[Editor's Note: This is a guest post from Eric Tait, MD, MBA, a practicing internist and a professional real estate investor. After having a few lengthy arguments with Eric on the Sermo forum, I invited him to write up his story for publication here. A few months later, I received this in my email box. I think you will find it inspiring. We have no financial relationship. Enjoy!]
My story begins with a wide-eyed first year medical student who was trying to figure out how he was going to invest his eventual millions (isn’t that what all doctors make?). My world had just been rocked by a book that would become the best-selling personal finance book of all time – “Rich Dad, Poor Dad” by Robert Kiyosaki. This book called into question all that my middle class upbringing had taught me about money. Because I had graduated from Morehouse College as a Biology major, I had no experience with business or finance; but I have always had an entrepreneurial spirit. It was this spirit that led me on a quest to find the most effective ways to invest my money. Leaving Atlanta to attend Baylor College of Medicine in Houston, Texas, afforded me the chance to join a newly created dual degree MD/MBA program, and I jumped at the opportunity to learn the language and principles of business. This experience would further push me down the investment road less traveled.
It was the summer of 2000. I was finishing my first two clinical rotations at the same time I was entering the world of business school at Rice University. My first class, Financial Accounting 101, introduced me to the language of commerce. As Latin is to medicine, the income statement, balance sheet, and cash flow statement are to business, and I loved it. My sister, a Columbia University Business School graduate and portfolio manager at J.P. Morgan Investment Bank at the time, would speak to her friends in “back of the envelope” calculations that made my head spin, and now I was going to be able to join those conversations. One of our first class assignments was to dissect the balance sheet of one of the most beloved companies in Houston and a darling on Wall Street. As I tackled the project, I realized that this company, despite much hype and promise, so many glowing reviews and praise about its innovative business model, had raised many questions for me, a second year medical student, one month into business school. Later that summer, this company’s stock price would hit a record high of $90/share until it eventually faded into the dust bin of history taking many of my neighbors’ 401K and IRA account balances with it. You see, this company had not generated any profits from its core operations in over three years, even as its stock price soared. This was pivotal for me, and I began in earnest to find alternative ways to invest that were outside the traditional stock and bond markets.
I knew that I loved medicine. My great-grandfather was a country physician, his son joined him in practice, my uncle was an oral surgeon, and so I was the 4th generation in my family to enter the profession. Yet, I now had a desire to incorporate my new area of study into my future career. As they say, medicine is a jealous mistress, and as such, I knew that my investing life would have to center around assets or industries that would not require me to be a full-time operator of a business.
Introduction to Real Estate
So I looked around and asked myself, where have most of the world’s millionaires and billionaires either made or held a large percentage of their assets? The more I researched the question, the more I kept coming back to real estate as the answer. With this knowledge, I devoted the rest of my time in business school, medical school, and residency training to reading, researching and practicing how to own real estate effectively.
I got my start investing in real estate with the condominium that I lived in during medical school. I purchased it for my own use, but later became an “accidental landlord” when I left Houston to travel 50 miles south to the Gulf of Mexico to attend the University of Texas Medical Branch at Galveston for my Internal Medicine residency training. Before leaving, I researched the rental rates of apartments and condos in my area and realized that after factoring in my mortgage and condo fees, I could lease my condo to another medical student and still make a cash profit every month; so that is what I did. I had no formal plan or training at the time, just a simple understanding of taking in more rent than it cost to own and operate the property. In retrospect, it was more luck than skill that allowed my plan to work, and I warn would-be investors from taking this approach.
Investing the Attending Earnings
When I returned to Houston three years later to join a mentor in private practice, I decided to add to my growing real estate portfolio. I loved the fact that I was being paid passively while someone else was paying down my mortgage. I was receiving a cash dividend, acquiring capital gains through price appreciation and I was in control of the asset. Oh, and as an added benefit, the cash flow that I was receiving was not being taxed because of a thing called depreciation. In my mind, I had found the holy grail of investing.
So I set off to educate myself on how to effectively buy real estate so that I could duplicate my accidental success. I took on-line training courses and joined a few local real estate investing clubs in Houston. I talked with successful real estate investors and listened to their advice. I did not try to do it on my own, I found mentors and followed their successful leads. I encountered difficulty only when I thought I was smarter than my mentors.
In the summer of 2007, my wife and I bought our first property solely for investment. It was a foreclosed single family home in a northern Houston suburb. We purchased it for around $45,000. [Welcome to Houston-ed.] It was a 3 bedroom 2 bath, 2 car garage home of approximately 1500 sq. ft. At the time, Houston had not experienced the economic downturn of the recession, so foreclosed homes were not common. We purchased the property using a hard money loan, which allowed us to buy the property, renovate it, and then refinance into a 30-year fixed-rate loan with no money out of our pocket. We continue to own this property today and it generates after all expenses around $400 a month in passive income and is currently worth around $95,000. In 2008, we decided to purchase a small dilapidated apartment complex that had 10 rental units. We purchased the property for $180,000 and invested around $60,000 of our own money to purchase and renovate it. This property generates between a $12,000 – $30,000 cash return annually depending upon the capital improvements we make to it each year. We have used this as a training property as we begin the process of purchasing larger apartment complexes.
The Empire Expands
From 2009-2013, we continued to purchase single family properties as the Great Recession took hold in Texas. This included nine more single family homes for our own portfolio. It was during this period that a few colleagues approached us about joining us in our property investments. We placed five of our single family homes into an Investment Fund and offered investors the opportunity to purchase bonds based upon the rental revenues from the homes. Because of the Federal Reserve’s low interest rate policy investors could not find attractive yields on fixed income investments that paid out monthly cash flow, so we created our own to satisfy the demand. That was our first investment fund and it allowed some of our physician colleagues to participate in the debt side of real estate investing with us. In 2012, my mother decided to retire, so I had her liquidate one of her 401K plans containing around $70,000. We purchased seven single family rental homes in Houston, which generate around $3000 a month for her in retirement and has captured over $280,000 in equity/capital gains. We have also purchased several rental homes for other family members, as well. In total, we have 21 single family properties along with our apartment complex that have been purchased, renovated, repositioned, and are currently rented. My wife and I are closing on another single family property in the coming weeks for our own personal portfolio.
The Great Recession was a wakeup call for us about having all of our holdings within in the United States, tied to one economy and fixed to one currency. Although we invest primarily for cash flow, and that cash flow actually increased during the recession, we realized that we were heavily levered to the United States and real estate prices transiently declined here for several years. So we decided to diversify our real estate holdings into international markets and search for the highest-yielding asset class within buy-and-hold real estate. Our research showed that hotels have the highest return on capital within real estate. We found an experienced real estate developer from the United States who had previously developed hospitality properties internationally and was preparing to build the largest resort development in the history of Ambergris Caye, a Caribbean Island in Belize. The developer had already partnered with the largest land owner on the island as well as the top-producing real estate broker in the country. Because of our real estate investing experience, the developer asked that we put together an equity partnership to bring in current and new investors for this project. We now lead an investment group that owns six rental units in this development. We expect to earn between 8-15% a year in cash returns on these units without the use of any debt.
Rags to Riches in 8 Years
Collectively, our personal holdings and investments (exclusive of properties bought for family members) went from a negative $250,000 in net worth coming out of residency in 2007, to close to $2,000,000 in net worth and around $5-6,000 in semi-passive monthly income. Generating this income has required some time, dedication, and focus. But it has been manageable, even minimal over the years.
And although I am still a full-time practicing Internist, through real estate my wife and I have been able to amass the wealth that we have in a relatively short time. I am asked all the time by colleagues why I still practice medicine. The answer is, because I love it. And I love it especially because I can practice in a manner that is consistent with keeping the patient the focus of my time. I am not beholden to medicine to generate an income to live the lifestyle that I want to live and can afford to give my patients the time they need. My goal is to continue to build the passive income streams for both my family and investors to a point where we can all retire, if we choose to. In the meantime, my wife and I have two young daughters who factor heavily in our planning. Over time as they grow older, they will be added to the business as owners of the corporations in which we hold our property. Our children will eventually inherit our portfolio outside of our taxable estate, and in this way we will use real estate as a way of estate planning as well. However, I have no intention of stopping the practice of medicine.
I hope this brief look into my journey as a real estate investor prompts you to begin to research how you too can add direct ownership of real estate or real-estate backed debt as a way to diversify your investment portfolio. I look forward to sharing with you what I know about how to effectively invest directly in real estate in future columns.