[Editor's Note: You may have noticed that we've changed the formatting of our Thursday podcast show notes posts. We're still publishing the transcript of each week's podcast (and we've also added the transcript of the Milestones to Millionaire podcast that runs on Mondays!), so if you want to read every word that was said, you can still do so. We're also giving you a couple of show highlights that will give you a feel for that week's podcast so you can decide if you want to read the full transcript or download the podcast and listen to the entire show. Happy listening!]

Today, we are answering your questions from the speak pipe. We talk about if a medical reimbursement plan is a good option for a private practice, and we talk about the proposed ban on non-compete contracts and get into what non-competes are, why people use them, and when they are and are not fair. We answer a question about divesting interest in the sale of practice. We talk about short-term investments and discuss if annuities are a better idea than usual with interest rates as high as they currently are. Finally, we talk about what to do when you have a bad financial advisor.

 

Non-Compete Clauses 

“Hey, Dr. Dahle. I'm a longtime listener, but first-time caller. Thanks for all you do. My question has to do with the proposed ban on non-compete clauses, both by the FTC as well as Congress. I feel like these clauses are bad for everyone. They're bad for doctors as well as patients. Doctors should not have to leave their communities if they want to leave their employer or a bad partnership.

Unfortunately, I have not much support from the medical community for this. In fact, the AMA came out with a statement saying that they felt that a ban on non-compete clauses was not necessary. Fortunately, the American College of Emergency Physicians has come out in support of it as well as the American College of Surgeons. But I would love to see a groundswell of support from the medical community for this. And I guess my question is, how can we best support this and get awareness out there? What are your opinions on a ban on non-compete clauses?”

First of all, I'm surprised you think the medical community doesn't support this. I just saw an article about how 90% of doctors are in favor of banning non-competes. I think you're totally wrong if you think the medical community as a whole does not support these. I think the vast majority of doctors are very excited and positive about these potential bans going into place. Whether it's done by the FTC, whether it's done by Congress, whether it's done by whoever, they're thrilled about it. The reason they're thrilled is because most doctors are employees. There is no good that comes from a non-compete for an employee. Of course not. It's a restriction on you as an employee. It's all bad if you're an employee. No surprise there that most people don't like them.

I think we ought to inject a little more nuance into the discussion, though, and that might help you understand why maybe not everybody's against them. For example, our employees here at WCI sign a non-compete. Obviously, there won't be if the FTC bans them, but they sign a non-compete. It's a very specific non-compete. I basically tell them they can't go work for any of our competitors. We give them a list of the competitors and basically tell them they can't start another business that's essentially doing the same things as WCI. We view that as protecting some of the information about WCI, including how it runs and some of that proprietary kind of information. I understand why some businesses want non-competes, because I've got a non-compete.

It would be a big deal for me to spend a year training somebody to work at WCI and then they turn around because some other company that competes with us wants them and wants that information. They pay them a few thousand dollars more; they go work for them; and all of a sudden. they've got access to all the information of how WCI runs. I get why companies want to protect that sort of thing. Now, that's not necessarily the reason that most doctors have non-competes put into their contracts. The issue there is, oftentimes, the employer is investing a lot of time and money and effort into bringing them out and establishing them in their practice.

For example, let's say you are a doc in a relatively small town. Maybe you're the only doc of your specialty in that town. You bring an associate out to work for you. You pay off $50,000 of their student loans. You give them a $20,000 signing bonus. You pay for them to move out. You establish them in practice. You introduce them to the community. You cover their overhead for three months. You give them a salary for three months before they're even really generating any money for you. Then they walk out the door at four months, open a practice across the street, and start competing with you. How's that going to make you feel? Not so good.

You can understand why that doc, that employer, would want a non-compete. What's a reasonable thing to do? A reasonable thing to do is to have some sort of reasonable time limitation that they can't walk across the street the day after they quit and open a new practice and compete with you. Maybe they have to wait six months or 12 months or two years or whatever. An unreasonable time period would be something like 10 years. I feel the same with distance. Maybe they can't go across the street, but if they go five miles away, maybe that's OK. They're really not going to take that many patients with them if the patient's got to drive a long way. But if you want to put a non-compete on there that's 250 miles, that's not reasonable. Those tend not to be enforceable.

I don't think a complete ban on non-competes is necessarily fair, either, to the employers. That's the nuance in the discussion. But there's no doubt that I'm in the minority when it comes to that opinion. Most docs think these are so terrible for doctors and patients that even any possible good they could do is not worth it and that they should be completely just eliminated. I'm not sure I quite share that opinion. I think there's some value. I think they do need to be reasonable and limited, for sure. There are two people in the contract, and you want to be able to protect both of them in a reasonable way, but without you having to totally pack up and move if the employer treats you crappy. If the non-compete means you have to move your family, that's probably overly restrictive in my opinion. If it means you have to commute for eight more minutes to a new job, I don't think that's overly restrictive. If you only have to do that for a year and then you can go back and open a practice across the street from your prior employer, I don't think that's too restrictive.

I guess my argument would be for a little bit more nuance there rather than a complete ban. But I have a feeling that it's going to happen anyway, and most doctors are going to be happy about that because most docs are employees. Like I said, there's really no benefit to an employee for a non-compete. It's all bad for you. As far as patient care goes, I'm all for a continued relationship. I want doctors to be able to have that continuity of care with their patients. But at the same time, if without the non-compete, that job doesn't happen at all, if that employer is not willing to bring an associate to town, that's not good for patients, either. There's more nuance to it than I think your question included. But there's no doubt that these have been abused in the past, that some employers put these in just to punish you, to put on the opposite of golden handcuffs. They're just handcuffs. I’m obviously very much against that.

More information here:

What Physicians Need to Know About Contract Negotiation

Things to Ask for in a Physician Contract 

 

Annuities in Today's Market

“Hi Dr. Dahle, this is Robert from South Carolina. I'm calling with a question about annuities. In the past, I'd never have considered them, especially with interest rates very low. But now that rates have gone up quite a bit, it seems like there might be a place in our portfolio for an annuity.

I'm also curious about taxation issues. It looks like they're funded with after-tax money, and then the money that's withdrawn on it is taxed with an ordinary income rate upon withdrawal. But it does look like there are some annuities that might be tax-free. For example, those from a settlement. I'm curious for your take on annuities and their taxation as to whether or not annuities have a place in a modern physician’s portfolio.”

Let's just give a broad overview of annuities. I do not think of annuities as a way to invest. If you're using a variable annuity, that is an investment vehicle, but those for the most part should be avoided anyway. They're generally just a way for a product to be sold, not bought. Think of an annuity as a way to spend your money in retirement rather than a way to build your nest egg for retirement, if that makes sense.

As far as the taxation, if you buy an annuity with qualified money, meaning money that is in a 401(k) or an IRA or whatever, then when it comes out and it's paid to you, an annuity is essentially buying a pension. When it's paid to you, that's 100% taxable—just like any withdrawal from an IRA would be. It takes the place of Required Minimum Distributions for that money that's now in the annuity—100% taxable at ordinary income tax rates. If you buy it with non-qualified money, meaning you buy it with after-tax money, then the taxation on it is determined by what's called the exclusion ratio. Some of the money coming out as principal, you don't pay tax on that, just like you wouldn't on basis if you sold a taxable investment. The gains are taxed at your ordinary income tax rates. This is the downside of annuities. When the money comes out, it doesn't come out at qualified dividend rates. It doesn't come out at long-term capital gains rates. It comes out at ordinary income tax rates.

It grows in a tax-protected way just like your retirement accounts do. But when it comes out, it's taxed at a higher rate. You need many years of tax-protected growth to make up for the fact that it is taxed at a higher rate when it comes out. That's why, for the most part, investing in an annuity, just like investing in a non-deductible IRA that isn't converted to a Roth IRA, probably isn't the best move most of the time because that's the way it's taxed. Also, there's the age 59 1/2 penalty. Annuities are for retirement. Just like a Roth IRA or 401(k), unless you qualify for an exception, if you pull that money out before age 59 1/2, there's an additional 10% penalty.

For the most part, annuities are products designed to be sold, not bought. Single Premium Immediate Annuities (SPIAs) might have a place in a spending plan. In retirement, for people who are worried about running out of money, you might want to buy some longevity insurance, which is a delayed income annuity. One type of that is a Qualified Longevity Annuity Contract, or a QLAC. That's what a delayed-income annuity is called when you buy it with retirement money. Some people might want to buy those, but for the most part, these are products that annuity salespeople are out there selling to you. That usually means you don't want to buy them.

More information here:

What You Need to Know About Annuities

What Is a SPIA Annuity? 

 

Check out the transcript below to read Dr. Dahle's answers to questions regarding:

  • Medical reimbursement plans and if they are a good idea
  • Whether you should take a lump payment or hold the note on the sale of your practice or business
  • Whether Treasury bills are a good place to store short-term money
  • When to fire a bad financial advisor

 

Don Wenner – CEO of DLP Capital 

Don Wenner, the CEO of DLP Capital, joined Dr. Dahle to discuss how recent events, such as the increasing interest rates and the banking sector's instability, are affecting commercial real estate in general and DLP Capital in particular. Wenner shared that the current situation is creating opportunities for DLP Capital to acquire distressed assets that will likely appreciate in value over the long term. He explained that DLP Capital's lending funds, which are similar to banks, have been benefiting from the 4% increase in interest rates because their loans are short-term and not fixed for long periods.

The conversation also touched on the problems faced by real estate operators who took out short-term debt to buy long-term assets, which has caused significant challenges due to the current increase in interest rates. Dr. Dahle agreed that the current market is creating opportunities for those who can afford to buy, but it is also causing a higher percentage of people to become renters, which drives up the demand for affordable workforce housing. Wenner explained that DLP Capital has been focusing on acquiring properties with strong unlevered returns, generating over 7% yield on cost—even in the peak of the market.

The conversation concluded with a brief introduction to DLP Capital's equity and debt real estate funds, which are focused on workforce housing and lending to experienced operators. DLP Capital is now offering a lower minimum investment for white coat investors at $100,000. To read the full conversation, please see the transcript below.

 

Milestones to Millionaire Podcast

#116 — ER Doc Builds Wealth and Pays Off $344,000 in 2 1/2 Years

This ER doc has worked hard since finishing residency and has paid off $344,000 in 2 ½ years. He also managed to build wealth and buy a new truck at the same time. This doc says paying off his loans made him feel like he was finally and officially done with med school. How did he do it? Living like a resident and working like a resident. They are now using those big student loan payments to build a nest egg and to save for a down payment.

Finance 101: Mortgages

Buying a house is likely the most expensive purchase of your life, and it's essential to get the best deal possible on your mortgage. There are two schools of thought when it comes to putting money down on a mortgage. The first is to put 20% down to get a standard mortgage with the best terms, rates, and fees. The second is to put down less than 20%, which can be done with physician mortgages. While these mortgages may come with slightly higher rates and fees, they are designed to avoid the need for private mortgage insurance.

When considering a mortgage, Dr. Dahle highly recommends keeping the mortgage to less than two times your gross income. It is reasonable for some people to stretch a bit beyond that, but being house poor is never a good idea. The total housing expenses—including principal, insurance, taxes, interest, and utilities—should be less than 20% of your gross income. It's also important to have a plan to pay off the mortgage before retirement, as carrying a mortgage into retirement can be a regret for many people.

Be sure to read the transcript below to get all of the information. If you need help figuring out what kind of mortgage is right for you, check out whitecoatinvestor.com/mortgages.


Sponsor: SoFi

 

What’s changed in healthcare? The opportunities, the lifestyle, and you. Your needs, wants, and goals are probably different than they were five years ago. Now’s the perfect time to explore locum tenens opportunities. Start your research at locumstory.com, an unbiased, educational resource. You’ll hear true stories from physicians, learn about specialty trends, compare locums agencies, and more. Locums could be an essential part of a career that adapts to your needs. Visit locumstory.com.

 

WCI Podcast Transcript

Transcription – WCI – 313

INTRODUCTION

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 313.

Everyone has a story, different needs, wants, and goals, and how to attain them. Your story determines your solution. Whatever your situation and story, locum tenens should be part of that conversation.

How do you find out if locums is a good option for you? Go to an unbiased, informative source like locumstory.com. You'll learn all the ins and outs of locums, details on travel and housing, assignment coordination, tax information, and more.

You'll also hear first-hand stories from locums physicians from all walks of life, so you get a bigger picture of the diverse options. Get a comprehensive view of locums and decide if it's right for you at locumstory.com.

Welcome back to the podcast. We're recording this actually back in March. March 29th is when we recorded this. I've still got two feet of snow on my front lawn as we record this.

Hopefully by the time you hear this, as it drops on the 4th of May, I don't have any snow on my lawn. But on the 4th of May, I'm going to be on the Salt River in Arizona and hopefully we still have plenty of water from all that snow melting on the river. I’m looking forward to that trip a lot, but in order to go on it, I got to record this in advance, like much of what we'll be running in May. Because May is a time to play, not a time to be recording podcasts.

All right, let's get into your questions. This show is driven by you, your feedback is very important to the White Coat investors. We love your feedback. We really appreciate when you fill out the annual survey. But you drive the content of this. If you ask for guests, we bring the guests on. If you leave questions on the Speak Pipe, those are the questions we answer. If you're like, “Man, all the questions are too advanced”, Well leave some beginner kind of questions on the Speak Pipe. If you're like, “All the questions are too easy,” we'll leave some questions to get us out into the weeds on the Speak Pipe. But we usually have plenty of those.

We'll get your questions answered and we'll talk about what you want to talk about. This is driven by you and your financial concerns and successes and those sorts of things.

The first question of the Speak Pipe is from Roy. Oh, if you want to leave some on the Speak Pipe, that's at whitecoatinvestor.com/speakpipe.

 

MEDICAL REIMBURSEMENT PLAN QUESTION

Our first one today from Roy that he has left on the Speak Pipe is about a medical reimbursement plan. Let's listen to his question.

Roy:
Hello, Dr. Dahle. My name is Roy. I'm an internist in Northern California. My private practice group is looking into subscribing to a medical reimbursement plan. This is different than an HSA or such thing. It's apparently allowed under Internal Revenue Code Section 213 and purport to allow you to reimburse yourself pre-tax for qualified medical expenses, out pocket expenses and the like.

I'm not at all familiar with this. There is an annual fee and a per transaction fee associated with it as well. Is this a good idea, a good thing? Is it legitimate? We'd love to hear your thoughts. Thank you very much.

Dr. Jim Dahle:
I've got you guys trained well. The first question you ask is, “Is this a scam?” That'll keep you out of trouble in life. That's actually a good first question. No, it's not a scam. These are legit. I have had a health reimbursement account or arrangement before. An HRA. That's what we're talking about here. And they can be used in conjunction with an HSA. They must be used in conjunction with a health insurance plan.

But essentially, this is your employer paying for some of your health insurance. And if you are the employer too, that allows you to pay for some of your healthcare with pre-tax dollars. So, that's a good thing.

The way mine was used in my group is it essentially turned our high deductible plan into a low deductible plan. So, we had a plan that qualifies as a high deductible health plan, so we could use an HSA, but the actual deductible that I saw was like $250. So I'd pay the first $250. I think the HRA picked up to $2,000 or $2,500. I can't remember what it was. This has been quite a while ago. And then I'd met the deductible. But most of that deductible was paid by the HRA, and this was when I was in the partnership track. So I was an employee. This is something we do for our employees.

And so, that was really cool. I thought it was neat to have a low deductible plan, a high deductible plan. There was actually a low deductible plan. So, it's kind of beneficial that way.

There's lots of different ways to pay for healthcare at pre-tax dollars. There's FSAs, there's HSAs, there's HRAs, there's the employer picking it up. And so, there's lots of ways that you can do that. And obviously a lot of the time your health insurance premiums are also paid for with pre-tax dollars.

And so, this is a good thing. I guess there's ways to make it bad. If the fees were really high or something, maybe it's not still a good thing, but most of the time this is a benefit worth using or maybe looking into implementing in your group. I don't know that makes a huge difference if you got to fund it yourself, the employer's not putting any money toward it and you have plenty of money in an HSA anyway. I don't know that it really moves the needle. But if you're an employee and your employer's offering this, say thank you. This is a great benefit.

 

NON-COMPETE QUESTION

All right, let's talk about non-competes. We'll start with this question off the Speak Pipe.

Speaker:
Hey, Dr. Dahle. I'm a longtime listener, but first time caller. Thanks for all you do. My question has to do with the proposed ban on non-compete clauses, both by the FTC as well as Congress.

I feel like these clauses are bad for everyone. They're bad for doctors as well as patients. And that doctors should not have to leave their communities if they want to leave their employer or a bad partnership.

Unfortunately, I have not much support from the medical community for this. In fact, the AMA came out with a statement saying that they felt that a ban on non-compete clauses was not necessary. Fortunately, the American College of Emergency Physicians has come out in support of it as well as the American College of Surgeons. But I would love to see a groundswell support from the medical community for this.

And I guess my question is, how can we best support this and get awareness out there as well as what are your opinions on a ban on non-compete clauses? Thanks so much.

Dr. Jim Dahle:
All right, let's talk about non-competes. Here's the deal. First of all, I'm surprised you think the medical community doesn't support this. I just saw an article, we're including it in the April monthly newsletter. You should sign up for those newsletters, by the way, if you haven't. You can sign up at whitecoatinvestor.com. Just go down to WCI Plus, and there's a newsletter subscription form there. They're totally free.

But I include the best links each month from articles that I find on the web. And in March I found this article about how 90% of doctors are in favor of banning non-competes. So, I think you're totally wrong if you think the medical community as a whole does not support these.

I think the vast majority of doctors are very excited and positive about these potential bands going into place. Whether it's done by the FTC, whether it's done by Congress, whether it's done by whoever. They're thrilled about it. And the reason they're thrilled is because most doctors are employees. There is no good that comes from a non-compete for an employee. Of course not. It's a restriction on you as an employee. So, it's all bad if you're an employee. No surprise there that most people don't like them.

I think we ought to inject a little more nuance into the discussion though, and that might help you understand why maybe not everybody's against them. For example, our employees here at WCI sign a non-compete. Obviously, there won't be if the FTC bans them, but they sign a non-compete. And it's a very specific non-compete. I basically tell them they can't go work for any of our competitors. We give them a list of the competitors and basically tell them they can't start another business that's essentially doing the same things as WCI.

We view that as protecting some of the information about WCI. How it runs and some of that proprietary kind of information. I understand why some businesses want non-competes because I've got a non-compete.

It would be a big deal for me to spend a year training somebody to work at WCI and then they turn around because somebody, some other company that competes with us, wants them, wants that information. They pay them a few thousand dollars more, they go work for them, and all of a sudden they've got access to all the information of how WCI runs. I get why companies want to protect that sort of thing.

Now, that's not necessarily the reason that most doctors have non-competes put into their contracts. The issue there is oftentimes the employer is investing a lot of time and money and effort into bringing them out and establishing them in their practice.

For example, let's say you are a doc in a relatively small town. Maybe you're the only doc of your specialty in that town. You bring an associate out to work for you. You pay off $50,000 of their student loans. You give them a $20,000 signing bonus, you pay for them to move out, you establish them in practice, you introduce them to the community, you cover their overhead for three months. You give them a salary for three months before they're even really generating any money for you. And then they walk out the door at four months, open a practice across the street and start competing with you. How's that going to make you feel? Not so good.

And so, you can understand why that doc, that employer would want a non-compete. And what's a reasonable thing to do? Well, a reasonable thing to do is to have some sort of reasonable time limitation that they can't walk across the street the day after they quit and open a new practice and compete with you. Maybe they got to wait six months or 12 months or two years or whatever, but an unreasonable time period would be 10 years. If you say they can't do that for 10 years, that's not reasonable.

And the same thing with distance. Maybe they can't go across the street, but if they go five miles away, maybe that's okay. They're really not going to take that many patients with them if the patient's got to drive a long way. Maybe it's 10 miles, whatever. But if you want to put a non-compete on there that's 250 miles, that's not reasonable.
And those tend not to be enforceable.

And so, I don't think a complete ban on non-competes is necessarily fair either to the employers. That's kind of the nuance in the discussion. But there's no doubt that I'm in the minority when it comes to that opinion. Most docs think these are so terrible for doctors and patients that even any possible good they could do is not worth it and that they should be completely just eliminated.

I'm not sure I quite share that opinion. I think there's some value. I think they do need to be reasonable and limited for sure. But there's two people in the contract and you want to be able to protect both of them in a reasonable way, but without you having to totally pack up and move if the employer treats you crappy. If the non-compete means you have to move your family, that's probably overly restrictive in my opinion.

If it means you got to commute for eight more minutes to a new job, I don't think that's overly restrictive. And if you only got to do that for a year and then you can go back and open a practice across the street from your prior employer, I don't think that's too restrictive.

I guess my argument would be for a little bit more nuance there rather than a complete ban. But I have a feeling that it's going to happen anyway and most doctors are going to be happy about that because most docs are employees. Like I said, there's really no benefit to an employee for a non-compete. It's all bad for you.

As far as patient care goes I'm all for a continued relationship. I want doctors to be able to have that continuity of care with their patients. But at the same time, if without the non-compete, that job doesn't happen at all, if that employer is not willing to bring an associate to town, that's not good for patients either. There's more nuance to it than I think your question included. But there's no doubt that these have been abused in the past, that some employers put these in just to punish you to put on the opposite of golden handcuffs. They're just handcuffs. And I’m obviously very much against that.

All right. No matter where you work, whether you're in practice by yourself, whether you're a partner, whether you are an employee, however you work, thanks for what you're doing. It's hard work. It is important work. And if no one said thanks today, let me be the first.

 

INTERVIEW WITH DLP CAPITAL PARTNER DON WENNER

Dr. Jim Dahle:
We have our partner Don Wenner back here on the White Coat Investor podcast with us. He's the CEO of DLP Capital and a long-term partner of WCI as well as manages some of my own investment money. Don, welcome back to the podcast.

Don Wenner:
Thank you, Jim. Pleasure to be here.

Dr. Jim Dahle:
Yeah. I wanted to talk with you about a few issues that people have been talking about in general, but particularly in regards to commercial real estate. Banks are melting down left and right, it feels like. Even the bank that we do business with, with WCI was put on a watch list, essentially. One of the large regional banks here in Utah.

And so, people have been thinking about this, talking about this, all of a sudden people care about FDIC insurance and that sort of stuff. And of course, interest rates have gone up 4% plus-ish in the last year. And the Feds signaling at least a little bit more going up. And I wanted to get your thoughts first on how these phenomenon are affecting commercial real estate in general and then affecting DLP in particular.

Don Wenner:
Yeah, that's a big one, Jim. Coincidentally, as we're sitting here, talking right now, down the hall in my conference room, I have the leadership team, the board and the management team of the bank I own, as well as the leadership team from South State Bank, which is one of the largest banks in America who's here in our offices doing ALCO training, is what it's called. Training on assets and liabilities and credit and risk. We're getting to use some real life, very fresh examples of some of the problems going on with Silicon Bank and signature and a lot of the things happening right now today.

And it's very, very interesting times to say the least. And we're very blessed on our side of owning a bank. Our bank is actually benefiting from this. We're having an inflow of deposits and we're not dealing with any of the challenges that some of these larger banks face.

I think the fundamental issue that's going on from my seat is a pretty obvious one if you just took a step back and you said owning assets that produce very low returns doesn't make sense in the long term.

And so, owning long term mortgages or bonds at 2%, 3% made sense to these banks when they're were paying nothing on deposits and we were in a zero interest rate environment.

And what's causing a lot of the issues with many very good banks right now is there's significant unrealized losses sitting on the books and wide out in the open in these public banks that nobody paid attention to for some reason. And all of a sudden now people are, when some of the news has come out.

So, it's the polar opposite. DLP in a lot of ways are private funds, especially our lending funds are very similar to that of a bank. We do private credit, but what we do is very similar to a bank. We lend money out with an expectation of a return and our principle back.

All of our lending we do at DLP is very short term in nature. Our average loan matures in six months. So, our interest rate is only fixed for on average about six months. We're actually been benefiting from the 4% increase in rates. And then our rates are going up because our rates are adjusting based on what's going on in the market. And we didn't take long-term exposure. We didn't lock in our rates for five years or 10 years, or 20 years or 30 years.

It's benefiting us as a private lender and then we're benefiting the other side as a commercial real estate owner in that we have a lot of our debt locked into these low interest rate loans that are problem now for the banks, but a benefit to the borrower to have a 30 year fixed rate or a 10 year fixed rate in the 3%, 4% range.

For those who planned ahead and predicted or planned that there'd be some sort of volatility going on in those in commercial real estate, a lot of the turbulence that's been happening actually is benefiting us.

But if you didn't plan ahead and you thought forever we'd have zero cost to capital and forever property values and rents and so forth would just keep going straight up, this has been a pretty rude awakening for many over the past year. I can dig a lot deeper into that, for sure, but I'll kind of pause there and turn it back to you.

Dr. Jim Dahle:
Yeah, for sure. Warren Buffett is the one who classically has said that you don't know who's swimming naked until the tide goes out. And the tide has gone out when interest rates went up and people with variable rate debt have gotten in a little bit of trouble with that. All of a sudden their cost of capital went from 4% to 9%. And that's caused I know some commercial real estate operations some trouble.

Don Wenner:
Yeah.

Dr. Jim Dahle:
Also the classic mistake of short-term debt to buy long-term assets. Which is really what got Silicon Valley Bank in trouble. They got these deposits which are essentially callable debt at any time, and they used them to buy 30 year treasuries that then dropped in value of course.

But it does present opportunities because typically as the cost of borrowing goes up, that has an effect on the value of real estate. People have more trouble affording it because they can't afford to get the leverage to buy it. And so, that has some pressure on the price gains. Have you been seen that produce opportunities to buy for DLP or do you feel like that's affecting everybody kind of equally?

Don Wenner:
Yeah, those are wonderful comments and questions. Yeah, for sure, the challenge of a lot of the adjustable rate debt or short-term debt that's been taken out by real estate operators over the last few years has been a problem for many. Not to mention in the scheme of things the typical real estate I'll call syndicator really is leveraged to 98, 99, if not 100% leverage.

And what I mean by that is they took out 75%, 80% debt in first position, and then went out and got an equity partner who brought them up to 97%, 98% effective leverage because their returns don't get paid until after the equity. And then they went out to family and friends or other people to raise the rest of the money to take them, depending on how they structured it.

It’s really 100% leverage and that's caused many problems. And not only did they do that, but they didn't set aside cash, they didn't set aside reserves. And now the short-term challenge of these heavy growth and rates has created a lot of pressures.

On the other side, though, you use the kind of concept of short-term kind of liabilities for long-term assets. But long-term, I don't think there's many people who look at, say, multi-family real estate, which is fundamentally what we invest in. But we're mainly focused on kind of workforce, multi-family.

I don't think there's many people who look at workforce housing and don't say that property values are going to continue to go up if you looked at a three year horizon or a five year, let alone 10 or 20 horizon, and that rents aren't going to continue to go up and demand isn't going to continue to be really strong.

There's not many people who look at the asset class and don't have, when you take even a midterm or a long-term review, a very positive view. Really a lot of the pain right now is very short term. It's the today's interest rates, which may or may not continue to go up.

But whether they do or they don't, it's a short term pain. And the short term pain a lot of people are facing creates some opportunities here on the short term. To pick up fundamentally great assets that are going to continue to grow in value that are going to continue to have increase in income at distressed prices or stressed opportunities. And maybe the cash flow is not as good on the short term because of the rates available today. But again, those are short term challenges.

The other short term challenge that’s going on, that you just said, the heavy increase in rates has made it very difficult for a lot of people to be homeowners and has only increased the percentage of Americans who are going to stay renters, which only further drives more demand and stability and ultimately increase in rents because more and more people are choosing or are in need of continuing to be renters.

There's so many positive fundamentals that make us feel really great in this environment to want to own, to want to acquire, to want to invest in an affordable workforce housing and to feel confident even if right now we would've to take out 6% or 7% debt to buy a property, feel really great about it and feel really great that at some point over the life of our investment, the odds are good we're going to be able to refinance into lower cost debt, and increase cash flow even further.

For us, we've been focused even in the peak of the market on buying assets with really strong unlevered returns. The number one metric we focus on in acquiring properties is yield on cost, which tells us what do we generate in cash flow, not factory in any leverage at all. What we're most focused on is our stabilized yield on cost. So, that's just the cash flow we would generate if we bought the property all cash.

And we were focused on generating over a 7% yield on cost in the peak of the market when it was an arguably a four cap rate market. And when you can generate 7%, 8% unlevered current returns, not factoring any appreciation, not factoring in the tax benefits, not factoring in the benefits of leverage, just the cash flow we generate from renting out our properties, we feel that's a great place to be in virtually any market.

And in the last kind of volatile cycle we had of COVID, two of the best three deals we ever bought in our history. We've bought over 30,000 apartments, hundreds and hundreds of properties. Two of the three best deals I ever bought were the first two deals I bought post COVID.

We think right now is a similar environment. We're going to find some really great opportunities to pick up assets significantly distressed due to some of the challenges other sponsors and operators are facing right now, largely due to liquidity crunches.

Dr. Jim Dahle:
Awesome. Well, for those who aren't familiar with DLP Capital, they offer both equity and debt real estate funds. The equity's focused on workforce housing. The debt is focused on lending to experienced operators in first lean position. So, two different types of assets, both available at DLP. You can get more information on that at whitecoatinvestor.com/dlp.

Be aware that they are now offering a lower minimum investment for White Coat Investor. It is now $100,000 minimum investment for White Coat Investors, and you can get all the information you need about that at whitecoatinvestor.com/dlp.

Don, thank you so much for coming on the White Investor podcast and giving us your thoughts on the changes in commercial real estate with all the excitement in the banking sector these days.

Don Wenner:
Thanks Jim. That's a good way to put it.

 

PRACTICE OWNER DIVESTED INTEREST PAYOUT QUESTION

Dr. Jim Dahle:
Okay. Let's talk about now a question specific to a practice owner.

Speaker 2:
Hey Dr. Dahle. I'm looking at divesting my interest in practice and the payout is between 3 to 3.3 million dollars. And I'm trying to decide if I take the payment as a lump sum and pay capital gains and ordinary income taxes on that or whether I should consider holding the note and getting the interest over the next 10 to 15 to 20 years.

And if I didn't hold the note, I would probably put the money into real estate to have passive investment income coming in and the depreciation to offset taxes. I’m curious on your thoughts about that. Thanks.

Dr. Jim Dahle:
All right. That question is way too simple for the situation you're actually in. It doesn't work that simply. It's not just a question of “Do I take the lump sum or do I hold the note?” Because when people are coming to you, they may be willing to pay you more if you were to hold the note. So, would you rather have 3.5 and hold the note or 3 and get your lump sum? Well, that's a different question.

Obviously, if it's the exact same amount of money and exact same amount of sales terms, etc, exactly the same, and you can either have the money or you can get the money over time, you're going to take the money. Because there is a certain risk that they stop paying you. And I don't know what you get back. Maybe you get your practice back if they stop paying you, but maybe they've damaged it so much or maybe you don't even want it back, that that's not a good option.

And so, there's risk in holding the notes. So, if all else is equal, take the money. All else is not usually equal. Plus you have to look at, “Well, what are they paying you?” 8% interest is better than 4% interest. 12% interest is better than 8% interest. What are they going to pay you? Is this really that great of an investment?

You should actually ask yourself, “If I didn't already own this practice, and I was just offered the option to invest in this note, would I do so?” The answer is probably no, you probably wouldn't because it's very risky to have that sort of a note. And so, you got to keep that in mind.

As far as the taxes go, you're going to pay the taxes the same on the sale of the business. It's going to be capital gains taxes, probably long-term capital gains taxes assuming you've owned it for at least a year. So, that's the same whether you take the note or not.

The only difference is the interest on the note is taxable at your ordinary income tax rates. Not taxable for payroll taxes, but neither is the capital gain. So, whether they pay it to you over time, the actual value of the practice is going to be capital gains and the interest will be ordinary income tax. That part shouldn't really sway your decision one way or the other. You just have to look at the whole thing as a package and decide whether taking back that note is an option or not.

This happens a lot in real estate. Somebody buys an apartment complex, an eight door apartment complex and they have it for 20 or 25 years. They get sick of landlording, they're trying to retire and they want to sell it, but they can't find anybody to buy it, not for what they want to sell it for unless they do the financing themselves.

And they can get a pretty good term because the person buying it can't qualify for financing from the bank. And so, maybe they're willing to pay an 8% note to the seller and that's a way they can get the property now. And so, in that sort of situation, because it allows you to actually sell, you may take back that note.

The other thing is it's relatively easy to foreclose on an apartment building. You don't have to build it back up for the most part. Maybe you got to repaint it or something, but they can't destroy it too much like they could a medical practice. Whereas if you had to foreclose on a medical practice and take that back because they stop paying the note that might be a little bit harder to do, especially if you've been out of practice for five or 10 years at that point.

Tread carefully, read all the terms, get good legal advice, good luck. I hope this works out spectacularly for you. I know for many people it does if they're looking to retire soon and many people that are selling out to private equity or somebody else, it does not because then they find they're working for less and they have much less control and more burnout. So, be careful, especially if you're selling early in your career.

 

SHORT-TERM INVESTMENTS QUESTION

All right, let's take a question from David about short-term investments.

David:
Hey Jim, this is David, retired ER doc from California. I have a question about what to do with short-term money. I found the best place is six month treasury bills. They are easily bought through Vanguard. They pay a 4.8% annually guaranteed rate. You can take the money out anytime you want without penalty and they're even great for personal money because in California you don't have to pay taxes on the interest. And if you tax program, at the end of year Vanguard will figure out all your taxes and your accounting. Can you see anything wrong with this? Thanks.

Dr. Jim Dahle:
It sounds like we're just talking about short-term investments. Sure, treasury bills are fine. They're really popular right now. I'm not sure why they're so popular. They certainly weren't popular when they were paying 0.25%, but they're popular now when they're paying 4.5% or 5%.

But all this is essentially is building your own money market fund. You can go to Vanguard and you can get the treasury money market fund, very liquid, very convenient, one purchase, etc, super easy. And they will manage a bunch of treasury bills for you.

Or you can roll your own by buying the treasury bills yourself, either at TreasuryDirect or via broker like Vanguard or Schwab or Fidelity or TD Ameritrade or whatever. Either one's fine. That's all you're doing though. You're running your own little treasury money market fund. And if you do that, you get paid a little for it.

Whatever it costs Vanguard to run that fund, that's what you're making by doing it yourself. I don't know what it is, 0.3%. Maybe you get an extra 0.3% you wouldn't get otherwise. And that seems about right. If you're telling me treasury bills are paying 4.8% and I think the fund's paying about 4.5%, it's about 0.3% and that's about what the expense ratio on that money market fund is. So, it makes perfect sense.

You're right that when you invest in treasuries, the interest is state and local tax free. That means more to those of you in Chicago, in Manhattan and California than does to those of you in Texas and Washington and Nevada and Florida. But that's just the way treasury bills work. That's the way any treasury bond works, whether its short term or long term, those are state tax free.

And you're right that if you're using TurboTax you can just download your consolidated 1099 from Vanguard or Fidelity or wherever right into the program and it'll insert it right in there. And that works pretty good for the most part. You might want to be careful with the state tax-free interest. I'm not sure all the tax programs handle that exactly right. So double check when you're doing your taxes to make sure that's right and you don't need to make an adjustment there.

But great observation David. I guess that question was not about life insurance. I was trying to figure out what short-term life insurance was, but once we listened to it carefully, that's not what it was about.

If you do need help with your life insurance though, we have a recommended list for insurance. They can help you with life, disability, etc. We even have a few other types of insurance on that list. You can find it at whitecoatinvestor.com/insurance. These are vetted agents. They've been vetted by me, but most importantly they've been vetted by you because White Coat Investors have been using them for years and years and years.

And if I ever get a complaint, which does happen, rarely, we just go to them and they fix it. And so, that's really great. We've got some great people on that list that can really help you with evaluating whether you need more insurance or helping you to buy some, obviously through commission. Obviously they pay us. Conflict of interest there but that's part of how we support the site so that this podcast is free to you and we have to make money somewhere in order to pay the staff. Because I'm not going to do everything at White Coat Investor and for some reason my staff wants to get paid every month. It's really weird.

 

ANNUITIES QUESTION

All right. Let's talk about annuities. This question is from Robert on the Speak Pipe.

Robert:
Hi Dr. Dahle, this is Robert from South Carolina. I'm calling with a question about annuities. In the past I'd never have considered them, especially with interest rates very low, but now that rates have gone up quite a bit, it seems like there might be a place in our portfolio for an annuity.

I'm also curious about taxation issues. It looks like they're funded with after tax money and then the money that's withdrawn on is taxed with an ordinary income rate upon withdrawal. But it does look like there are some annuities that might be tax free. For example, those from a settlement. I'm curious for your take on annuities and their taxation as to whether or not annuities have a place in a modern physician’s portfolio. Thank you.

Dr. Jim Dahle:
Okay, let's just give a broad overview of annuities. I do not think of annuities as a way to invest. That's probably not the right way to think about annuities. Now, if you're using a variable annuity, that is an investment vehicle, but those as for the most part should be avoided anyway. They're generally just a way of product design to be sold, not bought. Think of an annuity as a way to spend your money in retirement rather than a way to build your nest egg for retirement, if that makes sense.

As far as the taxation, if you buy an annuity with qualified money, meaning money that is in a 401(k) or an IRA or whatever, then when it comes out and it's paid to you, because an annuity is essentially buying a pension. When it's paid to you, that's 100% taxable. Just like any withdrawal from an IRA would be. It takes the place of required minimum distributions for that money that's now in the annuity. But that's how it works. 100% taxable, ordinary income tax rates.

If you buy it with non-qualified money, meaning you buy it with after tax money, then the taxation on it is determined by what's called the exclusion ratio. Some of the money coming out as principle, you don't pay tax on that, just like you wouldn't on basis if you sold a taxable investment. And the gains are taxed at your ordinary income tax rates. This is the downside of annuities. When the money comes out, it doesn't come out at qualified dividend rates. It doesn't come out at long-term capital gains rates. It comes out at ordinary income tax rates.

It grows in a tax protected way just like your retirement accounts do. But when it comes out, it's taxed at a higher rate. So you need many years of tax protected growth to make up for the fact that it is taxed at a higher rate when it comes out. That's why for the most part, investing in an annuity, just like investing in a non-deductible IRA that isn't converted to a Roth IRA, probably isn't the best move most of the time because that's the way it's taxed. So, keep that in mind.

Also, there's the age 59 and a half penalty. Annuities are for retirement. Just like a Roth IRA or 401(k), unless you qualify for an exception, if you pull that money out before age 59 and half, there's an additional 10% penalty.

For the most part, annuities are products designed to be sold, not bought. Single premium immediate annuity might have a place in a spending plan. In retirement for people who are worried about running out of money, if you're really worried about running out of money, you might want to buy some longevity insurance, which is a delayed income annuity.

One type of that is a qualified longevity annuity contract. QLAC – Qualified Longevity Annuity Contract. That's just when you do it with qualified money. That's what a delayed income annuity is called when you buy it with retirement money. Some people might want to buy those, but for the most part, these are products that annuity salesmen are out there selling to you and that usually means you don't want to buy them. So, I hope that's helpful.

 

QUOTE OF THE DAY

All right, let's do our quote of the day. This one's from the late Jack Bogle who said, “If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks.” That's true. And you can lose a lot of money in stocks in a hurry. And I wouldn't even say that 20% is the limit. 50% is what the stock market lost in 2008/2009 and some asset classes did worse. REITs like the Vanguard REIT Index Fund lost 78% in the 2008/2009 stock market. I know because I owned it. So, be aware that particularly in the short term stocks are very volatile, easy to lose a lot of money in them.

 

FINANCIAL ADVISOR QUESTION

Okay, let's take a question from a serviceman here.

Speaker 3:
Hi Dr. Dahle. Thank you for all the work you do at the White Coat Investor. I also just wanted to mention I'm a second year medical student at VCU in Richmond, Virginia and I was my class champion last year. We all really appreciate your generosity in giving us the White Coat Investors Guide for Students.

Now for my question. I'm in the Air Force HPSP and I've been maxing out my Roth with my stipend for the past two years. My dad set me up with the firm he has used for investing in Richmond. My advisor is a fiduciary and is charging me a 0.9% fee per year. I figured it was a cheap enough deal since it will only cost about $200 per year with how much I currently have invested. And this would allow me to learn a little bit more before eventually managing my own investments.

The firm also did a good job for my dad over the life of his career. So I thought I'd be getting good advice for cheap, but I turned out to be quite wrong with this. I was placed with a different advisor than my dad, given my small portfolio. He invested in individual Google stock in addition to a collection of other ETFs in my non Roth fund.

He purchased an individual stock when Google was near its peak in January, 2022. I saw this but just got busy with school in training over the summer. My portfolio performed about 8% worse than an already bad market in 2022, largely due to a 30% loss in Google stock.

Can you think of any good reason for him investing in an individual stock like this and would you fire him now or ask him to fix it? I'm thinking he was trying to game the market and I should just move on before he makes another mistake.

Dr. Jim Dahle:
Okay, sorry that happened to you. Happens to a lot of people. Financial advisors are not necessarily good at their job. It turns out. There are a lot of terrible financial advisors out there. You have unfortunately hired one.

So, should you fire him? Yes, you should. Do you need to do it immediately? No. First figure out what you're going to do. Are you going to be a do-it-yourself investor? If the answer is yes, great, set up your plan. Figure out what you're going to invest in, then let the advisor know you're firing him and move the money into your desired asset allocation and move on.

If you're still going to use a financial advisor, go hire that financial advisor before you fire this one and they can handle all the paperwork and all the hassle of moving your investments away from that advisor and reinvesting them.

Either way is fine. Financial advisors get fired all the time, particularly bad ones, so they should be used to it. But no, there's no excuse to be investing in individual stocks. You shouldn't be doing it. Your advisors shouldn't be doing it. And you've just demonstrated why, because it's hard to pick stocks because you don't have a functional crystal ball and neither do financial advisors. So, don't just buy one of them, buy all of them.

And yes, in 2022, you would've lost money if you'd bought all the stocks. But you know what? You wouldn't have lost as much as if you put all your money in Google. There's no guarantees there that Google or Tesla or ARKK funds or whatever meme stock of the day is going to outperform the overall market.

So, the best way to invest in stocks is a low cost, broadly diversified collection of index funds rebalanced periodically. You just can't beat that. And it's super easy. I think it's so easy that it's pretty easy to do it yourself. But even if you're not doing it yourself, you're paying somebody to do it, that's what they should be doing for you. You should look at what your advisor's doing and go, “That's so easy, I could do it myself.” Well, it's probably true, but if they're not doing that, you're probably doing worse.

Yeah, this advisor needs to go. I'm glad your dad got treated well. I'm suspicious he may not have been, especially if he's got a lot of money and he's still paying 0.9%. But while you're paying a good price for your advice, there is no price low enough for bad advice. And so, if you're getting bad advice, you need to move on to a new advisor sooner rather than later but get a plan in place before you go.

And you may find it helpful to take our Fire Your Financial Advisor course, put together a plan on your own or at least help you have the tools and the language and the vocabulary you need to discuss with a potential future financial advisor.

One other piece of advice that I learned, I do learn stuff every now and then, believe it or not. I learned on the WCI forum the other day 457 accounts can be used by independent contractors. Now the plan doesn't necessarily have to allow their independent contractors to use it, but they can allow their independent contractors to use the 457.

So, if you're contracting with a hospital and they have a 457, you might want to go to HR and ask if you can use their 457 plan, assuming it's a good one and all the usual caveats with 457s.

Be aware when it does pay out, I think that's W2 income. So, be aware of that. You may end up having to deal with the hassles of having W2 income when you pull that money out.

 

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Milestones to Millionaire Transcript 

Transcription – MtoM – 116

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

Dr. Jim Dahle:
This is Milestones to Millionaire Podcast number 116 – Emergency physician pays off student loans.

Right now, qualifying medical professionals can refinance their private student loans with an up to 1% rate discount. Still a resident? With SoFi Student Loan refinancing, you could pay just $100 a month during your residency. And as a SoFi member, you'll have access to a powerful set of tools, education, even financial planners to help you not only save money, but help you get on the road to financial freedom. Check out their payment plans and interest rates at sofi.com/whitecoatinvestor.

SoFi Student loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions may apply. NMLS# 696891.

All right, we've got a great interview today. I'm not just saying that because he is an emergency physician, but he's accomplished two milestones, which are very impressive. I'm not going to say he did everything right, but he did enough right that he's doing really, really well together with his spouse, who's now a stay-at-home mom. She will soon to be mom. By the time you hear this episode, she'll be a mom. It's a great interview. Let's stick around afterward. I want to tell you a little bit about mortgages afterward.

Our guest today on the Milestones podcast is Alex. Welcome to the podcast, Alex.

Alex:
Hi. Thanks for having me, Jim.

Dr. Jim Dahle:
Tell us what you do for a living and where you're at.

Alex:
I'm an emergency physician in the Upper Midwest.

Dr. Jim Dahle:
Okay. We're celebrating two milestones today. Tell us what they are.

Alex:
I've paid off my student loans, which is about $344,000. And during that time period, I also accumulated about $300,000 in network.

Dr. Jim Dahle:
Awesome. So, how far are you out of residency?

Alex:
I graduated residency in 2020. So, coming up on three years.

Dr. Jim Dahle:
Not very far out at all. All right. And you're married? Single?

Alex:
Married.

Dr. Jim Dahle:
Married. Any kids?

Alex:
Not yet. No. One possibly on the way here in about a week or two, but no kids yet.

Dr. Jim Dahle:
Oh, that's exciting. Exciting. Okay. Well, hopefully not during this recording.

Alex:
I hope not.

Dr. Jim Dahle:
But before it goes live, certainly you're going to be a father. So, that's awesome. Congratulations on that.

Alex:
Thank you.

Dr. Jim Dahle:
What does your spouse do?

Alex:
She stays at home now. She was a teacher for seven to eight years, and shortly after we were engaged, she was having a kind of a miserable time teaching due to a lot of the changes. And so, she decided to stay home and we talked about it and we get a lot of value out of her being home.

Dr. Jim Dahle:
Cool. Okay. So, tell us about where you sat financially in 2020. The middle of the pandemic is raging. All of a sudden, emergency department volumes are dropping like a rock. We're down 40% nationwide. You come out of residency and it's a scary time. Where were your finances sitting? What was your net worth then, when you came out of residency in 2020?

Alex:
It would've been… Boy, it would've been right around $320,000 in the hole. I think I had a small Roth IRA with about $23,000 in it. And other than that, it would've been just the student loan debt.

Dr. Jim Dahle:
Did you know that at the time? Did you know that's where you were sitting?

Alex:
Yeah, I did.

Dr. Jim Dahle:
How'd that feel?

Alex:
It weighs on you a little bit. Fortunately, I was able to find your book my second year of residency and kind of came up with a plan. I definitely didn't do things completely by the book. When I signed my attending contract, I did buy myself a truck. Mine came on time. I know yours has been a little delayed.

Dr. Jim Dahle:
Yeah, it must be nice. I think I ordered a truck in about 2020. I still don't have it. No, actually, it was the end of 2021, but truly I still don't have it.

Alex:
Yeah. I did buy a new truck, which is something I'd wanted for a long time.

Dr. Jim Dahle:
On credit, I assume, because you didn't have any money, right?

Alex:
Yeah. I had signed a contract early in residency. About a year and a half into residency I had signed a contract. I had a bonus at sign and a bonus at start. And part of my bonus at sign went towards my truck, and then the rest was on credit.

Dr. Jim Dahle:
Okay. So now at this point you owe $350,000 or something instead of just $320,000.

Alex:
Yeah.

Dr. Jim Dahle:
All right. Well, then what happened? What kind of job did you take?

Alex:
I took a job, like I said, in the Upper Midwest. I interviewed at a number of places as a job in kind of a rural type setting. And I started early. I know most people when they come out usually start in about August, but I didn't want to really wait around. I didn't have any plans or goals and obviously no money. So, I decided to start right away.

Dr. Jim Dahle:
You had a truck payment to make.

Alex:
Yeah, exactly.

Dr. Jim Dahle:
Okay. So, this is an employee job? This is a pre-partner job? What kind of job is
this?

Alex:
I'm an employee.

Dr. Jim Dahle:
Okay. Employee job. And approximately what have you been making over the last two and a half years?

Alex:
The first year coming out, combining the residency and then what would've been about six months of an attending salary was about $260,000. And in this last year, due to working a lot, I was about $525,000.

Dr. Jim Dahle:
Wow. It's a great income. You have been working hard.

Alex:
Yeah.

Dr. Jim Dahle:
Yeah. Awesome. Well, that gives you lots of power to do some things. It makes you pay a lot of taxes too. How'd you like that? Paying your first attending tax bill?

Alex:
That was a shock. I had heard people complain about taxes as attendings when I was in training. And until you really see it on your first tax statement, it's a bit of a shock.

Dr. Jim Dahle:
Yeah, it's painful. It’s painful for sure. Okay. All right. You have a plan, you've read the book halfway through residency. So, you had some sort of a plan. Let's talk just about the student loans. What was your student loan plan?

Alex:
Yeah. When you first start to see those attending checks come in, obviously, it's a massive difference in what you've been making in residency. My plan from the beginning was to use one of those paychecks and just put it towards student loans. I was living off of one of my paychecks a month, getting paid every two weeks. And that seemed to work out pretty well. And then fortunately moving forward I was able to take the paychecks and kind of increase the amount that those were due to some staffing shortages and bonuses and working more nights than other of my colleagues. And so, I was able to increase the amount that one of those paychecks was worth.

Dr. Jim Dahle:
So how much are you sending in a month to the lender?

Alex:
Well, I sent that start bonus. It was the first thing that I sent in. It was the first payment I made in August of 2020.

Dr. Jim Dahle:
That's separate from the one you bought the truck with?

Alex:
That is separate from the one I bought the truck with. Yes. And then basically it was anywhere between $8,000 to $12,000 a month.

Dr. Jim Dahle:
Okay. Well, if you sent them $10,000 a month, your loans go away very quickly, it turns out.

Alex:
Yes.

Dr. Jim Dahle:
Were these federal loans mostly?

Alex:
They were, yes. And then they were refinanced.

Dr. Jim Dahle:
You're sitting here, these loans have no payments due and they're 0% interest and you're still sending them $10,000 a month. How come?

Alex:
Well, they were federal loans. I should rephrase that. They were federal loans, and then I refinanced them my second year. The timing was kind of interesting. I had refinanced through SoFi. I did the $100 payments kind of early in my second year, and then had signed my contract and once I had my contract, I refinanced through Laurel Road.

Dr. Jim Dahle:
Which makes sense. It was the perfectly right decision at the time, right?

Alex:
It was, yeah. That's obviously just luck with what happened with the market and everything. I know that some individuals that kept them in federal loans obviously had to pay no interest.

Dr. Jim Dahle:
Some of them are about to see their loans go to 6% and 7%.

Alex:
Exactly.

Dr. Jim Dahle:
But what'd you refinance to? Do you remember?

Alex:
I refinanced initially to about 3.5% with SoFi. And then when I went to Laurel Road, it started right around there, but it was a variable loan and obviously I just saw that interest rate decrease.

Dr. Jim Dahle:
Yeah, pretty awesome. Pretty awesome. So you didn't pay all that much in interest. Despite the fact that you did the “wrong” thing, because you didn't have a crystal ball that told you your loans were going to go to 0%. You still didn't end up paying that much. That's pretty awesome.
Okay. So, how'd that feel to make your last payment?

Alex:
It felt great. I was talking to my wife about this. It doesn't really feel real yet. I think the biggest change for me was it kind of feels like I actually graduated medical school now.

Dr. Jim Dahle:
You're finally done with your education.

Alex:
You feel like you're done. Yeah. You don't owe anything anymore, which is a big deal to me.

Dr. Jim Dahle:
That's pretty cool. So, what are you going to do with $10,000 a month?

Alex:
Well, we're increasing our nest egg, trying to increase our savings rate, and then we're putting a large chunk towards a down payment for our dream house.

Dr. Jim Dahle:
Cool. Has this been kind of a “live like a resident” period for you in the last two and a half years?

Alex:
Yeah, definitely. Obviously, with one of my two checks a month going towards student loans, that's been a “live like a resident” period.

Dr. Jim Dahle:
And half of the other one going into taxes.

Alex:
Yeah. Right, right. But there's also work like a resident period. And I think that's something that I pride myself on, working those extra shifts and putting in the extra time and working the nights and maybe some of the less desirable shifts that also grants you credibility with your colleagues and you kind of earn your stripes at the same time.

Dr. Jim Dahle:
Yeah, you don't have the princess schedule I've got right now with six day shifts.

Alex:
No, I'm the guy you paid to get rid of your nights. That's me. But it worked out really well. It benefits everybody. I think later in my career, I'm not going to want to work nights either. And fortunately I think with the way I've set myself up, I'll be able to do that.

Dr. Jim Dahle:
Yeah, I think you probably will too. Do you have plans to cut back immediately or are you going to work this hard for a few more years?

Alex:
Yeah. I actually joke with my wife frequently. So, since the beginning of this year, I've actually cut back to full-time. I'm only working full-time. Last year was about 1.3, 1.35 FTE, which was a lot.

Dr. Jim Dahle:
Yeah.

Alex:
Fortunately with her being home though, we were able to take care of things and we are able to still travel when I have off and we don't have to wrestle two different schedules.

Dr. Jim Dahle:
Yeah. And a lot of people don't get this when they're in two earner families. That support role is huge.

Alex:
Oh, huge.

Dr. Jim Dahle:
All of a sudden there's a lot of things at home that somebody's taken care of and it's valuable and sometimes we forget that. This is often the financially optimal setup. In a situation with a very high earner like you and a relatively lower earner like your wife. This is often a much better setup to be able to maximize your productivity.

Alex:
Definitely. And then with kids on the way too, you don't have to pay childcare.

Dr. Jim Dahle:
Yeah. I've mentioned before, two surgeons I work with. Married surgeons, they're half of the surgeons on our call list. So, every other night there's calls coming into their bedroom and when one of the kids gets sick they look at each other and go, “Who's going to cancel their cases today?”

Alex:
Yeah.

Dr. Jim Dahle:
And it's hard. It's hard to be a two doc couple in some ways. Okay. Well it's pretty cool, but in the meantime, you didn't just pay down loans. You've also grown your nest egg from $20,000 to $300,000 over the last two and a half years. So, it didn't all go towards student loans. Tell us about your investments.

Alex:
Yeah. My investments are located within a 403(b), a 457. That's non-governmental Roth accounts for both my wife and I. And then a savings account that fortunately I inherited from my wife. Even though she was a teacher, she saved religiously throughout her seven to eight years of teaching and was able to accumulate almost $70,000 in a saving account on a teaching salary.

Dr. Jim Dahle:
Cool.

Alex:
We were able to bring all of those things together. And that's where the nest egg came from. I think that the big point of that was the non-governmental 457 and the 403(b). They were automatically taken out of my paycheck along with an HSA and I never saw the money. So, you didn't feel like you were losing it. You maxed it out every year with your distributions and you just let it accumulate.

Dr. Jim Dahle:
What kind of houses are you looking at?

Alex:
We're hoping to get a nice five bedroom, four bath house, kind of a dream home in a neighborhood that unfortunately houses don't seem to go for sale very often. But that's what we're looking for. And we're in no rush. Fortunately I bought a modest starter home and I did that in late 2020. It's big enough and works for us now, but I think it's going to get pretty small when kids start coming.

Dr. Jim Dahle:
Well, Alex, you've done everything right.

Alex:
Thank you.

Dr. Jim Dahle:
And it worked. It's amazing. You're doing awesome. What advice do you have for others who are maybe coming out of residency? Maybe they're sitting there $300,000 in the hole plus. What advice do you have for them?

Alex:
I would say get educated. Coming out, fortunately, I stumbled upon your book. I actually went to your speaking lecture in San Diego at this Italian restaurant where I think there were about 150 people slammed in a 50 person restaurant. But I would say get yourself educated.

My wife and I talked about this yesterday and she said, “Well, you're passionate about this type of stuff, you like to read these books. What about somebody who's not?” And I said “We all went to medical school. I don't know too many people who are passionate about the Krebs cycle, but we had to learn about that.”

And I think that this really affects your future and your family's future, and I think it's really important to get yourself educated. Go to your conference. It was excellent. I'm going back in Orlando next year.

Dr. Jim Dahle:
Yeah, it's going to be great. I'm looking forward to seeing you there. And bring your spouse, bring your newborn. I don't know how much your newborn is going to appreciate Disney World or anything, but it'd be great to see you again anyway.

Alex:
For sure. And I also want to say I think background definitely plays an important role. My wife and I both grew up in modest middle income family homes. We talk about what were things that really influenced us, and I think it was really commitments. They were really important to us. Whether that be a job, we were both three sport athletes and whatever you were committed to, that's really important.
And I think it really builds that type of mindset moving forward with finances. I had a plan, I was committed to it, just like you're committed to not missing practice or showing up to work. I think that we really have our parents to thank for distilling those kinds of values within us.

Dr. Jim Dahle:
Yeah. Sometimes those parents aren't able to give us as much money, but what they do give us can be even more valuable, especially once you apply it to a high income you get after coming out of residency.

Alex:
Definitely.

Dr. Jim Dahle:
Awesome. Well, thanks so much for coming on the podcast and sharing your wisdom and your experience, and hopefully it'll inspire others to do the same.

Alex:
Thanks, Jim. Thanks for having me.

Dr. Jim Dahle:
All right. I hope you enjoyed that interview. It's a good example of how not only living like a resident but working like a resident can really jumpstart your net worth building. He basically went from a net worth of minus $320,000 to a positive net worth of $300,000. He was able to buy his dream truck, bought a starter home once he realized that the job liked him and he liked the job, bought a starter home, and now making plans to move at some point into the doctor home.

This is perfect. This is the way it's supposed to work. Even though you have more than 50% more than the average student loan, you can still get on top of your finances, build wealth quickly, have that life you've always dreamed about. It just takes a little bit of discipline, a little bit of planning, a little more time and delayed gratification in some ways, but obviously it didn't delay everything, and you can be successful.

 

FINANCE 101: MORTGAGES

All right. I promised you at the top of the episode I was going to tell you a little bit about mortgages. And mortgages are not my favorite thing in the world. Mortgage is a pain. It's a fixed cost and I don't like fixed costs. I like variable costs. If something happens to your income, you can just get rid of that expense. The mortgage isn't like that, it's a fixed cost. But it's one that almost all of us have for at least some portion of our life.

I took out my first mortgage in 1999. It was 8%. It's a house, a condo, really, we bought during medical school. Not the greatest idea we ever had. We didn't really make money on it once everything was said and done, but it was my first experience with a mortgage and it was an FHA mortgage. So, I think we had to put like 3% down. We actually had to get my wife's parents to cosign for us.

And here's a tip. If somebody else has to cosign for your mortgage, you probably shouldn't have a mortgage. When we actually found a really sweet rental deal after we'd already bought the place, that would've been a way better deal for us. That's what we should have been doing in med school.

But anyway, we paid on the mortgage for a few years and we actually refinanced it a couple of times during those four years as rates were starting to drop. Kind of got ripped off on the refinances. One time they tried to slip in a prepayment fee and we barely caught that. So, watch for that if you refinance mortgages.

The second mortgage was coming out of residency and we bought a little town home out in Virginia where I was stationed with the military. Got that mortgage at 6.25%. I actually put down 20% on that one and got a standard mortgage.

The interesting thing about 2006 though, for anybody who got a mortgage around that time period, I got this mortgage in like 10 minutes on mine. It wasn't a ninja loan. They knew what I was making because it was USAA and I had a military job, but boy, it didn't take much to get it all, which is probably why we had the global financial crisis.

That one, we ended up turning into a rental property. It didn't work out awesome. We ended up selling after nine years still underwater for what we bought that house for, but the mortgage was okay. I think it was 6.25% and when we moved out of it, I needed to take the cash out to buy our current home. We actually used what was supposed to be a bridge loan, ended up holding onto it for five years. And that was 6-ish percent or so as well.
Well, when we bought our doctor home in 2010, that mortgage was also a standard mortgage. We put 20% down. We'd saved that up and used the money we'd essentially accumulated in the other mortgage to make this down payment. And subsequently refinanced once or twice. And I think by the time all was said and done, our rate was like 2.75%, which back then you couldn't even make 1% in a savings account. So, it didn't seem all that low. In retrospect, it's obviously very, very low.

Then we paid that off in about seven years when the White Coat Investor really kind of took off. It just seemed silly to still have that loan hanging out there. So, we paid it off, wiped it out. We’ve been mortgage free since 2017.
But for most of us, you're going to have a mortgage for 10, 15, 20, maybe even 30 years of your life. And so, you want to be smart about it. Buying a house for most of you, this is going to be your most expensive purchase of your entire life. And so, you want to get the best deal you can on the mortgage.

And there's a couple of schools of thought here. One is you get the best mortgage by putting 20% down. You can then get essentially a standard mortgage. Lots of people competing for it. You get the best rate, the best terms, the best fees.

The other school of thought is, “I've got a better use for my money.” I might be paying down student loans or maxing out retirement accounts or whatever. And if that's the case and you're a doc, or for many lenders, a similar profession, you can get a physician mortgage or its equivalent. They have attorney mortgages, they have dentist mortgages, whatever you want to call them.

And these require you to put down less than 20%, but still don't charge you the main problem with not putting down 20%, which is private mortgage insurance or PMI. So, you might only have to put down 5% or 10%. Occasionally you'll find one with 0% down and then still not have to pay PMI.

Now, the rate is often a little bit higher, not always, but often a little bit higher than you would get with the standard mortgage. The fees are often a little higher than you would get with the standard mortgage. You certainly have fewer choices.

We keep a list of both regular lenders and special physician loan lenders at whitecoatinvestor.com. You can check those out under the recommended tab and get people that have served other White Coat Investors well.

But here's a couple guidelines for when you go out to buy a home and do so with a mortgage.

Number one, try to keep your mortgage to less than two times your gross income. Certainly, if you're in the Midwest, you need to follow this guideline. If you're in San Francisco, if you're in DC, if you're in some expensive part of the Northeast, you may have to stretch that a little bit.

But when I'm talking about stretching, I'm talking about stretching that to 3 to 4X, not 10X. If you do 10X, you'll be house poor. Even at 3 to 4X, there's going to be consequences. It might mean you work a little longer, don't go on as many vacations or not drive as nice of a car or whatever. There's consequences to it, but it's probably reasonable.

The other guideline I often give people is try to keep your total housing expenses, principal insurance, taxes, interest, utilities to less than 20% of your gross income. And if you follow those guidelines, you won't be house poor. You'll have enough of your income left over to be able to build wealth with. And I hope that's helpful.

I've told you where you can get a mortgage, what kind of mortgages you ought to consider, what you ought to do with it once you have it, which usually is have a plan to pay it off at some point before you retire.
Most people regret taking a mortgage into retirement unless you're one of those people that's just like, “I want to leverage my life as much as possible and build as much wealth as I can. I'm willing to take on this risk to do it.” Fine, knock yourself out. But for most of us, you got to plan to have that thing paid off before you head into retirement. I hope that's helpful to you.

By the way, our sponsor today, which is SoFi, they also do some doctor mortgage kind of lending stuff you ought to check out. But right now we're going to talk about their student loan refinancing, which obviously our guest today took advantage of.

Qualifying medical professionals right now can refinance their private student loans with an up to 1% rate discount. You’re still a resident? With SoFi Student Loan refinancing, you could pay just $100 a month during your residency. And as a SoFi member, you'll have access to a powerful set of tools, education, even financial planners to help you not only save money, but help you get on the road to financial freedom. Check out their payment plans and interest rates at sofi.com/whitecoatinvestor.

SoFi Student loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions may apply. NMLS# 696891.

We'd love to have you on this podcast by the way. You can apply to be on at whitecoatinvestor.com/milestones. Any financial milestone you've accomplished, we will celebrate with you. In fact, I love it when we get unique ones. If you can come up with one I haven't even thought about, we'd love to bring you on, celebrate it, use it to inspire others to do the same.

Till then, I hope this was inspiring to you. Keep your head up, keep your shoulders back. You've got this. We'll see you next time on the Milestones to Millionaire 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.