Today we are answering all of your real estate questions. We spend a big chunk of time talking about when is the right time to invest in real estate. Then, we discuss how real estate is not necessary to reach your financial goals. We talk about using LLCs for your investment properties, what to do with profits from selling a house, and answer a question about ATM syndications.

 

When to Add Private Real Estate to Your Portfolio

“Hi, Dr. Dahle. My question is about when a reasonable time is to consider adding private real estate investments to your portfolio. My spouse and I are new attendings in our first few years of practice. As you have mentioned before, we have plenty of good uses right now for our new incomes, including student loans, maxing out our retirement accounts, saving a down payment for a house, and starting 529s for our kids.

Right now, we are aggressively investing into our 401(k)s, Backdoor Roths, HSA, a small taxable account with an asset allocation that is mostly equity, some bonds, and a small amount of the Vanguard REIT Index Fund. Eventually, I think we would be interested in adding private real estate into our portfolio for additional diversification, likely in the form of a fund such as the ones you advertise on your site. The cost of entry to many of these funds is relatively high, and right now does not seem like the time to do this since it would take us longer to save that amount of money instead of making our monthly investments into the other accounts I mentioned.

My question is, at what point in a high income professional's financial life does it make sense to start adding in these types of investments? Is it at a certain level of net worth or portfolio size, or how should I think about planning for this for the future?”

Let's start at the very beginning here. Real estate is not mandatory. Yep, I said it. You don't have to invest in real estate in order to reach all of your financial goals. You certainly don't have to invest in private real estate to reach all of your financial goals. And you certainly don't have to be a direct real estate investor. Landlording is not mandatory for financial success, for becoming a millionaire, for being financially independent, or for retiring successfully. I had zero private real estate investments when I became a millionaire. I guess we still had our accidental landlording property out in Virginia that we couldn't sell in 2010. We owned that, but it certainly wasn't making much money and really didn't contribute to that first $1 million we had.

This is all optional. Let's keep that in mind. There should be no rush to add something that's optional in the first place. You want to invest from a position of strength. For most high-income professionals—most doctors—you have more and more financial strength each year of your career. You come out of residency with a negative net worth. You owe $200,000 or $300,000 or $400,000 in student loans; you hardly have anything to your name. You're not in a particularly strong position. But if you're doing things right, a month later you're in a slightly better position. The month after that, a little better, a little better, a little better. That is the way the last 20 years of my career have been since I came out of medical school in 2003. Every month I have been wealthier than I was the month before.

Maybe that's not entirely true and there's a big nasty downturn and I lose a bunch of money in stocks or something, and my net worth actually goes down. Or maybe when you put down a big down payment on a house or you buy a new truck or a boat or something, your net worth actually goes down that month. But as a general rule, year after year after year, you become wealthier and wealthier and wealthier and wealthier if you're doing this right.

If we talk about real estate, the easiest way to add real estate to your portfolio, assuming you want more than what's in just the basic total stock market index fund, is to tilt your portfolio toward publicly traded REITs, which are real estate investment trusts, by using something like my favorite ETF in this space, the Vanguard REIT Index Fund. I've been using it for a long time. I first added it to my portfolio in 2007. That was a mistake, by the way. I lost 78% of what I put in there in 2007 in the subsequent bear market in 2008. But such is life. It wasn't that much money, and we continued to add to it over the years. We have a very good return over the years from that fund, even though it started out with a pretty nasty return that first year. That's the way investing goes when you're investing for the long run.

It sounds like you, meaning the person asking this question, want to do more than that. I have a portion of my portfolio that's dedicated to private real estate. I've invested in some syndications in the past, but primarily my investments now are private real estate funds. I think the solid returns there as well as the lower correlation with the overall market is worth the hassle and expenses of dealing with that asset class. Our portfolio is 60% stocks, 20% bonds, and 20% real estate. Of that 20%, 5% is still in VNQ, which is publicly traded REITs. Ten percent is in equity real estate, almost all in funds. And 5% is in debt real estate, all in funds. That's money that's loaned out to developers who are essentially developing and flipping properties. That's what we invest in.

These investments, as you've noticed, have fairly high minimums. That's not an all bad thing. High minimums mean that they're managing fewer investors. That cost savings in some ways can be passed along to you. If they're trying to manage a whole bunch of investors with $80 in the investment, that's very expensive and lots of hassle and very time-consuming. Some of the regulations actually make it difficult to have small investors in those investments. The investments tend to be high. You can find some that are $15,000 and $20,000 and $25,000, but most of them are $50,000 or $100,000. I think the highest one I've invested in had a $250,000 minimum. That just doesn't work at the beginning of your career. If you're making $150,000 a year and you're saving 20% a year, that's $30,000. If you're trying to hit a $100,000 minimum investment, that's over three years’ worth of investment savings just to do that. That's not going to work for you.

You've got to have a higher income than that if you want to play in this space and actually have a diversified portfolio, or you have to have a bigger portfolio, which after many years you can. These investments all require you to be an accredited investor. The federal requirement for that is you have to have had an income of at least $200,000 a year for each of the last two years, $300,000 together with your spouse, or you have to have investable assets of at least $1 million. That's what they call an accredited investor.

An accredited investor, in my mind, is two things. One, you can afford to lose the entire investment without it affecting your financial life. If that's true, it means you've got a fair amount of money and a fair amount of income if you're losing $50,000 or $100,000 investment without it really affecting your financial life. You have to be wealthy—at least high income. And two, to be an accredited investor, I think you need to be able to evaluate the merits of the investment yourself without the assistance of anybody else. Meaning attorneys, financial advisors, accountants, etc. If you need a whole team to evaluate this investment, that's probably going to decrease the returns on the investment enough that it's not worth it for you.

I think you also ought to take those government-mandated numbers to be an accredited investor and double them. Not only double them but instead of having them be “either/or,” have them be “and.” That means you're making at least $400,000 a year in your household and you've got at least $2 million in investable net worth, investable assets. I think that's about the mark where this stuff can start making sense to add to your portfolio because the minimums are so high and you still need to be diversified. You are outside of the public markets here. This is a place where scammers abound, where incompetence can abound among operators. It’s not that hard to start up a syndication, it turns out. You need to be heads up when you're investing in this space, and it helps if you are already wealthy.

That's my take on it. Do you have to wait that long? No. If you meet their requirements of an accredited investor, you can invest. If you're OK not being diversified and adding one of these at a time over several years, you can invest. That's your call if you want to do that. But my recommendation is be able to have a diversified portfolio from the beginning. Maybe that means you have to lean toward the ones that have lower minimum investments. We've got a number of sponsors that are more like crowdfunding platforms, for lack of a better word, that can get you into investments with those lower minimums. That's absolutely where I started with them.

The nice thing about those lower amounts is you get to dip your toe in the water and try them out and still be somewhat diversified. The downside is you get the same exact number of K-1s, whether you have $10,000 in there or a million dollars in there. You have the same cost and hassle of dealing with filing that K-1, which may include filing multiple state tax returns. It's an expense and a hassle. If you're filing them yourself, it's a hassle. If you're not filing them yourself, it's an expense.

If you are a gynecologist making $350,000 yourself, you're married to a neurologist who is making another $325,000, you're eight years out of residency, you've paid off your student loans, you have a seven-figure portfolio—then, this stuff's worth taking a look at and seeing if you want to include that as part of your portfolio. If you came out of residency last year, if you are a PM&R doc making $210,000, if you owe $350,000 still in student loans, if you have a five-figure portfolio, this is not for you yet. And it doesn't ever have to be for you. You don't have to invest in this stuff.

Don't forget, The White Coat Investor is multiple things. The White Coat Investor is an educational platform. We want to teach you about money. We want to help docs stop doing dumb things with your money. We want to help you get a fair shake on Wall Street. White Coat Investor is also a business. Fifteen people work here. They all like paychecks, I assure you. And they want their health insurance. So, this thing has to make money. And we have to have profit. We have advertisers just like we had an advertiser at the beginning of this podcast, Laurel Road. We have advertisers in real estate. You're going to hear about this stuff in the form of ads on the podcast and you see them on the blog and that sort of stuff. But keep in mind that there is content and there are ads. If you're having trouble telling them apart, let me know and I'll make it real clear for you. Because it's very clear in my mind what is content and what is ads. If it is not clear for you, let me know.

More information here:

The Case for Private Real Estate

The 18 Downsides of Private Real Estate Investing

 

Do You Need a Lawyer to Open an LLC? 

“Hi, I'd like to ask a question about LLCs. I'm interested in forming an LLC for real estate investment property. I kind of want to go the cheaper way, just going onto LegalZoom or something similar like that. Well, traditionally I could hire a lawyer. What would you recommend? Is it OK to cut corners and kind of make this a do-it-yourself project, or is it something that I truly do need the expertise of a lawyer?”

An LLC is a limited liability company, and as a general rule, it's a good idea to have your investment properties inside LLCs. The reason why is that in most states, the LLC provides some liability protection for you. It provides both internal liability protection, meaning some protection against liability that emerges from the property itself. If somebody slips and falls on your property and sues you, they can't sue you personally because you don't own the LLC. They can only sue the LLC. At most, you'll lose the contents of the LLC, i.e. the property. It is a nice protection to have.

It can also provide some protection from external liability, meaning liability from something that has nothing to do with what's in the LLC—your personal liability. Let's say you get sued for malpractice and let's say they get a judgment that's not reduced on appeal, and you're forced to declare bankruptcy. That LLC may protect that asset. This is all state law-dependent, of course. But assuming there are other investors in that LLC—other owners in that LLC—there's no reason that the state should hurt them just because you have a judgment against you. It will provide that creditor nothing more than a charging order, meaning when the LLC distributes income to you, that creditor can get that income. But they can't force the LLC to sell the property and they can't force the LLC to distribute income. That's the benefit of having an LLC. It all varies by state.

The first thing to do when considering an LLC is to look at your state LLC laws. Is this even giving you significant protection in your state? If not, maybe skip the hassle altogether. The other thing to keep in mind is LLCs have different prices in different states. For example, I'm in Utah. Here, it costs $70 to start an LLC, and I think it's $15 a year to keep it active. But if you go to California, it's like $800 a year. If this is not a very expensive property, $800 a year is a significant amount of the income from that property that it's eating up just from the LLC fees.

As far as whether you need a lawyer or not, forming an LLC is ridiculously easy, at least in my state. It's a two-page form you fill out. You just go to the state website and fill it out. It's no big deal. I wouldn't even think about getting a lawyer for it. I did not get a lawyer when I originally set up an LLC for The White Coat Investor. Of course, we have a general counsel now for WCI, and they look over everything we do. But just to form an LLC that owns one investment property, that's not a very hard thing and I would feel very comfortable with that as a do-it-yourself project.

If you need a lawyer, you can always go hire one. But I don't know that you get much from going to LegalZoom or something online. You can literally just go to the state website where you form LLCs and fill out their forms. That's all there is to it.

More information here:

Should You Put Rental Properties in an LLC?

 

Amortization Question

“Hey Dr. Dahle. Thanks for all you do. I have an amortization question and a math equation for you that I was hoping you can help with. We have a recent mortgage, which is approximately three times our gross income—more than you normally suggest. We have $400,000 from our prior home in equity, which we could use down to get it under double our gross salary, which we're motivated to do. Our mortgage is a 10-year ARM adjustable 4.75%. We're motivated to pay it down. However, we have a guaranteed 8% return loan that we can loan out to a family business that's real estate backed and guaranteed money for us. We're in the 32% tax bracket.

My question is, if you were to pay down the loan with the $400,000 today—there's no recast fees associated with my loan—am I better off to take the 8% loan, putting the interest from that 8% loan into the mortgage tier and put the $400,000 into it when this opportunity expires in one to two to three years? Or based on an amortization table, am I coming out ahead by paying out a significant chunk of the mortgage early on in the loan to lower the interest paid each month and increase the equity paid each month?”

This sounds all complicated, but at the bottom of this, this is just the age-old invest-or-pay-down-debt question that we all deal with unless we're debt free. Every doc out there is dealing with this dilemma. Do you pay down your debt, or do you invest? Obviously, the math of borrowing at 2% and earning at 8% would suggest you invest. But that ignores risk and there is risk in our lives, and it ignores cash flow and we all need cash flow in our lives. Sometimes having better cash flow can cause us to take risks and take advantage of other opportunities that improve our lives or allow us to earn more money. It's not always a no-brainer to borrow at a low rate and invest at a high rate.

The other thing I want to point out is that you keep throwing out this word “guaranteed,” and it reminds me of that line from The Princess Bride. “You keep saying that word. I'm not sure that word means what you think it means.” No guarantee is worth anything more than the guarantor can provide. You say guaranteed and I say guaranteed by what or by whom? Even a Treasury bond or a savings bond is guaranteed by the full faith and credit of the United States of America. That's pretty good, but it's not perfect. When you talk about the guarantees in whole life insurance, that's guaranteed by the insurance company. What it sounds like is this loan you're talking about, this 8% loan is guaranteed by whoever's borrowing it, No. 1. And No. 2, in the event that they fail to pay you, it’s backed by a property.

Your option is to foreclose on the property, try to manage it, or sell it as best you can and get your money out of it. That's the only guarantee you have. Eight percent sounds great. Only you can decide how risky that 8% really is. If truly it's very low risk, then borrowing at 4.75% and earning at 8%, you're going to come out ahead. If you need to do that in order to meet your financial goals, then that might be a very reasonable risk for you to take.

As far as paying off a mortgage, though, here's the deal. You have a few options. You can refinance this loan, but you're probably going to end up with a higher interest rate. That's not a good thing. Sometimes they will let you recast a loan—you put a whole bunch of money down and they recast the loan. Here's essentially what they're doing. Let's say you've paid down the loan for 10 of your 30 years. They're going to recast it after you put all that money in and you're still going to pay for 20 more years, but you're going to be paying a lower amount each month because your principal is lower. That's recasting. Another option is just to send the money in as principal and your payments will still be the same after that, but you'll pay off the loan sooner because more of your payment each month will now go toward principal. By putting a whole bunch of money down, maybe you pay it off in eight more years instead of 20 more years.

I don't know what your time is exactly, but those are all reasonable options to do. If you have a cash flow problem, you might want to recast it. If you have a high-interest rate and can get a lower interest rate, a good option is to refinance the whole thing. Even if you go back out to a 30-year loan, just realize you'll be paying longer. You could refinance into a 15-year loan. Lots of people do that. They have a 30-year for three or four years, and they refinanced into a 15-year. Payments go up, and interest rate goes down and they're done in a total of 19 or 20 years instead of 30.

Then what a lot of people do: just throw extra principal at your mortgage until it's gone. Whether you do that all at once or whether you do it each month bit by bit, it's the same effect. Essentially that money is earning at the after-tax rate of your mortgage, your mortgage interest rate. That's what you're earning on that investment. That's guaranteed because that's an investment or that's a loan that you have to pay on. You're guaranteed to earn that. You have a 4.75% mortgage. You put money down on it; you just made 4.75% guaranteed. That's a pretty good return although you can get the money market fund over 5% right now. Good luck with your debate with yourself, wrestling between investing and paying down debt. Both are good things. Both build your wealth, and both will increase your net worth. If you're not sure what to do, split the difference and do both.

 

Read the WCI Podcast Transcript below for answers to the following real estate questions: 

  • Passive real estate with pre $1 million net worth
  • How to structure bank accounts for real estate properties in an LLC
  • Parent structure in an LLC
  • ATM syndication
  • What to do with profits from the sale of a home

 

Milestones to Millionaire Podcast

#126 — Pharmacist Writes a Book and Pays Off a Mortgage and Finance 101: Index Funds

This pharmacist turned educator paid off his investment property mortgage. He shares his fascinating story of moving through several different careers before settling into what he does now: teaching. He wrote a successful pharmacology book that made it possible for him to pay off his first of two rental property mortgages, and he is on his way to paying off the others. After the interview, Dr. Dahle talks about index funds for Finance 101.

 

Finance 101: Index Funds

The best way to invest in stocks is to buy low-cost, broadly diversified index mutual funds that include all stocks. You can get these at Vanguard, Fidelity, and Schwab, and they provide better performance compared to actively managed funds. By investing in funds like the Vanguard Total Stock Market Index Fund and the Vanguard Total International Stock Index Fund, which cover all publicly traded companies worldwide, it is as if you had bought all of those stocks individually. Index funds have lower costs, consume less of your time, and offer better tax efficiency compared to actively managed funds.

Trying to beat the market by picking stocks or hiring professional fund managers is not a wise decision. Active managers fail to outperform the market consistently, even with their resources and expertise. Index funds provide better performance, lower risk, and lower costs over the long run. They are widely available and easily accessible through various brokerage platforms, including retirement accounts like 401(k)s and 403(b)s. Investing in index funds also minimizes regret since it eliminates the need to make individual stock selections or worry about missing out on specific high-performing stocks.

Index funds are the best way to invest in stocks due to their broad diversification, low costs, better performance, lower risk, and tax efficiency. They provide a simple and accessible option for building a well-rounded portfolio.

 

To learn more about index funds, read the Milestones to Millionaire transcript below


Sponsor: InCrowd

 

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Disclosures:
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WCI Podcast Transcript

Transcription – WCI – 323

INTRODUCTION

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is White Coat Investor podcast number 323 – When to invest in real estate?

Our sponsor is Laurel Road for Doctors. Laurel Road is committed to serving the financial needs of doctors. We want to help make your money work both harder and smarter, which is why we boosted the rate on our high yield savings accounts to 4.8% APY.

Laurel Road high yield savings account comes with zero cost to open and no monthly account fees. Whether you're saving for an emergency fund or planning your next big purchase, you can keep building your savings and access your funds whenever you need them.

For terms and conditions, please visit www.laurelroad.com/wci. Laurel Road is a brand of KeyBank N.A., member FDIC.

 

QUOTE OF THE DAY

All right, Henry David Thoreau said “Wealth is the ability to fully experience life.” And I think there's lot of wisdom in that quote. I've been trying to fully experience life this summer as I do most summers with lots of fun trips and adventuring. I recently came back from the Middle Fork of the Salmon River. We launched there, out of not far from Stanley, Idaho at a place called Boundary Creek and floated a hundred miles down to the junction with the main fork of the Salmon River. Took the boats out and drove home. It was wonderful experience.

Unseasonably cold though for June. The second morning, we pushed off with it's snowing. There was snow high on the hills above us, and it was snowing literally on us as we pushed off rafting down the river. The next morning, there was frost on our boats. Luckily, by the end of the trip, it was nice and sunny but I still spent the whole trip wearing a dry suit in the rafter or the kayak, whichever one I was in. And it was a lot of fun.

I took my son Jonas with us and had a great time. We only swam once in the river. We attempted to paddle an inflatable canoe or inflatable kayak rather, through pistol rapid, which didn't work out so well. We got through the top two thirds of the rapid before coming out and getting to experience the fun of being in a 50 degree river while it is 40 degrees in the air. And luckily got back in the kayak pretty quickly and still made it back to the shore before we floated past our camp for that night.

Great adventure. It's one of the premier trips, multi-day rafting trips in America. Very difficult to pull a permit for it. It was not my permit, it was somebody else's permit. I was just lucky enough to be invited along on a great adventure. Good times. And thank you Krell, who's actually a dentist who invited me on the trip. Somebody in his family had the permit.

All right, speaking of cool things going on around here, it’s scholarship time. Send in your applications. Go to whitecoatinvestor.com/scholarship for information. We also need judges.

Who can win? You've got to be a professional student. Most of the applicants are physician and dentist students, so medical students and dental students. And you can't be already beyond a full ride. If you're already got a gazillion dollars in scholarships, we're not going to let you win this one.

But that's it. Those are the only requirements. You've got to be a student in good standing in medical school, dental school, or a similar professional school. And you can't be on a full ride already. So, apply for that whitecoatinvestor.com/scholarship.

We'd like if you don't qualify for that, if you're already an attending, you're a retiree, whatever you're in your career, we'd like you to be a volunteer judge. Help us judge who's going to win this money. I don't know how much it is. I haven't looked, but last year it was like something close to $7,000 a piece for the 10 winners. And so, it's literally cash they can use for whatever they want that directly reduces their indebtedness.

So, if you’d be willing to read like 10 essays, they're all less than a thousand words, 10 essays, then you can be a judge. That's all it takes. Tell us which ones you like. Sign up for that by emailing [email protected] and just put “Volunteer judge” in the title. We usually have 40 or 50 or 70 judges and we need that money because we have a lot of applicants for this scholarship.

 

CORRECTION

All right, we got to do a correction. Everybody's favorite part of the podcast when you get to hear how wrong I was. Well, on the podcast I ran June 22nd, I said the Kiddie tax is essentially a rule that says you can't put a bunch of money into a UGMA or UTMA account just to get out of paying taxes. Once that account has enough money in it, that there's more income there than about $2,400 a year, it gets taxed at the custodian's tax rate.

The Kiddie tax is essentially a rule that says you can't put a bunch of money into the UGMA or UTMA just to get out of paying taxes. And I said that once you have more income and that certain amount that works out to be about $2,400 a year, then it gets taxed at the custodian's tax rate. That's not entirely true.

What's true, as I was informed by somebody that wrote in and subsequent research seems to indicate he is right and I am wrong, is that it's about the parental tax rate and that tax goes to the parent even if the custodian is not the parent.

Now, that's a pretty rare situation. Most custodial accounts, these uniform gift to minor accounts or uniform transferred to minor accounts, the custodian is the parent. So, it's all the same for most people, but it's not the custodian, it's about the parent. I guess it's theoretically possible for grandpa to set up a UGMA account for grandson and for that tax bill to go to mom if you put too much money in there. So, be a little bit careful.

Typically, I tell people, don't use a UGMA for more than about $100,000. There's no real point to it beyond that, you're just losing control over money and not getting any tax benefits for it. So, I hope that's helpful.

Note, of course, that changes if neither of the child's parents are alive. And in fact in those cases it could make sense to have more in a UGMA or UTMA account. That's a pretty rare situation where neither parent is alive for somebody before they're 18 or 21. And if you get adopted, that counts as your parent as well.

Okay, let's talk about some stuff. Let's talk about real estate. Let's listen to the first question on the Speak Pipe, and then I think we're going to need to spend quite a bit of time answering this.

 

WHEN TO INVEST IN PRIVATE REAL ESTATE QUESTION

Speaker:
Hi, Dr. Dahle. My question is about when a reasonable time is to consider adding private real estate investments to your portfolio. My spouse and I are new attendings in our first few years of practice. As you have mentioned before, we have plenty of good uses right now for our new incomes, including student loans, maxing out our retirement accounts, saving a down payment for a house, and starting 529s for our kids.

Right now, we are aggressively investing into our 401(k)s, backdoor Roths, HSA and a small taxable account with an asset allocation that is mostly equity, some bonds, and a small amount of the Vanguard REIT Index Fund.

Eventually, I think we would be interested in adding private real estate into our portfolio for additional diversification, likely in the form of a fund such as the ones you advertise on your site.

The cost of entry to many of these funds is relatively high, and right now does not seem like the time to do this since it would take us longer to save that amount of money instead of making our monthly investments into the other accounts I mentioned.

My question is, at what point in a high income professional's financial life, does it make sense to start adding in these types of investments? Is it at a certain level of net worth or portfolio size, or how should I think about planning for this for the future? Thanks so much for any insight you have.

Dr. Jim Dahle:
Okay, that's a great question. Well, let's start at the very beginning here. Real estate is not mandatory. Yep, I said it. You don't have to invest in real estate in order to reach all of your financial goals. You certainly don't have to invest in private real estate to reach all of your financial goals. And you certainly don't have to be a direct real estate investor. Landlording is not mandatory for financial success, for becoming a millionaire, for being financially independent, for retiring successfully. It is not required.

I had zero private real estate investments when I became a millionaire. I guess we had still our accidental landlording property out in Virginia that we couldn't sell in 2010. I guess we owned that, but it certainly wasn't making much money and really didn't contribute to that first million dollars we had.

So, this is all optional. Let's keep that in mind. There should be no rush to add something that's optional in the first place. You want to invest from a position of strength. And for most high income professionals, most doctors, you have more and more financial strength each year of your career. You come out of residency, you got a negative net worth. You owe $200,000 or $300,000 or $400,000 in student loans, you hardly have anything to your name. You're not in a particularly strong position.

But if you're doing things right, a month later you're in a slightly better position. And the month after that, a little better, a little better, a little better. And that is the way the last 20 years of my career have been since I came out of medical school in 2003. Every month I have been wealthier than I was the month before.

Now, maybe that's not entirely true and there's a big nasty downturn and I lose a bunch of money in stocks or something, my net worth actually goes down. Or maybe when you put down a big down payment on a house or you buy a new truck or a boat or something, your net worth actually goes down that month.

But as a general rule, year after year after year, you become wealthier and wealthier and wealthier and wealthier if you're doing this right. And your money starts to do more and more and more of the heavy lifting as you go along until eventually at some point the money being generated by your money dwarfs the amount of money that you can make by going to work and earning. And so, that's just the general backdrop of a physician's financial life.

Okay, now if we talk about real estate, the easiest way to add real estate to your portfolio, assuming you want more than what's in just the basic total stock market index fund, is to tilt your portfolio toward real estate, publicly traded REITs, which are real estate investment trusts by using something like my favorite ETF in this space, the Vanguard REIT Index Fund. Ticker symbol VNQ. I can't remember right now what the fund version ticker is, but I use that.

I've been using it for a long time. I first added it to my portfolio in 2007. That was a mistake by the way. I lost 78% of what I put in there in 2007 in the subsequent bear market in 2008. But such as life, it wasn't that much money and we continued to add to it over the years. We'd have a very good return over the years from that fund, even though it started out with a pretty nasty return that first year. That's the way investing goes when you're investing for the long run.

Okay, it sounds like you, meaning the person asking this question, wants to do more than that. And that's fine. I have a portion of my portfolio that's dedicated to private real estate.

Now, I've invested in some syndications in the past, but primarily my investments now are private real estate funds. I think the solid returns there as well as the lower correlation with the overall market is worth the hassle and expenses of dealing with that asset class.

And so, our portfolio is 60% stocks, 20% bonds, and 20% real estate. Of that 20%, 5% is still in VNQ, which is publicly traded REITs. 10% is in equity real estate, almost all in funds. A little bit of syndication still there. And 5% is in debt real estate, all in funds. And that's money that's loaned out to developers who are essentially developing and flipping properties. And so, that's what we invest in.

Now, these investments, as you've noticed, if you're subscribed to our real estate investing opportunities list, which is free by the way, you can just go to whitecoatinvestor.com/newsletter and sign up for that. You can unsign up for it if you feel like you're getting too many emails from us. No problem, we won't be offended. Don't nuclear unsubscribe from everything, or you won't get the blog post or a monthly newsletter. But you can unsubscribe anytime you want from that real estate opportunities list.

But as you've noticed, they have fairly high minimums. And that's not an all bad thing. High minimums mean that they're managing fewer investors. And so, that cost savings in some ways can be passed along to you. If they're trying to manage a whole bunch of investors with $80 in the investment, that's very expensive and lots of hassle and very time consuming. And some of the regulations actually make it difficult to have small investors in those investments.

And so, the investments tend to be high. You can find some that are $15,000 and $20,000 and $25,000, but most of them honestly are $50,000, $100,000. I think the highest one I've invested in had a $250,000 minimum.

And so, that just doesn't work at the beginning of your career. If you're making $150,000 a year and you're saving 20% of a year, that's $30,000. If you're trying to hit $100,000 minimum investment, that's over three years’ worth of investment savings just to do that. That's not going to work for you.

Now, you've got to have a higher income than that if you want to play in this space and actually have a diversified portfolio, or you have to have a bigger portfolio, which after many years you can.

These investments all require you to be an accredited investor. And what the federal requirement for that is, is you have to have had an income of at least $200,000 a year for each of the last two years, $300,000 together with your spouse, or you have to have investable assets of at least a million dollars. That's their minimum requirement. That's what they call an accredited investor.

Now, if you're a trust or whatever, there's some other definitions of that, but that's what it is for most individuals. And that hasn't changed in many years, to be honest with you. And minimum investments have gone up over those years. So, that tells you a few things. One, it's kind of an outdated definition. And two, it was never a good definition to start with.

What is an accredited investor? An accredited investor in my mind is two things. One, you can afford to lose the entire investment without it affecting your financial life. And if that's true, that means you've got a fair amount of money and a fair amount of income if you're losing $50,000 or $100,000 investment without it really affecting your financial life. So, you got to be wealthy, at least high income, better yet wealthy.

And two, to be an accredited investor, I think you need to be able to evaluate the merits of the investment yourself without the assistance of anybody else. Meaning attorneys, financial advisors, accountants, et cetera. If you need a whole team to evaluate this investment, that's probably going to decrease the returns on the investment enough that it's not worth it for you.

I think you also ought to take those government mandated numbers and double them. Not only double them, but instead of having them be “either/or”, have them be “am.” Meaning you're making at least $400,000 a year in your household and you've got at least $2 million in investable net worth, investable assets.

I think that's about the mark where this stuff can start making sense to add to your portfolio because the minimums are so high and you still need to be diversified. You are outside of the public markets here. This is a place where scammers abound, where incompetence can abound among operators. It’s not that hard to start up a syndication, it turns out. And so, you need to be kind of heads up when you're investing in this space and it helps if you are already wealthy.

So, that's kind of my take on it. Do you have to wait that long? No. If you meet their requirements of an accredited investor, you can invest. If you're okay not being diversified and adding one of these at a time over several years, you can invest. That's your call if you want to do that.

But my recommendation is be able to have a diversified portfolio from the beginning. And maybe that means you got to lean toward the ones that have lower minimum investments. $10,000, $15,000, $20,000. We've got a number of sponsors that are kind of crowdfunding platforms, for lack of a better word, that can get you into investments with those lower minimums. And that's absolutely where I started with them.

The nice thing about those lower amounts is you get to kind of dip your toe in the water and try them out a little bit and still be somewhat diversified. The downside is you get the same exact number of K-1s, whether you have $10,000 in there or a million dollars in there, and you have the same cost and hassle of dealing with filing that K-1, which may include filing multiple state tax returns, which is an expense and a hassle.

If you're filing them yourself, it's a hassle. If you're not filing them yourself, it's an expense. But same thing really. So, keep that in mind. That's when I think it's appropriate to be looking at these things. ,

If you are a gynecologist making $350,000 yourself, you're married to a neurologist who is making another $325,000 yourself, you're eight years out of residency, you've paid off your student loans, you got a seven figure portfolio. Yeah, this stuff's worth taking a look at and seeing if you want to include that as part of your portfolio.

If you came out of residency last year, you are a PM&R doc making $210,000. You owe $350,000 still in student loans. You got a five figure portfolio. This is not for you yet. And if it doesn't ever have to be for you, that's okay. You don't have to invest in this stuff.

Don't forget, White Coat Investor is multiple things. A White Coat investor is an educational platform. We want to teach you about money. We want to help docs stop doing dumb things with your money. We want to help you get a fair shake on Wall Street.

White Coat Investor is also a business. 15 people work here. They all like paychecks, I assure you. They're all still cashing them. And they want their health insurance. So, this thing has to make money. And we have to have profit. So, we have advertisers just like we had an advertiser at the beginning of this podcast, Laurel Road. We have advertisers in real estate. You're going to hear about this stuff in the form of ads on the podcast and you see them on the blog and that sort of stuff.

But keep in mind that there is content and there is ads. And if you're having trouble telling them apart, let me know and I'll make it real clear for you. Because it's very clear in my mind what is content and what is ads. And if that's not clear for you, we probably need to make some changes to make sure it's clear for everybody.

 

PASSIVE REAL ESTATE WITH PRE $1 MILLION NET WORTH QUESTION

Let’s take a question now from Luke. This is also a passive real estate related question.

Luke:
Hi Jim, this is Luke, a physician spouse from Northern California. At the 2023 WCI Conference and in the Real Estate Masterclass, you note that it may be unwise to utilize accredited investor REITs and syndication investments when you barely meet the accredited investor qualifications.

For families shortly out of residency with pre $1 million net worth, what is a reasonable allocation range to passive real estate? How would you fill this allocation? Anything to consider in addition to VNQ, the Vanguard Real Estate ETF? Thank you for all you do.

Dr. Jim Dahle:
Okay, I talked about a lot of this stuff already, but here's somebody less than a million dollars, not very far out of residency and wants to have some sort of an allocation to real estate.

Well, let's talk about asset allocation to start with. What is a reasonable allocation to real estate? Anything from 0% and I mentioned earlier to 80% I think is the top. If you have all your money in real estate, I think that's too much. I really think you ought to put some money into at least stocks, if not some money into stocks and bonds or stocks and cash or stocks and something else.

If you get beyond 80%, I think that's too much. No matter how much you love real estate, no matter how much you wanted to build a real estate empire and have a hundred doors under your management, I think more than 80% is too much.

I think everybody ought to have some money in stocks. These are shares of the world's most profitable companies in the millennials of world history. These are the most profitable companies that have ever existed. And owning small pieces of them I think is a good idea for pretty much everybody's portfolio.

I'd say 0% to 80% is a reasonable allocation. Now, you're talking about not having a million dollar portfolio. Let's say you have a $500,000 portfolio. Let's say you really like real estate, you decide you're going to put half your portfolio into real estate. You got $500,000 that leaves you $250,000 to put into real estate.

Now, how do you want to break that in? Well, maybe you qualify for private real estate by virtue of being an accredited investor based on your income. You don't based on your assets, but based on your income, maybe you do.

So, how do you divide that up? Well, $250,000 does allow you to get into some of these more higher minimum investments while still being diversified because you have such a high percentage of your portfolio in real estate. If you're looking at $50,000 minimums, you could have three or four different funds there and you could have another $50,000 dedicated to public REITs or something like that and that would work.

On the other hand, let's say you have a $300,000 portfolio and you've decided you only want to put 10% into real estate. Well, that's only $30,000. There's not a lot you can do with $30,000 in private real estate.

So, pretty much that entire allocation is most likely going to be in something like VNQ. Maybe you got $20,000 of VNQ and you put $10,000 into a syndication or something with plans to add another syndication in six months and another one six months after that. And that's fine as well. Different strokes for different folks, but those are the factors to be considering when you're looking into your asset allocation there.

 

LLCS FOR INVESTMENT PROPERTIES QUESTION

Okay, let's talk about LLCs for investment properties. Now, we're moving toward the direct or active real estate investing side.

Speaker 2:
Hi, I'd like to ask a question about LLCs. I'm interested in forming an LLC for real estate investment property. I kind of want to go the cheaper way just going onto Legal Zoom or something similar like that. Well, traditionally I could hire a lawyer. What would you recommend? Is it okay to cut corners and kind of make this a do-it-yourself project or is it something that I truly do need the expertise of a lawyer?

Dr. Jim Dahle:
Okay, good question. An LLC is a limited liability company and as a general rule, it's a good idea to have your investment properties inside LLCs. The reason why is that in many states, most states, the LLC provides some liability protection for you.

It provides both internal liability protection, meaning some protection against liability that emerges from the property itself. Somebody slips and falls on your property and sues you. They can't sue you personally because you don't own the LLC. They can only sue the LLC. So at most you'll lose the contents of the LLC, i.e. the property. So, that's a nice protection to have.

It can also provide some protection from external liability, meaning liability from something that has nothing to do with what's in the LLC, your personal liability. Let's say you get sued for malpractice and it's extremely rare, of course, but let's say they get a judgment that's not reduced on appeal and you're forced to declare bankruptcy.

Now that LLC may protect that asset. This is all state law dependent of course. But assuming there's other investors in that LLC, other owners in that LLC, there's no reason that the state should hurt them just because you have a judgment against you.

And so, it will provide that creditor nothing more than a charging order, meaning when the LLC distributes income to you, that creditor can get that income, but they can't force the LLC to sell the property, nor can they force the LLC to distribute income. So, that's the benefit of having an LLC. And this all varies by state.

The first thing to do when considering an LLC is to look at your state LLC laws. Is this even given you significant protection in your state? If not, maybe skip the hassle altogether.

The other thing to keep in mind is LLCs have different prices in different states. For example, I'm in Utah. Here, it costs $70 to start an LLC and I think it's $15 a year you got to pay to keep it active. So, no big deal.

If you go to California, it's like $800 a year. And if this is not a very expensive property, $800 a year is a significant amount of the income from that property that it's eating up just from the LLC fees.

But as far as whether you need a lawyer or not, forming an LLC is ridiculously easy, at least in my state. It's like a two-page form you fill out. You just go to the state website and fill it out. It's no big deal. I wouldn't even think about getting a lawyer for it.

I did not get a lawyer when I originally set up an LLC for the White Coat Investor. Of course, we have a general counsel now for WCI and they look over everything we do. But just form an LLC that owns one in investment property, that's not very hard thing and I would feel very comfortable with that as a do-it-yourself project.

If you need a lawyer you can always go hire one. But I don't know that you get much from going to Legal Zoom or something online. You can literally just go to the state website where you form LLCs and fill out their forms. That's all there is to it. It's no big deal.

 

PARENT STRUCTURE LLCS AND BANK ACCOUNT FOR LLCS QUESTION

Okay, let's take another question on LLCs here.

Speaker 3:
Hi, I'm interested in learning about once we set the LLCs, which is an article I was reading. I had a couple of questions so I just wanted share those suggestions in terms of topics. One is there's sort of a parent structure with the LLC and then the individual structure where you have each property in one LLC. The bookkeeping of that gets very expensive and cumbersome. So, is it better just to have an umbrella like one LLC with many properties and not just umbrella insurance property?

And then the question related to that is, what is the bank account structure that we should use? Do you have one bank account if you have all these LLCs? What's the recommendation for that topic? Thanks.

Dr. Jim Dahle:
Okay, great question. I kept the question even with the background noise because I thought it was such a good question, but when you're recording your Speak Pipes, do me a favor. Do it in a quiet room so nobody has to listen to the guy chatting on the phone in the background.

Here's the deal. Bookkeeping and bank accounts can be a hassle if you own 20 different companies, there's no doubt about it. You got to keep separate books for each company. These are separate entities and you better not be mingling the money between your company and your personal accounts.

Because if that happens, what they're going to do is they're going to basically just breach that corporate veil, is what it's usually called, or LLC veil in the event that there is a claim on those assets. So, the LLC won't do you any good if you're not keeping good separate books and treating it like a separate entity.

Now, what should you do about the bank account? Well, I guess the very cleanest best thing to do is for every company to have a separate bank account and every company to have a separate set of books.

Now in practice, what I think a lot of people do that have a lot of doors under management, let's say you got somebody that's got an eight door apartment building and has got two duplexes and three single family homes. Let's say that's their portfolio. Well, maybe they have three companies instead of one for each property. Maybe they have one with the duplexes in it, maybe one for the apartment building and one for the single family homes. And so, they only got to keep track of three bank accounts and three sets of books.

You could put it all into one LLC. But the risk there of course, is that if you get sued for something that happens at that apartment complex, you could lose the single family homes as well. So, you've got to weigh that additional asset protection with the convenience and cost of having LLCs.

In some states you can have a serial LLC that kind of holds all the other LLCs. So look into that. I think California allows for that. But in general, you're trying to find a balance between complexity and extra asset protection. And how many properties to put in each LLC, I'll have to let you decide that on your own, but I've seen recommendations going from anywhere from one to 10 properties in each LLC and I'll let you decide how to do that. But as far as bank accounts, yeah, if it's a separate company, it needs its own bank account, probably needs its own credit card, probably needs its own set of books.

And bookkeeping doesn't necessarily have to be too complex. This might be just an Excel sheet or a Google Sheets. That might be your books for a very simple company. That's all we did for WCI for a number of years. As things get more complex, you can move to something like QuickBooks. Maybe if you get really big, you need something more advanced than that. That still works for WCI though, so I'll bet it'll work for your real estate empire.

Okay, let me tell you about a book. I got this book in the mail from Wealthy Doc. You may not know Wealthy Doc, but I know Wealthy Doc. Wealthy Doc is Brian S. Foley. And Brian's an interesting guy. You may not be aware of this, but the White Coat Investor was not the first physician finance blog out there. It turned out it was the second one. And when I started it, I had never seen the first one. One thing Brian did not do very well with Wealthy Doc was market it. And so, I didn't even know about it until several years after I started the White Coat Investor.

But anyway, he started that website in 2007, 2008, mostly just appointed trainees too. You see, Brian is a fellow who grew up with very little. One bedroom shack. His family didn't even own a car, no one in his family had ever been to college. He dropped out of high school. Eventually goes and becomes a doc and eventually gets an MBA in finance.

And so, he’s got 30 years of real world investing experience. He’s now financially independent and still practices medicine. And he wrote this book. I kind of encouraged him to write it. I said, you've got to write a book. It'll be fun, you'll enjoy it. People will think you're more of an expert than you are, even though you're no different than you were before you wrote the book.

But he wrote this book, he calls it “Wealthy Doc's Guide to Achieving Financial Freedom: Transform Your Physician Salary Into Wealth.” And did a nice job on it. One of the things I really like about it is that he points out what for most doctors is their primary wealth building tool, which is their income. So, you got to take your income, you got to turn it into wealth, and he shows you how to do that. And you're not going to find anything in here that's not good solid advice consistent with everything we teach here at the White Coat Investor.

But some people love reading finance books and if you love those, here is one just written for you by a doc who has been there and done that. You ought to check it out. Wealthy Doc's Guide to Achieving Financial Freedom available at Amazon. Self-published, I believe. Yes. And we'll put a link to it in the show notes. If you buy it through our link, we'll get like 37 cents. So, we do appreciate you doing that. Maybe we'll make $7 off that promotion.

 

AMORITIZATION

All right, let's take a question about mortgages.

Speaker 4:
Hey Dr. Dahle. Thanks for all you do. I have an amortization question, and math equation for you that I was hoping you can help with. We have a recent mortgage, which is approximately three times our gross income, more than you normally suggest. We have $400,000 from our prior home in equity, which we could use down to get it under double our gross salary, which we're motivated to do.

Our mortgage is at a 10 year arm adjustable 4.75%. We're motivated to pay it down. However, we have a guaranteed 8% return loan that we can loan out to a family business that's real estate backed and guaranteed money for us. We're in the 32% tax bracket.

My question is, if you were to pay down the loan with the $400,000 today, there's no recast fees associated with my loan, am I better off to take the 8% loan, putting the interest from that 8% loan into the mortgage tier and put the $400,000 into it when this opportunity expires in one to two to three years? Or based on an amortization table, am I coming out ahead by paying out a significant chunk of the mortgage early on in the loan to lower the interest paid each month and increase the equity paid each month? Thank you. I look forward to hearing from you and again, thanks for all you do.

Dr. Jim Dahle:
Okay, this sounds all complicated, but at the bottom of this, this is just the age old in investor pay down debt question that we all deal with unless we're debt free. Every doc out there is dealing with this dilemma. Do you pay down to your debt or do you invest? Obviously, the math of borrowing at 2% and earning at 8% would suggest you invest, invest always and borrow more money, invest it.

But that ignores risk and there is risk in our lives and it ignores cash flow and we all need cash flow in our lives. And sometimes having better cash flow can cause us to take risks and take advantage of other opportunities that improve our lives or allow us to earn more money or whatever, be happier. And so, it's not always a no-brainer to borrow at a low rate and invest at a high rate.

The other thing I want to point out is that you keep throwing out this word “guaranteed” and it reminds me of that line from the Princess Bride. You keep saying that word. I'm not sure that word means what you think it means or whatever it was in the movie.

No guarantee is worth anything more than the guarantor can provide. So, you say guaranteed and I say guaranteed by what or by whom? Even a treasury bond or a savings bond is guaranteed by the full faith and credit of the United States of America. Now, that's pretty good, but it's not perfect.

When you talk about the guarantees in whole life insurance, that's guaranteed by the insurance company. And what it sounds like is this loan you're talking about, this 8% loan is guaranteed by whoever's borrowing it, number one. And number two, in the event that they fail to pay you, it’s backed by a property.

So, your option is to foreclose on the property, try to manage it or sell it as best you can and get your money out of it. And so, that's the only guarantee you have. 8% sounds great. Only you can decide how risky that 8% really is. And if truly it's very low risk then borrowing a 4.75% and earning at 8%, yeah, you're going to come out ahead. If you need to do that in order to meet your financial goals, then that might be a very reasonable risk for you to take.

As far as paying off a mortgage though, here's the deal. You got a few options. You can refinance this loan, but you're probably going to end up with a higher interest rate. And so, that's not a good thing. Sometimes they will let you recast a loan, you put a whole bunch of money down and they recast the loan.

And essentially what they're doing, let's say you've paid down the loan for 10 of your 30 years, they're going to recast it after you put all that money in and you're still going to pay for 20 more years, but you're going to be paying a lower amount each month because your principle is lower. So, that's recasting.

Another option is just send the money in as principal and your payments will still be the same after that, but you'll pay off the loan sooner because more of your payment each month will now go toward principal. And so, by putting a whole bunch of money down, maybe you pay it off in eight more years instead of 20 more years.

I don't know what your time is exactly, but those are all reasonable options to do. If you have a cash flow problem, you might want to recast it. If you have a high interest rate and can get a lower interest rate, this good option is to refinance the whole thing. Even if you go back out to a 30 year loan, just realize you'll be paying longer. You could refinance into a 15 year loan. Lots of people do that. They have a 30 year for three or four years and they refinanced into a 15 year. And yes, payments go up, an interest rate goes down and they're done in a total of 19 or 20 years instead of 30.

And then what a lot of people do, what we did is you just throw extra principle at your mortgage until it's gone. Whether you do that all at once or whether you do it each month bit by bit, it's the same effect. Essentially that money is earning at the after tax rate of your mortgage, your mortgage interest rate. That's what you're earning on that investment.

Now that's guaranteed because that's an investment or that's a loan that you have to pay on. And so, you're guaranteed to earn that. You got a 4.75% mortgage, you put money down on it, you just made 4.75% guaranteed. That's a pretty good return although you can get the money market fund over 5% right now.

So, good luck with your debate with yourself, wrestling between investing and paying down debt. Both are good things. Both build your wealth, both will increase your net worth. If you're not sure what to do, split the difference. Do both.

 

ATM SYNDICATION QUESTION

Okay, let's talk about… This is an interesting one. This is a syndication but it's not real estate. There's lots of other things you can invest in out there in the world and here's one of them.

Zach:
Hi Dr. Dahle. My name is Zach and I'm an internal medicine physician from Michigan. I was curious if you had any thoughts about ATM syndications. My first impression was that this was a very niche and kind of odd type of investment when the topic came up on another investment podcast.

Of course, the guest was giving a sales pitch, but it does sound like there were some unique tax advantages to generating cash flow with this type of investment. I searched the WCI blog but didn't see any mention of ATM syndications in particular. Granted that is a hyper-specific request. I wondered what your thoughts were about this serving as a small part of the real estate portion of my portfolio. Thanks in advance.

Dr. Jim Dahle:
Okay, I have looked into this at some point in the past. I looked into it, I think because probably the guest you heard applied to be on the WCI podcast. I guess we didn't put them on, if you've never found it in a search. We haven't had anybody on with ATM syndications have we, Megan? No. Okay, so we've never had them on our podcast.

But here's the deal. This is a business. You can make money with ATMs. Those fees they charge, I don't know what they are now, $2 or $3 or $4 every time someone withdraws money. I mean, no one takes just 20 out anymore, I hope, because that'd be a heck of a fee. But those make money. Yes, most of our banks reimburse them, but they're still making money. That money's coming from your bank now instead of you and your bank account. But every time someone withdraws from the ATM, it makes money.

Now, ATMs have expenses. The machinery is not free. It breaks down from time to time. Somebody's got to go out there and stack it up with Benjamin's again. I guess it's not Benjamin's, it's Hamilton's, right? ATM's $20 bills and $50 bills these days. And so, it's got expenses.

So, can you make money in ATMs? Absolutely, you can make money in ATMs. But like any business, it depends on how well the business is run and it depends on how much you pay for the business.

Now a syndication is just a whole bunch of people going in and pooling their money to buy a business. Whether that business is a rental property, whether that business is an ATM company, whether that business is a food truck. That's all a syndication is. Think of it like a mutual fund.

A mutual fund might have thousands or millions of investors and a typical syndication is less than a hundred. But that's basically what it is. It's a bunch of people pooling their income or pooling their resources in order to benefit from some economies of scale, higher professional management, et cetera, so they don't have to do it themselves. They're trying to get passive income from this ATM business rather than actively running an ATM and running around and checking on all your machines.

So any syndication, you got to look at the syndicator, that's probably the most important part. How good of a job are they going to do running your business? And what kind of fees are you going to be paying to do it? Is everything this business makes going to go to the syndicator as a result of fees? You've got to look into that.

Every one of these investments is a unique company and requires its own due diligence. This is not the no-brainer of going out and dumping a whole bunch of money into VTI where you get thousands of businesses, the 4,000 or 5,000 most successful American businesses of all time. You're not getting that. You're getting one company. You got a chunk of one company and it could fail. The syndicator could be a fraudster. All kinds of terrible things could happen. So, you really have to do your due diligence.

But I wouldn't say you shouldn't invest in ATMs. If you want to put some small portion of your portfolio into that investment, that's okay with me. I've invested in small businesses and done very, very well. They are some of my best investments. But I tend to only invest in businesses that I feel like I have an advantage over the rest of the world in.

My advantage for the most part is physician financial blogs. That's where I know more than other people. I don't know more than other people in ATMs. I kind of doubt you do, either. But who knows? Maybe you're an ATM expert and you know what locations are going to do great and which syndicators are the best and all that. I don't know. But if that's an area you feel like you have an advantage, sure. Put some of your money into that sort of a thing.

You wanted to add it to your real estate allocation, though. I would not call an ATM real estate. Maybe a billboard company you could call real estate, but ATM is kind of a stretch. Now you want to call that area of your allocation real estate and small businesses, it's fine with me, stick the ATM in there, but I wouldn't call it real estate. It's not a real estate investment. Now, renting space to ATMs might be a real estate investment. You might look into that.

All right. The time has come once more for me to thank you for what you do. And yesterday, as I sat in the ER complaining… Well, I wasn't complaining, but I was thinking about if every day was like this day, I would not be practicing medicine. I thought about you and all the hard things you do each day.

You see, our computer system went down yesterday and for those of you who have worked in a busy emergency department, on paper, when you're used to working on computers, bringing your labs back to you, bringing your radiology results back to you, putting in your orders and doing your documentation and those sorts of things, you know how terrible it is to all of a sudden with no warning be forced to go to paper to do all that.

And so, of course, our department went on diverge, which helps. At least the ambulances stopped coming in. But there's still plenty of patients came in the front door and those who were there wanted to be taken care of for some weird reason, right? But this is totally terrible. It's a terrible day at work anytime that happens, and I know all of you out there deal with those sorts of things all the time.

Of course, there's always change happening. I also found out yesterday all the CEOs of our area hospitals, which were recently bought out by a different company, all the CEOs got canned yesterday. So, that news was floating around as well. And you always worry about what that means for your practice and your hospital and your contract and we don't know yet.

But just being in medicine and having those stresses is hard. I know those of you who aren't in medicine, you have similar stresses in your jobs and somebody ought to tell you thanks for dealing with that. And sometimes a thank you beyond the monthly paycheck is worthwhile, and a special thank you to the IT folks who got that computer system back up and running before the end of my shift so I could finish my charts and still go home.

 

WHAT TO DO WITH PROCEEDS FROM SELLING A HOUSE QUESTION

All right, back to your questions. This one's kind of about your residence more so than I think an investment property. But let's take a listen.

Speaker 5:
Hi, Dr. Dahle. I'm the wife of a person wearing a white coat, but I still love reading your blog and listening to your podcast. You gave me the confidence to begin investing, so thank you for that.

My question is about selling our house and the profits from that. After we sell our house, we'll have about $350,000 profit. We also have debts of student loans that are about $220,000 with 2% interest rate and then a car loan for about $15,000 that's at a 1% interest rate. And another piece of information is we're buying into a practice in about six months and we'll be spending about a million dollars on that.

So, I'm wondering what we should do with that profit. I was thinking maybe when we buy our next house we should use a 0% down doctor loan and then we could use that extra money to invest in rental houses or something like that. Anyway, I'd love to hear your thoughts. Thank you.

Dr. Jim Dahle:
Okay, this is the classic situation for a White Coat Investor family. Tons of expenses, tons of debt. Some you already have, some you're about to get and not enough cash to go around. You got tons of great uses for your cash. You could use it to pay off student loans. You could use it to pay off the car loan, you could use it for a down payment on a house. You could use it for a down payment on that practice loan. You could invest it, you could max out retirement accounts with it. You could invest it in investment property.

The choices are almost unlimited, not enough money to go around. How awesome for you guys that you have $350,000. That is something lots of people don't have. So, count your blessings that you're that much further ahead than everybody else.

Now, what should you do with it? Well, this is again kind of the classic invest versus pay down debt question. What would I do? Well, 1% car loan. I hate car loans. I really do. I think people ought to never have a car loan more than $5,000 or $10,000 because you can get a $5,000 or $10,000 car and have it be reliable. The car I'm driving, I just looked it up the other day because I had to do some repairs on it and it's worth about $5,000. It gets me where I need to go. It got me across the river and into the float I wanted to do a couple of weeks ago. It's a perfectly functional car.

I don't like car loans. But that said, let's be honest, you have a better use for your money than paying down a 1% car loan, especially these days when you can make 5% plus in a money market fund at Vanguard.

Same thing with those 2% student loans. Let's be honest, you got better uses for your money than those 2% student loans. Right now with inflation at 4% I think as I'm recording this, essentially they're paying you to use their money.

I don't like this million dollar practice loan coming up. That thing would be stressing me out. And so, what I think I would use the money for is to reduce the cost, reduce the size of that practice loan. That's probably where I'd put the money. I think I'd do what you're doing, which is the 0% or very little percent doctor loan for your house. And keep the house moderate, because you're not yet wealthy. And then use that money toward the practice loan.

That practice, and it sounds like your spouse is a dentist or something, but that practice is probably going to double, maybe triple, who knows, maybe more of your income versus that of an associate. This is a good investment. Investing in yourself, just like going to medical school or dental school, is probably the way to go here. And I view putting some money toward that practice loan as a good step in that direction.

I think that's what I'd use the money for. But it's not like any of the other things are bad choices. The only bad choice out there is to take all this money and use it to buy a fancy RV or something. As long as you're not doing that, you're doing good things.

If you decide to split the difference, pay off some student loans, pay off the car loan, invest a little bit of it and save some of it for practice expenses, I think that's reasonable, too, but I'd put it toward that practice loan.

 

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Thanks for all who are leaving us five star reviews and telling their friends about the podcast. It really does help us to spread the word about this awesome message. The recent one came in from Heather, who said, “Awesome content. Great mix of topics and engaging guests. The podcast presents actionable tips that can easily be implemented.” Five stars. Thanks for that great review, Heather.

All right, that's it. End of the episode. I hope you're having a great summer. I know I am and I'm looking forward to seeing you again the next time we are going to record. Keep your head up, shoulders back, you've got this. We can help.

 

DISCLAIMER

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

 

Milestones to Millionaire Transcript

Transcription – MtoM – 126

INTRODUCTION

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

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 126 – Pharmacist writes a book and pays off a mortgage.

This episode is sponsored by InCrowd. Their five to 10 minute microsurveys use a mobile first approach giving physicians an easy way to participate in paid research on diverse healthcare topics. It's medical research designed for physician schedules. Join now to be matched with studies that fit your areas of specialization at whitecoatinvestor.com/incrowd.

All right, we've got a unique milestone today, so let's get our guest on the line. Stick around afterward, I'm going to talk a little bit about the investment that makes up the majority of my portfolio.

 

INTERVIEW

All right, our guest today on the Milestones to Millionaire podcast is Tony Guerra. Tony, welcome to the podcast.

Tony Guerra:
Hey, thanks for having me. I'm really excited. I’m a longtime listener.

Dr. Jim Dahle:
Yeah, this is great because we're going to be celebrating a milestone today that I don't think we've celebrated yet on the podcast, despite 125 previous episodes. So, tell us what milestone you've accomplished.

Tony Guerra:
I paid off a house by writing a book, but I'm actually in the process of paying off two more houses, and it just worked out really well. And one of those, you write a couple of books and some are not successes and then all of a sudden you hit a cord you didn't mean to, and Amazon starts paying you more than you pay Amazon, and it worked out really well.

Dr. Jim Dahle:
Awesome. Well, those are all milestones we're celebrating, I think. But let's step back a little bit and let's just talk a little bit about your career path so people kind of know where you're coming from because it's not the typical career path people hear about on this podcast.

Tony Guerra:
Okay. I started as a pharmacist. I graduated in 1997 from Maryland and I worked in Arizona for four years. Then came back to Baltimore and something happened. I didn't realize it was my iliotibial bands, but I was having real knee pain. We stand about 12 hours a day, which is just kind of par for the course. And I was really worried that my career was going to be over just maybe five or six years in.

I didn't have disability insurance or any of that stuff. And so, I became hyper aware of those types of things. And then found out, okay, it's the IT bands, got the PT, got that sorted out, but I really got spooked. And so, I went and got my real estate license, said I'm going to do this side hustle thing and I'll start selling houses.

And I actually ended up getting formal coaching, Buffini & Company out in California. And then did that for a while. Moved to Iowa with my wife and I think we could stop there, but that's where I ended up getting a job as a community college professor where I am now. And my first nine month contract, which would've been 2009, was $53,000. So, I was making resident pay as a real career job.

Dr. Jim Dahle:
It's interesting to hear this because we hear about all these people leaving medicine, pharmacy, nursing, whatever, to go into real estate. And you did that, you went into the real estate space and left it.

Tony Guerra:
I did.

Dr. Jim Dahle:
Essentially, at least partly. You're still a real estate investor, but left it at least as a major side gig, a full-time gig, et cetera, to teach. And was that a passion thing? Was it that you found it was harder than maybe you thought it was going to be? Or what drove that change?

Tony Guerra:
It was actually quite abrupt. 95% of my clients were pharmacists that I had gone to school with or I knew, and it did happen that we were moving at that time. So, it was kind of we’re going to move to Iowa where my wife is from. And I was in Baltimore. And it's not one of those things you can just pick up and take it with you.

Maybe I could have kept going with it, but something you find out later is that that's one of the professions that's fundamentally incompatible with being a present partner and a good parent. And it isn't a good fit.

It's a good fit in your early twenties or whatever, when you got lots of time, and it's a good fit after the kids are gone. But it's a little bit of a tougher fit to explain to your spouse why you're buying a washer and dryer for a client at 09:30 at night on a Saturday night or whatever. It was just more incompatible with the good lifestyle. And so, now I have this government job that's fantastic.

Dr. Jim Dahle:
Yeah, it's funny the clients all want you to work on evenings and Saturdays and Sundays, don't they? But somewhere in there you picked up a little bit of a taste though, for real estate investing. You have some real estate investments. How many rental properties do you own?

Tony Guerra:
I just have two. One in Arizona where I lived before, and one in the south part of Ankeny where we live now. And then we have our own home. It was completely per chance geo arbitrage to move from Baltimore on the east coast to Iowa. Our dollar does go a lot further here, but I learned a lot helping about 300 people find homes. And so, when I went to get them, I actually haven't even seen the Arizona one. I've never actually been in it. My agent just got a two year contract with a new renter. So, I’m really excited to kind of lock in and continue to get those rents, but that's the one that's paid off.

Dr. Jim Dahle:
Very cool. So then you started another side gig, this writing, you're doing books?

Tony Guerra:
Oh yeah.

Dr. Jim Dahle:
Tell me about how you got excited about doing that, how you got into that and how the books have gone.

Tony Guerra:
The first book I wrote was actually explaining why pre-med isn't actually a major. And that's a conversation as a pre-professional advisor where I work. My impetus for books is always to buy myself time. And so, those were hour long conversations explaining that, “Well, you can be any major you want. And while bio is the most common major, it's actually the one that has one of the least acceptance traits and it's actually better to be a humanities major.”

And to be honest, a physics major, engineering major is going to have the highest chance of getting in. And it becomes this long conversation that I said, maybe I could just put it in a book, not have the conversation over again.

But the one that hit was memorizing pharmacology, a relaxed approach where I taught as an adjunct, a pharmacology class in nursing. I didn't realize that chemistry was really not the way and nursing as it is in medicine where, they don't have Chem 1, Chem 2, Organic 1, Organic 2, Biochem. They may not have chemistry at all.

And so, I had to approach it from the humanities, and talk a little bit more about the stems and endings and it really took off. I think it took off because it was an audio book. I hired a British narrator because I'm like, “If a British narrator can make the phone book exciting then maybe you can make pharmacology exciting.” And one day my book was next to Atul Gawande, because my book was one of those audible specials. And so, it sold 300 books a day for three days over that weekend. But that doesn't happen anymore. That was the good days. But I only make about $25,000, $30,000 a year from it now.

Dr. Jim Dahle:
Mostly nurses are buying it.

Tony Guerra:
Yeah, nurses and allied health professionals. The pharmacy technicians, medical assistants. But those go-getters, like the pre-meds that are in high school, the ones that take freshman organic chemistry, those guys can also get ahold of it too. Yeah.

Dr. Jim Dahle:
Huh. Still $25,000, $30,000 a year is life changing money when you're making a resident type salary. That's a lot of cash.

Tony Guerra:
Yeah. It was $60,000 to $70,000 a year because the way Audible worked is they would give you $50 for everybody that joined Audible because of your book, and because this particular group that kept buying my book was not on the audiobook scene, I was getting massive amounts. And now you have to get through a link rather than just who comes to Amazon because of you. And so, it changed.

I guess I'm looking at it half empty because it's $30,000 not $60,000 or $70,000 anymore but that's how the money for the houses came around. We've got to do something with this extra cash. And I was so terrible with the stock market. Like recently I dropped all the money I had in the stock market when it went down to $23,000 and then it obviously went up to $37,000 or $36,000 or whatever it is. So, my space is real estate now.

Dr. Jim Dahle:
So you ended up paying off the investment house mortgage. Have you paid off your regular mortgage as well?

Tony Guerra:
We have a plan to pay it off in six years each because of the weirdness that's going on with the interest rates. And that interest rate is only 3.5% and the one on my house is 4.5%. So, we're going to pay them off because our triplet 11 year olds will graduate high school in six years. So, they'll be paid off at graduation.

Dr. Jim Dahle:
Very cool. Very cool. So, how'd you do this? Obviously you had an increase in income, but most people, when they get an increase in income, particularly when they're not making that much, spend it. How did you avoid spending that extra income?

Tony Guerra:
Well, we did. I have three 11 year olds, and if you've ever put someone into childcare that's like six or five or four and then you triple that, we spent it on that. But really I think I enjoyed buying houses and that was just kind of fun. So just like some people buy cars, I just happened to buy something that actually has a tenant in it, so that's just more exciting for me.

And then my wife, like your 4 million guests, is relatively frugal and she can make a penny scream. So, she's great with the coupons, loves doing that stuff. And so, I have a good partner. It's just not our value set to do that. It's very Midwest.

Dr. Jim Dahle:
So, if there's somebody out there that wants to be like you in some way, maybe they want to write an audiobook or some other side gig, or they want to pay off some mortgages, what advice do you have for them?

Tony Guerra:
Oh, I'm glad you talked about this. All right. The first thing is stay away from the $7,000 to $10,000 book people that'll make you a book or whatever it is. They tend to go after a high income people that want to put a book and they'll talk all about your feelings and how great it'll be, but the ROI is terrible.

But what you really want to do is, you want to figure out what the book is. I don't want to say outline because I know people don't like to make an outline, but just figure out what problem in your life would give you more time. So, if whatever it is with kids, with something, attack that.

And I don't like it when people use the word “writer.” I prefer that they use the word “author” because if you say writer, then you start thinking about typing and all of these things. You want to be an author, you want to record the book, whether you're going to have an audiobook later or not, but you want to record it, make it happen fast, get that vomit draft out, and then once you get that draft out, all of a sudden you've got something to work with, you've got enough momentum that you'll keep going.

But the average book only sells 300 to 400 copies. If you're going to make $7 a book, if you're lucky, $2,100 a year, if you're at physician salary, that means you're going to lose at least 30% to 40% of it. So, better to solve a problem in your life, which may happen to solve other people's problems. And that would be the way that I would write the book.

And it happens fast. I wrote a book with Brandon Dyson of tl;dr pharmacy in 11 days. We just recorded back and forth, back and forth a hundred residency questions. So, it can happen fast. It doesn't need to happen over the months and paying somebody thousand dollars a month to help you write this book.

Dr. Jim Dahle:
Awesome. Well, good advice. Congratulations on your success. It's pretty awesome to be able to create something that is actually valuable to other people and can create an income that can change your life. And also congratulations on paying off the mortgage. Well done.

Tony Guerra:
Oh, thank you.

Dr. Jim Dahle:
All right. I hope you enjoyed that one. It's a little bit different, right? I don't know that we've had somebody with quite that low of an income on here before, but it emphasizes a few things. One, it emphasizes the importance of side gigs, particularly when your income is not all that high. They can make a big difference, especially when one of them really takes off.

And also the importance of controlling when you have a boost in income, whether that's from graduating from residency, or whether that's from a side gig doing really well or being able to sell something or an inheritance or whatever. But actually being able to control your spending and using that additional income, maybe not all of it, but at least a big chunk of it to build wealth. And I think that's pretty important.

The other lesson I think that can be learned there is that everybody's a little bit different. And it's okay if your financial life doesn't mirror mine or anybody else's. It's okay to have your own pathway, your own mix of how you pay off your debt versus invest your own mix of how you work and then what your career path looks like, your own mix of investments.

The important thing is that you stick with something. You pick something that you can stick with because what you don't want to do is be bailing out every six months or every year or every three years, or sell it all your stocks at the bottom of bear market. That can really hurt you. So, make sure you're not doing that.

 

FINANCE 101: INDEX FUNDS

Speaking of stocks, the best way to invest in stocks. I spent a lot of time looking at this over the last couple of decades and I am firmly convinced that the best way to invest in stocks is to simply buy them all. Truly, it is the best way and there's a lot of reasons why.

One of the reasons is that it gives you better performance. What am I talking about when I'm talking about buying them all? I'm talking about using a low cost, broadly diversified index mutual fund, such as those you buy from Vanguard, Fidelity, Schwab, iShares, State Street on the ETF side.

These are mutual funds that just buy all the stocks such as the Vanguard Total Stock Market Index Fund. This buys all the stocks in the US. The Vanguard Total International Stock Index Fund. It buys all the stocks outside the US. Between the two of those, you own all the publicly traded companies in the world. It's not entirely correct, they actually do some sampling, but your performance is the same as though you bought all of the companies in the world that are publicly traded.

You can even do that with one fund. It's called VT on the ETF side, but it's basically an all world index fund. I don't know that I necessarily recommend that. It actually costs more than just buying the two separate parts and you also lose your foreign tax credit, which is unfortunate, but that's getting into the weeds.

The point is, when you buy these index funds, you get better performance. The vast majority of the time for the vast majority of people compared to the alternatives. And what are the alternatives? Well, one alternative is hiring somebody else to pick all the good stocks. That's called an actively managed fund manager or a separately managed accounts manager. You're hiring a professional to try to beat the market. And the truth is that most of these professionals do not beat the market. They don't beat the market before tax, and they certainly don't do it after tax.

The data is pretty clear that an index fund over time, and I'm talking about an investing career, 20, 25, 30 years, over time is going to be somewhere between 80% and 98% of the active managers. Is it still possible to beat the index fund? Absolutely, it's possible. But is that a bet you should make? Not really. That's not a bet you should make, number one. Number two, the downside of doing that aside from the risk is a whole lot of time and effort and education and trouble and hassle. And that's probably not worth it either.

Okay. The other thing you can do besides hire a professional and try to beat the market is try to beat the market yourself. If all these professionals are struggling to do it with the world's fastest computers and with all these specialists and super educated people they're sending out to talk to all these people at all these companies all over the world, if they're struggling to do it, why do you think you're going to be able to do it in between patients? The odds are just not with you.

And if it turns out you are really good at it, you shouldn't just be managing your own portfolio. You ought to be managing money for other people and charging them to intend to do it because they won't gladly pay you if you can reliably beat the market over the long term.

So, what do you get with an index fund? Number one, you get better performance, and that is why 85% of my portfolio is invested in index funds, publicly traded securities, stocks, bonds, real estate. 85% of my portfolio. It's been that way for a long, long time.

We've been getting some feedback lately, “Hey, it's like everything's real estate these days.” Well, yeah, we have a bunch of new real estate advertisers here at the White Coat Investor. My portfolio hasn't changed and neither has my recommendation of how to invest. I think most people ought to have stocks in their portfolio, and the way to invest in stocks is using index funds.

Another great benefit of index funds it's just less time consuming. You don't have to watch the managers, you don't have to track performance and worry about them losing their touch. You don't have to diversify between managers. You don't need a manager. It's just a computer managing them. You're buying all the stocks. One fund is fine.

I have 25% of my portfolio in the Total Stock Market Index fund. It's actually an ETF version in my taxable account. But same thing, really. That's it. It's a whole lot of money in one mutual fund. Very non-time consuming, very boring, very effective over the long run.

Another reason to use index funds, they are less risky. Not only do you not have manager risk, you got more diversification and there's just less risk there compared to the alternatives. It's better. It's better. Better performance, less risk.

Another reason it's lower cost and that just leads to better performance. In fact, the main reason why index funds beat actively managed funds most of the time is their costs are much lower. Most actively managed funds are really expensive.

If you ever want to try to pick an actively managed fund and give it the best shot you can at beating an index fund, it's important that you choose a low cost one. That helps minimize the advantages of indexing.

Index funds are also more tax efficient. Most of my stocks are now in my taxable accounts, so tax efficiency matters a lot to me. I'm in the highest bracket, both for capital gains and for regular income. And so, tax efficiency is a big piece of it. And index funds are more tax efficient. They have almost no turnover, at least the broadly diversified ones. So you're paying almost nothing in capital gains a year to year as the investments grow.

I can't remember the last time the Vanguard Total Stock Market Index fund distributed a capital gain. It just doesn't do it. You get dividends, yeah, they have to send you the dividends, but at least you got to pay it the long term, order the qualified dividend rate on those.

Another good reason for index funds. They are very easy portfolio building blocks. You decide, “Well, my asset allocation is going to be 15% international stocks.” Okay, well, you can get that with one simple index fund. A total international stock market index fund. It's just really easy to build a portfolio. It's really easy to go from your asset allocation to your actual investments when you're using index funds.

Another great thing about index funds, they are widely available. Almost every 401(k) and 403(b) and 457(b) has got index funds available in it. Now, you can get them whether you're at Schwab or Fidelity or Vanguard. If you're another brokerage, you ought to really be asking yourself why. But even if you are, you can buy an ETF from Vanguard or iShares or State Street at that brokerage. They're just widely available. They're all over the place.

You're always guaranteed to capture the market return. And another nice thing about at least total market funds is there's no factor risks. You've heard of factors. These are people that tilt their portfolio to small and value, and you can get a small value index fund too.

But when we're talking about total market funds, there's no factor risks. For example, these small value stocks are supposed to outperform in the long term, right? Well, that hasn't been the case for the last 10 to 15-ish years. They've underperformed the overall market. You don't have to worry about that when you're investing in a total market index funds. So, another advantage of these broadly diversified funds.

And perhaps the best reason to use them is it just minimizes regret. And you don't have to worry about, “Ah, I picked that crappy fund” or “I shouldn't have been picking my own stocks.” How about this one? There's somebody at a cocktail party bragging that they own Tesla or whatever the hot stock of the day is. Well, you own that. You owned it before it went big because you own all the stocks. So, you always get to minimize regret, and you can brag that you own that stock even before this person at the cocktail party.

All right. Index funds, they're good investments. If you're investing in the stock market, it is the way to invest. And if you're not investing in the stock market, you really ought to consider it for part at least of your portfolio.

This episode was sponsored by InCrowd. Their five to 10 minute microsurveys use a mobile first approach giving physicians an easy way to participate in paid research on diverse healthcare topics. It's medical research designed for physician schedules. Join now to be matched with studies that fit your areas of specialization at whitecoatinvestor.com/incrowd.

If you'd like to be on this podcast, we will celebrate your financial milestone with you, whatever it might be. I don't care if you paid off a mortgage, I don't care if you wrote a book and made some money with it. Whatever your accomplishment has been, we will celebrate it with you. Sign up at whitecoatinvestor.com/milestones, and we'd love to get you on the podcast and use your experience to inspire others to do the same.

Thanks so much for what you do. We'll see you next time on the Milestones podcast.

 

DISCLAIMER

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