Real-Estate / Podcast

YFP 130: House Hacking Your Way to Financial Freedom

Posted on December 12, 2019November 2, 2022 by yfpadmin

House Hacking Your Way to Financial Freedom

Craig Curelop is the author of The House Hacking Strategy and is a real estate agent, investor, and employee of BiggerPockets. Craig talks all things house hacking including what it is, how he got started with house hacking and why he claims it is the single most powerful way to build wealth.

About Today’s Guest

Craig is a real estate investor and agent living in Denver, CO where he moved in April 2017 and shortly after closed on his first property. His move to Denver also afforded him the opportunity to work for BiggerPockets where he is the finance guy talking and writing about all things real estate, personal finance and early retirement. Outside of real estate and personal finance, he is a self-proclaimed health nut where he strives to be able to perform the highest possible level for the most amount of time. For fun he loves to exercise, hike, travel, ready write, snowboard, golf and play and watch sports. Craig is the author of The House Hacking Strategy and has been a guest on The Bigger Pockets Real Estate & Bigger Pockets Money Podcast. He’s also been featured in The Denver Post, the BBC and numerous real estate/personal finance podcasts including Choose FI, Side Hustle Nation, and The Best Ever Real Estate Podcast.

Summary

Craig breaks down what house hacking is, how he got started with house hacking and why he claims it is the single most powerful way to build wealth. Tim and Craig also talk through several key components of Craig’s book, The House Hacking Strategy.

In 2017, Craig closed on his first property in Denver, Colorado. He had $90,000 in student loan debt and a negative $30,000 net worth. He quickly reached financial independence in a short period of time through house hacking, side hustles, and spending less money.

Craig defines house hacking as buying a property with a low percentage down (generally 1, 3 or 5%), living there for a year (required), and renting out the other units or rooms. If you purchase a single family home, then you would rent out the other bedrooms. With a 2-4 unit home, the other units would be rented out. The rent from those units covers your mortgage and you live for free and sometimes even have cash flow coming in. Craig explains that at this point, you’ve eliminated your largest expense while building equity, paying down your loan, and saving money. You can use the money you saved to do it again and again to create more streams of passive income. Aside from these two methods, you could also buy the home of your dreams and live in the mother-in-law suite or a basement room.

Craig’s first house hacking property was a newly renovated duplex in Denver that had a one bedroom unit upstairs and a one bedroom unit downstairs. He purchased the property for $385,000. Craig lived in the lower unit and rented out the top for $1,750. The total mortgage payment for was $2,000 and Craig wanted to live for free, so he put his bedroom up on Airbnb and created a quasi bedroom in his living room. By renting out his bedroom for a year and the top unit, he made $2,800, lived for free and also brought in additional money.

Craig also discusses what he learned from his first house hack, his concept of net worth return on investment (NWROI), the four main benefits to house hacking, and how to get started with a house hack

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 this week, we have a special guest for you, Craig Curelop, author of “The House Hacking Strategy” and employee of Bigger Pockets. A little bit more background on Craig before we get started with the interview: Craig’s a real estate investing agent living in Denver, Colorado, where he moved in April 2017 and shortly after, closed on his first property that we will talk about in more detail during this episode. His move to Denver also afforded him the opportunity to work for Bigger Pockets, where he is the finance guy, talking and writing about all things real estate, personal finance, and early retirement. Outside of real estate and personal finance, he’s a self-proclaimed health nut where he strives to be able to perform at the highest possible level for the most amount of time. For fun, he loves to exercise, hike, travel, read and write, snowboard, golf, and play and watch sports, and as a Buffalo Bills fanatic myself, I’m reluctantly supportive of his love of the New England Patriots. In addition to his book and being a guest on the Bigger Pockets Real Estate and Bigger Pockets Money podcast, he’s been featured in the Denver Post, the BBC, and numerous real estate and personal finance podcasts, including Choose FI, Side Hustle Nation, and the Best Ever Real Estate Podcast. Craig, welcome to the Your Financial Pharmacist podcast.

Craig Curelop: Hey, Tim. Thanks for having me so much. Grateful for the opportunity to be here.

Tim Ulbrich: And I’m hopeful my Bills might be getting closer to catching your Patriots. We’ll see what happens this year.

Craig Curelop: Eh, we’re giving you a flicker of hope, but I think we’ll smother that flicker.

Tim Ulbrich: That’s right. We’ll take a flicker. So I have to say, I’m a huge fan of both Bigger Pockets as well as the house hacking strategy, which you did a great job in the book talking about. And I think it’s a strategy that is such a good fit for so many pharmacy professionals. And we’ll talk about many reasons why. So it’s an honor to have you on the show and to share your experience and expertise. And before we jump into the weeds on house hacking, let’s start with your personal journey. So 2017, you find yourself, as you mention in the book, in $90,000 of student loan debt — many of our audience can relate to that — and a net worth of -$30,000. So take us from there to when you ultimately become financially independent just two and half years later in 2019. How did you make that transformation?

Craig Curelop: Yeah, so honestly, it all started with house hacking, right? But there are three things that I really did to allow me to get to that financial independence mark. The first and the most important and largest was house hacking. The second was kind of side hustles and all that kind of stuff, just figuring out how to make more money. And the third was how to spend less money. So between those three things is what has allowed me to pay off all of my student debt and achieve financial independence in such a short amount of time.

Tim Ulbrich: That’s awesome. What an awesome accomplishment. In the very beginning of the book, you talk about — which really resonated with me and I think will resonate with our community — you talk about the typical strategy for home buying, which is “go to the bank, see what you can afford, and purchase the largest possible house and live there for 30 or more years.” What is the problem with this strategy and why does it increase the likelihood of someone being trapped in the rat race?

Craig Curelop: Well, it’s because when you buy the most expensive house you can afford, you are going to live a very luxurious life. And you are going to get used to living that luxurious life, and you are going to be very difficult for you to scale back and to start saving in times when you need. When times are good, you spend your money because you can. But then when something happens, you may have to scale back, and that’s going to be really tough for you. So why not just never scale up, save as much as you can, do these strategies that we’re going to talk about in this episode, so you can have the financial freedom to then go do whatever you want so you’re not stuck in your pharmacy jobs or your doctor jobs or whatever your audience does. Like it’s great, even if they love their jobs, it’s great to have that option and say, you know what? I don’t need this anymore. If I want to go travel, I can. If I’m having a kid and I want to spend time with my family, I can take a few years off no problem. So that’s kind of what I really believe in. And that’s why this strategy is so powerful.

Tim Ulbrich: Yeah, and I love what you just said about having options there. We recently interviewed a pharmacist, Aaron Howell, who got started in real estate investing really by accident but has built up a portfolio of 29 units. And he talks about this concept of getting to the point where you ultimately has choice. He loves what he does as a pharmacist, but he now is in a position of choosing how he spends his time. And I think ultimately, when we talk about the concept of money leading to happiness, I think that’s a great example of how that can become possible. So in the book, Craig, you say something that really resonated with me. And I’m just going to read the quote. It’s, “The concept of financial independence can be lost on some people. Growing up in a middle class family, it was lost on me. That was until I read ‘Rich Dad, Poor Dad’ by Robert Kiyosaki. In that book, I learned the secret that separates the rich from the middle class.” So Craig, tell us about what is that secret? And why did that book have such a profound impact on you?

Craig Curelop: Yeah, well that book taught me that you don’t necessarily need to trade time for money. Right? You can make money by trading your time. You can spend less than you make and invest that difference wisely into assets that provide you passive income. So that money makes you more money but in your sleep. And once that passive income of more money exceeds your expenses, you now have the freedom and the flexibility to do whatever the hell you want whenever the hell you want, which was just mind-blowing to me because I just was never — it’s such a simple thing, right?

Tim Ulbrich: Yes.

Craig Curelop: But like it just — no one brings it up, no one talks about it. And because money is such a taboo subject in so many families and the American way is to go to school, get a job, work for 40 years, live in the house. But to challenge that conventional wisdom is mind-blowing.

Tim Ulbrich: Yeah, and I was so glad to see you reference Kiyosaki’s book in your book because that’s one I often recommend, I’ve mentioned it on the show here, I recommend it when we’re speaking at events, is that for me and even my wife as we read it together a second time, that fundamentally changed the way I just think about money and think about personal finance. So if you haven’t yet read it, I highly recommend you do so. Again, “Rich Dad, Poor Dad” by Robert Kiyosaki. Alright, let’s get to the basics of house hacking. Definition. How do you define house hacking?

Craig Curelop: Yeah. So house hacking is when you buy a property for a low percentage down, typically it’s 1, 3, or 5% down. You’re required to live there for one year, so you live there for one year while renting out the other parts. If you’re buying a single-family home, you’ll rent out the other rooms. If you’re buying a two-, three-, or four-unit, you rent out the other units. And such that the rent from those units covers your mortgage, and you live for free and perhaps even get paid to live there. So you’ve now eliminated your largest expense, you’re building equity in a property, you’re paying down a loan, and you’re just saving so much money that you can do it again in a year and just have that compounding effect and build that passive income extremely quickly.

Tim Ulbrich: Yeah. And the reason why I mentioned at the beginning of the show I think this will resonate so well with so many pharmacists is we know that for most individuals and obviously pharmacists as well, their mortgage payment becomes such a big percentage of their overall monthly expenses and ultimately can become a significant limiting factor in what they’re able to do in terms of cash flow, so this concept, essentially the idea here is one or two or three more people may be paying your mortgage and obviously allowing you to build up equity and other things, we’ll talk about tax advantages, but hopefully freeing up some cash flow as well. Now, Craig, before I read your book, when I thought about house hacking, I thought about it in the very traditional sense, which in the book as you outline, is a traditional house hack, which is buying a duplex, a triplex or a quad and ultimately renting out the other units. But you also talk about other options that are considered a house hack besides just that multi-unit situation where you’re renting out other units. So talk to us about the variety of what can be considered a house hack.

Craig Curelop: Yeah, so you can go as aggressive or as not aggressive as you want. And you know, we kind of talk about it on a continuum, right? We call it the comfort continuum where basically, you can sacrifice — you can be more comfortable, but you’re going to sacrifice profit for that. So it kind of depends on where you and your family and the people living in that house are going to lie. So my favorite strategy is the rent by the room strategy because you can buy a single-family house, you live in one bedroom, and you rent the other bedrooms out. Single-family houses are more liquid, they’re easier to sell, they tend to appreciate a little bit faster. And they’re just also kind of a little bit more cozy and nice to live in. So I like the single-family house strategy. But if you don’t want to live with roommates, the other strategy is a luxurious house hack where you still buy that single-family house, but instead of renting out the rooms, you have the house of your dreams that you love but maybe you have a mother-in-law suite in the basement or out back or you have like a casita or something out back, and you rent that out on Airbnb or maybe even long-term rental. And that may not fully cover your mortgage, but it may give you $1,000-1,500 a month. And that’s still $1,000-1,500 a month, which is still considered house hacking.

Tim Ulbrich: Yeah, and I love the way you reference that in the book, you mention the continuum. You call it the least profitable, smallest lifestyle change all the way to the most profitable, biggest lifestyle change. And that really resonated with me because I was thinking about this for my situation with four young kids, obviously that may look very different from somebody else who’s listening that is single and open to roommates and other types of things. So ranging from renting out additional units all the way to live-and-flip, which our listeners can check out the book to get some more information on that as well. Why is the four-unit number so important? So as we talk about a duplex, triplex, or quad, talk to us from a loan standpoint of why that four, that number of four units is so important.

Craig Curelop: Yeah, so anything above four units, so five and higher, will be considered a commercial property. And banks will not lend to that as a — you wouldn’t be able to get that low percentage down that I talked about, the 1, 3, or 5% or 3.5% if you do the FHA. But if you keep it at four or under, you can then. They consider it a residential residence.

Tim Ulbrich: So if I were to buy a quad and it’s not an investment property, it’s my first property. It’s essentially treated like it would be if I purchased a single-family home, but in a percent down, interest rate on the property but also in a future sale beyond the year. Again, from a tax standpoint, it’s treated — obviously there’s rules around the amount of value and things of which there’s profit, but it has all the benefits of a single-family home as long as it’s four units or less, correct?

Craig Curelop: Yep, it’s basically treated like a single-family home. Yep.

Tim Ulbrich: Awesome. So let’s talk about your first house hacking property, a newly renovated duplex in Denver. So talk to us through that property, the numbers, and what you learned from that first experience.

Craig Curelop: Yeah, so that first property, it was, like you said, a newly renovated duplex, it was a one-bed on top, one-bed down below duplex just a few blocks north of City Park, which is Denver’s largest park and just a mile and a half away from the office that I worked. So it was a perfect location for me. And it was listed at $400,000. I purchased it for $385,000. And I lived in the bottom, I rented out the top.

Tim Ulbrich: OK.

Craig Curelop: So total mortgage payment on that property was just about $2,000. I rented out the top for $1,750. And I lived in the bottom not for free, right? I was still paying $250.

Tim Ulbrich: $250.

Craig Curelop: But I really, really, really wanted to live for free. That was my goal. So what I did was I rented out my bedroom on Airbnb. And I made this quasi-bedroom out of my living room where I put up a curtain and a room divider, like a cardboard box room divider. I threw a futon behind there with like a little tote for my clothes and lived behind there for one year while I had a revolving guest of roommates, a revolving door of roommates coming in and out on Airbnb. And you know, with that, I was making $2,800 a month on the $2,000 mortgage total.

Tim Ulbrich: OK, awesome.

Craig Curelop: So I was living for free, I was cash flowing, I was saving tons of money, and I was really set my foundation for what has to come in the years since.

Tim Ulbrich: So you started that in essence of living on one floor, renting out to the other, saw that you were getting close to getting the home mortgage covered but not the whole thing. You wanted to see that, so then you added in the Airbnb and set up shop in the living room, made that your bedroom and rented out the other. So on the continuum spectrum, obviously we’d put that on the little more of the extreme side but love the passion and energy to make that happen. So what did you learn from that? I mean, was that an Aha! Moment or did you take away from that to say, hey, I never want to live with roommates again? Or did you see that as a strategy that you’d want to replicate further?

Craig Curelop: That was a foundation for me. I knew that it was only going to be for one year, so that helped. It wasn’t bad after the first two weeks. I’ve said this in previous podcasts I’ve been on, but it’s basically what’s called hedonic adaptation. And that whole idea if your listeners don’t know is that basically, they did a study of people who lost a limb and people who won the lottery. And after two weeks, they’ve regressed back to their happiness before that event happened. So whatever happens, you’re basically going to get used to it within two weeks. And I’d applied that some type of wisdom to OK, I’m going to live behind this curtain. It’s going to suck for two weeks. If I can just get past those two weeks, it’ll be just super normal. And that’s exactly what happened. It just became normal. It became my bed. Even when my Airbnb was vacant and I had my bed available, I would still sleep on my futon because it was just, you know, it wasn’t even worth it to clean the sheets again for me. So yeah.

Tim Ulbrich: Love that. And I think that’s a great reminder, Craig, you know, you gave the example there where two weeks you got used to it in terms of living in the living room and behind the curtain, but that’s true with so many things. As people are evaluating might I purchase a $500,000 home or maybe look at smaller and $200,000, they may have this built-up image of how painful it’s going to be or how awful it’s going to be. But ultimately, to your example in the research, you get used to it. But also, it’s all the other peripheral benefits. So when you in your case are living in your living room and you have roommates and obviously it’s cash flow positive versus if you’re living by yourself, fully funding the mortgage in a nice neighborhood, there’s other expenses that come along with that when we think about keeping up with the Joneses, taking care of your yard, all those other things that you can mitigate through some of these strategies. In the book, one of the concepts I found really interesting, Craig, is a concept that you call “net worth return on investment” or NWROI. What is this? Can you explain that? And why is this relevant to house hacking?

Craig Curelop: Yeah. So if there’s any finance people out there, it’s basically like a glorified internal rate of return or IRR calculation. But what it does is it takes all of the wealth builders of house hacking, so it takes into account cash flow, rent savings, loan paydown and appreciation, and it adds — it sums up all of that over the course of one year. And it divides it by your initial investment. So that would likely be your down payment and any rehab costs. And it gives you a percentage. Right? And that percentage is oftentimes well into the 100% or more, which just means that people are actually — like you’re making all of your money back on a house hack within that first year, which obviously allows you to then go ahead and save up for the next one and the next one and the next one. And it’s just such a powerful strategy, and there’s just no other investment out there that’s far from putting your money in a startup that has a 95% chance of failing. There’s just no other like risk-reward that’s better than house hacking. I just have never found it.

Tim Ulbrich: Yeah, and that’s why I love in the book, mention that house hacking for you — and I would agree — is the most logical first step to real estate investing. And I think in terms of building wealth and building net worth is something that many of our listeners can consider. So you outlined four main areas in the book in terms of benefits of house hacking. And I’m going to list these off, and then we’re going to go through each one of them briefly: cash flow and loan paydown, equity through appreciation — and that could be either natural or forced appreciation — learning to landlord, and then some of the tax benefits. So let’s walk through each of those. What are the benefits when it comes to cash flow and loan paydown, probably the most obvious here in this group of four?

Craig Curelop: Yeah. Well, you know, you obviously are living for free. So you’re saving whatever you paid for rent, that’s $0. You’re likely going to be cash flowing even more than that, so if you’re cash flowing $400 and you were just paying $1,000 for rent before this, that’s a $1,400 difference. Like that’s $1,400 a month difference. Like that is significant numbers, you’re talking tens of thousands of dollars a year just in cash flow, right? And a part of that payment you’re going to make is going to be your loan paydown. And so each time your make a payment on your loan, there’s a portion of it that goes to interest, and a portion of it that goes to principal. And the principal is what you actually owe to the lender. The interest is what you’re paying to the lender to borrow the money that you borrowed. And over time, the principal that you’re paying down goes up and the interest goes down. So you’re just — so you’re creating wealth that way by paying down your loan. But you’re not actually paying it down because your tenants are paying it down.

Tim Ulbrich: And your example, I think it was your first property, your example where if you would have moved into that home without renting it out, you would have been paying $2,000 a month. But instead of you writing a check for $2,000 a month, you had $2,800 that was coming in. So you’ve got to really think about what that net difference is and what that means to your financial plan. So No. 1, cash flow and loan paydown, which then obviously also impacts as that property increases in value. So here we’re talking No. 2, equity through appreciation. So talk to us about that point as well as the difference between natural and forced appreciation.

Craig Curelop: Yeah. So appreciation is exactly what it sounds like. It’s just your value appreciating or gaining value over time. And so forced appreciation is when you actually do something to the house, right? Maybe you remodel the kitchen. Maybe you add a bedroom or a bathroom or you add square footage to the house. You’re adding value to the house, and that’s forced appreciation. And that’s why real estate is so amazing too because you can actually just take an asset and you can change it yourself. Go ahead and try to buy Apple and then go try to change something that Apple does to force appreciation. That’s just not going to happen, right? So that’s forced appreciation, which is why a lot of people love real estate. Now, natural appreciation is just over time, real estate appreciates, right? It always goes up. Look at any 20-year period, and real estate has gone up over time, even in the pit of 2009, go back to 1989, and it’s still up from there. So over time, if you can just hold it, it’s going to go up. And that is what natural appreciation. And with my duplex, I got super lucky with this one. I bought it at $385,000, like I said. And I just got it appraised a couple months ago. And it came back at $550,000.

Tim Ulbrich: Wow.

Craig Curelop: I’ve done nothing to that property except just hold onto it. And it appreciated that much in that short amount of time.

Tim Ulbrich: That’s awesome.

Craig Curelop: So you know, did I get lucky? Yes. But I also — you can’t get lucky if you don’t put yourself in a position to get lucky. So I went ahead and bought that property, put myself in a position where I could get lucky, and lo and behold, I did.

Tim Ulbrich: I love that. And speaking of putting yourself in a position to be lucky, going back to the beginning when you had $90,000 of student loan debt and net worth of -$30,000, digging yourself out of that obviously is a part, as it is for our community as well, to put yourself in a position to be opportunistic. So No. 3 is learning to landlord. And I think a lot of people look at that and say, “Benefit? Landlord? I don’t see the connection.” Talk to us about that as a benefit of house hacking.

Craig Curelop: Well, so when you’re house hacking and if you do want to get into real estate investing, you will be a landlord at some point. Now, you can always outsource that to property management. But even still, you’re going to want to manage your property manager, so you’re going to want to know the basics of landlording. And it’s just a nice transition because you’re basically just living there, you’re going to go home anyway, you’re going to be with your tenants, you’re going to see what your tenants are doing. They’re not going to be that day. You’re going to make sure to screen them well. And you’re just going to go through that process of being a landlord. And you know, it sounds like a daunting term of whatever it is, but honestly, it is very — it’s not as hard as it sounds.

Tim Ulbrich: Yeah, and I like — and I think you talk about this in the book — when you’re house hacking obviously a property, let’s say a duplex, you’re on one side, you’re renting out the other, I think that’s about as convenient as it can get in terms of landlording, you know, versus if you’re trying to manage another property at a distance or even in the other part of town. So learning that process and reaping the benefits as you look to expand your portfolio I think makes a whole lot of sense of getting that skill while you’re going through a house hack. And then No. 4, which to me is an area that I’m really interested in and I think often gets overlooked, is the tax benefit. So we talked about already not only do you have cash flow, somebody else is paying down your loan, the property’s appreciating either naturally or through force, you’re learning some skills, and then also we have this bucket of tax benefit. So talk to us — and obviously disclaimer, I’m not a CPA, you’re not a CPA — but generally speaking, what are the tax benefits that come along with real estate investing but more specifically here in house hacking.

Craig Curelop: Yeah. So there’s a whole bunch of tax benefits that come with owning real estate. The biggest one by and large, especially for buy-and-hold investors is what is called depreciation. So what depreciation is is that the IRS says that you own a house for $300,000 or whatever it is. You are allowed to take a portion of that house and deduct it from your taxable income every single year. And so you basically take that $300,000 and divide it by 27.5, and you get roughly $10,000 or whatever that is dollars a year. And you’re able to take that as a loss against your business of collecting rent. So now your taxable income is much lower. Frankly, it may even be negative. And this may not apply to your audience, if you’re under a certain threshold, then you take that loss from your real estate business and apply it to your W2 income so your tax basis is lower, you’re not getting taxed on any of the rental income that you have, and so you’re like double saving on taxes. And that’s hard to actually quantify because it’s such a case-by-case basis. And it depends on if you’re below that threshold or not. But either way, there’s tremendous other benefits as well in terms of like doing 1031 exchanges or if you live in the property for two years, you can sell it with no capital gains tax to $250,000 if you’re single or $500,000 if you’re married. So there’s just tons and tons of tax benefits when it comes to real estate.

Tim Ulbrich: Yeah, and I hope our listeners will check out the book. You do a great job of teaching this in a very easy-to-understand way. You talk about the tax write-offs, obviously the depreciation, you give good examples in there, and the 1031 exchange are two of the last five here. And this reminds me, Craig, I read — awhile back after reading “Rich Dad, Poor Dad,” “Tax-Free Wealth” by Tom Wheelwright I believe is the author, which is connected to Robert Kiyosaki. And I remember hearing this for the first time, and I thought, wait a minute. So properties are appreciating in value, and you’re going to reap the benefits of that. But you’re capitalizing from a tax standpoint on the depreciation that you can write off. And the answer is yes. And it’s an amazing thing. And you highlight that in the book. So drawbacks of house hacking. Obviously, I imagine many of our listeners are thinking of objections. And you outline several in the book and you talk about ways to overcome these potential objections. But two that I want to specifically ask you about that may be most common objections that our community has: No. 1, living with or next to others, which you addressed a little bit already, and No. 2, which you call “living in a crappy investment property.” So talk a little bit more about those and how listeners may get comfortable overcoming those to be able to reap the benefits of the house hack situation.

Craig Curelop: Yeah, so it’s all — really, what it comes down to is delayed gratification if I had to sum it up in two words. It’s like, yeah, you could afford the nice house. And you know, your friends aren’t going to be impressed with you living in a dingy place with a bunch of roommates. And it may not even be dingy. You can still have a nice place and live in it with roommates. But — and it’s going to be slightly more work and all those things — but you’re making a couple sacrifices. You’re like, people might think a little less of you for a couple years, but what are those people going to think of you when you’re able to retire in 3-5 years and they have another 35 years ahead of them? Right? So think about like those — think about like 3-5 years out rather than just like in the now because this is going to be the huge, huge difference.

Tim Ulbrich: And I would encourage — as a follow-up, I would encourage our listeners pick up a copy of the book, I think you did one of the best jobs I’ve seen of talking about the importance of a why and giving a very specific activity of how you can identify and articulate your why and why that is so important before you jump into I would say real estate investing in general, whether that’s house hacking or otherwise is really spending time to figure out why is this idea of generating passive income important? Because I think ultimately, that will help uncover some interesting things but also keep you motivated along the way to achieve that goal. So the activity you have in the book is great for that. So Craig, I’m someone listening, I’m ready to pull the trigger and questions that I think of right away are, gosh, where do I even get started with finding deals? And what type of financing might I pursue? And where do I go there? But what advice do you have for people that say, yes, I buy into it, I love the philosophy, I love the idea, I’m ready to get going. Where do they go to get started in terms of finding deals?

Craig Curelop: Yeah. So I always say the first thing you should actually do is get in touch with a lender. Well, you can get in touch with a lender and an agent at the same time. So to find a deal, you need to be in touch with a real estate agent, tell them exactly what you’re looking for, tell them exactly what you want. It’s super helpful to find an agent that actually knows about house hacking and that knows about at least investment property. And you can find those on Bigger Pockets or you can find those — actually, I have like a website that I created. It’s just like www.CraigCurelop.com, and I have a thing where I can introduce you to a house hacking-friendly agent pretty much anywhere in the country.

Tim Ulbrich: Oh, cool.

Craig Curelop: And yeah. Basically the idea there is you want someone that either has done what you’re doing or at least knows a hell of a lot about it. So they can tell you what you’re going to get for rents, what your mortgage payment’s going to be, how you can extract the most dollar out of each investment. And so picking a good agent is really important. So I’d recommend finding a good agent that knows what they’re doing, they’ll send you MLS deals — and MLS is the Multiple Listing Service, which is just like a database of deals all around your area, and honestly, you don’t need to like — you know, if you’re into real estate investing and all, you’ll hear terms like driving for dollars or calling on foreclosures. You don’t need to get the best deal on a house hack because the difference between — like a $20,000 difference is going to be like $50-75 on your mortgage, which is peanuts compared to the thousands of dollars you’re saving a month in rent. So it makes way more sense to offer on a property whatever they’re asking and just like get the deal done so you can start saving on rent, start cash flowing, and most importantly, start that one-year timer until you can get your next one. So then you’ve got two working for you exactly one year from now instead of one working six months from now, then another 18 months from now. Those really start to add up as you get more and more farther down in the process. So tens of thousands of dollars, maybe hundreds of thousands of dollars if you just continue to wait.

Tim Ulbrich: Yeah, and I think the Bigger Pockets team does such a good job of emphasizing the importance of get started. Jump in and not get paralyzed in some of the weeds and details. Obviously you want to be educated, you want to be informed, you want to make sure you’re ready, it fits in with the rest of your financial plan, but ultimately, so much is to be had in terms of the learning, especially as you get started. And I think that’s great advice that you shared. So congratulations, Craig, on the work that you’ve done with the book, “The House Hacking Strategy.” It’s an excellent, comprehensive resource for anyone that is hearing this for the first time and wants to learn more as well as those who are ready to execute and certainly I think everybody in between. I hope our community will check it out. Available on Amazon as well as BiggerPockets.com. And really, we’ve just scratched the surface of house hacking during our interviewing time together today. We didn’t even get into all the information you have in the book about after you purchase the property such as marketing for rent, screening tenants, managing the house hack, etc. Again, all of which you cover in detail in the book. So Craig, where can our listeners go to learn more about you? Obviously, we’ll link to CraigCurelop.com, BiggerPockets.com, we’ll link to the book in the show notes. Anywhere else that our listeners can go to connect with you or learn more?

Craig Curelop: The best way is Instagram. My Instagram handle is @theFIguy. So @theFIguy. And yeah, follow me on there, hit me up, shoot me a message. I’m pretty good at responding within 24-48 hours. So by all means, yeah, I would love to hear from you guys.

Tim Ulbrich: Awesome. Craig, thank you so much for your time again. We appreciate it.

Craig Curelop: Thank you so much for having me on, Tim. Thanks.

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YFP 129: How One Pharmacist Built a 29 Unit Real Estate Portfolio

Posted on December 5, 2019November 2, 2022 by yfpadmin

How This Pharmacist Started in Real Estate Investing and Renting Properties

Aaron Howell, a real estate investor, real estate agent and ambulatory pharmacist at University of Virginia Health Systems joins Tim Ulbrich on this week’s episode. Aaron talks about his journey from accidentally falling into his first investment property when trying to sell his condo to how he built his current portfolio that includes 29 units in 3 different cities across the country. Aaron’s real estate investing and the cash flow it provides has put him in a position to choose how he spends his time.

About Today’s Guest

Aaron Howell graduated from West Virginia University with his BS Pharmacy in 2000. Aaron is a part-time pharmacist at the University of Virginia Health Systems and the Pharmacist in Charge at the Charlottesville Free Clinic. He is also a private pilot and recently became a real estate agent. Before he met his wife, he accidentally fell into real estate investing. They currently have 29 rental units in their portfolio in 3 different cities across the country.

Summary

Aaron Howell is a pharmacist and real estate agent. He accidentally fell into real estate investing when he couldn’t sell his condo in Charlottesville, Virginia in 2009. After having it on the market for a year, his realtor suggested that he rent it out to at least bring in some income. That’s when the lightbulb went off for Aaron and his passion for real estate investing began.

After renting out that property, his mother suggested that he look at properties in Las Vegas to purchase. In 2011, the market was very hot and properties were selling for a half or a third of their original listing. During a visit to Las Vegas, he got one property under contact for $90,000 (original asking price was $270,000) which would bring in about $1,100 a month while being rented. Six months later, Aaron purchased another property without even seeing it. In 2014, his local realtor showed him a listing for a duplex in Charlottesville which he ended up purchasing. In 2015 Aaron married his wife, a nurse, found BiggerPockets, and ended up purchasing property in Cleveland to rent.

Aaron was still working as a full-time pharmacist for Walmart, however, in 2016 the company started talking about cutting hours. At this point, Aaron knew he needed to get his portfolio in order and redid his home equity line of credit.

To buy properties, Aaron uses his home equity line of credit. He worked hard to pay the principal on his first house down and eventually built up equity in it. He then opened a HELOC and uses it as a bank to fund purchases. He’ll take a large chunk out for the principal and down payment and then will use money that’s cash flowing from other properties to pay the HELOC back down.

When choosing a property to purchase, Aaron focuses on three main areas: location, price and the condition of systems (roof, water heater, etc). When asked about his financial why, Aaron shares that his goal is to generate more time and to have more flexibility in their schedules. He currently works 3 days a week, however his wife is still a full-time nurse and he’d like to be able to provide her the option to reduce her hours if she wants.

They currently have 29 rental units in Cleveland, Pittsburgh and Charlottesville.

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. We mentioned before that we would be bringing more real estate investing content to the YFP community, and I’m excited to do exactly that this week through my interview with Aaron Howell, who is a real estate investor, real estate agent, and ambulatory pharmacist at University of Virginia Health System. Aaron, welcome to the Your Financial Pharmacist podcast.

Aaron Howell: Thank you so much for having me.

Tim Ulbrich: I’m excited to do this. We had a conversation a few weeks ago, and you got me fired up about your path in real estate. As I mentioned, we’re wanting to do more with this topic in the community. I think your story is really going to inspire many, so I appreciate you taking the time. And before we jump into your specific journey in real estate investing, including your current holding, talk us through your pharmacy career thus far since graduating from West Virginia University in 2000.

Aaron Howell: OK. I started out — kind of rewind that a little bit back to 1994. I graduated high school and my aunt — I kind of started college that August. My aunt was at the local pharmacy talking to the pharmacist there. She’d mentioned, hey, my nephew, he’s looking for a job. And the pharmacist there had mentioned like, hey, we’re actually looking for a technician. So I just kind of luckily got the job, started there, loved it, enjoyed it, kind of soaked everything up. You know, I knew I’d be kind of aiming for that as a career. So I was just like a dry sponge at that point just soaking every little bit of info, working extra shifts when somebody needed to trade or couldn’t work a shift. Got into pharmacy school, graduated, and moved to Charlottesville, Virginia, took a job here in town. And I didn’t know a soul. I remember talking to my mom and grandmother and they were like, “Why are you moving to Charlottesville?” And I just kind of just wanted to go somewhere and get kind of a fresh start — not that anything was bad back home, but I moved here, I didn’t have any relatives, didn’t have any friends that were living here, and kind of just started from scratch and started working. I worked for about probably a year and a half as a staff pharmacist. And then I took an overnight position at the pharmacy there. At the time, they were open 24 hours. Did that for about a year and then I started floating from various pharmacies kind of in central Virginia. And did that for about three years. At one point, you know, I was kind of approached by my district manager to take a PIC job at a local pharmacy, the one that was closest to my house. So I started there, did that for about three years, then I changed companies and then took a job with them. Worked for about 10 years, and so I worked up until about 2008 for Kroger. And then back in middle of 2008, I kind of had the idea of maybe changing companies. There had been some transition kind of with the leadership at Kroger. And so I made the move to WalMart chain. Literally, a good friend of mine was working as the PIC there and he’s like, “Hey, we’ve got a spot open.” It was like maybe half a mile, maybe a mile down the street, so I made the move then. And at that point, I had bought my first townhome at 2006 or so. This was 2008. And I worked up until June of 2018 at WalMart. And at that point, made the move down to a part-time position at the University of Virginia Health Systems.

Tim Ulbrich: Awesome. And that’s your work as an ambulatory pharmacist. And we’ll talk a little bit as we go through, I’m sure, how real estate investing allowed you to go down into a part-time position as you were able to supplement some of your income. But let’s start back at why real estate investing. Obviously, many pharmacists listening I’m guessing have much of their investments tied up in 401ks and 403bs and other areas, which certainly makes sense. But you obviously said, hey, I want to also get involved in real estate investing. Why was that the case? And where did that desire come from?

Aaron Howell: I mentioned that the house, or townhome I had purchased in 2006, you know, it really started kind of there. By 2009, I’d kind of outgrown the place just space-wise. I was like, I need a bigger place. I think I wanted a yard and a garage and things like that. So I decided to move a little bit outside Charlottesville to a small community called Crozet. It’s kind of to the west of Charlottesville, kind of toward the mountains. And bought a home, and this is kind of like in the height of the Great Recession. We had listed the house for sale, the prices were decreasing and decreasing and decreasing. So we had it on the market for about a year. My realtor at the time was like, “Hey, why don’t we go ahead and just rent this thing?” So I was like, OK, sounds good. So about a month later, he had brought a tenant to look at the place. She decided to move in, and you know, the lightbulb kind of went off at that point. She stayed a few months and then she lost her job and she had to move away, but I found the second tenant myself. And she did great. She eventually purchased the place in 2016. She was a great tenant for a beginner landlord like me. I’d go to fix something or go to go by to pick something up, and she had the place looking better than when I lived there. So she was a great start. But somewhere along the line there, I think the lightbulb just kind of went off. And I kind of thought to myself, OK, I can outsource my debt and take advantage of the tax benefits and maybe put a little bit of money, aka cash flow, in my pocket at the same time.

Tim Ulbrich: So I find it interesting you kind of accidentally fell into that first one. You mentioned the recession, not being able to sell the condo, and that person recommending that you get into a rent situation, which turned into a purchase. Obviously the numbers made sense. Can you talk a little bit about the cash flow with that property in terms of what was that doing in terms of month-to-month, which obviously I’m sure gave you the momentum to say, hey, I want to do more of this, you know, with other properties.

Aaron Howell: Grand scheme of things, I pretty much broke even. I might have maybe had $50 or $100 a month cash flow.

Tim Ulbrich: OK.

Aaron Howell: At that point, I wasn’t the one making both mortgage payments. I did that for a year. It was kind of painful. But you know, with her kind of making the mortgage payment and then long story short, when I sold the property in 2016, she had paid the property — or I had paid the property down to where I actually got a check at closing. Even though it was a monumental real estate fail, it was kind of like a high tuition real estate university for me over those seven, eight, nine years.

Tim Ulbrich: Yeah. Yeah, and I think it’s a good strategy even though you accidentally fell into it, I think it’s often something that people might think about, especially if they’re in a good rental situation with their first home and they’re looking to buy a second home or a condo situation like yours. You know, do they have the financial margin, the capacity to keep that property if the numbers make sense, of course, and purchase their second property but ultimately be able to rent out their first? And I guess my question for you on that point, Aaron, is you obviously had put yourself in a financial position that although painful, you could short-term take on two mortgages as well as come up with a down payment on a home without having to sell that condo. So I think for some of our listeners, they might be thinking about, there’s no way I would move in unless I pull the equity out of this to put down a down payment. So can you talk a little bit about how you were able to put yourself in the position, you know, whether it was you had paid off debt at that point, you had solid savings that allowed you to be able to front the two mortgages as well as come up with the down payment on the new home without needing the equity from the condo?

Aaron Howell: Yeah. You know, at the time, I had done some good saving. I had some money kind of set aside in the bank. You know, all through those years, there was a great shortage pharmacy market-wise. So from when I graduated in 2000 to when 2008 I had left Kroger, there was a huge opportunity for overtime. I mean, I’ve got a picture of me holding up like five paychecks, and just kind of like — it was kind of crazy at the time.

Tim Ulbrich: The good old days.

Aaron Howell: The good old days, yes. You know, like Kroger would pay us monthly. But they would pay you weekly for overtime. So I had gotten I think maybe a paycheck or two and like two or three overtime checks. And it was just a good time. I saved that money, though, and kind of was able to get into the second home.

Tim Ulbrich: Yeah, I’m guessing we have recent graduates that are like, what is this guy talking about? This doesn’t even exist. But what I heard there is you were intentional about saving it. Obviously, I think that could easily have been sucked up with other expenses. And I think being intentional to have liquid savings, whether it be for an emergency fund or beyond that, to put yourself in a position to be on the offense when it comes to something like a real estate purchase. I think that’s such an important, important detail in that story. So you accidentally kind of go into this first property, a condo you couldn’t sell, you turn it into a rental, you mention it’s break even, maybe a little bit better. Where did you go from there that ultimately obviously has led to your current portfolio? Talk to us about the second, the third, the fourth property and how you made those decisions.

Aaron Howell: Somewhere along the line, sometime after moving or right before moving out to Crozet, I become — got interested in hiking and mountain climbing. And I’d went to a mountaineering school in Alaska for a week on Denali, or in Denali National Park in 2008. I’d been to Mexico and climbed some of their highest peaks in 2009. So 2011 rolls around, and I fly into Las Vegas to go climb Mount Whitney, which is the highest mountain in the Lower 48 states. And my mom had mentioned before I went, she’s like, “Hey, get some of those real estate booklets that they give away for free like at gas stations and McDonalds.” And I was kind of like, “Huh?” And she’s like, “Yeah, the market out there is really depressed. You know, grab one of those while you’re out there or a couple of them and bring them back to take a look at them.” And you know, I completely blew her off. I’m Point A to Point B lots of times and I landed in Vegas and immediately made a beeline to Bishop, California, driving for brief stops in Death Valley and looking around a little bit. But real estate was not on my mind at that point. But a month or two later, she had sent me some listings via email and she’s like, “Hey, I’ve been in contact with an agent there in California” — not California but Las Vegas and you know, “Do you want to fly out there maybe and take a look at some of those properties?” And I’m just kind of like OK? Maybe? So we made the trip out there. And the market at that point, this was probably August or so, maybe late August, September of 2011.

Tim Ulbrich: OK.

Aaron Howell: The market at that point was just crazy. People were buying stuff left and right because it was half of the original price, a third of the original price, so we got one place under contract. It was pretty much Class A, you know, nice, gated community. The house was about five or six years old. We picked it up for like $90,000. I think it recently had sold for $270,000. It was getting probably $1,100-1,200 rent per month.

Tim Ulbrich: OK.

Aaron Howell: So it was kind of very easy. We had been recommended to a property management company there by the realtor. We used them from the get-go. They did great. So about six months later, I go back and I buy the second property on my own at this point kind of getting a taste for that first property. Again, the market was just crazy hot. Stuff would come on the market, it looked good, and it would go under contract by noon, 1, 2, 3 o’clock. So at this point, I didn’t fly out there at all. I just trusted the realtor’s input. She was able to get me into another property. We got it for $100,000. Again, $1,100-1,200 rent per month, pretty much Class A in a nice, gated community. And you know, the funny story is — and I highly do not recommend this — I never saw the property. I didn’t go out there to see it, I had the home inspector do the home inspection, I got the report, I had pictures, but grand scheme of things from purchasing it to selling it in 2017, I never physically laid eyes on the property, which was strange. Again, I don’t recommend that for the most part. But so things go well there, 2012, late 2012, get that property, and at the same time, I started getting my pilot’s license, so that kind of put property buying on hold for awhile. I’m still managing at WalMart, doing things there. The company was great to work for up until that point. 2013 rolls around, I have some mutual friends who introduced me to my wife. So I met her. 2014, we get engaged. Late May or so, maybe early May of 2014, I walked into my realtor’s office just kind of saying hey, shooting the breeze, and he hands me a listing for a duplex here in Charlottesville, which is near the college, aka prime rental market there. So long story short, after probably about four months of working on closing and whatnot, we purchased the duplex. And Day 1, it was pretty much a cash cow. It’s also been the problem child of the portfolio too.

Tim Ulbrich: There’s always one if not more.

Aaron Howell: Yes, exactly. You know, there’s been many days I’m like, sell it. Sell it all. But for the most part, like the last couple years, it’s had 0% vacancy. The property management company here just keeps it — if the tenant doesn’t renew, they have them move out four or five days ahead of time and then July 1, they’ll have a new tenant in there and ready to go. So 2014 rolls around, 2015, early in January, I got married. We at that point — I had kind of found Bigger Pockets online and was looking in the marketplace there and then discovered Cleveland. So we at that point, probably June, July, contact a realtor up there and we fly up there, take a look at some properties, we go to an Indians game, we went to the Rock and Roll Hall of Fame, had a great time.

Tim Ulbrich: Awesome.

Aaron Howell: But we get a house under contract, single-family home at that point and close on it probably November or so. And in the meantime, my realtor here again knowing kind of what I’m looking for, he shows me a townhouse that was a foreclosure just here in the neighborhood. There was no sign up in front of it. Lots of times, he and his partner don’t put signs up in front of properties. They just list on the MLS because they don’t want people just tire kicking. But I can see the townhouse from right here, from my back porch. And I had no clue that it was for sale, but we go in there, and there was an awful smell, the carpet was messed up, not one of the appliances in the kitchen worked properly. Like the refrigerator was dead, the microwave was missing the handle, the oven’s bake cycle didn’t work. But we end up purchasing that about the same time we did our first purchase in Cleveland. You know, again, that one here local, the townhouse I can see from here has been a great rental property. We’ve had pretty much 0 vacancy the last couple years. So 2016 rolls around, and we purchase another duplex in Cleveland, kind of later in the year. And then things at work kind of changed late 2016. You know, it was kind of happy-go-lucky. I had built a kind of great staff there at work, and then kind of late 2016, you could hear kind of like winds of change on the conference calls. Everything went from like, “You guys are doing great. This pharmacy is leading in this, this pharmacy is leading in this. You’re doing great,” to late 2016, it went from that to kind of like, “Hey, we need to cut hours.” And you know, at this point, it was kind of like, OK. So another couple months go by, maybe another two or three months, and I’m like, I need to get my butt rolling with my portfolio. So I redid some things. I changed our home equity line around a little bit. The things in our neighborhood were selling for a lot more than I had ever purchased for back in 2009. So we redid the home equity line and kind of got things rolling there in Cleveland. I went back I think maybe in April or so for a home inspection. We had got a quad under contract there. And it went from the home inspection, everything looked pretty well. And I remember kind of flying out that day to go to Cleveland for the inspection and this little voice kind of in the back of my mind was like, how dare you think you could leave pharmacy and be a real estate investor? How dare you? But I knew that other people had done it, so I was like, if other people can do it, then I can do it.

Tim Ulbrich: Yeah. Now, so that’s really — it’s really awesome. And first of all, congratulations. I mean, what you’ve done here — and we’re going to dissect it a little bit more, I’ve got a lot of questions that I’m hoping our listeners are thinking as well — but first of all, congratulations. I mean, what you’ve done and I think obviously you’ve taken some risk, calculated risk along the way, you’ve taught yourself. And I think for many of us, especially when we’ve been in school for so long, maybe residency training, other things, there’s kind of that one-track mindset of maybe I can only do this. But I think what you saw as changes were happening in the market and obviously latching onto an area that was of interest to you that would diversify your income and give you options, also allow you to build your portfolio and long-term wealth, I think it’s really incredible. And so many things that I want to dissect. The first one — and you alluded to this maybe a little bit with the HELOC when you talked about the Home Equity Line of Credit, you know, if I’m somebody listening to this and I have no real estate investment properties, I’m thinking to myself, man, he’s just talking about buying properties, buying properties, buying a home in Vegas, buying a duplex in Cleveland, buying a quad in Cleveland. So what is your strategy? How are you coming up with the cash to buy these? Are you putting these on conventional loans with 25% down? Even that, where is the cash coming from? Has it been savings? Has it been a HELOC? Has it been a combination of? And what might be some strategies our listeners can find in that area?

Aaron Howell: Yeah, that’s a good question. So basically, the home equity line, I had purchased my house in 2009. And for a long time, I had worked really hard to pay it down, to pay the principal down. And I paid extra whenever I could. I would get a bonus at work and I would use that to just pay the mortgage down. So eventually, I’d build up equity. The market here, the values were improving, and you know, I was paying the principal down. So eventually, I opened up a home equity line and over the years, I’ve kind of used that as a bank to fund purchases. So I’ll take like a big chunk of principal for the down payment and then with the cash flow from Property A, Property B, Property C, I’ll take and pay the home equity line back down or use the home equity line to pay more principal down on the original property.

Tim Ulbrich: OK.

Aaron Howell: I just basically use that kind of as a bank. It could be problematic. You actually have to make payments on the home equity line.

Tim Ulbrich: Sure.

Aaron Howell: And it’s almost like the bank’s giving you enough rope to hang yourself with.

Tim Ulbrich: Yep.

Aaron Howell: But you had to be kind of somewhat responsible in a controlled kind of fashion.

Tim Ulbrich: Yeah, and I’m glad you mentioned obviously there’s risk there as well. But I think many investors — and I know several, and my wife Jess and I have explored a similar path — once you put yourself in a good equity position on your home, if done well with calculated risk and you understand the risk and you have a good emergency fund and you’re buying properties that you’ve done your homework and you know that the numbers and all those things, obviously you can mitigate that risk. But nonetheless, the risk is still there. And you have to be aware of it, but I think your point is well taken is that we don’t want our listeners to hear this and say, “Oh, well, I’ve got a decent amount of equity in my home and I’m just going to run out and purchase properties and use it as a bank and hope for the best.” So I think that obviously, there’s payments that come with the HELOC, obviously the longer you have that money out, you’re going to be paying interest on that depending on the rate, a whole host of variables to think about. But I think that strategy is one that our listeners should think about that especially when they either have their student loans gone or maybe have a really good debt payment plan, got a really solid emergency fund and have a good equity position on their primary residence, OK, how can they then begin to move into that next level, offensive position if they’re interested in real estate. And I think this speaks so well to some of the challenges with $0-down mortgages and other things that you know, if you enter into your primary residence with a good equity position to begin with and then you can ensure that home is at a price point that you can ideally make aggressive payments, even potentially extra payments to build more equity, it’s going to give you options in the future. And here, we’re talking about one option being that you can then potentially invest in real estate. What, Aaron, do you look for — and we’re going to talk in a little bit about, you know, maybe preference of property because I know you have a variety of things from duplex to quad to single-family homes, you started with a condo, but before we do that, what are you looking for in terms of general rules of thumb when you’re screening properties to say OK, I think this one looks good enough in terms of something I might want to invest in? Are there a couple rule of thumbs? And I know this is obviously a complex question, but a couple things that you tend to focus in on?

Aaron Howell: Yeah. You know, initially, I think I kind of looked for location. I wanted the property to be in an area where there are going to be tenants who want to rent the property. I mean, you could buy something in a population of a town that’s like 2,000, but it’s going to be hard to rent it. So that’s one thing. Probably No. 2 is the price, obviously. You want to be able to cash flow some. 3 is the condition kind of some of the systems in the house, you know, like how is the roof, the hot water heater, what are the condition of the units? Because at some point, you’re going to be putting that money back into or into the property, and you’d like to put it in later than sooner. Those are some of kind of the key things. But location, primarily is the big thing.

Tim Ulbrich: OK. And you mentioned, I know for our listeners, we could get into this in the future as well, but on Bigger Pockets, they often talk about a 1% rule, which is obviously a very general rule of thumb. But in short, the idea is if you buy a property for $100,000 and you’re able to rent it out for $1,000 a month, then obviously you’d meet that 1% rule. And the examples you’ve given so far were above and beyond that. Again, very general rule of thumb. But I’m guessing something along those lines is numbers you’re looking at but other variables that are included in there as well, correct?

Aaron Howell: Yeah. Yeah, absolutely.

Tim Ulbrich: OK. So one of the other questions I had for you is I find it fascinating that you have invested in multiple areas, so obviously you started with the condo, you mentioned the Vegas property, you talked about some others you picked up in Virginia where you’re located, you mentioned identifying the Cleveland market as a unique opportunity where you saw and have continued to invest. And then one we haven’t talked about is you’re also doing some investing in the Pittsburgh area. But I’m guessing as our listeners hear that, they might be thinking, man, how are you comfortable with investing outside of the area? You know, you can’t necessarily just drive down the street and see how everything’s going. And I could see that being both a blessing and a curse. And so talk a little bit about the out-of-area investing or long distance investing and how you became comfortable with that. And what are some things our listeners might want to consider if that’s an area they’re going to dabble into?

Aaron Howell: Yeah, originally the out of the area investing was in Vegas. We were just essentially at that point looking at the barrier to entry, which is price on the property, what would our down payment be? So that was a big thing. Some reservations generally you would have kind of at a distance would be like how are you going to manage the property? You know? And a lot of people ask me like, do you manage those yourselves? And I always answer like, no way, man. No way. So a good property manager is going to make your life a lot simpler or make your life a lot tougher. And that’s kind of my key is just honing in on that property management company. You know, the one we had in Las Vegas is amazing. The one we have here locally, they’re great. Our Pittsburgh property managers are great. I’ve recently just changed property managers in Cleveland, just kind of wasn’t comfortable or wasn’t necessarily real happy with the management there. So we’ve made that change. But investing at a distance, it’s a little less comfortable than you would normally like it. I mean, I would love for all my properties to be here in the Charlottesville, Albemarle, Virginia area. But the barrier to entry because of price is pretty prohibitive. So I’ve kind of got to go where the market is available, where I can purchase things that cash flow well. I mean, I could buy a house here in our neighborhood and buy it for $300,000, $400,000, $500,000 and charge $2,500 rent, but I’m not going to make the cash that I do say like if I purchase a duplex in Cleveland for $100,000 and I’m getting $1,500-1,800 rent.

Tim Ulbrich: Yeah, and I think what that does is, you know, to your point, it allows you to look more strategically at markets where the numbers make more sense than the area in which somebody is. So for example, my wife and I are here in Columbus, Ohio, and I don’t claim to know the Columbus, Ohio, market as well as many other investors do, and I’m sure there’s plenty of deals to be had regardless of market. But we’ve gone outside and identified some opportunities with another pharmacist up in the Muskeegen, Michigan, area because of just more opportunity there where the numbers make sense. And one of the books I read — and I’m sure you’ve read as well — and we’ll link to in the show notes for our listeners is Bigger Pockets has a really good book on long distance real estate investing. And one of the takeaways I had from that in addition to being able to then shop by market and where the numbers make sense is it really forces you I think to develop systems and processes and checklists that I think allow you to scale and grow if that’s a goal that somebody has. And I’ve seen that firsthand where, you know, when I can’t drive down the street and see something or run by the property before work and have to work with contractors at a distance, you start to put some of those other checks and balances in place and develop some of those other systems because you can’t control, you can’t do all of those things. And I think that in hindsight, now that we have this first one behind us out of area, I feel more comfortable doing more knowing that I think we’ll be able to grow a little bit quicker because it’s not all on our back, you know? And again, property management being another one that I often hear people that want to do that themselves. And I, like you, tend to think about it as hey, look at the deal and calculate in property management, of course assuming it’s good, as a cost to ensure that the deal still makes sense with that cost included because I think that’s going to allow you to get to the point of growth that I’m assuming many people want to get to with their portfolio in the future. Do you have, Aaron, you’ve mentioned single-family homes, duplexes, quads — do you have a certain type of property that you would say, I really like these better for this reason? Or are you just looking at a variety of opportunities that come your way and looking at where the numbers make sense?

Aaron Howell: You know, I think a lot of people like to start with single-family. You know, I’ve graduated more to multi-family at this point. You know, I kind of think maybe the bigger, the better at this point. You know, I have the same issues on a duplex that I have on a six-unit apartment building that we purchased. Same issues, but scaling it is just a lot more manageable for the property manager and the six-unit absorbs the hit. Say if we had to change a hot water heater on a duplex, that’s $800-1,000 there that basically eats up cash flow for a month or two. Where if we have a six-unit building and we have to replace a hot water heater, that’s maybe a half a month’s cash flow.

Tim Ulbrich: Makes sense.

Aaron Howell: So over time, I’ve kind of graduated into the bigger, the better. But also too if there’s a deal in front of me on a duplex, I think I probably would take advantage of that also.

Tim Ulbrich: Awesome. Yeah, that’s cool. I think just the reinforcement there of looking at the numbers and being open to the opportunities, whether it be something you hadn’t originally thought, whether that’s a duplex instead of a single-family home, or a quad instead of a duplex, or another variance of an area. So I mentioned in the introduction, Aaron, that you’re a real estate agent in addition to being a real estate investor. So give us that backstory. Why did you decide it was worth your time and effort to get an agent’s license?

Aaron Howell: You know, over time, as the portfolio grew bigger, I knew at some point in the last year or two that I needed to change my CPA services. And so I did change that last — I guess officially this year for the first time. But in the last year or so, I’ve kind of sat down with them on several calls, and they kind of planned out some strategies. And one of those strategies was becoming a real estate professional in the IRS’ eyes, that I was spending probably, you know, an hour or two hours a day just dealing with real estate stuff in general. And they said, you know, “Hey, you need to take care of keeping a log with your time you spend on doing things. And then you need some active hours.” And where I wasn’t managing the properties myself, they recommended me getting my realtor license because I needed to have some of those hours for the year to be where I’m materially participating in real estate. So where I didn’t have the management, where I’ve outsourced the management, that realtor status or license was the way to go about that.

Tim Ulbrich: OK. Got you. One of the questions — and you and I talked a little bit about this when we talked a few weeks ago, but I think it’s important, as I’ve said on the show before, that people have a purpose and vision behind their investment decisions, whether that’s investing a 401k where they’re saving a significant amount of money, whether it’s starting a business or here, whether it’s buying real estate. And we often talk about this as the financial why. Why do you want to do what you’re doing? So as you reflect on building this mini-real estate empire, what’s the goal? I mean, obviously you’re going to hopefully build wealth over the long term and you have positive cash flow, all of those things, but what is the bigger goal, the why behind what you’re trying to do with your real estate investment portfolio.

Aaron Howell: The bigger goal, I think it will change over time, but the bigger goal now is to be able to generate some just time. I’m down to three days a week as a pharmacist. If I need to go in more or if I want to go in more, like example, I think last week on Wednesday, I went in for like three hours. I had to be in Charlottesville for a meeting at the bank. And my wife, she had just went out of town for a nurse’s conference, so I was like, you know what, I’m going to go in. I’ve got to be in at 11:30 or so, so I’m going to go in and work from like 8:15 to 11:15. You know, I was scheduled for two days, and I’d taken off the Wednesday, Thursday, Friday. So I actually did go in Wednesday for the three hours, but I just, meh, I’ve got to go, see you guys later, bye.

Tim Ulbrich: Right.

Aaron Howell: And they were just kind of funny, they were short staffed that morning so I walk in there, they’re like, “What are you doing here?” And I just came to work a little extra. They were like, “OK. Great.” But you know, having the real estate portfolio, ultimately, I’d love to be able to generate some more flexibility with my schedule, if not just mine, my wife’s also. She’s working like nine days in a 10-day pay period now. So she works five days one week, and then she’s off one day the next week, so she works four that week. Maybe giving her the option of maybe working 2-3 days a week, just like kind of what I’ve done. You know, she’s had kind of a stressful two or three days at work, and she’s telling me about it last night and so I think down the line, maybe giving her that option too. Yeah.

Tim Ulbrich: Love it. Yeah, love it.

Aaron Howell: And we don’t have kids yet, but at some point, we’ll have kids. And we have a little park down from our house and they have soccer leagues. I’d like to be able to coach the kid’s soccer team at some point down the road.

Tim Ulbrich: Yeah. Options, option, options. I mean, I think that we try to talk about that a lot in terms of when you’re putting together a financial plan — and here, we’re talking about real estate investing, but it could be a whole host of things that putting yourself in the position to make decisions rather than those decisions being made for you. Speaking of your wife, one of the things I was thinking about as you told your story is that you were already investing in several properties, I think out in the Vegas area, and then you mentioned you met your wife and you ultimately, of course, got married. Talk to me about that in terms of you were doing this investing, then you got married. I’m guessing we have many people listening that maybe one partner’s really interested and the other either maybe is not interested or is kind of like, yeah, I’m on board, I’m not on board, I want to learn more. How has that worked for the two of you? Was she instantly on board or was that a journey that you two have kind of come along together along the way?

Aaron Howell: To be honest with you, she’s not terribly involved in real estate investing. I think she kind of gives me a blank slate and just says, “Hey, don’t screw up.”

Tim Ulbrich: No pressure.

Aaron Howell: No pressure there, no pressure. But you know, I think at this point, she trusts me. I’m cautiously ambitious with the whole portfolio. But I think at this point, she trusts me. She’s really on board, though, with the realtor. She’ll ask me like, “Hey, what’s this couple? Do you think they’re going to find what they’re looking for?” Like, “Well, you know, I think they really liked the house today.” And she asks me questions about that. I mean, she’s aware of what’s going on for the most part, but she kind of after about 30-45 seconds, she’ll glaze over. But at this point, she trusts me and things are going well for the most part. So she kind of lets me take charge.

Tim Ulbrich: Sure.

Aaron Howell: And just don’t screw up.

Tim Ulbrich: Don’t screw it up. And I would encourage our listeners, if anybody finds themselves in a situation where one person’s been eagerly learning this topic by listening to Bigger Pockets, reading books, and the other maybe is not as interested or just hasn’t been as eager in their learning, I think dragging somebody along is certainly never the right approach, especially when you’re potentially taking on some risk. And I would encourage people to dive into education together. I think when two people can learn together, just like we talk about with the budget, setting a vision, setting the goals together, and then working on the budget, I think the same thing is here true. If you can learn together, you know, watching webinars, listening to a podcast, reading books, I think it’s much more likely to be successful when you can both be on that journey. Before I ask you as a wrap-up question, ask you about your current portfolio because we talked a little bit about the beginning and some things you did along the way but haven’t talked about exactly where you are today, where would you recommend — I mean, Bigger Pockets is one resource you mentioned, which I would second, great resource. Anything else you’d recommend to pharmacists that are listening that say, “Wow, he’s really got me intrigued. I want to learn more. I want to think about getting started in 2020.” Are there certain books, other websites, other podcasts that you really have found helpful for you in your own learning and your own journey?

Aaron Howell: Yeah, I found at some point along the way, I think I had heard him as guest, the Michael Blank podcast on multi-family investing. It’s Blank. He’s German, so the k is pronounced a little differently than you would normally say it. But it’s spelled Blank. I’ve found that podcast, I found that ultimately to be very kind of informative as far as what I wanted to do with my portfolio and my career. That’s been a great find. Another thing too if you’re interested in investing, generally, there’s some local meetups for real estate investing. I’m sure, you know, any major city, you could probably go to meetup.com or find a meeting, maybe a once-a-month or twice-a-month meeting there. And just kind of immerse yourself with people who are doing the same thing or doing things that you’re wanting to do.

Tim Ulbrich: And we’ll link to the podcast you mentioned, we’ll link to Bigger Pockets as well in the show notes. And we’re excited, we’ve got some more content as I mentioned at the beginning of the show and hopefully some opportunities coming your way as well for those that want to learn more about this, for those that want to invest in properties. And we’re excited to build upon a lot of the existing content and education that’s already out there and bring a lot of that to the pharmacist community. So let’s wrap up, Aaron. Where are you at today? Tell us about your current portfolio and what you see coming ahead here in the next year or so.

Aaron Howell: So at this point, we spent a lot of this year kind of consolidating the stuff we’ve purchased in 2017-2018. And when I say consolidating, I mean kind of developing systems more so. We’ve had the property manager transition. But we’ve renovated a bunch of units. And at this point, I’m kind of with the portfolio, I’m looking to syndicate. We did our first deal in January as a syndication.

Tim Ulbrich: Oh, cool.

Aaron Howell: So I’m looking to do a little bit more of that, kind of gathering some passive investors for that. But you know, just have been kind of enjoying things a little bit, kind of got the realtor status off the ground here in the last couple months and just kind of been enjoying things.

Tim Ulbrich: So how many doors do you have? And what cities are you at today here in 2019?

Aaron Howell: We are currently at 29 doors. We’ve got 13 in Cleveland, 12 in Pittsburgh, and then four here locally.

Tim Ulbrich: Awesome, awesome. Very cool. Well, thank you so much, Aaron. I appreciate you taking time to share your experience with our community. I think it’s going to be inspirational. Again, as I mentioned, I think many people in the community have a desire to learn more if nothing else or maybe need that nudge to say, hey, I’ve been learning for a couple years, now I’m ready to get started. And I think hearing from others that have done it and done it well is really helpful. So thank you so much for taking the time to come on the show and congratulations on the success you’ve had and wish you the best of luck in the future.

Aaron Howell: Alright, thank you very much.

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YFP 113: Is Your Home an Asset or Liability?

Posted on August 15, 2019November 2, 2022 by yfpadmin

Is Your Home an Asset or Liability?

On this week’s episode, Tim Ulbrich welcomes Nate Hedrick, The Real Estate RPh back to the show to talk about the value of homeownership. Tim and Nate discuss whether or not the American dream of owning a house is for everyone, the true costs of home ownership, when to consider renting vs. buying and tips for knowing when might be the right time to purchase a house.

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

Is your home an asset or liability? Nate and Tim dive into this question on this week’s episode.

Nate explains that there is a lot of emotion in home ownership and that pharmacists often feel pressured to buy a home even if we’re not financially ready to do, especially after residency or school. He recalls comparing the cost of a mortgage and interest vs the amount of money he was paying in rent when he decided to purchase his first home. Unfortunately, there are many costs and factors that are associated with home ownership. Like anything in the personal finance world, you have to make a decision that’s best for you while weighing both the math and your feelings toward the decision.

So what is the true cost of home ownership? Nate explains that the biggest cost you’ll have is your mortgage, which includes the principle and interest payment. In addition to the mortgage, you’ll incur other monthly costs like property tax, HOA fees, and maintenance which can produce some large capital expenditures (think roof, boiler, etc).

Of course, there are also upfront costs when buying or selling a home, like agent fees which the seller usually pays and mortgage fees such as inspections, the cost of reviewing the title, closing costs. Perhaps you’ll also spend money on adding on a deck, putting up a fence or lawn maintenance.

Robert Kiyosaki, author of Rich Dad, Poor Dad, explains that an asset is anything that puts money into your pocket while a liability is anything that takes money out of it. Nate says that a home very rarely puts money into your pocket. While homes could appreciate over time, that doesn’t necessarily mean that you’ll make money on the house. With Kiyosaki’s definition in mind, Nate says that a home is generally not an asset.

Tim and Nate also discuss how to decide if renting or buying a home is better. Nate shares that you have to look at your personal finances to see if you’re able to take on a financial hit (like a large maintenance cost). If not, you should wait to purchase a home. If so, you then have to determine how long you might be at that property to see when you’ll break even. There are factors in determining when you’ll break even, like looking at the rental price and home values in the area and how they’ve changed over a few years.

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 have a familiar voice back on the show this week, Nate Hedrick, also known as the Real Estate RPh. And here, we’re talking about this question of is your primary residence an asset? And we’re going to talk about buying a home, owning your own home versus renting, pros and cons, considerations, running the numbers. You’ve heard from Nate before on this show. We’ve had him on in Episode 040, where we talked about 10 Things Every Pharmacist Should Know About Home Buying, as well as Episode 064 and 065, Six Steps to Home Buying, Parts 1 and 2. So Nate, welcome back to the Your Financial Pharmacist podcast.

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

Tim Ulbrich: So two things I want to talk about first, before we jump into the recording. First is before we hit record today, you shared the good news that you and your wife Kristen are getting ready to close on your first rental investment property. So congratulations. Tell us a little bit more about what you’re working on there.

Nate Hedrick: Thanks, yeah, we’re really excited. I’ve helped a number of pharmacists get their own rental and investment properties, and it was time for me to pull the trigger. So I’d been looking for awhile, we finally found a house that the numbers worked on, and we got under contract just a couple of days ago now. And now we’re going through the process of inspections and all that good stuff. So hopefully that all goes well, and we’ll have that secured here by the end of the month.

Tim Ulbrich: That’s exciting. And Jess and I are going through a similar process, and you and I were talking before we hit record, we’re going to come back on in the future and kind of break down those experiences, we’ll talk about the numbers, we’ll talk about the good decisions we made, probably the stupid decisions we made that we don’t even know about yet, right?

Nate Hedrick: Exactly.

Tim Ulbrich: All with the goal of really hopefully encouraging and teaching, as we’ve done with other topics on the show before. The other thing I want to mention here is that we’ve been talking about this on social media, we’ve been talking about it on other platforms as well, but we’re excited to continue the collaboration with you to roll out the concierge service that you offer for pharmacists as a part of the YFP community, for those that are both buying or selling a home. Tell us a little bit more about what is that concierge service? What’s involved? And where people can go to learn more about that?

Nate Hedrick: Yeah, absolutely. So the concierge service is this thing that I’ve been doing for a little while from my own website, Real Estate RPh. And now we’re rolling it out to the entire YFP community. And the basic idea is that we’re looking out for pharmacists in terms of finding a local agent that knows what they’re doing. We want to be kind of on your team because if you really get into the process of buying or selling a home, as, again, I’m going through it right now myself, there’s a lot of steps, a lot of processes, and a lot of things to know. And having more people on your team can only be helpful. So what we really do is we get together with you and whoever’s going to be buying that home or selling that home, go through your budget, go through some background about why you’re making the move or whatnot. And we come up with a plan, and then we find you a local agent. And all of these agents have been personally vetted by myself, they’re a part of a growing network I’m creating, and we find that local agent or connect with that local agent that we know really well and get you to basically purchase that home using that agent. So the service is completely free, but the agent that we are working with basically pays us a referral fee. So there’s no cost to you, but we’re able to connect with more agents and bring them clients and make everybody happy in the process.

Tim Ulbrich: Yeah, one of the things I’m really excited about, Nate, with this is that obviously besides your peer-to-peer connection, pharmacist-to-pharmacist, which I think just puts you in the position to be able to understand some of the issues and the challenges but also really being able to — you know, you’ve lived this life of you’ve had student loans, you and your wife have worked through budgeting and all these other financial goals and where does home buying fit into this? So I think there’s some of that peer mentoring and advising that can happen as well that, you know, clients may be thinking about things like, hey, what would be good in terms of percentage down and how might this fit in? And you can point them to various resources and content and obviously your own personal experience as well. So we’re really excited. This is live. If you go to YourFinancialPharmacist.com, you’ll notice at the top of the home page, there’s a button that says, Buy or Sell a Home. And from there, you’ll be able to learn more about the concierge services and get access to schedule an appointment with Nate and to move that forward and hopefully coming in the future — in the not-too-distant future — we’ll also have an option here for those that are looking to jump into real estate investing. So again, that’s YourFinancialPharmacist.com, top right of the page, Buy or Sell a Home button, and that will take you to the page to learn a little bit more. So Nate, setting the stage for this conversation today, so again, we’re talking about is your primary residence an asset? How might somebody decide this decision of what’s the ROI on a home buy? Or should I continue to rent or should I purchase a home? And really the backdrop here is that I feel like there’s a lot of emotion that comes with home ownership. And I think especially here in the great U.S. of A that there’s a common belief that owning a home, I know I had it, should be a top priority and is beneficial to everyone to build equity and that often, it should supercede anything else in your financial plan. And you know, I think what we really want to talk about is some questions like, do we take this common belief too much at face value? What does the math really say? What are the pros and cons of home ownership? And how does home buying fit in with student loans and other financial priorities? Because at the end of the day, home buying is really just one — albeit a significant one — one part of a financial plan. So am I alone, Nate, in kind of hearing that common belief? Or is that something that you hear as well?

Nate Hedrick: No, I think that’s absolutely. I mean, it’s even true in my own life. I mean, as soon as we became full-time pharmacists and got out of residency, it was like, OK, how do we get a house? Because that’s the next thing, right?

Tim Ulbrich: Yeah.

Nate Hedrick: It didn’t matter if it financially was the next thing, that was just, that’s what you did next because that’s what you do, you own a house. So I’m totally with you.

Tim Ulbrich: Yeah, and I know Jess and I really felt the itch as well post-residency and I think when you feel that itch and then somebody says, “Hey, why are you dumping money down the drain renting?” and then you start looking at homes, it’s all over from there, right? I mean, you just kind of go down.

Nate Hedrick: And even worse was that I, again, at the time, totally naive to this, but I just compared mortgage and interest payments versus my rent payment, and I was like, oh, it’s cheaper to buy a house. Like it’s actually less expensive. And didn’t factor in any other things than that mortgage and interest payment.

Tim Ulbrich: So I did the same thing, so let’s start with that component, what you just mentioned, the true cost of home ownership. And I think often, as you alluded to, people are thinking about, OK, I’ve got a mortgage, I’ve got interest, and often that’s what will come up on a calculator. Or if you’re looking at a home on Zillow or Redfin or whatever, you’ll see those fees. But of course, there’s many other fees that need to be considered when somebody’s really evaluating what is the true cost of home ownership. So what is involved? What’s everything that’s involved when we look at the true cost of home ownership?

Nate Hedrick: Yeah, absolutely. So obviously the biggest things are that principal and interest payment, right? You are paying the mortgage. Unless you’re paying cash for a house, you need to be paying for that mortgage every single month in terms of the principal balance, then interest. The way most loans are structured, you’re going to pay a lot more in interest than you are on the principal. So just looking at a loan and saying, “Oh, it’s a $200,000 loan,” just that principal amount is not going to give you an idea of what your actual payment’s going to look like. So factoring in both of those and looking at your interest rate and how that’s going to affect your interest payment is certainly important. The next thing and the thing that I think is funny because I totally ignored when I bought my first house is taxes, property taxes. It can be a huge component. I mean, we pay thousands of dollars a year in taxes, and that’s money that doesn’t just come out of nowhere. You have to plan for it. And again, I don’t know why I didn’t look at that. Like everyone knows there are property taxes. But I didn’t think of that as a big important number. But it really is.

Tim Ulbrich: And how different that can be, right? From one area to another within a city even.

Nate Hedrick: Oh, absolutely. I mean, where we’re investing, the property we’ve got, the taxes are several percentage points higher, in fact, than where we live right now. And that was a major factor to say, is this really a good area to invest in? Because of that property rate. And so the number’s still work, but you have to have all that in mind. So then the other things to keep in mind, if you live in a community, there might be homeowner’s association fees. Those are often kind of hidden. But they can be quite high. I actually helped a client quite recently buy a condo here in Cleveland, and the homeowner’s association fees were probably, I don’t know, $200 more a month than her mortgage and interest payment were.

Tim Ulbrich: Oh, for the love…

Nate Hedrick: I mean, it was huge. It was crazy. And if you ignored that, it doubled her payment every single month. It doubled it. And without taking that into account, you would assume that this was a great deal. But you had to look at those numbers before you could do the final math.

Tim Ulbrich: So when you mention principal, interest, taxes, insurance, so that term is referred often to as PITI. And I think for the most part, when people are looking at a home, they’re thinking of those things. You mentioned obviously we talked about the variance that can happen on property taxes, I think for the most part, people are thinking of that, although I didn’t necessarily think as much about it. Even here in Columbus, for example, 10 minutes away, one part of the city to another part, you can easily have an increase of property taxes of 60-80% based on school districts and other factors. You mentioned homeowner’s association or some type of an association fee. And I think our goal here is not to suggest that you should find a location in the middle of nowhere that has terrible schools with low property taxes and no HOA fees, I think what we’re getting to is just understanding what’s involved in the total cost so you can really evaluate it with the rest of your financial plan. So besides those things, besides PITI, besides HOA, besides property taxes, what else could be involved when somebody’s really looking at this aspect of true cost of home ownership.

Nate Hedrick: Yeah, the last thing really that in terms of every single month kind of a thing that you need to keep in mind are the maintenance fees. So when you live in a rental place, often you’ve got a landlord or some sort of maintenance division that’s taking care of the property. Maybe they’re cutting the grass, maybe they’re fixing things when they break. But the maintenance of a home, it vastly, vastly outweighs the maintenance of a rental property. And so you all of a sudden have big capital expenditures that might come up. You might need to replace a roof or a boiler or whatever. And all of a sudden, that’s on you. So you have to kind of plan for those things. It’s much harder to predict, but I’ll tell you one of the things that we do whenever I’m walking around a home with a potential client or with a client, I say, “Look, if these things are all about to break, that means your capital expenditures in the next couple of years are going to be much, much higher. You need to factor that into the payment.” If everything’s brand spanking new, then you can look at it a little bit differently. But keeping that kind of thing in mind. And even though you may not be paying for it every single month, you’re going to be paying for it eventually. And so factoring that into your monthly payment can be really important.

Tim Ulbrich: Do you suggest, Nate, on that point — you know, I’m thinking about like on a rental property, it’s often recommended that you set aside x percent each and every month to be able to fund those big capital expenditures, roof, eventually you’re going to need a new hot water tank, things like that. Do you typically recommend clients think of that as well to say, hey, obviously the numbers may be different, but it may not be a bad idea to every single month, you put aside some dollars, essentially a sinking fund, to be able to cover those things?

Nate Hedrick: Yeah, I usually recommend it. And that probably comes from looking at investment properties so often. I’m always calculating a cap x rate and what that’s going to look like, but I definitely recommend that, especially first-time home buyers, somebody that may not have had those kind of experiences before. If all of a sudden you need a $4,000 boiler, you don’t want to just have that surprise pop up.

Tim Ulbrich: Absolutely. And I think your point on upkeep and maintenance is a good one. I was just reflecting as you were saying that — and anybody who owns a home could appreciate this — is just go into your garage and look at all of the things you didn’t have before you moved into your house, right? So it’s not even just the week-to-week type of things and OK, you’re going to plant flowers, you’re going to do these things, but even all the different tools and devices and lawn mowers and all the things that you need that you probably necessarily didn’t need in a rental situation and factoring those in over time as well. So you alluded to, Nate, that there’s these monthly types of things that you have to consider beyond just the principal, interest, taxes, insurance, which then lends me to believe there’s some other expenses that may not be monthly but that are significant that we have to consider. Tell us about those.

Nate Hedrick: Yeah, you’ve got a number of up-front fees and costs whenever you’re buying or selling a house. You know, everything from simple agent fees, so if you are a seller, for example, often the seller is the one that’s paying the real estate agent fees. So the buyer doesn’t often see that, but sometimes maybe the seller can’t afford to pay all of it and want to split that with the buyer, that’s something they negotiated. So there’s even just the fees of doing the actual deal itself can pop in, and then again, if you’re getting a mortgage, not paying cash for a house, you’re going to have a number of fees associated with that, so everything from the inspections that you do after you get under contract — and believe me, you should be doing inspections, please — to title, the cost of actually reviewing the title on that property, making sure that it’s valid and re-writing that title in your name. You’ve got things like closing costs, which can be anywhere from 2-4% of the overall loan cost. And again, I’ve been in a mire this past week of loan documents and negotiations with closing costs and such. But all those things can really start to add up. So ignoring all those one-time fees can be really scary too because if you need $30,000 and you’ve calculated that as your down payment and all the stuff that you need for a house, all of a sudden you’ve got an extra $6,000-7,000 potentially in one-time, upfront fees that might be coming out. So you really need to keep that in mind.

Tim Ulbrich: I’m glad you said that because I think it’s easy to look at let’s say a $200,000 home and say, OK, we’re going to put 10% down, so we need $20,000 but not think of the additional cash. And that’s really important for those that have a goal that are listening of they need so much down to get into a home, putting those assumptions into that calculation so they can plan accordingly. The other one I would add here, Nate, just from personal experience, and I think this is certainly very variable from one person to another and isn’t as easy to measure as some of these other things, would just be the reality of depending on where you’re at in the neighborhood is that I think it’s natural that your expenses and costs may go up accordingly to those that are around you. So we’re getting into the concept here of potentially keeping up with the Joneses and you know, as people incur law maintenance costs, they install fences, or they put nice decks or patios on their property, like do those same pressures have an influence on how you’re spending money in your own home? And again, there may be costs there that are incurred over time. So if we think about, Nate, you know, I’m thinking back here to “Rich Dad, Poor Dad,” Robert Kiyosaki’s book, that an asset is anything that puts money in your pocket. And a liability is anything that takes money out of your pocket. As we just talked about all of these costs, even after a mortgage is paid off, how do you look at this? Is a home really an asset?

Nate Hedrick: Yeah, I think it’s so funny because I think growing up, we had this societal norm that a house, you did it because it’s cheaper and it’s better for you than renting, and it makes you money somehow. And like we never really think about how that works. Well, the house appreciates and then you sell it, and you make out. Everybody wins. But in reality, if you look at all those fees we just talked about, even though historically, houses have gone up in value considerably over the years, you don’t always make money on a house. In fact, very rarely do you put any money into your pocket. And so by that definition and by what Robert Kiyosaki often says, your house is not an asset in that regard.

Tim Ulbrich: Yeah, and I think of course, we have to mention here the market specifics, right? So I’m thinking about previously to coming down to Columbus, I was living in the booming metropolis of Rootstown, Ohio. And so just seeing the appreciation in that market, while there was some post-2008, certainly it’s nowhere compared to what happened here in Columbus or other markets. So even just thinking about appreciation, taxes, expenses, of course this is going to be varied from one market to the next. So Nate, one of the most common questions if not the most common question I get besides ‘Should I pay off my student loans or how should I pay off my student loans?’ is ‘Should I rent or should I buy? And how might I consider that and weight that decision in the context of all these other competing priorities?’ So when somebody comes to you and they’re looking at a home or maybe even how you thought about it for your own personal situation, just talk us through how you think through that scenario for the right time to buy.

Nate Hedrick: Yeah, yeah, absolutely. I think the first thing you need to look at is your own kind of personal finances and where you stand. Again, the biggest thing — if we haven’t said it enough already — is that there are a lot of extra costs that come with owning a home. It’s not simply just a rent payment every single month anymore. You’ve got things that are going to show up from taxes to maintenance to stuff that breaks, and you need to be able to weather that. So if your finances are to the point where you are spending so much on student loans or so much on other debt that a big financial hit would really ruin you, it may not be the right time to buy. That’s kind of the first thing is making sure that you’re stable enough and comfortable enough that if something does crop up, you’re able to handle that. Once you’ve kind of made that decision and made that move and said, OK, I’m comfortable here, the next question I think is how often or how long do I plan to stay in this particular area. And this is where it really varies by location. Different locations benefit from longer stays or shorter stays. I was recently reading about the advantages of buying a home in like New York City, and it’s so expensive there compared to renting — I mean, renting is expensive — but it’s so expensive to buy a home in New York City, you’d have to live there something like 20 years to make it worthwhile compared to renting.

Tim Ulbrich: Wow, wow.

Nate Hedrick: It’s absolutely insane. But in other areas, it can be a year and a half and the values are increasing so quickly and the purchase prices are so low that it doesn’t matter, you can turn that around in a year and a half and be fine. So if you’re financially sound, you then need to ask yourself, how long am I going to stay here? And then what does that mean for this market? Does it make sense based on that information to buy or sell?

Tim Ulbrich: Yeah, and I think you highlighted well that it certainly can be region-specific with your example from New York and market-specific, but I think it’s also economy-specific and what’s going on. I mean, if somebody bought a home today versus they bought it right after things crashed in 2008, very different outcome in terms of how long you need to be in a home before you may be able to break even on those costs. I would reference here too, one of the tools I love and I often give out to others is New York Times — and we’ll link to it in the show notes — New York Times has a really good buy v. rent calculator because I think to our conversation earlier, it typically is not an apples-to-apples conversation because just like you did, just like I did, just like many others do, you’re typically looking at, OK, here’s what I’m paying for rent, here’s what I’m going to pay for my monthly mortgage payment, which would include the principal and the interest. And obviously, it’s much more than that as we highlighted just a few minutes ago on this episode. And what I like about that calculator is that it helps you consider all those other variables and bring it to as close to an apples-to-apples comparison as possible. So we’ll link to it in the show notes. For those that are listening that can’t get to the show notes, if you just Google “New York Times buy v. rent calculator,” you’ll see that come up. So Nate, I want to continue that conversation for a moment on how long you might need to be in a home before you really start to really that value because I think we often see this with new graduates that are doing residency or maybe they’re in a transition period with the first job, and they’re really not sure, maybe three years, maybe five years, maybe 15 years, who knows? But while we have established it can vary, what are the factors that one is really trying to consider here in terms of will this be break-even or not? What’s going to help determine that?

Nate Hedrick: Yeah, so I think what you need to look at is if you’re looking at a particular area — and most people, honestly, start with that, right? You’re not just saying, “I want to live somewhere.” You have a plan, you’re going somewhere for a job or what have you. So once you know where you’re looking, you can look at the rent prices there. And then look at the home values and look how they’ve changed over the last couple of years. You know, nobody can predict the future in terms of what home values are going to do, but it should give you some insight as to wow, this — maybe it’s like a Columbus market where you live, Tim, and it’s just been going gangbusters for the last couple of years, or maybe it’s been on a decline. And so you can get an idea of well, where do I expect this home to go? If I only live there two years, where is it going to be when I end up selling? The other thing is if you are — even as a resident, I advocate for this quite a bit — even if you’re thinking you’re only going to be there for a short amount of time, what if when you leave, you end up renting that property out as a rental property? So maybe if you really have that itch to buy a home, maybe the trick is to go buy something that you know once you’re done, you could leave it, and it could still become a cash-flowing rental property. I’ve actually advocated, again, a lot for residents to look at doing this. You’re living most of the time in a big city, a lot of people want to rent there, you’re near to a hospital, which means near to a lot of jobs, you’re kind of setting yourself up for a perfect rental property location. And so if you want to go there with the idea that hey, I might be here one year or I might be here for 10, buying a home’s not a bad idea if you set yourself up for success to begin with and get a place that kind of meets whatever need you’re going to have down the road and has that flexibility built in.

Tim Ulbrich: And are you suggesting a potential single-family home? Or like a duplex, triplex, something you could house hack? What are you thinking there?

Nate Hedrick: Yeah, yeah, so I actually had an article about house hacking as a resident and how you can do that. But I think either would be fine. I think if it were me and I could do it all again, I wish I would have gotten a duplex when I was a resident.

Tim Ulbrich: Yes. Yes.

Nate Hedrick: So if I could change one thing about residency, that would be it. I would have bought a multi-family home, I would have had people paying my rent while I went off and did my residency. But again, I think you can still go right with a single-family home as long as you build it with the idea that, OK, when I leave this, it needs to be rent-happy, it needs to be capable of producing cash flow and worth its while.

Tim Ulbrich: Yeah, and while I would say if we’re honest with ourselves, there’s many things we probably would have changed about residency, but on the personal side, I agree with you. This is one that I would have done is I think a duplex, a triplex. For those that haven’t heard that term before, can you just define that quickly?

Nate Hedrick: Yeah, so multi-family homes, the short version is — so you get single-family homes, right? Which is a one-family dwelling, most people are aware of them. There’s one door and one unit. Multi-family homes are anywhere from two to four units within the same structure. So it’s kind of like a tiny apartment building. And the advantage of these multi-family homes over an apartment over a single-family home is that the bank when you’re getting a loan on a multi-family property, they don’t look at it as a commercial loan. It’s still considered a residential loan, so there’s a number of advantages in terms of lending and in terms of tax implications and so on to having a multi-family property, that two to four units.

Tim Ulbrich: I love it. And we’ll link to your article in the show notes as well if listeners want to learn more about that concept. There’s also lots of resources out there that talk about house hacking. The other variable I would add here, Nate, when you think about kind of this question of what’s a break-even in terms of how much time I have to be here, obviously would have to include how much equity you have in the home and how much down payment you had or didn’t put down in the home, right?

Nate Hedrick: Yeah, exactly.

Tim Ulbrich: So this could either be equity you build into your down payment, it could be equity that happens because of appreciation, but you know, if you put 20% down, and you move in three years and the market has only appreciated a little bit, you’re probably not going to have forced much equity through payments just because of how those payments are structured, as you mentioned earlier on the show. However, if you have to pick up and move, even unexpected, and you’re then going to incur realtor fees with selling, closing costs, all those things, you at least have some equity that can help cover the expenses of that. And while it may not necessarily be break-even at that point, you’re at least able to weather that storm and kind of work through that. So I think how much down payment you have, how much it has appreciated, what actually are the closing costs that are involved, all those types of things will determine this number of how long you have to be in a home before you get to a break-even place. And of course, with a greater down payment, you’re kind of working yourself down that amortization table where you’re making payments that more is going toward principal and less is going toward interest, which is always a good thing. So Nate, let’s just shift gears real quick to wrap up and talk about we’ve kind of established that is a primary residence an asset? It depends when you consider the costs, probably maybe not so much for many people. But I don’t think we’re saying there’s no value in home ownership, right? I mean, from your perspective, just thinking about for you and Kristen, like beyond the number, what is the value for you guys in terms of owning your own home and having your own place?

Nate Hedrick: Yeah, I think it’s easy to get into the financial weeds and just say, yeah, well, home’s not an asset, so maybe it’s not worth it anymore. But no, the reality is that there are so many emotional aspects to owning a home that are very difficult to replace and are hard to put a value on. Just having a safe, secure place that I can go back to with my family and I can put time and money into this place, I get the benefits out of that. There’s a lot to be said for that. And again, it’s something that I don’t think you can put a true value on. So it’s not something you can calculate, not something that you can Google and pull up in a table or an Excel spreadsheet, which all my data nerds are cursing, but it is an important factor to keep in mind.

Tim Ulbrich: Yeah, I think you have to weave into this the value of your own place and making it your own and being part of a community and all that comes with those aspects and factor that in. You know, we talk about with student loans that you’ve got to run the numbers, and you have to add the emotions on top of it, right? How do you feel about the debt? And this is the same thing. I think when we’re talking about home buying, you’ve got to run the numbers, but you have to also consider some of these other variables as well. So as we wrap up here — and again, you’re going to be hearing from Nate a lot more in the future — we already talked about the concierge service. If you’re looking to buy or sell a home, make sure you check that out, YourFinancialPharmacist.com, top of the page, ‘Buy or Sell a Home’ will get you more information on that. Also would recommend you check out — if you haven’t already — we have a first-time home buying Quick Start Guide, which Nate helped develop that for somebody’s who’s looking at home buying for the first time is really a great place to get started, to get more information as you’re continuing to evaluate what the next step will be for you in that process. You can download that guide for free at YourFinancialPharmacist.com/homeguide. That’s all one word. Again, YourFinancialPharmacist.com/homeguide. So Nate, as always, thank you for taking time to come on this week’s episode of the Your Financial Pharmacist podcast.

Nate Hedrick: Yeah, thanks for having me.

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YFP 111: How One New Practitioner is on FIRE

Posted on August 1, 2019November 2, 2022 by yfpadmin

One New Practitioner and His FIRE Journey

Jared Wonders joins Tim Ulbrich on this week’s episode. Jared is a 2012 graduate of the University of Findlay and currently works for the VA remotely doing home health care. Jared and Tim talk about how he and his wife, Jess, aggressively paid off their debt within a few years, how they got started in real estate investing, and how and why they are on a FIRE journey (financial independence, retire early).

About Today’s Guest

Jared Wonders graduated from the University of Findlay school of pharmacy in 2012 and completed a PGY-1 general residency at the Dayton VA Medical Center in 2013. Jess, his wife of two years, and Jared currently reside in Charlotte, North Carolina to pursue job opportunities and get away from the long Ohio winters. Jared has had the amazing opportunity to serve our nation’s veterans for the past 5 years as a Home-Based Primary Care Pharmacist at the Dorn VA Medical Center. Jess, who is also a pharmacist, and Jared are currently pursuing FI through a high savings rate mixed with real estate investing.

Summary

On this podcast episode, Jared Wonders joins Tim Ulbrich to give an insight of his financial journey since graduating in 2012 from the University of Findlay, how he paid off their debt within a few years, how they got started in real estate investing and how and why he and his wife Jess are on the path toward FIRE (financial independence, retire early).

Although Jared and Jess didn’t carry the debt load most pharmacists accumulate, $75,000 is still a large amount of money and requires a lot of intentionality to pay off. Jared and Jess were motivated to tackle their debt to have more opportunities in their life, have the ability to explore investments and not have to be tied to a job.

They caught the FIRE (financial independence, retire early) bug when they realized that they didn’t want to be stuck without options. Jared explains that they are trying to diversify their investments as much as possible by taking advantage of different retirement funds like the TSP offered through the VA, his wife’s 401(k) as well as looking into an HSA account.They also have two real estate investment properties and are pursuing brokerage funds like Vanguard. The real estate income is supplemental and allows them to have more control in regard to expenses with the properties. Traditional retirement vehicles are unable to be accessed until age 65 1/2 , so real estate investments provide cash flow sooner and also have tax strategies and savings. Additionally, Jared and Jess currently save 50% of their income or more. Jared says that it helps that they have two good incomes, but they also try to live frugally.

Jared discusses the purchases of their real estate properties next. He shares that the first purchase was full of pure excitement. He had done research for 8 to 10 months prior and was excited to finally take the next step in purchasing a property. The biggest issue he’s faced so far is having a good property manager, so he and his wife manage their properties. They put 20% down on a $170,000 home that’s now worth $190,000 to $200,000. They purchased the second property for $140,000 and it’s now worth $190,000 to $200,000 (paid $10,000 for renovation). Jared says that they are getting close to the 1% rule, meaning that rent should be 1% of the purchase price.

Although Jared enjoys his job, he shares that they are pursuing FIRE aggressively to create opportunities in the future. In the next 5-10 years, Jared envisions that they will focus on building more equity in their properties but will keep an eye out for good deals.

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. Joining me is Jared Wonders, a 2012 graduate of the University of Findlay, who completed his residency training at the VA in Dayton and currently works for the VA in South Carolina remotely doing home healthcare. Jared and his wife Jess have a fascinating journey as two new practitioners that are on the path toward financial independence. Jared, thank you so much for joining me on this week’s episode of the Your Financial Pharmacist podcast.

Jared Wonders: Hey, Tim, I want to thank you so much for giving me this opportunity. Always good to meet a fellow Buckeye.

Tim Ulbrich: Absolutely. Go Buckeyes. So before we talk about what you’re doing with real estate investing, we’ve got some exciting late-breaking news on that related to your own journey. And before we talk about Financial Independent Retire Early, I really want to give our listeners some insight into your financial journey since graduating in 2012 from the University of Findlay, because I think all of what you did and laid the foundation has set you up on the path to be that you’re on right now, which is certainly one that I think is bright. So give us an overview of the student loan and the debt position that you and your wife Jess were facing at the point of graduation.

Jared Wonders: Yeah, absolutely. So when I graduated pharmacy school, I went and decided to go through the route of residency, so I did a residency in Dayton, Ohio, which is fortunately where my wife was actually living at the time, current wife. So we ended up moving down to North Carolina kind of just on a whim, and I was able to find a job in South Carolina working as a pharmacist. When I graduated pharmacy school, I had about $75,000 in debt, so definitely not the typical debt load that you might see with some pharmacists graduating.

Tim Ulbrich: So this is all your debt, then, not Jess’ debt.

Jared Wonders: This is all my debt. She came to the table with no debt at all. So I definitely married up in that situation for sure.

Tim Ulbrich: Well done, yes.

Jared Wonders: Yeah, so she actually was very fortunate. She went to the University of Toledo, a public school, and actually worked as a TA. So she did not come in with any debt whatsoever, which was great.

Tim Ulbrich: That’s awesome. And I think that speaks to, you know, I always talk with the students when I talk about student loans, say, “Hey, anything you can do to minimize the amount of debt at graduation makes all the difference in the world.” And here I think that’s certainly a case where being aggressive and whether it’s support from parents, scholarships, TA, anything students can do to minimize that debt load will pay off in the long term. So even though you didn’t have $160,000 like is the national average right now, $75,000 is no small chunk of change. And it still requires being intentional to get it paid off in such a short period of time. So tell me about the motivation. Why were you and Jess so adamant about aggressively paying off this debt?

Jared Wonders: Yeah, absolutely. My motivation was definitely just to have more opportunities and to kind of just give my life some sort of purpose. And I think that the one thing that really kind of catapulted me into really being aggressive with paying off my loans was actually, honestly, getting married to Jess because that just kind of gave the motivation I really needed and really thought that — you know, because I needed to provide for not only myself, but I needed to provide it for my wife. And I knew by being able to do that, paying off these loans would not be necessarily hog-tied to a job if I didn’t want to do it and would maybe be able to pursue more opportunities as far as like investments or real estate, whatnot. Yeah. So that’s pretty much where the motivation came from, honestly.

Tim Ulbrich: Yeah, options, options, options, right? Once you have that off your back, I mean, the rest of the story, you’ve got a lot of opportunities ahead. And we’ll talk about some of those here in a minute with real estate investing and other things. So one of the questions I want to ask you — because I think often, I’ve seen where whether it’s two pharmacists or not, couples may or may not be on the same page in terms of how aggressive they want to pay off the debt. Sometimes, there may be competing priorities like home or investing or cars or other things. Was this something that you and Jess had to work through to get on the same page? Or were you both of this mindset of hey, we need to aggressively get this off our plate?

Jared Wonders: Yeah, I think that for the most part, we are on equal pages I think for the most part of kind of going forward in that process. It did take us — of course there were some definite times where we were kind of like, well, maybe we don’t need to be necessarily as aggressive as we need to. But for me, I guess it was — actually before our marriage, I really wanted to try to get all my loans paid off before we got married. So it was one of those things where I wanted to make sure that happened, and I actually worked an extra pharmacy job in retail as well just to make sure, ensure that happens.

Tim Ulbrich: So did you guys go all in to get the $75,000 paid off? Meaning that you delayed other goals such as savings and other things? What was your approach to pay off the debt in the context of balancing other goals?

Jared Wonders: Yeah, no, that’s a great question. So we actually went the unconventional route, possibly from the Dave Ramsey crowd, and we actually did buy a house before we had all my debt paid off. We bought a house together before we got married, but it ended up working out. Obviously it worked out very well.

Tim Ulbrich: And we actually did an episode — I can’t remember it off the top of my head, we’ll reference it in the show notes — we did an episode on what we think are some of the pros and cons and some of the considerations around the Ramsey plan that people should think about. It’s certainly not a one-size-fit-all. I think for certain people, the steps are spot-on, exactly what they need. For others, depending on personal situation, how much debt you have, what else is going on, so I think certainly for the two of you, that made sense in the route that you went.

Jared Wonders: Right, and honestly, the interest rates were only going up at that point, so we kind of just wanted to lock in what we got.

Tim Ulbrich: Yeah. Now they’re finally coming back down, right?

Jared Wonders: Exactly.

Tim Ulbrich: It’s crazy, my wife Jess and I bought a home in October 2018 here in Columbus.

Jared Wonders: Oh yeah, congratulations.

Tim Ulbrich: I think it was a 4.62% interest rate, and now we’re back down to the 3.7-3.8%, something like that.

Jared Wonders: It’s crazy.

Tim Ulbrich: Yeah. So let’s talk about FIRE, Financial Independence Retire Early. And in Episode 104, we covered the basic tenets of FIRE. Again, Financial Independence Retire Early. So I don’t want to spend too much time rehashing exactly what is FIRE but rather talking more about specific plan that you and Jess are taking around FIRE and why you’re taking that route. So talk to me about why you caught the FIRE bug. What was in terms of why this concept of Financial Independence Retire Early really stood out to you as an option that you want to pursue? And really, what is the goal? What are you trying to achieve when it comes to FIRE for your personal situation?
Jared Wonders: Yeah, that’s a great question. Honestly, I think the most important thing is when pursuing FIRE, having a why. So you really need to have that why in order to really, I guess just really make it happen and really kind of just studying those goals and attaining those goals. So mine, honestly the thing that kind of pursued me and kind of got me into it was honestly like just really trying to not be stuck at a job or position I didn’t necessarily want and having those options to pursue if I really wanted to and you know, not having those golden handcuffs, if you will, and just being able to really not necessarily be hog-tied to a job for 30 or 40 years.

Tim Ulbrich: Sure. Yeah. I mean, again, options, like we talked about. And in Episode 104 when we interviewed Jason Long, he had retired at the age of 38, self-made millionaire, and he gave a lot of really good specifics about the amount and the calculations and how he determined that and how he was saving and a distribution plan. So what is the goal? Have you guys defined a number? And how aggressive are you saving to try to do that and the investment strategy in getting to that point?

Jared Wonders: Yeah, I mean, Jason has an absolutely terrific story. I would definitely reference that or definitely check out that podcast episode as well. But honestly, what we’re doing right now is we’re really trying to diversify as much as we can. So we’re taking advantage of the retirement accounts, we’re taking advantage of the TSP through the VA, which is an absolutely terrific retirement program. My wife is taking advantage of her 401k. We actually just recently looked into doing an HSA as well, so you know, the high deductible plan. The HSA we found out just is an absolutely terrific vehicle for those who haven’t looked at it. I know that you guys have done some research on that as well in previous podcasts. One of the things we stumbled upon is real estate, of course. And I mean, honestly, what we’re doing right now is we’re saving probably around 50%, maybe a little bit higher, of our income, and we’re trying to pursue those active investments like some of the brokerage funds, like doing some Vanguard, but also trying to attain our goals in real estate as well.

Tim Ulbrich: So let me talk about that for a minute because I think some pharmacists hear that and say, “Jared, 50% of your income? Like how is that even possible when you just think of life’s expenses and housing?” So what are you guys sacrificing? What are you giving up? What have you minimized costs in other areas so that you’re able to both save in traditional tax-advantaged retirement vehicles, you mentioned those: TSP, 401k, HSAs, but also be able to then build up cash reserves to get involved in some real estate investing? How are you doing that? And what are you giving up to be able to do that?

Jared Wonders: That’s a great question. We obviously have the advantage of having two great incomes right now. But I mean, for how we’re doing that is I would say we don’t do fancy stuff, honestly. We’re trying to live frugally. I mean, we’re still going out and enjoying ourselves from time-to-time, of course, but we have a goal and we have a mindset of when we want to retire, when we want these future assets to be utilized for our kids. So we just have that goal and are really focused in on that goal, on what we want to do. So honestly, that’s just kind of what’s kind of pushed us forward and getting us to that point. So it’s really just a lot of mindset. Honestly, you know, there is a little bit of luck that’s involved, but I believe that I’ve heard this reference on I think Scott Trench referenced it, but luck is the intersection of preparation and opportunity.

Tim Ulbrich: Amen.

Jared Wonders: So just being able to find that aspect and being able to prepared and kind of make yourself prepared for what’s coming I think is incredibly important.

Tim Ulbrich: So you mentioned an interested in diversifying in real estate, so let’s talk about that for a few minutes. Why real estate investing? And what do you see as the advantages of doing that and why you want that to be such a big part of your financial plan going forward?

Jared Wonders: Yeah, I think the biggest thing for us is that supplemental income that you can get through real estate. If you are a little bit more aggressive and have a paid-down real estate portfolio, then you have an income coming in, and it’s not through dividends, it’s not through other things. And I think that one of the greatest things that I love about real estate is the control that you have. So we currently have two properties that — and it’s obviously not like a huge portfolio — but we are able to control basically every single aspect when it comes to expenses, when it comes to income. I mean, there’s obviously things you can’t control like some capital expenditures and things, but you know, I can see a property and I can be like, “Oh wow, there’s carpet there. There’s a value-add. We can put in vinyl plank and the property look more appealing to renters,” those types of things. So it’s just a lot of different opportunities and things that you can do with a particular property that really just make it look better and make it more appealing for someone to actually live in.

Tim Ulbrich: Yeah, one of the things I enjoy — just building off of what you said there — that gets me excited about real estate investing, we’ve talked about it before on the show why I think it’s a good fit for our community to consider, and obviously, I don’t want to minimize, there is risk involved, of course, with anything. But when you think about traditional retirement vehicles, you think about accessing those at the age of 59.5, and this obviously is an opportunity to generate some cash flow sooner. It’s an opportunity to be able to have some different tax strategies and savings. But also, one of the things that I really enjoy in thinking about this — you and I talked about it before the show — is if you have that tolerance of risk, it’s I think a really fun challenge to think through. It’s a very different mindset in how we typically think as pharmacists. And there’s no ceiling on the opportunity in terms of what you’re able to do. Obviously, there’s limitations in terms of how much cash you have to invest and other types of things. But talk our audience through the IDEAL principle because I think that really helps frame the relevance and importance of why pharmacists out there may want to consider real estate investing.

Jared Wonders: Yeah, absolutely. And as pharmacists, we have the opportunity I think to actually invest in real estate and use our capital because of our good salaries as well, so because of our good income. And yeah, we had mentioned the IDEAL principle, the acronym IDEAL, which I like to use in real estate because it’s kind of a good way to kind of understand the different ways you can actually make income or offset some of your expenses that you have in real estate. And I, of course, can’t take credit for this. I’m going to give a shoutout to Bigger Pockets and Andrew Syrios, and I can’t remember the other brother, but the Syrios brothers in one of the earlier episodes, they mentioned this principle. The I stands for Income, so income being cash flow that actually comes from the property after all your expenses are paid off and everything is kind of paid off with the property. D stands for Depreciation. So the government sees the house or a home as a depreciating asset, kind of like a car or like a vehicle. So they mark it off on 27.5 years, so you basically buy a property for $100,000. They use that asset, and they divide it by 27.5 years, and you can use that depreciation to offset some of your income that you make going forward. There are some caps like as far as like income and stuff goes, so you definitely don’t want to buy a property just for tax purposes. But definitely something to look into and check out. The E stands for Equity, so as a tenant is paying off or giving you rent money, they’re actually already paying down the mortgage. Your mortgage principle is being taken down. The A stands for Appreciation. So properties typically appreciate in value, but you mentioned risk, like you said before. So 2008-2009 can happen, of course. But properties typically over a long period of time do appreciate. And then the L standing for Leverage. Now, my wife and I take a little bit less of a stance on leverage. We have leveraged two of the rental properties that we’ve bought, but we’ve bought them in a position of financial strength, which I think is incredibly important when you’re delving into real estate because we put 20% down and we have stable jobs and incomes and we’re able to kind of offset — and when we went into this going forward, we wanted to make sure that we had the reserves in place to be able to cope for anything that comes up because problems will come up. I will give you an example of one that just came up. So we had a storm come through in North Carolina, and a couple branches fall down, and you know, that’s just something that we have to deal with. I mean, stuff comes up.

Tim Ulbrich: Got to have cash reserves. Yeah, and I’m glad you mentioned that because I think, Jared, I think it’s easy to listen to something like “Bigger Pockets,” and you get all fired up and it’s like, man, I want to go buy a property tomorrow. And I think building a strong foundation — so obviously, you guys were in a position, no debt, you have reserves, I’m guessing you’re in a good equity position in your home, you’re putting 20% down, so obviously if things happen, which they will, you’re in a position to be able to handle them, market dips 5%, 10%, 15% next year, who knows what will happen, you’re able to weather some of those things and continue to move on with that plan without it being derailed. So I did just find the “Bigger Pockets” episode you were mentioning. It’s Episode 121. We’ll link to it in the show notes. “Creating the IDEAL Real Estate Investing Business with Andrew and Phillip Syrios,” and we’ll link it to our show notes for those that want to learn more about the things that you mentioned with IDEAL. So talk us through that first purchase because, you know, when I’m listening to the “Bigger Pockets” podcast, I often hear them say, “It’s about doing the first deal and getting it done.” Obviously, you don’t want to lose your money, but it’s about learning, it’s about actually doing the deal because I think so many people learn, learn, learn, read, read, read, but don’t actually do the deal. And obviously, the second one becomes a little bit easier, the third, the fourth, and so on.

Jared Wonders: Yep.

Tim Ulbrich: So when you were getting ready to do that first deal, what did that look like? And how fearful were you in that process? And what made you decide to actually finally pull the trigger?

Jared Wonders: So like I would say that the first deal was pure excitement. Like I was so pumped about this first deal because I had probably done research for 8-10 months, I did a lot of research on “Bigger Pockets,” I listened to Paula Pant. It was one of those things where I think another important thing is having an accountability partner to kind of pull you back a little bit. So my wife is my accountability partner and kind of pulling me back a little bit. The first property, I mean, it was definitely one of those things where we thought it was a good buy. And it was a good buy, and we bought it in a great area. However, we did make a lot of mistakes. That is something that I think that when you make a mistake, you can’t let it define you. You kind of have to work through it. And I think it makes you stronger on the other end of it. But you know, like you said, you have some issues that come up, of course. I don’t know if you want me to — I can give some examples because it definitely happened quite a bit. But the first one that we bought was not like a value-add, so it was one that was probably — it was pretty much rent-ready when we bought it.

Tim Ulbrich: OK.
Jared Wonders: So we were pretty much ready to have a tenant and basically move into the property. The biggest issue that came up with us was we vetted property managers, however, we probably didn’t vet them as well as we should have. So we had not a great experience with property managers, which is actually —

Tim Ulbrich: It’s funny how often you hear that.

Jared Wonders: What’s that?

Tim Ulbrich: It’s funny how often you hear that. I mean, they talk about that on the show all the time.

Jared Wonders: Oh, yeah. You really need to manage your manager. Like I can’t emphasize that enough. And honestly, for me, it’s definitely busy managing it — like we self-manage right now. It is busy, but it’s more rewarding, I think. And you get more of that control aspect back because you lose that control aspect of real estate when you do have a property manager do it. But like I said, if you have a really good property manager that you trust and is really good, then definitely — well, either send them my way —

Tim Ulbrich: Yeah, right?

Jared Wonders: But no, it’s definitely very important to have great processes around you.

Tim Ulbrich: Getting a little bit more detail if you’re willing to share, how did you guys finance that first property? What was your strategy for finding the deal? How much was the property that you’re purchasing? Because I think our listeners may be thinking, hey, I’m really interested in this, but what are we talking about here? Like what would I maybe need in terms of cash and things to get started with that first deal?

Jared Wonders: Yeah, absolutely. So we put 20% down. And Charlotte is a crazy market right now, so we purchased outside of Charlotte a little bit in an area called Lake Wiley, which is a little bit south of Charlotte. It’s in South Carolina. And that was one of those things where we purchased, like I said, 20% down, so we put in about $40,000 into the deal. The property itself was about $170,000. It’s probably worth about $190,000-200,000 now, so definitely not like a property like with a big value-add, like I said.

Tim Ulbrich: Is it a single family?

Jared Wonders: It is a single family rental, yes.

Tim Ulbrich: OK. And conventional loan, 20% down?

Jared Wonders: Conventional loan. And I should probably talk about how we found the deal too. So we honestly just had a realtor that we liked, we trusted, and he would just give us leads automatically through email. And this popped up on a Saturday. I was like, oh, this is kind a cool-looking property, nice area. I checked out the area, and he responded right back. So I think having a really good realtor on your side, especially for that first deal, is really important because having a very responsive realtor is great because you can go in and see the property that same day and really check into it before it’s popped up, especially if you’re in a hot market like Charlotte is.

Tim Ulbrich: So your goal with this first property is buy-and-hold, is that correct?

Jared Wonders: Yeah, correct. That’s honestly our focus for most — actually all — the two properties that we have right now is buy-and-hold, yeah.

Tim Ulbrich: And the second one, you mentioned before we jumped on, had a little more rehab and other things involved?

Jared Wonders: Yeah. The second rehab that we had, we might have it — we talk about the acronym BRRRR, which is Buy, Rehab, Refinance, Rinse and Repeat, which we could possibly do for this property but definitely more of a value-add. We purchased this one at $140,000, and it’s probably worth about $190,0000-200,0000 now with about — I think we spent $10,000 to renovations.

Tim Ulbrich: OK.

Jared Wonders: So there is a pretty good amount of equity buildup in there. And we kind of are trying to get close to the 1% rule, which where you buy a property for — so I’ll use my example, the $140,000. So you buy a property for $140,000, and we’re actually going to be renting it out for $1,400, which is right at that 1% rule purchase price. And that kind of usually takes care of most of your expenses, your property management if you do want to pay for property management, repairs and maintenance that come up, and vacancy, of course.

Tim Ulbrich: So to our listeners that are hearing some of this for the first time and thinking, this is awesome and I’m cracking along but I’ve got these questions, stay tuned. We’re going to be bringing a lot more content on the podcast, on the blog, around real estate investing and trying to do some more education. Obviously, Bigger Pockets is a great resource, fantastic resource as well, and we’ll continue to bring more into the future going forward. Going back to the FIRE — and obviously, real estate investing is playing a big part in that, I want to talk about the concept of Financial Independence Retire Early. And the reason why I’m thinking about this is I’m going through re-reading — actually that audio book, so I guess re-listening — “Four-Hour Workweek” by Tim Ferriss, which is a fantastic read. And it really has me thinking more and more that the concept of early retirement is somewhat overhyped and somewhat overrated, although I think the Financial Independence piece is incredibly important. And obviously, I’m making broad generalizations. This is a unique situation for everyone. But when I hear you talk and we had our previous conversation that you really enjoy your job, you’ve got great benefits, you’re working with the VA, pharmacists have great scope of practice. I think you’re probably practicing at the top of your license, you’re teaching students and residents, so really doing a lot of neat things. And so some people may be thinking, why in the world are you so aggressively chasing Financial Independence Retire Early. So talk to us about that. Is it more about the FI, Financial Independence for you? Is it about the options? You never know what may change in the future. Give us some more input on that.

Jared Wonders: It’s more about opportunities. I think having the — I believe that Jim Collins referred to it as F-You money, so have the financial resources and those funds to I guess make it happen and just kind of pursue opportunities that you wanted to pursue that may not have been possible if you didn’t have that income at your disposal I guess. So I think that’s kind of the biggest thing why we’re pursuing this. And I’m the kind of guy that I want to be there for my kid when he has a game. I want to be there for my kid. I don’t want to be stuck at work all the time and like have to have that be something that I’m tied down to. So it’s just all about opportunities and all about something that I can pursue in the future. If something comes up, and I like it, then I’m probably going to try to do it.

Tim Ulbrich: I love that. And I even love how you shared practically what you guys are doing. It sounds like you’re kind of carving out 50% of your income, some of that going to maxing out 401k’s and TSPs, some of it you’re saving up cash for real estate so you’re ready to put money down, you’re ready to do a rehab. And then obviously, you’re going to build equity in those homes and they’re further going to generate cash flow and other types of things. So a mixture of tax-advantaged retirement savings and real estate. But I think that gives our listeners one example of a road map of something you may follow if this is an area of interest. So I’m hopeful you and Jess have had some of these conversations, you know, I’m guessing you have because your story’s awesome and what you guys are doing is pretty aggressive. But what does success look like for you guys in 5-10 years in terms of where you’re at with savings, where you’re at with real estate, maybe you have other goals and things that you’re thinking about? Where are you hoping to head in the next 5 or 10 years?

Jared Wonders: Yeah, honestly, that’s awesome. I really appreciate you asking that. So I think that the biggest thing for us is we’re probably slowing down after the second one because it’s a little more rehab, a little bit more work. It was great because I tell you, I know a lot of stuff about homes that I definitely did not know before going into the second one. So that has been really interesting. So I think we’re probably going to slow down the real estate just a little bit, maybe build a little bit more equity in these homes because I think that for us, having that income at our disposal with a fully paid-off rental property is really important to us. So that’s something that we’re going to be pursuing. But we’re definitely going to keep our eyes open for deals if they come up. And if we spot a real estate deal that we like or even could partner on or something like that, that’s something that we’re definitely going to consider taking on for sure because we really like it, we like the process, and it’s something that we both really like, really enjoy.

Tim Ulbrich: That’s good. And I think that makes all the difference when the two of you are on the same page and getting excited. And you mentioned accountability partner, which is awesome because I think that getting on the same page is so critical to be able to achieve the dreams and the visions and the why that you guys have identified for your family. Do you have — outside of Bigger Pockets and the things that you’ve mentioned, do you have a book, a podcast, a resource, something you’d recommend to our community that either has inspired you in your journey in the past or is currently inspiring you in your journey towards this quest of Financial Independence?
Jared Wonders: Oh my gosh, there’s so many. But I’ll list my top three that I really enjoy. My first one is the guys at ChooseFI are absolutely incredible. Jonathan and Brad Barrett are just outstanding to listen to.

Tim Ulbrich: One of which is a pharmacist. That’s cool.

Jared Wonders: And Jonathan was a former pharmacist. Like that was one of the things that really got me hooked on the FI, honestly. The second one is Paula Pant. Paula Pant’s interviewing skills are just terrific. I would encourage anyone that is pursuing FI to listen to the Suze Orman episode because that is just an absolute hoot to listen to.

Tim Ulbrich: That’s a good one.

Jared Wonders: It will get you fired up if you’re wanting to pursue FI. But she is a great interviewer, and she’s outstanding on her FI journey and does a lot of real estate and everything. My third one is Chad Carson. He just recently had a book come out, and I think it was called “How to Retire Early on Real Estate.” That kind of was a little bit more in tune of me and Jess’ goals as far as like not — we don’t want to be real estate moguls and have thousands of properties. We want to just have a couple properties, kind of give us that cash flow, and kind of be able to just kind of live on that in the future and have those options. So that was an incredible read.

Tim Ulbrich: Awesome. And that book, “Retire Early with Real Estate: How smart investing can help you.” So we’ll link to that in the — or “How smart investing can help you escape the 9-5 grind and do more of what matters.” So we’ll link to that in the show notes. So for our listeners that have heard your story, are fired up and say, hey, I’d really like to get in contact with Jared, how can our listeners reach out to you if this is something they’re interested in learning more about?

Jared Wonders: Yeah, reaching out to me on Bigger Pockets is great. And I’m actually not really on social media too much, so Bigger Pockets is probably the biggest social media advocate or arena that I’m in. You can honestly just shoot me an email too. [email protected].

Tim Ulbrich: Awesome. Yeah, and for those not familiar with the Bigger Pockets community, easy to sign up. And from there, you can connect with others. I would highly recommend that as well. And to our listeners that are interested in learning more about FIRE, again, make sure to check out Episode 104 of the podcast where I interviewed Jason Long about his journey, including how he retired from community pharmacy at the age of 38 as a self-made millionaire. And I’d also recommend the blog post written by Jeff Kymer on our site, “The FIRE Prescription: How to retire early as a pharmacist,” which is available along with all of our blog posts at YourFinancialPharmacist.com/blog. So Jared, thank you so much for reaching out, No. 1, No. 2, coming on the show. You have got me fired up, and I enjoyed both of our conversations. And I have a feeling this is just the beginning to hopefully some exciting collaborations and future with the community as well. So thanks for coming on the show.
Jared Wonders: Absolutely. And I want to say congratulations again for getting to 100 podcast episodes, that’s incredible.

Tim Ulbrich: Thank you, appreciate that. And as always, to the YFP community, if you like what you heard on this week’s episode of the Your Financial Pharmacist podcast, make sure to leave us a review and rating on iTunes, Apple podcasts, Stitcher, Spotify, or wherever you get your podcasts each and every week. As always, we appreciate you joining us for the Your Financial Pharmacist podcast. Have a great rest of your week.

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YFP 067: Rapid Fire Home Buying Q&A

Posted on September 27, 2018November 2, 2022 by yfpadmin

Rapid Fire Home Buying Q&A

On Episode 067 of the Your Financial Pharmacist Podcast, Tim Ulbrich, Founder of Your Financial Pharmacist, is joined by Nate Hedrick, the Real Estate RPh, to wrap up the month long series on home buying by taking questions from the YFP Community in a rapid fire Q&A format.

Summary of Episode

Nate Hedrick answers questions from the Your Financial Pharmacist community covering various facets of home buying process. Nate shares advice, resources, and parts of his financial, real estate, and home buying journeys to help answer these questions. The first question asks how to save for a down payment. Nate recommends using a savings account if the home will be purchased soon, otherwise he suggests to use a higher interest rate investment. The second question is in regards to comparing rates from different lenders without committing to them. Nate shares that it’s best to be upfront with lenders upon your initial conversation and let them know you are shopping around for a mortgage lender. During this process, you’ll receive a GFE (Good Faith Estimate) which is a document you can use as a comparison tool. Question three asks about tax advantages for home buyers. Nate discusses potential tax advantages for home buyers, such as buying down the rate or mortgage points, as well as property taxes. When asked about the process for building a home, Nate suggests asking pointed questions to the builders and to be wary of perks and additional up-sells they may pitch. Nate then talks about real estate crowdfunding sites which pull money together from different investors to leverage larger investments. Finally, Nate discusses buying a home while in debt with student loans.

About Today’s Guest

Nate Hedrick is a 2013 graduate of Ohio Northern University. By day, he works from home as a hospice clinical pharmacist for ProCare HospiceCare. By night, he works with pharmacist investors in Cleveland, Ohio – buying, flipping, selling, and renting homes as a licensed real estate agent with Berkshire Hathaway. This experience has led to a new real estate blog that covers everything from first-time home buying to real estate investing. Nate’s blog can be found at www.RealEstateRPH.com

Mentioned on the Show

Splash Financial
Real Estate RPh
YFP Concierge Service w/ Nate Hedrick
YFP Episode 064: 6 Steps to Home Buying (Part 1)
YFP Episode 065: 6 Steps to Home Buying (Part 2)
YFP Episode 066: 10 Home Buying Lessons Learned
Home Buying Quick Start Guide
YFP Episode 56: Rapid Fire Student Loans Q&A
YFP Episode 61: Rapid Fire Insurance Q&A
YFP Facebook Group
Ally.com
Script Financial
YFP Episode 009: Interview with Carrie Carlton
Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! by Robert T. Kiyosaki

Episode Transcript

Tim Ulbrich: Welcome to the Your Financial Pharmacist podcast. This is Tim Ulbrich, and I’m excited to have again Nate Hedrick, the Real Estate RPH, back on the show to do a rapid-fire Q&A to wrap up this month-long series that we’ve been doing on home buying. So Nate, welcome back to the show.

Nate Hedrick: Hey, thanks for having me again.

Tim Ulbrich: So for our listeners, we’ve been all over this topic of home buying during the month of September. And if we have anybody listening who’s just jumping in at the end of this series, I’m going to quickly recap where we’ve been before we jump into the Q&A because I think that will help set the stage and hopefully give you an opportunity to go back and listen if need be. So here we are in Episode 067, and at the beginning of the month in episodes 064 and 065, Nate and I covered the six steps of the home buying process. And I think for those that are just getting started or want a refresher on home buying, that’s a great primer, and I’d highly encourage you to go back and check out episode 064 and 065. In 064, we cover three steps. In 065, we cover three more in detail. And then in Episode 066, last week, I talked through 10 home buying lessons that I have learned over the past few months, maybe some hard lessons, mistakes, lessons reinforced as my family gets ready to make the move from northeast Ohio to Columbus. And just as a reminder, along with this series, we have developed a YFP first-time home buying quick start guide that you can download for free at YourFinancialPharmacist.com/homeguide. Again, that’s YourFinancialPharmacist.com/homeguide. Nd if you’re looking to buy or sell or home or you want to get started in real estate investing or you just have a question that you want to have answered by a licensed real estate agent that is also a pharmacist, head on over to YourFinancialPharmacist.com/realestaterph, where you can get in touch with Nate, the Real Estate RPH. So Nate, you ready to do this rapid-fire Q&A?

Nate Hedrick: I’m ready. I’ve got my coffee, so I’m good. Let’s do it.

Tim Ublrich: Me too. I’m ready to go. So an early morning, here we go. And here’s the format. We’ve done several of these before. We’ve done one on student loans, insurance, and just like those, we’ve taken questions from the YFP community via email, via our Facebook group, and I’m literally going to throw them off one-by-one to Nate, and we’re going to hammer some of these. And then if we have time, I’ve got a couple at the end that are ones that are of interest to me and I know that have been asked out there before. So first question, Nate, comes from Austin via the YFP Facebook group. He says, “What is the best vehicle for saving towards a home purchase? Putting 20% down means holding onto a significant amount of money until finalizing a home purchase? So do you feel it is best to invest that money or save it in a low-interest savings account?” What do you think, Nate?

Nate Hedrick: Yeah, that’s an awesome question, Austin. So it’s funny, I’ll tell you the safe plan. And I’ll tell you what I did. The best bet is honestly to put that in a high interest savings account or some sort of rotating certificate of deposit, something that’s going to be able to basically meet or get near to inflation so that all those dollars you’re saving are basically protected and that your money is worth as much as it was when you put it in. Because if it takes you two or three or four years potentially to get that full 20% down, hopefully not that long, but depending on how long it takes, you want that money to be still worth as much as it was when you put it in. So the safe plan is a high interest savings account or a rotating certificate of deposit. But what we did when I was saving for our down payment, we didn’t have a high interest savings account. I think my savings account made .065% annually. It was a joke. So you know, I knew I was getting beat up by inflation every year that we basically didn’t pull the trigger. So what my wife and I did at the time was I took half of the money that we saved for a new home and put that in a savings account. And the other half for that down payment went into basically a short-term investment account. And I basically, the goal was to make about 6% on that investment, which isn’t outrageous. And if I could do that, basically and inflation was 3%, then I’m basically beating inflation with all that money. And so that was kind of the idea behind it. And it worked pretty well. It’s a riskier play, obviously, you can easily lose money that you’re investing, even in short-term investments, especially. So it’s a risker play. But again, at the time, I didn’t really have a whole lot of options. I suppose if I were just doing it today, I would look for some aggressive certificate of deposits, some of those online banks like Ally and whatnot are fantastic for that.

Tim Ulbrich: Yeah, and it’s nice that some of those higher yield savings accounts, the interest rate has come up a little bit, you know, so I think the last statement I got from Ally, it’s up towards 1.8% or something like that, which is nice from the .5%, .4%, .6% that we were living in. You know, to me, Nate, when I hear this question — and you alluded to this — I think about what’s the time horizon, what’s the appetite for risk? And then also just thinking about some of the tax implications and things along the way as well because if somebody’s looking at, you know, I really want to buy a home in six or 12 months, does the math on getting 6% in an account versus getting, you know, 1.5-2% in a savings account, you think about the potential risk that you’re taking out in an investment account versus a savings account, is it worth it with that time period when you really need the cash? Probably not. But if we have listeners out there that are thinking, you know, I’m in a position to start saving or maybe I have a gift from a family but I’m thinking about buying in five years or six years or seven years. When you think about that type of time horizon, to Nate’s point about the impact of inflation, I think that’s where you then start to think about, OK, how could I leverage these funds? Where yes, I’m investing them so they’re growing and beating inflation, but ultimately, I don’t necessarily want to be losing these moneys or at least minimize the risk of losing those moneys along the way. So for somebody that is thinking about investing, any other details you can provide? So you alluded to a little bit of a CD. When you talked about putting that money into a fund, were you just investing it in mutual funds out in the open market? Obviously you’re not doing that in a retirement account, I assume, correct?

Nate Hedrick: No, no. This was basically open market. Basically, you sign up with an online brokerage. I was doing individual stocks and bonds, I was doing larger investment vehicles like mutual funds, like you said, high dividend stuff. And obviously, like you said, there are tax implications to doing that. So this isn’t something you do lightly. But it’s something I had experience with and felt comfortable doing. And it was something that was, again, successful for me at that time. But I also had a larger time frame to look at. You know, we kind of started looking at that while I was still finishing up college, so I totally agree with you. If you’ve got a short-term play, you’re looking at a year, just throw it in a savings account, just protect that investment. And know that that money’s going to be worth it here in the next year, and you can use that down payment.

Tim Ulbrich: Yeah, and I think this is another good place too to think about, you know, the peace of mind variable, which often gets lost in the math and the weeds of this, right? So if you and/or a significant other or a spouse or somebody really wants to have the peace of mind that that money’s there and I’m not going to lose it, you’ve got to factor that into the equation.

Nate Hedrick: Definitely.

Tim Ulbrich: So Nate, I’m guessing some people are hearing this and thinking, 20% down? Do I really have to do this? I know we’ve talked about this on previous episodes, and you know, you do the math on this. On a $300,000 house, you’re looking at $60,000 down. On a $400,000 house, you’re looking at $80,000 down and so forth. And so we got a follow-up comment to this in the Facebook group where somebody alludes to, well, maybe you don’t need to put 20% down. So the comment here was, “I would consider weighing the option of not paying 20% down. Local credit union offers a first-time home buyer with 0% down. This avoids the PMI without having to save a boatload of money for down payment. Although credit scores were high, we were still approved, even with a pretty high student loan-to-income ratio. Keep in mind that the fixed rate was around 1% higher than going mortgage rate at the time. But with enough equity put in, we may explore refinancing to a lower percentage down the road if possible.” So we’ve talked before about in episodes 064 and 065, we talked a little bit about, OK, if you don’t have 20% down, you’re going to be paying Private Mortgage Insurance. However, there are some instances, and it looks like this is the case, where somebody’s not putting 20% down, and there’s no PMI, in fact 0% down loans. But the implications here are potentially a higher interest rate and obviously not having equity in the home. So what are your thoughts here and what are some variables for people to think about that may be leaning towards, you know what, I’m not going to put 20% down. What are your thoughts?

Nate Hedrick: Yeah. I think it all comes down to your priorities. You know, if your priority is to get into a home quickly, then yeah, I think it’s a really reasonable thing to not put 20% down. You know, before I started this financial journey, you know, our home, we didn’t put our full 20% down. We just got to the point where we had saved a good, I think we were at like 15%. And I said, look, this is the time, we’ve got to move. Our rental lease is up, and we just need a home for a couple of reasons. And so we just went for it. So it’s not for everybody, you kind of have to take that emotional side sometimes, which is harder to think about with a financial decision, and know that now, as we’re getting much, much further. We’re 10 years out now — well, almost 10 years out from the financial collapse of the housing market in 2008. There are a lot more options available to you now. I’m seeing a lot of 10% down conventional loans that have no PMI and the rates are pretty comparable. So there are products becoming more available. I think that the 20% down is very good in terms of being very financially stable and starting off with a lot of equity, but it’s by no means necessary.

Tim Ulbrich: Awesome. Next question comes from Mac via email. He says, “They say nowadays, your best off to obtain multiple loan quotes when buying a home. Sometimes it can be hard to compare rates when you are comparing apples to apples and fee structures, rates and commissions. What’s the best way to compare rates without going too far with one lender and then feeling committed to them? Or depending on how far down the road you are buying a home, is it too late to switch lenders and not put your purchase at risk in the market that we are in these days? What do you think?

Nate Hedrick: Yeah. That’s a great question. And there’s a couple aspects to it. So the first thing is I would go in with the expectation when you go to these lenders and tell them up front, I’m shopping around for a mortgage lender. My wife and I or my spouse and I or whatever are going to buying a home. And we wanted to find the appropriate mortgage lender for us. So help us make that to be you. And if you set that stage from the beginning, it’s going to be a little bit of an easier conversation. So they should be able to walk you down the road of OK, what kind of home are you looking for? What’s your budget? So on and so forth, which you have when you go in. And they should be able to give you a good faith estimate. This is a GFE document, it’s a very, very common thing. A good faith estimate shows you all of the numbers that they expect a loan to basically take. So an interest rate, it’s going to be all the fees, it’s going to be all the terms of that loan. So how long the loan is going to last, you know, are there prepayment penalties, are there escrow charges, what are the — all the aspects that go into the loan process. So that good faith estimate is that comparison tool because if you get three of those, one from each of your lender, although the individual loans may be a little bit difficult to compare, you’re going to have all that information in front of you, and you can do the math yourself to figure out how those stack up. So really once you get those good faith estimates, focus on the big numbers, APR or annual percentage rate, not just interest rate is a good way to do that. APR basically takes into account a lot of those fees. So if two loans are 4.5%, but one has $5,000 in fees and the other one has $0, that one with the fees is going to have a larger annual percentage rate, basically the effective interest rate is what they really should call it based on those fees that are built in. So you can use an APR to get a better estimate of what that loan is going to look like. The other big thing is you want to watch for — especially on your GFE — are things like rate locking and the ability to lock your rate at a certain time. That can be really beneficial. What the lender fees actually look like because these are one of the most negotiable aspects of a loan. You can basically take one lender’s fees and throw them at another lender and say, ‘Look, they’re not charging for this. I don’t think you should either.’ So that’s a good option. Watch for prepayment penalties. And then also watch for things like mortgage insurance. We’ve talked a lot about private mortgage insurance, but different loans require different amounts of it. And the GFE will basically show you exactly what those are going to look like.

Tim Ulbrich: I think that’s great advice, and the GFE, the good faith estimate to me was kind of the Aha! moment as Jess and I were going through the process. Once you can see that document, you’re like, OK, I can look at this, I can understand it, I can break down all of these costs and you can really start to get that full picture and not just focus on the interest rate, which I think is the common practice when you just get started and you’re getting quotes that are out there. So I love the recommendation of the practice of getting two or three different GFEs from companies, then you can really compare, as Mac’s question, is kind of apples-to-apples. Couple thing that I’ve learned as we’ve gone through this process here over the last month is that I think it’s very easy to just get locked in with a lender really early. And once you’re far enough down that rabbit hole, it’s hard to come back out of it. So I think really starting up front and being clear that you’re getting quotes, get those multiple quotes because I think what we’ve experienced actually on the side of those that are buying our current home is they actually did switch lenders, as Mac’s question is about, can you switch lenders? And how far down the road are you putting things at risk? And the thing you’ve really got to be careful about is that really restarted the whole process and put our sale about two weeks behind. And so you know, documents had to be transferred and how willing is a mortgage company — I mean, how readily available are they going to be to give documents over on a loan they’re no longer doing? And all of these things, and so it can certainly delay the process, so I think shopping up front is really key. And then you can go forward with one lender before you’re too far down the process. To your point, Nate, about the rate lock, I’m actually paying for this right now, this week. So I don’t know if this is something I could have negotiated up front, I think it was one of those things I looked at and said, ‘No big deal. We’re going to close on time, so why does this matter?’ Well, guess what? Closing got delayed, now the rate lock — I’m actually having to pay a few hundred dollars to get an extension on that rate lock.

Nate Hedrick: Yeah, that’s fairly common.

Tim Ulbrich: And I think that if that was something I would have played out and thought, well, what if closing gets delayed? Then I think we could have hopefully prevented that in advance. So great question, Mac. And actually, Mac had a follow-up question via email, unrelated, but on this topic of home buying. He asked, “What should be considered when buying a home to help maximize your tax advantages?” So the dos and don’ts in terms of home buying and tax advantages. And obviously, this is a big question. What are some of your thoughts, Nate, around home buying and tax advantages?

Nate Hedrick: Yeah, that’s a great question. And I’ll try to just hit on a couple of things here because like you said, it is a fairly big question. The first thing I think is important to talk about is what can you do up front? Like what can you do kind of as you’re buying that home to reap some tax benefits? And there are a number of things from, you know, first home buyer tax credits that are available depending on a number of factors. But one of the easiest things you can do is actually — it’s called buying down the rate. And you’ll hear this referred to as mortgage points or buying points. And this is something where if you have extra capital to put into a home purchase, you can actually percentages of that loan to lower your effective interest rate. So if you are buying a $100,000 home, just for easy math, every point on that loan is 1% or $1,000. And every point that you buy, every $1,000 that you spend, drops your interest rate by a certain amount, you know, whether it’s .25% or whatever. So you can put extra money on a loan to effectively lower your interest rate, which is great for the long term, right? If you had that home for 30 years and your interest rate is now a full 1 percentage point lower, let’s say, that’s going to make a big difference over the life of that loan. But in the very next year, basically as soon as you file those taxes for that year that you bought the home, you can also deduct all of that mortgage interest as a deductible on your taxes. So there’s a really cool kind of tax benefit right up front. So that’s one big thing to look at, at least early on. The other thing that you want to look at is — and this is really kind of a thing that’s changed. If you had asked me this question a year ago, it’d be a little bit of a different story. But with the new tax laws, you want to probably know, are you going to be taking the standard deduction next year? Or are you going to be doing the itemized? And with the standard deduction being raised to what it is, a lot of the individual benefits we used to get from homeownership have kind of fallen away. They’re still there, but they’re just not something that you’re going to get any benefit from. The example I have is that basically now that the aggregate amount of state and local sales and property tax is capped at $10,000 a year, people that are buying in New York and California and Hawaii, all these expensive places, they’re not going to see that benefit. You know, you’re no longer really itemizing that deduction anyway. So that cap at $10,000 is not enough to be worth it. So things like that you want to consider: Where am I buying? How am I going to be filing my taxes next year? You know, an accountant can really help with that because that may change your decision a little bit as well. And then the last piece I guess I’ll talk to is that you want to watch for the individual taxes for that area, so the property taxes. And this isn’t something that you can deduct or something that you have to worry about. It is one way to maximize your advantage, right? If I live in a township that has much higher taxes but much better schools, or do I live in a township that has much lower taxes but less amenities and maybe it’s nearby to the things that I want. You know, so that location aspect can be really important as well when talking about tax advantages.

Tim Ulbrich: So Nate, quick question for you on the buying of points, the first tax advantage that you mentioned. You know, I struggled a little bit when I got that offer on the table during the process we’re going through now. And the way I was trying to think about it — and I didn’t think about the deduction side of it, so I’m learning here right alongside the listeners as well — but what I was thinking about it from what’s the break-even point. So if I — just as an example — if I have to spend $2,000 to get my rate down whatever, .4%, you know, I can do the math on that to see that over how many months of saving that interest paid, why recuperate those dollars, and what if I would have just had that cash up front and done something else? So is that the right approach? Or how do you help your buyers evaluate whether or not that purchasing of points is worth it? Or whether those funds could be used elsewhere for other priorities that they’re working on?

Nate Hedrick: Yeah, and that’s a great point. So think about — there’s a couple aspects, and one is how long are you going to be in that home? That’s kind of the first decision. And how long do you expect to pay off that mortgage? If the answer is I can’t wait to buy this down and pay this off in 10 years or less, then buying points is probably not worth it. I think the break-even point is something around the 15-year mark or something like that.

Tim Ulbrich: Yeah, that’s what it was for us. Yep.

Nate Hedrick: Yep. And it varies based on the individual lender, but that’s usually where it’s at. So if you plan on having a true 30-year mortgage, then points can really be worthwhile. But if you plan on buying down your mortgage quickly or paying it off quickly, it’s usually not as beneficial. The other aspect to consider is that as soon as you pay that off, as soon as you put those monies in, it’s harder to get them back out, right? So that money is immediately tied up. So unless you’ve got a real excess of capital, which is obviously harder to find, it may not be worthwhile to tie up that extra money in the property.

Tim Ulbrich: Yeah, I’m especially thinking maybe for some of our listeners that are buying a home, and maybe they don’t yet have a fully funded emergency fund or they have high interest rate credit card debt or other things. So really, it sounds like buying points is an ideal scenario for somebody who is in a great overall financial position, has extra capital, and plans on being in the home for a long period of time.

Nate Hedrick: Yeah, if you’re spending 5% on your student loans every month or every year, you don’t want to be paying, you know, a couple thousand bucks to get a couple of miniscule percentage points off. It’s not worthwhile.

Tim Ulbrich: OK, good stuff. Mac, thanks for your contribution, great questions. Mindy has a question that actually came in via the Real Estate RPH contact form, which is over at YourFinancialPharmacist.com/realestateRPH. She asked, “I’m building a house, second-time home buyer. Wondering what I need to know about the process, things to watch for, etc.” So thoughts for those listeners that may be thinking about building and whether they do or don’t currently own a home, what does that building process bring in terms of new factors and items that people need to be thinking about?

Nate Hedrick: Yeah, yeah. Besides the regular aspects of buying a home, it does add a couple things to the mix. The nice thing is is that you know you’re getting kind of — you know what you’re buying upfront, right? They’re building the home new. You’re not going to find any lagging issues that the home’s been there for 60 years and now the foundation’s starting to crumble, right? As long as everything is done quality upfront, you’re going to get everything brand new, which is a really big advantage. So I think the first question you want to ask if you’re considering building a home is you know, question around the idea of quality. And I think you don’t want to go to them and say, ‘How nice are your homes? Like what’s your quality?’ Like that doesn’t tell you anything because they’re just going to say, ‘They’re fantastic.’ And then you’ve learned nothing. But you want to ask some pointed questions, you know, things like, ‘Talk to me about some of your building standards. Talk to me about how energy-efficient your homes are.’ Because those are things that are going to show you yes, they follow code, but how close do they get to modern building standards? How close do they get to really high energy efficiency standards because those are much more better indicators of quality than just, oh yeah, we always follow code. Like you wouldn’t be a home builder if you didn’t follow code. So asking the right quality questions is a really good place to start, and that will help you know that what you’re getting when you put all that money in is going to be worthwhile. The second part is really the additions or the amendments or the kind of the perks, right? So you’re going to sit down when you’re building a home, and they’re going to walk you through and they’re going to say, ‘OK, the base model that you’ve selected is $400,000. Now let’s get to some of the upgrades.’ And these upgrades can take you — I’ve seen them honestly double the price of a home from that base value. So be careful when they say, ‘starting in the $300s.’

Tim Ulbrich: Starting at…

Nate Hedrick: Yeah, exactly. Like you’ll see that advertised on the big signs for the new developments. ‘Starting in the $200s,’ and realistically, no one’s walking out of there for under $300,000. So the upgrades, the things I would caution you on or draw your attention to is that take the upgrades that you find beneficial. Don’t let them talk you into things that, oh, this ups the resale value. So if you sell this home in five years, this is what people are going to want. If you’re building a home, in all likelihood, you’re building it for you. And so you should buy the upgrades that you want. One of the things I just had a client walk into it and was working through is that they said, ‘Well, we can do your upgraded kitchen cabinets. And right now, the popular thing is to do dark cabinets on the bottom and light cabinets on the top. And that’s only going to be $10,000 more, and you get this super modern kitchen.’ Well, if they sell that home in 10 years and that’s not popular, they may have to redo that. So if you don’t want that, don’t buy it. And that’s I think a good addage for all the upgrades that go with building a home. If you don’t want it, don’t invest that money because you’re the one that you’re building it for.

Tim Ulbrich: So Nate, one of the things that I’ve always wondered about building a house — we’ve never been through the process — is how does the cash flow needed differ from a buying a existing home? So if I’m in a current home, and I’m looking at building, how does that work in terms of selling and the timing? Am I having to put down money earlier where I necessarily can’t wait until the sale of my home? Or is it very similar to buying an existing home that those things are all ironed out?

Nate Hedrick: Yeah, it’s a little different because a lot of times, you have to buy the lot or you have to put in some sort of down payment to secure the lot. And sometimes, you have to buy the lot like upfront. Like it’s a $28,000 or a $50,000 piece of land that you have to basically buy upfront, and then you move forward. Or sometimes they can say, ‘OK, well it’s a $50,000 plot. We need $5,000 to secure this.’ But generally, it’s a lot more. It’s usually on the higher end of securing that location. So depends on the popularity, it depends on how they want to structure it. But there’s really two sides to it. One is basically securing that land and buying that land, and then the second is getting the mortgage on the home itself. And you can often wrap those things together so that everything’s kind of one piece, but the builder and the developer usually wants a lot more upfront to secure that property to begin with.

Tim Ulbrich: You know, one of the things that I’ve seen in our neighborhood, and we don’t actually have a homeowners association, so this may be different in areas that have a little bit tighter regulations, but we’ve actually seen several houses go up where my guess is maybe they didn’t anticipate all costs involved where six or 12 months later, like the yard is still not in or something’s not fully finished, you know, in terms of a porch or something else. So I think just things to consider, to your point earlier about, you know, what is the starting out price? What’s the actual price? And going back to you really defining your budget before you go into those conversations with the builders or else I think it easily could be a conversation where you start at $250,000 and you end at $400,000, you know, depending on what you’re looking at. So Lauren via the Facebook group asked, “What are your thoughts about real estate crowdfunding sites like FundRise?” So talk to us a little about what are real estate crowdfunding sites and what are your recommendations on these for those that may be interested in doing some real estate investing?

Nate Hedrick: Yeah, this was an awesome question from Lauren. I actually answered it on the Facebook page because I’m in the middle of writing an article about it right now. My wife Kristin actually found FundRise — I had never heard of it before — and said, ‘What is this? Like what’s going on with this?’ And I said, ‘I’m going to find out.’ So I’m actually in the middle of writing this article right now because it’s super interesting. The basics is this: So it’s a REIT, which is Real Estate Investment Trust, but they’re calling it an e-REIT, or an electronic or online or whatever they want to define it as. But the idea is very simple. The idea is that they’re a group of individuals who buy real estate — and this is many aspects. They’re buying rental properties, they’re buying commercial development, they’re buying land, they’re buying all sorts of stuff. And you yourself wouldn’t be able to buy those pieces, you wouldn’t be able to buy the land, you wouldn’t be able to buy the commercial buildings, but if you could buy a very, very small chunk of that, you could still reap some of the benefits. So if you put in, you know, a couple thousand dollars, and 50 people do that, now all of a sudden, they’ve got the capital they need to go forward and take on these big investment and real estate investment properties and projects. So you’re basically crowdfunding a investor group to do these things. So it’s kind of like a mutual fund where you’re buying small chunks of a larger company, but instead, you’re buying small chunks of a larger real estate investing group. And I’ll say a couple of things about FundRise in particular. And I don’t have any personal experience investing with them, so I’ll say that upfront, but the reading that I’ve done and looking through their fine print, I think there’s a couple of aspects. One is that I think that their model is very good in terms of what they’re investing in, where they’re doing it. I think they’re a little ahead of the game. They’re kind of targeting areas that are still not quite on the rise but will be on the rise soon. So I think they have good investments. People in the industry that are talking about them, they’re investing in the right areas. And their current return on investments in the 10-12% area are indicators that they’re doing the right things. So that’s a good sign, right? That they’re investing in the right areas. The problems I think come in when you look at how that money that you’re giving them is being used and how you get it back. They are not a publicly traded entity. They are a publicly available entity. And those are two very different things. If I go into my brokerage account and buy a REIT, a buy a portion of an investing property, I can sell that at any time. It’s publicly traded, so a broker will take that off my hands as soon as I am ready to sell it. Just like a stock — if I buy Apple stock and then go sell it tomorrow, someone’s going to buy that. That’s publicly traded. But if it’s publicly available, I may not have someone available to buy that investment whenever I need to sell. So I could say, ‘Hey guys, I want to cash out. I’m done with FundRise. I want my money back,’ and they would be like, ‘Well, nobody’s buying right now at the price you’re offering. So I’m sorry, we ahve to hold onto your money.’ And if you read all the fine print, they actually really talk about how illiquid the money really is. They can hold onto your money almost indefinitely if it benefits the group of investors. And really, I want you guys to look at that on your own terms because it’s pretty interesting to see how that breaks down. But the idea is simply that if they find it to be in the best interests of the investor group, they can hold onto that money for a long period of time, so it’s pretty difficult —

Tim Ulbrich: That’s interesting.

Nate Hedrick: Yeah, it can be difficult to get that money back out. And I’m sure people are — right now, at least it’s fine. But who knows what it’s going to look like five years down the road? So that’s one of the big concerns that I have. The other one is that even though there have been great returns — and again, 10-12% is fantastic returns for something like this — their fee structure is a little bit high. They talk about only charging about 1% upfront, but if you really break down the fees that are built into the back end, fees can be upwards of 3% a year. So the fees can be quite high, and that’s something that you really want to take into account because that’s taking away from your gains. So all of a sudden your 12% is down to 9%, and if they start dropping and they go to 8-10%, now you’re talking about gains that are less than the S&P. And so is it really worthwhile to have this illiquid money making less than you make in a general just brokerage account. So there’s a couple of pieces to consider there.

Tim Ulbrich: Yeah, those are great points. And I would encourage to our listeners that are thinking about this, don’t forget about your tax advantage retirement savings account. So your 401k’s, 403b’s, Roth IRAs, obviously there’s inherent tax benefits of being involved in those accounts that you may not see with something like a FundRise. So don’t forget to factor that into the equation. And certainly I know in my 401 account, I certainly have the option to invest in REITs, and so is there a way that you can get involved in diversifying your investments into real estate while still taking advantage of those tax advantage retirement accounts if you’re not already doing so. Couple other questions that I want to throw out there briefly because I think they’re ones that I get often. The first one is, Nate, probably the most common question I get. And I was surprised we didn’t get it on the Facebook group is, where does home buying fit in with student loan debt? So is buying a home appropriate when I have $150,000-200,000 of student loan debt? If so, is there an ideal or a right time? And what are some of the principles I should be thinking about? And so I wanted to get your thoughts on this one.

Nate Hedrick: Yeah, it’s a great question. It’s actually a really large question. And I think the simplest answer is it fits in wherever your priorities say it does. And that’s almost too simple of an answer, but it really is the truth. If you need a home right now. If your family or your personal environment says that I need a home right now, then you’re going to make it work with your student loan debt. It’s certainly possible. If you are someone that just hates being in debt and hates the idea of owing somebody more than your salary, you’re probably going to wait. You’re going to pay off those loans first before tackling the home buying process. But it really depends on that priority set. In fact, Tim Church and I — Your Financial Pharmacist Tim Church and I have been working on an article that will be coming out probably around the time this podcast is launched. It talks all about how to buy a home with student loans and what that can look like. So it really comes down to your personal journey and where you’re at and trying to fit that in. I mean, I’ll be honest. I’ll tell you, when my wife and I bought our home, we were well into the negatives in our net worth at the time. But it was something that for us, we wanted a home, we needed a home at the time. So it was worth doing. And it really depends on your own situation.

Tim Ulbrich: Yeah, Jess and I were right there with you. And I think for me, this is such a personal, customized question that the answer to this is different for everyone, right? So you know, I think this is a great example of sitting down and really looking at all of your financial goals in terms of things we’ve talked about before on this podcast: emergency funds and how much debt? And is there credit card debt? And where are you at with retirement savings? And what other financial priorities are on the table? And I think the thing I would encourage the listeners to think about is on a month-to-month basis, depending on your student loan payment, as you look at evaluating the home purchase, you know, you really want to be cautious and not put yourself in a situation where you feel like between your student loan payment and your mortgage payment, you really got no margin to do anything else or a little margin where you’re feeling super stressed each and every month. Now, that can also be tricky because some people may say, ‘Well, I’ll opt into income-driven repayment plan, I’ll minimize my student loan payment, I’ll free up cash, and I’ll then be able to purchase a home.’ But obviously, that has limitations as well, being in student loan debt longer. So I think really taking a step back, working with a financial planner like Tim Baker or really looking at all of your financial goals to say, ‘OK. Where does home buying fit in with all these other priorities?’ And then if it fits in at this point in time, what’s the best next step in terms of how much down, what’s the overall purchase price of the home, location, all of the other factors we’ve been talking about this entire month. Nate, one last question I have here. We’ve gotten a lot of action in the YFP community about real estate investing. And I think there’s a big interest out there, rightfully so, especially while the market’s hot, of course. But we had Carrie Carlton on in Episode 009 that talked about real estate investing, which is one of our most popular episodes. For those that haven’t listened to that, I would check that out. But I think many people are thinking about, OK, where is the job market heading? You know, I want to think about an alternative revenue stream. Real estate investing may be that alternative revenue stream. So for those that are thinking about investing in real estate, whether that be for a side income, a business, diversification of investments, what is the best first step they can take? And I think with other financial priorities also in mind, such as emergency funds, debt, etc., is there a right time to jump into real estate investing? So I know this is a huge question. We could do a separate series in episodes, we probably will in the future. But I know we have listeners that are thinking about real estate investing. I want to give them something to hang onto as the next step. What do you think?

Nate Hedrick: Yeah, no, I think that’s great. And you’re right, it’s a huge question. This is why I have a website, right? This is why I have the Real Estate RPH because this is exactly where I was. I remember reading “Rich Dad, Poor Dad,” learning about passive income and real estate investing and thinking, how do I jump into this? What’s the next step I can take? So if you’re looking for the next step, I think the very first thing you should do no matter what is educate yourself. Listening to podcasts like this, checking out blog posts for our site and for Real Estate RPH, that can be a really great tool. And there are so many other resources out there. There are books, there are blogs, there are podcasts. But educating yourself about the types of investing can be a really great first or next step. And then once you’ve done that, and if you want to take a tangible action, you know, I want to do something and see what this actually looks like, I really encourage people to assess some deals in the area that you’re considering. I work with a lot of pharmacist investors here in Cleveland, and the very first thing if they’re new investors, they say, ‘Well, where do I start? What do I do?’ I say, ‘Well, I need you to assess some deals first. Understand the market in which you’re looking in so that you know what a good deal looks like.’ And there are a number of tools that can help you do this. But really, the best thing is just go pen and paper and a calculator. But seriously looking at what available homes are there on the market right now? What are rents looking like if I’m going to rent that? Or what are flips looking like? Or comps looking like if I were to flip that home, depending on the type of investing you’re going to do? And just figure out if that is a good deal, a bad deal or something in between. And then once you have that pulse on the market and you understand it and you’re doing the education and the background, it becomes that much easier when a good deal comes along, you can actually pull that trigger and look at seriously putting an offer on that home.

Tim Ulbrich: So for me here, I think it’s all about learning. Reading, blog posts, books, listening to podcasts, engaging in communities like this one. And I love your advice of really looking at deals and doing the math on them. And I think when I think about real estate investing, Nate, I think all of us have either a family member or a friend or somebody who’s doing this and who is encouraging us to get involved in real estate investing and talks about all the upside of real estate investing. And of all the things I’ve read, for every good, positive return on investment story when it comes to buying homes, there’s probably five that have gone bad that maybe you’re not going to hear about. So really doing your homework, doing the math, making sure you understand all of the costs, everything involved. But we’ll definitely have more content coming on this topic in the future, so stay tuned in the YFP blog, podcast and Facebook group as well. So Nate, this month has been a ton of fun. We are super excited about the partnership between YFP and Real Estate RPH. So thank you so much for taking the time to come on the podcast, contributing to the blog. And for our listeners, again, we continue to bring you content around real estate investing, buying and selling homes. If you have a question that you’d like to get answered by Nate, head on over to YourFinancialPharmacist.com/realestateRPH, and Nate will get back to you in regards to your question. As we wrap up today’s episode of the Your Financial Pharmacist podcast, I want to take a moment to again thank our sponsor, Splash Financial.

Sponsor: If you’re looking to refinance your student loans, head on over to SplashFinancial.com/YourFinancialPharmacist, where in just a few minutes, you can check your rate. Splash’s new rates are as low as 3.25% fixed APR, which can literally save you tens of thousands of dollars over the life of your loans. Plus, YFP readers receive a $500 welcome bonus for refinancing with Splash. Again, that’s SplashFinancial.com/YourFinancialPharmacist.

Tim Ulbrich: Hey, thank you so much for joining me for this week’s episode of the Your Financial Pharmacist podcast. Next week, Tim Baker and I will be talking about the pros and cons of Dave Ramsey’s seven baby steps and how they do and don’t apply to the pharmacy profession. This is a good one, you’re not going to want to miss this episode. If you’ve liked what you’ve heard on this week’s episode, please make sure to subscribe in iTunes or wherever you listen to your podcasts. Also, make sure to head on over to YourFinancialPharmacist.com, where you’ll find a wide array of resources designed specifically for you, the pharmacy professional, to help you on the path toward achieving financial freedom. Have a great rest of your week.

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YFP 066: 10 Home Buying Lessons Learned

Posted on September 20, 2018November 2, 2022 by yfpadmin

10 Home Buying Lessons Learned

On Episode 066 of the Your Financial Pharmacist Podcast, Tim Ulbrich, Founder of Your Financial Pharmacist, talks through 10 home buying lessons that he learned over the past few months as his family makes the move from Northeast Ohio to Columbus. He shares the good, the bad, and the ugly and hopes these lessons learned will help you in your home buying journey.

Summary of Episode

Tim Ulbrich shares the top ten home buying lessons he’s learned.

DIY route
Read, re-read and understand the fine print
Set your own budget
Ask lots of questions
Put 20% down
Shop around
Consider the total cost of buying a home by including all of the fees
Long-term hidden costs can make a difference
Value of an emergency fund
Have a great team around you

Mentioned on the Show

CommonBond
YFP Episode 064: 6 Steps to Homebuying (Part 1)
YFP Episode 065: 6 Steps to Homebuying (Part 2)
Real Estate RPh
YFP Concierge Service w/ Nate Hedrick
YFP Facebook Group
Send in Questions for Real Estate Rapid Fire Q&A
Homebuying Quick Start Guide
Script Financial
Wyndam Capital Mortgage
Dave Ramsey
The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Tom Stanley
New York Times Rent or Buy Calculator

Episode Transcript

Tim Ulbrich: Welcome to Episode 066 of the Your Financial Pharmacist podcast. I’m excited to be here, and this week I’m flying solo, following up on the two-part episodes that we did in episodes 064 and 065 with Nate Hedrick, the Real Estate RPH. And he’s going to be coming back on next week in Episode 067. We’re going to be doing a rapid-fire Q&A all about home buying. So if you have questions related to home buying, make sure you get those questions answered and ask them. You can head on over to the Your Financial Pharmacist Facebook group or shoot us an email at [email protected], and we’d love to feature your question on the podcast next week in Episode 067.

So this week is all about lessons that my wife, Jess, and I have learned and in some cases, to be frank, mistakes that we’ve made during the home buying process. So we are in the thick of it right now, actually getting ready to move next weekend from northeast Ohio to Columbus, Ohio, so I’m in transition from my job at Northeast Ohio Medical University to Ohio State University. Go Buckeyes! Excited about the opportunities ahead and with this transition, of course, comes selling and buying a home. And so just a few weeks ago, when we were planning this episode, believe it or not, it started as five lessons learned. And it quickly grew to 10. And to be honest, it probably could be many more than that. But that’s just sometimes how it goes. And so this episode is about being transparent, it’s about being honest — I’m not going to hide anything from our listeners — and the reality is, even here, a topic that I feel like I know fairly well, I think this just shows that anything related to personal finance, we’re prone to making mistakes. There’s something to be learned in everything that we do. And obviously, I’m hopeful that these lessons can be passed on to you all in the community and can even help Jess and I as we go through this process again in the future.

So to be honest to the listeners, this process of home buying — and for those of you that have gone through it recently, you know that it can be exciting, it can be emotional, it can be stressful — all of which have a tendency to throw us off of our financial game. And I think when we’re talking about such a large purchase and a home buy, and obviously, the selling aspect of it as well, there’s lots of emotions that can be flying around, lots of excitement, lots of highs, lots of lows. And all of those I think are the more reason that we have to have our financial guard up when it comes to home buying and making sure we’re educated and ready to make the best decisions in this area.

And so a couple reminders that I have before we jump into some background about the move that Jess and I are going through and then I’ll jump into the 10 lessons learned. And if you listened to Episode 064 and 065, we reference that all of the month of September is about home buying. And so along with this month, we’ve developed a YFP first-time home buying quick start guide that you can download for free at YourFinancialPharmacist.com/homeguide. Again, that’s YourFinancialPharmacist.com/homeguide.

OK, so here’s the background. Jess and I have been living in northeast Ohio since 2009, actually neither of us are from this area. I grew up in Buffalo, New York — go Bills — and Jess grew up in the Toledo-Bowling Green area in Perrysburg she spent most of her life, and we’ve been in our current home in Rootstown, Ohio, for eight years. And we actually rented for one year prior to that, so we made the move directly after my year of residency. We came up to northeast Ohio, we’ve been here for nine years. Eight years, we’ve lived in our current home, and we had one year that we rented prior to doing that. Now, when we bought in 2010, we bought with an FHA loan — and you’ve heard us talk about that in episodes 064 and 065. And the main reason we did that is because we didn’t have 20% down for the home. And I’m going to talk about that as we do go through these 10 lessons that are learned. So we only put 3.5% down, which is standard with an FHA loan. At the time, we had lots of student loan debt, as you’ve heard me chronicle my journey before, had no significant emergency fund and had no clue, no idea of the process that’s involved. And ironically, as I look back on that, there was very little stress that was involved with that purchase when in fact, there probably should have been a lot of stress. Very little down, lots of student loan debt, no significant emergency fund, and having really no clue of what was going on and the papers that I was signing. Now, here we are in 2018, we’re moving to Columbus, exciting new job, going to be starting at Ohio State. I have no student loan debt, we’re able to put 20% down, we have a fully funded emergency fund, we’ve got a great retirement account and to start on that retirement. And I think we have a decent, solid understanding of the process. But to be honest, I’m finding it incredibly stressful. And I don’t know if that’s because I’m more aware of what’s going on, I’m more concerned about the places where things can go wrong, maybe I have a little bit of post-traumatic from 2010 and thinking of the things that I could have done better. Whatever the reality is, what I’m fearing right now in the moment as we’re about to close in the next week is I’m feeling a little bit stressed, a little bit anxious and obviously, there’s so many moving parts that go along with this process. And hopefully, we’re going to cover many of these in these lessons learned.

Now, the big difference here in 2018 is that we are both buying and selling. And obviously, all that comes with that and the timing of that can be incredibly stressful. So here’s the deal. At the end of the day, home buying, like any other part of your financial plan, it’s all about being intentional. Being prepared, putting it in the context of the rest of your financial plan, and giving yourself from grace when you make a mistake here or there, and learning from those mistakes and being willing to share those mistakes with others. The only difference here is this is arguably the largest purchase that you’re ever going to make.

And so here we go, 10 lessons that I’ve learned or maybe a better word here would be mistakes or maybe even things that have been reinforced for me as we went through the process back in 2010 and I’m reliving here in 2018.

No. 1, the DIY route, the Do It Yourself route, has saved us a lot of money. BUT, capital B-U-T, is that wow, it has been a lot of work and to be frank with you, I’m not sure if I would do it again. Now, what am I talking about, the DIY route? So No. 1 here, the DIY route has saved us a lot of money, but it’s been a lot of work, and I think it’s added a lot of stress along the way. So what I’m referring to is in terms of the DIY of the sale of our home. Now, the only reason we are doing a for-sale-by-owner is because we literally have somebody in our neighborhood that was interested in buying the home. And so long story short, a few months ago when we were just getting ready to think about putting our home up for sale, we have a Facebook community group that has a, somebody sent out a message and said, ‘Hey, we’ve got somebody in the neighborhood that’s been renting. They’re looking at buying. Is anybody looking at selling their home in the next year?’ Saw the message and said, ‘Well, in fact, we are.’ And so I reached out to them and said, ‘Hey, we’re looking at selling. If you’d love to see the home, we’d love to have you come over and check it out.’ They came over two days later, came back and saw the home another week later, and they said, ‘Hey, we want to buy the home.’ And so obviously at that point, I didn’t feel like we needed to have a realtor in the process to be giving up 6-7% of commissions on the home. And so ultimately, by not having a realtor in the process, that saved approximately $12,000-15,000 if we were to assume a 6-7% realtor fee on the sale price of the home, which is pretty standard. Now, that sounds great, $12,000-15,000, but as I’ve alluded to in the intro to this No. 1 DIY route saved us money, but is it’s been a lot of work, a lot of stress and a lot of ups and downs all the way. And so because we had a neighbor that was looking to buy it, it made sense, we didn’t have to go through the process. We have three young children, so going through that process of listing the home, showing the home, we’ve been through that before and we know how much work that could be. However, as I look back and as we work through the process of making sure the language in the purchase agreement or the contract was in line, looking and finding a title company that we felt comfortable with, being in constant communication between the parties, the different lending agencies, the title company, the sellers — or excuse me, the buyers that are looking at the home, you are that central glue to the process. And really, the thing that I think has got me the most is the uncertainty that can come with this process. And things have literally been in flux from the second we started working with these buyers. And nothing that necessarily is on their back, but they ended up switching lenders because they were having difficulties with one lender, which re-started the entire process, which meant that there was paperwork that had to get re-filed, and ultimately, we are now running up against potentially not having our closing dates align — fingers crossed we’ll hopefully figure that out tomorrow if that’s going to happen. And ultimately, we are so far along the process with them and we have been along the way, and it’s a great opportunity to have them involved so early, but where ultimately it’s at some regards at the whim of what’s going on in their situation, and so that can make things quite different. And now I will say if I did not feel comfortable with working a title company that we had a good connection with, being able to reach out to the Real Estate RPH, Nate Hedrick, with a question here or there, working with my financial planner and YFP team member Tim Baker, obviously all those really help support me along the way. But I think that as I look back on this journey, I’m not sure that I would do it again, although ultimately, it did save us money in the process, so what’s the lesson learned to be here? If you are somebody that is selling your home and you’re looking at the DIY route, make sure that you feel comfortable and understand all the pieces and parts of the process and not just look at what am I going to save by not having a realtor fee, but do you feel comfortable with everything that’s behind you and how might that also impact you on the buying side of things? So that’s lesson learned No. 1.

Lesson learned No. 2 is the importance of reading, re-reading and understanding the fine print. Now, this sounds like common sense, and you’re probably thinking, Tim, come on. You do this all the time, how do you not read the fine print? Now, it’s not that I didn’t read the fine print, I’m actually quite obsessive about reading the fine print. But it’s making sure that you don’t assume things along the way in the fine print and you re-read the fine print. And obviously when you’re going through this process, you’re excited about buying a home, you’re excited about selling a home, you want things to naturally work out, so you have an optimistic lens in which you’re reading things. And so I think that tendency there, at least it was for me, is to not really read to the detail and understand to the detail that you’re asking the tough, probing questions and you’re not making assumptions that somebody else is taking care of it. And so there’s lot of fine print to read. You have the purchase agreement documents, you have a loan estimate documents that will show you as you get closer to close what are all the different fees involved and what you need to bring to the table as you are selling your home, and as you’re buying your home, what you need to bring to the table at the point of close and what are all those fees that are involved and do you understand exactly what that 85-page document says. And if not, are you willing to ask the questions along the way? You know, what a couple examples that I’ve run through along the way here is actually in a home that we were looking at purchasing in Columbus, that ended up falling apart is that there was something in the contract, which come to find out is actually pretty standard in Columbus contracts, that essentially gives the sellers a three-day, 72-hour clause, almost like a seller’s remorse clause. So if for whatever reason within 72 hours the seller decides, you know what, I really don’t want to sell my home because of reason A, B or C, they can pursue that if they issue an attorney letter explaining exactly why they do not want to pursue that, and that ultimately gives them a right out of that contract or at least to have to offer a counter to that, but of course, they could offer something that is egregious and ultimately, you’re not going to be interested in anyway.

So I’m going to give you an example of this is that we were looking at a home in Columbus. And I never knew that a washer and dryer were something that would be such a big deal to a seller. So long story short, in Ohio, it’s pretty standard that your appliances are going to stay with the home, the washer, dryer, that was going to stay, that was in the contract. We were on vacation, we get a call from our real estate agent, who says, ‘Hey, you know what, the buyer — excuse me, the seller really didn’t want to give up their washer and dryer, they didn’t mean to do that. Can they pull it out of the contract?’ And without even thinking much about it, not really objectively thinking, you know what, now we’re going to have to spend money to buy a washer and dryer, wasn’t trying to be a jerk but said no problem, they can keep the washer and dryer. Just add $1,000 toward close and we’ll go out and buy a washer and dryer. Well, that apparently sent the seller off the deep end, and I guess if you love your washer and dryer, you love your washer and dryer, that’s how it is. And they decided to pursue that clause, issue an attorney letter, spent $300-something dollars to do that, and came back with a counter offer that was $20,000 above what we had originally agreed on, which obviously, we were not interested in at that point. And so the lesson there was I read the purchase agreement. I read every detail of it more than once. But I never caught that section and the detail that obviously until it plays out, I thought maybe you can’t even necessarily do that. And so making sure you’re asking questions where you’re confused, you have people around you that can help and support you, and I think what I’ve learned is that by reading the fine print and showing a commitment to your real estate agent if you’re working with one, to the title company, to the lender, the more you are reading, you’re learning, you’re asking questions, I think the more informed buyer that you are, and it keeps all parties accountable and they’re ready to answer your questions because they know they’re probably coming. So No. 2 is the importance of reading the fine print.

No. 3 is a key one. And Nate and I talked a little bit about this in episodes 064 and 065, but I want to reemphasize it here is that you as the buyer set your own budget. Do not let the bank or the lender set your own budget. And I can speak here from firsthand, going through this right now, is that it’s easy to look at a certain range and then you start looking and you think, that would really be nice or this area would be really nice, and all of a sudden, you’re creeping up. And if the lender is setting the budget for you, you’re not going to necessarily really evaluate does the purchase of this home fit within the context and the other financial priorities that I have? It’s a great example that’s right now is that when Jess and I started working with our lender, Wyndham Capital, who has been outstanding, they’ve done a great job, is that they essentially — and this is in part because I think the lending is fairly loose right now because of how good the market is versus where it was, say, 10 years ago after the crash — they pretty much said, I hear what you’re saying, I know what you want, but you can have double that. Or are you sure that you need to or want to sell your current home? Because you know what, you don’t necessarily have to from our end. And so remember, and Nate talked about something called the 28-36 rule that will be used by the lender in determining what they will allow you as a maximum, what they will allow you as a maximum, to take out or to loan. And the 28-36 rule basically says that a household should spend a maximum of 28% of its gross monthly income on total housing expenses, total housing expenses, and no more than 36% on total debt, including housing and other debt such as car loans and other debt that you have as well. So the 28-36 rule, which may be used by a bank to determine what they will allow you or what they will give you in a pre-approval, $400,000, $500,000, $300,000, isn’t necessarily what you should be purchasing in the context of your other financial goals. And this is where it’s really critical to take a step back and say, what other financial priority goals am I trying to achieve? Maybe it’s paying back student loans, maybe it’s paying off credit card debt, saving for retirement, kids’ college, whatever the other things that you’re working towards, and how can I purchase a home in a way that allows me to achieve these other goals? And what is the maximum I am willing to do in terms of that purchase, not what the bank is willing to give to me.

So just quickly, a couple rules of thumb that I really like that you may have heard of before. If you’ve listened to or read any of Dave Ramsey’s stuff, he refers to a mortgage payment — and there’s different variations I’ve heard of this — a mortgage payment — it could be the mortgage alone or it could be the mortgage and insurance, it could be the mortgage, insurance, taxes and interest, so you’ll hear different versions of this — that is no more than 25%, no more than 25%, of your take-home pay. So if your monthly take-home pay is $8,000, this rule of thumb would say that your mortgage payment, and if you want to be conservative, with taxes, with insurance, with interest, your total monthly payment would be no more than $2,000 if you had an $8,000 take-home pay. Now, what that’s trying to do is prevent you from becoming or feeling like you’re house-poor. So if you have other goals that you’re trying to work on and achieve, you know then that no more than 25% of your take-home pay is going toward your home. Therefore, you’ll be able to achieve your other goals. Now, that’s a great general rule of thumb, but some of you maybe listening have no student loan debt, others of you may have $200,000 of student loan debt plus credit card debt plus very little progress on retirement, and obviously, those two situations would be very different. And so you need to evaluate this on a case-by-case basis.

Another rule of thumb is from the book, “The Millionaire Next Door,” by Tom Stanley says that no more than 2x your household income on the purchase price of a home. So if you have a household income of say $150,000, no more than $300,000 on the purchase of your home. Again, that’s trying to get to this idea of preventing you from becoming house-poor. And I cannot emphasize right now for those of you that are looking at buying in this moment, the lending right now — and I’ve experienced this firsthand — is pretty loose, meaning that you as a pharmacist with a good income, a good, stable earning potential, I think you’re going to find that the bank is willing to give you much more home than you probably need to have and that you probably want in terms of the other goals that you’re trying to achieve. And so what I really encourage you to do is zoom out of the lens of just the monthly payment and look at the total payout of what this home is going to cost you. So as one example, if you were to have a purchase price of a home around a $350,000 with mortgage, taxes, insurance, assuming a 30-year home with about a 4.5% interest rate, it’d be about a monthly payment of $1,900 a month for 30 years. If you do the math, that $350,000 home over the course of 30 years, you’re going to pay out about $684,000. Now, it doesn’t mean it’s a bad decision. It may be a great decision, depending on the other financial goals and what you’re trying to achieve, but looking beyond just the monthly payment also helps you look at this in a different way and evaluate how does this fit in with the other goals that you’re trying to achieve.

So No. 3 here is set your own budget, it’s a great reminder. Jess and I had this reminder this year, especially as the lending is loose. Don’t let the bank set the budget for you.

No. 4 is ask lots and lots and lots of questions. And I alluded to this a little bit in No. 2, but Jess and I have experienced this firsthand is that you want to be respectfully annoying. Be respectfully annoying because I think asking questions and showing a desire to learn, as I mentioned before, keeps all parties — the title agency, the loan officers, the lenders, everyone that you’re working with — let’s them know that you have a desire to learn, let’s them know that you’re ready, you’re invested, and I think it keeps people more accountable along the way. And I’ve had several individuals in this process, everyone from the loan officer to the title agency say, ‘You know what, I can tell that you’re really interested in this, and I usually don’t get these types of questions.’ And I think ultimately, I want them to know that I’m probably going to be asking questions. I think that helps them give me a more detailed and thorough response, also helps keep them accountable to make sure that they are giving the attention due to the process that is going along the way.

And I think this is really true of anything, whether it’s a home, a car, any major purchase that you’re making, an educated buyer, I truly believe, is going to get the best value along the way. And so just a few examples that we have in the lesson learned of the value of asking lots of questions is by asking lots of questions along the way, this has allowed us to negotiate and reduce title fees that actually identified an error in a property tax calculation that got corrected — and maybe that would have probably been identified anyways, but that question really helped identify that, and obviously that led to a reduction in what will be our future monthly payment. And for us, most importantly, as those two examples I just gave you are short-term savings, is that it helped us ensure we understood the process and we know exactly what we’re paying for. So whether it’s cost at closing or whether it’s when we send in that monthly payment each and every month, I know exactly where that money is going each and every month. And I think obviously that is powerful in and of itself, but I think it’s valuable just to know going into the future when we do this again or as we’re helping guide others in the process as well, knowing where that money is going, I think obviously is going to help motivate us to eventually get this paid off and turn this liability into an asset.

OK, so No. 4 is asking lots of questions.

No. 5, I’ve hit on this many times on the podcast and in blog posts, is the importance of 20% down. Now, no judgment here. I’m speaking from making this mistake back in 2010, I alluded to that at the beginning of the episode. Jess and I put 3.5% down through an FHA loan, and to be frank with you, we were paying for that for many years — really up until probably the last year because the reality is the way the mortgage is constructed with interest, it takes so long to build up equity in a home. And so to me, there’s lots of reasons to have 20% down on a home. Instantly, you have equity in the home. So if something like 2008 were to happen and the housing market would flip, you’re not likely to be underwater on your mortgage. Or what if you go to sell unexpectedly in two years because of a job change? And maybe you thought you’d be there 10, 15 or 20, you could build up equity, but you’re not for whatever reason or something unexpected happens. Now, you may not have enough equity in the home to cover all the costs associated with selling that home. And obviously then, you’re going to need additional funds to bring to the table to cover those costs.

Other advantages of 20% down — obviously, no Private Mortgage Insurance, we’ve talked about that, PMI, which is foreclosure insurance. You don’t have restrictions that are associated with loans like an FHA loan, which is in terms of how that PMI is structured and how you’re going to pay it, more stringent inspections and appraisal processes. And I think obviously, 20% down just keeps it simple. No PMI, no restrictions on how that loan is being structured, a cleaner inspection, appraisal process, you’re not trying to buy points in the process and trying to eventually get your PMI reduced. It makes a conventional loan purchase process incredibly simple, and I think it makes you an attractive customer to the lender. That’s something I heard over and over again from the lender that we’re working with, Wyndham Capital said, ‘You know what, you’re a great buyer. And we’re glad to be working with you,’ and I think it’s because of that 20% down, they obviously feel very comfortable with that conventional loan.

Now, the other thing I think 20% down really does — and again, I’m speaking here out of a personal mistake — is that it forces you down in the expectation of the home that you’re buying. It forces you down in the expectation of the home that you’re buying. Now what do I mean by that? If Jess and I right now were to say, ‘You know, we really want to buy a $500,000 home,’ if we stayed committed to 20% down, that would mean we have to come up with $100,000 in cash to be able to go to closing at that home plus the closing costs on top of that. Now, if we don’t have $100,000 equity in our current home or we’re buying for the first time, that obviously is going to take a lot of time to build up $100,000 of cash to be able to close on that home. So I think what that does if you stay committed to 20% down, you say, you know what, maybe that’s a $250,000 home. Maybe that’s a $300,000 home. Maybe less than that or maybe slightly more than that, depending on the market that you’re living in, will allow you to potentially buy down on the home, whereas if you go into a 0% down loan or a 3.5% down loan where you have to bring very little, if any, cash to the table, obviously I think it’s much easier to buy up on home and find yourself in the situation where you feel house-poor.

So 20% was the lesson learned No. 5, and I think here, this is an important point where you really have to evaluate, am I rushing to buy a home? Should I stay in a rent situation for longer? Should I buy? We have talked about this at great length, and what I would reference you to and will link to in the show notes is the New York Times has a great rent v. buy calculator that really helps you look at this in an apples-to-apples way in the best that you can to make the comparison. Because I know the trap that I fell into was well, I’m paying $1,100 a month for rent, my mortgage with taxes and with insurance is going be $1,100 a month. Why wouldn’t I buy a home and build up some equity? And the reality I learned, which is an obvious one now looking back is that I was really building very little, if any, equity because of how the loan was structured and because I had almost nothing down and I forgot to include all those other fees on top of that in terms of the maintenance and everything that comes with the home that easily is upwards of 30-50% of the mortgage payment by itself.

So before we jump into points 6-10, I want to take a quick break and just re-emphasize something we talked about in episodes 064 and 065 is that if you are looking to buy or sell a home, get started in real estate investing or have a question that you want to have answered by a licensed real estate agent that is also a pharmacist, make sure to head on over to YourFinancialPharmaicst.com/realestateRPH to get in touch with Nate Hedrick, the Real Estate RPH. Again, that’s YourFinancialPharmaicst.com/realestateRPH. And you can submit your question. We have a few details and information to fill out, and he will respond to you as soon as possible. Again, we’ll have him back on in Episode 067 for the rapid-fire Q&A on home buying.

OK, so points 1-5, we covered lessons learned. No. 6 is shop around. Shop around for title companies that you’re working with if your contract allows that, shop around for the lender that you’re going to work with, but be careful how you do it. So lesson learned No. 6, shop around, but be careful how you do it. Now, why am I saying be careful how you do it? So I made a mistake — and I alluded to this on Episode 065 — I made the mistake of saying, I’d really like to see this tool that’s out there now advertised called Lending Tree becuase if it’s a good tool to compare for lenders, rather than just depending on the local bank or a lender that I’ve worked with previously, I’d love to be able to share that with the YFP community. Now, I’m glad I tested that first because honestly, I would not recommend that you use a tool like Lending Tree because I submitted my information, and literally for about a month-long period of time, I was getting phone calls and voice messages all day long of lenders trying to get ahold of me, even long after I selected a lender. And so I think that the point here is a good one is shopping around and not just depending on one lending quote or one title company, whatever you’re working with, one real estate agent, is really shopping around will allow you to look at multiple options just like you would with any other major purchase. However, do not just focus on the price when it comes to a title company or an insurance quote that you’re getting or a commission that you’re going to pay a real estate agent or a rate that you’re going to pay a lending company on your loan. That certainly is a critically important factor, but you need to make sure you’re looking at the other components like are they easy to work with? Are they communicative? Are they responsive? Do they have a good reputation? Because I can tell you from this process over the last month, all of these individuals I’ve been in touch with, on some weeks on a daily basis. And so working with one lending agency that’s going to give you a 4.55% rate versus another that’s going to give you a 4.6% rate, but one’s not going to respond to you as much or not going to close on time, they’re going to cause you a lot of headaches, you have to really evaluate is it worth it? And obviously, if you can get the best of both worlds, that’s the place to go. And so making sure you’re shopping around for all these different areas, making sure you know what is and is not neogtiable, I think is a great lesson to be learned, certainly one that I’ve learned. But be careful how you do it in terms of getting multiple quotes.

Lesson No. 7 is make sure to consider all of the total costs and fees that are associated with buying a home — and if you’re selling a home, obviously that’s associated with the selling as well. And to be fair and to be honest, don’t be surprised by a few more that come along the way. And there was sometimes I would look at documents, and just this past week, I was looking at our loan estimate closing documents, and all this laundry list of title fees and no explanation of what they are. And they ended up being legitimate fees, but again, back to being an educated buyer, making sure you’re asking questions, making sure you’re trying to compare one of these to another if you’re looking at shopping around with two different companies, but I think what tends to happen when you’re buying a home is you hone in on the sale price of the home alone. So ooh, that home’s at $350,000, it’s within our budget. Great, that is certainly an important factor, but what about all of the other fees that are involved.

Now, if you’re just buying a home, as Nate mentioned on the previous episodes, there’s really no realtor fees that are involved because of how they’re absorbed by the seller, so that’s simplified somewhat. However, when you’re on the selling end, you obviously have the realtor fees, which can be 5-7%, roughly, of the sale of the home. And depending on the purchase agreement, you may be responsible for some of those at the buyer’s expense. And obviously, that can vary from state to state, region to region, purchase ot purchase. You’ve got the down payment on the home, you’ve got the appraisal cost, you’ve got inspection, you’ve got title fees, you’ve got prepaids at close in terms of homeowners insurance and mortgage insurance if you don’t have 20% down, and property taxes and HOA fees. You’ve got moving fees, right? So if you have to pick up and move across the state or across the country, are you going to hire a mover? Are you going to do it yourself? Are you going to have them pack? Are you not going to have them pack? And of course, you have the transitionary fees. So as you’re in the pack-up phase, you’re probably eating out more, you’re taking trips to Lowe’s to fix things on your current home before you sell if that’s the case or when you’re buying a home, when you get there to do some quick home improvements. So really set out and not just look at the purchase price and say, ‘OK, we got to 20% down or whatever our goal is.’ But look at all of the costs that are involved with the purchase along the way.

And prior to this episode, I sent a note out to our Facebook group to say, hey, what are some of the lessons that you’ve learned along the way when it comes to home buying. And I like what Wes said in terms of ‘be wary of what’s called a special assessment fee in a new neighborhood. Typically, it’s a fee being applied to each homeowner for the cost of development of the new neighborhood. Think bonds taken out by the municipality that include interest that then are being applied equally to each new homeowner for a period of time, say it’s 10 years.’ So Wes, thank you for contributing. For those of you that are not yet a part of the YFP Facebook group, we’d love to have you join. And I think that’s just an example of this laundry list of fees and miscellaneous fees and more fees that can come along the way. And I think the lesson that Jess and I learned is we are so focused on the sale price and so focused at getting that 20% down, thankfully, we had some buffer beyond our six-month emergency fund, our 3-6 months emergency fund to cover some of these other costs. But making sure you’re really looking at the entire picture of all fees that are involved. So that’s No. 7 is consider all the costs.

No. 8, the lesson learned here is the long-term “hidden costs” when buying a home that can make a difference. Now, I’m not talking about the transactional cost, I’m talking about the long-term hidden costs beyond what I just covered in lesson No. 7. So here, we’re talking beyond the sale price, beyond the transaction costs. So what I’m referring to here are things like property taxes, homeowner’s insurance, HOA fees, local income tax if that is applicable or not. And so I think here that again, another area you tend to focus, I know we tend to focus, on the sale price of a home. But in reality, from one neighborhood to another in the same city, your property taxes could be different by $2,000-3,000 a year. Well, that has a huge impact on your monthly payment. Or homeowner’s insurance that you’re going to be paying each and every month, each and every year. Or does the development have HOA fees or not? Does the city have a 1-2% local income tax or not that you’re going to be paying each and every year? These are the long-term, what I call hidden costs that — not saying you necessarily wnat to avoid these because there could be great reasons for being in an area that has these: great schools, great community, great neighborhoods, etc. — but making sure you’re aware of these and how they’re going to contribute to your monthly payment and making sure you’ll be able to stay within budget and to achieve your other financial goals.

And Brittany from the Facebook group here says that, ‘Upkeep costs of one home versus another for sure. So we have two acres and a pool. Upkeep is quite pricy.’ And I think that’s great is if you’re looking at two very different styles of home that’s on land, a home that’s not on land, a home that has a pool, a home that does not have a pool, or any other factor like that, what is going to be the upkeep differences and making sure you’re acounting for those and how that may fit into your monthly budget, obviously those factors being beyond your monthly payment.

No. 9, Jess and I have learned this firsthand, we are feeling it right now, is the value of having a solid emergency fund in place when you’re making these big purchases. So we’ve talked many times before on this podcast and the blog, 3-6 months of expenses in a long-term savings account set aside to cover a job loss or some other emergency fund, and I think it goes without saying that here, when you’re making a massive purchase, you’re in a transitionary period of time, a solid emergency fund in place gives you peace of mind that if something goes wrong on either end, if you’re buying or selling, or you have some backup there during a transition, if you have a gap of employment, as I mentioned, something goes wrong, the peace of mind here can not be traded in terms of what a solid emergency fund will bring. And so I’m a big advocate of, again, 20% down, a solid emergecny fund, neither of which Jess and I did on our first purchase, both of which we’re doing now, brings an incredible amount of peace and I think reduces anxiety during that transitionary period.

And finally, lesson learned No. 10 is the importance of having a good team around you. Now, I mentioned at the very beginning, lesson No. 1, that we’ve taken the DIY for-sale-by-owner approach because we had essentially a buyer approach us in our neighborhood. And so we don’t have the real estate agent involved in the process. However, as I alluded to, if I had to do it all over again, even with a known buyer, I would question that decision, although it’s had great value. And so here, a great team around you, I’m referring to a real estate agent that is transparent, that is acting in your best interests, that you know and that you trust; a good financial planner that knows your situation and that can keep you accountable in this process. So for Jess and I, Tim Baker is a phone call away, and I called him just a couple weeks ago because we were having some potential issues and still are potentially with closing dates to say, hey, what are the options? Help talk me through this. What am I not thinking about? What are my blind spots? And I think for such an emotional, big decision, having a financial planner on your team that can say, hey, does this fit in the context of all these other things that we talked about? Or what if we waited three more months? Or maybe it’s the right time, but what about this or that? Somebody to keep you and/or a spouse accountable through this process is incredibly important. Obviously, you have the lender, the title company, this team is one that you’re going to be communicating with regularly. And Nate alluded to this on previous episodes, making sure you have this team ready to go and knows exactly what your priorities are before you get started in the process.

So there you have it, 10 lessons learned that are reinforced or in some cases, mistakes that we’ve made through this process. And we’re not fully through it yet. So we’ve got a couple weeks. Hopefully at the end of this month, we’re going to be moving into the home in Columbus. We’re in the final processes of getting paperwork signed, closing date’s hopefully this Friday, early next week. And so stay tuned; I may have more stories to share — successes, mistakes along the way. Again, that’s what this is all about, hopefully helping you learn through the process as well and I’m hoping through these lessons, you can save yourself some headaches and do this in a better way or potentially even share some of your own stories with others as well.

So as a reminder as we wrap up here, again, along with this month-long series, we have a YFP first-time home buying quick start guide that you can download at YourFinancialPharmacist.com/homeguide. Again, that’s YourFinancialPharmacist.com/homeguide. And as we wrap up this episode of the podcast, I want to take a moment to again thank our sponsor of today’s show, Common Bond.

Sponsor: Common Bond is on a mission to provide a more transparent, simple, and affordable way to manage higher education expenses. Their approach is no big secret. Lower rates, simpler options, and a world-class experience, all built to support you throughout your student loan journey. Since its founding, Common Bond has funded over $2 billion in student loans. This is the only student loan company to offer a true one-for-one social promise. What that means is that for every loan Common Bond funds, they also fund the education of a child in the developing world through its partnership with Pencils of Promise. So right now, as a member of the YFP community, you can get a $500 cash bonus when you refinance through the link YourFinancialPharmacist.com/commonbond. Again, that’s YourFinancialPharmacist.com/commonbond.

Tim Ulbrich: Thank you so much for joining me today. I look forward to next week’s episode where we’ll bring Nate, the Real Estate RPH, back on to do a rapid-fire Q&A on home buying. Have a great rest of your week.

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YFP 065: 6 Steps to Home Buying (Part 2)

Posted on September 13, 2018November 2, 2022 by yfpadmin

6 Steps to Home Buying (Part 2)

On Episode 065 of the Your Financial Pharmacist Podcast, Tim Ulbrich is joined by Nate Hedrick, the Real Estate RPh, to continue a two part series covering the 6 steps to home buying every pharmacist should consider during this exciting process.

Summary of Episode

Nate Hedrick, pharmacist and licensed real estate agent, talks with Tim Ulbrich about the benefits of home buying for pharmacists and the last three of six steps to take when you are considering buying a home. As in Episode 064, these steps to home buying are found in the Home Buying Quick Start Guide.

Step four covers choosing a loan and getting pre-approved. Nate discusses the differences between being pre-qualified and pre-approved for a loan and dives into breaking down different types of housing loans available, such as Conventional, FHA, VA, and Doctor Loans. Step five is all about finding your home and negotiating. Depending on what type of housing market the house you are looking to buy is in, you may be able to negotiate closing costs, a home warranty, or inspections. Nate stresses that everything is negotiable, within reason, and to not focus solely on the purchase price. In step six, the final step of the home buying guide, Nate covers how to inspect, insure, and close on your home.

About Today’s Guest

Mentioned on the Show

Commonbond
Real Estate RPh
Homebuying Quick Start Guide
YFP Episode 064: 6 Steps to Homebuying (Part 2)
YFP Facebook Group
Send in Questions for Real Estate Rapid Fire Q&A
Contact Nate Hedrick, Real Estate RPH

Episode Transcript

Tim Ulbrich: Nate, welcome back to the show. How are you doing?

Nate Hedrick: Great. Thanks so much for having me again.

Tim Ulbrich: Awesome. Excited to be here in Episode 065 where we’re continuing to talk about the six steps for the home buying process. And we talked about, in Episode 064, we talked about the first three: making sure that you’re ready to buy a home, we talked about determining what’s important and then ultimately, assembling the right team. And as a reminder for our listeners, you can go to YourFinancialPharmacist.com/homeguide to get a copy of this. No need to take notes. We’ve got it all there for you in more detail, even, than what we’re talking about here on the show. So let’s jump right back into step No. 4, and here we’re talking about choosing a loan and getting pre-approved. So before we talk about the different types of loans, talk us through the pre-approval process. What does that mean? And how does that play out as people are looking for a home? And when should that part of the process take place?

Nate Hedrick: Yeah, great question. So there’s two components here. And here, we have two different terms thrown around. One is pre-qualified, and one is pre-approved. I’m here to advocate, basically, for the pre-approval side of things. Basically, both of them are going to be that the lender says, within some capacity, that this is the amount of money that we would be comfortable lending you if we were to offer you a loan in the future. The biggest difference here is that a prequalification is a very simple, they can do it within an hour or two, they just look at your income, and they give you an idea of what you likely would be able to be lended. And honestly, it’s very weak when you’re bringing that to the table as part of an offer. Pre-approval is a little bit different in that it actually looks at your finances and it really goes through your income, your credit, your current debts, just your financial health in general. And it says, without a doubt, this is the limit at which I will happily lend you. And as a seller, you can take this letter and say with confidence that there’s going to be a loan available to this particular buyer if I accept their offer. So it’s a really powerful tool that you can bring to the table when making an offer because, again, it shows the seller that you’re serious, and it shows them that you are capable, that you’re financially capable of handling the offer that you’re saying you are.

Tim Ulbrich: Yeah, and I think my impression in the market the way it is right now, Nate, is that basically to your point, if you want to be competitive, you better have that pre-approval letter ready to go at the point of making an offer.

Nate Hedrick: Oh yeah.

Tim Ulbrich: So I think going all the way back to step No. 1, you know, before you go to the bank and get that pre-approval and are making sure that you have determined what is the appropriate budget for you. Because my experience, not working with you, Nate, but working with other real estate agents, is that often if I have a pre-approval letter for $500,000, even though that may be outside of the range of what we’re looking for, that often may dictate the types of homes that are being shown to you. So being really ready to establish that budget. And let me give a word of advice to listeners, a mistake I just recently made — and actually, I’m glad I made it before we took it out to the YFP community, but I wanted to use a tool like LendingTree that’s out there to see what are the different quotes that you can get to begin this process. And basically, LendingTree is a compilation of a bunch of different lenders, and you can quickly see different lenders that are out there, you can see what the rates that they’re offering, you enter some information, and I thought, oh man, if this works out, this would be a great thing to give to the YFP community as a tool to use rather than just going to one bank, being able to shop the market at large. And Nate, as you might suspect, I put in my information, and still, a month later, my phone is ringing off the hook.

Nate Hedrick: I was going to ask how your phone is doing.

Tim Ulbrich: Oh, man. It’s crazy. I mean, probably the first two days, I was getting 10-12 phone calls a day, voice messages, and I’m still getting them, even a month later. So I think the point of shopping around is a good one. I think the days of just going to one lender and calling it a day are over, but just be careful in terms of the process you’re using to shop around if you don’t want to get bombarded with phone calls.

Nate Hedrick: I would really recommend you ask your realtor too. They’re going to have a good inside scoop as to how these loan processors actually work. I can tell you in my own experience as a home buyer what it was like, but it’s really nice to know all of the inner workings of, OK, how responsive is this loan officer? And how responsive is their underwriting team? And that’s something you’re never going to get as a general consumer. So asking your real estate agent, going back to step 3 and making that a part of your team, but asking that agent, OK, which companies do you recommend based on my current status that I should get pre-approved with? And that can be a really powerful tool.

Tim Ulbrich: Yeah, and I think that’s great advice as well that you gave me when you’re also shopping around for homeowners insurance. You know, you certainly can go online and shop around for best rates, best dollar amounts, whatever, but really asking around and making sure you’re going to be able to deal with somebody that 1, is friendly but also 2, is responsive. You might save $50 or $60 a year, but if they’re not going to be very responsive to your needs, is it worth saving $50 or $60 a year, right?

Nate Hedrick: No. It’s invaluable, honestly.

Tim Ulbrich: So in terms of the pre-approval process, I think it’s important to note here as well that there’s going to be some items that you’ll need to provide for this pre-approval process. So you’re going to have to prove income, show your assets, so get ready to send in information related to retirement accounts, logging of any debt and other items, social security, could be rent history, credit reports, etc. And going through this process recently versus 2009 when my wife and I bought our last home, I was really impressed with how automated this has become. So rather than having to download forms and get it to the lender, now they’re using tools where you can enter information, and they’re automatically able to pull that information. So you’re not having to provide those documents every few weeks throughout the process, so obviously will be dependent on who you work with. But I think it’s cetianly become more convenient. So as we continue this step 4 of choosing a loan and getting pre-approved, I think it’s worth talking here about the different types of loans that are out there. And you mentioned one earlier in terms of conventional. So talk us through what exactly is a conventional loan? And then also talk us through some of the other ones, notably would be the FHA, the VA and then the doctor loans that are out there.

Nate Hedrick: Yeah. Great. So there’s a couple different types of loans, and this is by no means an exhaustive list. This is just some of the more common ones. Basically, when you think of a traditional mortgage loan, you’re probably thinking of what’s called a conventional loan. And this is usually with a 20% down payment, and it’s a 30-year fixed rate, and it’s a very kind of standard, general, run of the loan. And the biggest differentiator here is that the conventional loan is not secured or insured by the government. That’s the thing that differentiates it from an FHA or a VA type loan, meaning that the bank, when they take on the risk of you being a lendee, they take on that risk themselves with no insurance that they’ll ever basically be paid back. They’re using the home as collateral, but if you default on payments, that’s all they have. There’s no kind of backup plan. The biggest difference with a government-backed loan is that they do have that sort of backup plan. So because of that, they’re allowed to or they’re able to lend to some people who may not be as qualified, potentially, as someone that might go for a more conventional loan. Now that’s not to say that you or I wouldn’t benefit from the use of a FHA or VA loan, but it does open up the market a little bit better to more individuals. For example, an FHA loan drops the minimum down payment all the way to 3.5%. So if you’re someone that’s having trouble saving up money every single month, and that idea of a $40,000, $50,000, $60,000 down payment is just never going to happen, then this is maybe a potentially attractive option for you. The other thing is that it actually drops the required credit score in some capacity as well because that guarantee is there. So there are some benefits in that. The downside of an FHA loan is, however, some of the additional mortgage insurance premiums that you’ll pay. Because there is that greater risk, they’re going to charge you a little bit more in terms of mortgage insurance premiums. Basically all FHA loans, for example, require an up-front mortgage insurance premium, and it’s usually broken out into the — it’s basically broken down into the individual months, but there is going to be an extra amount that you pay every month for that added risk. So there are advantages and disadvantages to each side. The VA loan is a little bit different. VA loans are really attractive because of their — basically, you can get a 0 down, no money down, basically a loan agreement, but you have to be an active or retired member of the military or at least the spouse of an active or retired member of the military or National Guard. So that’s a really important thing to break out. And it’s not available to everybody, but if it is available to you, it might be a really attractive way to buy a home without as much money required down. So definitely something you need to look into. And then this new type of loan that’s really starting to emerge and we’re seeing it more and more are what we kind of casually refer to as “doctor loans.” And doctor loans or really any sort of specialty loan is what this is classified under are loans that are targeted toward certain types of individuals — in this case, physicians. So if you are a physician, and you’re making x amount of dollars a year, they’re going to look at you as a much more stable lendee than somebody who may not be a physician. And maybe that’s biased, maybe it’s not. But they know, on average, that these physicians are able to hold a higher loan amount or they’re more likely to pay it back or whatever. So they’re offering more attractive loan rates to people like that. So there are loans specifically — there are very few that specifically cater to pharmacists — there are a lot more for physicians available. But I think we’re going to see these specialty loans kind of growing, that you’re going to be targeted based on your occupation, based on your credit history, rather than the other way around.

Tim Ulbrich: Yeah, I think it’s worth mentioning, though, as you mentioned, there’s not a ton of them available out there for pharmacists, although there’s some. I think what I’ve been hearing and seeing is they’re expanding in their reach. And I think at face value, they can appear to be very attractive because of the little to no down payment that’s required, because of not necessarily having the mortgage insurance that’s tied with not having the 20% down in the conventional or the mortgage insurance premiums in an FHA, and because of their exclusion of student loan debt when they’re looking at your debt-to-income ratio, so I think all of those together really makes it a very viable option for somebody that maybe is a new graduate, they have tons of student loan debt, just to get quickly into their home buying process, whether or not they’re ready. And so I don’t think I’m trying to send a message here that these are terrible products, but I think that it just requires a little bit more work on the end of the consumer as those barriers are taken down for you to really do your homework and make sure you’re ready to buy before you jump into one of those loans if they were to be available to you.

Nate Hedrick: And regardless of the loan that you’re going to choose, you’re going to want to make sure you’re doing that homework. In fact, on our website, Real Estate RPH, we’ve got a lot of articles that talk about the different types of loans and really break down the advantages and disadvantages of each. So I encourage you to take a look at that because it’s a good idea to do your homework and understand the different parameters that are involved. It sounds boring, but this is a big part of your life. This could be 30 years of payments that you have to go with, so knowing that before you jump in is really important.
Tim Ulbrich: Yeah, again, in the guide, we have much more detail on each of the information on those four loans. So check that out. And in step No. 5 here, we have finding your home and negotiating. And I think this is a huge one, Nate, because I think often as you’re in the buyer seat, you get excited, again, you’ve got this emotional component, you’re ready to sign the papers, you like the home, you start to envision yourself there. And I think there’s that tendency to not go into that mode of negotiation. So talk us through this step of finding your home and negotiating.

Nate Hedrick: Yeah, so obviously the first step, you know, is going to be that hunt. And the market you’re looking in is really going to differentiate how that search goes. If you’re in a hot sellers market like you were talking about, Tim, that’s kind of what you’ve been dealing with it sounds like, homes are going to be on the market and off the market just that quick. And you’ve got to be able to put in offers quickly and respond to them quickly as well. Here in Cleveland, actually, we’re dealing with kind of a sellers’ market as well. I just sold a home for considerably over our asking price because it was that popular, there was nothing else in the area that was in really nice shape. So people were throwing in offers left and right. So you’ve got to be able to work quickly. That house was off the market within 72 hours of being listed.

Tim Ulbrich: Wow.

Nate Hedrick: Yeah. You’ve got to be able to work quickly if it’s that hot sellers’ market. And that can be really frustrating because you might miss out on something that you were really interested in. Conversely to that, if you’re in a cool buyers’ market, you have a lot of power in your hands. This is really when negotiations are going to be able to come in. You have the time to basically to find that right home, you’ll be able to look at several properties. My wife and I were really lucky when we bought our house a couple of years ago, it was definitely a buyers’ market. We were able to negotiate significantly and really take our time in making offers and thinking about things and working from there. And if you do get to that point where you’re at the negotiation table, realize that everything is negotiable, within reason. But everything is negotiable. I think many people focus on the final sale price as kind of that’s the end-all, be-all negotiation. But there’s a lot of things that can be thrown into there, things like closing costs, which we talked about on last episode. If you need a little help with that extra cash up front, make closing costs a part of your negotiation. Maybe you offer $3,000 more toward the purchase of the home, but you ask for $3,000 back in closing costs. What that allows you to do is basically finance more of the upfront cash requirements right into the loan itself. So you’re going to pay $12 extra a month over the 30 years that you have the loan, but you’re going to have those extra closing costs without having to save up and bring them to the table. So things like that. The other thing that I’ve seen a lot more of is basically non-standard items being entered in the negotiation. I actually just had a property that I sold near me, that I helped someone buy near me, and they had a large piece of farm equipment. Basically, it was a tractor, that the property had used, and the buyer wanted it. He said, ‘How much for the tractor?’ And they actually kind of worked it into the deal. Now, I want you to be careful. All furniture and basically non-secured appliance — and the real estate community refers to that as chattle — that’s anything that’s not a fixture of the home cannot technically be in the purchase of that home. So I can’t say, ‘I’m buying this house and the tractor for $500,000.’ I need to basically have a side agreement with the seller to basically negotiate that. But you can work that into the price in kind of an off-the-record kind of a way, and I’ve seen a lot of people doing that now.

Tim Ulbrich: Yeah, and I think to your point here and just building on what you’re saying and building on the conversation we had before about looking at things like property taxes and homeowners insurance and looking at some of the other components, I think the focus so much is on the typical purchase price, which of course is important and you want to get it at a fair price because obviously that’s going to impact equity when you go to sell it at some point, but there’s all these other things where I think you can really spend time digging into the details and the weeds and make sure that you get yourself a good deal. And you’ve talked about some of these things that you can negotiate. So obviously, there’s some of the things that are within the home, but also you have things like home warranties, you have appliances that may or may not be included. All these other parts of the sale that, again, not just ending at the home price and moving on, but really looking at the entire picture as you’re going throughout this process.

Nate Hedrick: And one important thing to remember is whatever you’re doing in terms of haggling, make sure you’re running everything past your agent. Don’t surprise them with something at the last minute that you said, ‘Oh yeah, we totally handshaked, we did a handshake agreement on that,’ because that’s not going to hold up anywhere. And if it’s going to title and escrow and eventually some sort of lawyer has to get involved, you don’t want to be on a handshake negotiation. So run everything through your agent, make sure it’s all legal and documented. And that way you protect yourself in the long run.

Tim Ulbrich: So Nate, something interesting I’ve seen, and I was always told it was kind of standard that — here in Ohio — things like a washer and dryer, refrigerator, whatever, stay with the home. And for whatever reason, both homes that we’ve been involved with in great detail, both of the owners had some type of fixation with their washer and dryers. It was an odd thing, but isn’t it pretty standard that those major appliances with the home? Or does that vary by region and state as well?

Nate Hedrick: You know, it varies. The best way to determine it is look at the actual listing. So if you are working with an agent and you have access to the MLS, which is the Multiple Listings Service for that region — and they should be able to provide you with this — the listing will define hey, these appliances are all included. And you can generally feel pretty confident going in that if it says washer and dryer, the washer and dryer’s included. And ultimately, if it’s on the purchase agreement and part of that whole contract is the washer and dryer, for example, then that has to be included. And the biggest thing that I’ve seen in terms of ways to kind of thwart this or be a little less than kosher is people will say, ‘Oh yeah, washer and dryer included,’ and then they’ll take the junk washer and dryer from the garage and they’ll hook those up and then take their really nice Samsung brand-new front-loading washers, and they’ll take those with them. So if you’re worried, be very, very specific, you know, x, y, and z washer and dryer have to stay.

Tim Ulbrich: Yeah. I think the other way I’ve seen that, Nate, and maybe this — I didn’t realize it before, maybe why the language existed was appliances, fixtures, whatever, as shown in the listing. And I think that gets to the point that you’re just making there. So OK, step No. 6, our final step here is inspect, insure and close. So here we’re talking about inspection, home warranties, and the closing process. So talk us through these final components here in step No. 6.

Nate Hedrick: Yeah. General home inspection is what you’re really going to be thinking of when you’re thinking about inspecting. And this is absolutely vital to your purchase. We talked a little bit about hot sellers’ markets. I’m seeing areas, not around us, but areas of Ohio, even, where the market is so hot and deals are moving so fast that people are foregoing inspections. And this is a really dangerous practice to get into. The inspection is kind of your final line of having a professional come in and looking at the bones of that house and making sure that it’s going to be safe for you and your family. And so really before you move in, before the deal ultimately goes through, you absolutely want to have that inspection done. And most of the time, the way this is going to work is that you’re going to put in an offer, and it’s going to be contingent on a number of things. And that basically means the deal will not go through unless I sign off on these individual pieces. And one of those contingencies is usually inspection. And again, I always, always advocate that you’re going to have this in place. Inspections usually run anywhere from $200-500, depending on the size of the home and how in-depth it is. And they can take anywhere from one up to — I was on one that was five hours long. But generally, they should be anywhere from 1-3 hours long. And they should really go through with you as the buyer and show you everything in the home. So if they talk about, the boiler is going out soon or the air conditioner needs to be replaced, then they should show you why that is and where that is and what that looks like so that you, once you acquire that home, if you do go through with the transaction, you know all the nuances of that house and how it’s all going to work.

Tim Ulbrich: Yeah, I think that’s great advice, especially considering the cost of the inspection process. I think it’s a no-brainer, and I’m glad you mentioned that as a somewhat concerning trend that you’re seeing, especially in a sellers’ market. So that covers inspection, so talk us through home warranty. You know, that’s something you often hear about. Is it worth it? Is it not worth it? And then ultimately, the closing process as well.

Nate Hedrick: Yeah. So home warranty, this is a point of contention for a lot of people. It feels like — I’ll back up. A home warranty is basically a one-year insurance policy, for those that aren’t aware. It covers the replacement or repair of any major home appliance, so things like your A/C, your heating, your washer, your dryer. Basically, what it’s guaranteeing is that when you move in, one year from that date, if something breaks, there’s going to be a company available to repair or replace it at no cost to you. And that’s really, that sounds great. You know, it’s really a helpful thing that if you are already stretching your budget or you’re worried about some appliances that might not be working in the long run or over the course of the next year, a home warranty can be a really great way to insure that you don’t have to come up with a really expensive cost down the line. The story I always tell is that when I was buying our home, my wife and I said, ‘Oh, home warranty, that sounds like insurance for suckers. We don’t need that.’ And it was like, I think it was like $500, something like that. It wasn’t even that much. It was cheaper than that. Regardless, we said, ‘We don’t need that.’ And within like three months, our dryer broke, and we had to come up with all the money for the brand-new dryer. And luckily, nothing else broke. But it just, you know, when you want it, you never have it. And it just feels like one of those things that it’s usually not a large cost, if you’re getting it at the time of purchase, you can often get a really good deal on it. Basically, the home warranty companies want you to get it right when you buy the home, and so you can usually get it for only a couple hundred bucks. And then if something does go wrong, it’s going to cover that and take care of it. So it’s something to consider, it’s definitely not for everybody. If you’ve got a brand-new home with brand-new appliances, it’s certainly not necessary. But if it’s an older home, you’re worried about some of the appliances being on their last legs, it’s a really good idea.

Tim Ulbrich: Yeah, and what I saw back in 2009, Nate, in more of a buyers’ market, I would often see these negotiated where the seller would pay for this. And we tried that here in 2018, and the seller’s like, ‘Ah, no. No thanks.’ So I’m guessing that’s just a matter of the nature of the market and where things are at. But I’ve seen these policies as high as $700-800, so to your point, there’s a lot of variety here. Obviously, what does it include? What does it not? And making sure you’re shopping this around. But I think also here, not only for the potential cost it could come to be, but also think about the peace of mind and things you may not even know. And so another thing that I was taught here is making sure that if on inspection, not everything is looked at, hot tub functioning, some random appliance or two or whatever, a home warranty may be a place where you can have those covered in the event that something’s wrong that may not have come up or been reviewed upon inspection.

Nate Hedrick: Yeah, and the other thing I’ll point out that’s really important is ask your real estate agent about which companies they recommend. Again, having that person on your team is really beneficial because I know for a fact there’s a couple of companies that I will not recommend to my clients because I’ve seen in the past clients that used them and they’re unresponsive, they don’t help out in a timely fashion. If the air conditioner breaks, you don’t want to wait two weeks for them to repair it. So make sure that the company that you’re using is very, very reputable and has a really good response time because when this stuff goes down, it’s a major inconvenience you want fixed right away.

Tim Ulbrich: Absolutely. So Nate, we covered a lot in these two episodes covering the six steps to consider throughout the home buying process. And again, we have these available through the first-time home buying quick start guide that you can download at YourFinancialPharmacist.com/homeguide. And I’m guessing as listeners digest all of this information, we have some listening that are in the process of buying or selling or have questions, and they want to work with another pharmacist that has this expertise in real estate. So what’s the best next step that people can take that want to get in touch with you?

Nate Hedrick: Yeah, definitely. I’m always available for questions. I love working with pharmacists, especially, but really anybody that wants to reach out, I’m available. And as part of our partnership, you can find us right on YFP. So you can go to YourFinancialPharmacist.com/realestateRPH. That’s YourFinancialPharmacist.com/realestateRPH, and you’ve got a contact form there. Fill out a little bit of information about yourself and ask anything you want. I’ll be available.

Tim Ulbrich: Awesome. And as we continue this month-long series on home buying, next week, I’m going to talk through some mistakes that I’ve made throughout this process. And you know, you go in thinking, I’ve got this covered, I’ve been through it. And here we are, the reality of topic, I’ve learned a lot through this process, doing it again. So I look forward to sharing those. And at the final episode of September, we want to take your questions related to home buying. So questions from the YFP community. We’re going to do a rapid-fire Q&A. We’re going to bring Nate back onto the show and fire some questions at him. So the best way you can get us your home buying questions is you can jump onto the YFP Facebook group and join us if you’re not in there already, pose your question, we’ll grab it and bring it on the show. Or you can shoot us an email at [email protected]. So as we wrap up another episode of the Your Financial Pharmacist podcast, I want to take a moment to thank our sponsor of today’s show, Common Bond.

Sponsor: Common Bond’s on a mission to provide more transparent, simple, and affordable way to manage higher education expenses. Their approach is no big secret. Lower rates, simpler options, and a world-class experience, all built to support you throughout your student loan journey. Since its founding, Common Bond has funded over $2 billion in student loans and is the only student loan company to operate a true one-for-one social promise. So for every loan Common Bond funds, they also fund the education of a child in the developing world through its partnership with Pencils of Promise. Right now, as a member of the YFP community, you can get a $500 cash bonus when you refinance through the link YourFinancialPharmacist.com/commonbond. Again, that’s YourFinancialPharmacist.com/commonbond. Nate, thank you so much for taking time to join us and looking forward to having you back on in a couple weeks.

Nate Hedrick: Yeah, always a pleasure. Looking forward to it.

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YFP 064: 6 Steps to Home Buying (Part 1)

Posted on September 6, 2018November 2, 2022 by yfpadmin

6 Steps to Home Buying (Part 1)

On Episode 064 of the Your Financial Pharmacist Podcast, Tim Ulbrich is joined by Nate Hedrick, the Real Estate RPh, as they kick off a two part series covering the 6 steps to home buying every pharmacist should consider during this exciting process.

Summary of Episode

Nate Hedrick, PharmD and licensed real estate agent, talks with Tim Ulbrich about the benefits of home buying for pharmacists and the first three of six steps to take when you are considering buying a home. These steps to home buying are found in the Home Buying Quick Start Guide. They are a great framework to follow whether you are buying your first or fifth home or are just starting to think about the home buying process.

Nate first lays out the benefits of home buying including being able to change the house and property how you wish, being your own landlord, increasing equity, taking advantage of tax credits and breaks that pair with home buying, and several others. Then, Nate and Tim dive into the thick of the episode, discussing the first three steps to home buying.

Step one involves making sure you are ready to buy a home. Knowing your budget, understanding your current debt-to-income ratio, as well as being aware of the additional costs of a mortgage are all important aspects of this first step. Step two urges you to think about what is important in your home search by narrowing down your must-haves. Be sure to think about location, size and space, and flexibility of the home you are looking for before beginning your search.

Step three is all about assembling your team. By bringing in professionals like real estate agents, financial planners, accountants, lawyers, the Your Financial Pharmacist community, and family or friends to be a part of this home buying journey, you will be supported with knowledge and guidance.

Be sure to listen to part two of this series to learn all about last three steps in home buying.

About Today’s Guest

Mentioned on the Show

Commonbond
Real Estate RPh
Homebuying Quick Start Guide
YFP Episode 040: Ten Things Every Pharmacist Should Know About Home Buying Part 1
YFP Episode 041: Ten Things Every Pharmacist Should Know About Home Buying Part 2
Zillow
Realtor.com
Contact Nate Hedrick, Real Estate RPH

Episode Transcript

Tim Ulbrich: Nate, welcome back to the Your Financial Pharmacist podcast. How you been?

Nate Hedrick: Good, Tim. Thanks for having me.

Tim Ulbrich: So we’re excited not only to be doing this month-long series focused on home buying but also this two-part series outlining steps that pharmacists should take in the home buying process. And the good news is there’s no need to take notes. So Nate along with the team at YFP has worked hard on developing the first-time home buying quick start guide. You can get access to that at YourFinancialPharmacist.com/homeguide. Again, that’s YourFinancialPharmacist.com/homeguide. So Nate, it wasn’t too long ago, episodes 040 and 041, we had you on to talk about 10 Things Every Pharmacist Should Know about Home Buying, so are you ready to dig a little bit deeper here on this topic?

Nate Hedrick: Definitely, let’s get into it.

Tim Ulbrich: Awesome. And I’m excited also just to introduce Nate in a more formal role to the YFP community. I know, again, we had you on episodes 040 and 041, but we’re really excited about this partnership between YFP and the Real Estate RPH. We’ve got some awesome content coming to the YFP community. And we’re excited to leverage your expertise and bring you to the YFP community. So to our listeners, stay tuned. You’re going to see a lot more and hear a lot more on real estate from Nate Hedrick, the Real Estate RPH. So Nate, we’re excited to be on this journey together.

Nate Hedrick: Yeah, I’m really excited. I think it’s the perfect marrying of our two kind of entities. It’s going to be a great opportunity.

Tim Ulbrich: Absolutely. Alright, let’s jump in. Six steps, as you think about six steps for the home buying process. And I think before, Nate, we jump in to these six steps, I think let’s just start with kind of a high-level discussion of the benefits of owning a home. So for those that are listening that maybe are renting now or thinking about buying in the future, as you’re working with clients or potential clients, what are some of the things that you’re thinking of as benefits of owning a home to begin with?

Nate Hedrick: Yeah, definitely. I really write these down into the financial benefits and then I would call them the emotional benefits, if nothing else. The financial benefits are things like the equity that you’re able to build. You know, if your home goes up in value — and in general, the home market is going up in value. Obviously, we’ve got scenarios where it may not do as well, but generally, your home’s going to go up in value. You’re building equity in that home, your home is going to be worth more down the road. So it’s almost like an investment, makes for a great investment in your future. And then there’s also things like tax breaks. You can write off your mortgage interest and there are tax credits for first-time home buyers. You can deduct loan points, right, when you go and buy your first home. Energy credits, all that stuff. So there’s financial pieces that a lot of people benefit from, and then there’s also, like I said, the emotional side. You know, you’re the landlord now. You don’t have to answer to anybody. You can tear down a wall or put in a garden. It’s all kind of up to you. And there’s no maintenance department you have to call to make sure it’s OK and all that. So I think you have to key in on what’s the most important part to you. But you’ve got all these different aspects that make home buying really something to look forward to.

Tim Ulbrich: I’m glad you broke that down to the financial and the emotional because I think often when I’m talking with community members, I hear kind of that comparison just dollar-wise of renting and buying. And there’s a lot to consider there, of course. But you also have to consider some of those emotional aspects, as you mentioned. And you know, one of the great things of owning a home is just having a place to call your own. You mentioned being a landlord but also that sense of community that you can develop in your neighborhood and having that sense of stability of a place that you can come home each and every day. So as we jump into these six steps — and we’re going to cover three of them on this first part in Episode 064 and then we’ll cover three more in Episode 065. So Step No. 1, Nate, is making sure that you’re ready. Obviously incredibly important as I think this is a step that people jump over, jump past. They’re excited about getting a home, and buying a home, as you just outlined, can be a great move. But you have to be in the right position. So as you’re talking to a pharmacist, and you’re talking to them around this concept of making sure they’re ready, how does somebody know if they’re ready or not?

Nate Hedrick: Yeah. And just like the benefits, there’s an emotional side and there’s also a financial side that you really need to be able to weigh in on. Financially, I think because this is Your Financial Pharmaicst, that’s kind of the bigger focus here. But, well, we’ll touch on both. So the very first thing you want to look at is your budget and understanding your budget. It’s really easy to get out of school or be out of school for a couple of years, you’re making this great salary, and we’ve talked about this on the podcast before, but it’s easy to go to that bank and they say, ‘Oh yeah, you’re approved for a $700,000 home based on your income and your debt.’ But you have to know what your budget is. And there are 10 different ways you can calculate your appropriate housing budget, but you first need to know what that number’s going to look like because if you’re not able to wrap your head around that new payment that you’re going to be having every single month and all the aspects that go with it, you might run into some trouble down the line.

Tim Ulbrich: Yeah, absolutely. So knowing your budget, you mentioned there’s lots of different ways to get there. Are there general rules of thumb or things that you’re advising people to say, ‘Hey, this is roughly what you should be considering’ because we know, of course, the bank will help you set a budget, but ideally, as we’ve talked about before on this podcast, you as the lendee are better off to set your own budget than the bank is. So what are some general rules of thumb? What should people be looking for?

Nate Hedrick: Yeah, I’ll tell you what I use because it’s worked for me for years, and it’s a really simple but effective way to kind of get the raw numbers. So I use what’s called a 50-30-20 rule. And 50% of your budget of your take-home budget — that’s important, not your gross but your take-home budget — should go to your needs, things like food, clothing, shelter, everything that you absolutely need day-to-day. 30% of your budget, 50-30-20, the 30% should go to your basically your wants, excess stuff, so things like going out, entertainment, paying off loans faster, all those things that aren’t absolutely necessary but are important in having a comfortable life. And then the last 20% should be really your savings. Again, this is take-home pay. So 20% of that should be going into your savings or some sort of, again, you could throw a little bit more of this at paying off your loans or bumping up your retirement, something that is going to basically increase your net worth with that last 20%. So if you break those numbers down and we just look at the 50% for your needs, housing fits right into that. And so if you already know your food costs, and you know your clothing costs and all that other stuff that goes along with your needs, you can figure out how much is left over for a housing budget. And use that number with a couple of online calculators to easily get to a final housing number and what you can probably afford in a monthly payment. And that’s just one option. There are a lot more, but that’s one that’s worked for me because of its simplicity.

Tim Ulbrich: Yeah, I think that’s a good general rule of thumb. Obviously, this is going to be highly individual, right? So we know that people that, somebody that has $300,000 of student loan debt and credit card debt versus somebody that has no or a little debt, or of course cost of living can vary significantly from one area to another. I like your guidance there. The rule of thumb that I’ve heard before that I’ve used, and Jess and I are actually working through this right now as we’re on the home buying process down in the Columbus area, is no more than 25% of your take-home pay in terms of principal, interest, taxes and insurance. And obviously, again, in some areas, it’s more feasible or reasonable than others. But I think the point that we’re trying to get here is avoiding this idea of becoming house-poor and ensuring that your financial house is in order before you add on what arguably would be the largest payment and the largest purchase that you’ll ever make. So what will the bank give you? What are the rules of thumb that a bank’s giving you? Because I will say, going through this process in 2008 when my wife and I bought our first home — no, excuse me, 2009 — versus 2018 now, it seems like in 2009, we were put through the ringer. And it seems like now in 2018, it’s pretty much like, hey, whatever you want, we’re willing to give you. So what are the numbers, if there are any anymore, that banks are using?

Nate Hedrick: Yeah, it’s definitely getting a little lenient, which is a little bit scary, I’ll be honest. But the big numbers that you want to recognize is really what’s called your debt-to-income ratio. And no matter what type of loan you’re going to be getting, the conventional, FHA, VA, private, any of those, one of the biggest things they’re going to look at is your debt-to-income ratio, which is exactly like it sounds. How much debt are you carrying right now? What are you paying every single month toward your debts? And then what are you bringing in every month? And how do those compare? To give you some perspective on what they’re looking at, a bank for a conventional loan will use what’s called the 28-36 percent rule, 28-36 rule. And what they’re looking for here is that if 36% of your annual gross income, no more than that can go to your housing debt. So if you already have a significant amount of debt that’s taking up a lot of your income, basically that housing allowance can’t push that number over 36% because otherwise, they won’t be able to lend to you. So they do put some hard stops in place, and you can extend those hard stops with different types of loans, FHA pushes those numbers a little bit higher. VA has different limits. But there are some hard stops where they will say either your income is too low or your debt is too high, and you cannot take out this loan, basically.

Tim Ulbrich: Yeah, and I think the take-home point being here that you’ve got to obviously have a good budget in place already. You mentioned one method of doing that. We’ve had previous posts and podcast episodes talking about the zero-based budget, which we highly recommend on behalf of the team of YFP. I think, too, it’s worth, Nate, here thinking about the future on some level. So as you think about your month-to-month expenses now, what might, if anything, change in the future? So family situation, job changes that may come down the road, are there home repairs or other things, get an idea of what other portion of your monthly income might change as you move into the future and how that might impact what you’re ready to buy. And I think living this in-the-moment, right now, I cannot emphasize enough setting your own budget versus letting the bank set it for you. I know if Jess and I would not have done that, what we got back from the bank basically for the pre-approval was double what we had said was the high end of what we wanted to purchase. And so the bank doesn’t necessarily know exactly all the financial goals that you’re trying to achieve and other things that you’re working on, so making sure you’re setting that budget yourself before you go into this process. So what are the costs that our listeners should be thinking about associated with a mortgage? Of course you’ve got a down payment, so talk us through that. And then on a conventional loan, what that means, maybe, versus some other loans. And then other costs that individuals should be thinking about when it comes to the home buying process.

Nate Hedrick: Yeah, the biggest thing that you should keep in mind are, first of all, the costs that you’re going to have to basically take on up front. And this is basically before you move in, what kind of cash you’re going to need in-hand because obviously, you’re going to have the loan payment, and you’re going to have those monthly payments, but you’re also going to be making monthly income. So those are manageable, and you can easily budget for that. But we still need to go to the table with quite a bit of money in hand. So the first, like you said, is down payment and having that ability to basically secure the loan with a significant amount of cash. And that can be anywhere from as low, there are some that are 0 down, 3.5% down, all the way up to 20% down for a more conventional, traditional mortgage. But you have to have that money in hand or if you’re going to get that from a family member, you have to have basically a letter indicating where that down payment is coming from and so on. But that’s probably the biggest chunk you have to account for. And it’s the one that most people know. But what you often overlook is things like earnest money and closing costs. And earnest money is basically what you bring to the table to the seller that proves that you’re a legitimate offer. It’s basically money that’s held in escrow that if you back out on the deal for something that’s not due cause, you just say, ‘You know what, never mind. I don’t want this house.’ They actually get to keep that earnest money, generally anywhere from $500-2,000. It’s basically something that can prove that you’re serious. And then they get to keep that if you back out for any kind of unforeseeable reason. And again, the other thing I mentioned is closing costs. So anywhere from 2-4% of your total loan amount is going to be charged to you by the bank in closing costs. These are things like your loan application fee, your appraisal fee, the title loan search fee, there’s all these little things that the bank tacks on, and a lot of them are negotiable. But these are things the bank is going to tack on that, again, you’re going to have to have in some capacity at the time that the deal goes through. Now, closing costs is one of those things where it’s a little bit more negotiable because you can actually have the seller cover all or some of your closing costs. But regardless, you should have that money in hand because if you can’t get that into the deal, you don’t want the deal to fall through because you couldn’t come up with the extra couple thousand dollars you needed for closing costs.

Tim Ulbrich: Yeah, and it seems like the list of those closing costs go on and on, and it’s this fee, that fee, like you mentioned. And we outline these in the guide as well. But I think too, in terms of those being negotiable — and I don’t know your experience as the realtor — what I’ve been experiencing as the buyer in what is a seller’s market is that it seems hard to get those items to be paid for by the seller in this type of a market. But I’m sure obviously, that can vary by region and vary by the type of market and what’s going on.

Nate Hedrick: It definitely varies. And it comes a lot to how long has the house been on the market? You know, if you’re coming in with a couple thousand off, and the house has only been on the market for five days, there’s very little change that they’re going to be assisting you with closing costs. They’re just going to wait for another offer to come. So it totally depends on where you’re looking.

Tim Ulbrich: So Nate, regarding the down payment, I’m guessing some of our listeners are wondering — and we’ll come and talk a little bit later in this episode about the different types of loans that are out there as well — but there are loans, as you mentioned, that you can get out there as low as 0% down or a 3.5% down in an FHA situation. So why would somebody consider 20% and a conventional loan? What are the benefits of doing that?

Nate Hedrick: Yeah, there are two big benefits to the 20% down. For a conventional loan, it basically removes what’s called Private Mortgage Insurance. Now again, as you said, things are getting a little bit more lax. I actually had an offer come into me a couple weeks ago for a house that I was selling, and they managed to find a loan from a very reputable, very large banking organization. It was 10% down with no PMI at all. So it’s not unheard of. I think the 20% down loan requirements are going to start going away. But the requirements going away doesn’t mean that you shouldn’t have the 20% down. And I’ll explain what that means. If you put that 20% down, your mortgage payment obviously is going to go down considerably. You’re going to have a lot more equity kind of built into your home to begin with. If you go at that house with a 3.5% or a 0% down, and something goes wrong or your budget is really tight as it is, that very high payment is all of a sudden going to be much more of a problem. So if you’re able to save that money and put that money down initially, you’re going to have a lot more equity built into the home to begin with and that payment is going to be just that much more comfortable because it’s going to fit that much more easily into your budget if you’ve planned for it like that in advance.

Tim Ulbrich: Yeah, and I think that’s really critically important because I’m sure a lot of people are hearing that number and thinking, my goodness, I want to buy a $300,000 or $400,000 house, so now we’re talking about $60,000 or $80,000 cash in hand, and I think to your point, obviously — and I’m speaking here from a personal mistake I made on my first home of not having that equity in the home. You know, obviously if the market switches, something happens, maybe you want to pick up and move in two years because of a job change and the cost of moving overrides any equity that you really have or built in the home. So I think it gives you not only a lower monthly payment, it obviously gives you a better interest rate on these loans but also because of that built-in equity, it allows you, gives you some more options in the event that some of those unforeseen things happen — the market changes, you have to move, whatever may happen over time. The other thing I think it does — and maybe this is theory and not proven fact, Nate, you can tell me — but what I think it does is I am now in the buying process. If I hold true to that 20%, it kind of forces me down on what I’m willing to buy. So if I didn’t have to put anything down, I think it’s much easier for me to sign the papers on a $400,000 or $500,000 house. But if I stay true to that 20% down, and now I look at that and say, ‘Wow, that $400,000 house, I’ve got to put $80,000 in cash on the table.’ You know, I think that really helps bring down our expectations. And that’s been the experience for Jess and I and I think also helps people get in a better financial position when they’re ready to buy, even though it obviously will take longer to get to that point of building that down payment.

Nate Hedrick: I completely agree. I think it’s something that it’s a rate-limiting step for you. If you can save that 20% down, you’re going to really set yourself up for success rather than trying to stretch everything and going for that 10% down and then pushing your mortgage payment limit anyway. Yeah, I agree. It’s going to set you up for a lot better chance of success.

Tim Ulbrich: And so I think there’s a reason why we started this episode with the benefits of home ownership, right? Because we’re talking now about costs, and we heard 20% down, you mentioned 2-4% closing costs, and people are like, oh my goodness, why am I going to buy a home? Right? And what we haven’t talked about are taxes and insurance and maintenance and utilities. And so these are the ones that I think you can really make some headway or at least be aware of. And I know what Jess and I experienced as we’re buying in Columbus is that depending on the area, you know, you can, we have some homes we’re looking at that property tax is between $4,000-5,000 and other areas that were upwards of $8,000 or more. And so obviously, what that means on a monthly basis is significant. So talk to us about taxes, insurance, maintenance and utilities. What should we be thinking about there?

Nate Hedrick: Yeah, definitely. And I can tell you, it’s funny that you mention that because my investor clients, the ones that are really savvy and really know the markets and really understand the rate-limiting steps of house buyings, one of the first questions they always ask me about a property is what were the yearly taxes on that? Because again, that’s kind of that hidden cost that 1, you don’t really expect and you don’t really plan for if you’re not paying attention, and 2, it can actually go up. So your mortgage payment isn’t really going to change, you know? You’ve set it up, it’s a 30-year loan, it’s a fixed rate or whatever. And it stays the same. But your property taxes, those can easily go up. And if a value of a home is reassessed, then all of a sudden, you’re paying more on it every month. So it’s definitely one of those easy-to-miss kind of hidden costs that I think a lot of people ignore and really need to pay attention to. So it’s really simple. You can actually look up your tax rate for any given property. If you’re on Zillow or Realtor or you’ve got a real estate agent like myself, they can actually look up exactly what they paid last year. It’s all public record to see what the property taxes are. And then you can just break that down into what’s this going to cost me every month or every year? The important things to kind of keep in the back of your head is that a lot of times, banks want that money for taxes, especially taxes, but also insurance to be paid in escrow. What that means is that you’ll pay the amount and a little bit extra into a fund that the bank is going to basically hold onto and twice a year, they will pay out to the county or the city or whoever, they’ll pay out your tax payments. But they get to hold your money, and again, it’s usually a little bit of extra. I think my escrow, they have like $2,000 of mine that I want back, and they —

Tim Ulbrich: Ugh.

Nate Hedrick: I know, it’s awful. This is my poor negotiation skills when I bought my first house. But they’re going to hold onto that, and they’re going to use it as basically an overage to make sure that I don’t mix my tax payments.

Tim Ulbrich: Yep.

Nate Hedrick: So one of the biggest things I recommend to my clients is that you negotiate that, try to get on the plan where you’re paying the taxes directly, not the bank, because they’ll try to swindle you a little bit and hold onto extra money. So all important things to keep in mind.

Tim Ulbrich: Yeah, so you’ve got your property taxes, you’ve got obviously your homeowners insurance that they’re going to require at the point of finalizing your lending. And then I think a portion that a lot of people don’t think about is local income tax that may or may not be there as well. I know I experienced this living in a township, I don’t have it, but potentially going to other areas where you do. And that could be 1-2%, depending on the area. So again, these are the small things but the things that matter because when we talk about the difference of $100, $200, $300, $400, when it comes to either paying taxes or getting a better deal on an insurance policy or having or not having local income tax, for those that have been listening to the podcast for some time, you know that that money, if used elsewhere, paying down debt, investing for the future, etc. certainly can have a monumental effect over time. So you want to be in the details, not only looking at the sticker price of the home, which is I think where most people stop. And often, even if you go into a mortgage calculator, making sure you’re looking at the whole picture and looking at taxes and insurance and obviously, the last piece we have here is maintenance and utilities. And I think a best practice that I learned from others and I’ve heard you talk about before too is just getting an accurate record of what that seller, what the owner of the property has been paying in the maintenance and utilities so you can plan accordingly and making sure it fits in your monthly budget along the way.

Nate Hedrick: And many sellers will provide that to you if you ask. I’ve not had too many issues in the past with people not being upfront. They’ll say, ‘Yeah, this is what I paid last month for sewer, water, trash, electric and gas.’ And that way, you can get a really good estimate of what you might be into once you got into that home.

Tim Ulbrich: OK. So that’s step No. 1, making sure that you’re ready — so again, you defining the plan and the budget, not letting the bank do that for you. No. 2 is determining what’s important. So before you start the home search — because we all know how that goes, right, Nate? You start the search and all of a sudden, you go down the rabbit hole and all of a sudden, you’re signing a contract. You’re like, what just happened? So before you start the search, really narrowing down what you want, your must-haves in a few key areas. So what should people be thinking about here in terms of determining what’s important?

Nate Hedrick: Yeah. This is a really good exercise, I think, for everyone to kind of take away and do before you start that Zillow or that Realtor.com search because if you can define some of these parameters, it’s kind of like hunting for a car, right? I don’t go in and just say, I want a car. I ultimately decide, OK, I need a vehicle that’s going to fit three rows, it fits seven people. Or I need a vehicle that’s going to be really fuel-efficient or whatever. You’re defining something to begin with before you start the hunt for that vehicle. You have a general purpose in mind. This is no different. You know, you want to kind of figure out location as a big key factor. Are you moving for work? Or are you working from home and can move anywhere? You know, do you have to worry about where your kids are going to go to school? Or if you’re going to have kids down the road? You know, all those things can buy into location. But it’s one of those very first, narrow-down steps that you should be taking. So first, looking at location. The next thing you want to look at is probably size and space. You know, how much space are you going to need for you and your family if you have one? You know, do you need three bedrooms or do you need five? Is one bathroom going to be enough? Or do you need multiple? How important is an outdoor space? Or are you living in the city? You know, all those little things about size and space can really help narrow down your search as well. And then the last thing I’d have you look at is flexibility. And flexibility is how dynamic do I need this home to be? Do I need the room to grow into it? Or have I already got my family established, and I know how many bedrooms I need and so on. Or am I only planning on staying here for a couple of years and then I want to rent it out? A lot of people that I know utilize house hacking, which I’ve talked about in the past. And their plan is basically, live there for a year and then move out and rent it out. So making sure that that house is going to be an appropriate rental property as well. So all those little pieces I think will help really narrow down your search so that you’re not just swimming in this sea of available homes. You’ve got a targeted focus as, OK, we’re looking for things that need these given parameters in this given location, and you can jump off from there.

Tim Ulbrich: Yeah, that’s really great advice. And I would even add on top of that trying to prioritize some of these things because I think the home search creep is such a real thing. And I think the danger — and Jess and I felt this in real-time — is when the market is so hot like it is right now, if you don’t go in with a rock-solid idea of what you want and you’re getting pressure from a realtor that hey, we need to make an offer on this, it’s moving, it’s above asking, whatever, and you don’t hold true to those things, all of a sudden you look up and 24-48 hours later, you have a home and you’re like, wait a minute. What happened? Did we veer off from where we initially started, what we wanted? And you know this from looking at homes, maybe you have yourself set on something, like we really need a fourth bedroom or we really need a home office space or we really need whatever, but then you walk in and they’ve got the beautiful cabinets and the countertops and all of a sudden, you’re like, wait a minute. Like it doesn’t have the bedroom that we needed or the home office or whatever. So I think making the list and prioritizing it. We’ve got a set of questions you can consider in the home buying quick start guide, again, at YourFinancialPharmacist.com/homeguide. So check that out, and that will help you here in step No. 2, determining what’s important. So step No. 3, wrapping up this first part of this two-part series, is about assembling your team. And I really like this one because I think often we think you’re going to work with a real estate agent, which obviously is key. But you stop there, and really the right team and having that team in place before you get started can really make sure you stay on track in terms of what you’re looking, it aligns with your goals, but also in having a competitive offer and a plan. So talk to us about assembling this team throughout the home buying process.

Nate Hedrick: Yeah, definitely. And everybody’s team is going to look a little bit different. And I think some people when I talk to them about, OK, what’s your team look like for this? That can sound overwhelming, like oh gosh, I didn’t hire an accountant yet. You don’t need all of these pieces, but these are all pieces that might be part of your team if it’s appropriate. The very first and I think the very most important piece is going to be a real estate professional. You can definitely negotiate and navigate the real estate world without one, but in general, especially for home buying, it’s really nice to have someone that’s an expert about the documents and the markets and just how to work through everything. And ultimately, if you’re buying a home, the real estate agent is free. All of the proceeds for that real estate professional in terms of getting them paid comes from the selling side of things. So it’s really to your best interests if you’re going to be buying a home to have a real estate professional in your corner, someone that understands your priorities but also knows how to make that a realistic possibility based on the market and what’s available to them. So if there’s nothing else that you add to your team, a real estate professional has got to be, I think, one of the top ones. I’m probably biased as a real estate agent myself, but I think that’s really key. And I’ve seen some people make some mistakes basically not by having one. So that’s first and foremost. From there, again, it’s going to matter based on your individual situation. Things like a financial planner can be really beneficial, helping you identify, you know, OK, what does our budget actually look like? I design my budget, but does that actually make sense based on my financial future and everything else I need to allocate for? Some states require an attorney. In fact, many states require an attorney be part of a real estate transaction, so you may need to have one of those as well. If you don’t know an attorney or don’t know where to look, ask your real estate agent. Again, that’s why that’s the first step because they’re going to be able to direct you to somebody that’s good with real estate law. Again, you might need an accountant. That might go hand-in-hand with your financial planner, somebody that’s going to help you with not only determining maybe things like your budget or your allocations, but more importantly, helping you get those tax breaks we talked about earlier. A good accountant is going to be able to identify every little piece that you can claim, all the little nuances in the very extensive tax code that you should be indicating when you’re finally filing your taxes at the end of the year. So having that accountant can be really beneficial. And then really the last component, the last two components, is going to be just people to help you out. And that’s like your spouse or your brother or your mom. Whoever you’ve got in your court that’s going to be that extra piece to help you out. And the YFP community, it can be part of that as well. Just people that are going to be unrelated to the transaction but still have your best interests in mind. I think that’s really important to bring with you because, you know, my wife and I ran into this years ago. We looked at a house, and we fell in love with it. And it was this Frank Lloyd Wright-style, gorgeous property on like 15 acres. And we had absolutely no business buying this place. It was totally run-down, but we just, we zonked in on it. We wanted it so bad. And we brought our family through for the second walk-through, and they’re like, what are you guys doing? And we finally kind of shook out of it. And not having them there, we probably would have made a lot of mistakes, so it was really nice to have those — again, they’re not going to be a part of the transaction, but they still have your best interests in mind.

Tim Ulbrich: Yeah, I think accountability is key here, whether it’s a financial planner or, you know, if not, making sure if you have family or friends in the process, making sure they’re not just enabling the emotional component here but really checking you to say, ‘Hey, remember you said these things were important?’ And the story that you just gave there, too often we’re in left field, looking at something else. So there you have it, we got the first three steps of six that we’re going to cover. So we talked about making sure you’re ready, setting an appropriate budget, prioritizing this in the context of other financial goals, determining what’s important. We talked about location, size and space, and flexibility and assembling your team to be involved in the real estate buying process. So again, you can get access to all this information and more detail, these three steps as well as the other three that we’ll cover on the next episode of the podcast. You can download that, again, for free on YourFinancialPharmacist.com/homeguide. So Nate, I’m guessing we have some listeners that are thinking, OK, I’m going to be buying, maybe I am buying, I’m selling, I really would love to talk to a real estate agent that is a pharmacist. So how can people get in touch with you? What’s the best next step that they can take?

Nate Hedrick: Yeah, definitely. And you know, getting in touch with somebody and having someone to ask questions to can be a really big benefit. So we, again, as part of our partnership, you can actually go to YourFinancialPharmacist.com/realestaterph, and there’s a great contact form there you can fill out. It’s just some basic information about yourself, and that will kick right to me. And if you’re interested in having a discussion or need a real estate agent or really just want to ask some questions, I would love to be that resource for you guys.

Tim Ulbrich: Awesome. Again, that’s YourFinancialPharmacist.com/realestaterph. And so as we wrap up another episode of the podcast, I want to take a moment to again thank our sponsor of today’s show, Common Bond.

Sponsor: Common Bond’s on a mission to provide more transparent, simple, and affordable way to manage higher education expenses. Their approach is no big secret. Lower rates, simpler options, and a world-class experience, all built to support you throughout your student loan journey. Since its founding, Common Bond has funded over $2 billion, with a b, in student loans and is the only student loan company to operate a true one-for-one social promise. For every loan Common Bond funds, they also fund the education of a child in the developing world through its partnership with Pencils of Promise. Right now, as a member of the YFP community, you can get a $500 cash bonus when you refinance through the link YourFinancialPharmacist.com/commonbond. Again, that’s YourFinancialPharmacist.com/commonbond. Nate, thank you so much for joining and looking forward to next week where we’ll tackle the last three steps of these six steps of the home buying process.

Nate Hedrick: Yeah, thanks so much for having me.

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YFP 053: One Pharmacist’s Journey from Financial Ignorance to Financial Independence

Posted on June 21, 2018November 2, 2022 by yfpadmin

On Episode 053 of the Your Financial Pharmacist Podcast, YFP team member Tim Ulbrich interviews Dr. Tony Guerra, an author, podcaster, entrepreneur, real-estate investor, educator and father to triplet girls that has an incredible story to share going from financial ignorance to financial independence. Tony talks about his financial journey, his various business ventures, and how and when his mindset shifted that allowed him to be on the path to financial independence.

About Our Guest

Tony Guerra graduated with a Doctorate of Pharmacy from the University of Maryland in 1997 and has followed a non-traditional career path to best suit his needs and interests. Tony has taken on the roles of pharmacist, homeowner, professor, real estate agent, author, mentor, podcast host, husband, and father of triplet girls while continually striving for financial independence. Through motivation and creative entrepreneurial thinking, Tony has created a lifestyle that allows him to focus on his family and his passions.

You can learn more about Tony and his work at http://MemorizingPharmacology.com

Mentioned on the Show

Memorizing Pharmacology: A Relaxed Approach by Tony Guerra
How to Pronounce Drug Names: A Visual Approach to Preventing Medication Errors by Tony Guerra
Memorizing Pharmacology Mnemonics: Pharmacology Flashcards and Fill-Ins for the Future Nurse, Doctor, Physician Assistant, and Pharmacist by Tony Guerra
Seven Figure Pharmacist by Tim Church and Tim Ulbrich
First Time Pharmacist: Everything you didn’t learn in class or on-the-job training by Richard Waithe
YFP Student Loan Course for Pharmacists
Script Financial
Brian Buffini
Blair Thielemeir
The New York Times Rent to Buy Calculator
YFP Episode 040: 10 Things Every Pharmacist Should Know About Home Buying Part 1
YFP Episode 041: 10 Things Every Pharmacist Should Know About Home Buying Part 2
Pharmacy Leader’s Podcast
Your Pursuit of Purpose Podcast
The Five Love Languages: The Secret to Love that Lasts by Gary Chapman
The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas J. Stanley and William D. Danko

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 053 of the Your Financial Pharmacist podcast. We have an awesome episode in store for you today with a special guest, Dr. Tony Guerra that has taken a nontraditional path with his pharmacy career, which has allowed him to be on the path to financial independence. And I’m excited to have him on the show to share that story and journey today. And ever since I heard about Tony’s work more than a year ago and having the chance to learn about his background, I’ve been excited to get him on this show and to share his story with you, the YFP community. So Tony, thank you so much for taking the time to come on the YFP podcast.
Tony Guerra: Hey Tim, thanks for having me on.

Tim Ulbrich: So to be honest, Tony, there’s lots to talk about today. The more I dug into your background and story, the more I thought, where do we even start with this? We’ve got your fascinating pharmacy career, the real estate that you’ve been involved with, successful business ventures, and so I think maybe the best place to start is let’s go all the way back to when you graduated from the University of Maryland in 1997 with your pharmacy degree. So tell us a little bit about your first job out of school and what was your financial situation right away after you graduated?
Tony Guerra: Well, first, thanks for having me on the show. I actually listen to every single one of your podcast episodes, so I’m honored to be No. 53.

Tim Ulbrich: Thank you.

Tony Guerra: And my journey was a little bit different in that, you know, so many students right now are graduating, want to do residency, do 40-60 hours a week. When I sat down for the interview to work for Walgreen’s when I graduated to go to the Phoenix area, I actually asked to work only 24 hours a week or three days a week. And he talked me into four days a week, or 32 hours a week. So I had no interest in maxing out the number of hours I had, and my situation’s a little bit different because they had doubled our tuition from BS to PharmD, but my tuition was $4,000 a year.

Tim Ulbrich: Wow.

Tony Guerra: So I had $16,000 total in tuition. So my situation there is a little bit different, and before people hang up like, this guy doesn’t have any problems, let me talk about the mistakes that I made. So the issue with Maryland is that New Jersey and Atlantic City is not that far of a drive away. So a lot of times my buddies and I would go up to Atlantic City, and the most important thing that we had to do was because in New Jersey you can’t pump your own gas, we just had to have enough money left over to have a tank of gas or at least half a tank of gas to get us back to Maryland. So when I talk about finances, it was truly monopoly money that I was playing with back then. I had $20,000 in credit card debt, I had the student loans, and then I bought a $20,000 car, brand-new car, just out of college. So I had absolutely no concept of what it meant to owe money at the end. So in terms of graduating, the only budget I did was to make sure that I could work 24 hours or 32 hours, so I worked four days a week. And I didn’t want the pharmacy life to take over my life. So I was going to the Phoenix area. I wanted to go to a destination area. After seven years of college, I didn’t want to work 40 hours a week. I only worked 32. But I’d made some mistakes with finances, and eventually, it did catch up with me.

Tim Ulbrich: Couple things there that really stick out to me is, you know, even the student loan numbers, which obviously are very small relative to our indebtedness we’re dealing with today, right? $160,000, $200,000, depending on public-private, whatnot. But also, you’ve got to remember context of, you know, 20 years ago. But that I think does highlight how much that has increased in that period of time, which is obviously shows you —

Tony Guerra: 1,000%, right?

Tim Ulbrich: Yeah, and I think to your point about Monopoly money, I know we just talked about this on your show as well is that we’ve got to change that conversation that it’s got to hit us, have a little bit more of an emotional reaction to that debt. And when we see a number like $160,000, we should be like, ‘Holy cow! What is that?’ One of the things I wanted to ask you, though, which is intriguing to me is your intentional choice to not work full-time. And the reason I want to ask this question is that as you know, right now, there’s a trend going on nationally where some pharmacists are getting cut back to 32 hours, and they’re not getting full-time work because of various reasons, saturations of markets and whatnot. And here you are, and I think a lot of people out there are obviously unhappy with that. They maybe financially feel pressed that they need their full salary, but here you are intentionally not choosing to go full-time. And I heard in your conversation, I heard a little bit of a strategic decision that you didn’t really want maybe to get burned out, you wanted to give yourself other options. Talk more about why you made that choice to not go full-time right away.

Tony Guerra: Well, I can connect the dots looking backwards. I think Steve Jobs said in that famous graduation speech at Stanford, but I call the other eight hours, the Entrepreneurial Eight. And so what I wanted to leave was that other day just for kind of entrepreneurial ventures, and I was taking classes in journalism and writing. I never had a plan to become a journalist, but I knew I wanted something besides pharmacy. I didn’t like my job after about three months, and I kind of knew that that was coming. I’d been in retail for 3-4 years, so it wasn’t a surprise that I’m like, ‘Gosh, this kind of got repetitive.’ And I did try to make changes. I would change my days, I would go to overnights, I worked as a pharmacy manager in a grocery store, I worked in mail order. But it just — I just wanted to minimize that. What I found was that it was OK — I enjoyed the people I was with, and so I focused a lot more on the people I was with and the people I was serving. But if I had that one day a week that was completely dedicated to creative work and making money a different way — and now we call them side hustles — I just wanted a creative outlet. So I think making room for that intentionally before you graduate was something that I really wanted. The residency burnout is much lower in pharmacy than it is in medicine, but to have to dedicate 50, 60 hours at that salary — and it works out to I think maybe $16 an hour as a resident if you work 60 hours a week, that’s deflating. And I didn’t want that to happen. So if I’m going to go to a destination, I wanted to have time to enjoy it. So I knew early that I wanted to be a writer, but that success didn’t come until much later. But the entrepreneurial space — I always made room for entrepreneurial space.

Tim Ulbrich: Yeah, I remember, Tony, my whopping $31,000 salary during 2009.

Tony Guerra: Ouch.

Tim Ulbrich: And I think it’s an interesting point you bring up there, and I’m so glad — and I hope our listeners can stop and listen and absorb the wisdom that you just shared. The Entrepreneurial Eight, I love that term because I wouldn’t say I have many regrets. But if I look back and now with a family of three young boys, every year that goes on since graduation, my tolerance for risk is looking more — looks different with each passing year, right? Because you have more things that you’re accountable for, you have more things that you’re responsible for, and I think as I envision where the profession of pharmacy is going, and as I think about some of the new grads being frustrated with either the options that are available to them or maybe the work environment that they’re in, I love that concept of why not carve eight hours a week? Why not work part-time? Why not put yourself in a financial position that you can do that? Because I think while it not only positions you for potentially long-term other options, business ventures, things where you can control your own destiny, that one day of creative outlet I’m guessing made some of the other time more palatable, whatever you want to call it, that you knew you had that day of the week that you could ultimately turn to that creative outlet. So I hope the new graduates, some of those in their mid-20s where maybe they don’t have a lot of things that are going to hold them back risk-wise, obviously besides student loan debt — is this the time potentially to think about some of those entrepreneurial risks that somebody could take? So what — as you look back and kind of think about the graduates, I know you take a lot of APPE students on rotations, what advice do you have for them? Maybe mistakes that you’ve made? Things you wish you would have done differently? Obviously, you mentioned credit card debt, new cars, and I’m guessing there’s just a certain set of advice or points that you give to your APPE students to say, hey, if I were in your shoes right now, these are the things I wish I would have done differently. What are those things?

Tony Guerra: I find that money and budgeting is kind of deflating. And so what motivates me is doubling my money. So I find places where I can double it. And I want to be very careful not to say, I can double a pharmacist’s salary. I don’t know how to do that. But I can certainly double $400, $5,000, even $40,000. And maybe I can go through some of those stories where I’ve done it or where I understand where I’ve doubled my money. But I find that what you have to do first is what you’ve taught — I think when you’ve talked about your student loan course — is you have to have everything in place before you start playing with this double-your-money game.

Tim Ulbrich: Yes.

Tony Guerra: To put the money somewhere because you can get it, you can always lifestyle creep up to whatever you spend. But I’m actually taking on debt right now so I have a place to put the money so that’s something you also talked about in a recent episode is that people that are high earners that have no debt really struggle to know where to put their money.

Tim Ulbrich: Yeah.

Tony Guerra: So I’m taking on debt in the form of a third home, I just bought it yesterday. And that’s where it is. But maybe we can talk a little bit about some ways to kind of double your money. And we’re not giving investing advice. And I’m going to take this on instead of you guys taking it on because you guys have a very good, methodical way. But maybe we can just talk about how to double $500 to start with.

Tim Ulbrich: Yeah, let’s do it. And I know you’ve been involved in different things. As I mentioned in the intro, you’re an author, so you’ve written a couple different books, and we’ll link to them in the show notes, so “Memorizing Pharmacology,” “How to Pronounce Drug Names,” what am I missing, Tony? What else have you done on the book front?

Tony Guerra: The new one’s “Memorizing Pharmacology Mnemonics.” It’s meant for APPE students. And it should be free on Audible if they’ve never had an audiobook before, but something they can listen to back and forth on their way. You know, I think that really, as you get into the APPEs and you get into the internal medicine one and then the grueling critical care ones, you’ve got to have the basics down. And by having the basics down, I wrote that book and made it into an audiobook with another pharmacist out in New York, so “Memorizing Pharmacology Mnemonics” is where I would start if I was an APPE student.

Tim Ulbrich: So we’ll link to those in the show notes, and I’m guessing — and we’ll talk real estate here in a little bit — but I’m guessing your authorship, and I know you’ve put these online, so you’ve done audiobooks, which if I’m right, one of these has landed its way onto the Audible.com best seller list. And so you’ve obviously had success here. So talk to us about even just that journey of, wow, I want to write a book and how I did that, what impact that’s had for you financially but also maybe just the scratch that entrepreneurial itch that you’ve had all the way back to graduation.

Tony Guerra: I found that I couldn’t write a book until I got mad. So I had to do something to get mad about the book, and so what I did was I was taking classes up at Iowa State, and I went into a class that I knew I was going to get kicked out of. And so there’s an MFA program, a Master of Fine Arts program there, and there was a class on nonfiction creative writing, and this is a class I wanted to take. And I knew I was going to get kicked out. I knew the teacher, and I knew the people there. I said, ‘Hey, you know, I signed up for your class.’ And she said, ‘No, no. You’re not in the MFA program.’ ‘Yeah, but I’m allowed in. I’m in an English program, and part of the department.’ ‘Yeah, we’re just going to stick with what we have here.’ And I knew that would — I didn’t know for sure she’d kick me out — but she did kick me out, wouldn’t let me in the class, so I was excluded. And the one thing that makes me mad is being excluded, and I knew that would happen. So it made me mad enough to write the book, and now the book actually makes double the salary of the professor herself, so I won’t name the person, but it just makes me mad. So I think 98% of people, they say, want to write a book but only 1% do. So some kind of emotional reaction — and I think in your writing your book, “The Seven Figure Pharmacist” with Tim Church, I think that it was an emotional response to what had happened with your stories as well. So to write a book or to get there, you really have to. And what I think I’ll point to is actually another author, Dr. Richard Waithe, who was the host of Rx Radio podcast, I think he probably put about $500 into his book, and I can’t remember the name, but it’s like “The New Pharmacist” or “First Time Pharmacist,” that’s what it’s called. Yeah, “First Time Pharmacist.” And I just by seeing his numbers and knowing how much he makes from each book, he’ll probably double his money I would say in four or five months. But the way that I would — and I don’t mean to be self-serving to your course — but the easiest way to get make $400 on $400 is to invest in your course because the return could be close to $100,000. And that’s one of those returns that’s so big that you don’t even do the math on it. You’re just like, I put $400 into the course, and I saved $100,000. Or in your case, if you had had — if we could go back in time and you wrote the course for yourself, you would have saved $300,000.

Tim Ulbrich: Oh my gosh. I try not to think about it.

Tony Guerra: And I would have saved tons of money. So that’s an easy way to double $400 or $500 — either write a book that you’re passionate about, put maybe $400 or $500 into it or take the student loan course. That’s where I would start with $500. And then maybe we can talk about $5,000 is the next way. But I would recommend being a little slower with this one. But I can tell you how I doubled $5,000 as well.

Tim Ulbrich: Yeah, so before we go there, just talk me through — obviously, you got mad, which I think obviously there’s an emotion there which inspires action. I’m with you, I need something to fire me up, especially if you’re going to sit down and start writing and typing. I remember lots of early mornings, lots of late nights, and it’s a grind, right? As you’re kind of working through the process. So you’re mad, but you obviously were very strategic about, you know, I’m not going to write this just to write this, I want to write something that’s going to provide value and is needed in the market and is something that I have expertise in. And so I think a lot of listeners might be hearing that, hey, I do this every day, and there seems to be a need for something, whether it’s a book, a course, a Webinar, whatever. Talk to us, though, about how you put those pieces together that it’s not just writing a book to write a book, it’s that you want to put something that had value, that was needed and lined up with your expertise. And does that connect with your day job and what you do as a professor right at Des Moines Area Community College? Were you able to sync those experiences up to maximize your time?

Tony Guerra: I actually think you have to sync it. So my recommendation to anyone who’s always wanted to write a book is instead of worrying about writing a book, just write the curriculum for the course that you’re going to teach or that you would want to teach and just put it in book form. And then when it comes to audiobook, it took — when I first talked to my narrator, I never had hired a narrator. He was $400 per finished hours, so that means for a 7-hour book, it’s $2,800, a ton of money on something I had no experience with. And he said, boy — because it was a two-month lag between when I could have him do it — he’s like, ‘Boy, you’re going to really have a heck of a time making this for the ear.’ And what he was saying is is that if you can make nonfiction into something that is listenable, people will buy it. And so that’s really where it came from is the two steps are 1, what course would you teach if you could? And then write the course for something that you actually are maybe doing. It’s a lot easier for professors and things like that that have it. But if you’ve got technicians or you’ve got other people that work for you, what would be the course that you would write for them? Or if you, you know, with you guys and teaching about money, how would you write that course? And the second part is is make it for the ear. So you take that course, and then you just read it. And then you just continue to revise it but make it as if you are talking to someone. So those two components, writing for a need — and the pharmacology books, the need was that many nursing students have to take pharmacology but don’t get chemistry before it. So imagine hearing beta lactam or N-acetyl para enol phenol and all of these things, and you’ve never had chemistry. So that was kind of the need that I filled. But the way to get a book done — align it with what you do anyway, and then No. 2, then read it and re-write it as if you’re reading it to someone rather than ‘Here, I’ve wrote this book.’ And if you read Dr. Richard Waithe’s book, it’s really conversational.
Tim Ulbrich: Yeah, I love that. And I think for those that are listening that maybe are not fully satisfied with your job, and you’re looking for a creative outlet, you’re looking to create something, obviously the money that we’re talking about here and how you can generate revenue to help accelerate your financial plan is an important piece, but you can’t underestimate the positive energy and the feeling and momentum that you get from being in the creative process. And so you know, I would ask, outside of your time, of course, what is there to lose to potentially consider a path like this, thinking of the work that you already do? I want to take a brief moment before we jump into the second part of the show to highlight today’s sponsor of the Your Financial Pharmacist podcast, which is Script Financial.

Sponsor: Now, you’ve heard us talk about Script Financial before on the show. YFP team member Tim Baker, who’s also a fee-only certified financial planner, is owner of Script Financial. Now, Script Financial comes with my highest recommendation. Jess and I use Tim Baker and his services through Script Financial, and I can advocate for the planning services that he provides and the value of fee-only financial planning advice, meaning that when I’m paying Tim for his services, I am paying him directly for his advice and to help Jess and I with our financial plan. I am not paying him for commissions, I am not paying him for products or services that may ultimately cloud or bias the advice that he’s giving me. So Script Financial specifically works with pharmacy client’s. So if you’re somebody who’s overwhelmed with students loans or maybe you’re confused about how to invest and adequately save for retirement, or maybe you’re frustrated with just the overall progress of your financial plan, I would highly recommend Tim Baker and the services that he’s offering over at Script Financial. You can learn more today by going over to scriptfinancial.com. Again, that’s scriptfinancial.com.

Tim Ulbrich: Alright, so we’re back with today’s show. We’re walking through with Tony Guerra to hear about all of his work. We’re talking about some of the books that he’s written, and he’s shared with us kind of that first step he took to earn income. And now we want to talk, Tony, about the next step that you took. So we talked about getting to that $500 point, and now we’re talking about that next level of $5,000. So talk us through for you kind of that next level of the business venture.

Tony Guerra: So the mantra is invest in yourself. And right now, you guys have an only $400 course, but I expect that if you guys continue on your path, there’s going to be a $5,000 course that you guys are going to have in your future where maybe we go to a destination, we get everything done with the finances and things like that, but then we start talking about investing, then we kind of create our own group. So somebody that has done that in the real estate space is Brian Buffini. He came here from Ireland and was one of the best realtors in the country but then created a coaching company. And the $5,000 I spent — I remember these exact words to my coach, and we’re very similar in that we want return on investment mathematically, where my wife is completely different. She would want certain feelings that come out of it. But when I talked to my coach, I said, she said, ‘What do you want to get out of this?’ I said, ‘$10,000. I want my $5,000 back, and I want $5,000 more.’ And that was it. And I ended up making $22,000 as a real estate agent. But what I invested in was $400 a month to get one-on-one coaching, 30 minutes, every two weeks, and what I was basically doing was following the path of somebody that had done these steps and was able to articulate how to do it. And then years later, I want to say five or six years later, just before the crash, my income — and I didn’t take all of this home, I had a little bit of group of people, of real estate agents, but my income — I had to leave pharmacy because it had just gotten away, and it didn’t make enough money. But I made $253,000 in that coaching program.

Tim Ulbrich: Wow.

Tony Guerra: So that $5,000 at first got me to $22,000 in the first year but then I was making $253,000 that last year. And I would have stayed with real estate even with the crash because that’s when people really needed me, but my wife made it clear that we’re moving to Iowa. And so I moved to Iowa, and I completely gave up the real estate business. But to spend $5,000 and make $5,000, I would invest in yourself in some kind of program. I think Blair Theilemier has something that’s a couple thousand dollars or something like that. But those kinds of things, that’s where I would put up to $5,000 in terms of investing in myself. And where I wouldn’t go is into some kind of postgraduate Master’s degree or something like that because you have to wait until you graduate to maybe get a return on that. I’m talking about things that you can — like a real estate license, it’s like $500 — that you can get returns immediately, that you can start making your money right away. But that’s how I’d put $5,000 in and get $5,000 back.

Tim Ulbrich: Yeah, and we think about — we’re always harping on our students, professional development, professional development, professional development. It’s the same thing when it comes to your finances, real estate, a business coach, whatever, you have to look at those opportunities and say — and I’ve done the same thing with business coaching, I’ve done the same thing with hiring Tim Baker to help me with my finances — and I’ve realized all of those and said, ‘That’s an investment. I’ve got to write a check.’ But I realize the return on it is going to be much greater than what I’m investing. And I think that’s true for so many different areas of your life is you have to look at those things and say, OK. I’m going to try to go at this all myself or what are the opportunities I can really hire somebody who’s taken this path that can really keep me accountable and has the expertise to get me to the goal that I want to achieve. So let’s segway, then, into the real estate investing. So you alluded to the fact of being a real estate agent, you got your license, you’re selling real estate. But you’re also now getting into real estate investing. So as I know, you now have three properties, is that correct?

Tony Guerra: Yeah, we’ll close on the other one the first week of July. But I’ll have three again. And we kind of talked through the very first things that I did and then — so I have a 20-state, 20-year real estate career. And this will be my 10th property that I’ve moved in some way or another.

Tim Ulbrich: OK.

Tony Guerra: But I only own three. I only own three right now.

Tim Ulbrich: So why don’t we — obviously, you have the primary residence, and we’ll come back and talk about that because I think there’s some due diligence that people need to do in buying their primary home. But specifically from the real estate investing side, why did you look at this area and say, ‘As a pharmacist, this is something that I want to get into in the long run?’ You mentioned currently owning three. You’ve been involved in 10 properties. So talk to us a little bit about your mindset around real estate investing as a category or as an area. And maybe for you, where did that fit in while you’re also looking at more traditional streams such as a 401k, 403b, and the timing of those.

Tony Guerra: OK. So let’s kind of go all the way back to graduation and you know, should I rent? Or should I buy a home? And the first thing that I did, and when I did look at my student loans, I heard, I was like, why is this not tax-deductible? And your student loan interest is not tax-deductible, but it is deductible on a home loan. So my parents owned a vacation home, and the first home I bought was for $1. I bought it from them for $1; they were able to transfer it to me.

Tim Ulbrich: Sounds pretty awesome.

Tony Guerra: Yeah. Well, they took back the loan. So then I had to pay them monthly payments, but then I immediately put a mortgage on the property and then paid off the student loans so that now, the interest that I would have had on the student loans was now tax-deductible.

Tim Ulbrich: Got it.

Tony Guerra: So that was kind of the first deal I made. This is a deal that’s very common now with the new graduates in all fields in that they’re deciding to rent where they’re going to live, but they’re getting in the real estate market in a different area. So for example, if somebody wants to move to San Francisco, it’s a lot easier to find a rental with maybe rent control or something that’s a little bit more manageable and then buy something maybe in Nevada that’s maybe a vacation home or something like that. So the first thing I did was recognize that a home is a commitment as much as it is a marriage. And you don’t go into a marriage just saying, ‘Oh, look, I qualify for this marriage. Time to get married.’ You know? And I think a lot of people do that. They’re like, ‘Well, I think I should buy a home because it’s supposed to be tax-deductible interest.’ And that may or may not be true with the new tax code. So the first thing I would say is, find a place you want to live and get to know it. And so I lived there a year before I ever bought a home in Tempe. So I didn’t — my first piece of advice is to not buy a home in an area that you haven’t known for at least a year.

Tim Ulbrich: Amen. Yes. Yeah, that’s a mistake actually my wife and I — we had been in the relative area for a year but didn’t know well enough. And we were kind of itching from a renting standpoint, and as I look back, a little bit more patience would have done us a lot of good in terms of the rest of our financial plan. We’ll link in the show notes, there’s actually a good calculator the New York Times has to do a rent-to-buy comparison because I think a lot of times I hear people say things like, ‘Well, my rent costs $1,000, and the mortgage costs $1,000.’ But as you know, that’s not an apples-to-apples comparison. So really trying to look at your financial situation and look at all the pieces to say, where does this fit in in terms of the buy of knowing the area? But also where does it fit in with rest of a financial plan? So where did you then see real estate investing beyond your primary home come into play? And how did you determine it was a right time to get involved in that? Was there a certain point where you said, I’ve got enough equity in my primary home, I’m on the path with my other retirement savings, so now’s the time? When did you make that jump into investing?

Tony Guerra: Well, I first thought I didn’t agree with you on this, but now I do agree with you on this — when I had 20 percent to put down.

Tim Ulbrich: OK.

Tony Guerra: And because I had bought this vacation home, which was in Ocean City, Maryland, so I actually never lived in it more than the 14 days you’re allowed by the tax code as a rental, that I decided to just buy something in Tempe. And the first thing I would say is don’t ever try to time it. The market is crazy. You know, right now, you would say, ‘OK, well now prices are going up. So now maybe I shouldn’t buy because they’re going up, and I shouldn’t do it.’ But then you’ve got this investing coming from China, and I just saw in the news that a house in San Francisco went $1.6 million over asking.

Tim Ulbrich: Gees.

Tony Guerra: So you know, you might say, ‘Oh, well you know, the student loan bubble’s coming and all these things so prices are going to drop, you know, in a couple years.’ And then you have this weird investing thing coming from another country. Timing it is not the way to go in terms of like trying to time when the best time to buy is. But what I liked was that once I had 20% to put down, I don’t want to say I was a bully, but I was kind of a bully. When you make an offer, and you’re putting 20% down, all of a sudden because of the savings rate in the U.S. and all of these things, you are in the pull position. All of a sudden, that seller is like, ‘Whoa. I don’t want to upset this person. I want to get them.’ So when I offered on my Tempe home, I offered under asking in what is a white hot market. The summer, right by Arizona State, to the east side of Arizona State University, is a white hot market. And I was able to offer a little under asking because I had 20% to put down. So when I talk about timing, don’t time the market. Time yourself. Time your own situation because if you have built up 20%, that 20% is actually — I don’t want to say a symptom — but that 20% represents that you have gotten your financial house in order and that you are ready to buy a home.

Tim Ulbrich: Yes.

Tony Guerra: That you are financially ready, and a lot of the things that you put in your course and things like that. So don’t look at 20% as I have to do this thing first, it’s 20% will come if you do all the steps right. And I did a lot of things right in that year, and I took a little money out of that deal I did with my parents, and I bought a house that was $90,000. So the 20% wasn’t a ton of money.

Tim Ulbrich: The other thing — and I would love your input on this — the other thing to me, and my wife and I are hopefully going to be dabbling in this a little bit more here in the near future, but one of the things that interests me about real estate investing is that it has an opportunity, if done well, it has an opportunity for a cash flow on a monthly basis that is not waiting until a traditional withdrawal age for a retirement account of 59 and a half like a 401k, 403b or a Roth IRA. And so I think as people are out there maybe thinking, Oooo, I like pharmacy, I don’t love pharmacy, maybe I want to do something different — at the right time, and if done well, I think real estate investing or business ventures like we’ve talked about the work you’ve already done are alternative revenue streams that aren’t having to wait to a certain age to be able to draw down money over time. And so when you looked at this most recent one you mentioned is out in Tempe, right?

Tony Guerra: Mmhmm. Yep.

Tim Ulbrich: Was that connection because you know the area from being out there previously? Or how do you, I guess how do you approach real estate investing outside of your backyard and feeling comfortable — I’m assuming are you working with a property manager? What does that look like kind of day-to-day on those rentals?

Tony Guerra: OK, well let me give you the big picture. And again, this is kind of advanced investing. Let me actually talk a little bit about just buying a home, and then I’ll talk about this more advanced investing. So if you are — let me talk first about a single person. If you’re a single person coming out of college, and you’re going to buy a home, buy a home as if it were a — my thought is to buy a home as if it were a rental, and make sure that you have at least two other rooms that you’re renting out to other people or at least one other room. Don’t buy a house with just one toilet. Make sure there are two toilets because if you have one toilet, it’s an emergency if it doesn’t work. And that’s my first thing is get cash flow from the place that you’re living in. If you are married, and you’re like, I am not living with anyone anymore, that time is done, we are grownups now, I’m not doing that — and that was — but my wife and I did have somebody always in the basement while we were in residency here. Then my thought with maybe what you and Jess are thinking about is to start thinking about using a team approach. So my wife is a great lurker. She loves to look at homes, so if I say, ‘Hey, can you look at houses here?’ and so forth, that would be something she would be all over it. And then I would be the one that’s crunching the numbers, like, ‘Oh, that’s not going to cash flow at all.’ ‘But it looks so good!’ ‘No, the cash flow is terrible.’ You know? So when I looked at this Tempe home, I almost pulled the trigger on a house — and this is how hot the market is. They asked me to waive the appraisal. So I would pay in if it didn’t appraise. And I was close to doing it. It was $185,000 for a two-bedroom, and I just couldn’t do it. You know, my sensor was going off, like don’t do it, don’t do it. But you want the house! Don’t do it, don’t do it. And then I talked to my wife, and she’s like, ‘No. That’s dumb. Don’t do that.’ So always bring your wife in. She’s turned down a number of the ones that I was like, ‘Oh, I love this one!’ She’s like, ‘No. Why? I just don’t feel good about it.’ And I’ve learned over my 10 years, now almost 11 years of marriage, ‘I don’t feel good about it’ — you want to listen to that sentence. Always, always. But when I went from the two-bedroom that I didn’t buy, I bought a place that’s now a three-bedroom, two-bath in the same place. It’s a mile from a Starbucks and a Target. That seems to be — follow people that are smarter. If you’re trying to go into an up-and-coming area, if you see a Target moving in and then a Starbucks, those are really smart people. Follow those guys. But if you’re going in, if you and Jess are looking for a place, I would start in terms of looking at one, but the other caveat is that I was looking in four different areas of the country so I could see what’s going on. So at Tempe, 85281, 85284; I was looking in Baltimore, 21230, 21224, where I think Tim Baker is, I was looking in Gainesville, Florida, I don’t remember the zip code, and then I was looking in Ocean City, Maryland. So four places I knew, but I was looking at four different markets. And Tempe, in many ways, I just wanted it. My parents are going to end up moving to Arizona, there are a lot of reasons I picked it, but I was looking at different areas, so I didn’t have this kind of myopic view. And I think, not to keep talking too long, but when you’re looking at pharmacy school admissions — I help a lot of pre-pharmacy people — if you’re trying to get the best deal from one school, you might not get the best deal because you’re not looking at all the schools. Just as you know, you’re looking at one repayment plan. You want to look at all the repayment plans. But that was my kind of thought. And in terms of who I had there, Lisa Schofield (?) is my contact there in Arizona, she’s been a realtor for 17 years, I’ve done other deals with her when I was there. Having somebody that’s knowledgeable with investing. You don’t want just a real estate agent, especially not someone that’s related to you. You want someone that specializes in working with investors.

Tim Ulbrich: Great stuff. And to wrap up this section on real estate, I would reference listeners back to episodes 040 and 041, we had Nate Hedrick, the Real Estate RPH on, we talk about 10 things every pharmacist should know about home buying. And I think, Tony, I really appreciate — we haven’t talked as much on this podcast about real estate investing, but I think right time, right place, for many pharmacists, it’s a great move to think about obviously building your own financial foundation and house in order first, but when the right time is there — and I think for many listeners, that may already be there — to be pursuing real estate investing as an alternative way to diversify their investments at large. So I have a couple kind of next-level questions that are not related to any specific topic here, but as I hear this conversation to you, what sticks out to me is that you’re incredibly motivated. You obviously have a significant drive. You have an entrepreneurial mindset. You’re creative in the way that you think; you see alternative revenue streams. You’re willing to look at things that are in an outside-of-the-box way. Where does that come from? Where do you attribute to having that skill set? Is that something you feel like was taught by your parents? Have there been mentor that influenced you? Where would you say that’s come from?

Tony Guerra: This might be disappointing, but its fear. Absolute terror. And it comes from when I started, and I came back to Maryland after four years of being in Arizona, I had something go on with my leg, and I thought it was some kind of rheumatoid arthritis or something like that. It ended up being that I was standing 12 hours a day, and my IT bands were pulling so hard on my knee that I was in knee pain, but I actually, you know, I had to get it so I had a stool that I could sit on, and then I really thought I was going to lose my career. So I thought I was going to go to — I didn’t know what I was going to go to. And so that fear and then also watching the collapse of the real estate market, I was a little better prepared there, but I went from a $253,000 income to doing residency with my wife. So I went from $253,000 to $40,000. So seeing those two drops, I wish I could say I’m motivated by some great, entrepreneurial spirit, all these things, but it’s just fear of not having money. And I think people that maybe have gone through the Great Depression had this kind of mindset, maybe people that were crushed by the drop in ‘08 had this mindset. But really, it’s just that I was really fearful. But the most important caveat in terms of entrepreneurship is to give, ask and receive. So I continue to give without hope of getting anything back, and things come back to you. But that’s kind of my mindset. I’m a little bit scared about money, and that’s why I have two years’ worth of income in my savings account. That’s pathologic to have that much there. But I’m just scared of going through that again, and I never want to have to take a job or a career that takes me away from my children, makes me into a person that comes home that is just so dissatisfied with my work that I’m taking it out on my family, and I feel like that maybe happens a lot. And I just didn’t want to go back there again, ever again.

Tim Ulbrich: So obviously, there’s the fear of money there, which obviously is real. But as I also look at the work you’re doing on the Pharmacy Leaders podcast, I can tell there’s a very intentional pathway of shaping future leaders of the profession that is beyond just wanting to create revenue streams. So as you think about the work that you’re doing there and even some of your other entrepreneurial work, what are you hoping down the road to look back and say, this is what I was trying to do, this is what I was accomplishing. It’s a thought that’s been hanging with me a lot over the last year of, when I’m 70-75, you’re in retirement, what am I going to look back and say, this is what I was trying to achieve, this was the goal that I was going after. So with your work around the pharmacy leaders podcast, developing future leaders, maybe even modeling kind of entrepreneurship, what is that goal for you? What is that pathway?

Tony Guerra: I see time differently. I can’t see really past dinner. I’m very short-term; my wife is very long-term. And usually, people come together that way. So something will really bother me that might be due three weeks from now but I feel like I have to get it done now. So I guess when I look at what’s going on with pharmacy, I see, I guess I’m really scared for them in many ways as a parent who looks at it, and I know that certain students are going to be absolutely fine. These are the kind of national candidates, I look at their resumes, their CVs, what they’ve done, and what they’ve done differently is they’ve invested in other people. And I guess I just fear for them, and that’s why I keep interviewing them and giving them a space to be interviewed so that they can share what they have with the other people that may be making some mistakes. And you can never change someone’s mind, but what you can do is put out the people that are doing it right and expose them to those people. Casey Rathburn, for example, from the University of Houston, comes up, Dallas Tolburg (?) from University of Maryland, (inaudible name) are names that come to mind. These are the people that have invested so much in their pharmacy education in helping other people while they were in pharmacy school that it all came back to them — in the residencies they wanted, the career and eventually the careers they want, so I’m just seeing that if you just try to get through pharmacy school and you’re not known for anything, as Blair Thielemier says, you’re going to be in trouble. But if you continue to invest in other people as Ahmad Ahmad (?) who just started the Your Power Pursuit of Purpose podcast, those are the kinds of people that are going to have no problem. So that’s what my drive comes from. It’s just like, look, I made a bunch of mistakes when I came out. I think I can help a lot of people if I can expose other people to these leaders that are moving and shaping their own lives and other people’s lives.

Tim Ulbrich: Great wisdom there. And if our listeners have not yet checked out the Pharmacy Leaders podcast, please do. You’ve done an awesome job with that podcast, super inspirational, I think motivational for students and really helping shape the future of these leaders. I think you’re, what? 129, 130 episodes in already? Something like that?

Tony Guerra: Yeah, like I said, that’s kind of pathologic too. I mean, I do 3-4 episodes a week. Casey Rathburn (?) said, ‘Hey, can I do some episodes?’ I was like, OK, and she gave me seven episodes in three days. So you know, I wanted to make a space, but again, it’s so in line with what I do. I’m just a people-y person, so I like to talk to people. So it’s not work. And you know, if you’re doing something that you love, you’ll never work a day in your life.

Tim Ulbrich: So we’ll link to that in the show notes. Again, that’s the Pharmacy Leaders podcast. Now, one final — it’s actually kind of a split question — but I want to end here because I would be remiss if we didn’t talk about family. I know it’s important to you, you’re a father of triplets. You’ve got all of these things going on, your day job and your real estate investing, your book, your podcast. So two questions I have here for you that I know will be inspirational for me and probably even help me as well in my own journey. How do you balance all of this with the kids and obviously a marriage? And then second to that, how has some of these ventures in your financial success allowed you and created the space to enjoy the time with family that I perceive to be so important for you?

Tony Guerra: OK. You know, marry the right person.

Tim Ulbrich: Yes, Amen.

Tony Guerra: I hate to say that, it’s kind of a cliche. But man, marry the right person. But the one thing that we did was we did the Five Love Languages book. And I’m physical, which means that it’s better for her to tap me on the shoulder than to say anything to me when she comes home. And hers is service. And I can’t believe I didn’t know this until about seven or eight years in our marriage, but that means that the things that I do, making sure the house is clean when she comes home, it’s the first thing she sees is clean house, not extra work to do after a long day at the VA. So that’s my first recommendation is figure out which love language you have and which love language your spouse has because then you can know what’s important to them. So that allows the marriage to work well. And you’ve talked about “The Millionaire Next Door,” and most millionaires are married with three kids, and that’s the first thing. That’s the strength. But the other thing was — I guess I took for granted, and I didn’t do the episode, I should have, but the Father’s Day episode — I took for granted that 100,000 pharmacists each Father’s Day are probably working, you know, men and women. And I took for granted that this Sunday, I could be with my kids, coach their soccer team, and I think that was the other part is that I work so much because I’m fighting for that time to not have to ever say, ‘Dad’s got to work.’ And my one daughter just absolutely threw a dagger at us one morning. She’s like, ‘Daddy, you always get to come to the parties on Friday. Why does Mommy never get to come?’ And I was just like, oh my gosh, how do I answer this? And so I made sure to — I was like, ‘Daddy just doesn’t make enough money yet. And when Daddy makes enough money, then there’s going to be no problem with Mom coming to everything.’ She’s like, ‘Well, Daddy, you just need to work another job.’ And so I think too many pharmacists accept that that’s just how it is, I work weekends, every other weekend. And I have to tell you, if you follow the steps that you have in your loan course, I can tell you that once they get out of that debt, they could do a 32-hour week or a 24-hour week, no problem. And then they would have, they could stop having those conversations with their children, and they could have really good conversations like, you know, wasn’t that a great game that we had on Sunday?

Tim Ulbrich: Tony, great stuff. And I know your work has been an inspiration to me. I appreciate you taking time to come on this podcast, I appreciate your support of the YFP podcast. And I’m sure we’ll be finding lots of opportunities to partner in the future. So thank you again for coming on today’s episode, I appreciate it.

Tony Guerra: Yeah, I appreciate it too. Thanks so much, Tim.

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YFP 049: Ask Tim & Tim Theme Hour (Pay Off the Home Early or Invest?)

Posted on May 24, 2018November 2, 2022 by yfpadmin

On this Ask Tim & Tim episode of the Your Financial Pharmacist Podcast, we take a listener question from Michael in Columbus, OH that has stimulated lots of conversation and debate in the YFP Facebook Group…’should I pay off my house early or would I be better off refinancing, extending the term and investing the difference?’

If you have a question you would like to have featured on the show, shoot us an email at [email protected]

Mentioned on the Show

YFP Episode 015 – West Point to CFP: Tim Baker’s Journey to Becoming a Fee-Only Financial Planner for Pharmacists
YFP Episode 016 – 3 Reasons Why Pharmacists Should Consider Hiring a Financial Planner
YFP Episode 017 – Essential Questions to Ask Before Hiring a Financial Planner
YFP Episode 040 – 10 Things Every Pharmacist Should Know About Home Buying – Part 1
YFP Episode 041 – 10 Things Every Pharmacist Should Know About Home Buying – Part 2
The Millionaire Next Door by Thomas Stanley
Simple Savings Calculator by Bankrate
How a 1% Fee Could Cost Millennials $590,000 in Retirement Savings by Dayana Yochim and Jonathan Todd

Episode Transcript

Tim Ulbrich: Hey, what’s up everybody? Welcome to Episode 049 of the Your Financial Pharmacist podcast. Excited to be alongside Tim Baker as we tackle a great listener question about paying off a home early versus investing the difference for the future. Now, if you don’t own a home, and you’re thinking, you know what, this question doesn’t apply to me, before you hit stop on the play of this podcast, let me encourage you to stay with us. I think this question is really applicable to anybody that’s debating whether or not they should focus on debt repayment, whether that be student loans or in this case, a mortgage, versus investing in the future. So Tim Baker, hard to believe here we are, Episode 049, and that means we’re turning the corner next week on Episode 050 and somewhat of a spoiler alert — almost hitting 50,000 downloads of the podcast. Hard to believe, right?

Tim Baker: Yeah, we always joke, we’re not really sure if that is a good thing or like how we’re doing in the podcast world. But I think 50,000 downloads is a lot. So yeah, I’m excited. I think the podcast has been a great avenue for us to interact with our audiences, and I think it’s been successful so far.

Tim Ulbrich: Yeah, I would agree. And you know, I’m with you. I don’t know what that number means. I don’t know if 50,000, 100,000, 10,000, whatever. But as long as we hear from the listeners that hey, it’s good content that’s providing value and it’s helping, we’re going to keep doing it.
Tim Baker: Definitely.

Tim Ulbrich: And I think we’re having fun doing it. So how often do you get something like this question about the pros and cons of paying down debt, whether it’s student loans or in this case, a mortgage, versus investing? It seems like it comes up all the time, right?

Tim Baker: Yeah, and I definitely get it more in YFP circles than with Script Financial clients. I think ultimately, with a lot of clients I’m working with, it’s still kind of definitely foundational. But it does come up. It’s the same situation with student loans. Do I pay off the student loans? Or do I invest the difference? Like what do I do there? And it’s a tough — you know, you can do the math, which we’re going to go through the example today, but I would say that for this, there’s really no real right answer. I think for this one, there probably is. But it can be definitely shades of gray in terms of which way you go. And I think you know, for this particular question, you got to make sure you have all the information and the advice, like where’s it coming from, that type of thing. But yeah, I mean, it’s a tough one to kind of navigate.

Tim Ulbrich: Absolutely. So let’s jump in and hear the question from Michael in Columbus, Ohio.

Michael: Hey, Tim and Tim. This is Michael from Columbus, Ohio. I have a question about the benefit of paying off a home mortgage. I met with my adviser last week, and he mentioned it would be more beneficial to refinance to a 30-year loan, although I only have five years left on my current one. His rationale was that the banks are giving you the money for next to nothing. And investing the difference in the mortgage payment over 30 years would far exceed the amount of interest that would be paid on a loan. This is completely opposite from everything I know about eliminating debt. What are your thoughts?

Tim Ulbrich: So thank you to Michael for submitting your question on this Ask Tim & Tim episode, we appreciate it. And just a quick shoutout to Michael, he actually was one of my good friends and classmates at Ohio Northern University Class of 2008 — go Polar Bears — so excited you’re a part of the YFP community, really appreciate you taking the time to submit this question because I think it’s probably something that many others are thinking about, and I know something that Jess and I are talking about regularly in terms of whether or not we should pay off the home earlier or whether we should be focusing on other financial goals. So before we jump in and dissect this question, let me first point you to episodes 040 and 041 where we talked about 10 things every pharmacist should know about home buying because in this episode, we’re not going to focus so much on the logistics of home buying itself but rather how to balance the repayment of a mortgage versus other financial goals such as investing. So if you’re listening, and you have other questions about home buying, make sure to check out episodes 040 and 041 where we talk in detail with the Real Estate RPH Dr. Nate Hedrick about home buying. OK, so a couple things I want to recap about Michael’s question, and actually, I want to add in some additional details that he provided on the Facebook page, on the YFP Facebook page, in the Facebook group that is going to help us and be important as we talk about the context of this question. So obviously we know and we heard from Michael, he’s got five years on his current mortgage, which is awesome to begin with, approximately $90,000 left to pay back. And that interest rate, the current interest on his home mortgage is 3.49%. So the suggestion that he got from a financial advisor was to refinance to a 30-year loan, so instead of paying it off in five years, refinance a 30-year loan, which would bring down the monthly payment from approximately $1,500 per month, what he’s paying now, to $500 per month and then invest the difference, which of course would be $1,000 per month that he could then free up and invest. Now, one last piece of information that’s important. If you look at the current 30-year mortgage interest rates, it’s about 4.75%. So his current mortgage rate, 3.49%. He’s got five years left, $90,000 to pay back versus refinancing to a 30-year loan, which would bring up the rate to 4.75%. OK, so Tim, as we start to look at this, I think what would be helpful is if we could spend just a minute or two and break down the math, and let’s get out of the weeds on math, and let’s actually talk about all the other factors that we need to consider on top of the math. So when I look at this, I really am thinking about two different options here that Michael has or that he’s ultimately considering. Option A is to pay off the mortgage, $90,000, pay it off in five years at the current rate, 3.49%, and invest that current mortgage payment, which would be $1,500 a month. After he’s done paying it off in five years, take that entire amount and invest it, $1,500 per month going forward. Option B would be instead of paying it off in five years, would be to refinance to a 30-year mortgage, which would lower the payment from $1,500 down to $500 and investing the difference right away, $1,000 per month rather than waiting five years to invest the full amount. So talk us through the math on those two options, and then we’ll talk through some of the other variables to consider on top of that.

Tim Baker: Yeah, I actually think this is the best way to do it. Obviously, you’re going to have different things that could go on. I mean, he could move and you know, get another mortgage, and that obviously throws a wrench in it. But I think for the best apples-to-apples comparison, Option A, which would be stay the course, you know, pay it off over five years and then invest the $1,500 versus go with the advisor’s advice is probably the best way to measure it. So if we break down the math, for the stay the course Option A scenario, if he were to pay five years to the completion of his loan, he’s going to pay an additional $8,000 in interest paid. So what he actually saves over the course of that is $1.215 million. And basically, the net of that — so if we take out the interest paid, he’s going to net $1.207 million. If we compare that to the advice of his advisor, if he pushes out the loan from five years left and basically refinances it with a 30-year mortgage at 4.75, the interest that he’s going to pay over those 30 years is actually $79,000. So the savings that he gains on this is $1.219, so that is a net of $1.14. So if you compare those two, the net is $1.207 with Option A, and then $1.14 with Option B, which is the refinance.

Tim Ulbrich: Yeah, and I think that’s important. And for those listening, remember what we’re talking about here, the context of Michael’s situation. So five years left on a payoff. Now, the other assumption we made here was an annual rate of return on the investing side of 7%. So I’m going to ask Tim Baker about that in a minute and why we used that number. But remember here, we’re talking about a five-year repayment period. So if somebody’s listening, and you’ve got 20 or 25 years left on your mortgage, I think one of the lessons here to learn is do the math, run the numbers, and obviously, the greater the difference of these rates between your mortgage rate and what you might accrue investing and/or the time period that you have on the payback, obviously these numbers are going to shift and be different. But here what we actually see if we’re looking at this is what I think is the closest apples-to-apples comparison. Both resulting in him paying $1,500 a month over the next 30 years, whether that be Option A, stay the course, all of that going to the mortgage for five years and then all of that for the remaining 25 going toward investing versus Option B, which is the advisor advice, which would be refinancing on a 30-year and balancing that between mortgage and investing over the total 30 years. So I think for me, that’s the apples-to-apples where you as the individual are putting $1,500 a month. And what we see here is actually Option A, pay off the house, and then invest beyond that for the next 25 years, that math actually comes out in favor of that, although for your situation, those numbers may be off or differ slightly. Now, before we talk about the other variables to consider — because I think there’s lots of variables to consider, even if the math wasn’t favorable in terms of paying off the home, Tim Baker, talk us through the 7% because some people might be wondering, why are you using 7% when it comes to the assumed average rate of return on the investing side?

Tim Baker: Typically, when I do any type of calculations for you know, long-term investments, I typically use 7%. Now, with the market has shown over long periods of time — this is not, you know, buying in and out of different types of stocks, it’s basically buying the market and having it take care of you over long periods of time. It will typically return 10%, you know, as an annual rate of return, on average, and then 7% is basically what that is if you take out inflation. So 7 — I’ve seen some people use 7, 8% — that’s typically the best, kind of the — I wouldn’t say industry standard — but that’s typically what I see a lot of advisors use when they’re saying, OK, let’s do a nest egg calculation, how much do you use? And that’s typically what the market will return over long periods of time.

Tim Ulbrich: Yeah. I think that’s important context because obviously, when we look at a mortgage payment or student loan payment, that’s typically a fixed interest rate. You know exactly what you’re going to get if you pay it off early, which obviously when we look at the investing side, we’re making some assumptions. And here, we’re using that 7% number. So just to recap here on the math, for Michael’s situation if we’re comparing that Option A of pay off in five years and then take the whole mortgage payment and invest it over 25 years beyond that, versus Option B, the advisor advice being refinance to 30 years, invest some of it and then pay off the house over 30 years, here the math actually comes out in favor of paying off the home early. Now…

Tim Baker: Which we were surprised by that.

Tim Ulbrich: We were. And I think that to me, because as I look back at the discussion on the Facebook group, myself included, I jumped to conclusions right away. Now, people who know me, you know I’m going to air on the side of pay it off, but I think the assumption is whether you’re on the side of pay it off or whether you’re on the side of invest it, do the math, right? Do the math, and then after you do the math, start to ask yourself, what are the other variables beyond the math that you need to consider? So Tim Baker, when I think about debt repayment, whether it’s a home or student loans, versus investing, beyond the math, usually the No. 1 variable I’m looking at is what is somebody’s feelings toward the debt? And what peace of mind, if any, might they have about getting that off their shoulders? And so as you look at this situation here, even in the context of you working with clients, how do you typically talk somebody through that? And how does that factor in as a variable?

Tim Baker: Yeah, I mean, I think it comes down to — we talk about this a lot in the student loan course — it kind of comes down to like, well, how does this particular debt make you feel? Some people, they look at mortgage debt and they’re like, well, you know, it’s a use asset, I know it’s going to appreciate over the long term, so it’s OK. I don’t mind having that for 20, 30 years. Now, it might change, you know, if he’s been paying this for 25 years or 15 years or whatever the circumstances for this and then to push it out again, that might be a different factor. But I typically — and this is kind of where I think, you know, having a conversation, me asking questions and getting the heck out the way and saying, and you know, I don’t work with Michael, but you know, some of the questions I would ask him is how does he feel, how does he feel about the debt, the mortgage debt? And I know Tim, you have what he originally wrote on Facebook in terms of his feelings towards that. So can you read that off real quick?

Tim Ulbrich: Yeah, I think it’s a great post. It gives us some insight, I think, into how he’s feeling about it overall. So he says, and this was in response to what you had asked him about fees and whatnot involved, and he said, ‘We haven’t decided what to do yet. The idea of having no mortgage in five years or less sounds amazing. However, I know that the best opportunity to create wealth is now so the money has time to grow and compound.’

Tim Baker: So I guess like I would say that, and be like, yes that is true. And obviously in this situation, we saw that that wasn’t true. Now I guess if you use a little different assumption, maybe 8% or if the interest rates weren’t that different for the house, maybe that were true. But in this case, it’s not necessarily the best play. But you know, if I hear a client, say things like ‘amazing’ or ‘anxious’ on the other end of the spectrum, to me, that carries weight. And the math is one thing, but you know, the idea for Michael not to have a mortgage — and we always preach financial freedom. What is one of the big probably milestones to create financial freedom for yourself? It’s probably paying the mortgage off. Now, having $1.1, $1.2 million in the bank is not too bad either, but I think that has to play a part in this. And you know, I just, I cringe at some of these advisors and the advice because I know that it’s probably not necessarily what’s in the best interest or it’s tone deaf to what the client actually wants. So I think that’s the point of the question and the thread that we went through was OK, what are some of the other competing factors that are going on here?

Tim Ulbrich: Yeah, I think there’s so much blanket advice out there too.

Tim Baker: Yeah.

Tim Ulbrich: I think that’s why it was so enlightening to actually run the numbers. Like, you know, if the interest rate market here were three years ago when you could refinance on a 2.75, this math looks different, right?

Tim Baker: Sure.

Tim Ulbrich: Or if you’re assuming 8 or 9 or 10% on the investments or you’re assuming 20 years on a mortgage, so I think that’s a great take-home point for the listeners is to run the numbers first. Don’t get hung up on only the numbers, but you’ve got to see the math. But then layer on all these other things that we’re talking about because for me personally, even if this situation were to be different and let’s say that the advisor advice would net $1.2, and you know, paying it off in five years and going with Option A would net $1.1, personally, I’m probably still going to pay it off because of all these other benefits. Somebody else might look at that and be like, ‘Tim, you’re crazy. You’re leaving $100,000 on the table.’ And what I would say to that is, you know, for me personally, and as I think about peace of mind and flexibility and options and all these other things, is I look at the difference of $100,000, which is going to be further minimized, that difference, when we think about, oh by the way, investing’s not done in 30 years. That’s going to be taken out another 20 or 30 or 40 more, you know, now we’re talking about the difference of what is the total of maybe $3 million versus $2.9 or $2.8, whatever. I’m going to take that trade all day. But other people might have different beliefs or philosophies, which is OK. I think it’s a matter of doing the math then evaluating what it means for your own personal situation. So I think we would take some flack from people on the Facebook group if we didn’t address the tax advantages of home ownership. And so how, if at all, would you factor that in terms of being a plus for carrying out a mortgage for as long as you can?

Tim Baker: Yeah, I don’t know. I mean, I hear taxes like a big mover of the needle for a lot of things that we do financially, but I really think it should be a secondary thing. Like obviously, you know, the bigger that your estate is or the bigger that your balance sheet is, we’re talking a lot more money, but I think just to have a mortgage to have a mortgage to get a tax break, I don’t know. I mean, I think there are other things that you can do. I think with the new tax code, you know, they’re capping that. So $10,000 basically per household is what you get. So it doesn’t really help you too much in high cost of living areas, which Columbus, Ohio, is not. But I think it definitely plays a part in this, the tax advantage and being able to write off that interest. But I think that is very much a tertiary thing that, you know, should be considered. And obviously, we just went through tax season and somebody had to pay Uncle Sam a lot more out of pocket than they’re used to saying, ‘Tim, you’re crazy,’ but I mean, I think real estate can be great from you know, basically, sheltering assets that are tax advantaged. But I think in this particular scenario, to me, it wouldn’t be a major factor in my decision because again, we were talking about do we pay this thing off in five years and be free of debt? Or do we just have it hang over us for 30 years? And obviously, I’m a little bit biased as well, but I think the tax situation should be considered but not necessarily the main driver.

Tim Ulbrich: Before we continue with the rest of today’s episode, here’s a quick message from our sponsor.

Sponsor: Today’s episode of the Your Financial Pharmacist podcast is sponsored by “Seven Figure Pharmacist,” the No. 1 financial resources for pharmacists and pharmacy students. Written by pharmacists for pharmacists, “Seven Figure Pharmacist” will help you get on the path towards building wealth and achieving financial freedom. Specifically, you will learn about how to manage multiple competing financial priorities, strategies to eliminate your student loans and other debt, how to increase your income, the basics of investing, and what to look for when hiring a financial advisor. Head on over to sevenfigurepharmacist.com and use the coupon code “YFP” for 15% off your order of the book.

Tim Ulbrich: And now back to today’s episode of the Your Financial Pharmacist podcast.

Tim Ulbrich: I’m with you, and I think two thoughts I had there is I remember, Tim, when you and I did a session at APhA back in Nashville, you had the group literally close their eyes and kind of visualize how they felt about a situation where they no longer have their student loans. And I think for me, for those listening — unless you’re driving of course, don’t do that — but I think whether it’s student loans, credit card debt, mortgage debt, whatever, like visualize this scenario to get a pulse of how you would feel, and let that be a factor in decision-making and really embrace the emotional part of that decision. You know, the other part I was just thinking about, Tim, as you were talking, is thinking back to “The Millionaire Next Door” by Tom Stanley. And you know, as I read through that book, I can’t imagine people that achieve net worth of $1 million or $10 million, like, are they thinking about taxes? Of course. They’re trying to maximize ways that they can take advantage in a legal way and minimize their tax burden. Of course. But is that a primary factor of why they became a millionaire? Probably not, right?

Tim Baker: Yeah.

Tim Ulbrich: So is it a consideration? Yes. But should it be driving decisions? And I think, especially with this situation, again, interest rates are coming up a little bit, which is a variable that you have to consider. In five years, who knows? Maybe they’ll be higher, maybe they’ll be lower. But again, I think all the more reason to look at the math.

Tim Baker: Well, and I think the other thing to consider with the tax question is that it’s not, it’s not set in stone that you get the interest on your house is written off every year. It’s just like our conversation about, you know, PSLF and the longevity of that program and that it’s not a guarantee and could the law change? Absolutely. And I think the same is true — now, I think it would be tough for people to swallow that, and obviously, from a political standpoint, it would be tough to move on for that because it does encourage home ownership and all that, but that’s not necessarily a guarantee, either. And I think the new tax code moves in that direction in terms of capping some of it. So that’s something to keep in mind as well.

Tim Ulbrich: So what about — you know, one of the other things I was thinking about, Tim, is in terms of timeline towards the potential date for retirement and how that factors in. So obviously, we know Michael graduates 2008, so he’s — doing some quick — about 10 years or so into his career. And how might this equation differ for you when you’re talking with a client in terms of somebody who’s a new grad versus somebody who’s maybe 20 or 30 years out and a little bit closer to retirement?

Tim Baker: Yeah, so obviously where you are on the spectrum of like your financial maturity I think is probably a good conversation or a good thing to look at. You know, someone that is early 30s, late 20s, that mid-30s maybe, you still have, you know, 30+ years until you can retire. So you have a lot of time to basically right any wrongs. That’s one of the reasons that I love working with young professionals because at previous firms, you could walk in 55 years old with $30,000 in credit card debt and maybe $50,000 in an IRA and say, I want to retire in five years, and it’s not going to happen. It’s just not going to happen. So with younger people, I think that the time can be a double-edged sword. You can use it for good but then wake up one day and be 55 and like, what have I done? So you know, in this particular case, you know, refinancing a mortgage at Michael’s age, obviously it puts him kind of back in line with what probably a lot of his peer group is doing in terms of their ability to work through the debt and pay it off close to retirement age, I feel like that’s what a lot of people is do is they’ll buy a house and as they’re approaching or ending the accumulation stage of gathering stuff and they’re kind of into this protection phase, you know, it flips because now you have this large asset that you own wholly. If you’re later stage of life, maybe this makes a little bit more sense because you can essentially direct more dollars towards your retirements investments that you’re not really afforded once you get clear of the debt. So I think that timing question is important to recognize. And we kind of see this in student loans is we’re like, you know, for some people that are all-in on their student loans, you know, they can be hyper-focused for five, 10 years, but then they still basically have a good part of their career in front of them to begin building assets. For some people, that’s not the case. So maybe in this situation, you’re kind of, you’re fenced in essentially. You’re saying, OK, I’m going to split the difference and put that $1,000 towards the investments and allow that to grow knowing that when I get to that — those things kind of merge — when I get to that finish line, the house is paid in 30 years, but then I also have that nest egg of $1.1 million. So I think that is probably where it makes sense to look at that. But even then, I think I would look at that on a case-by-case basis because you can have people that are in that stage of life and just know that I don’t want the debt hanging over me. And you know, I’ll be as aggressive as I can. And then when I get through it, I know I need to shift my focus from debt destruction to wealth creation, when that’s basically putting that $1,000 or $1,500 like clockwork into the investments and get it to work. So I think it’s a conversation to be had, but to your point, Tim, like I just, you know — and I don’t know if it’s blanket, I don’t want to overly bash someone else’s advice, it’s just not something that, to me, makes a whole lot of sense for this particular case.

Tim Ulbrich: Yeah, and I think as we look at other factors we know about Michael’s situation through comments and discussion on the Facebook group, I think it further kind of points us in the direction — validating the math in this case — but even further pointing us in the direction of the payoff of the mortgage is that we know — Michael shared within the community that he works the Kroger company, and so they’ve had some recent cuts in hours and whanot, which obviously has resulted in a reduction of pay and I think has inserted a component of uncertainty. Obviously, he’s employable. He’s been working for 10 years and whatnot, so I think other options could be on the table, but I think one of the things I could tell is on the back of his mind is that, what is the long-term career play here? And how certain do I feel in terms of being able to depend upon this income? Or do I want to depend upon this income versus having some flexibility and options? Now, the counterargument to that would be well, if you refinance your mortgage, you’re actually freeing up cash that you could use for flexibility if needed within the next five years. I guess I would counter-counterargument that, and say, yes, but if you can really see the next five years through, from there on out, you’ve got flexibility at $1,500 a month that here, we’ve assumed you’ve invested. But what if just life happens? You have options. What if he decides that he wants to work part-time and get involved in real estate investing? Or he wants to do something else? Or there’s further job cuts and they can’t move? He has options with that amount being freed up. And I think Sandy inside the Facebook group nailed this component that everyone must consider when it comes to flexibility. And she said, ‘I wouldn’t have a good feeling about that at all. Only five years left, to committing to 30 more years at a higher interest? And I constantly think, what happens if a catastrophic thing happens to someone in my family and I have to stop working to care for them? I want that mortgage gone ASAP because that is one less thing I want on my plate, worrying if I’m going to lose my house on top of everything else. The thought of committing to that 30 years or more makes me nervous for you.’ So one component I think to think about in terms of this idea of flexibility. Now, Tim, I want to wrap up here by really digging into us thinking about two important factors here: fees when it comes to advisors and investing and making sure we’re factoring that in, and then also the potential bias of where the advice is coming from. So talk me through at least first that option of fees associated with the investing, how much of an impact that can have and making sure you’re also accounting for any fees that are associated with the advising side of it.

Tim Baker: Yeah, so I mean, when I first saw this post, I was like, I kind of, like, cringe a little bit because to me, this is a blatant play to you know, to get the client investing. You know, you see an opportunity there to get the client investing, which basically helps the advisor from a compensation standpoint. So you know, most advisors out there are paid based on assets under management. So as an example, the example that I tell clients, you know, when I explain my fee structure, which is based on income and net worth. So I had a pharmacist at Hopkins where at my last firm, I charged based on assets under management for everything. And you know, I was managing about $100,000 of their portfolio, an IRA, they left Hopkins and they rolled over another $100,000, and my fee essentially doubled. So I was being charged 1% on $100,000. And then the next day, I was being charged, I was charged 1% on $200,000. So the conflict there is obviously, what stirs the drink, what wags the dog’s tail in a lot of advisor’s, their recommendation, is skewed by the fact that they want you to get into investing. And that’s not a bad thing, to get into investing as early as possible, but when you’re looking at things like the balance sheet, and you’re trying to figure out, OK, what’s the best path forward to grow and protect income, grow and protect net worth while keeping the client’s goals in mind? Sometimes, the investments are going to be a secondary thing. It’s not going to be the main thing, or at least for the early part of the client’s financial life. So when I saw this, I’m like, uh, this is like an attempt to basically grow the client’s AUM and charge him there. So he did confirm that his advisor charges based on AUM, so basically, what that means is if he’s putting in $1,000 every year, you know, it’s growing by $12,000 plus how the investment is actually performing. And at the end of the scenario, at the end of the situation, we said that the basically what he would have is what? $1.1 million, right, Tim?

Tim Ulbrich: Yeah, right about there. Yep.

Tim Baker: So if you charge — if you basically take $1.1 million, and you charge 1% on that, that’s $11,000 per year that he’s basically taking out of that account as basically his compensation. Now, the thing to make notice of that or to take note of is that studies have shown even a 1% AUM can erode your ability to build wealth over time. So we say that it’s $1.1 million, but I’ve read studies that up to two-thirds of that sum can be eroded if you put in a 1% AUM fee every year, which sounds crazy. It sounds like that would be false, but we probably can link a few articles, and I think I might have shared one with him, is it doesn’t sound like a lot, 1%, but over 30 years, it can really add up. And it’s worth noting — and my thing with him was, you know, what are all the facts? So if you take out 1% — and obviously, the same would be true if he were to pay it off in five years and then for 25 years, put in $1,500. It would still be on the same fee agreement. He’s still going to be charged that 1%, but I think the, all the conflicts of interest need to be on the table. And I think advisors do a good job of not actually disclosing what those are. And that, to me, is unfortunate.

Tim Ulbrich: Yeah, and I think just asking yourself the question, not necessarily that somebody’s necessarily giving you bad advice, but asking yourself the question: Where is the potential bias coming from? And making sure you’re doing your due diligence and homework to vet that and make sure the recommendation is really the best for your personal situation. And we will link to that article in the show notes and also put a link to a simple savings calculator because I think it’s helpful for people to run some own assumptions themselves and say, hey, if I were to save $1,000 per month for the next 30 years, and let’s say in one situation I get 7%, the other situation I get 6% because of an AUM fee, what’s the difference of that? And I think those numbers and seeing those numbers is really puts a point of emphasis to the discussion we just had about the impact that fees can have because it’s not just the 1% that Michael would have on this $1.1 or $1.2 million in 30 years. It’s the 1% that’s happening over the course of the next 30 years, each and every year. And this situation, again, we don’t know enough about the advisor relationship to say it’s a bad one at all. And we’re not suggesting that. I think we’re just trying to look at the question objectively. But if we take a step back, if somebody’s charging on an AUM model, they do not have a financial motive to tell you to pay off your home or pay off your student loans. But they do have a financial motive to help you grow your investment side, which growing your investment, as you said, is not inherently bad. You just need to look at it in the context of other financial goals. I would also point listeners here, Tim, to episodes 015, 016, and 017, which were still three of my favorite episodes where you and I dissected the financial planning industry, what to look for, questions to ask, how they get paid. And so we’ll link to those in the show notes as well. Now, last question I have for you is obviously, we’re looking at this, we’re looking at Michael’s question in the vacuum, and I know a little bit about Michael’s situation, so I know he has built a good foundation. But we wouldn’t want to also overlook, you know — before we’re talking about paying off the house early or investing the difference, we also would want to still be looking at, hey, where are you at with the other foundational items? Is there credit card debt? Where’s the student loan debt at? Emergency funds, correct? Looking at some of those other pieces?

Tim Baker: Yeah, that and you know, insurance. I think, you know, we talk about a lot of this is growing wealth, accumulating wealth, but how are we protecting it? If we’re going to putting $1,000 a month into your investment portfolio, is there proper life insurance in place? Is there proper disability insurance? What does the consumer debt look like? What’s the emergency fund look like? Are we funding some of those other goals that he has, like maybe it’s vacationing, maybe it’s starting a side business. All these things are important, and obviously they fall on a scale of what’s more important than the next, but I think having that in place is — and at least being asked the question — is ultimately important too. So yeah, the protection of the overall financial balance sheet and the emergency funds I think would be the things that I would look at, even before I would look at growing that nest egg because I think those are, again, kind of the foundational things that we need to have in place before we get into the market and start doing damage there. So that would be the place that I would look at as well.

Tim Ulbrich: So there you have it, Michael, our thoughts on your question. We appreciate you taking the time to submit it, being a part of the community. For those of you that are not yet a part of the YFP Facebook group, you’re missing out on some great conversation, discussion, encouraging one another, people posing questions, getting answers, getting input, different perspectives. So highly encourage you to check that out. We’d love to have you as a part of that community. And Tim, as we wrap up here on a topic that relates to home buying, I also want to give a shoutout to the work that Nate Hedrick is doing over at Real Estate RPH. We had a chance to talk with him last week, obviously we had him on in episodes 040 and 041. We also had him on the blog. And his blog over at Real Estate RPH and the community that he’s building really addressing everything from first-time home buying to real estate investing, I think he’s got a lot of great direction, content and work that he’s doing that would resonate with our community and I think — would you agree? — we had a good conversation with him with some great ideas coming.

Tim Baker: Yeah, great guy, easy to work. I mean, he knows his stuff, and I’ve directed a few clients his way who are going through the home buying process. I wish we had a Nate in every city, and maybe that’s something that we’ll work on. But you know, I think if you haven’t read his stuff or if you’re not following him, check him out and listen to the podcast episode to get a feeling for kind of his voice and his brand and definitely an up-front guy and like, hopefully we have some collaboration here in the future, more collaboration, I would say.

Tim Ulbrich: So for those that haven’t hit yet, or haven’t yet hit stop on the podcast, I think we have to give them an update on the puppy news in your household because you’ve talked about Rover and dogsitting and the desire to get a puppy. So give us the update.

Tim Baker: Yeah, so we — and I talked about, I think I talked about Leo more than I’ve talked about my daughter Olivia on the podcast, which I joke about. But we did Rover last year, and we’re still doing it, and we watched a dog, Leo, and just loved this dog and we actually got a puppy from kind of the same breeder. We had to go the hypoallergenic and things in our household, so we got Benji over the weekend. And Benji is a little Golden Doodle that is a ball of energy and part of the Baker family. And Olivia, who’s 3, is super stoked. She’s bragging about it to her friends about that Benji is her best friend, so it’s super cute. So yeah, our family is growing for sure, the YFP family is growing.

Tim Ulbrich: So we need a picture on the Facebook page — you, Shay, Olivia, Benji, so get us something out there.

Tim Baker: Yes.

Tim Ulbrich: And this is actually going to be a test to see if Jess actually listens to the podcast or not. I don’t think she does. So Jess and the boys have been heckling me for months about getting — it’s been a cat, a dog, both, whatever — and I think I’m finally about to cave on a Golden. So if she’s listening, I’m into the commitment, we’re going to do it. It’s a matter of time, so we’ll let the group know when that happens as well.

Tim Baker: So if Jess listens to this, basically does that unlock the dog?

Tim Ulbrich: That’s it.

Tim Baker: OK. Alright.

Tim Ulbrich: And it’s right there, so if she doesn’t, it’s not happening I guess, right?

Tim Baker: Right. And I can’t tamper, right? It has to come naturally if she listens to it.

Tim Ulbrich: It has to come, yeah, because it really is too big assumptions. One, does she listen? And two, does she actually listen all the way through? So we’re going to find out. Well good stuff, really appreciate it, Tim, as always and to the YFP community, constantly we’re appreciative of this group and what we’ve been able to do in providing great content and the feedback that you’ve given us, so thank you all. We look forward to next week’s episode.

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