07. CASE STUDIES ON HOME AFFORDABILITY PT. 1

SUMMARY KEYWORDS

money, people, Adrian, degree, conversation, income, income-based repayment, pay, home, debt, achievable, wealth, years, deferment, talking, literally, down payment, world, professionals, unpack

SPEAKERS

Rob, Intro, Adrian

Intro 

Welcome to the get rich, slow podcast. This is the stuff we and our expert guests Wish we knew a decade ago to get the most out of our financial life will provide you with insight into wealth building activities and practices that can expand your net worth exponentially. get insight from top professionals who will reveal how to build wealth the long way, work smarter, not harder and identify your financial blind spots. With over 25 plus years of experience as licensed real estate professionals and a long track record of winning for their clients. Robin Adrian will teach you what it takes to be an everyday real estate millionaire.

Adrian 

Hello, future millionaires. Thanks for joining us again on the get rich slow podcast. This is Adrian SHERMER here with my cohost, Robert Delavan.

Rob 

Good morning.

Adrian 

And we are going to be talking a little bit more about house affordability today. I do want to just mention up front here too. We’re on a number of different platforms, including YouTube. So if you want to take a look at us from you know about chest height up, we’re available, broadcasting there, if you want to see chest height down, subscribe to our only fans. Rob, how’s your morning going?

Rob 

Hey, I got it. I got to tell everybody a joke. My brother came across this and texted it to me this morning.

So

Rob 

a police officer called the station on his radio. And he said I have an interesting case here. An older lady shot her husband for stepping on the floor. She just mopped. The response was have you arrested the woman yet? He goes No, not yet. The floor still wet. Not that that applies to getting rich slowly at all. But hey, you got to keep a sense of humor and all this stuff, because shit happens. Stay safe. So anyway, I wanted to start us today with telling you a quick conversation I had with a client. Um, and then we’re going to go into a scenario of some 20 something clients that Adrian and I are working with. And just just run through some different things and tie in the affordability and the process and all of these things. And then I want to end with a story about someone I ran into actually a family member of mine ran into about, you know, their wealth situation on the other end, and they’re in. And this gentleman was in his seven is in his 70s. So just to kick it off here, we won’t use names. But the conversation that I had recently was basically when something like this with a 30 year old, and she was having asking me questions like hey, how, how can I look at you know, not renting, buying a home? What’s that look like? She’s relatively new early in her career. But doing reasonably well owns small business, and is just building that that foundation. But the thing that she told me that has stuck with me and it it has just been weighing on me the last couple of weeks. And Adrian, we’ve talked about it a little bit, but I want as much of your just just brutal response to this. And and there’s an emotional component of it was this. She told me, she said of my social circle, half of she said, I’m 30 half of my friends are, you know, partnering up or getting married, you know what, whatever they’re going on, they’re starting to either think about or starting to have kids. Which, you know, all of our parents and grandparents, you know, we’re having their kids in their early 20s. Right. And now it’s, you know, 30 into your 30s, that sort of thing, but that they’re actually making progress in their lives, and they’re all buying homes. She said, that’s about half of them. And she said the other half are working in service industries, their own businesses, they’re trying to kind of find their way. Maybe the less traditional route, but frankly, that kind of in my opinion is more the norm. Yeah. And she said, You know, they’re not making a ton of money, but they’re getting by, and she said they’re all renting and every single 150 percent of them that are in that position, are saying, I’ll just never own a home. That’s just not in the cards for me.

Adrian 

Yeah, it’s I that phrase puts me straight to a boil instantaneously because it’s, I see it online, I see it, you know, in pop culture even. It’s like a trope. There’s memes about it. There’s, you know, it’s a stereotype right? millennials now it’s Gen Z It’s it’s like this, this lie that gets told over and over again. And it’s funny because I don’t think the people who tell it even know that they’re lying. It’s just that they hear it. And it sounds right to them. You know, we are growing up in a world that we’ve become hyper aware of the problems that face us all today, and can make the world look like a really ugly place, like things are getting worse, even though statistically speaking in a lot of metrics, the world is becoming a safer, cleaner, healthier, happier place, people are living longer, and in most countries, life expectancy is on the rise, crime is on the fall, you know, and, and homeownership among younger groups, you know, regardless of what the statistics are, is achievable. Absolutely. Not for everybody. We all have our own, you know, situations. I’m not gonna say every single person in the world can own a house in the United States, but a lot of people who think they can’t can,

Rob 

right, and I would even maybe challenge you on that is not for everybody. What do they say? If you think you can, you will? And if you think you can’t? Well, you know, there’s no way in hell. Yeah, yeah. butchered that statement?

Adrian 

I think there’s no question you’re not, you’re already proactive enough to potentially do it, there’s a very high likelihood in my mind, that if you’re asking that question, and you feel like you’re the type of person who can set goals for yourself, you know, there’s a pathway to it.

Rob 

Right? And it’s intentional, and you focus, it’s not something you do overnight. It generally is a one year to three year journey, which is compounded upon the previous year to three years of getting that education, training and experience which is often compounded with, you know, going to school finishing high school going to college, which you don’t have to do. And there’s another episode we’ve already planned out on the blue collar millionaire. Yep, absolutely. Which is, frankly, way faster than going to university, getting a bunch of debt. And a, you know, degree in whatever it is. Yeah, yeah. And kind of, you know, we roll our eyes at the philosophy degrees, it doesn’t mean that it’s not incredible, you know, knowledge, but, no, and there’s ways to turn that into profitability,

Adrian 

which right thing I want to touch on as well. I mean, I’ve got a degree in child psychology, okay, ended up working in biotech, being one of the highest paid professionals in her field. So, you know, child psychology degree, I mean, she literally when I was a kid, you know, we had developmentally challenged kids that she would watch and, you know, provide services to, and then she’s, you know, they’re the company she worked for is literally making the vaccine right now.

Rob 

Right. And, and the fun part about that is to see that and obviously, that’s a person making something of something else. Yeah. But and that’s, that’s why you know, these degrees that we normally say, Oh, hey, it’s sociology, would you like fries with that? Yeah. It’s not really about the degree I have a good friend lives in LA. And he he’s in his 40s. And he very successful banker, and his degrees in history. We met in college. Just I mean, it’s, it’s really about the person and the track and the hard work and, and the relationships they build and all that sort of thing. But you know, what you don’t want and what we’re talking about the relationships they build, you breeze through that, but that is

Adrian 

super, super valuable. That’s it’s a door opener, but you got to get in there and shake someone’s hand, you can’t just, you know, expect the degree to be something you put into a machine and a job comes out.

Rob 

Right. So with with all of this, you know, there’s so many areas that we can explore here. But getting back to that statement is on never afford a home. You know, you guys can look at our audience, please look at our affordability index. Episode. Yeah, the that is that is huge. But let’s unpack a specific example of somebody that’s a little farther along from the gal that was 30 and said, you know, half of my friends won’t own a home and I don’t know that I will either. But she’s asking the question. So we know she will. And and, of course, I had that conversation. And we may actually at some point have her on as a guest here and we can unpack that at a very personal level with her. But let’s let’s move forward to our avatar people, but this is actually based on a couple that that we know and we’re currently working with. Let’s call them Alice and Fred. Right. And they are 26 and 28 years old. They are professionals. They both have college degrees. They are living in in downtown area of Portland. I won’t say the exact neighborhood, but they are. They like the walkability. They like being able to be within five or six blocks have some great restaurants, bars, all that sort of thing. Of course the pandemic doesn’t really. Yeah, not quite as quite as appealing. But there are coffee shops. I mean, their backyard is, is downtown Portland. And they’ve enjoyed that. And they lived there for a reason. They like all of the things that go with it. It’s just the two of them. And I know I’m going to get their names wrong as we move forward. We just need to make sure we don’t use the correct that virus specific names I’ve already got. Right. And and their talk. And they’re living in a one bedroom, between the two of them. You know, they’re making well into six figures. You know, somewhere in that like 75,000 range, a peace giver, yeah, maybe slightly average. But 2628 years old, they live in a one bedroom apartment. And they initially were introduced us to us by another business owner that we know where they were just talking to that person about. We just don’t know how we could ever afford a home. They currently pay 20 $600 a month for that rental. 20 $600 a month. Yeah, you’re going to be okay. Adrian.

Adrian 

Yeah, just give me a second. Okay. He’s it’s 20 it’s expensive to live in a city now.

Rob 

It’s a very nice apartment, it has all of the finishes. Sure. You know, your your quartz countertops and your stainless steel appliances. And you can

Adrian 

probably take an elevator that and walk down to a restaurant that people drive, you know, an hour, the nice video to, you know, there are a number of stories up, they

Rob 

have a nice view, all that sort of thing, okay, but 20 $600 a month, so they don’t have a ton of cash yet, because they’ve really just kind of started to get to this point where they have income. They don’t feel like they can afford a whole lot more than 2600. So we’ve kind of kept to their search at things that wouldn’t cost them more than say about 3000 a month. based on current situation, interest rate, downpayment, mortgage insurance, all that sort of thing. And what that translates to, and we’ll unpack some more details here. But what it translates to is roughly between 505 $150,000 home and they’re looking for a for a single family home, not a condo, or a townhouse, which is very different from what they’re experiencing right now. But the question becomes, okay, what’s that look like? Is that doable? They, the first thing I did with them was sent them to you, Adrian to have that conversation of, Okay, what can they afford? Yeah, and pre approval process. Right? Yeah. So walk me through the conversation you had with Fred malice.

Adrian 

So this is honestly, it’s probably my favorite conversation to have. I feel it like buzzes I can feel it in my hands in my arms when I have a conversation with someone I’m getting the the high of it right now. This is what excites me about the job that I do because these conversations often start in the same place. It’s Yeah, you know, we’re doing this we’re doing that but you know, we just want to know when in the future this this might be achievable to us right and watching the the change in energy and feeling it um, you know, in the room if I have right now we’re doing a lot of zoom stuff, it was a zoom with them, but you know, watching the the change in demeanor, watching their shoulders push back and up, as they realize it’s totally achievable right now, that they can get in with a lot less down than they thought they could, and with without their student loans being as crushing as they might have thought that it that it would have been, you know, a lot of people feel the weight of student debt. And I think one of the most important things I can say about that is that the amount of money you owe is really irrelevant to lending. When we qualify someone it’s a debt to income ratio, debt as a ratio of income is all about monthly minimum payment. A lot of people are on deferment right now, which means we have to use a quarter or sorry, a half or 1% of the balance, which is a pretty large amount of money. But a lot of people are also on that, like scaled deferment, you know what I mean? And that payment is often much lower than that number. It’s it’s often lower than a lot of it’s, it’s lower typically than the average car payment in the United States. So it’s not as crushing as you might think. The term is income based

Rob 

repayment. Yeah, in that world, right.

Adrian 

Yeah, they’re scaling you based on your income, which ultimately means if you’re on a plan like that, I can practically assure you that It’s not a considerable enough portion of your income. I’ve even had some people who got off of the zero payment deferment because of that half or 1% rule and went into the Income Based Repayment because that number was smaller than a half percent of the balance. And that made it easier for them to qualify. I had one just recently, prepayment went to $10 a month on like, $30,000 worth of debt. You know, that’s, that’s a pretty crazy ratio, right? It doesn’t even sound like it hits interest. She was lucky enough that in her career, it’s it’s a forgiveness after a certain number of years. So she holds out works for the government, and then, you know, it’s part of her system there.

Rob 

But yeah, so use a couple more specific numbers. It’s very typical for somebody to have 75 80,000, you know, even 100,000 like, it’s super common. Yeah, with a four year degree with, you know, $100,000 in debt. Yep, somebody who makes $75,000 a year, there are certain deductions they can make on that income when they go through that income based repayment process. And, of course, you know, we’re not saying that we’re necessarily experts and sure, in contact your lender, the FASFA or it’s not FASFA, it’s Department of Education, you know, their computations and that sort of thing, right, you definitely want to have that conversation with the lender, because you can literally call up the Department of Education. Talk to them about what your income is, there’s some there’s some formulas, and you can take that $75,000, especially if you have a kid or two or dependents in the household, and they say, Oh, well, you actually only make for our purposes, you know, 45,000, by the time they take those deductions, right, and they’re extremely fair, it’s it’s one of the most fair types of debt out there. Right, you know, so

it would be one to

Rob 

12 $100 a month to pay it off over, you know, 20 years, as your normal pay. If

Adrian 

it was a mortgage payment, it would be very different. But it’s Yeah, I’ve seen these in the two to $300 range, honestly, in the income range you’re talking about, it’s pretty typical. And a lot of them too, they they scale up based on where you are in the career. So you know, first few years where you’re making the lower portion of income. There’s kind of this period in there, where they’re a lot more lacks with it. And you’re right, they often do factor in household factors, that sort of thing, what you’re paying in rent to even be a factor. Again, contact your lender, but have the conversation. My experience with my clients has been that every one of them walks away from those conversations feeling pretty good. You know, these are not the typical. This isn’t like some companies and credit card company calling you to try to collect on their debt, you know, some collection account or judgment. They’re very flexible. They want people to pay, and they know that you can’t, you can’t even bankrupt yourself out of the student debt. Right. So they’re going to get their money one way or the other. It’s, it’s in their best interest to get you on a payment plan, and they will find a flexible way to do that. Right. So then whatever that payment is, we got paperwork for it, that’s what we’re using for your debt to income ratio, a $300. student loan payment is no different than a $300 car payment. Right. And so applying for a home loan,

Rob 

that was one of their big concerns, right. The next big concern was or that they sighs potentially insurmountable before they talked to you was downpayment. Right? So for let’s just use round numbers for a $500,000 house. Okay. They were thinking and ever and so many people think this because there’s so many assumptions that go even the affordability index, talks about, you know, assumes a 20% downpayment, right. Yeah, well, first time homebuyers especially, I mean, generally speaking, pay 20% down, ever. Now. They’re at like three to 5%. Obviously, with VA and some other programs, you can get 0% mainstream conventional financing. You’re talking three to 5%. So we’re talking 15 to $25,000. down?

Adrian 

Yeah, yeah. 10,000 on 500k. You absolutely. You know it better than anyone robbed, your group is incredible negotiating this, you can get a seller credit that literally absorbs 100% of your closing costs. I’ve had plenty of loans where the money to closing is literally 3% of the purchase price. And that’s it and $50,000 is an insurmountable amount of money. I mean, it’s not, it’s not small and $15,000 just sitting in my wallet, but you can borrow from a 401k. A lot of people will borrow from a retirement account, you paying yourself back by borrowing from your 401k you’re borrowing against money that was taken out pre tax, so I encourage people to continue contributing. Don’t think that you cannot contribute to your retirement account, because then you won’t be able to stockpile money for a down payment. In fact, one of the most clever ways to do it is to in this example, put away 30,000 do it pre tax because what’s 30,000? after taxes, right? It’s it’s what 17 $18,000, depending. But if you’d put it into a 401k, you’re allowed to pull half of it. In a lot of cases, sometimes, a lot of times more actually, but half is one of these more restrictive programs, right? That’s 15,000. You know, that’s, that’s closest makes no difference. I think it’s a better way, if you can to put it in there. And then you’re paying yourself back. And obviously, it’s a win when you go to retire. Sure.

Rob 

Which is a no brainer. So you mentioned gifts, a lot of gifts, a

Adrian 

super common source, you know, parents, grandparents,

Adrian 

you know, we’ve got money earmarked for it often, I’ve had this conversation with with books, like our example a couple and, you know, they go, you know, I guess I could ask, don’t be afraid to ask, it’s an investment in your future. And especially the generation above us, you know, they know it better than anyone they’ve watched, they’ve at least watched their friends gain wealth through real estate. Most of the time done it themselves, and they’re aware that that’s, that’s seed money is going to multiply like a trust that, you know, like a trust account you never heard of, right. They could, they could give you $5,000, and it could be worth 100,000 in equity five years later. That’s a pretty serious change to someone’s life that you can make with a relatively small investment.

Intro 

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