YFP REI 114: Prediction Wrap Up and 2024 Strategy

This episode revisits our 2023 predictions! We also discuss property trends, interest rates, investor insights, realtors’ role, and 2024 strategies.

Episode Summary

At the end of 2022, we published an episode on our 2023 predictions. During this episode, we discuss how the year has unfolded, all the contributing factors, and how they are likely to influence the year to come. Tune in to hear our insights on the changing motivations to purchase property, what we expect may unfold in terms of interest rates, investor attitudes, and rental rates, and changes that may affect all of these factors in 2024. We discuss the value of a good realtor in a changing world, unpack how to prepare for the unpredictable nature of the real estate investment space, and reflect on the unique period between 2020 and 2022 and its impact on investors. We touch on refinancing, focusing on reserves, and why it’s so important to have a robust strategy in a complex environment. Listen in to hear all this and more today!

About Today’s Guests

Nate Hedrick is full-time pharmacist by day, husband and father by evening and weekend, and real estate agent, investor, and blogger by late night and early morning. He has a passion for staying uncomfortable and is always on the lookout for a new challenge or a project. He found real estate investing in 2016 after his $300,000+ student loan debt lead him to read Rich Dad Poor Dad. This book opened his mind to the possibilities of financial freedom and he has been obsessed ever since. After earning his real estate license in 2017, Nate founded Real Estate RPH as a source for real estate education designed with pharmacists in mind. Since then, he has helped dozens of pharmacists around the country realize their dream of owning a home or starting their investing journey. Nate resides in Cleveland, Ohio with his wife, Kristen, his two daughters Molly and Lucy, and his rescue dog Lexi.   

David Bright is a pharmacist with a heart for teaching. He’s been a full-time professor since 2009 with a passion for implementing and improving pharmacy services. Themes of “implementing and improving” in the pharmacy space are quite similar to themes of “building and fixing” in real estate, which has been a growing hobby for David and his wife, Heather, who bought their first house more than ten years ago. That fixer-upper house became a live-in house flip, which they sold a few years later, only to repeat the process with their next house. When David and Heather got sick of perpetually living in a construction zone, they pivoted to fixing up rental properties in West Michigan, where they now live. 

David invests in real estate as a way to bring greater diversity to financial planning and to fund memorable life experiences with family and friends.

Key Points from the Episode

• Reflecting on 2023 and the general attitude of ‘wait and watch’.
• The big picture strategy behind these decisions.
• How our wild guesses for 2023 stack up against this year’s events. 
• Why we predicted that the interest rates would not get any lower in 2023. 
• Changing motivations to purchase property.
• Why it’s likely that rates will go down slightly in 2024.
• How investor attitudes towards interest rates affect their movements.
• The key variable of rent rates in 2024. 
• 2023’s relative stability and limited movement.
• Changes that might affect rent rates and rate shifts in the coming year. 
• Why it is advisable to rely on a good realtor in 2024. 
• Preparing for the unpredictable nature of real estate. 
• Reflecting on the profits made by purchasing in 2020 and selling in 2022. 
• Predicting stability in mortgage, rental, and purchase prices in 2024. 
• Applying caution to investment and refinancing in 2024. 
• The value of focusing on reserves and refinancing.
• Why you need to know that there is complexity and apply a strategy accordingly. 
• Where Nate’s focus lies in terms of balancing long- and short-term strategies.
• How necessity influences the housing market.
• Addressing variables that might affect your rental environment in 2024.

Episode Highlights

“There’s no reason to buy a place at a high interest rate that isn’t also a deal.” — David Bright [07:28]

“It’s a big thing to watch in 2024, where the mortgage rate is going and whether that will do something, like for instance, unlock some of the pent-up demand, increase transaction volume, and start to see some healthy behavior in the mortgage space.” — David Bright [11:07]

“If you are investing in rentals then knowing if rents are going up or down is really helpful for your math of underwriting and deciding if a rental property is a good deal or not.” — David Bright [11:52]

“There was limited movement. Some markets went up, some went down, which is kind of what we both said would happen in a sense but yeah, it was not a very dramatic year on either side of the coin..” — Nate Hedrick [12:14]

“We love to sit here and make these predictions because we’re a podcast and it’s fun, like it’s not part of our investment strategy to just bank on these things happening.” — Nate Hedrick [24:04]

Links Mentioned in Today’s Episode

• Rental Market Trends in the US
• Three (Likely Wrong) Predictions for 2023 Real Estate
• Your Financial Pharmacist
• YFP Real Estate Investing Facebook Group
• Nate Hedrick on Instagram
• David Bright on Instagram
• YFP Real Estate Investing Website
• David Bright on LinkedIn
• Nate Hedrick on LinkedIn

Episode Transcript

[INTRODUCTION]

[0:00:00.4] NH: Welcome to the YFP Real Estate Investing Podcast. I’m Nate Hedrick.

[0:00:09.9] DB: And I’m David Bright. We’re both pharmacists and real estate investors that believe that real estate investing does not have to distract from a meaningful career in pharmacy.

[0:00:18.8] NH: Each episode, we share stories that educate and inspire pharmacists, to leverage real estate investing as a part of your financial plan.

[INTERVIEW]

[0:00:30.6] NH: Hey David, how’s it going?

[0:00:31.4] DB: Hey, good things, how are you doing man?

[0:00:33.4] NH: Good, man, it’s the end of the year. We have officially made it, our final podcast of 2024.

[0:00:40.1] DB: Yeah, and it’s been a wild year, this 2023. I know we had that prediction episode about a year ago but it has been a wild ride.

[0:00:48.1] NH: Yeah, I mean, it’s a good year, right? A lot of celebrating at this point, a lot of reflecting back on what happened in 2024. I mean, we had a lot of stuff happen, this is my first year as a real estate professional, getting that status but tried to buy a couple of houses, weren’t able to but you know, found some other interesting projects to get into and that we’re going to take us to the next year. So, it’s been a cool ride.

[0:01:11.3] DB: Yeah, we weren’t able to unfortunately find a few houses to buy in 2023 but really focused a lot of time and energy on selling some high equity rentals to try to make space and open up opportunity for what is to come. So, I know in a lot of situations where value has gone up, there’s a lot of investors that are kind of walking away from the market at this point and kind of waiting and ready to jump in when something comes about.

[0:01:35.5] NH: Yeah, it’s been neat to talk to other pharmacists, to her investors to see where they’re at. Some people are still diving in with both feet but it seems like a lot of people are at the point now where it’s a little more strategic wait and watch, which is what most people have been saying that I’ve been talking to but it – you know, every marketer is different. So, it’s nice to talk to people and hear from people around the country about what they’re doing.

[0:01:56.3] DB: Yeah, because I just talked with someone in my market who said they were trying to buy like more than a dozen houses by the end of the year or something. So like, yeah, some people are all in, some people are hanging back and I think a lot of these decisions are driven by a lot of some of these big picture trends that we’ve been observing in the market over the last year. You know, some investors believe in that just buy it and forget it strategy of real estate and that they believe that is best.

That certainly works for some, others prefer to play chess a little bit with a little more buying and selling and strategy mixed into that and I don’t think that there’s a right or wrong answer. I would argue that pharmacists are probably a little more hands-on, especially pharmacists that are going out of their way to listen to podcasts and dig into the topic are probably a little more hands-on.

So, you know, we’re probably a little more tinker-y than the average investor so it might be a good time to kick around again, some of these just big-picture concepts that we saw in 2023, how that might apply to 2024, and then how that might drive real estate investing strategy as well.

[0:02:54.8] NH: Yeah, and I think even more important, we need to wrap up our predictions from the beginning of the year, right?

[0:02:59.8] DB: Yeah.

[0:02:59.6] NH: So, if you guys follow us at all, they’ve been listening to the show for a while, way back on episode 90, right at the beginning of the year, we did a prediction episode. We basically said, you know, what do we think our wild guesses are for how the market’s going to turn out by the end of 2023? And so, it’s fun to now see how right or wrong we were 12 months later and go back and see what the year looked like.

[0:03:21.5] DB: Yeah, and if you missed that episode, don’t worry, we’re probably not going to hang out on that too much because we weren’t all that right if we reflect back. So, but we will dive in and we will talk about kind of those predictions, why are thoughts were in that space, and even kind of regardless of predictions coming true or whether this year’s predictions may come true or not, I feel like the value is more in what are the general concepts that drive strategy, how those might play out in your local real estate market, and how you might be able to apply those and other concepts to drive strategy for your real estate investing in 2024.

So, with that, can we jump into the first topic that we talked about? I know we talked a year ago about how our mortgage rates were the story, the big story at the end of 2023 and I feel like that’s still a really – or end of 2022, and I feel like that’s really still a big story at the end of 2023 as we see some major shifts in mortgage rates. We went at the beginning of 2022, from three-something to like six-something by the end of the calendar year and this year, we went from that six-something to really, seven-something. 

I guess we’re recording in middle of December right now and so, right now, we’re at the low sevens and so, who knows? As fast as mortgage rates have been moving, I could end up higher or lower by the actual end of the calendar year but really, we went up a smidge across 2023, and that impacts things like value appreciation, transaction volume, people just feeling stuck in their homes if they have to sell a house with a three-something mortgage to go buy a seven-something percent mortgage rate house.

And then, even the uneven impacts of different price spans in different markets. So, a lot of variables that go into mortgage rates that we’ll unpack today.

[0:05:04.9] NH: Yeah, and you and I both made some predictions here at the beginning of the year and at that time, we had said that by the end of 2023, you did not think that interest rates would be any lower than they were, pretty safe bet, I like that. They were not going to be lower and then I thought that rates would be closer to 6%. So, just slightly lower than that and so, we didn’t quite hit it I guess but I suppose you were on it, right? They weren’t lower than they were before, so that’s pretty good.

[0:05:28.4] DB: Yeah, I kind of hedge, I probably shouldn’t give a whole lot of credit on that one, right? Because I just said they wouldn’t go down. So yeah, I didn’t really make a prestigious prediction.

[0:05:35.4] NH: I like that.

[0:05:36.2] DB: Yes, yes, exactly. So, you know, but with the right around 7% at the end of the year here you know, rates only went up a little bit, right? So, I think that it’s at least a good sign that they didn’t go wild. Like, I had heard some predictions they may hit like 10 or 11 or something like that. I’m happy about that that they only went up a smidge, right?

[0:05:57.0] NH: Yeah, I think, like you said, many people were worried that they were going to go haywire, right? That they were just going to go up and up and up and there was no stopping it, and again, they’ve still come down actually in the last month or so, which is great. So, I think, hopefully, we’re kind of seeing that start to plateau a little bit but either way, that shift and that continued higher rate that I think people were used to, as a real estate agent, I’ve just seen the transaction volume go down as a result of that. It’s changed a lot of buying plans along the way.

[0:06:25.0] DB: Yeah, the transaction volume is a term that I think it’s thrown a lot, a lot. Could you unpack that a little bit for folks or what that means kind of on a practical basis in the market that the volume of transactions in real estate?

[0:06:36.5] NH: Yeah, and you’ll hear a lot of terms thrown around in this space, it’s like, you know, average days on market is thrown out a lot. The other one is home buying inventory is thrown out a lot as if that means something to anybody but generally, what they’re saying is, you know, how many people are buying and selling homes right now, right? How many people are listing a house and then are there people available to buy that? 

And you’ll see different markers in different markets of what is normal and what is slow or fast or what have you but the idea is simply, are a lot of people listing houses, and are a lot of people buying those homes? Meaning, are they turning over quickly or is the transactions, is the volume of that high or is it low? And again, we’ve seen very low transaction volume, meaning that not a lot of people are listing.

And the ones that are being listed, the good ones are being bought out quickly but the ones that are kind of tinkerers are just sitting there because there’s no reason to buy place with a high-interest rate that is also a deal because it’s just – it’s not worth it like it was.

[0:07:33.6] DB: Yeah, it seems like the motivations for someone to buy a house as an owner-occupant might be like moving geography, where they have to sell and they have to buy but someone moving across town to go from three-bed to a four-bed house, or a four-bed to a three-bed house or just making kind of minor changes within a market seems like that’s really dropped off quite a bit knowing that people have this kind of dramatic differences in their existing mortgage rates versus where they would be if they buy. 

So, even if they’re making kind of an on-par movement from a value standpoint, they’re seeing that monthly payments go way, way up if they sell and buy. So, I think it’s incentivizing a lot of people to just stay put, maybe do a renovation or an addition or something on an existing house, rather than make a big move across town.

[0:08:19.7] NH: Yeah, I’ve been throwing out a stat recently that kind of gives you some idea that if you had a USD 500,000 loan, so, forget that price of the house for a second but a USD 500,000 loan at 3%, you’re basically paying USD 2,100 a month on that mortgage payment, okay? So, USD 500,000 at 3%, USD 2,100. That same USD 2,100 today at 7.75% gets you a USD 294,000 loan. 

So, who is selling their house with a bunch of equity at USD 500,000 to buy a smaller house so they can have the exact same payment? It’s just, it’s not viable for a lot of people, it’s not worth it.

[0:08:54.2] DB: Yeah, not a lot of incentive to downsize if your payment stays the same or even goes up, and not a lot of incentive to make a smaller upscale improvement in a house because your payment could like, double, right? Like, it could really have major impact.

[0:09:08.3] NH: Exactly.

[0:09:10.2] DB: So, I feel like that’s going to be one of the stories then for 2024 because I keep hearing people, like, begging interest rates to go down and start to see something so that it will start to unlock some of that – just kind of pent-up demand in the market of people that may want to move, which is no, it’s not a financial reality. So, I think there’s a lot of people hoping the rates will come down. I don’t know where that’s going to go. 

My personal gut is that we’re going to see rates come down just a little. I don’t think we’re going to hit 4% or 3% anytime soon. I think we’re going to come down just a smidge in 2024. Though I’m hesitant even to bet on a strategy on it because there’s still so much uncertainty in the market, it seems.

[0:09:50.4] NH: Yeah. I’d like to double down on my 6% from last year because that’s kind of – like you said, I think I’m playing the hope strategy. I want it to be around there and I truly believe that over the long-term, like five to 6% is sort of the market rate for where interest rate should be, right? I think it should be kind of near that S&P 500 return. I think that’s just – that is where a healthy market ends up being.

But, knowing where we’re at, everyone’s sort of priced in this idea of, “Well, it’s got to come down sometime” right? And then when everyone’s pricing that in, it tends to not change, right? It kind of stays stagnant because everyone’s anticipating it, anticipating it, every time it bumps down slightly, everyone reacts like, “Oh yeah, I knew this was coming” and everybody wants to kind of keep going and it won’t.

So, I think we’re going to be right around the same, I think we’re going to be closer to seven and a half. 7.25%, unfortunately. 

[0:10:44.4] DB: Yeah, and I think that the reason why I think a lot of people hang on to this issue is because it impacts so many other pieces of real estate, whether that’s rent rates or house prices is two really major ones. So, I want to spend some time digging into those two concepts also. So, whether or not you agree or disagree with us, I think it’s a big thing to watch in 2024, is where mortgage rate is going and will that do something, like for instance, unlock some of this, just pent-up demand, increase transaction volume, start to see some healthy behavior in the mortgage space. 

So, with that then, the second thing we want to talk about would be, rent rates. So, we talked about that last year as a key variable. We expect that most pharmacist investors that are getting into the space, probably as we talk with more and more pharmacists, we see not as many people on the houses flipping side of things although that certainly exists but a lot of pharmacists that have a full-time pharmacy job are looking for something a little more passive and that tends to be more rental real estate focused. 

So, whether that’s commercial, large multi-family, small multi-family, single-family, vacation rentals. It’s some sort of rental-type environment. So, if you are investing in rentals then knowing if rents are going up or down is really helpful for your math of underwriting and deciding if a rental property is a good deal or not. 

[0:12:03.5] NH: Yeah, and so, we went back and looked at a couple of options to see, you know, how do we track this rent rate over time? Nerd Wallet actually put together a really nice market trend, we’ll link that in the show notes but throughout 2023, basically, there was limited movement. Some markets went up, some went down, which is kind of what we both said would happen in a sense but yeah, it was not a very dramatic year on either side of the coin.

[0:12:27.1] DB: Yeah, and again, I don’t know if we can give ourselves a lot of credit here because I don’t know if we necessarily hit the nail on the head of which markets might go up and down. At least there wasn’t like, dramatic movement. We didn’t see like 25% rent drops in a lot of places, right? Or 25% rent increases in a lot of places. There was relative stability and we thought that maybe some of the crazy high markets might just kind of stop. 

But there were some crazy high markets, it just kept going and there were some lower markets that didn’t necessarily catch up. So, with exceptions to where we thought it might go, overall rent rates across the country were up just a little bit on the year.

[0:13:05.0] NH: Yeah, and I think again, I think we deserve a little credit on that one. I’m going to give us a point I think, maybe just one because we’re close enough, right? I think the overarching net market trend was there but I agree, you know, if you look at some of the specific markets, we didn’t quite nail the level of increases or level of decreases that we thought we would see. I just think it wasn’t as dramatic a year as maybe we had predicted, it was pretty flat.

You know, and again, even if we look at like, I was looking at Chicago as a broad metro area, you know, they are drastically different parts of Chicago, right? And so it’s saying, Chicago doesn’t mean anything until you dive into those pieces and even seeing Chicago total rent rates going up or down, it might be meaningless for you, especially if you’re investing in this one small part that change more than others, right?

So, it’s hard to give these broad trends and make investment decisions based on them. You have to really be able to dial into your specific market anyway.

[0:13:56.9] DB: Yeah, I think some of the other changes that might impact local rent rates would be things about just employment in the area. One of the big headlines that we saw across 2023 was you know, less and less work from home, people getting pulled back into the office at least some days of the week and so, if some of these migration trends are over, like for instance, we saw a lot of folks leaving high-cost-of-living areas and migrating towards areas like Boise where there was lower cost of living until just recently, right?

And so, some of these other areas we may see those migration shifts start to either slow down or maybe even reverse to some extent, depending on some of the in-office policies. So, that might be something to continue to watch. So, I feel like population movement would be a key variable to look at in 2024 if you’re evaluating a local market, whether employers are coming into or leaving an area, kind of back to the fundamentals that we used to look at before the pandemic and before work from home was a super key issue.

So, one of the things I think we are going to see this continued differentiation in markets that is going to be just highly market-dependent rate shifts in 2024, that would be my prediction. So, I think it will be super important to pay attention to local statistics, not just for a market area like Chicago but certain areas and neighborhoods and blocks and development in those areas and what are employers doing in those areas. 

I think it’s going to be extra important to lean on a good realtor in 2024 that kind of understands those market trends within a local market because I think that those decisions are going to have larger impacts on rent rates this year and that could have a bigger impact on a portfolio, and a decision to buy or sell a rental property.

[0:15:43.4] NH: You know, you nailed something there. I’m obviously biased, right? Thinking that realtors are important here but I think a good realtor is super important because most of – and again, I say this as someone in the industry, most agents are going to tell you, “Oh, this is a great place to buy.” Or “Oh, this is a great time to sell.” They’re going to sell it, right? What you want is someone that has data that says, “Hey look, the trends of this area are X because of A, B, and C, and here’s two articles that I can show you that are showing the development of that.” Or, “I sit on the board at the local” whatever “And this is why I understand what’s happening” right? That data and that level of involvement is what’s going to be key. Not just some realtor telling you, “This is a great market because I saw that Amazon opened up a facility down the road.” 

Like, it needs to be, “Here’s the data to support this and we’re seeing market trends go this direction because of X, Y, and Z.” Like, that’s going to be absolutely key next year, and arguably, it’s always important but I think it’s going to be extra important as time goes on.

[0:16:41.2] DB: Yeah, and speaking of data then, I think going into our third piece of house prices, right? I think we need to go back to the data. So, Core Logic put together a good article about US home prices as we come into the end of the year here and looking at how prices on nationwide basis came up just a little, right? Kind of in the neighborhood of overall inflation.

So, as we’ve talked about before, this is generally a good thing for real estate investors, to see prices go up, even just a little bit year over year. Particularly because a lot of real estate investors jump into a property on a leveraged basis, right? You may put 25% down on a rental investment property. So, let’s just say for round numbers, you put a hundred thousand dollars down on a USD 400,000 property. 

If that property increased by 5% over the year, so that USD 400,000 property went up by 5%. Now, it’s USD 420,000, there’s a USD 20,000 increase in value. Putting that in a different way, you had a hundred thousand dollar down payment, the value went up by USD 20,000, that’s kind of like a 20% increase on your initial cash invested, which is really not bad. That looks like a pretty good investment, that can be tempting in markets where we’re seeing values go up. 

[0:18:00.5] NH: Yeah, and conversely, right? Not to be the negative but you’re right. If you saw a 5% decline in price, that could mean you lost 20,000 in value, right? So, your equity went from 100,000 down to 80 if you know, if you have to sell but that’s kind of the key, right? That leverage helps you out and it only matters when you have to sell, like you only realize that gain or loss when you get rid of the property. 

People ask me all the time like, “Oh, I’m worried that I am going to buy this place, and then if the market declines, you know, then I’m going to lose money.” And the question becomes, “Well, when are you planning on selling it?” Because if the market declines but you’re not going to sell it then you haven’t lost anything, right? That equity is still there, it should come back over time or you know, it only becomes a problem when you have to actually make that sale happen. 

[0:18:43.5] DB: Yeah, and I think that I’ve heard from people that from any time over the last like almost 10 years as the market started to come up out of the 2008 recession, some people saying like, “Well, it’s got to go back down eventually” and being so nervous about losing value and you’re right, you know real estate can go up, it can go down, and you need to be absolutely prepared for that. 

And you need to be prepared that the leverage scenario, just like you said, if the value of the property drops by 5%, that could look like a much more significant drop because of the leverage. So, it’s important to know in case you have to sell but if you are willing to ride it out then yeah, looking at the long-term metrics it certainly as we look at house prices over the last hundred years, we know that you give it long enough it tends to come back up. 

Not a guarantee of future success but it certainly helps to lay some of those concerns for real estate investors. 

[0:19:38.6] NH: I think that’s why you and I always focus on multiple exit strategies and having that padding built in, right? So, even if you know, you do have a small decline in value, if you can hold that property and cash flow or get the tax benefits or just focus on netting zero and paying down the mortgage, like those can all be wins even in a bad market or a decline in value. It doesn’t mean it’s a bad investment necessarily just because the property is going down in value. Again, if you’ve got that long-term play in mind, it can still be worthwhile. 

[0:20:10.6] DB: Yeah, particularly thinking through like cash flow, tax benefits, all the – everything that goes into real estate, a little bit of decline in value, and particularly if you’re not planning to sell, you don’t need to sell, that can be really strong. So, I think thinking through things like a strong emergency fund in ways that you can insulate yourself from needing to sell in a bad situation and take that loss can help you hold out until that property starts to recover. 

I think too, one thing that we need to think about here is, you know we know that if we look back just a few years ago if we think about like 2021 or even end of 2020 when the market started to really go wild, if you would have bought in like June 2020 and sold in June of 2022 or 2023, that two or three year period, there’s a whole lot of people that just bought a house, did nothing to it, sold it, and made a killing, right? Because the market just supported them. 

I don’t know that we’re going to see a boost like that anytime soon. I know there’s some people that are suggesting that if interest rates dropped quite a bit, we might see some further increase. I’m like you, I feel like interest rates are kind of where this conversation begins and I’m not willing to bet that they go dramatically lower causing a big market jump this year. I feel like my prediction is that rent rates and house prices are going to be relatively stable, save for some market-level differences but what about you? 

[0:21:40.5] NH: No, I think you’re spot on. I think it totally starts with the mortgage rate and I think that if we think, the mortgage rate is going to be pretty stable to flat and even if there is a slight decline, like even if we lost half a percentage point right now or even a full percentage point, I don’t think there’s going to be this huge, huge influx of buyers that had been just waiting for that point five percent drop. 

I don’t see it happening, I don’t see that being enough to move the needle when you are talking about people that are trying to sell their 3% interest rate loan and so I don’t think we’re going to see this big swing in the market or anything like that unfortunately. Again, especially if you’ve been somebody sitting on the sidelines waiting to buy, I don’t anticipate us seeing this big correction of market drop that you can suddenly buy into. I just don’t see it happening. 

[0:22:24.2] DB: Yeah, and as much as we’d like to share these predictions, you know I’m not really excited to share that we were both pretty often on this one also. Like, I think that we predicted different things in this, like 5% increase that we saw nationwide, and one of these we talked about though last year in being really off I think it’s still at least true that it’s helpful to know that these predictions are just predictions, right? 

And you can’t really take this to the bank by any means but one of the more valuable things is can you stress test your investment, what would happen if the market did go down by 10%, by 15%? Like would that make this investment look more catastrophic in some way? Am I going to – like you talked about how the value only really matters when you go to sell, I would say that’s true. The minor exception to that is if you have a refinance built in your strategy. 

[0:23:11.7] NH: Sure. 

[0:23:12.4] DB: Right? So, if you are going to buy in January ’24 and you want to refinance in July of 2024, if the market you believe may drop by 10% and you’re expecting a really high appraisal of July of 2024, you may want to have some caution there and stress test, “Could I still make this deal work if values drop or if interest rates don’t go the way I want them to?” People that are banking on, “Well, hey, in a year the value is going to be higher, interest rates are going to be lower. It will be an easy refinance.” 

“It might suck as an investment today but it will be great in a year” like those are the scenarios that make me a little nervous, especially as a risk-averse pharmacist. 

[0:23:49.3] NH: I completely agree and I’ve heard multiple people talking that way, like, “Well, I’ll buy it now, it will be fine because in six months rates have to be lower.” 

[0:23:56.2] DB: Yeah. 

[0:23:56.8] NH: Anytime your investment strategy is, will they have to do this? I get that nervous feeling, right? Because you don’t know. We love to sit here and make these predictions because we’re a podcast and it’s fun, like it’s not part of our investment strategy to just bank on these things happening, right? It’s completely a stress test, you have to be able to weather any outcome for it to make sense and so I think that’s a really good clarification that you know, banking on that can be dangerous and people need to be hesitant to do so. 

[0:24:25.8] DB: Yeah, and it’s one thing to have that baked in your strategy. It’s like, “This would be great if this worked out” but knowing that it doesn’t have to. Like I know, you’ve had a story before of a house that you bought where you were hoping for a refinance in order to get more cash out of it but as rates went up, you were like, “You know what? I think it just makes sense to leave some cash into the deal to make it cash flow.” And it wasn’t your first choice, right? But it worked for you. 

[0:24:50.2] NH: Yeah, and that was a – right at we bought that. It’s funny, we got that house under contract in December of ’21, I think it was. Yeah, December of ’21 and so really right before everything started to take off and so our six-month refinance was like in the height of interest rates every week were going up. 

[0:25:09.4] DB: Yeah, yeah. 

[0:25:10.3] NH: And it just it be every – literally every day that went by the rehab wasn’t done made less and less sense to refinance and that is something we didn’t anticipate but it was okay because we have multiple exit strategies. We said, “Look, we can just hold this, we let the equity sit in the property.” It slows us down on other plans but it still makes it a good deal. I mean, it’s been fine like we still – that house is still one of our rentals today and we haven’t had to refinance it. The equity is still sitting in there and it will tappable someday when it makes sense. 

[0:25:37.5] DB: Yeah, and tappably whether you refi or whether you sell it or – but if right now you’ve got a really low mortgage payment on a rental and that’s not necessarily a bad thing from the cash flow standpoint, so. 

[0:25:48.8] NH: Hard to beat. 

[0:25:49.5] DB: Yeah, I think that one of the things going into 2024 I think that I am at least taking home from this is focusing on reserves and caution so that if I’m not able to refi out, it doesn’t break me, right? Same kind of scenario that you are describing. So, in our strategy, I want to make sure that there’s some cushion there that if the market doesn’t go the way that I’m predicting, I’m okay because I think we’re in kind of an unpredictable state. 

But yeah, I’m still thinking that this is probably going to be a little more stable value year, let it, you know, setting aside some market-level changes. Is that kind of where you’re at in your prediction for the year then? 

[0:26:27.3] NH: Yeah, I think so. I think you know like always, there’s always properties you can buy and there’s always deals that can work. I think you just have to be more cautious about it than we were, you know, two years ago. You can’t bank on the fact that it’s going to be an appreciation gain and you’re going to have a new district that you can refinance out of. What if our prediction at the beginning of this episode is wrong and interest rates go to 8.5%, right? 

So, I think trying to, like I said, bank on any of those things happening is where you’re going to get burned. So, we’re just cautiously working our way into 2024, keeping those reserves available so that when a good deal does come along, we can pounce on it but we are not fighting for every single deal to be – to make it work, right? If that makes sense.

[0:27:11.5] DB: Yeah, and I think that seems like a good strategy and I’m hearing more and more people taking this kind of more just like route of caution, right? Particularly in a risk-averse group like a bunch of pharmacists, caution could be a good thing. Wait for a good deal, don’t just assume that you can buy anything in this 20% year-on-year appreciation is going to make you look like a genius for buying any house out there, right? 

You have to put a little more strategy into it than just buy something and hold it, right? So, yeah, knowing that there’s a little more complexity, what’s your strategy Nate, looking like for the next 12 months for your own personal real estate investing? 

[0:27:46.8] NH: Yeah, so right now we’re looking at trying to focus on some different deals, some things we’ve not done in the past. We really like the buy-and-hold single-family here locally in Cleveland, Ohio and we’ve been doing a little bit of restructuring to kind of make that a bit easier. So, selling off some rentals that are out of state, trying to restructure to more local stuff here that I can manage myself. 

So, that’s been part of it and then again, we’re also looking at a large multi-family deal for the beginning of this year. I mean, I think that will be pretty different for us but I think the spreading out some of that risk of a higher mortgage rate to a larger multi-family just makes a little bit more sense around the numbers. I told you at the beginning, we looked basically the entire year for the right deal, put offers on houses, and we’re getting beat by people offering way more than the number said, made sense. 

And so I think just a little bit of frustration from this year from that, not being able to find the right properties is kind of driving us to look into other avenues where you can share that risk and spread it out a little bit more. 

[0:28:49.4] DB: Yeah, and then you’re leaning more still in the long-term rental rather than the short-term rental, or is short-term still on the horizon for you? 

[0:28:56.5] NH: You know, we were always sort of looking for that short-term but I think for right now, we’re shifting toward that long-term strategy. We really like that from an investment standpoint that the long-term buy-and-hold is still there and so I think if we find the right short-term rental place, we’re always in for it. It’s just we’ve started looking a little bit less just because the interest rates make it so much more difficult than it was two years ago. 

[0:29:18.6] DB: Yeah. Yeah, no, that makes plenty of sense and I think we’re kind of in a similar boat. Like I am looking a lot more for the long-term rentals too. I think flipping could still be viable particularly if it’s a shorter time horizon so that there’s not as much risk, like doing some sort of 12 or 18-month massive project feels a little risky in an environment that can go in a lot of different directions.

But flips – or sorry, rentals I feel like is a good place to stay and I know that one of the spaces that you and I have talked about is the price bans that we brought up earlier. You know, kind of the middle market, kind of the median home value across the nation, it seems like a pretty sensitive area to shifts in interest rates. I’ve seen some arguments that higher-priced properties may be less sensitive, particularly if someone maybe not necessarily a W2 qualifier on that mortgage and it may bring more cash to that picture. 

And then some of the lower price points may be a little sensitive to it, where half a point shift on a USD 100,000 loan may not be super dramatic on a monthly basis. So, I think one of the areas that we’ve talked about over the last few months that we should probably talk about here for a minute would be those price bans and now you and I are both kind of gravitating towards more of the affordable housing area, right? 

[0:30:38.7] NH: Yeah, I think some – a lot of this for me is driven by just the necessity, right? I think there is a huge housing problem out there right now and people are trying to figure out how to solve it. Anytime there is a problem like that I think there’s people that can jump in and help out and find that good opportunity and so I think for us looking at that and saying, “Look, okay, this is clearly an issue. How can we step in and basically be available to combat that issue?” 

And also you know, make it a good investment decision as well. So, I think the affordable housing is going to be huge. I think you are going to see a lot of people trying to find ways to convert things that aren’t currently affordable housing into affordable housing. We have a huge project going on in Cleveland right now, someone is buying up an old office building that’s like right in the heart of downtown and their location is amazing, and converting it into like 150 small, you know, single-family housing units and it looks like it’s going to be incredible. 

So, I think people that are creative like that are going to have a lot of success and if they do it the right way, it can be really advantageous for again, individuals that need that housing and also the investors behind those individuals. 

[0:31:42.6] DB: Yeah, I think along those lines, a couple of things I’m seeing in my market are some increased flexibility in converting single families into small multi-families like either adding an additional dwelling unit like converting maybe a larger detached garage into a unit or converting a basement into a basement apartment or something like that, I’m seeing some of that or another strategy I know we’ve talked about before that I’m definitely looking to in 2024 is trying to find areas where there is a house that has a potential to unlock some value that may not be quite as visible. 

So, maybe something like converting a two-bedroom into a three-bedroom house by finishing a basement and adding an egress window or by taking a house with a family room and a living room, converting the family room into a primary bedroom and a half bath or something like that to try to increase the value, increase the utility of the house with some minor improvements. So, areas like that to try to create some value also I feel like helps with some cushion against some market forces if they go the wrong way. 

And then also may help with some affordable housing options if you can buy at a two-bedroom house kind of price but make it into a three or four-bedroom, it can make it more viable to rent that out at a more affordable rent rate. 

[0:32:58.8] NH: Yeah, I think that’s going to be huge and I think again, anyone that’s able to find those creative solutions, that’s where you’re going to be making success, you know, especially in 2024, and beyond but that’s really I think where the value is going to be found. 

[0:33:12.7] DB: Yeah. No, I think it makes sense and I think it makes some hunting and some strategy a little different in 2024, which again, whether you agree with our predictions or not, that’s more of where you want to get the juices flowing is what are some of the variables that might impact your local market as far as home prices, as far as transaction volume, as far as what’s in demand and what’s not, what are the rental rates going to be. 

And so as you are evaluating your local rental market where you are doing your investing then what should you be looking at, who should you be talking with, and how can you make really good informed decisions for your local market in 2024? 

[0:33:48.6] NH: Yeah, we would love for you guys to share it with us too and the rest of the community if you want to join us on the YFP Real Estate Investing Facebook page, that’s an awesome place to touch base with the community and just talk with other likeminded investors like yourself. We’ve got a lot of new stuff cooking in 2024, so do stay tuned. 

If you’ve not checked part of our newsletter yet, you can access that on yfprealestateinvesting.com or yfprealestate.com, excuse me, that’s a great way to sign up for our newsletter so you can stay in the know, especially if you’re not on Facebook or something like that but there’s a lot coming and there’s a lot of fun stuff that’s going to happen next year. So hopefully, you guys can stay with us for that ride and keep learning and keep being a part of the community. 

So, thank you guys so much for joining us this year, and looking forward to what the next year holds. 

[END OF INTERVIEW]

[0:33:48.6] DB: 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 us, head on over to yfprealestate.com and join the growing YFP Real Estate Investing Facebook group.

[DISCLAIMER]

[0:34:51.7] NH: As we conclude this week’s episode of the YFP Real Estate Investing Podcast, an important reminder that the content of this podcast 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 their financial advisor with respect to any investment. 

Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and therefore, may not be accurate at the time you listen to it. Opinions and analyses 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. 

[0:35:45.1] DB: Thank you for your support of the YFP Real Estate Investing Podcast. Have a great rest of your week.

[END] 

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