[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.
Eric Tait MD, MBA
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.
Going International
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.
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Featured Real Estate Partners
Ok, Eric, back to square one with me.
You are impressive and good at what you do.
If I write you a check today for $100,000 what does that do for me?
What kind of capital do you need for your mega-resort?
I want nothing to do with the active management, just “passive income”.
Please advise.
Joseph, I am honored. I will spare the message boards any more commercials than I have already run. Email me through our site (I think there is a link in the original article or you can reach me on linkedin), you and I will do a needs analysis to make sure that your investment philosophy and objectives sync with this particular project. If it does, we move forward, if it doesn’t I can refer you to other Real estate investors who I know and trust that match with what you are trying to accomplish.
I give Dr. Tait high marks.
Not just because I also have preference for real estate.
I thought his article was very well-written and was not at all a sales pitch. He expressed a philosophy in which he believes and why. People asked him some specific questions about his fund…he answered them. He didn’t call anyone who disagreed with him ignorant or stupid.
You don’t have to agree with him to appreciate him.
I appreciate WCI for including personal stories like Dr. Tait’s. It gives readers of the blog potential for connection if it makes sense. Due diligence and personal investing philosophy will determine.
We all have biases – some based on fact, some based on fiction and overall, much based on our personal experiences and what we have been exposed to in life.
This blog is a great place to express opinions and have civil debates. It’s how we learn and become more open-minded.
I like people to challenge my beliefs – I don’t get my feelings hurt or become offended unless they personally attack me. In the process, I may either become more convicted in what I believe or I may consider another perspective – it’s a healthy process.
I appreciate Eric Tait’s convictions – whether I agree or not. He has passion. He appears to me to be patient and thoughtful in his answers to the many questions that he received without trying to put another person’s opinion down.
The extra hours of “work” that some may want to criticize Dr. Tait for simply means that some people value their time differently. Even though I don’t have a personal relationship with Dr. Tait, I know that his real estate endeavors are not work to him; it’s a passion and he sees the end game very clearly. He has a strong “reason why” and he can articulate it. How many other people can do the same?
There are certain intangibles in regard to active or semi-active real estate investment that cannot be measured in direct ROI – those are the connections and the network that Dr. Tait is building. Investing in real estate tangible assets (not REITS or mutual funds), is an insider’s game. It’s not what you know or even what you do necessarily that allows one the greatest leverage…it’s WHO you know. That’s another form of leverage that hasn’t even been discussed here.
But it’s not right for everyone. If that kind of “work” is not your thing, then active/semi-active investment in real estate is not for you. Period.
Management – my experience has been that I have more control over my real estate investments than I can have in a paper portfolio. Some see “management” as a bad thing or “more work” and even believe that if someone else is managing, they must be skimming all the profits.
Sure, it can happen. But who is managing the index fund, the REIT, the mutual fund? Do you think someone is being paid to handle it for you so that you can be more passive? Sure. Management is not evil if one learns how to delegate to others – in real estate, I have a say in who and how my portfolio is being managed – if I don’t approve, I can change it. For some again, that would be considered work and would not be for them.
I do know that for those who are either behind in their wealth-building platform, either because of life events (health, divorce, business failure) or just poor planning and discipline, leveraged real estate invested the right way is difficult to surpass in equity building. Does that mean everyone should go out and leverage? No.
In so far as supporting our own positions, we all have a tendency to “hunt facts” and data that force a given conclusion. All ideologies do that. It’s fun for a while, but then it becomes a tit for tat match of trying to wear out the other side; a futile exercise at that point.
Eric,
I’d say the rental purchases have been exhilarating and even fun. Part of our business statement is to buy at a 10-20% discount and I like making money going in.
I don’t touch my index investments, I rarely look at their returns. Once a year, I’ll take a look at my AA to ensure it fits my desires.
I enjoy looking at my monthly cash flows and returns on cash and equity on my properties. I like trying to figure out ways and can increase value and rent or decrease expenses.
WCI –
“My average salary those 7 years was ~$180K. I was in the military for 4 of them ($120K a year), an employee for 2 more years, and then one year as a partner. There are many roads to Dublin. A physician salary + a solid savings rate + an optimized financial plan = millionaire in less than a decade. Maybe a little more if you have to start out $3-400K in the hole.”
I stand corrected, Kudos to you. I guess my lifestyle is a little too extravagant to have been able to do that 😉
No worries. Just pointing out there are many roads to Dublin. I’m certainly spending a heck of a lot more money now than I was those first 7 years out. That was my goal- to frontload my savings a bit.
Hi Eric,
I’m intrigued by your article. I have to admit, I was a little thrown off at first by your opinion on net worth and how you say you have a net worth of $2 million, mostly from real estate (I think), but that you don’t have $2 million of equity in the property (because you only own 40% of each property). My guess, from the numbers you supply is that you have assets of around $2 million ($550,000 in single homes x 153% Houston home price capital appreciation = $1.4 million and your other assets and savings), debt of about $1.2 million, and equity or net worth of $800,000. I have a securities background so I’m assuming this is right (assets-liabilties = equity or net worth) on any income statement and I’m assuming the accounting is the same for real estate.
With that said, even if you have acquired a net worth of $800,000 (you own 40% of $2 million in assets) from Houston real estate in 7 years that is super impressive. Given that according to Trulia, the median price of homes in Houston have appreciated by over 150% during that time period it is also totally believable that you could have done it and were perhaps really smart and savvy in how you did it.
But I have a question about real estate debt and how the deals are structured. I don’t understand this because even though I’m a millionaire too, and am around your age, I made most of my money in my job and the securities market so that is my baseline of understanding things. I want to expand to other assets though — I just don’t understand them well.
So here are my questions:
1) When you bought your 11 houses in Houston for investment purposes – did you have to personally guarantee the mortgages in any way? I know Texas is a nonrecourse state which I think means you can walk away from the loan and the bank gets the house but your other assets are unaffected. Was your financing structured in that way – or are you personally guaranteeing the loans? Also, are some of the properties used for collateral of the other properties loan or is each property separate so that if you defaulted on one loan you could keep the other properties? Or are they all linked together like Dominoes where if you lose some of them you could lose the others? I’m a total novice at this so forgive me if this is a stupid question but it seems in real estate sometimes people lose all their properties at once. Is that a possibility for you or did you structure in a way that that cannot happen to you?
2) It sounds like you haven’t sold anything you bought. If that is the cause I would assume that your mortgages should only be about 40% of the value of the property today (due to the 153% price appreciation generally in that market and I’m assuming, perhaps wrongfully that your tenants paid down at least some of the principal on your mortgage). But you say your loans are about 60% of the properties value which leads me to believe that you probably borrowed again against the houses. Is that right? If so, was that difficult to do (i.e. is that something you can do in real estate investing) – and how do you smartly use debt to leverage your gains in one property to control more assets (if that is what you did)?
3) When you were first buying $50,000 homes in Houston what was the annual rental income you expected as a percentage of the price of the property? (I.e. what was it renting for before renovations – and what did they rent out for after renovations). I ask this just because I am trying to understand what the first deals really looked like to the naked eye and so we can understand your process better and see the world as you saw it in 2009.
4) My understanding is that to be good at real estate investing it is critical to watch out for your cash flow and be smart about your leverage. I’ve noticed that the richest real estate investor in the U.S. – Donald Bren – who owns the Irvine Company in Orange County, CA keeps leverage rates at around 40%, whereas the industry as a whole has about 60% leverage. How do you decide to how much leverage to use in your personal and fund real estate investment strategies and what is your reasoning for how much leverage to use?
Thanks again for the great article — you’ve truly helped educate the WCI community and even though you caught some flak for people who didn’t agree with all of your statements – I think we all appreciate you taking the time to educate us about your particular style of investing and how it has benefitted you in your own life.
Hey Dan,
Thanks for the comments, I feel like I have opened the Kimono a bit too much as it is, my family is freaking out and I have gotten calls from friends who have read this thing, but heck, we’ve come this far right.
The Networth number is the one your typical banker would recognize, assets – liabilites. It is primarily in investment real estate, but I have included our personal home, our vacation/weekend home, cars, cash. No home furnishings or anything like that. I also did not include a particular investment that has no physical assets, but generates a healthy income, it would be too subjective to put a revenue multiple on it to come up with a value. It is also closely held and non-transferable so better to just keep it out. We also have an apartment building and equity in our Funds in Belize included. All of the Houston property is wholly owned by corporations that we control, we have no equity partners in our current Houston properties, we do have debt partners though.
1) No such thing as a stupid question, these are all great action oriented questions. Yes, Texas is non-recourse, we do not cross collateralize, though we do have blanket loans with individual lien releases on a couple of properties (a blanket loan is where one bank lends across multiple properties based upon each individual properties performance). We do personally guarantee the loans, but because this is a non-recourse state, the bank will only get the property if somethings goes catastrophically wrong. They are not linked like dominoes, so one falling would not affect the other properties.
2) You are correct, we have not sold anything. I tend to be conservative in my estimation of price in our portfolio, again because I do not care so much about the increases and decreases I do not really look at it. I would say the blended LTV is closer to 50% if I had to really analyze it. And in all honesty, that is not the optimal thing to do, that is leaving too much dead equity on the table that could be generating income in other assets. Texas is interesting in that statutorily you can only cash out refinance up to 80% of a residential property’s market price. So the bank actually puts a break on how much leverage they will allow you to have here.
Personally I use a sensitivity analysis to look at what would happen if rents declined 10-20% in the market, if the amount of debt coupled with all of the expenses (taxes, insurance, maintenance, vacancy, HOA fees) does not create AT LEAST $150-200 a month in positive cash flow, then I either pass on the deal or lower the leverage amount accordingly.
3) Great question!!!! – I actually cover this in the series that I wrote about single family home investing that I hope WCI runs (hint hint). So what you actually do is look at the market rent in the neighborhood for properties that are already in great condition or newly renovated. The one thing you cannot control is the market rent, it is what it is, it does not matter how much renovation you do, you cannot go much past $100 above market rent (at least not down here). But the flip side is not true, if the rental product you are putting out is not up to the neighborhood standard, you will definitely get less rent or sometimes, no renters at all. That is why the optimal business model is to fix everything on the front end during initial purchase, it cuts down on maintenance costs and phone calls and leads to happy tenants who want to stay for many years.
I do not go by the % of property price vs. rent, I run what the actual numbers would be after purchasing the property, what the debt service, expense etc…. would be and then look at the market rent. I want to achieve a minimum of $200 a month cash flow which is about the average in an appreciating market with normal (6-8%) interest rates. Right now, because interest rates are so low, you can buy full price properties that will still cash flow $400 or more after all expenses.
4) So as it stands right now, I do ALOT of market research so I can understand the trends and what the growth drivers are in a particular area. Then I look at the revenue stream I am trying to capture and then determine what I can pay for the asset to achieve my desired return. At this point, because I am still in build mode in terms of my cash flow streams, I use the maximum amount of leverage on a property that will ensure me at least a 10-15% return on my invested capital. The key in real estate is not today’s tenant, it is the tenant in 5 years. Is someone going to pay you to use your asset 5 years from now, and are they going to pay you more or less than they do today, how many of those tenants are there, is that number increasing or declining? If you cannot answer those questions, you probably shouldn’t be investing in that area.
Now from a personal investment philosophy, once I have a cash flow number that I am happy with on a monthly basis, unless there is a screaming deal, I would probably start taking our personal portfolio’s leverage down if we were above 70% in any particular asset. Currently we are not above 70% in any of our assets, but I am also on the look out for a larger apartment project so we will see.
Feel free to ask any clarification questions if you like.
Any reason you don’t have each property in its own LLC?
WCI –
One big reason is the cost of maintenance. My accountant basically charges me $500 per LLC for tax returns. It doesn’t make economic sense as that is in some cases more than 1 months income on some of the properties.
So to mitigate the risk of not having one property per entity, I made sure that I have a decent size general liability policy on each LLC that had more than one property. I also made sure that we kept a decent size debt load against the property, the last thing plaintiff attorneys want is a charging order against and LLC where their client is liable for the proportional debt and no way to force distribution payments. Now the apartment project and the Belize funds are all in their own LLCs.
What I am in the process of doing is putting them into series (series LLC’s). My asset protection attorney says that Texas has decent case law surrounding the Series LLC now, which did not exist when I first set up all of my entities. That will keep the same number of tax returns, but give each single family property their own LLC.
Wow! I’m really impressed with how well you thought out each of these steps. It seems to me that you’ve taken steps to be really responsible with the leverage as well as to give yourself a margin of safety on your investments so that the market could take a little bit of a hit and you’d be okay. You seem to be going about this in a very smart and well thought out way!
It also strikes me as tremendously clever to have bought a number of smaller homes as opposed to buying one or two larger priced homes like many real estate investors I know have done. That seems not only to give you a larger pool to rent to but also that it can reduce the hassle factor in real estate since if you have 40 toilets that might need fixing instead of 4 you might have more influence over service providers like plumbers or handymen. If I am reading your decisions right – they seem like you went about this a different way than some others but that your approach seems so much more clever than what I’ve seen elsewhere.
I have just two very quick follow up questions.
1) I know that Texas does have deficiency judgements in their property code (section 51.003) where the lender can sue a borrower you to recover the full value of the mortgage, even after a foreclosure, in the event of a default. You say if things went catastrophically bad you wouldn’t be on the hook for the full amount of the mortgage (even with your personal guarantee) – you’d just lose the house to the lender. Are you not subject to deficiency judgements because your debt is the first mortgage on the houses? Is it standard for the first mortgage to not be subject to deficiency judgements? I heard that a second mortgage or more junior obligations on the debt hierarchy often are subject to deficiency judgements and banks in Texas sometimes do sue on those junior obligations to recover the full value of the debt even if it is more than the house is worth. How did you avoid being exposed to deficiency judgements since they do seem to exist in Texas even though it is a non recourse state?
2) What is the typical length and type of the mortgage when you buy houses as investment properties? Is it a 30 year fixed rate mortgage (like many people use for their personal residence) or is the type (fixed rate, interest only ect.) and length of mortgage different when you borrow in real estate as an investor? When investors buy apartment buildings or hotels, what is the typical financing instrument like? Is the mortgage usually for a term of 30 years and fixed rates as well or is something else standard in the industry. If it isn’t too personal — would you mind explaining what length of mortgages you choose for your single family homes and apartment buildings and how you decided that would be the best option for your investment?
Once again thanks for taking the time to educate the WCI community. I do hope that Mr. WCI gives you more opportunities to write more articles for the blog because it seems that you’ve gone further in the real estate journey (and potentially seen more) than most of our members. Your knowledge and experience in the field are invaluable for those novices like me who are thinking about branching out from publicly traded securities and are trying to educate ourselves so that we can attempt to make good investment decisions in this field.
Thanks for the kudos, I truly appreciate it.
So, the decision to purchase many lower priced homes as opposed to fewer more expensive homes is because we like to be in what we call work force housing. One of my mentors calls it the “Walmart” approach to investing.
We go after the average consumer in rental real estate. That means we look for property that the average person in our market can afford. (I go into the metrics of that in my series). So that keeps us in the price range of 85K-150K, we do this for a couple of reasons.
1) It gives us the widest swath of potential customers.
2) In the face of an economic downturn, people will trade down from more expensive properties.
3) In an up market, these are starter homes, so as more people are able to purchase a home, this type of property is in demand so the prices will rise.
So it hedges us up and down.
As for the deficiency judgment, we would technically be on the hook for the deficiency that is left over between what the property would ultimately be sold for and what was left on the balance of the mortgage. It is possible for a bank to come after us for that, but I actually own very little by way of assets. So there would be very little for them to come after to satisfy that judgement.
As it relates to mortgages, for single family homes I recommend investors use all 10 of their fannie mae/freddie mac 30 year fixed rate mortgage slots before looking for private bank financing. It is the cheapest, longest term money that you are going to find. I also mentor people to purchase property separate from their spouse as each of you has 10 slots for fannie/freddie mortgages. My wife bought our principle residence in Houston with her credit, I purchased our vacation home on my credit. We do not own any single family properties together and that is by design to take advantage of those slots. Also, it helps to isolate credit if something goes terribly wrong, only one person in the household would have a blemish on their credit report.
As for commercial mortgages they typically run for 5-10 years in terms of their fixed rate period but the amortization table can run from 15-40 years. This is standard, but you can find many variations to this with interest only periods, higher interest rate mezzanine debt for purchase money etc…
Right now, because money is so plentiful interest rates are being forced down and amortization tables are lengthening, there is real competition in the lending space right now and it is a great thing for equity investors.
In our portfolio we have a mixture of lines of credit, portfolio loans (loans banks keep on their books and do not securitize on the open market), and 30 year fixed rate loans.
We use the lines of credit because I hate to dump money into a mortgage and not be able to use the equity, also I can pay debt down more quickly if I choose because a LOC is interest only and when I have spare cash I just dump it back on the LOC. The blanket loans were used to establish a relationship with a local bank, and the 30 year fixed is self explanatory.
Although you kept the homes relatively small, you’re also not investing in $30K homes, presumably for the reasons noted here:
http://www.biggerpockets.com/renewsblog/2015/03/03/why-you-cant-make-money-on-30000-houses/
WCI –
Correct, I know people who make money is this area, but it is much more management intensive than I care to be.
What a great article! Congrats on all your success Eric. Something for us all to aspire to… Agree with WCI that there are many roads to success and you certainly seem to have found one…
Thank MM –
I just wanted to add as much value as possible to the site, I appreciate the opportunity.
Hi Eric and Jim,
Thanks for this excellent post, which I have read thru with much interest all of the comments as well. I am a frustrated doctor who is looking for an alternate income stream to supplement and eventually replace my stressed practice income from decreasing reimbursements and increased regulations, paperwork, etc. In fact, I have spent a lot of time thinking about this for the past few years. I figure it is too late for me to become the next star athlete or celebrity, I do not have any business acumen to become a CEO/ entrepeneur, and I have never taken a financial course to become a successful wall street tycoon or hedge fund manager. I made the mistake of just focusing on learning medicine throughout my 9years of residency and thinking things will work itself out, but my surgical practice was a rough wake-up call for me. In retrospect, I should have taken some finance courses in college and joined the MD,MBA program that was offered at my med school so I do not feel so helpless when discussing these business issues. Nevertheless, I have done my best to catch up by reading as much as I can now about finance, including the Rich Dad series and Jim’s book and WCI blog. Anyway, going back to my point, after reviewing options, I think real estate may be my only salvation to freedom from medicine. However, like many other commentors, I am afraid of the significant risks of going into real estate and have been stuck in making the leap. I remember my parents rented out our house in Chicago when I was young (to a doctor family of all people!) who ended up destroying the house, not paying rent, and requiring legal fees and a lot of stress to evict them after over a year. I have also heard of squatters in rental properties who refuse to leave and there are laws protecting them. I also have a friend with rental property who was taken to small claims court for not returning $500 of a $7500 deposit after their tenant threw a party before leaving, breaking the garage door and ruining the carpet with heavy stains and dirt throughout the property. I am also the most unhandy person ever and could not help with any maintenance issues should they arise. Property managers are an option, but similar to actively managed funds, they probably would take whatever little profit is left (and more) after the mortgage, taxes, insurance, maintenance, etc are paid for. Thus, I do not think rental property would be the way to go for me personally, and I am still amazed some people make money with rental properties.
However, I did want to ask your opinions on the other big class of real estate investments that noone has mentioned yet- flipping houses. I have been watching on HGTV the show ‘Flip or Flop’ (please don’t laugh), and this seems like something I or anyone else can do. They buy a distressed property at a discount, have a contractor fix it up, then sell it at a significant profit. This would remove any trepidation of having dead-beat tenants who do not pay, destroy the house, or try to sue you for falling on your property. You also do not have to worry about maintenance with a call at 3AM that the toilet is clogged or that the dishwasher broke or the entire roof needs replacement. I also understand you can roll your profit into buying another property to avoid paying taxes (?1031 exchange) and if you flip a few properties a year, you will easily be doing better than most physicians that I know. It seems that if you have a reliable contractor who knows how to renovate homes and a good realtor to find the deals and help buy/sell the flip, you do not need to spend significant time or effort with this endeavor. Can you please comment on this and explain any obstacles or difficulties with this method? What am I missing? If it was really this easy, why is not everyone doing it? I would appreciate your, or any other bloggers, honest feedback and share any experiences with flipping, good or bad.
Thanks in advance for your feedback, PG.
Flipping is a second job. Are you really better at that than practicing medicine? I mean, there are lots of ways to invest in real estate, but flipping properties is by far the most time intensive. Can it work? Sure. But it’s nowhere near passive.
I concur wholeheartedly!
If you own your own surgical practice you have so much flexibility. My husband’s go to book on practice management is “John Pinto’s Little Green Book of Ophthalmology.” It is applicable to every field of medicine. You might enjoy medicine more and have more time for outside business pursuits like flipping homes if you address whatever in your current practice is most stressful to you. Best wishes!
Hey PG – thanks for engaging and sharing some of your background and your fears. If you are voicing them, there are a ton of others who are not, so lets see if we can work through some of them here.
“I should have taken some finance courses in college and joined the MD,MBA program that was offered at my med school so I do not feel so helpless when discussing these business issues.”
For most physicians this is not necessary, there are enough free courses on the web from reputable sources and schools so that you can learn the language of business. The biggest thing I think you should be able to do is be able to read the:
1) Income Statement
2) Balance Sheet
3) Cash flow statement
And now how each flows into the other. I am sure you can find that on youtube.
Here is a good one from Khan Academy
https://www.youtube.com/watch?v=Z7C4cz2HkeY
Next re-read “The Cash Flow quadrant” by Robert Kiyosaki. It shows you how the poor, the middle class, and the rich make and spend there money and how it relates to your own personal balance sheet so you can analyze your own spending and investing habits and mind set.
“I remember my parents rented out our house in Chicago when I was young (to a doctor family of all people!) who ended up destroying the house, not paying rent, and requiring legal fees and a lot of stress to evict them after over a year. I have also heard of squatters in rental properties who refuse to leave and there are laws protecting them. I also have a friend with rental property who was taken to small claims court for not returning $500 of a $7500 deposit after their tenant threw a party before leaving, breaking the garage door and ruining the carpet with heavy stains and dirt throughout the property.”
There is sooo much in here and its great! Let’s break it down.
Your family’s experience is typical of many newbie landlords who never learn how to effectively manage property. What you are doing here and in the next sentence is using what is called “referral past experience” to frame your beliefs. This happened to other people not you, and while it is a cautionary tale of what not do in residential real estate investing, it does not have to be your experience.
My dad lost his lunch owning a small apartment building in Manhattan, looking back, he had no business being a landlord because he did not know what he was doing. Had I used his referral past experience I would never had started in real estate investing. I learned how NOT to do it from him, but I had to go out and seek how to ACTUALLY do it effectively.
Now let’s look at how these situations could have been mitigated. If I had to guess I would lay good odds that your parents did not do a thorough background check on the family they rented to, including a credit report, speaking to previous landords etc…. A mentor of mine says, “tenants don’t just turn bad in your property, they were bad before they got there.”
That is not to say legitimate things happen to good people, but good people will work with you to get out and leave the property as they found it. It is your (or your property management co’s.) job to find good people through thorough background checks.
Let’s take the squatters issue, there are what are known as tenant friendly states (usually found in the the more liberal leaning blue states) and landlord friendly states (usually mirroring the old confederacy). This is what is known as political risk in real estate. I personally have no desire to own month to month rental property above the mason-dixon line, just for the reasons you stated.
But you do not have to invest where you live, as another of my mentors says “live where you want to live but invest where the numbers make sense”. I personally keep my money in landlord friendly jurisdictions.
If you decide to keep a full deposit or a portion of one, there are strict rules that must be followed in the process. You take photos of the damage, and then you send an itemized bill to the tenant along with a receipt showing what was paid to have the damage repaired. You may still have to go to court because anyone can sue you for anything in the U.S. of A., but you are going to win.
Let’s take your next section –
” I am also the most unhandy person ever and could not help with any maintenance issues should they arise. Property managers are an option, but similar to actively managed funds, they probably would take whatever little profit is left (and more) after the mortgage, taxes, insurance, maintenance, etc are paid for. Thus, I do not think rental property would be the way to go for me personally, and I am still amazed some people make money with rental properties.”
I personally have NEVER done any maintenance to any of our properties. It is not my role, my role is the asset manager and coordinating a team to get any and all work done. You are an investor, not a handyman.
A good property manager is worth their weight in gold, the issue is finding one. One way is to make sure that the owner of the property management company owns rental property themselves, it is an amazing short cut to finding good property managers.
Some charge a flat fee, others between 8-10% of collecting rental revenue (less if you have a larger portfolio of properties).
The key to making money with rental properties is a function of being able to buy an asset at a price relative to its cost of financing and ongoing expenses that is able to give you the back end return that you want considering the market rents for the area. You cannot change the market rent, so with that understanding you have to buy an asset at a specific price to get your return, if you cannot, you have to wait, or look in a different market, there is no guess work, it is simple math. (for out of area property, you have to factor in the 10% property management fee as well).
Flipping is a job, it is speculating, and in my opinion fairly risky. Can it be done, yes, is it the highest and best use of your time, no.
” I also understand you can roll your profit into buying another property to avoid paying taxes (?1031 exchange)”
You cannot do this on properties that you own for less than 1 year and if your flip is taking longer than a year you are probably losing money. Also, some really conservative accountants believe that you have to hold a property for at least 2 years to qualify for a 1031 tax deferred exchange.
What you choose to invest in is a personal decision, but do not eliminate direct investment in a whole asset class because you think you cannot be the one to do it, there are myriad ways to directly invest in real estate along side experienced investors, and with the prohibition on general solicitation for private investments getting lifted you will have a ton of opportunities available to you. Now you just need to learn how to vet them.
Amen
Thank you Jim, Dr.Mom, and especially Eric for your in-depth response to my inquiry. I realize you are all experts in financial and business acumen, and I appreciate your taking the time to counsel novice morons such as myself, and of course for having the WCI blog to help us clueless physicians have a ‘fair shake’. My father is a college professor who told me all my life to study hard, get good grades, and you will do well (sounds familiar?- ‘poor dad’). He has zero business sense and got screwed whenever it came to any financial transactions including losing money in retirement stock/bond investments as well as the house rental incident I wrote about before. Apple does not fall far from the tree, which is my problem. Eric, your analysis of my ‘referral past experience’ was pretty accurate. My fear of investing any time or money on rental property is significantly affected by past negative experiences. In fact, another fun story, when I moved after finishing my training in Ohio, I almost became an accidental landlord when my house did not sell. Multiple realtors told me the market was bad and I should just rent it out until the economy improves, but I did not want to do anything related to being a landlord from past knowledge, especially from 2000 miles away. Thus, I kept praying and dropping the price until finally we sold the house 3 years later for much less than we bought it, requiring me to bring money to the table. Another negative experience with real estate. If I can ask, where did you learn how to be an effective and schrewd real estate investor as well as learn how to be a good landlord and know all the rules? Online videos and books? Your MBA at RICE? Your sister/family’s business influence? The school of hard knocks?
Ironically, I now live in southern CA where the average cost of a similar home is easily 10x more expensive, and I have found the market to be completely the opposite where multiple full cash offers and bidding wars are snatching up tear-down properties for millions. It is a completely opposite bizarro world out here, which is why I am still renting after 6 years. Physicians are considered the lower class out here! I think you were spot-on about knowing your particular market, and after some research, as well as your comments Eric, I think CA is not a good area for rental property as I have found typical mortgages with 20% down is still a lot more expensive that market rental rates are out here, even if magically I am able to buy a property. As it is a democratic state with a lot of governmental regulation and inefficiencies, I believe the tenants have all the rights here and there are many taxes and regulations making it difficult to have rental property here. This again is all theoretical because unless you are a hedge fund manager or business tycoon or A-list celebrity, I am not sure how anyone can afford to buy property out here. I would prefer not to be a landlord from a distance, and before you say anything, I have no interest in moving out of state as my parents keep lecturing me to do. Aside from high taxes and cost of living, I do love living out here. Can you argue with 80 degree sunny weather in the middle of winter?
The reason I brought up the whole house flipping thing is because after my local market analysis (ie. looking around) for the past few years, I do think there is more opportunity to make money flipping here than other places due to this unique market. Properties are very expensive here, and when they appreciate, they appreciate tens to hundreds of thousands (sometimes millions) of dollars per year! That show Flip or Flop is based here in Orange County and if they can do it, I am thinking why cant I? We are all smart physicians who passed multiple exams to get to our position, it shouldnt be that difficult to learn this stuff, right? I just need to know where and how to learn this stuff without going bankrupt in the process. Thus, I am interested if you have, or any other bloggers out there have, any experience or stories of flipping houses, good or bad, so that I can get a better sense of methods, as well as risks and pitfalls with this potential endeavor.
Thanks again for any and all feedback- PG.
I’d spend some time on the Bigger Pockets forum if I were you, but remember that there is a lot of “cheerleading” there, meaning people accentuate the positive but not the negative so much. But remember this, house prices go down as well as up, and prices tend to be sticky…meaning they don’t necessarily drop in a downturn, but stuff doesn’t sell. It just sits there…while you’re paying the mortgage trying to sell what you bought and fixed up. There is plenty of opportunity to lose money there if not done well.
If you want to invest in a market outside your own, but don’t want to go the REIT route, the syndicated property approach works well and is pretty passive. As a doc, you probably qualify as an accredited investor, giving you access. It is also easily mixed with index fund/stock/bond investing which makes it attractive. But it’s hardly the second job you seem interested in. The fees are also an issue. The syndicators are definitely making money on the deal, whether you do or not.
WCI –
“The fees are also an issue. The syndicators are definitely making money on the deal, whether you do or not.”
That is not always the case, it depends upon the syndicator, the type of project, and the competitive market.
In development projects, the sponsor usually has to take a fee and you as an investor want them to because there is no cash flow during the construction phase of the Project and you want to make sure that if something happens to them, the syndicate can bring in another sponsor to finish off the project.
In cash flow focused syndications, often the sponsor subordinates their return until the investors begin receiving theirs.
In our Belize Fund, as the syndicator I do not receive any compensation until investors begin to receive theirs. So it would not be accurate to say that the syndicators are definitely making money on a deal whether it makes money or not, you have to get the business plans and look at the different structures.
Agreed. But usually there seems to be some kind of acquisition fee and management fee in addition to the formal “return.”
Yes, you just don’t want it to be egregious, many times it is to cover the cost of the legal work to become SEC compliant (~15-20K) to set up the syndication. You then have to pay for due diligence (market analysis, appraisals, Phase 1 reports, pre-paid insurance etc…) all of those operational costs of the syndicate have to be charged upfront.
Let’s say in an apartment project, there is going to be an asset management fee that goes to the sponsor even if he or she brings in a 3rd party property management company because they have to monitor the property manager, pay the bookkeeper, send out statements, and usually sign on the line for the debt.
So it is a matter of proportionality so that the problem that you highlight (getting paid whether the deal is working or not for investors) does not misalign incentives between the sponsor and investors.
I agree.
PG –
I am cutting and pasting this from an earlier comment I made –
I am an unabashed Robert Kiyosaki Disciple, so we start with the triumvirate. This gives you the why, which to me is more important than the how –
1. Rich Dad, Poor Dad
2. The Cash flow Quadrant (this is probably the most important book he has written in my opinion)
3. Rich Dad’s Guide to Investments. (Teaches you what the wealthy really invest in)
Moving on to the tactical books on how to purchase and manage –
1. Equity Happens by Robert Helms and Russell Gray
2. Real Estate Investments and How to Make Them – Milt Tanzer
3. The ABC’s of real estate investing – Ken McElroy
4. Insider Secrets to Financing your real estate investments – Frank Gallinelli
5. Rental Houses for the Successful Small Investor – Suzanne P. Thomas
6. The ABC’s of property management – Ken McElroy
This will get you very far down the road to learning how to effectively invest in single family homes. Also, join your local Real estate investing club (to find it look at the National REI website) and if you can, find a local investment mentor who is willing to guide you as well.
Don’t be afraid to ask someone for help, as a lot, I find that successful real estate investors are more than happy to pass on their knowledge because someone did it and continues to do it for us.
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End of pasted comment
But in all honesty, your mind is made up to not do this yourself, and there is nothing wrong with that.
You might consider investing with someone who IS and experienced house flipper in your area and that would be a portion of your speculative portfolio. You would then roll that money into syndications of larger properties for long term cash flow and tax advantages. I would limit the position size of your portfolio that goes into flipping though.
I have a couple of friends in southern california who put together syndications in real estate I can introduce you if you like.
Two random thoughts…
1. Change the voices in your head. You are smart and intuitive enough to learn not to be a “mark” for anyone else. Continue to educate yourself so you understand fully what you are getting into with whatever investment path you choose. Remember when you invest that you will not be dealing with people who function with the same fiduciary duty that you do as a physician.
2. It’s fine to dance with the one that brought you here. Something attracted you to a career in medicine and you have devoted many years to it already. Medicine can be a great financial springboard for other endeavors. Address the issues in your practice. As you hire business help to run the practice you will free up your time and begin to form important contacts to help you in your desire to pursue real estate investing. One personal example…my husband operates his practice as an S Corp. We set up a separate LLC to own all the office equipment. We pay ourselves rent monthly for the equipment creating a passive income stream from otherwise more highly taxed active income. This same LLC can be used to invest in property if/when we find an attractive opportunity.
Best wishes.
Are you telling me that those “reality shows” aren’t real? 🙂
WCI –
I think it would be interesting exercise to see how other people who are reading this define wealth.
So for the record. I define wealth as:
The ability to maintain one’s standard of living (whatever that may be) without working the typical 9-5 job (trading time for dollars) and not depleting your assets by spending down your savings or selling off assets.
I will readily agree with you that to the average income american I would be considered wealthy using my definition, but my material comfort is not at an average level because I have worked harder than the average american as have all of us in healthcare.
Also, while I am not overly materialistic, I do enjoy varied experiences and am willing to pay for them, so restricting my lifestyle so as to not run out of money before I die, is not a way I plan to live life especially since our generation’s life expectancy continues to grow.
Having enough.
I just went through the article and the very interesting comments. Very nice article and great discussion thereafter.
One observation I would like to add is that for most of us mortal investors a simple, hands off, diversified index portfolio does as good if not better over time. Why spend time and energy that is better spent enjoying your life?
Simply investing through tax advantaged vehicles such as Roth IRA, 401k, 457 and 529’s our net worth has grown from negative 150k to over 1.1 million in just seven years. This required no real effort and no hardship…
You’re right that index fund investing in retirement accounts is very easy and certainly works.
Syncretist –
I agree with your no real effort comment, I do not agree with your “as good or better over time” statement, but that will play out over time.
It really is a matter of what you are wanting and expecting out of your investment portfolio.
I expect mine to give me more time to do what I enjoy and more income every year. I want the ability to retire at a relatively early age (even if choose not to).
No one has been able to show me how saving money in tax deferred accounts would allow me to accomplish that, hence I invest the way that I do.
I really just want to demystify the process for people so that they can see anyone can do it, I am not special, I just have a very clear focus for my money. I want people to see for a relatively small input of time spent learning, they can control their financial future on their own terms for the rest of their lives.
The real fear that I have for people is that when the next paper asset crash comes, the Federal Reserve will not be able to print money to re-inflate that market like they have done over the past 7 years. And a good bit of the paper riches that have been accumulated is going to be wiped out.
No one has shown you that? Is this the only post on this site you’ve read? Here’s how you do it:
1) Make a lot of money.
2) Save it. Tax-deferred accounts help, but a taxable account works too.
3) Get a reasonable investment return.
4) When stash is big enough, pull some out every year and spend it. That may be some combination of dividends and LTCGs depending on the yield of your portfolio and your particular withdrawal rate.
It’s not that complicated. There are some sequence of returns issues to deal with, some adjusting as you go issues, and some retirement account rules to work around (not nearly as big a deal as most think, for instance the SEPP rule lets you get into your retirement accounts at any age without penalty.
I will elaborate a little more on my business experience for whatever it’s worth. I work in a small but mature commercial real estate development/management company. We develop senior housing. We have sufficient working capital on hand that future development proceeds are not necessary to continue doing deals. Our upfront development costs are reimbursed at the construction loan closing. An outside private equity group puts in 100% of the equity for ownership of 50% of the deal. If the deal, when stabilized, spins off $1m/year NCF we make ~$500k/yr without having a penny in the deal. Our risk, beyond the market risk, is the loan guarantee that will burn off when we hit predetermined benchmarks. Say I have $100k left after taxes/expenses annually, that money is invested in the market not back into real estate. In other words we use real estate to make our money but we use the market to grow/save the money we earn. I’m glossing over the details (covering overhead, etc.) for simplicity sake.
Jason
Great business model!
Do you guys have an equity stake in the final senior housing project or just manage it?
Do you guys hold it for long term cash flow, or do you develop them to sell off to institutional investors if you don’t mind me asking.
We are the GP, we own 51% of the deal, we also have a long term management contract. We are long term hold, we were lucky to find an investor whose interests aligned with ours. It goes without saying you need a long term successful track record to get these terms. We could probably raise our own equity for cheaper dollars but we haven’t gone down that road yet.
Jason.
You have what we are all looking for. Congratulations!
I will assume then that you can personally retire with your equity stake in the firm, and since that cash flow satisfies your needs, you take your excess and move it into the market?
Or am I missing the mark?
Eric I am relatively young (mid-30’s) but yes your take is accurate. Development is always interesting, foremost it allows (demands) a working knowledge in so many different fields from engineering, architecture, insurance, finance, to law. It can also be frustrating, a development can take 4-5 years before you see a dollar. Two years for entitlements (more challenging in the northeast), a year to build, 12-18 months for lease up etc.
Jason –
I am getting a taste of that in our Project in Belize, the good thing was all of the entitlement work had already been done as well as all of the environmental impact work.
So all we needed was a cohesive plan and the capital.
What you describe is why I had initially shied away from commercial development here in the U.S. The costs to acquire the land and to build were usually too high to justify holding the property after completion, so you would need to sell to make money.
But I see with your ability to have management fees and possibly a higher revenue stream from rents, development to hold works in your model.
That is great!
WCI –
My goal is to be able to retire at 45 with at least 20K a month in passive tax free income. That gives me 6 more years to do that.
1) Make a lot of money – relatively speaking, check we have that.
2) Save it – Not a fan of that, I don’t like holding U.S. dollars if I can help it and it would cramp my current standard of living.
3) Get a reasonable investment return – Let’s say I save a 100K a year for the next 6 years, and assume the stock market goes up 10% a year for those 6 years. I will end up with around 727,717 dollars (rough math). I would have to then make a 10% CASH return every year to receive around a 6K a month income stream. Add that to what I already am bringing in passively and to what will come out of Belize and I would not reach my goal.
Also, this scenario requires there to be a perpetual bull market. We are currently in the 4th longest bull market in history and it has been fueled by FED money printing, I would have to bank on that continuing for the next decade and more to reach and maintain my goal. And this is without taxes being taken out of the gains during the capital growth phase or during any draw down phase. I don’t think I’ll make it by age 45 this way.
4) The nest egg theory – See my bull market comment above. Between having to rely on the paper asset market continuously going up, finding paper assets that can generate a 10% cash return every year, and having to save 100K plus a year, and lastly having to pay taxes each year on those gains and cash distributions, I do not see how it is possible using the strategy you outlined in the time frame I am looking at.
There are too many variables that have to go exactly as I need them to and it has to remain that way indefinitely.
The flip side, I could take the 100K a year, put 25K down on 4 houses a year that each generate $400 cash flow a month, do that for 6 years and that is $9600 a month in passive income. Add that to what we already have and allow Belize to kick in and I have reached my goal. This is not my plan, as I do not want that many individual homes, but I COULD do it without having to have real estate prices go up.
If they do go up hey, it’s a bonus, if prices go down, we can buy more in a year and reach the goal more quickly. It doesn’t require that the real estate market continue to go up to achieve.
This is what I mean about taking a relatively small amount of time to learn a skill set that can put you in a position to not have to worry about your finances no matter what the broader market is doing.
Eric,
First let me start by thanking you for all the time you put into this blog post and answering all these questions. Now, lets take your comments above and relate them to an average investor. Lets us say that indeed I have no assets and no debt except my mortgage and from this point on I want to invest $100K/yr. I may buy index funds hopping for a historic average return on a 60/40 portfolio of 8.7% (This is long term that includes ups and downs) or I can buy real estate as you alluded 4 properties leveraging myself 4:1 to bring in $1600/month. I looked in the real estate market in Houston and I can’t find a single property that I can buy for $100K that will provide $400 in profit over the mortgage, maintenance, and property tax with a 10% of the time the place is unrented. I do see plenty of homes that will provide $250-$300 But they cost closer to $140K for the property. Therefor in this example I will be generating $900/month
I can easily invest in the market on margin possibly 4:1 such as you do and increase my returns several fold far surpassing real estate investing. This is clearly high risk and can leave me broke if I run into a solid recession.
If you don’t mind, I will bring in the worst case scenario for real estate. Lets take Phoenix for example that took a massive hit on real estate in 2008/2009. Lets assume that 6 years down the road I now have 24 properties and we hit a similar housing crash. All of a sudden all my properties are now devalued below my purchase price. Since I am renting to the working class, they are at high risk of layoffs or furlows. A chunk of my tenants now can’t afford to pay rent and my cashflow goes negative. To make matters worse 1 tenant completely destroys the house costing a fortune to repair. This is how being so highly leveraged is very dangerous and another housing crash can devastate such a business model leaving me broke in just a matter of a year or two. In the first example my stocks will return back to baseline as long as I don’t sell. In the second example I lose a very large amount of my real estate forced to sell at a market low. This indeed can happen in Houston as it did in Phoenix.
My point is that there is no free lunch. You take increased risk through leverage and therefor get higher returns. It makes complete sense, but don’t fool yourself or us that it is risk free.
My next point is that for me to buy 1 investment single family home would take a great deal of time for someone like me. First I would need to take the time to learn more. Then find the property, close on the property, find a contractor to repair the property and then get it rented out. For a guy like me, I would assume this process may take 20-30 hours of my own time if not more. Since I currently make over $250/hr I can instead take those 20 hours and make an extra $5000. That is about $3000 in cash after taxes. Instead of spending an extra 80+ hours trying to buy and rent 4 properties, I can instead work a little harder (80 hours lets say) for that year and generate $12000 in after tax income. Which I can invest in index funds generating 8.7% a year. Plus I get to invest the extra $100K to also grow at 8.7% a year. No leverage and therefor decreased risk. If a big downturn occurs, I rebalance, and still have the investments on hand. Not to mention I am not taking hours upon hours of managing property for a measly $300 or 900 a month (that’s less than 4 hours of work.) On my days off, no one calls me, no one bothers me, no one is late on rent, and I don’t have to go and get a handyman or myself to install a new dishwasher.
Which brings me to my 3rd point. Obviously real estate is fun for you. But, don’t forget that it takes time and effort. Owning rental properties is a second job. You might love the second job more than practicing medicine and therefor want nothing more than to get out of being a doctor, but for many others owning rental properties is work, sometimes very hard work especially when first getting started.
Point number 4: You constantly talk about cashflow, but cashflow is not everything. Just because something is not throwing off cash doesn’t mean I am not making money or building wealth. In all honesty, I currently don’t want any of my assets throwing off cash. I don’t want to pay any more taxes than I need to until I retire and withdraw at a lower tax bracket. Currently cashflow comes at a 39.6% tax. Even with depreciation, I am still paying some taxes on that cashflow actually cutting into my return. With paper assets I can always decide how much cashflow I want and when I want it. I can also choose how I get taxed on it. I can sell appreciated shares and pay long term cap gains, I can sell assets that have not appreciated or even at a loss cutting the taxes paid.
My conclusion: Real estate is clearly an excellent investment when you are willing to take the time and effort to learn the business, and actively participate in the business. It is a risky second job as to make a reasonable return you need to leverage your assets. But if done properly and with a little luck should provide increased returns over simply owning index funds.
Nicely said, I think you are right, Eric does enjoy RE more than medicine and probably he will make more money than we do, but he has worked very hard to get where he is. Wish him luck.
Now Dr. Kahn,
you can easily ask me if I like RE more than medicine, don’t project that onto me. If I did I would have left medicine already, but there is not alot mentally stimulating in RE as a cash flow investor. Now as a developer, you bet, that can be fun and exciting, but buy and hold real estate is a relative snooze.
Also, it is not about “making more” than anyone else, it is about fulfilling your own personal goals and dreams, life is not a competition. Either your investments are moving you towards your goals or they are not. Real estate happens to move me towards my goals better than any alternative that I have found.
I have to say its been good reading your comments back and forth . You definitely do a good job of penning it down, dont give up and maintain Your may be the first article to reach over 250 comments and you havenot lost your cool yet.
Kudos
Thanks,
Dr. Khan,
I won’t lose my cool because:
1) I am doing exactly what I am talking about and getting results I am happy with, my ego is not really invested in being right about this. If something better comes along, I will switch to that, it’s the outcome that matters.
2) I am a teacher at heart, you have no clue how many people reach out to me by email asking for advice or guidance or just thanking me for demystifying the process. They hear all of the same naysaying from people and pundits and it paralyzes them with fear, I want to give them a small window into the other side.
And I want thank WCI for giving me the platform, I must say he is very fair and balanced and works as a great referee.
Is it all rainbows and unicorns? heck no. But is it worth it? heck yes.
First to 250? Have you never seen an article on whole life insurance? I literally asked people to STOP commenting on a post and it still went 100 more comments.
https://www.whitecoatinvestor.com/8-reasons-to-avoid-whole-life-insurance-and-4-reasons-to-consider-it/
This one’s got something like 900. There is only so much to say about one article. To get over 100 comments that something has to be getting said over and over and over again.
Ok, I fell for it. Just lost an hour of my life reading some of the comments. You are very patient, I think I would just start deleting or freezing comments. I does make me cringe reading it though. So many of the things they use are exactly what was used to try to sell one to me.
What a great, well thought out comment! Very impressed. Thanks. Given that you signed with “Real Estate Tycoon” would I be current in surmising you invest in real estate? Could you tell us a little more about your story?
Hey Tycoon,
I am glad that I read further on to realize at the outset that you do not actually invest in real estate, so I can now understand some of your misconceptions surrounding it. So with that understanding let’s dive right in!
” I looked in the real estate market in Houston and I can’t find a single property that I can buy for $100K that will provide $400 in profit over the mortgage, maintenance, and property tax with a 10% of the time the place is unrented.”
Just because you cannot, does not mean that I cannot:
http://www.movoto.com/spring-tx/22415-ferngate-dr-spring-tx-77373-403_28813203/
So let’s take this property and walk everyone through the process of how we evaluate properties. I think it will be instructive.
If we were to purchase this property at full list price for 25% down that would be 27K (fairly close to what I said off the top of my head).
We would then have a mortgage of 81K. At 4.5% for 30 years that is a monthly Principle and interest payment of $410.42.
We then go to the taxing authority and see what the monthly taxes would be for this property:
http://hcad.org/records/details.asp?crypt=%94%9A%B0%94%BFg%85%8D%87%81pk%8El%87tXu%60W%9E%99%A2%D3%89%95%C2e%7CU%8A%80%86%C0%AB%A8%AD%86%5E&bld=1&tab=2
With this we can see that the monthly taxes are:
School:$85
Water: $44
County :$50
HOA: $30 (high, but I am guestimating based upon our other property)
That gives us $209 a month, now this property is homesteaded, so the owners get a small discount on their taxes because of it, so let’s just make it $275 a month to compensate for that. (over estimation, but let’s be conservative)
So right now we have $410.42 + $275 = $686.42 a month in expenses.
Now let’s add in insurance which runs on the high end $950 a year. So that is another $54 a month.
Now we take another $100 a month for maintenance and vacancy. (Mind you this is a civilian seller, who will give you a 1 year home warranty on the property as part of the sales contract, also, we own about 7 single family homes in this area, 4 of which I have not laid eyes on in over 2 years, we have not had a vacancy of longer than 2 weeks in over 4 years)
So all told for costs we are at $840.42 a month
Here is a nice rental comp to get us started.
http://www.realtor.com/realestateandhomes-detail/24207-Azure-Sky-Dr_Spring_TX_77373_M78743-95086?source=web
This is a similar property, in this area, some rentals are going for $1600 a month, some are going for $1250 a month. I chose this because it is in between. So at $1495 a month in rent we subtract $840.42 in “all in” expenses and that leaves us with $654.58 a month in positive cash flow. (I could of course lower my rental as if I wanted to get to the $500 I want.)
Take this amount and multiply it by 12 and you have $7,854.96.
We then divide that by the 27K you had to put down and you are left with a 29% return on your invested capital (or cash on cash return as we like to call it).
This is a property I just pulled off the net and did this analysis as I am responding to you. This is how easy it can be if you know what you are doing, and there is no renovation risk as you would have with a foreclosure. (you would get a home inspection).
So my analysis still stands even in this sellers market.
I will take your other points in another post.
Thanks for taking the time to explain the process. I think that both of you are happy doing what you do, which is great. Both of you will find things to prove you are right, but it comes down to what you are comfortable with. Many of those here are not comfortable with using that much debt to get a return. (I’m in that camp and would look at it as I used 100k to get about $8000 back each year, or 8%, even if I only put down a portion of it, as I’m on the hook for the whole amount.)
But, once again, glad you love it! There is great money to be made in it if you put the time in, which you have done!
Tycoon –
Let’s finish my rebuttal to your points, I want to make sure the readers have a good understanding of both sides so that they can make an informed decision –
“I can easily invest in the market on margin possibly 4:1 such as you do and increase my returns several fold far surpassing real estate investing. This is clearly high risk and can leave me broke if I run into a solid recession.” –
I am glad you are smart enough to realize this, but let’s break it down into a few parts
1) Who is going to give you that 4:1 leverage? I have banks/credit unions/private lenders/hedge funds begging me to borrow money to buy more real estate. Who is going to give you 4:1 leverage to purchase stocks? No one that I know.
So that means you will have to either take out a home equity line of credit (have to use my preferred asset class to get your money) or take out a personal loan. So while it is easy to say, it is not as easy to do in the real world. Nor would you want to honestly.
Tycoon –
Let’s take your “worst case scenario” situation – I am not sure why you chose Phoenix, I would much rather you choose a place that actually had good real estate market fundamentals even during the Great recession. Places like Texas, and Tennessee (specifically Nashville and Memphis).
You see, I do market research before I invest, and even in the depths of the recession Texas had positive net migration and job growth and did not have the attendant massive run up in housing prices or housing construction. You see, being able to spot a bubble is not that hard if you know and understand your metrics. (I speak to this in my real estate investment series)
That is why investing for cash flow is SO important. If a single person household making near the median income of your area cannot afford your rent, you should not be buying in that market place or that specific asset class.
Next point –
” Lets assume that 6 years down the road I now have 24 properties and we hit a similar housing crash. All of a sudden all my properties are now devalued below my purchase price. Since I am renting to the working class, they are at high risk of layoffs or furlows. A chunk of my tenants now can’t afford to pay rent and my cashflow goes negative. To make matters worse 1 tenant completely destroys the house costing a fortune to repair. This is how being so highly leveraged is very dangerous and another housing crash can devastate such a business model leaving me broke in just a matter of a year or two.”
So much bad information here. Yes, we had property whose price fell during the recession (we were not hurt because we bought at deep discounts or pulled all of our invested capital out of the properties) but we bought in a market that had a surplus of people coming to it, and a deficit of entry level single family homes (which still exists today). We also had/have a situation where Section 8 tenants have over a 3 year wait for housing (we do not rent to them, but in a depression type crisis, they would be our tenants of last resort) so we try and hedge or exposure that way as well.
We have vandalism riders on our insurance policies for the eventuality that a tenant goes to tearing up our property. Does it happen, rarely if you screen your tenants, but if you have those 24 houses like we talked about, one month’s income will completely restore a house in the areas where we buy.
Now, with our properties going down in price in your scenario, I have no reason why I would need to sell the property, they are cash flowing, all that is changing is the price, not my cash yield on invested capital. And I think that I showed you in the earlier example, that a 20% rate of return is not unrealistic. Who cares if there is a transient price decline, I am getting paid 20% a year on my money.
As for the leverage, the bank is not calling the note, it is a 30 year fixed rate mortgage. As long as we are paying the mortgage the price of the property is immaterial. Now if you bought stocks on margin, YOU would have a problem and be in a world of hurt trying to raise cash with impaired collateral.
Tycoon –
“My point is that there is no free lunch. You take increased risk through leverage and therefor get higher returns. It makes complete sense, but don’t fool yourself or us that it is risk free.”
Nothing in life is risk free, it is “as compared to what” scenario.
I trust bankers to determine what they think is risky with their account holder’s money. If they say I can have 70-80% leverage in an appreciating asset that generates cash flow, who am I to argue with them?
I’d love to see what they would lend to purchase a paper asset portfolio.
Tycoon –
“I would assume this process may take 20-30 hours of my own time if not more. Since I currently make over $250/hr I can instead take those 20 hours and make an extra $5000.”
That is very true at the outset. But your learning curve goes down the more that you do, by my 4th property I was rocking, and I could do the analysis that I did for you up above in less than an hour. I would then have the agent who listed the property send me a contract, by fax, I’d make an offer all told that takes an hour. Then you stop by the bank on the way home ~ (30 minutes) and get a cashiers check. You then call your home inspector (5 minutes) and text them the property address. You then drive to the property another day and meet your contractor (~1.5 hours) and get a scope of work. You call your insurance agent (10 minutes) for them to work up a quote and e-mail it to you. You call your mortgage broker (15 minutes) who already has all of your information and you give them the property address and send them the purchase and sales contract.
Now you wait for closing. You request a courtesy close and they come to your office for you to sign papers (30) minutes. The agent leaves the lockbox and you get the code and send it to your contractor to start any renovations. (5 minutes).
So all told that is 5-6 hours over a one month time span to purchase an asset that could conceivably pay you for the rest of your life.
At some point I am guessing your $250 an hour self is not going to want to get up nights and weekends to work for that money. Also, if we are close in age, you may not continue to make that $250 an hour in medicine under a new non-fee for service payment model.
Tycoon –
“If a big downturn occurs, I rebalance, and still have the investments on hand.”
You hope you do, and then it will be at a severely reduced capital level on which you will try and rebuild. Remember a 50% decline requires a 100% gain to get back to even, what about your opportunity costs of that capital that you lost?
“Not to mention I am not taking hours upon hours of managing property for a measly $300 or 900 a month (that’s less than 4 hours of work.) On my days off, no one calls me, no one bothers me, no one is late on rent, and I don’t have to go and get a handyman or myself to install a new dishwasher.”
So, I personally do not spend hours upon hours managing property. Remember, I invest in real estate to give myself more time to do the things I want, not less.
Property management is easy if you know how to do it effectively.
So I’ll give you a little tip, training your tenants is the key. Work hours are monday-friday 9-5, they can text an issue to me and it gets forwarded on to the appropriate trades person, less than 5 minutes of my time, I get e-mail invoiced where I send out a payment through online bill pay.
The lease is your friend, and you let your tenants know that they are responsible for day to day issues. If they are given a property in perfect working order, if something breaks, it is because they broke it and they are responsible for it. (excluding sewer line breaks, HVAC issues not caused by a dirty air filter, or roof leaks) All else is on them and we do not warranty appliances, nor provide them except for a stove/range.
So training your tenants on the lease and it’s provisions from the outset and fixing everything in the property on purchase cuts down on maintenance costs and maintenance calls.
I have appliance services that deliver and install dishwashers, so that is not something I worry about, and you can find handymen very easily on Angie’s list or at your local real estate investment club, or ask the real estate agent that sold you the property.
Tycoon –
“Which brings me to my 3rd point. Obviously real estate is fun for you. But, don’t forget that it takes time and effort. Owning rental properties is a second job. ”
When done INeffectively, it most certainly is, but when done effectively it is more like a hobby. And just like a hobby, you can choose when you want to do it. The major time and effort is learning the skill set, after that it is basically auto-pilot.
Real estate is not “fun” per se (well Belize is fun, single family homes in Houston are not my idea of fun), but getting passive income is fun.
” You might love the second job more than practicing medicine and therefor want nothing more than to get out of being a doctor, but for many others owning rental properties is work, sometimes very hard work especially when first getting started.”
You must have missed what I said in the article, I loving being a Physician, I am actually taking a pay cut staying in medicine, I could be WAY more effective in real estate if I was doing it full time, but that is not where my passion is.
I use real estate to allow me to be a primary care physician and not have to worry about viewing my patients as products or customers that I must do something to to make a buck. I can practice medicine the way that I want to on my terms and not have to worry about it affecting my standard of living and my lifestyle.
Anything worth doing takes hard work at least initially, I prefer to work hard once, and then get an annuity stream off of the past labor, not continue to work hard day after day, year after year, decade after decade to save up some mystical/mythical amount. It is just a different way of investing.
Tycoon –
“Point number 4: You constantly talk about cashflow, but cashflow is not everything.”
You are right, cash flow is not everything, IT IS THE ONLY THING!!!
at least for me and my goals right now. Once I reach my monthly cash flow number then I may do some more speculative things with the income we have coming in.
“Just because something is not throwing off cash doesn’t mean I am not making money or building wealth.”
I mean that really depends, I am big on realized gains, I know that is not popular on these message boards, but an increase in price is not making money, selling the asset and realizing the gain is “making money”.
Everything else is just hope.
As for building wealth, my definition of wealth is:
The ability to live at your current standard of living while not working a 9-5 job and not spending down your principal, selling your “assets”, or spending your savings.
And by my definition what you are doing does not build wealth, it is building networth on paper, that you hope to be able to turn into wealth when you need it.
But we do not have to agree on this point, we are all on a personal journey, we have to do what is best for each of us.
Tycoon –
” I currently don’t want any of my assets throwing off cash. I don’t want to pay any more taxes than I need to until I retire and withdraw at a lower tax bracket. ”
Now to me this is the biggest lie that the financial services industry perpetrates on the public. I like to say that this thinking already sets people up for low expectations.
Think about this rationally, I have worked for 30-40+ years, why would I be making less money at the end of that process than I did at the beginning? That makes no sense to me, if I am putting my excess income into investments.
“With paper assets I can always decide how much cashflow I want and when I want it. I can also choose how I get taxed on it.”
Cash flow is recurring and does not require you to sell an asset to receive it, what I assume you are referring to is the selling of assets to realize your gains (hopefully) which is not cash flow. You already said the money is coming out of a 401K type vehicle, it will be taxed as ordinary income, you have no choice on that.
“My conclusion: Real estate is clearly an excellent investment when you are willing to take the time and effort to learn the business”
I truncated your comment because this is absolutely right. Most people will be passively invested in real estate in larger projects. What I wanted to do was introduce people to the possibility of direct investment, they can then go out on their own and learn more about it and see if it makes sense in their portfolio as a passive investor or more actively like I do.
Thanks again for sharing.
Eric,
Thank you for the excellent rebuttal points and your earlier recommendations for me. Reading through all the comments between you, Jim, and the others has been really enlightening. I think you both make valid points and both methods of investing in real estate or index funds in the long-term can make a physician, or any individual for that matter, comfortable for retirement if done properly. My take home points (and correct me if I am wrong) are:
1. You can probably make a lot more money in real estate…as long as you know what you are doing. By this I mean you need to have a good business sense to analyze the opportunities and costs/benefits of every real estate transaction, as well as spend significant time (at least initially) to learn all the rules and regulations of running a successful real estate empire.
2. You need to have a smooth, streamlined system of processing every transaction and tenant management to avoid a lot of headache and wasting time and money on purchase escrow/closing costs/ realtor fees, finding a reliable home inspector and contractor to make any revisions or updates who do good work and do not upcharge, screening and managing tenants who won’t destroy the property and not pay their rent, finding reliable handymen to succinctly make any repairs without charging you extra as a ‘rich’ physician who typically does not know how to change a lightbulb, let alone fix any plumbing, electric, etc. Eric obviously has become a master of this process with his background MBA training as well as extensive real estate experience. I would guess that most average physicians, including myself, would not come close to figuring out a well-oiled system as Eric has.
3. To be successful in real estate, you really need to analyze the market and know where the best locations are for holding rental property as Eric mentioned several times. His locale of Houston and ?Tennessee apparently are very favorable for positive cash flow from rental income after mortgage/taxes/maintenance/etc are accounted for. I have come to learn after reading this blog and speaking with several people that my neighborhood of southern CA is one of the worst areas in the nation to hope to see any profit in rental property. If this is the case for you too, it was mentioned that you can invest in favorable areas from thousands of miles away, but that sounds even riskier investing in regions where you do not live and know nothing about except for maybe internet posts and news.
4. If you are the average knucklehead who thinks they know how to successfully manage real estate property for profit and cash flow by reading a few books and watching some HGTV shows, chances are you will get burned, and any and all retirement savings will go with you.
5. The thought of passive income sounds really nice. However, probably for most physicians, unless you have significant time to spend learning how to develop a clear system of managing every aspect of your real estate investment, have some extra money to risk losing during the steep learning process, and happen to live in a rental-favorable location, the simplest and least risky way for most doctors to save for a comfortable retirement is to just put your money every year in a tax-sheltered IRA with index funds for steady growth. This won’t make you rich, but hopefully you can pull enough out in retirement every year from your IRA to pay the bills before running out. For the few other individuals where the stars have aligned such as for Eric, real estate can be a source of significant wealth and passive cash flow into retirement. You need to decide for yourself whether the challenge and risk of losing it all is worth striving to be in the latter group.
Best- PG.
PG –
Thanks for the thoughtful comments
1) – Yes
2) – Yes, can be done by joining your local real estate club in your area.
3) – Yes, and I would argue this should be true for ALL investing whether it be in stocks, private businesses, bonds etc…
4) – God YES!!!!!
5) – Yes with a caveat. I happened to come to graduate school and medical school in Texas, so the stars aligned there, but we also invest outside of Texas, shoot outside of the United States.
So you do not have to limit your investment to your local area, in fact you probably shouldn’t in all honesty. 50% of the world’s equity markets are outside of the U.S., so if 50% of your own equity portfolio is not as well, your portfolio is suffering from what is known as “home country bias” and you are not truly diversified.
I would argue that once you have your investing principles down (aka Investment Philosophy) you can go anywhere in the world that matches your philosophy and “risk” tolerance.
As for direct investment in real estate, with the passage of the JOBS act and final implementation by the SEC, accredited investors (which most Physicians are) will have a panoply of options to directly invest in real estate with experienced managers.
We personally have quite a few physicians who invest with us, for just the reasons you elucidated. I am under no illusion that most Physicians are going to do what I do, but there are a few, and I just wanted to give them encouragement.
Save means “not spend” not “cash your check and put it under your mattress.”
It certainly does not require a perpetual bull market. Why would you believe that as a businessman? If you buy a business, let’s call it “Apartment Complex A” which provides a good or a service for people, you expect it to make money, no? If reasonably run, it should make money going forward, no? In fact, those earnings ought to be somewhat indexed to inflation, and if run particularly well, increase at a rate even beyond that. It’s no different with all the other businesses out there. When you buy part of a business, whether it is Exxon, Apple, or an apartment complex, you are entitled to a share of the earnings. Sometimes those show up as a dividends (they’re like rent) and sometimes they show up as appreciation in the value of the business (that’s like when your apartment complex is worth more when you sell it than when you buy it.)
Stocks are businesses, not beanie babies.
WCI
“When you buy part of a business, whether it is Exxon, Apple, or an apartment complex, you are entitled to a share of the earnings.”
In the olden days, that was absolutely true, and Exxon is better than most at returning shareholder value through share buybacks and dividends, the same cannot be said for Apple. And lord knows that is not the case for Google as they have told you that they will never pay a dividend.
For that reason, I use real estate to declare my own dividends at rates nothing but maybe a highly leveraged (to short term maturities) mortgage REIT can approximate. It is the same principle, it is just a matter of what control do you have over your claims to the earnings? Public companies are run for the benefit of the management teams by and large, not the shareholders.
You can declare any size dividend you please at any time, up to 100%.
I guess if you feel that the company you own isn’t run for your benefit, then it seems reasonable to sell it.
Over the last seven years, despite two big market downturns, our real return has been over 10 percent if you add in dividends.
I really do not see a similar return for amount of effort in RE on a consistent basis. I can see that there is the possibility for way more, but the same can be said for stocks.
At our current, very comfortable rate of savings and investments, we are projected to have a five million nest egg by the time we retire. This based on a rather simple portfolio of mostly index funds. The only substantial stock I hold outside of index funds is BRKB, and even that we plan to liquidate later this year.
So while I applaud all your efforts and mental acrobatics, I really do not see why it’s worth all this effort to you or anyone else unless it’s a hobby or something you really enjoy.
In the end a less risky, less hands on, more diversified portfolio seems to do as well if not better. In the spirit of full disclosure, I have about 20 percent of my portfolio invested in a Vanguard REIT, but it’s sheltered in my Roth IRA so no tax liability.
I do have to state that I dislike the intellectual dishonesty that RE investors resort to when calling stocks and shares paper assets…
The real question is whether with exceptional management/skill etc and a reasonable amount of leverage if you can’t get 12-14% long-term instead of 10%. That doesn’t seem like a big difference, but multiplied over decades it is. Obviously, some people don’t do as well as others. But you can see the allure.
Syncretist – Good to see you outside of Sermo, thanks for the comment.
Sorry for the delay, I didn’t touch my computer this weekend. Let me go ahead and address your points. I will do this with the caveat that this is not a competition between asset classes. It is MY using a specific asset class to achieve a specific outcome.
“Over the last seven years, despite two big market downturns, our real return has been over 10 percent if you add in dividends. ” –
7 years ago was the start of the great recession, if you held through that you should be up more than 10% a year from the bottom just on capital gains alone. The question I would ask is what were your returns from 2000-2008 minus all of the capital that you possibly contributed along the way?
How do yo get a true accounting of all of the capital that was destroyed on the way down or languished during that 8 year period? What was the opportunity cost? Hard to say, but it has to be accounted for.
For me I preferred to increase my monthly income during that time, because I do not want to HAVE to work in my 50’s. That is my goal, not a nest egg per se, but a monthly cash flow number. That SHOULD equate to a decent sized networth, but again, that does not matter to me particularly at this point.
If you don’t mind me asking, at what personal savings rate and how long did it/will it take you to reach that 5 million dollar mark?
“I really do not see why it’s worth all this effort to you or anyone else unless it’s a hobby or something you really enjoy.”
I am actually ambivalent towards real estate, it is a means to an end, that end being financial freedom. Which I define as not having to wait until I am older to decide to do something else if I choose and not having to sacrifice my standard of living in making that decision. Real estate is a tool, a means to an end. It is actually quite boring creating a passive income portfolio.
“In the end a less risky, less hands on, more diversified portfolio seems to do as well if not better.”
I would argue that this is certainly not true on a relative or absolute basis, but that is besides the point. I would argue that for me, paper assets are WAY riskier than effectively managed income producing real estate. I do have a specific skill set that minimizes my risk, I just wanted to introduce people to the possibility that with a little bit of effort it is possible for them as well if their goals aligned with my goals.
“I do have to state that I dislike the intellectual dishonesty that RE investors resort to when calling stocks and shares paper assets…”
I am sorry that you do not like the term, but you disliking it does not make it intellectually dishonest. Hard assets are just that, (gold, silver, oil, real estate) they have intrinsic value in and of themselves.
Paper assets (common stock for this discussion) are shares in a corporation that use hard assets to create products that people then buy, it is an amalgamation of inputs to create something of use, a corporation is not inherently useful by itself. Now that is not to say there is no value in the corporation, there certainly is, but the real question is, to whom does that value flow, and to what end? And where do you as a common stock holder stand in line to make claims on that corporation in the event of a crisis?
Again every asset type has their pro’s and con’s we all have to use the tools available to us to achieve our goals.
Dr. Mom,
You requested my realestate story so here it is. I strongly evaluated and considered buying rental property, but very quickly realized that my cash flow would only be $200-$300 per month and just not worth my time and effort when I can work one extra shift and make months worth of realestate income. The only property I own is the one I live in.
So any reason you choose the name Realstate Tycoon?
Same for us although if the right opportunity presented itself we would consider real estate investing. Like Dr. Khan, curious where the name came from besides apparent sarcasm. Thanks for the answer.
I see both stocks and real estate as good investment vehicles. I ordered the WCI book and should have it in a day. Was wondering if Eric had any forthcoming books/articles about how he got the RE investing off the ground. Also was curious as to what James thinks about SDRs and how to tweak the portfolio with the coming conversion of the financial system from a U.S. Based financial system to a multilateral global system with addition of the Chinese renminbi to the SDR basket slated for Jan 2016?
Was that English?
Seriously, for those who don’t know (and I had to google this) an SDR is a Special Drawing Rights, or a basket of international currencies.
And I have absolutely no idea how adding the Chinese currency to the dollar, pound sterling, Euro, and Yen currently in the basket will affect my current portfolio. Man I’m glad that my financial goals are not dependent on knowing the answer to questions like that.
Hey Sam,
Just e-mail me, I have a series on investing in single family homes that I can send you in it’s entirety.
As for SDR’s, If you read Jim Rickard’s books Currency Wars, and The Death of Money (I encourage EVERYONE to read these books) he talks about the fact that no other currency not even the IMF’s SDR’s is a liquid enough market to handle the loss of the dollar as the world’s reserve currency.
I went to Simon Black’s Global Investment Conference 2 weeks ago and Rickards was there along with Peter Schiff, Marc Faber etc… They are all calling for an end to the dollar as the world reserve currency, the question is just the timing and how orderly or not it is going to happen.
If there is a disordered collapse of the dollar, all dollar denominated paper assets will be toast, so stocks, bonds, private mortgages etc… will catastrophically lose value (this is why Peter Schiff recommends foreign dividend paying stocks). The problem is that we are in the largest fiat currency experiment in human history, so no one is sure how it will ultimately play out.
Many think that the suppression of the gold price is so that China can add to their gold hoard so that when the re balancing of the SDR allotments occur, China will have enough gold to be near par with the U.S. and the Eurozone in terms of the size of their monetary bases relative to their gold reserves. It is all a game of confidence right now.
Sounds like an investment in canned food and bullets is the way to go. Economics has always been a game of confidence.
Eric, I am interested in the single family homes investing series. Should I contact you through the contact form in your investing firm webpage? BTW thanks again for the book recommendations, much appreciated.
He’s been publishing it on Sermo if you’re on there. Just search his name.
Yes,
All of those e-mails eventually make it to me.
WCI –
So in a collapse yes, guns, food/water, fuel, gold/silver. 1-6 months of chaos then it usually settles out and you pick up the pieces, you have to figure out what to own though so that you have some liquidity at the bottom, that is when REAL fortunes are made.
Gold actually requires no confidence and that is why it historically has been the only sound money anyone trusts in times of crisis. You owning gold is no one else’s contingent liability, no one else has a claim against it.
That was the beauty of a worldwide gold standard not controlled by central banks. Now, no one knows who to trust and speculation runs rampant. It’s funny, if we were on a gold standard or a modified one, I probably wouldn’t be as heavily invested in real estate as I am.
I had no idea you were a gold bug too. 🙂
Seriously, try using gold to buy some food some time. What do you plan to do? Shave off little bits and trade them for a loaf of bread? Better to have bullets and just take the bread. 🙂
I have friends who have it for just that, but even in the 1/10 oz coins, if it hits the fan, then you are going to be paying $300+ for any small transaction. Even silver would be way up there.
Not a bug, just afraid right now.
And I’m a golden rule kinda guy, I’d rather share than fight (naive I know)
So we will use silver for small daily transactions.
But I am moving to have 3-6 months of food and water stashed, the weekend place is on an island with its own small police force.
I hold gold in an off-site storage vault through a service that uses ACH transfers and can sell the gold and convert it into any currency you want (even bit coin) and be sent to any bank account anywhere in the world.
The world is a dangerous place.
Seems like a little overkill for a 2M net worth. I always felt that if the Zombie apocalypse comes, internet may be a thing of the past so I don’t know that the ACH is going to help. Seems easier to keep the gold on hand. Shoot at 1K an oz you can keep $100,000 in gold inside a child shoe box (not that I recommend that!)
Seems like canned food and guns, with maybe a little silver and gold if you want, would be easier, safer and a lot less expensive to maintain.
Ricky,
Remember wealth tends to accrue exponentially, not linearly. If it takes me 5-7 years to get to 2M, (again I could care less about networth), just imagine what it will be 10 years from now with the skill set I have?
And I do have gold stashed personally as well in an undisclosed location. I am not worried about the zombie apocalypse with a monetary collapse. It is usually 3-6 months of chaos. The ACH is if the U.S. government decides to impose capital controls, I want to be able to beam my $$$ out of dodge and be liquid at the bottom to buy assets dirt cheap.
Again, I am only going to allocate 10% or so of liquid reserves for these types of insurance measures. I am still looking to buy more real estate at great prices as we speak. I am currently negotiating on a 97 unit apartment complex here in Houston, so we still march on, with an insurance plan just in case.
read this post when it was originally posted; came back to it, and, YES! A brother.
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which online courses did you use or would you recommend? (to learn how to effectively buy/invest in real-estate/ or for self education)
I generally prefer books to courses. Then I can go at my own pace.
thanks! any books you recommend to start with:)
Depends on what you like. There are lots of “cheerleader” type books that I’m not a big fan of. I prefer the how-to types. My list of recommended books is here, but only a couple are real estate books: http://astore.amazon.com/whicoainv-20?_encoding=UTF8&node=66
thank you!
YSM, I have a whole list of books on shifting paradigms about money and wealth.
I think that is where you should start first. Real estate is just a tool in the toolbox, but it is not always the best tool for everyone. So getting crystal clear on your “why” is paramount. Most people want the benefits that real estate can offer, but they have no clue of what they will have to do to effectively buy and manage real estate for themselves.
Shoot me an e-mail at [email protected]
and I will send you a reading list that I give to people to start that I have found to be very beneficial on fleshing these things out.
Sounds like an excellent journey. There’s always more to learn when it comes to REI, and there’s even more people to meet. The biggest thing I think most people getting in don’t realize is that networking and relationships are the absolute most important thing. Without that, you stand at a huge disadvantage.
Thank you, it’s been a great ride. Interestingly, I am at an investment conference as we speak. What you say is so true, you find experts, come alongside them, and learn from them. That is what I always try and do.
Sorry to post in this old comment thread but I couldn’t seem to figure out how to create a new topic in the forums.
I just got my first K1s from a couple of syndicated deals
Interestingly, on the first k1, section K (partner’s share of liabilities), I get:
Profit: 1%
Loss: 1%
Capital 1%
On the 2nd K1, I get a surprising:
Profit 0.65%
Loss: 1%
Capital: 1%
Is this uncommon that I would share disproportionately in the loss but not the profit? Should I be raising a red flag with the sponsor?
-J
Seems weird to me. Why not send them an email and try to figure it out?
That said, those particular numbers don’t seem to affect your tax bill at all. But I bet it’s a typo.
Each project is often structured differently. Some syndications are structured in such a way that the GP’s do not receive any profits until the LP’s receive their initial capital back (usual venture capital structure). Where as most others are set up where the GP’s participate from dollar 1 of distributions. That MAY account for this difference.