Do You Need Debt to Reach FIRE? How to Use Leverage to Build Wealth

Mindy:
It goes without saying that Americans are in debt. The average debt in America is $104,215, which includes mortgages, car loans, credit card statements, and student loans. Debt peaks at age 40 to 49, and the largest percentages of the average consumer debt balance are mortgages. And I think a lot of people on the fire movement ask themselves, what should I do with this debt and what debt should I be taking on? We’re going to cover all of that in today’s episode so you can avoid the common pitfalls getting in your way. Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen, and with me as always is my quarter panel co-host, Scott Trench.

Scott:
Thanks, Mindy. Great to be here together. You and I make 50 cent. Did you know actually 50 cent has some great life and financial wisdom to impart on folks? I think there’s two quotes in particular that stand out there. One is, if you die in an elevator, make sure you press the up button and perhaps the more relevant piece of advice that 50 cent has is Get Rich or Dia Try. So go check him out for more financial wisdom like that. You can find his albums on Spotify and anywhere music is sold. Alright, with that BiggerPockets is the goal of creating 1 million millionaires. You’re in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone no matter when or where you’re starting, whether that’s with 50 cent or with several million dollars in debt. Today, we’re so excited to be joined by Amanda Wolfe and Kyle Mast, who I’m sure everyone is familiar with. If you have been listening to the BiggerPockets Money podcast for some time, it’s great to see both of you guys today.

Mindy:
Great to be here,

Scott:
Great to be here.

Mindy:
We know the average American has $104,000 in debt. Let’s all discuss what if any debt we have and if you don’t have any debt, when did you pay off your final debt? Scott, I’m going to start with you. Do you have any debt?

Scott:
I have $1.92 million in outstanding mortgages across our rental portfolio. I have a $0 mortgage on my primary residence and I have a $16,000 loan on a Toyota RAV4 that I purchased two years ago. And that is it. I have a small credit card balance I pay off in full each month, which I do not count as debt.

Mindy:
I would say that I don’t count that as debt either. Millions of dollars in debt is what I heard you say, Scott, but then you said it’s across your rental portfolio, so that’s not really personal debt. That’s your business debt. Scott’s rental portfolio business debt. Wouldn’t you say?

Scott:
The question was do you have any debt? So I was like, all right, well, I got to list all of my debts there. Those are five mortgages across five rental properties in the greater Denver area. I’m very comfortable with that debt. All of that debt is locked in between 3.375% and four and a quarter percent. So it’s all long-term mortgages and it’s reasonably, lightly levered. Somewhere between I would say 50 and 60%.

Mindy:
Okay, so I approve of your debt, Amanda, let’s look at your debt load.

Amanda:
I’m like, wow, it sounds like Scott practices what he preaches. So that feels very trustworthy. Mine is a little more simpler. I have no debt the same as Scott. I use a credit card for every single thing in my life, but I pay it off in full every month and I have no debt.

Mindy:
Okay, so Scott has millions of dollars in debt. Amanda has no debt. I think Amanda wins.

Amanda:
Well, I also don’t have a rental portfolio of five homes. So

Mindy:
Amanda, did you ever have debt?

Amanda:
I did. I’ve had both loads of it. At some point or another, I paid off my final piece of debt, which was my 2014 Ford Escape, which I’m still driving her today. I had a 1% interest rate on this thing and was making the minimum payments for as long as possible, paid it off last summer. And it’s one of those things where, like I said, I was paying it off as slowly as possible because my credit score had been an 8 46 and it dropped 80 points when I paid my car off my last $300 payment. It did recover, but that was a sad day.

Mindy:
Dear credit score people come on.

Amanda:
Yes, literally a fake

Mindy:
Report card for your money, a fake report card for your money that you kind of have to have because nobody will give you credit if you don’t.

Amanda:
Right,

Mindy:
Exactly. Okay. Kyle, Amanda’s got zero. Scott has millions. Where do you fall? I’m guessing kind of in the middle.

Kyle:
Yeah, I lean more towards Scott. I’m in the millions. I’m not going to give the exact numbers that I’ve got, but it’s on mortgages, on rental properties, and we’ll talk about this later on as we get into philosophy on debt and where we’ve come to and where we’ve been over the years. But that’s a kind of debt that I’m super comfortable with. If it’s at a good LTV to the properties and if we’ve got good cashflow on the properties and reserves savings to cover things that come in that are unexpected because that always happens. But I’ve had student loan debt in the past. It’s been paid off, never had any credit card debt. And we can talk about vehicle debt too. I do have some vehicle debt. Mindy, tell us, let’s just jump to you. What do you got?

Mindy:
I have mortgage debt and I have a line of credit against my after tax stock portfolio holdings that I used to buy another house, so it’s kind of all house related. I do have a credit card that I swipe on everything and pay off at the end of every month. I did have a loan for a 0% interest loan for my daughter’s braces that I just recently paid off. She got her braces off now she has a beautiful smile. So I bought my orthodontist a boat and a house and a car and a private plane and all that stuff. But yeah, I don’t have student, I never had student loan debt. My parents pay for my housing, my parents pay for my college, and I have been very, very conscious about not having consumer debt just because I don’t like to be in debt, but I also don’t consider mortgage debt to be debt.

Scott:
That was really interesting to hear everyone’s different takes on debt here. So Kyle, I think we’re going to have a lot of similarities in terms of how we think about these things and that’s going to be a fun discussion here. I’m super interested that you’re essentially debt-free. Amanda and Mindy is discarding her mortgage, which I would feel way. I love having a paid off primary and I feel debt-free even though I’ve got the millions of dollars mortgage that I talked about previously because I don’t have to pay for my personal home on there. If I’d ever had a problem with rentals, I’d just sell ’em all is the way I view it. So anyways, let’s talk about when we first started out on our fire journeys. I want to hear from folks about whether you prioritized paying down debt or whether you prioritized focusing on investing and what influenced those decisions. And Amanda, let’s start with you on that.

Amanda:
Yeah, so for me, I feel like I started my fire journey before I even knew what it was called. So I feel like once you’re kind of in the personal finance space, getting a handle on your money, it comes down the road at some point and you’re like, oh yeah, that’s the thing I’ve been chasing. For me, I grew up really, really poor. So when I finally graduated college and I got my first big girl job, I thought I was rolling in the big bucks and definitely did not have a grasp on how money works at all. So I had a bunch of student loans, but I also knew that I was supposed to be investing in my 401k, but then I was also spending more than I was earning. My salary was like $37,000. So at the time I was just kind of throwing a little bit at everything.

Amanda:
If you’ve seen that meme where the house is on fire and she’s trying to throw a bucket of water on the house that’s on fire, and so nothing is actually getting accomplished. I would say that’s how my journey started. I’m throwing a little money at the credit card, I’m putting a little money into the 401k. I’m budgeting sometimes, but I would say about a year into my first corporate job that I really started sitting down and thinking like, okay, I need to come up with a plan because it seems like I’m not actually moving the needle at all. And it was definitely a learning journey. I prioritized paying down my student loans because having all that debt freaked me out, which if I could go back in time, I would take back because my student loans were like 3% interest, so I didn’t need to knock those out in six years. So I’d probably go back in time and deprioritize that and instead invest the difference. But over time I think it’s evolved, like I said, started out a little bumpy and now I would say I prioritize investing. If I had any high interest debt, I would be working toward that. But any low interest debt, if I got a different car that was low interest, I would not be rushing to pay it off. So that’s kind of how I feel about it, make the most use of my money.

Mindy:
We have to take a quick ad break, but while we are away, we want to hear from you. What kind of debt do you have? You can answer in the Spotify or the YouTube app.

Scott:
Welcome back. We are joined by a Kyle Mast and Amanda Wolf. Kyle, do you next?

Kyle:
Yeah, starting out, I was kind of one of those, I don’t know if you’d call it a weird person, but when I was in college, I was out of state for college. I’d go through the airport and I’d buy a personal finance book every time. I went through one of those bookshops in there and one of them is the Total Money Makeover by Dave Ramsey, the David Bach, what is it? Millionaire? I can’t even remember. Millionaire Next Door is one by Stanley, several of those books. So I had all these things going through my head, kind of like, Amanda, what do you throw things at? But I think I landed on the Dave Ramsey thing early on and one of the things that really influenced me was when I got married and my wife was basically, I’ve said this before, kind of like my venture capitalist in me starting my financial planning firm.

Kyle:
I made nothing. I had no clients and she was just my sugar mama. She had a real job and she was making things and she hated her job and the goal was to not have her work that job anymore, go part-time, help me. So basically our priority was to eliminate every monthly payment we had, which means that you have less that you have to live on. So the faster we could eliminate the largest of monthly payments, the sooner we could take a job where I made less, she could make less in a job that she maybe liked more. So our goal was knocking out every payment we had and that was student loan debt and that was a little bit of a cart debt that she had when we got married, just everything. And that, I can’t remember how many a few years it took us to do that. We lived super lean. So that was the beginning of our journey. That was where we landed. And I wouldn’t change that actually. We paid off low interest rate student loans and the freedom, I’m in that stage of life, the freedom feeling of that I’m in the Dave Ramsey camp, I’m different for this season of my life, but in that season of my life and the goal that we had of reducing our monthly required cash outlay, that was the right decision. And I do the same thing. Absolutely. Again, same way.

Scott:
Alright, Mindy, I know you have a lot of depth here to your answer, but could you tell us about your situation, about how you prioritize this

Mindy:
Investing? Because I didn’t have any debt, but I also had no idea what the fire movement was. So my husband was having a terrible day at work. He banged out on his computer, how do I quit my job earlier? How do I retire early? And then a pop’s Mr. Money mustache and he’s like, oh, that’s interesting. So that created the rabbit hole that we dove down into and we discovered that we were already on the path to financial independence. We just didn’t know that we had been saving for stuff, we were saving for the future. We prioritized a little bit more. We focused on what our expenses were and we focused on being able to invest more. We took some investment risks. We were heavy into tech stocks. We didn’t do anything about index funds. We never heard of them. I don’t remember when we first started investing in index funds, but it was probably a decade after we started our finance journey. Scott, how about you? Did you prioritize paying down debt? Well, clearly not because you think millions of dollars in debt is the best way to go.

Scott:
Well, I started my journey basically broke with a couple thousand dollars, which is a huge privilege because I didn’t have student loan debt or any of those types of things to get going. And when I started my career, I needed a car. So I bought a brand new then 2014 Toyota Corolla. And I remember for a long time I would’ve been like that was the worst financial decision in my life. I should have bought a 2007 Toyota Corolla that was much cheaper for it. That’s how ridiculous I was and am in a lot of ways on that. So that was a big part of it. I had that loan at 1.99% and it bugged me for the next five years that I had that debt as from a personal perspective. So that’s how funky I think I am to a large degree, but I had no problem the next year taking on a several hundred thousand dollars mortgage from my first duplex house hack because I just viewed it completely differently and the leverage and how that was an investment on that front. And I essentially have never racked up any type of personal debt whatsoever in my life. Again, good fortune, very privileged for my upbringing and have college paid for, but I’ve only ever taken out loans for rental properties or my two car purchases.

Mindy:
So I’m hearing you say you prioritize collecting debt instead of paying it down, but for a good reason.

Scott:
Yeah, the 30 year fixed rate Fannie Mae insured mortgage that is at three, but 4.5% is, to me that was just an unbelievable window of opportunity and I tried to take advantage of it, not to the point where I couldn’t sustain it or I was in way beyond way in over my head, but to take advantage of it in a way that would have a really meaningful impact on my life long term. So I think that holding those and never paying them off will be a big advantage for the next 20 years.

Mindy:
So there’s a lot of different schools of thought on debt in general, and I’m hearing a lot of different schools of thought here, but also kind of the same. Scott, would you recommend somebody following in your footsteps if they are on their journey to fire? Or what would you say to somebody who is on their journey to fire with regards to their own debt?

Scott:
Look, I think that if you’re starting from scratch and you want to get to financial independence in a relatively short order and you don’t earn a great income, then you have to take some kind of risk. And for me, that has always been the most obvious risk in that world has been a house hack. There’s just not a lot of other great options like that. You might take an SBA loan too if you’re really interested in the business buying route or entrepreneurship, but at some point you have to take a risk. Otherwise, the brutal reality of saving making 50 grand, saving 10 to 20% of that and investing it in the stock market will just need to compound over 30 years. Yeah, I think I’d largely pursue it the same way that I did to that effect. I think that one of the things that’s bugging me around this is the mortgage debt and the personal debt, and I never really had to face that situation because of the way I approached my house hacking career in life.

Scott:
But for example, I have a savings account with my emergency fund, which has more than the balance of my car loan of 16 grand, which is an interest rate of 2.5%, and the interest rate I get on the savings account is like 4%. So it’s all simple interest and it’s all incremental, so it’s all taxed at the highest relative bracket that I’m in. So am I really getting a spread there by not paying off the Toyota RAV4 loan and then why is that different with my rental property portfolio? Well, the reason is that the personal loan, I can’t deduct, I can’t deduct my interest payment on my car as part of my expense profile, but on the rental properties, the interest is absolutely deductible. So it’s a no brainer to keep my interest rates and my mortgages, my rental properties at the three point a quarter to four and a half percent range.

Scott:
And it’s kind of a toss up the way that I’m managing my money personally about whether I should even have the car loan. So that framework I don’t think was something I had thought through previously. And I think that if my car loan were at four or 5%, I would probably pay it off rather than keep any, there’s no point in having the extra money in the savings account earning 4.5% when I’m negatively arbitraging a spread between that and the car loan, for example. So that’s probably the only difference I would be thinking about or ideas I would want to put in someone’s head who’s listening to this to think about their debt situation.

Mindy:
Now, Amanda, how do you think someone should approach debt on their fire journey? I

Amanda:
Think that it completely depends on the individual because I think there’s the math answer and I think there’s the feelings answer. So the math answer could be like, let’s put it in a spreadsheet and see what makes most sense for you. If you have a super low interest rate on these other loans and you’re actually going to invest the difference, that’s the key part, then maybe it makes more sense mathematically. And I say that’s the key part because a lot of times people will be like, oh, I only have a 3% interest on this thing, so that’s great. I don’t need to rush to pay it off. And then they go and spend the extra money that they would’ve had versus investing it because how we think about it, how Scott was saying even with his savings account. So I think there’s the math answer where you can sit down and say, okay, am I earning more interest on this money versus what debt is costing me?

Amanda:
So that’s the math answer, but then there’s also the feelings answer, which is how does the debt make you feel? So Mindy, earlier when you were like, oh, I don’t count my house debt as debt, I’m like, I feel like I would because as somebody who’s had their home taken away from them when they were a kid, you don’t forget about that type of trauma. And so I think that if that’s something that’s eating away at you, if you’re afraid your car could be taken away because maybe it was your mom’s car was repoed when you were a kid or you didn’t have somewhere safe or stable to live, paying down your mortgage or your car or something like that might be more of a priority for you. It just might feel better. So I think it totally depends on the individual and then their own experiences with money.

Mindy:
Amanda, I love that you called out math and feelings because everybody started their journey at the place that they started, not where anybody else started. So of course the financial independence community and the financial media is telling you all debt’s bad, you should pay off everything. But if you grew up financially insecure and having any sort of debt at all gives you the heebie-jeebies, then Scott and I telling you that you shouldn’t pay off your mortgage because it’s only a 2% shouldn’t be something that you’re like, well, I guess I have to do that. No, if you want to pay it off, pay it off. If you want to be completely debt free and live by Dave Ramsey’s mantra and not have any credit cards and all of that, that’s your choice. Okay, Kyle, how do you think someone should approach debt on their fire journey?

Kyle:
Oh my goodness, this is such a cool show. I feel like this is so awesome. Hearing everyone’s opinion as Amanda’s talking there, everyone’s situation is so different. And this is something that if you read any decent personal finance book, they will have a section and hopefully a large section on behavioral finance. Everyone behaves different. There might be the wrath or the wrath, there might be the math answer, but there’s also the what gets the job done answer. And if you look at history, you look at research, everything points to we do not behave rationally. We behave how we want to behave. So the trick as a financial planner, when I would work with clients, the trick was to figure out what someone’s history was, figure out what their goals are, what behavior will get them there. And it can be totally different for different people.

Kyle:
So to answer your question, how people should start out, it totally depends on their background and where they want to go to how I started out just knocking dead out really fast so we could get my wife out of a job she doesn’t like. That was perfect for us. That’s not going to be perfect for everyone. Someone who ideally the math thing would be house hack, do it again, house hack, do it again. Just keep doing that. That’s really in today’s economy, one of the best ways. At any income level, you can build wealth long-term, but it just doesn’t fit everyone’s situation or their goals even. So I don’t have a specific recommendation for people. What I would say is that be willing to learn over time and adjust your thoughts over time. The longer I worked with clients, the more I looked at people’s balance sheets, their own debt, their own behavior, the wealth that they built, my idea of what risk was and what debt, the risk associated with certain types of debt in line with things like inflation really got influenced.

Kyle:
And I think I am a different person from a financial viewpoint standpoint now than I was 15 or 20 years ago by far. So just know that the seasons of life change and you should probably change along with that, hopefully learning along the way, if you learn a certain strategy that works well for you at a certain point in your life, don’t expect it to learn or work really well for you the whole way through. Be willing to adjust as economy changes, as your family life changes, as your health changes. These things can really influence where you’re starting today, but also if you have to restart or change course later on down the line. So that was a terrible answer. I’m sorry, I have no specific way to start.

Scott:
I think that’s a great answer, Kyle. And yeah, I completely agree with that. I would never today put 95% leverage against my entire net worth to try to get to the next level, but I absolutely would do that again if I had 20 grand and was trying to get started by my first house hack. So it seasons of life and it’s different for everybody and many people are like, that sounds terrible, I would never do that. And that’s fine. There’s just different approaches, different strokes. Let’s talk about that concept that you just brought up Kyle here, how debt strategy changes as you get farther along on your fire journey. And Mindy, I’d love to hear your approach. How did things start out and how did it evolve?

Mindy:
Well, how it started out is that I had no debt outside of the mortgage on my primary property. And I’m sure during the course of the renovations that I was doing on the various live-in flips, I had some debt that I would acquire because if you charge a certain amount on your store credit card, then they give you no interest for six, 12 or 24 months. So I was taking out 0% interest loans on building supplies, and then I tried really hard to get that 24 months. I’m going to sell the house in two years. I could if I timed it right, sell the house and then pay off the debt and pay no interest on that. But again, because it’s a 0% interest rate, because I had the money to be able to pay it off if I had to, I didn’t consider that to be debt.

Mindy:
I have changed my debt strategy a little bit in that we took out a line of credit against our after tax stock portfolio. I think this is called an equity line on your stocks. At one point we had this much margin between what we owed and what we owned and then we watched that margin go smaller, smaller, smaller, smaller, and we’re like maybe something’s going to happen. So we took out a home equity line of credit on our primary house just in case something happened. Something did happen. We had to throw money at that from the home equity line of credit into the line of credit against the stocks until the stock market rebounded and started going back up again. That was a bit of a, Hey, I really don’t like debt scenario. So now we’ve started thinking of ways that we can pay down that margin loan, faster margin loan, that’s what it’s called. But for the most part, we are not going out and acquiring extra debt just for funsies. And we always pay off our credit cards every month regardless of the balance, and that’s never going to change.

Scott:
How about

Amanda:
You, Amanda? I feel like mine has changed as I’ve learned more. So I mentioned in my twenties, I was just so scared of having any debt at all. So like I said, I rushed to pay. I realized I was creeping up a little bit on my credit cards, nothing crazy, like a couple thousand, but I was like, that’s still a couple thousand that I’m paying interest on now. I understand how interest works. So it was like I need to pay those down. And then I wanted to get rid of my loans and I just wanted to get rid of debt altogether because I thought it was really, really scary. But now that I’m in my thirties, I’m like, okay, well I now understand how debt can also be leveraged, so if used correctly, it can work in your favor. So I do think it’s changed as I’ve learned more and understood how it works and understood my own risk tolerance and those types of things. So I completely agree with what Kyle was saying earlier about seasons of life. Sure, probably in my forties and fifties it will look even different.

Scott:
We heard a little bit about it from Kyle. I don’t know if you have anything to add based on your previous response to the last question, but any other color you’d like to add, Kyle?

Kyle:
Yeah, we’ve kind of touched on a lot of it. I think a couple of things to keep in mind as you’re looking on maybe how your debt strategy might change. And so I’ll talk about how mine did. I think I’ve learned over the years the importance of inflation. Inflation is a huge risk that people do not factor in hardly ever into their financial life. And I just saw it with client balance sheets, the people that had things like real estate or a decent sized stock portfolio, the long-term hedge that was, and people that, so I didn’t work with high net worth clients. I worked with middle America as clients. So these were people, some of them social security was their chief source of income with maybe a 50,000 or a hundred thousand dollars IRA. That was their backstop where they take a little bit of extra money from.

Kyle:
And that even though social security, you get a cost of living increase every year. It does not cover true inflation, not even close depending on what your life situation is. But in general it does not. And not having that good hedge against inflation over the course of years really starts to hurt. So that was one thing that my strategy has really been structured around inflation as a piece of the puzzle. And like you said earlier, Scott, the window that we had of two to 3% interest rates at that time, I was doing so much research on historical inflation in societies for the last couple thousand years, and it was just nuts that we could take out loans and refinance in two to 3% for 30 years fixed. And I was just trying to push everyone as fast and far as possible to refinance current loans to lock those in place.

Kyle:
And I don’t think we’ll ever see that again. I think that is just gone. So that’s one thing that’s a hedge that you can put in place and if you’ve got cashflow on a property cover that, or even if it’s a business that you have and you have some sort of business loan that is backed by probably something secured like a property or a building, but the cashflow of the business, that is a good way to hedge your debt and hedge your financial situation in the long run rather than just trying to steer clear of debt completely because debt, well, how do I say this and not sound like I just want everyone to go into debt. Well leveraged debt with good reserves to back up if something bad happens. Reserves means emergency funds is one of the best ways to hedge against inflation in the long run.

Kyle:
And I also think when you’re younger, there’s a huge value to not swinging for the fences, trying things that you might not try later on. And this is someone, if anyone listens to the Radical Personal Finance podcast, Joshua Sheets, it’s another one in the world here. This is something that he’s changed his view on a lot over the years is that when you’re young, you can try things, you can make mistakes, you can maybe go broke, but you can recover and you only have a small window of learning those lessons. And sometimes it’s good to learn those and sometimes you learn such good lessons that it benefits you exponentially down the road as opposed to not trying something that might be a little bit more risky. Again, this word risk, it’s all built around risk, but how do you define it if you don’t put inflation into the scenario, if you don’t put in the risk of not taking a chance on something, that could be great. Yeah, I think there’s just so much more to this discussion as you can tell. I’ve just become so much more nuanced on it over the years and it’s a fun thing to talk about. It’s a really fun thing to talk about.

Scott:
Stay tuned after our final break where we’re going to break down the irresponsible ways to handle debt and what you should not take on and how that could impact your fight journey.

Mindy:
Let’s jump back in. How about you, Scott? Did your debt strategy change as you got further down the financial independence journey?

Scott:
Yeah, I think once again, I’m going to find myself really aligned with Kyle and I’m going to just kind of reframe a few things that he said in the way that I think about it. It’s the same thought process, just a different way of spitting it out. From my view, when I got started on the journey, it was I didn’t have any wealth, so I needed some wealth to protect, and that’s where I had the lever real estate was the tool. But if you take away the leverage, real estate is a definition, it’s that’s a third of the CPI. It is inflation housing cost in a very literal sense. And so if you have a couple of paid off properties, you have the definition, at least a third of the definition of an inflation protected portfolio. Sure, there can be volatility on there, but it becomes less about how do you continue to evolve the wealth and how do you build an inflation adjusted portfolio?

Scott:
And that’s where, just like Kyle said, it’s a stock portfolio, it’s a real estate portfolio, and over time that real estate portfolio will deliver and it will just preserve wealth in line with inflation, preserve an income stream. That should be by definition, again, in line with inflation. And that’s the way I think about it is there’s no point in pacing with inflation. If you don’t have any wealth, you have to get ahead of it somehow by earning a lot, spending very little and investing in a way that can outpace it. And once as your strategy evolves and hopefully you begin to approach fire over the years and decades, then it becomes about preserving wealth there. And debt just amplifies return and or amplifies risk. And so it’s just where can you layer that in to move faster? You never want to get in over your skis, but if you don’t use it at all, you might be there five, you might get there five, 10 years slower.

Kyle:
Yeah, this is as I’m hearing me and Scott talk, I’m just hoping we don’t lose anybody here too. We’re talking about a lot about inflation and leverage. And just for everyone listening, this is really something, it’s important enough that if it’s kind of going over the head or if you’re not comprehending it, I would definitely look into it more. Our economy is built on the assumption that inflation will happen, and if it doesn’t, the government literally prints money to make it happen at a certain point and then subtracts money to make it happen at a certain point. So it’s just the ocean we’re swimming in. So understanding it a little bit is super important to be able to keep pace, even just keep pace with living expenses when Wheat thins now cost $57 for 10 wheat thins. It’s really important stuff.

Scott:
I think that it sounds like there’s a general agreement around avoiding consumer debt. We didn’t even talk about super high interest consumer debt. This is BiggerPockets money. We assume that that’s a given at this point. But there I think are bounds for what’s responsible, what’s reasonable relative to debt, and the alignment that they can be used as a tool depends on your comfort level around there. It can be powerful, but I think there are certain restrictions we should put on it. And I’d love to go around the horn here and hear what you guys think about what’s reasonable and what’s not when it comes to debt. And Amanda, I’d love to kick it off with your thoughts on that.

Amanda:
Yeah, so earlier I was talking about how there’s the math answer and the feelings answer, right? So on paper, what makes the most mathematical sense and then how do you feel about the debt? But I think those two points do converge at a certain point. So if you have, for example, a lot of credit card debt that’s in the 20%, maybe even 30%, that’s when we start reaching a level of just being straight up irresponsible. There is a very popular TikTok trend going on right now where a lot of girls out there are like, I’m in my credit card debt era. Screw it. I’m going to Lululemon, Sephora, I’m getting all the goodies and I will worry about this later. And that could not be a poor choice. It is such a small blip in your life where you’re going to enjoy these little treasures and it is going to haunt you for potentially decades. So I do not approve of this TikTok trend. I think it’s very irresponsible. And so when we think about debt, like I said, there’s the math and the feelings, but they do converge at a certain point.

Scott:
Mindy, what do you think?

Mindy:
First, I want to over annunciate what Amanda just said. She said, I don’t think this could be a poorer choice. I want to make sure people didn’t hear her say, oh, I don’t think this is a poor choice. It could not be a poorer choice. You could not make a worse choice than getting in massive debt in your twenties at this 20, 25, 30% interest rate. I don’t even understand how credit card companies are allowed to charge that and not be subjected to usury laws. But either way, you are making such a big financial problem for what? A pair of leggings, some makeup. Is that what Sephora sells?

Amanda:
Yes. Skincare makeup,

Mindy:
Yeah. You know what? Target sells the same thing at a whole lot lower price tag. And how many pairs of leggings do you need? One to go to the gym today and one to go to the gym tomorrow while you’re washing the ones that are dirty today? Or you could reuse those. I’ve done that before, but you wear ’em twice before you wash them, but you are setting your entire future up to be paying. I mean, there’s also a TikTok trend where women are saying, I’m sorry, where people are saying, I am in massive debt. I have three jobs and all of the income that I’m making still doesn’t cover the interest payments on my debt load. That is the result of some usurious loans, the student loans, the getting used to not paying your student loans, but also buying Sera makeup and Lululemon leggings when you can’t afford them. If you can’t afford them, then no, you don’t deserve them. So that really, really, really just wanted to underline. You could not be making a poorer choice. Scott, I forgot the question.

Scott:
That was it. What are the unreasonable limits you take debt to? Yeah, I think we’re going to make some really big headlines with this particular episode of personal finance panel condemns, putting it all on the credit card and worrying about the payment later on that. But yeah, Kyle, so love the violet agreement there. Kyle would love your thoughts on this subject as well.

Kyle:
Oh man, I’m in the same camp. I worry that we went through this episode and we talked about some of the good aspects of debt and how to do it responsibly, but I’m loving that we’re kind of summarizing it here that there are some major ways that you can just get into trouble buying things that don’t appreciate in value in general, like buying a hamburger and paying it off over 25 years, not a very good idea. So that’s the biggest thing. If you can just buy things that appreciate with debt, that’s maybe a rule to put in there. There’s other rules along with that, but if it doesn’t appreciate in general, don’t buy it. And again, something that has 20% interest a credit card, it is just you’re signing yourself up for servitude in the long run. The thing that I would just add on is the importance of savings and reserves, the importance of stop gaps when you do take on responsible debt even because you never know what’s going to happen.

Kyle:
So in my case, with rental properties, you don’t know when a tenant’s going to give notice and move out and you’re going to have to renovate a unit. It’s going to take three months or four months to get someone back in there. You don’t know. That just happened to me yesterday. I got an email. One of my properties, a longtime tenant is moving out, probably going to have to do some expensive renovations on the property to get it listed, get someone back in there. They’re moving out in the middle of winter. It’s going to be spring almost probably until we get somebody in there. But you have to have the cat and that property has a mortgage on it. I’m going to make a mortgage payment for three to five months that I’m not getting any rent on. But that’s built into the proforma of the property that’s built into the savings that’s going to happen.

Kyle:
So anytime you take on some sort of investment debt, I mean if you want to sleep good at night, have a whole bunch of reserves, have a savings account, also have a Roth IRA, it’s any other account that also is just liquid, even if it’s in the stock market and it goes down by 30%, there’s still something in there and you can get to it. So just have those reserves in the real estate world as your properties increase. If you’re someone who likes to have a certain amount of healthy leverage or debt on them, continue to increase your reserves proportionately. Don’t get ahead of your skis on that, but yeah, that’s the biggest thing. I mean, that’s the way to sleep. Good at night savings for sure.

Amanda:
Can I add just one thing? I know if this will fit in, but regarding the credit card debt piece of things, I thought this was something that everybody knew, but after looking at the comments and these TikTok trends of these girls who are in their credit card debt era, when your credit card gets closed and it’s sent to collections or whatnot, it doesn’t just disappear. It literally follows you for life. So when Mindy was mentioning these people who are working three jobs to just pay the interest on things, it is something that is going to follow you forever. So don’t get caught up in some of the TikTok trends are really, really cool and inspiring. This is not, that is not cute at all. So I just wanted to call that out, that don’t get swept up in the herd mentality of screw it, I’m just going to add it to my credit card and worry about it later. It will continue to follow you. So put the TikTok app down if you are one of those people right now and pay that card off.

Kyle:
Yes, your decisions, no matter what they are, follow you for a long time. What you do in your young years for good or bad financial or not, those can haunt you. And with the era of credit reporting and the amount of data that’s out there, this stuff does not go away. And lenders or insurance companies, cell phone providers won’t, that you’ll pay more down the road for your credit card spending season. It’ll hurt.

Mindy:
And employers, employers are starting to run credit checks on people and Oh, you’re not good with your credit, your financial life. I’m not going to trust you with my company. So having bad credit,

Scott:
I mean you think BiggerPockets is going to hire someone in our finance org with bad credit?

Mindy:
Let me look at my crystal ball.

Scott:
That’s a great way to screen potential finance professionals. Does the sales team need to have that? No, but I think that there’s certain roles where that’s, that’s critical. Alright, yeah, I have two kind of reactions to the what should someone do or what’s, I guess, sorry, I have two reactions to the what’s irresponsible thing here. And I’ll start by saying what I’m not going to talk about is the taking out credit card debt to buy Sephora, because that’s so far out of left field. You should not be doing that in a general sense. And I think we’re all aligned on that. I think that when I think about debt, there’s two things that I think people are getting into trouble with in the real estate world, in the BiggerPockets money world. And one of those is you heard my debt balance earlier, some people went and took that to crazy extremes.

Scott:
So even if it’s multiples of your income in a way that is so far out of hand for you to deal with, it’s all acquired in a relatively short-term basis and you’re going all in a way that you can’t sustain across the decades. I think you’re setting yourself up for a problem. Because even though real estate’s a great bet, or many asset classes are a great bet over the long run, short-term volatility can BK you. And the goal of the game is to keep things compounding for a lifetime and you eliminate the compounding when you go bk. And we’re going to see some real estate investors and some real estate investments go in BK in the next few years. We’ve already seen it in a couple of cases and there’s a limit and you need to know what that is. My loans were accumulated over a decade, one property at a time every two years-ish.

Scott:
So that’s one. The second thing that I would call out is a mismatch between the use of the debt and the asset you’re going to hold. And my favorite example of this is the heloc. When you take $60,000 out for a HELOC and you use it as the down payment on a $240,000 Midwestern rental property, you got to pay back the heloc. That means HELOCs a short-term loan. So I don’t know what your definition of a short-term loan, but it’s probably less than five years. That’s a thousand dollars a month. And not a lot of Midwestern single family rental properties are spitting out a thousand dollars a month in cashflow after $180,000 in mortgage debt to help you pay off the heloc. So that thing’s going to suck a lot of cash out of your life over that. And the reason that’s happening is because you’ve used a short-term debt instrument to finance a long-term down payment and people got away with this over the last 10 years and they’re not going to over the next five years. And that’s a problem, a risk that I want to call out as a mismatch map, the tool to the use case if you’re going to use debt from an investment standpoint. So those are the two things I would call out that I think I’m seeing that are fairly risky out in the investing world in terms of use cases for debt.

Amanda:
Scott, you explained that so well, you’re really good at this money stuff. You should do something with that. I feel like you nailed it because hearing about millions of dollars worth of debt, I feel like you just articulated that so well.

Scott:
Yeah, I think and do I feel like if I had bought all that at once and was a higher LTV, I’d be pretty uncomfortable. But having stockpiled it very gradually over 10 years, I feel much more comfortable with it. And I think that changes the perspective. I don’t know, Kyle, if that’s how it went for you as well.

Kyle:
Yes, very similar scenario. I had a bump in there where I bought more because, but I also sold a business. So that’s more not really buying, it’s more of transferring one asset to a few other assets. But yeah, I agree. You spread it over time. You’ve talked about it before, dollar cost averaging into properties over time just like you would stocks and even dollar cost averaging into good mortgage debt over time and over time, locking in long-term fixed rate debt and having a spread of cash flow over what your property requires and a spread of cash reserves over what your overall situation requires, your living expenses. I think if you can start to think as you build these other through your financial life, you have at the beginning, you usually have one employer where you’re trying to make some money and then you buy a rental property, now you essentially have two employers.

Kyle:
One that’s also paying you just a little bit. If you can build more employers over time, you are reducing risk as long as you’re not taking on too much liability with each of those employers, which different rental properties, stock portfolios, sources of income in your life rather than one employer. So if one goes belly up or you need to throw some cash at it for a while, you have those reserves. I’m just pumping the reserves thing here. I just think that is just a big, big deal. Scott, you touched on it. I want to push on a little bit more. The name of the real estate game is to stay in it. It will go down and if you go out when it goes down, you lose. That’s when you need to be in it and you make it through that. And that’s when real estate is magic in the long run. But if you go out when it’s down, it hurts really bad.

Mindy:
Scott, I was teasing you at the beginning with your millions of dollars in debt, but then you said they’re 50 to 60% leveraged, right?

Scott:
Yes. So there’s a good amount of buffer in there on some of those. And that’s been put some takes over the years. As you buy in 2014, things go up and you refinance in 2021 when rates go down. So there’s puts and takes that go over there that have changed that leverage ratio over the years. But right now I’ll also call out that because I am not going to refinance any of these properties and I’m not going to sell of the long-term bet on there, and I wonder how I’m going to finance the next property maybe via an assumable or seller finance thing, but probably with just cash. And I might go to a cheaper market as part of that as well, given the current higher interest rate environment.

Mindy:
The point that I wanted to make is that you’ve got 50 to 60% leverage. I’m seeing people saying, oh, take out as much as you possibly can when you’re buying properties. Buy it as a house hack, buy it with the owner occupied mortgage, which you can get for as little as three to 5% down and live there for a year and then move out and do it again and again and again. So you’ve got properties that are leveraged between 95 and 97%, and that’s kind of a one-way ticket to losing Kyle Masts game of staying in it. And you could absolutely lose it. I’m seeing people who are losing their properties because they can’t make the payments because they also don’t have Kyle’s R word reserves and they’re just kind of hanging by the skin of their teeth. And that just makes me so sad. So yeah, you want to stay in the real estate. I hate when we call it a game. It’s not a game, it’s a business. You have to treat it as such. But if you want to be in real estate for long term, you have to do it intelligently

Scott:
For a long time. The more you bought and the higher leverage you bought it at, the more money you made. And that worked for 10 years and I was sitting there, am I a fool? Am I just sitting here watching all these other folks get super rich super quick? And if I had just bought more and gone way more all in, I’d be way farther ahead. And the problem is that the type of people who do that are often the people who can’t stop and they just keep going until they’re forced to. And that literally in some cases translated to individuals buying over a billion dollars in real estate, which is now worth 600 million. And that’s a huge problem in some cases for that, especially when you’re financing it with 600 to $700 million in debt and using a lot of other investor capital. So those problems are coming home to roost in here and will be a facet of the economy even though the long-term investment in real estate, if you can hang on, is I think good math.

Mindy:
Yeah. And the way that you hang on is by having reserves so that when something happens, not if something happens, when something happens and you need to put money into your property, you have the money to put into the property, like when your tenant leaves and you don’t have another tenant, that happens. That is going to happen to every single person who is listening to the show who has real estate investments of any kind. If you have tenants in there, they are going to leave eventually. And then you’re going to have to find a new one and you might not be able to find ’em for a while. So you need to be able to float that. And when you can’t float it, that’s when you have to sell. It always happens in a down market Murphy’s Law, that is the way it goes. It rules real estate. So just be intelligent about your investments. And also, Scott, maybe you could have had trillions more in real estate investments, but could you sleep at night knowing that that comes back to Amanda’s feelings full circle. Okay. I think this has been an absolutely fantastic conversation. I always love it when I get to talk to Kyle. I always love it when I get to talk to Amanda and I get to talk to Scott all the time, but I always love that too. So Kyle, do you have any last bits of advice for our listeners?

Kyle:
No. I would encourage people to try to not get overwhelmed with everything that we talked about, the fear, and we’re talking a lot about rental properties in here too. And it’s not the only way you got to go. You can keep things a lot simpler. You can keep things very generic where you save a high amount of your income, you put a decent amount of way for reserves, you reduce your taxes. I mean, I could go off on a whole tangent on taxes that we didn’t factor into a lot of the risk and calculation of this stuff, but you can keep it a lot simpler than what we’re talking about here. So if anyone’s feeling overwhelmed, the main money habits that will get you to your financial independence goals still stand. No matter if you’re taking on leverage in a good way or totally steering clear of it, you can still accomplish what you’re looking to accomplish.

Amanda:
Absolutely,

Mindy:
Amanda?

Amanda:
Yeah, I think for me, I would say to take a step back and think about what you actually want. I saw this stat that just came out, Investipedia, am I allowed to say that? Investopedia did some research recently that showed that the American dream costs $4.4 million, which is $1 million more than the average American earns over their entire lifetime. And when I saw that stat, I was like, that blows my mind because what is the American dream? What is that? To me, that should look different for everybody? So I would say take a step back and figure out what you actually want out of life. Do you want to go do the house hacking thing, which is a little more complicated? You need to learn a little bit so you don’t make some big mistakes. Do you want to just work your nine to five, put money into your 401k and your Roth IRA work until you’re 65? Spend time with your kids on the nights and weekends and call it a day. Take a step back and try to figure out what you actually want out of your life and what is going to get you there. So it doesn’t have to be complicated. It can be if you want it to earn as much as possible. And retire as early as possible, but what does that American dream for you? Take a step back, figure out how to actually get

Mindy:
There. Yes. Okay. Scott?

Scott:
Yeah, I think my key takeaways are use debt only, I think to buy assets that can appreciate over the long run and ideally that cashflow enough to service the debt, map the debt to the right tool and avoid it in most other cases. Last parting thought I’ll leave on that line is, and we’ve discussed this multiple times on previous money episodes, so if you’re a regular listener, please forgive me for restating this for the umpteenth time, but the less debt that you have in your personal situation, for example, like mortgage debt, the less wealth you need to satisfy the financial independence, retire early equation and producing 60 or $70,000 a year in income with a paid off mortgage is a lot easier from an investment portfolio standpoint than producing 120 if you have to pay that mortgage payment, for example, if that’s what’s going to add in there, I guess that’s our two big numbers. So a hundred than a hundred thousand and you’re going to pay more taxes when you realize that much income. So there’s another play there that I think begins to change the math even further in favor of paying off debt early once you get into the upper echelons and begin getting closer to the end of the fire journey.

Mindy:
Yes. Yes and yes. Okay. I just agreed with all three of you. I can’t top any of that because you guys are just amazing and I’m just going to leave that. Kyle, where can people find you online?

Kyle:
Oh, not on social media. I usually don’t hang out on social media anymore. I have a website, kyle mass.com. Sometimes I do some writing there, but that’s about it. Most of the time I’m hanging out with my family and traveling and doing some rental stuff.

Mindy:
Living the fire life,

Kyle:
I guess so.

Mindy:
And Amanda, where can people find you online?

Amanda:
You can find me on social media. She will pull Wall Street Wolf with an E, my Instagram or she wolf of wall street.com is my website. Got lots of good freebies and I do some writing there too.

Mindy:
And you can find Scott and I all over biggerpockets.com where we teach you how to invest in real estate the right way. Alright, that wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench. She is Amanda Wolf. He is Kyle Mast. And I am Miny Jensen saying Tutu Lou Canoe.