This Investor Has $1.8 Million Trapped in Real Estate Purgatory

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In This Article

Below is an email transcript from a BiggerPockets Money listener who sent me a message about their personal financial situation and wanted my insights. We’ve used AI to edit the email’s content to be more readable in an article format and remove sensitive personal information from the sender to protect their privacy.

Email Subject: Appreciating the Podcast & Seeking Insights on Financial Independence

Dear Mindy and Scott,

I just listened to your podcast episode on the Middle-Class Trap concept, and I really appreciated the content and suggestions! Your discussion resonated deeply with me because I feel like I’m squarely in this trap and am eager to find a way out.

A Bit About Us

My wife and I live in Louisville, CO—I’m 47, she’s 43, and I have a 9-year-old from a previous marriage. We’ve been married for 1.5 years, and last fall, we moved my 80-year-old mother, who has dementia, into our home so she could have the support she needs. We also have two golden retrievers rounding out our household.

Financial Overview

Our finances aren’t fully blended yet, but I’ve been a diligent saver while my wife is working on building her savings after recently completing her MBA from DU ($75K, financed).

My net worth: ~$2.855M

My wife’s net worth: ~$75K (401(k): $150K, MBA debt: -$75K)

Income:

My W-2: $200K

My wife’s W-2: $135K

Investment Breakdown

Total investments: $937K

401(k): $10K (new)

HSA: $37K

529 plan: $22K

Rollover IRA: $550K

Roth IRA: $150K

Brokerage: $170K

Cash: $15K

Credit cards: $7K (paid off monthly; just returned from a Peru trip and have a big ski trip planned)

Car loans:

My 4Runner: $16K left

Her Model Y: $4K left (goal: No more car loans after these are paid off)

Real Estate Holdings

Primary residence: $1.3M value | $463K loan

Rental No. 1: $625K value | $368K loan (refinanced during divorce, breaks even)

Rental No. 2: $490K value | $72K loan (cash-flows $500/month)

Rental No. 3: $425K value | Paid off (cash-flows $1,500/month)

Getaway cabin: $350K value | Paid off

Why I Feel Stuck in the “Trap”

I’m eager to leave the workforce, but my wife is happy to continue working (though she’s considering a career shift that may come with a lower salary).

We max out our 401(k)s and contribute to our HSA (not fully maxed), but only contribute modestly to our brokerage account.

Despite our net worth, we often feel like we don’t have much discretionary income, though we do prioritize travel and experiences.

Future Considerations and Tax Planning

I purchased our primary home 12 years ago for $550K, so when we sell, we’ll owe capital gains taxes beyond the primary home exclusion. We plan to sell when my son goes to college (~9 years).

Considering a strategy to move into Rental No. 1 (a condo in Boulder), live there for two years, then sell it as a primary residence to take advantage of tax exclusions before transitioning to a mountain home.

Would Love Your Thoughts!

If our situation sounds like an interesting use case for your podcast, I’d be happy to dive into more details. Otherwise, I just wanted to share how relevant your episode was to our journey—thanks for getting the wheels turning!

Best,

Scott’s Reactions

C—Thanks for reaching out. Congratulations on a clearly successful financial situation, with what I imagine is a wonderful lifestyle and a net worth in the upper percentiles of Americans! Let’s get to work.

The obvious problem here is that the rental portfolio is not providing near-term optionality. While you could be building long-term net worth, this portfolio is not doing what you need it to do, and you’ve got well over $1.1M in this, producing $2,000 per month in cash flow. This is not why we invest in real estate, and needs to be corrected.

Here’s what I’d take a look at:

Rental 3: These are terrible numbers. This property is operating at a 4% cap rate. Given that it is paid off, you could likely 1031 exchange this property for something that generates much more cash flow at this valuation. Given that the property is paid off, it’s also clearly not being held to drive appreciation.

I love paid-off rentals—but their purpose, almost by definition, is to generate an acceptable income stream. Gotta get above a 5% cap rate here, I think.

Rental 1: I am skeptical, before seeing more numbers, that this property will contribute to your freedom for seven-plus years. While the leverage may drive a solid IRR compared to your lightly levered properties, this property is for future Charles, not for near-term Charles. Is that OK with you?

If not, we should consider selling it or aggressively paying off the mortgage if the property has a high cap rate. If the play is for this to be your primary residence in nine to 10 years, that changes things a little bit. But that’s a deep, long-term move to lock up $300K for 10 years. Be sure if that’s the plan. Otherwise, treat it like any other real estate investment asset.

Rental 2: I bet that the cash flow jumps meaningfully if you pay off the property. Your IRR and spreadsheet math will likely tell you not to pay this thing off. But “feelings math” might make this compelling—if you spend $72K to pay off this property and its cash flow jumps to $2,000 per month ($1,500 incrementally) per year, you will feel $18K per year freer with this move.

The million bucks in equity you have here needs to be working harder, especially that $750K in the two nearly paid-off rentals. They need to be building your long-term wealth or generating cash flow. It looks to me, as an outsider without more context, that while they got you here, they won’t get you to where you want to go.

Primary: I don’t know your numbers on the mortgage, but I bet that the simple act of paying that mortgage off is a big piece of the puzzle in allowing you to comfortably step back from work, especially if your wife continues to work a job that comes with the basic benefits of health insurance for the family.

Potential Next Steps

You guys bring in $335K per year right now. Here’s one hypothesis for you to explore:

Putting in a high, but firm, spending ceiling: Capping your spending at $11,000 per month.

In a related move, become experts in travel rewards: On that spending, those will rack up and allow you to retain meaningful lifestyle options.

Max out the HSA.

Max out the 401(k)s.

From there, allocate the remaining ~$75,000 you’ll have leftover toward paying off the mortgage on your primary early.

Reposition the $1.1M in rental equity into 6%+ cap rate rentals with little/no incremental leverage, or pursue my bias of leaving Rental 1 in place, paying off Rental 2, and 1031 exchanging Rental 3.

I believe that within three to four years, if you find yourself with a paid-off home, a portfolio like this will enable “Wife FI” no problem, without you having to touch anything in the retirement accounts.

First Pass Verdict

In your situation, I don’t think you have too much in the retirement accounts/HSAs. I’d keep contributing while you work.

I think that your problem is that you are in real estate purgatory, where your portfolio is too lightly levered for it to be a meaningful returns multiplier, yet you also have enough debt service between the three mortgages that you can’t confidently cut back at work without running into cash flow problems.

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