Common Real Estate Questions from High-Income Professionals

INTRODUCTION

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.

Dr. Jim Dahle:
This is White Coat Investor podcast number 453.

Full disclosure, what I'm about to say is a sponsored promotion for locumstory.com. But the weird thing here is there's nothing they're trying to sell you. Locumstory.com is simply a free, unbiased educational resource about locum tenants. It's not an agency. They simply exist to answer your questions about the how-tos of locums on their website, podcast, webinars, videos, and they even have a locums 101 crash course.

Learn about locums and get insights from real-life physicians, PAs, and NPs at whitecoatinvestor.com/locumstory.

All right, welcome back to the podcast. We have had a wonderful morning and afternoon here today at White Coat Investor. We had a whole bunch of people in town I wasn't expecting to see. Two of our staff members were here for our staff meeting today, which was great. They're normally on Zoom, but it was fun to see them in person.

I'm reminded every time I meet with our staff how wonderful they are, and I feel like a total slacker. In fact, I am certainly the thing holding White Coat Investor back. All these wonderful people working full-time and pouring their heart and soul and careers into White Coat Investor is really pretty impressive.

We have a great crew meeting here, and it seems like it's more and more people all the time. And even when you get beyond our employees and our independent contractors that function almost like employees, there's lots of other people, too.

We've told you a little bit about White Coat Planning, and that's moving right along. I think four or five planners were hired before we have recorded this. They're going to be taking clients later this spring, and it's going to be pretty awesome. But that company is now already half the size of White Coat Investor, and we were talking about our partners that help you buy disability insurance and life insurance.

We try to meet with them the day before WCICON starts, and to see how committed they are to the mission of White Coat Investor to help you get a fair shake on Wall Street is pretty awesome.

It really is a huge community, and I'm honored to be a part of it. It's shocking to me to think that this is what me going on a Monday morning and typing some crap into the internet has grown into. All I wanted was for you to get a fair shake on Wall Street, and now there's all these people whose lives and careers and their living is based on us in this community.

Thanks for being here. Thanks for being part of the community. Obviously, without listeners, it's not much of a podcast, and I always think it's wild to meet all of you guys that listen to this podcast because the podcast feels to me like something we did on a whim. We're like, “Oh, people aren't reading blogs as much. They're listening to podcasts. I guess we'll do a podcast.”

I still think of myself as a blogger, though, and I think I do my best work on the blog, and yet I meet you folks, and none of you have ever, well, not none of you, but some of you have never read the blog at all. What's fascinating to me is to go to WCICON and meet people there who have never either read the blog or listened to the podcast.

So however you like to learn this stuff, please learn it. It's important. It'll make your life better, and whether that's conferences or online courses or social media or podcasts or blogs or whatever, we're trying to package this information up into whatever format you want to digest it in and to inspire you to take control of your financial life so you can actually focus on the things that really matter, which is your practice and patience, your family, and your own wellness.

I'm supposed to tell you tomorrow is the swag bag deadline for WCICON25. From the first time we did WCICON, I'm like, swag bags suck. Let's make an awesome swag bag that people actually want. We put books in the swag bag, like books you actually want to read, books by the keynote speakers and that sort of thing. And so, it really is the best swag bag of any conference I've ever been to, and we try to do that again every year.

But tomorrow's the swag bag deadline. If you sign up for WCICON this year after tomorrow, we will not guarantee we can get you a swag bag. The books have to be printed, they have to be shipped, we have to get them here, we have to get them to Vegas, there's a bunch of stuff we have to do to make sure we can get all that together. So we need you to sign up early enough that we can guarantee that for you.

Now usually we've got some leftover stuff and we'll try to get you something even if you sign up after January 9th. But be aware, if you want that awesome swag bag, tomorrow is the day, the day after this podcast drops, January 9th is the last day we're going to guarantee a swag bag coming to the conference.

But the conference you should come to even if you can't get a swag bag, it's awesome. March 25th through 28th, it's right next to the Red Rocks of Las Vegas this year. If you want to go to the Strip, you can. If you don't want anything to do with the Strip, you can still come to this conference. It's a beautiful resort, it's CME eligible, it might be the best investment you can possibly make in yourself. If nothing else, it'll be a few good days spent with your kind of people. You know how you can't talk to anybody about finance in your personal life? You can talk to the person just sitting next to you in this conference about personal finance. It's pretty awesome.

All right, I mentioned the swag bag, what's in it this year? At a minimum there's going to be How to Retire. This is Christine Benz's new book. 20 Lessons for a Happy, Successful, and Wealthy Retirement. The Compass Within by Robert Glazer. The WCI book we're going to include is the WCI Boot Camp book. At a minimum you're going to get those three books this year.

Okay, I have a confession to make. I don't know if this is a confession. We've got a webinar coming up for the FEW, the Financially Empowered Women. And we're going to have our first speaker there who is not a woman. I'm a little worried about this. I'm actually pretty nervous because it's me. I'm going to be joining the FEW to talk about all things Roth. It's backdoor Roth season. It seems like a good time to do it. We're going to do it January 14th, 6:00 P.M. Mountain Time.

We're going to try to get into as many details about this as you need. And then we're going to take questions. You guys are sick of asking backdoor Roth questions. I'm going to try to talk about all things Roth. I'll at least be talking a little about the mega backdoor Roth. We'll be talking about Roth conversions and the decision there. The decision between making Roth versus taxable contributions. All of that we're going to try to cover that night. It's going to be all Roth. Sign up whitecoatinvestor.com/few.

Now I know I'm a guy, but for you guys out there, you don't get to sign up for this one. This one's only for the women. And we'll see. They might throw tomatoes at me. I don't know exactly what's going to happen. I'm the first male speaker they've ever had at a FEW event. We'll see how it goes. I'm a little worried about it, but hopefully it goes okay.

All right. We're going to be talking about all kinds of things today about real estate. We've gotten a number of questions from our most recent real estate webinar. I've got an interview with one of our real estate sponsors. We'll insert into this podcast as well. And talking about all things real estate.

Why are we doing this? Well, real estate is not very sexy right now. And the reason why is mostly 2022. Real estate had a number of really good years, 2016, 17, 18, 19, 20, 21. And then 2022 interest rates went up 4%. That's tough for a leveraged investment. And most real estate investments are leveraged. And so, 2022 was not a great year.

For the publicly traded markets, as soon as those interest rates went up, their returns dropped significantly. I think publicly traded REITs were down 22% or something in 2022. There's a little bit of delay on the private side. Which is typical because they're not marked to market every day, like the publicly traded investments are.

But it hasn't been a great four years for real estate. In fact, I think if you include 2022 through the end of 2025, I think real estate's actually got a negative return over the prior four years. Whereas what have stocks been doing. They took a hit in 2022 for sure. But 2023 was like 24% for the US stock market. 2024 is like 26%. 2025 is not quite over when I'm recording this, but it's up like 17% the US stock market. So, it's done dramatically better than real estate over the last few years.

And so, no one wants to touch real estate. Well, you're not supposed to buy what's done best in the last few years. That's performance chasing. If real estate makes sense, it makes more sense now than it did four years ago. If you've been considering adding real estate to your portfolio this is probably a pretty good podcast to listen to. If you haven't, or you already have real estate, that's okay too. But we're going to be talking about lots of real estate stuff today.

A lot of these came from our most recent real estate webinar. I did a webinar, I don't know, like 5,000 people signed up to it. I think we only let 1,000 into the webinar. A lot of people just got the video from the webinar. But there are a lot of questions we couldn't get to. I think I spent 45 minutes afterward answering questions, but there's still some that came in that we weren't able to get to. We're going to be covering some of those today.

WHAT DOES DUE DILIGENCE ACTUALLY MEAN?

Dr. Jim Dahle:
Let's start with the first one, which is the question we frequently get about real estate, which is “What does due diligence actually mean?” And the questioner asks, “I have a hard time knowing what due diligence includes when evaluating more passive real estate investments. I'm finding it hard to make any moves or know exactly where to start.”

All right. So, what does due diligence mean? Well, at a bare minimum, it means reading the material that the investment has to provide to you. Most of the time, these are limited partnerships or limited liability companies. They have some sort of an operating agreement, some sort of a private placement memorandum, a PPM. Why don't you start by reading that? Then you'll understand how the investment works. And if you're like most people that read one of those 100 plus page documents, you'll have a few questions.

Now, you should concentrate your reading on a few sections of that document. There's a section that'll talk about fees. Make sure you understand it exactly. There's a section that talks about risks. Make sure you understand that completely. There'll be a section that talks about liquidity, like how you get your money back if you want it back before this thing's done.

Make sure you understand that because, especially with private real estate investments, they're usually not 100% daily liquid. It's not like buying the Vanguard REIT index fund where you can get your money back any day. When the market closes, you can get your money back out of that fund. In an ETF you can sell any minute of the day. Super liquid compared to a private real estate investment. They are not. So you need to understand how all of those things work.

Now, part of due diligence is making sure you're not investing with a scam artist. Start looking at who the principals are in this company. Who's in charge, the two or three or four or five people that are going to be most in charge of this company. Google their names. See what's out there. Google their names in connection with scam or with conviction or with lawsuit, those sorts of things. If there's something out there like that, you want to know about it and be able to ask questions about it. It doesn't necessarily mean you can't invest with somebody just because some hit came up, but make sure you understand what's going on – it allows you to ask questions about it.

Another important part of due diligence is simply looking at track record. Have they actually done what they're planning to do before? There's a lot of risk when you invest in a company's first fund or in somebody's first syndication. They've never done this before. It's a lot easier to screw it up when you've never done it before.

So you're not necessarily just looking for the person with the highest past returns, but it's nice to see that they've done what they're planning to do before. And there's a lot of variation. Even if we look at the people that sponsor here at the White Coat Investor. We have people that have been doing this for four, five, six years. We have people that have been doing it for 30 years. It's a big difference. But one year is not very long at all.

A lot of people asked us about a company that had some syndications kind of go bad recently, and they're like, “Well, what's going on with this?” That company had offered to sponsor this podcast. And we said you've never really done this before. We probably don't want to do that.

Now, I'm not going to pretend every sponsor we have is so vetted you can never lose money with them. That's not the case. But if they've never done it before, we're not taking them on as a sponsor. Because the reputational risk for us is just too high. It doesn't mean there's a guarantee that just because somebody sponsors this podcast that you won't ever lose money with them. That is a very real risk of any leverage investment and can certainly happen and has happened in the past.

So, you still need diversification to protect you from those possibilities, from manager risk, from leverage risk, from market risk, from those sorts of things. But it's a good place to start.

The other thing you can do is you can talk to other investors, talk to them, “Hey, what companies have you worked with? What do you like about them? What do you not like about them? What's kind of standard in these sorts of deals? What fees should I expect to be paying? What kind of liquidity should I expect to have? What should the waterfall of how the profits are divided up between the general partner and the limited partners? What's that typically look like?”

We go into this very much in depth in our No Hype Real Estate Investing course. Like all of our online courses, there's no risk to you to buying that if you don't like it and have watched less than 25% of it and ask for your money back in less than a week, we'll give it back to you. Try taking that and we teach you a lot more about how to do due diligence on these companies, on these funds, on these syndications, if you're interested in investing in those things.

INTERVIEW: GOODMAN CAPITAL

Dr. Jim Dahle:
All right, this seems like a good place. Let's insert our interview with one of our sponsors, Goodman Capital. We'll talk a little bit about real estate, particularly debt real estate investing with them.

My guest on the White Coat Investor podcast today is one of our sponsors, Eric Goodman, the managing partner of Goodman Capital. Eric, welcome to the podcast.

Eric Goodman:
Jim, thank you very much for having me. I'm really excited to be here today.

Dr. Jim Dahle:
Tell us a little bit about yourself and what Goodman Capital does for investors.

Eric Goodman:
Again, I'm the managing partner of Goodman Capital. Goodman Capital has been a trusted name in private lending since 1987, when our management team formed the essence that would grow into one of the largest private lending firms here in the major Northeast.

At Goodman Capital, we provide firstly mortgage financing on class A multifamily mixed use assets across the greater Northeast market. We sponsor funds, syndications, all focused on income generation and capital preservation.

Dr. Jim Dahle:
Okay, very cool. Now I've been out here, I feel like all alone in the wilderness banging on a drum and preaching the merits of investing on the debt side of real estate. Can you tell us a little bit about investing on the debt side and why some people might prefer to do that rather than being on the equity side?

Eric Goodman:
Absolutely. Well, I'll tell you, I always chuckle when folks highlight a finite period of time to be in the private lending space like the last two, three years, because as you know, we've always been in the private lending space. In fact, it's all we've ever done since 1987. Every decade offers itself the right opportunities.

Now, for those investors who may have participated in that run-up of equity syndications, and now they're wondering why they're receiving capital calls and losing principal, it's because they're in an inflationary non-resistant asset class that's struggling under the burden of debt financing, which is eating away at returns of the underlying equity investment.

In the lending space, the opposite is true. When you originate loans and you originate them with the way we structure them, floating interest rates with a fixed interest rate floor, you can actually capitalize on the increase in interest rates while protecting downside risk of a downturn in interest rates because of that interest rate floor.

Whatever asset class one likes, whether it's because of its historical resiliency or its sense of comfort or knowledge based around that asset class, you can invest in that same exact asset class, but safer. Instead of owning it on the equity, you can finance it on the debt.

At Goodman Capital, we only provide senior secured mortgage financing, primarily on mixed use, multifamily, and residential oriented assets because these are the types of assets that show the greatest resiliency across all market cycles. And with great resiliency, it gives us comfort that our loans are secure and investor principal protected.

Dr. Jim Dahle:
Yeah, I think a lot of people maybe don't understand the capital stack and what happens when a property or investment or whatever deal goes bad. The first people to lose their money are the equity investors. It's the same when you're talking about stocks in the stock market. The equity investors, when things go bad, can be completely cleaned out. And yet, the debt investors not only got all their principal back, but they got all of their expected return back. You're just investing in a much safer place at the capital stack.

Eric Goodman:
To your point, Jim, private real estate lending is one of the few areas where you can absolutely hit your returns, as we often do, even though the equity might lose principal. And that's because when you lend at the right loan-to-value, the ratio of the loan amount to the property value, you can withstand all kinds of macro headwinds.

At Goodman Capital, we primarily focus on sub 50% loan-to-value. That means that the ratio of our loan amount or our risk relative to the property value is half. The property value gets cut in half, we are still protected with our principal. But if the property value gets cut in half, the equity loses everything, we lose nothing. That paradigm is only afforded on the mortgage side of the equation when you invest in the senior, most safe part of the cap stack, as we do.

Dr. Jim Dahle:
Now, there's a price to be paid, of course. When people come and project returns that are pro forma for some value-add equity deal, they might be projecting 15%, 16%, 18% returns, hoping for 25% returns. Now, most of your investors don't come to you expecting 18% returns, I'm assuming.

Eric Goodman:
And if they do, they're investing in the wrong place. Because the only way to generate 15%, 18% on the debt side is to do very high octane, high loan-to-value financing, junior lien financing. That's not the place we play. Our investors are coming to us because they're looking first and foremost for capital safety. They like the way we structure, the way we underwrite. In 38 years, we've never taken a principal loss. And it's a track record that we tout by doing a few things, very few, but we do them exceptionally well. And one of them is managing risk.

If you're coming to someplace like Goodman Capital, you're looking to hit returns of 10%, 11% net annualized with monthly cash flow, tax efficiency. We have certain ways to enhance returns further, utilizing our dividend reinvestment plan with discounted gross conversion. But we never compromise on credit risk. Credit risk being the risk of principal loss from our loan investment. That's the one toggle that we never change. And we find other ways to manage that, as long as we're making sure that we're senior secure, safest part of the cap set, and never risking our principal.

Dr. Jim Dahle:
Yeah. Now, you operate mostly in the Northeast United States. It's mostly New York, a little bit of New Jersey. Tell us what's awesome about that market and being on the debt side in that market.

Eric Goodman:
I'll tell you about New York. It's very interesting. The largest institutional players, Blackstone, Angela Gordon, Starwood, you name it. Those players that invest in New York have dedicated teams in New York because they, like us, can appreciate some of the nuances of this very high barrier to entry market. I think what we're finding across the country is that those markets that are very low barrier entries were very susceptible to a lot of competition. And more competition, more product is now driving down pricing and is now hurting the fundamentals of those real estate markets.

In New York, we're a very finite little island over here. Very higher barrier to entry, just given from a physical space location, but also from a legal construct. If you want to lend in New York, you better be prepared to enforce that loan with a work out of foreclosure, navigate bankruptcy, appellate division filings. If you aren't equipped to navigate that, you really have no professional fitness to be lending in the New York space.

I'm proud that for the first 25 plus years of our family business, all we invested in was distress debt. We are uniquely positioned to be lenders because we know exactly how to manage downside risks.

Now, on the backside of being such a concentrated market, it's very interesting because it's very hard to construct new product here. And that's what's keeping vacancy rates sub 2% over the last handful of years post-COVID. Not only that, but our rental rates have been in a constant run up, hitting new market highs and staying elevated because of the lack of new inventory.

That's the real dichotomy for many of the secondary and tertiary markets that were moving into their primacy in the last five to 10 years that are now struggling with their rents because of overbuilding, overcapacity. Look at Austin, look at Denver. These were very attractive markets for quite some period of time, at least on paper. And now they're really struggling while New York is in its primacy.

Dr. Jim Dahle:
Now, the most interesting thing that's happened in real estate investing in the last five years is when interest rates went up 4% in 2022 in just over the matter of a few months. This was catastrophic for lots of highly leveraged equity deals in real estate. Can you tell us a little bit about how that affected being on the debt side investing when interest rates went up 4%?

Eric Goodman:
Absolutely. Well, I guess let's triangulate both. On the equity side, it was catastrophic because especially when investing in a multifamily or an income-oriented play, an equity syndication whose returns and financing are so tied to such razor-thin margins, much of multifamily construction pre-rate hikes was 75% loan-to-value. That's the ratio and certain debt service coverage ratios banks were using to size up that paper when they were building property.

And so, now you've had market run-ups and rents that are now plateaued because of all the new construction. And with that increased interest rates, multifamily, many secondary markets across the country are unable to keep up with that rent growth to continue to service their debt.

We've seen the debt increase at the pace of increases, unlike what we've seen in 20, 30 plus years. And that inability to catch up with that increase in rate has really put a lot of asset value compression on equity syndications that are now struggling and resulting in capital calls and asset value drops.

Conversely, on the lending side, all of a sudden today you can earn a very healthy rate of return at very low leverage. Because whereas if you take a look at where we were pre-COVID, take out the 400 or 500 BIPs, prime would have been at three and a quarter, the same 3% margin, which was the average margin we've seen in the New York market, 3% margin over a three and a quarter percent prime at six and a quarter. You look at the pre-COVID period, you were looking at 6 to 7% money as a lender.

Today you can earn a very healthy spread at 10% to 11% as we're doing just by doing nothing extraordinary, just lending at that midpoint between where banks are lending, if they're even lending today, and where the majority of the private lenders are at the 13, 14, 15% spread. Now we're in that nice 10, 11% spread, which as we talked about earlier, was really historically where the stock market's been.

But the difference is you don't have any of the volatility, any of the equity risks. And as that spread continues to narrow between equity returns and debt returns, it puts even more incentive and return from a risk adjusted perspective on the debt side, because you've removed the equity risks, and yet you're earning a very comparable level of return. And that's why we've seen such a big push to the private lending space.

Dr. Jim Dahle:
Very cool. Well, if any White Coat investors out there are interested in learning more about investing on the debt side of real estate, check out whitecoatinvestor.com/goodman. And you can learn more about Goodman Capital and the opportunities there to invest in real estate debt funds. Thanks for your time, Eric.

Eric Goodman:
Thank you very much, Jim.

QUOTE OF THE DAY

Dr. Jim Dahle:
All right, I hope you enjoyed that interview. Our quote of the day today comes from Dave Ramsey, who said, “Earning a lot of money is not the key to prosperity. How you handle it is.”

REAL ESTATE PROFESSIONAL STATUS

Dr. Jim Dahle:
The next questions we're going to go over are all about real estate professional status. The first one is actually not about real estate professional status. They just think it is. It is for the short term rental real estate professional loophole, “Can you still spend more than 100 hours doing a different job and qualify?”

Okay, we're getting two things confused here. There's real estate professional status. And there's the short term rental loophole. Two different things. It's not short term rental real estate professional status. They're two different things. And it's really complicated to understand.

But basically, here's the way real estate professional status works. If you are a real estate professional, you can take real estate losses, which are normally passive losses. And you can use them against your active income.

And so, if you're a real estate professional, and you see patients, you can use losses in your real estate investments against your active income. You pay less tax on those because you're using depreciation to shelter that income.

More commonly, it's your spouse. You're the doc, and your spouse is the real estate professional, but you file taxes together. So because one of you is a real estate professional, you can use it to offset the earned income. And so that's a beautiful thing, because now you're basically using money you would have paid in taxes in order to invest. Because you're covering all your income with depreciation.

Now, when you eventually sell a property, that depreciation is recaptured. But there's no rule that says you ever have to actually sell it. You could donate it to charity. You could leave it to your heirs, and they'll get a step up in basis at death, et cetera. That's the idea behind real estate professional status.

Now, what does it take to qualify? Well, the real estate professional has to work at least 750 hours per year in real estate. This isn't just like managing your investments. This isn't looking for a property. It's actually working in real estate, managing a property counts, those sorts of activities, but not just reading books about real estate investing. That's not going to count. 750 plus hours.

And here's the catch, which is what excludes most doctors and excludes me from being a real estate professional. You cannot spend more than the hours you spend in real estate doing anything else. So, if you get your 750 hours, but you also spent 1,000 hours practicing medicine, sorry, you're not a real estate professional. You cannot take those passive losses and use them against your earned income.

There is an exception though, because the way short-term rentals work is they're not considered a rental business. They are considered a hotel business. The usual rules for real estate, where it's generally always considered passive income, don't necessarily apply to a short-term rental business.

The rule that tends to be applied if your rentals are short-term rentals, especially that you're managing, is not 750 hours. It's 100 hours. And that is a lot easier to hit. I mean, 750 hours is like 16 hours a week. It's a serious part-time job. 100 hours, well, it's like two and a half weeks of work a year. Maybe you can get there, especially if managing five or six short-term rentals, you're going to get to your hundred hours in the year.

And so, that's how people can use their losses, which is typically from depreciation of the property, especially if you accelerate that with accelerated or bonus depreciation, especially if you do some sort of a cost segregation study. So you get a bunch of that depreciation upfront, then you can use it to offset your earned income.

With that background, what was the question? The question was for the short-term rental rep loophole, “Can you still spend more than a hundred hours doing a different job and qualify?” The answer is yes. That rule says you can't spend more than your 750 hours or whatever you spent on real estate, or you're not a real estate professional applies to real estate professional status. It does not apply to the short-term rental loophole.

Okay. Next question. “If your spouse works with you, who would you recommend as a real estate professional?” I'm not sure what we're asking here, but the bottom line is the person that's the real estate professional must work at least 750 hours in real estate and cannot work more than that in anything else.

If you're a full-time practicing physician and you worked 1,800 hours last year, you're probably not going to work more than that in real estate. But if your spouse was a stay-at-home spouse and wanted to get into real estate and is going to be a realtor, and is going to manage your seven doors of rental properties. Well, that's clearly the person that ought to be the real estate professional.

I don't know what we're asking if your spouse works with you. You're saying they work with you in your practice or your clinic, I don't know exactly. But it's the person that's going to do 750 hours in real estate and no more than that in anything else. However that works out in your particular marriage, that's the way it ought to be.

“Can the tax benefits of real estate professional status apply to your whole portfolio, i.e. direct real estate and private investments?” The answer to that is yes. If you're a real estate professional, you are a real estate professional. And so, those losses that you have when they get totaled up, they're going to go toward your real estate professional status.

Now, keep in mind anytime you're spending on a syndication where you're a limited partner, that's not counting toward your real estate professional status. You actually have to be working in real estate for those hours to count. Buying one rental property that you manage, then having 12 syndications that you have nothing to do with other than you collect checks, you're probably not going to get your 750 hours that's required to have real estate professional status.

Okay, next question. “If you become a real estate professional for rentals, do you still have to be picked up by a brokerage or can you be the brokerage?” Okay, I think you're thinking about being a realtor. Realtors generally work for a brokerage. And either one's fine if that's how you're getting your 750 plus hours by being a realtor, then you can be the brokerage or you can work for another brokerage. Either one's fine, both of them would work for real estate professional status.

But what a lot of investors are doing is they're not becoming realtors. They're just managing their rentals, they're buying and selling rentals and they're improving their rentals, they're doing the work inside the rentals to maintain them, to upgrade them, et cetera.

And in that case, you don't have to be a realtor at all. You certainly don't have to be picked up by a brokerage or be a brokerage, you can just be an investor. You just got to work 750 plus hours in real estate. I think a lot of real estate professionals are realtors and in that case, it wouldn't matter if you're the broker or not, as far as real estate professional status. You just have to decide how much you're going to be working there and whether it makes sense for you to start a brokerage. There's obviously additional fees and hassle and expertise required to do that.

BONUS DEPRECIATION TO OFFSET W-2 INCOME

Dr. Jim Dahle:
Okay, next question. “Can you benefit from bonus depreciation to offset your W-2 income in syndications and private real estate funds?” And does this require REPS or real estate professional status?”

Yes. If you want to offset earned income, you've got to qualify for that. And the main two ways people are qualifying for that is either real estate professional status or the short-term rental loophole. That's it.

And you're probably not getting either one of those if the main way you're investing in real estate is syndications and private real estate funds. It's just not going to happen. You're not going to get REP status if those are your only investments. You're going to need to be investing directly in some way or you're going to be working as a realtor.

You have to get 750 hours, it's 16 hours a week. How are you possibly going to come up with that as a limited partner in some syndications? Basically, once you sign up for a limited partnership, whether it's a syndication or a private fund or whatever, you're not doing any work there. This is mailbox money. Hopefully, if everything's going well, you're getting mailbox money, but you're not doing any work in that. So none of those hours are going to count toward your real estate professional status.

One of the partners we're working with through our discount program that you may have heard about and can find more information about at whitecoatinvestor.com/discounts is T-Mobile. Yeah, the cell phone people. Basically, if you go through these links, starting at whitecoatinvestor.com/discounts, you can get $20 per month off your full unlimited T-Mobile plan. $240 a year off.

Why not? We got lots of other perks available there as well, but this is a partnership we've been working with Wizard Perks on, and this is one of the better deals on there. Check it out. Just go to whitecoatinvestor.com/discounts, and you got to go through our website to get these discounts because they basically look at it as like an employee discount program, and you're all basically employees of White Coat Investor to be part of this group.

But if you go through that and go to the T-Mobile deal, you can get $20 off a month. It adds up over the long term. Of course, if you invest it, it adds up to even more, but why not? Why not pay a little bit less than you're paying now for your cell phone plan? Check out T-Mobile.

I think we have, frankly, most of the other cell phone providers on there as well. Chances are, if you haven't done anything recently with your cell phone plan, you're probably paying too much. So let's get you a discount. If nothing else, you can have a couple of nice meals out at some point in the next year with what you're saving. Why not?

WHY NOT STICK TO TARGET DATE RETIREMENT FUNDS?

Dr. Jim Dahle:
All right, our next question says, “Most target date retirement funds include REITs. Why not just stick to these?” Okay, this is a great question. The “why” real estate question. Or even if you decide you want real estate in your portfolio, why not just use publicly traded real estate? Whether that's in your target date retirement fund or whether you're using a separate REIT fund or ETF. The one I use in my portfolio is VNQ, the Vanguard REIT Index Fund. And I actually own it both in the fund share class as well as in the ETF share class.

Here's the deal. If you want to keep things as simple as possible, you use investments like target date retirement funds. Are there downsides to doing that? Sure, but it's a very simple investing solution, very simple. And if you just want to keep things as simple as you possibly can, if you put a very high value on simplicity, yeah, just invest in that. If you buy a total stock market index fund, something like 2% of it is invested in real estate investment trusts, publicly traded ones.

The downside is the real estate world is dramatically bigger than just what's in the total stock market index. Most real estate is not publicly traded. There's all this stuff you're not investing in if you're only investing in what's being traded on the public markets. Plus there's a few nice benefits of being in the private markets.

What do those big REITs have to buy? Well, they have to buy big properties, massive apartment complexes, huge malls, those sorts of things. It doesn't make sense for them to buy a duplex. Or a single family home, typically.

There are a few that try to get into single family homes. But they're not doing these smaller properties. These smaller properties can have fantastic returns, but they're just too small for these REITs to bother with. And so, you might be able to get better returns if you're in that kind of in-between space.

Plus you're going to have a whole lot more control. Especially if you're investing directly. If you're going down the street and you're buying a property and you're renting it out, you control everything. You control when it's bought and at what price, when it's sold and at what price, what you charge for rent, when you do renovations, how you depreciate it. There's all these things you're in total control of.

But if you go to a syndication or a private fund, you're putting that control onto somebody else. And if you just go to the Vanguard REITs Index Fund, you are so many steps removed from that control. It's not even close to being able to control it. So you've got to figure out how you're going to invest in real estate.

It's a spectrum, as I discussed in our real estate course, No Hype Real Estate Investing. On one side of the spectrum are publicly traded REITs. On the far side of the spectrum is ground up construction for a property you're going to manage and put tenants in and build and all that sort of stuff.

Everything else is somewhere in between. And you need to match how you're going to invest in real estate with not only your expertise, but your desire to have that control, to maximize the tax benefits out of it. And of course, if you just use the publicly traded ones, it's a little bit easier to diversify. You put $200 into the Vanguard REIT Index and you own pieces of 120 different REITs. It's probably 50,000 properties or something when you look at all those REITs. It's massively diversified and you give some of that up if instead you just go and invest in the property down the street. But you've got to find that balance that's right for you.

There are certainly a lot more cool tax benefits available when you're investing directly that you're never going to get out of buying publicly traded REITs, whether they're in a total stock market index fund or a target date retirement fund. And a lot of people are very interested in those. And you're just really not getting those when you invest publicly.

Plus the correlation between publicly traded real estate and your stocks is much higher than the correlation between privately traded real estate and stocks. Those are the main reasons why people would choose to invest privately, rather than just take a target date retirement fund.

But certainly if the rest of your investments are in a target retirement fund, real estate probably doesn't make sense for you. It's people looking to add a little more complexity to their portfolio in hopes of getting better returns, lower correlation with their other asset classes, some additional tax benefits. That's the reason why people complexify their portfolios. But there's lots of benefits to simplicity as well. And it can make a lot of sense to keep things as simple as you can.

ARE THERE REITS AT VANGUARD OTHER THAN VNQ?

Dr. Jim Dahle:
Okay, and the next question is, “Are there other REITs with Vanguard other than VNQ that may not only include large commercial properties?” VNQ is an index fund. It basically buys all the publicly traded REITs in the United States. So no, there really are no publicly traded equity REITs in the US that aren't in VNQ. It just buys them all. It's an index fund. You're asking if there's some REITs at Vanguard other than that, that may not only include large commercial properties. No, this is a problem with REITs across the band.

Now, some of them buy smaller properties than others, but now you're talking about picking individual stocks, picking individual REITs out of that index, and going with, “Oh, this one has a lot smaller properties on average, I'm going to go with that one.” That's probably not very practical. If you really want to invest in smaller properties, just get out of the publicly traded markets. That's probably the easiest way to do it. If you just want easy diversity and liquidity, that's where publicly traded REITs, especially via an index fund that buys them all, is probably a good move.

REITS

Dr. Jim Dahle:
The next question about REITs is, “If you're going to invest in REITs, where's the best place to purchase those funds? The 401(k), taxable account, Roth, or HSA?”

Okay. Well, this is actually a super complicated question. It's all about tax location, asset location, whatever you want to call it. And the problem is, the question, as usual, is being asked the wrong way. The question is not, where do you stick REITs? The question is, which asset class do you move into your taxable account next?

And usually, REITs are tax inefficient enough that they're one of the last asset classes you move into your taxable account. And so, they tend to be best in some sort of a tax-protected account. And if you're including your HSA as part of your retirement portfolio, you can put them in there. Otherwise, it doesn't necessarily matter whether you have them in your 401(k) or in your Roth IRA.

In my case, they happen to be in Roth 401(k)s and IRAs. That's where our REITs happen to be. We've moved most of our asset classes out of tax-protected accounts. Our total stock market index funds, totally out of tax-protected accounts. Our total international stock market index fund, completely out of tax-protected accounts. Our small value international funds, totally out of tax-protected accounts. Most of our small value US funds are out of tax-protected accounts. A big chunk of our bonds are out of tax-protected accounts. We just don't have the space.

The last things getting moved out of there are mostly debt real estate funds, publicly traded REITs, and TIPS. Those are kind of the least tax efficient ones. Those are the ones we're moving out of the accounts last. But it's a very complicated question. You have to look at it in total. Because the question you'd be asking is, “What do I move into taxable next? Not where do REITs go.”

ARE YOU LEAVING MONEY ON THE TABLE IF YOU DON’T GET INTO REAL ESTATE?

Dr. Jim Dahle:
Okay, next question. “Am I leaving money on the table if I don't invest in real estate in some way?” I think the answer to that is probably yes. I think you're leaving some money on the table. Does it matter? There's a good chance it doesn't. The truth is the default pathway that I've talked about for years works very well, very reliably. I'm not going to call it guaranteed. Nothing in this world is guaranteed.

But if you will just finish med school or dental school or whatever and you're residency in good standing, you take a good job that pays the average amount for your profession or better, you carve out 20% of what you earn over the next 20 or 30 years and invest it in some reasonable way, which can include boring old target retirement funds or putting it into a handful of low cost, broadly diversified index funds, you are highly likely to retire as a financially independent multimillionaire without ever investing into real estate in any specific way other than what's already included in those total stock market index funds.

So, do you need real estate to retire as a financially independent multimillionaire? Absolutely not. No way. Can you grow your wealth a little bit faster if you do include in your portfolio? I think there's a good chance you can. Obviously not the last three years. The last three years US stocks went through the roof and anybody who had any real estate in their portfolio instead did more poorly. But that's not the way all years goes.

Stocks did great in the late 90s. And what did they do from 2000 to 2010? Basically a return of more or less 0% for 10 years. There's nothing that says that can't happen for the next 10 years. If that's the case, you'll be glad you got 10% or 20% or 30% or whatever of your money in real estate. Even if real estate only makes 8% in those 10 years, that's way better than 0%.

I think it's worth adding into your portfolio. I've got 20% of my portfolio in real estate. But if you want to keep things really simple, a really good way to do that is to not invest in real estate or if you do, only do so in the publicly traded real estate. Because adding private real estate is going to complexify your personal finances for sure.

Not only is it going to make your portfolio more complex, it might make your estate planning more complex, it's almost surely going to make your tax filing more complex. This eventually drove me from doing my own tax preparation to hiring it out. I just couldn't figure out which states I had to file in for all these different private real estate funds. There are downsides to it.

But if I had to answer that question, “Am I leaving money on the table in the long term if I don't invest in real estate in some way?” I think you probably are. In fact, I think investing in building a small empire of short term rentals is probably the fastest way out of medicine. If you get to be 35 and you realize “I made a mistake, I don't like practicing medicine, it's not very fun for me. I thought I was going to like it when I was 20 and I was a pre-med and I took the MCAT, but now that I've finished fellowship and done this for a year or two, I don't really like it that much.”

I do think building that short term rental empire is probably the fastest way out. And I think if you really take it seriously, put a bunch of money into it, learn about it, work hard at it, run it well, take a reasonable amount of leverage, I think five years is reasonable for a physician to achieve some sort of financially independent status using a short term rental empire.

You're going to be managing it yourself, you or your spouse, and maybe that's good if your spouse is doing it, maybe they get REPS status and so you can use some of those tax breaks to build wealth faster. But I think it's probably the fastest way out of medicine. It really is.

I don't know that I'd want that for my career. I don't really have a lot of interest in building a short term rental empire. I'm using all my free time right now to record podcasts for you. The last thing I want to do after I finish recording this podcast is go check on my Airbnb account and go by and make sure the short term tenants this week in my short term rental are happy or whatever. It is some work. I don't necessarily want to do that, you may not want to either. But if you want out of medicine, it is an alternate pathway.

All right, I don't know that I've given you enough credit, by the way, for those of you who are in medicine or similar high income professions, dentistry, law, accounting, engineering, whatever. Your job's hard, it matters. Yes, it matters to provide people housing, but you know what? I talked to lots of real estate investors and only a few of them get really jazzed about providing housing for other people. I'm always actually impressed when I meet those people who are really passionate about providing housing. For the most part, people do real estate investing for the money.

That's not necessarily the case when it comes to dentistry and law and pharmacy and medicine and those sorts of things, particularly veterinary medicine. Some of the most selfless people I've ever met are vets. But if you're doing one of those things and no one's told you thank you lately, let me be the first. It is hard work. That's why they pay you well to do it. But sometimes it's nice to hear a thank you every now and then too. So thank you.

SYNDICATION VS. A FUND VS. REAL ESTATE DEBT

Dr. Jim Dahle:
Okay, the next question is “What are the pros and cons of investing in a real estate syndication versus a fund versus real estate debt?”

Okay, lots of different ways to invest in real estate. Let's start with the first of those, a syndication. The pros of investing in a syndication, I actually don't think very many people should have a syndication as their first real estate investment. I think that's probably a bad move.

But the pros of a syndication is control. You get to look at everything about that property and that deal before you buy into the syndication. That's the pro compared to a fund. With a fund, you're counting on the manager to buy good properties and put them in the fund. With a syndication, you can actually look at the property and decide “Is this likely to be a good investment for me or not?” You can go walk the property, you can go walk the neighborhood, you can go check out the local grocery store, you can talk to people there about what they think about living in that apartment complex. You can do all kinds of due diligence for that one property.

If that level of control is really attractive to you, that's what people like about syndications. The cons, well, for whatever the minimum investment is in that syndication, you get one property. Maybe it's $100,000 minimum. Whereas you took $100,000 and put it into a fund, you might get 12 properties or 15 properties. It's just a lot more diversified.

That's one reason why I think it's probably not a great first real estate investment. In fact, when the 2022 meltdown happened in real estate, because interest rates went up 4% a year, and really it took several years for that to play out, and you start seeing some syndications failing and people actually losing all their principal, a surprising number of those people only ever owned one or two of these syndications. And that's probably not a great first real estate investment. So, keep that in mind. Those are the cons of investing in a syndication is you're putting a lot of money into one property.

A private fund, and I think we're going to distinguish it from a debt fund here in just a moment. We're talking about an equity fund. The benefit is that you get more than one property. For your $100,000 or whatever that minimum investment is, you might have 12 of these properties. If one of them goes bad, and I've had a fund where one property went bad, and the fund manager literally mailed in the keys for that property, and we got a return of zero on that property of those 12 in the funds, but the overall return on the fund was still 10% per year. That's the benefit of diversification is every property doesn't have to do great for you to have a reasonably good return. You just get a lot more diversification. That's the benefit of the fund.

The downside, of course, is you don't get a look at every property. Some of them may not even be bought yet. When you buy into the fund, you have to put a lot more trust into the manager than maybe you would have to if you were doing a single property syndication.

Now the third thing they wanted to talk about pros and cons of was a debt fund, real estate debt. And I'm not a big fan of you just taking your $100,000 and loaning it to one developer. That's not what I'm talking about. I'm talking about putting it in a fund. And a typical fund like those I've invested in, they've got 50 or 75 or 100 or 200 loans out to different developers. And it's a pretty simple proposition. These developers find it painful to go to a bank to try to get money for the next eight months to build this property and sell it off.

So, what would they rather do? They'd rather go to a fund. It doesn't matter to them that they're paying 10% or 12% interest on this. It's just the cost of doing business. But it wouldn't be unusual for them to be paying 12% and two points for this debt. That's just the cost of doing business when you're in the development world. And you're only having that money for six months or a year, maybe 18 months, that sort of a thing. So, the interest doesn't add up to that much compared to all the other expenses of whatever you're doing to that property.

And so, these funds will loan that money. But typically in first lien position, meaning if the borrower doesn't pay them back, they take the property. And if they're smart, they're only loaning 60, maybe 70% of the value of that property. Even if they have to foreclose on it and they got to deal with it for a year and then they get it sold for much less than it was supposed to be worth, you still get your principal back. And it's not unusual for one of these funds. I've got one that is about 75 loans and two to four of those loans are typically in some sort of default status at any given time. And so, the funds foreclosing on the people that borrowed the money. And that's just part of the business.

The beautiful thing about a real estate debt fund is you're in a different position in the capital stack, a much more favorable position. You've heard about some of these syndications going bad in the last few years. Well, who got cleaned out? The equity investors, not the debt investors.

The debt investors get paid first all the time, which is particularly important when things go bad. It's not unusual for not only for the debt investor to get all of their principal back, but to get their entire expected return. And the equity investors are still cleaned out. They lost 100% of their investment and you got everything in your investment because you were investing on the debt side.

So, it's just a much less risky way to invest in real estate. And that's what I like about it. It tends to be, in my experience, the last six or eight or 10 years or however long I've been investing in real estate debt is it's pretty steady eddy. You’re not going to get 18% and 25% returns like you might in a really good equity side investment. You're going to get 6 to 11% returns. That's what you're going to get. Typically in the 8, 9% range is what I've typically seen. 10%, you're doing pretty good if you get 10% plus investing on the debt side. So, stock-like returns in a lot of ways much less risky than stocks.

What's the downside to real estate debt? Well, these are typically private investments. They're not 100% liquid, often more liquid than what you get on the equity side but not 100% liquid. And they're terribly tax inefficient. Your entire return is paid out as interest which is taxed at ordinary income tax rates and it's paid out every year.

So, it's as tax inefficient of an investment as you can think of. Compared to the dividends that you get qualified dividend rates on or long-term capital gains rates on or an equity real estate investment where the income is covered by depreciation so you can spend it tax-free. They're very tax inefficient compared to that. Of all my investments, they're the ones I try to keep in my retirement accounts if I can just because they are so tax inefficient.

All right, I think that's the last of our real estate questions I wanted to cover today.

SPONSOR

Dr. Jim Dahle:
Our sponsor for this episode has been Locumstory. And full disclosure, what I'm about to say is a sponsored promotion for locumstory.com. But the weird thing here is there is nothing they're trying to sell you. They're simply a free, unbiased educational resource about locum tenants, not an agency. They simply exist to answer your questions about the how-tos of locums on their website, podcasts, webinars, videos and even have a locums 101 crash course.

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Great sponsor, we've been working with them for years. I've talked to lots and lots of docs that have worked locums into their career, whether at the beginning of their career or they're trying to figure out what they want to do and just seeing the world. At the end of their careers, they're transitioning out of a full-time practice or just to mix it up in the middle of your career.

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All right, don't forget about the WCICON. You sign up for that at wcievents.com. The swag bag deadline is tomorrow. Don't forget about the FEW live webinar. We're going to talk about all things Roth, January 14th, 06:00 P.M. Mountain, whitecoatinvestor.com/few.

Thanks for telling everybody about the podcast. Thanks for leaving us five-star reviews. A recent one came in from SAS Memphis who said “It's never too late. Five years ago as a 54-year-old solo practice surgeon, I realized I had financially underachieved despite reasonable career success. I had always considered myself financially illiterate, but WCI and Dr. Dahle, along with JL Collins and Dave Ramsey helped me get back on track with my approach.

Having adopted the WCI mindset of high savings rate, low cost index funds, spending far less than I make and using all available qualified account tools, i.e. adding a medical HSA, backdoor Roth and cash balance plan to my existing 401(k) with profit sharing and taxable account strategy, I've greatly improved my situation and I'm much closer to being able to retire. Although I plan to do that gradually, make sure I have something to retire to. Thank you, Dr. Dahle.” Five stars.

Congratulations to you on your success and thanks for that five-star review. It does help us get the word out about this show.

All right, keep your head up, shoulders back. You've got this. We're here to help you. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only, and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 256 – Internist pays off $300,000 in student loans in seven years.

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Champion's program ends earlier this year than most years. The last day to apply is February 15th. This is our book giveaway program. We're trying to give a copy of the White Coat Investor's Guide for Students to every first year medical, dental, et cetera student in the country.

But you got to sign up, whitecoatinvestor.com/champion. What you're signing up for is to be your class champion, to pass the books out. If you sign up, we send you a couple of boxes of books, one for everybody in your class, and you pass them out. That's it. We give you some swag. That's the whole program. But we need you to apply by February 15th.

If nobody has handed you a book yet, your class probably doesn't have a champion. Please sign up to do it. And if you know somebody that's a first year student, make sure they've been handed one of these books. If not, encourage them to apply themselves. whitecoatinvestor.com/champion.

All right, we got a great interview today. A lot of times we get requests, people who want people with lower income or not highly paid specialties or somebody that's made some mistakes or somebody that's a non-traditional student. Well, today we've got all those things. I hope you enjoy the interview.

INTERVIEW

Dr. Jim Dahle:
My guest today on the Milestones podcast is Rose. Rose, welcome to the podcast.

Rose:
Thank you, Dr. Dahle.

Dr. Jim Dahle:
Rose, why don't you introduce yourself to the audience? Tell everybody what part of the country you're in, what you do for a living, how far you are out of training.

Rose:
My name is Rose Ngishu. I'm a physician in town of medicine subspecialty or rather specialty. And currently I'm practicing in the Dallas-Fort Worth area. I am seven years out of training.

Dr. Jim Dahle:
Okay, what did you accomplish?

Rose:
I just paid off my almost $300,000 student debt.

Dr. Jim Dahle:
Wow, okay. Take us back. Take us back to med school here and maybe even pre-med school. You're looking at it going, “Oh boy, I'm going to borrow how much a year? I'm going to be borrowing $75,000 a year or whatever.”

Rose:
Yeah.

Dr. Jim Dahle:
Tell us about how that felt.

Rose:
I'll go back to undergrad. I came to this country around 1998 with the full intention of going to medical school. I always wanted to go to med school. I always wanted to be a physician since about age seven that I can remember. And back in my country of origin, I missed it by one point and I was devastated. And so, talking to friends and family and realizing I may never get to this in this part of the world, I need to try it elsewhere. I made a determination to come to either Europe or the Americas to try it.

I came here thinking, “Okay, I'll just go and apply to med school and go to school.” And then lo and behold, I get to this country and I begin to learn the system. And they tell me, you have to have an undergrad before you can consider med school. And back in my country, I had started studying nursing. And so I thought, “Okay, I'll just go back to nursing.” I did my nursing training. I worked for about 10 years, actually, and started a family. We have four children, my husband and I.

Med school was beginning to become a non-reachable goal. In fact, I had thought, “Okay, maybe I just won't pursue that. Maybe I'll go to PA school or NP school or something like that.” And unfortunately, as the healthcare landscape started to change right around 2006 is when I started to feel it. We were short-staffed. You were running like a chicken with the head cut off and just couldn't get through all the tasks that you needed to do as a nurse in your shift. And I thought to myself, “I can't see myself doing this at 50.” I had to be honest. And just physically and emotionally, I was so drained. I actually became depressed.

And my husband, who obviously cared about how things were going, he's like, “What do you really want to do?” I said, “Really, I would want to pursue my dream.” And he looked at everything. We looked at each other and it was like, “How do we make this happen?” And so he decided, “Okay, we have four children. I'll stay home. You go to school.” That meant loans.

Dr. Jim Dahle:
So, he didn't work at all while you were in med school?

Rose:
No, not with four children. They need to go to school.

Dr. Jim Dahle:
And you didn't work at all either?

Rose:
Nope.

Dr. Jim Dahle:
You guys borrowed living expenses for six people?

Rose:
Yes.

Dr. Jim Dahle:
Plus tuition fees, books, everything?

Rose:
Yes.

Dr. Jim Dahle:
And somehow, miraculously, you kept this under $300,000.

Rose:
I made a mistake, which I will gladly share with the others so they don't make the same mistake. I had about $70,000 in my 401(k) at the time for my nursing job. And I pulled that out with the intention of doing some business with some folks. Bad idea. Don't do that. That was my way of trying to supplement loans, but it didn't work out.

Dr. Jim Dahle:
So you ended up losing the 401(k) money?

Rose:
I did.

Dr. Jim Dahle:
Oh, gosh, what a disaster.

Rose:
I did. And then we tried to just live the most frugal way you can. And with four children, thankfully, our cars were paid off at the time. We had two cars. And we lived on campus. They had student housing. We crammed all of us in a three-bedroom, two-bath apartment and just made life work.

Dr. Jim Dahle:
But this still doesn't work. Well, I guess maybe it works if you went to school in Texas and tuition was really cheap. That was the key. How much was tuition when you paid it back in 2006?

Rose:
Tuition was about $20,000, $26,000 a year.

Dr. Jim Dahle:
Okay. So, it was not the lion's share. The lion's share was your living expenses for the six months.

Rose:
It was my living expenses.

Dr. Jim Dahle:
Okay. You get out of med school. You owe $300,000. What year was that?

Rose:
It was actually more like $223,000, $226,000. And then you add on the interest and whatnot, it came to about $290,000.

Dr. Jim Dahle:
By the time residency was over.

Rose:
Yes.

Dr. Jim Dahle:
Yeah. Okay. What did you do with the loans in residency? Did you make income-driven repayment payments? This wasn't the student loan holiday, if you've been paying on them for seven years. Or did you just go into deferment?

Rose:
I went into deferment. I had multiple different kinds of loans. There was, of course, the Fed, Stafford and Direct and all that. And then I had some Texas college access loans that worked fair on their interest, which I think Texas does a good job of trying to supplement some of this. And then I had some private loans on top of this. I had just borrowed from here and there. And I paid interest during residency on some of the Texas loans, which wasn't bad. It was like $300 here and there. And then the others, I just deferred.

Dr. Jim Dahle:
Yeah. But basically your loans went from $225,000 to $290,000.

Rose:
Correct.

Dr. Jim Dahle:
While you're in your medicine residency.

Rose:
Correct.

Dr. Jim Dahle:
Okay. Then you come out seven years ago and you're looking at this debt. Did you have any sort of a plan or were you ignoring it at that point? Or at what point did you say, “We're going to pay this off in seven years?”

Rose:
My goal was to get rid of the thing as quickly as I could, because I knew I don't have a chance. If I dragged these around, it's just going to hound me. I'm data-versed generally, but also I recognized that it was my only avenue to get to where I needed to go, at least for my situation. And so from the get-go, I knew we had to pay this off and I was not going to wait for people who say, you could probably defer more and longer and dah, dah, dah.

But what I did was I looked for a job that would offer me some payback, some loan payback assistance. And so that's how I ended up in Oklahoma, a rural place. They offered reasonable figure that helped. They say this much a year, but then at the end of the day, you get about half of that because the taxes come out of that too. And I was like, you trapped me for like five years, but it helped.

Dr. Jim Dahle:
You worked in Oklahoma at a job that gave you some help paying off some of the loans. That made a difference. Give us a sense of the living situation. You go into residency, your husband's still a stay-at-home dad with the four kids?

Rose:
He tried to work something flexible, but it didn't really pay a whole lot. He did ride-share type things, Uber.

Dr. Jim Dahle:
Okay, a little bit of stuff here and there.

Rose:
Yeah, just so we'd get salt for today, sugar for tomorrow.

Dr. Jim Dahle:
How old are those kids now?

Rose:
22, 21, 18, and 16.

Dr. Jim Dahle:
Okay, you're getting closer to being an empty nester now.

Rose:
Oh yeah.

Dr. Jim Dahle:
Okay, this is all 13 years you're paying off this student debt with. And so you took the job in Oklahoma and that helped obviously, but it sounds like mostly, even during the last seven years, it was all your income as an internal medicine doc. Give us a sense of what your income looked like.

Rose:
Overall, I made over $300,000 a year. It was a good income.

Dr. Jim Dahle:
Does that include the loan payback amount too?

Rose:
The loan payback on top of that.

Dr. Jim Dahle:
Which was how much per year for five years?

Rose:
About $40,000.

Dr. Jim Dahle:
Okay, yeah, that added up to a couple hundred thousand dollars.

Rose:
Yeah, yeah.

Dr. Jim Dahle:
Okay, you actually made pretty good money for an internist. Were you working really hard? Were you taking a lot of calls? Were you doing hospital shifts? What were you doing?

Rose:
I did a little bit of everything. I did a little hospital work, mostly clinic. This particular part of the town, I was the specialist in town. And so, I had enough volume. Although at the same time, the hospital was generous. They offered me a guaranteed salary and I could take time off and they were very supportive, I guess, because of the need.

And so, I didn't feel like I was working overly hard. I did a few low income shifts at border town type hospitals on the border of Texas there in Wichita Falls for a few months, right before COVID hit. And so I made a few extra thousand dollars there just to keep us going.

Dr. Jim Dahle:
Okay, but between supporting four teenagers now and your husband and yourself and some moves and so forth, you still had to send some money into the lenders. This $40,000 a year wasn't going to wipe out your student loans completely.

Tell us how you balanced your financial priorities for the last seven years, how you decided how much to save for retirement, how much to spend, how much to send toward the debts, etc.

Rose:
We had some financial counseling sessions in my school right before graduation, end of residency. And so, I knew the priorities being, I need to secure my income with insurance and also just have a plan for handling my biggest liability right now, which was the student loans. And because of my family, and in part it was a compromise when we moved around, it's like, okay, once we move, we'll settle down, buy a house. And I had to honor that.

And it's the one thing that I probably would say isn't ideal for a typical person coming out of residency, don't buy a home just yet. But for me, I did. And this particular part of the country we were, there wasn't enough big homes for a family of six. And so, we just had to go all in and buy something substantial, which wasn't cheap, but I promised my family I was going to keep them comfortable.

Dr. Jim Dahle:
Yeah, at this point, they're teenagers, you're not talking about a two-year-old and a four-year-old and a five-year-old, oh, you guys can all share the same room.

Rose:
We have two daughters and then two sons. When we were in med school, they all shared rooms, the girls had one room and then the boys. And then we went to residency and the boys shared a room, and they still talk about it today. They're like, ah, I hated that. And I'm like, okay, I understand. And so after residency, that was not going to be a compromise. I had to get them all their own rooms.

Dr. Jim Dahle:
That's not going to work when you're making $300,000. That's not going to fly anymore. They've been sacrificing right along with you.

Rose:
Yeah. And so, I followed the plan for the most part. I deviated a few times, which is not good, but I stuck it to, we have a home, we have food, we have insurance. Now it's the loans and kept it to that up until about 2020. That was what? Two years into, three years into.

And during the pandemic, everybody was scared. I got into this also feel of unknown, what if I got sick and what would happen to me and the family and dah, dah, dah. And so, we decided at the time to dabble into real estate a little bit, especially since you could borrow up to $100,000 and invest it in something at the time, like a hardship money out of the retirement account. I guess I didn't learn this the first time.

Dr. Jim Dahle:
At least only this worked out better than the other business opportunity.

Rose:
It did. It did. We got a couple of homes and kind of like 50% equity into them. So, they're not bad. And so, I told my husband this is, at least if I die, you have something to start on besides my life insurance. You have a place for the kids and then you figure the rest of it out. I would just be honest, that was more of an emotional thing. And you always get tripped up on emotional things. And so it wasn't a well-thought plan, but nonetheless, we survived.

Dr. Jim Dahle:
You got something, you got some investments. Were you also funding retirement accounts too or was that it? That was your only investments?

Rose:
I did in residency, I actually put away almost $27,000 in my Roth, in my 403(b), which I converted at the end of residency to a Roth.

Dr. Jim Dahle:
There's a good move right there, right?

Rose:
Yeah. And that has grown over the time. I was looking at that recently. It's about $115,000, which that's untaxed. It's grown. I had a few other little monies in during my nursing years that different. I just pulled it all together and it's about $115,000 right now.

Dr. Jim Dahle:
And then at the time also did 401(k), maxed those initial four years. And I've had a challenge this year, so we'll get into that later, but I maxed the first four years. And then I also did extra just doing a backdoor Roth for myself and my husband. And so, that has helped. His account is doing better as well. It's about $88,000 right now.

Yeah. So, you took a balanced approach paying off these loans.

Rose:
Yeah.

Dr. Jim Dahle:
You got the house, you paid off the loans, you invested some for retirement. You started a real estate portfolio. Nice work. That's a good balanced approach. And yeah, it took seven years to get rid of those loans, but you also got five years of payments from an employer. It's probably pretty smart to maximize the benefit of those as well.

Well, as a non-traditional student, you're starting your career now, your financial career a little later than most docs do. Do you feel pressure to save more now for retirement to get to the same place? Or do you just think moderation, all things, this is where we're at.

Rose:
Right now, really, now that the loans are behind me, I think to myself, these are going to be my legacy years. I need to really build that nest egg to really maximize that to the best that I can. I try not to deprive myself because I know myself, if I do, I'll become very depressed and I'm worth nothing. I try to splurge here and there.

Between my husband and I, I'm the spender. And so, that's fine. He's okay with that. And a few trips here and there, some generous work with church and ministries and all that. That also goes, it's budgeted well, budgeted into every month. It's either we have it in priority or we don't. But moving forward, I really want to do the best I can to secure the legacy years.

Dr. Jim Dahle:
What advice do you have for somebody out there that can relate to your story? They're like, “Oh, I'm a non-traditional student or I went to medical school with kids or I lost money in a bad investment or a scam or something.” What advice do you have for them so they can become successful like you have?

Rose:
Thank you. That's a very, very good question because a lot of times you watch one thing go down and think, “Oh my gosh, can I ever make a right decision?” You begin second guessing yourself. But I think one is to really be grounded in what is your source of strength? For me, it's my faith. I always look at everything through the lens of faith.

The sparrows don't sow, they don't store, and God takes care of them. Somehow God has a way of taking care of me. That doesn't mean I'll become lazy and sleep all 12 hours, but I can go to him for wisdom to navigate the challenge. And so, what grounds you? I think we need to start there.

And a part of that is your mindset, train your mind, get it out here straight. And once you have that, then along with that comes the planning aspect of it. There is nothing that you can achieve without a plan. Somebody once said you fail to plan, you plan to fail. And so, it is very true that you have to have a plan. Can you tweak it along the way? Yes. But even in that, be cautious. Don't make decisions on emotion like I did and got in trouble a couple of times. And emotions are good. They are like an alarm, but they are not the firefighter. They just need to alarm you, okay, there is this concern here, but don't let them be the ones trying to fight that fire because then they mess it up. A, ground yourself. B, have a plan. C, don't work on your emotions or run off with your emotions.

Dr. Jim Dahle:
Good advice, Rose. Well, congratulations to you on what you've accomplished. You should be very proud of it. We're proud of you. And we thank you for coming on the podcast and sharing your story to inspire others to do the same.

Rose:
I appreciate it. Thank you so much. And keep up the good work. I would have never gotten here, or at least initially. I didn't know any financial information. I didn't grow up with this financial information. And so I'm still trying to indulge a little bit on your podcast and other resources out there.

Dr. Jim Dahle:
It's our pleasure.

Rose:
Thank you.

Dr. Jim Dahle:
All right. That was a fun interview. The resiliency is what I love to see. You find yourself in a career you don't like, and you're like, “I'm going to medical school.” And you do what you can to keep the loans down. You do what you can to pay them off. You roll with the punches. You take a job that helps pay them back. You send some money to the lender to pay them back. You balance your life, raising teenagers, and saving for retirement, and getting into a home.

You balance it all with paying off those student loans. And bam, seven years out of training, they're gone. You're free. You paid for medical school. And now you can concentrate on your other financial goals. I love it. Good stuff. And I hope a lot of you out there can take some inspiration from what Rose has done.

FINANCIAL BOOT CAMP: HIGH DEDUCTIBLE HEALTH PLANS VS. PPO

Dr. Jim Dahle:
There are a number of different types of health insurance. And it's important for doctors to understand all of them, not just because they're doctors and getting paid by these health insurance plans, but because they're also consumers, and they have to make decisions about their health care plans.

A common question I get these days is, “Should I use this PPO plan or should I use this high deductible health plan?” And I think it's important to understand the differences between the various kinds of health insurance plans and organizations. PPO stands for Preferred Provider Organization. It's sometimes called a Participating Provider Organization or Preferred Provider Option, all to keep the acronym the same.

But it's a managed care organization of doctors, hospitals, and other health care providers who have agreed with an insurer or a third-party administrator to provide health care at reduced rates to the insured or administrator's clients. And that's what a PPO is.

And sometimes that's contrasted with an EPO. An EPO is an exclusive provider organization. Very similar to a PPO. But unlike EPO members, PPO members are reimbursed for using medical care providers outside of their network of designated doctors and hospitals. EPO, you can only use the ones on the health plan. A PPO, you just pay less if you use the ones that the insurance company has chosen.

It's also often contrasted with a Health Maintenance Organization or an HMO. These really came around in the 1990s when they were talking about making pretty significant changes to our health care system. Unlike PPOs, HMOs often require members to select a primary care physician. And that doctor then acts as a gatekeeper to direct access to any sort of non-emergency medical services. And they often have to get a referral from the PCP before they can go see any sort of a specialist.

And so, the idea is to lower the cost. And HMOs often do have a lower cost than a PPO, but they're a little bit more of a pain for you as a consumer to work with because you got to go get these referrals and maybe you're discouraged from seeing as many specialists, et cetera, but the cost might be lower overall.

You notice I have not yet talked about a high deductible health plan option because technically all of these could be a high deductible health plan option. It's the government that designates what a high deductible health plan is. The government says you're an HDHP, you are. The government says you aren't, you aren't.

Typically what that means though these days is that you have a deductible of at least $2,500. That's for a single person, sometimes higher if you're a family. And the idea behind that is that you have more skin in the game and maybe you'll be a little bit more judicious with how much healthcare you consume.

Often when people are comparing a PPO to a high deductible health plan, whether that high deductible health plan is a PPO, an EPO or an HMO, they're looking at, “Okay, am I going to be a high consumer of healthcare? In which case I'll be on this PPO plan and I'll have a relatively low deductible. Or am I going to be a low consumer of healthcare? In which case, well, I'll get the high deductible health plan and have lower premiums.”

Usually you come out ahead unless something catastrophic happens and maybe that year you end up paying your out-of-pocket max, which is usually higher on a high deductible health plan option.

The other benefit, of course, of a high deductible health plan is it allows you to make HSA contributions, your health savings account. And those dollars, of course, grow in a tax-protected way and can come out of the account tax-free to pay for healthcare. While you don't necessarily want to choose a high deductible health plan just so you can use an HSA, it does help defray the additional cost because you're getting those tax and investing benefits as you go along with the high deductible health plan.

I hope that summary of how these various health plans works will help you to understand and make the important decision of what kind of health insurance plan you're going to use for the coming year.

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All right, I hope you enjoyed this episode. If you'd like to star in your own episode of the Milestones to Millionaire podcast, you can do so. Sign up at whitecoatinvestor.com/milestones and we'll take your experience, your milestone, whatever it might be, we'll use it to inspire others to do the same while we're celebrating with you.

Keep your head up, your shoulders back. You've got this. We're here to help. We'll see you next time on the Milestones to Millionaire podcast.

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only. It should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

Jim Dahle:
A mutual fund is one of the simplest and most common ways people invest, yet it often feels confusing at first. At its core, a mutual fund is just a group of investors pooling their money together to buy a collection of investments. Instead of owning individual stocks or bonds directly, you own shares of the mutual fund, and that fund owns the underlying assets.

When you invest in a mutual fund, your money is combined with money from many other investors. A professional fund manager then uses that pool of money to buy stocks, bonds, or other securities based on the fund’s stated strategy. That strategy might focus on large companies, small companies, international stocks, bonds, or a mix of many different asset types.

One of the biggest benefits of a mutual fund is diversification. Rather than putting all your money into a single company, a mutual fund spreads your investment across dozens, hundreds, or even thousands of different holdings. This reduces the impact that any single company can have on your overall portfolio, which lowers risk.

Mutual funds come in many different flavors. Some funds are actively managed, meaning a fund manager tries to pick investments they believe will outperform the market. Other funds are passively managed and simply track an index, such as a broad stock market index. These index funds aim to match the performance of the market rather than beat it.

Costs matter when it comes to mutual funds. Every fund has an expense ratio, which is the annual fee you pay as a percentage of your investment. This fee covers the costs of running the fund, including management and administrative expenses. Lower costs generally mean more of your money stays invested and working for you over time.

Another important concept is net asset value, often called NAV. The NAV is the price of one share of the mutual fund and is calculated at the end of each trading day. Unlike stocks, mutual funds do not trade throughout the day. When you buy or sell a mutual fund, the transaction happens at that day’s closing NAV.

Mutual funds can distribute income in the form of dividends or capital gains. These distributions may be taxable, depending on where you hold the fund. Holding mutual funds in tax advantaged accounts like retirement plans can help minimize the tax impact of these distributions.

Mutual funds are commonly found inside retirement accounts such as 401(k)s, 403(b)s, and IRAs. Many employer sponsored plans primarily offer mutual funds as their investment options because they are easy to administer and understand. For long term investors, low cost, broadly diversified mutual funds can be an effective way to build wealth.

At the end of the day, a mutual fund is simply a tool. It is a way to gain diversified exposure to markets without needing to pick individual investments yourself. Once you understand how mutual funds work, they become far less intimidating and much easier to use as part of a long term investing plan.