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Category: Real-Estate / Podcast

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

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6 Steps to Home Buying (Part 1)

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

Summary of Episode

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

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

steps to homebuying

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

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

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

About Today’s Guest

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 Your Financial Pharmacist podcast. How you been?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tim Ulbrich: Ugh.

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

Tim Ulbrich: Yep.

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

About Our Guest

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

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

Mentioned on the Show

Episode Transcript

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

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

Tim Ulbrich: Thank you.

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

Tim Ulbrich: Wow.

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

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

Tony Guerra: 1,000%, right?

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

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

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

Tony Guerra: Ouch.

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

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

Tim Ulbrich: Yes.

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

Tim Ulbrich: Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

Tim Ulbrich: Wow.

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

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

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

Tim Ulbrich: OK.

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

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

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

Tim Ulbrich: Sounds pretty awesome.

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

Tim Ulbrich: Got it.

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

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

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

Tim Ulbrich: OK.

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

Tim Ulbrich: Gees.

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

Tim Ulbrich: Yes.

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

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

Tony Guerra: Mmhmm. Yep.

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

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

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

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

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

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

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

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

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

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

Tim Ulbrich: Yes, Amen.

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

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

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

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

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

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

Mentioned on the Show

Episode Transcript

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

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

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

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

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

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

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

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

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

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

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

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

Tim Baker: Which we were surprised by that.

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

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

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

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

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

Tim Baker: Yeah.

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

Tim Baker: Sure.

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

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

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

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

Tim Baker: Yeah.

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

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

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

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

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

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

Tim Ulbrich: Yeah, right about there. Yep.

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

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

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

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

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

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

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

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

Tim Baker: Yes.

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

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

Tim Ulbrich: That’s it.

Tim Baker: OK. Alright.

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

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

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

 

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YFP 041: 10 Things Every Pharmacist Should Know About Home Buying (Part 2)

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On Episode 41 of the Your Financial Pharmacist Podcast, we wrap up a two-part series on best practices for home buying by interviewing Dr. Nate Hedrick, The Real Estate RPh. In case you missed it, we interviewed Nate for part 1 of this series (Episode 40), where he provided the first 5 best practices for home buying. On this episode, Nate provides 5 more tips to round out the list of ’10 Things Every Pharmacist Should Know About Home Buying.’

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.

Real Estate Investing Guide

Looking to learn more about real estate investing? Check out The Pharmacist’s Guide to Real Estate Investing at www.realestaterph.com/real-estate-investing-guide

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome back to Episode 41 of the Your Financial Pharmacist podcast. Excited to be here again alongside Tim Baker and again alongside Dr. Nate Hedrick, the Real Estate RPH as we continue our discussion on the top 10 list of things that pharmacists should know when it comes to home buying. In the first part of this series, I think Tim Baker, maybe you and I had some revelations about things that we did well and things that we didn’t do well. So Nate, thank you for reminding us of those things. We appreciate it. It’s a humbling moment, but that’s what this podcast is all about is sharing and helping those that are looking at this home buying process in front of them right now. So in the first part of this two-part series, we talked about five different things that people should be thinking about. No. 1, that the bank does not set your budget. No. 2, to shop around for mortgage lenders. No. 3, saving 20 percent down for a down payment. No. 4, not forgetting about the hidden costs of owning a home and buying a home. And No. 5, being ready for a lot of hurry up and wait. So if you didn’t catch that episode, go on back to Episode 40. We’ll link to it in the show notes, and make sure you catch up before we jump into the remaining five. So Nate, welcome back. We appreciate you taking the time to be here.

Nate Hedrick: Of course. Thanks for having me again.

Tim Ulbrich: Alright, let’s jump in. So No. 6 as we continue on this list. No. 6 that you had on this top 10 list is don’t skip out on the home warranty. So I think often we look at this, you know, as an extra add-on, an extra buy, so tell us why the home warranty is something we shouldn’t skip out on.

Nate Hedrick: Yeah, and it’s a good allegory for just in general, don’t skip out on things that it seems like a cost right now if in the long term, it may help you out. So really understanding, again, going back to that education piece we talked about in the first episode, understanding what these do. So an example of a home warranty like I talk about, a home warranty is usually a couple hundred dollars. An average one is about $300-400. Sometimes the seller will even provide them. And in general, a home warranty will cover all of your appliances — your furnace, your dishwasher, your refrigerator, everything else in between — it will cover that for up to a year, depending on how you buy that home warranty and what’s included in that. And one of the thing we talked about last episode was trying to save all this extra money for if something goes wrong or something breaks. Well, an average furnace is about $4,000. So setting aside an extra $4,000 is kind of crazy when you could set an extra $400 up front and in case something goes wrong, you’re basically covered, and they’ll come in and handle it. Now, I’ll fully admit that all home warranties are not equal, and some are better than others. And you really got to kind of do your homework on what’s going to be providing you the best outcomes if something does go wrong. But ultimately, it’s a good way to spend a couple hundred dollars up front and manage your costs for at least that first year where you’re trying to get your feet underneath you without having to pay a huge dollar amount if something does go wrong.

Tim Baker: Yeah, and I feel like this is one of the examples where, one of the points where, I think if you have an example — like I know I talked to a few clients who’ve bought in the Baltimore area, so you know, these houses were built in the 1880s. So it’s kind of a no-brainer, but I’ve had a few clients come back to me and say, ‘Thank goodness I did get that home warranty because this and this, this died after we moved in,’ or whatever the case was. So I think it’s a good point to make that not all warranties are created equal. And maybe that’s where kind of a good real estate agent comes in that can help you through that and what that essentially covers, so yeah, it’s a good point.

Nate Hedrick: Yeah, I personally experienced that. I remember distinctly, we were going back and forth through negotiations on our home, and our house was basically a slow flip. They took the time to redo it, but it was basically a flip for lack of a better way of saying it. And so everything was like brand spanking new, or so I thought. Turns out the washer was not in warranty when it broke, and basically what could have been a $300 home warranty cost me about $750 to buy a brand new washing machine.

Tim Ulbrich: And I think this too highlights, you know, in point No. 4, we talked about making sure of accounting for all the costs. Obviously, that fits in here as a cost. And also, while we would of course recommend that you have a fully funded emergency fund heading into a home, we know that many people may not, and all the more reason — even with one, you should have it — but of course, if you did not, it should be able to cover some of these expenses. So No. 7, Nate, is working with a real estate agent. It’s free, sort of. So obviously you being a real estate agent, there may be a natural bias here, but talk us through the benefits of working with somebody versus going at it yourself.

Nate Hedrick: Yeah, so certainly. So I think years and years ago, it was a lot easier to kind of go it alone. You can still do it today, there are many people that do for sale by owners, and they buy by themselves, but the advantage of buying a home and working with a realtor is that effectively, it’s free. So I’ll give you the behind-the-curtain of how real estate basically works. When a person sells their home and they use a realtor to do so, the real estate agent that’s selling that home negotiates a percentage fee. And they say, ‘OK, when your home sells, I want let’s say 6 percent of that home price. And that’s going to be my commission for marketing and for all the time that I spend on open houses and all the advice I gave you on what to set the price for and all the things that a real estate agent does.’ And so that actually is paid by the seller to the real estate agent. If a buyer comes in with their own real estate agent, those two agents basically agree during the process of acquiring the loan, they agree to split that 6 percent. So the buyer’s agent would get 3 percent, and the seller’s agent would get 3 percent. The nice thing is all of that 6 percent in general, comes from the selling side of the equation. So for a buying agent, for a buyer of a home, there’s no commission that’s coming out of your wallet and going directly that real estate agent. So you get this person that’s going to find you homes, they’re going to work with you every single day that you need it, you’re going to go to all these different showings, they’re going to give you access to the MLS, which we can talk about. All that stuff goes into it, and effectively, all you pay at the end is like a small desk fee. It’s usually $100-200 to do all the paperwork. So it’s a really nice tool that you have at your disposal that you almost don’t have to pay for if you’re on the buying side of the equation.

Tim Baker: So if I’m a pharmacist and I’m in Ohio or California or Louisiana or wherever, and I’m looking for a real estate agent that I like, know and trust, when you advise your pharmacy friends around the country, how do you advise them in terms of where to start with finding an agent?

Nate Hedrick: Yeah, that’s a great point. And that’s actually one of the things that I do quite a bit through my website because I agree, this can be a difficult part of the process. So the best thing you can do is ask your friends, ask somebody local that’s — like if you’re buying locally, ask somebody local that’s worked with a realtor recently. If they had a good experience, they’ll be more than happy to tell you all about it. The other thing that you can do is to go to someone like me who basically finds you a real estate agent in whatever area you’re looking for. This becomes especially important when you look at investment properties and certain types of buying of investment properties. You need certain types of realtors that are going to work very quickly, ones that are a little bit more savvy to the investment side of the market, and finding someone like that can be a little bit more difficult. So there are lots of different resources — again, our website is a great one for finding a local real estate agent. Basically, we’ll interview you, come up with an idea of what kind of an agent you’re looking for based on your needs, and we’ll set you up with somebody in that market that you’re trying to move to or in the market that you’re currently located in to help you go ahead and make that transition. So it’s definitely a part of the process and one thing that we’re trying to help out with quite a bit here at Real Estate RPH.

Tim Ulbrich: No. 8 is home ownership provides tax advantages, even for people that make “too much.” And I want your input on this one. I think probably as I talk with pharmacists about home buying, one of the most common reasons I hear about that itch to buy a home is ‘I need the tax advantages, I need the tax advantages.’ Despite student loan debt or other priorities they’re circulating. So talk us through exactly what are the tax advantages associated with a home. And then secondarily, how might those be changing under the new tax rules moving forward?

Nate Hedrick: Yeah, I’m glad you said that because it’s definitely changing quite a bit. So basically, if you make too much — again, that’s in air quotes there — but people like pharmacists in general make more than is allowed by the tax code for a lot of the standard, a lot of the deductions that we might otherwise benefit from. The one that always bothers me personally is the student loan deduction, right? My wife and I, again, make “too much” to get a student loan tax deduction, so even though we’re paying tens of thousands of dollars in student loan interest, none of that is deductible from our taxes, which is, again, frustrating personally. But if you look at the home, homes provide significant advantages in the tax area because a lot of those limits aren’t necessarily in place. So the first thing is that, you know, your state and local, your property taxes, are something that you can write off to an extent. Now, again, this is changing a little bit with the new tax code. They are limiting that property tax deduction to about $10,000, and that shouldn’t matter in all areas of the country, but it will matter in some. So New York, California, higher, basically more expensive homes in all those areas may start to kind of see an issue with that where your property taxes are now creeping over that $10,000 limit, and you’re not able to deduct all of that off of your taxes. So it’s something to kind of use but something to realize that also there’s a limit to it now with the new tax plan that’s in place. After that too, the other tax advantages that taxes are one of the few things — or excuse me, homes are one of the few things that there are limited or no capital gains on in certain scenarios. So if you buy or sell a stock, right, if I buy a stock at $100, and I sell it at $200, I’m paying capital gains tax on that $100 in profit. If I buy a home at $100,000 and sell it at $200,000, as long as I live there for two of the last five years, and it was my primary residence during that time, I pay no taxes on any of that profit. So not a single dollar of that goes back to the government on that profit that I made even though it was $100,000 over the course of just a couple of years. So if you’re looking at buying and selling your own personal home, if you’re going to stay there for a little bit of time, which we’ll get into, you can really do well for yourself in terms of not having to pay those capital gains tax where other investments, while maybe a little bit more tangible and easy to deal with than a home, are certainly taxed a lot higher.

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

Sponsor Message: This episode of Your Financial Pharmacist podcast is brought to you by Real Estate RPH. Founded by a pharmacist for pharmacists, Real Estate RPH provides the expertise you need when it comes to making one of the biggest investments of your life. Whether you’re looking to buy a home, sell a home, flip a home or learn more about real estate investing, head on over to www.realestaterph.com today.

Tim Baker: Now back to the Your Financial Pharmacist podcast. So point No. 9 is plan to stay for a few years, so you just alluded to that. So what typically is the crossover point or the break-even point for someone who is living in a house or purchased a house. Is it two, three, four, even five years? What does that look like?

Nate Hedrick: Yeah, great question, Tim. It totally depends on your market, unfortunately. I wish I had better information for you. They did an analysis on this on some of the low cost areas of the country and some of the high cost areas of the country. And places like Ohio, actually, where I’m from, are quite low cost in relation to the rest of the country. And you can actually get your money back or it’s worth it, basically, in just two or three years. If you look at some places like New York and Hawaii, it’s something crazy like 20 years. You’d be better off renting unless you were going to be in that home for 20 years. So it can really matter based on your market, doing your own little bit of research is best on that. But yeah, a couple of years is generally that sweet spot but totally depends on your market.

Tim Ulbrich: Yeah, and this for me is a plug back into the other things we’ve talked about with saving 20 percent down, not forgetting about all costs associated because obviously, when Jess and I were looking to move last year, we had been in our first home for seven years in a low cost market here in Ohio. But nonetheless, because we didn’t follow the 20 percent down, we didn’t have much equity, and when we looked at all the fees associated with the move, you know, it was not looking very good in terms of getting return on the equity we had gained. So I think that really evaluating and taking a step back and obviously, you can’t predict every factor, right, in terms of what may lead you to be there longer or not, but really trying to look at it. Say, is there a chance we might be here for a long period of time that we can absorb some of those fees and build up some equity in this home. OK, No. 10 for our real estate, maybe investing nerds out there, people who are excited about this potential about real estate investing, getting started on this, which takes me back thinking about Episode 9 where we interviewed Carrie Carlton about some of her real estate investment principles and experiences. What you have here is considered house hacking. I know this is something either you did or consider or recommend, right? So tell us more about that.

Nate Hedrick: I wish that I had done it. This is why it’s on my top 10 list because I just am kicking myself now, even still, that I didn’t get the chance to house hack when I bought my first home because I didn’t know what it was. So again, this is kind of what has gotten me to spreading the word on house hacking. House hacking, in a nutshell, is basically you buy a home with 2-4 units. So a duplex, a triplex or a quad. And you live in one of those units, and you rent out the others. And if you do it right, and you put your numbers in and everything works out, oftentimes you can actually have your renters paying your mortgage while you live there for free. Now, you’ll ultimately have other costs that you’re covering, and if you’re really good, you can actually get your renters to cover those costs as well. But I mean, think about it. If you could buy your first home, Tim, and I said you could live there for free, you’d be all over that, right?

Tim Baker: Where do I sign?

Nate Hedrick: Yeah, exactly. So the idea is that if you can find a popular market, something that is comfortable for you to live in that you can rent out quite easily at a good amount, you can easily get those other units to kind of pay off the rest of the mortgage. The beauty of this and where this gets really kind of lucrative is that the banks when they look at a duplex, a triplex or a quad, all the lenders, actually, they perceive those as being single family homes. They don’t treat those loans any differently than if you or I bought a single family home, so a one-unit kind of place. So you don’t have this crazy, like, apartment loan and there’s nothing fancy associated with it, you just get a regular loan and you get this multiple-unit place, and you can rent out the other sides of it. So it’s a really easy and convenient way to kind of dip your toe in the investing world of real estate. And I’ve seen so many people do this and just pay off their student loans so much quicker because they’re able to basically have someone else paying a mortgage, and they’re living for free.

Tim Ulbrich: And I think this is a good option, you know, as I think about a lot of pharmacists with student loan debt, obviously itching to get into a home, wanting to achieve other goals. Of course, again, with the principles we already talked about — 20 percent down and otherwise — but you know, getting in, you mentioned kind of dipping your toe and getting started, I think it’s a great way to do that, make some progress on your student loan debt. Obviously, not underestimating what’s involved in managing tenants, I think this kind of goes back to the learning process and making sure you’re prepared. So Tim Baker, from a financial planning perspective, we’ve just heard this list of kind of top 10 things that pharmacists should know when it comes to home buying. What are you seeing from pharmacist clients in terms of adhering to these principles? Or even from your viewpoint as an advisor to them trying to help them manage everything from student loan debt to home buying to investing? And any words of wisdom you could shed here.

Tim Baker: Yeah, I think from my perspective, probably the biggest word that comes to mind — and Shay and I recently went through this recently — was it’s emotion. So I’ll tell a quick story about this, and I’ll pivot to the clients. You know, we, Shay and I have talked about, we’ve been in our house a year, but we’ve talked about upgrading in 3-4 years, 3-5 years, and then renting out our home. We went across the street to look at a nicer, newer house and talked to the real estate agent and were talking about, you know, I rent space for my office for my work, and we want to have more kids and that type of thing. They’re like, well, you know, this house is a little bit out of your price range that you mentioned, so let’s go look at some that are in your price range. And we went through that, we went down the funnel of looking at different houses just to kind of check it out. And then, you know, we get in a house and Shay is like, we can make this work and blah blah blah. And the emotion just latches onto you because you can picture yourself in that house, and I kind of went through this. And it was almost like we had to shake ourselves out of this because, you know, we were not prepared, are not prepared to make that move. And I think, like, I do this for a living. I preach prudence. And I found myself going down that path and saying, OK, could we rationalize our way into this? I am paying kind of a mortgage and office space. Could I just combine that into one thing? And I see that with clients a lot is — and one of the questions that I want to pivot back to Nate here is — at what point do you actually start looking for houses in this whole thing? Because I think once you start looking for houses, you are, you’re kind of in that snare of, OK, I could definitely see myself in this spot. So from a financial planning perspective, it is a constant discussion about your ability to build wealth and the idea that your primary home is an investment or not an investment. And are there things outside of just paying your mortgage that you have to account for. Like I remember when I bought my first home in Ohio, we had all the costs and then we had to spend a couple thousand dollars just for blinds. You know what I mean? So what happened? Out came the credit card, and then that’s the kind of things that you just don’t think about. So yeah, I mean, I think it has the potential — real estate has the potential to help you build wealth, but it also can be a cash — we talked about Rich Dad, Poor Dad — it can be a cash flow crunch. So to kind of, you know, pivot back to you, Nate — at what point, if I’m a pharmacist out there and I’m looking, this question has been hanging over my head, my parents are telling me, ‘Hey, buy, buy, buy. It’s a great investment,’ what should like, at what point should I actually or where should I start? I think that would be a good question. Where should I start? Because it’s so easy to look at those emails that I get from Zillow or Redfin and say, Oh yeah, I could definitely afford this. So what would be your advice in that regard?

Nate Hedrick: Yeah, that’s great. And actually, you’re right. I get this question all the time as well, and I just put out a guide recently on how to get started in real estate investing. It translates exactly the same to first-time home buying. And really, the first step is to first assess your own finances. The fact that you’re here listening to this podcast means that you’re already good at that or at least taking the right steps, right? So assess your own finances, figure out what you can afford. Again, going back to point 1 from last episode, figure out what your budget is. So once you kind of have that, working down the road of get your team in place, OK? And your team might just be and your spouse. Or it might just be you and your dog. Your team doesn’t have to be this expansive thing. But get your team of support that’s going to be in place. So maybe you’re going to tour the house with your brother. Maybe you’re going to buy the house, again, with your wife or your spouse. Having that team is a really good next step. So knowing that you’ve got your support structure and who’s going to be in the decision-making process. Then you want to go ahead and basically, go ahead and get pre-approved. Find a lender, like I said, do that research, get pre-approved so that when you go to a home, what you don’t want to do is walk in to your very first home, fall in love with it, and they’re not accepting offers for people that aren’t pre-approved. You know? That would just be the worst because it can take a couple of days to get pre-approved. So go ahead and get pre-approved. Then at that point, really, I recommend again, trying to get with a realtor and help them help you find some homes. And you can do this on Zillow, you can do this on Redfin, you can do this by yourself. You don’t need a realtor, but it’s nice when you have one in your court, doing the extra work for you. And once you’ve got that realtor in place, then you start assessing your deals. You start looking at the homes available to you, and you know that once you go into it, you’ve done all the financial background, you’ve got your little team that you’ve built, you’ve got your real estate agent so that if you do need to make an offer, you’re ready to go and you’ve got all those ducks in a row before you get to the point where you can make that decision on when to buy a home. Because I think you’re exactly right, Tim, so many of my clients say this to me when they start. They go, ‘I’m just going to start looking. I don’t think we’re ready to buy for six more months. I’m just going to look.’ And that person inevitable is putting an offer on a home within three weeks. Guaranteed. And it just happens. So you have to be ready before you start looking. It’s really easy to jump on Zillow and get really kind of like, we should go look at that house! But I really encourage you to do that background homework before you jump in and start looking at homes.

Tim Ulbrich: Nate, great advice, and all I keep thinking through this episode and the previous one is I wish I would have had that chance to talk to you before I got started, you know, eight years ago. That’s what we’re here for, and hopefully our listeners, whether it’s first home buy, second home buy, interest in real estate, whatever, hopefully they’re getting some good advice here. So again, Dr. Nate Hedrick, the Real Estate RPH, you can learn more about the work he’s doing over at realestaterph.com. Nate, thanks for coming on the show as well as for filling this need. I think where pharmacists need more information and education on home buying. So thanks for joining us today.

Nate Hedrick: Of course, thanks for having me.

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YFP 040: 10 Things Every Pharmacist Should Know About Home Buying (Part 1)

Posted on by yfpadmin

 

On Episode 40 of the Your Financial Pharmacist Podcast, we begin a two-part series on best practices for home buying by interviewing Dr. Nate Hedrick, The Real Estate RPh.

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.

Real Estate Investing Guide

Looking to learn more about real estate investing? Check out The Pharmacist’s Guide to Real Estate Investing at www.realestaterph.com/real-estate-investing-guide

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YFP 009: How One Pharmacist Paid Off $135K in Debt and Acquired 18 Rental Units (Debt Free Theme Hour with Carrie Carlton, PharmD)

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On Episode 009 of the Your Financial Pharmacist Podcast, we launch our very first Debt Free Theme Hour. We interview Carrie Carlton, PharmD to discuss her journey of investing in real estate and how that helped her pay off $135,000 in student loans and be well on her way to achieve financial freedom.

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About Today’s Guest

Carrie Carlton, PharmD is a 2011 graduate of the University of Tennessee and currently works in the long-term care setting. Since graduating, she has managed to pay off $135,000 in student loans and acquire 18 rental properties.

Episode 009 Special Giveaway

Two lucky listeners of the Your Financial Pharmacist Podcast will be randomly selected to receive a real estate investing book that comes recommended by today’s guest, Carrie Carlton.

You can sign up to be eligible for this giveaway at yourfinancialpharmacist.com/009giveaway

 

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