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Category: Real-Estate / Podcast

YFP 169: Helpful Tips for Getting a Mortgage

Posted on by yfpadmin


Helpful Tips for Getting a Mortgage

Tony Umholtz, a Mortgage Manager at IBERIABANK/First Horizon shares helpful tips for getting a mortgage and what you need to know when financing a home purchase or refinancing your home. Tony also breaks down the difference between pre-approval and pre-qualification, how interest rates are calculated, different types of home loans and everything you need to know about escrow accounts.

About Today’s Guest

Tony graduated Cum Laude from the University of South Florida with a B.S. in Finance from the Muma College of Business. He then went on to complete his MBA. While at USF, Tony was part of the inaugural football team in 1997. He earned both Academic and AP All-American Honors during his collegiate career. After college, Tony had the opportunity to sign contracts with several NFL teams including the Tennessee Titans, New York Giants and the New England Patriots. Being active in the community is also important to Tony. He has served or serves as a board member for several charitable and non-profit organizations including board member for the Salvation Army, FCA Tampa Bay and the USF National Alumni Association. Having orchestrated over $1.1 billion in lending volume during his career, Tony has consistently been ranked as one of the top mortgage loan officers in the industry by the Scotsman’s Guide, Mortgage Executive magazine and Mortgage Originator magazine.

Summary

Tony Umholtz, a Mortgage Manager at IBERIABANK/First Horizon joins Tim Ulbrich on this week’s episode to dig into a huge piece of the home buying or refinancing process: financing. He breaks down several key components of financing such as the differences between pre-approvals and pre-qualifications, loan types and how interest rates are calculated.

Tony recommends that someone begins talking to a lender before they begin looking for a house so that they can learn about different loan products and get a pre-approval letter. A pre-approval letter is needed from the lender when you make an offer on a home. It communicates to the seller that you are able to finance a home and that your credit has been checked. If you’re not quite ready to shop for homes, Tony mentions that a pre-qualification can be run as a cursory overview of someone’s income and debt. A pre-qualification doesn’t pull credit, however it does use your debt to income ratio and could be helpful in the beginning stages of the process.

Tony talks through different types of loan products including conventional, FHA, VA and jumbo loans. Regardless of the loan product you chose, your mortgage will have an interest rate. That interest rate fluctuates based on many factors, like the market itself, individual factors such as credit score and the type of property (single family vs condominium).

IBERIABANK/First Horizon offers a loan option for pharmacists called the Pharmacist Home Loan (aka the Doctor’s Home Loan). This loan allows you to buy a home for 3% down if you’re a first-time homebuyer (5% down for subsequent homes) and pay no mortgage insurance. Full disclaimer: this is not the case for every homebuyer. There are certain restrictions to qualify (maximum loan amount and minimum credit scores) and certain property types where the down payment rates can differ.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tony, welcome back to the show.

Tony Umholtz: Tim, thanks for having me.

Tim Ulbrich: It’s almost like you’re a regular now, number three that we’re doing this. So glad to have you back. How are things going down in Florida?

Tony Umholtz: You know, we’re doing great down here. And Tim, always good to be here with you. And you know, it’s hot and humid down here in Florida.

Tim Ulbrich: We are finally on the tail end of that heat here in Ohio. I feel like we’re getting the beginnings of some fall weather, which I’m biased, of course, but some of the best weather I think in the country comes in September and October in Ohio. So excited for that time of weather here and just enjoying that with the family. So Tony, before we jump into I think what’s going to be a great discussion on helpful tips for those that are going through the financing part of the process, looking at obtaining a mortgage, I don’t want to make an assumptions that our listeners heard both of our previous episodes that you were in, so give us a little bit of background on you and the work that you do at IBERIABANK/First Horizon

Tony Umholtz: Yeah, sure, Tim. I’ve been with IBERIABANK/First Horizon now, gosh, two and a half, almost three years with IBERIABANK/First Horizon and I run a team that handles mortgage originations for purchase transactions, refinances, across the country. We can handle most states, 48 states. And I’ve been in the industry now almost 20 years — I can’t believe I’m saying that, Tim. But I’m aging myself — nearly 20 years. And my background, of course, through college was finance. I was a finance major and did an MBA as well. But I’ve just really enjoyed helping people, helping families, with the home buying process. I have several kids. I have three children. I have a daughter who’s about to turn 12, I have a 10-year-old, and we recently adopted a 2-year-old girl last fall.

Tim Ulbrich: Always appreciate having you on, sharing your expertise, I know a topic that is of interest to so many of our listeners that may be in a first time home buying position, might be moving, might be in a refinance situation, especially given the market and the landscape of what we have. And we had you on, as I alluded to, Episode 136, Ins and Outs of a Pharmacists Home Loan, and Episode 154, Getting a Home Loan in a Pandemic, so I’d reference our listeners to those two episodes for more information. But today, we’re getting a bit more specific in the home buying to talk about mortgages and to learn tips really when navigating the financing part of the process when it comes to home buying and refinance. And just for some background, the nature of how we came to this idea for an episode is I was reflecting, you know, having gone through the home buying process twice and having gone through the refinance process twice, most recently just a couple months ago here with our home in Columbus, which I’ve talked about on a previous episode, honestly, I feel like I still have a pretty elementary level understanding of everything that is involved with the lending process, and I feel like each time I have gone through that, I’ve learned something new. And so just like we do with much of our content on the Your Financial Pharmacist podcast, I feel like any education we can share with pharmacists so that they’re better prepared as they’re going through it, hopefully the better. You know, we believe firmly that the more educated you feel, the more empowered you are in the process, the more involved you are in the process, the better the outcome is. So that’s really the nature and the background for this week’s episode. So Tony, I want to in a moment start jumping into some terminology that I think often folks may get hung up on or wondering about, but my first question for you, as somebody who is perhaps listening looking for their first home, so going through the home buying process the very first time, when do you typically recommend somebody begins engaging in a conversation with the lender? As they’re out perhaps looking at homes or looking at Zillow or Redfin or wherever, when do you want to get the lending piece of the process moving forward?

Tony Umholtz: Tim, great question. I always believe that you want to get the dialogue with the lender going immediately, even before you’re out there looking at homes. I mean, it’s OK to be looking around on Zillow or Realtor.com a little bit, but before you start entering into homes, a majority of realtors out there are going to want to before they show you a house, a listing agent will allow you into the house, they’re going to want to know you’re pre-approved. And I always find knowledge is power. You know, knowledge is power. Knowing what you can and can’t do as far as affordability is critical. And you might be surprised, with the rates where they are today, you may be able to afford more home than you realized. But I would always engage with a lender first. I think that that’s a critical first step.

Tim Ulbrich: I’m glad you said that, Tony, because the other thing that jumps out to me here, as we’ve talked about before on previous episodes that you and I have discussed on the show is really the importance of you as the individual setting your home buying budget and really understanding how this fits into your monthly cash flow as you’re looking at all of the other goals when it comes to your financial plan. So you know, as you begin to get serious of looking at homes and you’re starting to obviously get excited about the process, I know through firsthand experience, the budget can quickly go out the window as you start looking at homes, or at least that can be challenged. And so having a good pulse on that and really understanding what would that loan look like and talking to the lender, what might that mean from a down payment, from rates, from month-to-month payment I think can really help understand and set expectations as you’re going into the actual process of evaluating homes and hopefully getting excited about what lies ahead. Tony, you mentioned pre-approval, and that was one of the questions I had for you is I know the terms pre-approval, pre-qualification, often get thrown around. Talk to us about the difference of those terms and why that’s important to lenders.

Tony Umholtz: Sure, sure. So the pre-qualification is actually — a lender will just do a cursory overview of your income and then your stated debts. So typically, a client will say, “I don’t want my credit pulled at this time, but I’d like to know what I can afford.” The risk here is we don’t — when we run your credit report, we know your actual score, we know exactly what those debts are. But we get an estimated amount or what you’re paying on it, and then we take usually a pay stub or a client will give us a tax return, and we can see what their earnings are and we can run what’s called a debt-to-income ratio. And if it meets that property, in that loan on the property, it meets the debt-to-income ratio, you can get a qualification. And a pre-approval is really just a little deeper dive. We actually run credit and then we review a pay stub or a tax return if you’re self-employed. So it’s really the difference between the two is the credit report is added on the pre-approval.

Tim Ulbrich: OK, Tony, so we have the difference then there between the pre-qualification and the pre-approval, so my natural question then as I’m thinking about this from the view of somebody that may be in the buying process is which is better? And does that matter in the process?

Tony Umholtz: Well, you know, typically most real estate professionals, realtors, are going to want a pre-approval letter that the buyer’s credit has been reviewed. So typically, that’s going to carry more weight in the real estate world. In today’s day and age, it’s a very competitive market, and knowing that you have a pre-approval is going to carry a lot more value when you’re up against other people who have a pre-approval and cash buyers. So I would say it carries a lot more weight. But if you’re still a ways out from purchasing, there’s nothing wrong with a pre-qualification. But if you’re serious and you’re really — you may make an offer, I really would advise, you know, I think having a pre-approval is the right way to go.

Tim Ulbrich: I think it’s worthy, Tony, that we’d spend a few moments talking about the different types of mortgages or loans that are available. Obviously we started the conversation with talking about when we might work with a lender, we talked about pre-qualification/pre-approval, but there’s more than one option that is out there that could have significant implications on not only rates but also down payments, how inspections are conducted, so talk to us at a high level about the different types of mortgage lending options that are out there for a home buyer.

Tony Umholtz: Great question. So we have the three main products that you’ll hear out there are conventional loans, FHA loans, and VA loans. And then of course there’s jumbo loans. And I’ll kind of go through at a high level what each of these are. Conventional mortgages are typically backed by Fannie Mae and Freddie Mac, not to get too technical and boring on this call. I don’t want to — I won’t get into the details of the secondary MDS market. But they’re essentially insured by government-sponsored entities because Fannie Mae and Freddie Mac are generally considered as government-sponsored entities, so when they insure a mortgage, an investor who buys that security has the — basically the intrinsic value, knowing the intrinsic value that the government’s going to back that investment. So if the home buyer were to default, the government’s going to reimburse the investor. So they are pivotal to the keeping our home mortgage market vibrant. Fannie and Freddie purchase so many loans. If we didn’t have those, it would be very much in trouble. The FHA is the Federal Housing Administration, can be very attractive. It has some programs for home buyers that may have a little bit of a challenge with credit or a little bit more flexible situation. So the FHA serves a big need. Typically, there’s home, there’s a cap per county, meaning that each county in the U.S. has a cap on the size of an FHA loan that’s allowed. And again, this is a government-backed mortgage as well. Then there’s VA loans, which VA loans are a great program, but it is kind of isolated to just a small sliver of the population who served our country. It would be for any veteran or active military. So that’s kind of what a VA loan would be. And it has its own guidelines as well. And then there’s jumbo loans. And what those are are loans that are above the conventional or conforming loan limit for a county or area. So the majority of counties in the U.S. had a $510,400 loan cap currently. Now that may change the beginning of the year 2021, but currently, that is where the limit is in most counties. You know, for example, in California, areas in California around San Francisco, Los Angeles, northern Virginia, Alexandria, Washington, D.C., New York City, you have a higher conventional loan limit in those markets, sometimes up over $700,000 depending on the county. But anything above — generally above $510,400 loan amount is considered a jumbo loan amount. And the significance of that is it’s not backed by Fannie or Freddie. So it’s not backed by one of those government-sponsored entities. It’s more private capital at risk, whether it’s a mortgage REIT, private like investment fund or a bank’s balance sheet. So a lot of jumbo loans are written by banks and are held on the balance sheet like just any other asset. So they’re just viewed with a different lens. So hopefully that was a high level, I didn’t want to get too technical.

Tim Ulbrich: No, that was great. Succinct. And I would reference our listeners to if you go to YourFinancialPharmacist.com/homeguide, all one word, we have a home buying guide that goes through several steps of the home buying process but also talks about each of those loans in more detail and I think builds upon the quick summary that you gave, Tony. And I think as I alluded to, it’s so important that our listeners understand these options. I think ideally before they even get too far down the path of searching for homes and beginning to think about where this home buying decision fits in because it will have significant implications on things like down payments, on rates and other types of factors. And so it’s an important decision to weigh and to understand. And we’ll talk in more detail about the pharmacist home loan option as I know that’s going to be of interest to many folks that are listening, how that compares to some of the options that you discussed, what that means in terms of down payments and credit scores and maximum loan amounts, which you already alluded to here a little bit, so hang with us and we’ll get there in just a little bit. Tony, you threw out the term REIT, and I know that’s something we haven’t talked a lot about on the show before. So I don’t want to go down a REIT discussion necessarily — we can cover that in more detail on a future episode — but for those that heard and may be wondering or hearing that for the first time, can you quickly define the REIT concept?

Tony Umholtz: Real Estate Investing Trust is what a REIT stands for. And again, we won’t go down too much into this rabbit hole, but that can encompass — a REIT can actually own real estate, right, can be publicly traded. They can own apartment complexes and all these different real estate assets, tangible assets, office buildings, shopping malls, data centers, you name it. There’s different sorts of REITs out there, and some are publicly traded, some are private. But there are actually what’s called a mortgage REIT. And there’s many that are publicly traded. And I’ll just throw out one, it’s called the Redwood Trust and it’s publicly traded. They are known for buying nonconforming jumbo mortgages. So that’s when I referenced that, there are actually REITs that buy mortgages that they have to originate them per their guidelines. But they are — they will essentially, if you originate it following their underwriting guidelines, they purchase the loan. That’s for jumbo mortgages.

Tim Ulbrich: And I want to spend a little bit of time talking about rates and something that it’s obviously a part of the lending process, people focus on it for good reason as I talked about on sharing my most recent experience refinancing our home with IBERIABANK/First Horizon rates matter. And we were able to go from a 4.625%, we bought here in the peak really of the market and rates in Columbus back in fall 2018 and refinanced that to a 30-year 3%. And my usual disclaimer will be inserted here as we talk about rates as we’ll talk about the makeup and nature of rates, it obviously can be and is very different based on the time period, based on what’s going on with rates and the economy, as well as based on factors that are specific to the individual. So as I mentioned, 3%, in no way am I trying to imply that that is what somebody may or may not get. We actually may see rates that are lower. Currently, some may be higher based on their own situation. But a general discussion about the makeup of rates is warranted as I know that’s such an important part of this process. So Tony, how is a rate determined? Kind of building off my point that it can and is different from person to person. And what factors are considered when somebody’s rate is being calculated?

Tony Umholtz: Great question. There’s a lot that goes into the interest rates. And the big factor is the market itself. So the interest rates are calculated really not by the Fed. Now, the Fed has a huge influence. And traditionally, I mean, I go back when I first started in the early 2000s in this business, the Fed had less power than it even does today as far as what they’re doing as far as mortgage securities. And that’s what they’re doing with buying bonds directly, which really keeps rates down. But the trading of the mortgage-backed security market is what dictates interest rates. So that is really why it can move from day to day. Right now, we’re in an economic crisis. I think the Fed has done an amazing job coming in and just stopping what could have been — as bad as things are, imagine if the Fed didn’t do what they did providing PPP to business owners, doing all of these things that they did to really backstop the economy. And I think that that’s been a really blessing for the U.S. But as a result, rates are very low, and the MBS market is what controls interest rates. We hear talk about the Fed Funds rate. The Fed Funds rate might be pretty much 0% right now, but that’s not really what dictates the mortgage rates. So it’s called MB — Mortgage-Backed Securities is what dictates where interest rates are going to go. But there’s a lot that goes into it. So the other big piece is of course the borrower themselves.

Tim Ulbrich: Yes.

Tony Umholtz: So their credit score is going to matter. It’s very highly sensitive to credit score. It also can be sensitive to loan-to-value. And what that means is what your home is worth compared to the mortgage amount. That can influence the interest rate you receive. A refinance compared to a purchase, oftentimes purchases receive a slightly better rate than a refinance will. The other factors are the property type. Condominiums are considered a riskier asset in the eyes of the lender than a single family home generally. You see a small increase in interest rate for a condominium. You also may see a small increase in interest rate for a multifamily property versus a single family property. And what I mean by that is a multifamily is considered to be a duplex, which is two units, a triplex, which is of course would be three units, and a quadplex, a four-unit property. Those can carry slightly higher interest rates than a single family home because of the property type. But even as a buyer, you know, if you purchase a condominium, there’s potential for risk for any of us. So the due diligence a lender does in assessing the condo’s what’s called warrantability, meaning its approvability as a condominium, just supports the buyer. It’s really like Big Brother looking over your shoulder when assessing a condo because the lender is going to assess the budget, they’re going to assess the viability of the project itself, make sure that the condo docs are in order. Essentially, they’re going to make sure it’s a viable project and protect both the buyer and the lender, but especially the buyer from special assessments. So condos are just looked at a as a little bit of a riskier asset class versus a single family home, generally. Also then the multifamily properties, duplex, quadplex, triplex, as we referenced, they’re going to potentially have other renters in the project and could add a little bit of a risk rate. So that’s why they have a slightly higher rate.

Tim Ulbrich: And I’m glad you differentiated that, Tony. I know — I feel like in a time period like this where rates are so low and it’s garnering so much attention, so many news articles out there about great time to buy, great time to refinance, everyone’s talking about rates. It almost becomes like a cocktail conversation, you know, where people are like, oh, you got what rate? You got what rate? And I think just reminding folks that at the risk of perhaps oversimplifying, what I heard you say there is that the rate, really three main buckets I hear is determining the rate: the market factors, which are changing of course day-to-day, you talked about the mortgage-backed securities, the individual factors of the borrower themselves in terms of their — looking at their credit scores, their debt-to-income ratio and obviously we know that’s different from one individual to another. And then the third bucket I heard there would be the actual type of lending and what’s unique to that specific property, whatever they’re looking at. So single family home versus the multiunit versus condos and then you even mentioned how it can be different on a purchase versus a refinance. So again, great summary and a good reminder that of course we’re looking at rates, we should be thinking about them, we know how they can impact a monthly payment, but really understanding that that can be different from one individual to another. So if I’m in a position, I found a house I want to purchase, and I’m looking to move forward with essentially writing up a purchase agreement, what things can or cannot be included in a purchase agreement? And the reason I’m asking this question, Tony, is I know we have had a couple folks from our community working through this process that may have realized some of this for the first time. And it’s worth talking to others about as well. So things that can or cannot be included in a purchase agreement.

Tony Umholtz: You generally when you’re going to — this is pretty universal for all lenders, you want to try to keep your purchase contract to the collateral, which is the actual piece of real estate that you’re looking to purchase. And you know, oftentimes, you’ll see a lot of other furniture, stereo systems, whatever, you name it, referenced in the contract, other items outside of the real estate that aren’t tangibly connected to the property. You don’t want to keep those in the contract for the appraiser or for the lender because we’re not there to finance personal property. We’re there to finance the actual real estate. So you have to be careful to keep that out. You can have another agreement for personal property with the seller. But you don’t want that to be part of the collateral for the appraiser view or for the lender. A lot of more experienced realtors will know this, but not everybody is aware of it. And if you’re buying a for-sale-by-owner and you’re working directly with a seller, it’s very common to see that.

Tim Ulbrich: Yeah. Tony, I want to go one step back before we talk about escrow accounts and then dig into the pharmacist home loan product in more detail. One of the things you mentioned that I think is of interest to our listeners is you mentioned the impact of credit scores on rates and how sensitive that can be. Can you give us some more information about what do you mean when you say how sensitive it can be? And perhaps that can help also guide or get folks thinking about strategies as they look at improving their credit and how that can impact the lending process.

Tony Umholtz: Another good point. So credit scores are — especially in conventional loans, especially on long-term fixed rates, so 30-year fixed especially — are going to be highly sensitive to credit. So someone that has a 680 credit score compared to a 740 credit score is going to have a different interest rate, clearly. And it’s even as granular as 700 to 720 or 740.

Tim Ulbrich: OK.

Tony Umholtz: There can be different movements in rate. One could have an eighth or a quarter higher rate because their score is 20 points below that 740 factor or if you start going into the 600s, it could be much lower than a 740. So it is highly correlated to credit score. And we actually have a program that we use for our clients where we’re able to boost the client’s credit score about 30 points in the processing time. Again, it just allows them to see — we have a program that will allow them to when we run their credit or give us what their credit score could be if they handle a few things on their credit, whether it’s paying down a credit card, paying down an installment debt, and that’s been a really good tool to help maximize not only qualifying but getting better rates. It’s highly, highly sensitive to — and certain programs have credit score minimums, right? You can’t go any — and it’s very sensitive on jumbo loans. A lot of jumbo loans will not go below a 700 credit score. It’s a big adjustment to both qualifying and interest rate.

Tim Ulbrich: Yeah, and as you mentioned, an eighth or a quarter of a point, that’s a big deal on $300,000, $400,000, $500,000, you know.

Tony Umholtz: Right.

Tim Ulbrich: Obviously people can run the numbers. So really being able to see that difference or being able to do some things to shore up that credit score could make a big long-term impact on the amount of interest that they pay over the life of the loan. Tony, let’s talk escrow. I know I mentioned this in detail when I talked and shared my refinance experience with IBERIABANK/First Horizon, but I think it’s one of those topics that for many, myself included, is just still kind of fuzzy in terms of really understanding how escrow works, pros and cons of pulling out of escrow, who may or may not have that options, what that would look like, what they should be thinking about. So give us kind of the main talking points around escrow. What is it? What’s the purpose? And what pros or cons may come from somebody looking to waive escrow?

Tony Umholtz: So escrows are just simply going to be your taxes and your insurance. Another word that is floating around are impounds is another word you’ll sometimes. But escrow essentially is just the taxes, your homeowners insurance, your flood insurance if you’re in a flood zone. So things that you’re going to pay no matter what, right? Even if you paid cash for the home, you’re going to owe your county or municipality or your state, and you’re also needing to pay for insurance to make sure your asset’s insured. So essentially, what lenders look for is typically at a 80% loan-to-value, a lot of lenders, I don’t want to say it’s universal because not all programs will allow it. But you know, some programs will allow you to actually waive escrow. What that means is you are paying the taxes and the homeowners insurance on your own. Now I want to say one thing about flood insurance. If you’re in a flood zone and you have a mortgage, even if you waive your escrow, like your homeowners insurance and your property taxes, you still have escrow for flood. That’s a federal mandate that lenders can’t get around. But you can waive the other two. You can have the homeowners — homeowners insurance is also called housing insurance, and you can waive those two items if you’re under 80% loan-to-value. If you’re over 80% loan-to-value, which a lot of first-time home buyers are, a majority are, you cannot waive them. The lender is required to escrow them. There really is pros and cons to having escrow. The majority of, again, of first-time home buyers are going to be over the 80% limit. So they’re going to typically be required to escrow. And a majority of people, even below 80%, I find want to have the escrow. And the reason behind that is you’re responsible for paying those lump sums on your own if you waive your escrow. So if you have an $8,000 annual property tax bill, and let’s say it’s due in November, which a lot of municipalities are, you’re paying $8,000, right? And if you have a $3,000 homeowners insurance bill around the same time, you’re paying $3,000. So most people like to have that spread out over the 12 months. And all the lenders doing is collecting each month 1/12 of your payment each month. Now, the cons are — of that is you don’t control it. Right? Meaning the lender does, and they’re holding the money for you. And right now, it doesn’t matter as much because interest rates are so low on deposits. So if you hold your money in the bank, you’re not really making much on it. But when interest rates go up and you can earn 2.5% on a Money Market account or more, the bank is holding your money and you’re not. So you can essentially earn interest off the money. That’s one of the cons I would say. And then the other thing would be just when you’re going to refinance, especially late in the year — and this is a key point I think people who are refinancing need to understand — if you’re getting close to the time when your taxes are due, the lender is going to have to collect a lot of tax. And it’s going to look like they’re rolling — I mean, if you were to refinance now, you’re almost rolling a year’s worth of tax into your mortgage. Now, the existing lender is going to give you back a check for everything they’ve built up in the escrow account.

Tim Ulbrich: Right.

Tony Umholtz: Right? So it will be a wash, but it’s going to look like a lot of money. Where if your escrows are waived, it’s a little bit cleaner. You don’t have all of that lump sum being moved back and forth. So that could be another pro to waiving escrow. But majority of people like the simplicity of having the lender take care of it, it’s one less for them to have to worry about, and just the ability of not having to stress over having to make lump sum payments on time.

Tim Ulbrich: Yeah, and I think, Tony, great points. And for those that do decide to pull out of escrow, you know, you mentioned being ready for that big payment or here, it’s divided into two payments. So you know, obviously there’s some strategies that can help that in terms of essentially creating a sinking fund for your taxes and insurance and every month contributing to that so you’re not caught off guard by that. But I think for everyone, individual situation, weighing the pros and cons and evaluating that as you’re going through the process if they have that option available to you based on loan-to-value.

Tony Umholtz: The one thing I did want to mention about escrow — sometimes, you’ll hear hey, there’s an escrow waiver fee or my rate is a slightly higher if I waive escrow.

Tim Ulbrich: Right.

Tony Umholtz: And some programs do have this adjustment. And the reason why is I mean, if you technically didn’t pay your taxes or your insurance, there could be risk to the lender. I mean, in some counties and states, if you don’t pay your taxes, someone could buy your tax deed. So there’s risk to the lender potentially if you didn’t do that. So I just wanted to make sure I outlined why there’s that fee that you’ll commonly see in the industry.

Tim Ulbrich: Great stuff. I’d like to wrap up our time together by talking about the pharmacy home loan as one option that folks may consider as they’re going through the home purchase process. And we’ve talked about it before on episodes 136 and 154. But I think it’s an opportunity that many of our listeners likely will want to consider and evaluate as they’re looking at all of their options. And what we know is one of the biggest barriers to pharmacists being able to purchase a home is student loan debt. And for most conventional types of loans, this obviously can greatly impact their debt-to-income ratio and certainly could affect someone’s ability to even get a loan or greatly reduce the amount that they could get approved for. So Tony, talk to us about the professional mortgage loan that IBERIABANK/First Horizon offers in terms of what it is, minimum down payments, term, max loan amounts, and things that they should be thinking about as they’re evaluating this among other options available to them.

Tony Umholtz: The product for pharmacists is going to — it’s going to be under that conventional loan bucket, essentially, even though it’s kind of a specialized product, because it’s not an FHA loan or a VA loan. But what it is is it’s got the ability for a pharmacist to purchase a home, if you’re a first-time home buyer, you can put as little as 3% down. If it’s a subsequent purchase, it would be 5% down. So very little down payment, and there’s no mortgage insurance. And I find that the rates tend to be better than normal conventional products by a bit of a spread, which can vary. But I find that can be a better rate than you can get ordinarily, even if you put 20% down. The max loan amount if $510,400, so it does kind of follow along — currently, that’s what the product we offer has a max of $510,400. It’s eligible for both a purchase transaction and a refinance transaction for both. But the real benefit’s just very little money out of pocket and the no PMI and a very competitive interest rate. So kind of the ability to have both of those makes it a very viable option for many. So that would be the biggest pluses. There is a biggie — you referenced student loans. It’s a little bit more lenient on the student loan calculation versus like some of the normal conventional products, I would say, like Fannie Mae-backed. It has a little bit more of a lenient way that they look at the student loan debt as well.

Tim Ulbrich: And talk about credit score impact here as it relates to the pharmacist home loan product.

Tony Umholtz: There is a minimum credit score of 700 with the pharmacist loan product. So you would have below 700, we couldn’t do the loan program. But 700 is the minimum. That is one thing we do have to keep in mind. So credit is important.

Tim Ulbrich: And I’m assuming just like other lending options, obviously the better the credit score, you get above 740 and beyond, I would assume then, you know, again, different person-to-person, but rates would be expected to get better.

Tony Umholtz: Right, right. The rates are going to be better at 740 up. I’ve even seen sometimes when you get higher credit, people will even get what’s called a lender credit for their rate too, which is kind of a rebate from the lender towards closing costs because there’s some add-ons or adjustments that are positive for better credit scores. So you’ll see that sometimes even as well, Tim. I think that yeah, credit scores really do impact the pharmacist product. 700 is going to be not quite as good as 740 or 720. Also as a kind of mini — if you are putting 3% or 5% down on a condominium, it may have a slightly higher interest rate than if one of your colleagues bought a single family home. So it’s something else to be aware of with the pharmacist home loan. And then same thing with a multifamily. I think this might be a good time to address that too is the — a multifamily is going to require a little bit more money down on the pharmacist product as well. It’s not going to be 3% down let’s say. A duplex might be 15% down. So you have to be very prepared for a much larger down payment if you try to buy a multifamily type property with this program.

Tim Ulbrich: Tony, one of the things you mentioned before we hit record that I think is — it would be helpful for our listeners to hear a brief overview that just highlights I think some of the unique circumstances that can happen based on trends that are occurring in the market at the time. Currently, you mentioned some of the things that you’re seeing around the quality of appraisals and how that can impact the lending process and the timeline moving forward. So tell our listeners a little bit more about that.

Tony Umholtz: Yeah, you know, in our dialogue there, Tim, just some of the things we’re seeing — and we do loans in a lot of different areas of the country, so it’s not subject to one market. But we’ve been seeing this inventory type. We don’t have quite enough inventory out there.

Tim Ulbrich: Right.

Tony Umholtz: I think home builders will eventually catch up, but right now, that’s the situation we’re in in many markets around the country. And you know, appraisals are starting to be done and they might be coming in a little bit higher values, and values are kind of going up at a pretty good rate right now as far as property appreciation. And in certain markets, there’s just not enough sales. And you’ll see some appraisals, every appraisal is scored. So they have a scoring mechanism that a lender’s analysts will look at, and that’s based upon comps in the area, adjustments in the appraisal, time since the last sale, so there’s a multiple things — I don’t want to get too technical on the appraisal side. But that’s how appraisals are scored. And oftentimes, lenders are required to do like a secondary review, which is called a field review or sometimes they’re required to even order another appraisal, depending on the lender or the situation. I’m kind of speaking in general because I’m trying to think of my whole industry here holistically. You know, the one thing that we have to be aware of is these field reviews. And appraisers are so busy with the volume right now between the purchase market and then the refinance market that they’re not always as timely as they used to be. So we used to be able to get a field review within a few days or two days. It might be a week. So it’s not that I’m seeing it on every transactions, by no means the case, but we’re seeing more of them lately. And it’s just — I think it’s because of where we are in the market cycle and the fact that there just isn’t that much inventory. So one thing to keep in mind is the appraisal is reviewed and is reviewed for quality. And sometimes those things come up too. So there is a multitude of factors in the lending process. And that’s why I always joke with people about this. There could be some — it’s like the airline flight with turbulence. There could be turbulence in the flight, right?

Tim Ulbrich: That’s right.

Tony Umholtz: But we’ve got to land safely is the key. And you never know. Sometimes it’s perfectly smooth sailing, but then there’s other things like this that are out of everyone’s control. But it’s just something to be aware of, you know, that these things can come up, even around the quality of the report. And if you hear that word, field review, that’s what it is. It’s a secondary look, and lenders are required to do that.

Tim Ulbrich: Tony, as always, great stuff. I feel like you provide great education, you succinctly explain what could be a very difficult process and appreciate you taking time to share your expertise. What is the best way for our listeners to reach out to you if they have questions or considering the pharmacist home loan product with IBERIABANK/First Horizon. What’s the best way to get in touch with you?

Tony Umholtz: Email is fine. I’m also old school, I do like phone calls, so I’m always welcome a phone call. I have a team of staff, some very hardworking and diligent individuals on my team that can also answer questions. Phone or email are always welcome. Those would be the best ways to reach me.

Tim Ulbrich: Awesome. We’ll link both of those in the show notes for our listeners, which you can access by going to YourFinancialPharmacist.com/podcast, find this episode and you’ll see that information listed in the show notes. And to learn more about the steps in consideration to getting a home loan, make sure to check out the post on the YFP site titled “Five Steps to Getting a Home Loan” by visiting YourFInancialPharmacist.com/home-loan. And as always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please leave us a rating or review on Apple podcasts or wherever you listen to the show each and every week. And if you’re not yet a part of the more than 6,000 pharmacy professionals across the country that are joining us in the Your Financial Pharmacist Facebook group, please make sure to check that out, join a community that is committed to helping and empowering one another on their path towards achieving financial freedom. Have a great rest of your week.

 

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YFP 168: How Blake and Zac Analyze Real Estate Deals

Posted on by yfpadmin


How Blake and Zac Analyze Real Estate Deals

Blake Johnson and Zac Hendricks talk about how they joined forces to build a successful real estate portfolio and investment strategy. They talk about their individual roles when investing in properties, the make-up of their current portfolio, and why they chose to focus on real estate investing. Blake and Zac lay out all the secrets on how to analyze real estate deals and break down the numbers on two of their own investment properties.

About Today’s Guests

Blake Johnson is a 2013 graduate of the University of Arkansas for Medical Sciences. Upon graduation, he married his wife Kristyn and he began working in a small town independent pharmacy. He worked there for 2 years and is now working in Conway, Arkansas at a local independent pharmacy. Upon graduation, Blake decided that paying off student loans would be a top priority, while still being able to travel and save for his retirement. After three and a half years, he was able to pay off his and his wife’s student loans. Since then, Blake has been able to increase his savings and start purchasing rental property. In his spare time, he enjoys traveling as much as he can and teaching others about finances.

Zac Hendricks is a 2013 Bachelor’s of Business graduate from University of Central Arkansas with an emphasis on Innovation and Entrepreneurship. Zac worked as an intern for a financial advising firm while finishing his degree at UCA. This is when he bought his first property. Upon graduation Zac got a job working in logistics at Maverick Transportation. While moving up in the ranks at Maverick he and his wife Mav purchased 7-8 more properties which eventually led to their finding financial freedom to change careers and working in the family business—Hendricks Remodeling. Zac and Mav find their most joy in using their business skills to fund missionaries in the 10/40 window and expanding the Kingdom of God.

Summary

Blake Johnson and Zac Hendricks met 7 years ago at a church they were both attending and decided to join forces as partners in real estate investing. Blake handles the financing and acquisition of properties, analyzes numbers and focuses on networking and finding deals. Zac assesses the homes with a quick inspection to determine rehab costs and rehabs the properties. They run numbers together to see if the deal is a good one. Zac’s wife manages the properties. Together they own 14 rental properties and a lot. They are currently renting 13 of the properties and are in the process of rehabbing one.

Blake breaks down their process for analyzing real estate deals and shares that there are several areas that need to be looked at, including accounting for capital expenditures, vacancy, and property management. Blake and Zac share the numbers from two very different real estate properties they purchased and the rehab process for each.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Blake and Zac, thanks for joining the show, and welcome to the podcast.

Blake Johnson: Good to be on here.

Zac Hendricks: Yeah, hey.

Tim Ulbrich: Appreciate you guys taking time. Excited to dig into this topic as we’ve been talking on the show for some time now wanting to bring more real estate investing content and happy to do that with Blake, who was on the show, Episode 082, with the ultimate mentor, Joe Baker, to talk about how he and his wife paid off $150,000 of student loans in 3.5 years. So excited to have him back on the show to talk about another part of his journey as real estate investing. And we’re also going to have his partner in real estate investing, Zac, join us to talk about how they work together, how they collaborate, what are their goals related to real estate investing, and my hope is as we have with other stories, that those that are interested and just hearing this for the first or second time, learning more, or perhaps taking that next step that these stories will not only be something that you can learn from but also something that you can take action. So Blake, it’s been awhile, how’s the debt-free life been treating you? And what have you guys been up to?

Blake Johnson: Debt-free life is incredible. I guess since the last time we spoke, my wife and I have done a lot of traveling, a lot of investing. It seems like when you’re out of debt, you can invest more. I guess that’s part of the reason to get out of debt. One of the big things that’s happened with us, we were able to adopt a child from birth, private adoption. And being out of debt made that a lot more smoother process. That was probably the most excitement that we’ve had in a long time. He’s actually turned a year old today.

Tim Ulbrich: That’s awesome. And congratulations. I know you and I had a chance to talk about that a couple weeks ago. I think just another example of the power of being debt-free and what that means for goals and being able to free up some of the cash flow and achieve some of those other things that are important. So Zac, excited that you’re able to join us today and really excited to hear more about your real estate journey and specifically how you and Blake are working together. Tell us a little bit more about yourself and ultimately why you got into real estate investing.

Zac Hendricks: Yeah, so we — my wife and I actually got into it kind of accidentally. My brother and I, whenever we were in college, we bought our first house together. We had no credit at all, I mean, we were broke joke. But we had a banker that we were close with. He said, “Hey, if you can bring some money, you can buy this house together.” So he helped us kind of get credit for that and then helped us buy the first house. My wife and I ended up buying that property from my brother when we got married. And we lived in it for a little while. Then we started moving around with the company I was with. And we had hardly any equity. It just didn’t seem like — it was so close to the university, the house was so close to the university that we said, it’ll be worth a lot more later on, so let’s hold onto it. So we rented it out and we didn’t know anything. My family has rental properties, my parents, but we didn’t know anything about it. So we got started in it and made a ton of mistakes. The first mistake was my wife let me be the landlord. That was a nightmare. We ended up with attic ladders torn out of the ceiling, three pitbulls left in the backyard, and about three dump trailer loads of trash in the backyard. So that was when my wife fired me from being a landlord, and now she does all of that. And anyway, so since then, we were moving around. We went to North Carolina, then we went Texas for a little while. And while we were moving, we decided, hey, let’s buy another property, just see how it is. So we bought one site unseen from North Carolina. It seemed like a pretty straightforward, easy deal, so we just bought it. And we realized that we could manage these properties from wherever we were and that it was really not that hard as long as you had the right systems in place. So when we moved to Texas, we ended up buying three or four more properties while we lived there and just realized, man, this is an awesome way to have some extra income, it’s a great way to just build wealth and at the time, we had set salaries so kind of like, well, this is the best way to kind of get ahead of the game. So in that time, we realized also if we’re not going to be doing ministry full-time, this is a great way for us to be able to support missionaries and other people that are local, and we can do a lot more in real estate than we can just with our regular 8-5 jobs.

Tim Ulbrich: So Zac, if I understood you correctly, you still have properties in multiple states? And then you guys are doing the property management for those?

Zac Hendricks: OK, yeah, let me clarify that. So actually, while we were moving around, we were buying properties in Conway. We lived in North Carolina and Texas. But we bought the properties in Conway.

Tim Ulbrich: Got it. OK. When I heard property management and how easy it was at a distance, I was like, oh, that’s interesting, love to hear more. So that makes sense. You were buying properties in Conway while you were in different locations. And Blake, talk to us about where your experience in real estate investing met Zac’s experience, ultimately how and why you guys came together — I’m assuming there’s some shared vision, perhaps different skill sets — and tell us a little bit more about what that collaboration and partnership looks like.

Blake Johnson: So Zac and I met about seven years ago at the church that him and his wife were attending at the time. And like he said, they moved off because of jobs. And funny thing happened, my wife and I were looking at rental properties, and we moved churches in Conway. And the first Sunday that we were there, Zac and his wife were visiting that church. And one thing led to another, we ended up in the same small group. And I can remember it vividly: We went out fishing on a local lake, and I started to express my love to want to get into rental property. So we talked back and forth, and we left it at, look, if you can find some properties, we can partner up. And so that started from there, and then our first deal, we landed two homes within the first deal. And so we’ve been there ever since.

Tim Ulbrich: And Zac, building off that, if we had to kind of divide roles and responsibilities that come with both acquiring, finding the deal, running the numbers, perhaps overseeing any work that needs to be done and then either renting it or selling it, how would you divide the roles and responsibilities and what each of you bring to the table.

Zac Hendricks: Yeah, so it was really interesting. My wife and I had kind of prayed about like the opportunities to find other people to get in with, and it just never really came. Blake and Kristin kind of came out of nowhere, and it ended up being just the perfect partnership because before, I was always the one finding the deals, and my wife was excited about it. She was ready to buy every house that we looked at, and I always had to tell her no or maybe, you know? Because she was just so excited about it. And then when Blake and Kristin came along, Blake just really dove into the acquisition side of things and also the financing side of things. So you know, I already had relationships with banks, he had relationships with some of the same banks, and so we both were kind of — we both still kind of handle the financing, but Blake analyzes things way more than I could ever dream of doing. He’s just so much more analytical than I am. His main thing is networking with people, talking with people, whether it’s wholesalers, whether it’s realtors, just other landlords, he’s really good about just meeting people, telling them what we’re doing, and then out of that, we found some deals, even networking with some local attorneys has helped. So then my role now, I mean, people ask me how we find deals, and I go, well I don’t know, you have to have a Blake, because I don’t look for deals anymore. You know, I’ll go and look at houses whenever we, whenever Blake finds one. I can kind of quickly do a ballpark of how much it’s going to cost to rehab or if it’s something we shouldn’t even be looking at or whatever and kind of a quick inspection of the property. But really, that’s the end of acquisition for me. And then we run the numbers together, so Blake usually has a — he can run numbers in his head super fast, so he usually just runs the numbers and tells me, yeah, let’s just do it. Let’s go for it. And then we kind of work from there. And then my wife, like I said before, she fired me from landlording, so she is the property manager. And so it really works well. We have two children, a 4-year-old — an almost 4-year-old and a 1.5-year-old. It’s great because she stays home now. She used to be a schoolteacher, now she stays home and manages properties full-time and then works for me with our remodeling company. So it’s really great because she handles the property management, she gets to be the bad guy and good guy where I just go in and I can fix things that are broken. So it works out really well.

Tim Ulbrich: So our listeners can understand before we go into the two recent purchases and kind of hear behind the scenes of how you guys think through and analyze those properties, if you could each talk for a moment — Blake, if you could start, and then Zac, talk about what is your portfolio — and I’m guessing there’s a lot of overlap, so feel free to clarify that. What is your portfolio? And types of properties you’re generally looking at investing in or specializing in as it looks to your portfolio? And then ultimately, what is some of the purpose, the vision, the why behind what you hope to gain from real estate long-term? We’ve heard a little bit of that, you just mentioned, Zac, what some of that has afforded to your family in opportunities, and Blake, I know you and I have had this conversation one-on-one. But I think it would be really helpful for our listeners to hear not only a little bit more about your portfolio and strategy but also what the why and purpose is for you and your family as it relates to real estate investing. So Blake, you want to start us off?

Blake Johnson: Yeah, I can start off. Zac and I, I don’t have any properties by myself. All of our properties that I’m involved in are in our LLC. Currently, we own 14 properties and the lot. So we can get into that later. That one’s a fun example. But anyways, we have 14 homes right now. 13 are rented, and one we’re rehabbing. And that’s where we’re at. Ultimately, my purpose down the road would try to get to 40 or 50 properties and have those paid off by the time I’m 50. I always want to be a pharmacist. I always want to be in the community. That’s what I went to school for. But if times get tough or if something happens health-wise, this is a fallback plan for replacement of your income and for retirement down the road. You never know how the economy’s going to be. People always have to rent homes. So this affords us a different avenue outside of the stock market. Asking about our purpose for the business, funny you ask that. Our corporate name is IHM Properties, which stands for In His Name. So our purpose for the creation of this business is not only to provide for our family financially down the road but also to be able to give back to missionaries overseas or to people locally. The wealth that we create is not only ours, but it’s to give to others.

Tim Ulbrich: And Zac, for you and your family and for the overall business, again, I’m sensing a lot of overlap, but anything else there to add?

Zac Hendricks: Yeah, no, he pretty well covered it. That’s our main goals, just to be able to have the financial freedom for ourselves but not just keep it to ourselves, be able to give back to others.

Tim Ulbrich: Awesome. So let’s dig into two recent purchases that you made as a part of your LLC. Talk through how you analyzed those deals to determine that you ultimately would move forward with them. And again, I think as we talk through some of the numbers and talk about your thought process, I think this will help our listeners see that are either building a portfolio or looking at that first one or just here to learn more get a little bit more information to hear from those that have been down this path. So before we crunch some numbers, Blake, give us a bird’s eye view of how you analyze deals. What’s your process? What are you looking for when a property comes your way? Where are you looking for properties? I heard Zac mention earlier some networking and things that are going on. Are you looking at the MLS? Are you primarily getting these from wholesalers or in contact with realtors? Numbers that you run? Talk us through not only where those properties are sourced from but then your thought process when you’re evaluating one of those.

Blake Johnson: OK, that sounds great. I think the first thing before we dive into the how and to the where and all that type of stuff is just to talk about a few figures that’s used in the rental business. There are just only a couple of them, but when evaluating a property, there’s three things that I look at. One of them is called capital expenditures or if you ever dive into the literature, that’s shortened for capex, which basically means your normal maintenance and also your long-term maintenance of the property. So your long-term maintenance is your roof, your heating and air units, your water heaters, all that type of stuff. So capex is one of the numbers that we look at. Another number that you have to run is one called vacancy. People always don’t stay at your house, and that would be nice if we had people stay there for 20 years straight. But your turnover is every couple of years, you’re going to have get new people in. You’re going to have to rehab it in between tenants. And so vacancy is a number that we run into our calculations. And the last one, if you have it — and I always recommend people to put it in there anyway — property management. Most people that start out kind of manage their properties themselves. They get tired of it anyway. So we always run that in all of our numbers. How we run numbers, when we find a house, the big thing we are looking for is the net cash flow. We’re not trying to pull any money off the business, but we want to make sure that these homes pay for themselves and has a little bit of room of a cushion so if interest rates go to 10 or 12%, there’s enough room in the numbers to cover that. So when we look at a house, we usually take — instead of looking at the purchase price, we look at what we think it will rent for and we take percentages off that gross rent. So for instance, if we use a home that we think will rent for $1,000, we use a 10% for capital expenditures, 5% for vacancy, and then 5% for property management. And so off that $1,000 rental home, we would use a number of $800 as our I guess gross margin. So if that gross margin can cover the payment, your taxes and your insurance and still net around $100 to us, that’s a good deal. And in any market, whether it’s an up or down market, you’re going to stay afloat. It’s a very conservative number, and it helps keep us — helps us sleep at night. So that’s how we run numbers. The second thing would be is a purchase price. I think Zac mentioned, we love to purchase all of ours with 0 money down, and that sounds intriguing, but the only way to get in homes $0 down is to have homes that need remodeling. So let’s take that $100,000 home, most banks if they’re local or small banks will lend up to 85% of the appraised value of the house. I would put appraised value in parentheses because appraised value is the value it appraises at after the repairs are done. Let’s use that $100,000 house, say we find it for $50,000. We go in it and see that it needs $20,000 worth of repairs, we can take that repair list to the bank, they’ll get it appraised, and the appraiser will say, “Hey, we’re putting in new flooring, we’re putting in new paint, I’m going to appraise this house at $100,000 after the repairs are done.” And so the bank on this home would loan up to $85,000. So as long as we can keep our repairs under the $85,000, so if it’s $20,000, we’re able to get in that house with $0 down. Still got really good equity.

Tim Ulbrich: And real quick on that, Blake, to me that also just goes to an important point about building some of those relationships. So what is the strategy there, you know, for folks that are looking to start their first or second property and not only is the analysis side of it or perhaps other pieces of it overwhelming, but then to begin to think about how those relationships are formed, what was your strategy in forming those relationships? And was it one bank that you were primarily working with? Or did it take you some time to find that lender that was a good fit?

Blake Johnson: I think one of the biggest advantages pharmacists have is our W2 income. The average salary across the United States is around $120,000, you know, that’s 3x the average wage for any normal working family. So that’s an advantage to pharmacists because what banks look at is not what your profit is from stocks or your profit is from bonuses. They want to know what your W2 income is. They look at what your salary and wages are. So as pharmacists, we have an advantage when we walk into a bank to forge that relationship. They want you. You’re a safe investor. You’ve got extra income coming in each month more than most people. And so that was an advantage for me. But on the relationship side, Conway’s a very small town. And we’re involved with a pretty good size church, and so out of our church, there’s two local bankers that I’ve developed relationships with. And those are the ones we use. And they’re local banks, so they’re real easy to work with. So we started working with them, and because of our conservative ways to approach purchasing homes and also just the income side, it makes financing homes pretty easy as far as that.

Zac Hendricks: Yeah, and I want to piggyback off that a little bit. With the finding a bank, if somebody’s new to investing and they’re trying to find a loan, find a lender, Blake hit on it, but the small bank, the small, local bank is perfect. A lot of the big banks just can’t — they don’t even care about you. And I don’t mean that in a terrible way. They have bigger fish to fry. The small banks, they care about their community, and they care about that you’re fixing up the neighborhood or that you’re just buying in the neighborhood. They care about that a lot more than they care about you. And so I’ve found that when you go to a big bank, you’re not going to find anybody that really cares a whole lot. But when you go to the small, local banks, they’re going to want to invest in a lot more.

Tim Ulbrich: So Zac, I can jive as Blake is talking about running numbers and analyzing and crunching it, like that’s speaking my language. What is not speaking my language is what I perceive to be your role, which is estimating rehab costs and kind of seeing that piece through. So talk us through when Blake calls you or messages you and says, “Hey, I think we’ve got a good one. I need you to look at it,” where does that knowledge come from that you feel comfortable walking through a property to estimate those costs? Where did you acquire that knowledge? What are the things that you’re thinking about, looking at? And you know, obviously also to protect yourself against some of the bigger items, I’m sure often what you expect and what is reality may not always line up. So talk to us about not only your process of doing that but also how you account for some of the margin of error that may happen just from the unknown.

Zac Hendricks: Yeah. So it’s been a learning process. I will say, I have an unfair advantage. My dad is a remodeling contractor. And so he’s owned — I actually work for him now — Hendricks Remodeling in Conway since 1987. So and he’s been in the business for longer than that. So there’s a little bit of an unfair advantage there because I’ve been around it my entire life. He put me to work for free whenever I was like 6. And so I’ve been around it, I’ve seen it, but the cost I didn’t always understand. I always knew what work went into a remodel, but I didn’t really understand the cost. And so that came in later, really with the first — whenever we were in Texas, we bought our first rehab project. And if anybody’s on here that listens to Bigger Pockets, they use the term BRRRR: Buy, Rehab, Rent, Refinance, Repeat. So that’s the strategy we’ve been at ever since that first rehab project. So before, we were just putting money in. And then we found that first rehab and we were like, oh wow, this is incredible. We don’t have to put money in. On that project, we lived in Dallas, and my brother at the time was working for my dad. I said, “Hey, run an estimate for me. How much is it going to cost to remodel?” And so I think we picked the property up for like $55,000. And then he went over there and he said, “Yeah, I mean, I think it’s going to cost blah, blah, blah.” I think the total cost was like $30,000. So I had him kind of walk me through what he was looking at as far as estimating goes. And so really, between my brother and my dad, they helped me understand the cost of things. And then from then on, it’s been experience. It’s just been we take one, we make some mistakes, now we know more. Now we know we’ve got to check the sewage every time. Now we know we’ve got to check the roof every time, the HVAC, there’s so many things now that we go, oh man, if I would have known that, that would have been better. So it’s really just getting into it. You can’t learn it without doing it in this business. You can’t just read a book or books. There is a really good resource called that Jay Scott wrote, it’s “How to Estimate Rehab Costs” is what it’s called. And double check me on the title. It is really good. It just talked about going from the top down for rehabs. I think he’s talking about mainly flips. But I read through that, and with some of the stuff I already knew, it really helped to just kind of oh yeah, I never really checked for rotted facia or whatever it is. I probably need to start checking that. And so he kind of gives you a little bit of a checklist — I don’t want to use a checklist, but whenever we walk through a house, I’m constantly just looking, just trying to figure out what issues there are. And then a lot of times, now me and Blake will walk into a house, and I’ll say, well, it’s going to cost this, this, this. And Blake will go, oh come on, we could do it for cheaper on this house. So there’s a little bit of back-and-forth there, and then we eventually come to a number.

Tim Ulbrich: That’s the sign of a good partnership. So appreciate that story. And I’m glad you mentioned the BRRRR concept as well, it’s one of the Bigger Pockets resources. We will link to those in the show notes, the estimating rehab costs book that you mentioned, the Bigger Pockets podcast, the Bigger Pockets blog. I’m sure we’ll talk about another Bigger Pockets resource at some point in the rest of the show. So we’ll link to those in the show notes, great resources. And I’m glad you mentioned BRRRR because Blake, it triggered my memory. One of the things I wanted to come back to, when you said nothing down, point of clarification: Are you referring to that when the deal was done at the point of refinancing, you didn’t leave any cash in the deal? But you ultimately had to obviously come with cash to purchase the property and do the rehab? Or do you have some other source of funds that you actually aren’t bringing cash up front to get started? Because I think that’s a hangup point for many folks getting started, even if they’re looking at a refinance down the road is that they still have the time period where they’ve got to purchase the property and fund the rehab and they may or may not be ready with that cash.

Blake Johnson: So yeah, that’s most of our properties that we do, the banks will let us come to closing with 10% of the purchase price of the home. But like I said, they’ll loan up to 85% of the appraised value. So the two local banks that we use, as long as the improvement plus that 10% down plus the purchase price is under the 85%, we’re able to pull our money back out. So on that $100,000 home, we’ll get it under contract, we’ll go to closing, the bank will provide the purchase price is $50,000, they’ll provide 85-90% of that, and then we’ll have to bring 10% of the purchase price down. But after closing, we have a pool of money that we can pull from to pay ourself back and also do the improvements. So you do have to have some money to come to the table to purchase the deal. But if you run your numbers and you can get your rehabs under that 85% margin, you can get your money back.

Tim Ulbrich: Got it. Thank you for that clarification. OK, let’s dig into a couple properties as examples of what you guys have been working on. One will be a little bit more traditional, the second we could categorize as maybe more interesting and creative, just to give two different examples and the contrast of how you approached each. So Blake, let’s start with the traditional property. Tell us about this one. How did you find it? Bedrooms, bathrooms, square footage, purchase price? And then we’ll have Zac talk through some of the rehab costs.

Blake Johnson: So most of our properties, I guess to clarify in the beginning of the question, all of ours are single family homes. We’ve tried a few duplexes. We’re actually looking at a few now, but we’ve looked at three and never made any of the numbers work. So all of our properties are all single family homes. And the first several came from the MLS. Up until about a year and a half ago, you could look on Conway’s website about once a month, find a deal. But it’s now been flooded with young investors, so the time of looking and finding a good deal on the MLS has really kind of gone away. So I’ve got relationships with a few lawyers, a couple of wholesalers in the area, and of course a bunch of realtors. And so the last several deals we’ve had have been from off-market deals from realtors or an estate type thing or an auction. So the first house that we’ll talk about is actually an estate purchase from a lawyer that I know. He’s the one that handles all of our LLC stuff. And I was discussing with him about how we were looking to buy some properties and if they ever have an estate sale come up where they’re needing a home purchased, we would be glad to do that. And about a day later, he texted us back about a house he had that was a four-bedroom, two-bath house. It was 1,800 square feet. And the guy had passed away over a year ago. The children were wanting to sell the house. So we went and looked at it. It’s 1,800 square feet, like I said, four-bedroom, two-bath. And we purchased it for $78,500. I’ll have Zac talk about some of the improvements that we made. But anyways, it appraised at — with the improvements — at $134,000. We put $20,000 into it and took a little bit more extra on the loan to cover a couple other projects we had going on. So our loan amount on that is $105,000. The good thing about that is our loan-to-value or how much we owe and how much it appraises for is 78%. So out the door on this one, we came out with 22% equity, which is music to our ears because anything below 80% loan-to-value ratio is really good and makes banks happy. So we’re pretty happy with that. It rents — we were excited; we got it rented for $1,350. So if you do the whole —

Tim Ulbrich: Wow.

Blake Johnson: Yeah, if you do the whole calculation like we talked about, the principle taxes and insurance on that is like $822. The capex or the 10% in rent is $135. And then the 5% for vacancy and property managing are $67 each. And so that one rents each month $258. So that’s one of our better deals there.

Tim Ulbrich: That’s awesome. And Zac, do you want to talk through a little bit of the rehab and what was included in there and what was or was not on budget along the way?

Zac Hendricks: Yeah, so this one is an oddball because we budgeted for a lot more than we ended up spending. Somehow or another, we ended up saving a lot of money. I think some of the subs that we used ended up being a lot cheaper than what we had used in the past. I think we budgeted like $27,000 for the rehab, and it ended up being like $17,000 or something like that. So that was a — we saved a lot of money on that one. Yeah, so it was really just a lipstick remodel is what I call it, anyways. We just — floors, paint, the guy had dogs, and they peed all over the floors. It’s a slab — it’s built on a slab, the house is. But somewhere along the way, somebody did a little addition on the front and had a little, a small — I don’t know if you can even call it a crawlspace, but it’s kind of a crawlspace, and it had wooden subfloors. So we had to tear all that out because the dogs — I mean, that smell is just terrible. So we tore out all the subfloors and then redid those. But that’s really, I mean, we just kills the whole house, and then it smelled like a brand new house. It wasn’t so bad. The next property that I think you’re wanting to talk about is a lot more interesting. This one was really basic: floors, paint, we put some granite countertops in, built a closet to make it an official bedroom, I mean, that’s really it on that one.

Tim Ulbrich: Yeah, and I think what was helpful about this one was just for folks to hear the numbers but also Blake, I like what you said about when I hear about you investing in Arkansas and I think you hear those numbers, 1,800-square foot, 4-bed, 2-bath, $78,500, obviously it needed some work, but there’s other people listening in other parts of the country that are like, I don’t even see those numbers exist, you know, in our part of the country. But what I heard you say is, you know, the relationships are really important. And here was a good example of a relationship with a lawyer. But you know, not necessarily just thinking you’re going to be able to find deals on the MLS but getting out to local meetups, taking advantage of those relationships, being a part of a community and getting creative in different ways to be able to find these types of properties and deals. So let’s dig into the other recent purchase. I guess again, you could categorize this as being more interesting, more creative, than the traditional one. So why don’t you start us off, Blake. Talk to us about this property. Why was it more interesting and I guess more nontraditional?

Blake Johnson: Sure. Before we dig into that, funny thing about the last house as far as rehab. We had to replace the ceiling fans. They had miniature ceiling fans in there. And pretty sure that Boeing sent some of their propellers into this place.

Zac Hendricks: Yeah, that was funny.

Blake Johnson: That thing was the loudest and most powerful fan I’ve ever seen in my life. It would just blow you away. The one other thing with that last house, something that you could let people know when they’re looking at homes is that one had two living rooms. It had the main living room and then there was an addition onto the house. Most of the time, you look at your rent, how much you’re going to charge for rent based on bedrooms and baths, and so that one already had three bedrooms, two baths, but we were actually able to spend $1,000 extra to frame in a closet, and we were able to increase our rent by about $150 a month. So if you run your return on investment there, it took us only eight months to recoup our costs in putting in a closet. So when you’re looking at a property, you’ve got to be creative because small additions like that can get you pretty good return. So let’s talk the second home. This one is really cool. So we bought this one at an auction. We actually paid cash for this. First auction we ever went to, nobody showed up at all. It was an auction that a local — the lawyer that sent us the first one told us about would be coming up. So we showed up on a Tuesday morning at 10 a.m., thinking that were going to be a whole crowd of people. About 9:59 rolled around, nobody rolled up, and then finally, we saw a guy, a gentleman walking up with a clipboard. He came up and I said, that’s got to be the guy. And sure enough, it was. Nobody else showed up, so we said, “What’s opening bid?” He said, “Open in bid is $35,500.” So we had to bid $1 over that. So we bought the property for $35,501. It was the craziest thing, he said he’s never seen where nobody shows up. So apparently we were lucky then. So this home is a two-bedroom, one-bath house. It’s around 1,100 square feet. But it’s in a really desirable area of downtown Conway. It’s right by downtown, a lot of people were tearing down homes, building up new ones, rehabbing them, I guess it’s like in your traditional Old Town downtown for people who are wanting to redo them and make them real nice. And so this one’s a two-bedroom, one-bath. I don’t want to spoil the fun, but we’re actually turning it into a three-bedroom, two-bath. Zac can talk about that. So we bought it for $35,500. Our rehab on the house is going to be right around $60,000. But the total value of the house is $125,000. So our loan on this house will be around $85,000, so we’ll have about $40,000 in equity.

Tim Ulbrich: Wow.

Blake Johnson: Yeah, the funny thing is — and we didn’t even know about it, when we purchased the house, we had gone and looked through the windows and some stuff, just to check it out because you can’t get in them at all. So we purchased the house, the next day we drove by, and Zac goes, Blake, this is big enough to split a lot off. I said, “There’s no way.” Sure enough, it was. We spent $1,000 and got it zoned off to have an additional lot. That additional lot is worth about $35,000, which is the same price we purchased the house for.

Tim Ulbrich: Wow.

Blake Johnson: This rezoning the lot paid for the purchase of the property. So our plans with that once lumber goes down the next year or so, is to build a new house there and rent that out. Anyways, that’s a fun part of that. I don’t know if you want to dive into the rent, all the numbers now or if we want to talk about the rehab and go on from there.

Tim Ulbrich: Yeah, let’s talk about the rehab and then we’ll come back to the rent. So Zac, do you want to talk about some of the rehab and the costs and what was involved and some of the creativity to turn that into a three-bed?

Zac Hendricks: Yeah, you bet. So yeah. So whenever we got this, we realized we could either tear this house down and really build two really nice houses. Or we could figure out how to make this house work. It was two-bedroom, one-bath. Those just don’t really rent that great. They do, but we prefer a three-bedroom, two-bath. And so we were trying to figure it out, my company, we have an in-house interior designer. So I just kind of put him on the task. I was like, man, we’ve got to figure out how to move some walls. I’ll work on the structure side of things, you do the interior part, make it look pretty. So he messed around with it, we went through probably five or six different design changes of how we’re going to do it. Finally, we figured it out, the best way to do it. We had to tear out two interior walls. So I’ll back up a little bit. I didn’t want to do an addition, a full-on addition, because I didn’t want to build out of the house and have to do all that. We can do that, but I’m in the business, I know how much it costs, I just didn’t really want to mess with it on this property. And so we said, if we’re going to do anything to add bedroom and bathroom, it’s got to be within the walls. So we tore out two interior walls and then were able to build a bedroom on the front side of the house and then build a bathroom in between the other two bedrooms — the original two bedrooms. And so — which we’re still in the process of that. So we just got done framing. But with that, we had to move front door, we had to add a window, change out a window, just to make it all right because the front door originally would have been right in the middle of the bedroom, of the new bedroom. So we had to move that over about 5 feet and put a window back in that bedroom for egress purposes. And then we ended having to reside the whole front. And then it’s in the historic overlay district of Conway, so if you’re doing anything to the exterior, it has to go through committee, a design committee. So they had a couple suggestions to make it look better. So with that, we ended up doing a little bit more than what we planned on. But it’s actually going to make it look really great. So can’t hate them for it. Yeah, so we’re in the process of the crawlspace, and it had a lot of foundation issues. Thought we’d fix them all on the front end, and then whenever we tore out some of the walls, found even more foundation issues. So we had to stop working on framing and work on the house for a little while. But now it’s actually a great house. Most of the lumber is new in that house now.

Tim Ulbrich: I guess it’s hard to go wrong when you mentioned the discovery of that extra lot that could be parced off that would have value equal to what you paid for it up front. So awesome bonus, but it sounds like it would have been a good property regardless, and obviously the creativity you had really helped in that. Blake, run the numbers for us on this one.

Blake Johnson: One of the questions you had is how did we finance it. So we paid cash for it, and then we went to a bank with an improvement list, and our total loan on this is going to be $85,000. So our projected rent is going to be around $1,200. The payment with taxes and insurance will be about $650. Our capex on $1,200 is $120, vacancy is $60, and then property management is $60. This is our best deal to date. And so just on the one home alone, we’re going to net profit around $316 a month. And that’s saving back for all those unknowns. So this is — normally we’re trying to get $100 a home, and this one, we’re getting 3x that amount.

Tim Ulbrich: That’s awesome. And I think for our listeners to hear two different examples — and obviously these are just a couple properties in your overall portfolio. And certainly want to mention that we’ve given two examples where the numbers are really good and you guys have been really successful overall. But you’ve also invested a lot of time, a lot of energy, a lot of effort, lots of relationships, lots of learning, lots of experience, lots of good connections. And so I don’t want to make this sound easier than it necessarily is but also don’t want to underestimate the work that you guys have put in to be successful and certainly I’m sure there have been some difficulties along the way. I do want to wrap up, Zac and Blake, I know we’ve talked about Bigger Pockets as a great resource. Other resources, books, podcasts, blogs, local meetups, what recommendations would you guys have for people that are looking to get started?

Blake Johnson: For me, the biggest thing, like we’ve mentioned, was Bigger Pockets. If you go on their website, they endorse several books. If you’re wanting to do your own landlording, Brandon Turner’s got a book that he wrote. They’ve got note investing on a home, so any facet of real estate you want to get into, there’s a book, there’s a blog or something you can get into. So if you want to educate yourself and get you a real estate degree or a doctorate in real estate, you can go on that website and come out pretty smart.

Tim Ulbrich: What about you, Zac? Other resources?

Zac Hendricks: Yeah, I mean, Bigger Pockets is probably the most. But part of it is getting inspiration from other people. So you know, reading books on it. We’re both — me and Blake are both big readers, so we’re reading about real estate as well. I went through a period where I think one year I read like 35 books just on real estate. And that was my college education for it, you know? I needed somebody else’s skills to kind of learn it. So there was a lot of them. I can’t name them all, but one of them I would say for inspiration purposes not for — I wouldn’t say it’s good for life goals, but it’s “Rich Dad Poor Dad.” It’s a great book for the overall goal of real estate and financial freedom and just really a business. But there were so many more good books out there. “Think and Grow Rich” is another good one. But there’s a lot of great books out there that people can read. But Bigger Pockets has a lot of resources. And honestly, going to Bigger Pockets and getting on the forums and saying, “Hey, I’m running into this issues,” I mean, there’s 1,000 people that can say they’ve had the exact same issue. So that’s where I’ve learned a lot is just saying, “Hey, I’m getting turned down on this,” or, “This isn’t working out,” or, “I’ve had this weird floor plan,” you know, people get on there and love to answer. And so that’s a great resource.

Tim Ulbrich: Great recommendations. We’ll link, again, to those in the show notes, Bigger Pockets website, Bigger Pockets podcast, they just launched recently a Real Estate Rookie podcast, which I think is fantastic. We’ll link to “Rich Dad Poor Dad,” Robert Kiyosaki, I think you mentioned “Think and Grow Rich,” Napoleon Hill, great recommendations. And I like what you said earlier, I can’t remember Zac or Blake, that you know, learning has its place and certainly there’s wisdom in getting that education, but I think — I’m only a property in, but I felt like I learned so much from that first property that the learning was helpful, but I felt like I was at that point where more books and more learning, I just needed to jump in and kind of figure it out and recognize that I was going to make some mistakes along the way and that it was a learning process and you build from those. And obviously here you guys are with a handful of properties and I’m sure many more ahead of you. And each one I’m sure the process gets a little bit more refined. I love seeing successful partnerships like this, you know. Not to say there hasn’t been challenges along the way. If there haven’t, awesome. But I’m a big fan when there’s shared values, when there’s shared vision and there’s good relationship, the value that can come from a partnership, especially when you have complementary skill sets and just being able to bounce ideas off of one another, to be able to move that forward, especially here as you guys have a shared vision for what you’re trying to do as your why behind real estate investing. Really cool to see and highlight this as an example. So Blake, Zac, really appreciate you guys taking time to come on the show and share your story with the YFP community.

Blake Johnson: Appreciate you having us on.

Zac Hendricks: Yeah.

Blake Johnson: It was a blast.

Zac Hendricks: Absolutely.

 

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YFP 167: Must Know Real Estate Terminology

Posted on by yfpadmin


Must Know Real Estate Terminology

David Bright, a pharmacist, pharmacy educator and real estate investor talks about why he views real estate investing as an important part of his financial plan, how he got started in real estate investing, and key real estate investing terms and concepts.

Summary

David Bright teaches at Ferris State University and loves his job, so the idea of getting into real estate investing didn’t come about as a way to retire early or to escape a career he didn’t enjoy. David’s family dabbled in real estate properties and he saw how those properties supported his family members’ retirement income, especially after the mortgage was paid in full. David and his wife decided to pursue real estate investing as a way to diversify their retirement income and to fund life experiences such as vacations along the way.

David shares his journey in real estate investing which began with a fixer-upper he and his wife purchased in 2009. They sold the property 5 years later for more than what they paid for it. They moved to Michigan and purchased a HUD foreclosure condo that they did some work to and were able to rent out when their family outgrew the condo. House prices increased in their town so they looked elsewhere for their next property and purchased a home in Muskegon, Michigan that they were able to BRRRR (buy, rehab, rent, refinance, repeat).

David also breaks down some key concepts and terms in real estate investing like the 1% rule, BRRRR, appreciation and short sale, among others.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: David, welcome to the show.

David Bright: Hey, thank you.

Tim Ulbrich: So long time in the making, you and I have known each other for a long time, all the way back to our PGY1 community pharmacy residency days here in Ohio. And we’ve had an opportunity to know each other further in the academic pharmacy circles and more recently with some real estate investing opportunities. So really excited to have you on the show to share some of your pharmacy journey but also some of your experiences in real estate investing as we really use this episode to highlight some of the key principles and terms of real estate investing. And we’re going to do that through some examples and stories. So David, before we jump into the weeds on the real estate investing part of the episode, give us some of your backstory in your pharmacy career.

David Bright: Absolutely. And thanks for having me on. This is a lot of fun, and it’s fantastic to see what Your Financial Pharmacist has done over the past few years to help people in their journey to financial freedom, financial independence and financial literacy. So yeah, as you mentioned, the pharmacy career story, we both went through the residency route. I had been involved in community pharmacy practice really since I was 16. One of my first jobs was a pharmacy technician in a drugstore at 16. And worked in drugstores through pharmacy school and community pharmacy residency, so that was really my passion. I love those opportunities to interact with patients and that kind of direct patient care where you’re having a lot of conversation, a lot of educational opportunity, a lot of that direct patient care that I really loved at a community practice. That led me to an academic position where some of those same kind of teaching aspects of community pharmacy certainly play into that academic pharmacy and also got to focus research on pragmatic implementation and improvement of non-dispensing pharmacy services that often took place in a community pharmacy or in am care. So that was a lot of fun. Spent five years at Ohio Northern and then since then, have taught at Ferris State University in Michigan.

Tim Ulbrich: Awesome. And got to give a shoutout to the Polar Bears. I actually hear from — as a Polar Bear alum myself, every once in a while, I’ll hear from other Polar Bear alums that say, “Hey, I love when you give the Polar Bears a shoutout on the podcast.” So here we are with another ONU connection. So great background, David, in terms of the community residency, the transition to the academic world, the work that you’ve done in advancing patient care services. And we’re going to approach this episode — we are both educators in terms of our work. Obviously I’m at Ohio State, you mentioned you’re working at Ferris State. But also just how we approach this topic, whether it’s financial education, literacy at large, here we’re talking about real estate. We are both teachers, and we know that we could talk about terms and go through them one-by-one and define them, but I don’t think that sticks well, right? We know that from our experience. So we’re going to use stories, we’re going to use examples, to really hopefully make some of these terms and concepts come to life. So David, first off, why real estate investing? You’ve got a full-time job, you’re busy. Why take on another job, side hustle, whatever you call it, in terms of the time it takes but also what this potentially means for your financial plan and your family?

David Bright: Yeah, that’s a great question. For me, I love my job. I love teaching Ferris, and so I’m not one of these folks that is looking to escape that and to do something else. Like I really love what I do. At the same time, I don’t want to be teaching at Ferris when I’m 85 years old. I hope to retire at some point. So my wife and I, we both had kind of extended family on either side of the family that have dabbled in owning a few rental properties and just kind of seeing that from a distance and hearing stories of how they bought a property or two in their 20s and 30s and with a 30-year mortgage, by the time they were retirement age, they had a paid-off rental house. They saw that as a way to diversify their retirement savings. And that just kind of stuck with me. It made a lot of sense as a diversification plan. And you know, in addition to that, one of the things they shared with me is that at the end of the month, if you can buy well, there’s hopefully a little bit of money left over after between the rent that you take in and the mortgage payment that you pay. And that little bit of money can fund other things. And my wife and I, we really value those experience, memory-making opportunities with the family. And so we thought, if there would be a little bit of that cash flow left over at the end of the month, we could save that up and help with the cost of vacation or other things. So not purely as a retirement play, but just kind of as a diversification for our overarching financial plan. So at the same time, you mentioned that some of this real estate work can be time-intensive if you let it. For me, I’m not remotely handy. Like I’m barely qualified to change a light bulb. Like you’re not going to find me swinging a hammer and doing things, like that’s just not me. I can’t do that. I’m a pharmacist. And so I’ve come to learn that there’s some things that I’m good and there’s some things where I’m not good at all. And so one of the nice things about real estate investing is that you don’t have to be good at swinging a hammer. Like you don’t have to be able to hang cabinets or do electrical work or any of the other things. Like by buying properties or looking at things that don’t need a ton of work, like what we’ve done, it makes it just a lot less intimidating when we’re hiring a lot of that work out. Like I’ve really not done much more than painting myself in the evenings, which is I think something that a lot of folks have done. So it’s been nice to find a way to diversify our retirement without it taking a ton of time.

Tim Ulbrich: Yeah, and one of the things, David, that I like about that — and certainly for folks that are handy, and I’m with you in the non-handy camp, probably even to a greater degree. You know, I’ve learned to accept my limitations and lean on my strengths, which are not being handy. But I think for folks that are, certainly if it’s something you enjoy and perhaps there’s some cost savings, great. But one of the things I’ve really enjoyed observing your path in real estate investing is that you really have done a nice job of building a system and a process that factors that in, you know? And really, I would argue then even becomes more scalable because it’s not dependent on you, which could work with one or two properties. But as you’re talking about longer term goals and a bigger portfolio, building a system and a property, analyzing deals and including things like property management fees, I’m working with contractors, and not all of that depending on you I think reminds me of how somebody builds a long-term successful business that is positioned for growth. So I think folks that are just starting, as you’re beginning this path, is there an opportunity to begin this path with some of that and some of the end in mind? And that may perhaps be minimizing some of your role and involvement in that. So David, you shared a little bit of the why real estate investing. So let’s jump into the how did you begin. So talk us through that first property. And then as you’re talking through that, I’ll pick up on some of the terms and concepts, and we’ll break some of those down after that.

David Bright: Yeah, definitely. Even when talking about properties in general, like it seems like there are very few people anymore that buy a property when they’re in their 20s and they live there for 60 years and then they sell it. Like most people over time are going to own several houses, at least most people in this podcast are probably going — or listening to this podcast — are going to own several houses over time. So I think getting in that mindset of what am I looking for in these. When my wife and I, we bought our first house in 2009, and when we did that, that was at a time in the market when those like house flipping were starting to come on TV, and it was like, oh, that would be fun. I could do that. Even though I totally — like no. But we thought we would look for something that was a little bit of a fixer upper. And looking back on it, a house that needed a little bit of paint probably wasn’t the definition of a fixer upper. But that was what we looked for. And so we bought a short sale property in 2009. And over the few years of living there, kind of like most people do, we fixed it up a little bit over time. We painted it, replaced some carpet, finished the basement, those kind of things. And that was what I would consider a live-in flip because we bought the house, we fixed it up while we lived there, and then when we moved to Michigan about five years later, we were able to sell it — in between the market improving a little bit and these fixes increasing the value — we were able to sell the house for more than what we paid for it.

Tim Ulbrich: OK. So the live-in flip, you had that for about five years, is that correct?

David Bright: Correct, yeah.

Tim Ulbrich: OK. And then I know we’re not attempting to play accountant or taxes, so disclaimer, this is not tax advice. You should consult your own accountant. But talk to us broadly about what does that mean for folks that are either in a live-in flip situation or considering a live-in situation? You mentioned being able to sell that, and I believe you sold it for tax-free profit. So is there a certain time period that folks need to be thinking about in terms of the time they’re in that house before they sell?

David Bright: Yeah, so again, I’ll repeat the disclaimer that a tax attorney or anything like that.

Tim Ulbrich: You taught me that disclaimer.

David Bright: Well, and even thinking through like if people listening to this in the future should certainly consult professionals at the time. But at least at the time that we were doing this, the advice that we got was that if you live in the property for at least a two-year period and then two out of the last five if you keep it as a rental or something like that, that two-year mark is when it becomes tax-free. So you’re right, the folks that are out in these house flipping, they’re probably paying quite a bit in taxes when they buy and then immediately resell these houses. But by doing it slowly, living in the house for a few years, that became essentially tax-free gain, which helped us to buy the next house.

Tim Ulbrich: It’s amazing, David, right? When’s the last house flipping show — when did you watch the last house flipping show that talked about the taxes they paid on the properties? Never mentioned, right?

David Bright: Yeah, exactly. Exactly.

Tim Ulbrich: So you mentioned also that you bought it via short sale. So I want to break that down for our listeners. What is a short sale?

David Bright: Yeah. A short sale, they seemed to be more prevalent back in that ‘08-’09-2010 kind of realm because a short sale is where someone has a loan on the property that the loan balance is greater than what they’re able to sell it for. And in that situation, a lot of people refer to that as being upside down on the property because you owe more than it’s worth. And so when you go to sell that property, your option is either to bring that extra money to closing or if you don’t have the money to bring to closing, then the bank can agree to accept whatever you sell it for as payment in full, and they consider that a short sale.

Tim Ulbrich: OK.

David Bright: So it’s presumably going to damage your credit pretty good because you’re not paying back the loan in full and all those kind of things. So I can’t really recommend it for people as a way to sell a house unless you’re really backed into a corner, which is the situation with the seller. He had bought this house as a brand new house just a few years before, so it worked out really well in the buyer side because we were able to get a practically new house that really just needed some kind of minor fixes, but that’s also the danger of some of these $0-down loans and some of those things that were going on back at the time.

Tim Ulbrich: And that typically — correct me if I’m wrong, David — that typically is a step before foreclosure, right? The short sale?

David Bright: Correct, yeah.

Tim Ulbrich: OK. So you mentioned the live-in flip in Ohio. You’re there for five years. And then you had alluded to your move up to the state up north not to be mentioned. So what was the game plan when you moved to the state up north? What did you guys do from there?

David Bright: Yeah, so when we were moving, we didn’t really know west Michigan at all. And so the advice that we were given is if you don’t really know the area, there’s a lot that you pay when you go to sell a house in terms of realtor fees and closing costs and all that. So if you’re not absolutely sure you want to be in that house for awhile, you probably don’t want to buy and then immediately move and buy again. So the advice we got was if you’re going to move to a new town, just rent for awhile, get to know the town, figure out where you want to be, and then buy.

Tim Ulbrich: Yep.
David Bright: And that made a lot of sense until we started looking at the math. And specifically in west Michigan, we were looking at homes that we could rent, and it was at the time in the neighborhood of even upwards of $2,000 a month to rent a house in the area where we wanted to be. But then we looked at there was a condo complex just barely outside the area where we wanted to be, and there was a three-bed, two-bath condo for sale for $55,000. And so we thought, two years of $2,000 a month seems remarkably similar to just buying this $55,000. So we thought, OK, we’re going to buy the condo.

Tim Ulbrich: Math sounds good.

David Bright: So we ended up in the condo instead of renting.

Tim Ulbrich: I’m assuming foreclosed property had some work to be done. Did you put work into that? And was that an additional investment?

David Bright: Yeah, this property, the short sale kind of got us warmed up to doing a little bit of work, and so we were looking for that same kind of thing. We found a foreclosed property that was actually a HUD home. So HUD homes are where the prior owner would have had an FHA mortgage. And when there’s a foreclosure on an FHA mortgage property, the government then takes it and sells it through the HUD process, through HUDHomeStore.com. The nice thing about a HUD foreclosure is that there’s some provisions in there to help owner occupants buy these. So they’re not swooped up by investors and that kind of thing. So as an owner occupant, we didn’t have mountains of cash and some kind of big track record of house flipping or anything like that to really go in and be competitive in that space. But we were going to live there. So we thought, this is a good opportunity to buy a foreclosure. It needed some drywall work and it needed all new appliances and new flooring and paint and some of those kind of things. So it was a decent step up but still didn’t require a ton of work. It wasn’t a super intimidating failed foundation and holes in the roof or anything like that like you see on TV. It was just a foreclosure that needed a little bit of work, and so we had a great agent that helped us buy the place. The agent knew some great contractors that we were able to hire to come in and do a lot of the work before we moved into it. It ended up being a great way to get into a much more affordable living situation than a $2,000 a month rent.

Tim Ulbrich: And for a moment, I want to put some of the pieces here together. You know, you disclosed earlier that you’re not necessarily handy. And even though this property, as you mentioned, didn’t require massive work, you still mentioned drywall, other things, had to work with a contractor. And I think just that step, right — I know for me hearing that, for folks that might be starting this for the first time, that alone seems somewhat overwhelming of, OK, I’m buying a property that needs work. I’ve got to find a contractor, I haven’t hired a contractor before. Who do I trust? Do I get multiple bids? How do I even navigate this? Am I going to get ripped off? So what advice would you have for folks — you mentioned an agent connection, maybe that’s a key people can pick up on. But for the folks who are looking to get some work done as a part of a model like this or another investing scenario, how can they approach that contractor relationship to find somebody hopefully that is trustworthy, that is quality, that’s reasonably priced, with the idea that perhaps it can continue to work with that person in the future?

David Bright: That’s a great question because I think we’ve all heard the stories of some contractor that did terrible work or took the money and didn’t show up or all these kind of horror stories, right? But we found the opposite. We found — like the quote that I heard recently is that rockstars know rockstars. And so by finding a fantastic agent, that fantastic agent had a library of different contractors. Like hey, you need a plumber? Call this person, tell them I sent you. They do fantastic work. I’ve recommended them several times, they’ve done work on my home. Everybody loves this plumber. Like great, that just got really simple. So we found a plumber that way. And same with someone that could do drywall and lay flooring. I’d asked that same kind of question, they said, “Hey, call this person. They’ve done work for us, they’ve helped other people.” So it got really easy by finding that first good person and then I’m just a big believer in referrals like that because yeah, you can Google and I don’t know what you’re going to find. But referrals are really powerful for us.

Tim Ulbrich: Yeah, and I think relationships, referrals, I think this is where the value of like local real estate meetups can come in. And Bigger Pockets does a great job of this, and you can find some in your community. But I’m with you, like if there’s somebody that I value and trust and have had a good relationship and they are able to recommend somebody, and then you’re starting that conversation with, “Hey, I know David, and David recommended you.” That all of a sudden builds some of the expectations of that continued good work on the part of the contractor. So I think that’s great input and advice. So you renovate your condo, David, what’s the next move then for you as it relates to your investing journey but also the personal living situation?

David Bright: Yeah, so we — at the point where we had lived in the condo for about a year, we were thinking that my kids were going to start school and we were thinking we probably want to be in a different school district and want to be a little bit closer to work, wanted to cut down the commute time and some of those kind of things. So while the condo was great for us for that season, it was a season where it wasn’t really as good of a fit anymore, so we were able to find a house and buy a house that was a better fit for us at that point, particularly after getting to know the area for some time. At that point, we thought, well, we’ve been observing family that have owned a few rentals, and it was good for them. We thought, it’s a pretty big step to go out and buy a rental property. It’s a much smaller step to just not sell a house and instead, try it out as a rental because we figured if it didn’t work out, we could always still sell the house. Like it just felt like about as low risk as we would ever have. And even a lot of the finishes and things that we did to the property, one of the recommendations that we got from, again, one of just the rockstar real estate agents that we worked with is when you’re fixing up properties, particularly at that kind of price point where for a $55,000 condo, you’re not going to go in and do $15,000 worth of super high-end granite countertops or something, you know? The quote that we heard was go Chevy, not Cadillac.

Tim Ulbrich: That’s great.

David Bright: That helped us just to kind of keep the budget in mind and some of that. But with that, at the end of all that fixing up, it was in pretty decent shape. We thought, you know what, let’s try it. Again, going back to the just busy world of a pharmacist, we didn’t really know where to start with all that, so that’s where you already mentioned Bigger Pockets, and I had found Bigger Pockets just kind of Googling around online looking for how do you rent out your condo, like trying to learn this. Found a few books and just tried to figure this out kind of in the evenings, talking with my wife. And we knew of a couple people that were looking for a place to rent, so we kind of started there, just friends of friends, just kind of putting the word out that we’re looking to do this. But after about a month, we couldn’t really find anyone to rent the condo. And we thought, this isn’t going well, and it’s probably because we’re trying to do this on the side. We’re just busy people, we just don’t have the time for it. So that was our point where — just kind of like with construction work, you don’t want me replacing countertops, you don’t want me like flooring, none of that. So we had found a professional to do that. And we just did the same thing here, we found a professional property manager that was, just like we’ve been saying, a recommendation from another rockstar, and we found a rockstar property manager. She came in and met with us and walked us through what the process would be like. She took some photos and a few days, she had a showing where she bought three people through the condo. Two of the three signed an application, one of the two put down a deposit immediately. And right away, we had a tenant moving into the property. And from a numbers standpoint, we were — the property manager was able to get $150 more a month than what we couldn’t get and the property manager fee to do that was $130 a month.

Tim Ulbrich: Winning.

David Bright: Yeah. Like she ended up doing all of the work and made us more money than us trying to do it all ourselves when we just clearly didn’t have time to do it ourselves. So it ended up being a fantastic fit.

Tim Ulbrich: That’s awesome. A couple things I want to break down there, and you didn’t mention the 1% Rule directly, but I want to bring that forward as I know people may have heard that before or if they’re working at a similar situation where OK, as you had mentioned, it’s easier to not sell than perhaps buy your first rental. What is that 1% Rule as folks are trying to just gauge — and of course this is market-specific and so many nuances, just like we talked about with many of the parts of the financial plan — but as folks are trying to determine OK, what might be rent? What am I currently — what’s the house worth? How do you even begin gauge roughly what might be a valuable rental situation that somebody might determine to keep the property and turn it into a rental?

David Bright: Yeah, the 1% Rule is one that I know we’ve talked about, and it’s stuck with me over time because I first heard it from my wife’s grandfather who told me that when he was buying — like he had heard this 1% Rule. When I was later Googling around on Bigger Pockets and I read it in another book that this 1% Rule. So it’s really stuck with me. And that’s where, just for round numbers, if you have a house that’s worth $100,000. If you’re able to rent it for $1,000 a month, 1% of the value of the house every month is rent. That’s a decent rule of thumb of the math will probably work so that your rent will cover the mortgage and then some of the additional expenses like the insurance and property manager, some of those things. And you’re right, it’s a really good disclaimer that that doesn’t work in all markets, it doesn’t work in all situations. But it’s a nice rule of thumb that you know, if there’s a pharmacist out there that has a $500,000 house that they can rent for $1,500, that’s probably not going to cover the mortgage.

Tim Ulbrich: No bueno. No bueno.

David Bright: Probably not going to work. But in our case, it was a $55,000 condo and so if it rented for a little over $1,000, that more than met the 1% Rule and that was kind of how the math worked out. At the end of the month, there was a couple hundred bucks left over between the rent that came in and then the mortgage that we paid, which is kind of for us was some safety. I know a lot of pharmacists are pretty risk-averse and so we thought if there’s more money coming in through the rent, at the end of the month, that will help to take care of what if the furnace goes out? Or what if the toilet gets clogged? Or what if all of the things that — like what if a lightswitch goes out? Like I can’t fix that. I have to hire someone to do that. So to have money for those kind of expenses that would come up — and like you said earlier, hopefully we could save some every month and then vacation or whatever using that.

Tim Ulbrich: Yeah, and we’ll get into in the future — again, focus here we want to introduce some terminology– but you’re mentioning some important pieces that I think when folks are analyzing a deal, I think it’s easy — almost like when people are looking at I currently rent versus what would my mortgage be and they forget to think about property taxes, homeowner’s insurance, what about all of the lawn equipment I need, taking care of my own, increasing utilities, the list goes on and on, right? Here, same type of thing, you know, as you’re looking at a real estate investment property, what are the things that you need to be thinking about in terms of repairs that need to be done, big projects over time, a roof, water types of issues, if you think about vacancies, all of those are factored in when you’re analyzing a deal. And hopefully the plan is that you’ve still got some positive cash flow after that. So David, we started with your live-in flip, we talked about the condo that you were able to do some renovations on and then turn into a rental. What was the game plan after that?

David Bright: Well that first rental was a great learning experience for us. And as much as the 1% Rule and some of the math — and certainly as pharmacists, we can get really nerdy into the math real fast, right. And there’s some great resources out there that can help that. You know, another shoutout to Bigger Pockets, they have some great kind of calculators and things that help you to make sure that you’re factoring in all of those expenses like property management, like the inevitable vacancy that you will have at some point, like the general repairs and the larger expenses, like taxes and insurance. But beyond all that, part of our goal with this condo was — and again, you and I are educators and we really just wanted some education in this. And we figured this is the best way to do it. So in our minds, it didn’t have to be a fantastic investment that would make all the metrics. It was really just how do we learn this to see if this is a fit for us as a part of our long-term financial plan? And that helped us to learn even other things like I didn’t know at the time that there were rental inspections and things. And once we hired the property manager, the property manager helped walk us through that and some of the local things that you need to know. And again, by bringing in a professional rockstar, like she was able to help make sure that we had all of our ducks in a row, that this was all done appropriately, correctly, safely, which again, pharmacists in health care definitely want things to be safe. And so that really helps. There’s a lot of learning that went on with that condo. And so after owning that for a couple years, it really seemed like it helped us to build some confidence that we could do this again. Over time, we started thinking about what point is it worth trying to do this again?

Tim Ulbrich: Sure.

David Bright: Again, this rockstars know rockstars? We were looking around at other places and trying to find people that were doing this and learn from other people. One of the things that happened in Grand Rapids, where we live, house prices just accelerated like crazy, which I think we had all kind of seen from about 2015-2020 that house prices have gone way up across the country. And certainly Grand Rapids is no exception.

Tim Ulbrich: Yeah, and I remember, David, seeing Grand Rapids like on “Top Places to Live in the Country,” raise a family, I’m guessing that contributed to it as well.

David Bright: Oh, for sure. Yeah. And then shoutout to Grand Rapids, it is a beautiful place. And as far as those memory-making experiences, we were out on the kayaks with the kids last night and just a lot of fun things to do around here. So I know growing up in Columbus, I also at one point referred to it as a state up north, but now that I live here, it’s really beautiful. So the good side was some property appreciation. The bad side was it was hard to find these 1% properties where it would make sense as a rental. We didn’t really want to go out and buy a $250,000 house that would rent for $1,000 or $1,500 a month. It just didn’t make sense. So a friend introduced us to the city of Muskegon, Michigan, which about 45 minutes or an hour from where we live. And little community out by Lake Michigan, great little place, and there were some properties there that met this 1% Rule. And so we were able to buy a house out there that between the short sale that we bought first and the condo, we’re getting a little more confident in being able to fix some things. This house needed a little bit more work, it needed a bathroom remodel, it needed paint inside and outside and flooring and some other fixes like that. But I guess we’re getting desensitized to it or something like that over time. And I think also, there’s some confidence in knowing other rockstars that can do a lot of this work. We were able to hire some contractors and buy a property. So a friend introduced us to what I’ve heard referred to as a tired landlord, someone that had rented out the house and just was done with it, you know? And I don’t know what the situation was, if they had an eviction or something like that that just soured them to the property, but they were just done with it and wanted out. And so we were able to buy it in still pretty dirty condition, it needed some work, and we were able to hire some contractors to go in there and fix it up. And so this property — just as an example from a numbers standpoint, we were able to buy a house for just under $30,000 and put roughly $15,000 into repairs. So we were all into it for a little over $40,000. And then at the end of that process, it appraised for just under $60,000. So that helped us because we were then able to refinance the property at 75% loan-to-value — and we can certainly walk through a lot of these terms in a little more detail — but 75% loan-to-value refinance. We were able to get back out of it almost every dollar that we had into the property from a purchase and a rehab standpoint.

Tim Ulbrich: That’s awesome.

David Bright: Yeah, that also felt like a way to reduce risk, again, pharmacist that doesn’t love a lot of risk, because then we didn’t have to save for years and years to make this enormous down payment on a house that might have a little bit of return every month. We didn’t have to have a lot of money into this property. But yet one more aspect of a long-term financial plan.

Tim Ulbrich: Well, and then if this works out as planned, here’s a great example, and we’re not trying to say this is all roses and cupcakes, you know, there’s a lot of education, a lot of relationship-building, a lot of things you did to make sure that this was a good deal and mitigate your risk, and there’s always things that could be unforeseen. So I don’t want folks walking away thinking, alright, let’s do this tomorrow. I mean, if somebody’s ready, awesome. But making sure we’re looking at both sides of the equation. So here though, David, this is a great example, I remember hearing about the BRRRR concept on Bigger Pockets, and it was one of those moments where I almost drove my car off the road. You know, one of those like Aha!, like oh my gosh, I just never being exposed to real estate investing, wasn’t even thinking this way, almost like reading “Rich Dad Poor Dad” for the first time. And then hearing this and the concept of getting all of your money or close to all of your money back out and being able to repeat that process potentially and grow the portfolio while you still have some built-in equity in the deal. So break that down for us briefly. What is the BRRRR model as folks may be hearing that for the first time? And I think the example property you just walked through is a great example of it.

David Bright: Yeah, so the BRRRR model — and I would agree, this is one of those things just kind of reading Bigger Pockets or part of my work here — for those that know Michigan, I live in Grand Rapids and Ferris State is located in Big Rapids, which is a city about, depending on where you live in town, it’s about 30-45 minutes away. So with that kind of drive, had some time to listen to some podcasts. I think a lot of folks listening to this podcast are probably in the same boat where you’re listening to things and trying to learn. And yeah, the BRRRR method also really struck me. And that’s that BRRRR: Buy, Rehab, Rent, Refinance, and Repeat. So the goal here is to buy a property that for whatever reason, whether you get it from a tired landlord or you buy it as a foreclosure or you buy it as a house that needs work or any or all of those, you buy it at some kind of discount because it’s something no one else wants to touch or something. You then rehab it, where you go through and you hire a contractor to do painting or whatever other work. At the end of that process, it is an attractive house where you can rent it out. So you can then rent it out, tenant, property manager, all those kind of things, refinance it at that point where you’re typically able with most banks to borrow 75% loan-to-value on what the property is worth. So not necessarily what you paid or what you paid plus your construction costs or anything like that, but what it appraises for that day. You can borrow 75% of the appraised value. So refinancing it allows you to get some of your investment back out of it and by doing that, if all the math works really well like this example — and like you said, not everything is rainbows and unicorns — but in this example, it did work pretty well where we had a little over $40,000 into it and it appraised just under $60,000, so 75% of just under $60,000 got us right just about all of our money back out of it.

Tim Ulbrich: And I think, David, this example really highlights well, you mentioned some of the things with loan-to-value, and if I’m understanding you correctly, with a 75% loan-to-value in a cash out refinance, you’re essentially then remaining 25% of the equity in the property. So you know, a lot of times you hear people talk about leverage with real estate investing. And for those of us that certainly want to make the most of an investment opportunity but also don’t want to find ourselves upside down on a mortgage, in this situation, you’ve got some built-in equity in the home so if something were to change market-wise or you run into a 2008 example of the market dips, you know, you’ve got some protection in there. You mentioned getting your cash back out in this deal, and obviously there’s fees as a part of the process that need to be considered so you can hopefully continue on with this. And then obviously from a rent situation, you want to make sure that it’s cash flow positive. So here, it checks all of those boxes. And I think, David, correct me if I’m wrong, but for those listening hearing this as one example and one path forward that they may consider, the rate limiting step here beyond just the understanding of the process and feeling comfortable and confident would be having that upfront cash to purchase the property, correct?

David Bright: Yes. Yes, because a lot of times, if you’re buying a house that is in pretty rough shape, it may be difficult or even impossible to get a traditional mortgage on that property. So certainly you see the folks on TV that are trying to flip these houses in California or something, they’re spending $1 million on these houses, that’s not something that I’m able to do.

Tim Ulbrich: Right?

David Bright: But you know, buying a house under $30,000 is a very different story.

Tim Ulbrich: Yeah, and I think that’s just something for folks to consider and I think why the first one and this example or this model may be the most difficult. But if you’re running this right, the numbers look good, once you’re able to save up for that first one. And obviously as we talk about all the time on the show, so important to reinforce here, real estate investing for those that are considering it should be looked at in the context of the rest of the financial plan. So where are you at with your student loan debt? Where are you at with your emergency fund? Where are you at with your retirement, credit card debt, other goals? And does this make sense, in this example, to be saving up a bunch of cash to purchase this property? And for some, the answer may be yes, and for others, maybe it’s no for the time being. So we have — and we’ll hopefully revisit, David, at a future point on another episode, I think we’ve thrown a good amount of information at the listeners, but you know, we’ve kind of dodged around some of the benefits of owning real estate and rental properties. Obviously the opportunity for cash flow, of course the appreciation of the properties, we haven’t talked about in detail the tax benefits, but certainly that’s a consideration, the fact that somebody else is essentially helping pay down the mortgage, being able through the cash flow to achieve other financial goals, perhaps even having an opportunity for diversification of income and if folks are predominantly saving in a 401k or a 403b where those funds are essentially locked down to 59.5, you’ve got some options here in real estate. And so we’ll come back and approach some of those more in the future. One of the things I want to wrap up with, David, is you mentioned Bigger Pockets as a resource and the Bigger Pockets calculator, which I certainly would attest to as well. Are there any other resources that you would recommend either a great book, a website, a community that really has been instrumental in your own journey that other folks may be able to apply as they’re getting started?

David Bright: Yeah, you know, we both reference Bigger Pockets, and I think podcasts are just really accessible for folks with a commute or things like that. So I would definitely recommend that. You’ve also mentioned the “Rich Dad Poor Dad” book, which I think really helped me to see, just see investing and a financial plan in a different way than I had previously thought, so that was another big resource that helped. And then “The Millionaire Real Estate Investor.” I believe that’s a Gary Keller book, that’s another one that was a little more nuts and bolts as far as how to look at properties, how to do some of the math and certainly pharmacy math nerd, I dove into some of that. And so that was helpful. I thought of the “Rich Dad Poor Dad” as more of a mindset book.

Tim Ulbrich: Yes.

David Bright: And “The Millionaire Real Estate Investor” as more of a tactical book. And so both of us, an audiobook here and there on the commute, and it was helpful there. I think that one of the other things that helped me to learn from just a mindset thing too is that I think some of this can certainly be a lot of — it can just be intimidating for people with a full-time job, busy life, family, kids, all those things. Like it can be certainly intimidating. And both of those books and then talking with other people in the area, other people doing this — going back to the rockstars know rockstars — talking with real estate agents and contractors, like one of the things that oddly enough, has helped us too is buying a house that’s an hour away.

Tim Ulbrich: Yeah.

David Bright: I’m not tempted to go drive by it and try to paint a room or something. Like I’m able to really detach from it and not let it take a bunch of time, which has been really, really helpful because I think that, again, typical pharmacist, little bit of a control freak. It’s hard to detach from some of these things, but it’s just been really healthy I think to do that and to trust property managers, to trust contractors, and yeah, just it allows it to be something that we can do as a part of our financial plan without it really taking a ton of time.

Tim Ulbrich: And I think that’s a nice recap of what we had talked about before briefly of I think one of the benefits of long distance real estate investing, whether that’s an hour or a different state away, is it really helps kind of force your hand in building some of the systems and processes that hopefully pull you out of the equation in some regard. Again, I’m thinking about this as somebody would be building a business and thinking about with the end in mind. The other resource — and actually one that just came to mind as I was just mentioning that Bigger Pockets does have a book on long distance real estate investing. So if folks are in a market where deals are harder to find and you’re looking at other areas of the country, I recommend that resource. Another one, David, I know Bigger Pockets just came out with I think it’s “The Real Estate Rookie” podcast, which I’ve enjoyed listening to. I know they’ve done so many episodes on their main show now and sometimes those stories, for new investors may seem just massive and overwhelming as people are talking about having 150 properties and their journey over the last 10 years. And I think that “Real Estate Rookie” podcast is a good segway introduction for folks that are just getting started. So David, really appreciate you taking the time to share some of your journey but also help break down these concepts. And we will link to some of the resources that we’ve mentioned in the show notes. And as a reminder to the listener, you can access show notes for this episode as well as any other episode, by going to YourFinancialPharmacist.com/podcast. Find the episode and in there, you’ll find a transcription of the show as well as a link to the resources and notes that we talked about. And don’t forget to join the Facebook group, over 6,000 members strong, pharmacy professionals all across the country, committed to helping one another on this path and goals towards achieving financial freedom. And last but not least, if you liked what you heard on this week’s episode, please leave us a rating and review on Apple podcasts or wherever you listen to your show each and every week. Have a great rest of your day.

 

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YFP 160: Navigating the Home Buying Process Through the YFP Concierge Service

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Navigating the Home Buying Process Through the YFP Concierge Service

On this week’s episode, sponsored by HPSO, Nate Hedrick, The Real Estate RPH, interviews two pharmacists, Shelby Bennett and Bryce Platt, about their home buying experience. Shelby and Bryce recently worked with Nate via the YFP Real Estate Concierge Service to craft a plan and connect with a local preferred agent to buy their first homes.

About Today’s Guests

Dr. Shelby Bennett

Dr. Shelby Bennett is a Clinical Assistant Professor at the University of Nebraska Medical Center College of Pharmacy. Originally from rural northwest Iowa, Shelby graduated with her PharmD from Creighton University in 2016. She then completed a community-based pharmacy residency with the University of Kansas and Balls Food Stores in Overland Park, Kansas, where she earned a teaching certificate from the University of Kansas Health System. After residency, Shelby designed and implemented clinical services at two independent community pharmacies closer to her hometown. Shelby made the switch to her dream career field and bought her first house (with some help from Nate and the YFP team!) during the COVID-19 pandemic, and she’s here to tell the tale. She is excited to be back in Omaha, where she resides with her cat, Sophia.

Dr. Bryce Platt

Bryce Platt earned his Doctor of Pharmacy degree from the University of Kansas and completed a postdoctoral fellowship in Population Health Management with Omnicell and Campbell University College of Pharmacy and Health Sciences in July 2019.

Applying five years of experience in community pharmacy practice and the same passion for improving healthcare, Bryce has worked alongside engineers, data scientists, business analysts, and executives over his career, providing clinical expertise and gaining valuable experience in improving population health. Key projects include leading clinical content preparation for a national health plan program, evaluating international markets for potential Omnicell expansion, working with international teams on protocol development for a research study, assistance with development of a new Medication Therapy Management platform, developing an opioid abuse mitigation program, and preparing business cases for innovative Omnicell solutions.

Bryce is currently the Clinical Pharmacy Specialist at Omnicell and serves as a preceptor for pharmacy students from six different universities during their rotation.

Summary

On this podcast episode, Tim Ulbrich hands the mic over to Nate Hedrick, The Real Estate RPH. As both a pharmacist and a real estate agent, Nate has a unique perspective on the home buying process and he’s used it to help many pharmacists achieve their dream of owning a home. Let’s put it this way: he’s got the insider’s view.

Nate interviews Shelby and Bryce, two pharmacists that both bought their first homes with the help of the YFP Real Estate Concierge Service. Shelby purchased a single family home Nebraska and shares her journey of real estate agent struggles, house she chose a lender and her lessons learned along the way. Bryce recently purchased a condo in North Carolina to house hack. Inspired by YFP 130: House Hacking Your Way to Financial Freedom, Bryce got to work and within months made this dream happen. Bryce talks about how the YFP Real Estate Concierge Service connected him with a preferred local agent, his most crucial team member on this real estate adventure and how he was able to get a pharmacist home loan with IBERIABANK/First Horizon for 3% down with no PMI.

The Real Estate Concierge Service is designed to help pharmacy professionals get connected with local preferred agents and have support well past closing on a home. Here’s how it works:

Step 1: Crafting a Plan. We start by designing a plan that works with your budget and your financial goals. Our 30-minute jump start planning session helps determine your needs and answers your important questions right from the beginning.

Step 2: Connecting you with a Pro. You need an agent you can trust. And one that understands a pharmacist’s busy schedule. Our network of agents have gone through a rigorous screening process to ensure they have your best interest at heart. Once we know what you’re looking for, we’ll connect you with one of our preferred local agents that will help find the perfect place to call your own.

Step 3: Staying the Course. After connecting you with a preferred agent, we stay involved well past closing. If questions come up, priorities change, or you need an unbiased opinion, we’re available to lend an ear and a helping hand.

Book a free 30-minute jump start planning call with Nate today!

Mentioned on the Show

 

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. Excited to have back perhaps the most frequent guest on the Your Financial Pharmacist podcast, Nate Hedrick, The Real Estate RPH, who’s going to be joining us as we highlight two case studies of pharmacists that worked with Nate as a part of the real estate concierge service to land really two incredible opportunities. And we’re going to talk about those in more detail on this week’s episode. So Nate, welcome back to the show.

Nate Hedrick: Thanks, Tim. Always nice to be here.

Tim Ulbrich: What’s new and exciting up in Cleveland, Ohio?

Nate Hedirck: Besides quarantining, actually Kristin and I just dove into our first out-of-state investment property. So we’re currently in the middle of figuring that whole game out. So I’ve been posting a little bit about it and I’m sure I’ll be posting more as demo gets underway. But that’s the exciting real estate world that I’m living in right now.

Tim Ulbrich: I saw your photos on Facebook, and I think for those that may not have experienced that firsthand or that experience of doing a flip and a demo, quite a project like that might give some people palpitations. But it looks like you’ve got your hands full.

Nate Hedrick: Oh man, yeah. The smell in there — and I have not been there, full disclosure — but I have been told it is horrible and the heat has not been helping. So we’re starting off maybe on a yucky note. But hopefully it will get better as time goes on.

Tim Ulbrich: Yeah, which either unfortunate or fortunately, depending on how you want to look at it with real estate, often means a great opportunity if you’re willing to work through some of that to be able to have a good investment opportunity, whether you end up flipping it or whether you keep it and BRRR it, it sounds like it might be a good opportunity. And we’ll feature that perhaps on a later episode of the podcast as well.

Nate Hedrick: Great.

Tim Ulbrich: So really excited, two awesome stories that you are going to feature, individuals, pharmacists that you’ve worked with as part of the real estate concierge service to help them with their home buying purchase as their agent and I think two very different stories. But we’ll really give our listeners an inside look into what that service is all about and perhaps even give some of our listeners some ideas about investment opportunities with Bryce’s story. So tell us a little bit about what our listeners can expect to hear from these two interviews that you did.

Nate Hedrick: Yeah, so you let me take the mic for the first time, which is kind of cool. I got to be on your side of the table, which was fun. So I interviewed Shelby and Bryce. And Shelby — both of them, actually — are first-time homebuyers. And what I think is going to be nice to share with you guys is that Shelby was really kind of your standard first-time homebuyer, looking for a place to live, you know, nothing frilly about it. And so I think moving for a new job. So she’s going to be a really great story to kind of showcase what most people are going to go into. And then Bryce is another great case study because he was looking for more of it as an investment property. And he actually ends up buying a 4-by-4, which we’ll talk about. But he’s a house hacker. So we’ll talk about what that looks like and what that’s going to do for him. But it’s two good stories of how first-time homebuyers can go in different directions and I really think it brings interesting notes to what the concierge service can provide.

Tim Ulbrich: Yeah, I think there’s a little bit of everything here for those that are listening, you know, whether they’re first-time homebuyers going about it more the traditional way, first-time homebuyers that want to do some more creative house hacking, investing, or those that have a home and perhaps want to get into real estate investing. I think there’s something to take away for everyone that’s listening. And you use as the framework for your interviews the six steps to the home buying process, which we outline in the home buying, YFP home buying guide. And so for those that want to download that guide and learn more about those steps and be able to connect that with the interviews that you did, head on over to YourFinancialPharmacist.com/homeguide, all one word. Again, YourFinancialPharmacist.com/homeguide. And hang with us, so we’re going to go into Shelby’s interview and then you’ll hear from Bryce as well and his interview with Nate. And then we will wrap up the show talking a little bit about the concierge service, connecting it back with those interviews and those stories and where you can learn more to connect with Nate from there. So let’s transition to hear Nate’s interview with Shelby.

Nate Hedrick: Hi, Shelby. Welcome to the show.

Shelby Bennett: Thanks, Nate. Thanks for having me.

Nate Hedrick: Yeah. It’s great. I really appreciate you being here. It means a lot to have you on the show. Can you dive in and tell us a little bit about yourself?

Shelby Bennett: Yeah, absolutely. So I am a pharmacist that graduated in 2016. So this is going into my fourth year of practice and recently made a big job change from an independent community pharmacy in rural Iowa where I’m from and recently took a job teaching at a college of pharmacy in Omaha, Nebraska. I went to college at Creighton here in Omaha for undergrad and pharmacy, so it’s kind of good to be back in my old college town. And yeah, I just bought my first house, which is what I’m here to talk about a little bit.

Nate Hedrick: Yeah, you just moved in — what? Two weeks ago now? Three weeks ago?

Shelby Bennett: About a month ago. I closed May 29.

Nate Hedrick: OK. Nice. And how’s the move-in process going?

Shelby Bennett: It’s going well. Everyone’s telling me that home projects never end, and I’m definitely starting to understand that. I think I’m finally to the point where all the stuff is out of the boxes. It’s just not put away yet.

Nate Hedrick: I knew that when we moved into our last house that any boxes that were there after like a year, we just didn’t need that stuff. We could just throw it out. So hopefully you’ve got everything unpacked, you’re in a good spot.

Shelby Bennett: Absolutely.

Nate Hedrick: Well we’re going to jump in and do a little bit about that experience. I again want to follow the Six Steps to Home Buying Guide that we have available through Your Financial Pharmacist. That guide will actually walk you through the same six steps that Shelby and I are going to walk through today. So if you take a look at No. 1, we are talking about making sure you’re ready. So this is before you start a Zillow search, before you do anything, you know, how do you determine if you are ready to buy a home? So Shelby, can you tell me a little bit about why you decided to buy a home instead of continuing to rent?

Shelby Bennett: Yeah, absolutely. So I decided to buy a home because I was ready for the permanence of living in one place, because I wanted to feel I had the freedom to make changes to the house or the yard without having to ask for a landlord’s permission. My last rental was a small house, and I liked not having neighbors as close as you do when you live in an apartment. But I was also ready for more space. My last place was only about 650 square feet, so I was ready to expand.

Nate Hedrick: Totally understand that. Yep. We were similar when we made our decision. So that’s great. And then if you’re like any good pharmacist like me, you’re probably extra detail-oriented. But did you dive into the numbers really deep on the budget? Or were you using something more broad? How did you set that ideal budget or how did you look at that question?

Shelby Bennett: Yeah, so this is going to be one of those don’t-try-this-at-home examples.

Nate Hedrick: Perfect.

Shelby Bennett: I discovered the YFP Home Buying Guide after I’d already started looking at houses online. So I definitely did this part in the wrong order. I started looking at house in the neighborhoods I wanted to live in and then extrapolated my budget backwards based on the houses that I liked.

Nate Hedrick: That’s awesome. You’re not alone in doing that. I think most people actually operate that way.

Shelby Bennett: My logic was, OK, so it will cost x amount of dollars to buy a move-in ready house in Dundee, like can I afford to live there? But then I got lucky in that after meeting with Tim Baker and working through some of his equations based on income and expenses, the budget I had originally set wasn’t really too far off topic. So I got lucky there.

Nate Hedrick: That’s good. Yeah. Tim’s home buying guide that he does with the YFP Planning is great. I love that spreadsheet.

Shelby Bennett: Yeah, that’s really nice.

Nate Hedrick: Great. Alright, so you’ve set your budget, maybe in a little unorthodox way, but I think probably more normal for most people, I like that. And then you’ve got to determine what’s important. You’re looking at things like location, size, flexibility, that’s our step No. 2. So this can get a bit overwhelming. You’re going from every house in a particular location and how do you narrow it down to what you’re looking for? So what were some of the criteria that you focused on when you were trying to determine what was important to you?

Shelby Bennett: Yeah, absolutely. So it was really important to me to be close to work. I grew up in a rural area, so everything that you wanted to do from a work perspective was really close, and then everything you want to do from a cultural or a shopping standpoint was a long ways away. But it was important to me to maintain the same short commute that I had had in my previous experiences. So because I’d lived in Omaha for six years during undergrad and pharmacy school, I had a pretty good idea of the neighborhoods that I’d want to live in that would be a short commute to work.

Nate Hedrick: Nice.

Shelby Bennett: And I also wanted enough space for my immediate family to visit and stay. My previous house was too small for all of us to hang out at the same time. And then as I alluded to earlier a little bit, I wanted a house that didn’t need a lot of interior work done. I figured starting a job, buying my first house, moving in a couple hours away, was enough projects to start with, especially since I’d be living in the new house during a renovation. So exterior work I was OK with since it doesn’t really affect the function of your house. But interior work, I wanted it mostly done.

Nate Hedrick: Yeah, that makes sense, especially with starting a new job and moving across the state and all that. That makes total sense.

Shelby Bennett: Yeah.

Nate Hedrick: Great. Well, were you able to hone in on that? It sounds like you had a couple of projects, but hopefully they haven’t been too overwhelming.

Shelby Bennett: Yeah, yeah. So I actually had a contractor come earlier today and look at a couple things. But yeah, I ended up picking a place that had some exterior projects that needed to be done but ended up finding a place that almost everything I wanted done was on the inside. So almost everything on the inside was already done, excuse me.

Nate Hedrick: Great. That’s great.

Shelby Bennett: So that was really nice.

Nate Hedrick: Good, good. Well one of the other important aspects that we really want to focus on too is Step No. 3, which is assembling your team. You know, there are a lot of important team members included in the home buying process, right? You’ve got a real estate agent, you talked about working with Tim, so your financial planner, maybe an accountant, sometimes a lawyer in most states. So looking back at your purchase, who would you say were the most essential members of your team?

Shelby Bennett: Yeah, so I’m going to rank my team members by how many questions I asked each of them.

Nate Hedrick: I like this.

Shelby Bennett: Definitely the award for the most questions asked and answered goes to my local real estate agent that I worked with through most of the process, Rebecca. A month out from closing and we still probably talk about once a week. So she was really great to work with. Next up is probably Tim Baker, who’s been working with me on financial planning with YFP since November of last year. So kind of around the time I decided I wanted to be buying a home soon and kind of looking at some of those things. My parents were definitely a sounding board for me when I had questions. And they came with me during showings to catch things that I didn’t. None of us are real estates experts, but it was nice to just kind of have an extra set of eyes and to think about things that maybe I didn’t. And then last but definitely not least was you, Nate. You definitely came in clutch for me during a couple of slightly awkward dilemmas throughout my process.

Nate Hedrick: Yeah, I want to talk about that because that’s actually one of the main reasons I wanted to have you on because I think this is really good. We talk about our concierge service and the home buying concierge and how that works. And in my head, it’s this perfect system, right? We match you with an agent and you get off and you find your dream home. But in reality, it’s not always perfect, right? So we originally connected you through the concierge service with Emily, right?

Shelby Bennett: Mhmm.

Nate Hedrick: And things were — it was OK, but it wasn’t a perfect fit. So maybe you can tell us a little bit about that because I think this is a really cool story to share about what this can look like.

Shelby Bennett: Yeah, absolutely. So I think I talked to you probably on a Thursday night, and I think by Sunday night I’d already received an introduction to my first agent, Emily. And I was pleasantly surprised at how quick the process was, even though you hadn’t worked with agents in Omaha before. My first interactions with Emily were pretty positive. She was quick to respond to my questions. I had requested to see a few properties that I had seen online, and she set up showings for them. I’d never really been to a house showing before. So I didn’t know what to expect except that I figured it probably wasn’t exactly like you see on HGTV. I remember not really knowing how to feel after that first day of showings. It was exciting to get out and see houses, but I didn’t feel that supported by Emily as we looked at houses. She’d let us into the house and then just kind of wait for us to be done exploring. She was available for questions but usually gave short answers I didn’t fully understand. The one house I saw that I felt like I could see myself in needed a lot of yard work and some of the windows needed to be replaced. I felt like the more excited that I got about the house, the more she seemed to be talking me out of it. Spoiler alert, that’s the house I ended up buying. But we’ll get to that later.

Nate Hedrick: Nice.

Shelby Bennett: But yeah, my situation was a little unique in that I was looking for houses during the interview process for my new job. So I wasn’t in a place to make an offer for at least another couple weeks. I think that definitely affected my experience with Emily. So the second time I wanted to set up showings, I feel like she tried to talk me out of them a little bit, saying they probably wouldn’t even still be on the market by the time I was ready to buy. When I asked if I could still see the properties to learn more about the home buying process so I wasn’t scrambling at the end when I really needed something, you know, she made me whittle down the list of places I wanted to see from five to three for a five-hour round trip drive on my part. And then all of a sudden she had this schedule conflict, and she sent another agent to show me the homes. And that was super awkward for me. I didn’t really know. I was like, isn’t that your job? I didn’t really know what to expect from her or from me or if I’d done a wrong thing. It was definitely awkward for me. But even though that was super awkward, I feel like it was the best thing that could have happened in hindsight because the new real estate agent, Rebecca, was super personable, she was exploring the houses right there along with us. And she was giving us insight about the homes and the neighborhood. And I felt like she really welcomed my questions. I didn’t feel like they were stupid questions, that I asked too many or anything like that. And we just had a great time seeing the homes. We had a lot of fun, and I left feeling just a lot more hopeful. The only thing is I didn’t know like was it possible to break up with your real estate agent? Could you switch to a new one? Like I had no idea.

Nate Hedrick: Yep.

Shelby Bennett: So thankfully, the next day, Nate, you’d sent me an email just checking in to see how things were going. And thank goodness for that. I had decided to fill you in on my predicament.

Nate Hedrick: I remember that email.

Shelby Bennett: Oh my gosh, I’m so glad I did. I feel like you just really validated all of the concerns I was having, and you helped me make the transition from Emily to Rebecca by helping me understand kind of the structure of real estate offices and kind of what to focus on when kind of asking to switch. I can’t imagine how the home buying process would have gone if I hadn’t reached out to you, taken your advice and then decided to work with Rebecca moving forward.

Nate Hedrick: Well, we messed it up to begin with, right? We gave you Emily first, so we had to fix it and get you back on track.

Shelby Bennett: Well you didn’t know.

Nate Hedrick: No, and you know, it’s hard, right? So we do these interviews, and we interview these agents. But until someone’s worked with them that we know, there’s no way to know up front. And so luckily, Rebecca was on Emily’s team and was just a much better connection point for you. She was much more first-time homebuyer-centric. And it was obvious in your email that she was someone that you connected with and that you were going to be able to work with long-term. So I’m really glad we were able to get you switched over to Rebecca. So again, the point here is that, you know, we try, we do the best that we can, but the concierge service is not perfect. But the good news is that we’re always a part of your team. So when something like that happens, you did the exact right thing, just reached out, say, “Look, this isn’t working. I need to pivot.” And we can help you make that pivot. So again, I really — I love sharing the good stuff that we do with concierge services, but I’ve also got to make sure that we share the real stuff too. And this is exactly that. So thank you for telling that story.

Shelby Bennett: Yeah.

Nate Hedrick: Alright, so then once we found a place, we found the original place and then we got talked out of it, now we’re back. Then it’s choosing a loan and getting preapproved. So a lot of people kind of struggle when it comes to getting financing. And so this is Step 4. So can you tell us a little bit about how you went about navigating that process and any tips that you have for our listeners now that you’ve gone through it once for yourself?

Shelby Bennett: Yeah. Absolutely. So I was in the market for financing in April. So right in the middle of the COVID shutdowns. So Rebecca had recommended that I choose a lender I knew I could get ahold of on short notice since not everyone was working from the office anymore. She said that delays from lenders can delay closing on the house. I definitely didn’t want that, ended up kind of a short schedule from by the time I accepted the job to the time I needed to be moving. So I knew I needed to get going more quickly. So yeah, so thankfully I have an extended family member who’s a home mortgage consultant. So I knew I’d be able to contact him if I needed. So the process I used, I got some rate quotes from both my family member’s national lending company and then I talked to others to see what rates were being offered by IBERIABANK/First Horizon, as recommended by Tim Baker. And then because I’d be putting 20% down with a conventional loan — and that was I guess a recommendation from Tim as well — and the interest rates were similar between the two lenders, I decided to choose my family member as my mortgage consultant because I wanted somebody, kind of like Rebecca, that I was comfortable asking questions to and somebody I felt like would recommend the best options for me and not just try to sell me something. I think my biggest tip is to really just use your home buying team to help you make those financing decisions. I don’t know about a lot of you out there, but I am not an expert on finances by any means. And so it was so nice to have pros to reach out to when I had questions or wasn’t really sure because I ran into another situation I was pretty sure I had all my financing ducks in a row. And then I had an immediate family member recommend I put less than 20% down after reading an article about how COVID would affect the housing market and its potential to be worse than the Great Depression, in the article’s words. And man, that really threw me off. On super short notice, I talked to both Robert and Tim Baker at YFP and to you, Nate, to kind of get your take on the situation. I knew my family member was coming from a place of care and concern for me, but I definitely didn’t want to make a decision I’d regret later, especially not one that costs a lot of money and was spread out over 30 years. So just like with my real estate concerns, both Robert at YFP and I feel like Nate, you really took the time to answer my questions, kind of justify both my concerns and then tailor your response around some of the details of my particular situation. And it was just so nice having another opinion. It made me feel like no question I had was a stupid question. And it just really made me feel like I had another person I could reach out to and I was like, I have no idea what I’m doing.

Nate Hedrick: Good, well I’m glad we could be there for you. And you’re right, the amount to put down and the type of financing and all the things that go into that, it’s so different for everybody. I think we’re so quick to say, you know, 20% is what you’re supposed to do. And it just feels like that’s what you hear about. But the reality is that it’s different for every situation and every person. So it’s always good to get those second and third opinions from someone else that knows your finances and knows what you’re going through. So yeah, definitely a tricky spot, but I’m glad you had the support that you needed. Alright, so Step No. 5 is finding your home and negotiating. So we talked a little bit about finding that home and the home search process. But I guess I’ll ask this too, it sounds like COVID did have an impact. Did that interrupt showings in any way? Or did you have any issues with seeing houses?

Shelby Bennett: Yeah, so I wasn’t really sure what to expect from that search process kind of at first. I spent a lot of time, especially early on, looking at real estate websites online. I set a lot of email alerts for houses that fit my criteria. But yeah, COVID definitely affected kind of the second half of my search process. Ended up doing a lot more FaceTime showings than in person, which with a five-hour round trip drive was actually really nice. I don’t know that I would have done as many of those without COVID. And so in some ways, it was nice because when you saw a house on FaceTime and you knew it definitely wasn’t the one, then you didn’t have to drive so far. But it was hard to get a really good feel of the house just from your phone.

Nate Hedrick: Yeah, until you’re standing in that space, it can be tricky to get a true feel for what that house is going to be like.

Shelby Bennett: Yeah, so I got really lucky in that the house I ended up buying I had seen in February before I knew I was going to be moving and before all of that. They had fixed up a lot of the windows and some of the yardwork, and so then Rebecca actually reached out, you know, mid-April to say, “Hey, what do you think about this house?” And I was like, “Funny you should mention. I feel like that was the house I liked.”

Nate Hedrick: “I know the house well.”

Shelby Bennett: Yeah, “that was the house I liked that nobody else liked for me.” COVID also made me feel a little bit like people weren’t putting houses on the market. And so it was frustrating at times to feel like I wasn’t going to find a place in time. But kind of by the end, I guess the search process was more or less like I imagined. You go to the house, you open up all the cupboards, you explore everything, and then you kind of talk about pros and cons of each place. Turns out Omaha is a seller’s market, so it was a little more stressful than I thought with fewer homes on the market and a little more buyers competition. Some houses I liked were off the market in less than a day, and so that was just kind of blew my mind.

Nate Hedrick: Wow. Yeah, no doubt. Gees. And we’re actually seeing that around the country right now. We’ve got a seller’s market pretty much everywhere. Inventory is very low. I know of very few areas in the country right now that are buyer’s markets. So that’s not totally unique to Omaha at this point. And then did you — you know, the part that intimidates most people about this step is the negotiation. Did you get into any negotiations with the seller or how did that part go?

Shelby Bennett: Yeah, absolutely. So Rebecca was really great at walking me through the negotiation process because I definitely wasn’t comfortable with that going in. So she had recommended a price range to start my offer at and actually had reached back out to Emily to kind of get her thoughts since she had seen the house as well. And so they kind of helped me understand where would be a good place to start and then helped me understand a little bit of the seller’s thought process kind of through the negotiation process and what they’d likely be thinking. And then, you know, she talked with me about common things home buyers usually negotiate on when they offer versus like what you might negotiate or put into the offer after the home inspection and kind of at different points along the way. We ended up negotiating the price of the home down about $17,000. And we got the seller to purchase the home warranty, so I was really happy about how that all ended up.

Nate Hedrick: Nice. That’s great. And it’s really nice to hear that Rebecca and Emily helped you really kind of step into the seller’s shoes for a minute because I think it’s easy to walk into a sale as a buyer and think, gosh, I’ve got to get this for as low as I possibly can. And I’m going to negotiate hard on everything. And the reality is like, there’s just two people trying to have a transaction. And so stepping into their shoes can actually help you a lot of times with that negotiation. So that’s great.
Shelby Bennett: Yeah, absolutely.

Nate Hedrick: And then the last step is Step 6, which is inspect, insure, and close. And I think a lot of this tends to run together, right? All these steps are kind of going on simultaneously. So you know, with all of the stuff that’s going in this, I guess I’ll just ask, is there anything that you learned or that you would have done differently now that you’ve gone through the closing process as a first-time home buyer?

Shelby Bennett: Yeah, so I definitely learned at the inspection that I don’t know a lot of structural things about houses.

Nate Hedrick: They didn’t cover that in pharmacy school? What the heck?

Shelby Bennett: No. My inspector and my agent were really good about explaining the significance of the findings during the inspection and kind of suggesting what to ask the sellers to fix. I definitely recommend being present for your inspection walk-through, even if it’s in the middle of a pandemic and you have to wear a mask like I did. But so you can physically see the inspection report findings, they can physically point out different things throughout the home. There were a lot of terms that I didn’t understand. But once I could see what they were talking about, it made a lot more sense. I definitely recommend that. Closing was definitely a blur for me. I was I think the first in-office closing the title company had after doing drive-through closings for COVID.

Nate Hedrick: Oh, wow.

Shelby Bennett: My title agent said she would email me the closing documents to review beforehand, and with all the craziness going on, I wish I’d remembered to reach out and tell her I never got them. But I couldn’t until it was too late, and then I closed right away in the morning. So when I got to closing, like there would be all these super long documents, and my title agent was great and would say like, “Hey, this is just a document that your lender needs to do x.” But I’m like, “It’s four pages long and this is all it says?” You know? But I definitely didn’t take a lot of time to read them being close proximity like in an office was definitely something that was very taboo kind of at the end of May with COVID anyways. And so I didn’t necessarily probably take as much time as I would have to like read everything. And then it was a bummer that Rebecca, my agent, couldn’t be there either. Turns out real estate agents and sometimes family members can be present at closing to kind of help answer any questions and kind of be there for support. And instead, I was in a conference room across from the title agent with a big plexiglass divider and just a little slot to pass papers back and forth.

Nate Hedrick: Wow. Oh my gosh, that’s so crazy.

Shelby Bennett: So yeah, so that was a little wild. So I wish I had been a little more proactive and remembered to reach back out and see those closing documents ahead of time. But overall, you know what, it went well. I haven’t discovered yet that I made any big mistakes. So you know, it all turned out for the good. But definitely something I feel like you just, you don’t know about until you have the experience.

Nate Hedrick: Absolutely. I remember my first closing as a home buyer and was just overwhelmed with the amount of things I was signing and I just wrote a giant check for a bunch of money, and it was terrifying.

Shelby Bennett: Right.

Nate Hedrick: So yeah, I totally understand. And that’s really great that you were able to share some of that with our listeners because again, step back, ask questions, and review the documents ahead of time. That’s a really good piece of advice. Well, you’ve given us some great tips, and I really appreciate you sharing your story today. Is there anything else that you want to share with our listeners that you — about the home buying process or really anything in general?

Shelby Bennett: Yeah. So really the only thing I had to share was something you just touched on. Don’t be afraid to ask questions. I think especially as a first-time home buyer, I definitely felt a little bit like I was annoying people on my team at times. But I’m like, this is your job. You know, like.

Nate Hedrick: I pay you for this. Hold on.

Shelby Bennett: I was like, home buying just isn’t one of those things, like you mentioned, like we don’t learn that in school. There’s no place to learn about it except for when you go through it. And it’s a huge decision. So I definitely say reach out, take advantage of all your resources. There’s lots of pros who’ve done this before and are super willing to help. So you don’t have to do it alone, and no question is too small.

Nate Hedrick: That’s really great advice. I really appreciate it. That’s awesome. Well Shelby, thanks so much for being on the show. It just means a lot that you would come on and share your story. And again, I think our listeners are going to learn a lot from what you had to say. So appreciate it.

Shelby Bennett: I appreciate that, Nate. Thanks again for having me.

Nate Hedrick: Hi, Bryce. Welcome to the podcast.

Bryce Platt: Hey, Nate. Thanks for having me.

Nate Hedrick: Absolutely. We’re glad to have you on the show. So I guess we’ll start off, can you tell us a little bit about yourself?

Bryce Platt: Sure. My name is Bryce Platt. I’m from Kansas originally and went to the University of Kansas for my pharmacy school, graduated in 2018 and then did a post-grad fellowship in population health management in North Carolina. I’d never been to North Carolina before until that fellowship. Spent a year there and did I guess not bad enough that they felt the need to get rid of me, so they decided to keep me. And stayed on as the clinical pharmacy specialist for pop health programs. And that’s where I’m at now.

Nate Hedrick: That’s great. That’s amazing. And you just bought a house there, right?

Bryce Platt: I did. I just bought a four-bed, four-bath condo.

Nate Hedrick: That’s amazing. Yeah, and that’s exactly why we’ve got you on the show today to talk a little bit about that experience. So again, we appreciate you being here.

Bryce Platt: Thank you.

Nate Hedrick: Great. So what I thought we would do is out on our website, on the YourFinancialPharmacist.com Real Estate page, we have a home buying guide. And it is the six steps to follow to basically have a great home buying experience. And so I thought we’d walk through those six steps and kind of see what your experience with those six steps and get some feedback from you, if that works for you.

Bryce Platt: Yeah, hopefully I can share a little bit of knowledge and help some people who haven’t done this before.

Nate Hedrick: Perfect, that’s what we’re looking for. So alright. We’ll start with No. 1 — oh, and if you’d like to get access to this yourself, you can to YourFinancialPharmacist.com/homeguide. And you can download those six steps. You can follow right along with us or work on your own plan there at home. So Step 1 on there is making sure you’re ready. So this is kind of the before you start searching on Zillow, you know, when you’re deciding that buying a home is the way you want to go, there are a number of steps that you should be taking, things like budget, things like looking at your location and all that goes into that. And so Bryce, tell me a little bit about how you decided to buy a home instead of continuing to rent.

Bryce Platt: Neither you or Tim know this, but this completely started from me listening to Episode 130 on this podcast.

Nate Hedrick: Oh nice.

Bryce Platt: It was where Craig Curelop from Bigger Pockets came in to talk about his house hacking strategy guide, his book that he had released.

Nate Hedrick: Yep.

Bryce Platt: So I listened to that mid-February and was like, I mean, my lease ends in early August. So I can go ahead and do this. It wouldn’t be any more expensive than renting, and I’d have the benefit of the cash flow and building some equity in an actual property. So I went forward with buying the book and from that first step in mid-February, I had closed on this condo by June. And before that never even considered should I look at a property? Should I buy a house? Didn’t even cross my mind at all.

Nate Hedrick: That’s great. Well, that’s awesome. I’m glad we’re inspiring a couple people out there. That’s the goal. So that’s amazing. And like I mentioned, one of the other steps to determining if you’re ready is figuring out things like budget and questions like that. So did you sit back and were you the classic detail-oriented pharmacist doing all these hard numbers? Or how did set about things like a budget?

Bryce Platt: You know, I can’t say that I had a budget. What I did was I completely looked at deal numbers. I looked at it completely as an investment. So I didn’t have a top number except for what the bank was willing to loan me. Beyond that, just did the numbers for the property work? Which of these look like the best deals and investment property? So as long as those numbers worked, it was very loose on the actual list price.

Nate Hedrick: Yeah, this is really different than buying a traditional home that you’re going to live in. It’s really more of an investment. And so approaching that like a business decision makes a lot of sense.

Bryce Platt: Absolutely.

Nate Hedrick: I guess, so that leads us really nicely into our next point, which is determine what’s important. And it sounds like house hacking was the thing that you wanted to do. So maybe you can — I know we talked about, like you said on Episode 130 with Craig, but can you talk a little bit more about exactly what is house hacking and how does that work?

Bryce Platt: Sure. House hacking is the idea of you owning a property, buying some kind of property, and being able to essentially lower that mortgage payment by having other people pay you money to live there. So that could be as intense as you buy a mobile home and live on the parking lot in front of your apartment or your property and rent out the actual property. Or it could be as minimal as you live in the house and you have like a garage that you’ve turned into an Airbnb spot. And you just rent it out occasionally for short-term renters. So there’s a big spectrum there. The traditional is you buy like a duplex, a triplex, quadplex, and rent out the extra units and you live in one unit. I tried to do that, and we can talk about that a little bit later. But this condo worked out much better as a investment property for me.

Nate Hedrick: Yeah, and so you’ve got a four-by-four. So maybe you can explain what that is for someone that might not know.

Bryce Platt: Sure. So the — if you remember, I don’t know, maybe back in college, you have this shared space where there’s a living room, a kitchen, that four people share. And then each person has their own bedroom with a door and a lock, a bathroom and a walk-in closet. So we all have our own private space as well as sharing the living room and kitchen.

Nate Hedrick: That’s great. What an amazing setup. And I’m sure that’s not possible everywhere, but it sounds like that’s a great fit for you guys.

Bryce Platt: Absolutely. It’s near the big public college here in North Carolina, so it’s traditionally been for students. But with COVID just happened in March, the students that were here broke their lease and moved out. And that wasn’t uncommon for the seller. So he had multiple properties like this that had nobody in there.

Nate Hedrick: Oh, wow.

Bryce Platt: And so he was looking to get rid of some of these.

Nate Hedrick: That’s great. And I guess we don’t have to get too far into the numbers, but I mean, is it looking good? Like are you going to be able to live for free? Because that’s the dream, right?

Bryce Platt: Yes, that is the dream. The reason I chose this property was — so I looked at multiple duplexes, which were really all that are around this area of North Carolina. There’s not really triplex or quadplex that are available. And the duplexes had decent cash flow numbers, but because of COVID, no one really wanted me to come like look at it in person.

Nate Hedrick: Oh, wow.

Bryce Platt: Because, you know, they were listed before COVID happened. So these were just people looking to sell eventually but not in a huge rush. For this condo, the numbers are much better anyways. So I essentially am doing a rent-by-the-room strategy, as you might imagine, with four-bed, four-bath. So these aren’t people that knew each other before coming in. So if we talked about the 1% rule here, this is more like the 1.5% rule. So the numbers are pretty good. And even with me living here as one of the rooms, I’m making a few hundred dollars every month over the mortgage.

Nate Hedrick: That’s amazing.

Bryce Platt: And the interest and the insurance and the taxes and the HOA fees, even.

Nate Hedrick: That’s amazing. Good for you. And for those of our listeners that don’t know the 1% rule, really popular in rental property investing, means that if the purchase price is, let’s say it’s $100,000, you should be able to bring in about $1,000 in rent every single month. So 1% of the purchase price is your goal number. And that 1% rule is kind of a quick back-of-the-napkin math for determining if a rental property is going to be worth considering.

Bryce Platt: Absolutely.

Nate Hedrick: So anything over the 1% rule is great, and it sounds like you’ve almost hit the 1.5%, which is amazing.

Bryce Platt: Right, and that’s even, like I said, with all of the PITI, insurance, taxes, interest and including the HOA fees, which are an extra couple hundred dollars on top of all of that.

Nate Hedrick: Yeah, those HOA fees can be killer, so being able to include that and including that in your budget, like that’s amazing. That’s great.

Bryce Platt: Yeah, I really am not bothered by the HOA fees because as my first house and as never having even considered doing things before this, like I mentioned, I do not want to have to figure out how to do landscaping and take care of huge roof, replace the roofs and the siding on the houses. Here, they have a pool and a sand volleyball court and a basketball court. And there’s no way I’d want to take care of those either.

Nate Hedrick: Yeah. I mean, your repair costs go basically to $0. It’s great.

Bryce Platt: Well, I wouldn’t say that because inside the condo, I have to take care of everything inside the condo. But anything that’s really — that’s typically a really large capital expenditure for a house, I don’t really have to prepare for those.

Nate Hedrick: That’s perfect. Great. Well and then I guess the next step, we’ll move along here, No. 3 is assembling your team. And there are a number of important team members that we list in our document, everything from a real estate agent, a financial planner, an accountant, sometimes there’s a lawyer that needs to be involved. So now that you’ve kind of made this purchase and you’re looking back, who were some of those most essential members of your team, would you say?

Bryce Platt: It was easily my real estate agent, Adam.

Nate Hedrick: OK.

Bryce Platt: When you’re looking for a real estate agent for house hacking specifically or any kind of investment property, really, you want a real estate agent that has done investing themselves so they know what you’re looking for. You’re not looking for the super expensive, granite countertops and the high-rise ceiling and the fancy chandeliers. You’re looking for a place that, for example, meets the 1% rule or you are able to cover the mortgage with your rent. So working with a real estate agent that understood that made it a lot easier.

Nate Hedrick: Good. And we were actually lucky enough to be able to connect you with Adam through our concierge service, right? So can you tell me a little about that experience? It sounds like it worked for you.

Bryce Platt: Yeah. Again, neither Nate or Tim paid me for this. So I will give them my endorsement.

Nate Hedrick: Uh oh.

Bryce Platt: It was super easy and working with Adam, made connecting me with Adam here in North Carolina. Because I had — like I said, I started from absolutely no idea what I was doing to getting this book and was able to eventually turn it into a condo a little over three months later. So the connection with the real estate agent was vital to doing this.

Nate Hedrick: Wow, that’s so good. I’m so glad you had a good experience. That’s what we’re all about. I appreciate the endorsement, and I’ll send you the check after this.

Bryce Platt: Yeah, alright.

Nate Hedrick: Great. Well No. 4 is choosing a loan and getting preapproved. A lot of people tend to struggle when it comes to financing. I get this question a lot that people are pretty good about the home search and what they want. But when it gets to financing, people kind of struggle a bit. So how did you go about navigating that process?

Bryce Platt: With house hacking, you want essentially the lowest down payment as possible. Obviously on Your Financial Pharmacist, I mean, I’ve followed you guys for a little while and I use the website, so I started with Credible to compare the different lending institutions and what kind of rates they had and the limits and such. But after that, IBERIABANK/First Horizon, which is a specific partner of YFP, they had the best interest and guaranteed no PMI, which is Private Mortgage Insurance where if you typically on a normal property, if you put down less than 20% on the property as a down payment, you have to pay PMI to protect the lending institution. The insurance doesn’t cover you. It covers the bank in case you default on that. So you’re paying them insurance for the bank, which is ridiculous. Anyways, and they also only require a 3% down payment. So I only had to put down 3% and was able to go without PMI and still have a pretty low interest rate. The 3% down payment, I will say was only if it wasn’t multi-family. So even if it was a duplex, triplex or quadplex, they do require for IBERIABANK/First Horizon 15% down payment.

Nate Hedrick: OK.

Bryce Platt: That’s something that both Tim Baker and I learned. And so I felt the need to share that. But if it’s not a multi-unit property, you can do as low as 3% down payment, and that’s what I did.

Nate Hedrick: Nice. Yeah. So this was — it basically is almost like a four-plex, but it wasn’t considered that because it’s a four-by-four as far as the bank is concerned.

Bryce Platt: Right.

Nate Hedrick: Oh, that’s great.

Bryce Platt: It’s a single family property.

Nate Hedrick: Yeah. Cool. Interesting. That’s a really neat mix. And for our listeners who are interested, you can go learn more about Credible and IBERIABANK/First Horizon at YourFinancialPharmacist.com/real-estate. So please take a look at that and you can learn more about those sources, just like Bryce did. Great. So No. 5 is finding your home and negotiating. So a lot of people, again, struggle with the negotiating side of this. But we’ll start with the home search, so can you tell me a little bit more about the actual search process, and it sounds like COVID kind of impacted some of that as well, so maybe you can share a little bit more about how that went.

Bryce Platt: Absolutely. So it was easier than I expected, but like I said, I didn’t really have any preconceived notions on what it was going to be like because I had never even considered this before. So Adam set me up on the MLS, the listing service, so I could see everything that was available to buy and so I could evaluate properties based on, you know, evaluating the deals and investment property whenever I wanted. And in the MLS, I could even request a showing from Adam to see these properties. This aspect was kind of impacted by COVID, like I mentioned. There were a couple duplexes that I had tried to see. But they didn’t want to open for showings, so I kept looking at other deals that were coming up and then eventually, this condo came up. And he was in much more of a hurry to sell, you know, because he had been vacant for a month or two at that point because the students had broken their lease. So it came on the MLS, the numbers were way better anyways than the duplexes, so made it a lot easier to request a showing here. And since there were no students or anyone here, didn’t have to worry about COVID stuff.

Nate Hedrick: Nice. Yeah, and it sounds like, you know, with it being vacant, you might have had a little room to negotiate there too, I imagine.

Bryce Platt: Yes. So personally, I’m comfortable with negotiation. If you guys have ever read the book, “The Difference,” about a boss — it’s an amazing book.

Nate Hedrick: Yes.

Bryce Platt: I’ve read it multiple times, both before I negotiated for this property and before I bought my car. And it worked out very well. I was able to bring the price down about 5% and keep all of the furniture that was here.

Nate Hedrick: Oh, wow. That’s amazing.

Bryce Platt: It worked out pretty well.

Nate Hedrick: Yeah. Well, we should put a link to that book in the show notes. I highly recommend that book. It’s good for business negotiations, life negotiations, I use it to negotiate with my toddler all the time. So I definitely recommend it. Very cool.

Bryce Platt: Throwing some mirroring out there.

Nate Hedrick: Exactly, mirroring works great on a toddler, I promise. That’s so cool. Well, and then the last step is No. 6, inspect, insure and close. So a lot of this can kind of get a bit nebulous. There’s a lot involved. So I guess what I’ll ask is, is there anything you learned or would have done differently now that you’ve gone through the closing process, you’ve been a first-time home buyer and made it out to the other side. You know, what are some tips you can share with our listeners?

Bryce Platt: Find a really good real estate agent because Adam made this go so smoothly for me. I had no issues. He provided me with a very good inspector. I had an insurance broker that I had no issues with, a closing agent, and had nothing that I needed help with. Zero issues with closing. And I hope that I can say that after every property I close on.

Nate Hedrick: Good, I’m so glad. And you’re totally right. That agent is so in charge of connecting you with the right people, otherwise you’re going out and finding your own lender just magically, and you’re going and finding all these different people. If you’ve got one point of coordination, it can get so much easier. So I’m glad that you had that great experience. That’s amazing.

Bryce Platt: Yeah, if people have the connections, which obviously I did not just starting, I mean, you could maybe find some good people to work with. But when you’re just getting out here in the first place, I think it’s more important to just figure out the people that your real estate agent trusts, as long as you trust your real estate agent.

Nate Hedrick: That’s great advice. Awesome. Well, good. Well those are the six steps. It sounds like you’ve made it out the other side. How is everything going with the actual finding tenants? I mean, that’s where we’re at now, right? Are we still running into COVID issues? Or how is that going?

Bryce Platt: Sure. So I had expected to rent to mostly students. As I had mentioned, it’s nearby the school and there were students living here before. As I made my listings, almost mainly following what Craig mentions in his house hacking strategy, I had many people interested. But they were mostly non-students. So right now, I have one person that’s in a similar life position as me, recently graduated out of school, so a young professional. And then one that is an intern and in school or I guess in the summer part of school. And then the third person of the, you know, there’s four rooms, I’m taking one of them obviously, so two of them are filled. The third one just applied this morning, and I expect that he will be accepted as well. So I think I’ve got it all filled out. And as I mentioned to Nate before we started the podcast that I don’t have to pay the first mortgage payment until August. So I am getting — I got my first rent payment like a week and a half ago. And that was nice to have before I even have to pay the property costs.

Nate Hedrick: That’s a cool moment. That’s when it feels real, like OK, I’m actually doing this. This is pretty awesome.

Bryce Platt: Yeah. And like I said, from starting mid-February from absolutely nothing to middle of June or the beginning of June, I closed on a property, I would not have ever guessed that.

Nate Hedrick: So yeah, so now you’re basically a landlord a couple of months later. That’s pretty incredible.

Bryce Platt: Absolutely. And like I said, no — I could have had no idea this was something I could do. But with lots of education — the YFP podcast was what kickstarted it. And then that’s also how I found Bigger Pockets, and Bigger Pockets was a huge education for me. I’m still working through all their podcasts. I haven’t even gotten through to the current ones, and I was still able to do it before I even caught up on Bigger Pockets stuff. So that’s two great communities that can help educate people to feel at least comfortable enough to take a step and do it.

Nate Hedrick: Great. We’ll make sure to put that in the show notes as well. I love Bigger Pockets, and I’ve been really diving into the Real Estate Rookie podcast they’ve been putting out recently. That’s been a great show.

Bryce Platt: Absolutely.

Nate Hedrick: Well Bryce, anything else you want to share with our listeners before we let you go?

Bryce Platt: Spending time to educate yourself is going to make you feel better about actually taking action. But you can’t stop with just educating yourself. There’s always — you have to take an action step. And after I bought that book, I kind of felt like, oh, I’ve made my step. I’m doing well now. But luckily for me, in my toastmasters group, there’s a real estate agent. And so I started talking to her about investment properties. And she kind of worked with me a little bit and wasn’t able to commit the time because she was working on her own investment property at the time.

Nate Hedrick: OK.

Bryce Platt: And then Tim Baker actually recommended I work with Nate to get a real estate agent here in North Carolina. And so that was the real action step that after I had done that, it was just a snowball effect. You didn’t have to worry about like, oh, am I doing the right thing? It was, I’m in the action phase now.

Nate Hedrick: Yeah, it’s hard to make that first jump. But once you do, it’s easier to make the next one and the next one. So that’s great.

Bryce Platt: Oh yeah.

Nate Hedrick: Well Bryce, we really appreciate you being on today. I think this has been an awesome story to share with our listeners. So just appreciate your time.

Bryce Platt: Yeah, no problem. Thanks for having me on, guys.

Tim Ulbrich: Alright, great stuff, Nate. Thank you for taking the mic and taking the time to interview Shelby and Bryce. And a thank you to Shelby and Bryce for taking the time out of their schedule to do that interview. So let’s talk, Nate, through the concierge service. Obviously they saw it come alive through these stories. But we’ll talk step-by-step what folks can expect from that service, how it works, and what they can expect throughout the entire process from looking for a home all the way to landing that property. So Step No. 1, crafting a plan. So talk us through that.

Nate Hedrick: Yeah, so just like we were talking a little bit in the interviews, the whole first step is figuring out a plan, right? We want to come into this with your goal is to buy a home or sell a home or invest or whatever the plan is. Let me help you put some framework behind that plan, so looking at things like budget, looking at things like location, what’s your goal with this property, right? Are you looking to buy your first house and then rent it out in a couple years? Or are you looking to buy your forever home? And those are all very different approaches, and they require very different agents and what they specialize in. So that very first step is really going to be our 30-minute jumpstart planning call. And during that call, I’ll be connecting with you and actually talking through those things that I just mentioned to figure out what the best course of action’s going to be. And that allows to kind of move forward with a really good mindset of, this is the goal. This is what we’re trying to achieve with.

Tim Ulbrich: Awesome. So Step 1, crafting a plan. Step No. 2, connecting you with a pro.

Nate Hedrick: Yeah, and this is where we then jump in and use that information from that jumpstart planning call to actually connect you with a local agent. And this is either someone that we’ve worked with in the past that other pharmacists have utilized or worked with recently, or it’s maybe a new person if you’re in an area where we haven’t added someone to our network yet. And what I’ll do is I’ll actually go out and interview a couple of agents, find somebody who I think is going to be a good fit, and then I’ll get you connected with that person. And it’s not just an agent too, right? Because that agent is going to become the boots on the ground leading your team. But it’s also going to lead to connecting you with lenders, connecting you with contractors, lawyers. Whoever you might need in that local area, they’re going to be the expert for that. And so we help kind of facilitate all those things with that connection.

Tim Ulbrich: And after connecting with a pro, Step No. 3, staying the course, to me is really important. Because I think while they’re going to have that interaction with the agent, obviously questions will come up. And through that crafting a plan in Step No. 1, you’ve got an idea of what they’re looking for for their situation and how that may fit, you know, in with other questions that they have as it relates to that home buying experience. So talk to us about staying the course and your involvement with them throughout the process.

Nate Hedrick: Yeah, this is the part that I think is actually most important because finding that initial agent is not a foolproof process, as you can tell with Shelby’s interview, right?

Tim Ulbrich: Yeah.

Nate Hedrick: We didn’t get it right right off the first bat. And that’s OK because we’re there as a part of your team the whole time. So even if it doesn’t go 100% the first time, we’re still involved in the process. And we’ve had a couple of clients now where we’ve pivoted a little bit from the initial person that we worked with to maybe a subagent or a totally different agent based on needs and how those have changed. So that whole idea that we are still on your team during the entire process, it’s absolutely essential to the concierge service. And it’s really the cornerstone of what we do.

Tim Ulbrich: Yeah, and I’m so glad that came out in Shelby’s story. And as you said, we’re not always going to get it right, and I don’t think we should expect to, right? As I think about so much of the agent relationship with a client and my experiences buying a home, sometimes that just comes down to personality fits. You know, obviously there’s the knowledge component and you want somebody who knows the market and who’s going to be your advocate. But sometimes, you know, an agent that works for Shelby or for Bryce may not be a good fit for me or somebody else that’s listening. So really finding that right fit and if it’s not the right fit being able to get back with you to be able to make sure that that right fit ultimately does get in place with the client.

Nate Hedrick: Yep.

Tim Ulbrich: Awesome. So as a reminder, if you head on over to YourFinancialPharmacist.com and you click on “Buy or Refi a Home,” from there you’ll see an option where you can find an agent, get a time scheduled with Nate for that 30-minute jumpstart planning session. Again, YourFinancialPharmacist.com, at the top you’ll see there “Buy or Refi a Home,” find an agent, and that will take you to get a time scheduled with Nate. So again, Nate, thank you for taking time to come onto the show again and thank you for taking the time to bring Bryce and Shelby’s story onto the show as well.

Nate Hedrick: Happy to do it.

Tim Ulbrich: As we wrap up this week’s episode of the Your Financial Pharmacist podcast, I want to again thank our sponsor, HPSO. HPSO’s the leading provider of professional liability coverage, insuring more than 100,000 pharmacists nationwide and sponsored by the American Pharmacists Association. As I mentioned before, when I was a practicing pharmacist, I carried my malpractice insurance through HPSO. And with individual policies for qualified persons starting at just under $150 per year, it’s a no-brainer compared to the cost of a claim and worth the extra peace of mind. Plus discounts are available for qualified students and recent grads. So head on over to HPSO.com/YFP to learn more. Again, HPSO.com/YFP. And as always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please do us a favor and leave a rating and review in Apple podcasts or wherever you listen to your podcasts each and every week. Have a great rest of your day.

 

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YFP 159: 5 Lessons Learned During a Home Refinance

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5 Lessons Learned During a Home Refinance

Tim Ulbrich shares his recent experience refinancing his primary residence. He talks through the numbers, how they determined the breakeven point, the rationale for refinancing and 5 lessons learned along the way.

Summary

On this episode Tim dives into his experience and the numbers associated with refinancing his primary home with IBERIABANK/First Horizon. The big question Tim asks is, should you refinance your mortgage? To know if refinancing will make sense for your personal situation, Tim mentions that you have to take many factors into consideration including the current interest rate, monthly payment, PMI, the total amount paid over the life of the loan and how long you will live in that residence. On top of those considerations, you also have to assess all aspects of your financial plan to make sure this is the best move for you.

Tim and his wife Jess purchased their home in Columbus, Ohio in 2018 for $345,500 and put 20% down which left them with a loan amount of $276,400. They had a 30-year conventional fixed mortgage with an interest rate at 4.625%. Without taxes and insurance included, their principal and interest payment on their mortgage was $1,421.08. Jess and Tim began shopping around to refinance in early Spring of 2020 and chose to refinance with IBERIABANK/First Horizon. Their new mortgage is a 30-year fixed loan at 3% interest (difference of 1.625%) leaving them with a monthly payment of $1,136.22 (difference of $284.86).

Tim mentions that while they were happy about seeing the initial lower monthly payment and large reduction in interest, the math cannot stop there and that you have to dig into other considerations to decide if refinancing is right for you. In their discussion, Tim and Jess talked about restarting the clock on a new 30-year mortgage, the costs associated with the new loan and when their break even point would be. They also talked about how they could strategically use the monthly savings they would have. After crunching these other numbers they decided that it was a no brainer for them to refinance.

Tim also discusses 5 lessons he learned along the way while refinancing his home which include:

  • taking the time to weigh the pros and cons of refinancing to different mortgage terms
  • avoiding looking at refinancing your home in a silo without considering the rest of your financial plan
  • differences in the appraisal process
  • how much closing costs will be
  • always read documents closely and ask lots of questions

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. On this week’s show, I’m going to be flying solo to give you an inside look into the refinance that my wife recently did on our primary residence. Now, on Episode 139, Nate Hedrick, The Real Estate RPH, and I talked through should you refinance your mortgage? And I’m not going to rehash that episode in its entirety. I want to hit a few highlights that will help frame our conversation today. So let’s start with what is mortgage refinancing?

So really when you think about a mortgage as a bank or lender giving you money to pay for a home, and you, the borrower, have a certain amount of time, essentially the term, to pay that money back. And mortgage refinancing, a lender or bank gives the leftover amount to pay the existing mortgage, and you get a brand new one, which essentially resets your loan. Now, it’s possible to refinance your mortgage with the same lender. And people choose to refinance their mortgage typically either to reduce their monthly payment, reduce their overall interest, to get better equity in their home if the house went up in value, perhaps eliminate PMI, Private Mortgage Insurance, or to reduce the term of the loan, for example from a 30-year to a 20-year or a 15-year. Now, you likely qualify for a mortgage refinance if you already have a mortgage. And to get a good refinance offer, three main categories will be looked at: the equity that you have in your home, so the difference between what your home is worth and what you currently owe in terms of the mortgage; second is your credit score; and third would be other debt that you have incurred, whether that be student loan debt or credit card debt, for example. Now, since this is a new mortgage when you refinance, you’ll incur the same costs as you did when you purchased your home. Now they may look different if you’re using different companies, but you’ll still have closing costs, title fees, and so on. And that’s an important consideration as you’ll see here in a few moments with our example.

And to figure out if mortgage refinancing makes sense for your situation, you really have to know your current interest rate and your monthly payment, principle and interest — we’ll talk about that and an example here in a few moments — what that rate and payment will change to when you refinance, what your overall payment will end up being, and how long you plan to live in that home because as we talk about calculating a break-even point, essentially how much are you going to save per month relative to the costs incurred to refinance, obviously you want to be in the home longer than whatever that time period is. So the length that you’ll be in your house or that you project to be in your house — of course anything can change — is really important to consider when looking at refinancing, depending on the amount of closing costs you’ll have to pay with that new mortgage.

So that’s exactly what we are going to do today. I’m going to jump into the numbers, talk through the situation my wife Jess and I went through recently as we refinanced our home. We’ll dig into the weeds a little bit with the numbers, and then we’ll take a step back and look at some of the lessons that were learned throughout that refinancing process.

So let’s dig into the numbers. Now, we purchased our current home in Columbus, Ohio — Go Bucks! — back in October 2018 for $345,500. So that was the purchase price of the home back in October 2018. We put 20% down when we made that purchase, so our loan amount was $267,400. So again, purchase price, $345,500, because of 20% down payment, our loan amount was $267,400. Now, for financing, when we purchased this home back in October 2018, we had a 30-year conventional fixed loan at 4.625%. Now for those of you that know the current market of interest rates, that number should raise some eyebrows. Pretty much this was the peak of the market in terms of interest rates when had purchased back in October 2018. So bummer but it was what it was when we moved to Columbus at the time. Now, to distill all of this down to a monthly payment that is due on our existing mortgage, again, 30-year fixed, this was $1,421.08. And this is principle and interest only. So for those of you that currently own a home, you know that when you’re making your monthly payment to whoever your lender is, typically you’re paying principle, interest, as well as taxes and insurance. And then if you have a homeowners’ association fees or other things that are in there as well. So again, this $1,421.08, to be specific, this does not include property taxes and insurance. And for those that are curious, those additional monies for property taxes and insurance that were going to escrow for us totaled about $689 per month, which brought our total monthly payment due to just over $2,100 per month. So for this example of running the number to compare the existing mortgage with the new mortgage via the refinance, I will only use principle and interest — again, $1,421 per month — to be consistent, knowing that that is the fixed amount for the life of the loan with the 30-year fixed loan that is the product that I’m referring to. And that insurance and taxes can and will change over time. So even in the two years that we’ve lived here in Columbus, our property taxes have gone up, and usually that’s the trajectory. But when it comes to insurance, it may be that your insurance goes up or perhaps you requote that over time and you’re able to keep that cost down or even see that decrease over time.

So that was our existing situation. We were about almost this coming fall, we’d be two years into the home, monthly payment of $1,421 of principle and interest. So starting in early spring 2020 when interest rates were falling, we started shopping around to refinance. And at that time, our remaining balance due on the mortgage was $269,500. So $269,500. So again, our original loan amount back in October 2018 was $276,400. Through payments down on principle, when we looked at refinancing, our remaining balance due is $269,500. And after shopping around at a local credit union that I had worked with previously and getting several quotes online through various lenders, we ended up working with IBERIABANK/First Horizon. And a shoutout to Tony Umholtz and his team at IBERIABANK/First Horizon, including Cindy and Karen. Tony was on Episodes 136 and 154 of the Your Financial Pharmacist podcast where we talked about the pharmacist home loan product and considerations for home buying during a pandemic. So if you want to learn more about those topics, learn more about Tony, learn more about IBERIABANK/First Horizon, I would encourage you to check out Episodes 136 and 154.

So we moved forward with our application to refinance with IBERIABANK/First Horizon for the remaining loan balance due, again $269,500, for a 30-year fixed term at 3% interest. So if you remember, I said 4.625% was our original interest rate. And here, we were looking to refinance to 30-year fixed term at 3% interest. So our new monthly payment would be $1,136.22, to be specific, which is $284.86 less per month than the previous payment that was due. So our previous payment, again, $1,421. Our new payment would be $1,136. So about $285 less per month with the refinance. Now, that really shows the power of interest. And here again, we’re looking at an interest rate reduction of 1.625%, which is why that number per month in terms of savings is so significant. So again, 4.625% down to a refinance at 3%. Now, I’m not guaranteeing talking about rates, obviously that depends on current markets, individual factors related to the lendee, so I’m just highlighting here what was our case and our example.

Now, when comparing this from a mathematical standpoint, we can’t just stop there. So we look at that number, we’re like, great. $285 less per month. Who wouldn’t want to have $285 per month back in our pocket? But we need to consider that we were restarting the clock on a new 30-year mortgage, again, the definition of refinance, and I was incurring costs associated with the new loan. Right? Closing costs, including lender costs, title fees and insurance, and so on. And again, I’m not going to be representing or including property taxes or insurance, even if those are costs incurred at closing. And that really depends on the timing of payments that you’re making for escrow and whether or not you are even in escrow as those will even themselves out over time. And I’ll give some more information on that in a moment. So if we factor in No. 1, the costs associated with extending the loan back out to 30 years by looking at the total amount that would be paid over the life of the loan and we factor in the closing costs, we can then determine a break-even point for the refinance. Again, what’s it going to cost to do this? And how much are we going to save per month? And how long will it take to recoup those savings?

So let’s look first at the cost associated with extending my loan back out to 30 years by comparing the total amount that would be paid over the life of the loan if we stayed as is with our existing mortgage or if we were to refinance the loan. So for our existing mortgage, again, we would have paid it off, assuming no extra payments that would be made to reduce principle, we would have paid it off on October 1, 2048. It’s just even crazy to say that out loud. This means that we had 339 repayment — remaining payments, which would have resulted in about $482,000 that would have been paid out of pocket over the life of the loan with our existing mortgage. And the way I calculated that was taking the remaining payments due, 339, and multiplying it by our monthly payment of approximately $1,421. Now, with the new mortgage via the refinance, we would have a monthly payment of $1,136 and some change. But instead of 339 remaining payments, we would have 360 payments because again, we’re restarting this 30-year clock. So in this example, if we take $1,136, we multiply it by 360 months, we see that over the life of the loan, we’d pay $409,000 and some change. So this is where the math gets really interesting. And for those that like to geek out on this stuff, it gets exciting. Not only with the refinance are we saving $285 per month approximately, but we’re going to be saving about $73,000 in monies that are paid out even though the refinance would put us back on a 30-year clock. So by looking at the total cost over the life of the loan, we saw that was going to be the difference between $482,000 of the existing mortgage or about $409,000 if we refinance. So again, not only the reduced monthly payment but also over the life of the loan, we’re going to be saving a significant amount in terms of those monies that are paid over the life of the loan. Again, this really highlights the power of interest is real. But as I alluded to earlier, we can’t stop there as we have to think about and consider the closing costs.

So our closing costs, which as I look at our example included lender fees, the appraisal, title costs and the recording fees, were in total $3,204.75. And I would really encourage you as you look at the mounds of paperwork that are associated with a home purchase or a refinance to really look closely, especially at your closing disclosure document. This is where you’re really going to be able to see all of these fees itemized and if you begin to compare one lender to another or negotiate some of these fees, this is the document that’s really going to help you understand what these fees are. So again, for us, our closing costs included lender fees, appraisal, title costs, and a recording fee that in total came to $3,204.75. So again, even though there often is cash due at closing unless you roll it into the loan, which I would caution you to really evaluate — and I’ll talk about that in a moment — so even though there is often cash due at closing for property taxes and insurance, depending on the timing of when those payments are due and how escrow is handled, I’m excluding those here as those will essentially true up over time. And what I mean by that is that if you have money sitting in escrow today, accruing for your next property tax bill, for example, you will also be putting money into escrow at closing, again depending on the timing of the year and what’s required by your local area. So you will eventually receive those monies back if there’s a discrepancy in terms of the timing of when payments are made, which typically there is. So these will essentially balance out or true up over time, even if you’re fronting some more cash in the moment at closing. So yes, you have to bring money typically at closing to pay for those dollars going into escrow as they are collecting those monies in advance for future payments that are due, again, assuming you are using escrow. About 20% of people don’t. But again, these will even out over time. So we’re only looking at the other closing costs that are included in this example. OK, enough about escrow. Escrow is annoying, one of the reasons that we really want to get out of escrow when we refinanced.

So we are now at a point where we can determine break-even. So we know that closing costs were $3,204.75 and monthly savings due to the reduced principle and interest is about $285 per month, so essentially the question here is how many months of saving $285 would it take to recoup the investment we’re making of closing costs that were going to be incurred of about $3,205. So if we take closing cost number, $3,205 divided by $285, that shows us that it will take 11 months for us to break even. Now, this one’s a no-brainer because of the significant rate reduction and perhaps that is the case for many of you as well. But as you will see, when you have less difference in the rate, let’s say it’s closer to 1%. You’re going from a 4.2% to 3.2%, the time to break even extends as that rate difference collapses. And you must consider, as I mentioned before, a very important variable, which is how long do you anticipate being in the home? Because how long you anticipate being in the home is ultimately going to impact whether or not you see yourself in the home for that time period that it will take to be able to recoup those costs for closing.

Now, as I look at this math, one of the things this does not include that I think is worth considering is what do you decide to do with that $285 per month saved? So in this example, if I were to save $285 per month, that’s great. But what if I were to take that money and then have that money working for us, whether that be investing that money in a 401k or Roth IRA, some type of brokerage account, depending on what goals and what you’re trying to, or what if you were to take those monies and invest it in real estate or other business activities and that money may be able to grow for you? So just as one example, if you were to take that $285, invest that in an index fund over 30 years that was earning on average 7% growth, you’re looking at another roughly $330,000 of savings that would accrue over this 30-year period. So it’s important to ask yourself, as we’ll talk about here in a moment, what’s the goal with these savings if you’re going to incur savings? And are you strategically using those savings and earmarking those savings for another part of your financial plan and other goals that you have?

Now, here’s the good news. All of those calculations that I just did and walked through one-by-one to show you how we got to that decision point, we have a calculator available on the website, shoutout to Tim Church that helped us put this together. If you go to YourFinancialPharmacist.com/mortgage-refinance, you can put in the numbers. What do you currently owe? What’s your interest rate? What would be your new loan amount? What would be your new interest rate? What’s the term? And it will spit out essentially that break-even time period for you. But again, I can’t overemphasize that it’s not just the numbers. You must consider the rest of your financial plan, other goals you have, what the primary purpose is for the refinance, and even other factors, which takes us to the second part of today’s episode where I’ll briefly talk through some lessons learned throughout the refinance process.

So let’s talk through five lessons that were learned or reinforced throughout this process. No. 1, taking time to weigh the pros and cons of refinancing at a 15-year or a 30-year fixed mortgage. And while there are certainly other options, whether it be a 20-year fixed term, a 10-year fixed term, an adjustable rate mortgage, these two options, a 15-year fixed and the 30-year fixed, are the most popular products and for the majority listening will be the path forward. So I would encourage you, when you’re looking at a 15-year versus the 30-year — and this was a great exercise for my wife and I to walk through — is to do the math, but don’t stop at the math. Do the math plus, you know, think of variables such as visualizing yourself 15 or 30 years from now. How do you feel about having a mortgage payment? There’s no right answer to this. How do you feel about having a mortgage payment? And what else might be going on in your life that would help answer that question for you? So you know, for some people that I talk to, it might be that they’ll have kids that will be going onto college or some other variable that they may feel one way or another about having a mortgage payment for that period of time. But don’t underestimate that factor in visualizing yourself in that future state. Another factor to think about: How long do you plan on staying in the home? We’ve talked about this already, and you can’t always predict this but going to be a very important variable to understand. Obviously the longer than you’re in your home, depending on the rate differences that you’re seeing throughout the refinance, the more likely you are to be able to reap those benefits.

Other questions you want to be thinking about here in addition to the numbers: What are the savings over the life of the loan between the two options? And does that, how does that weigh against the increased monthly payment? So you know, what I mean by that is if somebody’s looking to go from a 30-year to a 20-year or a 15-year because they want to more aggressively pay off their home, they’re going to see as they run the math significant savings, likely over the life of the loan. Right? Because of the reduced monies that are being put toward interest. But typically if you’re going from a 30 to a 20 or a 15 and you’re staying in your current home, that’s going to mean a bigger monthly payment. So how do those savings over the life of the loan weigh against that increased monthly payment? And how much room can your budget handle in terms of a larger payment if you’re reducing the term of your loan? And what could change that you may or may not foresee? For example, do you have buffers in place that if for whatever reason that larger monthly payment were to become a concern? So do you have more than one income in the household. Do you have diversification of income? Do you have a good emergency fund? And what other goals are on your plate, whether that be student loan repayment, on track with investing, kids’ college savings, other goals that you’re trying to achieve. And do you need that extra margin or not? Perhaps can you focus at a greater extent on your mortgage repayment? The other thing, as I’ve alluded to once already, is what is the opportunity cost of having your money tied up in low interest debt? And again, there is no one right answer to this, as there typically is not when it comes to the various parts of your financial plan. So as Jess and I really weighed this, as we were looking at 30-year at a 3% versus a 15-year at 2.75%, if we looked at the savings over the life of the loan, and let’s just say for simplicity that is, I don’t know, $40,000 or $50,000 difference, how do we evaluate that against the opportunity cost of that additional $285 per month or whatever it would be as you do these calculations being tied up in an extra additional higher monthly payment that perhaps could be used elsewhere, if that’s a goal you have for investing in real estate or other things that you’re trying to do. And I think it’s important to talk through the pros and cons of that opportunity cost.

OK, so that’s No. 1, taking the time to weigh the pros and cons of refinance at a 15-year, 30-year or some other term. No. 2 is avoiding the silo effect. Now, what I mean by the silo effect is that looking at only one part of your financial plan at a time while you’re not considering the impact it will have on the other parts of your financial plan. This is really easy, whether it’s student loans, investing, or here we’re talking about refinancing, for example, you might see an advertisement or read a story about how interest rates have dropped and it’s a great time to refinance. You might even run the rates to see what it would mean for your monthly payment. But you’re only focused on that one part of your financial plan. So take a step back, look at the rest of the picture, look at all of your goals, look at what this means from a monthly cash flow standpoint, and then make that decision in the context of the rest of your financial plan. And that is really the value, one of the main values, in my opinion, of comprehensive financial planning and having a coach that can help you work through that process. And so shoutout to our YFP Planning team, our comprehensive certified financial planners, which for those that are interested can learn more at YFPPlanning.com. I would also encourage you as we’re talking here about avoiding to silo effect to really ask yourself what is the motivation to refinance? Is it to free up extra cash per month? So again, the example as we look at our example, stay at the current term but reduce your monthly payment. If so, do you have a plan again for how those monies saved will be allocated towards another goal and that will help prevent any lifestyle creep that may happen from those savings? Or is your goal to pay down the home faster and save some interest that would be paid out over the life of the loan?

No. 3 is, you know, one of the things that I saw that I heard often is the differences you can see in the appraisal process. And this was really, you know, eye-opening for me. And I think this is important. And why an appraisal matters is when you go to sell your home, obviously appraisals have an impact on the lending side. If you are trying to determine how much equity you have in your home for things like PMI and other aspects, understanding the value of your home relative to what you earn is very important. Or for those that may eventually pursue something like a HELOC to be able to have a HELOC for a variety of different reasons, whether that be real estate investing, whether that be having a backup emergency fund, your appraisal is really going to matter. And what we saw in the variance of an appraisal, what our home was worth based on comps, was when we had within the same year a HELOC appraisal done, that came in at our home at about $338,000. And again, we purchased at $345,500. And then when we went through the refinance, that came in around $371,000. So a really significant over $30,000 difference. And again, I think that shows you some of the subjectivity and variables that can go into a difference of appraisal. So I say that just to be ready for, you know, I think it’s easy to look at RedFin or look at Realtor.com or Zillow or some tool or have an idea of what you think it should be worth. But at the end of the day, the bank’s going to be using that appraisal number, that’s going to have a big impact on when it comes to either purchasing or refinancing a home or perhaps even taking out a line of credit.

No. 4 is when it relates to the cash that you need at closing, do not forget about property taxes and escrow. Now, I told you that I excluded those from the example. But I want you to be aware that often, you’re going to have to either front those costs at closing, again, depending on the timing of when all those are due, depending on if escrow is or is not involved, but that you may have a reimbursement, a payment that comes back if you have existing monies that are leftover in escrow from before the refinancing. So you want to consider your closing costs here. We talked about those, the lender fees, the title costs, if you end up buying any point, which essentially is a process where you can pay to reduce the interest rate. All of that is going to result in what you would owe in terms of costs that you’re going to have to bring in terms of cash at the table or that that can get rolled into the loan. But again, think about that in terms of the impact of what that means for interest that you’ll pay on that as you go to pay that money back. So I think this is a good reminder as you look at your closing costs that much of this can be negotiable, whether it’s lender fees, whether it is title expenses. We’ve talked about this on previous episodes of the podcast where we’ve talked about home buying. But really looking at closely understanding these fees and the disclosure documents are really important and making sure as an educated consumer, you have your best interests in mind.

And Lesson No. 5, which goes without saying but has always, always been a good reminder of how important this is, is read your documents closely and ask lots of questions. Read your payoff statements, read all about understanding your closing costs, understand your options with escrow, read all of it. It’s boring, it’s going to put you to sleep, but it’s incredibly important. The more you read, the more informed you will be, the more questions you’ll ask, and perhaps errors that you’ll catch along the way. And if nothing else, just have a good, better understanding of the process. And really be careful about teaser rates that are introductory types of rates or closing costs that get rolled into your loan because often, you may see advertisements for no closing costs, but at the end of the day, that may not be completely true as those costs might be rolled into the loan, which you’ll end up paying plus interest over the life of the loan. And here I would also encourage in this fifth lesson learned is to not undervalue the human element. So similar to car insurance, you know, it’s been my experience that yes, rates and fees matter. But so does being able to quickly communicate with an individual and to work with folks that can quickly get your question and can ultimately be there in your corner to make sure that you feel comfortable with the process. And I think the other valuable piece of working with an individual is that I saw rates vary by the day, even within the day. And having a good relationship with a lender is that somebody that can be there, ready to act for you and tell you when that best time to act may be based on what they’re seeing with rates.

So in the show notes, which again are available at YourFinancialPharmacist.com/podcast, find Episode 159, you can find the show notes, including the resources that I mentioned, previous episodes, and calculators that we have available on the website. And don’t forget to join our Facebook group, over 6,000 members strong, pharmacy professionals all across the country committed to helping one another on their path towards financial freedom. And last but not least, if you liked what you heard on this week’s episode of the podcast, please leave us a rating and review in Apple podcasts or wherever you listen to your podcasts each and every week. Thank you for joining us and have a great rest of your day.

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YFP 154: Getting a Home Loan in a Pandemic

Posted on by yfpadmin


Getting a Home Loan in a Pandemic

Tony Umholtz, a Mortgage Manager for IBERIABANK/First Horizon, discusses the impact COVID-19 is having on the housing market, the current landscape for those purchasing or refinancing a home, and the role of the Professional Loan Program (aka the Doctor’s Loan).

About Today’s Guest

Tony graduated Cum Laude from the University of South Florida with a B.S. in Finance from the Muma College of Business. He then went on to complete his MBA. While at USF, Tony was part of the inaugural football team in 1997. He earned both Academic and AP All-American Honors during his collegiate career. After college, Tony had the opportunity to sign contracts with several NFL teams including the Tennessee Titans, New York Giants and the New England Patriots. Being active in the community is also important to Tony. He has served or serves as a board member for several charitable and non-profit organizations including board member for the Salvation Army, FCA Tampa Bay and the USF National Alumni Association. Having orchestrated over $1.1 billion in lending volume during his career, Tony has consistently been ranked as one of the top mortgage loan officers in the industry by the Scotsman’s Guide, Mortgage Executive magazine and Mortgage Originator magazine.

Summary

On this episode, Tony Umholtz, a Mortgage Manager for IBERIABANK/First Horizon, talks through the landscape of the housing market due to COVID-19, the professional loan product and answers questions from the YFP community.

Tony begins by saying that this period of time in the real estate market reminds him more of the recession after 9/11 versus the 2008 housing market crash. In this case, real estate is fairly stable during the pandemic and, in general, folks have more equity in their home, so if they lost their job due they are more likely able to sell and walk away easier than if they had no equity in it. He also shares that interest rates are down and it’s a great opportunity to refinance or buy a home if you’re in the position to do so.

Tony then discusses the professional mortgage loan (aka doctor’s loan or pharmacist home loan) that’s available through IBERIABANK/First Horizon. First time home buyers can get a 3% down payment with no mortgage insurance, no reserve requirement and and strong interest rates. If this isn’t your first home, you’re required to have a 5% down payment. There are requirements to get the professional mortgage loan, like having a 700 or more credit score and falling into a certain debt to income ratio. If you’re interested in exploring this option further, you can find more information here.

To wrap up the episode, Tony answers several questions from the YFP community.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. And before we jump into the meat of today’s interview, I would be remiss if I didn’t emphasize that the decision to buy a home and how much home should start well before digging into the financing options. This starts with No. 1, knowing your budget and No. 2, knowing all the costs involved with home ownership to figure out whether or not you are ready. And of course, this must be considered in the context of all of your other financial goals such as student loan repayment, building an emergency fund, and investing, to name a few. So if we fast forward and you’ve determined that the decision to buy a home fits within your budget and the rest of your financial goals, now we are ready to evaluate the financing options. And one of the options that exists is a doctor of pharmacist home loan, which is some unique features that can be attractive, and we talked about that on Episode 136 of the Your Financial Pharmacist podcast, and I’ll revisit that briefly today with Tony. Now, full disclosure, IBERIABANK/First Horizon is not the only lender offering a doctor type of loan. And these loans are generally defined for higher income professionals that are at lower risk to the bank and therefore, the lender requires a lower percent down, offers competitive rates and has no Private Mortgage Insurance. And we have explored several other options that are out there, but the rate-limiting step of bringing these forward to the YFP community has the limited availability of these loans in terms of the number of states that are serviced. Therefore, as we recommend with everything else, please shop around to find the best option for your personal situation. Also, full disclosure, we do have a sponsorship relationship with IBERIABANK/First Horizon, and as with our other relationships want to be fully transparent with you. We remain committed to bringing you solutions that we have vetted and we have the chance to bring value to your financial plan. And yes, while we do get paid for promoting several of these solutions, whether that be solutions for life and disability insurance or here with a lending solution for home buying, we are committed to maintaining this approach of vetting solutions and ensuring their value to the YFP community. Alright, without further delay, let’s bring Tony back onto the show. Tony, welcome back onto the Your Financial Pharmacist podcast.

Tony Umholtz: Tim, thanks for having me. Great to be here.

Tim Ulbrich: Excited to have you back. And in Episode 136, which seems like forever ago, that was pre-COVID life, we talked about a decent amount about the types of lending options available to a home buyer, including conventional loans, VA loans, FHA loans. And so we’re not going to spend more time on that here today, but I would encourage that didn’t catch that episode or that want a refresher in that area to go back to 136. And so we’re going to spend our time together really in three areas: First, we’re going to talk about the landscape and the housing market as it relates to COVID-19. We’ll then talk about the professional mortgage loan option that’s available to folks and to many pharmacists. And then we’ll wrap up by answering questions from you, the YFP community, and I’m going to tee those questions up for Tony. So let’s jump into the landscape of the housing market as it relates to COVID-19. Tony, generally speaking, how have you seen COVID-19 impact the housing market?

Tony Umholtz: Yeah, Tim, since our last call in January, it just seems like a lifetime ago. You know, just everything we’ve went through as a country, it’s been just unbelievable in such a short amount of time. The landscape has changed very, very quickly. There’s been a lot of different things that have impacted financial markets. Obviously the stock market liquidity and the high-yield debt market, all of these came under immense pressure. Mortgages were a part of that. You know, in March when most all asset classes were selling off, many mortgages got hit hard, so mortgages on the secondary market really lost a lot of value and a lot of the REETs and aggregators that weren’t backed by the government really had gone out of — shut down operations for the most part, especially on the jumbo loans, the larger loans that aren’t backed by Fannie Mae and Freddie Mac and Ginnie Mae. Those REETs aren’t lending right now or taking loans. So been a very big hit to the mortgage market.

Tim Ulbrich: And what do you see, Tony, you know, I lived through 2008, as many of our listeners did. I was doing residency at the time and can remember so much of the housing market being tied to 2008 and that recession. What’s different here as we think about COVID-19 and its impact on the housing market? What’s different in 2020 than what we experienced in 2008?

Tony Umholtz: Yeah, great question, Tim. I started my career back in coming out of the 9/11 recession and the dot-com recession in the early part of the 2000s. And this really — as far as real estate goes, this correction and downturn reminds me more of that one in that real estate has been pretty stable throughout this. ‘08-’09 was just so devastating because of the leverage in the market. There was a lot of things that — I didn’t do a lot of the non-prime loans myself, but there was easy approvals to things like that back then. I mean, the process of getting a loan was pretty easy. It was too easy, right? And that led to this steep correction. But the big indicator in ‘08 and ‘09, Tim, was the inventory on the market. There was so much speculative building, there was so much property and vacant housing and vacant unoccupied housing that that just — and then of course we had short sales and all these things that hit. So it was the perfect storm in the real estate world where this time around, we came into this with a very healthy financial system, and we came into this downturn with a very healthy housing market in most parts of the country. Obviously every housing market is different, but on average, the U.S. housing market was very, very strong. And we were actually under normal inventory levels in the majority of the markets of the country. So that’s really been one of the catalysts for what I’m seeing is a very, very strong real estate market.

Tim Ulbrich: And do you see — you know, I know we’re projecting here a little bit — but I think of things that are unique to COVID-19 like the enhanced unemployment benefits and some of the protections that lenders have in terms of forbearance and other factors. I wonder, are we going to see challenges that may come and it’s just delayed 4, 5, 6 months from now where we might see the unfortunate situation of people that are foreclosing on homes and those types of things? Or do you see it as really a big question that’s largely dependent on what happens with unemployment?

Tony Umholtz: You know, I think it’s all about unemployment. I really think that’s the key metric here. And there has been a lot of really sad situations out there. It’s a very tough thing to go through for many, many people. And when you take a step back and just look at everything, I don’t know for sure obviously, but just kind of looking at the numbers and the data that’s out there, we have homes on average are not overleveraged like they were in ‘08 and ‘09. So most people did not have a lot of equity in their home, so it was very easy to walk away from them. This time around, you know, you may have lost your job, but you may be sitting on substantial equity in the house. So I think it’s just going to be a different situation where if you had to sell, I think you could sell and you could get out of the home. I hope that we are through this sooner than later, but obviously the more time it goes on, that’s going to cause more pain.

Tim Ulbrich: And we’re going to stay away from talking about rates in the moment because we know these can change literally by the day and sometimes within the day. But generally speaking, what have we seen that’s been unique with rates? And I know the big news obviously, the Fed cut the interest rate to 0%. I think there’s an automatic assumption that we’re going to see mortgage rates kind of hit a floor, but we’ve seen some interesting trends here over the last few months. Talk us through what we’ve been seeing, generally speaking, on interest rates?

Tony Umholtz: Well, obviously when the Fed cuts rates, the short-term rates, it doesn’t correlate exact with mortgage bonds. Mortgage bonds are calculated off the long-term trading of long-term mortgage bonds, which are actual investment bonds traded on the secondary market. So that’s really what’s going to dictate what our pricing is on mortgage, not what the Fed does on the short end of the curve. But I mean, anytime we see something like this, there’s going to be a compression in rates. And rates have come down, and I think it’s created a great opportunity for people to refinance and lower their payments and consolidate debt. And we’ve had a lot of success with debt consolidation and of course buying a home. I think it’s created just a very, very good opportunity for buyers with rates low.

Tim Ulbrich: And there’s been some interesting — you know, I’ve been reading some articles in the Wall Street Journal and New York Times about kind of the situation we’re in that’s unique that the supply, for perhaps a variety of reasons, isn’t really out there. And it’s been maintaining the prices of homes for the most part. You know, as we perhaps start to open up the economy on some level and people are getting back out, do you think part of that supply issue is just hesitancy of people listing homes and having people come in their home? Do you think we’ll see that turn around in terms of more people putting their home up for sale?

Tony Umholtz: I think so. I think as more counties and states open up, I think you’ll see that people ease up, especially into the summertime more homes will be opened up for sale. I think that will provide a little bit more inventory. But there is a lot of buyers looking. It’s a good opportunity now. And if you’re renting, you’re looking at the numbers and saying, I can own for what I’m paying in rent. You know, the other thing — I think it’s more of the major cities, I think this isn’t for sure trend, but I think you’re going to see a little bit of a move more in the suburbs just in open spaces a little bit more than the crowded cities potentially. And I think that could benefit some suburbs, newer cities and maybe even some rural areas too just as people desire more open space. It could change the desire of what people are looking for too.

Tim Ulbrich: And for those that are listening that might be struggling to make a payment or perhaps find themselves in that situation in the future, what options do borrowers have to explore? And how does that differ even between the types of loans that are out there?

Tony Umholtz: Well, the — and I’m not an expert on the forbearance.

Tim Ulbrich: Yeah.

Tony Umholtz: But that has been a great tool I think for a lot of people that are in that position. I would stress, though, that this is only something you want to utilize if you’re in a position where you cannot make payments. If you can, it can have some adverse effects potentially. I wouldn’t do it if you can make payments. But that’s been a great tool I think to help a lot of people that are in a difficult spot. But you know, as far as the tools that are out there, the fortunate thing — you know, outside of the jumbo lending, which has been hit, those, some of the options I had in March, you know, I don’t have right now. And a lot of lenders don’t have any jumbos. I feel fortunate just to have the ability to write them. But the loan amounts that are backed by Fannie and Freddie on the conventional side, some of the programs that we have that are under a $500,000 type loans, those are very, very liquid. Those guidelines are very, very strong. And that’s been a blessing that that’s intact.

Tim Ulbrich: Great. So I think that’s a great overview of some of what we’re seeing in terms of the landscape of the market with COVID-19. And I want to transition to talking about the professional mortgage loan, kind of what is it? And more specifically, what is offered with IBERIABANK/First Horizon? And you know, I think this is an area that we’ve been seeing a lot of interest among the Facebook group. We’re getting a lot of questions about it, and I’m going to bring some of those questions forward to you at the end. But what we see certainly is that one of the biggest barriers to pharmacists being able to purchase a home, you know, is typically student loan debt. And for most conventional types of loans, this greatly impacts their debt-to-income ratio and certainly could affect someone’s ability to get a loan or greatly reduce the amount that they could get approved for and often we see has a significant impact on what they’re able to save in terms of down payment. So I think that’s a good segway into where the professional mortgage loan may come in. So tell us a little bit about that loan option, generally what it is and a little bit more about the program of what IBERIABANK/First Horizon offers.

Tony Umholtz: Sure. So the program essentially allows a first-time home buyer to finance 97% of the price of the home. So you — and there’s no mortgage insurance, which is a huge benefit. And if it’s a subsequent purchase, if you owned before, it’s just 5% down. So it’s 2% more down, but the real benefit driver is that there is no mortgage insurance. There’s also not a stated reserve requirement, which is good too because a lot of these programs have reserve requirements that can be difficult when you haven’t been able to save money. I know some of our physician loan products have reserve requirements as well. And this one does not. It also carries very, very, very strong interest rates. I don’t want to get into them because everybody is different for everyone based on credit, but it tends to have some of the better rates that I can offer, even though you’re putting 3% or 5% down. But the main driver is that no PMI, I think limited reserves, and there is a max loan amount of $510,400. So that’s the cap to loan amount. You can always purchase higher than that, but if it’s more than — let’s say you found a home for $550,000 and you put 5% down, you might have to put a little bit more down to get to that $510,400 max loan amount.

Tim Ulbrich: So one of the questions, Tony, we actually had this come up in a webinar this week that we were doing with Nate Hedrick on home buying, and we were talking a little bit about this option. And as we were talking about the things that you just said in terms of competitive rates, obviously a very low percentage down that’s required, no mortgage insurance, not having to have the same reserve requirements, those types of things, the question of well, why wouldn’t somebody do it? What are the downsides to an option like this? And the only thing that I could come up with within my mind is that if for whatever reason the rate weren’t competitive, you know, with something else that they were looking at, obviously that’s a consideration or that it might put somebody in a position to buy before they’re ready to buy in terms of the low down payment. But if they’re otherwise in a healthy financial position, they’ve got a good emergency fund, they’re in a good position to buy a home, I really don’t see a whole lot of downside here. What are your thoughts?

Tony Umholtz: Yeah, I mean, we do have a debt-to-income ratios that we have to abide by. So you know, there is controls put in place. We also have a minimum credit score. It’s 700. So those would be some other things we would look at. I didn’t want to get too technical, but I guess those would be just some of the metrics. But I mean, again, it’s a very tight population that we can offer this to. It’s not everybody. So it’s got to be in these stable, this stable job position and this occupation. But yes, I think as long as you qualify, it’s not a stretch, and you’re in a good position, I think it’s a good thing as long as it makes sense for you to buy a home in your personal plan.

Tim Ulbrich: Right. Yeah, and I think it’s always a good reminder of what could be the potential downsides of having a low equity position. So if somebody were to have to move quickly for whatever reason and obviously they couldn’t use the equity to cover other costs or purchase of a new home, those types of things, but again, if you’ve got reserves or you have other plans in place to be able to account for that, then I think it’s certainly a great, great option to be looking at. Tony, one of the questions we had come forward from the community is obviously thinking about what’s happening in the economy related to COVID-19 and perhaps the lenders becoming a little bit more astringent on who they’re lending to. And even though we’re talking about a minimum credit score here of 700, do you expect that an option like this might go away in the future or change in terms of max loan amounts because of changes that might come in lending?

Tony Umholtz: I certainly hope not. I think, you know, I think — anything can happen. Risk profiles, things can change depending on how bad this downturn gets. But you know, fortunately we got through this pretty far and there’s been no changes. So hopefully it’ll stay that way.

Tim Ulbrich: Awesome. And we’ll keep our community up-to-date and we’ll provide some more information. And as a reminder, you can go to YourFinancialPharmacist.com/home-loan, get some more information about this offering. And you can connect directly from there with Tony and his team over at IBERIABANK/First Horizon. Tony, speaking of your team and what you guys have done, I want to thank you guys for giving our community members the time and attention they deserve. And I’m currently working through a refinance. It’s been a great, great experience working with you and your team. And I went on over to our Facebook group and wanted to see what some of the chatter was around their experiences with IBERIABANK/First Horizon because I knew more questions were coming up about this option, and I knew that I had seen more discussion on it. And I pulled a few of the comments from that community of people that have just posted really within the last week. And there was a lot of great, great things that people had to say. So one of our community members said, “Iberia is where it’s at.” I love the brevity of that. Somebody else said, “I’m working with Iberia now for first-time — as a first-time home buyer. They’ve been fantastic to work with. Their online system is the best, easiest I’ve used so far.” I would agree with that, very intuitive system. Somebody else said, “Iberia is great to work with, user-friendly website.” Another community member said, “We used Iberia Bank to refinance our loan last fall. Easy process.” And then I also noticed there was some feedback on RedFin that was quick, easy, great rate, and a great loan officer. So thank you for the work that you guys have done and for how responsive you’ve been to our community that has reached out to engage with you guys.

Tony Umholtz: Oh, thank you, Tim. It’s been fun. We always enjoy helping people. That’s our job, but connecting and helping people is why we do what we do. So thank you for that.

Tim Ulbrich: So I want to transition now, as I mentioned at the beginning, I want to put Tony on the hot seat. And I asked you all, the YFP community, for your questions in advance, knowing that I’d have the chance to interview Tony today. So we have several questions that have come in, and we’re going to work through those one-by-one. So Tony, the first question we have from the YFP community relates to escrow. And the question is, in addition to costs associated with title and processing of the loan, how much money does one need at closing for property taxes and insurance? And if you could briefly define escrow for those that may be hearing that term for the first time.

Tony Umholtz: Sure. That’s a great question because this can be one of the most complex parts of real estate is escrow accounts and how they work. Well, escrow what essentially is is property taxes and homeowner’s insurance and flood insurance if you’re in a flood zone would be added in then too. So property taxes can vary based upon where you live in the country. Different municipalities collect taxes a different way. I know that many states, you pay it once per year.

Tim Ulbrich: Right.

Tony Umholtz: And others, it’s quarterly. Right? There’s different counties, different parts of the country do operate differently. So we need to be sensitive to that. But you know, overall, I’ll just also give one answer to a question that comes up about escrow accounts and what they are. Banks keep escrow accounts to help pay for taxes and your insurance let’s just say on an annual basis or quarterly basis. The insurance is generally due once per year, so the bank is actually collecting typically 1/12 of your tax, your insurance payment, each month to pay that annually. Generally, you do not have the option to waive escrow unless you have an 80% loan-to-value or bullet. So if you ever hit the — most people in the audience are not going to be in that position. But if you do, if you put 20% down or more on a conventional loan, you actually can waive it and pay it yourself. Now, there’s sometimes there’s a risk grade to the loan because there is a risk if you didn’t pay those things. So there could be a little effect to the interest rate. But that is an option, and I do see some people waive them when they do have a larger equity position. But the majority of Americans have an escrow account that have a mortgage. And the taxes and the insurance and how they’re collected I think is very important to understand. When you go to closing on a purchase, you’re typically going to owe one year of your insurance premium up front. So in a case of let’s say it’s a $1,200 insurance premium, well, you’re going to have to pay and bring that $1,200 to closing. The insurance company will want their funds. And then generally the lending institution — this is really universal for all lenders in the country — they’re going to collect a two-month cushion for the account. And then depending on what time of the month you close and so forth, let’s say you close in June and your first payment is due Aug. 1, they’re generally going to collect another month to cover that one month that you’re not making a payment. So it’ll look three months of insurance, 12 months of — three months of escrow for the insurance and then 12 months of your premium. So it looks like a lot of escrow, right? But that’s how it’s done. And the same thing for taxes. So in that example, property taxes would be a couple, probably three months of taxes collected: two months to establish the account and then the one month for the month you’re missing. But and then with refinances, it’s kind of a similar situation where — not to get too technical, Tim, but I think this is important. I think if you were to go refinance and you have your current servicer, loan servicer is collecting your insurance and your taxes, they typically will refund you the full amount within 30 days of your loan payoff. So the new lender is going to come in and they’re going to look like they’re collecting, especially if you close later in the year. Because most states and counties will want payment at the end of the year, right? So like November time frame. So if you close in the fall, in autumn, it’s going to look like your lender is collecting a lot of money from you that’s being rolled into your mortgage. You know, it could be 11 months of taxes. It could be whatever, 12 months of insurance.

Tim Ulbrich: Yes.

Tony Umholtz: It’s a big number being rolled in. But you have to realize that you have almost an equal amount being sent back to you. So that’s where that idea comes into place. Do I use that check to pay down my loan? So escrow is not something that costs you anything. You have to pay them as part of homeownership, but it can look like more is being collected than — it can look like your loan is being increased on a refinance to cover that.

Tim Ulbrich: That’s a great, great explanation, Tony. I know I found that confusing as a first-time home buyer back in 2009 but also, you know, especially I think for those that are moving from one property to another, especially if you’re moving from one area to another and timing is different, I think you very much can feel like you’re double paying. And I think that definition of escrow as really the holding place and there’s going to be a refund of existing as well as receive it paying forward and just keeping that in mind. And I think that’s an important consideration because if one is paying obviously at closing for future homeowners insurance and property taxes and then that refund check comes at a later time and you forget that and you go blow it on something else, well then obviously, you know, that can have the impact that you’re trying to avoid. So is there — while we’re on this topic, I’ve often heard as you alluded to, a small percentage of people that might pull out of escrow. And you know, you mentioned that might come with a little bit of a rate risk adjustment. What are the big benefits of that? I mean, I guess the thing that comes to mind when I think about that is, you know, the downside would be it’s now on my watch, I’ve got to make sure I’m making those payments on time for property taxes, homeowner’s insurance.

Tony Umholtz: That’s right.

Tim Ulbrich: But I guess the upside would be I feel like I’ve got a better pulse on what’s going on because it’s not rolled into my monthly payment. So you know, as my property taxes might inch up or I might be more apt to try to negotiate my homeowner’s policy. So talk us through why would that move be beneficial if it’s available to somebody?

Tony Umholtz: Yeah. You know, one of the things that I’ll mention just back to answer your question but also with refinancing, a lot of people will come to me, especially right now, and they’re telling me, “Hey, my payments went up a lot because there was a shortage in my escrow account.” Right?

Tim Ulbrich: Oh, right.

Tony Umholtz: And what really happened is the bank paid your taxes and insurance more than they had collected from you, and you’re basically getting an interest-free loan and you’re just paying that back. So that’s one of the — but your payment spiked. And what we do when we refinance, we true it up. We collect the appropriate amount. But that scenario if you’re able to waive your escrow, you can control, right? You can control. And I think the main thing is a majority of people with mortgages do escrow. But if you like controlling your money and you don’t mind making a lump sum, I think that’s an advantage, just having the ability to control it yourself. I’ll be transparent, I’ve waived mine for years. I’ve always done it, but I’m a finance major. You know, I’ve been a money person my whole life, so you know, if you’re good with money and think you understand it, I think it’s fine. One thing you did mention about insurance, I mean, you have the ability to check on your insurance, even if you have an escrow account. It’s very easy. The mortgage can be changed and the insurance company can still change. But I think the main advantage is you hold onto your money, you control it. And then right now, interest rates are low and you’re not getting much on deposit accounts. But if they’re higher, you can actually earn some interest on it while you wait to pay it.

Tim Ulbrich: Yep. Great stuff. Great explanation, Tony. Another question we have from the community is what options does IBERIABANK/First Horizon have for investment properties that are not owner-occupied? Anything creative on that end?

Tony Umholtz: Well, a couple things. First thing I’ll just mention on the investment properties — and this has come up a few times with the professional produce — with multi-family, if you’re buying a multi-family property, a duplex you can still put less than 20% down. You can’t do 3% or 5%. It’s generally 15% down. There is no MI. Rates are still very, very good even though it’s multi-family. But when you get to buying a three- or a four-unit, and a four-unit is the largest residential property that we can finance. Anything above that is considered commercial. That’s a completely different type of financing. But you know, you typically have to do 20% if you’re buying a three or a four. But we still do have quite a bit of investment property options that are conventional mortgages. There is one 85% that we have for investment. It does have PMI, and PMI can be tricky and a little expensive. So I usually recommend if you’re buying investment to put 20% or even 25% down if you can because then that’s where the best rates are for investment property. But there’s a lot of liquidity still for that type of thing. And the rates tend to be pretty good. We have — we’re still doing quite a few of those purchases people are making because rents are still high. It can be a good cash on cash investment.

Tim Ulbrich: Great stuff. And so for the house hackers out there, we’ve talked about that on previous episodes, it doesn’t mean it’s not a good option, doesn’t mean it’s not something you should pursue. But it just might mean a little bit more that you have to bring down to get that purchased.

Tony Umholtz: There is one thing I will say. There are — you know, for example, FHA, you can buy a multi-unit property with 3.5% down. Now FHA does have higher PMI, but the rates are very attractive. So that can still be a good solution for owner-occupied, you know, multi-family that you’re renting the other units out.

Tim Ulbrich: Awesome.

Tony Umholtz: So that is a good tool. There’s other tools outside of our professional product too.

Tim Ulbrich: Another question we have from the community, Krista asks, “What advice for those that are considering a refi that are hesitant because of a second mortgage such as a HELOC? Can borrowers with two mortgages consolidate and still get a competitive rate?”

Tony Umholtz: That’s a really good question. Very, very good. So a HELOC is if — so there’s two ways lenders look at this. So if you purchased a home originally with a first mortgage and a second so it was part of your acquisition of the home and we refinance and combine the two together, which I think is a great decision because you get rid of a floating rate second, right? If you combine into a fixed. But that’s considered what’s called a rate and term refinance, which is going to get you the best rates. If you were to buy the home and then take out a second mortgage let’s say a month later, if we pay that off, it’s considered a cash-out mortgage. And that comes with different guidelines and can be a little bit more expensive, depending on the loan-to-value. So it is possible, but that’s often — it just changes the type of loan if it’s a subsequent, if you subsequent purchase took out the line of credit.

Tim Ulbrich: OK.

Tony Umholtz: And that comes up a lot because if you’ve done it later after you purchased, it’s a cash-out and that can change the terms of the loan.

Tim Ulbrich: Great stuff. And the last question we have, which brings us full circle to some of our conversation about what’s going on with COVID-19, from Jessica, “Does national shortage of housing units create an environment where home prices will remain high despite the economic recession?”

Tony Umholtz: You know, every market — and we touched on this a little bit in the beginning of the call, is different. Every market has different demand and supply factors. So we don’t want to completely generalize. But on average, most of the country is in a supply issue. Right? There’s not enough supply of homes on the market. And I think commercial is a whole different story. This call isn’t about commercial, but obviously commercial market can be impacted much more deeply than residential. But being that we had such a low supply of homes and interest rates being low and the housing market is pretty strong, we’re very, very busy. I’m very surprised myself. But just in the things I read and the people I talk to, now I’m kind of on the ground level with this with realtors and buyers, there’s a ton of activity. So I would have to say that the residential market is very, very well supported, very well.

Tim Ulbrich: Great stuff, Tony. And thank you to those from the YFP community who submitted questions. We’ll have Tony back on the show in the future if you have a question that we didn’t get to today. And I want to thank Tony for his time, again, for his partnership and collaboration with us for serving you, the YFP community. And to learn more steps — about the steps in consideration to getting a home loan, make sure to check out the post on the YFP site titled, “Five Steps to Getting a Home Loan.” You can do that by visiting YourFinancialPharmacist.com/home-loan. Again, YourFinancialPharmacist.com/home-loan. And right from that page, you can get the contact information to reach out to Tony. And as always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please do us a favor and leave a rating or review in Apple podcasts or wherever you listen to your podcasts each and every week. That helps others find our show. So thank you for joining, and have a great rest of your week.

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YFP 148: How One Couple Got Started in Real Estate Investing

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How One Couple Got Started in Real Estate Investing

Jenny and Myke White join Tim Ulbrich to share their journey into real estate investing. They talk about why they feel like real estate investing is a good fit for them, how they got themselves financially ready to purchase their first property, the good and the bad of owning an investment property and future goals they have for building their portfolio.

About Today’s Guests

Jenny and Myke are both originally from Colorado Springs, CO; they’ve been together for the past 10 years and married for the last 6. Jenny attended Creighton University through the distance program and was awarded her PharmD in 2017. During her time as a student, she interned at Multicare Auburn Medical Center. After graduating, she completed a PGY1 residency at Providence St. Peter Hospital in Olympia, WA and then went on to take a position as a night pharmacist at Multicare Covington Medical Center. Currently, Jenny is working as an assistant professor at William Carey’s School of Pharmacy in Biloxi, MS. She divides her time at Keesler Medical Center, her clinical practice site where she practices as an ambulatory care pharmacist. Myke has been serving in the United States Air Force for the past 12 years. Five and a half years were spent at Luke AFB, AZ, where he worked as a Project Manager. He was the IT contact for both new facility construction projects and renovations, ensuring that customer and contractor support was above reproach, and milestones were met. Five and a half more years were spent at Joint Base Lewis-McChord, WA, where he worked Client Systems, which is usually referred to as the “Geek Squad of the Air Force”. He is currently a Technical Training Instructor at Keesler AFB, where he trains both recent Basic Military Training graduates and re-trainees before they begin their career as Client Systems Technicians.

With Jenny being a new graduate, the thought of paying down school loans was always in the back of her mind. Her night shift schedule really allowed her to start researching ways to create more income besides just working additional hours. During this time, she stumbled across Rich Dad, Poor Dad, which completely changed her mindset on building wealth and developed her new focus of creating passive income through real estate. After sharing her vision with Myke, he also became fascinated in beginning this journey to change their life trajectory in a major way. Shortly after finding this new passion for real estate, they received military orders to Mississippi. This initially came as a huge shock to them, but it truly was a blessing in disguise. Selling their house in Washington’s hot and expensive housing market gave them an opportunity to benefit in Mississippi’s much more affordable housing market. Jenny and Myke hit the ground running to find an investment property in August 2019 and were able to close on their first duplex that December.

They have 3 dogs, enjoy fitness, and love to travel.

Summary

Jenny and Myke recently moved to Mississippi from Washington state. They had planned to stay in Washington for a couple of more years, however, Myke, who joined the Air Force in 2007, received orders to move.

Jenny, a pharmacist, brings the student loans to the table in their relationship and felt responsible to find a way to bring more money in to pay them off. After pharmacy school, Jenny worked a 7 on/7 off schedule which allowed her to work per diem at two other hospitals. She wanted to figure out how to increase their cash flow and create passive income instead of having to work more hours. After readying Rich Dad, Poor Dad she realized that she could become a pharmacist real estate investor.

The couple works with Tim Baker, one of YFP’s CERTIFIED FINANCIAL PLANNERS™, and he suggested that she take the PSLF route in paying off her loans after hearing their financial goals. Jenny and Myke started focusing on saving money for a down payment on a real estate investment property with the extra money they had each month. They were also able to use the capital gains from selling their house in Washington to help with purchase their first property.

Myke shares that they dove into real estate investing because they can positively help other people while bringing in cash each month. They also want to be good landlords and take care of others. They closed on their first duplex in December 2019 and currently have one side rented. In this episode, they share what they’ve learned in the real estate investment process so far and what their future plans are.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. I’m excited to have on the show this week Jenny and Myke White to talk about their journey with real estate investing. Now, we have heard loud and clear from the YFP community that you want to hear more stories from those in the beginning stages of real estate investing. And this episode is intended to do just that, to share their journey into real estate investing, how they got themselves financially ready to go, what types of investing they’re doing, how it is going, lessons learned, and where they’re going from here. So Jenny and Myke, welcome to the Your Financial Pharmacist podcast.

Jenny White: Yeah, thanks for having us, Tim.

Myke White: Tim, it’s a pleasure.

Tim Ulbrich: Well let’s start with some introductions. Jenny, you first. And then Myke. Talk to us a little bit about your background, your careers and the work that you’re doing right now.

Jenny White: OK, so my name’s Jenny White, and I’m the pharmacist in this marriage. And so we actually met Tim Ulbrich through the other Tim, who’s been our financial advisor for the past year. I was starting my pharmacy career in Washington state, where I worked as an intern. I was actually part of Creighton’s distance program. And so once I graduated, I did my PGY1 residency at Providence St. Peter and then went on to work for about a year with multicare as an overnight pharmacist, so working in the ED and primarily MedSurg. And then we kind of had a change of plans, so we were in Washington for about six years during my whole time being a pharmacy student and then my pharmacy career. And then Myke, who will introduce himself here shortly, is in the Air Force, and we got orders to Mississippi, which changed things dramatically for us. ANd so now I’m actually an assistant professor at William Carey University. And so I split my time being a faculty member for the pharmacy school and then working at Keesler Air Force Base as an ambulatory care pharmacist.

Tim Ulbrich: Awesome. Thank you. Myke, go ahead.

Myke White: So my name is Myke White, I like Jenny said am in the Air Force. I joined in 2007. I started out in Arizona as a IT project manager. So I handled a lot of the high-dollar initiatives throughout the installation, whether it was new constructions or renovations, anything that needed communications, meaning network capability, computer servers. We were all up in it. So I was there for almost six years, made our way to Washington where I was a client systems technician, so I mainly focused on computer and end user devices. And I liked it. We were there for almost six years, and honestly, our plan was to stay for probably a couple more years, get Jenny established and maybe even try to get overseas if we could. And then actually came back from holiday exodus in 2018, and I realized that we got orders. And of course when you look at your orders, it just says that you’re notified or you were selected for orders. It doesn’t exactly tell you where you’re going. So I was excited because on my preference list, I had nothing but overseas. So I’m like yes, we’re going to get that opportunity to get overseas. And I checked, and I saw that we’re going to Keesler. And of course, I had to break the news to Jenny. And she was obviously not happy. But at the end of the day, we had to deal with what we were given. So now we’re here. And it’s actually not as bad as I ever would have thought. You know, it’s opened up quite a bit of opportunities for us. And hopefully they continue as long as we’re here.

Tim Ulbrich: I think the Mississippi folk listening will be glad to hear you say it’s not as bad as you had thought. And what a change, I mean, Pacific Northwest to Mississippi. We talked about before we hit record, you know, home being Colorado. So lots of transition for sure. But I’m excited, I know one of the goals that you all have going forward is sort of the flexibility and the freedom with travel and doing things that you love, especially as time in the military eventually wraps up and having more options, which is I think where real investing in the financial plan fits in so well. So Myke, I want to start with really a broad question about your financial plan as a couple and how real estate investing fits in. And the reason I want to start here is that I see many pharmacists, especially new practitioners, really struggling to get started with real estate investing. One, they want to do it but they don’t know how to get started because, you know, of course they’re balancing six figures of student loan debt, perhaps the need to build up reserves for a rainy day fund, getting rid of credit card debt, trying to prioritize other goals such as investing, home buying, wedding, starting a family, the list goes on and on, right? So tell us a little bit about for the two of you — and obviously in your work with Tim Baker as well I’m sure this has been part of the discussion — how has real estate investing been able to come up and bubble up as a priority among all the other things that you’re trying to work on?

Myke White: So starting from the beginning, honestly, I had not necessarily an interest but I just didn’t know better when it came to real estate just because you know, you have that typical mindset of people where there’s a lot of moving parts, there’s a lot of money involved, there’s a lot of things that people don’t know so they kind of just put it off, that’s not for me type thing. And of course once Jenny was introduced to YFP and in the midst of all of that, Bigger Pockets and I mean, her entrepreneurial spirit anyway, she kind of found out about everything. And then she kind of sold it to me. So of course I was a little bit apprehensive at first. I was like, eh, I don’t think so. But then after I started reading a few things, looking at a few different articles and of course read “Rich Dad, Poor Dad,” I think that’s when my whole mindset shifted. And I was like, OK, maybe we can do something different, we can stop this 9-5 mindset and think outside the box and figure out ways that our money can work for us and benefit us in the long run. So I think once we started that, we kind of started to zero in on our different priorities and how real estate can feed that. And also leaving Washington, we of course sold our house. And we ended up making quite a bit of capital, extra capital, in order for us to start to kick things off once we got to Mississippi. So we’re able to pay down quite a bit of our debt, we’re able to establish our nest egg or our real estate venture. So I think once we got to that point and once we got settled in Mississippi, we’re kind of able to set our priorities and get that going. But as far as right now, our plan is again to — so I retire in about eight years. So for us to kind of get established now, get smart on everything, establish our connects and different things and get that going. We of course got our first property. Obviously our goal is to get at least 1-2 properties at minimum a year until we get to the point where the cash flow is supplementing at least one of our salaries so we don’t have to worry about working.

Tim Ulbrich: So Jenny, you must have done an awesome job selling him well. I mean, hearing Myke go from “I’m unsure of this” to “We’re going to be getting at least 1-2 properties a year,” that gets me fired up. And isn’t it amazing — I mean, “Rich Dad, Poor Dad” had that same effect on me. And I recommend, I feel like it should be required reading throughout multiple times. It’s not one of those things you read once either. I feel like you pick up something new each time. But it’s a mindset book. It just makes you think differently about money, especially if something like real estate investing, small business, wasn’t a part of how you grew up. Jenny, talk to us for a moment about student loans because I’m guessing many people are listening saying, “My gosh. Like I would love to get started with real estate investing.” But you know, we know the average indebtedness is about $170,000 across the country for today’s graduates. So for you all, talk to us about the student loan position and then your repayment strategy and how that has played into allowing you to be able to prioritize real estate investing while you’re also facing student loan debt.

Jenny White: Yeah. So for us, student loan debt is definitely something that I think triggered this looking out for other options. So obviously when I went to school, pharmacy was my passion. Like I absolutely love it. I love what I do, I love hospital, I love ambulatory care, I love all realms of it. But once I was working as an overnight pharmacist, I’m like, yes, I finally made it. I’ve got that consistent salary, I’m making money. And we were paying down some of the debt that we had accumulated. And mind you, so Myke, he doesn’t bring this debt to the table. Like this is strictly mine. I know there’s a lot of people that are two pharmacists or other debt. Like this is all mine. So in my mind, I was almost thinking like, I have to get rid of this. So I kept looking at other things. I looked at side hustles and I was trying to figure out how we could do — how we could continue to pay it off because my first goal was I wanted to try to pay off all of the student debt because I was like, let’s just get this out of our way. Like I don’t want to deal with this anymore. But then after I’d talked to Tim and I was like, OK, I did sign up for PSLF because I was like, this is kind of my backup, if like in a couple years I realize like I’m not getting this paid down quickly enough then I could always fall back on PSLF and draw back on the payments and try to decrease them. The other thing that I noticed too was that like when I was working, I had the 7-on, 7-off working night shift, which was amazing. But it also gave me the opportunity to work per diem. And so I was working per diem at two hospitals. And then I was like looking at my paycheck, and I was just like holy cow, like so much of my money is getting taken away for taxes. And so I was like, there has to be something else, which is when I found “Rich Dad, Poor Dad,” which I recommend that book to every single person. It’s $5 on Amazon. There is like no reason, especially now in the quarantine, that you can’t read it because that completely shifted it where I was like, this is right, they’re taking all of my hard-earned money for taxes and using it for whatever they use taxes for. But like how can I hold onto more of my money? And then that’s where it really shifted to thinking about cash flow, passive income, and then we kind of shifted focus on like instead of paying down all the debt, let’s focus on saving up as much as we can to get down payments for houses.

Tim Ulbrich: I love it. And I think that strategy of PSLF here is really an important part because as our listeners know well, now if you’re pursuing PSLF, which right now doesn’t get sweeter than it is, right? We’ve got a bonus time period here of $0 PSLF-qualifying payments because of the CARES Act. But the PSLF strategy, you know, if that’s what you’re in is minimize payments, maximize forgiveness. And here, that allows additional cash flow to be freed up to be able to focus on things like real estate investing. And I think it’s a good reminder of the interconnectedness of all the parts of a financial plan and how someone like a coach can really help you balance those out and think about them where it’s often easy just to get siloed in the one part of the financial plan. So Jenny, talk to us a little bit about the month-to-month rhythm for you guys. I know if you’re working with Tim Baker, it likely means he’s talked about a budget and the spending plan and obviously I would assume that’s a key part here based on the goals that you have. What does this look like month-to-month and week-to-week for you and Myke in terms of how you’re able to account for income and expenses and ensure you’re able to fund and prioritize the goals that you guys have?

Jenny White: Yeah, so for us, Tim Baker has been a huge resource to us, and we’ve definitely learned a lot from him and kind of managing our finances as well as Tom, who is the budget guy for Tim. And so we’ve been working with him. So we really had to kind of focus in our spending. And we actually run a budget now, which is something that we didn’t really do before and we kind of just would pay our bills but we really wouldn’t look at our spending. And now when we do that, we’re like, holy cow, we spent this much money going out to eat, we spent this much money on groceries. And so it really opened our eyes, and so we try to make sure that we’re cognizant of that. So that was kind of a big thing. But even for kind of getting in the ball rolling for the real estate thing, a lot of it was just learning. And Myke and I are still doing that. We have tons of books from Bigger Pockets that we’re reading, we listen to podcasts, and we also — the thing with Bigger Pockets is that they have so many great resources. So one thing that a lot of people don’t realize too is they think like, I can’t get started in real estate because I don’t know everything. But start learning now so that you can get the ball rolling so that when you’re ready, then you’re good to go. So like we started in January of 2019. This is when I really started. And then you know, early in the year, then Myke really got involved. And so we were listening to all the podcasts, reading all the books. But they have a calculator on Bigger Pockets that you can use to like really dial in like your properties. But you have to practice it to be able to like see what a good deal is versus what isn’t a good deal. And so from the time that we started doing that, we were practicing probably from like March ‘til May-June timeframe before we got there so that when we actually got to Mississippi, we were ready to roll because we could actually pull in those numbers, we knew what we were looking for, we knew what made sense, and we weren’t trying to scramble and wonder if this was a good deal.

Tim Ulbrich: I love that. And I love your passion for learning because I think what happens here, what my wife and I have found is when you’re listening to podcasts, when you’re reading books, when you’re analyzing deals, running calculators, you can’t stop thinking about it, right? And then you kind of start talking about it more. And then you find yourself driving down the street and you’re like, ooh, I wonder if that would be a good property? Does that beat the 1% Rule?

Jenny White: Yep.

Tim Ulbrich: And it’s top of mind. And then it gets cemented as a priority, and I think it starts to build that confidence so that as Bigger Pockets talks about all the time, great resource, that first deal is the hardest deal. You’ve got to get over the hump.

Jenny White: Yeah.

Tim Ulbrich: And you’re never going to feel fully confident, fully ready. You’re going to make mistakes. We’ll talk about some of those along the way. And that’s OK. But you’ve got to get started. In that, of course, making sure you’re doing so in a way that fits in with the rest of your financial goals. So Myke, before we talk about the first property, why real estate investing? You know, I know our listeners are probably thinking about, OK, I could be maxing out 401k’s and 403b’s and HSAs and Roth IRAs, I could invest in a brokerage account. What is it specifically about real estate investing that intrigues you maybe equally or even more so than other areas and options for investing?

Myke White: For real estate, for us, obviously the bonus is money, is that cash flow. But it’s also helping people. And a lot of people don’t necessarily always think about that. They think, OK, this guy is huge into real estate. He’s in it all for the money. But a lot of money don’t realize that you’re helping people’s situation. And I feel like we’re seeing that firsthand with the property that we currently have. There is a tenant in there that, I mean, doesn’t necessarily have the best situation. But I feel like, you know, us being her landlords, we’re kind of seeing our focus shift from OK, it’s not about the money, it’s about making sure that they’re good. So if they’re good, that means that you’re good. So that’s kind of how we see it. Obviously like the money’s nice. That leads to other things. But at the end of the day, you’re helping those people. So I think that’s something that you don’t necessarily see in a lot of other forms of investment.

Jenny White: And I think too is sometimes landlords kind of can get a bad rap, and that’s not something that we’re striving for. You know, we actually want to provide a property. And we’ve had a lot of things that have already popped up that the property manager prior to us taking over this property didn’t take care of, but we’re taking care of it because it’s the right thing to do. And overall, she’s a great tenant. And we want to keep her long-term. And so by Myke saying like, you know, being good landlords and helping them out and even with like COVID-19 right now, making adjustments to payments, doing what we can. I think that’s going to help us keep her long-term, which is what we want because that helps with cash flow too. Turnover can get you quite a bit if you’re not careful.

Tim Ulbrich: I’m so glad you said that. You know, I’ve learned firsthand with the property my wife and I recently purchased, the cost of vacancy or turnover that leads to vacancy or obviously repairs that need to be done then because of damages or other things. But in tandem, it’s not just the numbers. Obviously you’re in a position to help, and I love that heart and passion to do that, especially during a difficult time like this. So Jenny, walk us through the first property. A duplex, tell us about it, where it is, what it looked like, kind of general numbers, and why the duplex is where you decided to start versus a single family home or even doing something like a house hack. What was the strategy and thinking there?

Jenny White: Yeah, so when we got to Mississippi, one, we were coming from Washington state where single family homes are easily not like even great, but they’re between $200,000-300,000 for like bare minimum. We came to Mississippi and we’re looking at like $60,000-100,000. We’re like, holy cow. So then when we started looking at properties, duplexes were popping up, which like in Washington are probably close to $500,000 where here, you can get them for under $200,000. And we were just like, we can’t believe this. So we started looking at both because to us, it was important just to make sure that the numbers made sense. And so we looked at both, and we probably looked at a good 10-15 properties, ran numbers on close to 50-60. And actually, our first deal fell through. So we had put down — or we had gone under contract for an initial duplex, which had two tenants in it. And we were planning on keeping them. Then some issues happened with the electrical boxes being in inappropriate places, so they were going to be expensive fixes for us. And then once we continued down the process, our appraisal came back down low, which would have been great for us, but the seller wasn’t willing to go down. And so we ended up losing out on that duplex because we couldn’t come to an agreement on terms and all that. And so at that point, that was like September timeframe and Myke and I were pretty bummed out because we were literally a couple days away from closing before it fell through. And so it had been over a month of working, getting inspections done. So we were really bummed. So we started going back to the drawing board and were looking at more properties when I actually went with our realtor — and we had a great realtor who was very investor-friendly. So she went with us, you know, even in the evenings, anytime she was like available to go with us. And so Myke actually didn’t even see the property until we actually had purchased it because I went with the realtor and it was listed for $125,000 for a duplex there was two tenants in. On the unit side A, it has some repairs that are needed but nothing bad. Unit B was a Section 8 tenant that had been there for about eight years, had really demolished the place. Like I mean, you walked in there and you could see like the smoke. It was just like everywhere. Everything was caked in dirt, it was pretty run down. And so we knew — I knew that it was going to need a lot of fixing up. So I told Myke, I was like, well let’s keep looking. We’ll keep an eye on that. It’s listed too high. We kept looking and I just kind of got like a gut feeling, and I was like, let’s just take a chance. And like our realtor had let us know that their realtor had kind of mentioned that the person who was selling was an older guy. He was just trying to get rid of the property. So then I went to look at the purchase information, I saw that he had purchased it back in 2009, paid $60,000 for it. So I was like, he’s got his money in and he’s made tons of money already. So I was like, let’s just try lowballing. I was like, let’s just take a chance, we’ll see what happens. They had said they were already evicting Unit B and they were going to get rid of her. So I was like, OK, if we can make that part of the contract, then that would be great. So it was listed for $125,000, and I said, “Let’s offer $60,000.” And so most people would think that I was crazy, which it was a little bit. My realtor even — our realtor even said, “Either they’re going to ignore you. Or they might come back with an offer.” She’s like, “That’s pretty low.” She’s like, “I don’t know what’s going to happen.” I said, “That’s fine.” I was like $60,000, we’ll pay closing costs, let’s see what happens. So it took — what? — about like a day and they came back and they said, “We’ll sell it for $85,000.” Yeah. So it was huge for us. Their realtor was actually really smart because at the same time, she said, “We’ll take $85,000, but we’re dropping the price to $92,000 on the MLS.” So that day, they got multiple offers from it dropping that much. But we had said, “We’re like, we’ll take it for $85,000. We’ll go.”

Tim Ulbrich: I love that. And you know, speaking of the cost difference from Pacific Northwest to Mississippi, there you go. If anybody’s hearing that, they’re probably like, “What number? Say that again. How much for a duplex?” But you know, when you talk about the 1% Rule as just a general example, when you’re talking about two units for $85,000, the math is pretty quick. I don’t really have the details, but I know just with those numbers it’s probably a good deal based on that. So you know, area matters. And I think this is important for our listeners to hear because some people might be in an area where they say, “The numbers don’t work. I live in Seattle. I live in Columbus. I live in wherever.” And so being open to out-of-state, out-of-area investing I think is really important. Actually, Bigger Pockets has a book out specifically on long distance real estate investing, which is a great read. It’s something I’ve done. And as I understand it, you all are thinking about bringing in other people that are out-of-area but see your market as an opportunity, correct?

Jenny White: Yeah. That’s something that we want to do.

Myke White: Yeah, so even when we were in Washington, obviously we wanted to try to get the ball rolling. But there would have been no way. It would have been out of our price range. So of course it’s comfortable. It’s convenient to stay in your own personal market. But sometimes you might need to consider venturing into other areas just to see what the environment is there. If you know people that invest in that particular market, you know, ask them how the climate’s been for maybe the past few months or couple years, even, and kind of go at it that way because yeah. Like I said, coming here has opened up a lot of doors and opportunities and as much as we really wanted to get into real estate, it wouldn’t have happened — it wouldn’t have happened at least as quick if we weren’t here.

Jenny White: And so we have people who are from Washington and Colorado who are interested. And I mean, getting into a partnership is kind of nerve-wracking as is. But that’s why we’ve talked to people that we knew we were interested, people that we trust, and we’re in the process of kind of like working out what those contracts would look like because basically, Myke and I are tapped on capital because we put our down payment down, we made the repairs to the other side, so it might take us a little while to pull our capital back out through the BRRRR method or just save up enough money to make that happen. And so we’ve talked to a couple people and said, you know, “You bring the funding for the down payment. We own the place 50-50 and there’s different ways to work it out with your financing. But then we can property — we’ll be the property managers for it.” And that also is a big thing that people don’t want to do, they don’t want to deal with the headache of being a landlord. And so we’re like, OK, if it’s in our area, we keep our duplexes within a certain radius for us to be able to get to, we manage that portion of it and then you get your payment every month, you get your cash flow, we both are building equity, we have this and we can figure out what we do with it down the line. But it’s an opportunity for people to get involved in real estate. And again, some people don’t want to learn the process either. So that’s another thing is we’re invested in learning in this process and managing it and being hands-on. So we’ll gladly work with people if they want to give us the money to do it.

Myke White: Yeah, so prime example, I mean, my dad came down here to visit about a month ago. And he had of course known that we were doing our thing with our duplex. And so of course, what better way to kind of tell him what we’re dealing with than actually show him the duplex, show him or at least explain to him the process so we could get there, the money involved. And really, we gave him like the short and simple version to kind of be like, oh, that sounds pretty interesting. That sounds like something I would maybe want to get involved with. So obviously, you know, you hear a lot of times when it comes to these type of things, don’t involve family, you don’t want to mess up the dynamic. And I was very reluctant, even though Jenny asked me quite a few times, “Just ask your family. Ask your mom and dad if they want to throw some capital at us.” And I’m like, no because if the crap hits the fan and something happens, I don’t want to be looked at or affect our relationship. But the way that we kind of conveyed it to my dad, he was excited about it, he told my mom. He was like, “Look, we want to make this happen. So if there’s any properties that you see come across your desk, let us know. And we’ll see if we want to provide a little bit of capital. So that’s like the best case scenario, honestly. And I know that whatever we give them, they know that we already did our due diligence and running the numbers and making sure it works for us before pulling the trigger.

Tim Ulbrich: I love the creativity there because you know — and I think as you all are discovering, like I think it certainly can be tricky with family and friends. But with really good agreements in place and good conversations and just very honest conversations about hey, there’s risk and we need to all understand what worst case scenario is. And I’ve done some investing with somebody else where I think they’ve done a really, really good job of that to say, “Hey, I care enough about you that I want you to fully understand the risk and be transparent because this relationship is first. So as long as we’re all on the same page about the risks as well as the opportunities, then we can clearly communicate that and document it.” I think that that’s reasonable. So I love the creativity because what I hear you saying is that the rate-limiting step for you guys growing your portfolio at 1-2 units a year — and I’m guessing if we talked a year from now that number might be 2-4, 3-5, whatever — is that you know, obviously you’ve got to have the capital. And I think it’s important to you all that you aren’t being overleveraged and that you can have equity in these homes. So it just takes time to build up a down payment. I mean, even when you were talking about an $85,000 property, if you’re putting a significant chunk down to get good financing and to make sure you’re not overleveraged, it just takes time to save to do that. But if you guys can put in sweat equity and bring other people in that maybe have the capital interest and don’t want to put in the sweat equity, you can essentially have the equity in the property without necessarily needing as much of the capital. And I love that creativity for you guys moving forward. So that makes a whole lot of sense. So Myke, tell me a little bit about the other side of this. You know, I think sometimes we talk about real estate investing and we talk about it like it’s roses, rainbows and cupcakes. But there’s another side of it as well, right? And that’s the — we all have stories of this didn’t go as planned or I thought this was going to happen or oh my gosh, I didn’t realize this. Talk to us a little bit about with this property what those moments were for you guys.

Myke White: Yes. Of course, like Jenny said, in regards to our duplex, I did not see the property until we had already got it. And so it was already 10 times better than it looked when she went there for the initial walkthrough because all the furniture was gone, of course the tenants were gone, the carpet was actually ripped up already.

Jenny White: Thank goodness because it was gross.

Myke White: There was a lot of that smoke smell. So I just walked in and — of course we had seen a bunch of other properties along the way that were not that great. And so I was like, OK, I feel like I’ve seen it all at this point. But I was sorely mistaken. So I walked in, yeah, it was really bad. And I was like, we’ve got a lot of work ahead. And luckily, we do have, you know, that support system and we do have our realtor that knows quite a few people that can do the handiwork. But we also have friends that can assist when needed. So we’re like, OK, maybe we can knock this out and do it on our own. But yeah, it was — once we got into it, we realized how much work it was. So we first started out by trying to get rid of that smoke smell because it was everywhere. And we knew a lot of it was absorbed into the walls. So we had done a little bit of research and we had found a solution that we got from Home Depot to literally just scrub the walls.

Jenny White: And we had white towels that were coming back black and brown and like we’ve been trying to document our journey too so we have like the videos on my Instagram and I post them to my Facebook just so people can see like what we’ve been doing.

Myke White: Yeah, so we were able to get some small stuff done. But literally, it was that first day — matter of fact, it was probably that first hour of that first day that we realized, OK, we might need to get some — we might need backup. So we called it a day and we looked into different contractors that could do at least a little bit of work for us. And so we had decided on one. They were able to get in pretty quickly and they replaced the flooring, they painted the walls and did a few annoying things. So right now as it sits, the duplex is almost OK. But I feel like anything else that needs to be done, we can do. But that’s just kind of the expectation. You’re never typically going to find a property that’s ready to go. And you know, it’s expected that you’re going to have to put a little bit of work in. You’re not always going to have the luxury of having that support system or having that realtor that just happens to know the handyman or the AC guy or the electrician. So sometimes it’s what needs to happen in order for you to make some progression.

Jenny White: But we learned too along the way that a lot of things, when we decided we were first going to do it, we’re like this is great because our tenant, the one that stayed, her rent covers our entire mortgage. So we’re like, OK, we can take a little bit of time with this, which is why we wanted to do it. Then we realized we both work full-time jobs, getting this done on the weekends and like evenings, it was taking up too much time. So realistically, with us delaying the nice rent money that we’re losing by not having a tenant in there, so we were like, we need to just get this fixed up, which I mean, we’ve had delays and life happens and things happen, so it’s still going. But that was again, when we purchased our original — when we made the decision to purchase this property, knowing that her rent covered our mortgage, it’s not anything that we’re losing money on, which is very good in our scenario. But we were like, we’re going to have this done by February. It didn’t get done by February. Then in February, like great, we’re going to get this done, then we had a delay on our appliances. We were still having trouble with the smoke smell, so we had to have the AC guy come in to do more repairs. And so now, it’s about ready and now COVID-19’s going on. And so we’ll see how long it takes us to get into — get a renter into that property.

Tim Ulbrich: Sure.

Jenny White: But that’s again, when you buy, buy smart and don’t overleverage yourself because, you know, we’re still in an OK position right now. So we’re just kind of biding our time.

Tim Ulbrich: And I think that’s a good reminder that what’s coming to me as you were talking of especially on the first property, buy smart, don’t overleverage. You know, when I heard you say one half of the total rent of the duplex covered your payment, that gives you margin right out of the gates, right? So if timing goes on, if an expense comes up you’re not aware of or doing this for the first time, we didn’t realize this or this, you’ve already got options and you have a little bit of wiggle room. So and I love — just kind of bringing this all full circle — I love as we think about the future of investing for you guys and why you’re doing this, connecting this all the way back to having some flexibility and options, diversifying your income, generating additional revenue streams so you guys can pursue travel and other passions and hobbies that you guys have. I also hear kind of a desire and a heart for giving and doing other things that you have options to do. So what a cool story, and I’m so grateful that you both took the time to come on the show to share this. And I think it’s going to help many people that are thinking about hey, I’d love to do this but I just don’t know where to get started. So I appreciate both of you taking the time to come onto the podcast this week.
Jenny White: Yeah, thanks for having us.

Myke White: Thanks for the opportunity.

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YFP 140: How Ryan Is Bringing in $11,000 a Month Through College Town Real Estate Investing

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How Ryan Is Bringing in $11,000 a Month Through College Town Real Estate Investing

Ryan Chaw, clinical pharmacist and real estate investor, joins Tim Ulbrich on the show. They talk about how Ryan was able to accelerate his financial goals through real estate investing and how he went from zero rentals and zero rental income to $10,755 per month from 18 tenants in four years.

About Today’s Guest

Ryan graduated with his Doctor of Pharmacy in 2015 at age 23.

He was inspired by his grandpa who bought 3 properties in the Bay and achieved financial independence for himself and was able to help cover college tuition for his grandchildren.

Ryan bought his first property in 2016. It was a single family home at his local college. He rented out the house per bedroom and renovated to add extra bedrooms to increase rental profit.

He repeated the same process for each property, buying 1 property each year. He then created a system for getting consistent high quality tenants, managing the tenants, and decreasing expenses through preventative maintenance. He now makes $10,755 per month in rental income.

Three of the properties are on 15 year mortgages and one is on a 10 year mortgage. Ryan took a HELOC out on the first house to help buy the 4th house.

Ryan is now teaching others his system: how to find a college town to invest near, analyzing a deal, generating tenant leads through strong marketing, and how to self-manage college tenants so everything is hands off and automated.

In his free time Ryan travels to many foreign countries to just absorb the culture and life outside of California. So far he has been to China, Japan, Taiwan, the Bahamas, Canada, Paris, London, Germany, and Mexico.

Summary

Ryan, a clinical pharmacist and real estate investor, quickly found his investing niche: college town real estate investing. Ryan started investing in real estate right after he graduated from the University of the Pacific. He now owns four single family homes in Stocktown, California, a college town, and has 18 tenants. By renting out each room individually, Ryan has maximized his income and brings in $10,755 per month.

Ryan’s grandfather owned a couple of rental properties in the Bay Area which not only funded his early retirement but also paid for Ryan and his brother’s college tuition. Ryan saw how impactful real estate investing could be and has the goal of reaching financial freedom so he’s able to do what he wants to do and provide for his family without money restricting his freedom.

Ryan purchased his first rental property in 2016 and has bought another single family home each year after. In high school, he worked a couple of jobs and saved all of that money in mutual funds. After 5 to 8 years, that money turned into $30,000. For his first rental property, he put around 25% down and took out a 10 year mortgage. He also worked overtime at his pharmacy job to help fund it. He purchased his first rental property for $262,000. Ryan receives $2,600 a month in rental income and has a $1,900 mortgage payment.

With the cash flow he brings in from his rental units, he makes sure his emergency fund is funded and averages that he’ll need about $100-200 in expenses monthly for each house. Ryan uses the leftover cash flow to fund his next property.

Ryan said that he thinks investing in student rentals in college towns can maximize your income the most in a single family home. Even though homes are expensive in California, he’s still able to have a cash flow from his properties. In this episode Ryan also discusses how he looks for tenants, handles complaints from tenants about other tenants, and how he built systems and processes.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. It is my pleasure to welcome Ryan Chaw onto the show to share his experiences with real estate investing. Now, as you know, we’ve mentioned real estate investing as a goal we have for 2020 in terms of bringing more information, more examples, more stories, to the YFP community. And today is another great one for you in this area. Ryan has a unique niche of real estate investing in California in college town real estate investing. He’s doing it well in a high cost of living area, and I think his work could translate well to other parts of the country. Furthermore, he is setting out to teach others his game plan and how real estate investing can help accelerate one’s path towards financial freedom. Ryan, welcome to the Your Financial Pharmacist podcast.

Ryan Chaw: How’s it going, Tim? I’m honored to be on the podcast.

Tim Ulbrich: Thank you so much. So glad that you reached out to me, really, really inspirational hearing the work that you’re doing. I’m excited to share that with our community as well. Let’s start with your career in pharmacy, and then we’ll dig into the real estate investing. Tell us a little bit more about your pathway into pharmacy, where you went to school and the work that you’re doing now.

Ryan Chaw: Yeah, so I graduated from the University of the Pacific in Stockton, California in 2015. Soon after that, I started working for RiteAid, and I did a part-time job at Kaiser and eventually ended up doing full-time at Kaiser. And now, I am an infectious disease pharmacist full-time at Kaiser. And from there, I just started investing in real estate. I saved up a lot for a down payment, I worked a lot of overtime, and I also had some money in mutual funds as well, so I just put 20% down on that first property in 2016 and then I rented out per room to college students to maximize my profits. Then I just bought one — I repeated the model. I just bought one each year, and now I’m at four single-family homes with 18 tenants and $10,755 in rental income.

Tim Ulbrich: That’s awesome. And we’re going to dig in to dissect that much further. You know, I think for people that are hearing that that are thinking about real estate investing, it can seem somewhat overwhelming why you went from just starting to, as I mentioned in the introduction, you just mentioned, four units, 18 tenants, roughly $11,000 of real estate income. And we’re going to talk about how you got from where you started to where you are today, really try to break down that plan. But tell us about the why, the inspiration. You know, where did your motivation come from to say, ‘I want to do real estate investing.’ And not even necessarily where you see the long-term, talk about that, but even to take that first ‘risk,’ that first step, that first property, what was the motivation and reason of doing that?

Ryan Chaw: I would say financial freedom, honestly. I just wanted freedom to kind of do what I would like with my life, have more flexibility in my life, be able to provide for my family down the line without having to worry about financials and have money restrict my freedom. So that was the goal for getting into this because eventually, this rental property portfolio will provide me passive income that will pay for all the bills and also allow me to, you know, take vacations, travel, and all of that.

Tim Ulbrich: And so, you know, as I think about your journey, your story, obviously you’re in a higher cost of living area, so you know, I don’t — as someone who is in Ohio, I think wow, real estate, California, crazy expensive, do the numbers even work? But tell me more. So I love the connection of financial freedom. But why real estate investing? I mean, other ways you could have just squirreled money and saved, you could have done other types of investing, you could have started a business. What was it specifically about real estate investing that really peaked your interest to use this as the vehicle to achieve that goal of financial freedom?

Ryan Chaw: I would say part of it actually is — because when I got to pharmacy, I wanted to provide a service for people. It’s the same idea for real estate investing. You’re providing a service for people. And I do interact with my tenants, and some of them I actually help out through the college because I actually went to UOPA as well. So just kind of giving back to that community is one reason why I did this. Another reason why is real estate investing is one of really the best ways to have true passive income and a good amount of it. If you were to invest in stocks, you would need to make — you would have to have like a several million dollar portfolio to get $10,000 a month in passive income in dividends. Right? But real estate, you can achieve it a lot faster, it’s truly a way to create generational wealth. I was actually inspired by my grandpa to get into it originally because he invested in a couple properties in the Bay area when they were cheap, right? And now they just went skyrocketed, right? So the rental income from that paid for not only his life in order for him to retire early but also paid for my college and that of my brother’s as well, so I really realized, this is a great way to create generational wealth.

Tim Ulbrich: I love that. So his experiences in doing real estate investing allowed you to get a jump start in terms of your financial plan by not having the massive debt load we see with lots of pharmacists, which allowed you to accelerate your savings. But even without the $170,000-200,000 of debt that we see with today’s graduate on average in the pharmacy world, I still don’t want to mitigate that it doesn’t mean there wasn’t hard work that was done to get to that first property. You know, often the objection I hear — and I know my wife Jess and I, we really felt like the hump of the first one is so difficult to get over, but for those that are listening or have listened to the Bigger Pockets podcast, they talk about this all the time of that first property, first property, you just got to do it. But I often hear as an objection — and there’s this disconnect between OK, I like the idea of real estate investing, I want to jump in, but my gosh, like where do I get the cash to even get started? So you talked a little bit about 2016, first property, 20% down, but talk to us, even before we analyze that property and that deal, talk to us about how you were able to save up money. What was the strategy that allowed you to have the cash flow to create the savings to get that 20% down?

Ryan Chaw: Yeah, so I actually worked a couple of jobs in high school during the summer. And I would put all my money, save it away rather than spend it into mutual funds at Edward Jones. And so that grew, that portfolio grew over the course of 5-8 years or so. And eventually when I took it out, it was around $30,000. So that was half of my down payment right there, plus I’m investing not in my directly local market, I’m investing in a city called Stockton, which is about an hour away from me in Sacramento. And the prices there for homes were around the $200,000s when I first started. Now, they’re around $300,000s. But compared to the price in Sacramento, you know, Sacramento costs $500,000 to buy a house. So for me, it made perfect sense, you know, I should just drive one hour away and create this system over in Stockton and then the cash flow would make a lot more sense. And yeah, that’s how I got started.

Tim Ulbrich: Yeah, and what I heard there is hustle and sacrifice, you know. And that was really my next question for you. I think many people, especially our California community members, might be thinking, my gosh, it’s an uphill climb to even be able to afford your own personal property, let alone being able to put 20% down on a second one. So how have you reconciled that to be able to cover your own expenses as well as then obviously be in a position to invest?

Ryan Chaw: Yeah, so part of it was a little bit of luck. First property depreciated like crazy. I bought it for $262,000. And you know California, it depreciates like crazy. So it went up to $315,000.

Tim Ulbrich: Wow.

Ryan Chaw: I was able to take out a HELOC from that to basically help pay for each house down the line.

Tim Ulbrich: OK.

Ryan Chaw: So yeah, that was one strategy I used.

Tim Ulbrich: And before we jump into more of that first property, are you living in one of the properties? Or what’s your situation to be able to cover your own personal living expenses?

Ryan Chaw: Oh yeah, great question. I actually do still — I have a great relationship with my family, so I do live with my parents. But you know, if I were to live outside, I would probably find a cheap, a very cheap place to rent, you know, nothing more than like $800 a month.

Tim Ulbrich: Yeah.

Ryan Chaw: But really, my real estate rents would cover that.

Tim Ulbrich: Yep. I love that, though. I mean, you think about the biggest barriers often and people getting started and this would obviously be their own housing expenses and student loans. And you’ve been able to overcome those barriers plus saving at a very early age, took advantage of compound growth, which allowed you to come up with a down payment, you got that first property, and then as you mentioned, you’ve got appreciation, you’re able to draw on the equity of that to be able to get into future properties. So first property, 2016, I think I heard you say $262,000? Is that correct?

Ryan Chaw: Yeah, $262,000.

Tim Ulbrich: OK. And it appreciated up to $315,000. So talk to us about just the numbers on that, roughly. You put 20% down. Talk to us about the rental situation and just so our listeners can get an idea of, you know, rental income coming in, your expenses and what those numbers look like.

Ryan Chaw: So the first house was basically a cookie-cutter property. It was a three-bed, two-bath, and what I do is I add extra bedrooms where I can. So I’ll either put up a wall or I’ll change an extra living room or family room into a bedroom where I can to maximize the profit because each room can rent out for like $600 a month. So for that house, I’m getting around $2,600 a month. And then for my mortgage payment, it’s $1,900 a month.

Tim Ulbrich: OK.

Ryan Chaw: So that’s $700 in cash flow. And this is on a 15-year mortgage, actually a 10-year mortgage.

Tim Ulbrich: Wow, OK.

Ryan Chaw: Yeah, I actually — I think I put a little bit more, like 25% down, but I did, yeah, a 10-year mortgage and you know, by renting it out per room, it really maximizes that cash flow you can get from the house. And then basically from there, we just reinvest the cash flow into the next down payment, into the next one, into the next one, right?

Tim Ulbrich: Absolutely. Tell our listeners about — a little bit more about why you decided a 10-year aggressive repayment versus a 15-, 20- or 30-year.

Ryan Chaw: I would say, you know, I did hear stories about overleveraging. So I wanted to start off a little bit safe, but then I realized it doesn’t really have to be that aggressive. I think another reason why is my end goal is financial freedom, so I want to pay them off as soon as I can because I want that passive, like complete passive income, you know, $10,755 per month coming in like period for the rest of your life.

Tim Ulbrich: Yeah, and I look at that example — this is a really good one. You know, you mentioned the rent at $2,600 a month across the tenants in that unit. And we’ll talk about the strategy and kind of the college town approach that gives you multiple renters. So $2,600 of rental income, $1,900 a month of a mortgage payment but that’s on a 10-year mortgage. So we fast forward 10 years, property is going to appreciate more, so the actual property will be worth a significant amount, which is a big impact on net worth. And then you get rid of a big part of that $1,900. Obviously, you’ll still have property tax, but you won’t have a mortgage payment. And in theory, rents will go up because of the market that you’re in and appreciation, all of these things. So I think hopefully our listeners start to put together the concept of the financial freedom. Break down a little bit further for me — I see in there $2,600 of rent, $1,900 of mortgage payment. I’m assuming that’s mortgage and taxes and insurance that’s in there as well. What would the rest of that $700, how do you reconcile that, you know — obviously you wouldn’t look at that as just being true profit because you’ve got other upkeep, vacancies, other expenses that you’re accounting for. So how do you determine, you know, what of that money, that $700 difference between $2,600 and $1,900, that you hold for those types of expenses? You know, versus that you account as more true profit?

Ryan Chaw: Yeah, so I always recommend having an emergency fund in case something breaks down, maybe $10,000-15,000 would be a good, reasonable emergency fund. I know some people say like six months emergency fund and all of that, but for me, you know, I do have my HELOC, so if I do have to use that, I can always take it out, which is — it’s basically like a credit card with a very low interest rate. So if I want to do that in an emergency, I could do that. But I would say my expenses are around maybe $200 or $100-200 a month or so average. But it really depends, a lot of times, things — because of the way I set up the house, things don’t break down too often. But when they break down, of course it’s a huge expenditure. And that’s what happened on my first house. I didn’t do my due diligence to make sure that everything was in working order before I bought it. And I made some mistakes, huge mistakes, actually. So one Monday, I got a call from a tenant who was saying, ‘Oh shoot, there’s sewage coming out the kitchen sink onto the kitchen floor.’ And this was like at 11 p.m. at night, right? I was like scrambling to call so many different plumbing companies, and it was hard to get ahold of someone because it was 11 p.m. at night to clean up the mess. So they had to put in a sump pump, they had to sanitize everything. That cost a couple thousand. And then we put a camera down the pipe, the sewage line, and then it was, you know, showed a lot of breaks in the pipes and routes in the pipes, so it cost me $6,000 to replace the whole sewage line.

Tim Ulbrich: Oh, gees.

Ryan Chaw: Yeah, it was crazy. So these things do come up, and they happen if you don’t do your due diligence. And so what I learned from that is during the escrow phase of the house, it’s very important to do a sewage line inspection. So that’s just sticking a camera down the sewage line, costs $200-300, but you know, they’ll find all the breaks, all the cracks and grooves in your pipes if there are any, and then you can use that as a negotiating point during the sale. Either have the seller repair it or have the seller cut a check for you to hire someone to repair it.

Tim Ulbrich: I love that, especially when you consider the cost of something like that, of the repair relative to the cost of the preventative, more diagnostic approach. So that’s great, great, great advice.

Ryan Chaw: Exactly. And I also learned not to buy houses that are over 100 years old when I can because that first house was like 100 years old. Crazy.

Tim Ulbrich: So you know, in California, knowing that you have multiple tenants, you’re in a college town — and again, we’ll talk about that more here in a little bit — do you not have to be as concerned about vacancy rates, you know, that you might see in other parts of the country? Or how do you think through vacancy?

Ryan Chaw: Correct. So I do one-year leases for all of my rooms, all of my 18 tenants. And it’s because the demand is so high for off-campus housing, I only charge $600 a month, right? And on-campus dormitories, they charge $1,000-1,200. So that makes sense for a lot of people. You’re getting more privacy, you’re getting a lot more space, right? And just more freedom in general, right? So a lot of people like that and they see that as a good — for them, a good place to stay. And I usually target third- or fourth-year students when I can. Sometimes I have second-year students stay. I rarely have first-year students stay because of the maturity level. Most of them, they’re already in professional school, pharmacy school, right, so they take — I mean, they mainly use the house to study and sleep.

Tim Ulbrich: Yep.

Ryan Chaw: To be honest, yeah. And not only that, the parents kind of visit them and they help clean up the house, so I cut down on the cleaning costs and all of that too. And so yeah, I do one-year lease. They can always sublease during the summer. Some schools like pharmacy school and dental school, they go year-round, so they actually go through summer. So it makes sense for them to do a one.

Tim Ulbrich: I love that. You know, the two objections I’ve commonly heard for college town real estate investing would be the summer period, but obviously you mentioned the one-year lease and the allowance of subleases or programs that have year-round type of offerings, as well as the potential damage and upkeep for a variety of reasons, you know, maturity and so forth and working with professional students — not that it’s immune to that, but obviously you have a lot better chance I think that they’re going to take care of the property and as many pharmacy students know, pharmacy is a small world, and you should be respectful, right, of somebody else’s property. So talk to us about the strategy of college town investing. I think that’s really the niche you’ve built here. And I think it’s really cool. You know, why? How? And what’s been the strategy that this is an area that you want to continue to go into further?

Ryan Chaw: Yeah, so I was first inspired by actually my friend who did this, his aunt basically bought a property right across the street from campus and rented it out to my friend’s friends. And so my friend basically lived there for free. In fact, if I were to go back, I would do the same strategy because for house hacking where you stay in the house, you can actually put down as low as 3.5% down, so I would have even started with that. But I guess I went into student rentals mainly — like I did examine the different tenant pools out there, but really, student rentals is the best way to maximize your profit on the single-family home because of that you’re renting out per room idea. So one of my houses, for example, appraised to rent out for $2,000. They estimated $2,000 in market rent, right? But I was actually — after I added the bedrooms, I was able to get $3,100 a month. So that house, you know, an extra $1,100 every month made a huge difference in my bottom line. And that’s how I’m able to invest in California where the rental rates — I mean, sorry, the housing prices are so high. If you were to do this in other states, you could get the same rent by $500-700 and the price of the properties are only hundreds of thousand — like $100,000 or $200,000. So the cash flow is tremendous. And that’s why I’m helping others and teaching others how to do this strategy because it’s really a great opportunity, especially in other states.

Tim Ulbrich: And it sounds like, you know, I’m guessing some of our listeners may be thinking about, hey, here we are in a really great, you know, 10-11 year run in the market.

Ryan Chaw: Oh yeah. They get the history, right?

Tim Ulbrich: Yeah, what happens to Ryan if this thing flips on its head? But a few things that I think you’ve done really well to protect yourself against that, obviously, it sounds like you’ve purchased properties at a good price point. You’re in a market that’s going to continue to have demand, regardless of what happens. Obviously being in a college town, you’ve got multiple tenants. You’ve built these year-long leases. But also, you’ve got some of your properties — I don’t know if you have all of them on a 10-year, but because you’ve done that and they’ve appraised and you’ve paid off a significant amount I’m guessing of some of those mortgages on a shorter time period, even that one you purchased in 2016, you’re essentially 3+ years in, so you’ve got this cushion with 20% down and this equity built in that even if housing prices go down, let’s say 10-20% overnight, you’ve really got some protection built in there, right?

Ryan Chaw: Oh yeah. For sure. They say you make your money when you buy, right? So I’ve got to make sure I look at several — oh, let’s say maybe 50 deals or so — just throughout the year. And I buy the best one, right? I constantly look at deals so I know what a good deal looks like. So that’s pretty key.

Tim Ulbrich: And what about getting tenants? What’s been your strategy of having a funnel of people that come to you? And I’m guessing this in part has to do with the relationships that you have. But how have you done that I guess initially? And then is there a point where, you know, after you have a good reputation with these students that I think it would be somewhat of a word-of-mouth of kind of passing it, you know, off to the next group that’s coming after they graduate?

Ryan Chaw: Yeah. Exactly. Nowadays, it’s word of mouth. But when I first started out, I did three things: I put signs or fliers up on the campus bulletin boards. That actually worked pretty well. I put a “For Rent” sign on my lawn. I mean, that’s usually how everyone starts out. That actually got me a lot of calls, but they weren’t from students. They were usually from people around the area. And then when I said, “Well, if you were to rent out the whole house, it would be $3,100 a month,” they’re like, “That’s crazy.” So usually, I would get some not very well qualified tenants to that. But then what really helped was the Facebook groups. All campuses have these Facebook groups for off-campus, there’s usually a textbook exchange group, there’s Class of 2020, you know, all these groups. I go onto them, and I write my targeted ads, right? I say, “Hey, we have this place that’s three minutes from campus.” I literally put up the map on there and show them where it’s at relative to their classes. And I get — I would say every time I post an ad, within the first three days, I would get like 10-12 people contacting me. No kidding, this is pretty average.

Tim Ulbrich: Wow.

Ryan Chaw: Yeah. So there’s a lot of people interested. It’s a huge market. You think about it, UOP I think has 7,000 students or so. I only need 18 of those. That’s like .1% of them, right? So yeah. It’s a great market.

Tim Ulbrich: Let me pick your brain on process. You know, as I’m hearing this — and I’m guessing our listeners as well — I hear you talk about things like advertising your properties and responding to interest and dealing with the sewage pipe issues at 11 o’clock at night and having to think about the strategy of finding these deals and you casually talk about adding rooms and putting up walls. And I’m guessing many people are like, oh my gosh, I just can’t even wrap my mind around —

Ryan Chaw: Right.

Tim Ulbrich: — how to process this. Tell me a little bit about your process, your team, what you’re doing versus maybe other things that you’ve really leaned on others to do.

Ryan Chaw: Yeah. So yeah, putting the systems and processes in place is key, so I’m glad you mentioned that. So I have a process for everything. Rental payment, I do through Zell. I require them to use an app called Zell. It’s a direct deposit app, so I don’t have to deal with a check being lost in the mail, right? And it tells you exactly when they pay their rent so I know when they’re late or not so I can charge the late fee if they’re late. Just putting everything in the lease, being very clear, having all clear, set terms and the wordings clear for any potential issues that could arise. Then you just refer back to the lease when the issue happens. I also have a system in place for like managing the properties if something breaks down. So if something breaks down, the tenant will typically send me a text. They’ll say the toilets not working. And so what I do is I just forward the text to my contractors. And I have a team of three contractors. One of them is more creative, he’s the one I use to help build walls and maybe create a hallway if I have to. He’s the creative guy. The other two, they’re more for like run-of-the-mill things like replacing a toilet, putting in a sump pump, things like that. But basically, I just forward a text to them. And then they let themselves in with the electronic lock on the door. So they just put in that code, right, let themselves in, do their job, they go home, and then I have someone else take a look at the work. And they just tell me, yeah, he fixed the toilet or whatever. And then he sends me the bill, and I send him the check. That’s it.

Tim Ulbrich: Awesome. Awesome.

Ryan Chaw: You know, I haven’t been down to Stockton in over seven months now. Right? So it’s great. Everything’s pretty automated.

Tim Ulbrich: And I think it’s hopefully an encouragement, you know, to me, to our audience, that the systems, the processes, you’ve built a lot of this, I can tell, over time. And as I talk about, again, they mention all the time on Bigger Pockets, really not hearing stories like this and feeling overwhelmed but just thinking about that first process. And there will be mistakes, you know, that’s part of the learning.

Ryan Chaw: Yes.

Tim Ulbrich: And really figuring out what the system and process, figuring out what you want to do yourself, what you want to hire out, what capacity you have time-wise, what’s the margins on the properties, you know, all of those things are really important. Now, considering your model where you have several tenants in a property, several students, I have to imagine you run into tenant issues, you know, just by nature of having people involved, probably often even between one another. Tell me about the issues that come up and how you handle those and deal with those.

Ryan Chaw: Great question, Tim. Yeah, so sometimes, you’ll get tenants complaining about other tenants about noise, maybe the other tenants smoking pot or something like that. And what you do, what I learned, actually — and I learned this the hard way — is you want to have the tenant talk to the other tenant face-to-face. Because if I go and call that other tenant, say, ‘Hey, this other guy complained about you,’ then the situation gets worse because the guy is saying, ‘Hey, you talked behind my back. I can’t trust this guy.’ So the situation actually escalates if you do that. So first, have them have a face-to-face discussion. And then if there’s still issues, then you can call up the tenant personally. And then if that still doesn’t work, you can call the parent because all these college students, they have parents, right? And usually after you call the parent, it gets straightened out pretty quickly. But I’ve only had to resort to calling the parent one time throughout my four years of investing. And most of the times, as long as you empower — and that’s the key. You have to empower the tenants that they’re adults now, they need to resolve these issues face-to-face with the other tenants. And once they kind of have that — once you empower them, then the issues get resolved very quickly. In fact, that’s all I have to do nowadays is just I’ll ask them to talk face-to-face. And after that, I don’t get any texts or phone calls or messages or anything like that.

Tim Ulbrich: I think that’s great advice. I didn’t learn that lesson in the real estate world. I learned that lesson in the academic pharmacy in terms of managing other individuals. But I think you’re spot-on. I mean, the second two individuals have an issue with one another and you jump in with one of them but they don’t talk face-to-face, things often get worse in the short term.

Ryan Chaw: Yes.

Tim Ulbrich: And even though the difficult conversation is difficult, it’s important to be had. What resources would you recommend to our listeners that are hearing this and saying, ‘Wow, I’m really inspired by Ryan’s story. I’m interested, I want to learn more.’ Podcasts, books, blogs, what is out there that you draw information from?

Ryan Chaw: Yeah, so Bigger Pockets actually has some great books on rental property investing to get you started. There’s one by Brandon Turner I think on rental property investing. But there’s also some great books for like mindset and kind of theory as well. I would say “The Millionaire Real Estate Investor” by Gary Keller is really good. That one teaches you how to build your teams and forms of that, of creating systems in place. There’s also “Rich Dad, Poor Dad,” of course. That’s a very inspirational book if you guys haven’t read that one. “Think and Grow Rich,” there’s “The Miracle Morning.”

Tim Ulbrich: Great book.

Ryan Chaw: I like that one. That was a great book, yeah, exactly. It teaches you how to take charge of your day. You know, journaling, meditation, those types of things to get your mind in the right place to really handle stressful situations if something comes up.

Tim Ulbrich: I’m really glad you gave some books that were around kind of more of the mindset, you know, morning routine types of things because I think while the x’s and o’s are important, the theme that I’ve now heard as we’re now 140-something episodes into the Your Financial Pharmacist podcast is, you know, those interviews that I reflect on afterwards and say, “Wow, there’s just something really special, something different, something unique in terms of how somebody’s operating, how they’re growing what they’re doing,” the consistent theme I see with you and others that I would say are really, really successful is this concept of mindset. And it’s just different. And I think it’s often this constant quench and desire to learn and to grow and naturally from that, you will see growth that will happen in a variety of areas. It could be business, it could be family, it could be many different things. So I know that you are kind of in this phase where you’re beginning to teach others how to do this, which I think is really cool. So tell us a little bit about that, you know, kind of what your vision is for that, and where our listeners can go to connect with you and learn more.

Ryan Chaw: Oh yeah, for sure. So I believe student housing — the student rental market is the best way to invest in single-family homes, hands down, because you can make the most profit. So I’m teaching others how to do this. I walk them through the whole deal analysis process to make sure everyone gets a good deal. I walk them through the renovations we make. We try to of course eliminate, do preventative maintenance for possible — like eliminating grass and replacing old mulch and cutting out trees and trimming branches and all of that. And then I walk them through the whole marketing process to get tenants in consistently and to screen them and how to manage issues down the line. And they can reach me at — or you guys can reach me at www.newbierealestateinvesting.com. That’s www.newbierealestateinvesting.com. And newbie is spelled newbie. And I have some great resources, you guys can put in, sign up for the newsletter, and I’ll send you some great information. I even have like a deal analysis calculator you guys can take a look at. It’s kind of like the Bigger Pockets one, but it’s more simplified and it has an amortization schedule and everything. And then I also have a great resource you can read through on the different areas of real estate investing because it’s not just student rental housing. Of course, I love that area. But there’s also fixing, flipping, there’s Airbnb, which is also known as short-term rentals. There’s apartments. But really, I think most people, the ones who aren’t millionaires or billionaires or whatever, the best place to start really is single-family housing and just doing the renting out per bedroom house hacking strategy.

Tim Ulbrich: Great stuff, Ryan. I really appreciate you taking the time, and I have a feeling this won’t be the first time that our audience will hear from you. So excited to see what comes for you in the future and as I mentioned to the community, we’re going to keep bringing more examples, stories, hopeful that will give our community some ideas of things to think about. I think this is another great example of a pharmacist who’s doing some really incredible things and is successful. So congratulations on the success that you’ve had. And thank you again for taking time to come on the show.

Ryan Chaw: Hey, thank you, Tim. I’m excited to be able to get on your podcast. Thank you.

Tim Ulbrich: Awesome. And as always, if you like what you heard on this week’s episode of the Your Financial Pharmacist podcast, please leave us a rating and review on Apple podcasts or wherever you listen to your podcasts each and every week. We appreciate you joining us. Have a great rest of your week.

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YFP 139: Should You Refinance Your Mortgage?

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Should You Refinance Your Mortgage?

Nate Hedrick, the Real Estate RPh, joins Tim Ulbrich to talk about all things mortgage refinancing. They talk about what it is, how to qualify, the costs associated with refinancing a mortgage, how to determine the break even point and how Nate recently evaluated his own mortgage refinance.

About Today’s Guest

Nate Hedrick is a 2013 graduate of Ohio Northern University. By day, he is a clinical pharmacist and program advisor for Medical Mutual. By night and weekend, he works with pharmacists to buy, sell, flip, or rent homes as a licensed real estate agent with Berkshire Hathaway in Cleveland, Ohio. He has helped dozens of pharmacists achieve their goal of owning a house and is the founder of www.RealEstateRPH.com, a real estate blog that covers everything from first-time home buying to real estate investing.

Summary

Nate Hedrick, the Real Estate RPh, is back on the podcast to discuss mortgage refinancing. Nate explains that a mortgage is a bank or lender giving you money to pay for a home and you, the borrower, have a certain amount of time (term) to pay that money back. In mortgage refinancing a lender or bank gives the leftover amount to pay the existing mortgage off and you get a brand new one which essentially resets your loan. It’s possible to refinance your mortgage with the same lender. People chose to refinance their mortgage to reduce their monthly payment, reduce overall interest, get better equity in their home if the house went up in value, eliminate PMI or to reduce the term of the loan.

You likely qualify for a mortgage refinance if you already have a mortgage. To get a good refinance offer, three categories will be looked at: the equity in your home, credit score, and other debt load.

Since this is a new mortgage, you’ll incur the same costs as you did when you purchased your home (closing costs, title fees, etc). Nate cautions that advertisements for no closing costs may not be completely truthful as those costs might be rolled into the loan which you’ll end up paying interest on.

To figure out if mortgage refinancing makes sense for your situation, you have to know your current interest rate and monthly payment, what that rate and payment will change to, what your overall payment is going to be and how long you are going to live in that house. The length you’ll be in your house is really important to consider when looking at refinancing depending on the amount of closing costs you’ll have to pay with your new mortgage.

Nate and Tim suggest exploring several lenders and banks if you’re considering refinancing your mortgage. YFP recently partnered with Credible for mortgage refinancing. You can compare up to 6 lenders at a time and receive quotes in under 5 minutes. Click here to compare multiple lenders with Credible.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. Excited to be here and to welcome back Nate Hedrick, the Real Estate RPH, as we talk about mortgage refinancing, including Nate’s own experiences, and we’ll talk about a question we’ve had from a listener, a community member, as well. So Nate, welcome back to the show.

Nate Hedrick: Thanks, Tim. Nice to be here.

Tim Ulbrich: So I was doing some accounting this morning. I think you officially now may have the record for the number of times you’ve appeared on the podcast. So we’re excited to have you back.

Nate Hedrick: Yeah, I expect my championship belt to be sent in the mail as well. I’ll give you my address after this.

Tim Ulbrich: Awesome. So we’ve talked before. We know how things can get expensive. We’ve done episodes before on home buying, we know of course there’s lots to consider. We did a previous episode on all costs involved in home buying, evaluating the rent versus the buy. It’s not just the mortgage payment, of course it’s the taxes, the insurance, the HOA fees, utilities, etc. And you know, for our listeners, when it comes to the mortgage and how much of a factor that can play in your overall financial plan, it typically is a big chunk of their monthly budget. And unless you move or downsize, many of these costs that come along with home buying are things that you can’t change. However, one thing that you might be able to change is the interest rate. And that can be accomplished through a refinance, which we’re going to talk about here today. So Nate, here we are, 2020, and I think we take for granted rates today in 2020. But rates have not always been where they are today. So just give us a quick history lesson on kind of mortgage interest rates and probably for many of us, what our parents were dealing with back in the early ‘80s.

Nate Hedrick: Yeah, it’s funny. This is something that I actually learned in real estate classes and for some reason, never knew up until that point. But for years, even if you look 30 years ago, early ‘80s, end of the ‘70s, interest rates were like credit cards for houses. I mean, you’re talking 15%, 16%, 17%, 18% for a mortgage, which just — it feels absolutely crazy in today’s world. I mean, we’re at 3.5%, roughly 4% on prime, so that is such a huge difference for us. And it’s something that I don’t think a lot of people even realize if you’re in our generation.

Tim Ulbrich: Yeah, I think so too. And so here we are, as you mentioned, rates, depending on the term, depending on a whole host of factors, which we’ll talk about here today, much, much, much lower, whether that’s 3.5%, 4%, 4.5%, it’s still notably lower than interest rates that were in the teens. And I always give my parents a hard time, ‘Yes, you dealt with that. But also, let’s look at the prices of homes back at that time period.’ So basic definition, mortgage refinancing, what is it in terms of basic things our listeners should know before we talk about the reasons and the hows and all the qualifying factors.

Nate Hedrick: Yeah, absolutely. So a mortgage in itself is just basically the bank giving you money or a lender giving you money to pay for a house. And you have some term to pay that back, whether it’s a 15-year, a 30-year or something in between, you’ve got a period of time which to pay that back. Well, the mortgage refinance is effectively a resetting of that loan. You’ve either got the same lender or a different lender who is giving you the money to cover the leftover amount you have on your current mortgage, and you get a brand new one. And that can be the exact same term, that can be an extended term, a shortened term. There’s all different ways to do it. And we can talk about those details, but effectively, it’s a reset of that loan.

Tim Ulbrich: Awesome. And I think for many folks listening, especially with the rates where they are at today, most notably, we think of a refinance to reduce your monthly payment, reduce the overall interest that you pay over the course of the loan, but what else is out there? Why might somebody refinance beyond those two factors?

Nate Hedrick: Yeah, the ones that I see a lot too are your house has gone up in value, so you actually want to get a better equity on that property so you can actually get more cash back out of your property itself. You can use it to eliminate PMI, that’s actually why my wife and I did it. And we can talk through that, but we actually wanted to get rid of PMI, and it was the easiest way for us to do that. You can actually just reduce the loan term. Maybe if you’re really driving toward that FIRE movement like we’ve been talking about and you want to get that paid down that much faster, you can reduce the actual loan term to a reduced interest rate and a number of other things to basically get that paid off that much faster.

Tim Ulbrich: So if we have somebody listening, you know, I’m going to give them my situation for Jess and I. We moved here to Columbus fall 2018. You know, interest rates really were at — I say ‘peak,’ but again, if we consider this historically, peak is a relative term. But at the time, we got a 30-year mortgage for 6.25% was our interest rate, wasn’t too long ago. And here we are again with rates lower than that. So I’m guessing many of our listeners are thinking, OK, maybe I’ve got a rate where this makes sense. And we’ll talk about how you evaluate whether or not that makes sense and where the break-even is. But how does one qualify? And what are the steps that are involved that if somebody’s thinking or finding themselves in a similar situation, to determine if this is for me, how do I begin that qualification process?

Nate Hedrick: Yeah, so if you currently have a mortgage, you pretty much automatically qualify for a refinance. The tricks to how you get a good refinance come down to a number of factors. So one is the equity in your home. That’s probably the most important factor, quite honestly. Most lenders are going to ask you that up front. So what is your current loan, basically? So if you took out a 90% loan, basically you put 10% down on your house a year ago, you probably haven’t built up a lot of equity in that home, right? You’ve been paying it off for a year, but most of those payments are going toward interest, not toward principal. And the actual equity you have, the ability to refinance probably hasn’t changed very much. There’s not been enough time for it to go up in value. And similarly, you haven’t been able to pay down the debt that you have. So that really is the key factor. How much equity do you have in the home right now? And how has that changed from your original loan? That’s kind of step one. The next thing is going to be based on like your credit score. So if you’ve got a better credit score, you’re going to qualify for better rates. So if you’ve bought the house five years ago, let’s say, and your credit score has gone up 100 points since then, you may qualify for very different rates than you did just that five years ago. So that’s a question to kind of ask yourself. And then beyond that too, it’s just what other factors are going into it? Do you have other debtload that the lender should be concerned about? It’s basically all the questions they ask you on an original mortgage and making sure that you’re a qualified candidate for that original mortgage again.

Tim Ulbrich: And I think that’s where for so many of our listeners, you know, we think of the life stage that often pharmacists, especially new practitioners, are in in terms of so many variables changing where, you know, income may have gone up, credit scores may have gone better, other debt has come down, perhaps they’ve paid down some of their mortgage. And obviously, that would make them more favorable, depending on the personal situation. The one thing, Nate, I’ve seen a little bit — and I don’t know if you’ve run into this — is especially recently as some markets have gotten really hot, if people got into bidding wars on a home where they, you know, were making just crazy offers, well above whatever was kind of market value at the time, and depending on what’s happened in those markets since then and how long it’s been, the appraisal process is going to be very important here to determine what that equity position is, correct?

Nate Hedrick: Absolutely. Yeah, the appraisal’s really what it all comes down to, and that’s effectively the bank sending someone to your home or sometimes they do a desktop appraisal where they’re researching it online only and not actually driving out. But they’re determining what is the market value of your home? There’s no one else bidding on it, right? You’re not actually up for sale. So they have to kind of use other area comps to determine what is the effective value of your home? And we’re going to base our loan on that amount.

Tim Ulbrich: My favorite appraisal story recently, I think I shared this with you, as Jess and I are looking at the refi process — we’re actually in the middle of this right now — is about six months ago, we got a HELOC on the home as we were looking at doing some real estate investing, and we haven’t done anything with it. But at that time, as a part of that, we got an appraisal done. And that came in at $10,000 less than we actually purchased the home. And now as we’re going through the mortgage refinance, you know, it was at our local credit union that I work with. And obviously as lending has become a little bit looser here again in 2020, couple quick pushes of the button on the computer and that appraisal is $40,000 different than the one on the HELOC. Same institution.

Nate Hedrick: Sounds about right.

Tim Ulbrich: And that came out $30,000 higher than we purchased the home. So I think that just speaks to some of the variability you see in the appraisal process.

Nate Hedrick: Yeah, a lot of that speaks to too basically how the banks make their money and how they want to get those loans, right? It’s better to have you in there for a long time. A HELOC is kind of boring to them, so they’re not going to appraise it very competitively.

Tim Ulbrich: But we like to think it’s objective, right? So.

Nate Hedrick: Exactly.

Tim Ulbrich: So let’s talk about costs. I think this is certainly top of mind for folks. You know, of course we can look at it and say, hopefully we get a lower monthly payment, hopefully we’ll reduce the amount we pay over the life of the loan, lots of commercials out there advertising no closing costs. And if somebody goes out and starts to shop, you see a wide range of what’s advertised as $0 closing costs to, as we’ll share an example here from a listener, question what can be fairly significant closing costs. So what are the reason for the differences? And what are some of the costs that are involved in a refinance process?

Nate Hedrick: Yeah, so like I said at the beginning, this is effectively a new mortgage. You’re resetting the button on your actual debt. So the banks and the lenders are going to treat it just the same way. So there’s the same level of closing costs, the same level of effort. They’ve got appraisals, they have to pay for title fees and all sorts of things that need to be taken care of. And while it feels like it should be less because you already live in the house and you already have the title and all that stuff, a lot of those things still persist. So just like when you get a regular mortgage, you will actually get basically a good faith estimate that will lay out all of those costs and what it’s going to be. Now, you talked about no closing costs. And there are some situations where there are truly no closing costs. But a lot of times what that means is that no direct out-of-pocket closing costs. They’re going to roll them into the loan. So if you have $5,000 in closing costs and your current mortgage is $180,000, well, your new mortgage would be at $185,000. And the idea is you just roll that into the loan, you’ll figure it out with interest later. So those closing costs advertisements can be a little bit misleading at times.

Tim Ulbrich: Yeah. And I think that’s such an important point. I’m glad you brought that up is really making sure you’re digging into that good faith estimate and doing your homework to understand what exactly are the individual line item charges, especially — as we’ll talk about in a moment — if you’re comparing multiple offers, getting as close to an apples-to-apples comparison as you can and really understanding what are you paying for now versus what’s being rolled into the mortgage, which ultimately you’re going to pay back with interest, you know, along the way, which may not be a bad thing. It’s just you have to be aware of what you’re working on and weighing how much you want to pay out of pocket versus how much you want to roll into the loan. So to your point, you’re resetting the mortgage, so think of it as somebody who’s buying a home for the first time, all those closing costs, again, you’re going to be evaluating and hopefully something you’re preparing. So I’m somebody listening, Nate, and I’m looking at a situation where OK, maybe I’ve got a 30-year mortgage at 4.5%, I’ve paid off two years, let’s say, 28 years left of a 30-year term, I hear that rates are lower, I’m listening to this podcast, how do I determine whether or not this makes sense? Talk me through how do you think through this process?

Nate Hedrick: Absolutely. So just like when we go to buy a house, right, I recommend all my clients shop around for a couple different mortgages. Right now, lenders are chomping at the bit to get you to refinance with them, even if it’s — this is ridiculous — but even if it’s the current lender you have, they can’t wait to refinance your loan, right? They just want you to secure your business as long as they can. So you give a call to a local branch or a lender that you know or a lender that your listing agent has recommended, anything like that, and they’ll immediately be like, ‘Oh yeah, refinance, let me get you to our refinance department. Here’s our refinancing guy,’ or what have you. And so they’ll be able to tell you quite quickly, you know, based on a 10-question survey that they’ll have over the phone with you, ‘Here’s what we expect your rate to be, here’s what some of the breakdown of what you’d actually pay in closing costs,’ I mean, I called up when we did our refinance, I called up three different lenders and within, I mean, within an hour, all three of those lenders had gotten me a reasonable result of what I was going to be able to refinance with.

Tim Ulbrich: Absolutely. Yeah, and I did the same thing. So you know, I actually reached out to the institution that currently holds our mortgage, and to your point, I think I get something in the mail every three days from them. I haven’t got any phone calls, but I get lots of mail from the current lender. So I reached out to them, I used the Credible tool that we have on the site, which I’ll talk about at the end, and then I went through our local credit union that I’ve done other business with. And I wanted to just see both experience-wise as well as rate-wise and again, trying to compare some of those costs what’s involved as well. And three very, very different experiences. And I think it speaks to the value of making sure you shop around, just like we talk about with many other things on this show, life insurance, disability, professional liability, etc. So breakeven, how do I figure out does the math make sense on this? So instead of just looking at here’s my current rate, here’s my new rate, here’s my current monthly payment, here’s the future monthly payment under refinance. That’s a good start but one shouldn’t stop there, right? So how do I determine whether or not this makes sense and ultimately get to a breakeven point?

Nate Hedrick: Yeah, so the trick is to know your numbers up front. You have to know what your current interest rate is and what you’re actually paying monthly. And then once you start getting these quotes and start talking to these lenders, you’ll have new data to basically plug into that chart and be able to say, OK, if we’re at 4.5% now and we’re at 3.5% later, what is our monthly payment going to go down to? Or perhaps if I am changing my loan term, what is my monthly payment going to go up to or change to or whatever the case is going to be? But what does that look like? What’s that difference? And is my overall payment going to be lower, my overall interest payment over the life of that loan going to be better? Now, most people, not everybody, but most people don’t live the entire 30 years in one house, right? Most people move on. So the other question is how long am I going to live here? Because if you’re saving $1,000 a year, but the closing costs are $8,000, you better be there at least eight more years for it to make actual sense. So that’s a really important question. I think no matter what you’re doing, the breakeven analysis is how long am I going to be here to basically make up that difference in terms of the costs up front versus the costs saved over the course of years?

Tim Ulbrich: So I think that’s a great way of thinking about how long am I going to be here? And I’m looking at the math, right? So if you’re going to save let’s say $200 a month, taking that figure and then looking at the closing costs, let’s say your closing costs are $3,000, your $200 a month, how long does that $200 a month have to be saved ‘til you get to that breakeven of $3,000? But also looking at, as you mentioned, the total amount of interest, the total payout over the life of the loan. One of the most common things, Nate, that I think I see and I’m sure you see often talking with individuals is somebody who maybe started with a 30-year, they now are let’s say 26 years left, and they go to refinance and they reup a 30-year, so they restart the clock, but they only focus on the monthly payment, right? And they don’t consider the fact that they’re then going to extend the loan another four years, which is the progress that they’ve already made. Correct?

Nate Hedrick: I see people doing this with student loans too.

Tim Ulbrich: That’s right

Nate Hedrick: And you guys have more experience than I do, right? They say, ‘Oh, look at my payment’s lower, this is fantastic. Yeah, my interest rate is lower too. I’m sure it’s great.’ They’ve gone from having three years left to now jumping back to 10 years of loan payments. The overall interest paid over that life is tens of thousands of dollars more, potentially. So you have to factor all three of those things in.

Tim Ulbrich: So I think this is where I would encourage our audience to nerd out, create a spreadsheet, right? So you know what I did, as I mentioned, three different institutions, so I worked with my current lender, worked with Credible, which is then shopping around multiple options, which I’ll reference here in more detail in a moment, and then the credit union. But within each one of those, you’re then going to get different options in terms of 30-year, 20-year, 15-year term. And then even within those, you’re going to have different options that range in terms of whether or not you purchase points. So I think I ended up with the spreadsheet of, I don’t know, 20 or 30 different fields, trying to figure out not only what would that be in terms of monthly payment but then also looking at over the totality to try to determine, OK, if I were to continue on this path as is today, how much would be out-of-pocket? And then how would that work out with each one of these? What about the other side of this, Nate? So somebody who let’s say has a 30-year term right now, maybe they’ve got 26 years left to pay and they’re thinking, maybe I’m going to go down to a 15- or a 20-year, how do you think about this from an opportunity cost standpoint? Because on one hand, somebody might say, ‘Well, this is great. I’m going to save x dollars in interest,’ which they could calculate. On the other hand, they might say, ‘You know, do I really want to be making extra payments when rates are so low? Even if I can save interest, could I be using that money elsewhere?’ Talk us through your thought process there.

Nate Hedrick: Yeah. It’s a great question. It all comes down to kind of what your financial goal is, right? Do you want to be throwing extra money at your mortgage right now? Or are you saving that for something else? Maybe it’s more investing or investing in properties or whatever the case may be. So yeah, it’s a good question. It’s going to be different for everybody, but when we looked at it, actually, we had a 30-year rate when we did our refinance. And we took it down to a 15-year because the amount we saved in interest made our payment not that much different. So for us, it was like, well, we’ll just take 10 years off this mortgage to keep paying effectively what we’re paying now. But we’ll know that we’re saving money in the long-term of the interest paid. It was a feel-good thing for us. And sometimes that’s a better driver than crunching all the numbers.

Tim Ulbrich: You know, this reminds me too, Jess and I were recently talking about this as we were looking at, hey, maybe we go down to a 20- or 15-year, and then of course you have the conversation of OK, what pressure is this higher monthly payment going to put on our financial plan? How much margin do we have? You know, do you have a good emergency fund? All the things we talk about on the show. But might there be any life variables that will change that could either increase or decrease that pressure on your margin, right? So you know, I’m thinking of things like potential job loss or could go the other way, a promotion or addition in terms of children to the family or maybe you have children that are moving out of the household and you have more margin. So it can go either way. And I think the conversation that is so common, just like it is with student loans, is it’s easy to say, ‘Well, let’s just opt for the 30-year, the longer term, and then we’ll make extra payments.’ And not suggesting that’s a bad move whatsoever, obviously it depends on your personal situation. I would just challenge, you know, what’s the reality of that happening when push comes to shove? And I think for some, there’s value in kind of forcing that hand with the more aggressive payment whereas for others, that’s not the move to make. So you’ve got to really take a step back and say, behaviorally, what do we need for our plan? How much margin do we have or not have? Would this put us in a tight position? Do we need that type of behavioral solution? Or can we really depend on ourselves to make that extra payment each and every month, perhaps automate that, but have the buffer if you need it for whatever reason?

Nate Hedrick: Yeah, I think that’s huge. And to make it even more complicated, I know when I was looking at rates, the difference in interest between the 15- and 30-year rate were significant.

Tim Ulbrich: Absolutely.

Nate Hedrick: So they’re enticing you even further to go to that 15-year, and it’s like, ah, now I have to do even more math and figure out what I want to do.

Tim Ulbrich: Absolutely. What about points? You know, this is something that caught my attention — and we’ll talk about an example here from a listener that I think can make this process a little bit more confusing. And I know from personal experience, when my wife and I, Jess, purchased our first home back in 2009, I felt like this as I looked back through paperwork, either I didn’t have the memory of the conversation or it was so subtle that all of a sudden, you know, points were applied and I didn’t really have a full understanding of the process. And I think that’s all too common. So talk to us about what are points? Why might somebody consider them? And just make sure that our listeners feel educated and ready to have that conversation with the lender.

Nate Hedrick: Yeah, it’s funny, I’m seeing this conversation come up less and less. I feel like with interest rates where they are right now, points are not as big as they were a couple of years ago. I’m sure they’re still talked about plenty, but I just don’t see it with my clients as much. But what points basically are is a way to buy down your interest rate. So you pay some amount of money, the bank sets what those point values basically are, and you buy down your interest rate. So if it was 5% and you pay a certain amount that the bank sets to basically get that down to 4.75%, you can pay an upfront cost to reduce the interest of the life of that loan. So you know, the basic principle is that you’re giving away up front cash to pay less over the life of that loan. So in the case where you’re like, this is my forever home, we plan on being here 20 years, it may be very advantageous to give up a little bit more cash up front, knowing that you’re going to have a lower interest payment down the road. Now again, with interest payments this low as they are or interest amounts as low as they are today, I don’t see points as being quite as important. But it is a way to kind of if you really want to get that interest rate down as low as you possibly can and you’ve got some extra cash to throw at the problem, that’s not a bad way to do it.

Tim Ulbrich: And does this just come down again to running your numbers and doing a breakeven analysis, again, thinking of factors like time that you’ll be in the home and how much can you let go of that cash now, what other impact does that have on other financial goals, right? I mean, all of these variables come to play?

Nate Hedrick: Yeah, and it’s funny, this one more than any of them really matters on how long you’re going to be in the home. The bank is always going to make the points advantageous at some number — like it will be like, at 12 years, it will break even. So you’ll know. That point is very obvious. So it all comes down to how long am I going to be here for whether or not the points are worth it.

Tim Ulbrich: So let me — that’s a good segway into a question we had from somebody in the YFP Facebook group. And I think this will help us summarize a lot of what we talked about and just hear and give our listeners kind of an inside Nate’s brain look of how you think about this situation.

Nate Hedrick: Dangerous.

Tim Ulbrich: So this question to the group is, “Would you refinance your mortgage” — it comes from Alena — “Would you refinance your mortgage if current mortgage is 4.6% and new one will be 3.3%?” She goes on to say, “It will lower monthly bill by approximately $200,” so lower monthly payment about $200, “and saves $86,000 for the life of the loan.” And that would be over a 30-year fixed period. “But it will cost $10,000 in closing costs. Just want to hear your thoughts.” So Nate, how would you — obviously, we don’t know every variable here. So big asterisk in how we respond and really just meant for us to kind of talk through from an education standpoint, how would you think through this specific scenario?

Nate Hedrick: Yeah, so this is kind of the classic setup, right? The hook is you’re paying 4.6% right now, wouldn’t you rather be paying 3.3%? Everyone listening to this would say, ‘Yes, that sounds fantastic. I want to take a point and some off of my current interest.’ And then again, you take that a step further and you say, ‘How much does this reduce my monthly payment? Wow, it’s $200 a month. That’s great. What could I do with that extra $200?’ And then again, we’re like, ‘Well it’s a 30-year rate, but who cares? Look, we’re saving $86,000 over the life of the loan. Everything seems to make sense.’ Then that $10,000 number kind of jumps in at the end, and that’s when you have to have that, OK, well how long are we going to be here? Right? If I’m saving $200 a month, at what point am I going to be able to say, ‘Well, that $10,000 was now worth it?’ And how confident am I in that decision to say, I’m going to be here for 15 more years or whatever the case may be.

Tim Ulbrich: Absolutely.

Nate Hedrick: That’s when that — it’s no longer a numbers game. It comes down to what is your life looking like? And how long are you committed to that particular home? So that’s, again, this is actually exactly what I ran into when I was doing my refinance, looking oh, great, these numbers looks fantastic. Everything marches out, makes sense. But wait, how much is closing costs? Oh, I don’t know if we’re going to be here nine more years. That doesn’t make a lot of sense for me.

Tim Ulbrich: Yeah. And here is a great other reminder, get out the spreadsheet, start crunching the numbers, and don’t stop at the monthly payment. You know, what we don’t know here is where they’re at in the current term. So now she’s doing a comparison over the life of the loan. So $86,000 saved over the life of the loan, $10,000 in closing costs, so we’ve got to already subtract $10,000 to say what’s the net difference? $76,000. $200 a month savings, so we know that would be $2,400 a year.

Nate Hedrick: Right.

Tim Ulbrich: So we’re looking at roughly four years to get the breakeven. But the question is how confident are you? And the second question I would add is what else is going on? So how much is that $10,000 needed or treasured? So is this somebody that doesn’t have an emergency fund, you know, is paying off lots of student loan debt, is this somebody that has other goals, wants to strategically invest, to do some other things? Maybe isn’t taking advantage of an employer match retirement account that this could help get kind of that match component if they contribute? So lots of variables here that I think would really get to, again, as we talk about over and over again on the show, not looking at one part of your financial plan in a silo but really taking a step back and saying, what else is going on? Now, if this is somebody who has no debt, every other part of their plan is humming, full emergency fund, they’ve got retirement accounts that are being maxed out, they think they’re going to be in their home forever and they’ve just got cash laying around, which sounds like a pretty sweet position to be in, right, they might look at this differently, right, than somebody else who is a little bit more pressed.

Nate Hedrick: And watch too — it’s funny. This is another great example of when the bank will come and say, ‘Well, it’s $10,000 in closing. But don’t worry, we’ll roll that into the loan.’ So now all of a sudden, your math, it doesn’t actually track as well as it did. You’re paying interest on that $10,000. So watch that. Watch where they’re going to set you upfront with here’s $10,000 in closing costs, and then they’ll roll it into the loan at the back end.

Tim Ulbrich: So one of the things I want to mention as we wrap up here is we are excited about a partnership we’ve rolled recently with Credible. And this really mirrors what we’re doing with some of the other things on life and disability of trying to bring our audience as many options as they possibly can to be able to shop around. And so Credible allows you to, on our platform, check six lenders. You can check the rate with them, and they do a soft credit pull, so it will not have a negative impact on your credit. Very quick, I went through this myself, less than five minutes, very user-friendly platform. And I will say, as somebody who did not have such a great experience with a platform like LendingTree, where I was getting harassed with phone calls for I think really, a couple months, to be honest, I thought this here, they did a nice job here of allowing you to see rates, shop things around, but I wasn’t getting hounded with phone calls. And you only have to upload documents once. So again, as we always say, just as I did, I wouldn’t stop here. I think this is a great place to start. But go to your current lender if you’re refinancing, you know, go to a different lender if there’s a unique product that’s in your area. And again, compare multiple options. And I think Credible is a great resource to get started doing that. And you can learn more and do that by going to YourFinancialPharmacist.com/reduceyourpayment. Again, YourFinancialPharmacist.com/reduceyourpayment. So Nate, talk us through, you just did this. Right?

Nate Hedrick: I closed on it less than a month ago.

Tim Ulbrich: Yeah, and yours was somewhat unique. So I think it would be interesting for our listeners to hear that experience, your thought process, and how you arrived — even if that one may not apply to many people that are listening, I think it’s just a good reminder of thinking of all options that are out there and for them to hear how you and Kristin thought through that process.

Nate Hedrick: Absolutely. So we bought our house five years ago now. It was five years ago in September. And when that five-year mark kind of hit, that’s when I said, ‘We should probably look at refinancing. Rates are really low, we’ve been here for a couple years. Hopefully there’s some good equity built.’ So we started pursuing it, and one of the main drivers was the fact that we’d been paying PMI. So again, fast forward — or rewind before. I was a listing agent before I knew what I was doing in terms of buying a house. We bought early, we put 10% down, we said, this is going to be great. And then we were paying $100 a month in PMI.

Tim Ulbrich: Been there, done that.

Nate Hedrick: Yeah, exactly. Many, many listeners I’m sure are in the same boat. And we actually went to our lender first, and we said, ‘Hey, can you get rid of our PMI? We’ve been paying this much, we think our equity is this. I did my own listing agent appraisal, which is worth nothing, but here’s what I think the house is worth.’ So we applied and they said, ‘No, absolutely not. You have to have x, y, and z loan-to-value.’ They basically said no. So I said, ‘Fine, then I’m going to refinance out of it.’ And I started getting quotes. I went to our current lender, I went to kind of a big bank. I went to one of the lenders that I use for my investing properties, which is kind of a little bit smaller and they’re a little bit more crafty with what they can do. And I just started comparing quotes and kind of getting an idea of what the landscape looked like. And my first thing that I got hit with was, ‘Here’s all your closing costs. This is how much it’s going to cost you.’ And then Kristin and I had to have that discussion, OK, well, how long do we think we’re going to be here? And we’re really kind of in a tossup right now. I think, you know, sometimes we say three more years. Sometimes we say 10 more years. And it’s really hard for us to put a number on that. And so that made the conversation that much more difficult. So anyway, I went back to that small kind of hometown lender that we use for our investment properties and started having conversations about, what other options are there? Is there anything we need to get creative? And actually, she presented me with a pretty unique option that it’s effectively a mortgage, but it’s more of a home equity loan. So you have to have you’re already in the house. It’s only for refinances, and it’s a Home Equity Line of — it’s actually a home equity loan, a home equity term loan is what the official term is. And with this particular product, they had a deal going on where it was a new branch, they wanted to drive business and create value like every other bank, and they offered it with $0 appraisal fee, $0 closing costs, not just rolled in closing costs, but $0 closing costs. And a fixed rate interest, which is huge. No prepayment penalties. I mean, all the things that I was like, ‘Well, this is going to be the catch. And this is what’s going to stop this from working.’ But all of those things I worked through, and there was really no catch. So I had a couple more conversations. I actually called up Tim Baker, our financial planner, made sure it made sense with him too because I hadn’t seen this product before. And everybody said, ‘Yeah, this looks great. I think you’re good.’ And yeah, it’s been a really great way for us to refinance. We got our interest rate cut by a full percentage point, and we didn’t pay $1 in closing costs. The appraisal was free, all that was free. And the kicker, my favorite part of the whole process, was that again, we’d been in the home for five years, so when they came out to do the appraisal, they looked at the improvements we’ve done, they looked at the market around us. We actually — I scheduled the appraisal the day after I knew a house down the street was closing.

Tim Ulbrich: Well played, well played.

Nate Hedrick: It helps to be an agent, right? And so we had this great other property supporting our value. And we gained like $30,000 in equity — actually, $35,000 in equity from when we purchased the house. So immediately after we refinanced, we went out and we got a home equity line of credit for the extra equity that we’d built in. And it was a great way for us to kind of group those together and set ourselves up for more success.

Tim Ulbrich: Such a good example of reasons to refinance. Not only the lower rate, but obviously you mentioned the PMI piece but then also with the increase equity, opening up a HELOC option if you’re trying to do other things, which I know you are, real estate investing, things like that. So I think too, this was a good reminder — and I had a chance to talk with that institution, just trying to learn more — it’s a good reminder of just to think creatively and look at all solutions. And if I understand this specific product correctly, it’s not a new product. But it makes sense in the current interest rate market that we’re in whereas historically, maybe it hasn’t made as much sense. And what I’ve found is that as I compared that option for us where we think we’re going to be in the home for a very, very long time, it wasn’t as competitive rate-wise.

Nate Hedrick: Right.

Tim Ulbrich: But I think that was what was unique about your situation is that perhaps there’s a move in the shorter term. And to find a solution that had maybe not the best rate but a close rate but didn’t have all the costs up front made sense for your situation. So I think, again, just a reminder that there’s not one solution that fits everyone out there.

Nate Hedrick: And for us too, it didn’t even reduce our monthly payment. I think I mentioned already, but we dropped from a 30-year, which we had paid five years on, down to a 15-year loan, so the idea being that if we are here for a little bit longer period of time, now we’ve got — we’re overall reducing the cost of the total cost of the loan by taking off that 10 years. So we didn’t actually reduce our payment by that much every single month, but the overall value of it was there.

Tim Ulbrich: Awesome. So Nate, this is great stuff. And as always, love having you on the show, picking your brain. Here, we’re talking about refinancing. But I know there’s some listeners that maybe aren’t in a refinance situation, might be looking to buy for the first time or they’re in a home and instead of looking at refinance, they want to actually move to another home. And then I think we’ve got that unique connection with you and the concierge service that we do with obviously you wearing the dual hat of a pharmacist as well as a real estate agent. So tell our listeners more about for those that are in that situation, either buying for the first time or looking to move, where they can go to learn more and what that service is all about.

Nate Hedrick: Yeah, absolutely. So through our partnership together, we’ve kind of launched the YFP concierge services, which is a great home buying experience you can take part in for absolutely free. The way it works is you work with me, we have a 30-minute planning call, kind of go through some of your priorities, talk about budget, talk about what you’re looking for in a home, location, all that great stuff, to figure out what’s going to be a good fit for you. And then I actually set you up with a local real estate agent. One of the things that I do is interview a bunch of local agents in the area that you’re looking, make sure I’ve got somebody that’s going to line up with your priorities and what you have in mind. And then I get you guys connected and I stay a part of that process the whole time. So we’ve had a number of clients actually go through the concierge services to find a home. We’ve had some in Baltimore, I’m working with one in Washington right now. We’re kind of all over the place, which is really fun. And it’s been a great way to if you don’t know the area very well or if you don’t know any agent in the area or you just want that peace of mind knowing that you’re going to get somebody really good that’s been vetted by another real estate agent, it’s a great opportunity to kind of work with us to make sure that you’re getting the best experience possible.

Tim Ulbrich: Awesome. So to our community members, you can go to YourFinancialPharmacist.com, and then we have a page you’ll see there, you can click on at the top. We have a header “Buy or Refi a Home.” And from there, we have an option to find an agent, and you’ll see more information about being able to connect and work with Nate. So Nate, thank you as always, and looking forward to having you on at APhA this year. So for our community members that will be at APhA, Nate will be joining us out there at the booth. So we hope you’ll stop by and say hello. And as always, appreciate your contribution to the show.

Nate Hedrick: Happy to be here, as always.

Tim Ulbrich: Awesome. And as a reminder to our listeners, if you like what you heard on this week’s episode of the Your Financial Pharmacist podcast, please leave us a rating and review in Apple podcasts or wherever you listen to your podcasts each and every week. Have a great rest of your week.

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YFP 136: The Ins and Outs of a Pharmacist Home Loan

Posted on by yfpadmin


The Ins and Outs of a Pharmacist Home Loan

Tony Umholtz, a Mortgage Branch Manager for IBERIABANK/First Horizon, joins Tim Ulbrich on the show. They discuss the considerations for financing a home purchase, the biggest mistakes people make when applying for lending, and a variety of lending options available to pharmacists including the Professional Loan Program (aka Doctor’s Loan).

About Today’s Guest

Tony graduated Cum Laude from the University of South Florida with a B.S. in Finance from the Muma College of Business. He then went on to complete his MBA. While at USF, Tony was part of the inaugural football team in 1997. He earned both Academic and AP All-American Honors during his collegiate career. After college, Tony had the opportunity to sign contracts with several NFL teams including the Tennessee Titans, New York Giants and the New England Patriots. Being active in the community is also important to Tony. He has served or serves as a board member for several charitable and non-profit organizations including board member for the Salvation Army, FCA Tampa Bay and the USF National Alumni Association. Having orchestrated over $1.1 billion in lending volume during his career, Tony has consistently been ranked as one of the top mortgage loan officers in the industry by the Scotsman’s Guide, Mortgage Executive magazine and Mortgage Originator magazine.

Summary

Figuring out financing is critically important in the process of buying a home. However, the decision to buy a home and how much home has to start well before digging into financing options. If you’ve decided that purchasing a home will work for your situation after you know your budget and understand all of the costs involved, you’re ready to start looking into financing options.

On this week’s podcast episode, Tim Ulbrich interviews Tony Umholtz, a Mortgage Branch Manager for IBERIABANK/First Horizon, to learn the ins and outs of the Professional Loan Program (Pharmacist Home Loan), a doctor’s loan that pharmacists are able to qualify for.

Tony talks about where you can go to look for current rates, different types of lending options that are available and the biggest mistakes people make in purchasing a home. Tony also discusses the interest aspect of loans, including a deep dive into adjustable rates.

Tony is happy to offer a Professional Loan Program through IBERIABANK/First Horizon. Programs like the Professional Loan Program are sensitive to the high student loan burden pharmacists carry. With this pharmacist home mortgage loan program, pharmacists can buy a home with 3% down and not be charged PMI. Compared to others, this is a lower cost to enter into a home. There is the option to put more down and you don’t have to take the full approval amount. This loan program also typically offers debt to income ratio thresholds as a protection to the borrower. The majority of people in this loan program opt for a 30 year fixed mortgage. The Professional Loan Program is offered in 48 states and is unique because most of these doctor loan programs do not include pharmacists.

The downsides or considerations to the Professional Loan Program are that if there is a market correction the borrower could be in a position of negative equity. Tony mentions that borrowers also need to understand what kind of investment needs to be put into the property (new roof, water heater, etc).

To learn more about the Pharmacist Home Loan, connect with Tony here.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. I hope everyone is having a great start to the new year and to 2020 as we turn the page onto a new decade. Today’s show is all about financing a home purchase. So in previous episodes of the podcast where we’ve discussed home buying — most notably, this would be episodes 040 and 041 where Nate Hedrick and I talked about 10 things every pharmacist should know about home buying, and then again in episodes 064 and 065, where Nate and I discussed six steps to home buying. In these previous episodes, I’ve emphasized that one of the most important decisions in the home buying process is figuring out the financing piece of the puzzle. Now, going through this process twice for my primary residence and now again with the start of refinancing my current home and working through the financing details with a couple investment properties, I can honestly say that this decision, although at times complicated, although at times it gets in the weeds and it can feel overwhelming considering all the options that are available, this decision of the financing is critically important. And so before we jump into our conversation with Tony about financing a home purchase, I’d be remiss if I didn’t emphasize, perhaps re-emphasize, that the decision to buy a home and how much home should start well before digging into the financing options. And this really starts with two key things: No. 1, knowing your budget and No. 2, knowing all the costs involved with home ownership to figure out whether or not you’re ready to purchase a home. Now, when it comes to knowing your budget, the question here is what can you afford? Not necessarily what the bank says, but what can you afford based on the rest of your financial goals and competing priorities? Because we know that there’s multiple costs involved with owning a home. We’ve talked about many of these in previous episodes of the Your Financial Pharmacist podcast, things like the down payment to purchase a home — and we’re going to talk about an option today that will help you there — things like closing costs, property taxes, insurance, interest, potentially HOA fees if you’re in an association, PMI if you don’t have 20% down and you’re pursuing a financing option that doesn’t eliminate PMI, and of course monthly utilities, upkeep, maintenance, and so-on. The costs of owning a home are real, and you have to know where do these costs fit in with the rest of your financial plan? And does this purchase make sense with the rest of your financial goals? So just a couple of quick notes before we jump in about evaluating mortgage rates and offers and first and foremost, where can you go to look for current mortgage rates? So many of you are probably trying to figure out if I’m ready to buy a home, what’s this going to cost me in terms of the mortgage and the interest, and if you head on over to FreddieMac.com/PMMS, again, FreddieMac.com/PMMS, you can find the most up-to-date rates that are out there. And that will help you as you’re evaluating different options and rates that are available from your local bank or perhaps some of the options that we’ll talk about here today. And as we talk about in many other areas, multiple quotes is always preferred. We talk about this with student loan refinance, we talk about this with professional liability insurance, life insurance, disability insurance. And here when we talk about purchasing a home, not necessarily just starting and stopping with your local bank or your parents’ bank perhaps but ensuring that you’re getting multiple quotes and you can find the best option and offer for your personal situation. So we fast-forward and let’s assume that you evaluated the decision to buy a home in the context of your goals, the budget, and the costs involved, and you determined that you’re ready to buy a home. Now we are ready to evaluate all the options that are available to you from a financing perspective. And one of the options that exists is a doctor or pharmacist home loan, which has some very unique features that can be attractive. And that’s why I’m excited to bring onto today’s show Tony Umholtz and the partnership that we have with Tony and IBERIABANK/First Horizon. Now, full disclosure, IBERIABANK/First Horizon is not the only lender that offers a doctor type of loan. And when I say doctor loan, these are generally those loans that are defined for higher income professionals that are lower risk to the bank and therefore, the lender requires a lower percent down, less than 20%, competitive rates, and they eliminate the PMI concerns. And we have explored several of these other doctor type of loan options, and what we have found is that the rate-limiting step of these products is the No. 1. They typically, many of them exclude pharmacists, and No. 2 is that they may not be offered widely enough across many states that it makes sense for us to bring this forward to the YFP community. So therefore, as we do with everything else, you know, we want to make sure that we’re bringing products and services to you that are as widely applicable as possible but also that we feel confident and comfortable in the partnership and product that we’re bringing forward as a consideration among others that you’ll evaluate. Also, we do have a relationship with IBERIABANK/First Horizon. And as with our other relationships, we want to be fully transparent with you about that relationship. We remain committed to bringing you solutions that we have vetted and have the chance to bring value to your personal financial plan. And yes, while we do get paid for several of these solutions, whether that be refinancing student loans, solutions for life and disability insurance, or here with a lending solution for home buying, we are committed to maintaining this approach of vetting solutions and ensuring they are of value to you, the YFP community. Alright, without further delay, let’s bring Tony in to talk more specifically about mortgage financing with the professional loan program that’s available through IBERIABANK/First Horizon. Tony, we’re excited to have you. Welcome to the Your Financial Pharmacist podcast.

Tony Umholtz: Thank you for having me, Tim. I really appreciate this.

Tim Ulbrich: So we’re really excited for our collaboration and to have you on the show to share your expertise in this area of mortgage financing as well as the collaboration to bring our audience forward an option that we, as I mentioned, haven’t been able to find as widely applicable knowing that we serve people all across the country. So Tony, before we jump into IBERIABANK/First Horizon’s professional mortgage loan program, give us a little bit of background on you personally and what led you into the role that you’re in with IBERIABANK/First Horizon.

Tony Umholtz: Oh, it’s a good question. You know, it’s funny. The mortgage business is an interesting one to get into. And I’ve been in the industry now for over 17 years. I started in the fall of 2002, and I was a finance major in college and also a football player. And I had a little bit of chance to play, bounce around with a few NFL teams post-my college career. And then always loved people and loved working with numbers. So I started working in the mortgage business, as I mentioned, a little over 17 years ago. And here I am today. I guess I look back, and time has flown. But I think we joke and we say, I think my team and I have done $1.4 billion in production probably over that timeframe. Over the years, we’ve really tailored our focus to helping many professionals, many different types of borrowers. But we’ve had a very dedicated audience in the medical professional field, so it’s been a big niche for us over the years.

Tim Ulbrich: Well, it’s been an opportunity to meet you and to get to know you a little bit more of your background. And as I’ve joked with Tim and Tim as I got to know a little bit about your background in football and obviously the mortgage business, as a diehard Buffalo Bills fan growing up in Buffalo, New York, when I saw that you played for the New England Patriots, you know, I think that’s the only knock that I have on you up until this point in time.

Tony Umholtz: Don’t hold it against me. And the Bills actually had a great year this year. So they’re coming back, Tim. They’re coming back.

Tim Ulbrich: They are coming back, although my wife reminds me I say that each and every year. So we’ll see if that will continue. So Tony, what are some of the biggest mistakes that you see people making when it comes to applying for lending and purchasing a home?

Tony Umholtz: You know, I think you really hit on it in your introduction there, Tim. It’s the planning aspect. This is the largest investment that most people make in their life. And it’s planning ahead and thinking through their budget. And I think that looking at where they’re going to be in their careers is another one too, you know? Planning ahead — and I typically recommend that if you’re going to be somewhere five years or more, it makes sense to buy. But if it’s only maybe one or two years, it may not make sense to buy. But I think just planning ahead because everyone’s needs are different.

Tim Ulbrich: Absolutely. And we see that a lot, you know, with our audience. We know we have a lot of pharmacists that are in transition potentially with residency training as one example or there’s some instability in the job market right now and they may be wondering, is this a temporary job? Am I going to pick up and move? So I think that timeline is such a critical piece. And obviously, you know, as we all know, the market can be so specific geographically. So the market here in Columbus versus D.C. versus New York City versus rural Iowa in terms of potential timelines of being there and breakeven and different lending products that are out there of course all influence that decision. Now Tony, in terms of lending options, before we talk about the professional mortgage loan option that is here applicable for pharmacists, walk us through, you know, even just at a high level — and I know we’ve talked about some of these in previous episodes — the different types of loans that are out there: conventional loans, VA loans, FHA loans and obviously here we’re talking about the professional mortgage loan. What are some of the nuances and differences between those loans?
Tony Umholtz: Yeah. So there’s really three main core products that are out there that are traded. I don’t want to get too much into industry jargon in this, but they’re basically supported by the secondary market. And that is going to be conventional loans, which are backed by Fannie Mae and Freddie Mac, the government-sponsored entities or GSEs. And then you have what’s called FHA and VA loans, which are backed by the federal government, and those are typically the core majority of loans are either going to be conventional or a government-backed program. Then there’s also what’s called jumbo mortgages, which are above the threshold, like the local limits for Fannie Mae and Freddie Mac and vary by state. But those loans are going to be above the conventional limits and are called jumbo loans. And oftentimes, those programs are held on a financial institution’s balance sheet. So they’re basically held by the bank or that institution. So that’s another type of product in the mortgage market. And then there are unique products that fall under that umbrella like the professional product, for example, or some other programs that focus on — whether it’s doctors or attorneys — oftentimes, they’re held by an institution directly on the balance sheet.

Tim Ulbrich: So those, again, the different types of loans, you outlined conventional, VA, FHA, the jumbo loans, and then the professional loans. And we’ll talk more about that last category here in a few minutes. When it comes to interest on the lending side, you know, often you see commercials or you hear terms thrown around, fixed rates, variable rates, adjustable rate mortgages, ARMs or ARM-hybrid types of loans. Talk us through just for a moment, you know, basic terminology. Fixed versus variable, adjustable rate mortgage, types of definitions.

Tony Umholtz: Sure. So obviously the fixed rates are going to be permanently locked for the term of the loan. So for example, a 30-year fixed, which is very common, has got a fixed rate that amortizes, meaning it pays itself off, incrementally over 30 years. Then you have a 15-year fixed, which is going to pay itself off over a 15-year period, so that’s going to have a 15-year amortization. So those are the most common fixed rates. Adjustable rate loans, there’s a couple different kinds. They’re what I call hybrid adjustable. And what I mean by that is when you hear the term a 5-year ARM or a 7-year ARM or a 10-year ARM, they simply mean that the rate is fixed for a 5-, 7-, or 10-year period. So they still, in most cases, are 30-year loans that are going to amortize themselves over a 30-year period. But they’re going to have a fixed rate for only that set period of time, whether it’s 5, 7, or 10 years, that is going to be the fixed rate period. And the advantage to those programs is sometimes, they actually have better rates than maybe a fixed rate program would. But they still are a 30-year loan. And then after that fixed rate period, they adjust based upon the terms of that agreement and that loan, whether it’s annually or twice a year for the rest of the life of the loan.

Tim Ulbrich: And so in that example, Tony, one of the common concerns I would have or others would likely have is I might get better rate up front, but then obviously once that adjustable rate period kicks in, what are the variables that one should be considering? You know, things to me that would come to mind would be like, what margin would you have in your budget if your monthly payment would go up? What might interest rates be in the future? So talk to us about some of the unknowns that can happen in the adjustable rate market and that type of product and how one might plan for that if they are considering a product that would adjust because of a lower rate and potential savings there.

Tony Umholtz: Yeah, absolutely, Tim. I mean, it’s definitely a program you want to plan through and think through because if you know you’re going to have a loan for at least seven years, let’s say. So a 7-year ARM or a 10-year ARM would be applicable in that case. We wouldn’t want to do a five because that could open up a little bit more risk in most cases. But rates do move up. They move down. Right? It’s hard to forecast. And typically, most ARMs are going to tell you several months in advance of the adjustment date what you’re going to adjust to. And how ARMs is they typically have an underlying index. And that could be something backed by the treasury market, it could be LIBOR index, it could be some other index that is basically a floating index where that rate is adjustable. And then the financial institution will have some sort of margin above that index. And that’s how you calculate your rate. So ARMs can actually sometimes be good, especially in a higher interest rate environment, because if rates go down, your rate will go down. But there is an element of risk because it can adjust upward. The other thing I’d recommend is to know your caps. And what that means is the absolute highest the rate could go to. And often, most ARM products or a lot of ARM products that are out there in the marketplace have both a yearly cap that the rate can move to and a lifetime cap, meaning the highest the loan could ever go. So in your scenario with planning this and looking at an ARM, one of the best calculations would be just saying, hey, what’s the max this rate could ever go to? And run your budget and your payments off that max rate. And if it’s affordable, then the ARM may be a good fit for that person.

Tim Ulbrich: And that’s a great way of thinking about it, Tony. I know we talk about something similar on the student loan refinance side of things where, you know, again, borrowers will get presented variable rate options, fixed options, and the conversation I’m always having is recommending folks run the numbers, obviously, on the introductory variable rate. Where do those numbers lie compared to the fixed rate options they’re giving you? What are those savings? And then run the worst case scenario, obviously, on a cap type of situation, and how do you feel about that? What do the numbers look like? How does that fit or not fit your budget? What are the potential savings? Are they convincing enough? And all those variables can help you make some of those decisions. And speaking of student loans, student loans are one of the biggest barriers, we know our audience knows well. Many of them are living this pain in real time. We have the average indebtedness now of today’s graduate coming out of more than $170,000. So student loans are such typically a big barrier for pharmacists being able to purchase a home. I know that was true for my wife Jess and I. And for conventional loans, most type of conventional loans, student loan debt can obviously have a significant impact on their debt-to-income ratio and their ability to borrow. But the other big concern that we see, which takes us I think to discussing more of the professional mortgage product, is that big student loan debt balances plus lots of competing financial priorities typically may prohibit somebody from being able to save up a significant percentage down while they also have aspirations to purchase a home. Now, we always have talked about ideal situation, 20% down, you don’t have to pay Private Mortgage Insurance, you’ve got some built-in equity into a home, and I think for those that are able to go that path, that still is a great solution opportunity. But we know that reality is many people are not putting 20% down. And they may not be in a position to get there in a timeline that is reasonable for their own personal situation. So this is a nice segway into the professional mortgage option that’s available and specifically talking about the option that we have available in our partnership with you and with IBERIABANK/First Horizon. So talk us a little bit more about the product, you know, how the down payment differs from a conventional, 20% down type of model and then obviously the next evolution of questions that would happen in terms of the terms, how Private Mortgage Insurance works, maximum loan amounts, those types of things with a product like this that would be available to pharmacists.

Tony Umholtz: Sure, Tim. And you hit on it absolutely accurate. I mean, student loans are very much a challenge for pharmacists, for many professionals. We see it all the time. And we see the cost of higher education continuing to rise. So I think that that’s going to be something we’ll be dealing with for a long time. But at the same time, programs like the professional product are sensitive to that. So you can, in many cases, be a first-time home buyer especially, as little as 3% down, you can buy a home without PMI and have the ability to get into a property at a lower cost than most people can, right, because of your profession. And there’s options to put more down. That’s not mandatory to put 3%. But that would be the minimum down payment in that situation. So and typically, there is debt-to-income ratio thresholds that we go to because we want to protect everyone, right? And the other thing I want to hit on too is just because we can approve you for a certain amount doesn’t necessarily mean that’s what you should do. Everyone is unique, and everyone’s budget is different. So you can definitely buy below your means and below what you’re approved for. But at the same time, we do calculate debt-to-income ratios, we do keep some accountability there where there’s a threshold of where everyone can qualify, you know, that it’s a standard percentage that we look at.

Tim Ulbrich: And such a great reminder, Tony, as we mentioned earlier in the show, just the individual setting the budget, not the bank, and really separating those two things out, the threshold the bank is using to evaluate your risk to the bank and the institution and what you’re able to purchase should be, most likely, a very different comparison and evaluation for the individual determining what they’re able to afford and how it fits in the context of all their financial goals. One of the best examples I like to use is when Jess and I moved down here to Columbus and we kind of had set our budget and we’re looking at homes and it was really the peak of the market here in Columbus. And so that was pushing a little bit of the boundary of our budget, what we were comfortable with. And then we went to the bank, and they basically said, “Double that, and that’s what you can have.” And it just made us obviously uncomfortable to go anywhere near that amount and we were able to hold true to the budget and the original numbers that we set. But if you don’t first establish that, I think it’s easy to get into a trap where you then start looking based on the numbers the bank provided you. And all of a sudden, you may be looking at homes that are going to take you out of reach of your other goals. And the bank isn’t necessarily thinking about all the other financial goals and what disposable income do you want to have available to achieve your other goals? So I think that’s such a critical piece. So Tony, obviously we can’t and shouldn’t talk about rates on a show like this. We know they can change and this wouldn’t be timely let alone there’s individual situations, credit scores, debt-to-income ratios, other things that will determine rates. So rates aside, can you talk to us a little bit more about beyond the 3% down as a minimum, obviously people can put more down than that, no Private Mortgage Insurance, are we looking at 15-year, 20-year term, 30-year term? Are these variable? Are they term rates? What’s some more details on those types of options that are available in the professional mortgage loan?

Tony Umholtz: You know, Tim, we find the majority of our clients opt for the 30-year fixed option. And that seems to be — especially given the market that we’re in right now, we’ve seen the federal reserve really compress interest rates again. And then we saw interest rates fall last year in 2019, so it’s made fixed rates very attractive. So a majority of our clients in this space have been opting for a 30-year fixed option. So that’s the majority of what we’re seeing. There are some other options available, but to answer your question, the majority of our clients just given the safety of it and just the fact that the federal reserve is really in the mortgage bond market has compressed and elongated the curve and caused fixed rates to be very attractive. So that’s where we’ve seen most people go, but there are some other options as well, ARM, ARM options as well. But the fixed has been where most people go.

Tim Ulbrich: And Tony, looking at this program, I alluded earlier in the show about there’s several other doctor loan type of programs out there. Many of them exclude pharmacists. And I mentioned geographically as well being a limitation. So for us and why we were so interested in bringing this opportunity for our community is I understand that not only are pharmacists eligible for this, but you also have coverage to 48 states in the United States, which obviously increases the accessibility. So talk to us a little bit more about the advantages of this program versus other doctor type of loans that are out there in terms of the applicability to the pharmacy population and our community here at Your Financial Pharmacist.

Tony Umholtz: Sure. And we have several different programs here for professionals. But some will only cater to MDs and DOs and veterinarians. But this particular product encompasses pharmacists, which is very unique. I haven’t — that is something that a lot of the industry has not really targeted that profession, our profession here. And the advantages — and the geography is great. I mean, that is one thing that I’m very excited about, the ability to help a lot of different people in different areas of the country. But again, the unique nature is many of the banks in our industry have only focused on MD and DO physicians, right? And that’s been the majority of the institutions that have a doctor product. And we have one too, and it has a little bit higher thresholds on loan amounts. But I’ve been very excited about this program. It’s been very well received by our clients.

Tim Ulbrich: And obviously I would be remiss if we didn’t make our audience hopefully think about, as we’ve already done a little bit here already, what might be some of the downsides or considerations? And we’ve talked about one, but I want to even get there a little bit further in that, you know, obviously making sure that somebody is setting a budget and they’re determining what value of a home fits in with the rest of their financial goals. Other potential downside I see is if somebody perhaps is not ready to buy a home and they’re able to get into a home with only 3% down, lower equity position in terms of the market changes and home values go down depending on their individual market, they obviously could be in some difficulty there. Are there any other downsides that you see as we think about the education side of this and where this product may fit well and for individuals that it may not necessarily be a good fit?

Tony Umholtz: Well, I think that in everyone’s planning, the nice thing about these loans is they’re amortized. So they’re paying principal and interest in the payment. So over time, even if your house value did not go up at all, you’re slowly building equity just through making your payments. And there is no prepayment penalty to pay the initial principal if you’d like to. But clearly, the downside is if there is a market crash and you put very, very little down and you have to move for one reason or another or relocate to another part of the country, you could be in a position where you have negative equity, you know? And I mean, obviously case show and there’s different positive forecasts for the nation, but every market is different in this country, right? And I think that that would be – the biggest risk is just what happens to the individual? And the other side of it is what kind of investment do you have to put in the property? Does it need a new roof, right? Does the air conditioner need to be repaired. These are things that are costs that you as a homeowner have to take on that if you’re a renter, your landlord does. But in your case, you’d have to take on those costs. So that’s just part of owning a home. And so just cost of ownership, maintenance, those to me would be the things you’d have to plan for. But clearly, it’s the low down payment versus having to move quickly that can be the most impactful downside of the program.

Tim Ulbrich: So I would remind our listeners too — and credit here to Tim Church who built out some great content and information, Five Steps to Getting a Home Loan — if you go to YourFinancialPharmacist.com/home-loan, again YourFinancialPharmacist.com/home-loan, you can go there to compare multiple lenders. You’ll also see there an option that says, “Apply for Pharmacist Home Loan.” And if you click on that, it will take you to a page that has Tony’s information, including his email address and I see here some beautiful palm trees. He’s based out of Florida while we’re freezing here in the blistering cold of winter in Ohio. But one of the things that most excited me about this opportunity, in addition to finding a product that was competitive, that was available to pharmacists as well, and that also covered a wider range of states, was the idea that we have an individual in Tony to work with, to connect with, and for those that are going through the process that they can work with an individual and build that relationship. So Tony, we appreciate you taking the time to come on the show. We’re looking forward to this collaboration and this partnership. And what would be the best way for our listeners to get in contact with you if they have more questions about this interview, about the product, or they would like to learn more?

Tony Umholtz: Well, Tim, first of all, thank you for having me. I’m very excited to be a part of this with you guys. And you guys are doing some great things here for your audience. And I’ve got obviously my contact information is accessible on the website. But one of the biggest joys I have in this industry is helping others. I’ve always been kind of a pay-it-forward person. But I do have a staff, a team, and several of my team members have been with me as long as 14 years. So I have three assistants and myself, and we’re all very, very much industry veterans and can answer questions. So email, call to the office, our office line is the best way to reach us. But we’re very accessible and excited to help. And thank you again, Tim, for having me here, for having me on.

Tim Ulbrich: Absolutely. And for our listeners that want to get directly to that email, it’s [email protected]. So again, [email protected]. So as one final reminder, if you’d like to learn more about the steps, considerations to getting a home loan, make sure to check the post on the YFP website, Five Steps to Getting a Home Loan, by visiting YourFinancialPharmacist.com/home-loan. And as always, if you like what you heard on this week’s of the Your Financial Pharmacist podcast and our episode this week, please leave us a rating and review in Apple Podcasts or wherever you listen to your podcasts each and every week. We appreciate you for joining us on this week’s episode, and we hope you will join us again on next week’s show. Have a great rest of your week.

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