Welcome to the 5 Minute Prime Podcast. Quick actionable tips to master personal finance and real estate investing. In just five minutes a day, we'll help you build wealth and achieve financial freedom. Hey Prime Investors, Martin Maxwell here. Welcome back to the 5-Minute Prime Podcast. Today I want to hand you somebody else's decision. Because I think a lot of you are about eight months from making it. Here's where they are. They did the work, stopped screening on the headline number for their metro, found the cheaper band underneath it, spent a Saturday driving zip codes, and in one of them, a duplex. $265,000. Two units. They live in one. They're pre-approved at 5% down as an owner-occupant. So $13,250 at closing. A loan of $251,750 at 6.66%. Principal and interest is $16.18 a month. Add taxes, insurance, and PMI, and the whole payment is $2,195. The other unit rents for $1,250. So the tenant covers $1,250 of a $2,195 payment. And this person's actual cost of housing is $9.45 a month. They currently pay $14.50 in rent. Owning this thing is $505 a month cheaper than the apartment they're sitting in right now. Not cheaper if rents rise, not cheaper if it appreciates, cheaper on day one. Then the lender asks a routine question What do you have left after closing? $4,100. Run that against a $2,195 payment, and you don't get a number of months. You get 1.9 months. Three months of that payment would be $65.85. Six months would be $13,170. And that's before the thing every landlord learns in year one. When the tenant leaves, nobody covers $12.50 for you. You cover the entire $21.95 yourself while you're painting. One vacant month plus a make ready runs something like $3,050, which is most of what they have for an event that isn't a disaster. It's a Tuesday. So the monthly math says go, and the reserve math says you're one water heater away from a credit card. Both of those are true at the same time. Three options. Here they are. Option one, write the offer now. It's $500 a month better than renting from day one, and the 30 year has climbed about a quarter point since the start of July. 643 then, 667 as of the middle of August. Reserves rebuild every month you own it. You can't rebuild a rate. Option two, wait and fund the reserves first. Six months of the full payment, $13170, then buy. Nobody was ever ruined by being over-reserved. Option three, write the offer, but only after funding the two things that actually break a first house hack. Not six months. The specific dollars that cover a vacancy and a turn. And before you answer, if you're listening to this already owning something, or already having made this call one way or the other, I'm not relitigating your decision. You had different numbers. This is for the person who hasn't made it yet. What makes it hard is that the two halves of the answer live in different time horizons. The 500 a month is a thing you feel every month starting immediately. The vacancy is a thing you feel once hard at a moment you don't get to choose. Human beings are extremely bad at weighing those against each other, which is why most people just pick the one that matches their temperament and call it analysis. Hit pause, pick one, then come back and I'll tell you which one I'd take and why. Okay, here's what I think. And I want to start by defending the option I'm not taking. Option two has the right instinct. Under reserved is exactly how a first property turns into a forced sale. And just buy it and figure it out is genuinely bad advice that keeps getting repeated because the people it worked out for are the loudest ones in the room. But six months is a number nobody chose. It got inherited the same way that Metro Headline did. And that's the thread running through this whole week. Monday it was a median somebody mistook for an entry price. Today it's a reserve target somebody mistook for a safety standard. Same failure both times. A number arrived from outside, nobody asked what it was measuring, and a real decision got made on top of it. It sounds prudent, it's easy to say, and it isn't attached to any specific thing that might actually go wrong. Six months here is $13,170. At the savings rate that got this person to $4,100, that's most of another year. A year of paying $1450 to a landlord instead of nine forty-five to themselves. That waiting costs about six thousand sixty dollars. So option two is defending against a risk it hasn't named at a price it hasn't counted. That isn't caution. That's the shape of caution. Option three keeps the instinct and drops the arithmetic. Two things, funded by name. First, the vacancy. One tenant turn, a month with no rent, plus paint, clean, and a relist. Call it 3,050 and adjust for what you actually saw in those units. And notice what that number is made of, because this is where people underbudget. It isn't just the lost rent. It's carpet cleaning or replacement. It's a coat of paint in at least one room. It's the locks because you're rekeying. It's however many days sit empty between the old tenant's last day and the new tenant's first, which is almost never zero. None of that is unusual, and none of it is optional, which is exactly why it belongs in a reserve number instead of a surprise. This is the near certain event. Not the tail risk, the thing that happens. Second, the floor underneath it. What keeps you solvent when that vacancy lands in the same month as something else? Three months of the full payment, $65.85, is defensible because it's tied to the real payment instead of to a round number. That's about $9,600 to be genuinely ready against a six-month target of $13,170. Smaller number. And every dollar of it answers a question you can say out loud. The reserves conversation goes wrong the moment it becomes a vibe. Make it a list. One more thing, and this is the part I'd want somebody to tell me. Right now this is a housing decision. 945 against 1450. That comparison is legitimate and it's winning. But the day this person moves out and rents both sides, it stops being a housing decision and becomes an investment. And investments get screened differently. So run it now. Both units at $1250 is $30,000 a year gross. Take half her expenses, and you've got $15,000 of NOI against $265,000. That's a cap rate of 5.66%. And the plus five rule wants a cap at least five points over the 10-year treasury, which is 4.68 as of the middle of August. So green light is 9.68. 5.66 against 9.68. That's red and it isn't close. Now, that is not an argument against buying it. The plus five rule screens investment purchases, and the unit you sleep in isn't one. Applying an investment floor to your own housing is a category error, and taken seriously, it would tell you to rent forever. But it is the number you'll be holding the day you move out. So know it now and let it shape the exit you plan instead of ambushing you in three years. So I'm taking option three. Not because it's the middle one. I'd have taken option one if the reserves were there, and I'd have taken option two if the vacancy weren't so cheap to fund. I'm taking it because it's the only one where the number you're waiting on is a number you picked. Here's your challenge today, whether or not you have a duplex in front of you. Write down the thing you're currently waiting for. Then, write down what specific event that money is protecting you from and what that event costs. If you can't name the event, you're not saving toward a risk. You're saving toward a feeling, and a feeling will happily take another year of your rent. The full write up with all three options side by side and every number laid out is linked right there in the show notes. I'm Martin Maxwell. This has been the Five Minute Prime Podcast. I'll see you next episode.