Today we have two generations of physicians joining us. Doctors Alan and Aaron Berkenwald. We're going to be talking to them about finances, how their finances interact, how Alan has been successful in his career as a doctor, Alan's side hustle of real estate, and what his son has taken from those lessons and those experiences that he's had watching his dad be successful financially as he embarks on his own medical career.

 

 

Education and Career 

Dr. Dahle:

Let's start by letting the listeners get to know you guys a little bit better. Alan, why don't you tell us a little bit about your education and career up until this point?

Dr. Alan:

I grew up in the Bronx, New York City, son of immigrant parents who came after the war, who had no education or any skills. Through the magic of the labor market, he joined unions and carved out a good middle-class life. I went to public schools and state universities. Then I went to BU Medical School and graduated in 1978. Unfortunately, at that time, I had drunk the Kool-Aid and believed that primary care was going to be with HMOs; we're going to rule the world. I thought the specialists would cower at our shadows as we take back control of medical care of our patients. Like I said, that was the Kool-Aid, but I've remained in primary care primarily. Generally, every seven to eight years I would recreate myself. I worked ED. I did solo practice. I did group practice. I am currently ending my career as a hospitalist. I formally retired a few years ago from full-time medicine. I do a little part-time per diem hospitalist work and also some nursing home work.

Dr. Jim Dahle:

Awesome. How did your background affect how you thought about money as you progressed into your career?

Dr. Alan:

One of the greatest gifts my parents gave me was transparency. English was not their primary language. Early on, I was helping my father pay bills and balance checkbooks. My father, as an immigrant, got into real estate early. Him and a partner would usually buy one building at a time, run the building, flip the building, then move on to another. On Sundays, I would go with him, and we would sweep hallways and knock on doors of tenants who weren't paying. I would read from manuals as he was trying to restart water heaters. I learned a lot of the hands-on dirty work of being a landlord.

As I grew older and started investing, I was fortunate that my dad was there because, while he wasn't educated, he understood a spreadsheet. I could run numbers by him and get the reassurance that I needed when I was venturing out on my own and throwing tens of hundreds of thousands of dollars around. It's nice to have someone look over your shoulder and say, “You're right. This is going to work.”

Dr. Jim Dahle:

So, this did not just start with your generation, it doesn't sound like. That is pretty cool. All right. Aaron, tell us about your education, your career plans now as an attending.

Dr. Aaron:

I also was the product of public schooling up through high school. I went to Northeastern University, where I studied biochemistry and economics. Then I went to the University of Massachusetts Medical School, where I graduated in 2016. I just completed a six-year residency program in urology at Lahey Institute. I graduated just a couple of weeks ago.

I've joined a private practice group that's in the vicinity of where I grew up which was a calculated decision. They offered the sort of career I want, which is the ability to do real general urology ranging from robotics to stones and everything in between but also allows me to move to my hometown where I can be close to my family. Part of the calculus in the decision to come out here and out of the city was to be close to family and also to learn from family. Real estate has sort of become the family business or the second job. My hopes are that I can learn a lot from him by living close and really get my hands wet.

Dr. Jim Dahle:

Now, one of the things about our podcast is that we talk about real estate a fair amount and typically from the perspective of getting started. People that are just making their first investment, people that are just learning what a syndication is, people that are just trying to figure out how the whole system works. But this is going to be a little bit of a different podcast because this is not new to Alan at all. Alan has been doing this for 30 years and has been very successful at it. I think it can give us some perspective from those decades of doing it but also kind of give us a glimpse into what the light at the end of the tunnel looks like. Before we get there, let's go back to the beginning. Alan, at some point, you decided to get in direct real estate investing early in your medical career. Other than the example of your father, why did you do that?

More information here:

A Beginner’s Guide to Investing in Real Estate

 

Direct Real Estate Investing Early in Career 

Dr. Alan:

Early on, I appreciated that generational wealth and actually the foundation of wealth in most nations is based on real estate. The tax code and business codes tend to favor real estate and real estate investment. One of the things early on in my career is I was fascinated by paying taxes. Here I was, postgraduate education, smart guy, got into med school, survived residency, and I have to hire someone else to do my taxes. This was in the 1980s and around the time when tax software appeared. I was an early adopter of TurboTax and started doing my own taxes. Initially, I would have the professional do it, and then I would do it on my own to see how I was learning. By playing with numbers on properties that didn't exist, I quickly saw how real estate income is handled so much differently than earned income.

Like most white coats, I get involved with the stock market as well. You remember the big wins and you try to forget the losses, but real estate seemed to me like a much more reasonable way to secure financial security.

Dr. Jim Dahle:

Tell us about your first investment. What was it? How much did you borrow for it? If you remember what you paid for it, if you remember the interest rate you got on that debt back then?

Dr. Alan:

I came to our hometown area, our valley, in 1981 and I bought my first property in 1992. Then in the meantime, I met my wife, we got married, we bought our first condo, and then we bought our first home. I also bought my first condo during the Carter/Reagan era when home mortgages were 12%-14%. You learn real quick about interest and you learn real quick about mortgages and you learn even quicker about refinancing and variable rates. Since then, I've never been a believer in fixed mortgages. I avoid them as quickly as I can, because all the economic interests pushed to have lower interest rates. I learned you don't be a fool, you don't bet against big business which wants federal policy to have low-interest rates. I've always done better with variable mortgages.

My first purchase was a six-unit apartment complex across the street from one of our local colleges. We live in the five-college area in Western Mass. My original plan was to buy properties near universities because it's almost recession-proof. Universities don't fire students or lay off students when the economy gets tough. Students have money, they have loans from banks, loans from the government, and loans from mommy and daddy. It seemed like a great market for tenants, and it was. All my real estate since then has been centered around universities and colleges, because it is a sure market. I learned not to rent to undergraduates. Not only were they a pain in the neck and destructive, but your insurance rates are one-third higher, at least in our valley. Grad students are good. The working young people who want to live near colleges and the vibrant community that exist are good.

That was my working model. The first property I bought was across the street from an Ivy League college. I paid $245,000 for it. This was back in 1992. Its assessed value now is over $700,000. I could probably sell it for $900,000. But in all those years since 1992, I have cleared $553,000. That's profit. That's over 30 years. The building has appreciated probably by $670,000. When you add up the total income and appreciation on that one property, if I was to sell it tomorrow, before taxes, I would walk away with a profit of $1.056 million on a building that I paid $244,000 and the tenants bought it for me. I put down 20%, which is roughly $40,000. And of those million dollars, tenants unbeknownst to them were working for me. They bought me the building.

More information here:

How to Get a Mortgage With a Great Rate

 

Managing a Property on Your Own 

Dr. Jim Dahle:

Tell us about the management of that property. As I understand it, you have done most of the management of these properties throughout your entire real estate career. But tell us about what you learned managing that first one.

Dr. Alan:

I want to bring up an analogy because I was trying to come up with a clever analogy. You can be a med student and you can read about colonoscopy and you can see the pictures and you can watch the video, but it isn't until you get into the room and they hand you the scope, you realize how smelly it is. It's full of [bleep] and the light at the end of the tunnel is often obscured. It's the perfect analogy because listening to your podcast, it sounds so simple. You have your price, you take half of your rental income, and half of that will be expenses. You add on your interest, you have your amortization sheet, and you sit back and let the cash payments roll in. It sounds really easy. But they don't talk about the smell, they don't talk about the stuff that you have to deal with.

What I learned early on with that building and the buildings that followed is: I got a management company, and I discovered it was ripping me off. They charged me for replacing a kitchen fixture. I was curious why it cost so much. So, I arranged to go into the apartment and look at it, and I asked the tenant, “Did they pick that? Did you pick that?” They said, “I'm sorry to say the bulb had burnt out. They just changed the light bulb.” Now, that's fraud. But how are you going to know?

I know other landlords who have management companies, and over time, you learn the good ones from the bad ones where they run a building into the ground and you're getting billed for things that don't always happen. Soon after this started, I stopped with a management company. I was managing the building. The secret to that, as I learned, is you had to have good contractors that you can trust. I would go there sometimes in the evening to look at whatever was broken and say, “Yep, I can't fix that.” But there are other things I could do. I can change a light bulb. I can reset a circuit breaker. I would always check out what the problem was.

I developed a stable bunch of contractors, and I would put them in contact with the tenants. They would arrange the appointment time. They have a key to the unit from a lockbox at the building. The secret to getting good contractors is you pay them immediately so that they know that if they do a job for you, the check is in the mail the next day. That way you go to the top of their list, and you essentially are earning their trust. That made managing properties going into the future a lot easier. That was one of the first lessons I learned: hands-on management.

 

Challenges of Self Management 

Dr. Jim Dahle:

What challenges did you run into doing that management in the beginning?

Dr. Alan:

Tenants. Tenants have a love-hate relationship with their landlord. They're happy when you improve things, but when they're moving out, they'll knock holes on the wall. They'll tear things off. They'll steal light bulbs. They'll call you up with crazy requests. One of them called up and said, “Can you get Amtrak to alter the train schedule that comes by too early in the morning? Can you get the contractors working on the property down the street to start later than eight o’clock? I work nights. I need to sleep.” They steal. I had one tenant who moved out and took the washing machine. How was I sure? Because another tenant said, yeah, I didn't understand. He pulled up with a pickup truck in the back of the building, and they took out the washing machine. I thought you said it was OK. Did you take a picture? No. Can I prove it? No.

I learned that leases are like locks for honest people. They say a lock only keeps an honest person honest. Well, you can have a year lease, and if they break it, what are you going to do? Go to small claims court. Then they find in your favor, and you're going to now get the sheriff to hunt them down and take their computer in lieu of payment? No. I learned month to month tenancy will protect me. If they're crazy, I tell them they have to leave, as opposed to them deciding they want to move in with their boyfriend or their girlfriend and just leave with no notice.

I learned that painting is a wasted investment. I try to avoid it as much as I can. You'll paint a brand-new apartment. You'll spend thousands of dollars. And then you come in for an inspection months later, and they decided they like black accents on the kitchen cabinets and black enamel paint is everywhere, or they changed the color of the bedroom, or they put up paints and lights. Even if you keep the security deposit, it never pays. So, tenants, it's a love-hate relationship. When I had a good tenant, I never raised the rent. If I had a bad tenant, I raised the rent until they would leave. That's legal when you have a month-to-month tenancy lease. The tenants were a big surprise. They are not on your side. They don't understand property tax. They don't understand insurance payments or water and sewer cost. They think that the check they give you goes right into your pocket and they damn you for it.

Dr. Jim Dahle:

But all these problems with tenants, they didn't scare you off. You were still interested in real estate investing despite getting into the smelliness, the colonoscopy of real estate investing, if you will. Was it the profit that kept you going, or was there something else that was interesting to you there that kept all these horror stories with the tenants from scaring you off?

Dr. Alan:

It worked because I have an MD at the end of my name, and the last thing I wanted was to be in the papers as a slumlord. So, I was a good landlord. As landlords go, despite what tenants did to me, you use all our special people skills, people-management skills to smooth over these problems. I did not make a tremendous profit as high as other landlords. I made a profit. If I made between 3%-5% before tax treatment, I was happy. Better than bonds, and I didn't get my name in the paper. I knew I had time and appreciation on my side. Most of my tenants never move. There were the occasional horror stories, but by and large, I had good working relationships with my tenants.

When they know you and you show up and you're inspecting and fixing things promptly—maybe I overdid the fear and horror, but I had good properties that I tried to maintain a higher standard of care on, and it worked. The profits: I didn't really realize because I lived on my income as a physician and my wife's income as a teacher. Every penny I made in real estate, I rolled over into more real estate.

Dr. Jim Dahle:

Okay. We'll get to that in a minute. Aaron, how old were you in 1992?

Dr. Aaron:

I would've been 3 years old.

Dr. Jim Dahle:

Three years old. OK. So, you don't have any recollection of when this property was purchased?

Dr. Aaron:

I remember him not being home very much at that point in my life.

Dr. Jim Dahle:

Well, between a full medical career and getting into hands-on real estate investing, I guess that's not surprising. What's your first recollection of this first property?

Dr. Aaron:

This property has a special place in my heart, because every weekend for much of my childhood, I would pile in the back of his old Saab with a bunch of brooms and vacuums and a bunch of those $10 quarter roll stacks. We'd drive to this apartment, and we would spend Saturday mornings working there. I would always start at the top floor, and I'd sweep the back steps all the way down to the basement. Then I'd sweep the inside steps. Then I would go down to the laundry machines in the basement and empty out the quarters, and then I would roll them while he did the rest of his inspections. As I got older, I started raking and mowing lawns, and eventually, I found myself on the roof asking myself, “How did I end up here?” It's a very tall building.

Dr. Alan:

Three-story building. And part of the time he'd be holding onto my ankles as I'm leaning over, trying to fit. Not for the faint of heart and not for all your listeners.

Dr. Aaron:

That's a true story. I do remember holding onto his jeans while he cleaned out the gutters 50 feet above the pavement. But it was just normal for me to go do these things on Saturday mornings. It's not like I didn't have a good childhood. I still played lots of sports and had friends, but it gave me joy to work with him. I didn't really understand the numbers aspect of it until I was older, when he started to explain it to me. 

Dr. Jim Dahle:

Alan, there are people that would say, “This is a bad use of your time. You're a highly educated, specialized person whose time is valuable and can be converted to cash at a relatively high rate. Maybe you shouldn't be using that time upside down on a roof, cleaning out gutters.” What's your response to that criticism?

Dr. Alan:

If you have cash in your pocket, it's not generational wealth. How do I invest it? It's nothing that I could share with my son, my daughter, my family. We can sit down and talk about stock investments. There's a sterility to that. There's something else about driving past a piece of property, stopping, picking up some trash, and making it the family business. The other thing is I'm semi-retired now. The last thing I want to do is volunteer in a health field-related committee or organization. What I volunteer now for is I help plant trees in the city with our local tree group. I pull out weeds that are overgrowing our local ponds in my canoe. I mean, I spent my life taking care of people. There's a part of my life that wanted to do more than constantly listening to other people's problems. I like getting my hands dirty. It was a different skill set, a different challenge.

More information here:

How to Screen a Tenant

 

Growing Their Real Estate Empire

Dr. Jim Dahle:

Let's move on to property No. 2. At some point, you're banking the money coming in from property No. 1, and you're deciding to reinvest it into another property. You've decided at that point, I like this. I'm going to build a real estate empire, essentially. Tell us how that decision went and when you bought the next property.

Dr. Alan:

Well, the next property was an accident, and it didn't work out. It was a two-family, and I got it at a good price. It had negative cash flow. It was making a profit on paper but had negative cash flow, and it had a very difficult tenant that I couldn't dislodge. So, I sold the building. Then I immediately bought another building after that. This one was a success. I bought this one in 1998. It was a three-unit residential building. When I bought it, it was a wreck. One of the terms of purchase was they had to evict a bad tenant that had made a huge mess of the property.

But I got the building on the cheap. I got it for $156,000, and the numbers were good. I had a tenant there who was a very capable young woman who was a nurse. She loved getting her hands dirty, and she was going to be the groundskeeper. She lived there for many years. She shoveled the snow and cut the grass, so I gave her a deal on the rent. That property has done well.

The total income in that property in the years I've owned it is $212,000 over 23 years. The building is probably worth $400,000. So, when you include the appreciation and the net income, it's probably close to half a million dollars. If I were to sell the building now and look back how much that building has brought me in total over 23 years, it's half a million. I only put down $30,000, and the tenants paid the rest. The tenants worked for me, and I had cash flow. All of which I invested in the next building. With each building, I keep track of when I purchased it and when I paid it off by rolling money forward. I'm actually buying a building this week. I own eight multi-unit buildings.

Dr. Jim Dahle:

Let's talk about your use of debt. You're pretty aggressive paying it down as you go. It sounds like you're paying down about as fast as you can. Why would you decide to do that instead of maintaining a significant amount of leverage and trying to maximize returns thanks to that leverage?

Dr. Alan:

I took lines of credit on each building. As soon as I paid them off, I went back, and banks are much more generous with lines of credit than they are with mortgages. Especially when they get to know you, and I've had a long-standing relationship with my bank, which is very important. You stick with one bank. They shave points in your favor. When you have a line of credit, the beauty is the bank allows you for the first 10 years just to pay the interest. It cuts your payments significantly down. If I have a lot of cash, I put it into the line of credit. If I need cash, I take it back out. It's like money on-demand with no penalty. I've had a line of credit on the first property now for 25 years. It's cheap money for me, and it gives me flexibility.

When I buy a new building, I use the line of credit, buy the new building, start paying it off, and get another line of credit. The other thing is that if your listeners do real estate and get a management company, a management company wants to hold onto a lot of money. They want to pay the taxes, the insurance, the water and sewer bills, the big-ticket items. They will hold a lot of money in escrow and a bank account that does nothing for you. I keep that money current, and I don't have $30,000 or $50,000 sitting around for three months waiting for the next tax bill. I take it as I need it and put it back in. I get to manage cash flow. It's a bit of an art, but again, you make money. You save money here, you save money there, and after a while, it adds up. I did pay them off quickly, but I got the money right back out as I needed it. I didn't want banks as a partner. 

Dr. Jim Dahle:

Let's talk about these other properties. You said you're up to eight now. Is that eight including the one this week? Or will that be nine total?

Dr. Alan:

Well, I had eight. I sold one two years ago and this replaces it, so I will have eight total.

Dr. Jim Dahle:

Let's hear about some of these other properties.

Dr. Alan:

I bought a beautiful piece of property. Again, you need to look at a lot of properties so that when the right one comes on the market, you can make a quick bid. You need to learn how to look at property so you can make a bid without an inspection. You want a quick closing. You get a letter from the bank showing you have the assets. There won't be a question of getting financing. The last thing a seller wants to do is wait months to find that they never got the financing or that you're going to quibble over a cracked rafter and you want $1,000 off. When you look at enough properties, you get a sense. The recent property I'm buying now was not subject to inspection, not subject to financing. I made a low-ball bid, and they took it because it's money in the hand.

The last property I've bought had unrealized assets. It had a big stretch of unused land. It was like a two-acre lot, an old acre bumping up against the back of an industrial park. It was a mixed-in Amherst commercial and residential property, and it was sitting there. It took two years, but I was able to get it rezoned. I was able to sell it to someone in the industrial park who needed it as a parking lot.

The building itself was full of good people who had a bad management company, and they were charging them for things they never did in the building. There was a wet basement that basically had a stream running through it. There were frogs living in the basement. When you went down to the basement, you had to hop from cement block to cement block to keep your feet dry. This one was not for the faint of heart and having someone to talk to was helpful. My dad was still alive, saying “Yes, this will work. The numbers will work.” That building is eight units and makes good money. I sold the land for tax purposes over five years. They didn't want a lump sum. It was an installment sale, and there's tax advantages to that. Again, real estate is a learning curve. Even though your podcasts are very useful in explaining the basics, with experience, that's how it works.

Dr. Jim Dahle:

You almost have to get out there and start doing it to really learn it.

Dr. Alan:

If you are just going to hire a management company and buy a property in another city and never see it, well, I'm not familiar how that would really work out. It's not my business model.

Dr. Jim Dahle:

At this point, you're seven, eight properties into it. I presume you're now making more from your investments than you ever did from your practice. Is that right?

Dr. Alan:

I'm actually this year going to make more than I ever made as an internist.

 

Following in His Father's Footsteps

Dr. Jim Dahle:

Aaron, listening to this story now, as we go through these properties, as we hear about this building income, what do you think about it? You've kind of been on the sideline participating here and there, but watching this from afar as you go to college and med school and residency. What do you think about it now looking in on the family business and how it's really run over the last two to three decades?

Dr. Aaron:

That is a good question. The speed and the rate of his acquiring new buildings has accelerated over his career doing this. It's only in the past six years that I've really started to look at the books and started to see the magic of how this is working. He really enjoys this. I don't know if you can tell from what he said. This for him is not only a side hustle; it's a hobby and he wants nothing more than to have a glass of scotch at the end of the night and sit down and show me his spreadsheets, which he's so proud of.

I honestly enjoy it, too, because math has always been fun to me and I think it is sort of magical the way that he approaches this and explains things. It's very hard to understand at first, but over time, I feel like I'm starting to get a handle on it. As somebody in my generation who is interested in hopefully retiring at some point in my career and having a nice nest egg where I can send my daughter to college and not have to worry about it, this seems like the right way to invest. People in my generation love the stock market. They love Bitcoin. They love basically what I see as gambling, putting money into something they don't really necessarily understand and then hoping for the best.

The thing about the stock market that I don't like is that, one, you're subject to the market fluctuations. And two, when you need the money and you withdraw your capital, you no longer have that capital. But what I see from his example is that he's able to live a good life on cash flow from properties that actually aren't changing in value at all. Or they are increasing in value. After much thought and talking to my wife, I've basically decided that this is the investment platform that I want to learn about. I'm really looking forward to becoming an attending so that when I start having a little bit of capital to play with, we can work together and buy our first building together.

Dr. Jim Dahle:

That's exciting.

Dr. Alan:

It's not to say you don't invest in your 401(k) and your IRA, but you really have limited control over that.

Dr. Aaron:

I read your book when I graduated medical school and all of the principles you talk about. You take your employer's match. That stuff is obvious. I'm definitely not saying you don't do that type of thing. But I think for people who have the time and the interest, if you're willing to get down and get your hands dirty, this is a good opportunity. Now, obviously, I have an advantage because I have him to show me the ropes. I do think that if I was doing this starting on my own, it would be incredibly intimidating. I do recognize that.

 

Why Dr. Alan Does His Own Taxes

Dr. Jim Dahle:

Alan, I understand you did your own taxes as you went along. Now, I've done my own taxes for many, many years. But you know what? Eventually, I ran into something that I'm, like, maybe I shouldn't be doing this myself anymore. That thing was real estate investing. Why did you decide to go that route of DIY taxes and how hard did you find it to do over the years?

Dr. Alan:

The real estate is the easiest part. Real Estate Schedule E, I think it is, is the most simple math. The rules are the most transparent, unlike so many other taxes. I'll give you an example. I quickly discovered you need to have an LLC. I have a couple of LLCs now, and my wife and I are the sole proprietor, which means it just flows through our taxes and makes it very simple. Then when you have an LLC, there are tax advantages. The prior Republican administration changed a lot of the rules on real estate so that if you have a real estate LLC, you get additional tax benefits. You plug the numbers in, and these spreadsheets are run by this commercial software. It's straightforward; it's easy.

Then when you have the spreadsheet and you have the taxes, you get to play with them, you get to experiment. I discovered that if I donate money to charity—and my wife and I like to give and make donations—if you give money from your earned incomes, as a professional with our high-income levels, you get hit with the AMT. So, the money you gave to charity, what you're deducting comes back as an AMT payment. LLCs are allowed to donate to charity as a business expense. All of a sudden, my charity-giving is a business expense, and it's worth a third more. That's something you don't discover until you do your taxes. The other thing is, again, depreciation is an interesting vehicle for wealthy landlords and land owners, where you are getting today's dollars that you're going to pay back in the future with inflated money. You get to invest the money the government gives back to you through depreciation. Then if you're smart, you can flip it. I think one of your educated speakers talked about depreciate, depreciate, rollover. Talking about 1031 transfers or depreciate, depreciate and die. And then the estate has a new basis point.

I used to have two taxes. I have the real ones and the ones that I would play with as an educational experience. Not that I was cooking books, but you learn by making hypotheses. What if I do this? What if I do that? That is why I was drawn to taxes. If someone is going to take this much money from me, I want to know why. My father, the immigrant, he would have people doing his taxes, but he wanted to have it explained to him. He always would say at the end, if only I had to pay more taxes. As physicians we're privileged. I don't mind paying taxes, and I don't mind taking advantage of what's legal and allowable to increase my generational wealth.

More information here:

One Tip For Deferring Real Estate Taxes

 

Leaving Inheritance to Children

Dr. Jim Dahle:

It sounds to me like you're not planning on selling these properties anytime soon. And you're planning on using the cash flow from them to fund your retirement. Is that a fair assessment?

Dr. Alan:

Yes. My wife and I, with our estate planning, are going to handcuff our children together for at least five years so that when the last one of us passes, they will inherit the family business. But they cannot deplete the capital for at least five years. If one of them gets a notion, they want to go around the world three times, and they want to sell a property to do it, it can't be within the first five years. It will force them to work together.

Dr. Jim Dahle:

Aaron, how does knowing about this inheritance you have coming affect the way you'll live your financial life now.

Dr. Aaron:

That's a good question.

Dr. Alan:

A very good question.

Dr. Aaron:

I'd like to think that it plays no part in my financial thought process, but it does. It's very nice to know that there's a cushion for me if, God forbid, things don't go well. But even just to know that somebody else is building your retirement for you ahead of time is a great feeling. Especially as somebody who's graduating from residency with not a lot of savings. But I did make some recent decisions that I certainly would not have made had I not had a knowledge of the financial situation of my parents and then also the support and mentorship of my father. We did purchase a new home just out of residency. I certainly would not have felt comfortable doing that without the reassurance of my father and knowing that he is this benefactor, should I need him.

Dr. Jim Dahle:

You kind of get a backstop there in your financial life, which a lot of people don't have.

Dr. Aaron:

That's exactly right. Somebody is watching over my shoulder to make sure I'm not making any major mistakes.  

Dr. Jim Dahle:

At the same time, you mentioned in your email to me that you have some significant student loans, at least, I don't know if they're yours or your spouse's or what exactly. So, it doesn't sound like Alan paid for all of your schooling. Tell us a little bit about that decision.

Dr. Aaron:

It's true. Like most people graduating out of residency these days, I have around $225,000 in loans from my own education. That's not including my wife's, which is sizable as well. She's an audiologist, which is a four-year doctoral degree beyond college. My father and my mother did pay for my undergraduate, but they made the conscious decision not to pay for medical school, which I think is fair. All of the debt that I have is from my four years in medical school. I managed to get through residency without building up any more debt and actually managed to save about $30,000 over the last two years, which we are now using to furnish our new home.

But getting back to your original question, the debt is definitely intimidating. I'm not going to qualify for any government loan service repayments because I'm not joining a nonprofit. As I mentioned, I'm joining a private practice group. I think the goal for my wife and I, aside from buying furniture for the new house, is trying to live within our means. Trying to maintain our lifestyle from residency. The goal is to try and pay off all of our debts in the first 10 years. Then come back on the show as a back to broke member, hopefully by the age of 40.

Dr. Alan:

Well, I have a plan. The magic of those lines of credit. We've started discussions about giving my son a line of credit that as long as he carries the interest costs, he can use that for real estate investment with me. It stays within the family. My father had an expression, “It's better to give with warm hands than cold.” Now my son and my daughter can wait until we're dead to get their inheritance, but they need their assets now. My wife and I, we've had long talks about this, we'd rather give with warm hands. To make available to my son and my daughter, lines of credit, they'll inherit the debt along with the assets, but let them have it now if they want it and invest it. But not to cut into my lifestyle, they will have to carry the interest but not the principal payments. They have the ability to make their own spreadsheet and figure out whether that works for them and start investing now. The only way real estate works is if you buy it early. If you wait until five years before you retire, you don't get the cash flow.

Any of your listeners who want to do this, they have to do it now. If you wait to the end, it doesn't work. What you do in the last few years before you retire is you try to pay off those lines of credit so that you have a limited carrying cost through retirement. Then if you're lucky and you have good kids and you trust them, you get them into the family business.

Dr. Jim Dahle:

What if you don't have good kids? What would you recommend? I mean, clearly, you've got a very successful son here that's just completed a urology residency. He's got an interest in real estate. He's clearly capable of doing this, but that's not the case for lots of people. Lots of people have a child struggling with a meth addiction or perhaps they're just not that bright. How would your plan be different if your kids weren't the kids you have?

Dr. Alan:

I have a three-word answer. Trust Fund Baby. Yeah, we know people, professionals, who have assets and unfortunately, children that are perhaps not as well seasoned. That's what trust funds are all about. I would never abandon my child, even if they had issues that made them less-than-responsible business partners. I wouldn't give all the money to a charity organization. I would limit how much I would save for that wayward child. Trust funds. They get a steady income, but they don't get control of the capital.

More information here:

What You Need to Know About Estate Planning

 

Would You Recommend Direct Real Estate Investing to Other Physicians? 

Dr. Jim Dahle:

This is a pathway that has clearly worked very well for you building wealth. You're now financially secure as you move into your retirement but it clearly has taken some work. You have no fear of a spreadsheet. You have no fear of doing your own taxes. You have no fear of going into a tenant’s apartment and fixing what you can and managing what you can't. Is this a pathway you recommend to other physicians, select other physicians, all other physicians, or a rare other physician? What would you say about what you've done to other doctors?

Dr. Alan:

It's not for everyone. It is clearly not for everyone. Most people, if they don't want to get their hands dirty, then you have to have a management company that you trust. Even then, you still have to check up on them. In the last few years, I got a good management company because my wife and I want to be able to travel now. It's part of our retirement plan. So, you need backup. I can't be here 24/7. I have a good management company, but I check up on them. I don't let them pay the taxes, the insurance, the water and sewer bills, because I want to keep that large chunk of cash under my control.

Is it for everyone? You need people on your show like me to talk about the unromantic part of the colonoscopy because it's not for everyone. It is a sure money maker. I mean, all the old wealth in this country is based on real estate. And all the new wealth in this country, they end up buying real estate. It might be farm ranches in Montana or penthouses in New York City, but they always come around to buying real estate and or investing in commercial properties. Just like you can't become a doctor without doing a residency, you can read all the books, pass all the exams. You have to get your hands dirty. It takes a little bit of introspection.

Dr. Jim Dahle:

You have done this in western Massachusetts. What about a doc that's in Boston or a doc in DC or the Bay Area? What if they live in a much more expensive cost-of-living area? People hear you talking about buying a $150,000 property or $250,000 property and they're thinking, “I can't buy my driveway for $150,000.”

Dr. Alan:

The property I'm buying now is a five-unit, a little bit of a fixer-upper. Their asking price was $950,000, but I'm getting it for $790,000. That has to do with the fact that it's a property that needs work. If you don't know what you're looking at, you don't have a good sense of how much it will cost. It needs about $20,000-$40,000 in the first year to make it a quality property. The insides weren't as bad as the outside, which turned off buyers. Money has just become expensive. My bank is going to give 5% and 8% variable mortgage, but the numbers work for me with the rents collected. So, we're talking an $800,000 property. In a larger city, the rents are higher, the properties will be higher, but the numbers should still work if you have a spreadsheet and an amortization table.

The other nice thing I'll say about real estate is it's very transparent. People are buying commercial real estate. You're buying with your head, not your heart. It's different than a bidding war on a residential property. It has a great view. It has good school systems. With commercial property, either the numbers work or they don't work. I really don't think it's different. In a big city, the numbers are scarier. Instead of owning eight properties, you may only own two or three.

Dr. Jim Dahle:

You haven't mentioned a lot about your spouses. What do your spouses think about the investing approach that you've taken, Alan, and that you are getting ready to take, Aaron? What are their thoughts on being landlords?

Dr. Alan:

Well, my wife is a loving and supporting wife, but timid. Almost every single property I bought she always said, “Don't do this.” But she trusted me. What I did is when I buy a property, I have my original spreadsheet and I file it away. Then, when I do my spreadsheets, I do first year, second year, sometimes third year with the increased costs at the beginning. Then after two or three or four years, when I'm ready to buy my next property, and my wife says, “No.” I say, “Let me show you something.” I pull out the old perspective spreadsheet and then I show her the current books, and I have been lucky to have been almost always on the money. I have proven myself after many years to my wife that with the spreadsheet, if you do it right, it doesn't lie. So, she trusts me now.

 

Why Aren't More Docs Millionaires? 

Dr. Jim Dahle:

Let's get some more wisdom from you, from the perspective of a doc toward the end of his career. About a quarter of doctors in their 60s are not yet millionaires. Why do you think that is?

Dr. Alan:

I'm sure you must have heard this. It's a famous quote: “The secret to wealth if you're a doctor is very simple. One car, one house, one wife.” I live in a small community—it's a 110-bed hospital and everyone knows each other quite well. All my colleagues, who are often older than me, are living with wife 3.0, and they can't understand why they have no money, why they have to continue to work. You can make bad business investments. Sometimes your relationships blow up. And you're saddled with that added expense of another household. But I will say this. When I came to this valley in the early 1980s, the doctor's parking lot was full of Buicks and Fords. Now when I drive my Volkswagen and park in a doctor's parking lot, I'm next to Range Rovers, BMWs, Mercedes, Porsches. I know the doctors are driving them, and I know they can't afford them. I think there's a lot to do with personal choice.

My son earlier today over lunch in preparation for this podcast asked me and my wife, “Were we excessively frugal growing up?” He has certain childhood memories, which I think are a little bit false memories. “We didn't get cable till I was a teenager.” Well, I pointed out to him, we lived in a rural area on a hilltop. They didn't bring cable until you were a teenager. He thought we were just cheap. So, there is a lifestyle component. Doctors, even the most poorly paid doctor, make an excellent living. My father was a furrier. He worked at a sewing machine. He only wished he had to pay more taxes. We doctors are privileged. You'll never see a doctor on an unemployment line. I think it really comes down to life choices and whether you developed a sense of entitlement and whether you act on it.

Dr. Jim Dahle:

Have you ever tried to talk to some of these other doctors about finances?

Dr. Alan:

They ask me all about real estate, because we talk finances. They all want real estate until I tell them how it works. I tell them about doing a colonoscopy, and it frightens them immediately.

Dr. Jim Dahle:

You don't make it sound all that appealing, for sure.

Dr. Alan:

It works. It's fun. I enjoy it, and it works. But if you're going to do a colonoscopy, sometimes you're going to get [bleep] on your shoes. You have to be prepared.

 

Importance of Financial Literacy for Younger Generation

Dr. Jim Dahle:

You've got the ear of 30,000-40,000 high-income professionals, mostly doctors. Let's start with you first, Aaron, and then we'll go to Alan. What have we not yet talked about that you think they should know?

Dr. Aaron:

I think that we haven't talked about financial literacy for the young generations of doctors that are coming out of training. I was privileged enough during my training to sit in an excellent resident room, surrounded by people that I adore. Financial discussions are a lot of fun when you're a poor resident. The things that people would talk about, it was very clear whether or not they had read your book. There's the cohort of people who don't manage their own money. They use dad's financial advisor. They have absolutely no idea what they're invested in. They're eating pasta for dinner every night, but they're really excited about the $5,000 they put into their Backdoor IRA. Then there's the people who live within their means, are educating themselves and listening to your podcast, and you can have a good educated discussion with them.

I think that it would be really nice to spread the doctrine and try to teach more young residents how to manage their money, where to go for good resources, because I think it is really a problem. It's really challenging coming out in your mid-30s, after a long training program and not having a dollar to your name and seeing the rest of your friends from college are mid-career or even almost at the peaks of their careers. They have houses and multiple cars. They've been privileged to have more children because they have more time. I think that we invest a lot of our greatest years in our training, and we kind of come out behind the eight ball. I guess I'm not sure exactly where I'm going with this other than I think that it would be really helpful for trainees to get more education on this topic so that they have a better hand at the table when they come out of training.

Dr. Jim Dahle:

Awesome. Thanks for sharing that. Alan, what have we not yet talked about that people should know?

Dr. Alan:

We, doctors, are privileged. We have access to good income. But like Aaron says, a lot of doctors, even doctors of my cohort, my age, they really don't know anything and they rely on other people. They don't always get good advice, and they don't know it when they get bad advice. It's like calling in a consultant in a field of medicine you know nothing about. The trick is getting a good consultant. And that's hard.

The other thing, of course, is you have to start early. Just when you have the most demands on your income, to start a family, find a good place to live, that's when you need to start making serious investments, if you're going to do real estate. You need to talk to someone at great length, drink a fine single malt scotch and learn the ins and outs because reading the book alone, it's not enough. You need your residency. You need a mentor to get you started and then start. The nice thing about real estate, if you make a mistake, you won't get wiped out. You may not make money, but you'll usually always get your investment back.

Dr. Jim Dahle:

All right. Good advice. Well, thank you so much for coming on the White Coat Investor podcast. I know your wisdom, both from a doc toward the tail end of his career as well as a doc just getting started this month, will be helpful to our listeners. I appreciate your time and effort in sharing your experiences.

I hope you enjoyed that interview as much as I did. I didn't want to spend a lot of time talking during that interview or pushing back against some of the ideas in it. I thought getting perspective on what real estate looks like after 20 or 30 or 40 years was so valuable, because we talk about it all the time. But we talk about the beginning of it and not necessarily the end of it. I wanted you to see what the end of direct real estate investing looks like. When you own seven or eight apartment buildings, and they're providing more cash flow than you ever made in your career. I hope that was really valuable to you.

But we should probably make a few comments. The first one is this idea that you have other people paying for your retirement, you have other people paying off your mortgages, etc. You're working hard and you're putting your money in and you're taking risks. It's not all about your tenants paying for everything. You're earning that money with your labor, by taking risk, by putting your capital at risk. I suppose it's no different when you're talking about fractional ownership of companies, aka stocks, right? When you own a bunch of stocks, whether directly or via an index fund, you have other people getting up every morning, going to work, going into their office at Amazon, at Google, at Exxon, at Home Depot and putting in their day's work and paying for your retirement. That part's not necessarily different with real estate or stocks. Either way, it's an investment, and it's an investment that makes money, and it makes money for various reasons that you understand as you come to understand the markets.

The other thing to keep in mind is this approach works. I've run into lots of docs that do this approach, that buy direct real estate in their hometown then manage it themselves. But you can only do that to a certain size. For example, you can probably manage 30-50 units. You can probably do that yourself. You can't manage 500 units yourself. It doesn't scale. At a certain size, you've got to hire management, whether they are resident managers in each of your complexes, whether it is a management company, or whether you're hiring a syndicator to take care of that for you, or whether you're investing in a fund or investing in a REIT mutual fund. At a certain point to scale up any further, you've got to get some help there.

I also found the comments Alan made about wanting to travel interesting. I tell you what. I feel tied down at times by my practice. It keeps me from traveling. I mean, not so much anymore now that I've cut back on shifts. But having another job, having direct management of a bunch of properties would make that even worse. The way I look at it is I want to travel now. I'm in my 40s and now is the time I want to travel and go around the world and climb peaks in Antarctica and go canyoneering in Costa Rica and see the sites in Europe and that sort of stuff. I don't necessarily want to wait until I'm 70. So, if that's also the case with you, you're also going to have to solve that management problem a little bit earlier than when you get to be 70. Keep that all in mind, as you embark on any sort of an investing, especially a direct real estate investing career.

 

The White Coat Investor is proud to introduce our No Hype Real Estate Investing course, which will provide the framework for developing further knowledge and experience as you progress in your real estate investing career. We call it an introductory course because there is always more to learn. But this is no short, superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet. Continue your wealth-building journey today with the No Hype Real Estate Investing course at whitecoatinvestor.com/courses.

You can do this and The White Coat Investor can help.

 

Quote of the Day 

Taylor Larimore of Bogleheads fame said,

“When experts disagree, often it is because it doesn't matter much.”

 

Milestones to Millionaire Podcast

#75 — Postdoc Pays Off High-Interest Debt

After not matching and doing a year postdoc before now being accepted into anesthesiology residency, this doctor accumulated $26K in credit card debt, mostly for the payment of his wedding. We celebrate with him today that he has paid off all of that high-interest debt. With a $48K income as a postdoc and interest rates on the cards between 26-29%, it was way harder than he thought!


Sponsor:WCI Monthly Newsletter

 

Full Transcript

Transcription – WCI – 272
Intro:
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 272 – Father and son physician duo does direct real estate.

Dr. Jim Dahle:
Let's see, we're recording this on June 30th. It's going to run on July 21st. I hope you're having a great summer. I'm having a great summer so far. I'm sure you'll hear about it in some of the blog posts on the blog as we move into the fall, but I've had a lot of adventures this summer. Let's give a word from our sponsor before we get into this too much.

Dr. Jim Dahle:

The White Coat Investor is proud to introduce our No Hype Real Estate Investing course, which will provide the framework for developing further knowledge and experience as you progress in your real estate investing career. We call it an introductory course because there is always more to learn. But this is no short, superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet. Continue your wealth-building journey today with the No Hype Real Estate Investing course at whitecoatinvestor.com/courses. You can do this and The White Coat Investor can help.

Dr. Jim Dahle:
All right, I've got a quote of the day today from Taylor Larimore of Bogleheads fame. He says “When experts disagree, often it is because it doesn't matter much.” There's a lot of truth to that.

Dr. Jim Dahle:
We're going to talk to two docs today, and they have very different careers, very different specialties. But each in their own way is doing important work that helps a lot of people out there just like you do. And it can be discouraging sometimes to have a high-stress profession, to be a high-income professional. So, if no one said thanks for what you're doing today, let me be the first.

Dr. Jim Dahle:
In case you're not aware, we're going to be talking a lot today about real estate investment, and we have a newsletter that goes out. Now, we have the White Coat Investor Newsletter that goes out the 1st of every month, but we have a completely separate newsletter. It's also totally free, that's all about real estate.

Dr. Jim Dahle:
We talk about real estate. We talk about opportunities in real estate. We talk about courses in real estate in that newsletter. If you're interested, you can add that on to your regular newsletter subscription. They're both completely free. There's no commitment. You can unsubscribe at any time, but you can sign up for those at whitecoatinvestor.com/free-monthly-newsletter.

Dr. Jim Dahle:
All right, we've got a long interview today because we've got two docs on it, but I think you're really going to enjoy it. I certainly enjoy recording it. Let's get them on the line and talk to them.

Dr. Jim Dahle:
All right. I've got our guests on the phone now here for this very special podcast. I've been looking forward to this one for a matter of weeks, and the moment has finally arrived. We get to record it. But we have Alan and Aaron here with us. Welcome to the podcast, guys.

Alan:
Thank you.

Aaron:
Thanks for having us.

Dr. Jim Dahle:
The reason I brought them on is this is kind of unique. They are two generations of physicians, and we're going to be talking about finances with both of them, how their finances interact, how Alan has been successful as the older member of this couple, and as well as what his son has taken from those lessons and those experiences that he's had watching his dad be successful financially as he embarks on his own medical career.

Dr. Jim Dahle:
So, let's start letting the listeners get to know you guys a little bit better. Alan, why don't you tell us a little bit about your education and career up until this point?

Alan:
Well, I grew up in the Bronx, New York City, son of immigrant parents who came after the war, who had no education or any skills. And through the magic of the labor market, joined unions, carved out a good middle-class life. I went to public schools and state universities. And then I did go to BU Medical School. Graduated in 1978.

Alan:
Unfortunately, at that time, I had drunk the Kool-Aid and believed that primary care was going to be with HMOs, we're going to rule the world. The specialists will cower at our shadows as we take back control of medical care of our patients. Like I said, that was the Kool-Aid, but I've remained in primary care primarily.

Alan:
Generally, every seven to eight years I would recreate myself. I worked ED. I did solo practice. I did group practice. And currently ending my career as a hospitalist. I formally retired a few years ago from full-time medicine. I do a little part-time per diem hospitalist work and also some nursing home work.

Dr. Jim Dahle:
Awesome. So, a little bit of, I guess, second-generation immigrant background. How did that background affect how you thought about money as you progressed into your career?

Alan:
One of the greatest gifts my parents gave me was transparency. English was not their primary language. So early on I was helping my father pay bills, balance checkbooks. And my father, as an immigrant, got into real estate early. Him and a partner would buy usually one building at a time, run the building, flip the building, move on to another. And on Sundays, I would go with him, and we would sweep hallways and knock-on doors of tenants who weren't paying. And I'd be reading from manuals as he's trying to restart water heaters. And so, I learned a lot of the hands-on dirty work of being a landlord.

Alan:
And as I grew older and started investing, I was fortunate that my dad was there because while he wasn't educated, he understood a spreadsheet, and I could run numbers by him and get the reassurance that you need when you're venturing out on your own and throwing tens of hundreds of thousands of dollars around. It's nice to have someone look over your shoulder and say, “You're right. This is going to work.”

Dr. Jim Dahle:
So, this did not just start with your generation, it doesn't sound like. Sounds like this started a generation before you. So, this is pretty cool. All right. Aaron, tell us about your education, your career plans now as an attending.

Aaron:
I also was the product of public schooling up through high school. I went to Northeastern University, where I studied biochemistry and economics. And then I went to the University of Massachusetts Medical School, where I graduated in 2016. And I just completed a six-year residency program in urology at LEHE Institute. I graduated just a couple of weeks ago.

Dr. Jim Dahle:
And what's your plans this next year?

Aaron:
I've joined a private practice group that's in the vicinity of where I grew up. And that was a calculated decision. They offered the sort of career I want, which is the ability to do real general urology ranging from robotics to stones and everything in between, but also allows me to move to my hometown where I can be close to my family. Obviously, with my family moved out here with me and my wife and my daughter. And part of the calculus in the decision to come out here and out of the city was to also be close to family and also learn from family. Real estate has sort of become the family business or the second job.

Alan:
The side hustle.

Aaron:
The side hustle. Thank you. I'm supposed to know that term, not him. Yeah, my hopes are that I can learn a lot from him by living close and really get my hands wet.

Dr. Jim Dahle:
Now, one of the things about our podcast, and we talked about this before we started recording, is that we talk about real estate a fair amount on this podcast, and typically from the perspective of getting started. People that are just making their first investment, people that are just learning what a syndication is, people that are just trying to figure out how the whole system works.

Dr. Jim Dahle:
But this is going to be a little bit of a different podcast because this is not new to Alan at all. Alan has been doing this for 30 years and has been very successful at it. And I think it can give us some perspective from those decades of doing it, but also kind of give us a glimpse into what the light at the end of the tunnel looks like.

Dr. Jim Dahle:
But before we get there, let's go back to the beginning. Alan, at some point, you decided to get in direct real estate investing early in your medical career. Other than the example of your father, why did you do that?

Alan:
Early on I appreciated that generational wealth and actually the foundation of wealth in most nations is based on real estate. And this is not an epiphany that only I had. The tax code, business codes tend to favor real estate and real estate investment.

Alan:
One of the things early on in my career is I was fascinated by paying taxes. Here I was, postgraduate education, smart guy, got into med school, survived residency, and I have to hire someone else to do my taxes. This was in the 1980s and this is around the time when tax software appeared. So, the long and the short, I was an early adopter of one of the larger, it was TurboTax, and started doing my own taxes.

Alan:
Initially, I would have the professional do it, and then I would do it on my own, see how close we were learning. And by playing with numbers on properties that didn't exist, I quickly saw how real estate income is handled so much differently than earned income.

Alan:
And the other thing, the stock market, which like most white coats, I get involved with. You remember the big wins and you try to forget the losses, but real estate to me seem like a much more reasonable way to secure financial security.

Dr. Jim Dahle:
Okay. So, take us to that first investment. Tell us about your first investment. What was it? How much did you borrow for it? If you remember what you paid for it, if you remember the interest rate you got on that debt back then? Tell us all about that first one you got when you became… It was when you became an attending I assume, I don't actually know that.

Alan:
I came to our hometown area, our valley in 1981 and I bought my first property in 1992. I got some notes here. And then in the meantime, I met my wife, we got married, we bought our first condo and then we bought our first home, a residential home. And I also bought my first condo during the Carter Reagan era where your viewers probably won't remember, probably weren't alive, but this is when home mortgages were 12%, 14%.

Alan:
So, you learn real quick about interest and you learn real quick about mortgages and you learn even quicker about refinancing and variable rates, and as a vehicle. Since then, I've never been a believer in fixed mortgages. And I avoid them as quickly as I can because all the economic interests pushed to have lower interest rates.

Alan:
And so, I learned you don't be a fool, you don't bet against big business which want federal policy to have low-interest rates. I've always done better with variable mortgages, for example. It brought me to my first purchase, which was a six-unit apartment complex across the street from one of our local colleges. So, we live in the five-college area in Western Mass.

Alan:
And my original plan was to buy properties near universities, because it's almost recession proof. Universities don't fire students or layoff students when the economy gets tough. And students have money, they have loans from banks, loans from governments, and loans from mommy and daddy. So, it seemed like a great market for tenants, and it was.

Alan:
All my real estate since then has been centered around universities and colleges because it is a sure market. I learned not to rent to undergraduates. Not only were they a pain in the neck and destructive, but your insurance rates are a third higher, at least in our valley. And so, grad students are good. The working young people who want to live near colleges and the vibrant community that exist is good.

Alan:
That was my working model. So, the first property I bought was across the street from Ivy League college. And I paid $245,000 for it. This was back in 1992. Its assessed value now is over $700,000. I could probably sell it for $900,000. But in all those years, I have some notes. I love keeping books here. In all those years since 1992, I have cleared $553,000. That's profit. That's over 30 years. The building is appreciated probably by $670,000.

Alan:
So, when you add up the total income and appreciation on that one property, if I was to sell it tomorrow, before taxes, I would walk away with a profit of $1,000,056 on a building that I paid $244,000 and the tenants bought it for me. That put down 20%, which is roughly $40,000. And of those million dollars, tenants unbeknownst to them were working for me. And they bought me the building.

Dr. Jim Dahle:
Tell us about the management of that property. As I understand it, you have done most of the management of these properties throughout your entire real estate career. But tell us about what you learned managing that first one.

Alan:
I want to bring up an analogy because I was trying to come up with a clever analogy. You can be a med student and you can read about colonoscopy and you can see the pictures and you can watch the video, but it isn't until you get into the room and they hand you the scope, you realize how smelly it is. It's full of [bleep] and the light in the tunnel is often obscured at the end of that tunnel.

Alan:
It's the perfect analogy because listen to your podcast, it sounds so simple. You have your price, you take half of your rental income, and half of that will be expenses. You add on your interest, you have your amortization sheet, and you sit back and let the cash payments roll in. And it sounds really easy. And when I listen to your podcast, I say, yeah, I know that. I discovered this all on my own, but they don't talk about the smell, they don't talk about the stuff that you have to deal with.

Alan:
So, what I learned early on with that building and the buildings that followed is, I got a management company, and I discovered it was ripping me off. They charged me for replacing a kitchen fixture. And I was curious why it cost so much. So, I arranged to go into the apartment and look at it, and I asked the tenant, “Did they pick that? Did you pick that? Did they pick that?” And they said, “I'm sorry to say the bulb had burnt out. They just changed the light bulb.” Now, that's fraud. But how are you going to know?

Alan:
I know other landlords who have management companies, and over time, you learn the good ones from the bad ones where they run a building into the ground and you're getting billed for things that don't always happen.

Alan:
So soon after this started, I stopped with a management company. Now I was managing a building. The secret to that, as I learned, is you had to have good contractors that you can trust in a lockbox outside the building. And this way if a toilet was busted, a sink was wrong, I would go there sometimes in the evening and say, “Yep, I can't fix that.” But there are other things I could do. I can change a light bulb. I can reset a circuit breaker. When the patient calls that the power went out, and a lot of your tenants, young adults, they don't know what a circuit breaker is. They can't find it in the basement if you give them a flashlight and point them in the right direction.

Alan:
So, the long and the short, I would always check out what the problem was. I developed a stable bunch of contractors, who I gave them the phone number of the tenants. They would arrange the appointment time. They have a key if the tenant is not there, because I give them the combo to lockbox.

Alan:
And the secret to getting good contractors is you pay them immediately. So that they know that if they do a job for you, the check is in the mail the next day. And that way you go through the top of their list and you essentially are earning their trust. And then that made managing properties going into the future a lot easier. So, that was one of the first lessons I learned hands-on management.

Dr. Jim Dahle:
What challenges did you run into doing that management in the beginning?

Alan:
Tenants. Tenants it's a love-hate relationship with their landlord. They're happy when you improve things, but when they're moving out, they'll knock holes on the wall. They'll tear things off. They'll steal light bulbs. They'll call you up with crazy requests. One of them called up and said, “Can you get Amtrak to alter the train schedule that comes by too early in the morning? Can you get the contractors working on the property down the street to start later than eight o’clock? I work nights. I need to sleep.”
They steal. I had one tenant who moved out and took the washing machine. How was I sure? Because another tenant said, yeah, I didn't understand. He pulled up with a pickup truck in the back of the building, and they took out the washing machine. I thought you said it was okay. Did you take a picture? No. Can I prove it? No.

Alan:
I learned that leases are like locks for honest people. They say a lock only keeps an honest person honest. Well, you can have a year lease, and if they break it, what are you going to do? Go to small claims court. And then they find in your favor, and you're going to now get the sheriff to hunt them down and take their computer and lieu of payment. No.

Alan:
So, I learned month to month tenancy will protect me. If they're crazy, I tell them they have to leave, as opposed to them deciding they want to move in with their boyfriend, their girlfriend, then they just leave with no notice.

Alan:
I learned that painting is a wasted investment. I try to avoid it as much as I can. You'll paint a brand-new apartment. You'll spend thousands of dollars. And then you come in for an inspection months later and they decided they like black accents on the kitchen cabinets and black enamel paint is everywhere, or they changed the color of the bedroom, or they put up paints and lights.

Alan:
Even if you keep the security deposit, it never pays. So, tenants, it's a love-hate relationship. When I had a good tenant, I never raised the rent. If I had a bad tenant, I raised the rent until they leave. And I think that's legal when you have a month-to-month tenancy lease. So, the tenants were a big surprise. They are not on your side. They don't understand property tax. They don't understand insurance payments, water and sewer. They think that the check they give you goes right into your pocket and they damn you for it.

Dr. Jim Dahle:
But all these problems with tenants, they didn't scare you off. You were still interested in real estate investing despite getting into the smelliness, the colonoscopy of real estate investing, if you will. Was it the profit that kept you going, or was there something else that was interesting to you there that kept all these horror stories with the tenants from scaring you off?

Alan:
It worked because I have an MD at the end of my name, and the last thing I wanted was to be in the papers as a slumlord. So, I was a good landlord. As landlords go, despite what tenants did to me, you use all our special people skills, people management skills to smooth over these problems.

Alan:
And I did not make a tremendous profit as high as other landlords. I made a profit. If I made between 3% and 5% before tax treatment, I was happy. Better than bonds, and I didn't get my name in the paper. And I knew I had time and appreciation on my side. And most of my tenants never move. So, there were the occasional horror stories, but by and large, I had good working relationships with my tenants.

Alan:
And when they know you, and you show up, and you're inspecting and fixing things promptly, maybe I overdid the fear and horror, but I had good properties that I tried to maintain a higher standard of care on, and it worked. The profits, I didn't really realize because I lived on my income as a physician and my wife's income as a teacher, and every penny I made in real estate, I rolled over into more real estate.

Dr. Jim Dahle:
Okay. We'll get to that in a minute. Aaron, how old were you in 1992?

Aaron:
I would've been three years old.

Dr. Jim Dahle:
Three years old. Okay. So, you don't have any recollection of when this property was purchased?

Aaron:
I remember him not being home very much at that point in my life.

Dr. Jim Dahle:
Well, between a full medical career and getting into hands-on real estate investing, I guess that's not surprising. Well, what's your first recollection of this first property?

Aaron:
This property has a special place in my heart because every weekend for much of my childhood, I would pile in the back of his old sab with a bunch of brooms and vacuums and a bunch of those $10 quarter rolls stacks. And we'd drive to this apartment, and we would spend Saturday mornings, I would always start at the top floor, and I'd sweep the back steps all the way down to the basement. Then I'd sweep the inside steps. And then I would go down to the laundry machines in the basement. I would empty out the quarters, and then I would roll them while he did the rest of his inspections. And as I got older, I started raking and mowing lawns, and eventually, I found myself on the roof asking myself, “How did I end up here?” It's a very tall building.

Alan:
Three-story building. And part of the time he'd be holding onto my ankles as I'm leaning over, trying to fit. Not for the faint of heart and not for all your listeners.

Aaron:
That's the true story. I do remember holding onto his jeans while he cleaned out the gutters 50 feet above the pavement. But it was just normal for me to go do these things on Saturday mornings. And it's not like I didn't have a good childhood. I still played lots of sports. I had friends, but it gave me joy to work with him. And I didn't really understand the numbers aspect of it until I was older when he started to sort of explain it to me.

Dr. Jim Dahle:
Okay. Now, Alan, there are people that would say, “This is a bad use of your time. You're a highly educated, specialized person whose time is valuable and can be converted to cash at a relatively high rate. Maybe you shouldn't be using that time upside down on a roof, cleaning out gutters.” What's your response to that criticism?

Alan:
If you have cash in your pocket, it's not generational wealth. How do I invest it? It's nothing that I could share with my son, my daughter, my family. We can sit down and talk about stock investments. There's a sterility to that. There's something else about driving past a piece of property, stopping, picking up some trash, and making it the family business.

Alan:
And the other thing is I'm semi-retired now. The last thing I want to do is volunteer in a health field-related committee or organization. What I volunteer now for is I help plant trees in the city with our local tree group. I pull out weeds that are overgrowing our local ponds in my canoe. I mean, I spent my life taking care of people. There's a part of my life that wanted to do more than constantly listening to other people's problems. I like getting my hands dirty. It was a different skill set, a different challenge.

Dr. Jim Dahle:
Let's move on to property number two. At some point, you're banking the money coming in from property number one, and you're deciding to reinvest it into another property. You've decided at that point, I like this. I'm going to build a real estate empire essentially. Tell us how that decision went and when you bought the next property.

Alan:
Well, the next property was an accident. Didn't work out. It was a two-family, and I got it at a good price. It had negative cash flow. It was making a profit on paper, had negative cash flow, and it had a very difficult tenant that I couldn't dislodge. So, I sold the building.

Dr. Jim Dahle:
How long did that last?

Alan:
Two years. Two and a half years. But then I immediately bought another building after that.

Dr. Jim Dahle:
Okay. Tell us about that one.

Alan:
That one was a success. That building I bought in 1998. It was a three-unit building, three-unit residential. And when I bought it, it was a wreck. One of the tenants there and the terms of purchase was they had to evict him. He had mental health issues, and had literally taken hammers to all the appliances and walls in his apartment. It was a real nightmare. I did not inherit it.

Alan:
But I got the building on the cheap. I got it for $156,000. And the numbers were good. And I had a tenant there who was a very capable young woman who was a nurse. And actually, she loved getting her hands dirty, and she was going to be the groundskeeper. She would live there for many years. She shoveled the snow, snow blue, cut the grass. I gave her a deal on the rent, but that property has done well. And so, in that property, do these numbers help?

Dr. Jim Dahle:
Yeah, yeah. Let's get into the details.

Alan:
The total income in that property in the years I've owned it was $212,000, and that's over 23 years. It's appreciation, the building is probably worth $400,000. So, when you include the appreciation and the net income, it's probably close to a half a million dollars. If I were to sell the building now and look back how much that building has brought me in total over 23 years, it's a half a million.

Alan:
And again, I only put down $30,000 and the tenants paid the rest. The tenants worked for me and I had cash flow. All of which I invested in the next building. And that's reflected in the numbers of like in the first property I bought in 1992, but I paid off the mortgage in 2006. So that was 14 years.

Alan:
The next building, I bought in 1998, I paid off the mortgage in 2009. So that's 11 years. And with each building I keep track of when I purchased it and when I paid it off by rolling money forward. Well, it's interesting, I'm buying a building this week. But the last building I bought, I paid off in two years. I own eight buildings, eight multi-units.

Dr. Jim Dahle:
Now, let's talk about your use of debt. You're pretty aggressive paying it down as you go. It sounds like you're paying down about as fast as you can. Why would you decide to do that instead of maintaining a significant amount of leverage and trying to maximize returns thanks to that leverage?

Alan:
Because I took lines of credit on each building. As soon as I paid them off, I went back and banks are much more generous with lines of credits than they are with mortgages. Especially when they get to know you, and I've had a long-standing relationship with my bank, which is very important. You stick with one bank. They do shave points in your favor.

Alan:
So, when you have a line of credit, the beauty is the bank allows you for the first 10 years just to pay the interest. So, it cuts your payments significantly down. And if I have a lot of cash, I put it into the line of credit. If I need cash, I take it back out. So, it's like money on-demand with no penalty. And my bank has allowed me, I've had a line of credit on the first property now for 25 years. It's cheap money for me and it gives me flexibility.

Alan:
So, when I buy a new building, I use the line of credit, buy the new building, start paying it off, get another line of credit. And the other thing is that if your listeners do real estate and get a management company, a management company wants to hold onto a lot of money. They want to pay the taxes, the insurance, the water and sewer bills, the big-ticket items. And they will hold a lot of money in escrow, and a bank account that does nothing for you.

Alan:
With me, I keep that money current, and I don't have $30,000 or $50,000 sitting around for three months waiting for the next tax bill. I take it as I need it and put it back in. So, you get to manage cash flow. It's a bit of an art, but again, you make money. You save money here, you save money there, and after a while it adds up. So, I did pay them off quickly, but I got the money right back out as I needed it. I didn't want banks as a partner.

Dr. Jim Dahle:
Let's talk about these other properties. You said you're up to eight now. Is that eight including the one this week? Or will that be nine total?

Alan:
Well, I had eight. I sold one two years ago and this replaces it, so I have eight total.

Dr. Jim Dahle:
Okay. So, let's hear about some of these other properties.

Alan:
Well, I bought a beautiful piece of property. Again, you need to look at a lot of properties so that when the right one comes in the market, you can make a quick bid and you need to learn how to look at property. So, you make a bid with no inspection, quick closing. You get a letter from the bank showing you have the assets. There won't be a question of getting financing. And so, the last thing a seller wants to do is wait months to find that they never got the financing or that you're going to quibble over a cracked rafter, and you want $1,000 off.

Alan:
So, when you look at enough properties, you get a sense. And so, the recent property I'm buying now was not subject to inspection, not subject to financing. I made a low-ball bid and they take it because it's money in the hand.

Alan:
The last property I've bought had unrealized assets. It had a big stretch of unused land. It was like a two-acre lot, an old acre bumping up against the back of an industrial park. It was a mixed in Amherst commercial and residential property. And it was sitting there. And so, it took two years, but I was able to get it rezoned and get it through the process. And I was able to sell it to someone in the industrial park who needed it as a parking lot. So, that was assets there that were unrealized and available.

Alan:
The building itself was being run for good people who had a bad management company and they were charging them for things they never did in the building. It was a wet basement. It had a stream running through it. There were frogs living in the basement. When you went down to the basement, you had to hop from cement block to cement block, keep your feet dry. And when they had to sell the building, it terrorized people. But again, with the experience, and not for the faint of heart and someone to talk to, my dad was still alive, saying “Yes, this will work. The numbers will work.”

Aaron:
And how many units was that one?

Alan:
That one is eight unit and makes good money. I sold the land for tax purposes. I sold the land as over five years. So, they didn't want a lump sum. It was an installment sale and there's tax advantages to that. Again, real estate is a learning curve, even though your podcasts are very useful in explaining the basics, with experience, that's how it works.

Dr. Jim Dahle:
You almost have to get out there and start doing it to really learn it.

Alan:
If you are just going to hire a management company and buy a property in another city and never see it, well, I'm not familiar how that would really work out. It's not my business model.

Dr. Jim Dahle:
So, at this point you're seven, eight properties into it. I presume you're now making more from your investments than you ever did from your practice. Is that right?

Alan:
I'm actually this year going to make more than I ever made as an internist.

Dr. Jim Dahle:
Aaron, listening to this story now, as we go through these properties, as we hear about this building income, what do you think about it? Now you've kind of been a little bit on the side-line participating a little bit, but watching this from afar as you go to college and med school and residency, what do you think about it now looking in on the family business and how it's really run over the last two to three decades?

Aaron:
Well, it's a good question. The speed and the rate of his acquiring new buildings has accelerated over his career doing this. So, it's really only in the past six years that I've really started to look at the books and sort of started to see the magic of how this is working. And he really enjoys this. I don't know if you can tell from what he said. This for him is not only a side hustle, it's a hobby and he wants nothing more than to have a glass of scotch at the end of the night and sit down and show me his spreadsheets, which he's so proud of.

Aaron:
And I honestly enjoy it too because math has always been fun to me and I think it is sort of magical the way that he approaches this and explains things. And it's very hard to understand at first, but over time, I feel like I'm starting to get a handle on it. Somebody in my generation who is interested in hopefully retiring at some point in my career and having a nice nest egg where I can send my daughter to college and not have to worry about it.

Alan:
Med school, send her to med school.

Aaron:
And hopefully med school. This seems like the right way to invest. People in my generation love the stock market. They love Bitcoin. They love basically what I see as gambling, putting money into something they don't really necessarily understand, and then hoping for the best.

Aaron:
The things about the stock market that I don't like is that, one, you're subject to the market fluctuations. And two, when you need the money and you withdraw your capital, you no longer have that capital. But what I see from his example is that he's able to live a good life on cash flow from properties that actually aren't changing in value at all.

Alan:
Increasing.

Aaron:
Increasing in value. After much thought and talking to my wife, I've basically decided that this is the investment platform that I want to learn about. And I'm really looking forward to becoming an attending so that when I start having a little bit of capital to play with, we can work together and buy our first building together.

Dr. Jim Dahle:
That's exciting.

Alan:
It's not to say you don't invest in your 401(k) and your IRA, but you really have limited control over that.

Aaron:
Yeah. I read your book when I graduated medical school and all of the principles you talk about. You take your employer's match. That stuff is obvious. So, I'm definitely not saying you don't do that type of thing. But I think for people who have the time and the interest, if you're willing to get down and get your hands dirty, this is a good opportunity. Now, obviously I have an advantage because I have him to show me the ropes. I do think that if I was doing this starting on my own, it would be incredibly intimidating. So, I do recognize that.

Dr. Jim Dahle:
Yeah. Alan, I understand you did your own taxes as you went along. Now, I've done my own taxes for many, many years. But you know what? Eventually I ran into something that I'm like, maybe I shouldn't be doing this myself anymore. And that thing was real estate investing. Why did you decide to go that route of DIY taxes and how hard did you find it to do it over the years?

Alan:
The real estate is the easiest part. Real Estate Schedule E, I think it is, it is the most simple math. And the rules are the most transparent, unlike so many other taxes, the AMT. Well, I'll give you an example. I quickly discovered you need to have an LLC. So actually, I have a couple of LLCs and I'm the sole proprietor, me and my wife, which means it just flows through our taxes, which makes it very simple.

Alan:
And then when you have an LLC, there are tax advantages. In the most recent, the prior Republican administration, changed a lot of the rules on real estate so that if you have a real estate LLC, you get additional tax benefits. And of course, depreciation, which is simple math. You plug the numbers in, and these spreadsheets run by these commercial software. It's straightforward, it's easy.

Alan:
And then when you have the spreadsheet and you have the taxes, you get to play with them, you get the experiment. Well, the best case is, I discovered that if I donate money to charity, and my wife and I like to give and make donations. If you give money from your earned incomes, as a professional with our high-income levels, you get hit with the AMT. So, the money you gave to charity, what you're deducting comes back as an AMT payment.

Alan:
LLCs are allowed to donate to charity as a business expense. All of a sudden, my charity giving is a business expense and it's worth a third more. So, that's something you don't discover until you do your taxes, because you put in charity, I put in $30,000 and it's like, because the taxes all of a sudden don't change. Even if I put in $50,000, you're playing. And then all of a sudden, the taxes don't change. But you do a deduction on the LLC real estate as an expense and look how the taxes change.

Alan:
The other thing is, again, depreciation is an interesting vehicle for wealthy landlords, land owners, where you are getting today's dollars that you're going to pay back in the future with inflated money. You get to invest the money the government gives back to you through depreciation. And then if you're smart, you can flip it. I think one of your educated speakers talked about depreciate, depreciate, rollover. Talking about 1031 transfers or depreciate, depreciate and die. And then the estate has a new basis point.

Alan:
I discovered these things by reading New York Times business pages, but doing my own taxes. And then I used to have two taxes. I have the real ones and the ones that I would play with as an educational experience. Not that I was cooking books, but you learn by making hypotheses. What if I do this? What if I do that? And that is why I was drawn to taxes. If someone is going to take this much money from me, I want to know why.

Alan:
My father, the immigrant, he would have people doing his taxes, but he wanted to have it explained to him what's going on. And he always would say at the end, he said, if only I had to pay more taxes. As physicians we're privileged. I don't mind paying taxes, but I don't mind taking advantage of what's legal and allowable to increase my generational wealth.

Dr. Jim Dahle:
It sounds to me like you're not planning on selling these properties anytime soon. And you're planning on using the cash flow from them to fund your retirement. Is that a fair assessment?

Alan:
Yes. My wife and I, with our estate planning, are going to handcuff our children together for at least five years so that when the last one of us passes, they will inherit the family business, but they cannot deplete the capital for at least five years. So, if one of them gets a notion, they want to go around the world three times, they want to sell a property to do it, not within the first five years. And it will force them to work together. Would I be digressing if I relay the story of the London Egg?

Dr. Jim Dahle:
No, let's hear it.

Alan:
In the London financial district, there's a very famous building that's called the Egg, because it looks like a Fabergé egg. It's sort of egg-shaped and glistens and turquoise. And it was a magnificent property built in the financial district, and they went bankrupt. The owners.

Alan:
And out of nowhere, this private family business came in and bought this many hundreds million-dollar business. And they bought it for 10 cents on the dollar. And all of a sudden, they made the newspapers. This was about 10, 15 years ago. And the story was that it was an immigrant who used to have a push cart in Syria, came to London, and had push carts. And then he had a little storefront, and he started buying property, and that was three generations later. He had sons, they were never allowed to sell the property, had a family real estate business that only bought property, turned it over, but never exited the market.

Alan:
And the generational wealth, after three or four generations, they were fabulously wealthy. They could buy this magnificent real estate property in the London financial district. And they came out of nowhere, but their investment strategy was “buy and hold”, “buy and hold” and make sure the next generations appreciate that.

Alan:
So, I have sort of that strange notion. I can't control my family and my real estate with cold hands from the great beyond. And I don't want to be unreasonable when I give with warm hands. It's finding a balance.

Aaron:
So, if an egg-shape skyscraper shoots up in Western Massachusetts, you'll know where it came from.

Dr. Jim Dahle:
Aaron, how does knowing about this inheritance you have coming affect the way you'll live your financial life now.

Aaron:
That's a good question.

Alan:
A very good question.

Aaron:
It's a good question. I'd like to think that it plays no part in my financial thought process, but it does. It's very nice to know that there's a cushion for me if for God forbid things don't go well. But even just to know that somebody else is building your retirement for you ahead of time is a great feeling. And especially as somebody who's graduating from residency, not a lot of savings.

Aaron:
But I did make some recent decisions that I certainly would not have made had I not had a knowledge of the financial situation of my parents and then also the support and mentorship of my father. Because we did purchase a new home, my wife and I, just now out of residency. And I certainly would not have felt comfortable doing that without the reassurance of my father and knowing that he is this benefactor, should I need him.

Dr. Jim Dahle:
Yeah. You kind of got a backstop there in your financial life, which a lot of people don't have.

Aaron:
That's exactly right. Somebody is watching over my shoulder to make sure I'm not making any major mistakes.

Dr. Jim Dahle:
Yeah. But at the same time, you mentioned in your email to me that you have some significant student loans, at least, I don't know if they're yours or your spouses or what exactly. So, it doesn't sound like Alan paid for all of your schooling. Tell us a little bit about that decision.

Aaron:
No, it's true. Like most people graduating out of residency these days, I have around $225,000 in loans from my own education. And that's not including my wife's, which is sizable as well. She's an audiologist, which is a four-year doctoral degree beyond college. So, my father and my mother did pay for my undergraduate, but they made the conscious decision not to pay for medical school, which I think is fair.

Alan:
I paid tuition. It was UMass.

Aaron:
I went to UMass medical school, which is a state school, but you did not pay tuition.

Alan:
Okay. All right.

Aaron:
Yeah. All of the debt that I have is from my four years in medical school. I managed to get through residency without building up any more debt and actually managed to save about $30,000 over the last two years, which we are now using to furnish our new home and buy furniture, which is very nice.

Aaron:
But getting back to your original question, the debt is definitely intimidating. I'm not going to qualify for any government loan service repayments because I'm not joining a non-profit. As I mentioned, I'm joining a private practice group.

Aaron:
So yeah, I think the goal and what me and my wife will try to do, aside from buying furniture for the new house, is trying to live within our means, trying to maintain our lifestyle from residency. And really, the goal is to try and pay off all of our debts in the first 10 years. And then come back on the show as back to broke member, hopefully by the age of 40.

Alan:
Well, I have a plan. I have a plan. The magic of those lines of credits. And we've started discussions about giving my son a line of credit that as long as he carries the interest costs, he can use that for real estate investment with me. So, it stays within the family. My father had an expression, “It's better to give with warm hands than cold.” Now my son and my daughter can wait until we're dead to get their inheritance, but they need their assets now. And my wife and I, we've had long talks about this, we'd rather give with warm hands.

Alan:
So, to make available to my son and my daughter, lines of credit, they'll inherit the debt along with the assets, but let them have it now if they want it and invest it. But not to cut into my lifestyle, they will have to carry the interest, but not the principal payments. They have the ability to make their own spreadsheet and figure out whether that works for them and start investing now. Because the only way real estate works is if you buy it early. If you wait till five years before you retire, you don't get the cash flow.

Alan:
So, any of your listeners who want to do this, they got to do it now. If you wait to the end, it doesn't work. What you do in the last few years before you retire is you try to pay off those lines of credit so that you have a limited caring cost through retirement. And then if you're lucky and you have good kids and you trust them, you get them into the family business.

Dr. Jim Dahle:
What if you don't have good kids? What would you recommend? I mean, clearly, you've got a very successful son here that's just completed a urology residency. He's got an interest in real estate. He's clearly capable of doing this, but that's not the case for lots of people. Lots of people have a child struggling with a meth addiction or perhaps they're just not that bright. How would your plan be different if your kids weren't the kids you have?

Alan:
Well, I have a three-word answer. Trust Fund Baby. Yeah, we know people, professionals, who have assets and unfortunately, children that are perhaps not as well seasoned. And that's what trust funds are all about. I would never abandon my child, even if they had issues that made them less than responsible business partners. I wouldn't give all the money to a charity organization. I would limit how much I would save for that wayward child. Trust funds. They get a steady income, but they don't get control of the capital.

Dr. Jim Dahle:
All right. So, this is a pathway that has clearly worked very well for you building wealth. You're now financially secure as you move into your retirement but it clearly has taken some work. You have no fear of a spreadsheet. You have no fear of doing your own taxes. You have no fear of going into a tenant’s apartment and fixing what you can and managing what you can't. Is this a pathway you recommend to other physicians, select other physicians, all other physicians, or a rare other physician? What would you say about what you've done to other doctors?

Alan:
It's not for everyone. It is clearly not for everyone. Again, listening to your experts on your podcast, they make it seem as just like investing in the stock market or buying a bond. Here are the rules. You put your money in and you wait for the cash payments to start hitting your bank account. No, that does not work.

Alan:
Most people, if they don't want to get their hands dirty, then you have to have a management company that you trust. You still have to check up on. So, in the last few years, about four years ago, I got a good management company because my wife and I want to be able to travel now. It's part of our retirement plan. So, you need backup. I can't be here 24/7.

Alan:
I have a good manager company, but I check up on them. I don't let them pay the taxes, the insurance, the water and sewer bills, because I want to keep that large chunk of cash under my control. Plus, it's the only way you can really screw up. If they don't pay those things, you lose the building. Ignorance is no defense.

Alan:
Is it for everyone? You need people on your show like me to talk about the unromantic part of the colonoscopy because it's not for everyone. It is a sure money maker. I mean, all the old wealth in this country is based on real estate. And all the new wealth in this country, they end up buying real estate. It might be farm ranches in Montana or penthouses in New York City. But they always come around to buying real estate and or investing in commercial properties. They need to fully appreciate it. Just like you can't become a doctor without doing a residency, you can read all the books, pass all the exams. You got to get your hands dirty. So, it takes a little bit of introspection.

Dr. Jim Dahle:
Now, you have done this in Western Massachusetts. What about a doc that's in Boston or a doc in DC or the Bay Area? What if they live in a much more expensive cost-of-living area? People hear you talking about buying a $150,000 property or $250,000 property and they're thinking, “I can't buy my driveway for $150,000.”

Alan:
The property I'm buying now is a five-unit, a little bit of a fixer-upper and their asking price was $950,000 but I'm getting it for $790,000. And that has to do with the fact that it's a property that needs work. And if you don't know what you're looking at, you don't have a good sense of how much it will cost. It needs about $20,000 to $40,000 in the first year to make it a quality property. The insides weren't bad as were the outsides, which turned off buyers. And money has just become expensive. My bank is going to give 5% and 8% variable mortgage, but the numbers work for me with the rents collected. So, we're talking $800,000 property. In a larger city, the rents are higher, the properties will be higher, but the numbers should still work if you have a spreadsheet and an amortization table.

Alan:
The other nice thing I'll say about real estate is very transparent. People are buying commercial real estate. You're buying with your head, not your heart. It's different than a bidding war on a residential property. It has a great view. It has good school systems. Commercial property, either the numbers work or they don't work.

Alan:
With me because I have a separate income, I can make them work even if it's a negative cash flow, which to your listeners, like if the principal in the first year is $12,000, your profit is $8,000. You have to put $4,000 of your own money into paying the bank the principal, but that's not a loss. That's just like an IRA, putting money away that you can get later. But you need to have the wherewithal to have that $4,000 for that year for that property. A spreadsheet makes that clear. I really don't think it's different. In a big city, the numbers are scarier. So, instead of owning eight properties, you may only own two or three.

Dr. Jim Dahle:
So, you haven't mentioned a lot about your spouses. What do your spouses think about the investing approach that you've taken, Alan, and that you are getting ready to take, Aaron? What's their thoughts on being landlords?

Alan:
Well, my wife is a loving and supporting wife, but timid. And almost every single property I bought she always said, “Don't do this.” But she trusted me. And what I did is when I buy a property, I have my original spreadsheet and I file it away. And when I do my spreadsheets, I do first year, second year, sometimes third year with the increased costs at the beginning.

Alan:
And then after two or three or four years, when I'm ready to buy my next property, my wife says, “No.” I say, “Let me show you something.” And I pull out the old perspective spreadsheet and then I show her the current books and I have been lucky I have been almost always on the money. So, I have proven myself after many years to my wife that with the spreadsheet, if you do it right, it doesn't lie. So, she trusts me now.

Dr. Jim Dahle:
Let's get some more wisdom from you, from the perspective of a doc toward the end of his career. About a quarter of doctors in their 60s are not yet millionaires. Why do you think that is?

Alan:
Should I tell them the lesson? I'm sure you must have heard this. It's a famous quote. “The secret to wealth if you're a doctor is very simple. One car, one house, one wife.”

Aaron:
Yeah. It's the whole last chapter of his novel actually.

Alan:
I live in a small community, it's a 110 bed hospital and everyone knows each other quite well. And all my colleagues who are often older than me and they're living with wife 3.0, and they can't understand why they have no money, why they have to continue to work. Well, they understand. You can make bad business investments. Sometimes your relationships blow up. And you're saddled with that added expense of another household.

Alan:
But I will say this. When I came to this valley in the early 1980s, the doctor's parking lot was full of Buicks, Fords. And now when I drive my Volkswagen and park in a doctor's parking lot, I'm next to Range Rovers, BMWs, Mercedes, Porsches. And I know the doctors are driving them, and I know they can't afford them. So, I think there's a lot to do with personal choice.

Alan:
My son earlier today over lunch in preparation for this podcast asked me and my wife, “Were we excessively frugal growing up?” Because he has certain childhood memories, which I think are a little bit false memories. “We didn't get cable till I was a teenager.” Well, I pointed out to him, we lived in a rural area on a Hilltop. They didn't bring cable until you were a teenager. He thought we were just cheap. So, there is a lifestyle component. Doctors, even the most poorly paid doctor, make an excellent living.

Alan:
My father was a furrier. He worked at a sewing machine. He only wished he had to pay more taxes. We doctors are privileged. You'll never see a doctor on an unemployment line. I think it really comes down to life choices. And whether you developed a sense of entitlement and whether you act on it.

Dr. Jim Dahle:
Have you ever tried to talk to some of these other doctors about finances?

Alan:
They ask me all about real estate, because we talk finances. And they all want real estate until I tell them how it works. I tell them about doing a colonoscopy, and it frightens them immediately.

Dr. Jim Dahle:
Yeah. You don't make it sound all that appealing for sure.

Alan:
It works. It's fun. I enjoy it, and it works. But if you're going to do a colonoscopy sometimes, you're going to get [bleep] on your shoes. You have to be prepared.

Dr. Jim Dahle:
All right. I wanted to give you each a chance here, but we're running out of time on our podcast, but you've got the ear of 30,000 to 40,000 high-income professionals, mostly doctors. Let's start with you first, Aaron, and then we'll go to Alan. What have we not yet talked about that you think they should know?

Aaron:
I think that we haven't talked about financial literacy for the young generations of doctors that are coming out of training. I was privileged enough during my training to sit in an excellent resident room, surrounded by people that I adore. Financial discussions are a lot of fun when you're a poor resident. And the things that people would talk about, it was very clear whether or not they had read your book, basically.

Aaron:
There's the cohort of people who don't manage their own money. They use dad's financial advisor. They have absolutely no idea what they're invested in. They're eating pasta for dinner every night, but they're really excited about the $5,000 they put into their backdoor IRA. And then there's the people who live within their means, are educating themselves and listening to your podcast, and you can have a good educated discussion with them.

Aaron:
I think that it would be really nice to sort of spread the doctrine and try to teach more young residents how to manage their money, where to go for good resources, because I think it is really a problem. It's really challenging coming out in your mid-30s, after a long training program and not having a dollar to your name and seeing the rest of your friends from college mid-career or even almost at the peaks of their careers. They've houses, multiple cars. They've been privileged to have more children because they have more time.

Aaron:
Again, I think that we invest a lot of our greatest years in our training, and we kind of come out behind the eight ball. I guess, I'm not sure exactly where I'm going with this other than I think that it would be really helpful for trainees to get more education on this topic so that they have a better hand at the table when they come out of training.

Dr. Jim Dahle:
Awesome. Thanks for sharing that. Alan, what have we not yet talked about that people should know?

Alan:
We, doctors, are privileged. We have access to good income. But like Aaron says, a lot of doctors, even doctors of my cohort, my age, they really don't know anything and they rely on other people, and they don't always get good advice and they don't know it when they get bad advice. It's like calling in a consultant in a field of medicine you know nothing about. Autoimmune diseases, you have to trust them. The trick is getting a good consultant. And that's hard.

Alan:
And the other thing of course is you have to start early. And just when you have the most demands on your income, to start a family, find a good place to live, that's when you need to start making serious investments, if you're going to do real estate. And again, you need to talk to someone at great length, drink a fine single malt scotch and learn the ins and outs because reading the book alone, it's not enough. You need your residency. You need a mentor to get you started and then start. The nice thing about real estate, if you make a mistake, you won't get wiped out. You may not make money, but you'll usually always get your investment back.

Dr. Jim Dahle:
All right. Good advice. Well, thank you so much for coming on the White Coat Investor podcast. I know your wisdom, both from a doc toward the tail end of his career, as well as a doc just getting started this month, will be helpful to our listeners. And I appreciate your time and effort in sharing your experiences.

Alan:
Check back in 30 years.

Aaron:
Sounds like a plan. Thank you, Jim. It's been a pleasure.

Alan:
It's been indeed a pleasure.

Dr. Jim Dahle:
All right. I hope you enjoyed that interview as much as I did. I didn't want to spend a lot of time talking during that interview or pushing back against some of the ideas in it. Because I thought getting perspective on what real estate looks like after 20 or 30 or 40 years was so valuable, because we talk about it all the time, but we talk about the beginning of it and not necessarily the end of it. And I wanted you to see what the end of direct real estate investing looks like. When you own seven or eight apartment buildings. When they're providing more cash flow than you ever made in your career. So, I hope that was really valuable to you.

Dr. Jim Dahle:
But we should probably make a few comments. The first one is this idea that you have other people paying for your retirement, you have other people paying off your mortgages, etc. You're working hard and you're putting your money in and you're taking risks. So, it's not all about your tenants paying for everything. You're earning that money with your labor by taking risk, by putting your capital at risk.

Dr. Jim Dahle:
I suppose it's no different when you're talking about fractional ownership of companies, a.k.a. stocks, right? When you own a bunch of stocks, whether directly or via an index fund, you have other people getting up every morning, going to work, going into their office at Amazon, at Google, at Exxon, at Home Depot and putting in their day's work and paying for your retirement.

Dr. Jim Dahle:
So that part's not necessarily different with real estate or stocks. Either way, it's an investment, and it's an investment that makes money, and it makes money for various reasons that you understand as you come to understand the markets.

Dr. Jim Dahle:
The other thing to keep in mind is this approach works. I've run into lots of docs that do this approach, that buy direct real estate in their hometown then manage it themselves. But you can only do that to a certain size. For example, you can probably manage 30 units, 40 units, 50 units. You can probably do that yourself. You can't manage 500 units yourself. It doesn't scale.

Dr. Jim Dahle:
At a certain size, you've got to hire management, whether they are resident managers in each of your complexes, whether it is a management company or whether you're hiring a syndicator to take care of that for you, or whether you're investing in a fund or investing in a REIT mutual fund. At a certain point to scale up any further, you've got to get some help there.

Dr. Jim Dahle:
I also found it interesting, the comments Allan made about wanting to travel. And I tell you what. I feel tied down at times by my practice. It keeps me from traveling. I mean, not so much anymore now that I've cut back on shifts. But having another job, having direct management of a bunch of properties would make that even worse.

Dr. Jim Dahle:
And the way I look at it is I want to travel now. I'm in my 40s and now is the time I want to travel and go around the world and climb peaks in Antarctica and go canyoneering in Costa Rica and see the sites in Europe and that sort of stuff. I don't necessarily want to wait until I'm 70. So, if that's also the case with you, you're also going to have to solve that management problem a little bit earlier than when you get to be 70.

Dr. Jim Dahle:
So, keep that all in mind, as you embark on any sort of an investing, especially a direct real estate investing career, that those are all things that you will need to keep in mind and problems that you'll need to solve as you go along through it.

Dr. Jim Dahle:
Before we wrap up this podcast, I want you to be aware of some real estate opportunities that are coming up for you. One of which is what we call PIMDCON, and PIMDCON22, this is Passive Income MD. My friend, Peter Kim, over at Passive Income MD is putting on a conference.

Dr. Jim Dahle:
And the last couple of years, that conference has been virtual. This one's also part virtual, but they're getting back together live. That's going to be September 23rd through 25th. I'm going to be one of the speakers there. There's going to be some other awesome speakers there. It's going to be almost entirely about real estate investing. So, if you would like to learn about this at a conference, go to whitecoatinvestor.com/pimdcon22 and check that out.

Dr. Jim Dahle:
If you are interested in learning more about direct real estate investing, and you would like to learn from an online course, we have a partner for that as well. That course is called Zero to Freedom. If you go to whitecoatinvestor.com/rental, you can sign up for that. July 25th through August 3rd is when it launches off, and you can check that out. That's from our friends, Leti and Kenji, who've put together that course.

Dr. Jim Dahle:
And lots of docs have gone through it. A beautiful thing about it is not only do you learn lots of material about how to do this direct real estate investing, but you also have a cohort of peers that you can get support from as you go along and start buying your first property. So that eventually, you get to the point that Alan is at.

Dr. Jim Dahle:
Now, we're working on a real estate course. We expect to have out about the end of the summer, beginning of the fall. So, watch for that. You'll get more details as that comes around. But in the meantime, we recommend this conference. We recommend this real estate course. Ours will be more of a broad overview of real estate. This one very much hones in on direct real estate investing. But watch for ours coming out as well in a few more weeks.

Dr. Jim Dahle:

The White Coat Investor is proud to introduce our No Hype Real Estate Investing course, which will provide the framework for developing further knowledge and experience as you progress in your real estate investing career. We call it an introductory course because there is always more to learn. But this is no short, superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet. Continue your wealth-building journey today with the No Hype Real Estate Investing course at whitecoatinvestor.com/courses. You can do this and The White Coat Investor can help.

Dr. Jim Dahle:
All right, thanks for those of you who are leaving us five-star reviews. It really does help spread the word about the podcast. Thanks for telling your friends about it. As we talked about at the end of that interview, docs need this information, and there's a lot of docs out there that don't have it.

Dr. Jim Dahle:
I just saw an article about a doc who had no idea what she was going to do with her $450,000 in student loans as she started residency. It was like nobody had ever told her about repay or PSLF or any of that stuff. And so, we got to get this word out to people so that they have the tools they need to manage their financial lives so that they can be better partners, parents, and practitioners.

Dr. Jim Dahle:
Anyway, our most recent five-star review said, “Excellent. I'm a clinical pharmacist, and I've listened to almost all of your podcasts since I subscribed. I've recommended your book to my relative who's a physician resident. These podcasts are informative, confirm what I've been doing right, what I may need to change and help me expand my knowledge. I enjoyed your episode on cryptocurrencies. What got me started was your book, recommended to me by a colleague and you're down to Earth, easy to understand, and honest podcast. Thank you. Ben.” Five-stars. Well, thanks, Ben, for that great review.

Dr. Jim Dahle:
For the rest of you, keep your head up, shoulders back. You've got this, and we can help. See you next time on the White Coat Investor podcast.

Disclaimer:
The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.