How to Stay Rich During FIRE by Dodging the 4 Financial “Horsemen”

You’ve worked so hard to finally achieveWe are so excited for today’s episode. We are joined by Whitney Elkins Hued, where she gives a tease of one of the big pillars highlighted in her book, money for Tomorrow, how to Build and Protect Generational Wealth. We discussed the concept of the four horsemen and how these parts could massively impact the longevity of your financial independence portfolio. Scott and I then use this special teaser as a jumping off point for a discussion of what you can do to retain your wealth if you’re working towards financial independence or have already retired early and you’re afraid of losing everything. Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen, and with me as always is my has money for tomorrow. Co-host Scott Rich.Thanks, Mindy. Great to be here with you. We’re always in an estate of discussion, personal finance topics. Alright, whatever. We’ll move on from that one. BiggerPockets is a goal of creating 1 million millionaires. You are in the right place if you want to get your financial house in order and then keep it in order because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting. Whitney Elkins Hutton, thank you so much for joining us. Welcome to the BiggerPockets Money podcast.Thank you so much for having me. This is such aPleasure. Whitney, let’s jump into your financial journey. Where does your journey with money begin?It actually starts when I purchased my first property in 2002. I bought a house with a significant other and I thought I was doing the responsible thing. Good job, stable relationship. Let’s dive into home ownership, right? But the relationship ended about a month after purchasing the house. Fortunately in this case, everything was under my name, all the mortgage, the deed, all the expenses and utilities too. But I really, I found myself stuck or I felt I was stuck with all of these expenses that I just really couldn’t afford. And this house was, we now call it a bur property, but at the time I’m just sitting here going, oh my gosh, there’s green shag carpet all over the floors and psychedelic daisies painted all over the walls and I don’t have the skills. What am I supposed to do? So I had two choices. I could panic or I could get resourceful.
And so I chose to get resourceful. I rented out every single one of the rooms to cover the mortgage and the expenses. Taught myself how to renovate the property. Mind you guys, YouTube didn’t exist back then. So I was reading a book, the Home Depot 1, 2, 3 book and going to a lot of the Home Depot classes to figure out how to resurface floors and do drywall. About 11 months later, I sold the property and it was really at that point in time that it clicked for me. I walked away with 50 2K in cash at the closing table, which was more than I made in my day job that had me traveling quite often. And that was really a light bulb moment for me because that’s when I realized that if I was going to build wealth, I had to figure out how to stop trading time for dollars and make money work for me, not me work for money. And so that just really set me on the path towards real estate investing. The next few years I was living, flipping house hacking, scaling, and single family rental portfolios, buying multifamily buildings. But I started off with that house hacking and flipping, and if I wasn’t doing flipping, I had another job. And so really that’s where the whole journey begins for me.That sounds very similar to my journey. I bought a house. Did you buy your house as a primary residence or as an investment?As a primary residence? Our realtor, yeah. Scott’s like, yay, how’s the heck? But at that point in time, our realtor put the book, rich Dad poured out in our hands, and I read the first two chapters. I’m like, oh, this is really intriguing. Okay, great. We’ve done everything. Check buy below value, we’ve got a property in a great part of town. And then I just skimmed the rest of the chapters and I put down the book. I really wish I had read the rest of the book because I never would’ve sold that property.I’ve got a lot of properties in my past that I wish I would’ve kept, but that’s not the right way to look at it. It was a great learning experience. It started you on the path. So it is the best thing that you could have done to see that there’s money there. If you would’ve kept that property and just lived in it for a while, maybe you wouldn’t have seen the power of how much money you can make in real estate just by fixing up a property. You did a bur house hack live and flip all together, and BiggerPockets wasn’t even around yet to make those phrases up yet.Oh no. And I was 103% financed with other people’s money in this deal. So I borrowed $7,000 from my grandfather who, God bless him, he cashed out. I’m sure he was making on 15% on the CD that he had purchased in the 1970s. So this was true love. He cashed it out, gave it to me for the down payment. I closed with the first guys, this is 2002, very different time. I closed with the first and then immediately a second was able to, as soon as the home equity line of credit closed, I was able to cash back out that seven K and give it to my grandfather.So when you say you close with the first, you close with a second, you’re talking about a first mortgage and a second mortgageHome equity line of credits.Alright, we’re going to take a quick break, but before we go, I want to announce that we are now offering early bird tickets for BP Con 2025, which is October 5th through seventh in Las Vegas. You can score that early bird pricing of $100 off by going to biggerpockets.com/conference while we’re away. And yes, we will be having a BiggerPockets money track. And yes, despite hosting a personal finance podcast that touts responsible personal finance habits, I love craps a few times a year with a very small amount of money.Welcome back to the show with Whitney.Whitney, let’s zoom out a little bit here. This is awesome. First foray into real estate investing and wonderful success story there. How did you transition from what I would say treating real estate as a supplement to your job to then building wealth, building really long-term wealth and a portfolio on there? How does your story evolve to that part of the journey?Well, it took me quite a bit of time because I only knew live and flipping and house hacking. So I did for about five more deals like that. And over that time, that’s when I’m realizing if I’m not flipping, I’m not earning a paycheck. I can’t pay the grocery bill at the grocery store, I can’t pay my utilities. I just have chunks of equity. And so really I pick up a book called Money Master the Game in 2014. And so that book by Tony Robbins really started opening my eyes to how many works and two big concepts that come out of there is one ownership, which I was like, yes, I own assets. And then two cashflow. How do you get cashflow at all different stages of the game? And so I’m the jerk that’s going to our 401k benefits advisor and going, Hey, can we expand our offerings within our 401k?
Can I get part of this money back so I can go invest in real estate and have down payments for single family homes? I get shut down left and and then I really took matters into my own hands in about 2016, and that’s when I bought my first single family rental. I still had not found BiggerPockets at this point in time. I did a lot of things wrong on this property, which is I wanted to purchase it for cashflow, but I put down an $80,000 down payment and I think the property cashflow $400 with me managing the property. So the first month, the toilet breaks, I’m in the hole the first month and I’m like, Ooh, okay, baby steps. I’ve proven to myself that this model will work, that the tenants will pay the bills, but I don’t have cashflow. And so that was the first property quickly switch to out-of-state real estate investing focused on cashflow.Can I ask a question about that? Because if you cash flowing, if you put $80,000 down, you cashflow $400 a month, that’s a 6% cash on cash return. So it’ss not necessarily as awesome as what we’re hoping to get out of real estate investing in there, but it’s also not nothing. Are you saying that that was phantom number because you had not accounted for things like the toilet or those types of things and that was actually overstating your cashflow?Yeah, well I know a lot of people self-manage their properties. And so if I were willing to just really give my time to the property, I think that, yeah, 6% is fine. But at some point in time I wanted to have the size of a estate portfolio that I could actually hire out property management, which means I did not leave myself enough margin to do that. And also I hadn’t set aside proper maintenance in CapEx allowance for the property. That became very evident very quickly.$400 a month divided by times 12 is 4,800 divided by 80 is 6%. But we were not actually getting a 6% cashflow is what we’re saying.I think I figured it was closer to 1.5 if I figured in property management and then I was upside down if I were sitting aside the proper allowance for CapEx and maintenance. And I see a lot of investors actually do that when they go into their first properties, they are like, oh, I’ll manage it myself. And oh by the way, they’re not setting aside two or $300 a month for CapEx and maintenance guys. Water heaters break. It can break in the first month of ownership. It could break in the 48th month of ownership. It’s just a matter of whenThe water heater thing. Yeah, you’re absolutely right. It will break. It breaks in the middle of the night. You’re welcome. So when it’ll break, I dunno which night, but it will absolutely break in the middle of the night. And the thing is, I like to say this about real estate, something will break as soon as you buy the house. The cost of that repair is inversely proportionate to how much money you have in the bank in reserves.You guys have completely set me up for this transition here. You found yourself in hot water with this property, Whitney, what happens next with your portfolio and how you build things out?I find a website called BiggerPockets and I actually learn how to calculate properly the due diligence of the deal. How can I truly underwrite the deal? How can I calculate the cashflow? How can I actually start understanding how can I build financial independence through real estate? And then it clicked for me and I’m like, for me in my goals, I want to be independent in my W2 jobs, so I need cashflow. For some people, their goal is to build equity. That wasn’t my goal. My goal was cashflow. And so I quickly start building out of state. I went to two markets, Indianapolis and Kansas City. And so the first year I secured 10 single family rentals. The year after that I got 15, and then the next year I got 15. But in there I started transitioning from single family rentals into small multifamily buildings and then eventually a 52 unit apartment building.Walk us through the transition point, the inflection point of I am aggressively building wealth with as much leverage and activity as I possibly can in transitioning to a portfolio that I can really believe will provide money for tomorrow.And what year was this? I’mBuilding very aggressively between 2016 in latter part of 2019. But when 2019 hits, I’m starting to see a lot of those adjustable rate mortgages that I saw or it was eerily similar for what I saw in 2016 when I was living, flipping and house hacking.So you said you saw the market changing. How did you see this? What clues were you starting to notice?Yeah, so at this point in time, I am in a general partnership at a private equity firm and we’re doing private syndication on multifamily buildings and none of the deals really worked unless there was a short two or three year construction debt piece with adjustable rate mortgages. And yes, the operators, us included, were putting interest rate caps on the property locking in IO for three or four years interest rates. But our underwriter was just like, red flag, what happens if the interest rate environment shifts at year three and you cannot exit? And I was like, wait a second. Okay, hold on, show me the math. And he showed me the math and I’m like, oh, we’ve got a storm coming guys. I don’t know what to tell you. There’s a storm and so many people I felt like were very unprepared. I’m telling everybody, okay, we’re going to focus on the core four, the four horsemen that are in our portfolio. We’re going to fortify our foundation, we’re going to get all of our line of credit taken out right now, we’re going to shifts part of our portfolio into cashflowing debt. And they were all like, no, Whitney, you’re nuts. I’ve got this equity deal here that I can go into. And I’m like, no, hold on. We need to balance things out.Okay, what are these four horsemen you’re talking about?Yeah, we’re not talking about the four horsemen from the viable, but really what are those big four wealth destroyers that can destroy anybody’s portfolio no matter how much you scaled, whether you have five figures in your portfolio or if you have eight, 10 figures in your portfolio. In the first one, I really go over six different wealth destroyers in the book money for tomorrow. But there’s four core ones that anybody can focus on and one is making sure that we’re using debt wisely, right? Most people assume that all debt’s bad, but debt itself isn’t the problem. It’s the bad debt. A lot of times we’re focused on the high interest rate consumer debt. This can bleed tens of thousands of dollars from somebody’s portfolio over the lifetime. So I know you guys talk a lot about, hey, have a cashflowing piece of real estate, making sure you have good quality debt on the property where cash flows greater than the expenses on the property.
Everything’s cool. That’s not the type of debt I’m thinking. I’m thinking about people who have tons of car loans or credit card loans, private loans. Let’s not start scaling extremely rapidly until we have a good payoff order of that debt. Simply take the loan balance your outstanding loan balance, divide it by the minimum monthly payment you need to make, not what you’re actually making If you’re overpaying, but the minimum monthly payment and you’re going to get an index and that index of that number is 50 or below that debt, you’re probably going to make a higher effective rate of return on your money if you pay off that debt as opposed to taking that capital and deploying it. I know people that have taken loans on credit cards all the time to buy real estate, but let’s get those things paid off as quickly as possible.
So that’s one, learning how to order off the payoff of our consumer debt. Number two is leveraging insurance appropriately. So it’s really tricky with insurance, you can either overpay the two big issues I see people is either they’re overpaying for the insurance or they’re underinsured, and so we want to make sure that we’re hitting the proper balance there. And so insurance is a big one. I mean, we’ve got two more horsemen really quickly. Taxes, that’s one of the reasons why we love investing in real estate. Or if you’re here listening, you’re probably curious about investing in real estate, but taxes can be a huge wealth leak. And so are you making sure that you’re working with a strategist that’s helping you leverage the depreciation on the portfolio, maybe helping you organize your investing to invest in tax advantage investments and pair it with taxed advantage vehicles, vehicles.
And they’re just more just being proactive about the tax plan. I see so many investors that try to master taxes themself because they don’t like hiring a professional. I’m all about asking the question, how can I, and when you ask that question, how can I solve this problem? It doesn’t always mean I have to require the skill. Sometimes it means I go find the person that can help me solve the situation. In this case, making sure that you’ve got a good tax strategist on your side. And then my favorite one, and Scott, I love to get your insight on this, especially in the fire movement, is the big horseman that I see draining people’s portfolios is investment fees, right? It can come from banking fees or loan origination fees, prepayment penalty fees, but I’m talking about retirement fees. And so for people who have a traditional 401k, they’re probably losing about 31% of their portfolio over a 21 year period to just fees alone.
The average person investing in a 401k is, I don’t know, I haven’t looked up that stat in a while, but I think 35, 40 years. So 31% is probably a huge underestimation of that. And for contacts, if you’re just maxing out your 401k at say $21,000 a year, you’re getting a modest 7% in the stock market, which I know we were just having a conversation before, probably not the case right now, but average returns over time and you don’t get a match from your employer, you’re probably still losing a solid six figures, a hundred thousand dollars or more just to fees in your portfolio. So be intentional about your investing and this is where I help people in the book Money for tomorrow to lay out this blueprint, lay out this plan so they can make some of these really, truly minor adjustments in their portfolio to help them save and keep money in it and grow the wealth for themselves and not somebody else.Whitney, it was so amazing to connect today. Thank you so much for your time. We don’t want to talk about any of the other concepts in the book because you can find that book Money for Tomorrow, how to Build and Protect Generational Wealth in the BiggerPockets Bookstore. So just go to biggerpockets.com/m fourt, the letter M, the number four T. Also, if you want to learn more about Whitney, you can listen to episode 8 89 of the BiggerPockets podcast.That was a quick tease with Whitney Elkins Hutton. And now Scott, I am excited to dive in a little bit deeper into the concept of the four horsemen. These aspects of your portfolio are really important to look critically at to retain your wealth if you’re working towards financial independence or are already retired early and you’re afraid of losing everything.Thanks for sticking with us.Let’s start with the first one, Scott interest. So she says that interest, I don’t think she’s really talking about the interest on your mortgage. I think she’s talking about your consumer debt interest. The high, because I didn’t pay off my credit cards interest the high because I don’t have good credit interest that you are paying and shouldn’t have to pay. It’s not that hard to have good credit. It’s not that hard to pay off your credit cards on time. If you can’t afford it, then don’t charge it. I mean, unless that’s your emergency fund, which it shouldn’t be, but if you need tires and you don’t have anything, you have to put them on the credit card. But I think that interest can sneakily suck out a lot of money from your wealth that you’re not even really paying attention to because I think it happens more for people who aren’t as educated about their money in general. What is your thought on the interest?No, I completely agree and I will go further, but this is BiggerPockets money. If you have consumer debt with high interest, you’re listening to the wrong podcast. We don’t do that here at BiggerPockets money. That’s an emergency. We pay it off. We don’t even think about it. So when I think about, I don’t have any consumer debt out there, but besides the balance, I pay off in full each month on my credit card so I can amass those points. I never spend that we talked about with the points guy a few weeks ago on there, but so when I think about interest, it’s interest that’s backing assets or that’s extremely low rate against maybe a car loan, for example. Sometimes you can get those at 2%, although I don’t have any on my cars right now, but when we talk about that, I think minimizing interest expense comes down to that interest.
For me, if I’m going to use interest to finance the acquisition of long an asset I intend to hold for a long period of time, it must be fixed rate and it must be very low interest below, ideally five 6% in those areas I may go a little higher, but I’m starting to get wary of it. If I’ve got seven or 8% interest rate debt, I’m paying it off. I just don’t think that I’m good enough of an investor to beat a guaranteed 7, 8, 9, 10% interest rate return over a long period of time and I just take it. That’s a win. If someone offers me eight, nine, 10% after tax, that’s what most types of this interest are in most situations outside of business expenses, I just take it. So if it’s between five and 8%, then we’ve got a little bit of a gray area, but at this point in my life, I’d lean toward paying it off. If I was in aggressive accumulation mode, I would be potentially fine with it and below 5%, I don’t pay off my rental mortgages, for example, at below 5% interest rate. So that’s how I think about minimizing the impact of interest while also using it sparingly as a tool, especially now later in my fire journey. How about you?I don’t have any consumer debt. I don’t pay any interest except my current mortgage, which is in the high 2%. I don’t pay a single cent more on my mortgage payment.Love it. Yep. I don’t either, but if it crossed that threshold, I would go all in on it, but if it doesn’t cross the threshold, I pay the minimum same as you.So I do own two houses. One I own free and clear and one I have a mortgage on. The reason that I own it free and clear is because I bought it with, well, actually no, we did pay it off, so I bought it with a line of credit against my stock portfolio when interest rates were a horrific 5% after being two and 3% forever. And I didn’t think that interest rates would stay so high so long,
So we just paid cash for it, cash and air quotes because it was going to, I pulled it out of my line of credit and then we have been paying that down. We just paid it off completely and that leads me into our next Horseman insurance. So I have these two properties. They’re actually located in the same neighborhood just around the corner from each other. The house that I’m sitting in is my primary residence. I have a mortgage on this property and I tried to raise my deductible on my homeowner’s insurance to the highest that the insurance company offered was $10,000. And I think they do this to kind of protect their customers. How many people outside of the fire communities, a bunch of frugal weirdos, how many people can come up with $10,000 to pay for the repair on the house? Let’s say you need a new roof, it’s $20,000. Well, you’re going to put 50% of that bill. So $10,000 was the highest I could go. I locked it in. I was saving significant money on my premiums every month or every year, and then I get a letter from my mortgage company that said, oh, you can’t do this. You can only have a $5,000 deductible. And I’m like, but I’m really good with money. Please let me have this $10,000 deductible. And they said, absolutely not. If you don’t drop it down, we will get you a different insurance policy and bill you the difference.What was the premium difference,Scott? It’s been a couple of years and I don’t remember, but it was a couple of hundred dollars.ItMight’ve been $500 a year.So I mean, that’s one of the benefits of owning property free and clear, and this is there’s no mortgage person that’s requiring you to do this stuff. My philosophy on insurance is I want a good carrier who will pay out the claim with full coverage, and I’m never going to call ’em unless it’s a disaster that threatens into the tunes of high single, high five figures or at least six figures. If not seven figures is where I’m going to be calling for that. I’m going to keep a cash position that will cover a solid deductible into the tens of thousands of dollars. My deductible is actually north of $30,000 on my primary, and I have a similar situation for a paid off rental that I recently, recently purchased, and that is a wonderful, wonderful situation. It increases cashflow on those. And I don’t know about you, but I’ve been doing this for 10 years as a rental property investor.
I’ve never filed a claim. I’ve had to replace roofs in those types of things, but it’s not for my situation with the roof replacement. It was not an insurance thing. The roof needed a replacement. It was part of the deal of buying that property. It’s why I got a good deal on that property in part because there was some deferred maintenance. So I have paid those types of expenses out of my portfolio reserves and the cashflow produced by it, and that’s my plan going forward. Maybe I’ll never file a claim or maybe I’ll file two across a lifetime hopefully in there, but when that day comes, I want that to happen. So I completely agree. Interest, I minimize by making sure I only have long-term fixed rate, low interest rate debt in my portfolio. I may take on additional interest, but then I would prioritize paying it down if I were to do that on a specific deal because I’ll take my eight plus percent return, enjoy it, and then insurance. It’s about making sure I have quality coverage from a real provider who will pay it out, but sending a clear message that I’m never going to call ’em unless it’s I really need the insurance to kick in a significant way. And I think that that’s a very massive advantage that those in the fire community will rapidly have access to it because you should be accumulating a lot of wealth very quickly in here and having access to liquidity that would allow you to self-insure smaller claims to a large degree smaller being less than 25,000, $50,000.My deductible on my paid off house is 10% of the value of the home, which you can do when you don’t have a mortgage.And when you do this, the insurance brokers will think you’re crazy. They don’t do this very frequently and it’s a new concept. You have to educate them on that. When I am shopping for insurance, I have to educate the broker and say, here’s what I’m trying to do. I literally want this to be there. And they’re like, well, the highest we can go is 1% or 3% or 5% of your home value or whatever. I’m on there. So it’s a very unusual way of shopping for insurance, but it’ll save you huge if you’re willing, if you know that when you do file a claim, you’ll have a large deductible as part of it, and over time that math I think will work out in your favor. Now, one thing I do not maximize this to the point of insanity. So in some cases you add on 50 bucks and now you can cover your car for collision or whatever around there for a year. I’m going to do that, those kinds of things and take reasonable ones there. So it’s not a pure, how do I take this to the ultimate extreme? There’s a little bit of common sense. You have to apply for these quotes on a line item basis as well when you’re shopping for insurance,But I mean sit down and take the time to, what I like to do is email. I don’t like to talk on the phone with insurance brokers. I want to get them on email. I want to ask them the exact same thing, copy paste it into a bunch of different companies and compare quotes, written quotes right next to each other. I think that’s easier for me personally than to try and take notes as they’re talking and trying to explain stuff to me. But if you’ve got more than one house and one vehicle, you should be looking at changing your insurance company if you’ve been with them for more than one year. I’ve got actually, if you have insurance, you should be looking to get quotes every single year, the end. I’m not going to caveat that with how many you have. I recently went from a homeowner’s company that I thought I was paying a decent rate for and they had my car insurance as well to a new company because a friend recommended them telling me how much great coverage she got. I went from kind of bad coverage on my house and really bad coverage on my cars to significantly better coverage on the cars and brought my house value up to replacement value instead of what I purchased it at, and I purchased it at a huge discount and added an umbrella policy all for less than what I was paying at the other company for worse coverage.Yeah, it’s remarkable. I think you got to shop this around with four or five different carriers once every two to three years, because otherwise, if you just keep renewing, it’s amazing how in my experience at least, they’re just like, whoa, I got a quote now. The insurance carrier on my house that I bought a year ago increased my premium 90% and I’m now shopping around, I’m getting quotes that have better coverage for one third of the annual cost of the premium on my current provider. It’s ridiculous on there. And so I think you have to be willing to shop this stuff every couple of years I think as part of it, and it’s a real pain and I got nothing for you. You’re got to spend an hour at least on the phone with four or five different carriers to shop this across Home Auto and Home Auto and umbrella. If you choose to get an umbrella, which I think a lot of people should in there, and I think it is just a time you got to spend because it’s several thousand dollars a year and it’s a very high hourly wage, you’re paying yourself to make sure to keep those costs low after tax.Okay, let’s talk about fees.When I think about minimizing fees, right, there’s two major investments that I participate in, the stock market and real estate. So the stock market, I think by this point, BiggerPockets money listeners and those pursuing fire know well and good not to use a money manager that charges an A UM fee of 1% of assets under management. And though the math and how crazy those fees stack up to over a lifetime in terms of helping your financial advisor become financially independent instead of you has been well documented. I’m sure we’ll talk about that in a minute. The other part though that I want to talk, so you just buy ETFs or directly invest through mutual funds through Vanguard or Fidelity and Stock Mart, low fee index funds. That’s how you avoid all those fees essentially over a long period of time and aggregate a lot more wealth for yourself in real estate though, fees can really begin to add up as well.
And so as a real estate investor, I encourage folks not on their first deal necessarily, but if you’re going to do 3, 4, 5, 10 real estate deals across your lifetime and begin massing a rental portfolio, get your license, go get your license, and after the second or third deal, you can really begin representing yourself to a large degree. So this is what I do here and when I need advice, I don’t transact like Mindy’s a real agent. You help people buy and sell real estate all the time, but when I need to transact on properties, I then pay Mindy an hourly fee that she’s happy with. I still owe you, actually, I free a check for the recent property here that you helped me with, but I pay you a fee and it’s a good fee, right? It’s a good hourly rate I think for you.Yeah, it’s greatOn there and a lot of agents would be willing to accept that. And then I save the two and a half percent fee that I would otherwise need to pay a buyer’s agent over a long period of time. So again, I would never do that in my first deal or even my second deal, but by this point, this is my sixth property I’ve purchased, right? I kind of know what I’m doing on this front, and I feel like the 150 hours of education I did to get my real estate license plus the continuing education and the three ish thousand dollars per year to get license has totally been overwhelmed by the hundred plus thousand dollars in fees that I have saved to buyers agents over the last several transactions. So I completely agree with the philosophy of minimizing fees, and that’s my approach. I get my license and maintain it as a real estate investor in order to avoid those over a long period of time.I will say that there is more to having a real estate license than just taking your continuing ed every year. It is a big commitment upfront, and you need to have some level of real estate knowledge. I had been flipping houses for, I dunno, 15 years when I got my real estate license and then took the real estate exam or took the real estate coursework and was shocked at how frankly unvaluable it is to have that information in your head. And I don’t even have that information in my head anymore. Let’s be honest. The coursework teaches you absolutely nothing about buying and selling real estate, but Scott is a real estate investor. He’s the president and CEO of BiggerPockets. He knows real estate, so he uses my help for the contracts part of it. You definitely need somebody’s guidance if you’re not going to be doing this as a full-time job. But even giving up a little bit of the commission as hiring somebody to guide you through the transaction is a great way to save on fees. But I would caution that this is for somebody who is buying and selling a lot of real estate.You’ve got to buy a property every year or every year or three in order to justify this, right? If you’re not going to do that, then don’t get your license on it. But I think if it’s part of your major, part of your portfolio over a long period of time, that absolutely keeping fees down makes a huge difference over a long period of time.Fees Scott, are not just for real estate, they’re for the stock market too. I would like to read something that Ramit wrote, Ramit I will teach you to be rich. He says, think a 1% fee isn’t much. Here’s the surprising math behind paying 1% to a financial advisor. Let’s say you’re 30 years old and you invest $50,000 and contribute another thousand dollars a month. The first thing you want to do when picking your funds is to minimize fees. Look for the management fees or expense ratios to be low around 0.2% and you’ll be fine. Most of the index funds at Vanguard t Rowe Price and Fidelity offer excellent value in 35 years with a low 0.2% management fee. And assuming a 7% return, which is a reasonable assumption, you’d have just over $2 million. But if you pay a financial advisor 1%, you would only have $1.7 million that he says that’s more than $380,000 going into your advisor’s pockets in fees.That’s right, 1% because you’re multiplying 1% of the portfolio value every year, so it will make you almost 30% poorer to pay a 1% fee every year for 30 years. It’s a remarkable impact on your long-term wealth. This 1% a UM fee,I’m just questioning his math because you had 2 million and now you have 1.7. So that’s only 30,000, not three point.That’s 300,000.300,000, not 380,000. But either way, that’s $300,000 going into your advisor’s pockets. By the way, if you pay 2%, that’s over $750,000 in fees. This is what I mean when I say that a 1% fee can cost you 28% of your lifetime returns.By the way, even his example of the low fee 0.2% is a very high fee for some of these passively managed funds. Vanguard’s total market index fund has an expense ratio of 0.03%. That’s a major difference. It’s almost 10 times less expensive from a fee perspective than the 0.2%, right? 0.2% versus 0.03% for an ETF, like VTI or it’s equivalent V-T-S-A-X or VOO, the s and p 500 version of that. So there are funds out there that have very low ones. Fidelity has similarly low expense ratios. They’re like one basis point 100th of a percent higher in some cases than Vanguard, but there’s some extraordinarily low fee index funds, and that’s the easiest way to avoid these fees.So yeah, when you think, oh, it’s only 1%, it’s not only anything.Yep.Now let’s talk taxes. Scott, I loved what Whitney said about having a tax planner have a conversation with you. Look, if you have a W2 and that’s it, you have a W2 and a 401k and that’s it. You probably don’t need to have a conversation with a tax planner, but Scott, I hope you’re having conversations with a tax planner because you’ve got a real estate portfolio and you’ve got a stock market portfolio and you’ve got a lot of other investments. You’re invested in BiggerPockets, you’re invested in a lot of things. It would be very helpful to you, and I bet you would make up the money that you spent on the tax planning session way more so with the savings that they provide to you just because you don’t know everything. I, as much as it pains me to admit, don’t know everything. So having somebody who does have so much expertise in one subject tax and the tax code is like 4 billion pages long or something like that, it’s huge. It’s enormous. It’s meant to be confusing having somebody who has sifted through that and gone through and said, oh, this is how you use this. This is how you use this. I mean, I have had people, Scott, talk to me about they need a new advisor. I’m sorry, they need a new accountant because their last accountant didn’t have them taking depreciation on their rentals for the last five years, which makes my heart break because their accountant didn’t know anything about it.Yeah, absolutely. I want to just kind of, this is the one where I think I would actually diverge with Whitney and many other investors from a philosophical perspective while completely agreeing that this needs the advice of a tax planner from a long-term perspective. So one of the things that I think traps people’s thinking, and this is fire specific, is this, I want to absolutely minimize my tax bill in the near term, and my goal is not to have a hundred million dollars in wealth at 90. My goal is to build a portfolio that allows me to enjoy Tuesday in my thirties and forties. And a consequence of that philosophical difference, I believe is not fearing paying taxes today, right? If I’ve been investing for a long period of time in the index funds, for example, and I want to start harvesting some of that wealth beyond just the principle I committed into those funds, at some point I’ve got to be willing to pay taxes.
I’ve got to be willing to realize that gain so that I can spend it on a trip, on a house, on whatever that I want to do there. And so I’m not afraid to realize that gain. I’m also not afraid to realize that gain when I can’t sleep at night. So I paid taxes when I sold my index fund portfolio out of fear for high prices in the stock market in February of this year, and those taxes will get paid to Uncle Sam. I’ll do my part to reduce the National Treasury here, and I sleep better at night. So I’m just not afraid to do that from one perspective. Second, I have a long-term bet in place that you can disagree with, but I think that taxes are going up. So while it is true, so if I have a hundred thousand dollars invested in the market and I pay a hundred thousand gain and I pay taxes on it and then reinvest it right away in Colorado, that marginal tax rate could be as high as 25%, 24.55%, 20% federal for capital gains and then four point a half percent for Colorado.
But if I realized that gain and then put it right back into the market, then I will be less wealthy in 30 years after tax, even after I sell it because the way that the math works, you can go play with that concept if I’m losing people on that. But I believe that tax brackets are going to go up over the next 30, 40 years from where they are at today. So I believe that when, and nobody knows what that’s going to look like. So I believe between the combination of me realizing a gain when I feel like it’s the best move for my portfolio, paying taxes, potentially getting a better risk adjusted return with whatever I then reinvest the proceeds into and combining that with the second fact that I believe tax rates will go up long-term. And third, the fact that I want to use that wealth to enable me to spend Tuesday how I want in my thirties and forties, I’m not afraid to pay taxes.
That said, I always understand the impact of the moves that I’m going to make from a tax perspective. I’m going to stay in an asset class. I want to 10 31 exchange something, right? I want to think through those types of decisions here. I also want to point out another thing here that why you need a tax planner on this. I was recently talking to somebody who wants to sell, I think $200,000 worth of stocks in order to fund a home improvement project. That’s their choice. So I see you don’t like that as a philosophical item, but that’s what they want to do. Let’s think about the tax implications there. I want it to all be long-term capital gains. Well, if you invested a hundred thousand dollars in November, 2024 in the stock market, and that has grown to $101,000 right now, and that’s part of the piece that you sell here, that $1,000 gain will be taxed as a short-term gain at your marginal income tax bracket right?
Now, if you sell a hundred thousand dollars of stock that you bought with a basis of $50,000 several years ago, you’re going to have a $50,000 gain that you’re going to pay taxes on with a long-term capital gains rate at 15 to 20% depending on your income tax bracket. You see where I’m going with this. Wouldn’t you rather realize the short-term gain of $1,000 and pay four or $500 in taxes to access some of that wealth today than to pay the long-term capital gains by selling the chunk that you invested in five, 10 years ago? That’s the kind of thing that people miss and don’t think about when they’re thinking about the tax planning perspective here is there’s the amount of the gain and there’s the type of realized income on there. And so that’s something that you got to really be careful of when you’re thinking about this. It’s not as simple as, oh, I’m going to realize the long term capital gain and stuff. The short term one,And the thinking behind both of those sides that you just shared is absolutely solid. Oh, I want to do long-term capital gains because that’s a lower tax bracket than my current tax bracket of 30% or whatever. But it’s not necessarily the right move like you just highlighted. So yes, that is a great point and that is absolutely what tax planning can help you figure out.Yeah, and I sold some of my stocks recently. I put that into place and I will have short-term capital gains that’ll be taxed at a marginal income tax income tax bracket here, and they’ll have some long-term ones, but I made the move. It was a very complicated exercise, frankly, into some of these to think about it, simple toggle inside of the Schwab trading account there, but it was a complicated exercise to figure out how do you minimize that tax hit in year on this? And there’s also that philosophy. Do I want to pay? Am I just cool paying a portion of taxes year to have a lower basis on the next of investments that I am going to invest here? Those are all things you got to think about here, and it’s the place where I diverge from Whitney philosophically, but also agree completely with the sentiment. You got to really understand what you’re doing here and minimize taxes with respect to the goal that you have. When do you want to use that money?This was super fun. I like these four horsemen and I encourage our listeners to check out the book Money for Tomorrow, how to Build and Protect Generational Wealth. This is a BiggerPockets Publishing book. You can buy it on our website at biggerpockets.com/store or wherever books are sold. Alright, Scott, should we get out of here?Let’s do it.That wraps up this episode of the BiggerPockets Money Podcast. I am Mindy Jensen. He is the Scot Trench saying Tutu Lu Mountain Dew.