YFP REI 61: Keeping vs. Selling in a Hot Market

Keeping vs. Selling in a Hot Market

On today’s episode, sponsored by Lima One Capital, Nate Hedrick, PharmD, and David Bright, PharmD, MBA, BCACP, FAPhA, FCCP, your YFP Real Estate Investing Podcast hosts, discuss how to decide whether to keep or sell a rental property in a hot real estate market. 

Episode Summary

Have you ever been caught in the dilemma between wanting to keep a house as a rental and selling it when the market favors sellers? In this episode, your YFP Real Estate Investing podcast hosts Nate Hedrick, PharmD, and David Bright, PharmD, MBA, BCACP, FAPhA, FCCP, do a deep dive into the decision-making process when faced with the question of keeping or selling a rental property in a hot market. Nate and David walk through the importance of assessing a house entirely before making a decision and the value of getting guidance from someone more experienced than yourself. Nate and David debunk some housing market trajectories and trends. They also provide a sneak peek into how to find and invest in an undervalued property and everything to look out for when it comes time to sell. Listeners will learn how changes in the market affect our decision-making and the three main points pharmacist real estate investors need to consider when deciding whether to buy a property, keep it, or sell it. In making this decision, Nate and David suggest considering the following three questions when deciding whether to keep or to sell an investment property: 

1. What are the near-term and long-term expenses for this property?
2. What is the outlook for value changes in the local market? 
3. What would you do with the money once you sell? 

Key Points From This Episode

• The necessary discussions to have when ending a rehabilitation project.
• How a fluctuating market changes our decisions.
• Why you should be careful and methodical to maximize investment.
• The difficult choice between keeping the property as a rental and selling it for a gain.
• The three key points of making the decision: Do I buy it or do I sell it?
• Assessing near and long-term expenses to ascertain whether investing in that property makes sense. 
• Increasing predictability by making all necessary repairs at the beginning of ownership.
• How to assess a house: roof to basement.  
• The value of speaking to someone more experienced, for guidance. 
• How the overall housing market and specific neighborhood trajectories can be both similar and disconnected.
• The importance of knowing neighborhood-specific market trends. 
• How to change a property to fit the statistics that you are looking for.
• Staying on top of nuanced market trends. 
• Making wise investments in properties that are undervalued.
• What to do with the money after you sell.  
• When it is the right time to sell.
• Nate’s dilemma of whether to rent out a property or sell it.

Highlights

“Sometimes, it can be in your best interest to get out of that property sooner because you’re avoiding those big expenses.” — Nate Hedrick, PharmD [0:10:06]

“You could just work roof-to-basement, literally, and think about those big, expensive, potential headaches and then, think through what is the condition of each of those, and are they going to need to be replaced sooner or later.” — David Bright, PharmD, MBA, BCACP, FAPhA, FCCP [0:12:33]

“I think that’s a good point: To connect with somebody that knows what they’re doing, if you’re not that person yet.” — Nate Hedrick, PharmD [0:13:38]

“You have to set aside much more for CapEx than a lot of calculators will initially show you.” — David Bright, PharmD, MBA, BCACP, FAPhA, FCCP [0:17:07]

“Stick with what works for you. Stick with your criteria and dump the stuff that doesn’t need it, and move on.” — Nate Hedrick, PharmD [0:18:56]

“There are ways you can really work within a market to change a property to fit the statistics that you’re looking for.” — Nate Hedrick, PharmD [0:22:52]

“If you are going to sell, have a reason to sell, and it is important that you have something to do with that money afterward.” — Nate Hedrick, PharmD [0:36:54]

Links Mentioned in Today’s Episode

• Lima One Capital: The Nation’s Premier Lender for Real Estate Investors
• YFP Real Estate Investing 50: Deep Dive Into Spreadsheet Analysis
• YFP Real Estate Investing 29: Investing with Purpose
• YFP Real Estate Concierge Service
• Join the YFP Real Estate Investing Facebook Group
• YFP Real Estate Investing
• Your Financial Pharmacist Disclaimer and Disclosures

Episode Transcript

[INTRODUCTION]

[0:00:08.4] NH: Hello, and welcome to the Your Financial Pharmacist Real Estate Investing Podcast. A show all about empowering pharmacists to achieve financial freedom through real estate investing. I’m Nate Hedrick and each week, my cohost David Bright and I explore stories from pharmacists all over the country, who are achieving their real estate goals while maintaining a meaningful career in pharmacy.

Whether you’re a first-time investor or a seasoned pro, we’re here to provide education and inspiration about the world of real estate. Please note, this podcast is intended for educational purposes only and should not be considered financial or investment advice.

[SPONSOR MESSAGE]

[0:00:42.5] DB: Before we jump into the episode, let’s hear a word from today’s sponsor, Lima One Capital. Are you a real estate investor looking for the right lender that can finance all your deals and help you scale? Lima One Capital is the best suite of loan products in the industry. 

Whether that’s fix and flips, fix and holds, building new construction or buying rental properties, they have incredible financing solutions for it all. A reliable, common sense lender is one of the most important parts of your investment team, and that’s exactly what you get at Lima One. Let Lima One Capital show you how they’ve helped thousands of real estate investor’s scale and increase their wealth.

Check them out at limaone.com/yfp or call 800-259-0595 to speak with a consultant in preparation for your next project. That’s limaone.com/yfp.

[INTERVIEW]

[0:01:31.6] NH: Hey David, how’s it going?

[0:01:31.8] DB: Hey. Good, thanks. How are you doing, man? 

[0:01:33.8] NH: I am good, thanks. I was at the house again today, that I’ve been working on for a while, and it’s a timely discussion, because I think we’re going to go through a couple of things that will help our listeners, and also help me, about what to do with it now that we’re almost done with the rehab.

[0:01:46.9] DB: Yeah. It’s an interesting point to be at the end of that rehab and to have that decision of like: “Well, now what do I do?” Because we all walk into these projects with an idea, right? Like, this is going to be a great rental or this is going to be a great flip project, but sometimes circumstances change. The market changes and all kinds of things change, so that clear objective and that clear roadmap, like the 12-step checklist that every pharmacist wants, right? 

At the end of the project, when rechecking that work, it doesn’t always feel like it fits anymore. It is a good discussion to have, anytime you come into the end of a project, just validating your assumptions and making sure that you’re in that groove.

[0:02:25.2] NH: Like you said, a lot has changed just in the last couple of months. I remember vividly, we put the offer on this property on Christmas Eve, actually. Kind of just worked out that way. Back then, again, rates were so low. We weren’t dealing with the markets that we have today. Again, a lot has changed in six months (or whatever we’ve been since then) so it affects our decisions for sure.

[0:02:48.1] DB: Yeah, and I think there’s even some things that come out in the rehab project. There’s a house that we’re working on, where we pulled up this 30-year old carpet, and we figured the whole place is just going to be gross and disgusting. And underneath it, it was like that thing that everyone dreams of, right? You pull up this gross, disgusting carpet and then there’s beautiful hardwood underneath. We were like: “What in the world? We just hit the lottery.”

Yeah, sometimes you find out things about the house, even though you do an inspection and you do walkthroughs and all the things. Sometimes you just learn things about the house that even moved the needle a little bit as well.

[0:03:19.8] NH: Yeah, I just kind of went the opposite way. Not terrible or anything, but it was like: “Oh, we got to do that too. Oh man, we got to do that project as well. Yeah, let’s throw some money at that problem, okay, super.” My plumber was there two weeks ago, three weeks ago, and he’s like: “Yeah, Nate. While I was there, it started raining and, it turns out, your driveway’s backed up too, the drain in your driveway.” I’m like: “Oh man, well snake that out please.” This one felt like everything kept getting added on every time I charge around.

[0:03:44.3] DB: Yeah. I hate to rub salt in that wound, but I think the other thing that changes in the market is we just saw a continued heating. Because, we also put in an offer on the house that we’re finishing up right now. We put that offer in January and saw that continued climb of the market, where we didn’t think that this specific neighborhood was all that hot. But then, between when we bought it and today, there were three really killer-good comps that just made us think that: “Wow, the value might end up coming out higher than we were expecting.”

So yeah, sometimes there’s market things that change, for better or for worse. House things change, for better or for worse. In some cases, there’s really only one play, right? If you buy a lakefront property, it’s probably short-term rental and that’s it. You’re not really going to put a long-term tenant in it, or property that you bought without needing any rehab that you bought to put a tenant in on day two of ownership. Maybe that’s a clear option because it was very specifically bought for that purpose.

But anyone that’s taking that distressed house (and you’re working on it over a series of months, checking your work towards the end), doesn’t mean you’ve done anything wrong even. It just means you’re being careful and methodical to maximize that investment.

[0:04:56.4] NH: Yeah, that’s sort of what happened to us. We bought this as tending to be a BRRRR, at a rental, in a long-term hold. As we started fixing things up, everything ended up being kind of new. We were going to do LPP in certain areas that we ended up just refinishing the hardwoods, because it was way better and way easier and just— it looked a lot nicer. So, we got toward the tail end of the project. Didn’t realize we basically redid everything on this thing: countertops, paint top to bottom, flooring top to bottom.

All of a sudden, we’ve got this new house sitting there that yeah, it would be a great rental, but it’s also ready to be listed. It is brand-new. So, we’re kind of in that space of: “Man, what’s the best move for us and how do we move forward?”

[0:05:35.9] DB: Yeah. I don’t think that you’re alone in that situation. Because there’s some investors that do the major, some investors that do minor rehabs, there’s others that hold rentals. As we come into the start of summer (which is classically a really good time to list a property for sale), there are seasonal things, there’s just all kinds of things in this wild market that are probably worth unpacking, because this can be a complex scenario for investors.

So, whether a listener has bought a property and he’s working on something, or just thinking about buying a property and thinking about potential future exit strategies— this is probably just a really good thing to have in the back of your mind of how to evaluate options and how to know which road to go.

[0:06:13.7] NH: We talked about this in the past, right? You and I are big proponents of having multiple exit strategies on a deal. If we don’t have multiple exit strategies, it really makes us take a second look at the numbers, and whether or not we’re going to even do it. So, I like those options. I like the option to sell a property for a gain. I like it when you could keep it as a rental. Making that choice, sometimes, is the hardest part. 

I know, we’ve done this before, where we go through deals and you get 90% of the way through and you still don’t know which direction you’re going to go. That’s exactly where I’m at. So we, you and I were talking before this, realized, this might make a good episode to walk through. And really wanted to boil it down to three key considerations that you can make, or you can look at, when it comes down to how to make that decision. 

[0:06:52.4] DB: Yeah. Nate, like you said, every few episodes, we do one of these deep dives. Where you take a topic that’s come up on the podcast, where people struggle with this decision of: “Do I hold on to it, do I sell it,” and we unpack that much greater depth. So, the three key characteristics or three key questions or three key things that we’re focusing on today are: What are the near term and long term expenses, it’s the first one, near term and long-term expenses; what’s the outlook for value changes in the area is the second one; and the third one is, what do you do with the money when you go to sell that property?

If you get all the proceeds of that sale, what are you going to do? So again, that’s our deep dive for today, is walking through those three things. So we thought we jump into the first one, the expenses. Near-term and long-term expenses, to start to look at whether that specific property makes really good sense. Because it’s really easy to sit back and look at what a property, what you think it might rent for, what the mortgage would be, and then assume that the difference between the rent and the mortgage is what you make every month, unless you cash flow and—  but we broke that down in another deep dive back in episode 50, right? That there’s a lot more to it than just rent versus mortgage.

[0:07:57.4] NH: Definitely. Some of those expenses might be a little more fixed and predictable. Things like taxes, insurance, even property management fees, those are really not going to change. It’s the things like repairs, capital expenditures, the things that are really going to vary in the short-term and the long-term that you need to be thinking about. They’re a little more nuanced.

[0:08:17.0] DB: Yeah. So, those big expenses, like the capital expenditures that are more of those: a roof every 20 years, a furnace every 15, 20, 25 years. Those kinds of major expense that maybe somewhat unpredictable in the moment. You may not know precisely the day that the furnace is going to die but if you have a 30-year-old furnace in the house, you need to know that that’s coming soon, right? 

It’s a different level of risk than a six-month-old furnace, probably not going to die tomorrow compared with the 30-year-old one. So, breaking down the capital expenditures, those small kind of nickel and dime, short-term repairs like the dripping faucet, things like that, there are ways to estimate that (we walk through that a little bit on episode 50). Some people use just a fixed estimate based on size of the house. 

Someone might say: “That per square foot, I’m going to recommend this” or “Per bedroom count, I’ll set aside this.” Others will use a percent of net rents, which I think is pretty common to look at say, five, seven and a half, 10% of gross rents to the repairs, and a similar figure as capital expenditures, with a theory being that setting that aside every month eventually, you’ll save up enough to cover that roof. 

But there’s also some nuance there. Because if you bought that house that has 30-year-old furnace and a 20-year roof, there’s no way they’re putting aside $50 bucks a month for six months, it’s going to cover those expenses, right? If those things go out. Those are really substantial expenses that could really hurt if you’re not planning for this. 

[0:09:47.2] NH: The thing that I think of too, is that if you know the roof is five years away from needing replacement, and you’re going to sell that house in three to four years anyway, are you just keeping it so that you can have that big expense down the road? Are you just cash flowing now to basically pay yourself back with the new roof later, and then go in and sell it anyway?

Sometimes, it can be in your best interest to get out of that property sooner because you’re avoiding those big expenses. And then, even on top of that, you’ve got those little expenses that can start to add up. You don’t want those things to nickel and dime you throughout the process of having that particular house. 

So, if you’ve got a house with two and a half bathrooms and a wet garden in the basement and, all of a sudden, you’ve got multiple faucets, multiple fixtures, multiple lighting sources, all these things are starting to add up. All those things are things that can break or be updated. So now, all of a sudden, even the little stuff in the repair column starts to really add up based on the specifics of that property. 

[0:10:41.5] DB: Yeah, particularly, if those things were really old. If the property hasn’t been remodeled in 30 or 40 years, then all those things could be towards the end of their useful life. I know that’s one of the things that you and I like, buying properties that needs some work, is that that work can all be done upfront. 

And you don’t really feel bad if the bathroom vanity is just broken and falling off the wall and: “Okay, it needs to be replaced, we’ll get a new vanity, we’ll get a new faucet, we’ll make it all right.”  Then you know that there’s never going to be zero repairs because things will still break.

It’s a house, that happens, there will always be something. But, it gets a little more predictable and a little less risky when, right at the beginning of your ownership, you’ve already gone in and fixed a lot of the things that can go wrong.

[0:11:27.6] NH: Yeah. Pharmacists like the word predictable, right? Especially with investing. We don’t need perfect but predictable is very nice, in terms of being able to plan ahead and knowing which repairs are going to be coming up and when. And, even if you can’t predict everything, you’ve got some predictability built-in by doing that work upfront, like you said. Taking a house that, if you’re fixing some of the things that break initially, you know exactly how long that’s going to last and when you might need to plan for in the future, which is great.

[0:11:53.9] DB: Yeah, so if we think of it like a pharmacy analogy, thinking through those near and long-term expenses and all the things that could go wrong in a house. Certainly, you can get a home inspection and all that. But I had an ICU pharmacist early on in my career walk me through his approach to doing this. A head to toe patient assessment of thinking through the major things that he wants to check in on, on a patient. 

So, you can do a similar thing with the house, right? You could look at what’s the chimney and the roof and then move on to other things about the house. Maybe we’re going to look at siding and windows next, then kitchen and bath and paint, flooring, plumbing, water heater, electrical, heating and cooling, foundation. You could just work roof-to-basement, literally, and think about those big, expensive, potential headaches and then, think through what is the condition of each of those, and are they going to need to be replaced sooner or later. 

[0:12:45.9] NH: Just take me a second, David, because that’s a lot of stuff, right? It sounds good but, roof to basement, there’s a lot of pieces and parts in between that. Is that something that—if I’m a new investor or someone that’s listening and they’re a new investor, what’s a way to start tackling that?

[0:13:00.1] DB: Well, I think about it, because we’re in the season right now where students have just started their first API rotation. A lot of them are walking to that first rotation and they’re walking into those ICUs with those experienced pharmacist and they’re panicking. So, that’s the season where I think that finding your preceptor/finding a mentor that can walk alongside of you, it can show you that. Because your first day as a student, walking into that hospital and trying just to tread water, it takes you forever to do some of that work.

But the experienced pharmacist in the ICU, they just know it. They just look and they just know what’s going on. So, connecting with someone like that can be really helpful.

[0:13:37.7] NH: Yeah, definitely recommend that. I think that’s a good point: it’s to connect with somebody that knows what they’re doing, if you’re not that person yet. It can be a realtor; it can be a home inspector, that you trust, that can be a fellow investor that you met. Again, we’ve had a lot of success talking to other pharmacists. 

I love going to people like, David, yourself. I’ll talk to some of their past guests sometimes. I just had a great phone conversation this past week with Kirby Atwell, who we had back on the show a couple of months back. Things like that are so nice. We go to somebody else that knows what they are doing, beyond what I’m aware of, and then I can really bounce these ideas off somebody else. It’s one of my favorite parts of what we do.

[0:14:13.2] DB: Yeah. I think that when you’re in the trenches and you’re walking houses like that, I know, for me, working with an experienced realtor that had been through a lot of those, a lot of investment properties and own investment properties, and had done some of that rehab, that was really helpful. I think that there’s something really crucial about working with a realtor that understands investing, and understands construction, and home repairs, and some of these expenses as well. 

[0:14:40.0] NH: Yeah, it’s like a good reminder, I guess. A good quick plug for the YFP concierge service. If you are looking for a good, investor-friendly real estate agent, definitely encourage you to checkout yfprealestate.com. You can connect with me and learn more about our concierge service, where we can get you connected with an investor-friendly real estate agent, at no cost.

So, if you’re looking for somebody good in your market, or even out of state, that’s where I see it being the most helpful. When you’re trying to invest somewhere out of state and need a really good contact on the ground, we can help you get setup with that. We’ve helped dozens of pharmacists, at this point, with great real estate contacts. So please, checkout that service, yfprealestate.com, just a good reminder, based on getting a good real estate agent.

[0:15:18.8] DB: Yeah, absolutely. Having that really good set of eyes to walk through that property, and understand some of those expenses, can be super critical. One of the things that we found with the house that I got into (because we also, just like you, bought it with rehab to rent in mind), and we thought: “This is going to be a great house.” Because it needed some work. There were some things that didn’t need attention right away, so it was going to be a faster turn to get it ready.

But, as we got into it, there was a neighboring house just two doors down that became for sale. And when we started comparing and contrasting, we thought: “Shoot, there’s a big difference.” Because the one that we had just literally a couple of doors down, the rent estimate, everything was the same. But that other house had new vinyl siding, new windows, new roof. This house had wood siding, old wood windows, and not as new of a roof. The other one had a new furnace and water heater. This one didn’t have a new furnace and water heater. 

So, I’m expecting that over the next five years, the neighboring houses won’t need to achieve anything. And the house that we currently own over the next—maybe it’s more like 10 or 15 years, even—but there’s a much shorter runway to needing some expensive repairs than on that other house. That can be a really big difference, you know, even if just in the next five, 10 years. We’re thinking, $15 grand in repairs, that’s a chunk of money to save up for in the next five/10 years. 

[0:16:40.8] NH: Especially if it does only five years. $15,000 over five years, that’s $3,000 a year. There goes a lot of your good cashflow. That can really start to add up over the long-term.

[0:16:51.8] DB: Yeah, $3,000 a year, I think that’s a really good number to work with. At $3,000 a year, if you’re setting aside $500 a month or, sorry, $50 a month, you don’t come anywhere close. You need more like $250 a month to hit that target to make sure that those expenses are covered. So, you have to set aside much more for CapEx than a lot of calculators will initially show you. Because calculators are built on assumptions, where you need to plug in these kind of property level nuances, and this is where addressing the CapEx calculations (what are those impending expenses) becomes really, really important.

[0:17:26.3] NH: So you’re going to flip the one then?

[0:17:28.7] DB: Yeah, that’s kind of what we’re thinking. Knowing where the market is at right now, and knowing what these expenses are going to be, we’re really tempted to sell the one that we’re working on, and then go buy the neighbors. Go buy the one that’s two doors down because we can hopefully get out of this—get into that one at a similar price point but then, reduce a lot of our headaches long-term. 

[0:17:49.4] NH: Maybe see if they’ll trade with you? Like, straight swap, you know? 

[0:17:53.3] DB: Yeah, exactly. And the one thing about that is, I don’t want that to come off sounding like I’m just going to dump a headache off on someone else, right? Because that’s also not it at all. Just because it doesn’t meet my criteria for a long-term rental, doesn’t mean that someone else might not really like that house. Particularly, because it will be worth less than this other house with nicer features and everything. 

So, maybe someone’s looking for a little bit cheaper entry point where they can get started, and they can do some updates and do some fixes themselves. and they can build value and equity living in that house. I know that there’s a lot of house-hack pharmacists that are looking to do that. To get into a property and maybe they want to paint it themselves, maybe they want to—I don’t know many pharmacists that are roofers, but who knows? Maybe they want to do the roof themselves.

But, the point is that there are some owner occupants that will want to get in there and that will be a great fit for them. So, just because it’s not a great fit for me, doesn’t mean it’s not a great fit for someone else.

[0:18:47.5] NH: Yeah, that’s a good point. To remind people too: stick with what works for you. Trying to go in 10 different directions and do everything, it’s just too difficult. So, stick with what works for you. Stick with your criteria and dump the stuff that doesn’t need it, and move on.

[0:19:01.3] DB: Yeah, that property is looking more and more like it will be a flip, we’ll have to see how it comes out in just a couple more weeks, we’re hoping to be done here soon. Yeah, that’s property level expenses, which is our first consideration. So, as a realtor, I know you’re very familiar with the second consideration, which is trajectory of neighborhoods, and value shifts, and all those kinds of things. 

So, help us out with the difference. My question off of that is: We’ve seen all kinds of things about the overall housing market, but talk for a minute about overall housing market and specific neighborhood trajectory, and how those can sometimes be similar and sometimes feel disconnected?

[0:19:36.3] NH: Yeah, this is such a difficult spot, right? Because there’s two big pieces like you said. And it’s all even hazier than normal because the near term is difficult to figure out. But, like you said, when you’re looking at a housing market in general, you’re looking at two big things. You’re looking at, generally speaking, the housing market—and a lot of people had been calling for a dip, either shallow or drastic, for the better part of the last decade. And we’re still seeing it climb but, generally speaking, people are expecting some sort of shift in that market.

But, case-by-case basis, you’re also going to see individual neighborhoods/ individual areas that are going to go against the general market trends. Down or up, right? You have to take both those things into account. It’s just like the stock market. If we take a look at, if we zoom out—the S&P 500 or the DOW, they’re going to do one thing. But individual stocks is going to do something totally different. And, sometimes, they go together, they both are rising together. Sometimes, one falls, one rises, and vice versa.

So you have to evaluate both and really start to look at both of those things before making that decision about what that market’s going to do for you.

[0:20:37.6] DB: So, it sounds like the US housing market could do one thing but housing in LA may go into different direction than Boise, than Dallas, than Albany. And does it get more complex than that? Talk for a minute about some of the neighborhood or even block by block considerations that filters into that?

[0:20:55.4] NH: Yeah, 100%. I mean, there’s a great example of one of the markets, that I invest in here locally, that the city itself is on an upward trajectory, but if you’re west of a particular road, the houses over there are two thirds the value of the houses that are east of that particular road, and they’re trending down. Nobody wants to live outside of town, it’s closer to a higher crime area. 

It doesn’t have great access to some of the amenities that that city is really benefiting from. So, again, it’s crazy, because you look at a city and the city is all increasing—you probably get this, I get like the Zillow emails every week versus like: “The properties in your area are going up 12 and a half percent next year.” But I guarantee, if I was able to boil down this particular neighborhood of that city, it would actually be going down quite a bit.

That’s difficult to be able to figure out without boots on the ground, without somebody that knows the areas and is really living and breathing in that neighborhood. It’s a really essential part of what we’re doing because if you don’t have that, you can miss things on that long-term plan.

[0:21:52.1] DB: So, not just looking at US trends but city trends, neighborhood trends, block by block trends and what about even—one thing we’ve talked about in previous episodes too is—looking at value within a specific property. So, for instance, we bought a two bedroom house and converted it to a three bedroom house recently. In doing that, we were able to capture a lot of value that wasn’t previously there. Because, as a three bedroom house, it appraised much, much higher than it did as a two bedroom house.

So how does that filter into the home search and things that people are doing right now?

[0:22:27.5] NH: Yeah, especially if you’re looking at things where you’re targeting a particular area where, perhaps, you want more of a family target. We’re going to have more bedroom count than typical. So, if you’re buying a two bedroom, those typically aren’t selling as high because most of the houses in that market are three and four bedroom. But you’ll take a two bedroom and convert it very easily into a three bedroom, you might actually bump your house into a more desirable position than it would have otherwise been. 

There are ways you can really work within a market to change a property to fit the statistics that you’re looking for. It’s more difficult, and it doesn’t work with every house, but it’s definitely something that (if you can be smart and look at a property in that way before buying) you can really find a diamond in the rough, so to speak.

[0:23:09.0] DB: I know that there are people that are looking at some of the national headlines right now and are stressed. I know that you and I might be a little bias, but we’re still buying, right?

[0:23:17.7] NH: So far.

[0:23:19.9] DB: Yeah. But definitely looking at this different picture of  the US housing market do one thing, states, cities, neighborhoods, blocks, even just house itself, there may be opportunity for value. By trying to find something that’s moving in the right direction or that maybe inherently undervalued, I feel like is one way to hedge against some of these trends that we are seeing right now. 

[0:23:41.3] NH: Yeah, I think there is always going to be an opportunity to buy no matter what the market is doing broadly. I think you just have to really be good with your numbers. You don’t want to be buying things that—and I have always been like this. Ever since we started investing, we’re never going to buy something that everything has to go right for the numbers to work. 

Really, the way I build it is: if everything goes wrong and the numbers still work, then great, it is a fantastic buy. That is what we’re looking for. But if everything has to go right just to make it a deal, then to me it is not a deal. And in this market, and the way things are changing, and with the ambiguity of the next six to 12 months, that’s never been more true. 

So, I think if you are concerned about: “Gosh this market is scary, I don’t know what’s going to happen” —nobody knows what’s going to happen. It doesn’t mean you should quit and walk away, it just means you need to be really diligent and really sure of your numbers before making a decision. 

[0:24:32.1] DB: Yeah. And not just sure of your predictions of national trends, but also at state, local, neighborhood trends. Because just as some neighborhoods maybe going up, your example of the neighborhood that can be going down, even if we see a continued say 10% incline of the national market, for example, a neighborhood could still drop by 10%. Or if the national drops by 5% that neighborhood may drop by 15%. 

So, you want to try to understand that nuance, so that you are staying in front of those trends as much as possible. 

[0:25:02.8] NH: Be careful, too, if you’re looking to flip, right? Again, we just talked about we’re selling houses here and there, but if you are looking to flip and you’re saying: “This is going to be a flip target, it has to be this and I want this to make sure that it goes up and it is going to go up at a certain percentage”, those were ones where I would maybe take a step back and just make sure that, again, that multiple exit strategy thing. 

That if the market goes south, and it does drop 10% in this particular neighborhood or nationally, we go down 15% let’s say. If that house still works as a rental, then you’ve created a safety net for yourself, right? So, that multiple exit strategy thing, the running your numbers before you ever get into it, that isn’t so much more important than it’s ever been before, and I really advocate for that, and it is the way that I am operating today. 

[0:25:46.0] DB: Yeah. Conservative numbers and finding those opportunities of value, so that you can have a hedge against that as well, like one house that we just offered on recently was just this. A few years ago someone had painted it Pepto-Bismol pink and I was pretty convinced that that was going to be difficult one to sell, right? But I also know that we can go to the store, we can get some paint and we can repaint the house not Pepto-Bismol pink, and make it a lot more desirable for a lot more people. 

So there may even be some pretty simple ways to shift value in a property and to find something that is undervalued because it’s ugly or dirty or whatever else is going on. So yeah, those kind of things, particularly in these situations where there’s some market uncertainty, just sticking to the fundamentals, trying to find things that are undervalued so that you are making a wise investment, not just getting caught in the hysteria of the markets going up everywhere like all these property. 

“If I don’t buy now, I am never going to get to buy.” Not buying into that narrative, but just sticking to fundamentals and making conservative, cautious decisions. 

[0:25:46.0] NH: Again, when you are doing market evaluation, like you said, the fundamentals are key. Are there market factors that are driving growth in an area? Are there market factors that are driving demand and pricing? Did Amazon just build a new warehouse down the street or did the hospital just build a new wing and they are hiring 500 individuals to house that? Those are all people going to be influenced into that community and influx into that community. 

Now, all of a sudden, you got more competition. More housing is needed, all those again, just like we do anytime you’re evaluating a market. That stuff doesn’t go away just because the rest of the market is crazy. That stuff can still stay around and, again, it is to help you make a decision. 

[0:27:23.6] DB: Yeah, if you are not as plugged into some of those things, those are things that realtors often are. So again, get a good realtor, stick with that realtor and have a lot of those conversations about cities and neighborhoods and where to be and where not to be when you are looking at buying a rental property and holding it for X amount of time. 

[0:27:40.0] NH: For sure. So great, we talked about the first consideration, which is property expenses, the second, which is neighborhood trajectory and then I know you’re passionate about the third one, David. That’s: what to do and what do you plan to do with the money after you sell. So let us talk a little bit about that? 

[0:27:55.9] DB: Yeah, I think this is definitely an overlooked consideration. When you sell a property and you take that money off the table because presumably there’s hopefully some equity in that property. Often times with an investment property, you are putting 25% or more down on that property. So, when you sell, there is equity that comes back to you. I had a friend who talked to me recently and saying that he was pretty convinced that, as he looks at his crystal ball, he is expecting a 10% market drop over the next year. 

You know, my crystal ball is not all that clear. But if we go with his assumption of a 10% drop over the next year, which I am hearing different people saying—I am not trying to say that is necessarily wrong, I am not trying to say that is right—but if we see that 10% drop over the next year, he said: “Why don’t you sell some of your rentals, park that money in the sideline and then go buy a property again once the property is on sale by that 10% dip?”

[0:28:50.4] NH: And the first thing that comes to mind is that selling a property is not cash neutral, right? It is not just free to do that. I don’t sell a $150,000 house and put a $150 grand in my pocket. There’s, again, the biggest thing that comes to my mind is realtor fees, especially if you are listing that property with an agent. We charge to do what we do and so that’s going to be the first expense that comes to my mind. 

[0:29:10.4] DB: Yeah. And definitely, in my market, it’s common for both the listing agent, the buyer’s agent to make three percent. Then I tend to estimate another 3% in closing fees and taxes and all of the other transaction costs. So, I estimate 9% is gone when I sell a house. So, if we have a rental property worth $200,000, we put a sign in the yard that sells for $200,000, I plan on a net of a $182,000 off of that.

[0:29:36.6] NH: Yeah, that sounds about right. My numbers are a little different because I can list mine without some of the commissions, which is nice. One of the small advantages of being a real estate agent. But, you’re right. I mean, all of those things are there, you’ve got transfer taxes, that you mentioned, and even if you held it, depending on how long you’ve held it, that could be additional taxes too. 

[0:29:52.1] DB: Yeah. Let’s say for instance, the capital gains tax should be one where if you bought that property for a $150,000 four or five years ago, now it is worth $200,000, then you are paying tax on that gain as well, which is just the same as any other investment, right? 

[0:30:10.1] NH: Yeah, I mean if you put $150,000 in stocks and it went up in value ,and you sold that, you are going to pay taxes on that. It is the same thing. It’s just real estate is not immune to that. I think it is harder to see because you think about these properties selling and it just feels like money coming back to you but it is the same, the same outcome. 

[0:30:26.0] DB: Right. Yeah, you definitely walk away. If were to sit in the sideline with that now $182,000, there is already an issue there. If it is not parking $200,000, it is parking less. Then, if we talk about cash flow, let us just say theoretically that that property, that $200,000 property, cash flowed $400 a month. So after all the expenses, mortgage, everything, there is $400 a month left over. 

Let’s just say, for round numbers, that is about $5,000 a year. So that is $5,000 in cash flow that I didn’t make if I put that property on the sideline and it just sat. 

[0:31:01.6] NH: Yeah, exactly. So, between the cost associated with selling, you’ve got taxes, the loss rental income. Like you said, you are losing that cash flow and it is not nearly fair to say that you could sell a $200,000 house, pocket that or park it somewhere, and then you now use it again later at that same fitting value. It is just not going to work that way. 

[0:31:18.2] DB: So, in this scenario (we can get into complex discussion of tax and all of those kind of things) let’s just say that it was more like a $180. We already said $182 after the realtor fees and transfer taxes, let’s say it’s more like a $170 after capital gains and other things that are going to play into that. So, if I am going to sell it and if that’s another property have a $170,000, and then go try to find this mythical 10% discount and try to buy a property at a $180, that no longer makes sense. 

Even though the market is dropping by 10%, there is not really a gain, if my purpose is to set that cash on the sideline and go buy something exactly like what I just had. 

[0:32:01.5] NH: So you’re saying I can’t day trade real estate, that’s really a bummer. 

[0:32:05.3] DB: Yeah, not quite as easy as day trading, yeah. 

[0:32:08.1] NH: So it is harder to do, all right that’s fair. 

[0:32:09.8] DB: Yeah. And there are more advance strategies. We could talk about 1031 exchanges. I know someone out there got their tax hat on. They are saying that there is ways to avoid that. There is fancy footwork that can be done. But yeah, it is definitely tricky to time any market let alone the real estate market ,because another issue would be like: “What if we don’t see a 10% drop?” 

What if it is a 5% drop or it’s stable? But on the other hand, what if it’s a 20% drop? Maybe it starts to make more sense to sell some, and that kind of thing. 

[0:32:42.4] NH: That has been, I guess, my next question. When is it time to sell? If selling and parking doesn’t make a lot of sense, when is it a good time to say: “You know what? It’s time to cut out of this property. Obviously, you and I do this all the time, right? We are taking properties and selling them, but it is for a purpose, right? That’s the idea. 

[0:32:59.2] DB: Yeah. So, there may be reason to sell. A couple of things come to mind. One, there may be reason to sell a particular property because of something about that property that you’d learned over the course of owning that property. Another thing is, maybe there is something better to do with that money than just park it in the silence. A way to buy something like it. 

Maybe there is a different purpose. So, for the first example, we bought a house several years ago that we got really cheap, we were excited about it. It was on a busy street and it had a shared gravel driveway and those two aspects—like gravel driveway in Michigan, when we get snow all the time and you’re shoveling all that stuff, it is just not fun and a shared driveway is less fun, and then trying to back out of a shared driveway onto a busy street in the morning in heavy traffic just makes it less and less desirable.  

So, we had a hard time getting that property tenanted and, eventually, we decided it’s time to sell. We had a hard time selling that property on a market that is not as hot. You’re listing houses and helping people buy houses all the time. I have a feeling in today’s market, if you have a property that has something painful about it, this is probably a good market to try to sell a problematic house. Because people are overlooking everything right now. 

[0:34:13.2] NH: If you have a house in Cleveland that you want to sell, I will give you my number after this because selling leads right now is great. Because, like you said, the inventory is so low that people are overlooking problems, fully disclosed problems. I mean, I have seen properties where in the discloser they’re saying: “Massive leak in kitchen, roof needs rebuild over this half of the house” and someone is like, “Yep, totally fine, waving that. I get it. I can handle it later.” 

It’s just incredible to see some of the things that are being disclosed and aren’t bothering people. Whereas, if you went back a decade and it was a real buyer’s market, those things would have been—it would have crushed the house. It never would be able to sell until you fixed it. So it is really interesting to see where we’re at today.  

[0:34:52.2] DB: Yeah and again, it is not trying to say like dump off all your problems on some unfortunate person, right? Because there are people that want to get in there and you know, they don’t mind the shared driveway. If they work from home and they don’t need to back out at eight in the morning like everybody else does, maybe that is just not a big deal for them. They are able to get a property less expensive because of that, and that’s a win. 

So just because it’s not a fit for you doesn’t mean it’s not a fit for someone else. Thinking those kind of things through:  this may be a good time to sell a property because of features about that property or something that you have learned where you just don’t want to own that property long term. 

[0:35:27.6] NH: The other thing I think about too is using a sale of a property for debt management. So if you wanted to pay off another rental, if you wanted to pay off some student loan debt of some other high interest debt that you’ve got sitting around, selling now when the market is high and using that capital right way to pay down some other high interest debt or to get out from under something else or to pay off debt on a property where the cash flow is much better, that can be a really good advantage as well. 

So, as long as you’re using that money right away for something that is benefiting you, it can be a great time to sell as well. 

[0:35:59.5] DB: Yeah. I think another thing that I am hearing people doing is if you have a property that is appreciated greatly in value, where you can get your down payment back plus a lot of appreciation back, there may be a way to trade up in this market, too. Knowing that you are buying an expensive asset, but because you are able to get out maybe two or three times what you initially put down in the first property. 

Maybe you are able to buy a two or three unit property instead of a single family or maybe you are able to buy two or three houses by selling the one. There is ways to scale up in this market, particularly if those new properties that you buy can be found at a discount or in a better neighborhood. There is other things you can do as well, where you can harness positive market conditions for those houses. You might be able to really accelerate your investing by selling it strategically and redeploying that equity into one or more different properties. 

[0:36:52.6] NH: So bottom line, it sounds like if you are going to sell, have a reason to sell and it is important that you have something to do with that money afterward. Parking it in a savings account, probably not your best plan of attack. 

[0:37:03.8] DB: Yeah, and who knows? There maybe someone that really just wants that money in a saving account to sleep better at night, right? To each their own. But yes, to your point, having a plan is crucial. Having a plan so that you don’t sell that and then think: “Why did I sell that? That was a great investment.” Just because the market went up: “Why did I sell that thing? I should have kept that.”  

So yeah, that could be a really tough decision, and it sounds like one you’re right in the middle of right now with this house in Cleveland, right? 

[0:37:30.3] NH: Yes, so help me out, David. This is a real example. I’ve got this house, it is almost done, I’ve got a couple of more hours of work and one contractor job after and then it is ready for listing. But should I sell it or should I rent it out? I am really split, I don’t know what to do actually. 

[0:37:43.9] DB: Yeah. Well, it sounds like—so refresh me a little bit with all the projects—but it sounds like you’ve done a lot to take care of a lot of the short and the long term expenses, right? Is there anything out there pending or looming that you are worried about? 

[0:37:55.1] NH: The only big one that’s looming is that I did some roof repairs but not a roof replacement. So, the roof would probably be something that, in the next eight to ten years, it needs to be replaced. That is kind of long term and not bothering me too much. Other than that, all the big stuff has been, I guess, the furnace as well. The furnace is about 15 years old, so that’s got another five to eight years left, probably, before that needs to be replaced. Otherwise, all the big stuff has been taken care of.  

[0:38:18.9] DB: Okay, well that is kind of a checkmark into maybe keep it category, right? So yeah, what about neighborhood trajectory? How do you feel about the neighborhood? 

[0:38:27.2] NH: I love the neighborhood, and it is funny. I have this block that I am always looking for housing because I am obsessed with this neighborhood. If we were in a different stage in our life, we would live there ourselves. It is so walkable and just awesome. The interesting thing, though, is that this is right on the edge of that neighborhood. The backyard actually overlooks like a street that is much busier. 

So, it actually looks onto some businesses and it’s a busier street beyond that, so it is right on the edge of this good neighborhood, which is every time we are over there, I’m like, “Oh, I love this neighborhood” and like, “I don’t know but this backyard isn’t the best.” So it is kind of half and half of that, what I guess is what I’ll say. 

[0:39:03.9] DB: Okay. And, if you were to sell it, I’m assuming that you would make some money for all the work you put into this, buying it smart, all those things? You’d walk away with some cash, right? 

[0:39:13.3] NH: Yeah. Conservatively, after realtor fees. I paid just half the normal realtor fees. I wouldn’t charge myself to list it but I’d pay the buying agent a fair commission. I probably net about $20 grand or so after it sells and everything else clears and all that stuff. So call it $20 even just to be on the safe side. 

[0:39:32.6] DB: Yeah, and that’s $20,000 flip profit, not just getting your down payment back and things like that, right? That is profit coming back to you? 

[0:39:39.4] NH: Correct. If we sold it where we want to, it would be $20,000 after everything is paid off and we paid off all the credit cards that we used to do all the rehab. Now that would be $20,000 back in our pocket. So I really, again, a good situation to be in for sure. 

[0:39:52.2] DB: Yeah. Aside from just getting that money and potentially parking it in a savings account or anything like that, what would the intention be? What is kind of the opportunity cost if you don’t redeploy that somewhere else? What are the things you’re thinking about? 

[0:40:04.2] NH: Yeah, I mean we were just bought it to BRRRR it, right? We wanted to use it as a high cash flowing rental and again, we bought it really cheaply, put in a ton of repair costs and so the thought was, “Well, we’ll BRRRR it. We’ll pull our money back out with a refinance.” The problem is, now that rates have gone up so much—I mean literally since we bought it in December where at 4.625, which even at the time, I was like, “Wow, it is going up there”—I wouldn’t be able to BRRRR it for anything less than 6.75 maybe even seven. 

I am quite honestly at a cash out refinance. So our mortgage, I was doing the math before we started talking, our mortgage today is just south of $400 a month, right? Super cheap. It would almost be $800 a month if we were to cash out refinance it. So you are taking about getting all that capital back out but taking away $400 a month in cash flow, but the cash flow is about 450 or $500 a month depending on how you do your numbers to begin with. So now, we are basically eliminating all that cash flow. 

[0:40:57.7] DB: Yeah. I am sure someone in New York City just fell out of their chair hearing you complain about your mortgage payment, right? So everything in every market is relative, right? So, the numbers may not make as much sense on a rental versus but what else would you do with that money then? 

[0:41:15.2] NH: We could turn it around and ideally invest it into other properties that are going to be able to cash flow better or just as well, and then I could split it out over multiple properties. So if we pull all that money back out, we not only get that $20 grand in profit but we get all the capital back that we can use and redeploy. So again, we’ve been really trying to find a short term rental recently. 

This would really help us expand our budget on that, so there’s options there. We would certainly use the money. We would be turning around and doing something with it. It is just a matter of where does it go next. 

[0:41:44.4] DB: Okay, so that maybe puts a check in the column of sell, right? Because you have a very intentional plan with what to do. You are giving that a lot of thought and you are running the math. It sounds like on one hand, you are either going to scale up to a more expensive, hopefully more profitable short term rental or you’re going to scale up to multiple houses or multiple units or something like that. 

Where all of that makes sense, with today’s interest rates, because today’s interest rates are what they are, right? We’re recording this in May and who knows by June, July, we’re raised to go and all those kind of things. But being intentional about knowing the reality of the environment, what makes a good investment today or giving that a lot of thought, coming up with some strong plan. So yeah, tough one. Tough one. 

[0:42:28.6] NH: Yeah, I think this is exactly why it’s difficult to give one answer to any particular property. I think there is so many different factors to consider but, hopefully, us going through these different considerations will give others in the exact same situation as me, a little more clarity. After having this discussion and talking with you about it, I think I am leaning 70-30 sell right now. 

The BRRRR option, the refinance option is just—it doesn’t make any sense, right? It kills the cash flow. The keeping it and leaving all the money stuck in the deal isn’t terrible, but if we do have a market correction, now I am leaving a bunch of cash in the deal and I am losing money on what I could have sold it for. So it feels like I am leaning more and more toward sell, but we’ll see.  

It has to. Maybe I will put it on the market for two weeks, see if I get a bunch of activity and if not, then I’ll go ahead and rent it out. Maybe that’s the plan. 

[0:43:15.9] DB: Yeah, no, it is always a tough call and I know that a lot of people are in this situation where either a rental property that you’ve had or a project you’re working on (or those kind of situations) are causing people to chew through some of these tough decisions. I know another thing if you’re struggling with this, Nate you and I talk about bouncing this stuff off each other all the time, where I’m like: “Man, do I keep this one or do I sell? What do I do?” 

We are trying to figure this out and so that’s where networking with other investors—if you don’t have someone like that that you text or call, jump into YFP Real Estate Investing Facebook group, that’s a great place to pose one of these questions, like: “Here is this house, here’s the cash flow, here’s the numbers, if I sold it today I could walk away with this and do this, what would you do if you were me? What makes the most sense?” 

You can get great feedback from a lot of different people. The community of other pharmacist investors that are wired like we are to be risk averse, all the things that pharmacist are, detail oriented, so it can be a great way to get some additional feedback as you’re working through these tough decisions. 

[0:44:15.1] NH: Yeah, definitely recommend you check out the YFP Real Estate Investing Facebook group. I’ll probably be posting what I end up doing with this house on there too. So if you want an update, that’s the place to find it. Hopefully this helps you guys out as you are contemplating what to do with your own rentals or your own properties, that is. So with that, I hope you guys have a great rest of the week and we’ll see you next time. 

[END OF INTERVIEW]

[0:44:34.4] DB: Before we wrap up today’s show, let’s hear an important mention from our sponsor, Lima One Capital. Are you a real estate investor looking for the right lender that can finance all your deals and help you scale? Lima One Capital is the best suite of loan products in the industry. 

Whether that’s fix and flips, fix and holds, building new construction or buying rental properties, they have incredible financing solutions for it all. A reliable, common sense lender is one of the most important parts of your investment team and that’s exactly what you get at Lima One. Let Lima One Capital show you how they’ve helped thousands of real estate investor’s scale and increase their wealth.

Check them out at limaone.com/yfp or call 800-259-0595 to speak with a consultant in preparation for your next project. That’s limaone.com/yfp.

[0:45:20.9] ANNOUNCER: Thanks for listening to the YPF Real Estate Investing podcast. If you like what you heard on today’s show, please leave us a review and subscribe to the show so you never miss an episode. If you have a question, know someone that would make a good guest or want to connect with Nate or David, head on over to yfprealestate.com and join the growing YFP Real Estate Investing Facebook group.

[DISCLAIMER]

[0:45:42.2] ANNOUNCER: As we conclude this week’s episode of the YFP Real Estate Investing Podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide, and should not be relied on for, investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. 

Furthermore, the information contained in our archived newsletters, blog post and podcast is not updated and may not be accurate at the time you listen to it on this podcast. Opinions and analysis expressed herein are solely those of your financial pharmacist, unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. 

Thank you again for your support of the YFP Real Estate Investing Podcast. Have a great rest of your week.

[END] 

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