Mindy:
Welcome to the BiggerPockets Money Podcast, show number 252, Finance Friday edition, where we interview TJ and talk about setting up your business to scale in the future.

TJ:
Yeah, I think that’s the main reason I haven’t hired anyone right now, is that I don’t want to hire someone and have them dependent on my income when I don’t personally feel like it’s stable. When it’s just me, I don’t have any dependents that are looking to make use of my money, then it’s not a big deal. If I lean on my emergency fund here and there or I decide to take December off, those are all great. But when I’m looking to hire somebody else, they either have to not also be depending on the income themselves, or I need to have enough coming in the door steadily to be able to give them that assurance.

Mindy:
Hello, hello, hello. My name is Mindy Jensen. And with me as always is my growth-minded business master co-host, Scott Trench.

Scott:
I’m just thrilled to be your CE co-host, Mindy.

Mindy:
Oh my goodness, that was awful.

Scott:
I thought it was great.

Mindy:
They’re always awful. It was clever though. Clever and awful can be at the same time. 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, start your own business, or hire your first employee, 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’m excited to talk to TJ today. She has a very fun problem. She is in the, “I’m about to grow really big,” portion and of her company, and she just needs, I think a little bit of guidance for where she wants to go. And once she puts her feet running, I’m imagining like the Road Runner where his feet go like this and then they finally hit the ground and they take off. Once her feet hit the ground, she’s going to take off and fly.

Scott:
Yeah. She’s in this awesome position where her expenses are low, she’s dual house hacker, she’s got a business with all this kind of stuff. And now, it’s a matter of, do we want a turbocharge And go forward, or we want to take a more methodical approach? She has all the options in the world because the status of her financial foundation is one of inevitably moving forward towards wealth and abundance over the next five to 10 years. So it’s just fantastic to see. It’s a higher income, but not a crazy high income with that. So kudos to her for building such a strong position.

Mindy:
Yeah. Before we bring in TJ, let’s hear a note from today’s show sponsor.
A great, big thanks to the sponsor of today’s show. And, my attorney now makes me say, the contents of this podcast are informational in nature and are not legal or tax advice. 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.
TJ is 30 years old and targeting a work-optional life within the next 10 years. She’s recently purchased a new-built home and has her expenses dialed in. She’s looking to optimize her finances and is actively growing her business, consulting businesses on their business practices. I’m actively growing the use of the word business in the introductions here. TJ, welcome to the BiggerPockets Money Podcast.

TJ:
Thank you for having me.

Mindy:
I’m so excited to talk to you today, because I think you have an interesting set of circumstances, and I think you’re not the only one in this set of circumstances. So let’s jump in and see where your money’s going. What are you bringing in and where are you sending it out?

TJ:
Great. Coming in the door, I recently just transitioned from working full-time as an IT project manager to full-time as a consultant. So this year, my finances are a little wonky, but I’m looking at bringing in a little under 150K this year based off of the leads I have right now. And after taxes, that’s about 9K a month.

Mindy:
Awesome. And is there any additional income?

TJ:
Yes. I have a couple, and they’re really just small. I do have one PPM or a syndication, and that’s bringing in about $125 a month. And then I’m actually part of a research study that gives me like $25 a month.

Mindy:
Well, that’s cool. I like those research studies. Yes. When you’re in college, you can generate a lot of income like that.

Scott:
Well, let’s get a picture of net worth. So what are your assets and liabilities, and however you want to present those.

TJ:
Sure. So from an asset perspective, I’ve got several retirement accounts and all sorts of fun things. On the traditional retirement side, that’s about 95K on the Roth side that adds up to about 55K. And then I’ve got a 529 plan that just sits there because I thought I would get my MBA at some point at about 16K. And then after tax, investments is at 66K. And then I do own, I just moved from a two bed, two bath condo into this new build home, and I hung onto that one. So right now that is a rental property that is worth about 171. And I do have a HeLOC out on that, which is about 62K. So a little bit of debt there, but that’s really just because I like to have the line of credit to have that flexibility.
And then this property, I’m actually house hacking it, so I have a roommate.

Scott:
Awesome. What’s the mortgage? Do you have a mortgage in addition to that HeLOC? And do you have a mortgage on your primary?

TJ:
The condo is paid off. I basically just got the HeLOC and took the HeLOC funds and paid off the mortgage, so it reduced my monthly expenses there. And then the mortgage on the single family home I’m in right now is at 235 with a 2.99% interest.

Scott:
And what’s the asset value of the house hack?

TJ:
The house hack, that is-

Scott:
How much is it worth?

TJ:
Oh, 171, that’s what it was.

Scott:
So, you have a mortgage for 235. So the condo’s worth 171.

TJ:
Oh, sorry, yeah.

Scott:
And you have the $66,000 HeLOC. And then you have a mortgage of 235. How much is the property worth?

TJ:
The single family is 350.

Scott:
350. Okay.

Mindy:
Oh nice.

Scott:
And how much does this all boil up to for total net worth?

TJ:
About 450K

Scott:
Awesome. One more question before we get to where you want to get to, what brought you to this point? How long have you been thinking about fi or personal finance or this kind of stuff? Can you give us a quick overview of your story in the past? A couple years.

TJ:
Sure. Yeah. I would say, a lot of it comes from just having strong fundamentals. My parents are immigrants. They came to America to do their masters and then stayed. And they’ve all always been super frugal. It’s just an immigrant mindset where you’re trying to fast track your way to the American dream. My mom’s amazing at finances. So she taught me a lot of things. She actually doing swing trades stocks right now. I look at her portfolio, I’m like, “What? How?” I really picked up a lot of that, and just knowing it was possible and having a female role model show me that this is how to do finances.
And then I learned about fi in 2017, and I was already in a good position. I already owned my condo at the time, and I was not enjoying my job. So I went to my boyfriend at the time and went, “I want to do this. Will you support me?” And he gave me that mental space and emotional support to really decide that this was something I wanted to do. And that’s really just the jumping off point. Since then, I’ve soaked up a lot of information, purchased several classes on real estate investing, stock trading, all sorts of other things, just to get myself to this point.

Scott:
Awesome. And did you ever have any debt or were you able to just pay off and build this position? Did you have a pretty good launch pad for that journey?

TJ:
I had a good launch pad. I did recently tell a salesperson that my family doesn’t take out financing for things, the only debt that we ever had in the house was the mortgage. So it actually was not a part of my world of possibilities that I could take out a loan for college, that just wasn’t a thing. So I got a scholarship that paid for most of it. My parents paid for the difference because they already had a 529 plan, so they wanted to use the money without the penalties. And then I did work internships and part-time jobs during college to pay for anything else I wanted.

Scott:
Awesome. Okay. So what’s the best way we can help you from this position?

TJ:
Right now, my main focus and passion is in growing my business. So I’m doing, how I describe it is, project and operations management and organizational change management consulting. So I help medium to large businesses optimize the way that their businesses run, and if they need a particular project to just hand off to somebody so that they don’t have to worry about it, that’s where I come in.

Scott:
Okay. Awesome. Do you have any representative types of projects you could share with us to give us a little bit more of a picture?

TJ:
Yeah. So my background is in IT, so I don’t currently work with an IT client right now, but a lot of spaces where you need any software implementation, upgrades, things like that, that’s where I have my bread and butter. So things like Salesforce, the most recent large one that I completed was in implementing their Field Service Lightning module. It was basically when a store like the container store deploys a contractor to your house to do a job, then that’s the technology they’re using behind that. And actually, right now, I’m helping marketing department optimize their operations. They don’t have any internal project managers, so I’m helping them figure out how to leverage the tools they have at hand, things like Microsoft Office 365, Teams, SharePoint, and really just get the most out of what they already have.

Scott:
Okay. Awesome. And how many hours a week is this taking you currently?

TJ:
It really depends on the phase of the project. The unfortunate part and the reason why going consulting was a big deal to me is that, some of it depends on how available the client is. So if the client doesn’t have any time to share with me what their current process is, then I actually have a decent amount of downtime. So that’s where I come in as a fractional consultant to help them win. They need the help, and bill them hourly and then I can juggle up to three clients at a time.

Scott:
Okay. And what would three clients at a time lead to in terms of total income?

TJ:
Three clients at a time? I actually haven’t projected that. With just the one client right now is where the 9K a month is coming in right now, and that’s at 40 hours a week.

Scott:
Okay. But you think your maximum capacity would be three clients juggling at a time?

TJ:
Yeah. Hypothetically, if I phase them correctly so that I’m not starting all three at the same time, then yes.

Scott:
Okay. So if you are able to do three clients at a time, if you’re able to juggle that and schedule that, then your theoretical income would go from 9,000 to 27,000 per month, which would be about a little over 300K a year. Is that how you’re thinking about the income potential for your business?

TJ:
Yes, though I would end up hiring some support staff. I would probably get a personal assistant, add a couple of expenses to really optimize that.

Scott:
And is that where you want to go? Is that the best thing we could help you with, is thinking through how to make that happen and build the business on that trajectory?

TJ:
Yeah. I think that long term, if I were thinking big about the business and it won’t necessarily get to this point, but dreaming big, what I love to do is have a staff of other consultants, not necessarily in my space, but my roommate is an industrial engineer and I’m not as versed in organizational change management as I would like to be. So if I had a specialist in that space, I’d really love to have a suite of offerings to my clients.

Scott:
I love it. So to me, I actually think that the game is very, very simple in the immediate and short term future, which is, you just don’t have enough revenue for your business to hire an employee with this. And to get to that level of revenue, you need to bring on two more clients, and that sounds like a brutal amount of work, but I think that is the price to pay to be able to get to a position where you can hire someone in this particular line of work, or at least that’s my immediate observation. That said, I don’t know what I don’t know, but I’m just going to float that out there and see how you react to that. Does that sound generally along the right trajectory?

TJ:
Yeah, I think that’s the main reason I haven’t hired anyone right now, is that I don’t want to hire someone and have them dependent on my income when I don’t personally feel like it’s stable. When it’s just me, I don’t have any dependents that are looking to make use of my money, then it’s not a big deal. If I lean on my emergency fund here and there, or I decide to take December off, those are all great. But when I’m looking to hire somebody else, they either have to not also be depending on the income themselves, or I need to have enough coming in the door steadily to be able to give them that assurance.

Scott:
I think that that makes perfect sense, and I think that that’s… That’s where I’m like, okay, it’s almost remarkably simple. It’s not easy, but it’s simple in the sense that like, okay, you’ve got to complete this job in 35 or 40 hours and crush it and then moonlight to get the second job and get that going, and that’s 18,000 per month. That’s good. That’s a good individual income. That’s a higher end individual income, but it’s still not like the ability to comfortably hire somebody at that point, I think, unless you have a backlog of business with it. So it’s getting that second one and then having the third one in the books, and that’s when the hire comes in place. At least that’s one way to think about it.
Mindy, I see you making some faces. Do you agree to disagree?

Mindy:
I want to throw on a different option, but first I want to make fun of you because you said, “Oh, $18,000, that’s a good income. Yeah, I’ll take that.”

Scott:
Yeah. It’s a very good income.

Mindy:
That’s okay. That’s not bad. So I’m just using you about that. But you keep using the word higher, Scott. She’s a consultant. I would encourage her right now in her “downtime,” and I’m making air quotes, in her “downtime,” start reaching out to other people. You said something about organizational change management or something that isn’t a strength that you have, start looking for somebody who has that strength, who can supplement your business when you need them, but you’re not hiring them as an employee because that’s not… It doesn’t sound like you putting in a lot of time to learn that is worth your while. It sounds like that’s the thing you can bring somebody in on.
Is that the sort of thing that your company needs to have somebody on staff, or can it be a hire out when you need to? If you could find a rockstar organizational change management person to come in and consult with you for the beginning of this project… Clearly I don’t know what that is, I don’t know if I’ve done a good job of hiding that.

TJ:
No, it’s good. Typically, best practice would be to keep them on for the duration of the project, but that is definitely something that a possibility to not have to hire them as part of my org. I think it’s more part of the vision that I would love to at some point, but certainly, as a middle ground, getting somebody to come in as like a subcontractor is definitely an option. I think my main challenge is less so in the change management space, but more in project management, which is where my bread and butter is, is that convincing a project manager to jump away from a W2 job is actually really difficult.

Mindy:
So it sounds like the personal assistant or the project manager would be the first hire that you do?

TJ:
Yes.

Mindy:
And you said that you have several leads on jobs, but you’ve got one client right now. When is the next job supposed to start?

TJ:
I actually have a short engagement about two weeks worth of work starting next week when that client comes back from vacation. So I’ll be working two jobs in November, in addition to all the other fun things I get to do in November. So it’s not actually a lack of demand, some of it’s just time timing or having some of that foresight into what my workload is going to be, things like, “Hey, do I want to just take December off? Or does it make sense for budgets for people to wait until 2022?” So there’s not really too much of a challenge in getting somebody in my sales pipeline, but it is more about kneeling down the actual timing.

Scott:
We had Joel Esparza on a few weeks ago, and Joel is building a video editing business. With that case, the use of a contractor or a set of subcontractors makes a lot of sense because you can boil down each unit of work product into something very tangible, complete it, decide if it’s satisfactory, and then begin scaling up to a large degree. It’s not always that easy, but it’s going to attend more towards that type of work product. What I’m reading into in your business is you need somebody for months on end, maybe in the short side, two weeks, to complete a contract to the satisfaction of the client with that. And that seems like it’s just going to be a lot more expensive or harder to subcontract out.
It doesn’t mean you can’t do it, and I think Mindy’s point is great. It may be a lower risk option in the next year or two to think about that, but you’re going to probably spend much more. It may be the same percentage difference as if Joel was hiring out each video individually, but the dollar amount’s going to be way bigger. If the contract is 40 grand, you’re probably going to have to pay somebody 30 of it or something, something substantial in order to be able to then subcontract it.
It’s still good, you’re arbitraging, I’m making that up 10 grand in that fictional example, but I think your business doesn’t scale, it scales much better with somebody being paid hourly and you arbitraging the $40,000 contract for $20,000 in employee expense. That’s interesting and I think that that’s the challenge. And again, that’s where I come back to, there needs to be a huge gap between that income and expense, and probably for some period of time in order to pull that off, unless you’re willing to give up much more of the contract, which could be an economy of scale, if you can get 10, 20 contracts, that could be a really good business-

TJ:
Yeah. And I want to be careful there because there, there’s definitely a space in the industry where it’s really just being a staffing agency, looking for project managers and pairing them up with a client. And that’s not the space I want to go to, because first of all, it’s oversaturated, it’s ridiculous. The number of LinkedIn messages I get looking for a project manager, it’s not something that I want to join the party for. A certain amount of the challenge is expanding my network and finding people who are in a position in their career where they may not feel like they have enough experience to be fully independent, where I can fill in some with my experience, and things like that.
And right now, a lot of my network is either people who are about at my level of experience or higher. So some of that is, I just need to put some more leg work into finding younger professionals.

Mindy:
Well, where would you find a younger professional? When we’re talking about real estate, because of the BiggerPockets aspect of this, we suggest going to local meetups. Are there local business meetups?

TJ:
There’re actually. Project managers have an organization that certifies them, the Project Management Institute. We do have a chapter in my area that I could start attending. I hadn’t attended since I was a student because it’s really just a bunch of people looking for jobs.

Mindy:
Oh, wow. Is it really just a bunch of people looking for jobs who may not have a ton of experience?

TJ:
Sure. Last time I checked, yes. So I guess I need to go back to doing that. It does come at an expense. Every single event costs money, so it’s something where I have to find out which ones are really going to be worth my time and money to be doing that. So that is one avenue. And then I’m still in the town where I went to college, and I do have professors that I’m keeping in touch with. SO if they have somebody who would be willing to take on… And at this point, I only need like five hours a week for a personal assistant. So if they have the ability to get to my place and they want to learn from a project manager, that’s what I’m looking to do. So I’m expanding my network in that space as well.
What I don’t want to do is convince somebody to do that when I either don’t have the income to pay them or that I don’t have a lot of work to give them either. So it’s a little bit of a balancing act.

Mindy:
When you’re in this space, it sounds like you’ve got some downtime coming up in the form of taking off all of December. When you’re in a space that has a bit of a lower demand on your time, start looking for things that you can put off on somebody else’s plate. How much time are you spending on the menial tasks? That sounds snotty, but the menial tasks like email and calendaring and all these things that don’t need TJ to do, as opposed to the business processes that does need TJ to do. What can you take off your plate? What can you put on somebody else’s plate? And do you have a system in order to pass that off easily, but it takes time to set up those systems.

TJ:
Yeah, definitely. And this is actually something I do a lot for my clients as well. It’s a funny space where I’m like, “I do this for my clients, but now I’m going to offload some of the stuff for my business to somebody else.” So it’s a little bit of letting go of control, a delegate thing as well, but I do think one of them-

Mindy:
I didn’t say it was easy.

TJ:
One of the main things I do want to do, because right now I’m operating in like three different calendar softwares, is to have somebody just sit there and sync them all up because that’s just the way the invites come in. And there is a purpose to having them separated. But in order for me to know where I need to be next, I do need them to sync up a little bit more.

Mindy:
Well, that sounds like more than five hours worth of work to do.

Scott:
What’s like a three year target for the business? What would you’d be like, “I’m super happy with my business,” in three years?

TJ:
Three-year target is definitely to have that personal assistant, and then maybe one other consultant at that point. And I’m not picky about in which space their specialty is in, but that would be the ideal space in three years.

Scott:
Okay. Your business currently generates, it looks like 110 to $120,000 a year in revenue. Is that right?

TJ:
Yeah.

Scott:
So I just want to point out, if you’re hiring a… What would be the salary range of someone that you’d be wanting to hire?

TJ:
So for a personal assistant, I’d probably do 20 to $30 an hour just because the demand for talent, especially type of talent that I want to mentor is going to be at that price range. For a project manager, that’s where it gets expensive. My starting salary coming straight out of college was somewhere around 60K. So we’re starting to really eat into the revenue there, unless that person can independently handle a client all by themselves.

Scott:
Great. Let’s say it’s 75K for the persons one or two years out of college with that. When I think about employee expense, I fully burden it, I say, “Okay, the bonus, the benefits, all that kind of stuff.” That’s going to be an incremental 50% on top of the base salary. So that would give you 37,500 on that. So that’s 112,500 that you’re going to be paying this person, I think I did that right, in compensation, that’s how much cash is going to leave your business on an annual basis to pay that person’s salary.
Let’s say the personal assistant, say it’s 50K. So same deal. 75K, maybe 80 in that case because you still have to pay the health insurance and all that kind of stuff, is going to come out on that particular one. So that’s 80. So that’s $200,000 in cash costs that are leaving your business in order to pay for just those two employees, not to mention your software and all the other stuff. How much do you want to make?

TJ:
That’s a good question. At the bottom of it, what I need to live off of is about 55K a year. What I’d like to make is at least 150 to make all of the rest of this worth it.

Scott:
So you need 150 in base plus bonus or plus some wiggle room, or is that the profit the business needs to be at the end of the year?

TJ:
Let’s say plus a low wiggle room, because I’ll probably do an S-Corp election and do an owner’s draw.

Scott:
Okay, great. And then you’re going to have benefits and all that kind of stuff that you’re going to want from the business, like health insurance and all that kind of stuff. So you say 150. Let’s add another 37,500 to be consistent with your top employee there. So that’s going to put you at 200. So now we’re now we’re fully loaded at 400,000 to $450,000 in cost to get to your future target. So you need to be able to generate business that does, I guess we can pull 150 out of that target, that generates about 450 to $500,000 annually in revenue in order to get to complete that picture. And the point I’m trying to make here is that, I like the systems and all that kind of stuff, but this is a revenue game right now.
You need to bring in more business and build that book of business. At first, I don’t know how much that scales. I think Mindy’s absolutely correct that you should write out all those tasks, the calendar syncing, that’s perfect. You’re certainly in a position to outsource some of that work that’s lower skill that anyone else can do that doesn’t need to do that, the project management, that is your professional thing. But I think, you’re saying three contracts, I can juggle three at once. You need to do six at once in order to justify this or fewer that are bigger or more that are smaller. I don’t know, with that, but that’s the name of the game that I see.
Do you think I’m framing the challenge appropriately with that? And is that sparking any ideas or thoughts on this vision?

TJ:
I like the way you laid it out, it definitely helps me quantify what the goal is. At this point, I’d say towards the end of the three years, that might be a bit of a stretch to really get to that point. And I only say that because the whole just trying to hire just a part-time person right now is a little bit slow going, more because of the networking aspect that goes into it. So some of it is like, I know what I need to do, but either I don’t have the network to do it yet. I don’t have everything set up, or I’m just waiting until the appropriate time to make those overtures.

Mindy:
What I’m hearing you say is, or what I am getting from this conversation is you need to hire a personal assistant. The ideal personal assistant is coming from a professor that you’ve been in touch with, is a junior or senior in college, is hungry and would work for 20 or $30 an hour, part-time your five hours, but they’re studying to be a project manager or that you have aspirations to be a project manager. So as they’re learning with you, learning your company on a part-time while I’m in school basis, they graduate, and now you’ve got a project manager who’s already familiar with all the aspects of your company and can hit the ground running and then you have to go and find another good personal assistant, but you can find a good personal assistant.
It sounds like project management is more of a difficult task. So that’s the first thing that I would do is really focus on reaching out to all of your professors and saying, “Hey, I’m at a position where I need somebody five hours a week, but I’m thinking it’ll grow.” And having a conversation with them, “Oh, midterms are coming up, great. You can take time off this week. And finals are coming up. Great. I want you to focus on that too.” But having this back and forth with your employee can be really, really beneficial to your business.
Another thing I want you to do is get a new client, it’s called TJ’s business, and look at TJ’s business from 50 miles up and say, “If TJ’s business was my client, what would I tell them to do?” And it’s very much Cobbler’s children have no shoes kind of thing where you know what you have to do, but it’s so easy to not do it. Let me tell you all the things that I know I have to do and I just keep finding reasons not to. So it’s not TJ’s business, it’s Mindy’s business. Mindy’s business just happens to run exactly the way TJ does. What would you tell Mindy to do in your exact position and start implementing that?
But I really think the assistant who can, like your calendar, that’s really important. If you miss a meeting, that’s going to be horrible. I don’t want to do all that moving calendar thing either. So I would love to have an assistant who could do all that. But that’s a great task that you can easily check on, “Oh, they messed this up. Forget it, I don’t want to hire this person.” But starting off on a project basis and then asking them, do you want to come on as a part-time and then as a full-time?

TJ:
Yeah, for sure. I think an answer to your, what would I tell you? If I was looking at my business as the consultant, it really is just to get a job description out there and just throw it out there and see what comes back. I’m totally definitely the introvert that doesn’t want to talk to anybody, so it doesn’t happen. I even drafted it and everything, and actually, I didn’t think about just sending it to my professors, I was thinking I’d have to put it on some kind of job board and things like that. But I think the professor route probably is the better way to go.

Mindy:
I would start with the professors and then start with, are there any project management institute? Do they have any like Facebook groups or LinkedIn? There’s a lot of technology in our fingertips, are there any college groups and clubs that talk about project management? I’m just throwing stuff out here, but maybe something like that could spark what heck is this.

TJ:
It’s a little tough coming out of the pandemic that people basically shuttered all their events and stuff. They are coming back, and I did just talk to a student on Friday. Where I do want to be careful though, is that if they have particular career aspirations that don’t line up or just isn’t a good first step for them, I don’t want to convince them that it’s better to work for me than whatever else they have going for them.

Mindy:
I think that’s fair.

Scott:
What would be a good outcome in the next year for you?

TJ:
You in the next year would probably be to feel stable in my business operations. Right now, I’m enjoying the whole like eat when you kill thing where you get to do the sales thing and all of that and having those conversations, but especially if I’m thinking about bringing on people that will depend on income from me, I do want to be stable enough where I don’t have to worry about whether or not I’m going to have a tough conversation with them six months down the line.

Scott:
Well, what does stable mean?

TJ:
Stable would be probably signing a client before I’m done with the current client that’s bringing in whatever the profit, because in the next year, I don’t think I’ll be juggling three at a time, maybe two at a time. So basically knowing when my next engagement is going to start, when I already know that the current one is going to end, and having that visibility into the future of what’s going to happen so that I can plan for it. And clearly as a project manager, I’m a big planner. So that’s what that means to me really, because I’m very flexible in a lot of other spaces, but I don’t want this business endeavor to be something that just falls apart because I stop paying attention to it.

Scott:
Okay. I love the focus on the personal assistant because there’s clearly opportunity to go there, but I think we’re missing a huge piece of what being in a future state that actually checks all these boxes means. And the personal assistant is one component of that overall approach with that. So what I’m hearing is you want to sign a client prior to the engagement ending. That means you need a sales and lead management pipeline. So there needs to be, there’s traditional sales funnel, here’s the amount of leads, here’s where they are in the sales cycle, here’s where they’re falling. I have my pricing figured out and I have all of that kind of stuff.
So that’s an easy to-check-the-box component of the business plan that only you can achieve, only you can construct for at least for now at that, and you can hire a consultant or something like that, but that would be really high-value work. Then creating some forecast with that or some schedule that compiles those and has those end dates figured out with that kind of stuff, and that making it into your calendar where you’re like, “Okay, my engagement’s at the end and I worked 40 hours, too bad, I got to do another five hours this week because I need to manage that pipeline and get that next lead into the business with it. Otherwise, I’m going to be increasingly anxious over the next month while this engagement is ending with that kind of stuff.”
And I think the tool for that would be helpful is the business plan. So it’s a bit back to basics college, dig up one of those things, but putting together a very simple two-page, three-page business plan may be very powerful for you because, again, I don’t think the personal assistant is going to solve as many problems as you think. I think it will solve some of them, but you’re attempting to build a business with an employee with all this, you need to have those traditional sales and marketing operations, finance, and forecasting, roles defined and filled.
It doesn’t mean you’ve hire people to do all of that, they just need to get done, probably by you in the short term with this. And so that’s where I think-

TJ:
I will rest for something.

Scott:
Yeah, go ahead.

TJ:
I was going to say actually, because my major was from the business school, it actually isn’t too much of a stretch to ask the personal assistant, if they were to come from my major or an adjacent major to do a practice run of it. They’re definitely parts of marketing that I don’t want to do, things like social media and stuff like that. I’m like, “I’m sure I could figure it out, it’s not like so much of a stretch, but it’s not where I want to spend my time.” So there is definitely opportunity if I could find a student that was interested in those spaces to have them stretch into those spaces as well.

Scott:
Absolutely. But I think if you start with what needs to get done in order to move the business forward and then fall back, and then outline that like, “Okay, somebody needs to post to my Instagram with this type of content with it.” Or, “Somebody needs to run a Facebook ad campaign with this kind of stuff. Here’s how much I’m willing to spend.” If you start by mapping out what needs to get done and then putting in place the pieces that move that get that forward, I think you’re going to find that more powerful than just saying, “Okay, well, all of this is a catchall. The personal assistant will take care of all of it.”
It is possible to hire that incredible assistant who can just take on all of these things and do them all well, but you may find on the marketing function, I’m making this up, I don’t know. You may find on the marketing function that outsourcing to a social media firm for 100 bucks a month is going to be much more powerful because they’re going to know what they’re doing than giving that as additional task to the personal assistant with that. You may find that an outsource bookkeeping firm can keep the books much better than the personal assistant can. The inverse of that may be true, I don’t know.
What I’m hearing is the next step is the personal assistant. That’s surely the case, some of the work with that, not doubting that, I just don’t think it’s the only tool in your toolkit to help you get to that stable position in a year from now. And it’s going to create a lot of dependency on this particular individual as well if we go down that route. And that’s why I’m just encouraging you to think about it from a business planning perspective and say, “What actually needs to get done? Who is the optimal person to do that? What’s a good short-term solution? What’s a good long-term solution with that? And mapping it out like that. That’s just, I think, a more powerful approach.

TJ:
Yeah. I think that makes a lot of sense that I do need to just write out the individual tasks that are easy to say, “Yes, this is done.” Or we can move the owner around as necessary because it might be the personal assistant, it might have to go somewhere else, it might have to be me, but there’s no way to determine that until I have a list and we stare at it and go, “What are you willing to do? Or what do you feel strong in doing?” And then delegate those out appropriately.

Scott:
And just so you’re aware, at BiggerPockets, we do this kind of stuff all the time. Let’s talk about this podcast. Mindy and I both work at BiggerPockets. The podcast is produced by an employee, but it’s edited by a contract firm in the Philippines. Then the video is edited by a firm in Spain. Then we have a contractor who listens to the show and comes up with titles. So there’s certainly somebody who’s managing that flow, but there’s also bits of work product that are best done by certain individuals out there. And it’s much cheaper, more cost effective or better outcome to structure it, we think that way than to do all of that in house with one all-rounder on that front.
And that’s our business that’s completely different, but just a framework to help think through.

TJ:
That’s a great point. And I think what I’m learning through this conversation is that because of where I come from as a project manager, what actually happens when you said, “Hey, there’s somebody managing the flow,” that’s what I do. And then typically at large enterprises, what they also don’t do is hire the correct people to do all those like, “This is the best person to do X, Y, Z.” So since enterprises don’t hire those people, it actually falls to the project manager to fill in those gaps.
And that’s been a big part of why I’ve been successful in project management is because I will jump in when we don’t have a body to do a particular piece of work. And that’s something I have to unlearn in order to run my business.

Scott:
Yeah. That’s more eloquently phrasing. What I’ve been trying to communicate with this is like, I love it. Your biggest problem is you need to drive revenue growth. You have a large body of work that needs to get done to drive the revenue growth, inclusive of operations, which is taking over most of this. And I think that another, replicating yourself is great, but continues to avoid the scalability, the long term scalability problem of mapping out each process with it.
I think you should definitely have the personal assistant with all this, again, at least on a part-time basis with all that. I just, again, encourage you to use that tool of the business plan, or don’t write a 20-page business plan, it’s a waste of time. But if you just jot your stuff down on a few pages, that may be very powerful for you to refer back to. And there’s a lot of templates out there. If you’re looking for the easiest or simplest one, Traction has a really good one. It’s meant for businesses that are larger than yours with that, but they have a two-page business plan called the Vision/Traction Organizer, which will force you to collect all of those thoughts on two pages.
It can take you away from an hour to a day to fill that in or months, depending on how long you want to spend on core values and that kind of stuff. But that may be an easy one for you.

TJ:
Yeah. I’ll definitely look into that.

Scott:
Okay. Well, do you have anything else we want to talk about on this particular subject? Or do you have any other questions about your financial position that would be helpful for us to discuss?

TJ:
A couple others maybe. The one that pops out at me, if I’m looking at my notes, is really in the healthcare space, because I’ve jumped off of working W2, and right now I’m on Cobra, but we’re also approaching open enrollment. So that’s top of mind for me right now, is figuring out healthcare as an independent consultant.

Mindy:
We have in the past suggested if you are relatively healthy, you don’t have any chronic conditions, the high deductible plan is the best option for you, but if you have chronic conditions, it may not be. I said this out loud on a show and somebody reached out to me and said, “I have run the numbers, this is like my thing. I ran all the numbers and there is this very teeny-tiny space where even with the chronic condition, even with great health, poor health, there’s a very tiny space where the HSA isn’t the best plan, the high deductible option, isn’t the best plan.”
So I would say if you were going out on the exchange trying to find this for yourself, the options aren’t great. Mostly they seem like high deductible plans, I would set up an HSA to make sure that you are able to invest the funds if you’re going with the high deductible route. But honestly, I think the exchange is going to be your best option, which isn’t a great option. It’s more of a catastrophic plan. If you have your appendix out, that’s going to be… I had my appendix out in ’96, then it was $27,000 back then. So it’s going to be more now because everything goes up.

TJ:
Actually, I’ve had my gallbladder removed. That was a tax year that I took advantage of a lot of things. So yeah, I definitely am a big fan of the HSA, and it’s great to know that somebody’s run the numbers and figured out that there’s actually long term more effective to stay in the HSA even if you have health concerns. So that’s definitely something I’m looking at, I think something that will mitigate the whole health concern thing, considering that I’ve already had major operations is probably just picking one that has a lower out of pocket max or a lower deductible.
And I actually looked at the exchange, there’s one that was 1,400 was the deductible, and I was like, “How does this exist?” But I also don’t recognize the network it’s in, so that some of my concern is more of like, how good is this network?

Mindy:
And that’s another thing to consider. I knew somebody who did not like a specific provider network because when she went in, she didn’t see the same doctor all the time. My kids don’t know their doctor because they go in once a year and then it’s a whole another year before they go in again. So we don’t have a relationship with our doctor, when we ended up with that insurance, it didn’t bother us because we didn’t have a relationship with our doctor anyway. So what it all boils down to is there’s no easy or cheap all-encompassing answer for healthcare in America.
It is expensive, it is going to be expensive, and it can be a business expense. Scott, her company TJ’s Business Consulting can provide health insurance to you 100% paid, right?

Scott:
I think that may be the case, but I want to caveat that where that is definitely going to be the case once you have employees. If you’re acting as an independent contractor, for example, I don’t know the structure of your business and how you’ve set things up.

TJ:
Actually, I’ve looked into it. Right now, I’ll probably stay sole proprietor. And just because of what a reasonable compensation is for a project manager, is on the higher end, I’ll be able to deduct off of my personal taxes, the premiums, but I won’t be able to have the business pay for all, I can’t do like a health reimbursement plan or anything like that yet. So until I’ve got other employees and I’m running as an S-Corp, that’s not an option.

Scott:
Okay. Thank you. I did not know that. So thank you for educating us on that particular one. That makes sense. It’s 601 half a dozen the other if it’s tax deductible versus a pass due to your business. So for now, that doesn’t seem like a high stakes problem for you.

TJ:
Yeah. I get this question a lot, how am I going to pay for health insurance after financial independence? How am I going to pay for health insurance as a small business? And I wish there was a great answer like, “Oh, go to Abc.com and they’re totally going to take care of you. Insurance is a dollar.” But there’s not. Insurance in America is expensive. So if that is something that you are going to be responsible for, it just needs to be a line item in your budget.

Scott:
I want to put out a little dangerous shout-out here, arm for this. I’ve considered in the past maybe creating a benefit for BiggerPockets Pro members of a healthcare plan or access to a healthcare plan that is reasonably competitive. So if anyone listening knows how to potentially help with that, that’s an exploration phase, probably not something coming in the next year, not in the 2022, but would be something that I would love to provide downstream because a lot of full-time real estate investors or flippers, etc, have this type of problem in the early stages of building a business and I would love to be able to offer a reasonable solution to that.
So if anyone has ideas, please send it my way, [email protected], I’d love to explore that, probably something for 2023 or 2024 BiggerPockets roadmap for that.

TJ:
Yeah, perfect, perfect.

Mindy:
Yeah. That’s [email protected] Email him.

TJ:
Nobody else.

Mindy:
Scott’s no longer inbox zero.

Scott:
That’s a tough one. I think the answer is, there’s no good answer right now. So there’s only list of bad options and you’re probably as informed as we are on those list of bad options for you through the research that you’ve already indicated in the portal there at healthcare.gov, I imagine. Is that right?

Mindy:
Did Warren Buffett connect with Jamie Diamond, and who’s the Amazon, Jeff Bezos and tried to disrupt the system and then decide they couldn’t?

TJ:
I think they went into pharmaceutical. That’s where I understand Amazon tried. And I don’t know if they’re still working on it or not.

Mindy:
Yeah. That’s the thing, I don’t know if they’re still working on it. I wish they would. I wish that somebody would figure this out. Warren’s really smart. Come on, Warren, step it up.

Scott:
Well, I’m sorry we don’t have a wonderful, helpful answer for that one on yet, but if anyone does, we’d love to collect notes and maybe we can post about this as well in the BiggerPockets Money Facebook group and just rehash if there’s any new or exciting news in that front about what are some good healthcare options for somebody who is self-employed or sole proprietor or has a small business that is not eligible for employer plans.

TJ:
Yeah, for sure. I kind of figured.

Scott:
Yeah. Then we’ll send you a link to that.

Mindy:
Link to episode 94.

Scott:
Yeah, show 94. She had a list of like 25 options or something like that that were applicable. There’s a couple of edge cases that you could qualify for. So it’s probably worth to listen because there might be some golden there, but I would say the odds are that it’s probably going to be something along the lines of what you’ve already researched.

TJ:
I’ll take a look and see.

Mindy:
Okay, awesome. TJ, is there anything else that we can talk to you about today?

TJ:
I think that’s about it.

Scott:
Well, I just want to compliment you on the fact that you’re doing really well with your I position with all this. You’re spending very little, you’re house hacking, you’re building a business, all this kind of stuff. You’re thinking about scale. I love it. You’ve got the two properties now with it. It just seems like you’re off on incredible trajectory with building wealth, with all this kind of stuff. And I’m excited to see how things go with your business.

TJ:
Thanks, Scott. It’s great talking to you guys.

Mindy:
Thank you, TJ. We’ll talk to you soon.
Scott, that was TJ. What did you think of her story?

Scott:
I thought there were some interesting financial decisions to contemplate. What’d you think, Mindy?

Mindy:
I really liked where she’s at. And I think she’s in that almost to the point where she’s… She’s in that position of business growth, where she could probably hire somebody on a very part-time basis, but I think very soon is going to be a little bit farther than when she should have hired. You know what I mean? You always wait a little bit too long to hire your first employee, I think she’s thinking about it, and I think you in particular gave her some really great things to contemplate, and I’m super excited for her business growth in the next couple of years.

Scott:
Yeah. Look, I feel like when a business line or area has that level of revenue one $60,000 employee on $110,000 in revenue is going to eat up 90 grand out of 110 in profits, if you pay anything else, rent or whatever, you’re at break even with that. So the plan has to involve aggressive growth projections, not just to protect your own business interests, but also the interests of continued employment for that employee with that. And so that’s where I think my challenge to her come from, where if you want to hire and get people in full time, that’s great, but you need to have the revenue to back it up, or you need to have aggressive path to getting to that revenue that your future employees can reasonably believe.
And so I think that’ll be your challenge. There’s a lot of ways, there’s a lot of betweens here and there, part-time assistant, hourly contract, all of that kind of stuff that can de-risk that, but that’s I think the big challenge there where last thing you want to do is have to eliminate the position because the revenue projections didn’t pan out.

Mindy:
You know, Scott, I think that you gave her some really great things to think about and consider that maybe she hadn’t quite gotten to yet herself. So I think this conversation is really helpful for TJ to start thinking about growth patterns. And when you get really busy, it’s really easy to say, “Oh, I want to hire somebody,” but hiring them in an intelligent manner is the best way to go. And of course, you have to have the revenue to back it up. That’s always, always the top. Okay, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
Ooh, ooh, before we do, I want to make a plea to our listeners. If you would like your finances reviewed, Scott and I would love to look over your financial situation. Please apply at biggerpockets.com/financereview. We don’t need to use your name, your video, we’re not here to out you, we’re not here to catch you in lies. We’re just here to review your finances and see what we would do if we were in your same situation. So if you would like us to talk, let’s talk, biggerpockets.com/financereview. Okay, Scott. Now, should we get out of here? And you say, “Let’s do it.”

Scott:
Okay. Let’s do it now.

Mindy:
From episode 252 of the BiggerPockets Money Podcast, he is Scott Trench, and I am Mindy Jensen saying, don’t be a punk skunk.

The housing market remains on solid footing heading into 2022, but there are some threats to property prices that investors should pay attention to. 

When I look at the data, the single most significant threat that I see looming for investors is rising interest rates. 

Interest rates play a huge — and often underestimated — role in housing prices because they dictate the price of a mortgage, which then impacts affordability. When rates are low, as they are right now, housing becomes more affordable and prices tend to rise. When rates rise, property values can be negatively impacted due to lower affordability and less demand. 

So what happens to today’s red-hot housing market when interest rates start to climb, as they almost certainly will do in the near future? 

I’ll give you the answer to that question below while walking you through everything you need to know about interest rates in today’s market: where we are right now, how interest rates impact the market, and what to pay attention to in the coming years as interest rates begin to climb. 

Where we are today

Over the last year, mortgage rates have either been at or near historic lows. Just look at the crazy chart below! 

As is clear, the pandemic has accelerated the decline in mortgage prices — but rates have actually been on an extended downward trend since the early ’80s. The pandemic just kicked it into high gear. 

Note: in this article, when I reference mortgage rates, I am referring to the average rate on a 30-year fixed-rate mortgage — as that is the mostly commonly tracked and reliable data. This may not be the exact type or mortgage you use, or the rate you get— but the lessons are applicable to nearly any type or mortgage or loan amount. 

So, rates are low. But if you’ve been paying attention, you have likely noticed that they are starting to creep up, albeit very slowly. Rates recently hit 3.16% — which is still low, but up nearly 20 basis points over the last few months. 

While I do believe this is the start of a long term trend of rising rates, keep that chart in mind. We’re still close to all-time lows for the time being. 

I’ll touch on more about why interest rates are going to rise and what is going to happen when they do below. But first, let’s review how this era of low interest rates has helped fuel the rapid price appreciation we’ve seen over the last 18 months. 

Why mortgage loan interest rates matter 

To make a long story short — interest rates are what dictate the cost of a mortgage. 

When interest rates are high, the borrower pays more in interest to the bank. This means that their monthly payments are higher, and borrowers have to shell out more money from their pockets to service their mortgage. 

When interest rates are low, the borrower pays less in interest on the money they have borrowed. This lowers their monthly payments and allows the borrower to keep more money in their pocket. 

To demonstrate just how large of an impact interest rates have on your mortgage payments, I created an Excel calculator and ran a few different scenarios through it. 

The first scenario we’re going to look at is a property with a purchase of $375,000 with 20% down and a loan with a 5% interest rate. 

As depicted above, this scenario produces a monthly payment of about $1,610 — with the borrower paying nearly $280,000 in interest over the life of the 30-year loan. 

But what happens if we drop that interest rate to today’s rate, which averages about 3%? 

With the decrease from 5% to 3%, the same property will only cost the borrower $1,264 per month — and just $155,000 in interest over the lifetime of the loan. 

That’s crazy! 

By decreasing the interest rate by 2% — from 5% to 3% — the borrower has reduced their monthly payment by 21%. They have also cut down on the total interest they pay the bank by 45% — which equals very significant savings. 

Let’s imagine for a minute that I, Dave, was comfortable with the first scenario at 5% interest and could afford a $1,610 monthly mortgage payment. Well, when interest rates drop, I can now afford a house that is nearly $100,000 more. 

Note that in the graphic above I have changed the purchase price to $475,000 — and my monthly payment of $1,602 is actually lower than it was when I was purchasing a $375,000 property at 5% interest. I would have to come up with a larger down payment, of course, but my monthly carry would actually be less. 

So, if you want to find a single reason as to why home prices have skyrocketed in the last year, interest rates are it. People can afford more expensive properties because rates are so much lower. 

Conversely, rising interest rates have the potential to hurt the housing market. Rising rates make mortgages more expensive, and in turn, properties are less affordable. Fewer buyers will be interested in purchasing a property that has a higher interest rate.

And, higher rates increase the debt-to-income ratio of the loan, too. Therefore, fewer buyers will qualify for mortgages based on the new higher debt-to-income ratio that comes with higher rates. 

Will mortgage loan interest rates rise? 

There are two primary indicators to look at regarding mortgage rates. The first is the federal funds target rate and the second is yields on the 10-year Treasury Note, which are a very common form of bond issued by the U.S. government. 

Let’s first talk about the Federal Funds Rate, which currently sits near 0. 

The Fed dropped interest rates at the start of the pandemic, which is a common tactic to stimulate the economy. Low interest rates make it cheaper to borrow money, which then gets more money flowing into the economy. This is also known as increasing monetary supply, and it helps grow the economy during recessions, like the brief one we saw in 2020. 

In an ideal world, the Fed would probably keep interest rates low for a year or two before raising them gradually. This is what happened the last time rates were near 0, which was during the Great Recession. At that point, they raised rates gradually over a number of years so that the economy had time to adjust to higher rates while avoiding any shocks to the system. 

This time around, inflation is on the rise — which is unfortunate for everyone. And now the Fed has inflation to factor in, too.  

The Fed targets about 2% inflation annually, but we’re at about 6% right now. If you’re wondering why the Fed wants any inflation at all, there’s a simple reason for it: If people expect prices to stay flat or decrease in the future, they have less incentive to spend money. So, having a little bit of inflation in the mix actually stimulates economic activity. 

But, let’s be honest here. No one is happy about where inflation sits today. I don’t believe it’s time to panic about inflation just yet, but the Fed will likely have to act to curb inflation more quickly than they want to — and the way they do that is to raise interest rates. That’s because rising interest rates lower the monetary supply, which helps to curb inflation. 

For now, though, the Fed has signaled they won’t raise rates until late 2022. Still, it’s something to keep an eye on. 

The second indicator for mortgage rates is the yield on the 10-year Treasury Note — one of the more common types of bonds issued by the federal government. 

Yields have been going significantly, and when yields go up, so do the interest rates. This is a complicated topic, but the simple explanation is that treasury bonds are very safe investments. Therefore, if a bank can invest in a bond at 2% and earn an essentially guaranteed return, originating a mortgage at 3% — which is a lot riskier — looks less appealing. 

As such, when bond yields rise, banks will typically raise interest rates to balance the risk vs. reward profile of originating a mortgage. 

Right now, however, yields are very low. That said, they are starting to inch up for a few reasons — but I believe the main reason is the Fed’s announcement regarding how they are starting to taper asset purchases. This announcement sent yields up and is also likely the cause for the modest increase in interest rates of late.

And, with yields near historic lows, as well as the Fed reducing stimulus and the ongoing issues with inflation, it seems likely that bond yields will continue to rise — albeit relatively slowly. 

So, just to recap, the two main indicators for mortgage interest rates are the Fed’s target rate and bond yields — both of which are likely to rise over the coming years. This will send up mortgage prices. 

With an increase in interest rates all but guaranteed, the real question is: How quickly rates will rise and what the impact will be on the housing market?

What happens when rates rise

To understand what happens when rates rise, let’s take a look at some historical data. 

Housing prices and interest rates are negatively correlated. This means that they have a relationship — but when one goes up, the other goes down, at least historically speaking. 

But to be clear, this doesn’t always happen. Look at what happened between 2011 and 2017. Look at what happened in 2019. Look at what happened in the late ’70s and early ’80s, when interest rates were at all-time highs! It’s not a perfect correlation. 

That imperfect correlation is precisely why we don’t really know for sure what will happen when rates start to rise. Still, we can make some informed conclusions about what investors should do in this economic climate:

1. If you haven’t yet secured a refi on a property you intend to hold on to for a while, it’s time to do so right now. That’s a no-brainer.
2. While the market outlook is unclear for the next five years, locking in a 30-year rate at historic lows is likely a good idea for investors who are in it for the long game. I think 2022 will be strong, but it’s too early to tell what will happen in 2023 and beyond.
3. Keep an eye on how quickly rates rise to understand the potential impact on property values. If rates rise quickly, it could cause a shock to the system, and housing prices could slide backwards. But, the Fed is not likely to do that. They will likely try to raise rates as slowly as possible to allow economic expansion and wage growth to counteract the impacts of rising rates. This is what happened post-Great Recession, which was one of the strongest periods of property price growth in American history — despite rising rates. That said, if inflation stays high for too long, or even starts to accelerate, the Fed could be forced to raise interest rates faster than they want to, which could hurt housing prices. 

Final thoughts

Before wrapping up, I want to make one thing clear: When I say rising rates could hurt housing prices, I am not necessarily saying that this would be a housing crash. In my mind, a crash is a drop in asset values of 20% or more. 

I think it’s very unlikely that interest rate hikes alone would cause that kind of decrease. Rather, I think rapidly rising rates could lead to a period of flat growth or modest price declines in the coming years. 

That said, if rising rates were to be coupled with a sharp increase in housing supply or a big drop in demand, that could certainly cause a crash. But if you watch any of my videos, you know I think that is pretty unlikely. So, my outlook remains the same. I believe in 2022 we will see solid price appreciation because interest rates won’t rise too rapidly. 

Once mortgage rates rise to about 3.75% to 4%, which I believe will be in 2023, I think values could be negatively impacted, but we’re still a ways off from that. Right now, I don’t think anyone has enough data to accurately predict what happens beyond the next 12-18 months. 

The best thing to do is focus on what we do know: rates are low, demand is high, and the 10-year outlook for the housing market is extremely strong.