Why ROE Beats ROI, and How to Earn Truly “Passive” Income from Real Estate

Key Takeaways:

– Eric Garber initially became fixated on cash flow as an investor, but realized he was “house poor” with a mortgage payment larger than he could afford.
– He stumbled upon house hacking, renting out his basement to generate extra income to pay off his house early.
– Eric’s world came crashing down when his marriage ended and his employer froze his pension plan, leading him to lose more than half of his assets.
– Instead of focusing on paying off his real estate and living off cash flow, Eric realized the opportunity to access his equity and put it to work for early retirement.
– Eric discusses the importance of prenuptial agreements and offers practical financial tips for couples before getting married.
– He also shares his investing strategy of syndication deals for earning truly “passive” income.

BiggerPockets:

As an investor, it’s easy to become fixated on cash flow, much like today’s guest at the start of his real estate journey. After realizing he was “house poor” with a mortgage payment larger than he could afford, Eric Garber stumbled upon house hacking. He rented out his basement and used the extra money to pay off his house early. With proof of concept for his newfound house hacking strategy and income from a stable W2 job, everything was going great.

Then Eric’s world came crashing down when his marriage ended and his employer froze his pension plan. Without a prenuptial agreement, his financial fate was left to the state court system. Losing more than half of the assets he had worked tirelessly to grow, Eric found himself back at square one. This time, he was going to do things differently. Rather than pouring his time, energy, and money into paying off his real estate and living off the cash flow, Eric realized the opportunity that could be had by accessing his equity and putting it to work—a revelation that will allow him to retire early, despite the curveballs life has thrown his way.

If you think getting a prenup is “planning for divorce,” you’ll want to hear what Eric has to share in this episode of the BiggerPockets Money podcast. Beyond offering practical financial tips you can put into practice before getting married, he talks about the paradigm shift that allowed him to unlock wealth. He also discusses the investing strategy that allows him to earn truly “passive” incomesyndication deals!

Mindy:
Welcome to the BiggerPockets Money Podcast, where we interview Eric and talk about how your net worth changes through a divorce, return on equity versus return on investment, and the power of house hacking. Hello, hello, hello. My name is Mindy Jensen and with me as always is my house hacking co-host, Scott Trench.

Scott:
Thanks, Mindy. Great to be here with my pity paying co-host, Mindy Jensen.

Mindy:
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 understand the intricacies and consequences of marital law in a marriage and finances. 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, today we’re talking about the financial consequences of a divorce and the fact that everybody has a prenup whether they know it or not. Like Aaron Lowry likes to say, if you don’t have a prenup, yes you do. It’s the divorce laws in the state in which you are divorcing. So if you don’t want somebody else to dictate what happens, you should get yourself a prenup. And we are talking with Eric today who did not unfortunately have a prenup, spoiler alert. But if we were talking to somebody who had a prenup, it would be a pretty short episode. Hey, to have a prenup. Yep, everything went great. Bye. That would be a terrible episode.
So before we bring in Eric to talk about the consequences of not having a prenup, let’s go to our money moment. This is a new segment of the show where we share a money hack tip or trick to help you on your financial journey. Today’s money moment is, do you like Starbucks? You want some for free? According to the company’s terms and conditions, customers who use their Starbucks card or the mobile app to order are entitled to unlimited free refills on brewed coffee and tea. Do you have a money moment for us? Email [email protected].
Eric is a program manager with 20 years of experience in the aerospace industry working on various programs critical to national defense and human space flight. He plans to achieve fire through a mix of traditional stock investing along with various methods in real estate such as house hacking, multifamily syndications, and direct ownership of investment property. Eric currently house hacks in Golden, Colorado with his cat Ace. Eric, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you today.

Eric:
Thank you. I’m excited to be here.

Mindy:
Let’s jump right into it. Eric, tell us a little bit about yourself and your relationship with money growing up.

Eric:
Well, I grew up in the Midwest middle class. My parents, I think did a really great job modeling the important things in life, really focused on experiences more so than stuff. I have to imagine, I remember getting some requests turned down of junk to buy, but they never turned down things like sports, musical instruments, summer camps, stuff like that. So I didn’t realize that at the time, but looking back on it, they instilled some really good habits, that being one of them. Another being the just family dinners. So I didn’t have a restaurant and takeout habit to break once I grew up and moved out on my own. So yeah, graduated college with an engineering degree and that’s when I got my first taste of a recession. So that was an interesting wake up call and introduction to the real world.
My job that I accepted during my senior year that happened to be 2001 while the dot-com bubble is bursting. So I got laid off without ever working a day in my life for my first company. The funny side note to that is I actually got a small hiring bonus and a small severance package and yeah, never worked a day in my life for them. So that was one of the two things. The other two that summer was I had gotten this great job offer, thought I was going to go do that. So I invested my life savings up to that point in diversified mutual funds and with the dot.com bubble burst, that crashed about 60 or 70% within the first six months probably. So that was my introduction to the working world and to the stock market.

Scott:
That’s unbelievable. That’s devastating.

Mindy:
Is it devastating or is it sweet to get that sign-on bonus and severance package for doing literally no work?

Eric:
It would’ve been sweet if it wouldn’t have taken so long to find a new job, and I was actually really excited about the job, but it took me a little less than a year. But I was finally able to land a job in aerospace and that moved me out to Denver. So from that point it all worked out because I did want to get out to the mountains at some point anyways. So instead of my first job being in the city of Chicago now, it was in the mountains of Denver. So I think there was definitely a silver lining there with the location.

Scott:
What year are we talking about where you moved out to Colorado?

Eric:
So moved out to Colorado towards the end of 2002. That was when I started my full-time aerospace career. And it was interesting because I got a job for a company that still offered a pension, which were becoming more and more rare even back then. So from a money side and a financial planning side, I knew I had this pension. I knew they had a 401(k) matching program, so I just put in the minimum, which was 8% to get a 4% match and just set it and forget it. Didn’t really think much about financial planning.

Scott:
And around this time, you were also, I believe getting into real estate. Can you tell us about your foray into real estate when you moved out to Colorado?

Eric:
Yeah. So a year after starting the job, I closed on a house in Golden and that’s when I learned about what it is to be house poor. So I did what now we call house hacking, but back then we just called getting roommates to afford your mortgage and not feel broke. So I got a couple of roommates, threw them down in the basement and really got to see the amazing power of house hacking. Not even really knowing what I was doing there, just stumbled into it out of a perceived need. Even though I could qualify for the mortgage, I just really didn’t feel like I had any extra spending money.

Mindy:
Okay. I was just going to ask you about that. When you said you felt house poor, what extra money was available? You were renting before you bought this house? What was your rent versus what is your now mortgage payment?

Eric:
Yeah. So back at that point, these are 2002 numbers, so adjust them accordingly. But it was about 700 and change, 750 a month for rent and then about 1200 a month mortgage. So once I got the two roommates paying 400 per bedroom in the basement, I basically went down to paying about 400 a month versus the 750 a month. And I was building equity and living in a place that had more amenities, just more square footage, guest bedroom, stuff like that.

Mindy:
And it feels more comfortable. I think people get excited about buying a house because it’s the American dream. I have to buy a house because that’s the next step. Because we’re talking about you, I have my big boy job, so now I have to go buy a house because that’s the next thing that I am obligated to do as an adult. And then you get your first mortgage payment, you’re like, “That’s a lot of extra money that I wasn’t really counting on.” So I actually have brand new clients right now. I am a real estate agent and I’m helping them look for their first house. And we started talking about being a first time home buyer, so they have a copy of that book, Scott, First-Time Home Buyer. Scott and I wrote a book and I was talking to them about what feels comfortable as a mortgage payment.
It doesn’t matter what the lender approves you for, it’s what feels comfortable for you to make payments at and to go from seven 50 to 1250 right now in 2023. That sounds awesome. Yeah. I’ll take 1250, but that’s a $500 a month jump. $400, yeah. Let me do my math really quick. That’s $500 a month more than you were paying. That’s a lot when it’s actually time to write that cheque. I think that’s an important point to make just because you buy a house. Now, did you pay the most that you were qualified to buy or did the bank actually approve you for more?

Eric:
Yeah. That was the scary part for me. I was like, “I didn’t even stretch on this and it feels like a stretch,” but I think it’s important to look at the percentages. So I went to buy a house. I ended up signing up for a mortgage. It was basically 50% more expensive than I was paying, but then by house hacking I was able to cut it in half effectively.

Scott:
Well, awesome. So we have this great house hack, you’ve got a good job. I imagine you’re able to save pretty solidly at this point and enjoy a good lifestyle. What’s the next phase of your journey here? How did things progress from there?

Eric:
Yeah. Good question. I basically became an accidental Ramsey disciple. I didn’t even know who he was at the time, but I just didn’t feel comfortable with being in debt basically for the next 30 years. So what I did with that extra money was I socked it into paying down my mortgage. So I was able to pay off my house over the course of about 12 years and that’s really what I did for a while there. And then I had a pretty big wake up call in, I guess that would’ve been 2014, so 12 ish years later. And that was the point where I had gotten married and then was getting divorced and my company of that point 12 years froze the pension plan. And when I ran the numbers out for a traditional retirement that was basically a million dollar hit to total retirement income. So those two things were pretty eyeopening.

Scott:
Let’s unpack both of these things. So we started with the house hack where we’re doing really well. We fast forward 12 years, 2015, and there’s another event here. In that time period for that 12 years, you were basically just socking wealth away in the form of paying down your mortgage and owning a home free and clear. Were you doing any other types of investing besides contributing potentially to some degree to this pension plan that you referenced?

Eric:
Yeah. I had a small, small Roth IRA fun fact, I actually started that with poker winnings. I got into playing a lot of poker years ago and I actually was able to use that to start the Roth IRA. So I had a meager Roth IRA. And over the years as I started to get more comfortable and get some promotions and salary growth, I upped my 401(k) contributions, but literally it was all was home equity and retirement accounts was my entire net worth at that point. There was very little of anything else? I think I finally opened a brokerage account sometime around when I got married, but nothing substantial in there.

Mindy:
BiggerPockets does not endorse gambling for investment purposes.

Scott:
Let’s go through the divorce and let’s go through the pension in the next little bit here. Walk us through the financial outcome.

Eric:
And I’ll start with a couple of disclaimers. One, I’ll talk about some things that were very frustrating in the system, but I accept full responsibility. I chose to get married, I chose not to get a prenup, so don’t take any of this as me shucking that responsibility. Also, I want to recognize that marriage takes two people to be successful and I take at least 50% of the blame in this marriage not working out. And then also, I can only speak from my experience from a Colorado law standpoint, but getting into the question, the stats really, it cost about $50,000 in legal fees. I can’t honestly remember what the total joint net that we were splitting up was, but I can tell you that the split was anything but 50/50 in a real sense.
So she even got 30K more than me on the backend just because the system really is set up to protect the lower earner for some obvious reasons, but they just didn’t really apply in our case. But the legal system doesn’t really care, it just basically does its thing. So I ended up losing about 30% of my net worth. And to put it in perspective, the marriage was during a great three year bull run, so like 2012 to 2015 when it was all said and done. So my net worth still managed to increase 45% over that time. Hers increased 560%. So if that puts it in any perspective there, it was definitely a huge swing in how it all played out. And the weird thing is that sounds like, “She must’ve had a good lawyer or whatever.” The lawyers, I don’t think they changed the outcome by one single dollar other than taking 50K out of the joint assets for the pleasure of them putting their names on stuff.

Scott:
Let me just make a couple of observation here so folks that are not in Colorado for example will understand what’s going on here. I believe what you just emphasized here is you came in with a certain amount of property. A paid off house, 401(k) plans, some cash, some after-tax brokerage accounts, the Roth IRA, these balances. Your wife came in with a lot less. In Colorado, if you get divorced after a three-year period, which should be considered a short-term marriage, then your property, the property you came in with is yours and the property that she came in with is hers, but the increase in value during the course of the marriage is what’s considered marital property. And because you came with a lot of property that appreciated and the appreciation on that property was split 5/ 50 with you and your wife in the divorce, is that a correct assessment of what happened here?

Eric:
That is an exact assessment and that was a shock to me because at that point I did understand compounding interest and I was like, “Well, clearly she won’t get the gains off of my things that I started with,” but the legal system does not draw that fine of a line. They don’t care about compounding interest whatsoever.

Scott:
And look, we recently had a baby, so I know we have an attorney walk through estate plans and all that stuff. I know a lot about this and I’m pretty fresh off of that experience with setting up a will and a trust fund, all that kind of stuff. But that’s what’s going on here. So the big takeaway, and we said this before a few times on the show, but is if you don’t have a prenup, then that doesn’t mean that there are not rules governing this. You effectively do have a prenup in place if you choose not to get one on your own. It’s the laws of the state that you’re living in or that you’re living in at the time of your future divorce or the future end result of your happy marriage with that. So that’s what happened here is you had a prenup, it was the laws of the state of Colorado, you just probably weren’t aware of it and didn’t really think about it that way during the course of this. Is that right?

Eric:
Correct. I did not appreciate how the legal system was set up here in that regard.

Mindy:
Did you actively choose not to get a prenup or did you just simply not think about it?

Eric:
I didn’t really think about it, I guess.

Mindy:
Well, and that’s not like an accusatory question. I think a lot of people don’t think about it. You’re in the love bubble and you’re, why would I be thinking about a divorce when I’m getting married? And we did a really deep dive episode on prenups on episode 301 with Aaron Thomas who is a prenup attorney who explains how a prenup works. And my husband suggested a prenup before we were getting married and I was like, “Don’t you ever bring that up again? If you do, we won’t even get married.” And he never brought it up again. Turns out when we go back in time, I actually had more money than he did, so maybe I should have protected my assets. And talking to Aaron, he actually changed my view about prenups. So it’s a great episode. If you are thinking about getting married, that is definitely something that you need to do. If you get married in the future Eric, would you get a prenup?

Eric:
Yes, definitely. And as long as we’re giving marriage advice, I will say that one thing I would definitely do differently is do premarital counseling. I think that is something we don’t talk about enough, but is a really powerful tool because marriages are going to be work, they’re going to be hard, and if you don’t come in there with some tools to be able to handle those situations, your chance of success is much lower. So I think it’s actually not unlike real estate investing, it takes work. You have to go in with the expectation that it’s going to have challenges and you need to prepare yourself for that. So education, the right mindset, developing the right tools.

Mindy:
That’s an excellent piece of advice. If you are thinking about getting married, hit the back button and re-listen to that because marriage is not hard. It’s not easy. It’s work. And the more work you put into it, the easier it is, the less daunting the task seems to be. But yeah, absolutely, totally love that.

Scott:
And also you got to put yourself, because the person who’s going to benefit from this is someone who’s contemplating getting married in the future on a go forward basis. So you might say hey, I think I got what Scott said there about marital estate law and all that stuff, and that makes sense for my situation or whatever. Let’s say you agree with that and that would be what you’d put in your prenup for example, you’d still want to get a prenup even if you completely agreed with your state law on how to handle the assets in a marriage. Because what if you move in a future state to a different state that has different rules and get caught by a surprise with that and then at least going into that and you’re not going to have a surprise, for example, which Eric, it sounded like this was a really nasty surprise and really tough for you in the divorce here.

Eric:
Yeah. It was definitely a big surprise and it was frustrating because you couple it with just the emotion of the biggest failure of my life at that point, standing up in front of family and friends and pledging till death to you apart and then being like, “Just kidding. It’s not going to work out. Thanks for the wedding gifts, but we’re done.” So yeah, it was an emotional time just from a personal failure sense and I’m a pretty competitive person, so failure’s tough.

Scott:
Okay. So this is one half of the disaster here from financial and life standpoint that we’re talking about. The other big news that you got around the same time was that your company froze the pension plan. Run us through the high level math on this problem that arose at the same time?

Eric:
Yeah. I don’t have a ton of the numbers handy, but I can give you broad brush to give you an idea. But basically what they did is they said, “Okay. We’re freezing the pension. So after this year in the near future, you will no longer get salary increases applied to it, and in this year, in the near future, you’ll no longer get additional years of service that go into the pension calculation for what your benefits are.” So if I remember right, when I was running the scenario of 3% salary growth, which was very conservative because it doesn’t include promotions. At 65, I’d have a $12,000 a month benefit. So then when this all happened, I ended up with about a $2,000 a month benefit at 65, so $10,000 a month. Now granted that’s not accounting for inflation, so that number is going to feel smaller at that point, but that’s still significant change in the overall benefit for the pension.

Scott:
Okay. So the pension plan, did you have to contribute to this pension plan or was this just part of your compensation? The company was funding it as a benefit entirely.

Eric:
It was purely funded by the company.

Scott:
Okay. So the company is funding this pension plan. It’s a part of the benefits package. You were advertised when you joined. You’d been at the company for a long time, so you thought it was going to be in there and the trajectory changed dramatically at this point in time. The end outcome would’ve been a multimillion dollar pension benefit if you were to consider that an asset, it’d be worth millions of dollars as a stable income stream. And then it dropped by 80% in terms of the value of the output of it.

Eric:
Yeah. And to be fully fair to the company, once they phased it out, they did offer an additional 401(k) match, but it was not the same as far as the overall impact that it would’ve had for me, especially switching midstream the way that it played out.

Mindy:
Did they change this on everybody or just newer employees?

Eric:
Everybody.

Mindy:
Wow. I mean that’s a big wallop to your overall compensation.

Eric:
So it impacted certain types of people more depending on where you were in your career, if you were really close to the end of your career, it was a small impact. If you’re in the middle there, that was the biggest impact. And if you’re early on you were like, “Cool, I wasn’t really planning on this thing anyways, and now I get an extra 401(k) match, which is real money and they can’t take that away from me.” So I think I was in that spot where it had more of the maximum pain, but even the people probably like five or 10 years ahead of me probably got the worst of it though, to be honest. I think I got out a little more unscathed at that point.

Mindy:
So you had previous investments before you got married. How were they impacted in your divorce?

Eric:
They basically all ended up getting split 50/50. There was very few things that didn’t get split 50/50 because even if you don’t actively contribute to them, if you touch them in any way, they become joint marital assets. So very few things were just hanging out there on their own. I think the one thing that I didn’t have to split was when I was 13, I got shares of McDonald’s stock and that was just automatic dividend reinvesting, and I think that was the one thing I got to keep completely untouched. That and your personal vehicle, since we both had our cars coming in, those didn’t get split in any way. But yeah, all the 401(k), the brokerage account, the Roth IRAs, pension plan, all that stuff got split up.

Mindy:
Wow. What about your house?

Eric:
Yeah. That got split up and she had actually contributed the last 20K to paying it off when we got married. So she had a little bit of money in it, but I had put years and years of things, work and money and time into that house that real estate really started taking off again from 2012 to 2015 when it was finalized. So she got to split 50/50, all the gains in that three year time stretch, which was significant. That was like a 40 to 45% growth.

Mindy:
Yeah. That was a huge amount of growth for real estate values. Did you end up selling that house and splitting the proceeds or did you buy her out of the house?

Eric:
I bought her out of the house and then I proceeded to pay off the same house for a second time, if you ever met anyone that’s paid off the same house twice.

Mindy:
I’m sorry. I’m not laughing at your experience. I’m laughing at the way you said that.

Eric:
Please do. We’ve got to be able to laugh.

Mindy:
Yes. So what advice would you give someone ahead of getting married to avoid a massive decrease in their wealth? Is there anything outside of the prenup?

Eric:
Yeah. One thing that I didn’t do that I wish I would’ve, because it hurts you in the end if this is the outcome, is when you’re cohabitating with a partner ahead of marriage and it’s your place, charge them rent, figure out something that makes sense because basically she ended up living rent free for four years. She got a lot of financial benefits that when I was looking at purely from the we’re going to be together forever thing, totally made sense because it was helping both of us. She was able to pay off her debts, come into the marriage nice and clean from a financial sheet, but yeah, you don’t get any credit for that during the divorce.
So the fact that she had been living rent-free for four years, not a line item when you get to that final tally from the lawyer standpoint and from the legal system. So my advice other than the obvious, the things we already talked about with the prenup and the premarital counseling is just if you are going to cohabitate work out something that makes sense just in case it doesn’t really work out, and then you’re not totally left holding the bag.

Scott:
Okay. So what happens next? You pay off the house for a second time here, you’ve gone through a divorce a couple of years go by, what happens next in your financial journey?

Eric:
Well, once the dust settled, there was just a lot of introspection and self-reflection, trying to figure out what do I want out of life? And one of those things that really came into focus for me was that I didn’t want to sit in a cube for 40 hours a week until I was 65, 67 and the classic corporate America retirement thing. I also knew that I wanted to take control of my financial future. So I knew I wasn’t confident that I could rely solely on a corporation to have my best interests at heart having seen the.com and now the great recession, 2008 financial crisis meltdowns, I didn’t feel comfortable solely relying on Wall Street either. So I was stuck. And having done the Ramsey thing, I also was starting to realize I couldn’t just frugal my way to early retirement. I mean, frugality is great, but you also need to create some cashflow too.
And I looked at my financial position and I guess as Scott as you would say, I had really no financial runway. I had no optionality. Everything was locked up in home equity and retirement accounts. So the first thing that I did after I realized this was I started saving and putting money into a brokerage account where I could figure out what to do next. And that gets me to where I actually met Scott for the first time where my friend had bought his book in 2017 when it came out and thought it was cool. So he let me borrow it, I read it and then he’s like, “Hey, I invited this guy Scott to come over to my house for dinner and we’re going to talk about finances and investing and stuff. Do you want to come?”
So yeah, I came there and I think it was a whiny… I was struggling with trying to figure out what to do and I didn’t really understand the difference between ROI and ROE, so return on investment, return on equity. And it was really hamstringing me because I just couldn’t quite get my arms around the problem that I had in front of me. It was like I got a paid off house, how come I can’t get to early retirement faster? And I realized took years and actually Chris Lopez, who you all know, and he recently had a short episode on the BiggerPockets main channel about ROE. I would recommend if you don’t think in ROE terms, watch that and start thinking about it because that in the last five years has probably been the biggest mind expanding concept that’s really helped me get off of analysis paralysis where I was for several years.

Scott:
So can you give us a practical example of how this was holding you back this concept and what flipped once you started understanding it?

Eric:
Yeah. So I mean here I’d been putting all of my money into paying off a low interest mortgage and so effectively getting a 4% return. And then I was trying to figure out how to move forward with pretty good monthly cashflow because I had low expenses at that point, but I wasn’t looking at the several $100,000 that was locked up in my home equity. So I was sacrificing the ability to put that to work for me in a better way to accelerate my financial goals basically.
So when I finally got off the dime years later, so this is like 2018 now, to give you perspective and bought a new house, which I house hack currently, and I’m standing in, I sold my old house and unlocked because of all the gains, I unlocked 400(k) of deployable capital. And since then I’ve just been putting that where I think it can do the most work versus before I understood the ROE concept, I was going to literally use most of that money to pay down the mortgage on the new house.

Scott:
Okay. So have you ever gone back and done the math about how much you paid down for the mortgage? And you’re talking about opportunity cost here. You paid down your property instead of investing it in something else and for return on equity versus ROI, here’s a great example of how that might… Well, how do I explain this concept very simply? A lot of people, I think when you’re looking at a property, we’ll say, I’ve got $400,000 in that property now. I put in 50,000 20 years ago, and therefore I made this enormous ROI. That’s great. That’s a wonderful analysis. Maybe you did make that ROI, but on an annualized basis or on a go forward basis, what are you going to earn now?
A $400,000 property in Denver, maybe it makes $2,000, $2,500 in rent. Something in that ballpark, you’re going to earn probably a four or 5% cashflow if you’re lucky on that, on a cap rate basis. And you’re going to get maybe one to three points of appreciation going forward. So your return on equity going forward is only going to be five to 7% depending on what you believe about the projection on that property and how can you expand that going forward? How can you always be redeploying your portfolio into what’s going to produce the best returns for you on a go forward basis? It’s not about what’s been the past, that’s about what’s going to look like going forward. Is that the revelation that you had? And as an output of that, you take your 400,000 house, you sell it and you redeploy it into much higher ROI initiatives than paying down low interest rate debt.

Eric:
Yeah. That’s exactly it. And I think opportunity cost is probably the best way to describe it for easiest understanding. But yeah, absolutely. You look at it and in your example, if you can get five or 6%, but you have to deal with being a landlord, well, why aren’t you just going to invest in the stock market, get seven to 10%? So before I learned to think that way, I was struggling to figure out next steps.

Scott:
So once you’ve redeployed this, what does your portfolio look like and where have you gotten to today?

Eric:
Well, originally I embarked on a strategy to buy two fourplexes, which I still wasn’t totally broken of my habits. I was going to pay them both off and then use the cashflow of the paid off fourplexes to fund early retirement. So I started down that path, bought a fourplex in Colorado and at the same year, within a few months of that, actually some friends of mine who I knew from aerospace who had been real estate investors since basically day one of their adult lives started doing multifamily syndications. So they started raising money for large apartment complexes from investors and they, at this time that I had all of this money sitting in my checking account needing to be deployed from the sale of the house. They reached out and said, “Hey, we’re buying this big apartment complex in Colorado Springs. Here’s the deal, would you be interested?” And I was like, “Yeah, that’s great. Yeah. I’ll do that.”
Cavalierly wired them money and got in on it not knowing too much other than I knew that they were 100% trustworthy and experienced. So once I saw how over the next couple of years my fourplex and the syndication performed the big apartment complex, I said, “You know what? This whole buying more small multifamilies and managing them is not really for me, that doesn’t align to my core values and isn’t exactly what I’m looking for.” The investing in syndications is definitely more the style that I am looking for. So since then, I’ve rearchitected my plan to focus all my real estate investments going forward into bigger deals as a limited partner. So basically a silent partner with no work whatsoever on my part.

Scott:
Awesome. What is your portfolio? Can you give us a ballpark of the amount, maybe the total size of your portfolio as it stands today?

Eric:
Yeah. So I’ve got the house that I live in-house hack, I’ve got the fourplex, and then I am an limited partner investor in seven multifamily syndication deals. Well, I guess I’ll put that as, that’s my real estate side. And then I’ve got the 401(k) and brokerage account and other Roth IRA retirement assets that I’m saving. So I determined that what I felt comfortable with was about a 50/50 Wall Street to real estate split. So that’s the direction I’ve been going on that to build out a portfolio that can help me sleep at night.

Scott:
Well, Eric, thank you so much for coming on the show today. We are very excited for the future for you. And now that you’ve unlocked the power of return on equity, I’m sure that you’re soaring to millionaire status. Where can people find out more about you?

Eric:
Thanks. Yeah. Hit me up on LinkedIn, send a connection request. I try and connect with people through there and then you can reach out to me directly via email as well, [email protected]. And that’s probably the two places I’d recommend.

Scott:
Awesome.

Mindy:
Awesome. Thank you so much Eric, and we will talk to you soon.

Eric:
All right. Thanks. It was a pleasure.

Mindy:
All right, Scott. That was Eric and that was a little scary to see the consequences of not having a prenup, and I just want to reiterate what a great episode our prenup episode was. That’s episode 301 with Aaron Thomas from Prenups.com. He’s an attorney who specializes in prenups, and I’m not kidding when I say the Aaron changed my mind about prenups. So if you are thinking about getting married, listen to that episode. Even if you don’t think that you have any money or anything to protect, even if you think prenups are just planning for a divorce, which they are not, if you’re getting married, you owe it to your future millionaire self to devote an hour and 10 minutes to listen to that episode.

Scott:
Yeah, absolutely. Again, I just stated in there, you have a prenup. If you haven’t signed one, you still have one. It’s the laws of the state you’re living in at the time you get divorced. That’s your prenup. So that’s too much variability. It’s not fair to either party, even if you expect, which I’m assuming we all do, your marriage to lasts forever. There are rules that are set in place and you need to understand them.

Mindy:
Absolutely. You can’t make plans if you don’t understand how the game is played.

Scott:
So I was curious. So I looked it up and Eric and his wife had a short marriage. If they’d had a longer marriage, then there would be even more complicating factors in there, such as spousal assistance and like payments, alimony that would be paid usually from the higher income earner to the lower income earner during the courses of this marriage. So understand that in the context even of these things like that’s a short marriage. That’s a simple, very straightforward approach there. He said the lawyers didn’t probably add one bit of value. That’s probably true. They probably valued the assets at the beginning of the marriage and valued them at the end and had them go out there and one side had to represent each party. So that’s a good day for lawyers and a bad day for the marriage obviously with this.
The longer the marriage though, the more complicated that stuff gets, the harder it is to go back in time and value the assets. I’d imagine the harder it is to figure out what’s equitable and fair and the more likely it is that someone like Eric would be paying the other spouse alimony on an ongoing basis. So again, those are the laws of your state and those are likely to be similar to the laws of your state, which they do vary, but not a ton in all these different cases. Go look them up and figure out what that is. Understand if that’s what you and your spouse wants.
And if you’re already married, you can still take care of this stuff and you can just put together simple paperwork, for example, that would value your estate at the time you got married, for example. You might need to do that anyways if you’re creating wills or estate plans and those types of things. So it’s never too late to go ahead and do all that stuff. It’s a really good thing and I think it empowers both people in a marriage. Just have a clear spell out set of rules. It does not have to be a, this is mine, this is your situation. You can call it all community property. Just call it something so that each party is clear and there’s not information barrier between parties or anything like that. So can’t recommend this enough. Don’t be caught by surprise in these things and it’s something to talk about.

Mindy:
Yes. And in matters of money, it’s always wise to think with your head and not your heart. Don’t let your emotions get in the way. Do it with a level head and think logically, and that’s what a prenup allows you to do. All right. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench and I am Mindy Jensen saying goodbye cherry pie.

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

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

 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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Property Chomp’s Take:

As an investor, it’s easy to become fixated on cash flow, much like today’s guest at the start of his real estate journey. After realizing he was “house poor” with a mortgage payment larger than he could afford, Eric Garber stumbled upon house hacking. He rented out his basement and used the extra money to pay off his house early. With proof of concept for his newfound house hacking strategy and income from a stable W2 job, everything was going great.

Then Eric’s world came crashing down when his marriage ended and his employer froze his pension plan. Without a prenuptial agreement, his financial fate was left to the state court system. Losing more than half of the assets he had worked tirelessly to grow, Eric found himself back at square one. This time, he was going to do things differently. Rather than pouring his time, energy, and money into paying off his real estate and living off the cash flow, Eric realized the opportunity that could be had by accessing his equity and putting it to work—a revelation that will allow him to retire early, despite the curveballs life has thrown his way.

If you think getting a prenup is “planning for divorce,” you’ll want to hear what Eric has to share in this episode of the BiggerPockets Money podcast. Beyond offering practical financial tips you can put into practice before getting married, he talks about the paradigm shift that allowed him to unlock wealth. He also discusses the investing strategy that allows him to earn truly “passive” income—syndication deals!

Eric’s journey with money began in the Midwest, where he was raised in a middle-class family. His parents emphasized experiences over material possessions, teaching him the value of prioritizing what truly matters in life. This early exposure to financial responsibility set the foundation for Eric’s financial journey.

After graduating college with an engineering degree, Eric faced his first major financial setback—a layoff due to the dot-com bubble burst of 2001. From this experience, he learned the importance of diversifying investments and weathering economic downturns. He also discovered the power of real estate as a means of generating income and building wealth.

Moving to Denver for a new job in the aerospace industry, Eric purchased his first property and became a house hacker. Renting out rooms in his home allowed him to afford his mortgage and avoid feeling financially stretched. This experience opened his eyes to the potential of real estate as a wealth-building strategy.

Unfortunately, Eric’s financial journey took a turn for the worse when his marriage ended and his employer froze his pension plan. Without a prenuptial agreement, he faced the harsh reality of losing more than half of his hard-earned assets. This painful experience served as a wake-up call for Eric to reassess his financial strategy and find a way to bounce back stronger than ever.

Rather than focusing solely on paying off his real estate and relying on cash flow, Eric realized the potential of accessing his equity and putting it to work through syndication deals. This shift in mindset allowed him to tap into new sources of passive income and accelerate his journey towards financial independence.

Eric’s story serves as a powerful reminder of the importance of having a prenuptial agreement, even if it may seem uncomfortable or unnecessary at the time. By taking proactive steps to protect your financial future, you can avoid the potential devastation of losing assets in the event of a divorce.

Furthermore, Eric’s experience highlights the need to adapt and pivot your financial strategy when faced with unexpected challenges. Life is unpredictable, and it’s crucial to have a flexible and resilient approach to building wealth. By embracing new opportunities and thinking outside the box, you can overcome setbacks and achieve your financial goals.

In conclusion, Eric Garber’s journey is a testament to the power of resilience and adaptability. Through house hacking, syndication deals, and a shift in mindset, he was able to overcome financial setbacks and create a path towards early retirement. Whether you’re a seasoned investor or just starting out, Eric’s story offers valuable lessons and inspiration for your own financial journey.

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