Just starting out in real estate investing? Join Ken Mcelroy and Marko of Whiteboard Finance in a discussion on debt, financing, and the various ways that you can set yourself up for financial success in 2021.
Ken McElroy:
Hey everybody. It’s Ken. I’m really excited to have my friend Marko here with the white board finance show. And, and if you guys have seen him, if you haven’t go over there, he’s got like 600,000 subscribers. He talks about all kinds of stuff. He’s been in real estate for years when we met, I didn’t realize he was in the brokerage community. He’s a finance guy. He talks about stocks and Bitcoin and all kinds of stuff. And, uh, welcome. Welcome, Marko. I’m glad to have you on the show.
Marko Zlatic:
Thank you, Ken. It’s my pleasure. Thanks for having me. Of course,
Ken McElroy:
Of course. So, you know, let’s talk about, uh, you know, how to get rid of debt. I, I, I, I watched a lot of your videos, not all of them, but a lot. And I know we were talking about one, uh, just before the show here, you know, I think a lot of people are hunkered down on debt and also, you know, the government’s getting into debt. So there’s a lot of people in debt and the government’s getting more and more and more into debt. And so a lot of people are listening, obviously are in debt and they could really use some advice on how to pay off that debt and save some money. Because as you know, you were getting into some really, really, um, interesting times with, you know, the government, the way they’ve been funding the economy.
Marko Zlatic:
Yeah, absolutely. So, yeah, I think the biggest thing that people miss when it comes to getting out of debt is not necessarily, you know, pinching every penny and making like, you know, 20 cent coffee and things like that. Although those things do help depending on where you’re at in your journey. Um, I always use the Dave Ramsey example of getting a bigger shovel. So that means increasing your income. So whatever it takes to do that you may have to sacrifice on the front end, maybe on taking on debt, such as student loans, or maybe potentially starting a business or something like that. Um, but I think that the quicker you can increase your income, the easier it becomes to get, uh, out of debt. So I think once you understand, or once you understand and establish that income at that point, it just becomes, you know, categorizing your expenses and also your income and understanding how much you have left over. And that’s how much you can really start to roll into each type of debt that you have. So any of that surplus should automatically go towards attacking, you know, one certain type of debt, canceling it out, eliminating it and rolling that payment into another one.
Ken McElroy:
Yeah, really, really good points there. So I know one of the things that happened to me when I was in college is I got a student loan and my student loan at the time was three and a half percent, uh, which was great. And, but then I also, as, you know, the credit card companies were all over me, you know, I was getting, uh, you know, these, Hey, sign up for, you know, we’ll give you a free credit card, you know, and of course I took them up on it and I racked up three, $4,000 worth of credit card debt. And I looked at the interest rate. I didn’t look at it unfortunately at the time, you know, I was 19 years old and, and it was 18%. And I, there was another one that was over 20% and, and, and that’s actually, that was for me when the light bulb came on, I was like, okay, like, like I’m I, cause I was never paying off my principal. I was never paying off. Like I would buy something and I was just basically paying the interest. And uh, but on my student loan, I was paying it down because it was three and a half percent on the credit cards. I wasn’t because it was 18 to 20%. So can, can you talk a little bit about that because those are, that’s some low-hanging fruit that people can take a look at and restructure, right?
Marko Zlatic:
Yeah. That’s a, that’s a great question, Ken. So I feel like people, when they look at, uh, investing like an ROI, for example, like return on investment, you know, people always want to invest in the market, invest in the next big thing. However, some of their quickest, the wins come from paying off high interest debt. So if you think about it logically to your point, you know, your student loans were very low at 3.5%, but your credit card was much higher at 18 something percent. Um, it makes all the sense in the world to pay off the higher interest debt first because you are making a guaranteed return on that investment. So you’re making essentially a tax-free risk-free rate of return of whatever the interest is on that debt. So in your case that credit card was 18 something percent. Well, by paying that off, you’re making that as a guaranteed rate of return. Um, the reason why you weren’t really scratching the surface or scratching the surface or making a dent on that principle is because the interest rate was so high and the student loans is a little bit different because you have less interest accumulating because of the lower percentage on that loan. Um, so I think once people start knocking out those higher percentage debts, uh, those are the bigger wins first, and then you can work on, you know, investing or potentially paying off lower interest rate debt.
Ken McElroy:
Right. Right. I wish I would have learned that in school, but they didn’t teach me, you know, how, how, you know, cause money’s just money. It doesn’t really care. It’s not biased at all. It just goes where it goes and it gets charged what it gets charged. And once, once I realized that, okay, it’s all about managing the cost of that money and, and uh, you know, and so let’s kind of roll into the difference between good debt and bad debt, because this was another area that honestly, as a college kid, I didn’t understand. And obviously I had credit card debt, which is not necessarily good debt. Uh, even though, you know, I maybe bought a new TV or a computer or whatever it was, uh, you know, so you, you know, but, but the, but the, a lot of times these, these stores, they, what they do is, and they do it around Christmas time.
Ken McElroy:
And my buddy who was in the, in the, uh, he had a company, he started called LifeLock and, and, and he’s like, well, the worst thing you could do is hand over your social security numbers, some know salesperson that’s working there for a buck, you know, trying to help the Christmas. And I’m like, Oh, that’s a good point. You know? And so it happens everywhere where they’re like, Oh, Hey, we can get you, we can put you into debt. Um, you know, can we talk about good debt versus bad debt? Because I know on some of your stuff I’ve watched you really, really do a great job explaining this.
Marko Zlatic:
Yeah. Thank you. So I think there’s a big difference between good debt and bad debt. So I’m not like a Dave Ramsey where, you know, all debt is the devil, you know, um, there’s smart debt to take on set. I mean, you’re coming from a commercial real estate background. That was my background as well. Um, you know, that your rates of return and your cash on cash returns and your IRS are way higher when you take on the right amount of leverage, right. AKA debt. Um, I would say that good debt is putting money down or borrowing money for something that brings you cashflow or an income, uh, or it can actually increase your income and fee in the future, such as taking out a student loan, for example, um, my wife is a perfect example. She’s a nurse, she’s a licensed nurse and RN.
Marko Zlatic:
Uh, she took out a little bit of debt to basically become a nurse practitioner. And those ROIs for the rest of her life is going to be in the, you know, it was tens of thousands of percent compared to what that debt was. Now, if you take out a loan to buy, you know, jewelry or something that doesn’t bring you money, say you want to buy like a nice purse or a nice clothes or nice suit. Um, you know, that’s probably in the realm of bad debt, right? Um, so there’s a big difference there. I would consider a very, uh, or define it very simply as good debt is taking on debt for something that will actually produce income for you or increase your income over time. Uh, bad debt is typically on consumer purchases. And that’s typically the debt that I talk about that should be paid down quickly.
Ken McElroy:
Yeah. Yeah. And the other thing that I know that you’ve talked a lot about in your videos, which I love around the inflation pieces, a lot of times people don’t consider that. And so, like, for example, when I’m getting a loan for a piece of real estate or, or, or you are getting a loan for a piece of real estate, and we’re getting that loan for in the high twos, and by the way, you could get that right now. And, you know, rates have gone up a little bit, but, uh, but I have a friend that just locked at 2.8, uh, last week on, on, on a, on a real estate deal. And, and so when the fed is saying that, you know, their inflation rate is going to be, you know, North of two, you know, they haven’t said exactly what it’s going to be, but they did say that they were going to relax it now. Um, what, what that basically means is that you’re borrowing almost for free, right? Like that that’s another piece around the good debt. I think a lot of people don’t realize because if inflation is moving up at the same rate that you’re borrowing, it’s like free money, right?
Marko Zlatic:
Yes. Yeah. So it’s funny, you mentioned that. So my wife and I, we closed on a house, hopefully knock on wood, our forever home, um, at 2.4, 9% on a 30 year fixed rate mortgage. And if you think about it, if she’s just getting these increases at work, whether it’s in her salary or whether it’s inflation in general, we’re paying back 20, $20 or 20, $21, you know, in the future where a dollar is inherently going to be worth less. Right. So it’s like the time value of money principle a dollar today is worth more than a dollar tomorrow. Um, so a lot of people, you know, during the camp of like paying off their mortgage as quickly as possible, but in this interest rate environment, can, it doesn’t really make sense to do that because it’s such a low interest rate, as you mentioned. Yeah.
Ken McElroy:
Yeah. And that’s, I think a lot of people have a tough wrapping their head around it. Sometimes the bad debt piece might be exactly like my example, like when the minute I buy a TV or the minute I buy a computer, or even the minute I buy a new car, those things are worth less. Um, obviously later they are immediately worth less. And so you’ve got this high number that you bought and you’ve got typically a higher interest rate against it. And it’s a valuing asset of the appreciating asset. Whereas when you borrow right now, it makes a ton of sense to borrow. I know you have a whole video on this and, and you know, and that’s what we’re trying to do right now is you obviously need to make the real estate make, uh, and these make sense fundamentally, but, but if you can borrow at less than three you’re, you’re basically riding the economy, just like the gutter.
Marko Zlatic:
Absolutely. Yeah. I think right now the biggest hedge against inflation or one of the best hedges against inflation is taking out a low fixed rate interest rate 30 year mortgage, and just letting it ride paying off the minimum. Um, obviously there’s a sweet spot if you’re kind of like the emotional type where it’s like, Oh, I don’t want debt at all. I want to pay off my mortgage tomorrow versus the math, which always makes sense in terms of investing somewhere else, rather than paying off low interest rate debt, you know, maybe put it somewhere in the middle, maybe take out a 15 year. I don’t know. But right now the way the economy has gone historically, um, we’re living in an inflationary environment, monetary environment. It makes sense to just pay the minimum and pay off 20, $20 or 2021, uh, debt, you know, 30 years from now.
Ken McElroy:
Right. Right. That makes a ton of sense. So now we’re going to take a quick break. We’ll be right back with Marco, from whiteboard finance right after this. [AD BREAK].
Ken McElroy:
So I know a lot of people are balancing, you know, saving money with having fun, you know, cause as, as you guys know, there’s a lot of money coming out right now and people need it by the way, they need it for rent. They need it for groceries, they need it for, you know, all kinds of things. Um, and I, I believe that you need to be somewhere in the middle and, and you kinda touched on this earlier, what’s your rule of thumb for how much cash reserves you need and you know, where should people be generally?
Marko Zlatic:
Yeah. So I like to think of first things first. So obviously you need to have a roof over your head. You need to pay your utilities. You need to have transportation in order to get to work. If you make an income that way, all those boxes need to be checked first. And then you can start, uh, I guess, uh, directing your money in certain buckets. So say for example, you take home a thousand bucks a week just for easy numbers. You know, that, you know, 300 of those dollars is going to certain things, you know, utilities, you know, groceries, you know, whatever, once that base layer is taken care of, then I recommend people start investing in different buckets. So you may have a travel fund or a travel bucket. You may have a savings bucket in an emergency fund bucket. You may have a car fund bucket if you want to save for another or make a car payment or whatever.
Marko Zlatic:
So whatever interests you in life. Um, I definitely believe in spending on those things. Um, I don’t, I don’t recommend people go through life as being cheap or being like a miser or like, you know, having like, uh, where you can enjoy life, basically, you know, buy around a drinks for your friends, go eat at a nice restaurant, treat yourself if you’re working hard. And as long as you’ve taken care of those first things first, um, I highly recommend, you know, spending the money because not completely, but it’s meant to be spent, it’s meant to be enjoyed as long as you’re taking care of all the first thing.
Ken McElroy:
Yeah. Yeah. And certainly we’re heading to an area where there’s a bit of uncertainty right. On people’s future money. And so this, this is, uh, this is very, very important for people to listen to right now because, uh, you know, the future is uncertain for, for a lot of folks. Absolutely. Great message. Um, so yeah, I know on one of the videos you talked about, um, a way to save money is to get a roommate and, um, you know, and, uh, can you, can you talk a little bit more about that? I was just talking to my trainer about this and he’s 23 years old, you know, and he’s a personal trainer, he’s making a bunch of money and he wants to buy a house and you know, all this stuff and he’s concerned about it and the prices and all that. And I actually mentioned that this morning too. And so let, let’s talk a little bit about that, cause I like what you, what you said in your video. Yeah.
Marko Zlatic:
I think it depends on what type, uh, what stage in life you’re at. Right? So if you’re married with kids and you know, all that stuff, it may not make sense to get a roommate. Uh, but the overarching message there was, you know, if you’re in the right type or right stage of life, um, you know, that can really offset your mortgage if you do own the house or the condo, or if you’re renting, for example. So some people get sick of roommates by the time they’re done with school or college. Some people have them until their thirties or forties. I don’t know, it’s all personal preference. But, uh, what I meant by that message was if you can somehow offset the cost of your mortgage, whether it’s by getting a roommate or by how sacking potentially, um, uh, buying a duplex, living in one half, renting out the other, um, that’s the fastest way to build wealth in my opinion, is by controlling real estate and reducing your monthly expenses to where you’re either paying very, very little for housing expenses or even potentially making money based on having a roommate or a tenant in that duplex.
Ken McElroy:
Yep. Yeah. I, I mentored a kid like this up in Idaho and that’s what he was doing. He was, he was buying homes and then renting out the basement or, uh, you know, the rooms above the garage and, and, uh, he ended up, uh, paying for the houses that he had and, and, and he’s like 28 years old and, you know, he’s got four houses now and that’s awesome. Yeah. And he just, that was his little model and it worked great and he’s like, you know, it’s fine with me. And, uh, he traveled a bit and, you know, people are paying off his house at the same time. Right.
Marko Zlatic:
You know, it’s, it’s that it’s that principal pay down and it’s also, you know, lowering your cost of living because, you know, let’s be honest, I think cars and, you know, housing is probably the two most expensive, you know, outflows of people’s money. It’s either a mortgage rent or a car payment. Um, so if you can take, if you can knock off one of those and cancel one of those in the form of rent or mortgage payments, I mean, you’re going to be able to fill up those buckets that I mentioned earlier much quicker,
Ken McElroy:
A hundred percent. So if I know you’re a finance guy and when we were talking, I was like, fascinated. I did not know that you were in the commercial space. And so, you know, obviously I, for, for, for me, I just loved being able to chat with you. Uh, so, and I know you’re a big proponent of spreadsheets, the budget, your finances. And I know this is a kind of a discipline thing. A lot of people do not do this, you know, can you talk a little bit about that and why you think this is important?
Marko Zlatic:
So I’m, I’m of two schools and I feel like I’m talking out both sides of my mouth here, but I feel like the people that are disciplined enough to have the spreadsheet and be able to maintain it and keep it up, uh, they kind of nerd out on that. And I’m one of those people. I like it. It’s fun. It’s a way to kind of keep track of my stuff. It’s almost like a physical exercise, you know, calories in calories out, you know, what workouts am I doing? You know, what have I done over time? I think the spreadsheets are great for people who are going to use them. However, I don’t think they’re great for most people because I feel like people don’t have the discipline to keep up with it unless they’re really nerding out on it or using it as their hobbies.
Marko Zlatic:
So I think it’s great because what gets measured gets managed and you can visualize, you know, Oh, okay. I didn’t realize I was realized I was spending so much money on coffee or, you know, whatever eating out or whatever the, whatever the case may be. Um, but I think once you can visualize everything, you can really start to understand your habits as a person better. Uh, but for the people that don’t like spreadsheets, what I recommend is just getting that baseline of really understanding your income coming in every month and understanding, you know, the ballpark of the expenses per month and then understanding to invest that difference. So I think there’s both types of people can win if you like the spreadsheets. Great. If you don’t look at it more like the big picture, if that makes sense.
Ken McElroy:
Right, right. And, um, so now, uh, we’re going to take a look at some of the apps that you like, you know, when we create a budget. So we’re going to jump over. These are for the premium people. And for those that want to take a look at this, they can go to KenMcElroy.com/Premium.
Ken McElroy:
Well, uh, Marco, thanks again, man. This is great information. I appreciate you as always, uh, love your videos and let let’s. Um, yeah, let’s keep having fun.
Marko Zlatic:
Yeah, my pleasure, Ken. I appreciate it. Uh, I hope to have you on my podcast one day, we’ll schedule something, uh, the whiteboard financial, um, you know, I’d love to pick your brain on real estate, all the stuff that you’re seeing out there. Uh, and it was a pleasure meeting. You we’ve met at, uh, George Gammon’s birthday party over in Scottsdale. It was a pleasure speaking with you.