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Category: Real-Estate / Podcast

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

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

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

About Today’s Guest

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

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

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

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

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

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

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

Summary

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

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

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

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

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

Mentioned on the Show

Episode Transcript

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

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

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

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

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

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

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

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

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

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

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

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

Tim Ulbrich: Wow.

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

Tim Ulbrich: OK.

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

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

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

Tim Ulbrich: Yeah.

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

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

Ryan Chaw: Yeah, $262,000.

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

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

Tim Ulbrich: OK.

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

Tim Ulbrich: Wow, OK.

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

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

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

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

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

Tim Ulbrich: Oh, gees.

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

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

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

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

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

Tim Ulbrich: Yep.

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

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

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

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

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

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

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

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

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

Tim Ulbrich: Wow.

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

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

Ryan Chaw: Right.

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

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

Tim Ulbrich: Awesome. Awesome.

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

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

Ryan Chaw: Yes.

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

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

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

Ryan Chaw: Yes.

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

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

Tim Ulbrich: Great book.

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

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

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

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

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

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

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YFP 139: Should You Refinance Your Mortgage?

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Should You Refinance Your Mortgage?

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

About Today’s Guest

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

Summary

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

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

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

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

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

Mentioned on the Show

Episode Transcript

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Nate Hedrick: Sounds about right.

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

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

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

Nate Hedrick: Exactly.

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

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

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

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

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

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

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

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

Tim Ulbrich: That’s right

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

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

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

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

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

Tim Ulbrich: Absolutely.

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

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

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

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

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

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

Nate Hedrick: Dangerous.

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

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

Tim Ulbrich: Absolutely.

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

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

Nate Hedrick: Right.

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

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

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

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

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

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

Tim Ulbrich: Been there, done that.

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

Tim Ulbrich: Well played, well played.

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

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

Nate Hedrick: Right.

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

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

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

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

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

Nate Hedrick: Happy to be here, as always.

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

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

Posted on by yfpadmin


The Ins and Outs of a Pharmacist Home Loan

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

About Today’s Guest

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

Summary

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

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

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

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

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

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

Mentioned on the Show

Episode Transcript

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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YFP 130: House Hacking Your Way to Financial Freedom

Posted on 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

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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 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

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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

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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

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?

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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

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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.

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

Mentioned on the Show

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.

refinance student loans

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)

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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

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

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.

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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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