Envelope Overwhelm
Episode 142R
Episode Guide
Episode Timestamps
Show Notes for ChooseFI Podcast Episode
Episode Title: Real Estate Investing Insights with Paula Pant
Episode Summary: In this episode, hosts Brad Barrett and Jonathan Mendonsa discuss real estate investing with expert Paula Pant. The conversation emphasizes seeing real estate not as a speculative venture but as a viable investment strategy. The hosts and Paula dive into mathematical frameworks for analyzing real estate deals, personal anecdotes about overcoming investment fears, and practical budgeting tips using tools like YNAB. The episode highlights the importance of minimizing unnecessary fees while maximizing savings, providing actionable steps towards financial independence.
Key Topics Discussed:
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Intro to Real Estate as an Investment
- Real estate is positioned as a strong investment strategy rather than speculation.
- Common misconceptions about property appreciation are addressed.
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Understanding the Cap Rate
- The cap rate serves as an unleveraged dividend metric for evaluating investments.
- The hosts discuss the math behind the cap rate and its relevance to personal investment decisions.
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The Envelope System and Budgeting
- Different approaches to budgeting tools like YNAB versus traditional envelope systems.
- Importance of understanding your spending and saving habits.
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Avoiding Fees and Building Savings
- Strategies to avoid unnecessary bank fees and enhance savings efficiency.
- Importance of being aware of your bank's fee structure.
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Wrap-up and Listener Questions
- Recap of the discussed strategies and the significance of taking action toward financial independence.
Actionable Takeaways:
- Evaluate investments using the cap rate as a foundational metric.
- Utilize budgeting tools like YNAB for better financial management.
- Automate bill payments to reduce financial stress and avoid late fees.
Key Quotes:
- “Appreciation is merely speculation; know your investments.”
- “Don't let financing dictate a mediocre investment decision.”
- “To progress, you must take action.”
- “Paying unnecessary fees indicates a lack of awareness.”
- “Financial literacy is attainable; you don't need extraordinary skills.”
Chapter Markers:
- Intro to Real Estate as an Investment
- The Envelope System and Budgeting
- Avoiding Fees and Building Savings
- Understanding the Cap Rate
- Wrap-up and Listener Questions
FAQs:
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What is real estate investing?
- Real estate investing involves purchasing property to generate profit, either through rent or appreciation.
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What is a cap rate?
- The cap rate is a metric used to evaluate real estate investments, calculated as the property's net operating income divided by the purchase price.
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What is YNAB?
- YNAB (You Need A Budget) is a budgeting tool designed to help users track their spending and prioritize financial goals effectively.
Related Resources:
- CIT Bank - High interest savings account.
- YNAB (You Need A Budget) - Budgeting tool.
Discussion Questions:
- What are the benefits and drawbacks of real estate investing?
- How does budgeting affect financial independence?
- What strategies can mitigate the impact of fees on your finances?
Email Campaigns:
- Learn the importance of understanding cap rates in real estate investing.
- Discover how YNAB can transform your budgeting process.
Podcast Description: Join Brad and Jonathan as they dive deep into personal finance and real estate investing strategies. With expert insights from Paula Pant, uncover how to analyze real estate investments effectively and embrace a financial lifestyle of independence. Gain practical advice on budgeting, savings, and eliminating unnecessary fees, paving the way toward your financial goals.
Hosts:
- Brad Barrett
- Jonathan Mendonsa
Podcast Intro:
Podcast Extro:
Mastering Real Estate Investing: A Guide to Financial Independence
Understanding Real Estate as an Investment
Real estate investing is no longer perceived merely as speculation; it’s recognized as a solid investment strategy. Many individuals aspire to achieve financial independence by leveraging real estate as a core strategy. When diving into the world of real estate, it's crucial to understand how to analyze properties effectively rather than relying upon speculative appreciation. This involves acquiring a solid mathematical framework to assess your potential investment's worth.
The Cap Rate: A Foundation Metric
One of the most important concepts in real estate investing is the cap rate. The cap rate, short for capitalization rate, measures the expected rate of return on a real estate investment. It’s calculated by dividing the property’s net operating income by its purchase price. This metric serves as a foundational tool to evaluate whether your investment decision is sound:
- Action Item: Calculate the cap rate for any property you are considering. This will give you a clear understanding of your expected returns on the investment.
Budgeting Tools for Better Financial Management
Effective budgeting is vital for reaching financial independence. One of the standout tools discussed is YNAB (You Need A Budget). YNAB is an easy-to-use budgeting tool that encourages proactive financial management and has transformed the way many individuals approach their finances.
- Action Item: Set up a YNAB account to streamline your budgeting and track your expenses efficiently. This tool not only helps allocate your money wisely but also keeps your financial goals front and center.
The Envelope Budgeting System: A Simple Approach
An alternative budgeting strategy is the envelope system, which involves allocating cash for different spending categories into labeled envelopes. Although traditionally physical, you can adapt this method digitally by creating multiple accounts or using budgeting apps. This approach instills discipline, ensuring you only spend what you allocate.
- Pro Tip: If cash management isn't appealing, consider setting up several checking accounts dedicated to specific spending categories. Automate transfers to simplify your cash flow management.
Minimizing Fees and Maximizing Savings
A vital takeaway for any investor is to avoid unnecessary fees. Paying fees can indicate a lack of awareness regarding your financial products. Opt for bank accounts and financial products that minimize or eliminate fees. This practice maximizes your savings and accelerates your path to financial independence.
- Insight: If you find yourself paying fees regularly, evaluate your current accounts and inquire with your bank on how to eliminate these costs.
Overcoming Investment Fears
Many aspiring investors harbor fears about entering the real estate market. Whether it’s the fear of making the wrong investment or the emotional toll of managing properties, these fears can paralyze. Paula Pant’s insight that "the only way to get ahead is to get started" encapsulates the necessity of taking action despite your fears.
- Action Plan: Start small and view your first investments as tests of your psychological resilience. This approach prepares you for the rigors of real estate investing and builds your confidence.
The Role of Financial Literacy
The discussions emphasize that everyone can learn about personal finance and investing—no extraordinary skills are required. Financial literacy is attainable and crucial for making informed investment choices. Take the initiative to educate yourself continually; this foundation builds confidence and assertiveness in your financial decisions.
- Recommendation: Consider reading finance-related books or listening to informative podcasts regularly. Knowledge is your most valuable asset in the investment arena.
Evaluating Properties Beyond the Purchase Price
When assessing whether to convert your current home into rental property, it's essential to evaluate the property's potential as an investment. Consider transaction costs, potential rental income, and whether the property maintains significant intrinsic value.
- Insight: Often, homeowners may underestimate the value of their property transitioning into a rental. Establishing a cap rate can discern whether this investment path makes sense.
Simplicity in Investment Processes
Many investors mistakenly think that real estate investing is complex. It's essential to filter out the noise and focus on the fundamentals—evaluating properties based on their intrinsic value. Committing to a structured approach alleviates fears of complexity and enhances success rates.
- Tip for Beginners: Create a checklist of key considerations for every property you're evaluating, focusing on critical metrics like the cap rate and the overall market conditions in the area.
Taking Action and Building Wealth
Investing is inherently about taking action. Those who succeed are the ones who transition from knowledge to execution. Begin by evaluating current market conditions, analyzing properties through essential metrics, and leveraging tools like YNAB for your financial tracking and budgeting.
- Action Takeaway: Participate in local real estate investment groups or seek out mentorships to enhance your understanding and confidence.
Conclusion
Achieving financial independence through real estate investing requires knowledge, strategic budgeting, and a willingness to act despite fears and uncertainties. By employing mathematical frameworks like the cap rate and tools like YNAB, you can establish a pathway toward wealth building that is transparent, effective, and tailored to your lifestyle goals. So, start your journey today and embrace the process of transforming both your finances and your life.
A discussion about simplifying personal finances as well as this week's episode with Paula Pant's take on real estate.
[elementor-template id="143609"]Personal Finance Made Simple
Although many spend hours each month dealing with bills, Brad has set up his personal finances on autopilot. With that, he only has to devote a total of 10 minutes a month to personal finance problems such as writing a check to pay a bill.
Personal finances does not have to be difficult.
Jonathan just bought a new home, so he recently went through the tedious process of setting up home-related bills on autopilot. It took a few hours to set up but now he doesn't have to devote hours each month to pay the bills.
This time saved is one more benefit of FI. Without having to worry about cash flow, you can set your personal finances on autopilot to free up time for other things. Many people don't have the luxury of not worrying when certain bills will hit their accounts. Brad and Jonathan both have a cushion in their savings account that allows them to never worry about whether or not the account has enough money for the bills.
Jonathan's Budget Evolution
Back at 18 years old, Jonathan was introduced to the envelope system. Basically, you take out a cash budget each month and divide it into these envelopes. For example, you might have a 'food' envelope that you could only use to purchase food.
After two weeks, he couldn't deal with the paper system anymore so he went digital. He opened eight free checking accounts through USAA and created a digital envelope system in this way. This led to too many debit cards to keep track of.
A few iterations later, he no longer uses the envelope system at all. Instead, he has embraced using credit cards responsibly.
Used properly, a credit card is an amazing financial tool. Used improperly, it can destroy your financial life.
Instead, he has one USAA checking account that pays off his credit card balances in full each month. He also has a CIT savings account that is earning 1.25% interest. Anyone can earn that interest rate through a CIT Savings Account if they contribute at least $100 a month or have $25,000 in the account. Check out our full review of CIT Bank here.
YNAB handles the budgeting of all of this spending easily. Finally, he manages his investments through M1 Finance. Check out our full review of M1 Finance here.
Avoid Fees
Brad and Jonathan both agree that paying fees for personal finance tasks is overrated.
If you're paying fees for anything, something has gone horribly awry.
Brad only pays annual fees for certain credit cards based on a very intentional analysis. If you are charged a fee for something, then dispute it. More often than not, if you call about a fee then the company will reverse it.
Related Article: Should You Pay An Annual Fee On A Credit Card?
Set up everything on autopay as a way to safeguard against late fees. If you bank with Wells Fargo, you may be able to avoid an overdraft fee by linking your checking account to your savings account.
Take the time and initiative to avoid fees and ask what you can do to prevent any future fees. Life doesn't need to be more expensive. Each time you take action on an idea, it's to simplify your life.
How ChooseFI Makes Money
Since the beginning, Brad and Jonathan decided to provide the best listening experience possible. With that, they've decided to avoid putting ads on the air.
Instead of ads, the show earns money through affiliates that Brad and Jonathan use in their personal lives. For example, Jonathan mentioned in today's episode that he uses M1 Finance and CIT bank to handle his finances. ChooseFI is an affiliate for both of these.
If you wanted to support the show, then you could sign up for either of those through our links for M1 Finance and CIT Bank. When you click through our link, you'll receive at least the best public deal available. Anytime you click through a link or type it into your browser, you are supporting the show. Your support allows us to continue creating content for you.
If you think about what the framework for that looks like, our guiding light is 'How can we help our audience earn more, spend less, enjoy the journey?' If you hear us represent or promote something on this podcast, it is because we feel, like personally, it has benefitted our lives. It's been helpful for us. And we think it will help you with one of those tenets, of effectively, our mission statement.
If you hear us represent something on the podcast, it is because we think it will help you because it has helped us.
Reading Goals
Jonathan has the goal of reading ten books this year. So far, he is on number four. He's read Mindset, Quit Like a Millionaire, and RESET. One book Jonathan is excitedly waiting to read is Atomic Habits by James Clear, once it is returned from Brad's household.
On the other hand, Brad has read many books so far this year. Audiobooks are a great way to "read" while you're on the move.
If left to my own devices, what I would do with my free time is read.
ChooseFI: Your Blueprint To Financial Independence is coming out soon. The release date is October 1, 2019. It will be released as a print book and an audiobook. If you haven't preordered, then consider doing that now. If you don't buy books, then perhaps request it at your local library.
Paula's Insights On Real Estate
Paula offered some great tips of anyone diving into real estate. We've recorded a second episode where Paula will share about turn-key rental programs, so look for that in the near future. Jonathan found the cap rate equation most useful for his current predicament of selling or keeping his old home. The cap rate offered a way to evaluate the asset without financing fogging up the picture.
Since the episode was recorded, Brad has bought two single-family homes as an investment. He is taking on the role of long-distance landlord. These properties will serve as a test to see whether or not real estate makes sense for Brad. He will report back in a future episode about how the test goes!
Listen to the full episode with Paula Pant here.
Community Feedback
The ChooseFI Facebook group hit 50,000 members! Let's see what they had to say.
Win From Scott
Scott paid off $165,000 in student loans. Congrats!
PMI Update From Wren
Wren, a mortgage industry insider, wrote to let us know more about PMI.
PMI is paid to the agency that backs the loan, not the mortgage bank or servicer. Since the servicer of the loan has nothing to gain from PMI, they are usually helpful in removing it.
If you have an FHA loan from 2013 or later, then you cannot remove PMI.
If you have a conventional Fannie or Freddy loan or an FHA loan taken out before 2013, then you'll need to show that your loan to value ratio (LTV) is now 78% or lower.
The first option is to call the bank you are making payments to. If you have been paying down the principal for a while, you can have the lender check the balance against the value of the property from the time when the loan was written. This value will be either the appraised value or purchase price for a purchase. For a refinance, this value will either be the appraised value or automated value.
If you have a loan but the property has significantly increased in value so that you are below 78% LTV, then you can submit an appraisal to the bank showing the current value of the property in order to have the LTV calculated. Make sure to talk to the bank before the appraisal, you'll want to use one of their selected providers.
If the LTV is 78% or less, then you can ask them to remove the PMI. The servicer will send it to the agency backing the loan for approval. It takes a few days but is usually approved.
If you do not call, then PMI will not automatically disappear.
Shout Out To Amon And Christina
This family reached FI on two civil servant incomes, congrats! As creators of Our Rich Journey, they will be on the podcast in the coming months.
ChooseFI International Foundation Celebration
We will be hosting a launch party for the foundation on September 6, 2019, at FinCon. You do not need to be attending FinCon to join in. Show your support for the foundation while hanging out with Brad, Jonathan, and Paula Pant.
Related Articles
- My Favorite Budgeting Software: You Need A Budget (YNAB) Review
- How FI Is Different From Personal Finance
New to FI? Be sure to check out Episode 100: Welcome To The FI Community!
