Revisiting Fundamentals in a Changing Real Estate Market
Blake Johnson, PharmD and Zac Hendricks return to the YFP Real Estate Investing Podcast to discuss their investment strategy and how they manage risk in a changing real estate market by returning to the fundamentals.
About Today’s Guests
Blake Johnson, PharmD
Blake Johnson is a 2013 graduate of the University of Arkansas for Medical Sciences. Upon graduation, he married his wife Kristyn and he began working in a small town independent pharmacy. He worked there for 2 years and is now working in Conway, Arkansas at a local independent pharmacy. Upon graduation, Blake decided that paying off student loans would be a top priority, while still being able to travel and save for his retirement. After three and a half years, he was able to pay off his and his wife’s student loans. Since then, Blake has been able to increase his savings and start purchasing rental property. He now owns over 25 properties and has hopes to acquire more, while paying them all off early. In his spare time, he enjoys running, traveling as much as he can, and teaching others about finances.
Zac Hendricks
Zac Hendricks is a 2013 Bachelor’s of Business graduate from University of Central Arkansas with an emphasis on Innovation and Entrepreneurship. Zac worked as an intern for a financial advising firm while finishing his degree at UCA. This is when he bought his first property. Upon graduation Zac got a job working in logistics at Maverick Transportation. While moving up in the ranks at Maverick, he and his wife Mav purchased 7-8 more properties which eventually led to them finding financial freedom to change careers and working in the family business—Hendricks Remodeling. Zac and Mav find their most joy in using their business skills to fund missionaries in the 10/40 window and expanding the Kingdom of God.
Episode Summary
With changing interest rates and an uncertain market trajectory, taking on real estate investing right now can be intimidating. How do you manage the risks as a new investor, and how can you adjust your strategy as an existing real estate investor? In this episode of the YFP Real Estate Investing Podcast, Nate Hedrick, PharmD, and David Bright, PharmD, MBA, BCACP, FAPhA, FCCP, welcome back guests from Episode 3, Blake Johnson, PharmD, and Zac Hendricks. Blake and Zac discuss the importance of intuition and insight when dealing with a changing real estate market and take a close look at the changes in real estate over the past year, sharing how they have adjusted investing strategies accordingly. Blake and Zac will inspire listeners to follow their advice to create and sustain good relationships for repeat business. Listeners will also learn how to manage buying through wholesalers versus an MLS realtor, the power of running and crunching your own numbers and be comforted with the advice that there is no rush to buy property. From appreciation to strategies for battling increasing interest rates, this episode is full of valuable information for new and seasoned real estate investors alike.
Key Points From This Episode
- A welcome back to Blake and Zac.
- An overview of the guests, their careers, and their real estate background.
- Looking at the changes in the market over the last year and how to adjust your strategies.
- Blakes’s endless energy and inability to stop buying properties.
- The importance of building a relationship with wholesalers.
- The difference between buying something off the MLS with the realtor or working with a wholesaler.
- Strategies Blake and Zac have used to handle the increase in interest rates.
- The effects of price appreciation on Blake and Zac’s rentals.
- Power that lies in running your own numbers and running your own race.
- Predicting and dealing with the rising costs of rehabbing a house and potential supply chain issues.
- Why you should always shop around to decrease maintenance costs.
- A brief look at how to run a cash flow equation.
- Blake and Zac’s prediction of the market change over the next six to eight months.
- Advice for new investors.
Highlights
“If you have your principles or if you have your equations, the market doesn’t matter at all.” — Blake Johnson, PharmD [0:06:33]
“If you’re buying deals on the MLS and you’re using those equations, nothing’s going to work unless you’re putting in a lot of cash. For me, it’s having a genuine, good relationship with the wholesalers.” — Blake Johnson, PharmD [0:08:46]
“There’s more demand, there’s still lower supplies so that doesn’t tell me that prices are just going to automatically go down just because interest rates are going up.” — Zac Hendricks [0:20:28]
“Maintenance has been definitely challenging for us but we’ve been working on systems to make it better, not necessarily cheaper.” — Zac Hendricks [0:28:05]
“If you buy high and then the stock market dips, you haven’t lost any money. You only lose the money when you sell.” — Zac Hendricks [0:35:47]
Links Mentioned in Today’s Episode
- YFP Real Estate Investing 03: Running the Rental Numbers with Blake and Zac
- Your Financial Pharmacist Podcast
- Baker’s Dirty Dozen: Principles for Financial Independence by Joe Baker, MBA with Lindsey Jordan Baker
- Smith Family Pharmacy
- Email Blake Johnson: [email protected]
- Follow Zac Hendricks on Instagram: @hendricks_remodeling
- YFP Real Estate Investing
- Join the YFP Real Estate Investing Facebook Group
- Your Financial Pharmacist Disclaimer and Disclosures
Episode Transcript
[INTRODUCTION]
[0:00:00.4] NH: Hello and welcome to the Your Financial Pharmacist Real Estate Investing Podcast, a show all about empowering pharmacists to achieve financial freedom through real estate investing. I’m Nate Hedrick and each week, my co-host David Bright and I explore stories from pharmacists all over the country who are achieving their real estate goals while maintaining a meaningful career in pharmacy.
Whether you’re a first-time investor or a seasoned pro, we’re here to provide education and inspiration about the world of real estate. Please note, this podcast is intended for educational purposes only and should not be considered financial or investment advice.
[0:00:42.8] NH: Hey, David, how’s it going?
[0:00:43.3] DB: Hey, good thanks, man, how are you doing?
[0:00:44.9] NH: Good, we just got done with a really fun episode, we recorded with Blake and Zac who we had way back on episode three, already the beginning of all this and it was just great, they’re such a great group of guys to talk to and it just was awesome to have them back on the show and see what they’ve been doing since it’s been over a year since we talked to them.
[0:01:02.5] DB: Yeah, they’re an inspiring duo, right? Like their volume, their strategy but also their willingness to learn and grow along the way, like, just a lot of great signs that they will be a very successful investor pair, they already are, right? They already got a ton of properties, they’re doing great things, so very cool to see what they’re doing.
So we thought, someone with their experience and their perspective from having a lot of volume of transactions, like number of houses they purchase in a year and things like that, we thought that would be a great duo to have back as we face a very different market this year than what we saw way back on episode three, a little more than a year ago.
You know, with low interest rates and strong appreciation a year ago and now, much higher interest rates and kind of questionable trajectory on the market, it’s a very different world.
[0:01:47.9] NH: I think, it’s very funny because everybody’s got an opinion on this, right? If you ask every investor, they’re all going to have a different idea of where the market’s going today, where it’s going to be. What I found interesting about Blake and Zac is that, rather than getting fancy and telling us their lofty predictions, they were like, “No, we’re just sticking to fundamentals, like, we just know what is going to happen, we just make sure the numbers work today and then, whatever happens down the road, it is what it is. So we’ll deal with it then.” I really like that approach.
[0:02:12.4] DB: Yeah, the fundamentals answer, like, it almost got me off-guard, I was like, that’s so cool and they also, having this pharmacy thread to them, they do think through some potential, negative scenarios and what that would do. So they’re still kind of prudent in how they do that and it was great to hear that thought process of how they kind of stress test their investments, to make sure that they don’t get hurt if things go sideways, particularly with loan types and all kinds of things like that.
So rather than just sticking their head in the sand and pretending that everything will be okay, they’re taking a conservative approach to make sure that if they buy a specific property, they’ll still be okay if things get rough.
[0:02:53.4] NH: Yeah, I’m always impressed at how they look through something and then plan for just these little nuance things, like, “Oh, well, if we do this, it’ll make our lives so much easier in five years” I’m like, “Man, what a good way to think about things that just not a lot of investors do, right?” We plan for, “How do I get to the refinance or how do I get to the point where I sell it?”
They look at like, “What does this look like in 10 years and how can I make sure that’s going to be better for me in 10 years?” and I’m really impressed by that. Not only take that wisdom and impart it quickly on a podcast but they passed this down to new investors, locally and again, just on this episode. It’s always great to talk to them.
[0:03:29.5] DB: Yeah, that balance of sophistication and practicality is just really cool in how that comes out throughout the episode. The other one is in there that I don’t want people to miss is they have this great story about the power of relationships and integrity and following through in what you say you’re going to do and how that has even earned them repeat business with people that they work with.
So I think it’s just a cool story to showcase how relationships matter in this world and how again, just separate from buying an index fund or something like that, like investing in real estate is much more of a – it’s really a people business and they bring that point home very clear.
[0:04:04.8] NH: Yup. Well, hopefully you guys enjoy the episode as much as we enjoy talking to Blake and Zac and with that, we’ll just let you jump right in.
[INTERVIEW]
[0:04:12.0] NH: Blake, Zac, welcome back to the show guys.
[0:04:13.0] ZH: Hey, glad to be back.
[0:04:14.5] BJ: Yeah, appreciate you guys having us back.
[0:04:16.2] NH: Yeah, it was back in episode three, right when David and I kind of kick this whole thing off and knew even less about what we’re doing than we do now but really excited to have you guys on.
[0:04:24.7] BJ: Yeah, you got your experts now.
[0:04:26.7] NH: Yeah, we’ll pretend that way, that’s good.
[0:04:27.8] BJ: Yeah.
[0:04:29.0] NH: So for those that didn’t hear the show, you know, a full year ago now, maybe you can give us a little brief overview of you guys, the partnership, just a little bit about your real estate background or your real estate strategy.
[0:04:40.1] BJ: Sure, so, I’m a pharmacist by trade, I actually bought the pharmacy that I work at in Conway back in April. So graduated in 2013 from UA Mass in Arkansas. Did community practice my whole time and about five years ago, saw the need for financial independence outside of just pharmacy income. So we jumped into real estate, met Zac and we’ve had a business ever since so we started in 2018 and now have 36 properties together. So it’s been good for us, we can dive in more details, whatever you want to do.
[0:05:10.9] NH: Yeah, that’s awesome.
[0:05:12.4] ZH: Yeah and my background, I’m not a pharmacist, I’m a business background, co-owner in a remodeling company with my dad. My wife and I started in 2013, we got married 2014, we became landlords actually and then, so, eight years gone by and we’ve been buying and then like Blake said, we met in 2018 and we – I guess, since we met Blake, we’ve, I don’t know, quadrupled or 6Xed what we were doing before, I don’t know but way more than that.
[0:05:39.3] NH: That’s awesome.
[0:05:40.0] ZH: I’m not multiplier, I’m not good at math. I’ve done a lot more since we’ve become partners to Blake and Christine so, definitely been blessed in the partnership.
[0:05:48.6] DB: Very cool, and since we last talked a year ago, I know that the market has changed, there’s all kinds of things going on and I know that particularly right now, that’s catching a lot of headlines with people talking about where the market is at, where it’s potentially going, what’s been going on with interest rates. So all those things, just kind of thinking big picture, how has the last year change your strategy?
If you guys have been in this, you know, five, six, seven, eight years in this business, what are you seeing and how has that changed your strategy in the last year since we last talked?
[0:06:20.7] BJ: I can’t sit still by nature. I’m just a go getter so I think we were talking about this when you guys sent us the questions and talking on this, going over what we want to say and I think, if you have your principles or if you have your equations, the market doesn’t matter at all, so your equations and what you need for cash flow.
[0:06:42.1] ZH: Let’s say for long-term rental.
[0:06:44.3] BJ: For long-term rental. Yeah, for long-term, that doesn’t really change anything so sure, it gets harder but it maybe has to get a little more intuition, a little more inside into the deal but for us, I don’t think it’s changed at all, it just makes it a little more fun to create the deal and make that happen.
[0:07:01.0] ZH: Yeah, Blake’s an energizer bunny so he never quits. So there was a point, was it last year? I think it was last year when I was running I think like, I think I had nine doors that I was actively working on, aside from my full-time job because we had just bought a bunch of properties at once and it was a lot.
So at one-point last year, I said, “I’m about to fire myself from being the guy that does the remodels on our rental property” and so, we had to work through a lot of things and so, we finally, we got to a point, because Blake can’t stop buying. I mean, literally, cannot stop buying houses. I got to the point where his father-in-law actually retired. We may have had that in the recording last time but his father-in-law retired and started helping rehab our houses.
So we’re not doing nine houses at a time anymore. We’ll do one or two, right now we have three, I guess.
[0:08:02.1] BJ: Yeah, we have three.
[0:08:03.2] ZH: Three going on. So I’ll do one and then Mick will do one and maybe we’ll have one that we are both working on or something like that. So personally, that’s how we’ve been affected but that’s not really anything to do with the market. So the market, we’ve also seen – we also probably couldn’t have bought as many properties because of just how many buyers there are per house. I mean, it’s unbelievable even off market properties.
You know, if you go, if somebody texts you a wholesale or texts you or whatever, if you don’t respond like that, then it’s gone. I mean, it’s nuts.
[0:08:41.7] BJ: I think it’s changing too so, you need to have key relationships in this market. So if you’re buying deals on the MLS and you’re using those equations, nothing’s going to work unless you’re putting a lot of cash. For me, it’s having genuine, like, good relationship for the wholesalers. It’s not like, “Hey, send me a deal” and be like, “Hey, how’s your family, let’s check in with you, let’s be friends with you. Okay, you can send me four houses, I’m going to reject all four. When you send me one, we’re going to capitalize on it.”
We’ve got a relationship with tier three wholesalers and I think the last couple that we’ve bought have been from wholesalers and assist those relationship where they’ll send them, they’re not sending it to anybody else until they filter through us and then through that, and then there’s another two bought, same sort of deal, there is a guy in town, you know, we called it a marriage of a relationship for a year, it took us a whole year to get two houses from him but because we were upfront people, not rude, not demanding, yeah, he was very happy to deal with this. So I think relationships are key in this market right now.
[0:09:44.3] ZH: Yeah, and I’ll add on to that. One house we got recently, the guy brought the deal to us and we said, “You know, we owe you, probably do that” or whatever and then he pulled back and he was going to try to take it himself and so and then later, we were kind of not in the place to really buy it so he posted online and for all these people.
I mean, I saw the comment he made. He had like this stack of people that were like, “I’ll buy it cash, I’ll buy it cash” blah-blah-blah. Well, he texted Blake and was like, “Hey guys, I kind of got in on it a little bit. I have to close this thing by December 27” I think it was. This was like, December 15th whenever he told us this and we were like, “Oh shoot, okay” and so he said, “I can’t go with any of these other buyers because I don’t know them and you all closed deals before fast, see what you can do” and we were like, “All right, we’ll take it.”
So yeah, we actually had a lender that told us, “Hey, I can probably handle that.” So we actually did finance that but yeah, that’s a very good lesson on just relationship building of he knew we could close, so he came to us and had all these other cash buyers, he still came to because he trusted us.
[0:11:04.0] NH: Yeah, that’s huge.
[0:11:05.4] ZH: It didn’t make him look like a fool.
[0:11:07.8] DB: Yeah, the relationship and the track record absolutely matters when you’re trying for that kind of repeat business, working with partners, folks like that. Just for those that may not have a good context, what’s the difference between buying something off the MLS with the realtor and what’s a wholesaler?
[0:11:25.0] ZH: So a wholesaler is someone who finds about the seller and he usually has a buyer list so he finds the seller, has a house and he says, “I’m going to buy it for X dollars.” Then he turns around and finds the buyer and says, “Hey buyers, I’ve got this house for $50,000 under contract. I’ll give it to you for $60,000 so I’ll make the $10,000 spread.” That’s a wholesale.
Then obviously, a realtor, that MLS, they say, “We’re going to help you get the highest dollar for your property” so they’ll list the property at what they think is fair, the buyers all come. In this market, they offer $100,000 over asking price then the house is sold. So that’s the difference.
So right now, used to, whenever we’re buying from a wholesaler, we didn’t have as much competition. Now, it seems like even the realtors. Actually, that list of people, a lot of those were realtors, they were planning to buy from a wholesaler. So it seems like the game’s changed a little bit.
[0:12:26.3] NH: One thing that we do want to mention though and that has definitely changed, right? Since the market is changing in ways that you kind of anticipated or in ways that you’re expecting but what about interest rates? Those are obviously going up. You know, how have you guys handled that? Is it just lower cashflow or just better deals have to be the ones that you close on?
[0:12:44.2] BJ: So we’re now going to probably start facing that within the next couple of months. We actually found a local credit union and a lot of credit unions will do this. The one here in Conway, that’s local based, they approved us for a year at a locked interest rate.
[0:12:58.9] NH: Wow.
[0:12:59.4] BJ: Last October, we got locked in at X amount of dollars at four and a half percent. We have four and a half percent all the way through October up to a certain amount. That’s basically like an improved loan amount that they’ll do. Now, you can use one deal to do it or 10 deals. But, once that goes away, you know, we’re going to see five to six percent.
I think the whole thing is making sure that you stick to your equation. So, if you’re going to drop 20 percent off rent and make sure that that number in mind is what your rent is or minus your payment and stuff equals X amount of dollars that you don’t waver from that.
Honestly, five years from now, say, rates go up to nine or 10 percent, if you’re getting that locked in on a 20-year amortization schedule, your principle’s going to be lower when you recapture or refinance. So your payment will be fine.
[0:13:50.2] NH: It’s great, again, just really highlights how important it is to have a good relationship, right? If you guys hadn’t had that relationship, didn’t have that ability to lock that in with that lender, it would be a different story, you know? Like you said, it’s still weatherable, right? We can all handle the higher interest rates but it does change things and so, you guys are lucky, you don’t have to deal with it yet but the rest of us do.
[0:14:08.3] ZH: We just push it down the road.
[0:14:09.5] NH: Exactly, hey, that’s not a bad thing sometimes, not a bad thing at all.
[0:14:13.7] ZH: Yeah, I think a lot of – I don’t know if your listeners, some of them I’m sure are newer investors, and a lot of them are going to get locked in and conventional. Conventional is not going to see the same interest rate hike. I mean, it is going to have some, absolutely but it doesn’t follow the same rules and so, I think it still helps to – like, right now, when 30 years conventional might be six percent right now.
So, six percent a secondary whatever house, not your primary household, 6 percent, locking it for 30 years, you’re still in good shape. You can use to make those cashflow numbers work and you don’t have to worry about the five-year balloon-like we are. We’re thinking about, “Okay, which properties are coming up for renewal next year.”
“Okay, so we’re going to be at hiring, whatever the interest rate is so where are we at with rents?” So, that’s where we’re kind of not only on the buy side but also on the immediate commercial loans, you got to think about which ones are coming up because some of those first-year houses we bought are now worth fifth year next year and we’re going to be starting to see some renewals come up.
Those things you have to pay attention to and so then you have to go, “Okay, where’s rent, are we – have we been keeping up with the market rent, or have we not been?” So, let’s start talking to our tenants, kind of seeing where, because it’s our cost go the way up, we can’t just pass that along to them at one time. We need to slowly increase and be fair to them.
[0:15:40.9] BJ: I think a healthy exercise too. So this is not on our home loans but on like on my pharmacy loan, when I purchase the business, I sat down yesterday and looked at what would the payment be or what would the amount owed on the business be at your five on my pharmacy plain payment balloons out and what would that payment amount would be at 10 percent and what do I need to save or to pay extra over the next five years to pay it down too, to keep my payment the same now?
[0:16:09.8] NH: Love that.
[0:16:10.2] BJ: So now, I know over the next five years, I need to pay maybe 15,000 extra per year on that loan, to capture less than the payment I have now. So I think it’s a thing in a head of time. If you have cashflow on an $80,000 house of, I don’t know, $200 a month, maybe it’s beneficial to put some money down every month, a little bit extra, popped that principle down if you’re doing an inhouse or commercial loan, we’re going to balloon out.
I think it’s being proactive too. That’s one approach I’m doing on my pharmacy business is I’m planning on paying extra 10, 15,000 a year, so when it balloons out, my payment should be less, even if it’s up to 10 percent interest rate.
[0:16:48.5] NH: That’s great strategy, love it.
[0:16:50.0] DB: Yeah, and I think those are some really key considerations that as you get further along, because you mentioned with conventional mortgages, you don‘t generally have those balloons in there, where five years in, either the whole thing’s due and so you have to refinance it or you have to pay it off at the five-year balloon mark.
Like that’s, I think that’s a scary thing for new investors but I think a lot of new investors can generally leverage conventional mortgages through a very traditional mortgage broker or bank. Yeah, what you’re doing is, as you’ve mentioned being passed the 10 home mark, it’s forced you into some of those loan products that would have the balloon.
Not a bad thing, just, you need to be a little more cautious with some of those terms on those loans, absolutely.
[0:17:30.7] BJ: Yeah.
[0:17:31.0] DB: One of the other things that has shifted in the last year is price appreciation and so, I know that we’ve, over the last year, over the last two years in different parts of the country, we’ve seen 20 percent year over year increase in value. I’m wondering kind of how that looks in your market and if that shifting strategy at all, particularly for some of these rentals that you’ve had, you’ve had them for five years, it was a value change when you think about selling anything or what is all these appreciation done for your business plan?
[0:17:59.0] BJ: I’ll give an example and in the last year, two years ago, my house that I’m in was worth, that I lived in was worth probably $215,000. I could sell it now for about 300,000 bucks. So probably a 25, 30 percent increase over the last couple of years. The good side of that is if you want to refinance and pull cash out, it’s a perfect time to do it. So a prime example, I think the last time we were on your show, we were building two duplexes. Well, because of the cost and the cost, our budget, you know, was inflated a little bit. So we were able to refinance and capture that increase in the margin to pull cash out and do that. So that was one benefit for us in that.
[0:18:40.1] ZH: Are you more asking about the market as a whole as for buying property or what are you more asking for?
[0:18:48.1] DB: I guess, really, both. I’m curious how, when it comes to buying what the price appreciation has done for you, and even in terms of selling, what you’ve thought about peeling out of the portfolio because I know you had some examples in the last time we talked about, “This house just made more sense to sell.”
[0:19:03.0] ZH: Yeah, so we did end up selling, I guess in the last year, we did end up selling one. It was in an area that we just weren’t super keen on. We had some issue selling it but we were able to still net like 50,000, a hundred, or something like that when we closed on that.
[0:19:17.8] BJ: Yeah.
[0:19:18.2] DB: Nice.
[0:19:18.7] ZH: It’s not an area, it’s just known to be like a super great area and so not an area that I would say I would love for my wife to walk around when it’s dark outside. So I said while we were, we were kind of ingesting some financial things, kind of had some extra cost on remodeling a couple of properties so we needed the cash. So we said, “Let’s just sell this one, pay some things off, get flush again.”
Yeah I mean, actually, the inflation helped us appreciate. I think it’s – The appreciation on our properties, it helped us get out of that situation. Yeah, I mean, buying right now is just like everybody talks about it, it’s just, it’s tough. Do you buy, I mean, people ask me, I talk to a lot of newer investors a lot, “Do I buy now or do I wait till prices come down?” and not – just from what I’m paying attention to a lot of things and I go, “I don’t know if the market is going to go – if prices are going to come down just because the lack of inventory.”
There’s still no supply and there’s still a lot of demand because more people have gotten into the business in the last two – since COVID, more people are investors now. So there’s more demand, there’s still lower supplies so that doesn’t tell me that prices are just going to automatically go down just because interest rates are going up.
[0:20:37.2] NH: Yeah, I think there’s a lot of people that are sitting there waiting for something bad to happen and they might just be stuck waiting for a long time and –
[0:20:43.6] BJ: Not me or they might look really smart.
[0:20:45.7] NH: Right, who knows? It’s impossible to say, that’s what I love when you guys talk about just running your own numbers, running your own race, making sure it works for you, and then just proceeding anyway and not trying to time everything out because none of us know, right? You can’t guess.
[0:20:59.9] BJ: Side story on that neighborhood that he was talking about. I own a house or owned a duplex, we’ve already sold it with another realtor in town and my buddy was painting that house and he said, he sent me pictures, he goes, “You will never find this anywhere else” so we took an old refrigerator out, put it by the street and this guy comes in, says, “Can you help me load this?” and he has a trailer on the back of a zero-turn mower.
He’s a homeless guy, somebody gave this homeless guy a zero-turn mower. So, we’ve got a picture of him hauling off a refrigerator with a zero-turn to go get scrap money for it. You can’t make it up.
[0:21:34.7] ZH: Queue in any Arkansas jokes.
[0:21:37.9] BJ: Yeah, queue in, yeah. So now you see why we sold that sucker.
[0:21:43.4] NH: That’s awesome, I love that. I am just picturing this guy cruising down the road in a zero-turn, those are nice, man. Those are good, those are nice mowers.
[0:21:49.4] BJ: You all have Bad Boy lawnmowers up there?
[0:21:51.8] NH: I have seen those, yeah.
[0:21:52.6] BJ: Okay, so that’s out of Arkansas, it’s an Arkansas brand but that’s a Bad Boy lawnmower that he dropped. It is like an eight to $10,000 lawnmower.
[0:22:00.4] NH: Those can get pricey real fast like the floor of those is like three grand, so that’s yeah. All right, one thing you mentioned too that I want to go back to briefly I think it’s important is that you said the rising cost of rehab and again, all of us have dealt with supply chain issues in some capacity over the last 18 to 24 months, how has that changed your approach in rehab cost or estimating those costs? Did they had an impact there for you guys?
[0:22:24.9] ZH: No, we get all of our materials for free.
[0:22:27.0] NH: Just been easy, yeah.
[0:22:29.4] ZH: No, man, it is. It’s affected us a lot. It’s hard to really pinpoint every little thing that’s gone up but every little thing has gone up and it’s gotten harder to get certain product but it has helped us kind of, we’ve shifted a lot, you know, and this is I am talking on the rental property but also in the construction side. We’ve shifted a little bit on who we use for certain things for vendors because we have started to find, “Oh, well this vendor has doors that are two weeks out whereas everybody else have them, they are 12 weeks out.”
So what are you seeing for that? We use this guy for the windows, we use these people for the lumber. So it kind of instead of just going to one shop, we actually had to start piecing it together if you get our full package. Anyway, so that is kind of – that is part of what we had to do to shift but yeah, I mean, it’s affected several of our properties where we ran our numbers and they work and then we get into the remodel and prices have gone up and we go, “Shoot! What are we supposed to do?”
But then on the flip side, on the duplexes we built, we ran our numbers, prices went way up on lumber whenever we were about to build. Well, it took us three months to get the earthwork done. So to get our 50 load to shell and letting it sit and all of that took us three months. In those three months, lumber dipped a little bit. Right around the time that we were pouring our slab and ordering our framing package and we got our lumber for like half of what at height of where it was to build.
So sometimes it works out that way. I would call that, thank you, Lord, you know? I’m probably, you know, very grateful for that because that actually end up, I think our overall savings on that were like $15,000 overall.
[0:24:08.1] NH: That can make or break a deal sometimes too, man.
[0:24:10.3] ZH: Yeah, yeah, I may have to sell another house just to pay for it, so it’s your lumber. Anyway, so kind of goes a little bit both ways. Right now, all I am seeing is increases it seems like in everything. You know, a door, a basic door, exterior door that I used to pay 250 to $300 for, I just got quoted at 750, just a basic fiberglass single pane or a single glass window, so it’s crazy but everybody –
You know I was talking to a guy the other day, another builder and he said, “What part of the supply chain in building do we need to go ahead or ahead of time because we might get something else that they say, can’t get for another four months, you know? So what’s that in extent?” and he said, “Throw a dart at the board, they don’t know. You know, there is just no way to know what you’re going to need or what’s not going to be available in the next couple of months.” Definitely seen a lot of changing.
[0:25:02.4] DB: Yeah, the timelines are crazy right now and you’re right that a great tip for people is to shop around. We found the same thing with windows, one vendor was 12 weeks out, the other was two weeks out and so that was an obvious solution even though we had to pay more for the two weeks, we just had to do it because we couldn’t let the property sit that long.
How is this reflecting in the maintenance cost? Because I love that you are emphasizing to work your numbers, work your equation, make sure the cashflow works. I know a big part of the cash flow equation is setting aside for maintenance and capital expenditures, those big and the small repairs that happen. So my experience was that I had a fridge go out last week and that fridge cost a lot more than what it would cost three years ago.
So I feel like I’m having to factor in increase and maintenance cost, increase in CapEx fees, how are you guys dealing with that with your properties that you manage?
[0:25:53.8] BJ: Rent shot up a little bit though. So you know two years ago for a four-bedroom house, we’re running comps on 1,100 a month. So now, we’re sitting at more like 1,500 a month. So yeah, if we are running CapEx at 10 percent, so that’s pretty normal at Bigger Pockets and everybody teaches, so if you’ve got a $400 increase, that’s 4,800 a year, that’s 500 bucks, give it or take. So that eats up a lot of that. I think it’s been, yeah, it helps out.
[0:26:22.0] ZH: I think one other thing that we did though to shift specifically in maintenance cost, to help the maintenance cost is we actually – we used to provide washers and dryers. That was a service that we provide our tenants and we just cut it off. We just said, “I’m sorry but we no longer can provide that service.” The washers and dryers that we had already grandfathered in, we said, “Those are yours, you can have them. That’s a gift to you but if it goes out, that’s your own expense.”
So that, because we were getting I think, I don’t know, my wife could tell you better but probably eight to ten maintenance calls a month just for appliances and washers and dryers happen to be the biggest one and so we’ve also – we were buying used appliances at one point and we stopped doing that. That was an experiment that failed miserably so we started just ponying up the extra dollars to get the brand new range.
We start using somebody local, the local appliance company that we use it’s a little bit more expensive but man, their service is better, they’re better with the tenants and all of that. So we’re paying a little more in maintenance. Part of it is maturity in our business. We are trying to get our tenants better product, sort of paying more but also like you said, the refrigerator, the $500 refrigerator doesn’t exist anymore.
I mean, the old over-under that you could pick up at Lowes for like 480 bucks to 500 with an ice maker, you know, it’s now like a thousand minimum. Man, it blows my mind. Everybody is trying to shift. I see those companies using different brands because they are trying to shift to make their prices stay low. So I mean, it’s hard on everybody. It’s not they’re not the ones that are at stake.
Maintenance has been definitely challenging for us but we’ve been working on systems to make it better not, necessarily cheaper.
[0:28:12.8] BJ: Yeah, we’ve also shifted too. One of our close friends has got a 100 doors, so anytime you want to learn, he’s been doing it for 15 years and I would say we’re doing this new approach probably on 70 to 80 percent of our homes but if we go in and the AC unit is 10 years or older, crank it up, put a new one in. If the roof is old, just put a new one on, and pretty much every house gets new, all new toilers, all new hot water heaters.
If you are doing that, your CapEx cost pretty much nothing in. I mean, you can level 10 percent, but you don’t have that much going on and he said, if you’re going to borrow it in the beginning might as well do it. He goes, just go and get it done in the front end, you have a whole lot less cost. So we’ve got –
[0:28:49.1] ZH: It didn’t cost us that much over the term of the loan.
[0:28:52.3] BJ: The two houses we’re remodeling now they’re going to be getting new roofs, new ACs, new hot water heaters. I mean, everything is going to be brand new. So that takes a lot of the calls away.
[0:29:01.8] NH: A lot easier to do it now before there is a problem. If there is a leak and then it’s drywalls repair and tentative, it sets you up for success later, I love it.
[0:29:09.3] BJ: Oh yeah and it is finding subs that you like. So for instance our plumber, now our plumber, he just goes in and checks everything. We don’t tell him just to go install the sink, he’s checking every line, everything for us. So we might have sent him in there for a $200 item, we might get an $1,800 bill but we trust him enough and we know that if we wouldn’t have done that, we’re going to get a mad tenant that they’re sewage is backed up. Then you got sewage backing up in the house or you’ve got to do replace along the front yard.
[0:29:37.3] ZH: He’s got to be one going underneath the house.
[0:29:39.1] BJ: Yeah.
[0:29:39.4] NH: Right. He is fixing the front end.
[0:29:42.1] BJ: Yeah, so I think it all goes back to relationships. If you have the subs you can trust, let’s get it all done in the front end that way we don’t have to worry about in the backend and it is a whole lot easier to put down 15 percent on 1,800 bucks and borrow from the bank or we can pay $1,800 from cashflow, so it is a lot easier to do it that way if you’re looking at the filings are out.
[0:30:03.3] NH: I have a plumber just like that, he was over at my property the other day and it was raining and he’s like, “Nate, your storm drain is backing up in the driveway. You want to snake that and scope it for you or something?” like that’s the kind of guy you want to have where you have to send them over that and they do the job you send them for, they do the job that you need done. That’s the guy you find, that’s awesome.
[0:30:19.6] ZH: Absolutely, they care about you.
[0:30:21.5] NH: Exactly. Yeah, he takes care of me. It’s good.
[0:30:23.0] DB: Yeah, you know I love the tips about just handling everything upfront that makes things so predictable moving forward. We got in the same trap the other day where we put a used dishwasher in it and it lasted a grand total of three days.
[0:30:35.3] BJ: Oh man, that’s hard.
[0:30:37.4] DB: Yeah, then we buy a new dishwasher, yeah. So just handling all this stuff, doing it right, the first time just simplifies everything for the predictability of the property, for the rental math, for everything.
[0:30:49.3] ZH: I will tell you one, real quick, to jump in with the dishwasher thing. I don’t know if I have mentioned this before but man, I’ve actually found – I probably have between our properties, seven or eight properties that don’t even have dishwashers like the cabinets aren’t built to hold the dishwasher and so instead of just remaking the cabinets to fit a dishwasher, we just didn’t and never put one in, best decision we’ve ever made.
We never have to replace a dishwasher that you don’t have and I’ve seriously never had a single tenant say that they wish they had a dishwasher, never once. If they had one they’ll use it but if they don’t have one, they just stay on top of their dishes better or they don’t [inaudible 0:31:30.0].
[0:31:30.8] BJ: Let’s be honest though, their search history on YouTube probably says how to wash dishes because nobody washes them now. I guarantee you.
[0:31:39.7] DB: One of the other things is that just kind of future of industries because I know you mentioned this kind of stress testing your portfolio of what happens if we hit 10 percent, what happens if we hit these other things. So I guess thinking through where you guys are predicting the market to be in the next six to 12 months, is that doing anything else to change your strategy further?
Because you mentioned you are doing a lot of reading, listening to people, I appreciate that you guys are really tuned into this. So as far as what your crystal ball is showing, what’s coming and what are you doing about it?
[0:32:10.9] BJ: In our market, so we’re in the south. You know, home prices here are pretty affordable. You can get a 3,000-square-foot house now for $500,000 new build, somewhere in there. You know that is a lot, back in the day that was 350 but anyway, so Zac and I were having this discussion beforehand and I think you’re probably going to see home purchases in the next year to go back to where they used to be.
On the $100,000 house that needs a fixer-upper, you’re probably going to see the less demand on it. Number one, the people that are going in there to borrow at 10 percent, now their interest rates have gone up. So it is going to make the first-time homebuyer’s payments go up by three or 400 bucks. When you are in a fixed income, you know three or 400 bucks is a lot of money.
On the flip side, you have these people that are new investors that might have to put some cash in that’s going to scare them away. So I think in our market, I think it is going to be easier to leverage some deals that way and on the higher end side, you know, if you’ve got a family with dual income, maybe two teachers, two nurses, name the college degree salary, if you’re making six figures, $100,000, which is easy for college, two college graduates, you can usually scrounge up five or 600 bucks, that’s not a big deal.
I think your 200,000 plus home process in our area, which gets you a nice home is not going to be touched as much, or hoping to see some more deals here. I think we’ll probably will because back in the day in 2018 on a 25, 30-year home that is a fixer-upper, there is the same four or five guys bidding on it. So it might be listed for a hundred grand, we’d go in at 90,000 cash and get it.
[0:33:46.3] ZH: We knew, we knew all of our competition.
[0:33:48.3] BJ: Yeah.
[0:33:48.9] ZH: That is just four years ago and now, I mean, everybody is – I mean, there is no person that is not investing.
[0:33:56.2] BJ: But I mean, face it on a – you know, if your interest rate on a $100,000 house goes up 3 percent, that’s three grand a year. It’s that 300 bucks. I mean, if you are on a very limited budget, 300 bucks that’s huge. I don’t know, I think it is going to be very interesting to see.
[0:34:11.0] NH: So guys, I love all your stamps and all this stuff has been great. I am a little nervous we’re scaring off our newbies, right? Everybody that’s listening to this is like, “Man, these guys are so impressive. They’ve done all these deals, all these houses, they have been buying for years” so taking a step back for just a hot second, what is some advice for those new investors out there? People that are thinking about jumping in, what’s a way for them to get them started with all the unpredictability that is going on in the market?
[0:34:32.6] ZH: I’ll say this and this is what I tell a lot of new investors this is if I would have been worried about the market in 2012 when I bought by first house with my brother, if I would have been concerned about the market, probably been thinking about that a lot, I probably would have not bought anything. I honestly did not have enough knowledge to be scared of it, I probably should have been but I wasn’t scared of the market.
Probably overpaid for a house, okay? That saying, I bought a house for $80,000 in 2012, that same house is not in the best area, so it had an appreciated super well but that same house now, I could easily sell for about 140, okay? So you know, 10 years, that’s not like but 60 grand is not super impressive compared to like California number but at the same time, 10 years makes anybody look like a genius.
You know, it is just that time. I mean, if you look at just the overall market, okay? You’re probably going go. Now, if you had bought 1998 to 2008, 2008 you’d probably look like a genius, you know? Whatever those markets went, the prices went down but in the grand scheme of things, usually, time is going to make a bad deal an okay deal and so if you can hold, that’s if you hold, that’s just like the stock market.
If you buy high and then the stock market dips, you haven’t lost any money. You only lose the money when you sell.
[0:35:53.0] NH: Love it.
[0:35:53.6] ZH: I think that is what people often times will do is they go, “Well, the market is going down. I better sell now before it gets too low” and at that point they’re selling for a loss or they are so scared that they don’t do anything about it and so they get foreclosed on them, whatever the case may be. So I think to the one very key thing is, don’t be skinny on your numbers. I think this is the wrong time to try to overleverage yourself.
100 percent financing is not where, you know, people say invest with no money down. Don’t think that’s necessarily the thing to do. Put some cash in, have some equity. If you don’t have money to play, don’t play. You need to have the money.
[0:36:33.7] NH: Great advice.
[0:36:34.2] ZH: To be able to play this game and my wife hates this analogy but you know, the rising tide lifts all shit, right? But whenever the tide goes down, you see who is skinny-dipping. That’s when you see people who haven’t been paying attention and they overleverage themselves and they haven’t been putting their lifejacket on because they didn’t put any money in, they don’t have any equity, they’re the ones that are going to be swimming naked. So I think that is important to say if you don’t have the money, let’s not be real estate investors.
[0:37:00.0] BJ: Yeah, so speaking to the pharmacy crowd because I mean, I am a pharmacist by trade, we’re over analyzers. We have to look at every little scenario and so I’ve got a couple of buddies right now that are pharmacists, one that almost got his first deal and that is one of the things we talked about like, “Hey man, you can analyze it but sometimes the best education is just getting your feet wet.”
So you know, before you hop in don’t overanalyze it. Do your homework but number two, for newbie pharmacists that are trying to get in that are worried about the cost, I mean, we’re lucky enough to have a salary that five to 10,000 bucks shouldn’t be that hard to save up, you know? 10, $12,000 for a down payment, it shouldn’t be that hard. If it is, we need to go back to the regular Your Financial Pharmacist podcast or the Joe Baker book and let’s start from ground zero.
But seriously though, we’re lucky enough to be able to save up money to be able to get down and do your first investment. So don’t let the money scare you to save some money up and then number two, just don’t overanalyze. I mean, it’s not a hard game. I am an over-analyzer and I still get told to shut up or quit looking at stuff so much, just getting my feet wet. I mean, it happens at least once a year, maybe once a month sometimes.
So sometimes, you just got to get your feet wet and learn. Most of the time in real estate, I mean, you might lose five or 10 grand but like Zac is saying along, you’re going to make your money back.
[0:38:17.3] DB: I love it. I think those are perfect tips right now to make sure that you’ve got some equity that in the case you have to sell, you have some cushion there and I love what you have been saying the whole time about making sure that the equation works, that you have money in there that if rents dip a little bit, if expenses go up a little bit, if your interest rate shifts because you are on an adjustable-rate or whatever else.
If you can absorb all of those things being able to cashflow the property, at the end of the day is what helps you to hold it really long term when you are not feeding it at the end of the month. So these are fantastic tips that I think particularly those that are a little cautious of getting into the market right now hopefully they can take that to the bank and feel a little more comfortable.
[0:38:59.7] BJ: Yeah, though one other thing I want to add is probably would raise questions because a lot of people are coming out of school with a lot of debt but if you still got pharmacy loan, student loan debt, you shouldn’t even be thinking about it. You shouldn’t be thinking about it at all because I mean, when I got of school I had a $100,000, which now I think is double. 200,000 bucks is pretty normal.
So if your minimum payment is 2,000 bucks, I mean, get that stuff knocked out then you got the wiggle room in your margin. I mean, even if it takes you ten years and you’re 32 to buy your first house, that’s great. You got a long time to get it paid off. So don’t get in a hurry, get your personal debt paid off before you get to jump in because it takes all the stress away, it makes life a little easier.
[0:39:36.7] NH: Great tip.
[0:39:37.4] DB: Love it. If people want to connect with you, where can they find you and learn more about you all?
[0:39:41.5] BJ: Yeah, you can’t find us at all. Yeah, we don’t – I have Facebook but it is just for the pharmacy but anyways, our pharmacy name is Smith Family Pharmacy in Conway and they can go on there and it’s got my email, it’s [email protected] and they can reach me there. I’d love to connect with them.
[0:39:57.7] ZH: Our Instagram is @hendricks_remodeling. I guess you can look that up on Instagram.
[0:40:03.2] NH: It probably gets updated a lot, so we should head there?
[0:40:05.8] ZH: No, it actually does. I have a guy that posts. You know, I actually had a look at, he does a really good job. He does like these reels, they’re videos but they call them reels on Instagram and it’s like that old fast motion time-lapse, there you go, time-lapse videos of our guys building cabinets and doing demos and install exits. It is actually pretty cool stuff. He shows me some videos and I’m like, “How did you all do that?” I’m the most technologically stupid 30-year-old, you’ll have me.
[0:40:36.4] BJ: You need to post pictures of the last house where we fell through. So we bought a house, the only MLS house we bought. We bought it cash for 50,000 bucks, 1,200 square foot house. So imagine how bad it is. So Zac is going to look at it with me, fell through twice and then I took my father-in-law and he fell through myself all the way to the ground. I mean, I felt dirt below me, so it’s a doozy.
[0:40:56.9] ZH: That house can have its own show. You have to have [inaudible 0:41:01.0], when we finish that house, I’d love to give more detail on how we came out of that house because right now, it feels like we’re probably going to be underwater on it.
[0:41:10.2] NH: We’ll hold you to that then. We will do a deep dive.
[0:41:12.2] ZH: Yeah, several people have said, “I thought you were going to tear that one down, what happened?” or “It looks like it’s already halfway torn down, why aren’t you finishing it off?” so yeah.
[0:41:24.6] NH: Well good.
[0:41:25.2] ZH: Historic district and zoning is the reason and so yeah, we need to do a more deep dive on that one someday.
[0:41:31.4] NH: Good, we’ll have you back for that and again, really, truly appreciate you guys coming on the show. Again, it is always inspirational to hear you guys’ story, you guys have such great educational tips and it’s again, just really appreciate you coming on and sharing this story and continue to talk to our audience and us. It’s been really fun.
[0:41:48.0] BJ: Yeah, we appreciate it.
[0:41:49.1] ZH: Yeah, thank you guys for having us.
[0:41:50.2] BJ: Yeah, thank you all.
[0:41:51.1] NH: Absolutely.
[0:41:51.8] DB: Thanks so much guys.
[0:41:52.6] ZH: Yeah, thank you.
[0:41:53.3] BJ: You’re welcome.
[END OF INTERVIEW]
[0:41:54.1] ANNOUNCER: Thanks for listening to the YPF Real Estate Investing Podcast. If you like what you heard on today’s show, please leave us a review and subscribe to the show so you never miss an episode. If you have a question, know someone that would make a good guest or want to connect with Nate or David, head on over to yfprealestate.com and join the growing YFP Real Estate Investing Facebook group.
[DISCLAIMER]
[0:42:15.4] ANNOUNCER: As we conclude this week’s episode of the YFP Real Estate Investing Podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.
Furthermore, the information contained in our archived newsletters, blog post, and podcast is not updated and may not be accurate at the time you listen to it on this podcast. Opinions and analysis expressed herein are solely those of your financial pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.
Thank you again for your support of the YFP Real Estate Investing Podcast. Have a great rest of your week.
[END]
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