08. CASE STUDIES ON HOME AFFORDABILITY PT. 2

SUMMARY KEYWORDS

wealth, house, people, home, bought, pay, area, talking, rent, corvette, money, cars, pole barn, rentals, started, years, monthly mortgage insurance, bedroom, mortgage insurance, roommate

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.

Rob 

Right. And so this this concept, so for them, Fred malice. keep reminding ourselves of their names, right?

Adrian 

Yeah. Fred and Alice right now. So

Rob 

for them we’ve taken you were able to pre approve them. Yep, they were able to look, figure out how to take their savings accounts, which they thought were meager, not even close, because they were thinking they needed 100k to buy a $500,000 house. And they were so and we’re taking

Adrian 

out my kid started as a goal setting session, it started as, let’s see, you know, we just want to figure out where the ball is going to be in six months, a year, you know, what do we need to save? What do we need to put away? And then by the end of, I think it was only an hour and a half. And you know, a lot of that was just educational pieces and talking about their dog, you know, and their lives. We were We were basically pre approved. You know, I asked them to send me some documents as verification for stuff. But they’ve done you know, it was quick and easy. The modern world, right most of the time, you can just log into a some sort of online system grab paychecks or w twos rapidly. So I pre approved people within a few hours. All the time.

Rob 

Yeah. So since then, and that was three, four weeks ago. They’ve seen a number of properties. We haven’t written any offers yet. But they are now doing the homework process, which we’ll talk about another episodes, but they’re actually you know, getting their feet into homes. They’re knowing what’s out there. Their shopping. Base. Yeah. And that’s the whole point, this is becoming a reality for them. And they’re in their mid to late 20s. If they can by mid to late 20s. How much is that $500,000 house gonna be worth 10 years from now, assuming at, let’s say, a very conservative two to 4%. rate of return. I mean, it’s nuts. Yeah, what that’s gonna, what that’s gonna look like they’re gonna have a decade from now at least $100,000 in equity, most likely. Maybe quite a bit more. I mean, in the worst markets ever, over a decade, you’re still ahead that we’ve experienced going past? Obviously, it’s no guarantee. But I mean, we do know that long, long term, you know, real estate property, they’re not making any more dirt, it is always going to increase in value over, you know, decade over decade.

Adrian 

Yeah. And that speaks a bit more in metro areas where they’re buying, I mean, sure, let’s not mince words, either. This is a half million dollar piece of real estate they’re talking about although, you know, audience please bear in mind we were talking about building wealth half a million dollars a million dollars even isn’t what it used to be million dollars, those crazy wealth decades ago. Now, it’s, I’m not gonna say it’s a modest amount of money. But you know, half a million dollar home is not as crazy as you know, that used to be a mansion. Now it’s what a nice house with a two car garage and right, four bedrooms or so. So 500k worth the home in 10 years at 3%. appreciation, which would be like, something went wrong in that area. Sure. $670,000. So 170 grand in equity gain over that 10 year period. You know, I gay? something terrible happens in the market market? Sure.

Rob 

So 17k a year. Yeah. In appreciation in in appreciation, passive? No, they’re exactly their net worth. Obviously, it’s not money in your pocket till you sell it, renting it out and letting it grow over the next 30 years. And you know, they’re not going to how many times have I said this? Have you heard me say this probably 100 you’re not gonna hate being 60 years old and owning a bunch of paid for houses? No, I do have a story about that

Adrian 

ugly in the that’s as good as a bank account that has that amount of money, like a CD or something that you can’t, you know, that’s a little more complicated to draw out of stocks that you’ve got to sell, you know, this is this is one stock in the city that you bought it in, and you got to sell it to get your cash out if you want to, but, you know, there’s times when the needle goes down on this type of investment,

Rob 

right, but it pays a monthly dividend, you know, so and that’s, that’s the point. Um, so give me some rough numbers, let’s assume they do the minimum down of 3%. Sure. And let’s say we lock them in roughly now. And we also get are able to negotiate, you know, roughly $10,000, in closing costs concessions from the seller, that basically get wrapped up into the loan. So with all of that being the case, they can either pre pay mortgage insurance or have mortgage insurance. That’s that’s a whole nother conversation, you get into it, are they in that 2600 to 30 $200 a month? area, including taxes and insurance?

Adrian 

Absolutely, including monthly mortgage insurance, they’re even within that range. So I’m running a scenario here, I use 1% of the purchase price for taxes and a quarter of percent of the purchase price for homeowners insurance, both of which are fairly conservative in the in the direction of overestimating, I usually find these numbers lower, especially on the insurance. Unless you’ve got something like a pool on the property or you know, something that adds risk. My personal insurance for my home is I literally a third of this, but hey, let’s, let’s go terrible first and work our way backwards. I’m less than 20 $800 a month,

Rob 

right? So and that would

Adrian 

confirm within 200 bucks of their rent payment right now. And then they get to own a house that gains 17 to $30,000 a year in equity.

Rob 

Right. So that, so unpack that 2800 for us. Okay, so that’s roughly $100 a month in insurance, right?

Adrian 

Yep, just a hair over 100. And insurance taxes are about 415 15 principal and interest 2100 bucks. And this is a monthly mortgage insurance of 160. My expectation for you know, buying buying out that insurance, if you wanted to, would probably be in the maybe seven or $8,000. So you’ve got this option for our audience here. To pay mortgage insurance as a single premium, you can just pay it right upfront, as per your closing costs. And again, because you can get a closing costs credit from the sellers, that in this case can be as much as 3% of the purchase price. It’s got to be baked into your offer when you make it and you’re usually making an offer over asking because of that to compensate for this money that the seller is going to lose out on by paying your closing costs. But you know, you borrow a little bit more money effectively by doing this and you have someone else pay in this example, the mortgage insurance out entirely,

Rob 

right. So all said and done.

Adrian 

You’re gonna do that we’d be out there rent.

Rob 

Exactly. So you’re looking at 2620 $800 a month for a $500,000 home. And here’s the other piece that people don’t really think about. They’re living in a one bedroom, little tiny 700 square foot apartment right now. Yeah, they get a $500,000 home that in the Portland relatively close into to the core of Portland market would call it would be like a two. Maybe a really small three bedroom but probably like a two bedroom, two bath, two bedroom, one bath older Portland home. Yep, that sort of thing. So, okay, they feel tight. It’s 2800. Let’s say it’s 3000 a month, right? Let’s just round up. It’s just it’s just a little tight. But remember, they have a yard. They have all of that because it’s a single family home versus a apartment. So okay, for a year or two What’s it look like to have a roommate? Yeah, what happens if that roommate pays $1,000 a month to rent the second room? Yeah, their house. Now granted, there’s there’s living standard issues. I mean, privacy issues, whatever the case may be, you want to make sure you get the right roommate. But you’ve done this in the past, I’ve done this absolutely. Where we had roommates living in a separate you know, bedroom, whatever. And it does work. Maybe it’s not ideal, but do it for a couple years. Yeah, your payments 2000. You’re literally saving and paying extra on your mortgage, to pay it the balance down or to pay for that next house that you know, instead of being a two bedroom and with a roommate, maybe it’s a two bedroom with an adu that 600,000 Yeah, and you afford it in a couple years and you have somebody living in the adu in the backyard. So you don’t have the same privacy issues.

Adrian 

And it’s my common house type right now to this like the little kitchen that you know me I got shared spaces, but I was just renting a place that had two living rooms. It’s actually much more common than you might think. Right? If you didn’t grow up A home like that you might not, you might think that that’s a weird thing. But, you know, they do like the kids living room or whatever. And then I’ve seen a lot of younger people grab a home like this, and then repurpose it into, hey, you know, I got a mini fridge and a microwave. I can, we can have separation of space, so we’re only in each other’s hair for little periods of the day or whatever. Right?

Rob 

So where, what what we’re getting at is there is options. Yes, Fred and Alice have options. And they have a number of options. And it’s really the limitation of what their creativity is with the property that you know, $500,000 for a small, modest home in Portland. I know, you know, those of you in in Kansas, are freaking out right now. Right? Yeah. And then, of course, those of you in the Bay Area, San Francisco Bay area are like, you know, there’s no, but

Adrian 

that’s what’s alien about what we’re talking about, right? Like we’re talking about all runs. And it’s all on the scale. I mean, I’m talking 20, you know, you can literally do the division. I’ll do it right now. 500,000. So what if I take that 20 $800 payment, and we call this factor is, you know, I divide that by five, that’s, that’s a 560 per 100k. If a house in your area equivalent to what we’re talking about is, you know, 250,000, then multiply that by 2.5. Now I got 14 $100 a month, that should be about where you stand. And that’s probably about what it costs to rent that house in that area. Most of the time in the metro area, rent is usually more expensive than a mortgage payment. And then as you get out, not that far, but as you get out of those inner rings, usually the needle goes in the other direction, right? Again, this is with mortgage insurance, this is without having to 20% down as you build equity in the home. And as rents continue to rise around you this is minimum downpayment, we’re not talking about saving 100 grand to buy a half million dollar house, we’re talking about a minimum upfront initial investment to get to this level.

Rob 

Right. And then we would be remiss if we didn’t talk about Fred analysis concept already. And part of this is is you know, US planting those seeds. But they were incredibly excited about, yeah, why wouldn’t I put a minimal amount of cash down because we’re not buying our dream house for 500,000? Right. And we would love love. This is the thing that like Jenner, the millennials and Generation Z are super into is this concept of buy the house and don’t sell it when you move up to the next one. Yeah, and use it as a rental. Because you know, that $500,000 house as we refer to 10 years from now is maybe we’re 670. Right? But how about 10 years from now, when the the tenant with rents go up over time, generally speaking, yep. And your mortgage payment is fixed, it’s gonna stay the same.

Adrian 

So they’re the most part, I will say taxes and insurance, taxes and insurance will vary, but that’s proportionally of the payment. Yes, it is relatively Not quite, you know, your payments are going to shoot up 100 bucks a month or something.

Rob 

Exactly. So what ends up happening is they live in this house for a couple of years, and then they buy the next one. And maybe at that point is that $600,000 house because they’re tired of a roommate, and they want something with an ad you or just want their own or whatever. And they’re making more because they’re 26 and 28. And I guarantee you when they’re 30 2030, they’re going to be making you know, way more than they’re making today. Definitely 38 and 40. They’re going to be making way more. And what ends up happening is that as they move up, they leave a trail behind them of homes that are gradually being paid for by tenants, and they’re building wealth. Which brings me to we got to close this episode at some point. So it brings me to the story. I was up at my uncle’s house, visiting him this weekend. And he ran into a gentleman within their social circles over the last six or eight months, he said, and they’re both car guys. And they started Yeah, exactly. Adrian’s a car guy too. I wish I had time to be a car guy but I can still appreciate him.

Adrian 

Yeah, I could do a get rich get pours quickly podcast about cars if I own cars, the exact polar opposite. But here’s here’s the way you want with your wealth, I guess.

Rob 

And that’s the best part. That comment actually is perfect for this because so he told me a story about getting to know this guy. They hung out and they started talking about I believe it was like a 1964 Corvette and this guy happens to have one and they’re having more of these conversations and apparently the 64 has single headlights instead of double headlights. So you know it was kind of a little bit of a unicorn of the 60s. Little rarities like

Adrian 

that. can be Yeah, the difference between double in value of some of these classics? Absolutely, exactly.

Rob 

So, um, as, as they get to know each other, you know, this guy just seemed like a cool guy. But hey, he had this Corvette, and I love to guys have a Corvette or you know, whatever. Eventually, my uncle ends up going over to the guy’s house to see it, because he’s like, hey, I’d like to see it. You know, he has a friend who maybe would be interested in buying it, you know, he just, they just got to know each other a little more. He finally he shows up at his house. And he pulls up and the gate opens. And it’s like this very nice, but reasonably modest home. And he pulls up into the driveway, I

Adrian 

don’t know you might have lost me at the gate opens to a modest home, but I hear exactly, but it’s not really a modest,

Rob 

maybe relatively modest to having a gate and like some land and opening up and all that sort of thing. But then over to the right, he sees this gigantic pole barn. And you know, pole barns aren’t super expensive to build. Sure, but it’s huge. And he the guy comes out Oh, hey, how you doing? You know, and Michael is going Whoa, all right. And he walks over and they go into this pole barn. Now outside being all metal. I mean, it looks like a ag barn. But surely, it looks

Adrian 

like there should be tractors in there.

Rob 

There you go. They walk in. He said, it’s 100% finished. It’s temperature controlled, has the smooth as glass floor. That’s pretty and speckled and you know, all those those concrete finishes and stuff. And the guy has like 60 cars in there. And I mean, and these are cars, like a lot of classics, but you know, he’s got some Porsches. And you know, I don’t know, he didn’t say Lamborghinis. But I’m sure some crazy stuff. I mean, your guy’s got to have multiple millions of dollars worth of Yeah, Korean vehicles, you know, talking about, you know, getting getting poor quick, right? Yeah, it’s been a lot of money on cars. But yeah, the guys that know what they’re doing, they pick out ones and keep them, and temperature control and all that sort of thing.

Adrian 

So he shows them the Corvette you can break even on it. You make a small fortune and racing. Start with a big one. Start with

Rob 

Yeah, there you go. So he’s having the conversation. And he just asked the guy he’s like, you know, obviously, he has incredible wealth. Yeah, relatively speaking. Sure. And you can’t have a collection like that.

Adrian 

Right. And you never know, you’re not gonna go get loans from the local Credit Union for all these expensive cars or something. Now, he’s got

Rob 

a boatload of money, right? invested in this, which means he’s obviously, you know, solvent. He’s asked him, you know, what the hell do you do for a living? And this guy’s in his 70s? And, you know, so you just assume he’s retired? He’s like, Oh, you know, I mean, I still work a little bit. Oh, what do you do? Well, he owns a property management firm that manages his properties, and they start talking about it. And he owns 90 rental properties. Nine, How the hell did you get into that? And he said, Well, you know, when I was 20, or so, I bought my first house. And

Adrian 

when I was 20, or so I bought my first house. So not mom and dad handed me the keys to 10 rentals. And then I climbed from there. No, I bought my first house, he bought his first

Rob 

house, and we don’t have all the details on exactly how it worked. I would love to have him. I’m going to look them up and figure out if we can interview.

Adrian 

Yeah, we’ll try to pull them in.

Rob 

But he said, I bought my first house when I was 20. And then this is the best comment. He said, and I never stopped. I just kept doing it. And the guy owns 90 rentals in the general Portland metropolitan areas, my understanding, yeah, and he has millions of dollars worth of depreciating assets. I guess some of those old old ones are appreciating assets, but it’s a good way to lose a lot of money. Obviously, he does incredibly well. He’s in his 70s. So you know, can’t take it with you was 5055 years years ago, but and houses were cute. He’s got like a car for each house. Maybe then Yeah. Hey, you never know. But it’s a good reward system point is circling back to Fred malice. Yeah. Is there’s this concept of they’re in their 20s. The world is their oyster. And by sitting down and having these conversations with people that say, yes, you can do it. And here’s exactly how we’re going to map it through for you. Absolutely. And it is doable, and they can build wealth, and they can work. They don’t have to be crazy. Car people that own you know, millions of dollars worth of real. Yeah, yeah, in the long term. But, man, when they’re in their 60s, even if they own three or four or five pieces of real estate or have traded up, or done whatever they’ve done, they are not going to be pissed at their 26 and 28 year old selves, for going through the process buying that first house being responsible. And this brings me back to the initial conversation of this whole thing of, you know, half of their peers in their age say I’ll never Be able to do it. Well, son of a bitch.

Adrian 

Yeah. Turns out people do

Rob 

educate them. Let’s figure out how to do that. And yes, you know, I’ll get off my, my preaching, you know, preaching box, if you will.

But

Rob 

what what we’re really trying to do is just say, Hey, this is doable, and you don’t have to feel hopeless. Let’s let’s work it out let’s just by asking the question your head and shoulders above your peers.

Adrian 

Yeah, when and that’s why we’re passionate about this because, yes, there are some people who were born with a silver spoon in their hand. And I think that they in their mouth rather, and that’s, you know, that’s part of that stigma out there right now, right is telling people, you know, oh, I started off with a little million dollar loan from my parents or whatever it is, you know, yes, those people are out there and they are competition but the markets huge and you don’t have to be the next Rockefeller in order to make money in real estate and you don’t have to have money passed to you to do it. You don’t have to have a ton of money down $15,000 again, it’s a lot of money. Or $7,000 if you’re in an area that you know, has more typical housing prices, but you know, we’ll we’ll break into it in a future episode, my blue collar millionaire started with a house that was barely worth more than 100k with literally zero down USDA Rural area. And he’s in the same boat. He’s you know, he’s making 20 to $40,000 a year in in net wealth. While he makes 40 to $50,000 a year in his real, real job, his day job. Yeah. So, you know, there’s many pathways to wealth. And I think, Rob, one of the greatest I love that quote you had, what was it? The average millionaire has seven income streams, something like that, on average? Yeah. And so no, diversification is cool. And it’s a good way to make sure that you’re not crushed by one, you know, issue in a market, like people in 2009, who had all their eggs in one basket and no buffer collapsed under their own weight. But you know, there’s also just a lot of people mom and pop renters, right. It’s, it’s very popular right now. And it’s a growing area of, of wealth generation, and you’re providing a service people want places to rent. I’m grateful for all the places that I got to rent, as I worked my way up to the home that I own. You know, it’s it’s a win win.

Rob 

Yeah, it’s so let’s just wrap this up. put a pin in it for today. This is a fun, fun, fun topic. We love doing it with people. Yeah, we’ll we’ll talk about it future points, you know, next steps and all that sort of thing. But man, this Yeah, first time homebuyer experience. But let’s just, you know, spread that theology of, you know, you can do this, yeah, daily responsible living, will allow achievers to go out there and just do and build incredible wealth. Yeah, and,

Adrian 

and if you’re listening and you’re excited, get in contact with a good lender, and start running the numbers. It’s free. I don’t charge anything. My clients don’t pay me directly. Anything upfront, we don’t talk about even a charge on a card until you’re under contract at the very least. And that’s paying for your appraisal and your inspection. So you know, have the phone call, make the phone call, have the talk, run the numbers and just start getting get data, you know, you owe it to yourself at least to get the data. Don’t let someone’s common phrase or thought about what the state of the world is. steer you away from what could be you know, one of those decisions you’re going to look back on and we talked about it before, right? You know, these people tell us all the time I wish I had started sooner. Today should be your day.

Rob 

Yeah, right.

Adrian 

Look someone up Pick up the phone. Make today that day.

Rob 

best best time to plant a tree was 10 years ago. Yeah. Next best time is today. Right? Absalom awesome. Love it. Thank you everyone for listening. We will look forward to the next episode. We love doing this. This is this has been a lot of fun. Thank you, Adrian.

Adrian 

Yes, thank you.

Intro 

Thank you for listening to the get rich slow podcast. If you like what you learn, please subscribe, rate and review so we can grow wealth for even more families.