On Episode 41 of the Your Financial Pharmacist Podcast, we wrap up a two-part series on best practices for home buying by interviewing Dr. Nate Hedrick, The Real Estate RPh. In case you missed it, we interviewed Nate for part 1 of this series (Episode 40), where he provided the first 5 best practices for home buying. On this episode, Nate provides 5 more tips to round out the list of ’10 Things Every Pharmacist Should Know About Home Buying.’
Nate Hedrick is a 2013 graduate of Ohio Northern University. By day, he works from home as a hospice clinical pharmacist for ProCare HospiceCare. By night, he works with pharmacist investors in Cleveland, Ohio – buying, flipping, selling, and renting homes as a licensed real estate agent with Berkshire Hathaway. This experience has led to a new real estate blog that covers everything from first-time home buying to real estate investing. Nate’s blog can be found at www.RealEstateRPH.com.
Real Estate Investing Guide
Looking to learn more about real estate investing? Check out The Pharmacist’s Guide to Real Estate Investing at www.realestaterph.com/real-estate-investing-guide
Episode Transcript
Tim Ulbrich: Hey, what’s up, everybody? Welcome back to Episode 41 of the Your Financial Pharmacist podcast. Excited to be here again alongside Tim Baker and again alongside Dr. Nate Hedrick, the Real Estate RPH as we continue our discussion on the top 10 list of things that pharmacists should know when it comes to home buying. In the first part of this series, I think Tim Baker, maybe you and I had some revelations about things that we did well and things that we didn’t do well. So Nate, thank you for reminding us of those things. We appreciate it. It’s a humbling moment, but that’s what this podcast is all about is sharing and helping those that are looking at this home buying process in front of them right now. So in the first part of this two-part series, we talked about five different things that people should be thinking about. No. 1, that the bank does not set your budget. No. 2, to shop around for mortgage lenders. No. 3, saving 20 percent down for a down payment. No. 4, not forgetting about the hidden costs of owning a home and buying a home. And No. 5, being ready for a lot of hurry up and wait. So if you didn’t catch that episode, go on back to Episode 40. We’ll link to it in the show notes, and make sure you catch up before we jump into the remaining five. So Nate, welcome back. We appreciate you taking the time to be here.
Nate Hedrick: Of course. Thanks for having me again.
Tim Ulbrich: Alright, let’s jump in. So No. 6 as we continue on this list. No. 6 that you had on this top 10 list is don’t skip out on the home warranty. So I think often we look at this, you know, as an extra add-on, an extra buy, so tell us why the home warranty is something we shouldn’t skip out on.
Nate Hedrick: Yeah, and it’s a good allegory for just in general, don’t skip out on things that it seems like a cost right now if in the long term, it may help you out. So really understanding, again, going back to that education piece we talked about in the first episode, understanding what these do. So an example of a home warranty like I talk about, a home warranty is usually a couple hundred dollars. An average one is about $300-400. Sometimes the seller will even provide them. And in general, a home warranty will cover all of your appliances — your furnace, your dishwasher, your refrigerator, everything else in between — it will cover that for up to a year, depending on how you buy that home warranty and what’s included in that. And one of the thing we talked about last episode was trying to save all this extra money for if something goes wrong or something breaks. Well, an average furnace is about $4,000. So setting aside an extra $4,000 is kind of crazy when you could set an extra $400 up front and in case something goes wrong, you’re basically covered, and they’ll come in and handle it. Now, I’ll fully admit that all home warranties are not equal, and some are better than others. And you really got to kind of do your homework on what’s going to be providing you the best outcomes if something does go wrong. But ultimately, it’s a good way to spend a couple hundred dollars up front and manage your costs for at least that first year where you’re trying to get your feet underneath you without having to pay a huge dollar amount if something does go wrong.
Tim Baker: Yeah, and I feel like this is one of the examples where, one of the points where, I think if you have an example — like I know I talked to a few clients who’ve bought in the Baltimore area, so you know, these houses were built in the 1880s. So it’s kind of a no-brainer, but I’ve had a few clients come back to me and say, ‘Thank goodness I did get that home warranty because this and this, this died after we moved in,’ or whatever the case was. So I think it’s a good point to make that not all warranties are created equal. And maybe that’s where kind of a good real estate agent comes in that can help you through that and what that essentially covers, so yeah, it’s a good point.
Nate Hedrick: Yeah, I personally experienced that. I remember distinctly, we were going back and forth through negotiations on our home, and our house was basically a slow flip. They took the time to redo it, but it was basically a flip for lack of a better way of saying it. And so everything was like brand spanking new, or so I thought. Turns out the washer was not in warranty when it broke, and basically what could have been a $300 home warranty cost me about $750 to buy a brand new washing machine.
Tim Ulbrich: And I think this too highlights, you know, in point No. 4, we talked about making sure of accounting for all the costs. Obviously, that fits in here as a cost. And also, while we would of course recommend that you have a fully funded emergency fund heading into a home, we know that many people may not, and all the more reason — even with one, you should have it — but of course, if you did not, it should be able to cover some of these expenses. So No. 7, Nate, is working with a real estate agent. It’s free, sort of. So obviously you being a real estate agent, there may be a natural bias here, but talk us through the benefits of working with somebody versus going at it yourself.
Nate Hedrick: Yeah, so certainly. So I think years and years ago, it was a lot easier to kind of go it alone. You can still do it today, there are many people that do for sale by owners, and they buy by themselves, but the advantage of buying a home and working with a realtor is that effectively, it’s free. So I’ll give you the behind-the-curtain of how real estate basically works. When a person sells their home and they use a realtor to do so, the real estate agent that’s selling that home negotiates a percentage fee. And they say, ‘OK, when your home sells, I want let’s say 6 percent of that home price. And that’s going to be my commission for marketing and for all the time that I spend on open houses and all the advice I gave you on what to set the price for and all the things that a real estate agent does.’ And so that actually is paid by the seller to the real estate agent. If a buyer comes in with their own real estate agent, those two agents basically agree during the process of acquiring the loan, they agree to split that 6 percent. So the buyer’s agent would get 3 percent, and the seller’s agent would get 3 percent. The nice thing is all of that 6 percent in general, comes from the selling side of the equation. So for a buying agent, for a buyer of a home, there’s no commission that’s coming out of your wallet and going directly that real estate agent. So you get this person that’s going to find you homes, they’re going to work with you every single day that you need it, you’re going to go to all these different showings, they’re going to give you access to the MLS, which we can talk about. All that stuff goes into it, and effectively, all you pay at the end is like a small desk fee. It’s usually $100-200 to do all the paperwork. So it’s a really nice tool that you have at your disposal that you almost don’t have to pay for if you’re on the buying side of the equation.
Tim Baker: So if I’m a pharmacist and I’m in Ohio or California or Louisiana or wherever, and I’m looking for a real estate agent that I like, know and trust, when you advise your pharmacy friends around the country, how do you advise them in terms of where to start with finding an agent?
Nate Hedrick: Yeah, that’s a great point. And that’s actually one of the things that I do quite a bit through my website because I agree, this can be a difficult part of the process. So the best thing you can do is ask your friends, ask somebody local that’s — like if you’re buying locally, ask somebody local that’s worked with a realtor recently. If they had a good experience, they’ll be more than happy to tell you all about it. The other thing that you can do is to go to someone like me who basically finds you a real estate agent in whatever area you’re looking for. This becomes especially important when you look at investment properties and certain types of buying of investment properties. You need certain types of realtors that are going to work very quickly, ones that are a little bit more savvy to the investment side of the market, and finding someone like that can be a little bit more difficult. So there are lots of different resources — again, our website is a great one for finding a local real estate agent. Basically, we’ll interview you, come up with an idea of what kind of an agent you’re looking for based on your needs, and we’ll set you up with somebody in that market that you’re trying to move to or in the market that you’re currently located in to help you go ahead and make that transition. So it’s definitely a part of the process and one thing that we’re trying to help out with quite a bit here at Real Estate RPH.
Tim Ulbrich: No. 8 is home ownership provides tax advantages, even for people that make “too much.” And I want your input on this one. I think probably as I talk with pharmacists about home buying, one of the most common reasons I hear about that itch to buy a home is ‘I need the tax advantages, I need the tax advantages.’ Despite student loan debt or other priorities they’re circulating. So talk us through exactly what are the tax advantages associated with a home. And then secondarily, how might those be changing under the new tax rules moving forward?
Nate Hedrick: Yeah, I’m glad you said that because it’s definitely changing quite a bit. So basically, if you make too much — again, that’s in air quotes there — but people like pharmacists in general make more than is allowed by the tax code for a lot of the standard, a lot of the deductions that we might otherwise benefit from. The one that always bothers me personally is the student loan deduction, right? My wife and I, again, make “too much” to get a student loan tax deduction, so even though we’re paying tens of thousands of dollars in student loan interest, none of that is deductible from our taxes, which is, again, frustrating personally. But if you look at the home, homes provide significant advantages in the tax area because a lot of those limits aren’t necessarily in place. So the first thing is that, you know, your state and local, your property taxes, are something that you can write off to an extent. Now, again, this is changing a little bit with the new tax code. They are limiting that property tax deduction to about $10,000, and that shouldn’t matter in all areas of the country, but it will matter in some. So New York, California, higher, basically more expensive homes in all those areas may start to kind of see an issue with that where your property taxes are now creeping over that $10,000 limit, and you’re not able to deduct all of that off of your taxes. So it’s something to kind of use but something to realize that also there’s a limit to it now with the new tax plan that’s in place. After that too, the other tax advantages that taxes are one of the few things — or excuse me, homes are one of the few things that there are limited or no capital gains on in certain scenarios. So if you buy or sell a stock, right, if I buy a stock at $100, and I sell it at $200, I’m paying capital gains tax on that $100 in profit. If I buy a home at $100,000 and sell it at $200,000, as long as I live there for two of the last five years, and it was my primary residence during that time, I pay no taxes on any of that profit. So not a single dollar of that goes back to the government on that profit that I made even though it was $100,000 over the course of just a couple of years. So if you’re looking at buying and selling your own personal home, if you’re going to stay there for a little bit of time, which we’ll get into, you can really do well for yourself in terms of not having to pay those capital gains tax where other investments, while maybe a little bit more tangible and easy to deal with than a home, are certainly taxed a lot higher.
Tim Baker: Before we continue with the rest of today’s episode, here’s a quick message from our sponsor.
Sponsor Message: This episode of Your Financial Pharmacist podcast is brought to you by Real Estate RPH. Founded by a pharmacist for pharmacists, Real Estate RPH provides the expertise you need when it comes to making one of the biggest investments of your life. Whether you’re looking to buy a home, sell a home, flip a home or learn more about real estate investing, head on over to www.realestaterph.com today.
Tim Baker: Now back to the Your Financial Pharmacist podcast. So point No. 9 is plan to stay for a few years, so you just alluded to that. So what typically is the crossover point or the break-even point for someone who is living in a house or purchased a house. Is it two, three, four, even five years? What does that look like?
Nate Hedrick: Yeah, great question, Tim. It totally depends on your market, unfortunately. I wish I had better information for you. They did an analysis on this on some of the low cost areas of the country and some of the high cost areas of the country. And places like Ohio, actually, where I’m from, are quite low cost in relation to the rest of the country. And you can actually get your money back or it’s worth it, basically, in just two or three years. If you look at some places like New York and Hawaii, it’s something crazy like 20 years. You’d be better off renting unless you were going to be in that home for 20 years. So it can really matter based on your market, doing your own little bit of research is best on that. But yeah, a couple of years is generally that sweet spot but totally depends on your market.
Tim Ulbrich: Yeah, and this for me is a plug back into the other things we’ve talked about with saving 20 percent down, not forgetting about all costs associated because obviously, when Jess and I were looking to move last year, we had been in our first home for seven years in a low cost market here in Ohio. But nonetheless, because we didn’t follow the 20 percent down, we didn’t have much equity, and when we looked at all the fees associated with the move, you know, it was not looking very good in terms of getting return on the equity we had gained. So I think that really evaluating and taking a step back and obviously, you can’t predict every factor, right, in terms of what may lead you to be there longer or not, but really trying to look at it. Say, is there a chance we might be here for a long period of time that we can absorb some of those fees and build up some equity in this home. OK, No. 10 for our real estate, maybe investing nerds out there, people who are excited about this potential about real estate investing, getting started on this, which takes me back thinking about Episode 9 where we interviewed Carrie Carlton about some of her real estate investment principles and experiences. What you have here is considered house hacking. I know this is something either you did or consider or recommend, right? So tell us more about that.
Nate Hedrick: I wish that I had done it. This is why it’s on my top 10 list because I just am kicking myself now, even still, that I didn’t get the chance to house hack when I bought my first home because I didn’t know what it was. So again, this is kind of what has gotten me to spreading the word on house hacking. House hacking, in a nutshell, is basically you buy a home with 2-4 units. So a duplex, a triplex or a quad. And you live in one of those units, and you rent out the others. And if you do it right, and you put your numbers in and everything works out, oftentimes you can actually have your renters paying your mortgage while you live there for free. Now, you’ll ultimately have other costs that you’re covering, and if you’re really good, you can actually get your renters to cover those costs as well. But I mean, think about it. If you could buy your first home, Tim, and I said you could live there for free, you’d be all over that, right?
Tim Baker: Where do I sign?
Nate Hedrick: Yeah, exactly. So the idea is that if you can find a popular market, something that is comfortable for you to live in that you can rent out quite easily at a good amount, you can easily get those other units to kind of pay off the rest of the mortgage. The beauty of this and where this gets really kind of lucrative is that the banks when they look at a duplex, a triplex or a quad, all the lenders, actually, they perceive those as being single family homes. They don’t treat those loans any differently than if you or I bought a single family home, so a one-unit kind of place. So you don’t have this crazy, like, apartment loan and there’s nothing fancy associated with it, you just get a regular loan and you get this multiple-unit place, and you can rent out the other sides of it. So it’s a really easy and convenient way to kind of dip your toe in the investing world of real estate. And I’ve seen so many people do this and just pay off their student loans so much quicker because they’re able to basically have someone else paying a mortgage, and they’re living for free.
Tim Ulbrich: And I think this is a good option, you know, as I think about a lot of pharmacists with student loan debt, obviously itching to get into a home, wanting to achieve other goals. Of course, again, with the principles we already talked about — 20 percent down and otherwise — but you know, getting in, you mentioned kind of dipping your toe and getting started, I think it’s a great way to do that, make some progress on your student loan debt. Obviously, not underestimating what’s involved in managing tenants, I think this kind of goes back to the learning process and making sure you’re prepared. So Tim Baker, from a financial planning perspective, we’ve just heard this list of kind of top 10 things that pharmacists should know when it comes to home buying. What are you seeing from pharmacist clients in terms of adhering to these principles? Or even from your viewpoint as an advisor to them trying to help them manage everything from student loan debt to home buying to investing? And any words of wisdom you could shed here.
Tim Baker: Yeah, I think from my perspective, probably the biggest word that comes to mind — and Shay and I recently went through this recently — was it’s emotion. So I’ll tell a quick story about this, and I’ll pivot to the clients. You know, we, Shay and I have talked about, we’ve been in our house a year, but we’ve talked about upgrading in 3-4 years, 3-5 years, and then renting out our home. We went across the street to look at a nicer, newer house and talked to the real estate agent and were talking about, you know, I rent space for my office for my work, and we want to have more kids and that type of thing. They’re like, well, you know, this house is a little bit out of your price range that you mentioned, so let’s go look at some that are in your price range. And we went through that, we went down the funnel of looking at different houses just to kind of check it out. And then, you know, we get in a house and Shay is like, we can make this work and blah blah blah. And the emotion just latches onto you because you can picture yourself in that house, and I kind of went through this. And it was almost like we had to shake ourselves out of this because, you know, we were not prepared, are not prepared to make that move. And I think, like, I do this for a living. I preach prudence. And I found myself going down that path and saying, OK, could we rationalize our way into this? I am paying kind of a mortgage and office space. Could I just combine that into one thing? And I see that with clients a lot is — and one of the questions that I want to pivot back to Nate here is — at what point do you actually start looking for houses in this whole thing? Because I think once you start looking for houses, you are, you’re kind of in that snare of, OK, I could definitely see myself in this spot. So from a financial planning perspective, it is a constant discussion about your ability to build wealth and the idea that your primary home is an investment or not an investment. And are there things outside of just paying your mortgage that you have to account for. Like I remember when I bought my first home in Ohio, we had all the costs and then we had to spend a couple thousand dollars just for blinds. You know what I mean? So what happened? Out came the credit card, and then that’s the kind of things that you just don’t think about. So yeah, I mean, I think it has the potential — real estate has the potential to help you build wealth, but it also can be a cash — we talked about Rich Dad, Poor Dad — it can be a cash flow crunch. So to kind of, you know, pivot back to you, Nate — at what point, if I’m a pharmacist out there and I’m looking, this question has been hanging over my head, my parents are telling me, ‘Hey, buy, buy, buy. It’s a great investment,’ what should like, at what point should I actually or where should I start? I think that would be a good question. Where should I start? Because it’s so easy to look at those emails that I get from Zillow or Redfin and say, Oh yeah, I could definitely afford this. So what would be your advice in that regard?
Nate Hedrick: Yeah, that’s great. And actually, you’re right. I get this question all the time as well, and I just put out a guide recently on how to get started in real estate investing. It translates exactly the same to first-time home buying. And really, the first step is to first assess your own finances. The fact that you’re here listening to this podcast means that you’re already good at that or at least taking the right steps, right? So assess your own finances, figure out what you can afford. Again, going back to point 1 from last episode, figure out what your budget is. So once you kind of have that, working down the road of get your team in place, OK? And your team might just be and your spouse. Or it might just be you and your dog. Your team doesn’t have to be this expansive thing. But get your team of support that’s going to be in place. So maybe you’re going to tour the house with your brother. Maybe you’re going to buy the house, again, with your wife or your spouse. Having that team is a really good next step. So knowing that you’ve got your support structure and who’s going to be in the decision-making process. Then you want to go ahead and basically, go ahead and get pre-approved. Find a lender, like I said, do that research, get pre-approved so that when you go to a home, what you don’t want to do is walk in to your very first home, fall in love with it, and they’re not accepting offers for people that aren’t pre-approved. You know? That would just be the worst because it can take a couple of days to get pre-approved. So go ahead and get pre-approved. Then at that point, really, I recommend again, trying to get with a realtor and help them help you find some homes. And you can do this on Zillow, you can do this on Redfin, you can do this by yourself. You don’t need a realtor, but it’s nice when you have one in your court, doing the extra work for you. And once you’ve got that realtor in place, then you start assessing your deals. You start looking at the homes available to you, and you know that once you go into it, you’ve done all the financial background, you’ve got your little team that you’ve built, you’ve got your real estate agent so that if you do need to make an offer, you’re ready to go and you’ve got all those ducks in a row before you get to the point where you can make that decision on when to buy a home. Because I think you’re exactly right, Tim, so many of my clients say this to me when they start. They go, ‘I’m just going to start looking. I don’t think we’re ready to buy for six more months. I’m just going to look.’ And that person inevitable is putting an offer on a home within three weeks. Guaranteed. And it just happens. So you have to be ready before you start looking. It’s really easy to jump on Zillow and get really kind of like, we should go look at that house! But I really encourage you to do that background homework before you jump in and start looking at homes.
Tim Ulbrich: Nate, great advice, and all I keep thinking through this episode and the previous one is I wish I would have had that chance to talk to you before I got started, you know, eight years ago. That’s what we’re here for, and hopefully our listeners, whether it’s first home buy, second home buy, interest in real estate, whatever, hopefully they’re getting some good advice here. So again, Dr. Nate Hedrick, the Real Estate RPH, you can learn more about the work he’s doing over at realestaterph.com. Nate, thanks for coming on the show as well as for filling this need. I think where pharmacists need more information and education on home buying. So thanks for joining us today.
Nate Hedrick: Of course, thanks for having me.
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