Invest Real Estate

HerMoney Podcast Episode 238: How To Invest In Real Estate (Passively!) 

Kathryn Tuggle  |  November 4, 2020

Yes, you can invest in real estate without ever worrying about tenants, toilets or termites. (We'll teach you how!)

Lately at HerMoney, we’ve seen that our stories on all things real estate are trending in a major way. Here’s a few of our favorites: 

There are those of you who are selling homes, those are you who are buying homes, and those of you who are looking to get into real estate as an investment… and the pandemic has made so many of these decisions more urgent, more important, as many of us looked to escape the cities for the suburbs, or perhaps sought to invest in a more tangible asset — like a house— rather than in the stock market. But by the same token, as appealing as an investment in real estate sounds, many of you don’t want to be landlords… you don’t want to have to deal with tenants, toilets, or termites… Which is why in this episode, we’re talking about investing passively in real estate, specifically via a vehicle called real estate syndications. 

To walk us through this world, we’re joined by two amazing women — Annie Dickerson and Julie Lam. Together, they’re the co-founders and managing partners of Goodegg Investments, a company that helps people invest passively in real estate syndications. They’re also the hosts of the ‘Investing For Good’ podcast, and are co-authors of the book ‘Investing For Good: The Surprising Strategy For Building Wealth While Also Making An Impact.’ 

Annie made waves last year with an article she wrote in Forbes, that began, “The first time I attended a real estate investing conference, I was shocked and pleasantly surprised to find absolutely no line for the women’s restroom during break time. As I washed my hands in peace in the mostly empty restroom, I started to wonder why this was. Where were all the women?” 

She shares with us her opinions on why more females don’t have a presence in the industry, and how she’s working to change that. 

“When you help a woman, you don’t just help one person, you help their whole family. You help their whole community, because once women learn what this is all about, they give back. They turn around and they teach their friends, they teach their neighbors, they share how these opportunities work,” Annie says. “In everything we do, we try to take this black box of real estate investing, which is so mystifying for so many people, and we just try to make it very relatable, very approachable, so that whether people want to invest with us or not, they are more educated, and they see real estate investing as something that they can do.” 

Annie and Julie walk us through all the different avenues for real estate ownership, and they tell us exactly what real estate syndications are and how they work. (They dive into how they differ from rental properties, or other properties one might purchase.) We also have a discussion about minimums that one might need to invest, and the typical returns one might expect from an investment in a real estate syndication. 

Julie and Annie also share their best single piece of advice for other women who are looking to get into real estate investing. “It’s always a good time to invest in real estate as long as the numbers make sense, and as long as you understand the fundamentals of the market that you’re investing in,” Julie says 

Then, in Mailbag, Jean advises a woman who is thinking about becoming a financial coach or counselor and is unsure where to start. Jean also guides a listener who is single with no children and is considering a hybrid life insurance policy. We also tackle a question from a Seattle listener who is looking to purchase a floating house (just like in Sleepless in Seattle!) but is unsure where to put her money while she saves, and exactly how much she’ll need to meet her goal. 

In Thrive, Jean dives into an extensive breakdown on which option is better — buying or leasing a car. 

This podcast is proudly supported by Fidelity Investments. You work too hard for what you earn to let it sit on the sidelines. Let Fidelity show you how to demand more from your money. Learn more at Fidelity.com/HerMoney. Fidelity Brokerage Services LLC Member NYSE, SIPC.

Editor’s note: We maintain a strict editorial policy and a judgment-free zone for our community, and we also strive to remain transparent in everything we do. Posts may contain references and links to products from our partners. Learn more about how we make money.

Transcript

Annie Dickerson: (00:00)
In everything that we do, we just try to take this black box of real estate investing, which is so mystifying for so many people and we just try to make it very relatable, very approachable. So that whether people want to invest with us or not, they are more educated and they see real estate investing as something that they can do.

Jean Chatzky: (00:29)
HerMoney is supported by Fidelity Investments. We all have our own financial needs and goals. Investment advice from Fidelity can help you reach yours. Plus they have tools like financial checkups and more to help you make smarter, well-informed decisions every day. Visit Fidelity.com/HerMoney to learn more.

Read More...

Jean Chatzky: (00:47)
Hey everyone. I’m Jean Chatzky. Thanks so much for joining me today on HerMoney. Lately at hermoney.com, we are seeing that all of our stories on things involving real estate are trending in a major way. There are those of you who are selling homes. There are those of you who are buying homes. There are those of you who are refinancing homes. And there are those of you who are looking to get into real estate as an investment. And the pandemic has just made so many of these decisions seem more urgent and more important, as many of us look to escape cities for the suburbs, or perhaps thought to invest in a more tangible asset, like a house rather than in the stock market. But by the same token, as appealing as an investment in real estate sounds, I have heard loud and clear that many of you do not want to be landlords. You don’t want to have to deal with tenants or toilets or termites. Which is why today, we’re going to talk about investing passively in real estate, specifically via a vehicle called real estate syndications. And to help us do this, we are joined by two amazing women, Julie Lam and Annie Dickerson. And together they are the co-founders and managing partners of Good Egg Investments, which is the company that helps people invest passively in real estate syndications. They are also the hosts of the “Investing for Good” podcasts and the co-authors of the book “Investing for Good.” Annie, I wanted to start with you. You wrote a Forbes article, that I absolutely love, detailing your experience at a real estate investors conference. And you wrote, “The first time I attended a real estate investing conference, I was shocked and pleasantly surprised to find absolutely no line for the women’s restroom during break time. As I washed my hands in peace in the mostly empty restroom, I started to wonder why this was. Where were all the women?” So, where are all the women? And is this changing?

Annie Dickerson: (03:09)
Yeah, that’s such a great question. And I still remember that moment so clearly. And I was like, where are all the ladies? And then I walked by the men’s room and there’s a line out the door. And that’s something that you just never see. And I’ve been to, Julie and I have both been to lots of real estate conferences since, and specifically real estate investing conferences. And it’s the same thing. It’s mostly a male-dominated industry. And there’s a lot of reasons for that. But I think one thing is that women tend to get intimidated by real estate investing. There’s a lot of jargon, a lot of terminology, a lot of figures and graphs and things to learn. And I know, personally for me, my priorities right now with two young kids in the house, I’m thinking about homeschooling and activities and homework and all that stuff. And the last thing I want to do at the end of a long day is now try to figure out this whole real estate investing thing. And I think, to your point earlier, a lot of women believe, a lot of people in general believe, that the only way to invest in real estate is through buying a rental property, which is what I believed for 10 years. I didn’t know that there were any other options. So, that’s why Julie and I love what we do now, which is that we help people invest passively in real estate syndications, which are group investments, so that busy moms, busy parents, anyone can really get into real estate investing.

Jean Chatzky: (04:46)
So, were both of you landlords for awhile before you came to this?

Annie Dickerson: (04:52)
Yes. We both were. We have very similar stories. We both started out with something called house hacking, where you rent out a unit or spare bedrooms in your primary home. And so, we both fell into landlording that way. And I think both of us thought that that was the only way to invest in real estate for a while, until we stumbled upon syndications.

Jean Chatzky: (05:18)
Julie, how did you switch over to syndications from being a landlord? And we all need a little bit of an education. So, I mean, Kathryn and I both shared with each other. I had never heard of syndications in real estate before I was on your podcast. And then I was like, well, I get a lot of letters from people who really want to invest in real estate, but do not want to be a landlord. So, what are they? How do they work? How much does it cost? What are the risks? I mean, I really, really, educate us here.

Julie Lam: (05:53)
So, I made the transition into multi-family coming from the world of owning single-family homes. And then moved to out of state rentals, which was great because I was making cashflow. I live in California and cashflow is like this novel idea. But as I was buying one property, buying one property, buying one property, I realized it’s going to take me a very long time and a lot of work to move from just buying one door at a time. And that’s when I became interested in buying apartments. And I started down the path of trying to understand what it would take to take down an apartment. And I just realized that there were a lot of pieces involved in buying an apartment. And so, I started reaching out – networking as a key piece to this. I think just talking with other people and trying to understand what the investments are like and what the terms are and how the deals work and things like that. And I naively asked someone who was buying these large apartment buildings if they wanted to partner with me on the purchase of an apartment building. And I thought that I was going to have to put in some sweat equity and also put in some money. And they said, well, I don’t have any opportunities like that, where you can be an active investor, but I have an opportunity for you if you want to be a passive investor. And I said, I thought to myself, well, I didn’t know that there was a difference. So, tell me what it means to be a passive investor.

Jean Chatzky: (07:16)
And tell us. What does it mean?

Julie Lam: (07:20)
Yeah. So, to be a passive investor means to buy an apartment building or buy something, where you are basically a partner in the deal, where you don’t really have any other role other than handing over some money. And that is really the value that you bring to the table, is the capital piece of it. And in order to buy these apartments, obviously you need a big chunk of money to buy the apartments. And so a lot of the, about 70% to be exact, most of the deals not always, are owned by the limited partner, passive investors. And so, that’s essentially what it means. You come in with your money. And usually it’s about $50,000 to $100,000, is kind of the minimum. And you come in with $50,000, $100,000. Now you can imagine some of these apartment buildings we’re buying costs millions of dollars. So, it’s kind of a group investment is the best way to think about it. Because there are a number of investors who come in with 50 to 100, sometimes more. And we, all together, buy the apartment building. So, that’s what it means to be a passive investors. You are leveraging the money that you have to essentially earn a return. And then the active partners in the deal are leveraging your money to help us buy the larger apartment building.

Jean Chatzky: (08:36)
And then who takes care of the stuff like the termites and the toilets and collecting the rent and making sure that the properties are rented out. I mean, we’re dealing right now with a huge evictions crisis in this country because of the pandemic. And so, I imagine that this is a pretty risky game right now.

Julie Lam: (09:00)
It can be. I think it depends what market you’re in. And I think it also depends on the experience of the people that you’re working with. So, you’ve got kind of two people. You have the general partnership, which I mentioned earlier, which is the active side of the team, who then oversees a third party. Sometimes it’s in house, but oftentimes it’s a third-party property management company that we bring on, who’s a part of the team. And we pay them a monthly fee, somewhere usually about 3% to 6%, depending on the size of the deal. And that property management team is somebody who’s local, boots on the ground, who knows the market very well, and likely has a number of other assets under management, that they know how to operate in that market. They understand the trends, they understand the demographics of the people who are living there. And they’re really the experts that we work with, that we partner with essentially is what it is, to help us mitigate the exposure to risk in terms of things like what you’re talking about with evictions and occupancy.

Jean Chatzky: (10:00)
So, Annie, Julie mentioned that the minimum is $50,000 typically, although I’m sure in some places, maybe it’s a little bit less and maybe it’s a little bit more. Break it down for me. How much of that money actually goes into the deal? How much of that money goes into fees and other expenses? How long does it take to start seeing some sort of a return? What are those returns likely to look like in percentage terms? And what’s the chance that I’m just going to lose my money?

Annie Dickerson: (10:34)
You got all the great questions, Jean. I love it. I love it. All right. So $50,000. So yes, the minimum investment for most of our deals is $50,000 over a five-year hold time. Now let me explain real quick, what happens during that five years and why we have a typical five-year hold time. So, when we buy the apartment building, let’s say it’s a hundred unit apartment building. So, right off the bat, there’s going to be some vacant units. And our business plan is always to go in and add value to the property. So we’re not going in, we’re not buying hold investors. So, we’re not going in just to hold it for 30 years. We’re going in to really, we’re finding communities that need a little bit of love. Maybe the kitchens need to be updated. The flooring is peeling apart. The pool area hasn’t been touched. The landscaping is a mess. We look for those kinds of properties where there’s some value to be added. So, we go in and we revitalize the community. We start with those vacant units and we turn those over. And then as leases come due, then we offer to move those residents into the newer units at a little bit of a premium. And usually they are more than happy. They see the sparkling new countertops and the cabinets, and they’re like, yes, I want to move across the way and move into this newer unit. And so, we slowly, over the course of the first 12 to 24 months, we renovate all of the units as they become vacant and it’s sort of a domino effect. And so, during that time, as we increase the rents to the market rate, we’re able to increase the income of the property. And so, for commercial properties, they are really valuated based on the income that they can produce, not necessarily what their neighbors are worth. And so, by increasing that income, we are drastically increasing the equity in the property. So, that’s one way that we de-risk the investment is that we go in looking for opportunities to add value. We buy properties that already cashflow as is. So, even if we didn’t do anything, it already cashflows. But we have this opportunity to add value and to force the appreciation, which really helps to lower that risk because we have multiple exit strategies and buffers built into place.

Jean Chatzky: (13:03)
As far as the return and the fees?

Annie Dickerson: (13:07)
Yes. So, as far as the returns go, let’s use a $100,000 as an example because the numbers are easier. So, let’s say you invested a hundred thousand dollars. So, typically with many of our deals, the cashflow distributions are either monthly or quarterly. And often they start right away, within the month or two right after the deal closes. And then, of course, all the projected returns are just projected and they’re different for every deal. So, there’s no guarantees. But I’ll give you an example of typical returns that you might see. So, if you invested $100,000, for each year of that five-year hold, you can expect about 7% to 8% return. And for most of our deals, this is a preferred return. So, let’s say it’s a preferred return of 8%. What that means is for that first 8% of the returns, those go entirely, 100% of that first 8% go to the limited partner passive investors. The general partners, the active syndicators, don’t get any piece of that first 8%. So, it’s a really great alignment of interest because the syndicators wouldn’t take on a property that they didn’t think could at least produce that 8% because otherwise they wouldn’t get paid. So, that 8% annually comes out, on a $100,00 investment, comes out to about $667 a month. And then, at the tail end of the investment, at that five-year mark when we look to sell, then you can expect, of course, your $100,000 back, plus another, say 40% to 60% on top of that. So, let’s say at 60%, then you’re getting $160,000 back, roughly. Plus the $8,000, that 8% per year during that five years. So, altogether, you go in with a hundred thousand and you come out with 200,000 after five years.

Jean Chatzky: (15:14)
In what instances do I get less than my $100,000 back?

Annie Dickerson: (15:21)
So, Julie, want to talk about that one?

Julie Lam: (15:24)
Yeah. So, I mean, the only way that that would essentially happen is if the value of the property was to drop below what we initially paid for it. So, let’s say we bought the property for $10 million, and then let’s say we had to sell it at a time when it was only worth $6 million, then $4 million of that money, it would basically decrease across the entire ownership of the property, the value, that $4 million value, would bring that down. So, let’s say you put in a $100,000, you would only get $60,000 back. But the way that we are buying the properties with the value-add component, because we’re going in and it’s almost like buying a flip property, you’re getting the properties at a little bit of a discount.

Jean Chatzky: (16:08)
I totally get that. I just think it’s important from an educational standpoint. Because there are lots of different people to do this with, right? It’s not just your company. And I want people to understand that there are risks. And, you know, I say that as somebody, and my listeners know this, who bought a home in 2005, and when I go to sell it next year, I will not get my money out. So, you can lose money in real estate. And I think that’s really, really important to put on the table. I want to talk about who is right for this. But before we do that, let me just remind everybody that HerMoney is proudly sponsored by Fidelity Investments. Whether you’re looking for a turnkey way to say that invest, or you need to tap the support of an experienced pro for a more complicated financial picture, Fidelity can help you meet your goals. In addition to investment advice, Fidelity also has online tools like financial checkups that can help you make smarter, more informed decisions every day. And you can visit Fidelity.com/HerMoney to learn more. We are talking to Julie Lam and Annie Dickerson, real estate investors, and co-founders of Good Egg Investments. So, how do you know if you have the mentality for this?

Julie Lam: (17:23)
Yeah, I mean, I think there’s always, you have to be willing to give up control at the end of the day, is what it is. And there’s a lot of people out there who aren’t, as much as you don’t want to deal with the tenants and the termites and all of that good stuff, letting go of control, I think, is a key component of this. You have to be able to be comfortable with relinquishing the power, to know when to sell, to know when to stop renovations, to when to do all the different things on a property you have. But that’s really the beauty of it is that you don’t have to do that. But if you were kind of a control person and you need to be able to say, okay, now is the time to sell or now is the time to stop renovations or start renovations or make the big decisions, probably not a good investment opportunity for you.

Jean Chatzky: (18:09)
Overall, and I don’t want to specifically talk about your investments or your deals, but overall, do you think now is a good time to invest in real estate, given the pandemic and the financial crisis?

Julie Lam: (18:21)
I think that it’s always a good time to invest in real estate if the numbers make sense. And as long as you understand the fundamentals of the market that you’re investing in, I think it always makes sense. I think trying to time the market is a very risky proposition, but that’s my opinion.

Jean Chatzky: (18:36)
It’s my opinion too. So, there you go. Annie, let’s wrap it up with you. I know that a big part of your mission and you started with this, is to help more women and more moms, specifically invest in real estate. Why is this so important to you?

Annie Dickerson: (18:51)
You know, it’s when you help a woman, you don’t just help one person. You help their whole family. You help their whole community because once women learn what this is all about, they give back. They turn around and they teach their friends. They teach their neighbors. They share how these opportunities work. And so, that’s why, in everything that we do, Jean, I can’t tell you the number of times I’ve typed fancy jargon words, like capital preservation. And then I’m like, wait, delete, delete, delete, protect your money. And in everything that we do, we just try to take this black box of real estate investing, which is so mystifying for so many people, and we just try to make it very relatable, very approachable, so that whether people want to invest with us or not, they are more educated and they see real estate investing as something that they can do.

Jean Chatzky: (19:46)
Fabulous. Thank you guys so much for the education. Where can we find more information about you?

Annie Dickerson: (19:53)
The best place to go is our website, goodegginvestments.com. You’ll find more information about our podcast, “Investing for Good.” You can get a free copy of our book and there’s courses there. Everything. We’ve got a ton of resources there.

Jean Chatzky: (20:08)
Julie, Annie, thank you both so much. And we will be right back with Kathryn and your mailbag.

Jean Chatzky: (20:19)
Hey Kathryn.

Kathryn Tuggle: (20:20)
Hey Jean. That was a awesome show as always.

Jean Chatzky: (20:23)
You know, when we think about how to program a season or this ongoing experiment, that is HerMoney, I try to, and I know you do too, we listen to what our listeners tell us. And some of the things they tell us are, God, I’d really love to buy a house, but I don’t want to be a landlord. Or I’ve got some extra money to invest because I’ve maxed out on retirement, but I’m not sure exactly where to put it. And so, you know, these solutions may not be right for everybody, but I think it’s interesting to know the landscape. It’s interesting to know, especially now with savings rates so low, what your options are.

Kathryn Tuggle: (21:07)
It’s so true. I think that that is a huge part of our mission really, at HerMoney, is just letting people know what your options are.

Jean Chatzky: (21:15)
Yeah.

Kathryn Tuggle: (21:15)
I think that this is what holds women back from investing, a lot of the time, is just not knowing like, oh, I could do a mutual fund. I could do an IRA. I could put more in my 401k. I could do real estate. Whatever it is, there’s just a wide world of menu options out there.

Jean Chatzky: (21:31)
And like I said to Julie and Annie, I had never heard that this was a possibility, this sort of real estate syndication, until they reached out to me and asked me to be on their podcast. So then I took the time to look into it and learn a little bit about it. And I thought, okay, this is something that our listeners should know.

Kathryn Tuggle: (21:48)
Yeah, likewise. I had never heard about it until you were on their podcast. So that makes two of us.

Jean Chatzky: (21:53)
But this is why I feel like I can continue to do personal finance for 30 years, because there’s always something new. And some of it is a total rip off and some of it is great and all of it is not for everybody. We need to know the options.

Kathryn Tuggle: (22:12)
So true. Such a good point.

Jean Chatzky: (22:14)
So we’ve got some questions?

Kathryn Tuggle: (22:16)
We sure do. Other people want to know what their options are.

Jean Chatzky: (22:19)
Okay.

Kathryn Tuggle: (22:20)
Our first question comes to us from Leanne. She writes, hi Jean. I turned 52 in December, and I’m looking to leave my job in 2021. I’ve been with my current employer for 23 years and I’ve had several different roles. I have an undergrad degree in finance and 10 years ago, I entered the world of compliance and ethics and obtained a master’s in business law. If I could do it all over again, I’d go to law school. But at my age it doesn’t make sense. I’m trying to be proactive and do something with my career that I’m passionate about that still provides financially. I don’t hate my current role in compliance, but I’m a little burned out with the hours. I’d really love to become a financial coach or counselor and help people with the basics of getting their finances in order. I don’t necessarily want to be an advisor and direct investments. I just want to help people get back on track. I’ve helped a couple of friends create a budget and map out a plan to pay off debt. And I really love helping people in this manner. My question is, what route should I go? I’ve looked at various certification programs for financial coaching or accredited financial counselors, and I’m willing to complete these courses, but I’m not sure which one is best. Is finding a financial coach role with a company even realistic? Are there other careers that I’m not thinking about here? I want to help people get their finances in order and I love helping people, in general, with organizing their life. I’m not in a position to start my own business and work it 100% of the time. I have eight years left on my mortgage and I’m the breadwinner. So, I need a steady income. I’m doing all the things financially that I need before actually quitting my job such as having six months of expenses in the bank, an emergency fund, et cetera. And I haven’t made any final decisions on timing. Obviously with COVID, there are so many unknowns, but I want to be prepared to jump when the time is right. I’d really appreciate your advice. Thank you,

Jean Chatzky: (24:04)
Boy, Leanne, there’s so much in your letter to dig into. The first thing that I flashed on was this fact that I keep in the back of my brain that my father, who retired at age 70, had always said he was going to go to law school when he retired. That was just something that he wished that he had done. I don’t know that he necessarily wanted to work as a lawyer. I think he just wanted to know the law and he was a good arguer. But I don’t think it’s too late if knowing the law is what’s driving you, I think there are lots of ways to go to law school and that includes going at night. If that’s something that, that interests you. So, I don’t want to see you table that dream if that is your real dream. That said, I love the idea of you becoming a financial counselor if helping people in this way is interesting to you. There are definitely jobs out there. I don’t know that they would pay what you’re earning now, because I don’t know what you’re earning now. But my guess is, being in compliance, it’s a pretty good salary. So, I would definitely compare those things as well. Specifically, the program that I would look at is the one from the AFCPE. That stands for Association of Personal Financial Counselors and Educators . And they offer several different tracks of courses for accreditation. If you aren’t sure which is right for you, you can just dip your toe in the water there by taking a class or by learning more about the specific training that they have going on. Simultaneously. I know there are life coach certifications. I believe that our guest, Julie Morgenstern still certifies professional organizers. She was on our first show in the new year. That is another hot area. So, I might test the waters a little bit. Do it in your spare time. Do it at night. Do it on the weekend. And if you find that you can’t quit your job in compliance, but that this is something that you could do as a side gig, maybe you find another area of this that makes sense for you. Or because you’re giving yourself some runway in looking to leave your job next year, you can figure out how much you really need to make in order to make ends meet and which of these scenarios will allow you to do this. But I wouldn’t commit to any of these options quite yet before you jump in and take a course here. Take a course there. And see what fits.

Kathryn Tuggle: (26:54)
And when she’s looking for programs and certifications, are there any to avoid or any that she should definitely look into?

Jean Chatzky: (27:04)
That’s why I recommended the AFCPE programs and Julie Morganstern’s coaching. Those are ones that I know personally. And so, I feel like I can get behind them, which is not to say that they are the only good ones out there. But before you spend money on training, I would absolutely hit the internet. Look for a Reddit thread. See if other people are commenting on whether this is a good deal or a bad deal. Read better business Bureau ratings. And you know, you’re spending good money here, so make sure you’re getting something for it.

Kathryn Tuggle: (27:39)
Great point. Thank you, Jean. Our next question comes to us from Anita in Country Club, Hills, Illinois. She writes, I’m a 56 year old single woman who’s hesitant about the purchase of long-term care insurance. My financial advisors brought the subject up recently and suggested a hybrid policy, but as a single woman with no children, I don’t need the whole life insurance. What are the best option for singles with no children?

Jean Chatzky: (28:04)
Anita, this is such a good question and you’ve raised so many pertinent issues. So, the first one is, your advisers are right that this is the age at which you should be looking at the concept of long-term care insurance. They’re also right that it’s even more important for single people than it is for couples, because if something were to happen to you, you don’t have a spouse built in or children built in to step in and take care of you. Not that that happens in every family, cause I know that it doesn’t, but it’s often a fail-safe sort of a mechanism. So, I do think they’re right that this is something that you should be looking at. The hybrid policy is an interesting recommendation. So, hybrid policies are a life insurance policy coupled with long-term care. I bought a hybrid policy. And the reason that I bought it was that I wasn’t thrilled with the idea of paying thousands and thousands and thousands of dollars into a long-term care policy that perhaps I would never use. A hybrid policy combines a life insurance policy with a long-term care policy. So, the way that mine works and the way that they typically work is that if you use the benefits in the policy to pay for your long-term care, that amount of the benefits come out of the cash value of the life insurance and don’t pass along to your heirs. But anything that you don’t use does pass along to your heirs. You point out you’re a single with no children. So the question is, is there an organization, is there a place that you would like to leave this money if you don’t end up using it. Hybrid policies are typically a little more expensive than just long-term care insurance or just life insurance because they’re being asked to do two jobs. And so, I’d throw this back at your advisors and I would ask why they’re recommending the hybrid instead of recommending just a flat out long-term care policy. And I would ask to see illustrations. That’s what it’s called when we look at life insurance policies and long-term care policies. I would ask to see illustrations for several of both.

Kathryn Tuggle: (30:40)
That’s such a good idea, Jean. Yeah. Get all the information in one place.

Jean Chatzky: (30:44)
Yeah. I mean, there’s some people I think who just don’t like the principle of it. But that’s what insurance is. You know, we pay for our auto insurance. We pay for our homeowners insurance. We pay for our health insurance. We never want to use those things, right? The whole goal is that it’s there if you need it, but you’re not wishing that somebody breaks into your house or that you have some other incident. You’re hoping that you don’t have to use it. And yet when it comes to long-term care insurance, sometimes we have trouble with that because we’re wondering what we’re really getting for it if we don’t need to use it. And that’s why these hybrid policies have sprung up.

Kathryn Tuggle: (31:24)
Yep. Such a great point. Our last question comes to us from an anonymous listener. She writes, hi Jean and Kathryn. Since I graduated college and started working in the real world, I’ve been avidly saving money, but I’m not sure for what. I recently decided my five-year goal should include buying a house. Now, my savings have a purpose. I just need your help figuring out what to do with the $30,000 in cash sitting in my savings account. I live in Seattle and I’m considering a floating home. And there’s only one lender in the area which would lend for this. And they require a minimum 10% down payment. I make $82,000 annually, max out my 401k contribution and I currently have a balance there of $7,000. The salary is new from a recent promotion. About a month ago, I was making just $55,000. I’m extremely fortunate to be in this position right now and feel very stable in my employment. I’m currently contributing $150 a month to a Roth IRA with the balance of $10,000 and another $150 a month to a short-term investing account with a balance of $5,200 where I see 3% returns typically. I keep all of my essential expenses low at $1500 a month and do not have any loan payments, other than my credit card, which I pay in full monthly. The only other information I can think to add is that I’m 27 and I have a credit score of 810, which I’m very proud of. My question for you is should I keep this $30,000 in savings or move it to the short-term investing account or somewhere else entirely. How much of this should be my emergency fund? And should I keep that separate from my house savings? And how much should I raise my contributions to my Roth and the short-term account, given my salary raise. Thank you so much.

Jean Chatzky: (33:04)
So, I have to thank this listener actually, because now I was like, a floating house. Is that like Sleepless in Seattle? And so, it is. And she sent me down the rabbit hole. I mean, you know Kathryn, how much I love real estate porn. And I could spend an entire hour telling you about the rabbit hole that I went down over the weekend, just to pick tile for the bathrooms that I’m renovating in the apartment that we’re going to be moving to. If anybody has any experience, by the way, in, I think you pronounce it zellige tile or in-cement tile, please write me and let me know if this is somewhere I ought to go. Because that’s the direction that I’m leaning, even though people on Houzz say that it’s difficult to work with. But that’s not the question that we’re answering here. So, I saw this letter and I started Googling floating homes Seattle. They come in all shapes and sizes and price ranges. But boy, are they fun? I mean, really. They have little outdoor areas and some of them are millions of dollars and some of them are $300,000. And, you know, I sort of figured, well, you’re 27. Maybe you would want a two bedroom. And those start around $500,000 – $600,000. And so, that means you’re looking at a down payment of about double what you’ve got right now. That money should be in savings. You’re absolutely right. If this is money for what you have a goal, you want to amp up your contribution to it. You say that you want to do it within the next five years, but maybe with interest rates so low right now, you want to do it even sooner. Set a time on your goal. Set a date for your goal. And figure out how long it’s going to take you to get to that downpayment. And I’d start looking. I would just start going to open houseboats or open boat houses or open floating home. What do we even call them? Floating home open houses. And seeing what it’s really going to cost to buy the type of place that you think that you want to live in for a while. The other things that I would do are, yes, to beef up your emergency savings. And I’m having a little trouble telling if your emergency savings are your short-term investments, the ones that you’re seeing, the 3% returns on, typically. Because you have so much in the house account, I’m not super-worried about that, but I would prefer to see your emergency savings really safe, like in a savings account. And I’d absolutely bump up that Roth IRA contribution if you can, till you get to the point where you are as close to maxing out as you can possibly come. But you’re doing great. This is so exciting. And when you buy your floating house, you have to give us a tour. Send us a video. Or send us a picture and tell us what it’s like to buy a floating house in Seattle. I’m incredibly jealous.

Kathryn Tuggle: (36:13)
I love that. I can see the headline now. Buying a floating house in Seattle.

Jean Chatzky: (36:17)
Exactly. I mean, I’m sure Tom Hanks doesn’t come with it. But it’s okay.

Kathryn Tuggle: (36:22)
I mean, if he does, start saving more.

Jean Chatzky: (36:27)
But it would have to be Tom Hanks circa Sleepless in Seattle. You know, it couldn’t be Tom Hanks circa, I don’t know.

Kathryn Tuggle: (36:37)
Covid.

Jean Chatzky: (36:37)
Aw…

Kathryn Tuggle: (36:40)
You don’t want Covid Tom Hanks.

Jean Chatzky: (36:41)
We don’t want Covid Tom Hanks and we’re glad that he and Rita are doing much, much better. But, yeah. What a fun goal. I mean, this is the fun of money, right? This is the fun of thinking, all right, what can my money do for me? What is my dream? And that’s what I just love about this letter. That she put a stake in the ground. I want to buy a floating house. It’s awesome.

Kathryn Tuggle: (37:07)
Yeah. Amazing. Thank you, Jean.

Jean Chatzky: (37:09)
Thank you so much, Kathryn. And keep the letters coming to mailbag@hermoney.com. In today’s Thrive, should you lease or buy your first car? If you focus solely on the monthly payment that you can afford, leasing a car is generally less expensive than buying. However, the decision to lease or buy a first car isn’t as straightforward as simply going with the option with the lowest payments. Instead, I want you to consider the following things. First, do you drive less than 15,000 miles per year? Sometimes less than 12,000 miles per year? Do you like a new car every few years? Does your car look like new even if it’s after three or four years? Do you have a limited monthly payment? If so, then leasing might be your best bet. Although car leases put a limit on the number of miles that you can drive during the leasing period, and again, most leases are between 12,000 and 15,000 miles per year, the average driver in the US puts about 13,500 miles annually on its vehicle according to the car and driver. If you go over your mileage on a leased car, it will cost you. You’re going to get hit with penalties as high as 25 cents a mile. So, you go over by 10,000 miles, when your lease is up, you owe an additional $2,500. That completely ruins all your leasing math. On the flip side, let’s talk about buying. If you drive more than 15,000 miles a year, if you like to keep your vehicles for a decade, if you have kids or pets who aren’t exactly gentle on your interior, or if you’re a bit of a slob yourself, if you can afford a higher monthly payment or a longer payment term, then purchasing might be the better choice. When you buy a car, there are no restrictions on the number of miles that you can put on it. If you have a long commute, take a lot of road trips, buying is probably a better option. You also don’t have to worry so much about the wear and tear, except again, in terms of resale value and making your car last. You won’t get charged for a big scratch or torn upholstery. And if your kids managed to grind rainbow sprinkles into the carpet or your dogs for gets woven into the upholstery, it is no big deal. Then of course, there is another option. You can look to buy a used car. It can be intimidating to buy a used car. But you can take some of the money that you’ll save by choosing used and put it towards your car repair budget for when issues arise. And even after factoring in the cost of additional repairs, you will often save money with a used car over buying new or leasing. Last point here, if you end up financing your vehicle, it’s important to understand the specifics of the loan or lease that you’re considering. Terms can vary widely. You should determine your likely total cost, rather than just focusing on your monthly payment. No matter what option you choose, do your research, come prepared, and be realistic when it comes to balancing what you want versus what you can afford. Thanks so much for joining me today on HerMoney. Thanks to Julie Lam and Annie Dickerson for talking with us about their investing journey and inspiring us to take a look at different ways to invest in real estate. If you like what you hear, I hope you’ll subscribe to our show at Apple Podcasts. Leave us a review because we love hearing what you think. We also want to thank our sponsor Fidelity. We record this podcast out of CDM Sound Studios. Our music is provided by video helper and our show comes to us through megaphone. Thanks so much for joining us and we’ll talk soon.


Next Article: