Podcast #42 Show Notes: Buying One Property a Year

In this episode I discuss the concept of buying one property a year as a path to wealth and financial independence. In a lot of ways this is an alternative pathway to what I have been teaching for years, which is max out your retirement accounts invest the proceeds in index funds and get on with your life. It is an alternative path but it is also a viable path. If this is something that appeals to you I think it is worth looking more into it. Remember this isn’t required for a high income professional. But it is an alternate path and quite likely a little faster, but more risky, path to financial independence.  Listen to the podcast here or it is available via the traditional podcast outlets, ITunesOvercastAcast, Stitcher, Google Play. Enjoy!

Podcast # 42 Sponsor

[00:00:20] Splash Financial is a leader in student loan refinancing for doctors. Consolidate and refinance your federal and private student loans to save money and simplify your life. No application or origination fees and no prepayment penalties. Your family is always protected with loan forgiveness in case of death and permanent disability. Plus, WCI readers receive a $1,000 bonus for loans over $200k, a $500 bonus for loans $100k-$200k, or $250 bonus for loans under $100k. You can even use their loan assessment tool to compare government repayment options against refinancing.

Quote of the Day

[00:01:13]  “Most of the luxuries, and many of the so-called comforts of life, are not only not indispensable, but positive hindrances to the elevation of mankind. With respect to luxuries and comforts, the wises have ever lived a more simple and meager life than the poor.” -Henry David Thoreau

Introduction

[00:01:33]  We hope you have signed up for the free newsletter. It gives you the free 12 email financial bootcamp series, updates on the blog posts, and a great monthly newsletter. Also we have the WCI course if you are looking for something more in depth.

Main Topic

[00:02:54]  Discussing the concept of buying one property a year as a path to wealth and financial independence.

[00:03:17] Here’s how to do it:

  • Carve out part of your earned income, perhaps $30-100K a year to buy property.
  • Use that money as the down payment.
  • Get a renter in it. If you’ve put enough down, it should be slightly cash flow positive. That usually requires at least 25% down and more typically about 33% down.
    Larry Keller
  • Take the excess cash flow from it, combine it with the money you’re carving out of your earned income, and use that to save up the next down payment. Then buy again.
  • Start out managing your own properties and learn the business. Start building your team- attorney, fix-it guy, HVAC person, lawn care, painter, carpet person, general contractor, plumber etc. Eventually, add a property manager.
  • Repeat the process each year.

[00:04:58] Why does it work?

  • You never have a cash flow negative property because you put enough down.
  • Rents generally increase.
  • Debt gradually decreases.
  • Depreciation shelters the income from tax, partially or fully.
  • You have a chance to add value to your investments

[00:06:35]  Downsides:

  • It requires you learn another set of skills
  • It requires significant work and effort.
  • Rents and property values can fall or remain stagnant for long periods of time.
  • Temptation to not fund the plan adequately and use more and more debt.
  • Difficult decisions if you aren’t saving enough to both max out tax-protected accounts and invest in real estate
  • You might not live in a low cost of living area. Putting down $50K on a $1M house isn’t going to cash flow.
  • Banks will only give out so many loans and you’ll have to seek funding elsewhere- sellers, other properties etc.
  • Much more complex financial life

[00:09:34] How you mix and match these two pathways:

  • Ideally you have enough savings to max out retirement accounts and buy some real estate in taxable. But if not, you’ll have to choose.
  • Favor Roth accounts
  • Consider crowdfunding, syndications, funds, and REITs

[00:11:34] Remember this isn’t required for a high income professional. But it is an alternate path and quite likely a little faster, but more risky, path to FI.

Q&A from Readers and Listeners

  1.  [00:12:35]  If it is recommended to save 20% of your salary a year toward retirement, one can put 18k into 403b and 1100 into spousal and individual back door Roth IRA, where is the additional money supposed to go?
  2.  [00:13:48] When you say save 20% of the salary does that mean part of that 20% goes to paying off student debt, savings for house down payment etc or is that an additional savings rate to that listed above?
  3.  [00:15:35] Would it be beneficial for me to start a “business” as I do a lot of surveys online & as a consultant?
  4. [00:17:31]  When a cash balance plan is created, is there any flexibility for individual plan members to direct investments, or are all contributions managed as one fund?
  5. [00:18:34] How do the plan sponsors/administrators make their money? What are typical/reasonable administrative fees for management of the plan?  Are these generally split evenly among plan participants, or are they split proportionately based upon ones assets in the plan?
  6. [00:21:39]  Should I pay off my mortgage quickly now and then invest more heavily, or do it the other way?
  7. [00:24:17]  Which student loan company gives the best interest rates for refinancing student loans?
  8. [00:25:12] Question on new tax laws, S and C corps, and when it becomes worth it to do this vs just write offs on 1099 income on personal taxes only?
  9. [00:27:37]Thoughts on WHERE to practice as financial strategy – I see so many residents wanting city life but rural areas pay a premium with low COL?
  10. [00:30:04] Do you think people who have been financially successful have an obligation to help those who are struggling, and, if so, what do you think that obligation is?
  11. [00:31:48] What are your suggestions for those living in NYC (all 5 boroughs) about buying real estate where a 2-br condo (not co-op) starts >500K?
  12.  [00:33:31] My questions are about starting a 501(c). Most likely one that offered care to low income persons a few times a year. What is the best career path for someone who wants to do this to avoid financial conflicts?

Ending

[00:36:41] Remember that the White Coat Investor online course available out there to help you develop a financial plan. If you’re looking for something lower cost the White Coat investor book is also available. Or if you’re looking for something that’s free. There is the free monthly newsletter with the 12 e-mail financial boot camp series available to you.

Full Transcription

[00:00:00] This is the white coat investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here’s your host Dr. Jim Dahle.

 

[00:00:20] Welcome to podcast Number 42, Buying one property years as a retirement plan. Today’s episode is sponsored by Splash Financial which is a leader in student loan refinancing for doctors. Consolidate and refinance your federal and private student loans to save money and simplify your life. No application or origination fees and no prepayment penalties. Your family has always protected with loan forgiveness in case of death and permanent disability. Plus WCI readers receive a thousand dollar bonus for loans over two hundred thousand, five hundred dollar bonus for loans of one to 200000, and a 250 dollar bonus for loans under 100000. You can even use their loan assessment tool to compare government repayment options against refinancing. More information at W.W.W. Whitecoat investor dot com slash Splash Financial.

 

[00:01:13] Our quote of the day today comes from Henry David Thoreau who said most of the luxuries and many of the so-called comforts of life are not only not indispensable but positive hindrances to the elevation of mankind. With respect to luxuries and comforts the wisest have ever lived a more simple and meager life than the poor.

 

[00:01:33] We hope you’ve signed up for the free newsletter on the site. It gives you the free 12 e-mail Financial Boot Camp series, updates on the blog posts and a great monthly newsletter. If you need a little bit more specialized attention I would suggest the White co-investor course titled Fire your Financial Adviser. While the title is a little bit provocative what it really does is it teaches you how to write your own financial plan and how to stick with it. Over the coming decades and I’ve been pretty amazed at the feedback. It’s been very very positive on the course. A lot of people are enjoying it. Hundreds of people have purchased it and it’s really been very beneficial to them. The best part about it is there is no risk to you, if you don’t like it, We’ll give you your money back for seven days. Every bit of it and so go ahead and check it out and see if it’s something that you think would be beneficial. You can find that easily on the home page at White Coat investor dot com and learn more about it and check it out. It’s really helped a lot of people and it may be right for you. Now if you spend all your time reading financial blogs and listening to financial podcasts and reading financial books is probably not for you. But if you’re not a hobbyist it could really help you to save a lot of money in the long term and get your financial ducks in the row.

 

[00:02:54] Today I’d like to discuss the concept of buying one property a year as a path to wealth and financial independence and a lot of ways this is an alternative pathway to what I’ve been teaching for years which is max out your retirement accounts invest the proceeds in index funds and get on with your life. It’s an alternative path but it’s also a viable path. And so if this is something that appeals to you I think it’s worth looking more into it.

 

[00:03:17] Here’s how it works. First you carve out part of your income perhaps 30 to a hundred thousand dollars a year to buy property. Then you use that money as the downpayment on buying an income producing property. You get a renter into it and if you’ve put enough money down it should be slightly cash flow positive that typically requires a downpayment of 25 or even 33 percent down. Although if you got a really screaming deal on the property maybe even less. Then you take the excess cash flow from the property, Combine it with money you’re carving out of your earned income the next year and use that to save up for the next down. Then you buy another property in year two.

 

[00:03:58] In the beginning you start out managing your own properties and you learn the business of being a landlord. You start building your team and attorney, fix it guy, H vac person, lawn care, a painter, a carpet person, a general contractor, a plumber etc. and then maybe eventually you’re able to add a property manager that handles all this stuff for you. But it’s good if you’re going to go into this business to learn the business first. So you know a little bit more about how it should be done and can manage your property manager.

 

[00:04:28] Each year you repeat this process. The first property is obviously the hardest. And then you’ve got other properties helping you to buy the next one and so you start getting a bit of a domino effect. Meanwhile the renters in these properties are slowly paying off the mortgages and the properties hopefully are appreciating in value and the rents are going up and typically between year 10 and year 20 The annual cash flow is equal to your annual spending and you reach financial independence.

 

[00:04:58] So why does this work and why does it work so well for so many doctors and others? Well it works because you never have a cash flow negative property because you put enough money down, because if you’ve got properties that you’re having to feed from your earned income, Not only does that suck but it also makes it much more difficult to own very many properties. If you’re having to feed all of them that really is not a winning situation. That happens when you overpay for a property and that happens when you don’t put enough money down on a property and that happens when you’re not very good at managing or hiring somebody to manage your properties because the expenses just build up to be more than the rent and you end up having cashflow negative properties.

 

[00:05:42] But it works because rents generally increase and your debt gradually decreases and your depreciation of the property helps shelter your income from tax, either partially or in some situations fully. This also gives you the opportunity to add value to your investments. You know the stock market is a fairly efficient place. It’s not perfectly efficient but it’s probably efficient enough that if you act like it is, that’s the right way to invest and that’s why index funds work so well but the real estate market by comparison is very inefficient. And so if you are talented or you’re good at spotting a good deal there’s a lot of opportunity there to add value.

 

[00:06:25] Real estate is also a relatively safe way to use leverage to build wealth. But again that depends on you actually putting some money down most of the time.

 

[00:06:35] There are significant downsides to this pathway to building wealth and financial independence. The first is that it requires you to learn another set of skills. And if you’re a busy person a specialized physician maybe that’s not really how you’re interested in spending your time. Second it requires significant work and effort. Don’t minimize this. You’re taking on a new job as a landlord. You really enjoy the landlord more than practicing medicine? If so why do you waste your twenties in medicine? Do you really want a second job? Those are all questions you need to ask yourself before you decide to take this pathway toward building wealth. Also bear in mind there is risk here, rents and property values can fall or remain stagnant for long periods of time. Don’t get recency bias where you start thinking all stuff went up 20 percent this year it will go up 20 percent every year. It just doesn’t work that way and it’s even worse when you’re highly leveraged because leverage magnifies everything, it magnifies your good decisions, it magnifies your bad decisions, it magnifies your good luck, It magnifies your bad luck. And it’s a good way to go broke. Lots and lots of people have gone broke being real estate investors.

 

[00:07:46] There’s also the temptation to not fund this plan adequately and instead use more and more debt. And that again gets you into the trouble with being over leveraged. It also becomes a difficult decision. Like we talked about on our last podcast. If you’re not saving enough money to both max out your tax protected accounts and invest in real estate. Now if you can do both. That’s great.

 

[00:08:10] That happens to a lot of docs actually who don’t have much tax protected account access in their retirement plans. But for those who have lots of retirement space it becomes a difficult decision are you going to pass up on known tax benefits, known as state planning and asset protection benefits in order to hopefully get a higher return in real estate, that can be a difficult decision. You also might not live in a low cost of living area. Putting down fifty thousand dollars on a 1 million dollar house probably isn’t going to give you a positive cash flow and so it works great in the Midwest. It doesn’t work so well in the Bay Area when you got to come up with you know half a million dollars or a million dollars just to get a property to cashflow. And when you’re banking on appreciation using a great deal of leverage. That’s a good way to get yourself into trouble. You might get rich but you might also go broke.

 

[00:09:01] You also find as you acquire more and more properties the banks will only give you so many loans. I think the typical limit is about 10 and if you’ve got more properties than that with loans on them you’re going to have to seek funding elsewhere from the sellers or borrowing against the properties you have that have appreciated. You just have to start getting a little bit more creative. You know you may end up going to hard money loans and having to pay 8, 10, 12 percent. And obviously it’s a lot harder to turn a profit on a property when you’re paying that much in your mortgage costs.

 

[00:09:34] So how do you mix and match these two pathways. One buying index funds inside retirement accounts, you know putting 20 percent of your income there and concentrating on your practice and the other buying one property a year and becoming a you know a real estate empire. Well it’s tough. Ideally as I mentioned earlier you’ve got enough savings to max out your retirement accounts and buy some real estate in your taxable accounts. But if not you’re going to have to choose.

 

[00:10:02] One thing to keep in mind if you do plan to buy a bunch of real estate properties is that should make you favor Roth contributions to your retirement accounts because you’ll be having in retirement all this taxable income coming from your real estate rents. You don’t want to necessarily combine that with a lot of tax deferred accounts whereas if you’re mostly just using retirement accounts you can pull that money out of tax deferred accounts and use it to fill up the lower brackets. Well if you’ve already filled up those lower records with real estate rents you’ll probably benefit more from having Roth accounts than you would from tax deferred accounts.

 

[00:10:41] If you’re really not interested in buying and managing the individual properties. There are other options. You know you can buy crowdfunded properties, you can buy syndicated properties, you can buy through private real estate funds, you can just buy publicly traded real estate investment trust through an investment like the Vanguard Reit index fund at very low cost and very little hassle. So nothing says you have to go out and buy individual properties just because you want to invest in real estate.

 

[00:11:08] I’m far too busy between my medical career and running the white coat investor to be running a real estate empire on the side. So this is how we do our real estate investing through funds and through syndicated properties and through real estate investment trusts. And while you give up a lot of control doing that and maybe you give up some return and some tax benefits too. The fact that I don’t have to be doing now a third job makes it worthwhile to me.

 

[00:11:34] And of course remember that this is not required for a high income professional. If you put 20 percent of your gross earnings throughout your career into index funds, you know some reasonable balance of stock and bond index funds maxing out retirement accounts when you can, investing the rest in a taxable mutual fund account as needed. You’re going to have enough money to have a very comfortable retirement but this is an alternate path. It’s probably a little bit faster to get to financial independence but does involve some additional risks. So this is the sort of thing you’re interested in. You can find more information about it both on the white coat investor website as well as Passive Income MD Web site and really get into becoming a landlord and earning this money on the side, a little bit of a second job, a little bit of investment that You have more control over but if you really dislike the stock market this is another method to become financially independent.

 

[00:12:35] All right let’s go over some questions that have been sent in from readers. Here’s our first one, if it is recommended to save 20 percent of your salary a year toward retirement. One can put eighteen thousand dollars into a 4O3b and eleven thousand dollars into spousal and individual backed or Roth IRAs. Where is the additional money supposed to go? Well if you’ve maxed out all your retirement accounts the place to do invest is just in a taxable non-qualified investing account and you can buy similar investments to what you can buy in your retirement accounts in that taxable account. You can buy the same index funds that you would like to buy inside a Roth IRA in that taxable account. Now it helps if you pick particularly tax efficient mutual funds such as a tax exempt bond or a municipal bond mutual fund or Total Stock Market Index or Total International Stock Market Index. Those sorts of very tax efficient funds that can reduce your tax costs. But basically that’s the answer once you’ve maxed out your retirement accounts if you need to save more for retirement. You do so in a taxable account. You can also invest in real estate there if you like. As noted earlier in the podcast.

 

[00:13:48] Okay, here is another related question. When you say save 20 percent of your salary does that mean part of that 20 percent goes to paying off student debt. Saving for a house down payment. Or is that additional savings above and beyond the 20 percent. Well the 20 percent for retirement. If you need to save up a house down payment if you need to save up college savings if you need to pay off student loans if you need to save up for a new car that’s all above and beyond the 20 percent. So what does that mean?

 

[00:14:16] Well that means you really can’t be ever spending more than about 50 percent of your gross income. And that’s just the way it is. If you want to become financially independent before retirement age or even at retirement age you’re going to have to save some significant sums of money and your savings rate is how much you’re saving Divided by how much you’re making. And 20 percent is really what it takes for a high income professional to have an adequate retirement, the kind of retirement you’re looking forward to having is going to take about 20 percent, now 15 percent might get you there but 5 percent is not going to get you there. And so if you’re having to ask about well do my student loan payments count? and does saving for a house down payment count? and that sort of stuff, Chances are you’re not saving enough money. And so that is the secret. The first few years out of residency before you get used to all that money try to live as close to your resident lifestyle as you can and use the difference to pay off your student loans, save up a downpayment, Max out those retirement accounts, get college funding accounts started etc. And that’s the way to become wealthy as a physician and have all these choices in your career that you’re going to want to have because 10 years from now it’s going to matter a lot more to you than it does right when you come out of training.

 

[00:15:35] OK. Here’s another question that came in. This one is asking about ten ninety nine income. It’s asking Do any of these sources of income outside of my employed M.D job qualify me for tax advantaged investments that would be more beneficial to me than investing in taxable accounts with Vanguard and or real estate? Well this particular questioner and I don’t read the entire question because it’s a couple of paragraphs long was interested in opening an individual 401k to do online surveys. Well let’s go over what this is useful for, right there. Even if you have just a little bit of ten ninety nine income that allows you to open an individual 401k which can be very useful if you need to roll over a big SEP Ira to allow you to start doing backdoor Roth IRAs. That’s super useful.

 

[00:16:29] But the fact is you can’t contribute a lot money in there if you’re only making a couple of hundred bucks doing surveys a year. It is just limited, your contributions are limited by how much that business makes. And so the business doesn’t make a lot of money. You can’t make very big contributions to it. You can rollover all the money you want in there but you can’t make big contributions to it. And so then you start looking at your other sources of income. And remember that ten ninety nine income is not always earned income. The only money that counts toward retirement accounts is earned income. If you have some K1 where you’re not really participating in the partnership and they pay you a certain amount of money or you got some sort of ten ninety nine income that doesn’t represent earned income you can’t use that to make retirement account contributions. And so when you look at your other sources of income it comes down to whether there are really other jobs or not. If there are other jobs that can be used to go toward your solo 401k. If it’s not really another job you can’t do that.

 

[00:17:31] Here’s a complicated question. When a cash balance plan is created is there any flexibility for individual planned members to direct investments Or are all contributions managed as one fund? Well remember a cash balance plan or a defined benefit plan is really another 401k masquerading as a pension. And so you have to follow pension rules. Then when you close the plan in five or 10 years for some reason that you know is legit to you and legit to the IRS then you roll that money into your 401k or your IRA. But in the meantime it has to look like a pension and pensions don’t look like 401k’s. A pension is where your employer and maybe you put some money into a fund and the employer hires somebody to manage that and then they guarantee a some sort of benefit down the road. But you don’t get to change the benefits around with a pension plan or a defined benefit plan. And so with the cash balance plan you don’t get to do that either. It’s all manners as one fund.

 

[00:18:34] OK a related question how does the plan sponsors administrators make their money? Well typically they charge fees. These might be flat fees they might be asset under management fees. With my partnerships plan, I think the asset under management fees are about zero point three percent per year. That covers both the management of the assets as well as the actuarial costs because remember with a pension you have to have an actuary come in and do all these fancy calculations every year. And so that’s one big reason why a cash balance plan generally has higher fees and a 401k.

 

[00:19:10] What are typical a reasonable administration fees for management of the plan? Well certainly if you’re up there paying more than point five percent a year I think you’re paying too much because there are people willing to do it for less. But either a low asset under management fee and the point one point two point three kind of range or a flat annual fee of just a few thousand dollars I think is probably reasonable. If you’re paying much more than that it may not be worth having this plan at all. Because all of your tax savings is being eaten up by fees.

 

[00:19:41] Are the fees generally split evenly among plan participants or are they split proportionally based upon assets in the plan? Well, they’re generally split proportionally. But lots of variation. Read your plan document if you’re set and one up you can set it up any way you like really.

 

[00:19:58] A few other questions related to it. Can one sign in to see her account in a real time balance? You can sign in and see how much is in the account but the balance might only be updated once a year. This isn’t a 401k where you’re going to move investments around from time to time. It’s something that’s much more hands off.

 

[00:20:17] If the fund consistently underperforms the assumed earnings rate How does that ultimately reconcile? Well the truth of the matter is if you expect this to return 3 percent a year and it has negative returns year after year after year the owners of the company are responsible to put more money into the plan. Now if the owners of the company are also the same people as the beneficiaries that’s not necessarily a bad thing because that basically forces you to buy low and so contributing more to your cash balance plan after 2008 like event is not really a bad thing as long as you have the money to put in there. But it is a requirement because the employer is backstopping this plan. And so if the returns of the investments are not giving you enough money to provide whatever return you guaranteed to the participants in the plan you have to make that up.

 

[00:21:12] On the flip side if the returns of the investments are very good they’re much better than what the anticipated return was for the plan that money goes into a side fund where it continues to grow and build. And then when you have a down year first you raid that side fund to make up the difference. Before you go to the employer in order to make up the returns below the projected returns for the cash balance plan.

 

[00:21:39] OK. Let’s go to some questions that came in on social media. These are actually left over from the podcast We did a couple of podcasts ago with the physician on fire. This one comes in on Facebook from Abigail Polzin who asked should I pay off my mortgage quickly now and then invest more heavily or do it the other way? Well this is the age old question. This is the question I get more commonly than any other and the answer is it depends.

 

[00:22:08] You know there is a lot that goes into that pay off debt versus invest question. We had a podcast on it a few episodes ago. I think we had one last year as well. I’ve got at least a couple of blog posts on it. I cover in the online course. I cover it in my book. It’s just a very common question and one that we will all wrestle with until that day when your debt free. I no longer wrestle with it because I don’t have any debts at all. And so it’s very easy for me to make this decision. I just invest more heavily. But when I had a mortgage I looked at it a little bit more carefully. For example I wasn’t going to pass up a Roth IRA contribution or a 401k contribution much less a 401k match in order to pay off at two point seventy five percent mortgage but once I had a significant amount of wealth and I had maxed out all my retirement accounts and I was considering investing in something like a municipal bond fund in a taxable account then paying off the mortgage starts looking a little bit more reasonable and after a while it just didn’t make that much of a difference in my financial life whether I had a mortgage or not. And so we decided to pay ours off.

 

[00:23:17] But there’s certainly nothing crazy about holding on to a 2 or 3 percent debt for a few years or even a decade or two in order to try to get better returns investing. Just realize what you’re doing. You’re borrowing money to invest and you’re borrowing money you know because money is fungible you’re borrowing money for everything else you buy in your life too. And that’s what kind of started to bother us after a while as we realized, Yes we’ve got this debt hanging out there of 100 or 200 thousand dollars and now we’re buying wake boats and fancy vacations to Paris. And in reality that made us a little bit less comfortable when we thought about borrowing money in order to buy a wake boat, something that was clearly not a required item in our house. And so then we decided well we’ll just pay off this debt and be debt free. But there’s lots of different ways to slay that dragon. I wouldn’t necessarily feel that you have to follow my pathway on it but if you’re carrying around 8 percent debt thinking you’re going to make better returns investing you’re probably making a mistake.

 

[00:24:17] Our next one comes in from on Facebook from Reese Bohn who asks which loan company has the best interest rates for refinancing student loans? Well splash financial is the sponsor of this particular podcast so I guess to plug them first. But the truth of the matter is it depends. Depends on your debt to income ratio, depends on your credit score, depends on how much debt you have, and depends on the company. Every company calculates out what your interest rate is going to be a little bit differently. And so that’s why it’s a good idea to apply to three or four or five of these companies all of which are listed under the recommendations tab on the white coat investor website. But apply to four or five of them and take the one that gives you the lowest rate because you will get different rates from them. And it’s almost impossible to predict in advance which one is going to give you the best rate.

 

[00:25:12] OK on Facebook Tran Tran writes in with an extremely complicated question. It didn’t take long to write it but it would take a long long time to answer it definitively. Basically Tran says new tax laws S and C corp and when it becomes worth it to do this versus just write offs on ten ninety nine income personal taxes only. Well I think what Tran is getting to here is with these changes in the tax law that passed at the very end of 2017 does it make more sense now to go start an S corp or a C corp in order to get more write offs. And the truth of the matter is if it didn’t make sense before for you it probably doesn’t make sense now. The main benefit to become a corporation for a physician is to get that S declaration and become an S corp. What this allows you to do is to mark some of your income as salary and some of your income as distribution and the benefit of what you call distribution is you don’t have to pay payroll taxes on it like Social Security or Medicare taxes. Now you’ve probably already maxed out your Social Security taxes on the salary portion of your income. And so what you’re really saving is just the Medicare taxes that two point nine percent Medicare tax.

 

[00:26:34] And so if you can declare 100000 of your income you know after all is said and done maybe you save a couple thousand dollars on your taxes for each hundred thousand dollars that you declare as distribution rather than salary. That’s worth the hassle of incorporating. Then go ahead and incorporate. If not then don’t bother just be a sole proprietor. You can still write off all your malpractice insurance and your licensing costs and your medical staff dues and your white coats and your stethoscope and all that kind of stuff just fine as a sole proprietor you don’t have to be a corporation to do that.

 

[00:27:09] The new tax law does have this pass through deduction for pass through businesses. But that really doesn’t affect the S corp decision because that deduction exists just as well for sole proprietors as it does for S corp. And the truth is if you’ve got enough income that you’re thinking about doing an S corp, chances are you’ve got too much to get that deduction as a physician anyway because there’s a phase out on it for professional income.

 

[00:27:37] All right let’s take a few questions off of Twitter. This one comes in from Joshua Aly who asks I want some thoughts on where to practice as a financial strategy. I see so many residents wanting city life but rural areas pay a premium with the low cost of living. Well this is true. I mean oftentimes by going to a more rural area not only do you have a much lower cost of living but you will often have a lower tax rate when you get outside of Manhattan and California and those kinds of places New Jersey and Washington D.C. and these places with relatively high taxes.

 

[00:28:15] And so you save the cost of living you save the taxes and a lot of times surprisingly you can even be paid more in a more rural area by getting out into those you know what are called affectionately as flyover states. And so you’re saving in three different ways by going there.

 

[00:28:34] The downside is well if you really want to live in the Bay Area you’re not going to be happy in Oklahoma. If you really want to live in Manhattan you’re probably not going to be happy in West Virginia. And so I think you have to figure out what you want out of your life. There’s no doubt that you can become financially independent faster if you live in some small town in rural Minnesota than if you live in San Diego. I have no doubt in my mind that that’s true but whether that is what you want for your life or not you’re really going to have to consider.

 

[00:29:05] Also it’s not like this is an all or none decision. I mean you can go live in the Midwest for a few years pay off your student loans save up some money and then move out to San Diego or wherever you want to live long term. Likewise you can go practice in San Diego or San Francisco or you know New York or wherever and then retire somewhere else like Florida or Texas and take advantage of that geographic arbitrage to someplace that doesn’t have any state income tax where when you pull that money out of your tax deferred retirement accounts. So it’s not an all or none decision. And most of us figure out where we want to be long term and then deal with the financial consequences of that.

 

[00:29:49] In my case I live in Utah which is kind of a moderate tax burden kind of a moderate cost of living. There is certainly cheaper places to go than this but it’s a good mix of where we want to live and reasonable financial benefits for living there.

 

[00:30:04] This next one comes in on Twitter from Frugalish physician who asked Do you think people who have been financially successful have an obligation to help those who are struggling? And if so what do you think that obligation is? I do think I have a responsibility to others. I view my money as kind of a stewardship mentality that I am the steward of this money for the next 40 or 50 years and that society and God expect me to manage it well as do my future family members. And so I think I have an obligation to manage it well, to invest it well, to give it well, and to spend it well and so that for us means giving money to charity. It means giving money to family members particularly in this case We tend to give towards college savings funds for our nieces and nephews. It means saving up money for my own children. And you’ve read elsewhere on the blog most likely about the different ways in which I give them money. You know the 20s fund, and their college savings fund, and the daddy match in their Roth IRA for any earned income they have but also you know future heirs and thinking about how we can make life easier for them.

 

[00:31:21] But that also applies to people who are struggling you know and that’s where the charitable contributions come into us. We’re very proud in 2017 it was the first year we gave more money away than we spent and we hope that will continue to be the trend for many many years. So I think that’s pretty important to give money away to people who are struggling. And I don’t count taxes on that either. You know when it’s mandatory that’s not really giving money away.

 

[00:31:48] OK. This one comes in on Twitter from Nick Deontay. Hope I’m pronouncing that right. Who else what are your suggestions for those living in New York City all five boroughs about buying real estate Where a two bedroom condo starts at greater than five hundred thousand dollars. You’re really in a tricky situation there because a physician income is not nearly as impressive in New York City as it is in Tennessee. And you know it’s relatively easy to buy one property a year when you live in Tennessee and you can find properties for 100000 or 200000 dollars or 300 thousand dollars or whatever when you go into Manhattan and you can’t find anything for less than a million dollars. It becomes a little bit harder on a physician income to buy those sorts of rental properties much less you know something to live in that you want to live in. And so it becomes much trickier.

 

[00:32:38] You’ve got a few options. One you can save up for longer. Instead of buying a property every year you could buy a property every two or three years. Another option is to invest elsewhere. You know you can buy turnkey properties out of state. I’ll never own a rental property out of state again at least not by myself just because it’s too big of a hassle for me. But that is an option if you really want to own rental real estate and it’s just not affordable or doesn’t seem to be a good deal in your local area.

 

[00:33:07] You can also invest in other stuff you can invest in reits, you can invest in syndicated properties, you can invest in funds, or crowdfunded real estate. You can also just invest in stock and bond mutual funds. There’s nothing that says you have to invest in real estate and so there are a lot of options there. But certainly it becomes more difficult the higher the houses cost in relation to your income.

 

[00:33:31]Another question coming in on Twitter this one’s from Lauren Klick who asks is beneficial in any way to have a 501C? If one owned a private practice. Could the charity legally financially benefit the private practice in any way? I think the idea here is to somehow use a 501c or a non-profit as part of your practice in order to provide medical care to low income persons. I think what Lauren is trying to do here is probably not what she thinks it’s going to do. I mean 501 c3s are great for charitable purposes. And you can donate money into a 501 c3 even if you own it or even if you manage it rather and get a charitable deduction for that. But what most doctors do for low income persons is they just take care of them and don’t charge them. Now that doesn’t allow you to get any sort of a tax write off because you never had the income that came with seeing that patient.

 

[00:34:37] And so you can’t take a tax write off for something you never got any income for. I’m very much aware of this given that our practices almost 20 percent of its patients who don’t pay us you know other self payer or what we call no pay patients. And so there’s really not a lot of benefit there to somehow trying to work a 501 c3 into the practice to try to somehow financially benefit you for what you’re doing anyway. If you want to take care of low income people I recommend you just see them as part of your practice decide how much of your time you are going to dedicate to that. Make sure you can keep the practice financially viable and you know and pay all of your employees and stuff because they might not feel nearly as strongly as you do about working for free. But I don’t think getting into the 501c3 mess is really going to help me there.

 

[00:35:28] Now if you’re doing some other thing on the side where it makes sense to be a non-profit then sure go through the paperwork and the costs of starting up a 501 C3 and donate money to it and take those donations off your taxes. But I can’t think of a really great way to combine that with your practice in order to help people or somehow reduce your tax burden.

 

[00:35:49] All right. We have been going for a while. I think we probably had to cut it off there. I’m appreciative to Splash Financial for sponsoring this episode. They are a leader in student loan refinancing for doctors. Consolidate and refinance your federal and private student loans to save money and simplify your life. No application or origination fees and no prepayment penalties. Your family is always protected with loan forgiveness in case of death and permanent disability. Plus white co-investor readers and white co-investor podcast listeners receive a one thousand dollar bonus for loans over two hundred thousand dollars, a 500 dollar bonus for loans of one to two hundred thousand dollars, or a 250 dollar bonus for loans under 100000 dollars. You can even use their loan assessment tool to compare government repayment options against refinancing. Learn more at W WW dot white coat investor dot com slash Splash Financial.

 

[00:36:41] Remember that the White Coat investor online courses available out there to help you develop a financial plan. If you’re looking for something lower cost the White Coat investor book is also available. Or if you’re looking for something that’s free. There is the free monthly newsletter with the 12 e-mail financial boot camp series available to you. Sign up for all of that at White Coat investor dot com. Head up shoulders back. You’ve got this. I’ll see you next time.