EPS 47 - “The $500 Question: Pay Down Debt, Invest, or Buy a Second Home?” - Pink Money

Episode Transcript
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SPEAKER_00 (00:00):
The following podcast is for entertainment and
educational purposes only.
Remember to seek competent tax,legal, and investment advice
that is unique to your personalsituation.

(00:47):
I'm your host, Jerry Williams,and we're here to talk about all
things related to money from agay perspective.
And you know, recently I wasasked a question, and it's one
of those kind of questions thatin my mind just doesn't have a
really straightforward answer.
So the person was telling methat they have an extra$500 a

(01:08):
month, and they were saying, Ihave three different options
that I'm exploring, and I kindof want advice on which is the
best option for me.
So of the three options, theywere telling me that the extra
$500 could go towards payingtheir existing mortgage down at
I think it was roughly a 3.42%interest rate, something like

(01:31):
that.
It was pretty low.
And then they said their secondoption was to invest it in the
market.
Or the third option they wereexploring is maybe buying a
second home.
And that could be a way for themto generate income if they were
not not living there and theycould use that to rent it out

(01:53):
and draw some extra income fromthat.
So they were just kind ofexploring, you know, the three
different options and wanting toknow again, like I said, which
option they thought might be intheir best interests.
So my answer to that really isit depends.
Right?
It really just depends.
It depends on what you're reallygoing after, okay?

(02:15):
Because each of those has threedifferent strategies, and each
of those has has its pros andcons.
So, for example, if you're gonnause it to pay down your existing
mortgage, then that's helpful,right?
Because it helps you get out ofdebt quicker.
And in this case, they weresaying that if they use the

(02:36):
extra$500 a month and put thattowards the principal on their
home, they would be debt-free intheir existing home in roughly
10 years, which is veryattractive, right?
And I mean, that's a lot ofpeople's goal is to live with no
mortgage.
You know, I remember when therewas a time, believe it or not,
even before my time, wherepeople would have mortgage

(02:58):
burning parties, meaning thatthey would torch their mortgage
note because they were free thatfree of the mortgage.
So that was a hell of a day foreverybody.
And it's still an attractivegoal, right?
But on one hand, you're sayingthat the interest rate is so
low, 3.42%.
You know, can you do better thanthat?

(03:19):
Because that's a really safebet, right?
I mean, because you're justsaying all I'm doing is trying
to get out of debt.
I don't want to carry this debtanymore.
I will live in my house,essentially mortgage-free, and
it's just the best of all worldsto me.
Nothing wrong with that.
If that's what you want, that'swhat your goal is, then go ahead
and do it.
On the other hand, if you'resaying I can invest that$500

(03:40):
into the market, you know, whatcould I do?
So sure, you can go down thatroute as well.
Now, then when you decide toinvest, what do you invest in?
Because your your options areare very broad, right?
Because you can invest instocks, bonds, you know,
mixture, you can invest in anyanything, gold, what have you,

(04:00):
right?
Everything.
But there and again lies theproblem here because how much
risk do you want to take?
And is the market safe?
Maybe, maybe not, right?
Because investing just by inlarge in and of itself is risky,
and that depends on how muchrisk you're wanting to take.

(04:22):
Let's say on a scale of one toten, if one's conservative and
ten is being aggressive, youknow, where do you fit on that
scale?
You know, five and a half, I'mat a seven, I'm at eight, I'm
all the way at the ten, I'm onthe opposite, I'm the one or
two.
So that's up to you.
And nor does it have to be just,I'm gonna sit at this stage in
my life forever, meaning I'mgonna start off aggressive and

(04:44):
then I'll go conservative or youknow, to the reverse.
That all depends.
But let's just say, for example,if you were investing that extra
$500, and let's just say anindex fund like the SP 500, you
know, that's 500 of the largestU.S.
companies.
And it's hard to say what you'regonna get year from year, right?
You might do well and you couldget maybe 10, 15, 20% out of it.

(05:09):
It could be just the opposite,right?
You could lose money and youcould be down 20% and you just
kick yourself and just say, Ishould have never done this, and
da-da-da-da-da.
I should have put the money inmy house and da-da-da-da-da.
It's just, again, hard to say.
There's just no guarantees.
But on the other hand, you know,if you do relatively well in the

(05:31):
market, and let's say that, youknow, you consistently put in
money, you know, the 500 bucksover the course of let's just
say 10 years, and you don't doany withdrawals at all, then if
you were to get, let's say, moreor less uh average of 4% uh
return on your money, you'd haveroughly 73,000.
If you have, let's say, youcould get a six percent return,

(05:55):
you'd have maybe somewherecloser to the vicinity of maybe
eighty-two thousand.
If you could average uh an eightpercent return, you might have
something closer to ninety-onethousand.
So, you know, there there is theopportunity there, right, for
sure, and it is attractive forsure, but you have to be able to
stomach it and you have to beable to accept the risk that

(06:16):
comes along with it, becausethere's certainly no guarantees
when you're investing in themarket.
You know, it what you what youget is what you get, and you can
hopefully take advantage oftimes when the market dips and
you could buy more, but youknow, there's just no way to
really say for any degree ofcertainty what's going to

(06:38):
happen.
And I think even I think it wasWarren Buffett, he his advice
was to invest in the SP 500.
And I don't know what else hereally said, but I just remember
something like that.
But you know, again, investingis not for everybody.
And if you were probably askingyour great grandparents or
grandparents, whatever, they mayjust be 100% a guess against
investing in the market andchoose the safer route.

(07:01):
Put the money in your house, youknow, it's gonna be there, it's
not gonna blow away, go, go, youknow, disappear like you know,
your money could do in themarket, etc.
But you know, anything couldhappen, anything, anything,
anything could happen.
And with a house, there's allsorts of issues and problems
that come up from repair andmaintenance, new roof, and

(07:22):
da-da-da-da-da-da-da.
You know, it's just another oneof those things.
But you know, again, we're juststrictly talking here about
extra$500 a month and gettingout of debt.
So let's say that the house isthe safest bed, you're at the on
my one to ten scale, that'smaybe the one or the two.
Okay, and let's say theinvesting in the market is the

(07:42):
opposite.
Let's say that's eight, nine,ten, somewhere along those
lines, just for easy, easy kindof comparison.
And so let's say then you'relooking at a second home and
you're saying, well, you know, Ifound a house, I think I could
swing it and I could use thatextra money to afford the
mortgage.
And if I rent it out, thenthat's beneficial to me as well

(08:04):
because that would pay mymortgage.
And, you know, I would have twohomes, my existing one that I
live in.
I have this other one, which ismy rental, and you can go all
the way down that path.
Well, in my mind, I I say thatis an option, right?
But then there's also the caveatof what comes with that, right?

(08:24):
You have homeowners insurance,you have property taxes, you
have maintenance, and then youhave to deal with your renters
as well, right?
I think I've told the storybefore, but I don't know if I
have or haven't.
But I mean, even within my ownfamily, my sister and my mom,
they both had rentals and theyhad lots of issues with their
renters.
And I know that there's plentyof other people who have had

(08:46):
similar issues with the renters.
I mean, my mom, my God, sherented to some people who are
cooking in the middle of theliving room, literally cooking
in the middle of the living roomand caused$20,000 worth of
damage.
And it was a whole nightmarescenario.
And me myself, I've rented topeople as well.
I had this house and I had twoextra bedrooms that I wasn't

(09:07):
using, and I decided this isjust way too much house for me.
And I rented to two differentmiddle-aged guys who were going
through divorces, and they weregreat.
And I don't even think I chargethem a whole lot, maybe$4.50 a
month or something.
I don't remember what it was,but I didn't charge them a whole
bunch, and they were fantasticguys, and it turned out really,
really well.
And I got them off ofCraigslist, you know.

(09:29):
So what do you say to that?
You know, I don't know.
Although I did thinking back, Idid have one of the guys who did
flood my uh upstairs twicebecause I was out of town and I
came back, and I ended up havinglike myself some$20,000 worth of
damage because he took a bath inthe middle of the night or
whatever and left the bathtubrunning and it overflowed and

(09:51):
caused a lot of damage, which hedidn't even tell me about.
I had to find it out on my ownwhen I came home and stepped in
a puddle of water and tried tofigure out where the water was
coming from.
Anyhow, that was kind of anexpensive thing because uh even
in that instance, even though Ihad them each take out renters'
insurance, the renters'insurance didn't cover squat,
nothing, because none of theirproperty got damaged, so their

(10:13):
renters didn't cover any of it.
I had to claim it on my ownhomeowner's insurance, and the
deductible, I think, was 2% ofthe value of the house,
something like that.
Anyway, it was like two grand,which I made him pay and he
paid.
But still, I'm just sayingthere's pros and cons to
everything, right?
And you may or may not even wantto deal with renters.
A lot of people don't, right?
They even just get managementcompanies who handle all of it.

(10:34):
And I think even my sister triedthat, but it was still more than
they wanted to deal with, andthey just bailed out of that.
So let's say we put the thesecond home in the middle of
these two options as let's saythe five, somewhere around
there.
So we got paying off your ownhome as the conservative option,
we got investing in the SP 500,let's say, or just investing in

(10:56):
the market, as let's say thesecond option as the eight,
nine, ten, and then we have thebuy a second home option right
in the middle.
So it isn't easy just to saythis is your best option,
because again, it really comesdown to what's really important
to you.
And you just have to figure thatout for yourself because again,

(11:18):
if you're really looking forsafety and security, then maybe
paying off your um existingmortgage is the best bet.
Especially if you start thinkingabout your existing world and
you're a little worried aboutthe economy, you're worried
about your job, and on and onand on.
So maybe that is a betteroption.
But I would say you really needto make sure you have access to

(11:41):
your money as well.
So if all your money is tied upin your house, then that can be
kind of tricky to get your moneyout of the house, right?
You either have to do like ahome equity, you know, or line
of credit or whatever on yourhome, or you'd have to sell the
thing, right?
Because you just can't turn thespigot on and off and go and
grab your money.
Now, on the market, of courseyou can, as long as it's there,

(12:03):
right?
And there, and again, if you'vegot some money in the market and
you sell, then you also havetypically your capital gains,
right?
Especially if it's been in thereover a year and a day, then you
have to pay long-term capitalgains, at least as it is today.
You know, you buy at one priceand sell at a higher price, then
the difference between the twois your gain, your capital gain

(12:24):
that only becomes realized whenyou actually sell your stock and
so, or your shares or whateveryou end up buying.
But so there is a caveat withthat as well.
So it is liquid in the sensethat you can pretty much get
your money relatively quickly,let's say in less than you know,
a week, you can get your moneyand put it in your bank account
and use it as you need to.

(12:45):
But again, as long as it's thereand the market doesn't rob you
of all your money.
And you know, if the market issuper low and you sell, then you
know, are you taking a loss andthat's harmful to you as well?
So, you know, again, yeah, youjust I don't know, you know,
hopefully it's a good you knowopportunity, but you just don't
really know.
And then the whole second homeissue, right?

(13:07):
So it it just again goes back towhat do you want?
What do you really want to havehappen?
And you can split the differenceand you can go one way or the
other, go, you know, pay some tothe mortgage, pay some, put some
in the market.
You could do that, you know.
If you do find a second home,maybe if it's you know a really
good deal on the house and it'sreally undervalued, then that

(13:30):
may be a good opportunity, butyou got to find a good realtor,
or maybe you are really astutein terms of being able to
evaluate real estate, and youcan go in there and you can find
these uh undervalued properties,uh a HUM or a foreclosure or
whatever, you know.
You can you can do all that,right?
And there's lots and lots ofdifferent, you know, uh schools

(13:52):
or you know, uh classes orpeople who are willing to teach
you all about that kind ofbusiness.
I'll just tell you a real quickstory of something I just
thought about because I know Iwatched this um video recently
and it was about this woman andman who'd been together.
I want to say they've beentogether like 15 years, and you
know, lo and behold, the husbandends up dying.

(14:14):
I think he had a heart attack.
And then next thing you know,the woman ends up, I think like
six months, maybe less than ayear anyway.
She was up and remarried to thisguy who was significantly
younger than her, and all of asudden she decides to change
careers because she was acorrections officer who actually
had an affair on her husbandwith some inmate.

(14:35):
I don't even know how thathappens, but anyway, then she uh
starts in an real estate career,and she's doing just what I
said.
She's buying these homes thatshe finds and renting them out,
and she's doing extremely wellfor basically a novice person
who's just starting up on thisuh real estate path.
Lo and behold, she tries to gether husband, her her deceased

(14:59):
husband's best friend, becausehe was he was in construction or
something like that, and hisbest friend was also in
construction, so she ropes himinto doing upgrades or you know
repairs on these variousproperties and whatnot, and he
starts finding out through Idon't I can't remember how
exactly how he found it.
It doesn't matter, but he foundout that she was involved in

(15:21):
some scams, she was actuallyrenting properties that she
didn't even own, and he waschanging the locks in these
properties that it belonged toother people.
I think that's what happened.
He was there to change a lockfor one of the houses that she
told him to change the locks on,and the people came home and
said, Who are you?
What are you doing here?

(15:42):
Why are you changing the lockson her house?
And it happened three differenttimes, and of course, she tried
to you know make excuses and itwas a mistake and all this other
stuff.
But lo and behold, he reportedher to the authorities, and then
she put a hit on him.
She she actually hired some dudeto try to kill this guy because
she said he knew too much abouther world, and then she put a
second hit out on her newhusband because she wanted to

(16:05):
cash in on his insurancepolicies, which she probably did
to the first husband, who youknow they never did an autopsy
on him and they just crematedhim.
So who knows what reallyhappened to him.
But anyway, this black widow,here she is, you know, trying to
kill people left and right andtrying to conceal her
activities.
And nevertheless, long storyshort, she got convicted, and I

(16:27):
think she was thrown in prisonfor, you know, I don't know how
long, probably her life for allI know.
But anyway, completely besidesthe point.
But my whole point in terms ofwhat we're talking about here is
the options of ABC, right?
Paying off your home, buying asecond home, or investing in the
market.
Just depends on what you'reafter, depends on what your

(16:48):
financial goals are and how muchrisk you're willing to assume.
So nobody else can answer thosequestions for you.
Your financial advisor or useChatGPT or you know, run the
numbers yourself, what have you.
And you can decide, you know, ifI do this, I can do this, I can
do this.
You can do all those things,right?
Or you can choose to do none ofthem, put your money in the bank

(17:10):
account, and then just hang onto it as long as it's safe and
it's FDIC insured, and you don'thave to worry about anything,
hopefully.
And I guess that's really all Ihave to say about that because
it was an interesting scenario,and I just thought that as
always, it just depends becausethere's no easy answers to a lot
of this stuff.

(17:31):
But if it's falls in line withwhat you're trying to achieve,
then go for it.
If you're really unsure, seekout competent advice, lean on
others.
If you're in an investment clubor team, you know, maybe you can
go into this, let's say, buyinga second home or you know,
pulling your money together, andyou guys can do something if

(17:54):
this person has a level ofexpertise and you trust them.
As always, you really want toprotect yourself if you're going
into partnership with anybody.
Get in and writing, seek legalhelp to create the right
contract so you don't leaveyourself exposed and really get
to know whomever you're decidingto go in business with, because
who knows?
You might go into go intobusiness with this black widow,

(18:15):
you know.
Next thing you know, someone'strying to murder you, but you
don't want that.
Anyhow, I think that's it.
I've really belabored this pointprobably too far, but I think
you got the gist of it.
And I think I'm gonna put asurvey up on the website.
There's another plug for mywebsite, www.pinkmoney.com, and
I'm gonna ask you to selectwhich option you think might be

(18:39):
the best option for somebodywho's in this circumstance with
an extra$500 a month.
What may be the best option forthem?
So is it A paying off theirexisting mortgage for security?
B buying this second home andgenerating some additional
income, or C putting the moneyinto the market and taking a

(18:59):
little bit of risk to see how itplays out.
Or is there a fourth option Ihaven't thought about or they
didn't think about?
Who knows?
I don't know.
Maybe there is.
Those are the ones that I thinkI'm gonna put out there.
And other than that, oh, I knowone thing I was gonna say.
I just really came across thistoday that I see that Nancy
Pelosi is retiring.

(19:20):
And I just want to say that Ithink she's just an amazing
woman.
She always has been, and she didsuch amazing work being the
speaker of the house, and she isone of those people that always
holds her ground, tries to make,like all of us, try to make the
best decisions possible.
And she's not a shrinking violinand never has been.
And even when her husband wasattacked, and um she was under a

(19:43):
lot of heavy criticism by Trumpand all of his, you know, GOP
fiends, that she didn't shyaway, and that's impressive.
And I think that the wholecountry is better for her being
involved in politics and alittle bit poorer because she's
not gonna be in Congress anylonger.
But I still think as long asshe's alive, that she's still

(20:05):
gonna be an important force tobe reckoned with, and I think
that's fantastic.
So, anyway, that's just myopinion, and other than that, I
will talk to you next time.

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EPS 47 - “The $500 Question: Pay Down Debt, Invest, or Buy a Second Home?”

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