QUESTION: Jeremy and wife are recent graduates, and they have almost $300,000 in student loan debt. He asks about purchasing some rental property, thinking they can handle it after recently selling their house and paying off about $10,000 in debt. They have advanced degrees, and the plan is to have a $400 mortgage on the property, charge $800 a month rent, and have an extra $400 to help pay off debt. Dave leaves no doubt in the caller’s mind that he thinks it’s a bad idea.
ANSWER: You’re broke! You’re $300,000 in debt, and you call me up wanting to buy a rental property? No, no, no, no, no!
You have a crisis. You’re like Congress, and you have a mess. No! You are on beans and rice, rice and beans. No vacations, and you will not see the light of day. You will work like an animal until you get this mess cleaned up!
No, you do not buy rental property. Even if you did, this plan assumes that it’s rented and the renter pays. Those are two pretty big assumptions. You have $300,000 in student loan debt, dude. Don’t talk to me about buying a rental house, please. Use your money to get out of debt, and keep your life simple. Quit trying to borrow your way through all of your dreams. You’re going to turn them into nightmares. Pay off the debt!
QUESTION: Erik and his wife in San Antonio, Texas, are thinking about selling their home. He was recently separated from the military due to downsizing, and his wife is a teacher who brings home about $3,500 a month. The only debt they have is their mortgage at $1,616 monthly, plus he was given a $35,000 severance package. Now, Erik is just starting a job in real estate and things are slow. Dave gives him some advice to help bridge the financial gap.
ANSWER: Variable income isn’t hard. It’s having no income that’s hard. Are there some things you can do on the side while you’re getting your real estate business going that will create some income? I mean, if you could create $1,000 to $2,000 a month, you’d change the whole picture and be able to keep your home while you make this transition.
Long term, two years from now, you’re selling a bunch of homes as a realtor, and you could easily stay in the house. But if you don’t find some side income while you get your real estate business going, I mean if you’re not willing to do that, then you probably need to sell the house.
It takes about six to nine months to start making a living in the residential real estate business. So, exactly like I was saying, if you go make $1,000 to $2,000 a month on the side while you’re running your residential real estate business and getting it going — even if it’s just delivering pizzas — $1,500 a month changes your whole life right now. It gives you patience to get the real estate business going, so you don’t have to sell your house.
The more houses you sell, the less pizza you deliver. But let’s find something to do to supplement your income in the short term, for the next six months or so, while you get the real estate business going. If you don’t do that, then you need to sell the house.
QUESTION: Susan calls in from Abilene, Texas, with a question about retirement and mortgage percentages. She asks Dave what percentage of your total net worth your personal residence should be once you are retired.
ANSWER: I don’t have a set percentage. The larger your net worth, the smaller the percentage would be. In other words, if you’re worth $50 million, you wouldn’t want to have 50 percent in your home. But if you’re worth $150,000, you’re probably going to have more than 50 percent in your home.
So, the smaller your net worth is, the larger the percentage of your home will likely be. And that’s very reasonable. That’s one ratio you can look at. If you’re in the million-dollar range of net worth, and I’m just making this up on the spot — I don’t really have it figured out — but I don’t think I’d want to have more than half of it in my house. I think I’d want to have about a half-million in investments, and about a half-million in my house. Again, I haven’t done the math. That’s just a feeling I have.
But you can kind of see how I’m looking at that. You want to try and have as small a portion as possible, but you also have to have a home you can live in.