Pam Krueger:
Hi everybody, I’m Pam Krueger. I’m the founder of Wealthramp, and I’m joined today by Matt Roberts who’s joining me from Syverson. It’s an advisory firm that’s based in Des Moines, Iowa, and we’re talking about real estate with Matt because so many of you have questions that sometimes you just want to ask an advisor and get a sense of buying and selling right now in the current real estate market environment. So thanks a lot, Matt, for joining us.
Matt Roberts:
Yeah, happy to be here, Pam.
Pam Krueger:
Yeah, that’s great. Okay, so what I’m thinking about right now is in this current environment, what’s on a lot of people’s minds right off the bat, before you even walk me through your typical process of how you help a client either buy or sell a home, and maybe we’ll start with the buying, but I’d like to kind of set the stage right now with the biggest questions that people have about timing, especially if they’re getting, maybe they’re into retirement and they’re going to sell their family home with the current interest rates. And I’m not asking you to forecast short-term interest rates right now and mortgage rates, but what is your sense right now of the activity and the buying and the selling right now with interest rates where they are?
Matt Roberts:
Well, I think it’s causing many clients to take their time and really just make sure that they’re making a good decision about their house. And it really does come down to affordability. With interest rates increasing, houses became less affordable, and so we’ve got high home prices. We’ve got high interest rates, and so I don’t think it’s going to prevent many people that want to purchase a new home from purchasing it, but I think they’ll make different decisions along the way than they would have if they bought the home three years ago.
Pam Krueger:
And for people who are counting on selling their home to downsize in retirement, these higher interest rates right now, and we’re just not in the same situation we were a year and a half ago, are you finding that people are putting off listing their homes thinking that maybe things will ease up? Do you think it’s really down to the number of people that are selling homes?
Matt Roberts:
I think there is a slow down. I don’t think that the market has come to a halt by any means. I think homes that used to sell in one day are selling in a week, so I think it’s just making the housing market a little less hot, but it’s still pretty active.
Pam Krueger:
Yeah. Do you think that people are having to make some sizable reductions on their listing price? If they’ve got it in their minds that they’re going to downsize and they’re in retirement, this is the family home, are you finding that they have pretty big price reductions? And I know that you’re in one market and real estate of course is local, but what are you finding where you are as far as reductions go?
Matt Roberts:
Yeah, there’s a correlation between higher interest rates and home prices. And we’ve seen that I think nationally over the last few months, home prices have gone down, but it’s important to remember we’re still somewhere near a peak in home prices. We’re not at the absolute peak like we were maybe a year ago, but we’re still somewhere near a high. So I wouldn’t get too hung up on getting the absolute maximum price in your house because it shouldn’t hold you back from just letting life happen. If you need to downsize or you need to upsize your home, I think you need to just look at your financial plan and see what makes sense for you rather than what’s going on in the market.
Pam Krueger:
That makes perfect sense. Matt. You’re a wealth manager, which means for people who really don’t know, it’s holistic financial planning, as well as your investment portfolio, including real estate. So it’s not just where’s my next investment going to be in the stock market? And it’s not just how do I get into the lowest tax bracket? It’s a holistic look, and real estate plays a big part of it, obviously it’s the centerpiece, aside from a 401K plan, it’s most American’s biggest assets. Let’s talk about what you do when you’re helping a client through the process of getting ready to buy a home. We know what a real estate agent does. Tell us what you do when you’re working with a client who says, we’re going to buy a home.
Matt Roberts:
Well, I hope that our clients come to us before they’ve made a decision that can help give some good advice on a few things. So the first thing we’ve got to determine is how much house can you afford? And that has changed with higher interest rates and higher home prices. And so we want to run that through the financial plan. We want to make sure that all the other goals that you have are not going to be compromised because you bought this house. So that’s the first thing we do.
Pam Krueger:
But you’re going to be the voice of reason where my realtor’s saying, rah rah, go. Now you have to do it now. Meanwhile, you’re going to be like, whoa, not so fast. Let’s look at your bigger picture. Let’s look at your cash flow. Because cashflow now and cash flow in two years and cash flow in five years is king. That’s everything.
Matt Roberts:
Yeah. It all comes down to cash flow. And it also comes down to how much money do you have to put in for a down payment? Are you going to be selling your home? How much equity are you going to capture after paying the realtor and paying for closing costs? What kind of cash do you have to put in? And with higher interest rates, you need to make sure that you’re getting the right type of mortgage that’s going to fit your budget. And so we also want to help, we will play the quarterback for our clients and work with their lender or help them find a lender that makes sure that they can get the right type of loan based on the house that they want to purchase. And then it’s that process of helping people get pre-approved so they can go out and shop. And so we can help provide all the documents, the tax returns, the W2s, the pay stubs to help them get prepared to be able to make an offer.
Pam Krueger:
Yeah, pre-approved versus pre-qualified. Pre-qualified just means that you can qualify. Pre-approved means that Matt, you’re helping them actually get pre-approved with the stamp of approval, which is further along in that process, but with loans and mortgage rates, let’s come back to where we are again right now and kind of touch it from a different point of view. We’ve had nine short-term rate hikes in the past year, which is just unbelievable. And the average interest rate right now being about 6.88, I think that’s about where mortgages are right now across the country on a national basis, which is pretty high. So again, now let’s go back to the purchasing. Are you finding that in cases, aside from cash flow, are you advising clients to wait and see what rates do next? Or are you saying, look, this is like you said a little bit earlier, I mean this is what you want to do and this is where rates are?
Matt Roberts:
I think you have to let life dictate your decisions and let your financial plan dictate your decisions. You can’t control the markets, just like the stock and bond market. You can’t control where interest rates are for mortgages, so will you make different decisions about your purchase as a result of interest rates? That could be possible because you may not be able to afford the house that you could a few years ago, but I don’t think you put your life on pause because nobody’s got a crystal ball and can tell you in 12 months as interest rates will be at four and a half percent, that’s just not possible. And if you’re waiting for home prices to come down, that may not happen either. So you have to just make decisions based on where we’re at today and your personal circumstances.
Pam Krueger:
Yeah, just sage advice. What you’re saying is remember, stay focused on what you can afford. Don’t try to chase where interest rates may or may not be going. And if you’re that sensitive to interest rate changes, mortgage rate changes, if you’re that sensitive, perhaps it answers the question that maybe it’s not affordable because if it’s going to make that much of a difference in your life, then perhaps it’s not. That’s a signal that it’s not a good fit for you. Yeah. What do you think are the most important things to consider before getting into a house? And we’re going to assume that it’s beyond maybe a first time purchase. It could be a first time purchase, but maybe it’s someone who’s trading up. What do you think if you had three things that are the most important that you counsel your clients to consider?
Matt Roberts:
Well, purchasing a home is more than just the price. It’s property taxes, it’s insurance, it’s utilities. These things add up and can dramatically impact your budget for your house. And so you need to be keenly aware of what those will be when you purchase a new house. And then oftentimes when you move into a new house, it’s not exactly how you want it. There’s going to be improvements and things that you want to do. So go into it with your eyes wide open about when you’re going to do those things and how much they’re going to cost because that can influence whether it’s the right house for you before making that offer. And I said this before, but it’s so important. Put this decision in the context of all your other goals. Nobody wants to be house poor, so make sure that you can afford the house while doing the other things you want to do, like travel, charitable giving, gifting to your family. Make sure all those things, saving for retirement, make sure all those things are in balance.
Pam Krueger:
Yeah, it’s so easy to have these blind spots where, and you get so hyper-focused on that house because it’s emotional, okay? It’s not even an asset. If you have a big mortgage, it starts out as a liability, but in our minds, we get so emotionally attached to what will become this asset because we live in it. I know I’m guilty of that myself, and it just has to play with everything else in your portfolio, in your spouse, and just everything you want to do as a family or on your own. But looking at the whole pie, are there cases, Matt, where you would recommend borrowing from your retirement account? I know Roth IRAs are great for this, but where you take money out of your retirement fund and you say, this is what I’m going to do. I’m going to use this money as the down payment on this other asset, which is my house.
Matt Roberts:
I would think that it should be a last resort. And again, this comes to balancing all of your goals, and it may be one of those signs if you have to borrow from your 401K that you’re not ready. And so you may need to take a little bit more time, build up some cash to be able to put down that down payment. Because when you take a 401K loan, which you can do up to $50,000 or 50% of the balance, either we’re not talking about it in a huge sum of money that’s going to be able to maybe make the difference or not, but you’re actually putting your retirement on hold when you do that because you’re not contributing to your 401K until that loan is repaid.
Pam Krueger:
And even though the loan gets paid back to yourself, and even though you’re paying the interest and it’s to yourself, I do think that you probably have, as a financial advisor versus advisor, again, someone’s selling real estate, you’re kind of the voice of reason as to look, we feel like a healthy down payment is X. Now, you can’t say that for all clients across the board, but where would you say minimally you like to see your clients in terms of down payment percentage, 20% down, 30% down? Or do you feel like there’s cases where 10% or 5% are enough?
Matt Roberts:
I think five or 10% makes me a little uneasy. Now, again, you have to factor this into your budget, and if you can afford the mortgage, and oftentimes you’re going to have insurance, PMI that goes along with a down payment that’s less than 20%, but I think somewhere between 20 and 30% is more appropriate. So if you don’t have that kind of down payment yet, it’s another sign that maybe it’s time to push that decision off for a little bit and
Pam Krueger:
Got it, okay. And then there’s the business of real estate where people buy rental properties. Of course. Would you recommend that your clients add rental properties to their portfolio? I don’t mean, of course everybody’s different. I’m not. For me personally, I know it seems really appealing. My brother and my sister-in-law owned a lot of rental properties and made great income, but it’s not my thing. You know what I mean? So when you’re talking to clients about real estate and they’re excited about it from an investment standpoint, how do you go about determining whether the prospective properties are going to have a good ROI? And again, the down payment plays a role as well to keep it safe. Let’s say it’s their first rental property.
Matt Roberts:
Yeah, I mean, number one, they have to have the interest and the passion for real estate because it’s not for everyone. It’s not just about the financial risk associated with investing in real estate. It often comes with time requirements as well. When you have a rental property and you’re the landlord, you need to be responsible for plumbing issues and everything that goes along with maintaining a home. So the other thing you have to look at is are you ready? I get this question a lot from my younger clients about wanting to do something outside of the stock market and they want to be an entrepreneur. They want to be a business owner. So oftentimes when you’re younger, the timing isn’t great for you to take a huge financial risk. So our rule of thumb is to have one single real estate investment, not be any more than 20% of your investable assets.
So the math, you need to build up a pretty nice portfolio to invest in a rental property, but oftentimes a rental property comes with leverage. You’re going to finance the purchase of that property, and the down payment could be 25, is going to be 25% in all likelihood to get into it. It’s a little higher than your own personal residence. So you need more capital to get in. But then from there, you need to work with your local real estate agent to make sure that the market will command the rent necessary to pay all of the expenses, the home, the mortgage,
Pam Krueger:
And you’ve got to have that dry powder for rental property. You’ve got to have that substantial amount, not only for the down payment, but for the cash set aside. Because going in, even if you’re the most optimistic person going in, there are going to be instances that are going to require cash, like something happens, there are repairs, just anything that can happen, a vacancy that you didn’t expect longer than usual. I mean, we can’t help it, but go into these scenarios with the idea that, oh, this is what’s going to happen. And then when things don’t go your way, I mean that’s the problem. This could go south and take you down financially very, very quickly if you’re not prepared for it. Matt, what I want to ask you too is maybe the last question here is give me an example, if you will, because from your point of view, again, we’re not talking to a realtor, we’re talking to a holistic financial advisor that’s looking at your whole picture. Give me a scenario where you might’ve had a client, I’m putting you on the spot, who might’ve been in a little trouble or over their heads because of a real estate investment that you were able to navigate through. Because I want people to get an idea of what you do beyond just sitting there looking at stocks, bonds, and cash.
Matt Roberts:
Well, this just happened earlier this year, and I think a lot of people find themselves in this situation where they have found their new place, but they haven’t even done anything to sell their existing home. And so there’s a timing mismatch, and a lot of people require the equity from their current home to get into their new home. So in this circumstance, clients identified a home, made an offer, and the closing date will be before the closing date for the sale of their existing home.
Pam Krueger:
Yikes. So we need to wait a minute, Matt. Where are they in their life in terms of career income earning? Are these people who are at the end of their career or in the middle?
Matt Roberts:
This is somebody that is near the end approaching retirement. A lot of transition is in play. And so a lot of times we have clients that want to downsize, but downsizing doesn’t necessarily mean you spend less. So it was one of those situations and well, what we offered, she came to us, the question, well, how do I get the money to buy my new place when I haven’t sold my existing place? Well, we worked with her to put a home equity line of credit on her existing home, found a lender that was willing to do a hundred percent of the value and may have her make interest only payments until her current place sold, which it did by the way. And then she sold the property and paid back the loan and got into her new place. And so it really bridged the gap.
Pam Krueger:
How long did that take?
Matt Roberts:
Three months.
Pam Krueger:
Yeah. That’s scary though. Obviously they were really in love with the new house, but when you’re at that point in your life, in your career, you don’t have the time to go back and do it over again. If you screw that up, you’re pretty much getting closer to retirement and everything is at stake. So I think that probably a lot of people don’t realize that you do that kind of analysis and that you help people work through those real estate issues, including finding the financing, finding that bridge, that home equity line.
Matt Roberts:
Yeah, absolutely. And we can get creative for clients, and so we want to make their dreams come true. And so we have found other solutions too, maybe borrowing against a portfolio to be able to provide the financing to buy a new property. So obviously it’s ideal to sell your house first before you get into a new house, but sometimes that’s not the way life works and we need to get creative and find solutions.
Pam Krueger:
But I really appreciate you shedding light on the different ways you get involved because I really believe that most people don’t realize that fee only financial advisors, investment advisors who are holistic, are knowledgeable enough, have the experience, have the connections in the local real estate markets to be able to help them. I mean, a lot of our advisors on Wealthramp work with clients who have commercial properties and looking and analyzing the cash flows. So I really appreciate the fact that you’re opening people’s eyes to how you can help them on a family or an individual basis with their real estate. Is there anything else you want to leave us with as either a, don’t ever do this or make sure you do that kind of advice right now?
Matt Roberts:
Well, I’ll leave you with this. I’m actually selling my home and we’re building a new home. And so for people that build new homes, stick to your budget, don’t go over. It’s so easy to do that when you build a new home and you get yourself in trouble by going over the price by 20 or 30%. So don’t blow the budget when you’re doing a new build.
Pam Krueger:
Okay, I’m hearing you because I will confess that right now I want to build a guest house. I have a half acre, I want to build a guest house in the back, and costs have gone up, and I am so emotionally attached to the plan that’s been approved, and I’m sitting on the sidelines just like you’re saying, because I need things to just come together a little bit more so that I feel like it’s not going to be putting me, I want to be able to sleep at night and as excited as I am about real estate, I don’t want to put myself in a position where I lose sleep at night because it was emotional. So I appreciate hearing that myself. Matt, thanks so much. And people can obviously find you through Wealthramp and by going directly to you, and I just really appreciate what you do. Thank you.
Matt Roberts:
Yeah, thanks so much for having me, Pam.
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