Finance Friday: How to Build a Six-Figure Business (in Your 20s!)

Mindy:
Welcome to the BiggerPockets Money Podcast, Finance Friday edition, where we interview Chris and talk about fi when you own your own business.

Chris:
I found out that the real problem there is in sticky garbage cans. It’s that, old ladies and grandmas don’t want to climb ladders. So, that’s pretty much what we do is, ladder related home maintenance for grandmas living in these communities where we do their home maintenance so that they ultimately have the opportunity to maintain their independence in the place that they love the most. And, graduated college, came back home to grow it. We’ve, as you’ve described, hired employees and doubled every year largely since I came back home. So, that put me on the, kick-started me to interpersonal development and find it all about podcasts, and real estate and investing, so here I am today.

Mindy:
Hello, my name is Mindy Jensen, and with me as always is my way too corporate for a startup, co-host Scott Trench.

Scott:
Thanks Mindy. Unlike our guest today, I never had to climb the corporate ladder.

Mindy:
No, you quit the worst company to work for ever.

Scott:
Get it? Because, he’s got a ladder bus.

Mindy:
Oh no, I missed it. Oh, that’s because puns are terrible, Scott. Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate or start your own ladder business, Mindy, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I apologize for missing your amazing pun. You’re so great at these amazing puns. I am excited to talk to Chris today. He has started a really cool business right out of high school. I think that he shows an enormous amount of initiative, and he continued to go to school while running the successful business and now is looking towards his financial future to determine when he’s done running this business what he wants to do. He wants to set himself up for financial freedom, but he’s not that interested in the early retirement part of fire, which I think is great, because I don’t think you should focus on the retire early part. I think you should focus on getting enjoyment out of your life, but I did enjoy talking to him, Scott.

Scott:
I thought it was really interesting. I think that, look, Chris has a services business, and a challenge in the services business for somebody who starts off as a self-employed entrepreneur just themselves, which is what Chris started as, is that when you begin to expand, you inevitably erode your profits. Because, if I’m billing out, if I do a service for a $100 an hour, and then all of a sudden I hire somebody for $20 an hour to do that same service, unless I’m getting more hours in, I’m eroding my margin, I’m losing at least 20 of those dollars. And so, that’s the challenge that Chris is facing right now, and I think it’s just a really good framework and lesson and thought to think through. If you have a services based business and you want to expand it, you have to take this period of sacrifice and there has to be a clear path to making more than you were in the first place. Because, running a services business is much harder than being an individual service provider.

Mindy:
It is. I think we gave him a lot of things to think about, and I think he has a good business head on his shoulders and now it’s just balancing the very different goals of growing your business and showing a lot of income to qualify for a new house purchase.

Scott:
Absolutely. Well, should we bring them in?

Mindy:
Well, we can’t yet, Scott, because we have to satisfy our attorneys. They make me say the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott, nor I, nor BiggerPockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal, tax and financial implications of any financial decision you contemplate. All right, before we bring in Chris, let’s take a quick break. And we are back. Chris is a 26-year-old entrepreneur who started his business right out of high school as a way to graduate from college debt free. Who knew it would turn into such a successful actual company that employs eight people providing handyman and home services throughout the year. Now, he’d like to think about his retirement plans so he’s financially ready when he’s actually ready to give up his handy manning. Chris, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you today.

Chris:
Thanks so much for the opportunity, Mindy and Scott.

Mindy:
Before we jump into your conversation, let’s look at your money snapshot. I see self-employment income that varies, of course, because it’s self-employment income, but $75,000 approximately for the year with additional income from a house hack of 4,350 per month. We have monthly expenses that total around $2,100. So, we’ve got 1,200 for rent or your portion of the house hack, $66 for utilities, 250 for gasoline, 250 for groceries, 50 for restaurants, 50 for household, gym membership is $10, clothing $20, car about a 100, gifts 15, mostly for Christmas, entertainment $20 a month, travel about 25, and internet Wi-Fi $85. Those seem good. I just want to caution you that those are your actual expenses, but you seem to have a good handle on them. Your investments, I’m sorry, your debts, let’s look at your debts, oh, nothing but the mortgage.
That’s a great position to be in at 26 years old. And, investments, you don’t have a 401(k). You can bet I’m going to talk about that later. You do have a Roth IRA with approximately $44,000 in it at 26, that’s awesome. A SEP IRA with an additional 39, that’s also awesome. Personal brokerage of 106, which makes me eat my words about that 401(k), but we’re still going to talk about it anyway. So, 106 in a personal brokerage that’s fantastic. $1,500 in cash reserves, I would normally want to have a conversation about this, but you do have a business where you can take business draws if you need to, so I’m not going to harp on that too much. So, Chris, I would like to know your biggest money pain point, your goals and a brief history of your money story?

Chris:
So, I think really my money story started out of high school. I didn’t have the greatest choices for college, fortunately in hindsight, really the best decision I ever made was going to community college. It wasn’t where I wanted to be, but it helped me get to where I wanted to go, which was ultimately transferring to UC, Santa Barbara, that was my dream school. And I was a caretaker and a paperboy at the time, kind of alluded to at the precipice from high school to community college, and I needed more money. And I was working as a caregiver for a grandma, and I got that job from a friend who went door to door cleaning garbage cans. So, at that time I was trending towards almost graduating and transferring to UC, Santa Barbara, and I realized, I need to make more money than I can make us a paperboy or a caretaker.
I thought back to my friend and I said, well, I’m above nothing. I’m going to go clean garbage cans. So, I started doing that in a local retirement community, it’s what called a 55 plus active living retirement community. I found out that the real problem there is in sticky garbage cans, it’s that old ladies and grandmas don’t want to climb ladders. So, that’s pretty much what we do is ladder related home maintenance for grandmas living in these communities, where we do their home maintenance so that they ultimately have the opportunity to maintain their independence in the place that they love the most. And graduated college, came back home to grow it. We’ve, as you described, hired employees and doubled every year largely since I came back home. So, that put me on the, kick-started me to interpersonal development and find it all about podcasts, and real estate and investing, so here I am today.

Scott:
What’s the revenue and profit from this business, and how much do you take in salary?

Chris:
So, interesting. Historically it’s been structured as a sole proprietorship. So, I think my net income last year was really good because I was the epitome of being self-employed. I was doing almost all the work. Our payroll was very little, so last year I made about 103 in net income. This year, effectively we’ve grown a bit, but our expenses are outpacing our growth. So, I’m going to take home a little bit less this year, probably closer to 54, 55, something like that. But, top line, last year we did 164 and we grew a little bit this year.

Scott:
And you do not take a salary then? Is it all distributions?

Chris:
Currently, right now I do not take a salary, I just take distributions, exactly right. I think over time we’re going to be implementing a different business structure and I’m going to have to pay myself a reasonable salary, but I’ll let my CPH choose that.

Scott:
Awesome. And can you walk through the employees? So, these are not full-time employees. They sound like hourly contracted guys.

Chris:
So, we have several really part-time employees. Most of our staff are current college students. We have one full-time operations manager, so he’s on a salary. I think there’s one other full-time person, one close to being full-time, but you’re right, about five or so are pretty part-time.

Scott:
Awesome. And then, can you walk us through anything about seasonality in the business?

Chris:
Absolutely. We do four core services, gutter cleaning, window cleaning, solar panel cleaning, and Christmas lights. So, we do really well during this time of the year, November and December. We do a lot of gutter cleaning and Christmas lights. Grandma’s have a high willingness to pay for those services during that time of the year, and during spring and summer it’s more about window cleaning, but it is a clearly seasonal business. We have a couple lulls, shoulder seasons between those two.

Scott:
Awesome. What do you bill at, and what do you pay your staff?

Chris:
So, I know the operations manager. He’s salaried exempt in the State of California, so he makes two times a minimum wage. The other staff, they’re all being paid living wage, it just depends on the role, but somewhere typically around $20 blended across all forms of compensation.

Scott:
Well, you’re paying these guys 20 bucks on an hourly basis. I presume you’re billing the client more than $20, otherwise you wouldn’t be in business. So, I’m wondering how much that spread is.

Chris:
Absolutely. We don’t typically really bill by the hour in that case, we bill by the project. Typically our revenue per man hour is north of a $100. It really depends on the service, but about that.

Scott:
Awesome. So, you got a profitable unit economics, very profitable on a services based business here, and the challenge is filling up as many man hours as possible on that. So, Chris, what’s driven growth over the last couple of years, and what are the plans going forward for your business?

Chris:
So, I’d say what’s driven growth is, obviously the first several years it was me doing the work. I maybe played the role of the ideal grandkid where I was actually there to help them. So, we had a lot of great referrals and word of mouth in these communities. They gossip like teenage girls. These communities are largely 65 to 85-year-old retirees, and they oftentimes socialize and talk to their neighbors and friends. So, I’d say that’s what really allowed me to get the foothold in these communities is, we take every opportunity to advertise in these communities, newspapers, publications, store hangers, signs, et cetera, but nothing really beats word of mouth. And I’d say that’s what allowed us to initially succeed. And ultimately we use those other forms of print media as I already explained, to expand out to the other 55 plus communities in the area. There’s about 20 of them, and we’ve so far serviced about half of them.

Scott:
Awesome.

Mindy:
I was telling Scott before we started this show, I’m so excited about this idea because I live in a neighborhood where there’s probably 30 or 40% of the people who live here are still original homeowners from the ’70s, so they’re in their 70s and 80s and 90s, and this would be an ideal neighborhood for you to come in if you lived here. But, how much did it cost you to start this business? It was probably very low startup. You need a ladder, that’s not that expensive.

Chris:
Exactly right. Initially really to start, I got a pressure washer to clean garbage cans, and then over time I found out, oh, they need this thing done and that thing done. And it’s very asset light, it’s equipment light, so it’s really a business pretty well positioned for an 18-year-old to get into. That also makes it a very competitive space that there’s a low barrier to entry. But, absolutely, it costed very little to get into this business. I literally think it was a $200 pressure washer that I just put in the back of my car and started going door to door.

Mindy:
And you use their water, their electricity?

Chris:
Exactly, pretty much. So, there’s really no cogs to put a business word to it besides obviously the cost of service as we were talking about.

Mindy:
Have you thought of franchising this idea?

Chris:
Absolutely. I initially pursued the idea of franchising the last couple of years. Early in COVID I called, I’d say played the role of a college student doing a marketing project or a class project for an entrepreneurship class and talked to a bunch of franchisees in the space. So, that gave me good insight as to maybe the expectation of the size of a franchise to really justify going that route. I don’t think there’s enough territories for the markets that we really target with type of business. Ultimately the most opportunity are in places like Florida or Arizona where they have a really high density of these types of communities. So, ultimately long term, three, five years, our plan is to expand out to those other places, Florida and Arizona to offer the same services. Because, if we can target and convert a 75-year-old lady that lives in Sacramento area, 55 plus community, we can do the same in Florida and Arizona and really go the corporate route ultimately.

Scott:
How many total billable hours did you bill last year?

Chris:
I could look up our KPIs. We probably did about 500 appointments. Each appointment is going to last somewhere between two to four hours. So, I’d probably say, how many billable hours? If we’re doing, we did about 164 last year in revenue. We do about a 100 or so plus or minus per man hour. So, what would that be? 1,500, something like that.

Scott:
So, here’s a question just to be frank with you and, well, a statement and a question. This business has to scale for you to continue operating the way that you’re operating, because the work year is 2,000 hours. So, that simple math says you could just do all of those hours yourself, you don’t need any employees, and you would’ve made $164,000 last year instead of 54,000. And so, that I think is something to noodle on conceptually and say, is there a path to getting this thing there? Because, on paper at least you don’t need any of those employees and the time is there. You have another 500 hours on top of that as bonus to actually schedule, and coordinate, and market and all that stuff to get that time. So, what’s your reaction to that observation?

Chris:
I would argue that half of our staff, four of the employees are really part-time, and they’re what I call a canvasser. So, they’re really stirring up leads and marketing for us, distributing the door hangers, the banded sign. So, I need them to get some proportion of the leads that we already generate. And this year was a big step in my business, because I recognize exactly what you’re talking about. This type of business is really profitable when you do it all yourself, what also happens, you get burned out. That’s what happened last year with me. I was overworked. I was working way too much, spending too little time with friends and family, and this is the messy middle in terms of the size of this business.
We need to get to 750, a million dollars to really get back to the level of profitability that we were prior, where I can take as much home as I was when I was doing all the work on the ladder. But, I think it’s a natural progression with this type of business is, the cost structure changes as you start to hire employees. We need to continue to grow to justify that change in that cost structure instead of just reverting back to what I had done the first six or so years and doing it all myself.

Scott:
How long will it take you to get to that point, 750 to a million where this business brings in more than if you just did it yourself?

Chris:
Sure. So, I think, I’m confident there are five or so businesses in the Sacramento area that do the same exact services like us that do a million dollars plus, so I know it’s a possibility, and so much so that there’s franchises in this space, so that really is what validates the opportunity. So, I think realistically, to get to the size that I had stated, 750, a million dollars, that’s going to take us locally here probably three, five more years. It’s tough to continue the pace of doubling what we’ve done historically, but I think we could get to 360, 400 this coming year. And if we have two or so years of slower growth, we could get to that 750 or so mark.

Scott:
I think that’s too vague, would be my observation. I believe you. This is a good business model. You’re clearly solving a problem. Your customers clearly like you, you’re getting word of mouth referrals, things are good. You’ve got something here. But, I think that this is a major problem we’ve uncovered in your personal financial situation, which is the purpose of what we’re trying to do here, where you could be making way more money by just going back to what you’re doing two years ago, and your outcome is five years away and we’re way too vague about how we’re going to move forward in the near term. I think that some suggestions I’d have for you are, let’s boil this down to a process perspective. I like the approach in a general sense. You don’t want to just be getting on a ladder and dealing with all these maintenance issues, hanging on Christmas lights for the next five years. We don’t want to do that.
But, the business side of it has to make sense in order to justify spending the next three years building your business, which is maybe even harder than that. So, let’s boil this down to a process. I think you should document, what are the steps to getting a lead in my business? We have door knock, door hangers, we have word of mouth, we have all this. Do I have a system to track all of that and understand the ROI? What if I’m paying these guys to hang door knockers, and that was a complete sinkhole for me. I got one deal out of it last year and I spent 20 grand. Do you know that in your business?

Chris:
Absolutely. You bring up a valid point. And I think one thing, one challenge historically is we’re very print marketing based because demographically we serve 75-year-old ladies. And what do they respond best to? You could argue physical print media instead of Facebook ad. I think the digital media strategies that we’ve yet to really undertake are probably easiest to grasp, like cost of customer acquisition ultimately is what you’re getting at. We’ve done a poor job of tracking that historically. We are using a CRM. I have an office manager. She’s asking that on every call that she receives is, ultimately where did you find out about us, so that we can do an analysis on, what are the most cost effective marketing channels so we can pull the right levers.

Scott:
Great. And then, what’s the process once you do get a lead? How many of them convert into appointments? What’s your process for setting an appointment, quoting the job if you have that, completing the job and then getting feedback?

Chris:
So, I’d say historically our close rate was about 40% blended over all of our services. Well, this year it’s gone down a bit as our prices have changed because the cost structure has dramatically changed to the business as I described. So, how it currently works is, most commonly we get 75% or so of our calls from these 55 plus communities. Typically, they see us from some print media, a door hangar, a sign. They see us at an in-person event perhaps, but some community-centric form of advertising. They see our number, they call our office manager, they say, I need gutter cleaning, how much do you charge? She gets a few questions asked. She prepares a quote that same day, very likely in the next hour or so after they had called. We send that quote via the CRM that we recently paid for and utilized. And from there they receive the quote, receive follow-ups, et cetera. And once it’s approved we contact them to book the service, so that’s the customer journey from prospect to book deployment.

Scott:
So, is this all automated? Are you a part of any of that?

Chris:
And as explained, this year’s been a dramatic change of me stepping operations and not doing all the cleaning, all the hanging Christmas lights, et cetera, and same with answering phones. Historically I was answering every phone call until I hired my office manager. And these maybe overhead costs are to explain some of the change in profitability, but I would much rather be where I’m at right now and make less money and not be burdened with doing everything in my business than reverting back to where I was.

Mindy:
So, I have a couple of customer acquisition ideas for you. You said that there’s what, 20, 55 plus communities and you’re in about half of them?

Chris:
Correct.

Mindy:
So, have you considered having an age appropriate brand ambassador in each one of these neighborhoods? You go and you clean Gladys’ garbage cans for free, and she’s so delighted that you did this, that she tells all of her friends and then all of a sudden you’re in that neighborhood now too. Are there services that your clients are asking for that you don’t currently offer, or have you pulled your clients to see if there’s anything else that you can help with? Because, you already have a client, getting that client to spend more money with you is going to be easier than finding a whole brand new client. You already have them, they already appreciate your services. Ask if there’s anything else that they would like around the house. Maybe you can help move heavy stuff, or rearrange furniture, or get rid of stuff or something like that.
And have you ever done a, like we are going to be in your neighborhood. We’re going to bring eight guys into your neighborhood this Saturday and we’ll take, we’ll clean anybody’s garbage cans for 10 bucks, or a 100 bucks, I don’t know how much it costs to clean a garbage can. But, some ideas where you’re already there, how much time does it take to clean yet another can? And that could be another way to introduce your services to people. Obviously you can’t hang up Christmas lights in a 5,000 house community in one weekend, but introducing people especially on some of those slower weekends.

Chris:
Absolutely. I particularly love the idea, that brand ambassador. I haven’t thought about that particular phrasing. We definitely do get great referrals on these communities. We could probably do a better job of catalyzing and asking for the referral, so that’s super valid. And ultimately lots of the people in these communities, they’re widows, they’re widowers, they’re vulnerable. They really rely on people that they can trust and they most trust who they’re referred to, so I think that’s a very valid point. Other services, we’ve definitely thought about adding on different types of services. I think one of the reasons we’ve really niched down on what we do is because they’re the things around the house that are the most physically demanding that we most frequently get asked about.
So, we do some small things like moving, or yard work, or changing a smoke alarm battery, air filter, name your other task that an 80 year old woman might struggle with. But, I also don’t want to get too spread out and going inch wide in a mile deep, or an inch deep and a mile wide, I want to do the opposite. So, in terms of other services, I think one hesitation is that it’s just operationally complex. This is already a very operationally intensive type business. I’m confident we can do what we currently do great, but lesser so if we continue to expand our set of services.

Mindy:
Sure, and that’s a great point. But, if you ask all of your customers, hey, is there anything else you would want us to do, or are having trouble finding somebody to do? And everybody asks for the same service, that shows you that there’s a demand. So, I love polling customers and asking, what are you looking for? If everybody wants 19 different things, well then, oh, we’ll look into that. But, if everybody wants the exact same thing, that’s something really valid. Now, you just mentioned something I think is very interesting, changing out smoke detector batteries. Those are always way up on the ceiling and they’re very difficult, and lights too. I don’t know if these neighborhoods have big high ceilings. I think they’re more like manufactured homes, aren’t they, some of them?

Chris:
Manufactured isn’t right. They’re stick built single family residences, but it’s a normal suburb just full of elderly folks largely. But, absolutely, we have done all these little things around the home. They’re not revenue drivers for the business. What’s really most profitable are the four main things that we do, the gutter cleaning, the Christmas lights, the window cleaning, the solar panel cleaning.

Mindy:
So, these non-revenue drivers are super helpful for these little old ladies who can’t get up on that ladder themselves. So, you go in on a Saturday, we’ve got eight guys for 20 bucks, we’ll come in and we’ll get all the cobwebs and change your batteries, and change your lights, and do all this stuff for 50 or whatever. And then, you go and you bang out all these houses and they’re so pleased that you were there. They call you back to do their gutters, and to do their, hey, by the way we offer all these services too. If you ever need anything, please give us a call. It’s not a revenue driver, it’s a lead gen. But, anyway, just something to think about. Another thing is with the referrals, like you said, you can get 10% off of your service and 10% for me, if you use my name, just tell them that Gladys Smith sent you.

Scott:
Well, is there anything else you’d like us to cover from the business perspective?

Chris:
I think one topic that I was thinking about is obviously insurance, and as it relates is I could start to offer that as a benefit over time. I think the thing that you’re probably going to point out is, we need to continue to grow to really justify doing that, but that’s something that I’ve entertained, but I think we’ve pretty well covered the business front.

Scott:
I agree. I don’t think you’re ready to offer health insurance as a benefit to your employees yet.

Mindy:
That’s really expensive.

Chris:
But, would love to do it over time.

Scott:
You could join a PEO if you need to, for you and your one full-time employee.

Mindy:
Well, let’s talk about this house hack. Give me the numbers. What did you purchase it for? What is it rent for? All the things.

Chris:
Absolutely. So, over the last several years I’ve really tried to prioritize getting my financial life in order. So, over the last couple of years I was obviously increasing my net income. Trying to show to a lender that even in the State of California I can buy a home, you can trust me. And last year was really the first year in which I met the threshold that they look at in terms of debt income and supporting the mortgage more or less. And during that time I had contacted a friend because I was under the impression that he was house hacking based on a Facebook post that I had seen. And I hit him up about a year ago, maybe a little more than that. And he was describing that, yes, he was house hacking currently. He was in contract to buy his second property with a friend, and that friend happened to drop out and he was put in a tough spot and he needed some help.
So, I was in the perfect position. It fell in my lap and we bought the home together, my first home. I currently live here. We bought it for 740 purchase price at the end of August, 2022. So, 740 purchase price, we put 10% down. Our rate was 6.125. We went with the preferred in-house lender because they give us some credit. Over time, we’ll very likely be five, hoping that rates eventually dip below five. And, so far I rent, I live in the master. The other five rooms are rented. So, how we qualify and count income varies, but it cash flows in a sense greater than the pity payment, which I think is a little over $4,900.

Scott:
Awesome. If you did not live in the property, how much total rent would you collect?

Chris:
I think it’s 5, 550. It’s a little over 5,500.

Scott:
And your mortgage is 4,900?

Chris:
Correct, hair over.

Scott:
Awesome. And how much do you think it will rent for in a year or two?

Chris:
Each of the rooms, we probably increase each of the rooms by 25, 50 bucks. I don’t think dramatically, but some marginal amount greater than it is today.

Scott:
So, we’re probably close to break even when we factor in CapEx, vacancy, turnover and maintenance on it. But, we’ve got an asset that we can hold here probably without bleeding on a monthly basis for the long term in a good spot.

Chris:
I would hope so. And really my plan here is to do the same thing over the next couple of years, is to qualify for primary residence, live in it for 12, 18 months. I don’t have a kid or any dependents, a wife that can tell me otherwise. So, I’m at a stage where that seems like a worthy sacrifice to make, and ultimately that’s one big reason I wanted to go on this call was just to make sure that I’m positioning myself to do so and ultimately achieve my goals of reaching some semblance of financial independence so long-term I can take the entrepreneurial risks that I desire.

Scott:
Awesome. Whose name is the mortgage on?

Chris:
So, we’re both on title, so it’s my buddy and I.

Scott:
Great. So, your question is, how soon can you purchase your next house hack?

Chris:
I think that’s one major concern is obviously that’s something to figure out with my CPA, is how we report income, et cetera, and meet the DTI requirements. But, that is definitely a point of maybe contention or conversation that I need to navigate, because as someone that bought a home with someone else, from a lending perspective, I’m liable for the whole mortgage. But, renting rooms doesn’t count income wise from what I’m familiar with. So, I think that puts me in a tough position DTI wise, but that is definitely some challenge to circumnavigate if I want to follow through on the goals that I just explained.

Scott:
That’s new to me that renting the room would not help you count on a DTI perspective.

Chris:
Perhaps you’re right. I trust your expertise more than my own. I know that-

Scott:
I’m not a 100% confident, I’m just surprised to hear it. So, I should know that probably, but I don’t. So, are you pretty confident, or has a lender told you that?

Chris:
From what I understand about living in a single family residence, they’re not going to count renting rooms as income, like income for their purposes. But, if I lived in a multiplex and I rented other units or, they would count some proportion of it, I’ve heard 75%. It probably depends on the lender, and the time, and that might change, but that’s what I’m familiar with, with the income reporting.

Mindy:
Oh, I’m not sure. I know you face challenges just by being self-employed. Even though you’ve been self-employed for a long time, lenders are very squidgy about that. I don’t know that you can’t count any of this rent towards your debt to income, and I would definitely speak to more than one lender. I have a lender based in California, but they’re licensed at all 50 states, and they can do self-employment after one year. You’ve got multiple years and you have shown a profit and you’re growing. I don’t think they would have an issue with your source of income. I think that we are looking at a problem with the amount of income based on the rent, so that’s where you would need to have the rental income counted in order to qualify. What would this whole property rent out for if you rented it out completely? If you moved out, and all the people moved out and you rented it as one property instead of by the room?

Chris:
I would need to look at comps to really verify this. We haven’t really considered going other than rent by the room, because we knew we could make more money doing it that way. I’m pretty confident somewhere in the realm of 3,000, probably a hair more would be my intuition, but you guys probably have a better pulse on that.

Mindy:
So, then rent by the room is definitely the way to go. Now, once you don’t live there, rent by the room is just, it’s still a rental, so I would think you could qualify that. And then, having a year of rental history, even though you’re living there, you still have a year of rental history to show the lender, look, I’ve been renting these rooms for 5,550 consistently over the course of this whole year.

Scott:
I think that’s right. This is something, we’re getting into really a place where the tactics really matter in terms of your timing for when that will hit. My guess, and you got to talk to a lender and your CPA about this, but my guess is, you want to report the income from this property on your tax return as much as you can, that makes sense. So, you don’t want to play games to reduce the income liability because, well, that way save you a little bit on taxes. You’re probably going to have a loss on the property for the first couple of years given what you just shared with us, a taxable loss once we factor in depreciation, so there won’t be much of a tax benefit, there’ll be some. But, more important to you it will be the income qualifications. And if you can show two years of tax returns with this rent income hitting there in a way that will qualify for the lender, you’re going to be in good shape.
So, if you can get that rent on your tax return in year 2022, which it sounds like you will, that’ll probably be in pretty good shape. And what that does is, it has a multiplier effect on your ability to borrow once you are able to report that income. Because, not only does the current rent from your property help you with this debt to income challenge, but as a landlord with experience, you’ll also be able to count the potential income on your next property as helping you with your debt to income.
So, if you buy a duplex, for example, next and it’s empty, but it would rent for three grand, 75% of that will help you qualify for your next conventional mortgage, which it won’t right now. So, somehow some way we got to figure out a solution to this problem. I would talk to a couple of lenders and I would not just listen to your CPA on this. Your CPA is going to give you great tax advice, but sometimes the consequence of getting great tax advice can be there’s less income to borrow against. And so, you want to make sure that you’ll also run that by your lender and get good advice from a lender who knows what they’re talking about in this area.

Chris:
Absolutely. More research is needed for your point.

Scott:
Is that a helpful starting point? We’re not quite answering your question, but is that a helpful starting point to think about how you get the two years of tax returns or at least one year of tax returns on there with the highest number possible for rent collections?

Chris:
Absolutely. I know I need to talk to lenders because probably different firms are going to have different lending criteria and such, and I know my situation is probably peculiar relative to a lot of the situations they deal with. But, absolutely, I agree. I need to talk to multiple lenders and ultimately brokers probably have the best source of the plethora of options that I can explore.

Scott:
It may be as simple as this as well. It may be that you live in the property this year and then you move out and you rent a place, half your buddy’s bedroom or something like that. I think you said there was some arrangement like that, that you had worked out. And so, you use that situation, you say, I have a true rental right now. It’s fully booked, and I’ve got the income on my tax return last year, I’ve been doing this. So, now you may be three months, we’re recording this in December 2022, you may be three months away from being able to qualify, because you have the cash for a down payment or you could access it from the brokerage side. So, that might be a really powerful booster there if you can create that situation. Because, it may be, I got the rent on my tax return for 2022, but I can’t be living in the property while I’m actively looking for the next one and using rent from roommates essentially to qualify.
But, I have a true rental. I don’t know, I’m getting really way in the weeds here, but I have a true rental because I’m actually renting another place right now and that is operating as a standalone rental property, or I have half of it, or whatever it is that you’ve worked out. So, that’d be the path I’d go down exploring this, and I wouldn’t be surprised if you’re not too far away from at least having a substantially brighter outlook on the debt to income side.

Mindy:
Oh, I was going to say, I wouldn’t be afraid to ask lenders, do you have any creative solutions? Do you have any suggestions for me? I’m willing to do a lot of things. I’m not married to anyone’s solution. I’m looking for ways to expand my rental portfolio, to expand my home ownership, to get into a property sooner, to do a lot of different things.

Chris:
Absolutely. I need to have these conversations with lenders, brokers, et cetera. I think the last resort option is ultimately to probably circumnavigate the 100% liability that I face with having two people on the title and me being really a 100% liable from the mortgage at the end of the day from a lending perspective is, either sell out to my buddy or vice versa and get one or the other off the title to circumnavigate these DTI challenges.

Scott:
Or just don’t repeat the problem the next property.

Chris:
I would agree.

Scott:
So, I think from a bird’s eye view, from my standpoint, you just got this place, it seems like it’s going reasonably well. You need to set yourself, start thinking about the next property purchase, but I think it boils down to make sure that you file your taxes. Probably the earlier the better with that. You think through if there’s new ramifications. If you do have any options in that, you probably don’t. But, if you do have any options, you want to report in such a way that your lender will be aligned with that.
And then, you want to ask, well, does that rental income, if it doesn’t count from roommates for my next loan, does it count the day after I move out of the property towards my DTI or what? And, I think that, at this point I wouldn’t fiddle too much with the structure you’ve got with your friend, that’s done. The property’s purchased and you’re going to have to transact the property in order to change things that has all to do on sale ramification ramifications potentially and would potentially give either one of you trouble if you couldn’t qualify for the mortgage on an individual basis.

Chris:
I absolutely agree. It’s a last resort, but it is a resort if needed.

Scott:
So, Chris, we’ve talked about your business, we’ve talked about your house hack. What else can we help you with today?

Chris:
I’d say, as a 26-year-old, 20 something, I’m relatively healthy, but the responsibility of insurance was recently bestowed upon me as a 26-year-old, so that is something that I’d love some advice on. I’ve heard some harsh criticisms of perhaps, like medical sharing programs, but I know I recently signed up for a Kaiser bronze high deductible plan so that I can start contributing to an HSA, but if you guys have high level thoughts, I’d love to hear them.

Mindy:
I have a lot of thoughts. First off, you’re healthy, that’s great. We have posed this question several times. We have made comments a lot on this podcast, and somebody reached out to the Facebook group and said, Mindy, you always say that unless you have a chronic condition, you should have a high deductible plan. He said, except in some very specific cases, even if you have a chronic condition, you should have a high deductible plan. And he was talking about the difference between the high deductible plan versus a regular plan. I’m talking about the difference between the high deductible plan with the HSA versus the health sharing plan. Because, the health sharing plan isn’t health insurance, and the health sharing companies haven’t negotiated with the healthcare providers to provide any healthcare.
And you can’t deny somebody who is in an emergency state. You can’t deny them health services, but you don’t have to take their health sharing money. So, essentially the way it works, and I’m really paraphrasing, but you go in with a broken leg, you go to the hospital, the hospital treats you, then they send you a bill for, let’s call it $20,000, because I don’t know, and that sounds good. Then your health sharing company sends them $2,000 and says, hey, would you take this for it? The healthcare provider can say, no, it’s $20,000. And then, either they negotiate back and forth, or ultimately you’re responsible for this until it gets paid. And traditionally they will take the negotiate with the health sharing provider back and forth, but they don’t have to. And things are not great in the insurance industry right now. So, having a high deductible plan, you’re footing the bill for the first, what is it, 3,500 or something like that, and then healthcare kicks in.
And the insurance company that you have that plan with has negotiated with this provider, provided you a network and make sure that you are, and you mentioned Kaiser, and there’s people who don’t like Kaiser. I think Kaiser’s fine. You go to a Kaiser doctor. If you don’t go to a Kaiser doctor, then you’re on the hook for it. So, just make sure you go to a Kaiser doctor. Step number one when you have health insurance is, read the rules of the health insurance. The book’s only about this thick, so it’s great reading, light reading, but it’s super important to understand what you’ve signed up for. And my favorite, Brandon, the mad scientist, has written an article called the HSA is the ultimate retirement account in 2022. He’s updated it several times. It is a fantastic account, especially if you can cash flow your expenses.
I have a medication that I take every night and I can cash flow that because it’s $5 or something for a month’s supply. And then, I save my receipts and in several years I will cash those in and collect some money for that. And the same with my copays, and the same with minor surgery if I need it, anything that I can cash flow, I just save the receipts and then down the road I can cash those in after my HSA has grown so much. You don’t need to take your expenses in the same year that you incur them. So, you can allow your account to grow and then take out the money when it’s less of a hit. If you’ve only got a $100 in the account and you take out $50 for the expenses, then you only have $50 to grow.
But, if you can cash flow these expenses right now and then allow this to grow, it can be a great way to pay for expenses down the road. It can be a great way to just recoup some of your expenses down the road, or you can even wait until you’re actually retired and then you can start withdrawing this money without the expenses attached to it. It’s a really great plan if you qualify, if it’s available to you, and I’ve used it every year that we have had it available at BiggerPockets.

Scott:
So, the only thing I’ll add to Mindy’s great points here is that, there’s no good solution. Healthcare in this country is very expensive and you’re going to go from not paying for it, presumably because of the, you turn 26 Obamacare protections and all that stuff where you were on your parents’ plan most likely, are going to go away and you got to start paying for this. So, it’s expensive and it’s just terrible, and it’s something that we got to fix in this country and we have not. And so, the answer is, the bronze tier plan with the high deductible and the HSA qualifier probably sounds like the least bad option at the highest level for this. That health share ministries can be one option that can be worth exploring. However, there’s a lot of issues that some people have with those types of plans.
One of which, at least at 26, would’ve been for me is, if you don’t live in accordance with those values and those sometimes Christian organizations, certain things won’t be covered. So, just something to think about there. So, I think that for most people, for your situation, this sounds like a great option. I don’t know the details about it, but the bronze tier is clearly not the gold tier. You’re a healthy guy. Get something that’s as affordable as you can, max out that HSA if you’re interested, if that’s something you want to do and take it from there. So, not great, not a fun answer, but that’s the truth I think.

Chris:
An answer nonetheless, thank you.

Scott:
Well, Chris, this has been great. Thank you very much for coming on the BP Money Show. We really enjoyed talking to you and hopefully this was helpful.

Chris:
Thank you guys for the opportunity, and I know it’s helpful for me, hopefully it’s applicable to someone else out there too.

Scott:
Absolutely. I think a lot of people will learn from this.

Mindy:
Chris, this was a lot of fun. I’m super excited for your old lady ladder job. I think that’s a really great opportunity and a really great service that you’re providing because like you said, older women and ladders don’t mix.

Chris:
Not a great combo.

Mindy:
Not a great combo. Well, this has been a lot of fun and we really appreciate your time. We’ll talk to you soon. All right, Scott, that was Chris. I thought you had some good advice for him for his business. I am excited to see the possibilities for his business, and I do think that he will be able to grow it. I think he’s got, like I said in the beginning, I think he’s got a really great business head on his shoulders, and now he’s just in that weird little, I want to grow, I’m not quite sure how to grow or let me try a few different things period of service-based growth that you have to get through before you find what works and grow from there.

Scott:
I love that he’s experimenting with it. I think that the plan for achieving that growth needs to be more aggressive and more specific. And, I think that’s the big homework I’d have if I’m Chris. And, Mindy, I thought you had some really good advice as well and some great tips.

Mindy:
Oh, thank you, Scott, I try. I think that there’s a lot of value in a brand ambassador who is the same age or similar age as other people that he’s trying to target and they all speak the same language. He can give her a free garbage can cleaning or whatever, and then connect with her, she’ll connect with other people. Just having somebody that you trust, like he said, that’s going to pay off in spades.

Scott:
Absolutely. Should we get out of here?

Mindy:
We should, Scott. That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench, and I am Mindy Jensen saying, park your truck rubber duck.

Scott:
If you enjoyed today’s episode, please give us a five-star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Mindy:
BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Kalin Bennett, editing by Exodus Media, Copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.