Today our friend over at Passive Income MD, Peter Kim, takes over the podcast to answer your questions about real estate. He took reader's questions that were posted in the Facebook Group and breaks them down for you. He covers real estate syndications, active vs. passive real estate investing, when to put more (or less) cash toward your down payment, and a whole bunch more.
In This Show:
- Real Estate Syndication
- Class B Catch-Up Contribution
- Rental Income and Rental Properties
- Do You Want a Lower Down Payment or a Lower Mortgage?
- Sell or Keep the Rental Property?
- What Is Your Number to Be Financially Free?
- Consider Investing Outside of Where You Live
- Active vs. Passive Real Estate Investing
- Real Estate Learning Resources
Real Estate Syndication
For those who aren't familiar with what a syndication is, it's essentially a pooling of capital. People get together and put their money together to purchase some sort of larger building that they couldn't do on their own—or maybe they don't want to manage on their own. Usually, it's run by what is called a sponsor or an operator. Usually, someone like you or me comes in as what's called a limited partner. We invest, get some equity in the overall property, get distributions and dividends accordingly, and have a share of the profits at the end.
That is typically what syndication is. I'm sure you've read about it in different blogs, and you've heard about it in different podcasts. But there are tons of questions about this because it can be confusing. Not every deal looks exactly the same. Many of them look amazing. The returns look amazing, but it's up to you to figure out how to do the proper due diligence for them. Again, no two syndications are alike. There are different fee structures; there are different return structures. It can be confusing.
“I just read two things in the real estate syndication space that seemed a little shady to me. I was wondering if I could get your thoughts on that. First, some sponsors will refinance the property and pay out distributions to the limited partners from the refinance. Now, this is considered a return of your initial investment. So, it reduces your investment in the project. Let's say you have a preferred return of 8%, and your initial investment was $100,000. If there is a refinance and $50,000 of your capital returns to you—so, half of it—your preferred return actually becomes $4,000 rather than $8,000. I guess they're saying that instead of getting the whole $100,000 and 8% of that, now you get 8% of $50,000, but your initial investment was reduced by half by $50,000 when you received that $50,000 distribution from the refinance. If this is what happens, I find that to be pretty sleazy. You take on all that risk and illiquidity for them to essentially give you half your capital back as a tax-free loan. Am I missing something here?”
This is a great one to start with. These can get quite complicated. I'm going to try to summarize this for those of you who might have got lost in the middle of it. Let's say they invested $100,000 in this deal. Now, when they agreed to do this deal and be part of this deal, there was something called a preferred return. If you haven't heard that term before, what it is is that the sponsor agrees out of all the profits that they get to them, the preferred return is the return that gets paid first. As an investor, when I get something called a preferred return—and usually the number is somewhere between 6% to 8% to 10%—that profit I get first. I get first rights to that profit up to 8%. That 8% is based on your initial investment.
What this reader is saying is that half their investment was given back to them on what was called a refinance. They paid you back half of your capital as the investor. Then what happens is that because they give you half your capital, your preferred return actually ends up getting cut in half. To this reader, that feels a little sleazy that they just gave you back half your capital. Now they have to pay you half your returns? Like, what's up with that?
I can understand from the reader's standpoint how that might look kind of funny, but let me explain to you a little bit how this actually works. Now again, remember no two deals are exactly the same. I want to stress if a refinance happens and you get your capital—whether 25% of it, 50% of it, or all of it—your investment in the property remains the same. You don't lose your stake in the investment. For example, I've invested in a deal where I invested $25,000 and I got 1% ownership of the property. What ended up happening was that they did a refinance of the property and they gave me all of my capital back. All of my $25,000. But guess what? I still own 1% of that building. So any distributions, any dividends, any profit from sale, I would be given 1% of that as a 1% owner in that building. That does not change.
This whole preferred return business that is dependent on your investment is still in the deal. So, let's go over my deal real quick, where I've invested $25,000. I was given that $25,000 back, but I still receive distributions and profits ongoing, and it's still been going on. I'll also get that profit at sale. The cool thing is I've been given my $25,000 back. Now this reader sees that as a bad thing. I see it as a good thing. I've got my money back. I don't have any money tied up in the deal. I feel like any profits that I get from then on, it's all house money. I basically got my money back and now I can move that onto another deal.
This is something that some people refer to as an “infinite return scenario.” I don’t know if you've ever heard about that, but it's a scenario where none of your money is still in the deal. You've gotten that money out. You moved it on somewhere else, but you still get distributions and profits. On a return basis, I don't know if you've ever heard of the term “return on investment.” That's based on how much money you put in the deal. In this type of situation, you've gotten all your money out. So, your return on investment is technically infinite as you continue to get profit and distributions. Yes, your preferred return is based on the amount of capital that's technically still in the deal. But when they give you back that capital, they no longer have to pay you that preferred return. But they will still pay you based on whatever the equity split is that they determine.
Usually, what happens in any of these types of deals is they'll say limited partners get 70%-80% of the profits or distributions, and the general partners, the people who are running the deal, the sponsors, usually get somewhere between 20%-30% of the deal. What happens is that, again, if your money is back, that preferred return is gone, but the way the waterfall or the way the dividends or profits are split up from that point are based on that equity split.
I teach a course called Passive Real Estate Academy, and we've had thousands of readers and thousands of people participate in it. We talk about these things all day long. We go over different case studies; we talk about these types of things. I can't pretend that you're going to get all this in one quick question-and-answer session, but I hope that helped in some way. Some people who want steady heavy cash flow may want their capital still in the deal getting a little bit more cash flow. But for me personally, I like the feeling of having my money back out and moving on.
More information here:
Should I Invest in a Real Estate Syndication or Fund?
Class B Catch-Up Contribution
The second part of their email is regarding something called a class B catch-up contribution. Again, I know this can be kind of confusing, and if this is a first-time syndication, this may be a little bit complex. I'll do my best to break this down. If they are understanding this correctly, there's something called a catch-up contribution and they're worried that they only have a preferred return for the first year. The way that the profits are split is kind of funny, and they find this to be extremely deceiving based on what's called this class B catch-up.
There is an order to the way profits are split in these deals. There is a priority to it in all of these investments. It's important for you, when you look at any syndication deal, to look at how they are going to pay and split up the profits. It's important to understand that priority. Now, that whole process is called the waterfall distribution. If you think about a waterfall, it flows from the top to the bottom. In this whole waterfall structure, in these types of deals, I like to think about it more as water flowing from one bucket to another. When one bucket is filled, then it flows to the next bucket and it flows to the next bucket and into the next one. Again, that is called the waterfall structure. Usually in these types of deals, when there's something called a preferred return, that is the first bucket that needs to be filled before any other buckets get filled. Again, there are numerous countless infinite numbers of possibilities of ways these waterfall structures are set up for the investment. It's important that you, as an investor, understand how each deal is specifically set up.
This person is talking about something called a catch-up contribution which is actually one of those buckets in that waterfall. In this type of situation, let's say you, as an investor, have been guaranteed an 8% preferred return. That bucket gets filled first. Then, what happens to any additional profits after that? The question is, does that get split among you and the sponsor? Or sometimes there's something called a catch-up contribution there. So that if you get your 8%, then the sponsor wants to make sure that the next set of profits fills them to that 8% as well so they can be on par with you based on the equity split. Then after that is filled up, then they do that whole equity split, 70/30, 80/20, whatever that might be.
Sometimes, that catch-up contribution isn't there, that bucket isn't there in the middle and it just goes straight to that equity split. Now, I know that can be a little bit confusing, and some people don't like it. They don't like having that little bucket, that catch-up contribution there. They think that, “Hey, it should just flow down to the investors after that.” Again, there's no right or wrong. That's something I want to really stress in these types of deals. People are very, very worried about what the sponsor gets. I know that's absolutely important. You want to make sure that, with your investment, you're getting minimal fees and the best profits possible. But again, every deal is different. There's no right or wrong.
You have a choice whether to invest in that or not, to see if it makes sense for you, but if you do invest in it, and it has a catch-up, what's going to happen is that profit is going to split like that. It's not necessarily a bad thing. If you think about it, all of these waterfall structures, all these payments out, it's all a series of incentives for the sponsor. You want a situation where there is an alignment of interest. The sponsor also wants to make money. You want them to make money, but really only when you make money. You don't want a situation where they make money without you. You want them to be aligned with you, so that in a bad case scenario where you lose money, they lose money as well. That's how you know you're aligned. A lot of people will say this actual catch-up contribution creates better alignment between the investor and the sponsors. What it means is that you get paid first. Then they get paid second. Then all these splits happen.
Some people like that. Some people think that actually incentivizes the sponsor to continue to increase profits and do well because it keeps them in the game in line with you as an investor. You have to look at some of the real-life examples of this and look at some of the percentages. It can be a relatively significant part of the profit split to have this catch-up contribution. Ultimately, you all want to make money together. You want them to do well, because that means you will do well, as well. I wouldn't worry so much about the catch-up contribution. I don't see it as sleazy. I think it's another part of the waterfall. It is what it is. If you want to invest in that type of deal, you want to invest with that sponsor, that is their current setup. It's up to you to decide whether it makes sense for you or not, or whether you have different opportunities.
Rental Income and Rental Properties
As many of you know, I absolutely believe that real estate investing is one of the best, if not the best way, to create cash flow, to create wealth, generational wealth, to create financial freedom. And I'm talking about now, like in the next five to 10 years versus waiting until you retire. One of the best ways to do that is through purchasing rental properties and getting that income from that. This question comes from somebody who is a member of the Facebook group. They paid off their multifamily property. Congratulations, they have a property, they paid it off. Now, rental income brings in approximately $4,000 a month, and taxes are approximately $15,000 a year. Approximately $30,000 in repairs are still needed. They want to know if it is better to sell or keep renting.
Usually, I like to have a little bit more information when I answer a question like this. I typically have an opportunity to ask a lot of questions. In fact, I'll spend the first, probably 10-15 minutes when I talk to somebody like this, just asking them questions. Finding out more about their current financial situation. What age are they? What are their goals? What's their risk tolerance? Where do they live? What kind of lifestyle do they want to live? And how much are they working? I'm assuming this person is still working in some capacity. How much do they want to work? I basically need to know a lot more info to answer this correctly for them and personalize it for them. However, I think there are some good things to talk about here. This person has paid off their property, which means that they have no loan in place. Now, that's a good thing, and it's a bad thing.
The good thing is there's a lot of security there. Not having a mortgage on a property—whether it's a rental property, whether it's your own property—provides a lot of security. You know that obviously you still have to pay property taxes. Then there are some ongoing costs with it where, if you don't pay those things, someone could put a lien on your house or things like that. But not having a mortgage on it provides amazing security for you because that's usually the biggest chunk and the worry and the biggest risk when it comes to any sort of investing. Congratulations to this person for having paid that off.
One of the most powerful things about real estate investing, which I think allows for creation of wealth and creation of net worth, is the ability to use leverage, to use essentially other people's money, which is the bank, the bank's money, to create outsized returns for you as an investor. There are ways to use that smartly. Usually, if you take a loan on your rental property, they'll let you take it all the way up to about 75%-80% of the purchase price of the property. It's up to you to figure out how much is a safe place for you. Using leverage is one of the most powerful things. Now, it can be like a double-sided sword. There are two edges to it where it can provide really nice outsized returns, but it can also honestly magnify losses as well.
You have to understand how to use debt. I don't think debt is a good or bad thing. When you hear certain people talk about debt, they always talk about it as evil or bad.
There's no moral aspect to debt in my opinion. It's a tool that you can use. If you use it smartly, it will really benefit you. It'll help you get where you want to be. If you use it poorly, you could end up in trouble. I think it's important to educate yourself on the topic, understand your limitations, understand your risk tolerance, and where you want to be.
Now, I'll just talk about what I would do. That's the best I can do in this scenario. If I had a situation where I happen to pay off my rental property right now, and it has brought in $4,000 a month and taxes are approximately $15,000 a year. It's a little bit more than $1,000 per month on that, and it needs approximately $30,000 in repair. Repairs happen every year. There are some delayed repairs, whether that's a big roof here, I don't know, $30,000 is for the roof or the HVAC system. This is a big cost.
So, is it better to sell or keep renting? Now for me, I usually get these rental properties. I want maximum cash flow. I want cash flow because that is money I can use to offset the income that I need to make in my day job. The goal is to bring in income from that so that I don't have to work as much. I can give up that night. I can give up that weekend, and I've got that cash covered coming in passively from my rental properties. For me, I would try to maximize my cash flow. The way you can do that, again, is by using leverage. You have a paid-off property, but in some ways, they have what's just called lazy equity or unused equity sitting in the walls of the house. Yes, it's paid off, but it's not doing very much for you in terms of being active.
With interest rates being what they are, and as we all know, we're just still at record lows. The Fed has talked about increasing those a quarter percent here, but we're still at record lows in terms of interest rates. I think there's a great opportunity for people who want to put a lot of the equity to use, whether it's in the rental property, maybe even their own home. If they feel comfortable with it, take out a low-interest loan. You could put that money to use and the goal is to get better returns elsewhere. It's a form of arbitrage, borrow money here, make money here. I think with rental properties, that option and the opportunity are available. If I'm trying to maximize my cash flow, maximize and grow my portfolio, I would absolutely take some of that multifamily property that you have refinanced, take some of the cash out for myself and then go purchase another property, get some more cash flow.
I don't know how large this property is or in terms of the value of it. The rental income brings in $4,000 a month. So depending on where it is, probably at very minimum, it's a $400,000 property. Maybe even more than that. That's a great opportunity to take that and put it in a short-term rental, put it in an apartment building. That's what I would do to maximize cash flow instead of just keeping it rented at that point. That's for me. I don't know what you guys would do. We'd love to hear; let us know. If you see this post in the Facebook group, let's hear from you, what you would like to do. There's enough good amount of deferred maintenance that needs to happen. So, it doesn't look like they'll be making very much in terms of cash flow anyway, so that's something else to think about.
More information here:
How to Use Leverage and the Differences Between Good and Bad Debt
Do You Want a Lower Down Payment or a Lower Mortgage?
“I'm buying my first home and I have some cash saved up. Is it better to use a lower down payment or put a higher amount down to have a lower mortgage? Is it better to use a physician or conventional loan in this scenario?”
Again, this is a pretty loaded question. There are a lot of questions to ask in terms of goals, what else do they have in their portfolio? What are they going to do with that additional cash? I think that's what I would talk about. I get this question all the time, because as some of you know, I also run another company called Curbside Real Estate where we help physicians get connected to the resources to buy their own homes. You can check it out on Jim's physician loan page. You'll see it right there.
We connect people to agents all over the country. One thing to consider is a physician home loan. For those who aren't familiar with that, these physician home loans understand the situation for the physician or the high-income professional who wants to buy their first home. Usually, they don't have a lot saved up for a down payment. They might have a shorter work history. They might have some student loans out there. Sometimes, that can be a challenge in terms of buying your first home. Physician loans are specialized products that were created for someone just like you, to be able to get you into those homes because they know you're a good bet.
Physicians and high-income professionals in the healthcare industry have the lowest default rates across the board. You are the lowest risk out there in terms of getting a home loan. And the reason why, I don't know if there's a set of moral ethics or whatever it is, but we stick to our obligations. That's just what we do as people. If we have to, we can always work more. We can pick up additional shifts and that's not necessarily a good thing, but we will if the situation arose. They figured out these loan products for people like you and me to be able to get in at lower down payments and get access to financing. The question is if you did save up a little bit extra—and this is good, congrats to this person who saved up additional cash, probably early in their career since it's their first home—they could probably go with that typical 20% down and get that conventional loan. But some of these physician home loans depending on your area, depending on the property side, the purchase price, can go down to 10% or 5% and then allows them to retain a little bit of additional cash.
My question to this person would be, what are you going to do with that cash? How much is security and having a lower mortgage worth? How important is that to you? How do you feel about debt and having carried that? I can only answer what I would do. Especially in today's low-interest-rate environment, I would probably skew toward putting down a lower down payment loan on your house, probably utilizing that capital elsewhere on an investment to help create additional wealth for yourself, create additional cash flow. I'll tell you one of the strategies that I use initially is to put that lower down payment down, take that cash, create cash flow that helps compensate for having a little bit of the higher mortgage and that gives you additional cash flow on top of that. There are options to be able to do that when you buy your own rental properties.
The question is, “Is your home the best place to stash additional cash and have equity in?” I don't know, that again is a personal decision. Most people who are in the field of real estate investing will say, your own home is not an investment. Yes, the value of your home can go up over time, but it's not necessarily that you'll just get out of your home. You can actually access some of that equity through home equity loans or a home equity line of credit or totally refinancing. That's one way to tap that. But typically, your own home is not an investment. You've got to live in it. You've got to pay for it. So, it's better to treat your home as almost like let's say a luxury or expense, and then treat a rental property as an investment. Treat those things separately.
It probably makes sense to utilize one of the physician home loans, if you can. Put down a lower down payment, take that cash and not just put it into your home to build a pool in the backyard or something like that. Utilize that to create more cash flow for yourself. Create that additional investment income. Especially with today's low-interest rates, there are great opportunities to do so. That would be my advice for myself, and that's what I would do. But again, if your goal is security, having the lowest mortgage possible, then yeah, put all the money in your house and have the lowest rate. But again, it's up to you and your personal preference. I just know what I would do.
Sell or Keep the Rental Property?
“I have an offer of approximately $545,000, but this is reflecting the current market. So, I’m not sure if this is because real estate is in a bubble or prices are expected to rise. Now, rental income is maybe slightly higher in the area than what I am asking. However, the house is older and needs some updates. Main issues are plumbing and an older heating system.”
They're debating on selling vs. renting their current townhome. It's a seller's market, as we all know, but rental income will be more secure than the currently volatile stock market. They give me a little bit more details here.
“A $300,000 townhome will rent for somewhere around $2,200-$2,500 per month in my area. They have $160,000 in equity and the remainder of the mortgage is a 2.5% fixed rate.”
They said their home is $300,000. They said they have an offer of $545,000. So, I would say the value of the property is actually $545,000. Their equity, maybe they're saying it's $160,000. But that's based on the price of $300,000. But if they're going to get $545,000, another $240,000 more value than they think, that's also all equity. It sounds to me that they probably have somewhere around $400,000 of equity, if I've got this correct, for the townhome. It looks like it's a rental property, just to summarize, with some older issues. There's some deferred maintenance that needs to happen or what they call CapX, where the plumbing probably needs to be replaced. They have an older heating system and those can be some large additional costs down the line. Of course, roofs are also in that equation.
They are getting about $2,200-$2,500 a month in rental in their area. Now, one of the rules of thumb, just so you know, there's something called the 50% rule. Just to be safe, a lot of times, if you're going to get about $2,200 a month, take 50% of that for expenses. And probably what's left over is what you're going to profit from it. So, let's say $2,200 a month, and they profit about $1,100 a month in cash flow from it. When you have a rental property, there are multiple ways to make money from it. There are ways where you actually get the cash flow, the net cash flow after expenses. That's one. Another way is that you're essentially helping to pay off your mortgage which means some of your equity goes up over time. It sounds like they bought their home, and it's appreciated quite a bit. It means the value has gone up. So that's another way. They're also probably getting some sort of tax benefits. That's another way that you can really benefit from having rental properties. They're taking advantage of all these things as part of this property.
Now, here's the question. What should they do? They have a lot of deferred maintenance and they have this property. To be honest with you, they have a lot of equity in this property, but it's only making them $1,100 a month, which is something. I'm going to guess that this person lived in their townhome, probably left it, and started renting it out. I don't know what they paid for this property. I don’t know whether it was $300,000 or not. They got some money and if they sold, they would have to pay some sort of capital gains tax on it. There is a condition where if you've lived in your property, let's say it's a rental property, for two out of the last five years, you still qualify for that homeowner's exemption, that tax exemption up to $250,000 for an individual or up to $500,000 for a married couple or partnership where you can get that completely tax-free. You don't have to pay capital gains on it. That is a huge benefit, especially if you're able to cash in on that.
I don't know how long this person has lived, whether they lived in the property first, if it just recently became a rental property, but this is something that they should think about taking advantage of. What kind of return is that? Let's say they made around $300,000 on this property, normal capital gains, long term. It can be anywhere around 20% or so. That could be a significant amount of cash that you could actually just keep in your pocket by actually selling this property and then buying another property that maybe makes more sense as a rental property. Maybe it makes a little bit more cash flow for you. Maybe it's in a better appreciating area for you. Especially with mortgage rates being low right now, there are a lot of opportunities to move around and buy a rental property. So that might work well for you.
I know this person is worried about it being in a bubble. There are bubbles in real estate and stocks and things like that, but the problem is nobody can predict this. Just like we talk about at The White Coat Investor. People say, “Oh, stocks are in a bubble. I'm going to wait for them to go down before I get into some of these investments.” The problem is, you don't know when that's going to be. The best thing for you, and that they've shown over time, is get in the game when you can get in the game. Play it for the long-term over time. Yes. Maybe this is a blip. Maybe there's a bubble here. And to be expected as part of the cycle, maybe prices will drop, but then they will go back up. You want to be part of this because you're not going to know when to time it.
Even with real estate, most people expect that, “Hey, when the bottom hits, I'm going to be ready to jump in.” The problem is you don't know when that is. And number two, it's a psychological thing. When everybody's running for the door, it's really hard to fight against a tide. That's when you probably make the most money, but emotionally, physiologically, it's just hard to swallow to do that. Oftentimes it's just better to get in the game and play for the long term. For this type of person, I would look for that tax-exempt to see if it works for them. That is a way to cash out and move it on to another property. Otherwise, to be honest with you, I would do another evaluation. Is this the best rental property for you? There are a lot of maintenance and deferred maintenance, which will cut into your cash flow. Are you getting the maximum amount of cash flow that you like? Is it in the area that you want to be? Are there other opportunities for you?
Personally, I don't love single townhomes. I think that the single-family home, unless you're using it as a short-term rental these days, you're not maximizing your opportunity to scale, to create that cash flow. And that usually comes with more units, to be honest with you. I'm a big fan of taking those single families, taking those small duplexes or triplexes and figuring a way to play monopoly with them, where you can sell some of those and sell them and trade them in for larger properties. The reason I say that is not because I want more headaches, but I've found that managing a single-family or a duplex or triplex is not that different from having management of a 20-plus unit building. The reason why is because once you get 20-plus unit buildings, you tap into a lot more professional property management. Either way, they are taking care of those major issues. You are able to honestly move a lot of the pieces around more, play with the property, play with the returns to really magnify gains at that point.
Having a single townhome, if the renter leaves, you've got zero income coming in. In a 20-unit apartment building, one person leaves, two people leave, you've got turnover, you still got rental income coming in on a monthly basis. Again, I care about cash flow. I want extra money coming in my pocket so that I don't have to take that moonlighting shift. I don't need to take that weekend. That's how I ultimately built up my streams of income.
More information here:
What Is Your Number to Be Financially Free?
For me, I said, “All right, how much money would it take on a monthly basis for me to be completely financially free?” I looked at my expenses. I looked at my family's expenses. I wanted to live a certain type of lifestyle. I said, “How much money per month would it take for me if somebody wrote me a check that I could be completely financially free?” That number for me was $20,000 a month. I live in California, high-income area. But I also wanted to travel, have a good life and just be able to do the things I wanted to do. I wanted to be able to give, to contribute, do these kinds of things as well. That was just the number for me. I planted that flag there at $20,000 a month.
I didn't expect to get it all at once. For me, my goal was initially $20,000 in 20 years. I think I started that when I was in my 30s. And I said, “All right, well, by the time I'm 50, 55, I'll be able to retire.” Honestly, that $20,000 seemed pretty insurmountable initially, but it was a goal. I started working backward. I started saying, “OK, if I'm going to get $20,000 in 20 years, that means in 10 years, I need about $10,000 a month to be on that track.” OK, so I can work backward a little bit. That means in five years I would need about $5,000 a month in passive income. That was starting to sound a little bit more attainable. I broke that down even further in one year. That means in one year, this first year, if I can figure out a way to create $1,000 in passive income, which means really just $12,000 a year in passive income, I could figure that out for year one. I found a system to do that. I could just repeat that every single year and I would hit my goal. That's how I started.
Now, I'll tell you the secret, which a lot of people don't know, is that once you start doing this and figuring it out, it does not grow linearly. It grows exponentially. You start getting smarter, you start getting better. You start doing these things like trading. You start figuring out ways to use leverage smartly. You create connections, you create networks, you create just more opportunities. I've found that once you're on the journey, once you're on the path, you get going, things tend to grow in an exponential scale. I hit my goal a lot earlier than I expected, fortunately, and it's something that's been a fun ride and I've learned so much along the way. The only way to do that is to obviously take action, but to reevaluate, constantly reevaluate your current assets. What is making money for you? How much is it? Is this meeting your goals? What are ways to maybe use arbitrage to trade, to move things around, to help you honestly accelerate on your journey a little bit faster and a little quicker?
Consider Investing Outside of Where You Live
“I'm a bit overwhelmed by the current economy. As a high earner, it's always been easy for me to save cash. I've done well in real estate and have about $500,000 in the bank with which I was planning to buy a two- or three-family, for rental.”
I'm assuming that's a duplex or a triplex for a rental.
“However, it's nearly impossible to find anything around here in the Boston suburbs. And when things come up, they are way overpriced. Normally, I'd be waiting on the sidelines, waiting for the bubble to burst, but my concern is inflation. If inflation keeps going, I'd still be OK, buy in even at these inflated prices. Things just aren't behaving like they should.”
I actually empathize with this person. I mean, yes, we'd all love to know exactly what's going to happen. What we do know is inflation is pretty high right now. And for those who haven't heard, that's usually tied to what's called the consumer price index—the index just tracks the cost of all these different types of goods. It really evaluates the value of a dollar. As we all know, a dollar doesn't go as far as it did 20 years ago, and a dollar won't go as far 20 years from now. Prices tend to just go up with time.
Real estate is known as the great hedge against inflation. Cost of living, especially buying your own homes, tends to rise and fall with inflation, it tends to go in line with it. That could be a good thing; that could be a bad thing, depending on how you look at it. But this person's wondering, “OK, if this is a bubble, if inflation is happening, will the prices of these rental properties continue to go up?” First of all, I want to honor this person. This person has about $500,000 in the bank. That's a great thing. To be able to save $500,000, first of all, they should feel proud of themselves. Not really overwhelmed, because they've done really well and they've been smart. They said even themselves, they've done well in real estate. So, congrats, they've made investments. They probably have some cash flow, and they want to buy a duplex or triplex. However, in their area, everything seems so high.
The first question I would ask them is, are you limited to buying in that area? As they live there, maybe they want to be closer to their investment property. They want to be able to check on it. They know they have current connections, resources there, property management, and that sort of thing. But I remember hearing it from a podcast called The Real Estate Guys and they say, “Live where you want to live and invest where it makes sense.” It kind of depends on their goals. For me, I live now in Orange County. I moved to Orange County recently, and prices here are ridiculous. I feel the Boston, San Francisco, LA people, New York people, Washington DC. I understand you. Prices for real estate are out of control, especially when it comes to rental property. You'd have to put down a significant amount to even cash flow. To break even in terms of cash flow.
I have some properties actually local to me, but they were a little bit better market. Would I buy them today? I'm not sure if I would buy them today. The game here with Los Angeles and these high-cost living areas is that you know the value of these things will continue to go up over time. The thing is, my actual priority is cash flow. In these coastal cities, typically, having rental properties doesn't really match that goal. I learned to invest in different areas of the country. I've done well, certain areas, a little bit of the Pacific Northwest, a little bit south of there. I've done the Midwest. There's Texas and different areas like that. I have invested in Florida and things like that. I've looked at different areas that cash flow might work out better for me.
Now, in the coastal cities, what I have found to work in terms of cash flow basis are short-term rentals. Short-term rentals are hot right now. Obviously, they're regulatory risks. But what I would really challenge as this person who wrote this question here is, do you have to necessarily buy a property in your area? And if so, why? Are you able to figure it out, to have the resources, to develop the connections, to invest where it makes sense? For this person, I'd probably tell them, the Boston suburbs may not make sense for them unless their goal is just to hold onto a property for a very, very long time and just hope that it goes up over time. That you're just expecting to play the market. Really your only game or exit strategy is to sell at a good time. Whenever you have rental properties for cash flow or multiple exit strategies, you can keep it, continue to get cash flow. You can sell it down the line. There are just more opportunities.
I would really challenge them, why are you looking in Boston? Is there an opportunity for you to look elsewhere? You have connections, you have resources, obviously, because you've done well in real estate. This community, our community, whether it's The White Coat Investor community, whether it's the Passive Income MD Facebook community called Passive Income Docs, there are resources, there are connections to different areas, to invest in certain areas. This person may even consider investing in syndications. Maybe they want to invest in their own area, but they won't invest with sponsors or operators who have found deals in certain areas to scale. Whether it's 250-unit apartment buildings in Florida or Texas that do get the cash flow that they're looking for. Then they don't have to even put their own time into it. They can leverage the experience, knowledge, team, resources, networks, connections of a sponsor to be able to do so. These are all questions, probably that kind of stuff brings up more questions than it does answers. For me, particularly, I look for something that fits my goals better. That's either going to be investing in a high cash flow area or investing in one of these syndications.
More information here:
Understanding Real Estate Syndications
Active vs. Passive Real Estate Investing
This next question is a personal question for me.
“How much of your net worth or your portfolio is allocated to active vs. passive real estate investing?”
For someone who's asking that question, I'm assuming they're referring to direct ownership of rental properties. Meaning you own, you're the landlord, you own your rental properties. And then passive is when you invest in other people's deals, whether syndications or funds like that. It's gone through a cycle. In the beginning, I started investing passively, because I didn't know what to do. I didn't have the connections. I didn't have the network. Then, I got some experience and knowledge, and I started investing in my own rental properties. I bought apartment buildings, mostly in the West Coast, and also some smaller unit buildings in Texas and the Pacific Northwest—things like that. Then after a certain amount of time, I realized I only have a certain amount of time to deal with these rental properties on my own. So I started adding to the portfolio by, again, investing a little bit more passively in other people's deals. That's allowed me to scale my investments and my portfolio and my cash flow.
To be honest with you, probably in terms of the net worth or value of the investments, I'm pretty split 50/50. You'll see so many debates about active vs. passive. There's no right answer. You have to figure out whether you want to try to maximize your returns by building your team, putting in the time, putting in the sweat equity for it, putting in the knowledge and experience. You could do that. As high-income professionals, I will tell you I've seen it again and again. We have the intellect, the ambition, the resources to make it happen, but you have to want to do it and you can potentially maximize your returns that way.
Then there's the passive side, where you know that the best way for you to create capital is to work at your day job. And what you want to do with that capital, you want to put your investment somewhere else that creates cash flow, that creates and actually protects your time. You don't have to put in more time, let somebody else do that and create returns for you. You want to leverage somebody else to get all that for you. Maybe you don't have the time. You want to spend that time doing other things with whatever free time you have. There's no right or wrong answer. I do both. I think the answer is that you can utilize the pros of both of these, from tax benefits to returns, to the time invested, to the resources, the connection, and utilize both to get your ideal situation, to get your goals.
I'll be honest with you, at different times in the market, sometimes I'm out there and I can't find the deal personally for myself. But guess what? There's a professional sponsor who has all the connections and the brokers and they're getting these large apartment buildings that make sense, off-market deals through connections. Then, it makes sense to partner with them. But other times maybe a deal, an opportunity comes up on my own, which did happen recently with a short-term rental that I'm putting together. And you'll look out for a post on that. I like to do both. I think there are benefits of both. I've seen people use both of these techniques or platforms or opportunities to create massive amounts of cash flow from them, which has totally freed them up from their day job. So, they can do it because they want to.
At this point, I feel very fortunate to say I practice medicine because I want to and not because I have to. It changes the way I have perspective on medicine on my day job. I absolutely love it, and it gives me different opportunities. I hope and I wish the best and the same for everyone.
Real Estate Learning Resources
There are some great books on both passive and active investing. The Bigger Pockets podcast is a great one. The podcast as well as their whole forum and their book on rental property investing. There are many of these doctors, as many of you know, that have been part of our Financial Freedom through Real Estate Conference in the past. We've talked about and shared their successful investing in terms of rental properties and things like that. The Zero to Freedom Through Cashflowing Rentals, Cash Flow Mastery. That is a great course that people can look to, to purchase their own rental properties. I know that Jim has a good partnership with them as well.
If you're looking for figuring out how to confidently invest in passive real estate investments, you can look toward our course Passive Real Estate Academy. And Jim has partnered with us, as well. There can be a link for that. We open that up twice a year so that people can join and, in four weeks, learn how to confidently invest in these things and do your due diligence for it. In any case, the opportunities are there for you. Whatever I can do to continue to support you, please let me know. You can reach out to me personally through our Facebook group, through social media, through our email [email protected].
Our mission is to ultimately help whoever's listening to this, high-income professionals and physicians, create additional streams of income so you can live life how you want. Live life on your own terms. Spend the time with the people you love doing the things you love. That's our mission. However we can help support you, please let us know.
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Quote of the Day
The quote of the day comes from a person on the Boglehead forum named Live Soft. They say,
“If one isn't ready to lose capital, then one isn't ready to invest. They go hand in hand, losses and investing. One cannot avoid losses if they invest.”
CFE 2022
If you did not get to attend WCICON22 but you want all of the awesome content, it is available as an online course. Each year, we call this course Continuing Financial Education. This year's course is CFE 2022. The early bird price on this CFE course is $699. That is 10% off and the sale will run from March 2-14. Be sure to get it on sale at whitecoatinvestor.com/cfe2022.
Milestones to Millionaire
#55 – Pediatrician Reaches Financial Independence
This pediatrician has an amazing story. Two lessons we can learn from her. One, despite having a great income as a pediatrician she still found herself with five car loans! But even with not starting out great financially, she was able to reach financial independence. Two, choose a specialty you love so you can practice it long term. But once you’ve done that, recognize there are people in your specialty making more money and there is no reason why you can’t be one of them.
Sponsor: CrowdStreet
Full Transcript
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. Here's your host, Dr. Jim Dahle.
Dr. Peter Kim:
Hey, everyone. I'm excited to be part of this podcast. I'm guest hosting. If you don't know who this is, this is Dr. Peter Kim. I'm the founder of Passive Income MD. I'm a partner of Jim, the White Coat Investor.
Dr. Peter Kim:
In this episode, I am taking over the mic. I'm excited to do this. We're going to be talking about question-and-answer sessions that we've gotten from the Facebook group, from forums on real estate investing. I'm just going to spend time answering your questions. We're going to be talking about a variety of topics and hopefully, we'll have a good time with this.
Dr. Peter Kim:
But before we get started, I wanted to quickly shout out a company called Pearson Ravitz. They're a disability and life insurance advisory company. They're founded by and for physicians. The White Coat Investor recommended agency grew out of one MD's experience with a career-changing on-the-job injury.
Dr. Peter Kim:
I know Stephanie Pearson myself. She's the founder of the company and she's fantastic. And today, they now serve a medical community in all 50 states. At Pearson Ravitz, they help you as a doctor safeguard your most valuable asset, which is your income so you can protect the most important people in your life, your family.
Dr. Peter Kim:
Pearson Ravitz, they make human connections before they make quotes. Go to pearsonravitz.com today to schedule your consultation with a Pearson Ravitz advisor. Disability insurance. We talk about it all the time. Extremely important. Take care of that, please. If you are a physician, reach out to Pearson Ravitz, I'm sure they'll help you out.
Dr. Peter Kim:
The quote of the day comes from a person on the Boglehead forum named Live Soft. It's, “If one isn't ready to lose capital, then one isn't ready to invest. They go hand in hand, losses and investing. One cannot avoid losses if they invest.”
Dr. Peter Kim:
Anyways, I want to thank you, the listeners out there. I know Jim always thanks you for what you do. I want to do the same. I know you're extremely dedicated to your specialty, your craft. It's taking you a bunch of time. You invest the time, energy, and effort to get where you're at. You do amazing work on a daily basis. So, I just want to honor that today. And I want to celebrate that you're taking the time to just invest in yourself and hope you will have a good time with this podcast. You'll get something out of it.
Dr. Peter Kim:
But before we get started again, I want to quickly mention, for those who weren't part of the conference, or maybe you were part of the conference, you know that WCI con 2022 just happened relatively recently. It's your chance now to actually purchase the virtual format of that. It's actually a course because it includes some wellness stuff as well. You're able to get some amazing CME from it.
Dr. Peter Kim:
The course sale goes from February 23rd through March 7th. The early bird price is $699 and then the regular price is $779. So, you have an opportunity to get 10% off. Go ahead and check that out at the whitecoatinvestor.com/CFE2022. I'm going to be speaking at that. So hopefully you'll get that as part of the package. I look forward to you checking that out.
Dr. Peter Kim:
Also, I wanted to let you know on March 9th through 13th. So coming up pretty soon is Passive Income MDs Leverage & Growth Summit, where you're able to hear from, I'd say, 30 to 40 physicians, who've taken action to live life on their own terms through investing, entrepreneurship, hear all these amazing stories.
Dr. Peter Kim:
This is our third annual one, and we've had actually 17,000 physicians who participated in this in the past. So come on now and it's a free summit. You can go to the link in the show notes, but you can check it out at whitecoatinvestor.com/summit. Again, that's the Leverage & Growth Summit happening on March 9th through 13th this year 2022.
Dr. Peter Kim:
All right. I think it's time to get to some questions. We got some on the Facebook group, we got some in different areas and I'm just going to try to hit these one by one. And hopefully you get something out of this.
Dr. Peter Kim:
So, let's start with this one. I think it's a good one. It's about syndication. And for those who aren't familiar with what a syndication is, it's essentially a pooling of capital. People get together, put their money together to purchase maybe some sort of larger building that they couldn't do on their own, or maybe they don't want to manage on their own.
Dr. Peter Kim:
Usually, it's run by what's called a sponsor or an operator who runs the entire thing. And usually, someone like you or me comes in as what's called a limited partner. We invest, get some equity in the overall property, what it is, and then get distributions and dividends accordingly and have a share of the profits at the end.
Dr. Peter Kim:
That's typically what syndication is. I'm sure you've read about it in different blogs and you've heard about it in different podcasts. But there are tons of questions about this because it can be confusing. Not every deal looks exactly the same. Many of them look amazing. The returns look amazing, but it's up to you to figure out how to do the proper due diligence for them.
Dr. Peter Kim:
And again, no two syndications are alike. There are different fee structures, there are different return structures. And so I know it can be confusing. And I think this reader here or this audience member has a question about one of the little quirks of syndications. So let me just go ahead and read this.
Dr. Peter Kim:
“I just read two things in the real estate syndication space that seemed a little shady to me. I was wondering if I could get your thoughts on that. Now, here's the first one. Some sponsors will refinance the property and pay-out distributions to the limited partners from the refinance. Now this is considered a return of your initial investment. So, it reduces your investment in the project. So, let's say you have a preferred return of 8% and your initial investment was $100,000. If there's refinance and $50,000 of your capitals return to you, so half of it, your preferred return actually becomes $4,000 rather than $8,000.
Dr. Peter Kim:
So, I guess they're saying that instead of getting the whole $100,000 and 8% of that, now you get 8% of $50,000, but your initial investment was reduced by half by $50,000 when you received that $50,000 distribution from the refinance.
Dr. Peter Kim:
Now, if this is what happens, I find that to be pretty sleazy. You take on all that risk and illiquidity for them to essentially give you half your capital back as a tax-free loan. Am I missing something here?”
Dr. Peter Kim:
Wow, this is a great one to start with. You can get quite complicated. I'm going to try to summarize this for those of you who might got lost in the middle of them. So, let's say they invested $100,000 in this deal. Now, when they agreed to do this deal and be part of this deal, there was something called a preferred return.
Dr. Peter Kim:
Now, if you haven't heard that term before, what it is, is that the sponsor agrees out of all the profits that they get to them, the preferred return is the return that gets paid first. As an investor, when I get something called a preferred return and usually the number is somewhere between 6%, to 8%, to 10%, that profit I get first. I get first rights to that profit up to 8%. Now, that 8% is based on your initial investment.
Dr. Peter Kim:
What this reader is saying is that half their investment was given back to them on what was called a refinance. The refinance was they would take a little cash out. They paid you back as the investor, they paid you half your capital. And then what happens is that because they give you half your capital, your preferred return actually ends up getting cut in half. And to them, that feels a little sleazy that they just gave you back half your capital. Now they have to pay you half your returns? Like what's up with that?
Dr. Peter Kim:
Now, I can understand from the reader's standpoint, how that might look kind of funny, but let me explain to you a little bit how this actually works. Now again, remember no two deals are exactly the same. And what I want to stress to someone and this person here, or anybody listening, if a refinance happens and you get your capital, whether 25% of it, 50% of it, or all of it, your investment in the property remains the same. You don't lose your stake in the investment.
Dr. Peter Kim:
For example, if I'm invested in a deal before where I invested $25,000 and the deal was a little bit smaller, I got 1% ownership of the property. And what ended up happening was that they ended up doing a refinance of the property, they gave me back all of my capital back. So, all of my $25,000. But guess what? I still own 1% of that building. So any distributions, any dividends, any profit from sale, I would be given 1% of that as a 1% owner in that building. That does not change.
Dr. Peter Kim:
Now, this whole preferred return business that is dependent on your investment that's still in the deal. So, let's go over my deal real quick, where I've invested $25,000. I was given that $25,000 back, but I still receive distributions and profit ongoing, and it's still been going on. And then again, I'll get that profit at sale.
Dr. Peter Kim:
The cool thing is I've been given my $25,000 back. Now this reader sees that as a bad thing. I see it as a good thing. I've got my money back $25,000. Guess what? I've got no money tied up in the deal. I feel like any profits that I get from then on, it's all house money. I basically got my money back and now I can move that onto another deal.
Dr. Peter Kim:
Now, this is something that some people refer to as an infinite return scenario. I don’t know if you've ever heard about that, but it's a scenario where none of your money is still in the deal. You've gotten that money out. You moved it on somewhere else, but you still get distributions and profits.
Dr. Peter Kim:
On a return basis, I don't know if you've ever heard of the term return on investment. That's based on how much money you put in the deal. In this type of situation, you've gotten all your money out. So, your return on investment is technically infinite as you continue to get profit and distributions.
Dr. Peter Kim:
Yes, your preferred return is based on the amount of capital that's technically still in the deal. But when they give you back that capital, they no longer have to pay you that preferred return, but they will still pay you based on whatever the equity split is what they determine.
Dr. Peter Kim:
Now, usually, what happens in any of these types of deals, usually they'll say limited partners get 70% to 80% of the profits or distributions, and the general partners, the people who are running the deal, the sponsors, usually get somewhere between 20% to 30% of the deal. And that's pretty common. So, what happens is that again, if your money is back, that preferred return is gone, but again, the way the waterfall or the way the dividends or profits are split up from that point are based on that equity split.
Dr. Peter Kim:
I know it can be a little bit confusing. It's funny, because I teach a course called Passive Real Estate Academy and we've had thousands of readers and thousands of people participate in it. And we talk about these things all day long. We go over different case studies, we talk about these types of things. And I can't pretend that you're going to get all this in one quick question-answer session, but I hope that helped in some way, again, you can get your money back in different ways and move it on to another investment, but your money is still in the deal, it's like planting a seed there and being able to keep moving on.
Dr. Peter Kim:
So I actually see that as a good thing. Some people who want steady heavy cash flow may want their capital still in the deal getting a little bit more cash flow. But for me personally, I like the feeling of having my money back out and moving on. Hopefully that's pretty clear. Hopefully you enjoy that little part.
Dr. Peter Kim:
But then they have another concern actually. This is actually called a class B catch-up contribution. They've heard about something like this. Again, I know this can be kind of complex. If this is your first-time syndication, this may be a little bit complex. I'll do my best to break this down. They've attached a link to an article about it.
Dr. Peter Kim:
So, if they're understanding this correctly, there's something called a catch-up contribution and they're worried that they only have a preferred return for the first year. The way that the profits are split is kind of funny. And they find this to be extremely deceiving based on what's called this class B catch-up. I'm going to try to explain this and break this down for people.
Dr. Peter Kim:
There's something overall and I kind of mentioned it that there's a way that the profits are split and there's an order to it. There's a priority to it in all of these investments. And it's important for you, when you look at any syndication deal for you to look at how they are going to pay and split up the profits. And it's important to understand that priority.
Dr. Peter Kim:
Now, that whole process is called the waterfall distribution. And if you think about a waterfall, it flows from the top to the bottom. And sometimes there's waterfalls and series and it keeps flowing down. Well, in this whole waterfall structure, in these types of deals, I like to think about it more as water flowing from one bucket to another. When one bucket is filled, then it flows to the next bucket and it flows the next bucket into the next one.
Dr. Peter Kim:
And again, that is called the waterfall structure. And usually in these types of deals, when there's something called a preferred return, that is the first bucket that needs to be filled before any other buckets get filled. And so, there are again, numerous countless infinite numbers of possibilities of ways these waterfall structures are set up for the investment. And I think it's important that you, as an investor, understand how each deal is specifically set up.
Dr. Peter Kim:
But I would say this person's talking about something called a catch-up contribution. And so, that is actually one of those buckets in that waterfall. In this type of situation, let's say you, as an investor, you've been guaranteed an 8% preferred return. That bucket gets filled first.
Dr. Peter Kim:
Then what happens to any additional profits after that? The question is, does that get split amongst you and the sponsor? Or sometimes there's something called a catch-up contribution there. So that if you get your 8%, then the sponsor wants to make sure that the next set of profits fills them to that 8% as well so they can be on par with you. Based on the equity split. Then after that, it is filled up, then they do that whole equity split, 70/30, 80/20, whatever that might be.
Dr. Peter Kim:
Sometimes that catch-up contribution isn't there, that bucket isn't there in the middle and it just goes straight to that equity split. Now, I know that can be a little bit confusing, but some people don't like it. They don't like having that little bucket, that catch-up contribution there. They think that, “Hey, it should just flow down to the investors after that.”
Dr. Peter Kim:
But again, there's no right or wrong. That's something I want to really stress in these types of deals. People are very, very worried about what the sponsor gets. I know that's absolutely important. You want to make sure that your investment, that you're getting minimal, I'd say minimal fees and the best profits possible. But again, every deal is different. And so there's no right or wrong.
Dr. Peter Kim:
Again, you have a choice whether to invest in that or not to see if it makes sense for you, but if you do invest in it and it has a catch-up, what's going to happen again is that profit's going to split like that. Now, it's not necessarily a bad thing. If you think about it, all of these waterfall structures, all these payments out, it's all a series of incentives for the sponsor.
Dr. Peter Kim:
You want a situation where there's something called alignment of interest, where the sponsor, they want to make money. You want them to make money, but really only when you make money. You don't want a situation where they make money without you. And you want them to really be aligned with you so that if in a bad case scenario where you lose money, you want them to be able to lose money as well. That's how you know you're aligned.
Dr. Peter Kim:
They're always looking for a way to set up these structures that they're in alignment with. And it's up to you to figure out whether there's true alignment or not. So, a lot of people will say this actual catch-up contribution creates better alignment, actually, between the investor and the sponsors. What it means is that you get paid first. Then they get paid second. Then all these splits happen.
Dr. Peter Kim:
And some people like that. Some people think that actually incentivizes the sponsor to continue to increase profits and do well because it keeps them in the game in line with you as an investor. Again, you have to look at some of the real-life examples of this and look at some of the percentages. It can be a relatively significant part of the profit split to have this catch-up contribution. But again, it's whether it makes the sponsor and you feel aligned or not.
Dr. Peter Kim:
Ultimately, you all want to make money together. You want them to do well. Because that means you will do well as well. And so ultimately, I wouldn't worry so much about the catch-up contribution. I don't see it as sleazy. I think it's another part of the waterfall. It is what it is. And if you want to invest in that type of deal, you want to invest with that sponsor, that is their current setup. And it's up to you to decide whether it makes sense for you or not, or whether you have different other opportunities.
Dr. Peter Kim:
Because as Jim Dahle, the White Coat Investor says “There are no call strikes in investing.” And I think that has to do with real estate as well. You're going to see a deal and you're going to see many of these deals. They're all going to have their different details and intricacies. And it's up to you to decide whether it makes sense for you or not. There's no right or wrong.
Dr. Peter Kim:
And if you decide to pass on it, then you should probably be passing on more deals and actually investing in deals, that means you got to see a good number of them. You're going to see different things. It's up to you to decide whether it makes sense for you or not based on your due diligence.
Dr. Peter Kim:
All right, we got through a mouthful there. Now we're going to move on to a few other questions on a few other topics, talking about rental income and rental properties. As many of you know, I absolutely believe that real estate investing is one of the best, if not the best way to create cash flow, to create wealth, generational wealth, to create financial freedom. And I'm talking about now, like in the next five, 10 years versus waiting until you retire.
Dr. Peter Kim:
And so, one of the best ways to do that is through purchasing rental properties, getting that income from that. This question comes from somebody who is a member of the Facebook group. They want to get advice from the brain trust, I guess that's us.
Dr. Peter Kim:
They paid off their multifamily property. Congratulations, they have a property, they paid it off. Now, rental income brings in approximately $4,000 a month and taxes are approximately $15,000 a year. And approximately $30,000 in repairs are still needed. They have a question. Is it better to sell or keep renting?
Dr. Peter Kim:
Now, usually, I like to have a little bit more information when I answer a question like this. I usually have an opportunity to ask a lot of questions. In fact, I'll spend the first, probably 10, 15 minutes when I talk to somebody like this, just asking them questions. Finding out more about their current financial situation. What age are they? What are their goals? What's their risk tolerance? Where do they live? What kind of lifestyle do they want to live? And how much are they working? I'm assuming this work person is still working in some capacity. And how much do they want to work?
Dr. Peter Kim:
I need details. I basically need to know a lot more info to answer this correctly. Or answer this for them, and personalize it for them. However, there's some things we can talk about. And I think there's some good things to talk about here. This person has paid off their property, which means that they have no loan in place. Now, that's a good thing and it's a bad thing.
Dr. Peter Kim:
Now, the good thing is there's a lot of security there. Not having a mortgage on a property, whether it's a rental property, whether it's your own property, provides a lot of security. You know that obviously you still have to pay property taxes. Then there are some ongoing costs with it where you can potentially if you don't pay those things, someone could put a lien on your house or things like that.
Dr. Peter Kim:
But not having a mortgage on it provides amazing security for you because that's usually the biggest chunk and the worry and the biggest risk when it comes to any sort of investing. Congratulations to this person for having paid that off.
Dr. Peter Kim:
The thing is, one of the most powerful things about real estate investing, which I think allows for creation of wealth, creation of net worth is the ability to use leverage, to use essentially other people's money, which is the bank, the bank's money, to create outsized returns for you as an investor.
Dr. Peter Kim:
And there are ways to use that smartly. As anybody who's taken out a loan on their home or rental property, usually, they'll let you take it all the way up to about 75% to 80% of the purchase price of the property. It's up to you to figure out how much is a safe place for you.
Dr. Peter Kim:
But using leverage is one of the most powerful things. Now, it can be like a double-sided sword. There are two edges to it where it can provide really nice outsized returns, but it can also honestly magnify losses as well.
Dr. Peter Kim:
You have to understand how to use debt. I don't think debt is a good or bad thing. When you hear certain other people talk about debt, they always talk about it as evil or bad.
There's no moral aspect to debt in my opinion. It's not good or bad. It's a tool. It's a tool that you can use. You can use it, if you use it smartly, it will really benefit you. It'll help you get where you want to be. If you use it poorly, you could end up in trouble. I think it's important to educate yourself on the topic, understand your limitations, understand your risk tolerance, and where you want to be.
Dr. Peter Kim:
Now, I'll just talk about what I would do. That's the best I can do in this scenario. If I had a situation where I happen to pay off my rental property right now, and it has brought in this much money, $4,000 a month. Taxes are approximately $15,000 a year. That's $15,000 a year. It's a little bit more than $1,000 per month on that. And approximately it needs $30,000 in repair. Repairs happen every year. There are some delayed repairs, whether that's a big roof here, I don't know, $30,000 is for the roof or the HVAC system. This is a big cost.
Dr. Peter Kim:
So, is it better to sell or keep renting? Now for me, I usually get these rental properties. I want maximum cash flow. I want cash flow because that money I can use to offset the income that I need to make in my day job, whether it be a doctor, whatever it is. The goal is to bring an income from that so that I don't have to work as much. I can give up that night. I can give up that weekend, and I've got that cash covered coming in passively from my rental properties.
Dr. Peter Kim:
For me, I would try to maximize my cash flow. And the way you can do that, again, is by using leverage. You have a paid-off property, but in some ways, they have what's just called lazy equity or unused equity sitting in the walls of the house. Yes, it's paid off, but it's not doing very much for you in terms of being active.
Dr. Peter Kim:
With interest rates being what they are, and as we all know, we're just still at record lows. The FEDS has talked about increasing those quarter percent here, quarter percent here, but we're still at record lows in terms of interest rates. I think there's a great opportunity for people who want to put a lot of the equity to use, whether it's in the rental property, maybe even their own home. If they feel comfortable with it, to take out a low-interest loan.
Dr. Peter Kim:
You could put that money to use and the goal is to get better returns elsewhere. Its a form of arbitrage, borrow money here, make money here. And I think with rental properties, that option and the opportunity is available. If I'm trying to maximize my cash flow, maximize and grow my portfolio, I would absolutely take some of that multifamily property that you have refinanced, take some of the cash out for myself and then go purchase another property, get some more cash flow.
Dr. Peter Kim:
For me, I don't know how large this property is or in terms of the value of it. The rental income brings in $4,000 a month. So depending on where it is, probably at very minimum, it's a $400,000 property. Maybe even more than that. That's a great opportunity to take that and put it in a short-term rental, put it in an apartment building.
Dr. Peter Kim:
Again, that's what I would do to maximize cash flow instead of just keeping it rented at that point. That's for me. And I don't know what you guys would do. We'd love to hear, let us know. If you see this post in the Facebook group, let's hear from you, what you would like to do. There's enough good amount of deferred maintenance that needs to happen. So, it doesn't look like they'll be making very much in terms of cash flow this month anyway, this year, so that's something else to think about.
Dr. Peter Kim:
All right. Well, here's another question from the Facebook group. “I'm buying my first home and I have some cash saved up. Is it better to use a lower down payment or put a higher amount down to have a lower mortgage? Is it better to use a physician or conventional loan in this scenario?”
Dr. Peter Kim:
Again, this is a pretty loaded question. There are a lot of questions to ask in terms of goals, what else do they have in their portfolio? What are they going to do with that additional cash? I think that's what I would talk about. I get this question all the time because some of you know, I also run another company called Curbside Real Estate where we help physicians get connected to the resources to buy their own homes. You can check it out on Jim's physician loan page. You'll see it right there.
Dr. Peter Kim:
We connect people to agents all over the country. And so, we spend some time talking to people. I just get on the phone. I love talking about this, myself and my partner. And there are people that are buying their first homes and they want to know whether they can have access to these things called physician home loans. And for those who aren't familiar with that, these physician home loans understand the situation for, let's say, someone listening to this, you, probably the physician or the high-income professional who wants to buy their first home.
Dr. Peter Kim:
Usually, they don't have a lot saved up for down payment. They might have a shorter work history. They might have some student loans out there. Sometimes that can be a challenge in terms of buying your first home. Physician loans, home loans are specialized products that were created for someone just like you, to be able to get you into those homes because they know you're a good bet.
Dr. Peter Kim:
Physicians, high-income professionals in the healthcare industry, have the lowest default rates across the board. That's what they'll tell you. You are the lowest risk out there in terms of getting a home loan. And the reason why, I don't know if there's a set of moral ethics or whatever it is, but we stick to our obligations. That's just what we do as people. And if we have to, we can always work more. We can pick up additional shifts and that's not necessarily a good thing, but we will, if the situation arose. You'd make it happen in any case.
Dr. Peter Kim:
They figured out these loan products for people like you and me to be able to get in at lower down payments and get access to financing. And so, the question is if you did save up a little bit extra, and this is good, congrats to this person who saved up additional cash, probably early in their career since it's their first home.
Dr. Peter Kim:
They could probably go with that typical 20% down and get that conventional loan. But some of these physician home loans depending on your area, depending on the property side, the purchase price, can go down to 10%, 5% and then allows them to retain a little bit of additional cash.
Dr. Peter Kim:
My question to this person would be, what are you going to do with that cash? How much is security and having a lower mortgage? And how important is that to you? And how do you feel about debt and having carried that?
Dr. Peter Kim:
Personally, I can only, again, answer what I would do. Especially in today's low-interest rate environment, I would probably skew towards and go towards putting down a lower down payment loan on your house, probably utilizing that capital elsewhere on an investment to help create again, additional wealth for yourself, create additional cash flow.
Dr. Peter Kim:
And sometimes what people have done, I'll tell you one of the strategies that I use initially, let's put that a lower down payment, take that cash, create cash flow that helps compensate for having a little bit of the higher mortgage and gives you additional cash flow on top of that. There are options to be able to do that when you buy your own rental properties.
Dr. Peter Kim:
The question is, “Is your home the best place to stash additional cash and have equity in?” I don't know, that's again, that's a personal decision. Most people who are in the field of real estate investing will say, your own home is not an investment. Yes, the value of your home can go up over time, but it's not necessarily that you'll just get out of your home. You can just leave your home and sell it. You live somewhere.
Dr. Peter Kim:
You can actually access some of that equity through home equity loans or a home equity line of credit, or totally refinancing. That's one way to tap that. But typically, your own home is not an investment. You've got to live in it. You've got to pay for it. If you don't pay it, then your home can get foreclosed on, and leave your home.
Dr. Peter Kim:
So, it's better to treat your home as almost like let's say a luxury or expense, and then treat a rental property as an investment. Treat those things separately. It's always better to do that, because again, you're going to look at your home differently than you would at a rental property.
Dr. Peter Kim:
For this type of person, again, it depends on what their goals are. Depends on what their cash flow goals are. Do they want to create that additional stream of income now? How important is it to them to have a little bit of extra cash flow on the side?
Dr. Peter Kim:
If that's really the priority, it probably makes sense to utilize one of the physician home loans, if you can. To put down a lower down payment, take that cash and not just put it into your home to build a pool in the backyard or something like that. Utilize that to create more cash flow for yourself. Create that additional investment income. And especially with today's low-interest rates, there are great opportunities to do so.
Dr. Peter Kim:
That would be my advice for myself and that's what I would do. But again, if your goal is security, having the lowest mortgage possible, then yeah, put all the money in your house and have the lowest rate. But again, it's up to you and your personal preference. I just know what I would do.
Dr. Peter Kim:
Here's another question from the group. I'm just going to go ahead and read this. This is about somebody again, whether they should sell their home or rental property, whether they should keep it. They're asking for some recommendations. So here it goes.
Dr. Peter Kim:
“I have an offer of approximately $545,000, but this is reflecting the current market. So, I’m not sure if this is because real estate is in a bubble or prices are expected to rise. Now, rental income is maybe slightly higher in the area than what I am asking. However, the house is older and needs some updates. Main issues are plumbing and an older heating system.”
Dr. Peter Kim:
They're debating on selling versus renting their current townhome. It's a seller's market, as we all know, but rental income will be more secure than the currently volatile stock market. They give me a little bit more details here. A $300,000 townhome will rent for somewhere around $2,200 to $2,500 per month in my area. They have $160,000 in equity and the remainder of the mortgage is a 2.5% fixed rate. Do they have any recommendations?
Dr. Peter Kim:
All right. A couple of things. They said their home is $300,000. They said they have an offer of $545,000. So, I would say the value of the property is actually $545,000. Their equity, maybe they're saying it's $160,000. But that's based on the price of $300,000. But if they're going to get $545,000, another $240,000 more value than they think, that's also all equity.
Dr. Peter Kim:
So, it sounds to me that honestly, they have something around $245,000 plus that $160,000 that they mentioned. It sounds like they probably have somewhere around $400,000 of equity, if I've got this correct for the town home.
Dr. Peter Kim:
It looks like it's a rental property just to summarize, with some older issues. There's some deferred maintenance that needs to happen or what they call CapX, where the plumbing probably needs to be replaced. They have an older heating system and these can be some large additional costs down the line. Of course, roofs are also in that equation.
Dr. Peter Kim:
They're getting about $2200 to $2,500 a month in rental in their area. Now, one of the rules of thumb, just so you know, there's something called the 50% rule. Just to be safe, a lot of times, if you're going to get about $2,200 a month, take 50% of that for expenses. And probably what's left over is what you're going to profit from it. So, let's say $2,200 a month and they profit about $1,100 a month in cash flow from it.
Dr. Peter Kim:
Now, when you have a rental property, there are multiple ways to make money from it. There are ways where you actually get the cash flow, the net cash flow after expenses. That's one. Another way is that you're essentially helping to pay off your mortgage. They're paying for the mortgage. And so, some of your equity goes up over time.
Dr. Peter Kim:
It sounds like they bought their home and it's appreciated quite a bit. It means the value has gone up. So that's another way. And then they're probably getting some sort of tax benefits as well. That's another way that you can really benefit from having rental properties. They're taking advantage of all these things as part of this property.
Dr. Peter Kim:
Now, here's the question. What should they do? They have a lot of deferred maintenance and they have this property. To be honest with you, they have a lot of equity in this property, but it's only making them $1,100 a month, which is, again, it's something, it's not anything. It is something.
Dr. Peter Kim:
I'm going to guess that this person lived in their town home, probably, left it, and started renting it out. And so, this is what they're able to get. And they're happy with it right now, but they're not sure where to put their money to best use. I would say that again, I don't know what they bought it for. I don’t know whether it was $300,000 or not. They got some money and if they sold, they would have to pay some sort of capital gains tax on it.
Dr. Peter Kim:
Now, there is a condition where if you've lived in your property, let's say it's a rental property, for two out of the last five years, you still qualify for that homeowner's exemption, that tax exemption up to $250,000 for an individual, or up to $500,000 for a married couple or partnership where you can get that completely tax-free. Don't have to pay capital gains on it. And that is a huge benefit, especially if you're able to cash in on that.
Dr. Peter Kim:
I don't know how long this person has lived, whether they lived in the property first, if it just recently became a rental property, but this is something that they should think about taking advantage of. What kind of return is that? So, let's say they made like $300,000 on this property, normal capital gains, long term.
Dr. Peter Kim:
It can be anywhere around 20% or so, that could be a significant amount of cash that you could actually just keep in your pocket by actually selling this property and then buying another property that maybe makes more sense as a rental property. Maybe it makes a little bit more cash flow for you. Maybe it's in a better appreciating area for you. Especially with mortgage rates, again, being low right now, there are a lot of opportunities to move around and buy a rental property. So that might work well for you.
Dr. Peter Kim:
I know this person is worried about being in a bubble. There are bubbles in real estate and stocks and things like that, but the problem is, nobody can predict this. Just like we talk about at the White Coat Investor. People say, “Oh, stocks are in a bubble. I'm going to wait for them to go down before I get into some of these investments.”
Dr. Peter Kim:
The question is, you don't know when that's going to be. The best thing for you and that they've shown over time is get in the game when you can get in the game. Play it for the long term, over time. Yes. Maybe this is a blip. Maybe there's a bubble here. And to be expected as part of the cycle, maybe prices will drop, but then they will go back up. And so, you want to be part of this because otherwise you're not going to know when to time it.
Dr. Peter Kim:
Even with real estate, most people expect that, “Hey, when the bottom hits, I'm going to be ready to jump in.” The problem is you don't know when that is. And number two, it's a psychological thing. When everybody's running for the door, it's really hard to fight against a tide. And that's when you probably make the most money, but emotionally, physiologically, it's just hard to swallow to do that. So oftentimes it's just better to get in the game and play for the long term.
Dr. Peter Kim:
And for this type of person, I would look for that tax-exempt to see if it works for them. That is a way to cash out and move it on to another property. Otherwise, to be honest with you, I would do another evaluation. Is this the best rental property for you? There are a lot of maintenance and deferred maintenance, which will cut into your cash flow. Are you getting the maximum amount of cash flow that you like? Is it in the area that you want to be? Are there other opportunities for you?
Dr. Peter Kim:
Personally, I don't love single townhomes. I think that the single-family home, unless you're using it as a short-term rental these days, you're not maximizing your opportunity to scale, to create that cash flow. And that usually comes with more units, to be honest with you.
Dr. Peter Kim:
I'm a big fan of taking those single families, taking those small duplexes or triplexes and figuring a way to play monopoly with them, where you can sell some of those and sell them and trade them in for larger properties. And the reason I say that, not because I want more headaches, but I've found that managing a single-family or a duplex or triplex is not that different from having management of a 20 plus unit building. And the reason why is because once you get 20 plus unit buildings, you tap into a lot more professional property management.
Dr. Peter Kim:
And either way they are taking care of those major issues. You are able to honestly move a lot of the pieces around more, play with the property, play with the returns to really magnify gains, at that point.
Dr. Peter Kim:
I'm a big fan of that. Like I say, having a single town home, if renter leaves, you've got zero income coming in. Whereas in a 20-unit apartment building, one person leaves, two people leave, you've got turnover, you still got rental income coming in on a monthly basis. Again, I care about cash flow. I want extra money coming in my pocket so that I don't have to take that moonlighting shift. I don't need to take that weekend.
Dr. Peter Kim:
And that's how I ultimately built up my streams of income. For me, I said, “All right, how much money would it take on a monthly basis for me to be completely financially free?” I looked at my expenses. I looked at my family's expenses. I wanted to live a certain type of lifestyle. I said, “How much money per month would it take for me if somebody wrote me a check that I could be completely financially free?”
Dr. Peter Kim:
And to be honest with you, that number for me was $20,000 a month. Yeah, I live in California. High income area. But I also wanted to travel, have a good life and just be able to do the things I wanted to do. I wanted to be able to give, to contribute, do these kinds of things as well. And that was just a number for me. I planted that flag there at $20,000 a month.
Dr. Peter Kim:
But again, I didn't expect to get it all at once. For me, my goal was initially $20,000 in 20 years. That was my goal. I think I started that when I was in my 30s. And I said, “All right, well, by the time I'm 50, 55, I'll be able to retire.” And honestly, that $20,000 seemed pretty insurmountable initially, but it was a goal.
Dr. Peter Kim:
I started working backwards. I started saying, “Okay, if I'm going to get $20,000 in 20 years, that means in 10 years, that means I need about $10,000 a month to be on that track. Well, $10,000 a month.” Okay, so I can work backwards a little bit. That means in five years I would need about $5,000 a month in passive income. I'm like, okay, well, that's starting to sound a little bit more attainable.
Dr. Peter Kim:
Now, I broke that down even further in one year. That means in one year, this first year, if I can figure out a way to create $1,000 in passive income, which means really just $12,000 a year in passive income, I could figure that out for year one. And I found a system to do that. I could just repeat that every single year and I would hit my goal. And that's how I started.
Dr. Peter Kim:
Now, I'll tell you the secret, which a lot of people don't know, is that once you start doing this and figuring it out, to me, I believe it grows not linearly, but it grows exponentially. You start getting smarter, you start getting better. You start doing these things like trading. Like monopoly, taking the houses, taking four houses, trading it in for a hotel, not a hotel, but maybe an apartment building.
Dr. Peter Kim:
And you start figuring out ways to use leverage smartly. You create connections, you create networks, you create just more opportunities. And I've found that once you're on the journey, once you're on the path, you get going, things tend to grow in an exponential scale.
Dr. Peter Kim:
And so, I hit my goal a lot earlier than I expected, fortunately, and it's something that's been a fun ride and I've learned so much along the way. And the only way to do that is to obviously take action, but to re-evaluate, constantly re-evaluate your current assets. What is making money for you? How much is it? And is this meeting your goals? What are ways to maybe use arbitrage to trade, to move things around, to help you honestly accelerate on your journey a little bit faster and a little quicker. I think this person has a lot to think about, about their town home, whether that might be the best investment for them or not, and see what other opportunities are out there.
Dr. Peter Kim:
All right. There's someone here, they're being really vulnerable and honest, and they're going to share their situation here. I'm going to go ahead and read this. This person says “I'm a bit overwhelmed by the current economy.” I would say that's a totally true statement. I know a lot of people feel the same way. “As a high earner, it's always been easy for me to save cash. I've done well in real estate and have about $500,000 in the bank with which I was planning to buy a two or three-family, for rental.” I'm assuming that's a duplex or a triplex for a rental.
Dr. Peter Kim:
“However, it's nearly impossible to find anything around here in the Boston suburbs. And when things come up, they are way overpriced. Normally I'd be waiting on the sidelines, waiting for the bubble to burst but my concern is inflation. If inflation keeps going, I'd still be okay, buy ingeven at these inflated prices. Things just aren't behaving like they should.”
Dr. Peter Kim:
This first question is, they're letting us know, the economy, the current cycle, the market is driving them a little crazy. It's hard to know what to do. They want to purchase a rental property in their area, in the Boston suburbs, but it seems to be overpriced. But they're worried that prices are going to actually come down in the future. Or because of inflation, are they going to continue to go up? Things just aren't behaving and they want to know what to do in this type of situation.
Dr. Peter Kim:
Well, I actually empathize with this person. I mean, yes, we'd all love to know exactly what's going to happen. What we do know is inflation is pretty high right now. And for those who haven't heard, you probably have, that's usually tied to what's called the consumer price index, which the index just tracks the cost of all these different types of goods. And it really evaluates the value of a dollar. As we all know a dollar doesn't go as far as it did 20 years ago and a dollar won't go as far 20 years from now. Prices tend to just go up with time.
Dr. Peter Kim:
Now, real estate is known as the great hedge against inflation. Cost of living, especially buying your own homes, tends to rise and fall with inflation, it tends to go in line with it. And that could be a good thing, that could be a bad thing depending on how you look at it. But this person's wondering, “Okay, if this is a bubble, if inflation is happening, will the prices of these rental properties continue to go up?”
Dr. Peter Kim:
All right. First of all, I want to honor this person. This person has about $500,000 in the bank. That's a great thing. To be able to save $500,000, first of all, they should feel proud of themselves. Not really overwhelmed, because they've done really well and they've been smart. They said even themselves, they've done well in real estate. So, congrats, they've made investments. They probably have some cash flow, and they want to buy a duplex or triplex. However, in their area, everything seems so high.
Dr. Peter Kim:
The first question I would ask them is, are you limited to buying in that area? As they live there, maybe they want to be closer to their investment property. They want to be able to check on it. They know they have current connections, resources there, property management, and that sort of thing.
Dr. Peter Kim:
But I remember hearing it from a podcast called The Real Estate Guys and they say, “Live where you want to live and invest where it makes sense.” A lot of different people say this. It kind of depends on their goals. For me I live now in Orange County. I moved to Orange County recently in California, near LA. Prices here are ridiculous.
Dr. Peter Kim:
Yeah, I understand. I feel the Boston, San Francisco, LA people, New York people, Washington DC. I understand you. Prices for real estate are out of control, especially when it comes to rental property. You'd have to put down a significant amount to even cash flow even. To break even in terms of cash flow. And so, I understand that.
Dr. Peter Kim:
I have some properties actually local to me, but they were a little bit better market. Would I buy them today? I'm not sure if I would buy them today. The game here with Los Angeles and these high-cost living areas is that you know the value of these things will continue to go up over time.
Dr. Peter Kim:
The thing is my actual priority is cash flow. In these coastal cities, typically, having rental properties doesn't really match that goal. And so, I learn to invest in different areas of the country. I've done well, certain areas, a little bit of the Pacific Northwest, a little bit south of there. I've done the Midwest. There's Texas and different areas like that. And in Florida and things like that, I've looked at different areas that cash flow might work out better for me.
Dr. Peter Kim:
Now, in the coastal cities, what I have found to work in terms of cash flow basis are short-term rentals. Short-term rentals are hot right now. Obviously, they're regulatory risks. We're going to talk a little bit about that if we have some time. But those tend to work in those areas.
Dr. Peter Kim:
But what I would really challenge as this person who wrote this question here is, do you have to necessarily buy a property in your area? And if so, why? Are you able to figure it out, to have the resources, to develop the connections, to invest where it makes sense?
Dr. Peter Kim:
And for this person, I'd probably tell them, the Boston suburbs may not make sense for them unless their goal is just to hold onto a property for a very, very long time, and just hope that it goes up over time. That you're just expecting to play the market. You got to buy at a certain point, you got to sell at a certain point. And really your only game or exit strategy is to sell at a good time.
Dr. Peter Kim:
Whenever you have rental properties for cash flow or multiple exit strategies, you can keep it, continue to get cash flow. You can sell it down the line. There are just more opportunities.
Dr. Peter Kim:
I would really challenge them, why are you looking in Boston? Is there an opportunity for you to look elsewhere? You have connections, you have resources, obviously, because you've done well in real estate. This community, our community, whether it's the White Coat Investor community, whether it's the Passive Income MD Facebook community called Passive Income Docs. There are resources, there are connections to different areas, to invest in certain areas.
Dr. Peter Kim:
This person may even consider investing in syndications. We talked about it. Maybe they want to invest in their own area, but they won't invest with sponsors or operators who have found deals in certain areas to scale. Whether it's 250-unit apartment buildings in Florida or Texas that do get the cash flow that they're looking for. And they don't have to even put their own time into it. They can leverage the experience, knowledge, team, resources, networks, connections of a sponsor to be able to do so.
Dr. Peter Kim:
And so, that opportunity is there as well. These are all questions, probably that kind of stuff brings up more questions than it does answers. For me, particularly, again, I look for something that fits my goals better. That's either going to be investing in a high cash flow area or investing in one of these syndications.
Dr. Peter Kim:
All right. And this next question was just a personal question. “How much of my net worth or my portfolio is allocated to active versus passive real estate investing?” For someone who's asking that question, I'm assuming they're referring to direct ownership of rental properties. Meaning you own, you're the landlord, you own your rental properties. And then passive is when you invest in other people's deals, whether syndications or funds like that.
Dr. Peter Kim:
Now, it's gone through a cycle. In the beginning, I started investing passively, because I didn't know what to do. I didn't have the connections. I didn't have the network. Then I got some experience and knowledge and I started investing in my own rental properties. I bought apartment buildings, mostly in the West Coast and also some smaller unit buildings in Texas, Pacific Northwest, and things like that.
Dr. Peter Kim:
Then after a certain amount of time, I realized I only have a certain amount of time to deal with these rental properties on my own. So I started adding to the portfolio, by again, by investing a little bit more passively in other people's deals. And that's allowed me to scale my investments and my portfolio and my cash flow.
Dr. Peter Kim:
To be honest with you, probably in terms of the net worth or value of the investments, probably I'm pretty split 50/50. In terms of where I am, in terms of my portfolio, that's allocated towards active and passive. To be honest with you, you'll see so many debates about active versus passive. There's no right answer.
Dr. Peter Kim:
You've got to figure out whether you want to maximize, try to maximize your returns by building your team, putting in the time, putting in the sweat equity for it, putting in the knowledge and experience, you could do that. As high-income professionals, I will tell you I've seen it again and again, we have the intellect, the ambition, the resources to make it happen, but you have to want to do it and you can potentially maximize your returns that way.
Dr. Peter Kim:
Then there's the passive side, where you know that your best way for you to create capital is to work at your day job. And what you want to do is with that capital, you want to put your investment somewhere else that creates cash flow, that creates and actually protects your time. You don't have to put in more time, let somebody else do that and create returns for you. And you want to leverage somebody else to get all that for you. And maybe you don't have the time. You want to spend that time doing other things. With whatever free time you have.
Dr. Peter Kim:
There's no right or wrong answer. I do both. And I think the answer is that you can utilize the pros of both of these, from tax benefits to returns, to the time invested, to the resources, the connection, and utilize both to get your ideal situation, to get your goals.
Dr. Peter Kim:
And I'll be honest with you, at different times in the market, sometimes I'm out there I can't find the deal personally for myself. But guess what? There's a professional sponsor who has all the connections and the brokers and they're getting these large apartment buildings that make sense, off-market deals through connections. Then it makes sense to partner with them.
Dr. Peter Kim:
But other times maybe a deal, an opportunity comes up on my own, which did happen recently with a short-term rental that I'm putting together. And you'll lookout for a post on that. And so, I bought my own as well. I like to do both. I think there are benefits of both. I don't think people who say one is worse than the other. I don't think it's necessarily correct. I've seen people use both of these techniques or platforms or opportunities to create massive amounts of cash flow from them, which has totally freed them up from their day job. So, they can do it because they want to.
Dr. Peter Kim:
At this point, I feel very fortunate to say I practice medicine because I want to, and not because I have to. It changes the way I have perspective on medicine on my day job. I absolutely love it and it gives me different opportunities. And so obviously I hope, and I wish the best and the same for everyone. And so yes, that's a great question. I'm going to continue to do both to whatever fits my needs. I enjoy both at this point.
Dr. Peter Kim:
So, if you do want to learn about some of these things, I know people ask, what are some of the resources? There are some great books on both. The Bigger Pockets podcast is a great one. The podcast as well as their whole forum. Their book on rental property investing.
Dr. Peter Kim:
There are many of these doctors, as many of you know, that have been part of our Financial Freedom through Real Estate Conference in the past. We've talked about and shared about their successful investing in terms of rental properties and things like that. The Zero to Freedom Through Cashflowing Rentals, Cash Flow Mastery. That is a great course that people can look to, to purchase their own rental properties. I know that Jim has a good partnership with them as well.
Dr. Peter Kim:
If you're looking for figuring out how to confidently invest in passive real estate investments, you can look towards our course Passive Real Estate Academy. And Jim has partnered with us as well. There can be a link for that. And we opened that up twice a year so that people can join and in four weeks, learn how to confidently invest in these things and do your due diligence for it.
Dr. Peter Kim:
In any case, the opportunities are there for you. Whatever I can do to continue to support you, please let me know. You can reach out to me personally through our Facebook group, through social media, through our email [email protected].
Dr. Peter Kim:
Our mission is to ultimately help whoever's listening to this, high-income professionals and physicians create additional streams of income so you can live life how you want. Live life on your own terms. Spend the time with the people you love doing the things you love. That's our mission. However we can help support you, please let us know.
Dr. Peter Kim:
As mentioned, another physician doing great things for other physicians, Dr. Stephanie Pearson at Pearson Ravitz. They help you as a doctor, safeguard your most valuable asset, your income so you can protect the most important people in your life, your family.
Dr. Peter Kim:
The company Pearson Ravitz serves the medical community in all 50 states, helping you find disability insurance, to make sure that if you have an on-the-job injury that you're protected.
Dr. Peter Kim:
Check out pearsonravitz.com today to schedule your consultation. It's a free consultation with an advisor there, and I really highly recommend anybody listening to this to check that out.
Dr. Peter Kim:
We'd also, again, like to mention that the WCICON2022 course sale is going on right now, February 23rd through March 7th. It's your opportunity to get an early bird pricing at $699. The regular $779. So right now, you have an opportunity to get 10% off. You can check that out at whitecoatinvestor.com.cfe2022. That is all the virtual recordings, the lectures at the conference that just happened, WCICON 2022. I have a talk there as well, so you can enjoy that. Make sure you check that out.
Dr. Peter Kim:
The other thing again, upcoming is Leverage & Growth Summit for physicians, put on by us at Passive Income MD. We're going to be speaking to 30 to 40 physicians about how to really create that ideal physician life, both in and outside of clinical medicine, using investments and entrepreneurship. March 9th through 13th, it’s totally free. Come on out and check that out and let everybody know about it.
Dr. Peter Kim:
And the last thing is, if you enjoy this podcast, if you enjoy Jim's podcast, make sure to leave us a five-star review, tell your friends about it. We want to continue to help grow his mission and our mission to make sure we get this kind of advice and information out to all physicians and high-income professionals.
Dr. Peter Kim:
Here's a five-star review that we want to read. This person is from Apple Podcasts. They wrote, “Five stars. Great advice for physicians from a physician. Follow your doctor's advice and listen to this show. It is informative and entertaining.” Thank you for that review, QBrill.
Dr. Peter Kim:
And as Jim says, I'm going to say what he says all the time, “Head up, shoulders back. You've got this, and we can help.” I hope you enjoyed this episode. Let's talk again soon. Take care.
Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney, or financial advisor. So, this podcast is for your entertainment and information only, and should not be considered official personalized financial advice.
If you had the ability to go back in time to age 20 knowing what you know now, would you still have gone to medical school or would you have gone directly into the real estate business?
The real estate business or selling real estate courses?
Either one. Something that doesn’t involve putting yourself through 12+ years of soul crushing school and training and instead doing a job that a motivated and intelligent high school graduate can do.
Personally? I’d still go to med school. I’m actually doing medicine (as I write actually) and I’m not really “doing” real estate. I have real estate investments.
What would Peter say? I think he’d say the same, even though he’s now practicing even less than I am.
thanks,great post.
where can I buy real estate courses?
https://www.whitecoatinvestor.com/onlinecourses/
I have been considering investing in real estate syndications for a few months now, but after listening to 15 minutes of this podcast with Peter I am really hesitant. Maybe he didn’t mean to present the topic this way, but it sounded like there are so many layers to this- and every deal seems different. Then I hear about the bucket scenarios. Geeez. I get that you have to do your due diligence, as we do with mutual funds. But this seems more steeped in complexity with less transparency based on what I just listened to. Makes my current REIT holdings seem so much safer even if they don’t behave the same. Can anyone point me to a link with specific gotchas to look out for with syndications, specific due diligence considerations , etc. ?
Yeah, they call it passive real estate, but it really isn’t all that passive on the front end (or so I’ve heard since I’m still in the process of figuring it all out). But I’ve started reading The Hands Off Investor (Jim endorsed it in his latest update in the recommended books post (https://www.whitecoatinvestor.com/best-financial-books-for-doctors/)), and that might be your best bet for answering all the questions you just asked.
Hey thanks. I will look into this
There are a lot of layers and complexity and lack of transparency to this. If you want simple and easy, check out a REIT index fund like Vanguard’s. If you’re into this stuff, then get into it. It’s totally optional though, and it’s for accredited investors. Not just those who technically qualify as accredited by virtue of their physician income, but for those who are actually accredited (can afford to lose the entire investment, are sophisticated enough to actually evaluate the investment without the assistance of an advisor). Although I find private real estate attractive, don’t let FOMO drive your portfolio design.
Agreed. I have been a Vanguard REIT fund holder forever, but like others I have been educating myself on the private real estate funds as I favor real estate in my portfolio. I consider myself very analytical (which is good and bad) and I tend to take deep dives into things I research. But transparency is very important for this, and it seems like even my deepest research effort might still result in foggy details given. I will look into the book mentioned above as it sounds like a good supplement.