Real-Estate

YFP 395: What to Look for in a Real Estate Agent (And Why It’s More Important Than Ever)

Posted on by YFP Media

Tim Ulbrich & Nate Hedrick break down 2025 housing trends, agent tips & the new buyer’s agreement.

This is brought to you by Real Estate RPH.

Episode Summary

Tim Ulbrich, YFP Co-Founder talks with Nate Hedrick, PharmD and Founder of Real Estate RPh as they break down the key trends shaping the 2025 housing market, from declining home sales to soaring interest rates. Nate shares what to look for in a real estate agent, why local market expertise matters, and how the new buyer’s agent agreement affects you.

Key Points from the Episode

[00:00] Welcome Back, Nate Hedrick, PharmD!
[00:44] Current Housing Market Trends
[02:37] Home Improvement Decisions
[03:49] Hiring a Real Estate Agent
[04:07] Understanding Buyer’s Agent Agreements
[06:36] Key Qualities in a Real Estate Agent
[07:49] Researching and Interviewing Agents
[11:03] Local Market Knowledge
[15:17] Communication Expectations
[16:51] Buyer’s Agent Agreement Details
[18:57] Changes in Buyer’s Agent Compensation
[19:37] Negotiating Buyer’s Agent Fees
[20:17] Impact on First-Time Homebuyers
[20:52] New Agreement Structures
[22:02] Alternative Fee Models
[27:25] Important Contract Details
[31:42] When to Start Looking for an Agent
[33:14] Real Estate Concierge Service

Episode Highlights

“And let’s not forget..it’s a low bar of entry right into the field. And because of that, not all agents are created equal.” – Tim Ulbrich [05:41]

“ I would recommend knowing what your goal is and what your specific kind of target is. If I am an investor buying an investment property, that’s a very different agent. If I am looking for a farm with a hundred acres and a 10 horse horse stall, like that’s a different agent. If I’m looking for an apartment in New York city, like that’s a different type of agent.” – Nate Hedrick [06:50:]

“ Typically I recommend three to six months before you think you’re sort of ready to buy a house. If your lease is running out in June, then January or February is your time to start talking with agents and start that process.” – Nate Hedrick [31:58:]

“A good real estate agent can be an important, not just team member, but the quarterback of the team.” -Nate Hedrick [33:00]

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich: Nate, welcome back to the show.

Nate Hedrick: Hey, Tim, always good to be here.

Tim Ulbrich: Well, we had you and David on REI real estate investing episode one 32, we talked about rent versus buy. Not a new conversation, but one that is relevant in today’s market and how today’s market might ship that conversation a little bit.

We’ll link to that episode in the show notes in case folks miss that. But today we’re talking about what to look for when hiring a real estate agent. And similar to our last episode, while we’ve touched on this periodically, there are some new things in the market related to, uh, buyers agreements and other things that we need to talk about that really are shifting this conversation a bit.

So we’re going to do that, but first let’s get your take Nate on kind of what’s happening in [00:01:00] the housing market in 2025. You know, if anyone’s been watching the news on this existing home sales. You know, fell again last year to lowest level since 1995, interest rates continuing to stay pretty high where they’ve been.

And people like you and I are saying, Hey, there ain’t no way we’re moving. And we’re not giving up the interest rate. We’ve had all of that contributing to what appears to be an ongoing challenging market for first time homebuyers. Right.

Nate Hedrick: Yeah, I, a lot going on just in the last 12 months and even in the short term, just in the last couple of weeks. Um, I’ll say all of this with the caveat that all real estate is local, right? So I might give a global trend or a local insight into. Cleveland, Ohio market that doesn’t apply to you, right?

Because it’s all going to be specific to your locale. Um, so that’s, that’s important to keep in mind that none of this stuff applies globally everywhere. It’s just sort of what we’re seeing in terms of trended data. So as you mentioned, we did see a new sales, new existing home sales, rather existing home sales.

[00:02:00] Um, and a lot of that analysts feel like was because of the rising interest rates, it reduced the amount of affordability that was out there. Um, if your interest rate goes up, that means your monthly payment goes up, which means you can’t afford as much house, which means, Hey, if I need a four bedroom because my family size is X and how I’m priced out of a four bedroom, like, My only choice might be to rent now.

Right. Um, so we saw a lot of that. The other thing, like you said, so astutely is just, we’re not moving, right? If you’ve got a sub 4 percent rate and you go to sell that property, your only option is to then go buy something that is. Either cash or above seven and a half percent. Right. Depending on the time that you were buying.

So a lot of people felt like, Whoa, I’m just going to put the brakes on, on moving and I’m just going to stay where I’m at. And so those existing homes kind of just sat there and didn’t move as much.

Tim Ulbrich: And I think what you’re seeing, Nate, which both you and I can attest to in our own situations and the pandemic really spurred this, but it’s continued as people saying, Hey, I’m not going to move. Maybe I was considering, I’m not going to move, [00:03:00] but I’m going to make improvements and updates to our house.

You know, we finished our basement this past year. We had talked about moving a year or so ago and decided, you know, what. Interest rates are what they are. And, and we had a much lower rate, mathematically doesn’t make sense. Let’s kind of focus on some improvements on the house. And just before we hit record, I heard the hammer in the background, right on your house.

So you’re, you’re doing something similar.

Nate Hedrick: Yeah. We, we, we basically have been talking about this for years and kind of this past. Within the last year, my wife and I sat down and said, look, I, I think this is it. I don’t think we’re moving. We’re pretty locked into this house. We love our location. We love where the kids are at. We love access. We have all the amenities we have here in our particular spot.

And so we said, let’s, let’s put on the sunroom. We’ve always talked about doing like, let’s just, let’s be here. And so, like you said, it just, if we wanted this exact property somewhere else, it’d be one, it’d be really hard to find and to pay an absolute ton for it somewhere else. So just make the improvements you want here and enjoy it while we’re here.

Tim Ulbrich: Yeah. Great [00:04:00] stuff. Well, today’s topic, what to look for when hiring an agent, again, not a new topic, but is. Updated information that we have to talk about. We’re going to get more in the weeds on this, but really the piece here that’s new is the implementation of a buyer’s agent agreement. So Nate, at a high level, kind of tell us why this new wrinkle has thrown a new factor into the equation for people to think about when they’re looking at hiring an agent.

Nate Hedrick: Yeah, I don’t want to get too deep yet. Let’s dive in as we kind of get through the pieces. But to, to, to set the 10, 000 foot stage, there was a settlement last year. We had an episode on this. Actually, um, the NAR settled on a lawsuit that was, that was pending. Um, they basically said we want it. Buyer representation to be very transparent, uh, by that extension or because of that ruling, um, the national association of realtors said, okay, before you work with a buyer’s agent, you have to have a contract in place that says what that buyer’s agent is going to be paid.[00:05:00]

And that compensation is going to be provided in a very clear laid out fashion. Um, again, we’ll go through some of the specifics, but in most cases, what those terms of those agreements say is that the buyer is agreeing to pay. Their agent, typically they’re going to try to get that amount from the seller as a, as a contingency of, of purchasing the home.

But technically the buyer is on the hook and they’ve sort of always been on the hook, but this is really laying it out to say, look, before we start working together, this is the contract. You have the sign that says how much I’m going to get paid. And that’s a very big difference from where it was years and years ago.

Tim Ulbrich: Yeah. And as you and I were planning for this episode, we said, Hey, Hey, these pieces now. Really raise the bar for this decision of hiring an agent. I mean, it’s always been important, but now we’re talking about signed agreements need to be in place, potentially financial implications on the buy side, if we can’t get the seller to take care of it.

And let’s not forget no offense to, uh, the real estate agents that are out there. Uh, but Nate, it’s a low bar of entry right into the [00:06:00] field. And because of that, not all agents are created equal. And we’re talking about what that means, but all the more reason that. On the buy side, we’ve got to be doing our homework and first time homebuyers.

Inevitably you’re excited about the home you’re looking. And this is where it’s like, Hey, aunt Susie’s third cousin’s neighbor is a good agent. You should work with them. And, and, you know, I remember being a first time homebuyer. We kind of run in that direction. That’s how I got connected to our agent, which thankfully worked out, but it wasn’t the best homework that we did in that process.

So. All the reasons we’ll, we’ll get into it during the episode of, Hey, as the buyer, what responsibilities do you have and looking for an agent? What are some of those things that you should be looking for to make sure you got someone in your corner, that’s really going to help you through this process.

So let, let’s start there. Nate, as I, as I mentioned, not all agents are created equal. So if that’s the case, what are some of the key qualities or traits that home buyers should be looking for when hiring an agent?

Nate Hedrick: Yeah, I think you could go down a bunch of different paths here. Um, I think [00:07:00] to start where I would recommend is know what your goal is and know what your specific kind of target is, right? So let me explain. If I am an investor buying an investment property, that’s a very different agent. If I am looking for a farm with a hundred acres and a 10 horse horse stall, like that’s a different agent.

If I’m looking for an apartment in New York city, like that’s a different type of agent. Right? So first start with what your goals are. Like if it’s just single family home in the suburbs, you have a bunch broader pool of people to be looking at. If you are looking for a specialized target, like. That that’s narrows your pool of options as kind of a first step.

Tim Ulbrich: Yeah. And I think that to your point, right. If someone’s looking at. A commercial property versus a residential. Is this an investment property that they’re thinking about doing Airbnb? And, and does that agent understand some of the local rules and regulations? Right? So start with the vision, start with the goal.

And then from there, what else are we thinking about on more of a micro level?

Nate Hedrick: [00:08:00] Yeah. So that’s where I would recommend you go out and you do kind of a background Google search, right? Or you’ve got great access to online information about these agents. You can get a good feel for something like transaction volume. You can figure out if they’re on a team. Um, if you look up their Zillow profile, their realtor.

com profile, you can see like, is it just Nate working as an agent by himself or does Nate have a team of people that I might be working with? And there, there are pros and cons to that. But if you set aside and you’re like, no, I want my guy or gal and I only want to work with that person. And that’s the way I want to operate.

Like you can do that background research without ever having to interview an agent that’s on a team or vice versa, right? You want someone that’s available all the time. Great. If you have a team of people, then you’re always guaranteeing somebody’s around. So you can do a lot of that background research to see things like that.

I also encourage people to look at agents, Facebook posts, their Instagram. Uh, I personally am and kind of terrible about being on social media, but you can get a pretty good feel for an agent’s style, their personality, their, how [00:09:00] they list a property. Um, a lot of agents will have walkthrough videos of their listings and you can feel out that person without ever having to interact with them, which is, which is nice, right?

You can just kind of start that book from. The very beginning without having to, to make a bunch of extra phone calls, interview a bunch of extra agents. You can, you can weed people right out over the internet.

Tim Ulbrich: Yeah. And I was joking, half joking about the referral, right? I mean, referrals matter and if people have a good experience, that’s great. But I, what I’m encouraging people to do is not stop there. Right. And what other information can we gather about that agent to understand, you know, whether or not they’re a good fit in our industry, in the financial planning industry for a firm like ours, that’s regulated by the sec, you know, a lot of this information is publicly available that people can look up.

You know, if they, if they want to read pages and pages of documents, they can read up forms that we have to publish in terms of services that we offer and fees that we have. And if there’s things like marks against or complaints against a firm or an advisor, you know, you can get to that information as well.

[00:10:00] Is there something similar that’s out there or what are these sources look like in terms of checking an agent’s experience in history?

Nate Hedrick: Yes. And no, um, a good agent will have a good review system somewhere, right? They’ll have either on their website or on Google reviews, realtor. com, Zillow reviews. One of those, hopefully if they’re a seasoned agent is going to have some sort of review system, um, where you can look at their actual reviews of their service.

Right. And if they’ve got. 20 people in the last year that have bought and sold a home and went on and left a glowing recommendation on Google. Like that’s a better indicator, uh, than, than if you don’t have anything out there. Right. Um, so that’s sort of one, you could also go to the national association of realtors website.

Um, you can actually dial down by your state. So like we have the Ohio realtors board and you can see if there’s been a complaint lodged against that particular agent or whatever. Um, it’s pretty rare to have that and have that agent be actively practicing, but. It might be worth looking up, um, and then ultimately you can just Google that individual, see if something’s come up, especially in [00:11:00] like the higher profile cases, you might see something where there’s an article published about somebody that, that maybe it’s, you know, good or bad, and you can kind of get a good feel for that.

So while there’s no national database that you can easily reference, there’s a lot of source material out there for you to go after.

Tim Ulbrich: One thing you said a little bit earlier to Nate, which is worth going back here is, is the importance of understanding the local market. And, you know, as we talked about on the real estate investing one 32 show, it’s not just the city or even the suburb or the area it’s, it’s, it’s the markets within the market, right?

It’s the school district, it’s the neighborhood. So what advice would you have for. Buyers that are out there to find an agent that really understands their market. Especially like I think about Jess and I, like, we’re not from Columbus and we’re looking for a home. Like I’m really leaning on that agent to help us out

Nate Hedrick: This is where the actual like agent interview might come into play. So again, you’ve done this sort of background research, you’ve narrowed it down. You can see that I have sold a bunch of homes in, you know, this particular city or this particular suburb. So now you’re going to add me to your [00:12:00] list of potential interview targets.

And, and I think a lot of people get like, Either overwhelmed or just turned off by this part of like, I have to set up like three interviews with three agents. Like that sounds like a lot of work. It can absolutely be worthwhile, right? This is a step that is a bit of a pain, but doing it now, we’ll make sure that you have a good process throughout.

And this is a huge purchase. Like you don’t want to get it wrong. So When you get that list, right, you’ve narrowed it down to two or three or four agents, whatever it might be, actually interview them, ask them questions about the local market. If they’re like, Oh, uh, yeah, there’s a, uh, I think there’s an apartment going in somewhere or like, you know, if they’re pretty unknowledgeable about the area, it’s going to come out pretty quickly.

Uh, if they understand it inside and out, you’re going to be able to hear and understand that right over the phone. So it’s something I recommend doing. Um, ask them questions about the local market, ask them about their experience. You can ask them for references, say, Hey, would you be if, and if your clients are willing, would you be willing to send me, you know, three people you’ve worked with and, and their contact info.

So I can just ask them how you were, um, [00:13:00] agents should be willing to give you this kind of stuff if their clients will allow it, of course, but, but they should be willing to give you this kind of stuff to support the fact that they are someone that’s good to work with.

Tim Ulbrich: Yeah. And they, just as you were talking, I was thinking about and jotting out some notes of things that just since living here. You know, we’ve come to understand that I probably could ask better questions about upfront, you know, school districts probably is the obvious one, but like in our neighborhood, we have this notorious issue with, we’re a smaller community.

And so where we draw water from, like, it’s really hard water and it just beats on your appliances. You better be ready for like costs associated with, uh, you know, appliances and soft water tanks and things like that. And everyone in the neighborhood knows it, but the buyer doesn’t know it. Right. Coming into the neighborhood.

I think about some of the HOA. Types of rules and specifics. And every HOA is different in terms of like, do they actually uphold the rules? Do they not? What does that look like? What are the fees? And that stuff, easy to find, you know, property taxes. Like we’re on the line of Franklin County, which is where [00:14:00] Columbus is and Pickaway County.

Well, if you throw a stone, like, and you’re in Pickaway County, property taxes are a whole lot different than they are in Franklin County. Right? So these are the things, what’s the economic development going on in the area? What’s the growth and population look like? I mean, so many things that a good agent.

Proactively hope is getting out in front and supporting you in that way.

Nate Hedrick: you can even ask them. Uh, I kind of like this question. I’ve, I’ve done this before with clients where you ask, you can ask the agent, um, you know, anything going on with city council, I should be aware of. And if they look at you like with deer in the headlights, right, that, that might be a bad sign. They should be involved in the community in some fashion.

Now, again, can I be involved in every single community around all of Cleveland where I start? No, but if you’re really specifically looking at like, Hey, I want to be in Brecksville, Ohio, or, you know, pick a spot, like Then you better know the nuances of that specific location. Uh, and what’s coming, right? If there’s a new trail going in, if they’re going to be rebuilding the bridge that you’re accessing your house from, right.

And you’ve got to go around an extra five miles for the next two years. Like those are the kinds of things you really want to have [00:15:00] an insight to.

Tim Ulbrich: Yeah. Nate is a first time homebuyer. Maybe you can relate to this. If somebody would have told me those things, I’ve been like, yeah, yeah, whatever. It’ll be fine. Right. But those are the things like, I think about the Metro parks and how we use the Metro park, like these things matter day to day in terms of quality of life and, and how you’re interacting with your community.

Nate, one other thing I want to ask you about here with this idea of interviewing agents, love this idea. Um, and I think we should have a similar conversation when it comes to like lenders, interviewing lenders and getting a feel. For what’s a good fit there, but how about communication? You know, what, what conversation, what questions can people ask?

I know first time home buyers, right. They’re eager. They want responsiveness. What’s reasonable. What’s not reasonable. How, how can you guide our listeners as an agent of maybe what buyers should be thinking about or think about asking an agent around communication?

Nate Hedrick: Yeah. I think setting a stage of like, what is realistic? So what are you looking for? Right? If someone came to me and said, look, I expect you to be answering a text message within five minutes from 7 a. m. to 10 p. m. I’m like, [00:16:00] I might not be the agent for you. Like I’m going to be with other clients. I have responsibilities.

I have kids like I’m going to get back to you in a reasonable amount of time, but, but this is what it looks like. So I think asking questions, knowing what your expectations are and just. Delivering that to the Asian and saying, Hey, here’s what I would like. I prefer to communicate via text or I prefer an email.

I really like a weekly phone call to understand where we are. If you can set that up with the Asian and they say, yeah, that’s absolutely reasonable. That works well with me. Or you know what? Like. That’s not how I operate. That’s how you’re going to get good communication. I don’t think it’s just coming at them and saying, do you have good communication skills?

And they’re like, yes, I do. Uh, because everyone’s going to say that you have to kind of make it a two way street of like, here’s how I expect to communicate. How’s that going to work?

Tim Ulbrich: Yeah, especially in this market, right? Timely communication, really important. So clear expectations upfront, what specific communication modalities, expectations around hours and timeline of responsiveness, all really important. All right, let’s talk about that buyer’s agent [00:17:00] agreement in more detail, because this is the new rankle.

As we talked about the beginning, really heightens the pressure on the buyer to make sure they have an agent that’s the right fit. As you mentioned the, the backstory for this, and we’ll link to it, it was episode one 18 of the Real Estate Investing podcast that you and David talked about the settlement from the National Association of Realtors.

We don’t have to get into the whole weeds of, of that all again. Uh, but that really led to this implementation of a buyer’s agreement that if anyone’s listening and bought a home, let’s say what? Eight months ago or yeah, since August. So anytime before that, you’re like, what buyers agreement, right? This wasn’t a thing.

So tell us a little bit more about what that looks like practically right now. So if I’m a first time home buyer or perspective, first time home buyer listening, and I’m starting to search, what should I expect in terms of these agreements and what the intent is of those agreements?

Nate Hedrick: Yeah. And it’s funny. I actually just went through this conversation earlier this morning. So like this is super relevant to what we go through every single [00:18:00] day. Um, but essentially what has changed is that before you can look at homes with a particular agent, they are supposed to have supposed to have a buyer’s agency agreement in place.

They basically says, I am going to be representing you. Here are the terms of that representation. Here are all the things that I’m going to do for you. Here is how I’m going to represent you when I’m talking to other agents. Here’s how I’m going to represent you to potential sellers. So on and so forth, right?

It lays that all out for my efforts. My compensation is X. And for the point of this conversation, let’s just say it’s 3%. Okay. I’m going to make 3 percent on the, as a percentage of the home sale. So if the house sells for 500, 000, I’m making 3 percent of that. If it sells for 200, 000, I’m making 3 percent of that, whatever it is.

And we’re going to establish that that is the, that is the amount that I’m going to be compensated. Now, where we get that from is up for negotiation. And that’s the big, the big nuance, the big difference from what it used to be. It used to be that the sellers would just offer whatever they were going to offer.

When you got a listing agreement in [00:19:00] place, you negotiated right then and there with the seller. Hey, it’s going to be two and a half for me, two and a half for a buyer’s agent. And when I would go show a listing, I would know it would actually display it. It would say, Nate, if you help a buyer by this house, you’re going to get two and a half percent, right?

It was listed right there. That is gone. There is no buyers. Uh, agreement that’s listed or advertised by a seller. Now, when I go to make an offer, and again, I just did this today with a client, uh, actually last night. And we said, look, here’s the offer. It’s 250, 000 in a 3 percent buyer’s agency.

Compensation agreement, right? And so that, that 3%, we pre established that that’s what I was going to work with the buyer for. And now we’re trying to get it from the seller. Interestingly enough, again, since this is, this is happening right, right here now with this client that I’m working with, they came back and they said, okay, we’re going to counter and we’re countering at this, this slightly higher number than what you’ve, what you’ve come up with.

And we’re only willing to pay two and a half percent of your buyer’s agency contract. And we said, okay, let’s talk about that. And so I went back to the [00:20:00] buyer and, uh, Ultimately, what we decided was that that’s fine. We’re going to take two and a half from the seller and that 0. 5 percent is actually going to come from my buyer.

And they’re going to, they’re going to pay that out of their closing costs. Um, but all of it is very transparent. All of it is very negotiated. Um, and that’s just how the agreements work now. So you’ve got to establish that before you ever look at houses, which is just way different than it ever used to be.

Tim Ulbrich: So different, right? I mean, days gone by quick recap, days gone by seller’s going to pay all the fees. So you were expecting as a seller, it’s going to cost me five or 6%. Right. And I’m paying for both the listing agent and I’m paying for the home buyer’s fee. It’s going to come out of that. So first time for the home, any home buyer, but first time home buyers, especially where we think about money available for things like a down payment, closing costs, things like this, they weren’t thinking about this fee.

Okay. On the front end. And so now we have this new piece, which is, Hey, we have to have an agreement upfront. It’s going to clearly outline what the buyer’s agent fee is that can no longer be on the listing. And the hope is we can negotiate [00:21:00] that from the seller, but I’m guessing you can tell us more here in a moment that, Hey, there’s going to be variances of this.

And depending on the market, there may or may not be more pushback. Right from the, the seller on this. So is this what you’re seeing? Like, are you expecting more of this? Like what you just had yesterday where, Hey, the seller is still going to kind of like days gone by pay for most of it, but we’re going to negotiate a little bit of that and now we got to put that on the buyer.

Nate Hedrick: Yeah. I think, I think this will be kind of the norm. I think you’ll see just more nuance to it of like, you know, let’s push back a little bit. Let’s adjust this number here. I’ve had some competitive bids where, uh, you know, there’s a lot of bids going into a house and the buyer’s compensation that the seller, that that was being.

Requested kept dropping, right? It’s, Oh, it’s only 1 percent for this offer. And ultimately it’s all money. Like if we take a step back, right, this was all baked in, even in the old way, it was all baked into the purchase agreement, right? If you were paying a 6 percent commission on a listing, like that was baked into the price.

Now it’s just very out in the open and it’s part of the negotiation. So it’s not [00:22:00] like it’s actually changed. It’s not actually more dollars out of the buyer’s pocket necessarily. It’s just out in the open and it’s a fully negotiated point.

Tim Ulbrich: Yeah. So if we just put some numbers to this, Nate, if we think about a 300, 000 home. Let’s say a typical buyer agent, I know some might be a little bit lower, but let’s say a typical buyer agent says, Hey, my fee is going to be 3 percent to you. First time home buyer. So if we get the home for 300, 000, that 3 percent would be 9, 000.

Now, if we can get that all from the seller, great. Nothing out of pocket, but if we can’t, let’s say the seller extreme circumstances, not nothing it’s on you. The buyer’s got to come up with 9, 000, or if it’s a variation. Like the one you just gave two and a half percent. Most of it would come from the seller.

And then a little bit is going to have to come out a pocket from the buyer. Do you, do you think most, I guess we’re assuming all agents are following the rules. Let’s start there,

Nate Hedrick: I hope so. God.

Tim Ulbrich: Yeah. But do you think a lot of agents in the instance you just gave where the seller says, Hey, we’ll do two and a half percent.

Um, that’s, that’s what [00:23:00] we’re going to negotiate. Do you think most agents are going to hold the line on their 3 percent fee and put that remaining point on the buyer? Or do you think people will start to discount? Their fees to not have the buyer. Can they do that

Nate Hedrick: So yeah, I think, so it’s, it’s, well, the, the, can you do it is very broker specific. So, so if you, if you kind of take one step back right behind me, like ultimately I’m representing my broker, right? So they’re actually the one that’s being paid when we close and then they give me a chunk of that payment.

So that 9, 000 or whatever we get, that actually, it goes to my brokerage office, first title office sends it to them. And then I have a contract with my broker for what my compensation from them is. I can only do so much in terms of like, well, just make it 1%. Like the broker is actually establishing these negotiated fees so that they can run a business, right?

It’s just part of, part of how that works. So that’s kind of part one. Um, there is, there is some adjustment that can take place. You could absolutely go back and say, you know what? Let’s renegotiate this. Everybody’s drawn a hard line in the sand that says that 0. 5 percent is going to be a deal breaker.

Like, okay, maybe we can work this out and waive some of the [00:24:00] compensation. Um, I think the risk for agents out there that is, is you could just start to dilute. You know, your work down so far that it’s not worth doing

Tim Ulbrich: the bottom. Yep.

Nate Hedrick: exactly. Um, so I think, I think it’s, there’s a lot of, of nuance to it. Um, but I do think we’ll see this continue where you’ll get this kind of negotiation on that, on that one to 0.

5 percent piece, uh, every single time.

Tim Ulbrich: One of the other things we hypothesized when we discussed this back in the summer was would this, or would this not disrupt the traditional. Right? So you, you gave the example of it’s a, it’s a percentage, right? Whether it’s a 300, 000, our home or 500, 000, our home, let’s say it’s 3%. Obviously that that’s very different dollars, right?

We’re talking about 9, 000 versus 15, 000 in that instance. Um, so we, we, we wondered, would we see a transformation to alternative fee structures, flat fee models, some hybrid things that might be out there. Are we seeing that or not yet?

Nate Hedrick: Absolutely. Yeah. They’re out there for sure. And, and we’ll even [00:25:00] 3 percent up to a certain cap or, you know, there’s ways to get around it, um, and, and make it more flexible because you’re right there, there. even in the old days, right? So, so higher end listings and higher end for Ohio, right? Like in like the 800, 900 million range that that’s higher end for Ohio.

Um, you would see that, that fee get diluted where, okay, it’s 3 percent up to 500, 000. Then it’s 2 percent of the next 200, 000 and 1 percent after that. So that you would see that fee come down as, as price points got higher anyway. Um, so yeah, I’m seeing people that are putting caps out there. I’m seeing people that are dropping their percentage based on it.

Purchase price. Um, I’m seeing, um, I’ve only seen a few of these and they’re not really taking off, which I think is interesting where people will do like a flat fee where it’s like, Hey, look, I am 1, 500 to negotiate a contract and I’m a thousand dollars per 10 showings or whatever the number is. Right.

And you can just agree to that upfront. And every time we hit 10 showings, you get, you’re going to pay me 2, 000 or a thousand dollars cash. And we’ll, you know, and it goes to my [00:26:00] broker. We figure all that out. So like there’s ways people are getting creative. I think that’s Not taking off yet, but I could see a world in which like someone looks at that and goes, that for me is what I want.

I want this a la carte option. I’m going to go with this person.

Tim Ulbrich: here’s my theory for why that’s not taking off Nate. And you can tell me if I’m wrong, cause you’ve got a lot more experience than I do is because so many first time homebuyers in today’s market may go searching and actually not find something. I don’t know if they’re willing to incur the costs to be empty handed at the end of it.

Right. Because the way the agreements are structured it with, with a 3 percent model, we got to get to the finish line before a fee is paid. Yeah. And now I would argue if I’m an agent, I’m doing work. I could show somebody 10 homes. And if they come up empty handed, like that’s unfortunate, but I just spent a lot of time showing them 10 homes and hopefully we’re doing it well.

And it takes an investment of time. So I can see both sides of the coin and the story, but I, I would guess in a different market than we’re in, that might take off a little bit more. But, uh, I, I [00:27:00] suspect many people might think about, Hey, I could spend a thousand dollars going to see homes. And then actually, actually don’t ever end up getting one for whatever reason.

Maybe there isn’t, isn’t enough inventory or they just change your mind. Right.

Nate Hedrick: no, I think you’re right. I think that’s probably, that’s probably right. I think that that may start to shift if, if people change their mind or if inventory changes, like you said, or if it becomes more of a buyer’s market, um, that may start to change, but you’re right. You could go to 10 showings, put in 10 offers and still get nothing because you know, the housing market’s crazy and you’re getting beat out on offers.

Right. So yeah, I, I totally see that.

Tim Ulbrich: We’ve talked a little bit about this, but I want to pick your brain some more. This, this to me adds a new layer of attention to detail that’s needed that I’m not sure if I think back to my first time home by herself and in 2009, come out of residency, like. Give me the documents. I’m signing the papers.

We’re buying the home, right? I don’t know how much I’m reading the details of it, but what’s in this agreement now, I think is really important information, right? So what should people be looking for in [00:28:00] terms of, of course, read it, but are there specific parts of these agreements or things that may vary from one agent, one broker to another, that, that might help them determine what’s a good fit?

Nate Hedrick: There are a few. Yeah. So the first one is to look for, uh, the actual compensation and how that’s delivered. Right. So, um, is it delivered at closing? Like, is it delivered, uh, you know, even if you don’t close on the house, like, so I’ve, I’ve seen agreements out there and we don’t do this, but I’ve seen agreements out there where if you bring a willing and able buyer and you.

They back out for a non contract reason. Maybe we get to five days before closing and you get cold feet and you’re just like, look, Nate, I can’t like I can’t. It’s too much. I’m done. They can have my earnest money. I don’t care. There are contracts that are built. I’ve seen these out there where the agent still gets paid legally.

They should get a compensation of 3 percent or whatever. for that deal because they brought a willing and able buyer. They were ready to close on house. The seller was ready to close and you screwed it up, right? So watch for language like that, that says how that payment is made and when, right? [00:29:00] Super important.

Um, also look for how you can get out of these agreements, right? So it’s a lot of stress to say, Hey, I want to agree to work with Nate or whoever, um, for six months, let’s say under a, an agency agreement, right? Whoa, I’m not sure I’m ready to commit. How do I get out of that? So our contract, our standard language in our contract is that if you notify me within 72 hours, like we’re done, only the houses that I showed you, are we, are we responsible for?

So I can’t like show you one, two, three main street. You write me a letter, say, Nate, we’re done. And then you go to the seller directly. Right? If I’ve showed you the house, we’re, we’re together on that. But if you were like, Nate, it’s not working out like this is how you can walk away. So look for what that walk away language looks like and make sure that you’re comfortable with it.

So those are the big ones that I, that I think can, can try to trip people up. Um, and then also look for the last pieces where that compensation is coming from. So again, the goal is to get it from the seller. Um, but it should be listed pretty explicitly in the contract that that is the goal. The way our, our contract is written, uh, it basically says [00:30:00] like we are trying to get this from the, the goal is to make this a piece of the commission or the piece of the compensation from the seller.

Uh, the goal is not to make the buyer just pay for it out of pocket. So I think that language is important to have in there just so you can be, make sure that the goals are aligned with, with what your goals are.

Tim Ulbrich: The time piece is really interesting, Nate, and I’m connecting some dots. Now I had a conversation with a connection through one of my boys baseball last summer that was bemoaning a, uh, by this must’ve been actually right after the implementation, probably late summer, early fall, uh, was bemoaning this relationship he was in.

I think he said a year. Um, and it’s just a really good example of the 72 hours, right? Makes sense. Whatever you showed them. There should be a, an agreement and understanding for it, but there also should be an opportunity to change relationship, change. Maybe it’s not a good fit. We thought it was a good fit, whatever might be the case.

And man, you don’t want to be tied up long term if you don’t have to. So I don’t know, maybe there will be some rules and stuff that come around that a while, but that to me [00:31:00] seems really a long, a year.

Nate Hedrick: Yeah. I think that typically what I’ll see is, and you’ll see this, you have like listing agreements, right? So it’s the same idea. Uh, and this has always been the case. This has been the case for years. If I list a home and I have 25 people that see it in a six month period, well, you can’t. And the listing agreement on January 1st and then on January 3rd, except an offer from one of the people that, that saw the house.

I get like six months after that. Anybody that saw the house, if I can prove that they saw the house when I was the one that’s trying to show it, then I’m, I’m due compensation. That’s always been there. And so I think that’s pretty similar. Hopefully that person wasn’t actually locked up to that agent for a year.

They were just locked to the listings they saw, but perhaps, I mean, that could be out there.

Tim Ulbrich: Oh yeah, that’s true. That might’ve been it. Hopefully, uh, he was not happy. I remember that.

Nate Hedrick: I can, I can imagine. That sounds awful.

Tim Ulbrich: So Nate, I’m a prospective homebuyer listening, um, you know, um, I want to be in this crazy market at some point, maybe in the spring or summer, when is a good time to be thinking about looking for an [00:32:00] agent to begin that, that home buying search, that home buying journey.

Nate Hedrick: Typically I recommend three to six months before you think you’re sort of ready to buy a house. Like if you can see yourself, if your lease is running out in June, January or February is your time to start talking with agents and start that process. Um, just to kind of work backward, right? Like if you have a goal of like, Hey, we want to be moved in by.

The fall for the school district. Typically, you’re going to have a 30 to 40 day closing, right? So you got to work backward from that. And then you could have anywhere from a week to five months of looking for a house, right? It depends on your market and what the kind of averages are. So building in that.

three to six month window, make sure that you have a pretty good chance at getting everything done in time. Um, longer than that, if you’re, if you’re a year away, you’re probably looking too early. Interest rates are going to change. The market’s going to change. Um, you’re just going to be wasting you and your agent’s time if you’re looking at that stage, but that three to six month window tends to be kind of the sweet spot.

If I, if I, [00:33:00] based on my experience.

Tim Ulbrich: Yeah, Nate, as we’ve talked about before on this podcast and in other webinars, like the, the, a good real estate agent can, can be an important, not just team member, but the quarterback of the team, right? There’s a lot of questions that can come, uh, in the home buying process and that individual, especially with good experience can help you navigate a lot of those.

So we really believe this is one of the first puzzle pieces of the puzzle, not the first piece of the puzzle that we have to put in place, which is a good segue in to talking about the real estate RPH concierge service. Many of our listeners, if they’ve, if they’ve heard the show before, know that we’ve had the opportunity to partner with you now, five years, six years, seven years, and, uh, we, we love what you have done to help pharmacists, home buyers all across the country.

And you’ve actually had on a couple of previous buyers that have worked with you on the show, and we’ll link to those episodes in the show notes. If people want to get a feel for what that is all about, whether someone lives in Cleveland, in your backyard, in my backyard, in Columbus. Tulsa, Oklahoma, you name it across [00:34:00] the country.

The goal of the concierge service is to get them connected with a local agent that is a good fit, not only a good fit in that agent relationship with that buyer, but that also then has you in their corner and with them along the process, uh, throughout the home buying journey to help hold their hands.

So tell us more about that concierge service, whether it’s a first time home buyer, second time home buyer. Investor. It applies across the board.

Nate Hedrick: Yeah, I mean, you nailed it. The goal is really take the guesswork out of this process, right? We’re talking about all these interviews. We’re talking about it. It’s a lot of steps and a lot of things to figure out. And when I first did it, especially, uh, as a first time homebuyer, I had no idea what I was doing.

Like, and I don’t know if a 30 minute podcast is enough to like make me an expert on interviewing real estate agents. Right? So, so we said, why don’t we develop this service? It’s completely free. It starts with a 30 minute phone call with me. We’re going to go through and answer any questions you have.

Okay. figure out your goals, look at your budget, figure out where you want to buy, like what kind of property you want to buy, all those important questions. So we can narrow in on [00:35:00] what is going to be the right agent fit for you. Then we’ll go out and either connect you with one of our network agents, people we’ve worked with in the past that we’ve vetted, that we know have really good backgrounds and are working with clients right now.

Um, and either connect you with one of them or we’ll interview agents on your behalf until we can narrow down to somebody we think is a good fit. You move on, you work with that agent, you can either, Stick with them like we’d recommend, or if it’s not a good fit, come back and we can, you know, redo the process, right?

That only happens a fraction of the time, but we’re, you know, you’re not locked into anything. The goal here is to make this a great process. And so that’s, that’s kind of how we, how we build it. So completely free service. Uh, the idea being that it just takes the guesswork out for everybody.

Tim Ulbrich: So you can find more information on that real estate, rph. com. Uh, you can get to Nate’s website, get connected with him. You can also send us an email at any time info at your financial pharmacist. com. And just say, connect me with Nate and we’ll help make that introduction. Uh, as well, and, you know, Nate, I, I’m thinking about the [00:36:00] small percentage of people that are listening in Northeast Ohio, which obviously have you in their backyard.

That that’s an easy win, but to clarify again, it’s really the intent is no matter where you live in the country, uh, that, that Nate can be alongside of you to help you, uh, engage and find that agent, which is we’ve outlined in this episode today. All the more important in evaluating agents, making sure that’s a good fit in the context of the new, uh, buyer agreement.

So again, real estate, rph. com. You can get more information or send us an email info at your financial pharmacist. com. Nate, as always really appreciate your experience and, uh, the perspective you give. Thanks so much for coming on.

Nate Hedrick: Tim, thanks for having me on the show.

[END]

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YFP Real Estate Investing 132: Rent vs Buy: Does Buy Still Make Sense?

Posted on by YFP Media

Tim Ulbrich, YFP CEO talks with Nate Hedrick, PharmD and David Bright, PharmD as they break down the rent vs. buy dilemma in today’s market, tackling equity, flexibility, financial strategy, and key market insights.

Episode Summary

Tim Ulbrich talks with real estate investors Nate Hedrick, PharmD and David Bright, PharmD as they dive into the rent vs. buy decision in today’s housing market, offering practical insights and real-life experiences. They explore the financial benefits of both options, the role of equity, and the flexibility renting provides. Their discussion highlights the importance of understanding local market dynamics, strategic use of home equity, and aligning decisions with personal and financial goals

Key Points from the Episode

[00:00] Introduction to Rent vs. Buy Discussion
[05:00] Market Perspectives: Optimism vs. Pessimism
[09:58] Analyzing the Rent vs. Buy Decision
[14:48] Benefits of Renting: Flexibility and Cost
[20:09] Understanding Equity in Homeownership
[25:02] Leveraging Equity: HELOC and Financial Strategies
[24:30] The Stability of Homeownership
[27:16] Navigating the First-Time Homebuyer Dilemma
[30:19] Starter Homes vs. Forever Homes
[32:13] Understanding Micro Market Dynamics
[34:44] Defining Your Vision for Homeownership

Episode Highlights

“ If you were buying in 2020, 2021, you looked like a genius if you sold the house a year later because the property values were just skyrocketing so quickly. That is not going to be the case anymore.” -Nate Hedrick [8:50]

“ We have to remember that not any decision should be one that we look at in a silo. So we can run the numbers on a rent versus buy and maybe we have a clear answer. But then when we zoom out, things might change.” -Tim Ulbrich [11:34]

“ There’s a big chunk of cash right there that we’re then locking up right into that home. And that could be very valuable, but also there’s an opportunity cost that we have to consider where those dollars could be used elsewhere in the plan.” -Tim Ulbrich [18:03]

“ You can’t paint an index fund to make it worth more, but you could paint your house to make it worth more, right?” -David Bright [26:06]

“ Renting is not always bad. And if we’ve been told that story, like. I think we need to unwind that a bit.” -Tim Ulbrich [35:34]

“ Take your time to assess what you want and then assess it for yourself. Like, don’t listen to what your best friend is saying, or the guy at work who is frustrated with his rental properties. Figure out what you want to do. Figure out what works for your local market, investor or buyer and then make a decision based on that information.” -Nate Hedrick [37:43]

Links Mentioned in Today’s Episode

YFP Real Estate Investing 131: Revisiting Our 2024 Projections and Looking Ahead to 2025
NY Post Article “Here’s how much more a single-family home costs to buy than rent”
Real Estate RPh Concierge Service
NYT Rent vs Buy Calculator
YFP YouTube Channel
Subscribe to the YFP Newsletter
YFP Disclaimer
YFP Real Estate Investing Facebook Group
Nate Hedrick on Instagram
David Bright on Instagram
YFP Real Estate Investing Website
David Bright on LinkedIn
Nate Hedrick on LinkedIn
Tim Ulbrich on LinkedIn
YFP on Instagram
YFP Facebook Group

Episode Transcript

Tim Ulbrich: David and Nate, welcome to the show. Hey, always good to be here. Thank you. I should have said welcome to your show, uh, as, as I’m having a chance to, uh, take the mic and, and pick your guys brain on an important topic, rent versus buy. And really excited to talk about this since it’s a topic we’ve talked about at length before in various shows, but today’s market adds a, as a whole new wrinkle to how we think about the rent versus buy decision.

Your last episode, 131, we’ll link to that in the show notes, revisiting your 2024 projections, looking ahead to 2025. Now that we’re two weeks into the new year, anything you guys feel the need to correct on your projections, or you still feel good on what you’re thinking for 2025?

David Bright: I guess I’ll throw out there, I’m, [00:01:00] I’m cautiously optimistic, uh, and I would say, I, I can’t be a pharmacist to not be cautious, right?

So that’s just how we roll. So I’m cautiously optimistic that there’s opportunity out there. But I think one of the things we, we talked about in the last podcast is just really knowing your numbers, really being intentional, just double checking your math. And that’s something that pharmacists are good at.

So if you can be disciplined in doing that work, I think there’s still good opportunity here in 2025.

Nate Hedrick: Well, I’ll take the flip side. I’m cautiously pessimistic at the moment. I just ran numbers on like 20 deals just this past week and none of them worked. And I just, I’m in a funk right now. So I’m going to, I’m going to play the bad guy card.

I I’m sure it’ll, it’ll figure itself out. But I was like, I was bummed last week. I was looking at just dough van. It was like, I got to find something here and nothing worked. But that’s, that’s just how it goes sometimes.

Tim Ulbrich: We caught Nate on the back end of running some numbers that didn’t work out. Didn’t work out,

Nate Hedrick: but that’s all right.

You got to run like a hundred deals before you have like two or three you can offer on it. Just how it goes. So I had [00:02:00] a bad week. That’s okay.

Tim Ulbrich: If we get more specific, I’m curious to hear from both of you guys as investors that have experience in several different types of real estate, buy and hold, fix and flip, syndications.

You know, how are you looking ahead to 2025? I know, David, you said cautiously optimistic, Nate, cautiously pessimistic, but is there, is there pockets or things that you’re excited about or things that you’re like, I’m kind of staying away from, from this in 25, David, let’s start, start with you.

David Bright: Yeah. I, I think that just from, from talking previously on the show, I, I really enjoy the fix and flip and the single family rental.

Like I feel. Most experienced and most comfortable in those two spaces. And so I think that the single family rental still has opportunity. I think there’s some real difficulty with that traditional 1 percent rule where. You, uh, you can generally think of a house as a viable rental if you can make 1 percent of the purchase price of that house as a, as a monthly rent [00:03:00] figure.

And you know, people have debated the 1 percent rule for forever, and some say it should be higher or lower than that. But at least that, that gets you in the ballpark of if it’s time to do. What Nate did in doing the more complex analysis from there to see if it really, really works, but that kind of just quick litmus test might, might be helpful.

And so I was really excited that we found one this morning and then I got beat on the offer. So we, uh, we didn’t get it, but, um, yeah, I think, I think that those opportunities are going to be out there. I think that they’re just, they’re going to be more difficult to find, but I still think that there’s a need, particularly in an overarching housing shortage.

For good, respectable, safe, single family rentals.

Nate Hedrick: I think you’re right, David. I think the trick is going to be finding those like diamonds in the rough. You kind of have to find something that needs some work. Um, like I said, I was just running numbers and everything that was like even vaguely move in ready, just like the prices were just through the roof and with interest rates where they are.

Uh, we just had a tax increase here in Cuyahoga County. [00:04:00] So they did the, um, every six year, like reassessment. So like property taxes are up for market value. And so I think all those things are kind of running into each other at the same time, and it’s just making the numbers really tight. And so you have to have something where you’re going to be able to put dollars into it, inject value, and then you can get it out on the back end.

Tim Ulbrich: Funny, you mentioned property taxes, Nate here, fresh on my desk. I got our, uh, notice, uh, yesterday and I was reflecting on the increase. And related to our discussion today, right, you know, the, the fixed 30 year mortgage at 3%. Great. I’ll take that all day. Uh, the escalation in property taxes that we’re seeing here, both with our primary home and our commercial property up in New Albany is, is wild.

Um, and you know, I, I think it’s just one of those factors that we think about when we discuss, you know, should I buy or should I rent is. You know, do, do we have some of that margin, right? That we’re going to have these increases in utilities, in property taxes, in upkeep and [00:05:00] maintenance and so forth. And, and I bring that up as a challenge to our community, where I think for many pharmacists, they might, you know, see somewhat of a flattening of that income and those expenses can be felt more over time.

And so we need to constantly be asking ourselves is, Hey, is our income keeping pace with these are hopefully beating, but at least keeping pace with some of these expenses that are going up. Over time. So let’s transition into our discussion for today. Buy versus rent. Again, an age old question with a new wrinkle and that new wrinkle being today’s housing market, the economic environment that we’re in, you know, I often hear David and Nate from pharmacists, especially if I speak to a group of pharmacists that are maybe just coming out of school, you know, where there’s that blanket advice from mom and dad, right?

Which is like always buy rent, destroying money down the drain. You got to build equity. And David, you sent over an article from the New York Post that we’ll link to in the show notes that I think it’s just challenging this question again in today’s environment and in today’s uh, interest rate environment and the housing shortage that we have.

And so before we get [00:06:00] into specifics on the value of buying versus the value of renting, I want to get both of your perspectives. Nate is a realtor, also is an investor, and David is a buy and hold investor. On what you’re seeing out there in the market related to this buy versus hold in today’s And today’s climate, Nate, let’s start with you.

Nate Hedrick: Yeah, so I, again, like you mentioned, I, as a realtor, I’m going to be a little biased on this. Um, but I have some numbers behind my bias, so maybe that’ll back it up. But, but generally speaking, uh, if you’re going to be in a place for, uh, a longer period of time, and I would define that as, as a couple of years or more.

Generally speaking, it’s going to be better to, to buy, right? You’re going to be able to mitigate some of those costs. Um, and of actual purchase price, right? Like the, the loan closing costs and the taxes and things like that. Um, with the appreciation that houses is likely going to see over time. Um, shorter than that, I still think it’s, it’s viable to rent.

I will say like typically if you’re going to be there for a shorter period of time, the renting can be [00:07:00] better because the price can be lower. But what I’m seeing now is that rent prices have gone up so much that even that is starting to fall away. And where you could have a situation where it actually might be better to buy even if you’re only going to be there a year because you can hold on to it, rent it out when you’re done or sell the property later when you’re done and it actually might be a wash at that point.

So that, that timeline for me in, in, in our target market here in, in, you know, Northeast Ohio, um, has really kind of shifted down. I know that’s not the case in higher cost living areas, but rent has just gone up so much that it’s making it, it’s making it harder.

Tim Ulbrich: Nate, as we see appreciation starting to come back closer to historic norms, right, we had a, uh, massive appreciation, you know, I think about post pandemic and, you know, that changes the decision of, of maybe how long you have to be in a home before you can break even when you think about closing costs, fees, taxes, et cetera, as we see that appreciation level returning more to quote normal, Yeah.

Yeah. Yeah. Does that impact how you think about the timeline at all in terms of being at home to [00:08:00] break even? Yeah.

Nate Hedrick: I mean, absolutely. Right. You have to kind of factor that in. But, uh, I think that, so it’s funny, you mentioned the getting your property tax bill. So like I said, here in Cuyahoga County, we do it every six years where they’ll reassess your home when it, when it transfers.

And then if you’re sitting in that house, they’ll reassess all the houses every six years that have just been kind of sitting there, not selling. And in our market, the lowest. City like municipality increase was 22 percent the highest markets were closer to 70 percent increase in market value 70 percent all coming at once right every six years, right?

So they’re just hitting everybody at one go. And it’s just, I mean, it’s a huge, huge increase that’s taken place. So I think, like you said, that has shifted down, right? We’re not nearly that crazy. I don’t think we’re going to see that level of crazy over the next couple of years. So it does impact that, right?

You can’t just, uh, David and I have talked about this on the podcast in the past, that if you were buying in 2020, 2021, you looked like a genius if you sold the house a year later because the property values were just skyrocketing so quickly. That is not going to be the [00:09:00] case anymore. But even despite that, you’ve got to weigh that with how rent prices have increased because that’s the, that’s the flip side of that, that decision.

And we’ll come back

Tim Ulbrich: to this in a little bit, but I think it’s important because when we hear things like, Hey, buy a house because you’re going to build equity, certainly when we zoom out over a long period of time, history would tell us that that’s true. And in fact, many people, uh, the data suggests that they’re building their wealth and part of the retirement plan through their home value going up over time.

Now, I don’t think that’s necessarily the case for many of our listeners that are probably saving substantial amounts outside of that. But what we have to remember is there’s a difference between equity and cashflow today. Right. So, you know, I, I’ve seen, uh, we moved into our house in 2018. We bought it for three 45, five, it’s funny how you never forget the numbers, right?

Certain numbers, uh, three, three 45, five. And I think last I checked, you know, Redfin or whoever says, Hey, it should be worth, you know, five, 10 or whatever, whatever the number is. That’s great. But guess what? My property taxes are coming up today. That impacts the budget today. [00:10:00] The equity, unless I’m borrowing against that equity to leverage and use it elsewhere in the financial plan.

I don’t feel that equity. You know, right now, so we have to also consider that in the decision, David, from a buy and hold investor perspective. How are you viewing the rent versus buy debate in today’s market?

David Bright: Yeah, I think it’s going to be very, very market specific is Nate. You gave some great examples of Cleveland area and what it’s looking like there.

Um, I was talking with someone else in a different market and they were saying that to buy their house would be about 3, 000 a month and to rent their house would be about 2, 000 a month. And that’s just the house payment. So not, not counting the furnace that’s going to go out, the roof that’s going to need replaced the, even if you just want to do paint and flooring, like just paint and flooring can be really expensive in a house too.

So with those kinds of considerations there, when they were describing that they probably only want to be in that house a couple of years while they get to know the area better and find their more forever [00:11:00] home, it started to make a lot of sense to. to rent instead of buy in that, in that market because of that spread on the monthly cost.

And Tim, to your point about the monthly budget, allowing you to save up for that down payment for that eventual, uh, forever home. So I think that it, I think that the market specifics are really going to play into this decision for different people based on what the rent looks like in the area versus what a monthly mortgage payment would look like.

Tim Ulbrich: Yeah. The other thing I would add to this discussion is I think about the work that we do at YFP and looking holistically at the financial plan. We have to remember that not any decision should be one that we look at in a silo. So we can run the numbers on a rent versus buy and maybe we have a clear answer.

But then when we zoom out, things might change. What else do we have going on, right? Are we, you know, looking at student loans and for someone who’s pursuing a loan forgiveness pathway versus an aggressive repayment, two very different strategies and impacts on On a monthly [00:12:00] cashflow. So as we look at the rest of the plan, you know, what else do we need to be saving?

Are we on track for investing in retirement planning and all the other goals that we talk about, how does this home piece and within that, the decision to rent versus buy fit within the broader context of the financial plan. And that’s so important because when we feel this pressure, you know, to buy, and if someone’s telling us, buy, buy, buy, maybe that’s the right move.

Maybe it’s not. Um, but. Are we looking at it in the context of, of everything else that’s going on as well. Let’s talk more about the potential benefits of renting. Nate, we’ve been alluding to the importance of flexibility, um, as we’re having this discussion, especially in today’s market where moving can mean significant transition expenses.

When we talk about the cost of transition, the cost of moving and why that timeline piece is so important. What are we actually referring to here in terms of these costs?

Nate Hedrick: Yeah, I think, I think you said it perfectly, like flexibility is, is [00:13:00] that, is that piece, right? Because if you buy And you are locking yourself into that home, right?

Like we said, if you want to get value on it, if you want to make a financial decision, you have to be able to, uh, uh, sell it at a certain period, or you have to be able to rent it out and make it viable, or else it’s going to be this, this handcuff that you’re kind of stuck to if you, if you end up having to move.

If you go the rent route, you build in that flexibility. You let yourself be able to make a change much more rapidly. I’ll give you a perfect example from my own real life. My brother lives out in California and bought a house a couple of years ago. Loves it. Great house. Fantastic. Um, but decided this summer like, Hey, I want to take some time.

I can work from anywhere. I work for a tech company. I want to like travel to Europe for a couple of months. And I want to live in Japan for a while. Well, there’s a whole house that he has to like figure out what to do with, right? He has to rent that out, get someone to take care of it, make sure the lawn is cut, make sure that, you know, if there’s a storm, the solar panels haven’t flipped off the house or there’s a lot that goes into that, that just really brings down your flexibility.

So I [00:14:00] think in today’s day and age where people are, are looking for that, where their jobs are more flexible, they’re, they’re changing jobs more frequently. They. Are doing things like a sabbatical, I think buying a house actually locks you into something that makes it just a little trickier to do that.

And so when you’re talking about like, Hey, I might rent just because financially I’m going to lose a couple hundred bucks a year or whatever, but the flexibility is worth my, my peace of mind, like that’s a completely viable option. Yeah,

Tim Ulbrich: I’m especially thinking about the people that might be in a known state of transition, right?

You know, I’m coming out of a residency or coming out of the fellowship. You know, sometimes we have this idea and, and there’s no judgment here. I remember having these feelings as well, where it’s like, Hey, we’re in an area and we’re going to be here forever. Well, like that changes, right? We thought we’d be in Northeast Ohio, uh, forever.

And then I realized I can’t listen to Brown sports radio anymore. It’s atrocious how depressing it is. So like, we got to move, we got to move to Columbus, right? Um, but that was a move I would, we would have never anticipated. [00:15:00] Now, thankfully we’re in that home long enough that, you know, we mitigated the costs of that transition, but.

Sometimes what we think is known may become unknown, and you know, that flexibility piece is a really important one that we have to consider into the equation. Now, on the flip side of that, we’ll talk about how one of the big values, I think, of having a home is just that sense of stability and community and being in a place that we often can’t put a number to.

Um, and so that, that flip side has to also be considered. David, beyond flexibility, what else comes to mind when you think about the potential benefits of renting?

David Bright: Yeah, I think the the dollars and cents really ring true like if I put on a fix and flip hat I tend to budget Whatever the sale price is, I’ll walk away with 91 percent of that, that I, I tend to figure 9 percent of the final sale price will go to, uh, realtor fees and transfer tax, closing costs, and some of those things, and that percentage is going to be different at different price points and different [00:16:00] markets, uh, but, but that can give you a ballpark figure to think about, and in addition, when it’s your own house that you’re living in, if you’re going to hire movers, if you’re going to Buy different furniture in a different house.

There’s a, there’s a lot of costs there. So I think that plays into the flexibility piece of if this is a temporary house, then that starts to make me nervous from what those costs are going to be. I think another factor might also be the timing of all that. So if you buy a house and you’re thinking of like Tim, your equity example is fantastic.

Like how much equity has gone up. And then I think a lot of us tend to think, well, that creates great equity as the down payment for the next house. The issue being then you have to sell the first house to unlock that equity. It’s, it’s trapped in that house until it sells. So it creates this timing issue of you sell to access those funds to put down in the next property, or you need to be saving for that as well.

So I think the dollars [00:17:00] and cents bring some, some complexity to that. Yeah.

Tim Ulbrich: And, and I harped on this a little bit, but I’m going to go back to it because I know so many of our listeners can resonate with this. And it’s something that Jess and I felt in our own journey that they might see their net worth trajectory going in a very positive direction, but they don’t feel that they don’t feel that right.

Because often it’s, it’s, it’s net worth that might be locked up in equity in a home or it’s net worth that’s locked up in a 401k or an IRA. So part of the financial planning process is when we’re making some of these decisions There’s an important liquidity piece as well that if we want to find this balance between growing and building our net worth for the future, yes, it’s important, but living a rich life today also important part of living that rich life today is having some liquidity and flexibility to do things, the things that we want to do, um, and sometimes not always market specific.

Sometimes renting might give us more of that flexibility, um, and allow us, especially when we think about if we use a traditional 20 percent [00:18:00] down on a home. Now, I know a lot of pharmacists may not necessarily do that. There’s a big chunk of cash right there that we’re then locking up right into that home.

And that could be very valuable, but also there’s an opportunity cost that we have to consider of where those dollars could be used elsewhere in the plan, whether it be other goals or experiences or other things that we haven’t touched on. I also think about from, from our experience, we rented a condo.

Uh, I know Nate, you’ll know where this is. Monroe Falls, uh, was our first rental. Um, and there was significant savings on time and money on upkeep and maintenance. Um, you know, someone took care of the property. I think about the amount of time in our current home, whether it’s hiring contractors or dealing with downed trees or, you know, taking care of the lawn and, you know, we can’t grow grass because the kids are playing and whatever it is, like there’s a lot of things that we have to factor and consider that’s both time, mental energy and financial related.

And so that could be one of the other, uh, benefits potentially of, of, of renting that we need to be [00:19:00] thinking about. Let’s turn the page and look further at the benefits of buying. So Nate, the one that typically gets the most attention, we’ve, we’ve mentioned a few times now is building equity, building equity, building equity.

We throw that term around a lot. What, what does that even mean? And does it really matter as much as we think it does, especially as we’ve been talking about this question of liquidity?

Nate Hedrick: Yeah, it’s, it’s actually a good thing to like take a step back on. Right? So, so equity by definition is just the, the, the intrinsic value that’s sort of like left in the house.

Right? So if I buy a hundred thousand dollar house. With 20 percent down, right? I’m putting 20, 000 into it. Uh, and, and 80, 000 loan. Well, over time, I’m paying down that loan, right? I’m paying down the balance and hopefully the property is also going up in value. So, let’s say we’re five years down the road and it’s worth 150, 000 and my loan balance is down to 75, 000.

Well, now I’ve got 75, 000 in equity, meaning if I were to sell the house today, That’s the difference in value that I’ve sort of created for myself. [00:20:00] Uh, some of that is, is the original down payment that you put in. Some of it is appreciation. Some of it’s loan payoff. But all those things are basically increasing the buffer between what you owe and what something might be worth.

Now tapping it is, is there’s lots of ways to do that, right? We could sell the house to get that money back out, to get the equity back out. Like David said, we’re going to lose some of that to fees and things like that. You could also refinance, uh, but you can’t usually tap all of that equity. Just like when you put down 20 percent to purchase a home, when you refinance to get either a HELOC or do like a cash out refinance or something like that, you have to leave some of that equity in the property as collateral for the bank.

So they might do Uh, 90 percent loan to value, meaning that they’ll give you 90 percent of that 150, 000, but you got to leave that other 10 percent locked into the property. So we can tap that equity in multiple ways, or like you said earlier, Tim, if you just kind of sit back, right, and do nothing, uh, that equity is sort of stuck in there, right?

You might see [00:21:00] that on your net worth balance sheet, but you’re not putting it into your pocket if you’re just kind of sitting back. So. So equity is this thing, this kind of elusive thing that you really only see when you go after

Tim Ulbrich: it. Let’s talk about the leverage of the equity a little bit more, uh, when we think about something like a HELOC.

So what Jess and I have done Pretty conservative, probably overly conservative is we’ve taken out a HELOC and, uh, probably time to increase the HELOC just with what’s happened with appreciation. Um, but we’ve never drawn on it. So I kind of view it as a, as a backup to a backup of an emergency fund, or if, if the right opportunity comes up, whether that be real estate or business or something, uh, where the calculated risk makes sense.

Obviously that calculation has changed just given the interest rates on the HELOC. Then it’s there, right? And we have access to it, uh, when, when we need it, I think both of you, correct me if I’m wrong, have used a HELOC before it actually leveraged that in terms of real estate transactions and kind of getting some of that off the ground.

Can you speak to that a little bit [00:22:00] further? And that may or may not be right for other people, but it’s, it’s something to consider of, Hey, we’ve got this equity building and maybe want to be more conservative. That’s just a tomorrow thing. It’s part of the retirement plan, or maybe there is an opportunity to leverage it today.

Nate Hedrick: Yeah, I’ve done it myself and I’ve had investor clients do it as well where they’re using that HELOC for either, uh, purchasing the, the property itself or doing the rehab. Um, we use ours most recently on a rehab where we actually tapped the HELOC to help fix up a house. Um, and then once we refinanced, they immediately paid that off, right?

The, the advantage years ago was then you HELOC at three and a half percent. It was like free money essentially, right? Now ours is closer to prime. Um, I think ours is most recently a credit score got us down to like prime minus, which is really cool. Um, but it’s still like 7 percent on the HELOC. So, uh, you can tap that money and use it for whatever you want.

It’s, it’s, it’s free cash, but you’re paying 7 percent of that every single year. And so you have to, you have to keep that in mind. So, um, yeah, it’s a completely viable option. But [00:23:00] the, David will tell you this every single day. You have to have a plan for that because if it just sits there. Now, all of a sudden you’re losing money by, by tapping that because you got to make sure you’re, you’re making up the difference in the, in the value that you’re, you’re adding with the money that you’ve taken out.

Tim Ulbrich: It reminds me of one time my dad shared with me, uh, you know, when it comes to a business, line of credit’s a really good thing if you have a plan. Line of credit without a plan, not a good thing. Yeah. Right. I think a VLOC with a plan, because what I hear you saying in that example is, Hey, even if it’s seven, seven and a half percent, whatever it is now.

If you’ve run your numbers, you’re, you’re just factoring that into the equation. And by the way, if something changes, a delay or whatever, you’ve got a backup plan and, and, you know, are able to work through that. So David, what about, what about for you?

David Bright: Yeah, I, I love the emergency fund philosophy for it also, because I think particularly as you get into real estate investing, emergencies can get bigger.

If something goes wrong. And I think as you are buying a house and making some of these bigger life decisions, emergencies get bigger than what [00:24:00] they may have been prior to that level of complexity in your world. So when you have, uh, kids growing older and multiple cars and, and all kinds of things like that, I think it, it.

Can help me sleep at night as the conservative pharmacist, just knowing that there’s access to that kind of money and that kind of liquidity when necessary.

Tim Ulbrich: Yeah. And I think in theory, everyone’s risk tolerance was different, but it does open up the door, you know, to take some more calculated risk in other areas.

When you know, you’ve got that as, as a backstop as well, David, in addition to building equity and, and potentially leveraging that equity, what, what other benefits of buying come to mind for you?

David Bright: I think one huge thing that’s, that’s hard to put down in dollars and cents is just the stability of that house.

And so if you’re looking for something in a specific school district, in a specific area, part of town, something like that, if you’re renting, depending on the, the laws in that state, once that lease is up, you may need to move [00:25:00] whether you’re ready to or interested in moving or not. So. Uh, that’s, that’s a potential complexity.

So the stability because you own it and you can stay there as long as you reasonably want to is, is something. There’s some predictability in that as well with the, with the payments. I think what we’ve talked about already with property taxes is a really good asterisk on that equation. I think another one that I think is gonna, I think we’re already seeing headlines and I think we’re only going to see more headlines on it is.

Property insurance as well has gone up quite a bit. And as we see things like, uh, like the fires in Los Angeles and things like that, there’s some really significant expenses coming up. And if that continues to drive, uh, property insurance up, then. You know, we need to budget for those kind of increased costs.

So, but at least some predictability on the principal and interest payment on that loan. Um, plus I think that one of the things we’ve, we’ve talked about too, is when your different [00:26:00] investments allow you different opportunities to, to push those yourself and, you know, Maybe what we’ve talked about before is you can’t paint an index fund to make it worth more, but you could paint your house to make it worth more, right?

So there’s some opportunities, whether it’s hiring a painter, whether it’s doing the sweat equity yourself of getting in there and taking a property that’s not all that pretty, but by making it pretty and nice, you can, you can increase the value to even if you’re not, uh, the handiest person on earth.

Tim Ulbrich: Yeah, I love what you said about the predictability, at least on the principal and interest side, assuming it’s a fixed rate mortgage, um, you know, while also recognizing we talked about property taxes. You gave another good example, homeowner insurance. That was one of those bills I got in December. We pay it once a year where I was like, what percent increase, what are we talking about?

Yeah. Right. And we need to remember the way insurance works, right? Natural disasters in Florida or natural disasters in California. Have a far reaching impact from an insurance standpoint beyond just those areas, you know, and I think we’re seeing that happen [00:27:00] in terms of, of premium increases. I want to talk to our first time homebuyers, Nate, and let’s start with you, you know, this is a question I get a lot, which is, hey, we’re looking at buying a home, maybe we’ve been sitting on the sidelines.

We’re wondering, right, do I keep sitting on the sidelines? I was hoping rates would drop in, in 24. Maybe we saw that a little bit. Rates trending back up ish. I think we’re hovering back around 7%. Do I wait? Do I make a move? We’re talking about long term appreciation, you know, obviously there’s a, there’s a shortage of housing.

We’ve got lots of buyers in the market that pent up demand is only going to potentially get worse. What, what, what, what words would you have to share to those first time home buyers?

Nate Hedrick: Yeah, I get this question all the time. In fact, I just had a brand new pharmacist client that, uh, is going to start looking here in Cleveland.

And the last question she asked me as we were kind of going through like our buyers presentation was, uh, is it, is it actually a good time to buy? Like, should I be doing this right now? Right. And that question comes up all the time. And I think it’s a really hard thing to answer because Baker says it great [00:28:00] on the podcast all the time, right?

Like trying to time the market is really difficult. Time in the market is better than timing the market, right? And so it’s the same with housing. It’s a very difficult thing to say, well, this is the perfect time because prices are blah, blah, blah. And interest rates or whatever. It’s a very difficult thing to get, to get right.

Um, so what I would say is if you are in a market where things continue to appreciate. Right? And most markets are that way right now. Uh, Every month you wait, is more down payment you’re going to have to find, is more house payment you’re going to have to make down the road, right? If things continue to go up.

Now, if things pull back and things, things decrease, like that’s a different story. But what we’re seeing is that as these appreciations continue to go up, people are like, well, I’ll wait because then my payment will be lower when the interest rates are lower. The payment is actually going up because the houses have gone up and the price they have to spend has gone up.

They could always refinance down the road if interest rates come down, uh, but you can’t change the housing costs if, if [00:29:00] appreciation continues. So I would love to say, just sit on the sidelines until all the housing prices come down. Um, but what I’m seeing is that there aren’t a lot of market factors.

There’s a housing shortage right now, right? And so there aren’t a lot of market factors that seem to indicate housing prices are going to come down dramatically. And so waiting doesn’t really seem to be a benefit at this stage. I just, I just, I don’t see the point in that quite honestly.

Tim Ulbrich: And the number of buyers sitting on the sidelines is compounding now, right?

So, you know, I think we’re, we’re obviously dealing with a competition piece that’s there as well. And, and Nate, I’ll put a plug here because the timing’s good in terms of what you’re doing with the real estate RPH and the home buying concierge service. So if we have folks that are listening and saying, Hey, I’m wondering.

Uh, about, you know, the home buying decision, whether you’re in the mix right now or thinking about on the horizon. Uh, we’ll link to, uh, Nate’s website, real estate RPH on the show notes, but, uh, be a great chance to get connected with Nate and have that conversation and, uh, find an agent that would be a good fit for you.

David, what are your thoughts from, from the, uh, investor perspective?

David Bright: Yeah, I think [00:30:00] that a lot of this discussion depends on what you’re buying. So I know it’s really tempting the brand new grad getting out of school first job with a real paycheck where you can buy like brand name mac and cheese instead of generic mac and cheese.

Let’s go. All those like big life changes. I feel like that’s the point at which a lot of pharmacists want to find their forever house right away. Um, and I think we’ve talked about some of those risks of job changes and life changes and things like that, where that forever house that you think you want it at, you know, 25 may not really be that forever house.

So I think that there’s something in there about, uh, if, if you’re, if you’re looking for more of that starter home, that creates so many more options because it’s probably at a lower price point. It’s probably going to then have a lower down payment, lower monthly payment consideration. And one thing that we’ve.

We’ve kind of hinted at, but we haven’t really said out loud yet, is the opportunity to, to buy that house with the intention of it being a rental and you’re really just thinking of it [00:31:00] as renting from yourself, retaining it as a rental down the line. You may find the best of both worlds though, where you’re thinking of it as, as a rental.

This doesn’t need to be my forever home. This doesn’t need to be the home that I’m truly in love with. But this is as good, if not better than somebody else’s rental. Instead, I can be the landlord and I can have that stability. And then when I’m done with it, it can be a great investment when I go buy my forever home.

So I think depending on what you’re looking at, it could be a, a really good time to jump in. That’s

Tim Ulbrich: a really interesting perspective, David. And I think just some of the pre planning that would have to be done to go in with that mindset. And then also thinking about certain associations, rental restrictions, other things, making sure you’re buying with that in mind, if that’s the goal and looking accordingly.

One other area we have to talk about is the micro market considerations. We’re talking global trends here. Um, I always think about Ramit Sethi on his podcast. He lives in New York city and he’s like the rent, rent, rent guy, right? [00:32:00] Like. You know, don’t feel the pressure to buy. And he’s obviously come in his perspective of like buying a home in New York city, doesn’t make any sense.

We’re coming from the perspective of the Midwest, the micro market considerations have to be considered because then we start to really look at the numbers and not just talking these generalizations of a buy versus red. Nate, what are your thoughts on, on the micro market?

Nate Hedrick: I mean, the classic line is that real estate is local.

I mean, you have to know your own market to be able to make that decision. I mean, like you said, everything we’ve been talking about, we’re, you know, we try to keep a global perspective on it, but we are so biased toward the Midwest. I think when you look at a 200, 000 starter home being four bedroom, two bath, like you don’t get that.

Anywhere on the east or west coast, like it’s just not a thing. Um, and we’re used to that as like, it’s a normal, like, Oh yeah, I can get those in this market and that neighborhood and that school district. And like, it’s just very different. And so I think you have to know your local market. Um, and if you don’t know your local market, get somebody on your team that does.

Get a really good local real estate agent to [00:33:00] actually explain this stuff, because you, you have to know it. It makes the decision. It totally changes how you can make that decision.

Tim Ulbrich: Yeah. And David, we’re not just talking city, right? You know, I think about Columbus. Like Great example, we live south of Grove City here in Orient, probably no one’s heard of Orient, smaller rural town, you know, vastly different in terms of when I think about property taxes, school district quality, other factors versus 15 20 minutes away in Upper Arlington, New Albany, Westerville, etc.

So, David, it’s not just the city, but it’s, it’s the, it’s the micro micro, right, that we need to get, even within neighborhoods, to be frank.

David Bright: Absolutely. I think, yeah, you, you look at those cities within a city, you look at the school district, you look at the, even down to the area within that. Is that kind of a path of progress?

Is there something going in across the street that’s going to change that neighborhood? Is there a A new development happening, uh, one block

Tim Ulbrich: to

David Bright: a next. And, and even, uh, I think the example that a [00:34:00] lot of people overlook when they’re shopping online and looking at beautiful listing photos is. What are the, you know, the neighbor’s houses?

It could be a gorgeous house next to two completely run down, boarded up properties, or it could be a gorgeous house next to more gorgeous houses. And the, those factors on that block could even make up a significant impact into desirability and price points and those kinds of things.

Tim Ulbrich: I want to wrap up by.

Just giving some global perspective from each one of us on, on really answering the, so what question? What, what do I do with this information to really inform my own decision making whether I’m a first time home buyer, or maybe I’m looking at potentially making a move, or I’m thinking about investing in a property and I’ll kick us off for, for me, it’s really going back to what is the vision?

What is the why? So what, what are we trying to accomplish? And David, I think your example is a really good one. Like if I’m looking at purchasing a property that. Maybe I can start to build as an investment property and, and really be the, the renter and eventually, you know, have [00:35:00] my first investment property.

That’s a very different philosophy than potentially, you know, I’m, I’m in a state of transition or I want to experience different parts of the country, or we’ve got a young family and we’re looking for stability. We’re starting in kindergarten, whatever would be the case, what’s the vision and, and really trying to move away from the generalizations of, Hey.

You know, buying is good. Equity is good. Renting is bad and really layering on what are your goals and desires. And then overlapping that, of course, with what’s happening in the markets in which you’re looking at. And I think just reminding ourselves that every market is different. Renting is not always bad.

And if we’ve been told that story, like. I think we need to unwind that a little bit. It can depend on the market, um, in terms of what’s happening that year, in terms of the local geography of that market as well. And one more time, making sure we’re zooming out. So, you know, what else is going on in the financial plan?

And when we think about the vision and the why of buying or renting and what that means to us, and [00:36:00] we overlap that with other goals, whether that be paying down student loan debt or other debt, saving and investing, traveling, experiences. What actually moves the needle for you? And where does this home buying decision, where does it rank among these other things?

I think sometimes we can feel these pressures to like buy something. And then I sit down with someone and really what matters most to them maybe is travel or experiences or giving or other things. And as Ramit Sethi, I think often says so well, like let’s spend money on the things we care about and not spend as much money on the things that we don’t care about.

And so. I often use cars as an example, but for people that might be housing, where some people, that sense of community and having your own place. Being able to make it your own, being able to work on projects around the house, that derives significant value and for other people, not as much. And I think just having that honest conversation with ourselves is, is so important to inform this decision.

Nate Hedrick: Nate,

Tim Ulbrich: what about for

Nate Hedrick: you? I think your last point was actually just really worth reiterating about like, do what is valuable to you. [00:37:00] Um, I talk to so many people, both investors and buyers, that just like buy a thing. And then six months later, like, why did we buy this house? Like we didn’t actually want this.

We didn’t actually need that. We didn’t realize we couldn’t sell it. We have to hold it. Like, there’s all these things that like, it’s easy to get wrapped up in the, well, this is what I’m supposed to do next thing. And not actually taking a step back of like, what do I actually want to achieve, right? Maybe it’s, I want to take a year to assess if Columbus or Cleveland or Miami is the place I want to live.

And it’s a great idea to rent there for a year while you figure that out, right? Uh, and then decide, okay, well, now that we’ve lived here, we realize we do need an outdoor space, or we absolutely need a basement, or, you know, whatever those things are. Like, take your time to assess what you want and then assess it for yourself.

Like, don’t listen to what your best friend is saying, or the guy at work who is You know, frustrated with his rental properties, like figure out what you want to do. Figure out what works for your local market, investor or [00:38:00] buyer, uh, and then make a decision based on that information.

Tim Ulbrich: And sometimes to your point Nate, you’re surprised by when you get into the area or get into the home.

Oh, I never really thought about the value of this feature of the home or this aspect of the community. I’ll give a small, maybe what feels like a silly example. But when we moved in our home, currently it had a wood burning fireplace. And I’m like, Oh, that’s cool. Like That’s a deal breaker now if we ever move like I love the wood and like the memories that have come from like for us It’s Sunday night football and we’re throwing you know, wooden the fire and we’re hanging out like That’s the rich life, you know, for us.

And, and I couldn’t have anticipated that. That seems small, but it’s a big

Nate Hedrick: deal. Super funny that you say that Tim, because that was actually on our must have lists and our realtor at the time, this is again, like 11 years ago now, thought we were bonkers for being like wood burning fireplace is a must have.

He’s like, don’t you mean like 2, 400 square foot and above? And I’m like, no, I mean, wood burning fireplace. So I totally get it. And for other

Tim Ulbrich: people, they’re like, I don’t want to deal with the hassle of that. [00:39:00] That’s fine. They’re like, can I convert this to gas? And I’m like, stop,

Nate Hedrick: you can’t.

David Bright: David, what about for you?

Yeah, I think it’s, it’s a season of really cautious, really honest math and making sure, you know, we, we’ve talked about all the surprises that can come out there, whether it’s property taxes or homeowner’s insurance or moving costs or. Uh, the cost of furnishing and fixing up a house every time you move.

I think just being really honest with that math is, is helpful. Whether that’s, whether you’re thinking as an investor and needing to also think through additional costs like property management and major repairs coming, or whether you’re thinking through as a, as a short term or long term homeowner in that space with what repairs are coming up soon.

And because I think as we do that math, you can, you can start to more objectively identify, well, if the, if the price point. Is really high, but the rent would be much lower. Maybe it does make sense to rent or if, uh, if they’re [00:40:00] really close, maybe we think about one versus the other. I think the math can really help as long as you’re really comprehensive and what that math means.

Tim Ulbrich: Yeah. And speaking of intentional, comprehensive, cautious math, there’s a great rent versus buy calculator tool out there that I often like to reference. I’ll link to that in the show notes. It was published by the New York times. I think it really helps to. Just put numbers and try to make it as apples to apples as we possibly can, right?

We all know the emotional feeling when you’re looking at homes. Nate, you and I have often joked about this on the show before where someone’s, you know, I’m thinking about buying in one or two years and then they start searching and like, we’re buying tomorrow, right? It can happen and, and I think really looking at the numbers and trying for this to be an apples to apples comparison or at least as close to possible and then layering on top of the calculations can be some more of the, the emotional factors that we’ve been talking about throughout the show.

Great stuff guys. Uh, as always, Nate, David, appreciate your expertise. Appreciate your perspective. Thank you for letting me hijack your show, uh, as the [00:41:00] host, uh, for, for this episode and, uh, looking forward to your, your content throughout the year. So thanks so much guys. Appreciate it. Thank you.

[END]

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First Time Homebuyers: Top Considerations Before Making Your Purchase

Posted on by Caitlin Boyle

Paid Partnership with Tony Umholtz, First Horizon

This is a paid post as part of a sponsorship agreement with Tony Umholtz, a mortgage loan officer at First Horizon.

Before embarking on your homebuying journey, it’s essential to understand the key factors that will influence your decision. From assessing your financial readiness to understanding your mortgage options, knowing what to consider beforehand can make your first home purchase a smoother and more informed process.

Financial Readiness

Before you start browsing listings, it is crucial to understand how much house you can afford. A good rule of thumb is that your monthly housing costs (including mortgage, property taxes, and homeowners’ insurance) should not exceed 32% of your gross monthly income. Additionally, your total monthly debt payments (including your mortgage, car loans, student loans, and credit card payments) should not be more than 43% of your gross monthly income. With our Pharmacist loan, First Horizon can go up to 50% in certain circumstances.

Your credit scores will play a significant role in your rates and qualification for mortgage programs. Saving for a down payment and closing costs can be a big hurdle. First Horizon’s program offers a low-down payment requirement of 3% for first-time homebuyers and 5% down for non-first-time homebuyers. This can help with the out-of-pocket cost of purchasing your new home. At First Horizon, we offer several different programs as we know each borrower has unique circumstances, so please feel free to reach out so we can place you in a mortgage that is best for you.

Getting pre-approved for a mortgage will give you a clear idea of how much you can borrow and shows sellers that you are a serious buyer. It involves a thorough review of your financial situation by the lender and can speed up the buying process once you go under contract for your home.

When you are ready, click here to apply online to First Horizon.

Understand Your Home Wants and Needs

Once you know what your budget for your new home is, your next step is to define your wants and needs.

The following are some examples of what you should consider and questions to discuss:

Location

How far away from work do you want to live?
What school district would you like your children or future children to attend?
Is the neighborhood safe
What public transportation options are there?

Type of Home

Does a single-family residence, condo, or townhouse best support your lifestyle?

Must Haves vs Nice to Haves

It’s important to distinguish between features your new home must have and items that would be nice to have, including the number of bedrooms, yard size, garage, swimming pool, and fireplaces.

Working With a Professional Realtor

Working with a professional realtor could help with finding the perfect home for you.

Realtors can be a great asset in finding your home with their knowledge of the area and can help you sort through your options to view the best homes for your situation. The realtors will be able to make informed offers and negotiate for you. If you need assistance in finding a professional realtor, please let us know as we work with a lot of great realtors who could be essential in your home buying process.

Conclusion

In conclusion, buying your first home is a significant and exciting step, but it requires careful planning and consideration.

By assessing your financial readiness, understanding your mortgage options, defining
your needs and wants, working with professionals, considering long-term implications, and making informed offers, you can navigate the home-buying process with confidence.

Take your time, do your research, and don’t be afraid to ask for help from experts along the way. Your dream home is out there, and with the right preparation, you’ll be well on your way to finding and securing it.

Find the Best Home Loan for You

Regardless of the type of property you want to purchase, finding the right loan requires a lot of research and expertise. Fortunately, you can turn to the professional loan officers on the Umholtz Team at First Horizon Mortgage. Tony Umholtz leads a team of experienced loan officers that provide you with high-quality home loan programs, tailored to fit your unique situation with some of the most competitive rates in the nation. Whether you are a first-time homebuyer, relocating to a new job, or buying an investment property, our expert team will help you use your new mortgage as a smart financial tool. Tony and his team can be reached at 813-603-4255 or by email at [email protected]

You can learn more about the Pharmacist Home Loan offered by First Horizon here.

Fannie Mae Cuts Down Payment Requirement to 5% for Multi-Unit Properties

Posted on by Caitlin Boyle

Paid Partnership with Tony Umholtz, First Horizon

In a significant shift that is reshaping the landscape of real estate investments, FNMA (Fannie Mae) has recently implemented a game-changing policy. Previously, potential buyers looking to purchase owner-occupied 2-4 unit properties faced hefty down payment requirements, ranging from 15-25% down. However, effective mid-November 2023, FNMA has now slashed this requirement, allowing buyers to secure these properties with just a 5% down payment. The development has sent waves of excitement through the real estate market, opening doors for a broader range of aspiring homeowners.

Historically, the high down payment barriers have deterred many homebuyers from exploring the potential benefits of purchasing multi-unit properties. With the reduced down payment requirement, FNMA is not only making real estate investments more accessible but also empowering more individuals to step into the realm of property ownership. This move holds the promise of increased homeownership rates and a more diversified real estate market.

One of the key advantages of this policy change is the potential for rental income. Multi-unit properties often generate substantial income. By living in one unit, and renting out the other units of the property, a homeowner can cover some or all their mortgage payments and even yield profits. The rental income of the property may also be used to qualify for the mortgage loan, increasing the purchasing power for an individual. With the lower down payment requirement, more people can now consider this option, creating a ripple effect of economic empowerment and financial stability.

Additionally, this shift is expected to foster vibrant communities. As more individuals and families can afford to invest in multi-unit properties, neighborhoods are likely to see an influx of responsible landlords and homeowners. This, in turn, could lead to improved living conditions, enhanced community engagement, and increased local investments, revitalizing areas that were previously overlooked.

For aspiring homeowners, this policy change offers a unique opportunity to step onto the property ladder. The dream of owning a home, especially a multi-unit property that can generate rental income, is now within closer reach. This not only fosters a sense of financial security but also opens up avenues for building wealth through real estate appreciation and rental income.

Real estate professionals and investors are also poised to benefit significantly from this development. With more potential buyers entering the market, real estate agents and investors can explore new avenues for business growth. Furthermore, the increased demand for multi-unit properties could drive property values up, providing investors with the potential for substantial returns on investment.

In conclusion, FNMA’s decision to lower down payments for owner-occupied 2-4 unit properties marks a transformative moment in the real estate industry. By breaking down financial barriers, FNMA is fostering a more inclusive and dynamic market that benefits individuals, communities, and the overall economy. As more people seize the opportunity to invest in real estate, the effects of this policy change are set to resonate positively for years to come, shaping the future of housing and investment opportunities in the US.

Find the Best Home Loan for You

Regardless of the type of property you want to purchase, finding the right loan requires a lot of research and expertise. Fortunately, you can turn to the professional loan officers on the Umholtz Team at First Horizon Mortgage. Tony Umholtz leads a team of experienced loan officers that provide you with high-quality home loan programs, tailored to fit your unique situation with some of the most competitive rates in the nation. Whether you are a first-time homebuyer, relocating to a new job, or buying an investment property, our expert team will help you use your new mortgage as a smart financial tool. Tony and his team can be reached at 813-603-4255 or by email at [email protected]

You can learn more about the Pharmacist Home Loan offered by First Horizon here.

How To Build a 6 Figure Rental Portfolio in Less Than 3 Hours a Week

Posted on by yfpadmin

How to Build a 6 Figure Rental Portfolio in Less Than 3 Hours a Week

The following is a guest post from Dr. Ryan Chaw. Ryan is a full-time pharmacist who built a rental portfolio on the side, going from zero to $10,755 per month in just 4 years. He is the founder of Newbie Real Estate Investing where he teaches others his system: how to find a college town to invest near, analyzing a deal, generating tenant leads through strong marketing tactics, and how to self-manage college tenants so everything is hands off and automated.

For most new investors, real estate is like a dragon.

It’s big, scary, and you’re afraid of getting burned.

Even scarier is having a bunch of immature college students renting out your bedrooms. But that’s exactly what I specialize in.

“Aren’t you worried the students will trash your house?”

This is a question I get asked all the time whenever I tell somebody that I invest in the student housing market.

My answer is always the same…

“Absolutely not. No way. Nope.”

In fact, thinking that college students will trash your house is one of the biggest myths of college town real estate investing.

Unfortunately, this myth is what holds most real estate investors back from one of the most lucrative markets in all of real estate investing: renting out by the room to college students.

You’re probably wondering right now, “Huh? I don’t understand. How’s that a myth?”

I’ll cover that later in this article, but let’s first talk about why I chose student housing.

How to Start Investing in Real Estate in a College Town

Most real estate investors leave half of their cash on the table when they rent out their house only as a single unit rather than renting by the bedrooms.

For example, here’s what one of my houses would have made if I rented it out only as one unit:

Source: Rentometer.com

But by renting out each bedroom separately, here’s what it’s actually making:

I doubled my rental income by renting by the bedroom.

Because I own 4 of these houses, I’m now making $10,755 per month in rental income!

It wasn’t always like this though. I started out as a typical pharmacist. I graduated in 2015 with my Doctorate of Pharmacy and worked two jobs as a retail and hospital pharmacist. I quickly realized that I didn’t want to work as a pharmacist until I was 65 after talking to an older pharmacist colleague. He told me, “Honestly, I just come here for a paycheck now. I wish I could have retired a lot sooner.”

I realized that while pharmacists typically make over 6 figures, this alone isn’t enough to achieve financial independence.

My inspiration to get into real estate came from my grandpa who had purchased several rentals in the SF Bay Area back in the 50s before Silicon Valley existed. As we all know, Bay Area prices went up like crazy, so Grandpa Chaw was able to retire early and live mostly off the income from his rentals.

I knew I wanted to get into real estate as soon as possible because it’s truly a time game. You buy as soon as you can, then wait for it to grow over time (as your rent goes up, your property price goes up, and you write off tons of money in taxes). When I got my pharmacist license, I decided to work a lot of overtime to save up for my first downpayment, which I used to buy my first rental in 2016.

Unfortunately, I made a lot of mistakes on my first rental and lost over $30,000!

I got a call from one of my tenants one night who said, “You’ve got to fix this. Sewage is pouring out of the kitchen sink and it’s all over the floor now.” I hired a clean-up crew and a plumber to assess the situation. It turned out that I needed to replace the whole sewage line. This cost me $9,000! I had to pay for the repairs out of pocket since this happened only 2 months after I purchased the property and I didn’t have much rental income.

On top of that, I didn’t realize the house had virtually no AC system. I ended up having to install a mini-split HVAC system which cost me $15,000.

Lastly, I had a vacancy for 8 months because I had no idea how to advertise my bedrooms. This cost me $5,200 ($650 per month x 8 months).

At the end of it all, I was feeling very depressed and discouraged. I was tired of having to take calls during my lunch breaks and late nights on weekends. I thought I had made a huge mistake investing in real estate. But I kept at it because I knew if my grandpa could do it, I could do it too. Over the next 4 years and after much trial and error, I created a system for student housing that I now teach to others. The system allowed me to cut the amount of time spent on my rentals to less than an hour a week. I’ll summarize the steps below.

There are 7 steps to creating your own student housing model that will significantly reduce the amount of time you spend on your rental properties.

Step #1: Do your research ahead of time.

Check your local city laws first to make sure everything you’re thinking of doing is legal. Some cities may require you to get a business license to rent by the bedroom. During this COVID-19 pandemic also check the college website to confirm they are scheduling on-campus learning (most colleges have some on-campus activities, whether it be with labs or experiential programs). Luckily, most graduate school students still need access to on-campus buildings to do their research.

Step #2: Choose a college based on enrollment data, college ranking, and the programs that are offered there.

You need to make sure to choose a college with a good market size to rent your bedrooms out to. Consider targeting more Ivy League type colleges because most students that go to those types of colleges received straight A’s in high school and are therefore more serious about completing their studies. Ivy League type colleges also offer opportunities for higher degrees such as medical school, pharmacy school, and nursing school. These types of students likely don’t want to waste their time partying in college. Finally, because these colleges are so popular, most of the students will be from out of the city, state, or even country, so they are definitely searching for a place to stay close to the college.

Step #3 Make your place attractive to college students.

I try to find properties that are in close proximity to campus so that I can charge premium pricing. I also look for houses with plenty of parking. This allows the college students to bring a car so they can drive to their experiential functions such as health fairs for pharmacy, nursing, and medical students. Check out the neighborhood to make sure it’s a good area so the parents feel safe letting their children stay there.

Step #4: Calculate your rental amount and know how much to charge if you put two people in one bedroom (like a couple).

If you are cheaper than on-campus housing, then you automatically have market demand. Because you provide more room and more privacy than on-campus dormitories and charge cheaper rent, it makes sense for a lot of students to just stay in one of your bedrooms. Keep in mind that putting couples into a single bedroom will allow you to charge more for that bedroom.

Step #5: Know what to look for when deciding if you can add or convert a room to a bedroom.

Whenever you can create an extra bedroom, that’s another $500-$700 in additional rental income per month. This is huge! Even adding one extra bedroom will pay for the majority of repairs and expenses that come up on your house throughout the year. Doing this step also typically allows you to at least double the amount of rental income and cash flow you make on the property.

Step #6: Market your bedrooms well to create urgency and demand.

You need to know how to create demand and urgency by highlighting the benefits of staying in your bedrooms vs on-campus housing. And, you have to advertise in the areas where your target market (i.e. college students) hang out. If you have a lot of students interested in renting out a bedroom at your property, you’ve really got the upper hand. You can choose the best tenant out of a large pool of applications. Consequently, it’s really important to get your marketing right so that you can be picky in choosing a tenant.

Step #7: Create systems and teams to help you self-manage the properties to save yourself a lot of money.

Personally, I spend less than an hour a week managing my rentals because I have systems in place for it. I empower my tenants to take on certain responsibilities. Payments are made through a phone app called Zelle since students are tech savvy. I’m able to manage my rentals while working as a full-time pharmacist job because I have these systems in place. And the best part is that I don’t have to waste 8-12% of my revenue on hiring a property manager.

Now that we covered the 7 steps, let’s go through the most important part of this process: how I completely avoid problem tenants to reduce my work load even more.

Marketing

As mentioned earlier, I do targeted marketing toward the type of students I want to attract. I’m looking specifically for the types of tenants who are more concerned about passing their midterms and finals than throwing wild house parties.

Screening

I screen social media accounts. You don’t want people who smoke, drink a lot of alcohol, do drugs, or party nonstop. Any of these types are hard a “no” for me.

Be strategic in pairing up housemates

I strategically pair up college students. This creates a balance so that even if there are a couple of immature college students in a property, they’re kept in check by the more mature, professional college students. I then also have at least a few people at every house who take on responsibilities to maintain the house. Sometimes I’ll have a tenant who may be messier, but his/her mess gets cleaned up by their parents or the other tenants.

Set yourself up for success

I minimize common space and turn those spaces into additional bedrooms. Not only does this boost my profit, but there literally will be no space to throw a large party.

That’s how simple this can be!

I believe real estate investing should be fun, simple, and enjoyable rather than this big, intimidating beast you have to slay. It also allows you to give back and provide affordable housing. If you’re interested in learning more about how student rentals can shortcut your way to financial independence, I offer a free PDF guide on how to do this and in my emails I offer you quick practical tips on how to determine the best location to invest in, red flags to watch out for, and how to create automated systems that you can implement in your own real estate portfolio at www.newbierealestateinvesting.com.

Ready to take the next step in your real estate investing journey?

One of the most important aspects of real estate investing is building your team and that all starts with finding the right real estate agent.

But as a busy pharmacist, researching, vetting, and connecting with real estate agents can be tough.

That’s why we partnered with our good friend Nate Hedrick, The Real Estate RPh, to offer a free home buying concierge service. As a pharmacist and real estate agent himself, Nate’s got the insider’s view. He has a unique perspective on the home buying process and has used it to help many pharmacists achieve their real estate dreams.

With this service, Nate helps you craft a plan that works within your budget and financial goals, connects you with a pro that you can trust, and helps you stay the course.

Click here learn more about this free home buying concierge service and to book a free call with Nate.

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7 Ways to Reduce Your Monthly Housing Costs

Posted on by yfpadmin

7 Ways to Reduce Your Monthly Housing Costs

The following post contains affiliate links through which YFP may receive compensation.

There are a few budget categories that eat up a large percentage of your take-home pay such as food, student loan payments, and maybe childcare.

But if you’re like most, housing costs, either as a mortgage or rent payment, will likely be one of if not the largest.

According to the U.S. Bureau of Labor and Statistics, those in the top income quintiles, which would include most pharmacists, spend around 30-32% of their pre-tax income on housing.

How does your spending compare?

You probably know many who stretch this percentage much further, maybe even up to 50% or more. This often leads to a situation known as being “house poor” and can be a huge reason many are living paycheck-to-paycheck.

And unless you are in a scenario where you can earn income directly from your living situation, this is purely an expense and can have a huge impact on your ability to direct your monthly income toward savings, retirement, debt, lifestyle, and other financial goals.

I can honestly say that one of the biggest reasons my wife and I were able to tackle our $400,000 of student loan debt in just five years was that we minimized our cost of living. Sure it wasn’t that easy living in a one-bedroom apartment for the first three years but with the overall cost of living at 15% of income, it allowed us to make some serious progress.

So whether you are house poor or just looking to unlock more disposable income, here are some ways to reduce your housing costs.

For COVID-19 housing relief info check out this post.

1. Downsize

Is your current living situation more than you need or stretching your budget too thin?

If so downsizing might be a good option for you.

No, you don’t have to sell all of your stuff and move into a 250 square foot tiny home (although, that is an option), but selling your current property and moving into a smaller house (or apartment) could save you a ton of money.

Larger expenses generally coincide with more square footage beyond just the mortgage payment (or rent payment). These include property taxes, utilities, and overall maintenance bills.

This can be tough especially if you are comfortable in your situation or used to a certain standard. Plus, it can take some time, energy, and money to make this happen.

However, this doesn’t have to be permanent and may just be a temporary move to improve your financial situation.

2. House Hack

Ah, house hacking.

It’s one of the best-kept secrets of real estate investing and can drastically reduce your housing costs while building your net worth.

The goal of house hacking is to eliminate your housing expense.

You read that right: eliminate your housing expense!

The cool thing is that there are several different ways to house hack.

Many purchase a 2 to 4 multi-family property with a loan that allows for a low down payment under 5% (like an FHA loan) and then live in the property for at least a year (mandated by the loan terms). While living there, you rent out the other units and those tenants pay down your mortgage thus greatly reducing or (hopefully) eliminating your housing expenses!

Other options for house hacking include purchasing a single-family home and renting out the other rooms or buying your dream home and living in the mother-in-law suite while you rent out the main house.

With any of these scenarios, you can drastically reduce your monthly housing expenses and even generate an income.

After your year obligation is up, you can continue living in the property or do it all over again by purchasing another house hack, ultimately creating even more cash flow.

Or, you can stash away the money you saved by house hacking to purchase a home of your own or to propel your retirement savings or other financial goals.

House hacking might not be for everyone as you have to be comfortable with sharing a wall or being in close quarters with someone else, but if you’re able to stick it out for a year or two, the savings, not to mention the tax benefits, could be huge!

To learn more about this strategy check out episode 130 where we interviewed Craig Curelop, author of The House Hacking Strategy and the Finance Guy at BiggerPockets.

3. Get a Roommate

Maybe you thought your days of living with a roomie were over, but have you ever thought of splitting your rent or mortgage with one of your BFFs or a French couple you met off Craiglist? (true story)

Having a roommate may not seem like the most appealing option especially if they don’t have the best habits and are straight-up annoying but just hear me out for a minute.

What if your housing payment was suddenly cut in half? What could you do with that extra cash?

Similar to downsizing this could be a temporary move but a powerful one to accelerate your financial goals.

4. Geo-Arbitrage

The average rent for 703 sq. ft in Manhattan is around $4,200. Not a small chunk of change, right?

I’m no stranger to high housing costs living in South Florida, but compared to places in New York and California, sometimes it feels like a bargain.

Unfortunately, areas with high costs of living don’t always grant a comparable boost in salary forcing a huge percentage of your income to go toward this expense.

So besides getting 7 roommates just to get by, what about moving?

Geo-arbitrage is a concept that’s been picking up some steam over the years especially among those in the FIRE community. Essentially, in order to save money on housing costs, healthcare, or the general cost of living (think gas, food, taxes, transportation, etc) and get more for your dollar, you pick up and relocate to a new place.

I know this can be a really tough decision especially if it requires moving away from family and close friends and means leaving a job you really enjoy. However, out of everything you can do to reduce your housing costs, this could be the one that has the greatest impact.

5. Airbnb

Ok, so you might not be ready to pick up and move yourself or your family to a different country or even to the next city over.

But what if you could bring people from around the world to you without having to leave the comfort of your home?

Putting your house, an extra room, a finished basement, or in-law suite on Airbnb for people to rent short-term out can not only help you justify having extra space in your home but allows you to monetize the home you’re already paying on.

While this strategy is obviously not going to be very desirable or lucrative in the COVID-19 era as demand has significantly decreased, it could make a comeback and something to be on your radar.

If you are interested in this, check out Episode 121 of the Your Financial Pharmacist Podcast where I interviewed Hilary Blackburn on how she and her husband created another stream of income by becoming Airbnb hosts. The Blackburns rent out their Nashville home 14 times a year which brings in about $600 a night.

If you’re interested in seeing how much you could earn by having your home or rooms on Airbnb, check out this Airbnb earnings calculator.

6. Re-evaluate Your Homeowners Insurance Policy

If you own your home and have a mortgage, you have homeowner’s insurance. Unlike property taxes, an HOA fee, or other fixed costs, it’s one of the few expenses with a home you may be able to change.

These policies vary in price and have different types of coverage including protection on the property, your personal belongings, other people, among other features.

Since you initially got your policy in force, have you shopped around to see if you could get a lower payment?

It’s not uncommon to do this with car, disability, or even life insurance but this is one many people forget about.

One of the companies that I have personally used and YFP recommends comparing multiple quotes for life and disability insurance, Policygenius, actually now has a platform to easily compare companies that offer homeowner’s insurance.

Within 3-5 min you can find out if you are overpaying and able to get a better deal.

Now even if there is a savings, this is not likely going to be to the same magnitude as some of the ways I mentioned but every bit helps.

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7. Refinance Your Mortgage

When you refinance your mortgage, you change the terms of the loan which could be the interest rate, type of interest rate, time to repay, or a combination of those.

Reasons to refinance include reducing the loan term, eliminating private mortgage insurance (PMI), cashing out on your home equity, or getting out of a variable interest rate.

However, the most obvious reason to refinance your mortgage is to get a lower rate. Depending on the term, a lower rate could reduce your monthly payment and result in less interest paid over the course of the loan.

This year, in large part due to COVID-19 and intervention by the Federal Reserve, mortgage interest rates have plummeted to historic lows. This is good news if you are a homeowner and are eligible for lower rates.

Now often times there are some closing costs to refinance so often in order for it to make sense financially, you may have to live at your current residence for a period of time at least to break even. You can check out our mortgage refinance calculator below.

Mortgage Refinance Calculator

There are multiple lenders that offer mortgage refinancing. Unfortunately, the process for comparing rates traditionally hasn’t been an easy one.

You can go to local banks or obtain rates from individual lenders online but this requires you to submit documents multiple times and could take significant time and effort.

Or you could go to sites that partner with multiple lenders, but the moment you provide your information, it’s sold to third parties and then you get bombarded with annoying phone calls, text messages, and emails by multiple companies.

Fortunately, there is a faster and easier way to compare rates and that’s why we partnered with Credible.

Not only does Credible have an outstanding user-friendly platform that lets you compare multiple lenders within minutes, but you also deal with them directly until the final stages of the process.

Another lender we recommend is IberiaBank. They offer a 3% down loan with no PMI for pharmacists who are first-time homebuyers but they also offer refinancing options as well.

Like all aspects of your financial plan, mortgage refinancing has several considerations that need to be weighed and might not be for everyone. To help you decide whether or not you should refinance your mortgage, check out our recent podcast episode with Nate Hedrick, The Real Estate RPh.

Another Possible Option: Live the Van Life

To say that Rena Crawford took a unique and unconventional approach to combat a high cost of living is an understatement.

On episode 152 of the podcast, Rena shared her story on how she purchased a 1994 Dodge Ram van and with about $7,000 renovated it so that she could make it her home during residency. Her dad helped with the renovation and built custom fit furniture for her new 60 square foot home. The van also boasts nice flooring, 200 watt solar panels, a full size dresser that doubles as a cooktop, a mini fridge, and a full size bed.

While living in a van down by the river may not be your answer to offset your housing costs, Rena showed that it can be done and it’s definitely an option.

Conclusion

Housing costs can take up a huge percentage of your monthly income and make it challenging to fund your financial goals. If your current living situation is not making you money and you are struggling, downsizing or moving to an area with a lower cost of living can be powerful moves. Also, getting roommates or house hacking are alternative options to have others bear some of your overall costs. Finally, comparing quotes for homeowner’s insurance or mortgage interest rates can also assist.

Three Strategies for Buying a House with Student Loans

Posted on by yfpadmin

Buying a House with Student Loans

Each month, many pharmacists throw thousands at a seemingly endless mountain of student loans often making it difficult to contribute to other financial goals such as savings and retirement. In addition, the dream of owning a home can seem completely out of reach. In fact, according to the National Association of Realtors, 83% of people aged 22 to 35 with student debt who haven’t bought a house yet blame their educational loans. This leads to the obvious question: How do I buy a house with student loans?

If you’re a pharmacist with typical student loan debt, you probably started or are starting your career with a significant negative net worth. Terrifying, I know, as this was exactly the position I was in. I pulled up my old budget while writing this post and although I cringe to admit it, my wife and I actually bought a house with a net worth of negative $262,000. Looking back, we probably could have prepared a little better, but at the time our top priority was buying a house even with our student loans. I’m happy to report that 4 years down the road we are in a much better position and buying our house at that time ended up being a great decision. Although you may be feeling like home ownership is far out of reach and years down the road because of student loans, you can still make it happen.

This post will explore the different strategies on buying a house with student loans and the advantages and risks of each. Because there are many factors that go into this decision, the goal is to help give you some tips so you can identify the strategy that best aligns with your goals.

Three Strategies for Buying a House with School Debt

There are three main strategies for buying a house with school debt. The first is to simply accept that you are going to be in debt up to your eyeballs for several years anyway and buy regardless as soon as you can. While certainly not the most conservative approach, the appeal of owning instead of renting can be a powerful motivator. The second tactic is the opposite of the first. Pay down ALL of your debt including student loans before jumping in and buying a property aka the “Dave Ramsey” method. The third and final strategy is a hybrid of the first two. The idea is to really assess your finances and pay down your student loans to some amount and then purchase. We’ll explore each option but let’s discuss some fundamentals first.

Renting vs Buying

Beyond answering the question of “how do I buy a house with student loans?”, there’s another common related question. That is: “Is it better to buy or rent?”

Many people make the argument that buying is always better than renting because you aren’t “throwing away money” and you get the opportunity to build equity. In addition, the statement of “if the mortgage payment is the same as the rent payment then buying makes sense” is commonly made.

Because of the way mortgages are structured with the amortization schedule, you actually don’t build much equity at all in the first few years as the majority of the payment will be going toward interest. Also, owning a home is hardly just making the mortgage payment. There are taxes, insurance, some communities have HOA fees, and stuff tends to break.

This question of buying or renting rarely has a simple answer and there are a lot of factors that can go into a comparison. These include the details of a potential mortgage, years you plan to be in the home, speculation of the home price growth and rent growth rate, inflation, your income taxes, as well as maintenance costs and fees.

While this topic could easily be it’s very own post, this is something to keep in mind even before getting into the different strategies. If you really want to crunch the numbers with considerations in your location, consider using the NY Times Rent vs. Buy Calculator.

Are You Ready?

Regardless of the strategy you choose, buying a house with student loans is a big decision and you need to be ready to take on that responsibility. Certainly, you have to have your finances in order to make it happen, but you also want to be emotionally prepared. That means being on the same page with your spouse or significant other and being able to devote time and energy to the entire process. That also means having your priorities and goals in place. Before getting into the numbers here are some key questions to answer:

Are my student loans and other debt causing significant stress?
When do I want to be free of student loan debt?
Am I adequately contributing to my retirement fund on a regular basis?
Have I built an emergency fund?
How will buying a home impact achieving my other financial goals?

Know Your Budget

Knowing your budget is key in this process and something you should establish before even getting preapproved or meeting with a mortgage lender. If you don’t do this, the lender will try to set it for you. Remember, the more debt you take on, the more you will pay in interest and if your mortgage takes up a huge chunk of your budget (a situation known as being house poor), it could put a strain on achieving your other financial goals.

Some people brag about how their mortgage is less than they would be paying in rent. However, they often forget to take into account things like home repairs, property taxes, maintenance, and insurance. Don’t ignore the full costs of a mortgage when setting up your budget. Check out our free guide on home buying for pharmacists if want to review all costs associated with buying a home.

Even if you think you’re ready to go all in and buy a home even with a large student debt load, you will have to meet some minimum financial requirements in order to get approved for a mortgage.

Debt-to-Income Ratio (DTI)

When a bank calculates how much they can lend you, they use the “28/36 rule” for conventional financing. This means that no more than 28% of your gross income may go to your total housing expenses. Furthermore, no more than 36% of your gross income may go to all your debts. Keep in mind these are maximum limits the banks set and stretching your budget to these rules could make it difficult to afford.

Let’s see what that looks like using an average income and debt load for a new pharmacy graduate. Let’s assume you make $115k in gross income. You have $160,000 in student loans with a 6% interest rate and a repayment term of 10 years ($1,775 per month). You also have a car loan and pay $350 per month towards that debt. The bank starts by calculating your 28/36 maximums.

28% rule = Max monthly housing expenses

$115,000 x 0.28 = $32,200 per year or $2,683 per month

Using the 28% rule, your total housing costs (Principle, Interest, Taxes, Insurance) cannot exceed $2,683 per month. (This equates to around a $450,000 house loan for a 30-year term) Assuming you pass the first test, they move to the 36% rule.

36% rule: = Max monthly gross income going to debt

$115,000 x 0.36 = $41,400 per year or $3,450 per month

Remember, the bank will not extend a loan that requires payments in excess of the 36% rule maximum of $3,450 each month. Your total debt payments each month with student loans and car payment currently sit at $2,125.

$3,450 – $2,125 = $1,325

(Maximum Debt)-(Current Debt) = Housing Allowance

This changes things quite a bit. Your $450,000 house loan was just reduced to $185,000. And remember this is the maximum the bank thinks you can afford but not necessarily what your personal budget may be able to handle. Your own financial situation will dictate whether these limits will become an issue for you or not. If you do find yourself over or very near the limit, there are a few things you can do:

1. Raise your income. Remember, it’s a ratio based on your debt AND your income. Starting a side hustle or a second job can give your top line the boost it needs to get you out of the red.

2. Lower your debt. If you pay off a credit card, sell your car for a cheaper one, or refinance student loans, you can adjust the debt side of the equation in your favor. If you don’t plan to use a loan forgiveness program, definitely consider refinancing your high-interest student loan debt through one of our partners. You can lower your DTI, pay less in interest over the life of the loan, and get a nice cash bonus!

If you are pursuing the public service loan forgiveness (PSLF){ program, then your goal should be to pay the least you can over 10 years. You can lower your monthly payments by decreasing your adjusted gross income (AGI) with pre-tax retirement contributions (i.e., 401(k), 403(b)). Lowering your payments in this way will also affect the numbers in your 36% rule.

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3. Consider a different loan product. While conventional loans use a 28/36 rule, there are many government-backed loan options that have looser requirements for DTI. FHA underwriting, for example, allows for limits up to 31% of your gross income and 43% of your total debt load. If you want more information on multiple loan options, check out our free guide on home buying for pharmacists. It’s also worth mentioning that these limits are in place to protect you from buying outside your means and it’s usually not in your best interest to try to work around them.

4. Reassess the size of your mortgage. This might seem obvious, but if you get to this point and still can’t make the numbers work, you might simply trying to buy too much house. In fact, the harder you have to work to get around your DTI ratio, the more likely it is you need to reassess your overall budget. This can be a hard pill to swallow if you’ve already located a house you really want. If you need a reminder for why these limits are important, just look back at 2008 when the housing market collapsed. A good portion of that failure came from people who owned too much house and too much debt for their income to sustain.

Credit Score

Next up, get your credit score up. There are countless reputable sites for obtaining your free credit score without it affecting your report. Most banks and credit cards even provide monthly credit reports so you can track things over time. Most lenders want your credit score to be above 750 for the best rates possible. Pulling your own credit score allows you to review the report for errors before heading to the bank. According to the FTC, more than 20% of consumers found errors on their credit reports that could be affecting their score.

Speaking of credit, regardless of the strategy you choose, you should knock out any existing credit card debt. The average APR for a credit card is 17%. This means that any gains you make with a good investment elsewhere are going to be eaten up by the interest costs of your credit card.

Down Payment

Often, saving up enough cash for a sizable down payment is one of the toughest parts of buying a house with student loan debt. With retirement contributions, other debt payments, rent, emergency funds, and everything else, it can be quite a challenge to save the thousands required. Although it’s easier said than done, try to use the process of accruing your down payment as a test for your new budget as a homeowner. Unexpected costs are going to come up and learning to live off a leaner budget now can help to ensure your success down the road. If you’re still struggling but have a generous family member, monetary gifts can also be used as your down payment without penalty. Don’t forget, while most conventional loan products require 20% to avoid private mortgage insurance (PMI), there are a number of options available with down payments as low as 3.5%.

All of these factors will be used by your lender to determine the loan products you are eligible for and the size of payments you can expect to make. Once you’ve crunched all the numbers and done all the homework from above, you’ll want to go ahead and get pre-approved.

Consider a Professional Home Loan

You’re well aware that student loans can make it challenging to save a 20% down payment (or else you wouldn’t be reading this post), especially if you live in a market where home prices are high and you have other competing financial priorities.

Additionally, getting approved for conventional loans can be tough because most lenders will count your student loans when determining your debt to income ratio as I mentioned earlier.

YFP has been on the hunt for another possible solution for you when a large down payment or conventional loans are out of reach.

We partnered with IberiaBank who offers a Professional Home Loan (aka Doctor’s Loan) that is available for pharmacists.

The Professional Home Loan product offers a 3% minimum down payment without PMI and is available in all states except Alaska and Hawaii.

Learn more about this loan product and the 5 easy steps you can take to get a home loan even if you don’t have 20% down.

Mortgage Calculator

Another Tip Before Moving Forward

Something that’s often overlooked as part of the home buying process is having good disability and life insurance policies in place. Your ability to pay for your home and student loans is dependent on you earning an income each and every month. If you became disabled because of an accident or illness and are unable to work, disability insurance will provide you with money to help replace your income. If you were to die unexpectedly, your mortgage will usually pass on to your spouse if he or she is on the loan. A strong life insurance policy could pay off the remainder of the mortgage or be enough so that your significant other could continue to make the monthly payments.

Ok. Now that you have your priorities in place and have done some due diligence, let’s explore some of the pros and cons of each of the strategies I mentioned above.

Strategy 1: Buy a Home ASAP

Let’s face it, a great deal of the decision to buy a home comes from your heart and not your head. Of course, you want to make a sound financial choice, and most homes are just that, but sometimes you also just WANT TO OWN A HOUSE.

My wife and I have owned our current home for a little over 4 years now. It’s very difficult to beat the feeling of security and peace of mind I have knowing that my daughters have a safe place to sleep every night. I never have the threat of a landlord deciding to sell the property, or raising the rent, or simply kicking me out with only 60 days notice. I can put effort into my home and enjoy the benefits of that effort. This is something that connects us to the property in a way a rental never could.

This strategy is for people who are looking for that feeling and are looking for it right now. You may also choose this strategy if you are someone who is confident in your housing market and feel that you can take advantage of the projected appreciation and resale opportunity.

There are some compromises of course if you choose this path. For starters, you may not have enough saved up for a full down payment. This means a larger mortgage payment in addition to paying private mortgage insurance (PMI), which will ultimately increase the total cost of the house. Depending on the size of the mortgage, you could put a strain on your budget making it harder to pay off other debts or to contribute to savings and retirement.

Also, if you pursue this strategy with very little equity, it could be very difficult to move if there was a dip in the housing market and your upside down and you owe more than the home is worth. Therefore, you have to be comfortable with this risk.

This strategy could definitely make sense if your student loan strategy involves one of the federal forgiveness programs, especially PSLF since you are anticipating having student loans for 10-25 years and will be making income-driven payments. Because there is a standard term to get the full benefits of forgiveness, it doesn’t make sense to make extra payments since you can’t accelerate the process.

If you choose this strategy, consider building a decent a down payment and a mortgage size that doesn’t cause too much stress on your monthly budget and make it impossible to make progress with your student loans and other financial goals.

Strategy 2: Pay off all student loans then buy a home

If the thought of your student loans makes you sick to your stomach, adding more debt by buying a home may be the last thing on your mind. This strategy focuses on paying off your biggest debts before adding more to your plate. This is the true Dave Ramsey philosophy and is a strategy for people who can handle delaying their gratification.

The advantage here is all about flexibility. You have the ability to move relatively easily if you experience a job change or life event. Renting requires far less in upfront costs compared to buying so you retain more flexibility in your budget for paying down other debts faster. The costs of renting are also much more predictable given you won’t have repairs or capital expenditures to worry about.

The tradeoff is you will miss out on the benefits of being a homeowner until later. Namely, building equity and tax benefits. Interest rates are also increasing at the moment and if trends continue, they could be significantly higher in just a few years. Missing out on a lower interest rate now could mean spending quite a bit more down the road. Plus, depending on the size of your student loans and potential mortgage it could take several years to clean that up and then save enough for a down payment.

Many people who follow this approach simply hate the idea of being indebted any more than they have to be or fear the possibility of defaulting on payments with a sudden change in income.

Strategy 3: The Hybrid Approach

The third and final approach attempts to mix the best aspects of the initial two. The basic philosophy is this: Pay off a portion of your student loans and lower your debt to income ratio, save up a sizeable down payment, and buy a home when you are more financially stable.

If you use this approach, what percentage of your student loans should take out prior to pulling the trigger on a home? It really comes down to what your comfort level is and how long you want to delay the homebuying process.

Similar to the last strategy, you will miss out on some of the benefits of being a homeowner for a period of time potentially missing out on market appreciation and locking in a lower interest rate.

Like strategy #1, this hybrid approach would definitely make sense if your student loan strategy involves one of the federal forgiveness programs.

Conclusion

Buying a house with student loans can certainly feel overwhelming. There are emotional and financial points to consider that are often at odds with one another. There are three basic strategies to consider and what works best for you will be dependent on your situation including your priorities, emotions, financial position, and risk tolerance.

Have more questions about buying a home with student loans? Nate Hedrick, the Real Estate RPh, is a full-time pharmacist and licensed real estate agent. Head on over to yourfinancialpharmacist.com/real-estate to get in touch!

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A New Practitioner’s Perspective on House Hacking

Posted on by yfpadmin

A New Practitioner’s Perspective on House Hacking

By: Dylan Koch, PharmD

In my second year of pharmacy school, I was introduced to Dave Ramsey. Dave Ramsey is a personal finance coach who is most known for his book, “The Total Money Makeover” and his podcast, “The Dave Ramsey Show.” Mr. Ramsey boils down his path to financial freedom through seven baby steps. Those include:

Save $1,000 for an emergency fund
Pay off all personal debt with the exception of your mortgage via debt snowball technique
Save 3-6 months of expenses for an emergency fund
Save 15% of your income towards retirement
Save for kids’ college
Pay off your mortgage
Build wealth (and give)

As a pharmacist, you may consider re-prioritizing paying off student loan debt to baby step #6 instead of baby step #2. However, this is only relevant if your student loan debt is comparable to your mortgage payment.

These baby steps can definitely work to move you out of debt and into financial freedom. With an average pharmacist’s income, everyone should be able to retire a millionaire, at the minimum. The “Seven Figure Pharmacist” book dives into this in detail so I won’t go into that here.

During my own personal finance education, I came across another book titled “Rich Dad Poor Dad” by Robert Kiyosaki. Mr. Kiyosaki states that rich people buy assets and poor people buy liabilities. The most common examples of assets include stocks, bonds, and real estate. The most common example of a liability is a new car. The main difference between the two is that assets increase in value over time whereas liabilities decrease in value over time. Multiple streams of income are important and allow people to leave the “rat race”. After reading “Rich Dad Poor Dad”, I started researching real estate as an investment opportunity, and that’s when I first discovered the concept of “house hacking”.

House hacking is buying a small multi-unit property (either 2, 3, or 4 units) and living in one unit while renting out the others. House hacking appealed to me because it would lower my living expenses, while creating equity at the same time. This would allow me to save more money in order to pay off my student loans quicker. I will go over my personal journey of how I purchased my duplex and dramatically lowered my monthly expenses.

I downloaded several real estate apps on my smart phone (such as Zillow, Trulia, Realtor, and Redfin) and changed my search criteria to “multi-family” properties inside a specific mile radius where my girlfriend and I wanted to live. You can be as specific as you want with the various filters including the number of bedrooms, number of bathrooms, square footage, etc., but I really just wanted to see what was out there.

After a few months of filtering and searching, I ended up looking at five different properties – two of which I made offers on only to be outbid by someone else.

A couple weeks later, I got a notification that a two-unit, two bedrooms/one bathroom duplex just came on the market, which fit the criteria we were looking for. I called my real estate agent that day to tour the property as soon as possible. After the showing, I made an offer that was accepted the same that night! I was overwhelmed with emotion. Excited that my offer had been accepted, but also fearful at the same time. Did I do all my calculations correctly? Was I making a mistake? What if the roof leaks a month after moving in?

The property was listed for $270,000. I was using an FHA loan, a loan that is used often for first-time homebuyers, that allows for a 3.5% down payment (versus 20 for a conventional loan). After closing costs, inspection costs, and appraisal, I needed just under $13,000 to make it to closing.

Here is where the fun began. At $270,000 with a 3.5% down payment, the loan balance was $260,550. I financed this property on a 30-year mortgage at 4.5%. That means my monthly mortgage payment would be $1,320.17. Considering each unit in the property I was buying was a 2 bed/1 bath unit and the average rent in the same area was $1,600/month, this seemed like a no brainer.

The other expense that needed to be factored in was property taxes. You can find information on property taxes for a home you are thinking about purchasing on the county auditor’s website. My property taxes are high and equate to an extra $400 each month. The lender I used put my property taxes, home insurance, and private mortgage insurance (PMI) in an escrow account. This just means that the lender will pay my principle and interest, property taxes, and insurance for me in one monthly statement instead of billing me separately. Add this all up and my monthly bill is now $2,000/month. *

*Because of the low down payment option, lenders (banks) require private mortgage insurance (PMI) on properties. If a conventional loan is used (20% down), then you would not have this expense and the total per month would then be $1,875/month and would also be abbreviated PITI vs the PITI(I) that I have listed. You can also re-finance out of this at a later date once you have at least 20% equity in your property. FHA loans require that you live in the property for at least one year before refinancing.

Multi-family properties (2-4 units) are treated like single family homes in regard to lending and tax purposes. When a property has 5+ units, then the lender (bank) looks at the property more like a business.

As mentioned above, I should be able to rent out the unit I’m not living in for $1,600/month. I advertised this unit on Craigslist and Facebook Marketplace and I had renters sign for $2,000/month just two days after posting. This covers the cost of utilities which is not separated for my specific duplex. I am now living in a nice area for free!

I can take the money I’m saving (by not having a housing payment) and apply it towards other expenses, whether that be a car payment, student loans, credit card debt, or something else. Additionally, when someone pays rent, that money is going into someone else’s pocket. With house hacking, the money is at least going towards equity into the property that you own via paying down the mortgage. There are additional tax benefits to owning real estate as well, but that is beyond the scope of this blog post.

Personally, I have transitioned from a Dave Ramsey philosophy to more of a Robert Kiyosaki philosophy. With that being said, following the Dave Ramsey approach while in pharmacy school and during my first year post-pharmacy school put me in a better position to make myself more lendable. Banks look at certain key metrics (such as debt-to-income ratio, loan-to-value ratio, other assets, credit score, etc.) to see if you qualify for a home loan.

For more information regarding house hacking, take a listen to Episode 130 of the Your Financial Pharmacist featuring Craig Curelop, the Finance Guy at BiggerPockets and author of The House Hacking Strategy.

If you have further questions, please don’t hesitate to reach out to [email protected].

NMLS ID: 1681276

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10 Things I Wish I Would Have Known Before Buying My First House

Posted on by yfpadmin

The following post was written by Nate Hedrick, PharmD., a 2013 graduate of Ohio Northern University. By day, he works as a clinical pharmacist for the sales team at Medical Mutual. 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 the creation of YFP’s Real Estate Concierge Services, a one-stop shop for getting you on the right track toward buying or selling your next home.

My wife and I met on a blind date in pharmacy school. We were set up by a mutual friend and despite an impending snowstorm and an exam I really should have been studying for, we went out to our local Mexican restaurant and had a fantastic time. We were crazy for going out in that blizzard and my transcripts can attest to the fact that I should have spent more time studying. Despite the risks, we made it home in one piece, I passed that exam (with a C), and I ended up meeting my best friend that night.

We made that date work despite nature and other obligations working against us.

Now, over 7 years later, we are blessed with two darling baby girls, a goofy dog, a wonderful home… and a mountain of debt.

Pharmacy school is expensive. So are homes. (So are dogs and kids come to think of it.) Looking back, our blind date is actually a great analogy for our early financial life together. We bought our first home pretty much the same way we handled our first date. We were jumping in with both feet regardless of other obligations. I had just finished residency, our friends and family owned homes, and we were tired of the “temporary feeling” we had from renting. We were driving out into that blizzard despite what the weather report said.

I certainly don’t regret our first date and I love the home my daughters get to grow up in, I just now realize that there was probably more we could have done to set ourselves up for success in both cases.

Just like we could have waited an extra night for better weather and would have still gotten married years later, we could have waited a little longer for our finances to get in order and still would have ended up with a great place to live. Hopefully, some of what I learned can help you whether you are about to buy your first home or your forever home.

#1 – The bank does not set your budget.

A pre-approval letter from the bank is not the same thing as how much house you can afford.

As pharmacists, we are lucky to make great salaries right out of school. However, this is a double-edged sword that often fools us into thinking we can take on a lot more debt than we probably should. When a bank calculates how you get pre-approved for, they use the “28/36 rule” for conventional financing. This means that no more than 28% of your gross income may go to your total housing expenses. Furthermore, no more than 36% of your gross income may go to all your debts. Using these numbers with a pharmacist’s salary will often result in a pre-approval that could have you looking outside your range. Check out the calculator below to estimate your monthly payment based on your projected loan and other costs.

Mortgage Calculator

While there are many ways you calculate your own home-buying budget, I recommend considering the “50/30/20 rule”. The idea is that 50% of your TAKE HOME income should go to your needs, 30% to your wants, and 20% to savings.

Needs are things like food, clothing, transportation, medical needs, student loans, mortgage (or rent), insurance, and property taxes. Wants include entertainment, vacations, charitable donations, and any extra you want to throw at your student loans or other debt. Savings include traditional savings accounts, extra retirement contributions, and wherever you stash your emergency fund.

Remember, this is take-home pay, which really should be what you bring in after taxes and after maxing out your 401k match through your employer. I like the 50/30/20 calculation because it is specific enough to illustrate what you can really afford but flexible enough to allow you to adjust certain things based on your individual needs. Regardless of the method you use, calculate the number for yourself instead of allowing your lender to fool you into looking for a house you really can’t afford.

#2 – Shop around for mortgage lenders.

When I was looking for a bank to get a home loan for our first house I had no idea where to begin. I ended up just asking my parents which bank they used for their mortgage and went with that. It seemed like too daunting of a task to tackle otherwise.

Despite the numerous choices, I encourage you to meet with at least 3 different lenders or utilize a mortgage broker when finding your first mortgage. Find someone who is comfortable with the loan product you intend to use (FHA, conventional, VA, USDA, etc.) and compare what other incentives or advantages they provide if you decide to use them as your loan servicer. If you aren’t sure what the differences or advantages are between the different types of loans, check out my website www.RealEstateRPH.com for an article that walk through each type.

You can go to multiple banks or individual lenders online but this requires you to submit documents multiple times and could take significant time and effort. Plus, the moment you provide your information, it’s often sold to third parties and then you get bombarded with annoying phone calls, text messages, and emails by multiple companies. Fortunately, there is a faster and easier way to compare rates and that’s why we partnered with Credible.

Not only do they have an outstanding user-friendly platform that lets you compare mortgage lenders within minutes, but you deal with them directly until the final stages of the process.

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#3 – Save 20% for your down payment.

It can be extremely tempting to skip saving up a significant down payment for your first house. With loan products available that allow 3.5% down, why would anyone want to save up a full 20%?

While there are a number of reasons, the primary financial concern comes down to private mortgage insurance or PMI. Essentially PMI is insurance that protects the lender against individuals who default on their loan. The problem is that this monthly payment effectively buys you as the homeowner nothing but ends up costing you $100 per month or more. Luckily, this requirement is removed once you have reached 80% loan-to-value.

What the lender often neglects to tell you is that unless you submit a request at that 20% they can actually continue your PMI requirement up until your reach 78% loan-to-value. Although it might not seem like much, this 2% difference could equate to hundreds of dollars! If you do decide to put only 5% or 10% down, make sure you are paying attention for when you reach the 20% mark and are aware of the process your lender requires for waving PMI on time.

#4 – Don’t forget the hidden costs of buying a home.

Aside from saving enough for a down payment, you need to have some cash reserves set aside for all the little things that come with buying a home. Once you put an offer in, your first major expenses will typically be inspections. General home, pest, radon, sewer line, and other inspections are all important in making sure the home you are buying doesn’t have any major issues. Depending on which inspections you choose to have, you can expect to pay a few hundred to about $1,000.

Closing costs typically run between 2% and 4% of the cost of the loan. That means for a $200,000 house you need to have an extra $6,000 or so available on top of your down payment. The lender is required to give you a detailed breakdown of exactly what your closing costs will be before everything is due. The good news is, many times the closing costs can be negotiated into the purchase offer and actually paid by the seller. Your real estate agent can help with this. Property taxes, home insurance, and PMI (if you have to pay it) are often taken out monthly by your lender and put into an escrow account. This ensures the lender that these important payments are received each month and are on time.

Lastly, if your heater goes out in the middle of winter, you don’t have a maintenance department you can call like you do with a rental. Setting aside some additional funds for these unexpected costs is why an emergency fund is so important. Don’t drain your savings account with your down payment and forget to keep something in reserve for the unexpected.

#5 – Prepare for a lot of “hurry up and wait”.

If you are going to be getting any kind of loan for your new house, prepare yourself for the uncomfortable month that is underwriting. I understand it from the bank’s point-of-view, there is some serious legwork to be done when giving someone tens or even hundred of thousands of dollars. However, I have yet to experience a closing that didn’t involve some mix of “We need this document from X and Y in 24 hours or the whole deal is going to fall through.” Promptly followed by days of utter silence. It can certainly be nerve racking. My advice is to simply be prepared for it and don’t try to squeeze your closing date into a smaller time period than is advised by your Real estate agent or lender. Also, be as diligent as possible when it comes to document collection. Create a new folder on your computer for all your loan documents to live in during the underwriting process and gather all your financial information in that one space.

#6 – Don’t skip out on the home warranty.

I distinctly remember the moment during our negotiations that my wife and I told our Real estate agent we didn’t need a home warranty. The house we bought had just been redone and we were certain the appliances were new. I lived in that certainty for about 4 months before I had no way to wash my dirty laundry. Several hundred dollars later we had a working washing machine and a heap of regret. The average home warranty costs between $300 and $600. The average cost of a new washer is $700. The average cost of a new furnace is $4,000. Each of these (along with several other household appliances) are covered under most home warranties. A small price to pay for a lot of peace of mind. This is especially true when you consider that you can often negotiate for the seller to cover the home warranty for you.

#7 – Work with a real estate agent – its free! (sort of).

Being a real estate agent myself, I admit I might be slightly biased. However, even before I became licensed, I realized the advantages of working with a good real estate agent. For starters they have access to a lot more information than Zillow® or Realtor.com®. These websites work well for the initial home screening process but when it comes time to look seriously for a home, you need a more powerful tool. Each agent has access to a database of housing information specific to your area called the multiple listing service (MLS). Think of it like Lexi-Comp® compared to webMD®.

The best part is that they can give you limited access to this database for yourself if you simply ask. Through the MLS portal, your real estate agent can set up automatic searches that deliver updated listings directly to your inbox as soon as new information becomes available. Once you find a property you are interested in, your agent should help you set up showings, put in offers, negotiate with the seller, and generally help you navigate the complex buying process.

When it comes to contracts and offers, I also recommend finding an agent comfortable with DotLoop®. This online tool allows all the important documents to be drafted, signed, and delivered online. The convenience of being able to submit a signed offer from your pharmacy’s break room is hard to beat.

Finally, the best part is that all this help provided by a real estate agent is effectively FREE if you are a first time homebuyer. The commission for real estate transactions is generally paid by the seller and then split between the listing agent and your agent. This means you usually only pay a small office fee of a few hundred dollars to get the whole deal done! Not a bad price to pay for personalized service.

Finding an agent like I described above can be a challenging prospect. That’s why we’ve created our FREE Real Estate Concierge Services! Here’s how it works: Head on over to our real estate page and click on buy or sell a home. There, you can sign up for a free 30-minute call with Nate. During that call, we’ll start by learning about your budget, wishes, and goals. Then Nate will connect you with one of our preferred local agents from a network of personally interviewed and vetted top-tier agents. This gives you a local expert to help you on your way. Throughout the whole process Nate will stick by your side, even after closing, in case you have any questions or need an extra opinion along the way. It’s as simple as that! Head on over to our Real Estate page and get started today!

#8 – Home ownership provides tax advantages, even for people that make “too much”.

Not many people would expect there to be disadvantages to making a six-figure salary right out of school. If there is a downside however, it has to be income tax and a significant lack of tax breaks. Even the meager deduction that is student loan interest is lost if you make more than $85,000 per year ($170,000 if married and filing jointly).

Luckily, real estate remains a refuge for limiting your taxable income. Since interest payments can be the largest component of your mortgage payment in the early years of owning a home, the biggest deduction for many people is mortgage interest. There is even an extra point-based deduction you can take the first year you buy your home. For example, if you paid two points (2%) to close on a $200,000 mortgage ($4,000), you can deduct the points as long as you put at least $4,000 of your own cash into the deal. And believe it or not, you get to deduct the points even if you convinced the seller to pay them for you as part of the deal.

Finally, you can also deduct local property taxes you pay each year.

All these combined deductions can add up to quite a lot come tax day. This advantage can even be taken several steps further when you talk about real estate investing and home depreciation, a complicated topic that is worth reading up on.

#9 – Plan to stay for a few years.

The real financial advantage to buying a home comes from slowly building equity by staying there for several years. Although it’s not always easy to predict where you are going to be in a few years (geographically and in life) try to make a five-year plan when deciding how and where you want to live. If you don’t want to be tied to a particular location, perhaps renting is a better idea. If you and your spouse want to have a large family, pick a location (and the number of bedrooms) that supports your plan for a few years down the road. Again, all of this is easier said than done.

My wife and I bought a home with three bedrooms thinking we could grow into them once we started a family. That plan started to fall apart when both of us ended up working from home. Just two years after buying out home we found ourselves with a master bedroom, a nursery, an office…and one of us at the kitchen table. Flexibility is really the answer if your original plan has to be scrapped. Eventually we worked out an extra office space in the basement and now my wife only works at home a few days per week. My advice is to have a plan, then be able to roll with the punches if and when things change.

#10 – Consider “House Hacking”.

How would you like to buy a home, live privately in your favorite part, and have someone else pay your mortgage for you? If this sounds to good to be true, I encourage you to start reading up on the concept of house hacking. The basic concept is to buy a home with 2-4 units, live in one of them and rent out the others. Ideally, these are long-term tenants that consistently pay you enough rent to cover all or most of your housing expenses.

The real beauty of house hacking becomes apparent when you learn that the bank treats the loan for a 4-unit home in the same way they treat a single-family residence. This means a single mortgage buys you not only your first home but also your first investment property. There are also easier ways to house hack if being a landlord isn’t your cup of tea. Renting out your extra bedrooms, transforming your basement into a rentable guesthouse, or even Airbnb are all simple ways to lower your house payments by having others pay your mortgage for you. No matter how you do it, if you don’t mind living with a guest or two, house hacking can be an incredible way to make your first home more affordable. To learn more about house hacking, check out Episode 130 with Craig Curelop, the Finance Guy for BiggerPockets and author of The House Hacking Strategy.

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One pharmacist’s experience with cutting his house payment in half

Posted on by yfpadmin

This post was written by Justin Cole, PharmD, BCPS. He is a 2006 graduate of Ohio Northern University. Dr. Cole recently accepted an appointment as Vice Chair and Assistant Professor of Pharmacy Practice at the Cedarville University School of Pharmacy. Over the previous 10 years, he served in various roles at Nationwide Children’s Hospital in Columbus, Ohio, where he continues to practice. Professionally, he is passionate about pediatrics, pharmacy leadership development, and medical care of underserved populations. You can follow him on Twitter for content related to these passions. He and his wife, Michelle, have three children and enjoy music, hiking, biking, and just about anything done outdoors. If you have any questions about this article, feel free to contact Justin directly at [email protected].

For most of us, a home is the largest purchase we will make in a lifetime. As a result, our homes are a symbol of status and wealth. We are slaves to comparison, defining ourselves by the number of square feet we occupy or the status of our neighborhood.

Pharmacists may also feel pressure to buy a “bigger and better” home similar to or better than the ones owned by our parents. These factors can lead to taking on mortgages that hinder us from achieving other financial goals. We give ourselves little wiggle room for changes in our financial situation and fail to account for all the costs of home ownership. Mortgage delinquency rates, even though improved today, remind us of this. Five percent of homeowners in the US are at least 30 days behind on their mortgage payment, and more than two percent are at least 90 days late (Ref: Forbes, 2017).

I felt many of these home-buying pressures shortly after graduating from pharmacy school. After having our apartment broken into, my wife and I decided to leave renting behind to buy our first home in a nice, safe neighborhood. We desired to have children in the future, so we looked for homes that we felt would be ideal for a family. During our first showing, we walked into the home and quickly felt it was our “forever home.” We ended up purchasing the beautiful four-bedroom home in a developing area. We knew it was a stretch for us to afford at the time, but we could not imagine passing up the opportunity.

To make it work, we ended up putting 10% down at closing and chose to take a second smaller mortgage at a higher interest rate for the additional 10% of the down payment (which I would never recommend doing). We paid off this second mortgage within a year by trimming costs in other parts of our budget. Over the next few years, we were able to refinance our home and were on track to pay off our mortgage years early. We felt incredibly blessed with our house and our three children that made it a home. We had hosted family gatherings, hosted a small group for our church, developed great relationships with neighbors, and made many fond memories in our home. It seemed that despite some of our financial decisions, things were working out well.

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After 10 years in hospital practice as a clinical pharmacist and coordinator, I accepted an academic appointment at a school of pharmacy. With this career change, we decided to relocate and were suddenly in the housing market again. During our search for a new home, we initially went into the process thinking of making a lateral move into a similar-sized home. After all, we were comfortable in our previous home and enjoyed the space it provided. We put offers on two similar-sized homes, but neither worked out. Because homes were selling quickly at the time, we had to rethink our strategy. My wife and I decided to consider homes that were smaller than the one we previously lived in.

In the end, we moved to a wonderful home that was less than half the size and cost of our previous home.

I did not fully realize the impact that home ownership had on our overall financial picture until our move. Through the process, we have learned a lot about ourselves and experienced many unexpected freedoms through downsizing.

Freedom to pay down debt. We were already on a path toward financial freedom, but much of my income was going toward our mortgage payment each month. Moving to a smaller home allowed us to pay off all of our non-mortgage debt including my student loans and an auto loan for a used minivan. Without the move, it would have taken us many more years to achieve debt freedom despite our best planning!

Freedom to save, spend, and give. We desire to be good stewards of all that we are given. Moving to a smaller home allowed us to bolster our emergency fund and gave us the flexibility to save more for retirement. Shortly after moving and paying off our non-mortgage debt, we also decided to take a family vacation that previously seemed like a distant dream. Most importantly, we were in a position to be more generous. While we had always budgeted to give to our church, mission work, and a handful of non-profit organizations we supported, we found ourselves with the ability to meet other needs around us.

Freedom from anxiety. It still pains me to admit this, but I did not realize how much time and energy I spent worrying about our financial situation until after the move. While we weren’t living paycheck to paycheck and had an emergency fund, I still spent a lot of time dissecting our finances, much of which went toward our mortgage payment. After the move, it was as if a burden had been lifted off our shoulders. I found myself thinking a lot less about our financial situation, and my sleep even improved as a result. I had never thought of myself as an anxious person but realized that concerning finances I was. Sometimes it takes a change in circumstances to reveal faults in our own mindset.

Freedom from the desire for more. No one likes empty rooms. The bigger the house, the more you have to buy to fill it. In moving to a smaller home, we began to reevaluate what we really need. We have sold some items, donated others to second-hand stores, given items away, and even trashed things that we had been holding onto for too long. For purchases, we now consider space carefully and evaluate the real need for something shiny and new. In essence, we have learned to live with contentment. We are now more debt-averse than ever before. Our spending habits have changed; we now spend less on possessions and more on experiences that our family can turn into memories.

While living below your means makes complete sense, it took an unexpected change to help us truly realize its blessings. We can confidently assert that freedom comes from making financial independence a higher priority than status symbols. While this may not be the last home we buy, we are content with all of the unexpected blessings that we have through it, and are prepared to make solid financial decisions because of the lessons we have learned.

So what is the way forward for someone who desires to achieve financial freedom and purchase a home? How do you determine what home you need rather than the home you want? Can you have both? Look for more posts this summer related to how home buying fits into your overall financial plan!

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Episode Summary

Key Points from the Episode

Episode Highlights

Links Mentioned in Today’s Episode

Episode Transcript

Episode Summary

Key Points from the Episode

Episode Highlights

Links Mentioned in Today’s Episode

Episode Transcript

Paid Partnership with Tony Umholtz, First Horizon

Financial Readiness

Understand Your Home Wants and Needs

Location

Type of Home

Must Haves vs Nice to Haves

Working With a Professional Realtor

Conclusion

Find the Best Home Loan for You

Paid Partnership with Tony Umholtz, First Horizon

How to Build a 6 Figure Rental Portfolio in Less Than 3 Hours a Week

How to Start Investing in Real Estate in a College Town

Ready to take the next step in your real estate investing journey?

7 Ways to Reduce Your Monthly Housing Costs

1. Downsize

2. House Hack

3. Get a Roommate

4. Geo-Arbitrage

5. Airbnb

6. Re-evaluate Your Homeowners Insurance Policy

7. Refinance Your Mortgage

Mortgage Refinance Calculator

Another Possible Option: Live the Van Life

Conclusion

Buying a House with Student Loans

Three Strategies for Buying a House with School Debt

Renting vs Buying

Are You Ready?

Know Your Budget

Debt-to-Income Ratio (DTI)

Credit Score

Down Payment

Consider a Professional Home Loan

Another Tip Before Moving Forward

Strategy 1: Buy a Home ASAP

Strategy 2: Pay off all student loans then buy a home

Strategy 3: The Hybrid Approach

Conclusion

A New Practitioner’s Perspective on House Hacking

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