This Real Estate Nightmare Could Derail Their Financial Freedom

Introduction: Young Couple, Big Decisions (0:00)

Luke: So, we bought a house during COVID.

Brian: Getting married, buying a house. This sounds like y’all were just checking the boxes.

Bo: You know, a lot of people you hear about the automatic millionaire ideal. You actually sold and made the decision to buy basically two houses at one time.

Hannah: We’re kind of hemorrhaging cash here and we need to build our reserves back up for some type of worst case scenario.

Luke: Well, we do have then our primary house where there’s things that we want to do to that.

Brian: There’s some bigger things going on here. How many kids have y’all talked about?

Hannah: Two to three.

Luke: And I would almost maybe I put my rose-colored glasses back on and just say, “Nah, let’s just figure it out.”

Brian: So, you’re saying you would grip and rip and just start a family and not worry about how the money is going to come?

Luke: That’s right.

Bo: Where are you guys from originally?

Luke: I’m from Indianapolis, Indiana. So, my whole family’s still down there.

Hannah: I’m from Michigan. We met in school and then moved back up for jobs to Michigan.

Bo: Two soccer players, too, right?

Luke: Two soccer players. That’s how we met. Yeah. Preseason, freshman year.

Bo: Classic. That’s awesome. When did you all get married?

Hannah: Right after college.

Luke: Yeah. 2020. June of 2020.

Bo: Wow, that’s a great time to get married when nothing else going on in the world, right? That’s awesome.

Hannah: We had a plan.

Bo: How many weddings did you plan for?

Hannah: The running joke that we planned like 30 different versions of our wedding.

Luke: Invite everybody. Uninvite everybody. Invite them back.

Bo: Yeah. Yeah, man. So, you get married at 22. Is that what you said? 22 years old. Awesome. So, we’ve been married for like five years now, right? That’s awesome. Been going pretty good. I’m guessing we’re having fun, right? Awesome. Good, good, good, good.

Current Financial Situation: $200K Net Worth at 27 (1:30)

Bo: Well, it looks like you guys have been crushing it, right? I mean, you were kind enough to share with us a net worth statement, kind of showing where you guys are presently. And for 27 year olds, you guys are rocking and rolling. Does it feel that way or are you like, “I don’t know, we’re just kind of doing the best we could.” How do you guys feel about where you are?

Luke: Yeah, that’s a good question. I feel we’re both the type of—I think the personality where we’re grateful for what we have, but we’re like, “Are we doing enough? Should we be doing more? What does that look like?” But no, I think we recognize that, you know, we’ve been blessed and have made some good progress and so trying to figure out, okay, now what’s next? How do we keep that ball rolling?

Brian: Are both of you guys type A personalities where you’re just trying to pack in 10 biscuits in a five biscuit container? Is that kind of what y’all are trying to do?

Bo: What kind of analogy is that?

Brian: I mean, have we not opened canned biscuits, you know, where they pop, you know, and they’re already packed in there.

Bo: Would you say you guys are a tin biscuit kind of couple is what he’s asking.

Hannah: We’re both oldest children. So I feel like we kind of fit that stereotype in that sense. So I would say yes.

Bo: We know where you are today. I mean here you are 27 years old total net worth of over $200,000 which is incredible. Did you guys know about money early on or did you have to figure it out when you got married?

Money Background and Upbringing (2:43)

Hannah: I had a very healthy view of finances growing up. My dad was an entrepreneur. We grew up with the savings jar and the spending jar and the charity jar. Bo resembles that. So I had a very healthy mindset around finances and I understood the importance of stewarding your money well too. Especially I grew up—we had four kids total and my dad was the sole bread winner and he did well. I think growing up with that mentality definitely helped me now in the future planning for our family and seeing how that turned out.

Luke: Yeah, I was similar but a little bit different because I was the oldest of five. So big family. My dad was a pastor. So it looked a little bit different for us and my mom was a stay-at-home mom. So a lot going on and they sacrificed a lot but still you know growing up I always remember they’re very generous with their money, sent us to private school which was great for them. I had the envelopes too that give, save, spend but I was a personality—I didn’t put anything in the spend. It was all save.

Bo: Do you see her nod? Is that still the case now? Okay. Awesome.

Hannah: It’s a good balance. It’s a good balance.

Brian: And how is your balance? Because now that we’ve kind of heard Luke is tight on that save part. Where do you fall between the spend and the save?

Hannah: I used to be a really big saver, especially growing up when—especially transitioning into getting my first big girl job and making a decent salary. I have swung more to the spend. But I’m definitely more of the—I like to have experiences and travel. I’m the spender.

Brian: By the way, don’t misread. I wasn’t saying that Luke was right with being super tight either. I mean, I think there is definitely a healthy balance. What do y’all do? Because I don’t know if we got the scoop on what y’all do for a living.

Luke: I’ll go first because my job is the boring job. I’m a project manager. So I work for a healthcare IT company. And I’ll just leave it at that because it can get kind of complex. But yeah.

Hannah: I work in public accounting, but I—

Bo: You see how he started grinning from ear to ear as soon as you said that? Made himself so hard.

Hannah: I know. The CPA. Yes. So, I’m in public accounting and I work as a forensic consultant right now, which is pretty fun.

Brian: That’s pretty cool. Forensic accountant.

Hannah: It is fun. It’s the most fun version of going—

Brian: TV show. It’s going to be a forensic accountant. It’s not going to be any other version of accounting. It’s not like you’re going and taking inventory of a car lot or a lumber yard. It’s going to be a forensic accountant. So, you have the sexiest version of accounting jobs.

Net Worth Breakdown (5:11)

Bo: Here you are, 27 years old, $200,000 net worth, a great income for two folks in their late 20s, make about $180,000 as a household. You guys are doing really, really well. And you’ve had some really solid behaviors. When we look at your cash right now, you have about $13,000 in cash. We’ll talk about that in a moment. Your total investment assets are right at about $132,000. You have real estate representing about half a million dollars of your total portfolio. And then you do have some debt on the books. You have a primary mortgage of about $315,000, a rental mortgage at about $120,000. And then looks like you have a small car loan right there at about $1,000 bucks. Now, as we were looking through this, one thing that immediately jumped out to us, we said rental property—walk us through how’d that end up on the balance sheet?

The House Sale and Rental Property Decision (5:59)

Luke: Well, we sold our first house. So we bought a house during COVID.

Brian: Getting married, buying a house. This sounds like y’all were just checking the boxes.

Luke: We get in trouble sometimes because we like to go fast and so like let’s do the next thing. What’s the next thing? We’ll check it off the box. But it was sad to see that, you know, that COVID interest rate go for the second house.

Brian: So you sold a house. How did we get into this rental?

Luke: With the cash from that house. We took some of that. We replaced what we put for the down payment for the second house. And then we were sitting there trying to think what would we do with the rest of that cash because the house that we moved into was a little bit of a fixer upper too. So there’s some projects that we wanted to do to build some equity. But we’ve always talked about real estate. We like the idea. We’ve been trying to learn a little bit about it. And so we just said we’re young. We don’t really know what we’re doing, but we have this cash. So let’s try and get in that space and figure out as we go.

Bo: What was the impetus to leave the first home?

Hannah: We kind of lucked into it. We knew we weren’t going to stay in the starter home. So, we were passively looking and we came across this house that we really liked. The market in Grand Rapids where we live is wild. I mean, houses go for way over asking, cash buyers. So, we—I mean, we really couldn’t compete traditionally. When we walked through the house, we figured out just with the seller situation, like maybe we would be able to come in and actually get it for market value, which we were. So, it was kind of a no-brainer decision because that just doesn’t happen—getting a house at market value. And it was one that we could see ourselves in.

Brian: So, when did you buy the first house? What did you pay for it? And what did you end up selling it for?

Luke: We bought the first house in the spring of 2021. I think we bought it for $193,000.

Hannah: Yep.

Luke: And then we sold it for $295,000.

Brian: Wow. And what year did you sell it?

Luke: We sold that last—was it last year?

Hannah: Last year. 2024.

Brian: 2024. Awesome. Wow. It’s incredible.

Luke: Fortunately, and kind of, you know, luckily, we timed the market pretty well for that house.

The Decision-Making Process (7:52)

Bo: How’d you guys think through, okay, do we roll all of this into the new house? How much do we put down on the new house? It’s a fixer upper. I just want to know where the mentality was because a lot of folks out there are in their first home, they’ve never bought their second home, and they’re facing that kind of thought like, “oh, okay, I’ve made money, but interest rates are the same. What do I do? And how do I approach that?” Walk us through how you guys had a conversation around that.

Luke: A lot of long conversations because it took us a while to figure out what to do with that equity. We parked it in a high yield savings account. Just said, “Let’s try to figure it out.” We already had money in the stock market through retirement accounts and we had some in the brokerage account at that time. So, we knew we liked the idea of diversification and then even figuring out again getting into the real estate space. So, that was kind of the rub. We’re like, “well, we could do this bathroom project that we want to do in the new house or we could buy a rental.” So, I bought a rental.

Bo: You know, a lot of people you hear about the automatic millionaire idea, like I buy a house and I live in it and then I move out of that house and I just keep it as a rental. You guys didn’t do that. You actually sold and made the decision to buy basically two houses at one time.

Luke: So that was another decision—we talked with our realtor and the house that we were in just based on what the mortgage was and then what rents were in the area and the age of the house. He’s like, “I wouldn’t keep it as a rental.” Yeah. Just from a cash flow standpoint.

Hannah: Yeah. It just felt like the best decision. And we did need the cash probably from the house, the equity to buy the second house. We just didn’t foresee that it would be so much equity. Like we sold it for way more than we ever thought we could.

The Out-of-State Rental Property (9:19)

Brian: I’ll go a little harder on it because there’s some things that I’m just scratching my head on. You did great on the first house. Now I have to ask the question. What was the interest rate on the first house?

Luke: 2.99%.

Brian: Okay. So 2.99%. No fault on the upgrading of the house. I mean, if you think about it, y’all’s total net worth is $211,000. We’ve just seen that over $100,000 of this is home equity—fantastic transaction that just man oh man it popped. So well done. You get to be the beneficiary of that. We have this $100,000 windfall come our way and yes real estate seems like something that was in the back of your mind when you’re thinking about doing rental property. What led to an out-of-state rental property?

Luke: Totally. And that’s a great question. So I’ve got family in Indianapolis which is where the rental is. Okay. So my sister’s a realtor, my parents have a couple rental properties in the area. My sister has a couple rental properties in the area.

Brian: I’m starting to put together a picture of peer pressure here. Okay, keep going.

Luke: It seemed cool. Like this is the thing to do. So I grew up in the area, too. So we knew the area well. The price point to get into that space was a little bit lower. The rental we bought was for $150,000 and I don’t think you could get anything under $200,000 in Grand Rapids.

Bo: So you paid $150,000 for the rental. How much did y’all put down on that?

Luke: 20%.

Bo: How is the managing that rental going?

Luke: That’s the tension right now.

The Rental Property Reality Check (10:38)

Luke: We started and said, “Let’s do this as a long-term rental.” With the interest rate on it—7.5%—the cash flow obviously isn’t great, but we knew, okay, this is an up-and-coming area. There’s a lot of development planned in that space for the city, so we could hold it for a couple years, maybe it would appraise for higher. So, we had a property management company come in, say, “this is what the market rent would be.” And we were happy with that number from a cash flow standpoint. It felt comfortable. And so for the first two months, we had them marketing our property and didn’t really love how it was going. Had a little bit of interest, but not a ton. And so we kept having to drop the rental rate a little bit lower.

Bo: So for the first two months after owning it, you were vacant. There was no one in there. Okay.

Luke: We’re paying the second—it’s our summer house is what we call it now.

Brian: Is there a tenant in it now?

Luke: No, it’s still vacant.

Bo: So this is your very first rental. I just want to be clear. It was not, “hey, I bought this rental property and we closed on it. We had the money, we did it, and all of a sudden, day one, a renter showed up and now it’s just mailbox money.” That’s not been—again, a lot of people out there say, “I want to do rental real estate. I understand how it works. I’m going to have somebody else pay my mortgage.” And but that’s not what you’ve been experiencing thus far, right?

Luke: Yeah. There’s two sides to that.

Brian: Is this brochure not popping yet? You’re like, where is this brochure of this passive income when I watch my home improvement channel? Where is this at on Instagram?

Changing Tactics (12:05)

Hannah: Well, we have changed tactics now. We’ve decided we’re not going to go with the traditional property management group. We started marketing ourselves. So, we feel like we have more control over it. There is nervousness to it. I think we’ve already learned some good lessons. Like the comps that we thought we were going to be able to rent it for were not accurate. Yeah, they were not accurate. And so, I think we probably learned we could have done a little more research ourselves. So, yes, there’s nerves. I feel more comfortable. I would say we both feel more comfortable now with what we’re doing, but it is still vacant and that is something we’re still paying.

Bo: Did you guys—before you did this and it’s okay if the answer is no, but one of the things we tell people before they go into some big life decision like investing in a rental property, we want you to put on your 3D glasses and do these three plans. What’s the dream plan if it goes like the brochure? What’s the down-to-earth plan like our highest probability outcome? And then what’s the doo-doo plan? I imagine that three months vacancy was not the dream plan and y’all did a lot of improvements on it, too. You put like $16,000-$17,000 into the improvements, right?

Luke: Yep.

Bo: So, it wasn’t the dream plan. It’s sounding like maybe it’s not the down to earth plan. Give us some context. Have you guys figured out how far does the doo-doo plan go? Like what are—you said you have some more tactics. What levers are you pulling to try to ease this cash flow burden right now?

Luke: Probably spending less on our own personal spending.

Bo: So you’ve had to lever down the hatches to make sure you can cover two mortgages.

Luke: Yeah. So that has helped sustain us a little bit because it’s not like every month that mortgage is coming out of our savings. Now we are obviously much more lean than we were when we had that $100,000 sitting in the high yield savings account. We felt really good then. But it has been a little bit “okay let’s pull back some of our personal spending, try to support that mortgage with our income coming in each month.”

Bo: You said you’ve changed some of your tactics, your marketing. Have y’all lowered what you’re asking in terms of rental rates a little bit?

Luke: Yeah. And then because also the thought was too, you know, we do have some boots on the ground there with family members, but we’ve also been learning a little bit more about how we could self-manage the property and do that in a professional way. And then also that will cut out some of the property management fees that would eat into our cash flow.

Bo: Do you have your bottom line number? Like we know that this is the cost to carry the mortgage. This is principal, interest, taxes, all that stuff plus maintenance. And we believe we’re going to be able to get rent to at least break even. Or are you going to have to settle for a rental rate that’s below market where it’s actually going to be a cash outflow for you guys?

Luke: No, I think right now we’re still cash flowing a little bit. So, right now the rent is $1,550. I think if we went down to $1,450, that’s where you’re saying you’re basically breaking even. You’re not saving for maintenance or repairs or anything like that. But with the mortgage and the property taxes and insurance, you’d be breaking even. Initially, that was our thought. We were like, “well, we’re okay breaking even because we know long-term it will appreciate. And then, you know, maybe the next turn you could raise the rent.” But then I think we had to drop the rent initially more than we thought. So, now it’s been a fun little activity of trying to say, okay—

Attitude Check (14:57)

Bo: You guys have—it seems like you guys have a great attitude. Like, I’m not feeling a ton of nervousness and anxiety from you guys. Is that an accurate read or y’all just really good at hiding it?

Hannah: I don’t think we’re naturally anxious people. I think we kind of went in with the mentality of “what if this was worst case scenario and you lost everything?” That would suck. But I think we both felt like we were young enough to take on a risk if it really did go bottom up. It would still be okay.

Bo: And I imagine you could still—again doo-doo plan scenario—you could probably just relist the house and sell it if you got into a really bad spot.

Luke: Yeah, we had it comped again after the repairs and it was at $190,000. So there is some built-in equity in it already.

Brian: That’s great. If your carry is around $1,500 a month and you guys, it sounds like you’re just cash flowing it to a large degree or that $1,500 cost, has that impacted y’all’s savings and investment rate as well? I mean, are you—

Luke: Totally?

The Opportunity Cost of Real Estate (15:50)

Brian: Full disclosure, we love real estate. Yeah, we’re big real estate people, too. But the thing I often caution people about looking at this passive income brochure versus the reality of it is that a lot of times you’ve got to have enough liquidity underneath you in case the brochure doesn’t work out. It’s back to Bo’s doo-doo plan. And it’s easy I think if you’ve gone through the first seven steps of the Financial Order of Operations. You can carry the months. You can be very picky about who you get in there as a tenant because you’re probably going to have that tenant for five, seven years. And they go, it’s mailbox money at that point. But as you guys are quickly seeing, it takes a while. You need margin to get that right person in there. And then what scares me is that we’ve got less than 10 months of coverage. Because not having a tenant in there, not having anybody in there, if all of a sudden a toilet started dripping, all of a sudden we have a $10,000 repair, that really puts you guys in a tough pickle of a situation. Y’all are so young. Your wealth multiplier. If you’ve ever gone to moneyguy.com/resources, every dollar that you guys put into long-term investments has huge impacts at your age that you can imagine if we’re gutting the savings because we’re having to carry this. It’s going to hurt you in the long term. We all are revisionist and y’all are type A, you’re trying to get it all in, you’re going to do okay on this no matter what. I think you’ll eventually either start cash flowing this, you’ll get a tenant in there, or you’ll just decide, “okay, I’ll cut loose and I’ll take that equity” and you’ll look out and you’ll be like, “okay, we ended up making money on this transaction.” What I’m always trying to educate people on is this is why you have to be patient and do it in the right order is that I don’t want people to have that revisionist history where you think this actually turned out okay when potentially all of the opportunity cost of this—the thousands of dollars that didn’t get invested—it could have a bigger drag on your future than you might realize.

Family Planning Conversation (17:38)

Brian: You guys are doing so well. I want to figure out how we get you in the right place because another thing that I wanted to ask about—where are y’all at with family planning and other things like that because that’s got to come into y’all’s decision matrix as well I would think at this point too.

Hannah: Totally. Okay, I’ll go. That is one of our short-term goals. That’s something that we want to start planning for. That’s something that we both really care a lot about and we have been—we always said when we first got married we said “let’s be married for 5 years.” I don’t know why that was the magic number and then we’ll think about having a family. We’re curious about what that would look like and especially planning financially for that. Like that’s a big change in your life but also in your finances. So that is one of our near-term goals is that we would like to start—especially when you think about that and then in the same time how do we keep our savings rate or what’s income coming in because it’ll probably have an impact on that.

Childcare and Career Considerations (18:34)

Bo: As you guys have thought about starting a family and what that looks like, what’s that future look like for you guys?

Hannah: We’ve had a lot of conversation and our mentality always comes back to—I’m just not sure there’s the—what if one of us goes part-time and what if we hire child care. One thing we both feel strongly about is not putting our kids in daycare. That’s just a decision we don’t feel comfortable doing ourselves. So whether that is someone goes part-time, someone comes home full-time, maybe you do something more creative like just an in-home nanny, we felt fine about that, too. It always comes back to I feel like we just don’t know what we don’t know. I think one of the most feasible things that we’ve talked about is one of us going part-time from the job.

Luke: And I work remote, too, so it’s pretty flexible.

Hannah: Yes.

Luke: Your hybrid public accounting not quite as flexible. Yeah. And also Hannah’s—she’s the driver too. She’s more of that type A person. So I think for you it’s hard to think about okay scaling back and maybe not working as much even though you’d be doing something way more valuable too. Trying to flush all that out is kind of where we’re at.

Bo: If I’m hearing you say this, it sounds like you guys are open to a lot of different scenarios because you just threw out there both working, one working part-time, one not working at all. It doesn’t seem to me that it’s been clear who would be the person to change career trajectory. Have you guys had that conversation around who it would be and how that would look?

Hannah: You can correct me if I’m wrong. It probably would be me. The reason I say that is because I work significantly more hours. So, it just makes sense from a practical standpoint for me to also be able to cut back on hours. I think that wouldn’t be sustainable when we had a family.

The Doo-Doo Planning Question (20:11)

Brian: What planning have y’all done? The doo-doo planning on rental property, family planning. What have y’all done so far? So I can make sure we kind of know where we are as we start showing you some of the things we have been doing behind the scenes.

Luke: I think for the doo-doo plan for the rental and-

Brian: Well for everything because this is all—by the way your financial life is all interconnected—one decision doesn’t do just one thing. They all kind of work together right?

Luke: And so I think that’s for us where it gets a little bit murky is because you add in the variables of a rental property and trying to save and then planning for having a family and that’s where I don’t know if this is right or wrong—that’s kind of why we’re here—but the brokerage account, right, where we’ve got money there. I’m like, “well, if things do go really south, we can liquidate things there.” Obviously, you’re kind of pulling out of that. There’s opportunity cost there, but maybe as a fail safe.

Brian: Did y’all actually do a plan, though, or is this just y’all felt like everything had worked so well, it’ll just work out?

Luke: Just work out.

Brian: Okay. Okay. That’s what I thought. That’s okay. Y’all have done great. I mean, look, y’all have done great. It’s just that I was just curious to know how much went into the process. So now we can kind of figure out and triage you guys.

Luke: You can yell at us.

Brian: No, we’re not going to yell. We’re not that type of show.

Current Burn Rate and Emergency Fund Analysis (21:21)

Bo: Because you said a lot of things—you didn’t use the word “it depends,” but you said, “Hey, there’s a lot of different options and we’re unsure and it’s a little murky,” I think is the word you used. And what we want to do is maybe apply some clarity to the murkiness. Give us an idea from a lifestyle standpoint. What’s your current burn rate? Like how much does it cost you guys to live the life that you want to at this present day?

Luke: So, I think if it was more fixed expenses, it would probably be $5,000-$6,000. And that’s dropping out saving for a trip or maybe, you know, other things that we like to do.

Bo: You guys right now are both—you make about the same income, right? So, two income family. There’s no kids yet. So, you would be one of those couples that we would say could probably from an emergency reserve standpoint fall into that three months of living expense category. That’s probably somewhere between $15,000 to $18,000 in an emergency fund. And that doesn’t include the rental. We’re going to talk about that in a moment.

Brian: I was about to say there’s a big asterisk sitting on top of this.

Bo: And so right now we see that you have about $13,000 in savings and you’re also having to cover this rental. So where would you guys say you are in the Financial Order of Operations?

Luke: I want to say five. I want to say step five.

Hannah: I think we’re probably a four.

Your Financial Order of Operations Journey (22:31)

Bo: And here’s what’s really wonderful. Again, we can kind of see this in that net worth statement. A lot of people think the Financial Order of Operations is kind of this straight line. And we always talk about on the show like, “hey, it’s not exactly a straight line.” We thought it’d be really interesting to show you guys. We actually tracked your Financial Order of Operations to see where you guys are. And you can see starting in 2020, all right, you graduate college and you get married, right? And we kind of go on this thing and we start saving. We get to emergency funds and then our career progresses and we get into step five and we’re doing Roths and HSAs but then we want to save up for a house and so we kind of go back to emergency reserves and then we buy the home and we go up and then the home does really really well and it creates some advanced opportunities for us to do some other stuff and we go up and then we come back down. That’s okay. Financial Order of Operations is not a straight line. But when I think about where you guys are right now present day I would say you are hard in step four and you’re also in step four. And I think that step four is likely going to change for you, right? Because we just said right now with no kids, you guys earning the level of income that you’re earning, your emergency fund should be $15,000 to $18,000. If you end up backing down where one of you is the primary income earner, maybe there’s only one income earner, well, now you become one of those families who it potentially should be like six months of living expenses. And that doesn’t even factor in the fact that you do have this rental because we are proponents that once you get into step seven and step eight and once you start having other types of assets like rental properties, you have your emergency fund for living expenses, but then you also have your reserve fund for that sort of thing.

The Cash Shortfall (24:15)

Bo: So, when we thought about sort of a cash layout for you guys right now today, your cash, if we’re going to have three months of living, it’d be $15,000 plus the three months of real estate vacancy because we think that would be a true reserve for rental folks. You should probably be at $20,000 based on where you are today. So, we have about an $8,000 shortfall. So, immediate goal—before we even do the family planning stuff—is how do we get from $12,000 to $13,000 of cash to $20,000 of cash? When I ask you that question, what’s your immediate response? Like how would you guys do that?

Hannah: I think that is what our conversations have been focused around. That rings true to what we were thinking too is that we’re kind of hemorrhaging cash here and we need to build our reserves back up for some type of worst case scenario. So right now what that’s looked like for us is tightening up more of our spending or discretionary spending than we have. I would say rice and beans—maybe we could do it if we needed to.

Luke: But I think that is hard too because again going back to this maybe almost shiny object syndrome where we have a lot of going on at once is well we do have then our primary house where there’s things that we want to do to that too and fix it up and so trying to figure out where is the best place for those dollars to go.

Multiple Goals in Conflict (25:32)

Bo: I love it. So, what you’ve laid out for us is that there are multiple goals in conflict. The only short-term goal you said for us was, “Hey, we want to start a family, right?” Like, that’s a short-term goal. But you just threw out another one. “Hey, we’d like to improve our current home.” And then I imagine there’s some long-term goals in there as well, like financial independence. What are some of the long-term goals that you guys have?

Hannah: That’s for sure. The financial independence, one of them. That’s I think where we initially—that was probably the biggest driver for us getting into real estate for better or for worse is thinking about being able to take back some of the hours that we work in our 8-to-5 jobs by just dipping our toe into real estate. I think we’re not stressed about the property right now because I do still see it as whatever happens—like you said—we still could just relist this property and make money and we could probably go back to where we were before we purchased this rental property.

Brian: There’s some bigger things going on here. How many kids have you have y’all talked about? Give me a range.

Luke: Two to three.

Hannah: Two to three. Yeah.

Luke: Hard three.

Brian: Did you see that?

The Sentimental Concern (26:31)

Brian: Well, here’s what I’m worried about. Y’all have a deficit here. And what I’m worried y’all are about to say is “we’re just going to have to button down the hatches and work even more. So, we’re going to defer this decision as a family on when we get to start growing the family.” And as the sentimental guy here, I’m just like, “I don’t—is that what y’all want to do or is that what you now feel like you have to do all because we made this decision of the rental property?” And let me tell you, most financial mutants who are wired like you guys with this type A personality, you’re not going to leave the planet broke. So, you have to start asking yourself, “am I making some decision right now that is going to sideline my 50-year-old version thinking about kids, potential grandkids, that I’m going to be ticked off at myself that I bought this rental property that caused me to push things off for 18 to 24 months, and now I had to make completely different decisions than what my ideal was?” That stuff hurts me because money is just a tool, you know, and I know we all get caught up in the brochure of “let’s maximize, let’s get to millionaire status and let our money work for us as fast as possible.” But if we make a decision that locks us into this rut that now we don’t get to live our best life of what we daydream about is what our future life looks like. I would almost say, can we get a reset here? I mean, because y’all are so far ahead of the curve, but yet we’re locked or potentially—we’ll go through the numbers with you there. I just wanted to kind of raise the temperature a little bit because this is hitting me. I’m like, they’re going to start getting squeezed. The time is going to be your element. Y’all have so much ahead of you, but I can already just start seeing we’re going to have to make some tough decisions that impact so much.

Luke: That’s the rub, right? We’re both kind of that type A personality. But I think when it comes to family, that’s such a big thing for both of us that I would almost maybe I put my rose-colored glasses back on and just say, “Nah, let’s just figure it out.” You know, we can go from there. Maybe, you know, our cash isn’t where we need it.

Brian: So you’re saying you would grip and rip and just start a family and not worry about how the money is going to come.

Luke: That’s right.

Bo: Well, and that’s a choice, too. And how does that make you feel?

Hannah: That’s not really what you think.

Luke: I could do that.

Hannah: Okay. Well, I feel like we should plan a little bit, though.

Luke: I agree. Okay. Yeah. I’m not saying don’t plan. I’m just, you know, I’m with you, Brian. I don’t want to delay our family because we feel like we have to get to this number.

Brian: It’s not just the delay in the family. It’s also just hardship for the sake of just having hardship because we made one decision.

Hannah: Sure.

Brian: I mean, if you don’t have to.

Applying Real Numbers: Three Scenarios (29:03)

Bo: The question that we had as we were sort of triaging and assessing is the timing. While that’s a wonderful goal to be able to create a family business where you’re doing this real estate thing, is now—is this moment—the time to begin going in that direction? And it may—the answer may be grip and rip. But what we want to do is apply some real numbers to it because we just showed you right now present day we would argue you have about an $8,000 shortfall in your emergency fund. But if you’re going to make a decision around “hey we’re going to decrease income where it really depends on one or the other of us to be the primary bread winner,” then you probably do need to expand your living expense emergency fund out to six months. So just doing that takes us all the way out to $35,000. And we still have the real estate—becomes even more risky, more aggressive when there’s one income who’s having to float that or a majority income. So right now, we would say that your emergency fund should be close to $20,000. But realistically, if you’re going to make an employment change based on family planning, your emergency fund should be closer to $40,000. I want you to kind of put that in your mind because we’ve actually done the work for you to say, “Hey, if you did decrease your income, what’s it like if you’re both working? What’s it like if one of you goes to part-time? What’s it like if you go down to one income?” And we want you guys to see the hard numbers that then determine, “okay, yeah, we can make that work. We can do this.” Does that sound fair?

Luke: That’s great.

Hannah: Awesome.

Scenario 1: Both Working ($180K Income) (30:32)

Bo: Okay. So, let’s assume that we go through the scenario of you guys both working. And if you’re both working, let’s assume that your gross income is going to be $180,000 a year coming in. And if we break that down into monthly income, it’s going to be about $15,000 a month. Well, we think that with $15,000 a month, this is what your budget would likely look like. We’ve already established your mortgage is going to be right around $2,900 a month. Once we think about taxes, it’ll be factored in. That’s going to be just a touch under $3,700 a month. And at this income, we really do believe that you can be saving and should be saving 25% of your gross income. So, that would be $3,750 a month. Now, if you’re both working, that means that there are going to be some child care costs. So, we just said, okay, if we look at the national average for child care, what would that be? And we came up with an estimate of about $1,200 a month. So, if you add all of that up, that leaves about $3,400 left over for lifestyle, for doing the things you want to do the way that you want to do it. Now, obviously, the remaining bucket and childcare bucket is kind of flexible. We can kind of combine those two and it could go up if you’re doing private nannies and other things like that.

Brian: As you can imagine, this is more of a daycare. So, we’re a little off already because y’all were like—because I heard Hannah say we do not want to do the daycare. So, I’m like—

Luke: I know.

Brian: Uh oh. Danger danger. We might be off on our assumptions a little bit.

Bo: Okay. So, the question we have is, okay, you’ve got all the savings taken care of and you got the home taken care of. $3,400 a month discretionarily for, you know, diapers and eating out and doing that fun stuff and having the date nights. I imagine that seems fairly reasonable, fairly feasible. You could make that work likely. And if you did this, it’s wonderful because remember, you guys are here saving 25% of your gross income. And if you just—let’s assume that you do this for the rest of your working careers and you save that 25%, no pay raises, no increases, this sets you up for an amazing great big beautiful tomorrow. You can see that at 27 you have $132,000 invested. You have that 25% savings rate. We just assumed a 9% rate of return for you guys because you are so young. Your portfolio grows to be $18 million by the time that you get to 65. Now, obviously at 65, $18 million won’t be the same as it is today, but we would say if you just want to assume a 4% withdrawal rate, that would generate for you about $20,000 a month to live off of in today’s dollars, $242,000.

Brian: We brought that back to present value. Because I mean, when you see those big numbers, and by the way, do you see the magic from 55 to 65? This is why there was a part of me that said, “Don’t show them the 65. Drop this thing because that requires—there’s so much that has to happen for this to work.” And you guys, this is almost fairy tale land here because we know the savings rate is way below 25% right now. But it—this is bringing it back. A lot of good stuff happens if this was what was working in the background.

Bo: So, we would call this if we’re—again if we’re putting on our 3D glasses, this would kind of be the dream plan. You got tons of income coming in. You have enough discretionary. You can save at the rate you need to save. This would be the outcome. I want to flip the question around to you guys. How realistic is it for you guys to start a family and both continue working full-time hours you’re working right now?

Luke: I’d say that’s probably less likely.

Bo: So, while this might be the dream plan financially, it’s probably a low probability outcome in reality based on the other short-term goals that you guys have. This long-term goal has to be adjusted.

Scenario 2: One Part-Time or $135K Income (34:10)

Bo: I’m going to call this dream plan. So, then we said, okay, what about down to earth? Let’s call it dream easy plan. What if we did one of two things? What if one of you decided to go to part-time or one of you just has career trajectory that would allow your income to increase to where as a household, whether it’s one of you bringing it in or both of you in some combination brought in about $135,000 of income. Well, if that’s the case, the monthly gross amount coming in would be $11,250. We already have said your mortgage is going to be just over $2,900 a month. On a lower income, the tax amount will go down. It’ll be about $2,400 in taxes. We recognize there’s a good chance you likely won’t be able to save the full 25% that we like, but we still think you should be able to save 20% at this income level. So, that’d be $2,250. Now, if only one of you is working or perhaps one of you is working part-time, we do think the child care costs would likely be lower. So, $600 a month for child care. So, if you add all of that up and think about the gross income, that would leave about $3,000 a month for lifestyle, for doing the things that you want to do on your terms. Give me some feedback. Does that seem reasonable?

Luke: I think just looking at that, I would say we’d probably need to make some changes. Probably at least with our current spending and all the different categories.

Hannah: Agree.

Bo: I want to remind you this does not factor in the rental. The rental is another thing above and beyond. Because you know if you have to continue carrying that rental mortgage, I just want you to envision what happens to that remaining bucket and that childcare bucket. And again, this is not to be frightening. That’s not our goal here. I just want to enlighten you because okay, say you get a tenant in here and it’s easy street and it’s good times rock and roll, but then something changes in their life and a year from now they move out and then you have another vacancy. Just because you have a tenant today does not mean that you will have a tenant in the future, right? That tenant is only good as the lease that you have in place. And even then, sometimes it’s not quite that good.

Brian: I’ll even play it up even more. What if they’re changing engines in the living room? I’ve had clients and people have heard me tell the stories where they rip off all the cabinet doors or they do something because people do the craziest things with this. We had another Making a Millionaire and they’ve actually done really good with real estate but they talked about their very first one. They put a convicted felon in there because they were self-managing, didn’t do any background checks, and they’re like, “man, oh man, we didn’t realize what a pill we were getting ourselves into by putting a convicted felon without knowing.” Nobody goes willfully, “Let’s go put a felon in our rental property.” This is the part—I mean, I like I said, I’ll let Bo keep being Mr. Nice Guy. We’ll be good cop, bad cop. But I’m like I see $3,000 bucks of flex and margin and we got $1,500 that might just evaporate because of this rental property. What are we doing?

Bo: I just—it creates a risky exposure for you guys having that there, having to know that you would be on the hook for that if you can’t get a tenant in there. If this works and this is the outcome and you’re able to save 20% of that income for the future, again, assuming that the rental stuff doesn’t derail that, it’s still a pretty exciting trajectory. You can see right now $132,000 today. We’re going to invest 20% every year for your working life out to 65. You don’t quite end up at that $18 million terminal number, but you end up at about $12.7 million. And in today’s dollars, assuming a 4% withdrawal rate, that would generate for you about $166,000 in today’s dollars. So that’s, you know, doesn’t factor in Social Security or any other income sources. That’s just from the portfolio. This kind of living off of the interest idea, right? That seems okay, right? Like that would likely work based on the lifestyle that you guys would be living, right? Again, you said in order for this to be a reality, we’d have to trim some stuff and we’d really need everything to go right with the rental. If anything goes wrong with the rental, it kind of derails us.

Luke: Yeah.

Scenario 3: One Income Only ($90K) (38:19)

Bo: Okay. So, now let’s look at the third scenario. And I wouldn’t exactly call this the doo-doo scenario because that makes it sound like it’s the worst outcome because I don’t know which one is more likely between this third scenario and the $135,000 we just laid out. Okay? But if you guys said, “Hey, we’re going to start a family and we’re just going to go to one income, right? And let’s just assume that one income is right where it is today at $90,000 a year.” So that’s $7,500 a month that we’re going to have in gross income coming in. We know that mortgage is still going to be $3,000. We know that taxes at this income will be just under $1,500 a month. We still want you saving. We still want you building for the future. So if we just have a 15% savings rate, that’s going to be a little over $1,100 a month. Then when we factor all that in, that leaves just under $2,000 a month for everything else for eating out, groceries, utilities, date nights, and uh oh—diapers.

Luke: Any unknown unknowns.

Bo: Well, diapers are not—I’ve heard those are expensive. And unknown unknowns. When you see that number, how does that make you feel?

Hannah: That really is rice and beans. That feels very—

Brian: Yeah, it’s less than that if you take the rent in there.

Bo: If this were the reality, I want to show you one more piece of it. And then I want some reflection. Right? If you were to do this, if you were to save this 15% every year, you can see from now at 27 out to 65, the portfolio still grows to over $8 million. But $8 million that far in the future, if we bring it back into today’s dollars, would generate for you an income of about $109,000 a year that you could live off of. Again, that’s great, but it’s different than the other scenarios that we’ve played out. So, you’d have to figure out, okay, what kind of lifestyle is that creating? Is that creating the lifestyle that we want to see in financial independence?

Reflections on the Three Scenarios (40:04)

Bo: When we show you this and show you “okay, the decisions you have have both implications today as well as in the future,” what do you take away from seeing those three different scenarios?

Luke: Well, one, it’s really helpful because it’s clarity, I don’t think, that we had previously. It is a lot to factor in, I think, and it does at least highlight for me—I don’t know if you would agree—but just when you do add other variables like a second mortgage, in our minds, we’re like, “Yeah, we know this is a risk, but we’ll figure it out.” And then highlighting, “okay, this is actually a risk, and this is what that risk looks like,” and then how it could affect you.

Hannah: I agree. I think this is really helpful because when we were talking about a rental property, I never really considered the opportunity cost of pulling back on your other savings. I don’t know why, but I didn’t really think about that. So this is very helpful especially that first slide—the rose-colored glasses slide—what it could be if you continued with the—I think you said 25%—is what that was. So I think this provides a lot of clarity like you said.

Luke: I think it’s hard for me because I just personality-wise am more of that saver where it is “okay like maybe it is better for us both to work” but then you get into the thing of “well are you sacrificing more family time just for the sake of a dollar bill” which I think we both agree is not the priority that we want to have and so try to figure out what the balance is there.

The Complexity Question (41:22)

Bo: One of the things we say on the show all the time is that so often when we’re young, we think that if we seek out complexity or more advanced strategies, there will be a better outcome from that. And as we kind of looked through your situation, we didn’t really talk about the investments. We can talk about that as well. It seems like you guys are already positioned. You are super young and you are amazing income earners. You’re doing everything fantastic, but you have now sought complexity and added some things into your financial life that’s creating a stressor that does not have to be there. And so the question then becomes, okay, when we think about the goals that we want to achieve, what if we could achieve those goals in a much more simple fashion without having to put ourselves out there on the risk spectrum? And again, don’t mishear. We love real estate. Rental real estate’s fantastic, but there is a time and a season and a place for it. And the question we had as we were looking through is did you guys make that decision at the right time given all of the other various goals that you have?

Luke: It’s a good question.

Hannah: Yeah. Well, I mean, yeah, going back to the slides, I think that was super helpful. There is an opportunity cost that I think we didn’t consider as much, especially since starting a family is one of our shorter term goals. I think that wasn’t as thought out as maybe as it should have been.

Luke: And it’s also you learn, right? Because that is one of the things we’ve learned so much even from the first few short months of having this property. We would do this different. We would do so many things different where I don’t even want to say this, but what if we got another one? You know, that’s where I know you guys—don’t bring that up.

Brian: He hasn’t been listening. He hasn’t.

Luke: I’m kidding.

Brian: I got hope on Hannah. Turn my mic off.

Homework and Path Forward (43:06)

Brian: I would—here’s where I would hope you guys go home from here is because if y’all are working with us, there’s several things that I would do as a homework for you guys. And Bo’s the official homework guy, but I’m just—I’ll play Uncle Brian here. I want y’all to go home and—you didn’t do it the first time. You didn’t open up a spreadsheet even though you have a rock star spreadsheet creator right here waiting in the wings. I would encourage y’all to do the 3D glasses. Legitimately do it now and take your current scenario with rental property. Take into account—we’ll get you all this stuff so y’all can use this as baseline assumptions. And then I would have you run multiple scenarios and figure—and then take into account the family planning too. Take in the non-money stuff, but what is going to be the fruitful life that you want to lead. So you look at yourselves when you’re in your 40s, your 50s and 60s and beyond and go, “man, well done. We knocked it out and did it the right way.” The building blocks is right now for you guys to figure that out. And I would look—I don’t know the answer completely because I’d want to run multiple scenarios, but I would hope that one of y’all’s scenarios is maybe we call one of these relatives that lives in the area who already has this propensity to be a real estate investor and say, “Hey, y’all want to buy us out or make you all a deal?” I mean, there’s got to—there is a scenario. I’m just trying to figure out how we level set you guys from the planning perspective.

Bo: It doesn’t have to be. Y’all could—once you do the 3D glasses plan of going through the three scenarios, it’s going to give you the clarity to say this is what we ought to do because if we were your financial planners I would say I would put that on you guys or we would do it together as a joint exercise so we could scenario plan it out to figure out what’s the best path because the grip and rip—that’s not going to work because it’s just going to create—look life is already hard. I mean, it’s just a natural thing that there will be things that happen to you that you don’t know that are coming your way, whether it’s illness, whether it’s accidents, there’s just things that happen in life. So, if you just grip and rip and don’t plan it, it just opens up a lot more turmoil and chaos and I just know in relationships and everything, that stuff takes a toll over the long term. Man, I want y’all to live your best life and be the happiest versions of yourselves, but you can’t do the things with all the tools you have with the grip and rip mentality. I just don’t think it works. It’s not going to give you your best life.

Luke: I think for us, because if you look at everything in a silo, it’s like, “well, all these things are good things,” but then if you do them all at once at the wrong time, that’s where you get into trouble.

Hannah: That’s it.

Luke: And so I think that’s even the rub that we’re—even the past month we’ve been talking about like “well we do want to start a family and it would be fun to travel when you have kids” but “well we do have this rental property and we like the idea of building a rental business” but then you start thinking about where the money is going and there’s less there and then are you overexposed. So this came at a really good time too just talking with you guys.

Quick Question: Roth 401(k) vs Roth IRA (46:13)

Bo: Before I give you your homework, what questions do you have for us? Anything that we didn’t cover that you were hoping that we would cover or mention to you?

Luke: Both our employer plans are Roth 401(k)s. And I know you guys talk a lot about Roth IRAs. Is that something that we should look at is opening a Roth IRA or is that redundant with having Roth 401(k)s?

Bo: Well, you know, generally the way that we recommend if you’re going through the Financial Order of Operations—you can look that—step number two is free. Step number two is your free employer match. We want you to participate in your 401(k)s up to the employer match. So, whatever that is for either one of your employers, at least go get that. And if you’re doing it on the Roth side, that makes a lot of sense. You guys are super young. You’re not in a super high tax bracket. So, I think Roth makes a ton of sense, but you could instead of putting additional in there, like if the minimum requirement to get the match is 3% but you’re doing 6% there, rather than doing that, you could go open up a Roth IRA and begin saving to a Roth IRA because it’s going to be a little bit less expensive. You’re going to have a wider opportunity in the entire investment universe—which I’m not entirely sure is a great thing for you guys—but it gives you a wider investment universe you can invest in and it’s completely portable so if you change jobs or you skip you can leave it at Vanguard or Fidelity. So we love Roth IRAs and that’s probably the reason why we would say to start doing that. But if you didn’t and you just kept putting money in your Roth 401(k), that’s okay too because in our mind you’re still building the step five tax-free bucket. It’s not like you’re making a mistake by doing that.

Brian: And I also want to remind you that even before you can begin moving in that path towards the Roth, that wasn’t even the right question to be asking because we just showed you that right now today presently you have a $7,000 to $8,000 shortfall in your emergency fund. Priority number one shouldn’t even be thinking about Roth 401(k) Roth IRA—you get the employer match and then every other dollar should likely be going to build up that emergency fund to a present day value of $20,000 and then once you figure out what the work situation is going to look like for the two of you even think about how do we get that to $40,000.

The Rental Property Decision (48:14)

Bo: This is not prescriptive. But again, if we look at the net worth statement, we know that right now the rental property you said is worth—you paid $150,000 for it. It’s worth about $190,000. So your mortgage on it is about $120,000. Well, if you sell it, if you were to sell it right now for $190,000 and your mortgage is $120,000, you’re walking away with a bunch of capital. That capital you walk away from immediately solves your emergency fund issue both today as well as “hey if we went down to one income we have enough to cover us that we don’t have to change lifestyle and then we can grip and rip and figure it out as we go through that” and we’ve gotten rid of a $1,500 monthly burn that’s no longer there at 7.75% interest.

Luke: I know.

Hannah: Yeah, that hurts.

Luke: That does hurt. Yeah, for sure.

Official Homework (49:04)

Bo: Here’s your homework. The first thing I put is I wrote “get a tenant or figure out the rental”—figure out what the right decision is. Something has to happen with the rental. It cannot continue on the way it is right now. Without being too biased, we have a thought on what you should do, but getting a tenant is also a solution. I think your next piece of homework, you got to figure out how you get your emergency fund up to at least $20,000. That’s where it should be based on your current spend with an eye towards recognizing if you are going to make an employment change it should probably be closer to $40,000. Now if you did get rid of the rental then you don’t need that bucket for the rental vacancy. So then your actual emergency fund might come back to like $30,000-$35,000. It does give you some reprieve on how much you need to keep in cash. The other thing y’all need to do is y’all need to go do your 3D plan. Walk through, “hey, based on our short-term goals of starting a family, based on our intermediate term goals of having a real estate empire, and based on our long-term goals of financial independence, how do we prioritize these? And what’s the most efficient mechanism to move towards those goals?” And it’s going to require figuring, “okay, who’s going to stay home, who’s going to back down hours, what’s that going to look like, and on what timeline do we want this to happen?” If that’s something that we want to have happen in the next six months, we’ve got to make some very, very serious consumption or asset decisions today in order to put that in place.

Luke: Okay, that’s great.

Hannah: Thank you.

Luke: Thank you.

Brian: Y’all are awesome.

Closing (50:38)

Brian: Guys, it’s been a blast. Bo, if somebody else wanted to come on Making a Millionaire, what do they need to do?

Bo: If you’d like to be a guest on Making a Millionaire, you can go to moneyguy.com/apply. Or if you want to check out any of our calculators or tools, you can go to moneyguy.com/resources.

Brian: Luke, it’s been a pleasure. Hannah, you got a lot of work ahead of you, but I’m super excited for you. I’m your host, Brian, joined by Mr. Bo, Money Guy Team out.