kids for at least a couple of years
Speaker 1: while they're while they're young. And hey, maybe it also,
Speaker 1: you know, saves a bunch of money on childcare costs,
Speaker 1: which are through the roof right now, I think, and
Speaker 1: I think you're spot on if you yes, if we were,
Speaker 1: if our lives were spreadsheets right then we could we
Speaker 1: could probably pull that off. But most of our lives
Speaker 1: don't act accordingly, and I'm glad they don't, because boy,
Speaker 1: that would make life really crimean boring. I'm curious. I
Speaker 1: just mentioned, like childcare costs, how expensive they are for
Speaker 1: the average person. The biggest expenses are housing, transportation of food.
Speaker 1: If you got young kids, childcare costs are probably up
Speaker 1: there with them, though each of those has become significantly
Speaker 1: more expensive since COVID nineteen, And you know, twenty twenty.
Speaker 1: Does this change in your opinion the trajectory or the
Speaker 1: timeline for a median earner to be able to achieve
Speaker 1: financial independence. You feel like it's maybe harder in twenty
Speaker 1: twenty six than it was for people starting in twenty fifteen.
Speaker 2: I don't know the answer to that, honestly, I think
Speaker 2: that the right answer may be somewhere along the lines
Speaker 2: of it's more unfair and unfair in the sense that
Speaker 2: the person who does live with roommates in twenty twenty
Speaker 2: six and or finds a way to house hack after
Speaker 2: a few years is going to see a much more
Speaker 2: a much more divergent outcome over the next ten to
Speaker 2: twenty years than they did ten, fifteen, twenty years ago,
Speaker 2: Because if you can lock down that housing expensive, find
Speaker 2: the ways to do it cheaply by living with roommates
Speaker 2: or house hacking or live and flipping, then you're going
Speaker 2: to take that out as a variable. All of that
Speaker 2: can go, all of those savings can go towards the
Speaker 2: creation of long term wealth in whatever vehicle you choose
Speaker 2: to apply them to, whether that's more real estate, whether
Speaker 2: that's stocks, whether that's some sort of business pursuit. So
Speaker 2: I think it's more important than ever to focus on
Speaker 2: that leverage point and say how do I keep my
Speaker 2: costs low? And the answer to that is sacrifice. You
Speaker 2: live with roommates, buy a property that's not nearly as nice,
Speaker 2: and make those changes. And if you don't, that's fine,
Speaker 2: but you're going to find it very difficult to float on.
Speaker 2: If you're going to find it incrementally more difficult here
Speaker 2: in twenty twenty six than in twenty fourteen, for example,
Speaker 2: to float your family's expenses, then maybe that family that
Speaker 2: if you're a media income earner. And I think that's
Speaker 2: the challenge that people will face, and the reward is
Speaker 2: exponentially greater for solving it, and the penalty for not
Speaker 2: solving it and not making that sacrifice is a really
Speaker 2: challenging environment of cash flowing your situation and really hard
Speaker 2: trade offs about whether you know, buy the extra groceries
Speaker 2: today or whether you say for retirement.
Speaker 1: Yeah, yeah, I think of all the things my mom
Speaker 1: told me, I love you was at the top, which
Speaker 1: is good, but then life's not always fair. It was
Speaker 1: definitely one of the things I heard a ton from
Speaker 1: my mom, And I think you're right, Like, what you're
Speaker 1: pointing to is the experience you had buying a property
Speaker 1: and house hacking and the accelerator that it was for
Speaker 1: you in terms of your trajectory towards financial independence. It's
Speaker 1: still a meaningful accelerator, but instead of going like zero
Speaker 1: to sixty in one point five seconds, you're going to
Speaker 1: zero sixty in like three point five seconds or something
Speaker 1: like that. Would you just say like it's muted in
Speaker 1: terms of its impact. It's not quite as significant maybe
Speaker 1: as it was in years past, but maybe that makes
Speaker 1: it even more significant and necessary.
Speaker 2: Well, I think it's all relative to the alternative, right,
Speaker 2: So you know, was it easier to find a property
Speaker 2: that covered most or all of the mortgage payment in
Speaker 2: twenty fourteen than now? Of course it was easier in
Speaker 2: twenty fourteen. However, now the option set is renting, buying
Speaker 2: the place as a primary resident, buying a place as
Speaker 2: a primary residence, or house hacking it. And so what's
Speaker 2: the relative advantage between those three choices. I argue that
Speaker 2: the relative advantage of renting over renting is lower, right,
Speaker 2: because renting is a slightly cheaper relative to buying today.
Speaker 2: But the relative advantage of house hacking over buying a
Speaker 2: regular house is as great or even greater than ever.
Speaker 2: And so those are the things that change, and I
Speaker 2: think that's how you have to make the decision making.
Speaker 2: Is what's going to give me the greatest relative advantage
Speaker 2: over my counterfactual.
Speaker 1: No, that's good. I like that clarification. Let's talk about
Speaker 1: your work life for a second, Scott. You mentioned early on, hey,
Speaker 1: you were the CEO of Bigger Pockets. You are no longer,
Speaker 1: and you're still you're still a young man, Scott, So
Speaker 1: you're not like a CEO retiring at age seventy they're
Speaker 1: finally kicking a out. You're in your mid thirties. And
Speaker 1: so I'm curious to hear your why behind that decision,
Speaker 1: Like is it the ideal day exercise that like got
Speaker 1: through to you and You're like, I'm not living my
Speaker 1: ideal days right now, I'm working too much. What was it?
Speaker 2: Yeah, So there were kind of three reasons behind that
Speaker 2: decision to step down. One was the Bigger Pockets had
Speaker 2: been in an obsession for me for a very long
Speaker 2: period of time. This was not this was more than
Speaker 2: an identity, you know, a CEO of Bigger Pockets. It
Speaker 2: was an all consuming passion project. I love what Bigger
Speaker 2: Pockets does and what we stand for. But also it
Speaker 2: was it was really consuming a huge portion of my life,
Speaker 2: not just in the much more than forty hour a
Speaker 2: week work weeks, but also in the evenings and at
Speaker 2: night in bed and those kinds of things, you know,
Speaker 2: thinking about the decisions of the day, what's coming up
Speaker 2: the next day. So that's one, and the second is
Speaker 2: my skill set is around building community, engaging with people,
Speaker 2: thinking through these intellectual childlenges that that hit real estate investors.
Speaker 2: But the next phase of Bigger Pockets growth needed, I
Speaker 2: think more more of a technology focus and building out
Speaker 2: a great website and technology experience. And that was something
Speaker 2: that I thought somebody else could come in and do
Speaker 2: a better job of than me. And then the third
Speaker 2: thing is my real passion this whole time I thought
Speaker 2: that I don't love real estate has been financial independence,
Speaker 2: Like this is what I love talking about and thinking through,
Speaker 2: and so Bigger Pockets money had been. I've been doing
Speaker 2: it for almost ten years, but it always as a
Speaker 2: side project, so I'd show up, you know, two days
Speaker 2: a week kind of record, go back to CEO job.
Speaker 2: And we never really figured out, like, hey, where does
Speaker 2: this fit into like the real estate investing world. I
Speaker 2: just loved it. I loved I love bigger pockets money,
Speaker 2: and and the goal of real estate investing for me
Speaker 2: was fire. So it's like financial dependence, retire early, So
Speaker 2: why not focus on that and really kind of go
Speaker 2: explore all the areas that I've been missing around tax
Speaker 2: optimization and what are those those challenges and so that's been,
Speaker 2: that's been. Those are the three reasons for the transition,
Speaker 2: and it's been a big life change. The first last year.
Speaker 2: My health has improved immeasurably. I would go through cycles
Speaker 2: of gaining twenty pounds with one kind of stress and
Speaker 2: then losing it, not in a healthy way because I
Speaker 2: was getting fit, but because of the various stresses of
Speaker 2: the job here. And now I've you know, finally gotten
Speaker 2: into a very sustainable routine with my health, like getting outside,
Speaker 2: I don't bring home, you know, the challenges of the
Speaker 2: of high stakes decisions every day to the to the
Speaker 2: you know, the dinner table or beyond.
Speaker 1: So you said, you said, it's been wonderful. You're a
Speaker 1: bigger Buckets for about a decade or as you still
Speaker 1: are in but you're not in the same capacity. Is
Speaker 1: it true that you never asked for a raise or
Speaker 1: that sounds like career self harm? You never asked for
Speaker 1: a raise. I'm so curious to hear what was your
Speaker 1: strategy about getting about compensation for your roles there?
Speaker 2: So, yeah, that I started at Bigger Pockets earning about
Speaker 2: fifty thousand dollars a year in twenty fourteen, and at
Speaker 2: the time I was actually a decrease from what I
Speaker 2: would have been making if I had stayed at Dish Network.
Speaker 2: But I also had the opportunity to, at least in theory,
Speaker 2: to sell advertising for the podcast and for other parts
Speaker 2: of the platform. And so that was my opportunity to
Speaker 2: ramp my income. And over the years, I really only
Speaker 2: looked for more opportunities to sell more. I always you know,
Speaker 2: I didn't say no to a promotion, but I just
Speaker 2: did my very best for Josh and said I'm not
Speaker 2: I'm not just trying to grow Bigger Pockets, you know,
Speaker 2: for for that sake, I'm also trying to do right
Speaker 2: by Josh as the owner and help him make better
Speaker 2: financial decisions, and that earned I think trust with Josh
Speaker 2: the founder over time, to the point where when he
Speaker 2: had to step he promoted me from director to VP
Speaker 2: at BP. I loved being VP at BP. I just
Speaker 2: thought that that that rhyming title soundate so cool. And
Speaker 2: then and then to president in twenty twenty eighteen when
Speaker 2: he decided to sell the business, and so that was
Speaker 2: my career dirojector under Josh, and neither of those came
Speaker 2: with requests for raises. I asked for maybe more commissions.
Speaker 2: I asked for more equit in the business because I
Speaker 2: believed in what we were doing and solve the growth potential.
Speaker 2: But I wanted those more than my base. And the
Speaker 2: reason for that was simple is I already had enough
Speaker 2: base to cover my lifestyle expenses. I was saving plenty
Speaker 2: on that. More base was more taxable income, which is great.
Speaker 2: I wasn't gonna say no to it, but if I could,
Speaker 2: if I made it very clear that in any situation
Speaker 2: where it was possible, I'd rather have something tied to
Speaker 2: a percentage, something that could scale something that was reflective
Speaker 2: of my very best efforts to compensate me. And so
Speaker 2: I got raises, so significant raises, and got my salary
Speaker 2: well into the six figures. But I never asked for
Speaker 2: that as the primary means of compensation increase.
Speaker 1: And so then your work, how Bigger Pockets did as
Speaker 1: a company, well, that was that was directly tied then
Speaker 1: to your compensation. Right, So if the company continues to
Speaker 1: grow and succeed and generate profits, like your bottom line
Speaker 1: is better by having more equity in the business instead
Speaker 1: of just have a bigger paycheck every two weeks.
Speaker 2: Yes, I think, And I keep getting questions about from
Speaker 2: folks about whether they should do the same in their situations.
Speaker 2: And it's really hard to answer that because the right
Speaker 2: answer should I have asked for more of a base
Speaker 2: or should I have asked for more equity? Well, I
Speaker 2: didn't know how to value Bigger Pockets at twenty four,
Speaker 2: twenty five years old like that, that wasn't that, you know,
Speaker 2: twenty six whatever, whatever, you know those three years I
Speaker 2: didn't know how to value the company. I didn't I
Speaker 2: wasn't a private equity analyst and couldn't tell you what
Speaker 2: it was worth. Today or what would be worth the
Speaker 2: next year. I just thought it was special. I thought
Speaker 2: I thought we had something really good going on there,
Speaker 2: and I wanted to be a part of it in
Speaker 2: as big a way as possible. And so, how do
Speaker 2: you then give that advice to like a twenty three
Speaker 2: year old kid, or twenty four year old or even
Speaker 2: or someone who's you've got a family and kids is
Speaker 2: making that same decision at their company. What the right
Speaker 2: approach is in that category, I don't know, but for
Speaker 2: me it was obvious it was instinctive to do this,
Speaker 2: and I believe that you should apply that approach if
Speaker 2: your expenses are much lower than your base galary and
Speaker 2: there's a disproportionate payoff for lowering your base relative to
Speaker 2: the extra bonus sales or equity potential. And I believe
Speaker 2: that was overwhelmingly true in my situation across the years
Speaker 2: at Bigger Pockets.
Speaker 1: All Right, I got more I want to get to
Speaker 1: with you, Scott, including let's talk about primary home purchase
Speaker 1: and why you think that should never be considered an investment.
Speaker 1: We'll get to that and a few other questions with
Speaker 1: you right after this. We're back still talking with Scott
Speaker 1: Trench and I want to talk about the middle class
Speaker 1: trap and how that relates to taxes. Scott, I know
Speaker 1: that's something you really you wanted to discuss and bring
Speaker 1: up on this episode, so fill us in.
Speaker 2: Yeah. So, remember we talked about our middle class family
Speaker 2: who cannot go through the entire retirement account stack and
Speaker 2: a mass liquidity after tax right, they can't go. They
Speaker 2: can't mass out both for one k is the HSA
Speaker 2: their equivalent and some five twenty nine plans and still
Speaker 2: have enough leftover to actually make some kind of meaningful
Speaker 2: decision in their thirties. So many people are stuck in
Speaker 2: this situation, which I call the middle class trap, and
Speaker 2: get made fun of because it's not really a middle
Speaker 2: class problem. It's really a problem for people who listen
Speaker 2: to personal finance podcasts for decades and are strong savers
Speaker 2: and are likely to retire very wealthy. But anyways, I digress.
Speaker 2: The problem with this is if you want to retire early,
Speaker 2: let's say fifties, you know, early fifties, maybe even late
Speaker 2: forties or even earlier, the optimal allocation asset location dynamic
Speaker 2: is really hard to predict and almost certainly going to
Speaker 2: be a balance you know, imagine your wealth in thirds, right,
Speaker 2: You have your a third in your wroth, a third
Speaker 2: in your four oh one k your traditional four to
Speaker 2: one k R pre tax accounts, and a third after
Speaker 2: tax in your brokerage account. And the reason you don't
Speaker 2: want it all in the pre tax right, or the
Speaker 2: big third, the really big third in your pre tax accounts,
Speaker 2: is because that income that has to come out as
Speaker 2: ordinary income one day, and that's very tax inefficient. You
Speaker 2: can do that up to a certain extent of the
Speaker 2: zero percent tax bracket, like we talked about with the
Speaker 2: thirty two two hundred dollars married filing jointly deduction here
Speaker 2: in twenty twenty six. But what's special about after tax
Speaker 2: growth is that it can be harvested at a zero
Speaker 2: percent long term capital gains tax bracket, which is up
Speaker 2: to like ninety eight five hundred dollars for a married
Speaker 2: filing jointly couple here in twenty twenty six, so that
Speaker 2: should adjust with inflation over time. That's a really powerful
Speaker 2: way to harvest this after tax wealth. And you're not
Speaker 2: really taking advantage of that zero percent long term capital
Speaker 2: gains tax bracket if all your wealth is in the
Speaker 2: four h one k.
Speaker 1: So do you think most people get Most people don't
Speaker 1: realize that the zero percent capital gains tax bracket exists,
Speaker 1: like that there is a way to harvest gains from
Speaker 1: your tax bile broker's account and not pay tax. To
Speaker 1: most people, are they just completely uaware?
Speaker 2: I think there's a lot of unawareness. I think people
Speaker 2: don't follow this then through to the conclusion. It's like,
Speaker 2: I should be maxing out my four oh one K,
Speaker 2: and that's great, you're probably gonna do that. But if
Speaker 2: you are a serious student of personal finance and listen
Speaker 2: to this podcast and read a dozen books, and you're
Speaker 2: saving thirty forty fifty thousand dollars a year towards retirement,
Speaker 2: which is not uncommon for the demographic that listens to
Speaker 2: a podcast like this. Yeah, right, then you're going to
Speaker 2: overfund retirement. You're gonna have so much more at the
Speaker 2: end of your journey than you really need. Or that's
Speaker 2: a real risk, there's a real problem. Like Ronald Reid,
Speaker 2: the janitor who died with eight million bucks. Right, that's
Speaker 2: not the goal. We're engineering for a different outcome here.
Speaker 2: And if you instead don't max out the four oh
Speaker 2: one K for a period of time. I think it's
Speaker 2: like two to five years, depending on your situation, you're
Speaker 2: going to pay, so you're gonna be a little bit suboptimal.
Speaker 2: But the opportunity cost is not nearly as large as
Speaker 2: you likely thought it was because you're only going to
Speaker 2: pay taxes. Now you're almost certainly you have a very
Speaker 2: high probability of not paying taxes on those gains at
Speaker 2: the end state. Now there's whole bunch of trade on. Yeah. Right,
Speaker 2: Like the four one K plans have higher fee investment
Speaker 2: products which can be a drag on their returns relative
Speaker 2: to your after tax brokerage, and the after tax brokerage
Speaker 2: if it's invested in next fund is going to have
Speaker 2: one point five or seven percent dividend yield, which will
Speaker 2: have a small tax drag. So you can beat me
Speaker 2: up on all these assumptions, but the end of the day,
Speaker 2: if you do a really rigorous analysis, the opportunity cost
Speaker 2: is not nearly as large as most people think it is.
Speaker 2: If they forego that deferral for a small number of
Speaker 2: years exit. My argument is for this family is max
Speaker 2: out your four one K for thirty five out of
Speaker 2: forty years, but the first five years or the next
Speaker 2: five years. Don't max it and focus on the after
Speaker 2: tax liquidity position because that will give you options along
Speaker 2: that entire life continuum, and you're only sacrificing a few
Speaker 2: years of that savings in the four oh one K
Speaker 2: And the earlier you do it, the most likely the
Speaker 2: lower relative income tax bracket you're going to be in,
Speaker 2: and the lower the opportunity cost. So that's the argument
Speaker 2: I've been working on in trying to defend rigorously in
Speaker 2: a very complex model, and it doesn't always hold true.
Speaker 2: Everyone's situation is different, but it's surprised it seemings to
Speaker 2: strike a chord and a lot of people who are
Speaker 2: stuck on this problem.
Speaker 1: Well, especially if you're retiring late fifties, you have potentially
Speaker 1: many years of very little income to be able to
Speaker 1: do a lot of tax maneuvering to at least pay
Speaker 1: a low overall tax rate, if not be able to
Speaker 1: completely remove your tax burden. Yeah, I feel like the
Speaker 1: average American, Well, when you look at the statistics, the
Speaker 1: average American has most of their wealth in their primary home.
Speaker 2: YEP.
Speaker 1: I don't think of that as a good thing. I
Speaker 1: think it's a forced method of savings, right, and so
Speaker 1: for some people who aren't going to invest in meaningfully
Speaker 1: in tax advantage retirement accounts in their taxable brokerage account,
Speaker 1: it's at least something, right, But what is your How
Speaker 1: would you want help somebody or want someone to think
Speaker 1: about a primary home purchase and how should they conceive
Speaker 1: of it if it's not an investment.
Speaker 2: Well, I think there's a what the concept of the
Speaker 2: fire portfolio and then your net worth? And so I
Speaker 2: when I create a personal financial statement, for example, I
Speaker 2: will exclude my primary residence from my fire my financial portfolio,
Speaker 2: I'll exclude five twenty nine plans, which are beneficiary accounts,
Speaker 2: don't advise funds. Cars, those are personal properties should be tracked,
Speaker 2: but they're not part of my financial portfolio. And so
Speaker 2: that's how I think about it is it's just it's
Speaker 2: just not part of your It's an expense. Housing is
Speaker 2: an expense, and it's there. You should track the wealth,
Speaker 2: you should know how it contributes to your net worth,
Speaker 2: but it is not something that will contribute to your
Speaker 2: financial independence or flexibility, except in the sense that once
Speaker 2: it is paid off or with a low interest rate mortgage,
Speaker 2: it pegs your housing expense at a lower rate, and
Speaker 2: you'll need therefore less of a financial portfolio to cover that.
Speaker 2: You can also include it in your financial portfolio if
Speaker 2: you intend to sell it. So if you're living in
Speaker 2: a property and you intend to sell it the next
Speaker 2: three or four years and then put that into put
Speaker 2: the proceeds into a financial portfolio, then I'd include it
Speaker 2: as an inflation adjusted store of value that equity. So
Speaker 2: that's how I think about it. I think again, it
Speaker 2: comes down to what's the lifestyle I want to engineer,
Speaker 2: and what's the cost of it. And I would encourage
Speaker 2: everybody to buy us towards if you can. The earlier
Speaker 2: you do it, the better. House hacking or live and flipping,
Speaker 2: where you move into a property and fix it up
Speaker 2: is the cheek code. You just do that a few
Speaker 2: times and you have very high probability of amassing hundreds
Speaker 2: of thousands of dollars that can make every financial decision
Speaker 2: for the rest of your life that much easier.
Speaker 1: I feel like I'm hearing from more people who are
Speaker 1: buying rental properties while renting. How do you think of that?
Speaker 1: Is that is that weird? Or do you think that's
Speaker 1: that's like a wonderful thing for at least some people
Speaker 1: to consider, or is it like, no, don't rent house
Speaker 1: hack homie.
Speaker 2: I would say, I would say that if you are
Speaker 2: very wealthy and have specific goals or very high income,
Speaker 2: then yeah. I've certainly come across people who rent in Manhattan,
Speaker 2: for example, and buy rentals out of state somewhere else.
Speaker 2: So I think that's there's a specific thesis to that,
Speaker 2: and I think it can work out great. It's just
Speaker 2: going to be works. This is a business that you're building,
Speaker 2: and the idea is that you're going to somehow outperform
Speaker 2: the alternative, which is your passively managed index funds over
Speaker 2: some period of time. And I think you can do
Speaker 2: it if you use leverage and build good systems. But
Speaker 2: you got to be careful because you know, I talked
Speaker 2: to this guy who made six hundred thousand dollars in
Speaker 2: Manhattan in a bad year, and his plan was to
Speaker 2: buy Class C rentals in Cleveland. And that's great, you
Speaker 2: know you can do that, but this guy's going to
Speaker 2: have to buy a lot like one hundred and fifty
Speaker 2: Class C rentals in Cleveland while distracted from whatever he does,
Speaker 2: that's so important that it generates six hundred thousand dollars
Speaker 2: a year at income, and that probably number is probably
Speaker 2: only going up if he's actually good at it. That's
Speaker 2: that's a real sacrifice there that I think of not
Speaker 2: enough people actually think through, and I would buy as
Speaker 2: people towards thinking about real estate investments in bigger lumps. Right,
Speaker 2: maybe I'm buying one hundred fift unit portfolio in that situation,
Speaker 2: or or fifteen unit portfolios, ten of them over time.
Speaker 2: But transacting on rinky dink properties relative to your income
Speaker 2: or projected net worth, I think as a trap that
Speaker 2: a lot of real estate investors fall into, and they should.
Speaker 2: They should think about not just where they're at or
Speaker 2: where they're going to be in five ten years with
Speaker 2: their career trajectories. I think a lot of people then
Speaker 2: buy rentals that are pain in the rear and maybe
Speaker 2: do fine, but are insignificant relative to the position that
Speaker 2: they're otherwise building.
Speaker 1: I think that's a really good point, and I want
Speaker 1: to drill down that real quick. So for the average
Speaker 1: person like who's making solid income and they're like putting
Speaker 1: money in the four one K, the roth iray, the
Speaker 1: h I can max all those out and I can
Speaker 1: build wealth that way. But I'm working fifty hours a
Speaker 1: week and I've got a family and so man, the
Speaker 1: rental real estate. I love that Scott did so well
Speaker 1: with it. I love hearing those stories, but my goodness,
Speaker 1: it feels like it would be a distraction in net
Speaker 1: worth building or maybe I just wouldn't be able to
Speaker 1: give it the time that it needs. One. From a
Speaker 1: research perspective, when you talk about before you bought your
Speaker 1: first property, Scott, before I bought my first property, I
Speaker 1: mean we're talking about dozens and dozens, if not one
Speaker 1: hundred plus hours of research and figuring it out and
Speaker 1: learning the ropes. It's it's like learning another language right
Speaker 1: before going to live in France for a year. You're
Speaker 1: spending two years on dual Lingo ahead of time. So
Speaker 1: from that aspect, do you think that rental real estate
Speaker 1: is like? How how should somebody know whether or not
Speaker 1: it makes sense for them given their lifestyle?
Speaker 2: Well, you got to be able to pay that. You
Speaker 2: just you just articulated it perfectly, right, we have bigger pockets.
Speaker 2: We literally map that out as the several hundred hour
Speaker 2: six months to two years emerging that real estate investors
Speaker 2: would put in prior to buying their first property, and
Speaker 2: that's the price. If you don't put that in upfront,
Speaker 2: you pay it on the back end when you have
Speaker 2: a bunch of problems you have to deal with. And
Speaker 2: you could still pay it on the back end, even
Speaker 2: if you put in that research, by the way, on
Speaker 2: the front end, but you pay that. You pay that
Speaker 2: price one way or the other, and that I think that.
Speaker 2: I actually got called out by this by a listener
Speaker 2: recently because I said doctors shouldn't pay that price, right,
Speaker 2: because that's silly. They're going to be distracted from their
Speaker 2: doctor profession. But this guy wrote me a very lengthy
Speaker 2: and very passionate and very correct rebuttaled that, saying no, no,
Speaker 2: the doctor's one. That they should pay it during residency
Speaker 2: when their income's fairly low and they'll be able to
Speaker 2: reap the rewards on real estate returns across a huge
Speaker 2: income earning career. That's very consistent. You can borrow against
Speaker 2: it all that. So I'll eat my words on that
Speaker 2: particular one. But I would say other high earning professions
Speaker 2: that are variable, for example, where the full time attention
Speaker 2: focused on that career, it could be very unattractive to
Speaker 2: put in that time investment that distracts them from the
Speaker 2: sixty first or sixty eighth hour of work that they
Speaker 2: could be doing. That translates directly to income potential. So
Speaker 2: that's very challenging. But for a middle class family, a
Speaker 2: middle to upper middle class family, that's where real estate
Speaker 2: I think has the sweet spot for a lot of folks,
Speaker 2: because that's where your side hustle now is actually something
Speaker 2: that translates directly to hourly savings for all the work
Speaker 2: you put into the property in the immediate future, and
Speaker 2: scales with you as you begin to build that portfolio
Speaker 2: over time. So I think it's hard as the years
Speaker 2: go by and your career progression moves forward, I think
Speaker 2: it gets harder and harder to justify the entry point
Speaker 2: into real estate investing for a lot of people, but
Speaker 2: on everyone.
Speaker 1: Yeah, So the earlier the better if.
Speaker 2: You're going to go into real estate, I think that
Speaker 2: paying that price early gives you the forty years to
Speaker 2: benefit from the expertise that can compound those extra returns. Yes,
Speaker 2: and I think the more likely you are to a
Speaker 2: house hack, which is the ultimate cheat code for this,
Speaker 2: because you mentioned leverage. With a house hack, you could
Speaker 2: have put down five percent instead of your friend who
Speaker 2: just bought a rental property you put down twenty five percent.
Speaker 2: That's a big difference. You can buy it with an
Speaker 2: owner occupant loan.
Speaker 1: Last question, do you think at some point the uh one,
Speaker 1: the market's too tough and you're just like, eh, I
Speaker 1: got a lot of other stuff going on. I got
Speaker 1: enough wealth. I'm not really interested in building up by
Speaker 1: rental property portfolio much anymore. Like I'm doing pretty good
Speaker 1: and the passive income is solid. How do you how
Speaker 1: do you know when to call it quits?
Speaker 2: So I sort of have gone down that rabbit hole
Speaker 2: to a point. So last year I moved money out
Speaker 2: of stocks and bought rentals. But I didn't buy a
Speaker 2: lot of rentals. I just bought two properties. These are
Speaker 2: big properties. One was a million bucks, one was six
Speaker 2: hundred thousand bucks. I paid cash for them. And the
Speaker 2: reason I did that is because now I got my
Speaker 2: income stream for those properties, and that supports a huge
Speaker 2: chunk almost all of the baseline spending for the household.
Speaker 2: And that's it, right, And so I have my levered
Speaker 2: property portfolio, and I still have my financial portfolio and
Speaker 2: some other some other you know, various projects that we
Speaker 2: talked about in that vision document, but that that really
Speaker 2: de risks my situation because I already paid that price
Speaker 2: over the years of managing rental properties, and it didn't
Speaker 2: complicate my position. I in by one hundred and fifty
Speaker 2: Cleveland Class C properties about two quality assets here in
Speaker 2: Denver I can drive to when there's an issue.
Speaker 1: Which is like buying buying headaches if you went that route, right.
Speaker 2: Yeah, So I think that's where that's the advantage of that,
Speaker 2: and you know, you can quibble, right. I think it'll
Speaker 2: be really interesting to see how this works because I
Speaker 2: sold the cash needed to buy those properties in February
Speaker 2: twenty twenty five, and if you remember, the market crash
Speaker 2: right after that, and I was like, oh boy, shure
Speaker 2: hire dodgeable, you know, And then of course it zoomed
Speaker 2: back up and ended the year like fifteen percent up.
Speaker 2: And now it's almost back to where it was in
Speaker 2: February as of this recording here at March thirty, twenty
Speaker 2: twenty six. So we'll see how this ride goes. But
Speaker 2: I wonder if I will get a very close return
Speaker 2: profile to the SMP five hundred unlevered if we assume
Speaker 2: these properties will appreciate three three and a half percent
Speaker 2: over five ten years, and I'll get my I would
Speaker 2: have wrote them both to about a six percent net
Speaker 2: operating income each, so let's call it five and a
Speaker 2: half percent cash flow after allowances and those kinds of things.
Speaker 2: And that includes property management all that stuff. So I
Speaker 2: think that that's we'll see, we'll see how it goes.
Speaker 2: But I think there's a I think there's a good
Speaker 2: chance that I'll have a much smoother ride and or
Speaker 2: maybe a pretty close result to the SMP five hundred
Speaker 2: over that time period. So we'll see. That's but that's
Speaker 2: fundamentally part of the bet.
Speaker 1: We'll have you have you back in a decade, we'll
Speaker 1: check and see how it's gone. Scott. I appreciate you man,
Speaker 1: thanks for joining me. And I know that you've been
Speaker 1: putting in a lot of work on bigger pockets money,
Speaker 1: so and you've got a lot more resources up on
Speaker 1: up on the site. Anything you want to send how
Speaker 1: the money listeners to?
Speaker 2: Oh yeah, if if you want to see, like what
Speaker 2: I'm trying to do one of one of the side
Speaker 2: projects here and I kind of do it in spurts.
Speaker 2: This week will be a heavy spurt because Mindy's on
Speaker 2: vacation and I have a whole bunch of free hours.
Speaker 2: But I'm building out these like spreadsheets or financial planning templates,
Speaker 2: and I think that there's a place for freepful, hopefully
Speaker 2: high quality resources here and I'm in a unique position
Speaker 2: to be able to do that. I think, so Bigger
Speaker 2: Pockets Money dot Com slash Resources has the latest versions
Speaker 2: of these. I have a personal financial statement, for example,
Speaker 2: that separates out those things. I've got that goal setting
Speaker 2: workbook that lists my vision as an example of what
Speaker 2: that could help out, and I keep populating it or
Speaker 2: updating them when people spot errors or suggest improvements in
Speaker 2: some of those resources. So that's the big project for
Speaker 2: the year.
Speaker 1: Well we'll link to that in the show notes as well.
Speaker 1: But Scott, thanks for taking the time, appreciate it.
Speaker 2: Thank you.
Speaker 1: Joel oh Man, such a great conversation with with Scott Trench,
Speaker 1: who is one an awesome dude and two just is
Speaker 1: clearly so passionate about this content, not just for himself,
Speaker 1: not just for his own life, but to see other
Speaker 1: people be able to enjoy the same financial freedom he's
Speaker 1: been able to create for his family, Like like I
Speaker 1: was like going to him after for just a quick second,
Speaker 1: and just all of the resources that he's creating over
Speaker 1: their bigger pockets, money that are free of charge, right
Speaker 1: to anybody who wants it, because he cares so much
Speaker 1: about other people having the freedom, earning that ability to
Speaker 1: have those options and avoid the middle class trap that
Speaker 1: we talked about, right, which is kind of this. Yeah,
Speaker 1: I'm saving for some far off future, but I don't
Speaker 1: know how to realize some of that optionality now. I
Speaker 1: thought Scott gave gave some good tips and I think
Speaker 1: one of the biggest ones, and it's something that's so underutilized,
Speaker 1: and we should man dedicate a whole episode to this
Speaker 1: at some point, especially if you are a younger listener.
Speaker 1: The house hacking strategy is unparalleled in terms of the
Speaker 1: options that can give you Currently if you're able to
Speaker 1: partic it. What if you're able to buy let's say,
Speaker 1: a duplex and rentout one unit, buy a triplex and
Speaker 1: renout two units, buy a property like the first single
Speaker 1: family property I bought. It was just I just had
Speaker 1: a roommate in there with me, and it was a
Speaker 1: ridiculously powerful strategy to be able to cut my living
Speaker 1: expenses so that I could save up that next down
Speaker 1: payment to buy the next home two years later. And
Speaker 1: it's not easy. It takes sacrifice, but there is nothing
Speaker 1: like house hacking. Then the third home, the third property
Speaker 1: I bought was a duplex, and we rented out the
Speaker 1: back part of that home for four four and a
Speaker 1: half years. And it's insane how much it juices your
Speaker 1: ability to reach financial independence, to funnel more money towards
Speaker 1: whether it's another property or towards your retirement accounts and
Speaker 1: your taxable broker's account. Just it frees up so much
Speaker 1: cash because it's reducing your living expenses meaningfully. So house
Speaker 1: hacking is something Scott did, something I did. I think
Speaker 1: we're both sold on that as a way for more
Speaker 1: people to be able to achieve the goal of financial
Speaker 1: independence earlier than most. And so even if you're thinking, man,
Speaker 1: real estate investing's not for me, I don't want some
Speaker 1: gargantuan portfolio, that's okay. I think for a lot of
Speaker 1: people maybe it just it doesn't make sense. I think
Speaker 1: the house hack can be that way where you do
Speaker 1: dip your toes in, but you're not going whole hog
Speaker 1: into real estate investing and it can be your way
Speaker 1: to have at least gained some of that flexibility without
Speaker 1: being a real estate investor who is constantly doing deals
Speaker 1: and has a dozen or more units. That's not necessary
Speaker 1: to achieve financial independence, but I do think the house
Speaker 1: hack can be a crazy good, powerful first step. So
Speaker 1: I hope you enjoyed this conversation. You can find the
Speaker 1: links to some of the stuff we mentioned up on
Speaker 1: our site at how to money dot com. Thanks, as
Speaker 1: always for listening. Until next time, Best friend out