Podcast #201 Show Notes: When to Rent vs Buy a Home

It is that time of year again when many doctors start asking, should I keep renting or buy a home? Truthfully many are asking, how can I get someone to loan me money for a home right now? But what we wish they were asking is, should I buy a home at all and, if the answer is yes, should I use a doctor mortgage or a conventional mortgage? We are going to jump into all these questions in this episode, along with whether it is better to repair or replace your older home, paying down your mortgage instead of buying bonds, and what these current low rates mean for the volatility risk on the principal of your home when rates rise. Home ownership is great when done at the right time and right place. We hope this episode will help you be successful in identifying that time and place for you. 

 

If you have student loans, SoFi practically invented student loan refinancing in 2011 and right now they have the lowest starting fixed interest rates they’ve had in years, which could help you save thousands of dollars on your student loans. Plus, they just lowered rates for physicians and dentists still in residency. If you refinance your student loans through SoFi, you’ll get a $500 cash welcome bonus just for listeners of this podcast.

Terms and conditions apply. Not all products available in all states. Welcome bonus not available to residents of Ohio and cannot be combined with any other offer, bonus, or discount. SoFi reserves the right to change or terminate the offer at any time with or without notice. Recipient is responsible for any federal, state, or local taxes associated with receiving the bonus offer. See SoFi for more information. Loans originated by SoFi Lending Corp. CFL 6054612 NMLS# 1121636

Quote of the Day

Our quote of the day is from Morgan Housel who said,

“Leverage is the devil here. It pushes routine risks into something capable of producing ruin. The danger is that rational optimism most of the time mask the odds of ruin some of the time in a way that lets us systematically underestimate risk.”

That is a long way to say, be careful with leverage. No one ever went bankrupt without owing some money to someone.

Expert Witness School

We had Dr. Gretchen Green on the podcast to discuss her new course on starting a business as an expert witness. If you are looking for a side gig, this could be the one for you. She received her first case just a week after starting her business 5 years ago and built this course to help you start another stream of income. Obviously, it is not passive income but if you enjoy educating others you can translate your knowledge in a legal setting. Dr. Green said it is really similar to what we do as doctors, when we talk to patients and families. We're translating and educating the information we know to terms that other people can understand.

In this course, you will learn what to say and not to say during that first critical conversation when a lawyer calls you out of the blue, asks you questions about your credentials, what you do clinically, and your areas of expertise. Then the course teaches how a legal case works, what your involvement is at each stage, how to engage with the lawyer, how to start your own marketing, and how to take a case and be successful and confident in how you treat the material.

There is a bonus module that deals with the business side of it, teaching how to run a business, how to bill, how to invoice, how to interface with an accountant to understand the tax implications and the benefits of doing this.

The course spans eight weeks. Each week, a new recorded module is available. You can watch it on your own time. There is one live Q&A via Zoom each week, and that runs for the total of the eight weeks but you have lifetime access. There is a seven-day guarantee to ensure that people have that opportunity to do the first module, to gain the information, and to ask questions. The course is $3,000, but it pays for itself when you know how to bill at the market rates and when you get your first case. Most physicians will earn that in their first retainer and it is tax-deductible if you are starting a business of doing this. The sale is from the 10th through the 17th of March. After that this course is closed.

Register for Expert Witness Startup School today!

Milestones to Millionaire

#4 – Military Pediatrician Pays off $150K in 15 Months

Paying off student loans quickly doesn’t take a high physician-sized income. It simply requires you to live like a resident for a little bit longer and put large chunks of your extra income toward the loans each month. Working together with her partner, this pediatrician slayed her six-figure student loan debt in only 15 months, giving them the freedom to now spend how they want without the weight of debt on their shoulders.

If you still have private student loans at a high rate, we recommend checking out Student Loan refinancing with Splash Financial.

 

When to Rent vs Buy a Home

It is spring, and we are heading into summer when everyone wants to buy a home. Should you buy a home now? Our answer to that is you should buy a home when both your professional and your personal life is stable. If you think you might be getting married six months from now, it's not time to buy a home. If you think you might leave your job soon, it's not time to buy a home. But when both of those are stable, then it's probably an okay time to buy a home.

The next question you ask should be, should I use a doctor mortgage or a conventional mortgage? That answer really comes down to the alternative uses for your money. If you're like a lot of doctors, you don't want to put much money down on that home because you have such great uses for your money elsewhere, whether it is maxing out retirement accounts, paying off student loans, building up your emergency fund, paying off credit cards, paying off a car, whatever it might be. It seems that doctors, especially doctors just coming out of training, have a lot of uses for money, far more than they have cash. Using a doctor mortgage loan could be a good option for a doctor whose professional and personal life are stable. If you have some other really great uses for your money, it's okay to use a doctor mortgage and put a little bit less down. If you don't have such great uses for your money, get a conventional mortgage and use that money for a down payment.

Physician or doctor mortgages are available to people that aren't doctors, though MDs and DOs obviously qualify. Most of the time, dentists will qualify for these loans, as well. Everyone else, it just depends on the lender. Pharmacists, nurse practitioners, PAs, veterinarians, attorneys, physical therapists, and occupational therapists can qualify for these with some lenders. But it just depends on the lender. So check with the lenders for your state on our mortgage lending page.

We had a couple of questions asked recently about when to buy a home.

“I'm a graduating resident and developing my financial strategy both long and short term. I have a stupid amount of student debt, $480,000. I've currently budgeted out projections for next year and we'll be able to afford to pay off $85,000 to $90,000 of loans a year. I have no credit card debt. The rent in the area my wife and I are moving to is looking like $2,000 to $2,500 a month in a tight market. So, my question is if I do a physician mortgage in year two with a minimal down payment and kind of refinance later into a 15-year fixed with a more favorable rate? My wife is pregnant with our first. So, she won't be working for at least six months after I start the job. I could save up $60,000 needed for a down payment, but would have to dramatically decrease my loan payoffs to do so. What are your thoughts? It seems to me that buying a home in year two makes the most sense, rather than paying the same amount in rent as a mortgage.”

This is the classic dilemma. Do I use my money to pay down my student loans or do I use it for a down payment? If you're ready to buy a home, meaning your professional and personal life are stable, and that's often 6 to 12 months after you moved to a new city out of training, then either one is okay. We are not going to tell you that you can't use a physician mortgage. It is a reasonable thing to do, especially when you got $480,000 worth of student loans to pay off.

However, remember if you're in a financial situation like that, buying a house doesn't get you out of the “live like a resident period”. The house you are buying ought to be relatively inexpensive. This is not the final Doctor House that you're buying when you're in a financial situation like this. You're getting a doctor mortgage, yes, but you're not getting it on the huge Doctor House that you'll be able to afford easily in 10 or 15 years. This is the home that you're going to live in for two to five years while you're paying off your student loans, maybe for a few years after that. Everyone is going to find that compromise somewhere in there.

But if buying this home means that you are paying off your student loans over 8 or 10 or 12 years instead of 2 or 3 years, you're buying too much house. Don't let the fact that there is a physician mortgage available, cause you to buy too much house.

But the question here is, if I do a physician mortgage in year two with minimal down payment, can I refinance later into a 15-year fixed with a more favorable rate? Well, you can refinance but you may have to have 20% in equity at that point, whether it's from paying down the loan, bringing more money to the table, or from appreciation of the house, but you can certainly refinance later.

Will it be a more favorable rate? Well, that depends on what interest rates do in the future. No guarantees. If interest rates climb dramatically between now and then, you may want to just stick with the rate you have with the physician mortgage. But if rates are similar to what they are now, then you'll probably be able to refinance later into a lower rate into a 15-year fixed conventional mortgage.

Another reader asks,

“My girlfriend and I are residents. We have three years left in residency and are looking to buy a house. We are currently paying $1,800 for rent in an apartment building. Home rentals are $1,500-$2,500 for outdated homes. To purchase a recently renovated home will cost $220,000 to $250,000. I can get a 30-year fixed physician mortgage loan with 0% down with 3% interest. Is it worth all the costs and fees to buy a house and sell it in three years rather than to spend that time paying $1,800 each month for rent?”

Residents, most of the time, should not buy homes. Especially if they're not in a stable professional and personal situation. Living with your girlfriend is generally not a stable personal situation. As a general rule, you don't want to buy a house with someone that you're not married to.

Far better for one of you to buy the house and the other one to rent from you or to live there free. Make it very clear from the beginning what's going to happen if you break up, because this is a business transaction. In marriage, there are some protections there. You go to court and you sort it out. When you're not married, it becomes very unclear, and it's really about whose name is on the title. It is a lousy time to be trying to get someone's name off the title when you're not even speaking to each other.

So, in general, residency is not a great time to buy. It is not a good idea to buy with someone that you're not married to. You don't justify it just because you can rent a house and the mortgage payments may be a little bit less than rent. Mortgage payments are supposed to be less than rent. Imagine you're a real estate investor, if the mortgage costs more than the rent, then you're losing money on that property. The rent has to be dramatically more than the mortgage because not only does it have to pay for the mortgage, it has to pay for all the other expenses associated with the property and provide you some profit.

Don't just compare mortgage to rent. That's a mistake a lot of people do. They start looking at $1,800 a month as throwing money away. No, you're not throwing money away. You're exchanging it for a place to live. When you buy a house, you throw a lot of money away, too. Interest, property taxes, maintenance, transaction fees, all that is throwing money away, just like renting is. You're just exchanging it for a place to live.

Buy a home when your professional and personal life are stable. If that means using a physician loan because you have better use for your money, use it wisely. They can be reasonable to use. We are not going to go all Dave Ramsey on you and say you can't buy a house until every cent of your student loans are paid off, but you need to be wise about it. You need to have a plan for those student loans and you need to have a plan to build wealth. You don't want to let just the fact that someone will loan you money cause you to borrow more money than you should and buy more house than you should.

Tim from San Francisco asked,

“My family and I had been thinking about buying a home recently. Unfortunately, home prices across a lot of the countries seem to be pretty high right now, presumably due to very low interest rates. Do you think that low interest rates are good because they mean that you can lock in sort of a low payment plan and allow you to essentially leverage the money you would have spent on your home, but may also increase volatility risk of the principal in your home? What I mean to say is that if interest rates go up, then maybe demand for housing will go down. And so, then the price of the house that you just bought will plummet, even though you got a very low interest rate on it.”

Low-interest rates tend to increase the value of houses, it enables more people to get into the house because they can afford the payment. The lower the interest rate, the more house you can buy. That tends to push up the price of houses because more people buy houses. Conversely, when interest rates go up, which presumably they will at some point in the future, no one really knows.

But when interest rates go up, that tends to be bad for the price of housing, because all of a sudden it removes a bunch of potential buyers from the market. They can no longer afford to buy your house because, at that price, the payment is too much for their budget. There is a risk when interest rates are low.

Without being able to forecast the future, it becomes very difficult. That is why our advice is generally to buy a house if you're going to be there long-term and your professional and personal life are stable. Don't buy too much house. But when you know you're going to be there long-term and you don't expect any changes to your life, it usually does work out better to buy a house.

 

Reader and Listener Q&As

Repair vs Replacing a Home

We had a couple of other listener questions about mortgages we wanted to answer.

“We love where we live. And we were wondering if you could give us advice about repair versus replacement of a home. Our house is from the 1940s, and, at some point, it seems with Tesla solar roofs and electric cars and everything else, that it would just be better to replace the house. We don't really want to move, and we're wondering at what point can we maintain our tax basis, taking down walls and doing an overhaul of the house, versus knocking the whole thing down and having an entirely new cost basis. I appreciate any advice you could give.”

This is a question that's near and dear to our hearts, given that a little over a year ago, we did a major renovation of our home. We had this conversation with the contractor. We tried to decide whether it was worth just bulldozing the thing because we love the lot and the neighborhood. Or doing this major rehab. He assured me that even with the size of that renovation, we were still much, much better off not bulldozing. Now our house wasn't built in the 1940s. It was built in 1989. But even so, there are some advantages to doing a major rehab rather than bulldozing and starting over completely. A lot of those advantages come down to approvals, permits, and taxes. It is easier and cheaper to get the permits for renovations than it is to get permits for brand new buildings. The other thing that happened is our taxes didn't change. It's a much bigger, nicer house but my taxes barely went up. So we think there are some real tax benefits to doing that.

Now, California has some unique tax laws as well. When you buy a house, you're basically kind of locked in your property taxes for the long run. Not sure if that changes if you bulldoze and build up from the ground. If it does, that's another reason to renovate rather than completely bulldoze. But be sure you look into that as well.

The main thing, of course, is to remember that anything you do with regards to this, the end price is going to be much higher than you expect it's going to be going in. So, prepare for that and make sure you can afford to do that before you get started.

Our general rule is that you should only be borrowing the amount it is going to increase the value of your home when you do this. The rest of it, you need to save up. Remember, it is not all going to increase the value of your home. If you spend a million dollars on a renovation, the home is not going be worth a million dollars more. You'll be doing well if it's worth $700,000 or $800,000 more.

Kitchen and bathroom renovations tend to bring a lot of value. Adding some storage space or updating the bedrooms, not nearly as much. So, keep that in mind as you do renovations.

Bonds vs Paying Down Mortgage

“Could you please discuss the concept of paying down a mortgage instead of purchasing bonds with regards to asset allocation and investment strategy? For example, my current retirement investments are split 85% stock and 15% bond. Is it reasonable to use that 15% bond allocation and any future bond contributions to pay down my mortgage rather than purchase bonds?”

This question is mostly a theory question. The truth is that a mortgage or other loan is the equivalent of a negative bond. Paying down a mortgage that's 4% gives you a 4% return. Just like investing in a bond, paying 4% gives you a 4% return. Keep that in mind. It is really silly in some ways to be buying bonds that pay you 1% or 2% while carrying around debt at 4% for a mortgage or at 8% for a student loan, certainly silly for 15% for a credit card. It doesn't make any sense.

So, that's awesome to know in theory. However, when the rubber really hits the road in a nasty bear market, a lot of people don't remember that their mortgage that they've been paying extra on functions as a negative bond. So, they panic and they ended up selling low.

If you ended up doing that, it didn't do you any good to think about your mortgage as a negative bond and you probably ought to have some bonds in your portfolio anyway, even though you have a mortgage or other debt out there.

That is what we did. We carried bonds while we had a mortgage and we don't really have any big regrets about doing that. But theoretically, if you wanted to be a hundred percent stock and put all the money that would have gone to bonds against your mortgage, that wouldn't be a crazy thing to do. You just have to remember that is what you've been doing when the next bear market comes and your stocks lose 50% of their value and you're feeling like panicking and selling low. You have to remember to look at the entire balance sheet of your life if you want to do that.

401(a) Accounts

“I will start my first attending job in July 2021. I will have access to multiple retirement accounts, including a 403(b), a 457 and a 401(a). I was hoping you could speak more about the 401(a) account. Do you have any reservations about using this? Are there any specific questions I should ask the HR department at the hospital? I'm unfamiliar with this account and any advice you have would be much appreciated.”

Technically a 401(k) is a type of a 401(a). A 401(a) is the bigger category. Typically, it is for government employees put in place instead of a pension.

It is typically made up entirely of employer contributions. The employer pays you a little bit less in salary and you get the 401(a) benefit. It's all really the same. It's all really your money, part of your compensation. But technically from a legal standpoint, a 401(a) is employer money that's going in there. You don't put any of your own money in there.

It's also not an ERISA account. That allows the employer to have all kinds of interesting rules about it. Usually, these are state employer plans and the state gets to make the rules. So, ERISA covers things like vesting rules and fiduciary actions like choice of investments and the disclosures, but 401(a)s are not regulated by ERISA, which is a federal law. They're regulated by state law, which is not usually as strict.

So, typically it takes you a little bit longer to vest in the benefits. The investments might not be as good. They might not tell you what the fees are. You really have to dig into stuff. But the questions you ask HR, what are the fees? What are the investments? When do I vest? What are my distribution options?

A lot of times you can roll these over, when you leave the employer, into a 401(k). You want to ask about those sorts of things, just like you would with a 457 account.

But typically, these contributions are not optional. They're usually employer contributions that they're going to put in there, no matter what you want to have done with the money. This is like your pension benefit. It’s just going into a defined contribution plan instead of a defined benefit plan.

You also need to be really careful about the fees. Sometimes there might be an investment advisor involved that picked the funds in the account and is now getting an AUM fee for it. So, make sure you understand all that.

But as a general rule, you may be offered a 401(a), 403(b), and a 457. You want to use all of those accounts at your employer, especially a government employer, because that usually means the 457 is a government 457, which has better distribution options than a non-governmental 457.

Conflicts of Interest as an Educator

“I am an academic physician who was lucky enough to stumble across your content, as well as the content of other like-minded individuals, as I began to educate myself on financial literacy towards the end of fellowship. I now want to pass on some of this knowledge to the upcoming generation and am considering developing curriculum for students, residents, fellowships at my institution and regionally. As I start to consider what content and what resources I might provide to these individuals, I start to think about the possibility of partnering with local individuals who might be selling disability insurance or life insurance or who might be financial planners. This gives me pause as I don't want to have any significant conflicts of interest. I don't want to direct folks who are giving their trust in me into the hands of people who may have questionable motives. I also feel a little funny about taking any commissions or kickbacks that might be involved. You've always been very good about announcing any financial conflicts of interest you may have. I was just wondering if you have any general advice on how to go forward.”

This is a subject that is near and dear to our heart and one we have been dealing with now for over a decade. The easiest thing to do is not have any conflicts of interest personally. That means you make no money from the course. You sell no products. You have no for-profit blog on the side. You don't write a book that you sell. You don't take any money from guest speakers that come in. You make nothing off of it. That’s the easiest thing to do.

When it came to the White Coat Investor, we weren't willing to do all that work for free. So we have had to manage the conflicts of interest. The way we have done that is through very transparent disclosure of our conflicts of interest. So, people know that we are getting paid when it's an advertiser.

But bear in mind, even if you do that and you disclose your conflicts of interest, there are going to be some people that are unhappy with it. Number one, they are going to feel you haven't disclosed them at all. Number two, they feel like you should be working for free.

If you do decide to make money, we would encourage you to be maximally transparent about that. If you have a book, say, “here's my book and if you buy that, I make $8.75 every time you buy a copy of it.” If you're getting paid by some speaker you have coming in, you can point out that this speaker has paid $2,000 in order to come in and speak. You can just disclose those conflicts of interest.

In an academic setting, you're probably not going to be able to have that course if you have a significant personal conflict of interest there. It does cause some problems, as you might imagine, when people have a lot of conflicts of interest and they're teaching in an academic institution.

As far as guest speakers for your course, the best you can do is to just disclose that if people go to them and buy services from them, they get paid, and so they have a conflict of interest. Just be very clear about those conflicts of interest when they come in. But don't kid yourself. Just by bringing that person in, they're going to get some business from it.

The alternative is that you can make nothing from the course. You can get paid nothing, and you can bring in no guest speakers, other than ones that also have zero conflicts of interest. That's really hard to do, though. You'll have a hard time putting together a course like that, and you probably won't get as much of an expert as you will from somebody that actually works in that field. In general, people that have put these courses together have found that it is worthwhile to bring in those experts and disclose their conflicts of interest. The experts are more than willing to come in because they are making money from it, without a doubt.

 

Ending

We hope this episode helped you make a decision about purchasing a home if that is on your mind right now. If you are looking for an extra stream of income, look at the Expert Witness Startup School before the sale ends March 17th.

 

Full Transcription

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

Dr. Jim Dahle:
This is White Coat Investor podcast number 201 – Physician’s mortgage loans.

Dr. Jim Dahle:
We're recording this on February 19th. It's going to run on March 11th. We have a big event between now and then, we have WCI con 21. So, I'll see on the other side of it, I guess when you're listening to this, but that probably explains a little bit why we're recording it this early. We just need to be able to focus the next couple of weeks on the upcoming conference.

Dr. Jim Dahle:
I hope a lot of you are coming to that. It's going to be really great. No point in advertising it now, since by the time you hear this, it's going to be all over. But as usual, we are going to package it up into an online course. So, watch for that coming out. Shoot, probably within the next week of the time you hear this.

Dr. Jim Dahle:
If you have student loans, SoFi practically invented student loan refinancing in 2011. And right now, they have the lowest starting fixed interest rates they've had in years, which could help you save thousands of dollars on your student loans. Plus, they just lowered rates for physicians and dentists still in residency.

Dr. Jim Dahle:
If you refinance your student loans through sofi.com/whitecoatinvestor, you'll get a $500 cash welcome bonus just for listeners to this podcast. That's sofi.com/whitecoatinvestor. Terms and conditions apply. Not all products available in all states. Welcome bonus not available to residents of Ohio and cannot be combined with any other offer, bonus, or discount. SoFi reserves the right to change or terminate the offer at any time with or without notice. Recipient is responsible for any federal, state, or local taxes associated with receiving the bonus offer. See SoFi for more information. Loans originated by SoFi Lending Corp. CFL 6054612 NMLS# 1121636And of course, you still get the same deal you would get on the loan if you went to SoFi directly, you just get an extra $500 in cash. So that's great.

Dr. Jim Dahle:
Thanks for what you do. It's been a long hard winter, a long hard year for a lot of us. And I hope your practice is recovering. Things are starting to get back to normal maybe. As we're recording this in Utah, our case numbers are down 75% from the peak. So, we're pretty excited about that. I'm looking forward to maybe being down 90% by the time summer starts. Our governor is talking about having all adults in the state immunized, by the beginning of the summer. So, I don't know if we'll meet that goal, but that ought to be pretty dramatic decrease.

Dr. Jim Dahle:
Unfortunately, it has finally affected the company with a couple of people here at the White Coat Investor becoming positive in the last week. And so, that's kind of a bummer for us. Everybody's doing okay so far, but they don't feel very good. So, those of you who've had this, know what I'm talking about. And I wish those of you who are struggling with COVID, a rapid recovery and uneventful future as far as long-term symptoms.

Dr. Jim Dahle:
We're going to be talking a little bit later in this episode with Dr. Gretchen Green. We're going to be talking about this new course she has out to teach you how to be an expert witness, which is a side gig that a lot of doctors enjoy. We'll get into that later. But if you're interested in that, you can check out her course at whitecoatinvestor.com/expertwitness. And there's a sale on that. It goes from March 10th through the 17th.

Dr. Jim Dahle:
All right, let's about physician mortgages. It's that time of year, right? This is running mid-March and everybody's interested in getting a new home. It's spring, we're coming into summer and everyone wants to buy a home. And if you're like a lot of doctors, you don't want to put much money down on that home because you have such great uses for your money elsewhere. Whether it's maxing out retirement accounts, paying off student loans, building up your emergency fund, paying off credit cards, paying off a car, whatever it might be. It seems that doctors, especially doctors just coming out of training have a lot of uses for money far more than they have cash.

Dr. Jim Dahle:
So, a frequent question that we get around here is “How can I get someone to loan me money for a home right now?” And I often wish the question was a little more sophisticated, such as “Should I buy a home at all?” And my answer to that one is that you should buy a home when both your professional and your personal life is stable.

Dr. Jim Dahle:
If you think you might be getting married six months from now, it's not time to buy a home. If you think you might leave your job soon, it's not time to buy a home. But when both of those are stable, then it's probably an okay time to buy a home.

Dr. Jim Dahle:
Another question that I wish people would ask more often is “Should I use a doctor mortgage or a conventional mortgage?” And that answer really comes down to the alternative uses for your money. If you have some other really great uses for your money, it's okay to use a doctor mortgage and put a little bit less down. If you don't have such great uses for your money, shoot, get a conventional mortgage and use that money for a down payment.

Dr. Jim Dahle:
But such as life. So, the question we get most of the time is “How can I get someone to loan me money to buy a home right now?” Well, if you're a doctor without much money to your name, the answer to this question is usually a physician or a doctor mortgage. And they're available to people that aren't doctors, MDs and DOs obviously qualify. Most of the time dentists will qualify for these loans as well. Everybody else, it just depends on the lender.

Dr. Jim Dahle:
Some lenders do and some lenders don't. Pharmacists to nurse practitioners, to PAs, veterinarian's, attorneys, physical therapists, occupational therapists can qualify for these with some lenders. But it just depends on the lender. There's a post on the blog that talks about doctor loans for other professionals that goes into details as far as which lenders will lend to other allied health professionals and other high-income professionals. But for the most part, we're talking about physicians and dentists when we're talking about doctor mortgages.

Dr. Jim Dahle:
So, we're going to answer a couple of listeners and reader questions about mortgages. But first, let's talk a little bit about what's new with physician mortgages this year. It's obviously a product that's used frequently by White Coat Investors. You can get more information about the lenders that offer these in your state at whitecoatinvestor.com/doctorloan.

Dr. Jim Dahle:
But there have been a couple of changes. One is due to the pandemic and the economic uncertainty some lenders are requiring you to have more money in reserve that can be as much as 12 months’ worth of mortgage payments. So, if your mortgage payment is $3,000 a month, they might require you to have $36,000 sitting in a checking account, preferably a checking account at their bank, in order to give you a doctor mortgage. So, be aware of that.

Dr. Jim Dahle:
The most appealing feature of a doctor mortgage, a physician mortgage loan of course, is that you can put down less than 20% and not have to pay PMI, which is Private Mortgage Insurance. Remember that's the mortgage insurance you buy to protect the lender from you defaulting on the loan. It doesn't actually do you any good whatsoever. So, avoiding it is a good thing. There's really no benefit to you paying, and you can avoid paying it by putting 20% down, getting a conventional mortgage, or you can avoid paying it by qualifying for a doctor mortgage.

Dr. Jim Dahle:
Last year, though, some lenders went from not requiring a down payment at all, essentially 0% down to requiring 5% down. And some went from 5% to 10%. Some of those are coming back down now, but don't be surprised if the deal is a little bit worse than it used to be before the pandemic. So, don't be surprised if you have to put down 5% or 10% in order to get the loan.

Dr. Jim Dahle:
All right, let's do some questions. Here's one from the WCI forum. “I'm a graduating resident and developing my financial strategy both long and short term. I have a stupid amount of student debt, $480,000. I've currently budgeted out projections for next year and we'll be able to afford to pay off $85,000 to $90,000 of loans a year. I have no credit card debt. The rent in the area my wife and I are moving to is looking like $2,000 to $2,500 a month in a tight market.

Dr. Jim Dahle:
So, my question is if I do a physician mortgage in year two with a minimal down payment and kind of refinance later into a 15-year fixed with a more favorable rate. My wife is pregnant with our first. So, she won't be working for at least six months after I start the job. I could save up $60,000 needed for a down payment would, but would have to dramatically decrease my loan payoffs to do so. What are your thoughts? It seems to me that buying a home in year two makes the most sense than paying the same amount in rent as a mortgage”.

Dr. Jim Dahle:
And this is the classic dilemma, right? This is what everybody's dealing with. Do I use my money to pay down my student loans or do I use it for a down payment? Well, if you're ready to buy a home, meaning your professional and personal life are stable and that's often 6 to 12 months after you moved to a new city out of training, then either one is okay with me. I'm not going to tell you, you can't use a physician mortgage. I think it's a reasonable thing to do, especially when you got $480,000 worth of student loans to pay off.

Dr. Jim Dahle:
However, remember if you're in a financial situation like that, buying a house doesn't get you out of the “Live like a resident period”. So, the house you were buying ought to be relatively inexpensive. This is not the final Doctor House that you're buying when you're in a financial situation like this. You're getting a doctor mortgage, yes, but you're not getting it on the massive, huge Doctor House that you'll be able to afford easily in 10 or 15 years. This is the home that you're going to live in for your two to five years while you're paying off your student loans, maybe for a few years after that. Everyone's going to find that compromise somewhere in there.

Dr. Jim Dahle:
But if buying this home means that you are paying off your student loans over 8 or 10 or 12 years instead of 2 or 3 years, I think you're buying too much house. So different question, right? How much house should you buy versus how should you pay for it? What kind of mortgage should you get? And don't let the fact that there is a physician mortgage available, cause you to buy too much house.

Dr. Jim Dahle:
So, what would I do in this situation? Well, I think this is probably okay to buy a house with a physician mortgage, a minimal down payment. I think that's probably a reasonable thing to do. It sounds like this doc's going to have the student loans paid off within five years. So that's living enough like a resident, I think.

Dr. Jim Dahle:
But the question here is if I do a physician mortgage in year two with minimal down payment, can I refinance later into a 15-year fixed with a more favorable rate? Well, you can refinance, right? You may have to have 20% inequity at that point, whether it's from paying down the loan, bringing more money to the table or from appreciation of the house, but you can certainly refinance later.

Dr. Jim Dahle:
Will it be a more favorable rate? Well, that depends on what interest rates do in the future. No guarantees, right? If interest rates climb dramatically between now and then, you may want to just stick with the rate you got with the physician mortgage. But if rates are similar to what they are now, then you'll probably be able to refinance later into a lower rate into a 15-year fixed conventional mortgage.

Dr. Jim Dahle:
All right, next question. My girlfriend and I are residents. We have three years left in residency and are looking to buy a house. We are currently paying $1,800 for rent in an apartment building. Home rentals are $1,500 and $2,500 for outdated homes. To purchase a recently renovated home will cost $220,000 to $250,000. I can get a 30-year fixed physician mortgage loan with 0% down with 3% interest. Is it worth all the costs and fees to buy a house and sell it in three years then to spend that time paying $1,800 each month for rent?”

Dr. Jim Dahle:
Residents, most of the time should not buy homes. Especially if they're not in a stable, professional and personal situation. Living with your girlfriend is generally not a stable, personal situation. It usually goes one of two ways within just a few years. Usually either get married or you break up. Now, if it works out that you get married, okay, fine. That obviously becomes stable eventually, but as a general rule, you don't want to buy a house with somebody that you're not married to.

Dr. Jim Dahle:
It just gets really ugly. Far better for one of you to buy the house and the other one to rent from you or to live there free or whatever. But in the event that you break up, it's very clear what happens with the house. Make it very clear from the beginning what's going to happen if you break up, because this is a business transaction. In marriage, there are some protections there. You go to court or mediators and arbitrators or whatever, and you sorted out. When you're not married, it becomes very unclear, and it's really about whose name is on the title. And it is a lousy time to be trying to get somebody's name off the title when you're not even speaking to each other.

Dr. Jim Dahle:
So, in general, I don't think residency is a great time to buy. I don't think it's a good idea to buy with somebody that you're not married to. And you don't justify it just because you can rent a house and the mortgage payments may be a little bit less than rent. Mortgage payments are supposed to be less than rent. Imagine you're a real estate investor, right? If the mortgage costs more than the rent, then you're losing money on that property, right? The rent has to be dramatically more than the mortgage because not only does it have to pay for the mortgage, it has to pay for all the other expenses associated with the property and provide you some profit.

Dr. Jim Dahle:
So, don't just compare mortgage to rent. That's a mistake a lot of people do. They start looking at $1,800 a month is throwing money away. No, you're not throwing money away. You're exchanging it for a place to live. And when you buy a house, you throw a lot of money away too. Interest, property taxes, maintenance, transaction fees, all that is throwing money away, just like renting is. You're just exchanging it for a place to live.

Dr. Jim Dahle:
All right. So, if you need a doctor loan check out what's available at whitecoatinvestor.com/doctorloan. We have a list of lenders in every state that can provide you a physician loan. Remember the components of that, the primary one is that you can put down less than 20% and not pay PMI. But also, in general, they will take an employment contract rather than requiring you to have pay stubs. And so, you can buy the home before you actually start working. That's another big benefit of a doctor loan.

Dr. Jim Dahle:
Now, if you're going to be an independent contract or otherwise, self-employed, you're going to run into some problems there. Sometimes it can be worked out, but a lot of the time you're still going to have to have a year or two of demonstrated income on your tax forms in order to get that loan. So, expect that. If you are going to be self-employed, expect to run into that issue with any mortgage, whether it's a doctor loan or not.

Dr. Jim Dahle:
The other thing that you can usually get with a doctor mortgage loan is that they will only look at the payments that you have to make for your student loans rather than how much you owe in total. So, if you're on some repay program and your payments are $200 a month, they're only going to look at that rather than the fact that you owe $480,000 in student loans.

Dr. Jim Dahle:
So those are the big benefits of a physician mortgage loan. Use them wisely. They can be reasonable to use. I'm not going to go all Dave Ramsey on you and say, you can't buy a house until every cent of your student loans are paid off, but you need to be wise about it. You need to have a plan for those student loans and you need to have a plan to build wealth. You don't want to let just the fact that somebody will loan you money cause you to borrow more money than you should and buy more house than you should.

Dr. Jim Dahle:
All right. Let's get to a related question from one of our favorite listeners Tim from San Francisco who always got good questions for us. Let's take a listen to his question.

Tim:
Hi Jim, it's Tim in San Francisco. My family and I had been thinking about buying a home recently. Unfortunately, home prices across a lot of the countries seem to be pretty high right now, presumably due to very low interest rates. Do you think that low interest rates are good because they mean that you can lock in sort of a low payment plan and allow you to essentially leverage the money you would have spent on your home, but may also increase volatility risk of the principal in your home?

Tim:
What I mean to say is that if interest rates go up, then maybe demand for housing will go down. And so, then the price of the house that you just bought will plummet, even though you got a very low interest rate on it. Thanks for your thoughts.

Dr. Jim Dahle:
Poor, poor Tim. I really feel bad for those of you who live in San Francisco or Manhattan or DC, or even LA these days. You're facing this dilemma of pouring this massive amount of money, this huge chunk of your net worth now and later into housing. The alternative of course is geographic arbitrage and moving somewhere else. Reno has some very nice houses, Tim, but that means you've got to live in Reno and Reno is not the same as San Francisco. I'm very much aware of that.

Dr. Jim Dahle:
So, I don't envy your dilemma. It's a problem for sure. And when I tell people that you should keep your mortgage to no more than two times your gross income, I recognize that some of you in these crazy expensive places to live may have to stretch that a little bit. Remember there are consequences to stretching it, even if you're going to three or four X, which is as far as I would go. Realize it's got real consequences on your financial life with how quickly you will build wealth, with when you can retire, with what you will drive, with how you can vacation.

Dr. Jim Dahle:
If you want to stretch for a home, there are going to be some consequences. Plus, don't go crazy, right? Some people are buying homes that are 10 times their annual income. And that's just going to leave you house poor. If you can’t make the payments at all, you might just lose it in foreclosure when you start doing that sort of thing. So be careful with that.

Dr. Jim Dahle:
But as far as your question, yes, low interest rates tend to increase the value of houses because it enables more people to get into the house because they can afford the payment, right? The lower the interest rate, the more house you can buy. And so, that tends to push up the price of houses because more people buy houses. Conversely, when interest rates go up, which presumably that will at some point in the future, nobody really knows. Maybe there'll be low for decades like they have been in Japan.

Dr. Jim Dahle:
But when interest rates go up, that tends to be bad for the price of housing, because all of a sudden it removes a bunch of buyers, potential buyers from the market. They can no longer afford to buy your house because at that price, the payment is on them, when you got to pay that much more in interest are just too much for their budget. They don't qualify for the loans, et cetera. And so, there's a risk there when interest rates are low and the housing has gone crazy, like it has in the last few months or years, then you got to worry about a decline in housing prices and maybe even a crash, depending on what happens. Perhaps it just remains level for a long time and you don't get as good of a return out of that purchase as you otherwise would have.

Dr. Jim Dahle:
Now this is all kind of a big dilemma, what to do. And without being able to forecast the future, it becomes very difficult. And that's why my advice is generally buy a house if you're going to be there long-term and your professional and personal life are stable. I think it's okay to buy a house in San Francisco. Don't buy too much house. But when you know you're going to be there long-term and you don't expect any changes to your life, usually does work out better to buy a house.

Dr. Jim Dahle:
But I can't predict what San Francisco home prices are going to do over the next 10 years, any more than anybody else can. So be careful, don't put too much of your life into it. But as a general rule in the long run, buying comes out better than renting.

Dr. Jim Dahle:
All right, let's take our next question here.

Speaker:
Hi, I'm a VA hospital chaplain in California. We love where we live. And we were wondering if you could give us advice about repair versus replacement of a home. Our house is from the 1940s. And at some point, it seems with Tesla solar roofs, and electric cars and everything else that it would just be better to replace the house. We don't really want to move. And we're wondering at what point can we maintain our tax basis, taking down walls and an overhaul of the house versus knocking the whole thing down and having an entirely new cost basis.

Speaker:
I appreciate any advice you could give and want to extend our thanks and prayers for all the white coats and allied health professionals out there. Thank you for all that you do. And a special shout out to everyone working in acute psychiatric units right now. There's so much need out there with the isolation that comes from this. So, thank you for self-care and other care and keep on doing what you're doing.

Dr. Jim Dahle:
Well, thank you, chaplain for your service. I just gave Tim in San Francisco a hard time about trying to live out there as a doctor. I think it's even harder when you're on a chaplain salary and not a doctor salary. So, thanks for what you do serving out there.

Dr. Jim Dahle:
This is a question that's near and dear to my heart, giving that a little over a year ago, we did a major renovation of our home. And I had this conversation with the contractor. We tried to decide whether it was worth just bulldozing the thing because we love the lot. We love the neighborhood. Or doing this major rehab. And when I'm talking about major rehab, I mean, we had excavators pulling walls off the house, right? This is not a minor rehab. It was down to the studs, new walls additions on three sides, et cetera. It was a big renovation.

Dr. Jim Dahle:
And he assured me that even with the size of that renovation, we were still much, much better off not bulldozing. And so, I think that's probably the case for you. Now our house wasn't built in the 1940s. It was built in like 1989 or something like that. But even so, there are some advantages to doing a major rehab rather than bulldozing and starting over completely. And I think a lot of those advantages come down to approvals and permits and taxes. I think it's easier to get the permits for renovations than it is to get permits for brand new buildings. And I think they're cheaper.

Dr. Jim Dahle:
The other thing that happens is my taxes didn't change. It's a much bigger house. It's a much nicer house. It's a much more expensive house and my taxes barely went up. In fact, we've been in here now for eight months. Now, granted some of this may be due to the pandemic and the tax guy hasn't even come around yet. And my contractor had had this similar experience. He built a house from the ground up and ended up paying a whole bunch of money in taxes.

Dr. Jim Dahle:
And then subsequently when moving to my neighborhood, he just did a matter of major renovation, very similar to what we did actually, and ended up again with only a slight increase in taxes rather than the dramatically increased taxes of building a similar home from the ground up. So, I think there's some real tax benefits to doing that.

Dr. Jim Dahle:
Now, California has some unique tax laws as well. I know when you buy a house, you're basically kind of lock in your property taxes for the long run. I'm not sure if that changes if you bulldoze and build up from the ground. If it does, that's another reason to renovate rather than completely bulldoze. But be sure you look into that as well.

Dr. Jim Dahle:
The main thing of course is to remember that anything you do with regards to this, the end price is going to be much higher than you expect it's going to be going in. So, prepare for that plan for that and make sure you can afford to do that before you get started. And this is probably very relevant to you chaplain, the story in the Bible about the man who starts building the tower without calculating the cost. You don't want to do that. You want to have the money to do the renovation or certainly a plan to pay for it.

Dr. Jim Dahle:
And my general rule with that is that you should only be borrowing the amount it is going to increase the value of your home when you do this. The rest of it, you need to save up. And remember, it is not all going to increase the value of your home. If you spend a million dollars on a renovation, the home is not going be worth a million dollars more. You'll be doing well if it's worth $700,000 or $800,000 more.

Dr. Jim Dahle:
Kitchen and bathroom renovations tend to bring a lot of value. Adding some storage space or updating the bedrooms, not nearly as much. So, keep that in mind as you do renovations. I hope that's helpful to you.

Dr. Jim Dahle:
All right, let's do a quote of the day here. This one comes from Morgan Housel who says “Leverage is the devil here. It pushes routine risks into something capable of producing ruin. The danger is that rational optimism most of the time mask the odds of ruin some of the time in a way that lets us systematically underestimate risk”. That's a long way to say, be careful with leverage. And nobody ever went bankrupt without owing some money to somebody.

Dr. Jim Dahle:
All right, let's take another question here. This one is anonymous question off the Speak Pipe.

Speaker 2:
Hi, Dr. Dahle. Could you please discuss the concept of paying down a mortgage instead of purchasing bonds with regards to asset allocation and investment strategy? For example, my current retirement investments are split 85% stock and 15% bond. Is it reasonable to use that 15% bond allocation and any future bond contributions to pay down my mortgage rather than purchase bonds? Thanks.

Dr. Jim Dahle:
Okay. So, this question is mostly a theory question. The truth is that a mortgage or other loan is the equivalent of a negative bond. Paying down a mortgage that's 4% gives you a 4% return. Just like investing in a bond paying 4% gives you a 4% return. And so, keep that in mind. It's really silly in some ways to be buying bonds that pay you 1% or 2% while carrying around debt at 4% for a mortgage or at 8% per student loan, certainly at 15% for a credit card. It doesn't make any sense.

Dr. Jim Dahle:
So, that's awesome to know in theory. However, when the rubber really hits the road in a nasty bear market, a lot of people don't remember that their mortgage that they've been paying extra on functions as a negative bond. And so, they panic and they ended up selling low.

Dr. Jim Dahle:
So, if you ended up doing that, it didn't do you any good to think about your mortgage as a negative bond and you probably ought to have some bonds in your portfolio anyway. Even though you've got a mortgage or other debt out there.

Dr. Jim Dahle:
And so, that's what we did. I carried bonds while I had a mortgage and I don't really have any big regrets about doing that. But theoretically, if you wanted to be a hundred percent stock and put all the money that would have gone to bonds against your mortgage, that wouldn't be a crazy thing to do. You just got to remember, that's what you've been doing when the next bear market comes and your stocks lose 50% of their value and you're feeling like panicking and selling low and doing that sort of thing. You got to remember to look at the entire balance sheet of your life if you want to do that. But yeah, that's the way it works. A mortgage is a negative bond.

Dr. Jim Dahle:
All right, let's get Dr. Green here on the line and talk a little bit about this course she's got going on. I want you guys to hear a little bit more about this and then we'll do some more Speak Pipe questions.

Dr. Jim Dahle:
Okay. I'm here now with Dr. Gretchen Green on the White Coat Investor podcast. Welcome.

Dr. Gretchen Green:
Thank you. Great to be here.

Dr. Jim Dahle:
Now, you have recently developed a course on how to become an expert witness, in essence. How did you become interested in becoming an expert witness for yourself?

Dr. Gretchen Green:
Yeah, that's a great question. And it's a way that I think a lot of physicians encounter this is I got a call out of the blue from a lawyer. I found I didn't know that I didn't know the right things to say or how to handle the situation. A colleague had referred me, but hadn't given me a heads up. So, the call just came and someone asked if I would review a case. I accepted and was able to review the case and did an okay job. But also learned that I had a lot more to learn about the mechanics and the logistics of doing an expert witness review, which is a little bit different, but complimentary to the work we do as physicians.

Dr. Jim Dahle:
But this is something you've now been doing for quite a while. How long have you been an expert witness?

Dr. Gretchen Green:
I've been doing this for five years now.

Dr. Jim Dahle:
And at some point, you said, “You know what? Doctors need to learn how to do this. I'm going to put a course together”. What inspired you to put together an online course to teach other doctors how to be expert witnesses?

Dr. Gretchen Green:
That was during the pandemic really early on when suddenly lawyers were not having trials, they weren't having cases that were moving forward. They finally found time where they needed cases reviewed. But lawyers with whom I had relationships through networking and marketing, they were hesitant to approach doctors because they thought, “Well, doctors are really busy right now. Just saving everybody's lives”.

Dr. Jim Dahle:
Little did they know a lot of us were just sitting around, right?

Dr. Gretchen Green:
Right. And so, that's the exact flip side of it, right? Like just when lawyers needed experts to finally review some of these cases, then doctors were looking for ways to supplement their income because the statistics are up to two thirds were either furloughed or had decrease in income. So, it was really the perfect storm of needs. And this was a way to get both sides together, to help physicians learn the ropes without having to do all the trial and error, get folks up and running in an eight-week course where they would be ready to start cases right after completing.

Dr. Jim Dahle:
This is obviously another stream of income for doctors. It's not passive income because you got to work for it, but it's another stream of income. Is this something you've enjoyed? What parts of this have you liked and not liked over the last five years, as far as being an expert witness?

Dr. Gretchen Green:
The part I've loved the most is educating. Having that opportunity to translate the knowledge that I have as a radiologist, to lawyers and into a legal setting. So, it's really similar to what we do as doctors, when we talk to patients and families. We're translating and educating the information we know to terms that other people can understand.

Dr. Gretchen Green:
Working with lawyers has helped me understand the different angles that these cases can take. And also, through the research that I've done to support my opinions, it's made me even a better doctor knowing standard of care, literature, how to support and how to understand why we make the choices that we do in clinical medicine.

Dr. Gretchen Green:
So, it's helped me be a real resource to my group where if someone's got a clinical question or if they want to know what should one do in this kind of setting, a lot of the times they turn to me and I'm really happy to serve as a resource, not only for lawyers through this, but also to my fellow physicians.

Dr. Jim Dahle:
Awesome. And one of the things, a lot of doctors think about, at least when they're first being introduced to this topic is “I don't want to be involved in suing other doctors”. How do you deal with that?

Dr. Gretchen Green:
Yeah. That's a big question a lot of physicians have, and some people approach it from different angles. They say, “Well, if I'm going to be an expert, I'm only going to do defense work”. But then of course, that narrows your focus and it removes some of the objectivity you get from being involved in both sides of the situation.

Dr. Gretchen Green:
The legal field is enormous. It's on the same scale as revenue from medical cases as well. So, we're not going to stop legal cases for moving forward by refusing to be experts. But the question is, “Will you serve in this capacity or let folks who may be working from other motivations, purely money, other things, do the work instead?” And I think if we have everybody with these skills, working together as a team and understanding the work we're going to elevate the quality of all of it, and we're not going to have reduced the number, but we can offer objective opinions and use our expertise.

Dr. Jim Dahle:
Okay. So, let's talk about the course. What will students learn in this course? What are they going to know and be able to do when they come out at the far end of it?

Dr. Gretchen Green:
Students will know from the beginning, what to say and not to say during that first critical conversation. So, that's what we start with is that first call. When a lawyer calls you out of the blue, asks you questions about your credentials, what you do clinically, your areas of expertise. And then move on to navigate how a legal case works, what your involvement is at each stage, and be able to engage with the lawyer, start your own marketing, and know how to take a case and be successful and confident in how you treat the material.

Dr. Jim Dahle:
Now, this obviously becomes a business for you as you're trying to develop a side passive income. Do you walk them in the course through how to run that business as well?

Dr. Gretchen Green:
That's an important part of it. We do cover those topics. There's a bonus module that deals with the business side of it. When I started my expert witness work, I was very focused on how to be an expert, how take cases, how to approach the material. But the business side has been even more gratifying in some ways, because they were skills I never had before. Even as a partner in a practice for 10 years with pretty good knowledge of the finances, this was an element of financial literacy that I was really glad to expand into.

Dr. Gretchen Green:
So, learning how to run a business, how to bill, how to invoice, how to interface with my accountant to understand the tax implications and the benefits of doing this. Those have all been benefits that I've really appreciated and that I help my students learn as well.

Dr. Jim Dahle:
Okay. So, let's talk about the structure of the course. How does it work? How long is it? And et cetera.

Dr. Gretchen Green:
The course spans eight weeks. Each week, a new recorded module is available. You can watch it on your own time. We do have one live Q&A via Zoom each week, and that runs for the total of the eight weeks. So, you can also have lifetime access. So, if this is a busy time in the middle, or you've got spring break in the middle of it, you can always catch up the materials available as part of that lifetime access.

Dr. Jim Dahle:
Awesome. And there's guarantee with it, I understand. Tell me about the money back guarantee.

Dr. Gretchen Green:
We do have a seven-day guarantee and that's to ensure that people have that opportunity to do the first module, to gain the information, to ask questions. And if they find that in learning that preliminary information, that they can't do expert witness work. For example, they find out that they checked their employer contract end up prohibited from doing it, something that's immediately affecting them, they can choose to not continue. But honestly, we've had only maybe one or two people ever cancel. The great majority, 90 plus percent continue on through to the end. And we've had people taking cases at the end of the course and doing great.

Dr. Jim Dahle:
Cool. And what does the course cost?

Dr. Gretchen Green:
The course is $3,000, but it pays for itself when you know how to bill at the market rates and when you get your first case. So, most physicians will earn that in their first retainer. And plus, if it's tax deductible for you, you can come out ahead from there.

Dr. Jim Dahle:
Yeah. Certainly, if you're starting a business of doing this, that should be a tax-deductible expense. So, awesome. If you want to learn more about this, if you want to take, Dr. Green's course on becoming an expert witness, you can find more information on that at whitecoatinvestor.com/expertwitness. Dr. Green, thanks so much for coming on the White Coat Investor podcast.

Dr. Gretchen Green:
Thanks for having me.

Dr. Jim Dahle:
All right. So, if you want to check that out, you only have a few more days. The sale is the 10th through the 17th of March. After that this course is closed. Probably open up again in the fall at some point, but 10th through the 17th, and then you're out of luck for six months, at least. So, check that out at whitecoatinvestor.com/expertwitness.

Dr. Jim Dahle:
Let's do some more Speak Pipe questions. This one comes in from Matt. Let's take a listen.

Matt:
Hi, Jim. Thanks for everything that you do and your commitment to financial education among physicians. I'm an internal medicine subspecialist. I will start my first attending job in July, 2021. I will have access to multiple retirement accounts, including a 403(b), a 457 and a 401(a). I was hoping you could speak more about the 401(a) account. Do you have any reservations about using this? Are there any specific questions I should ask the HR department at the hospital? I'm unfamiliar with this account and any advice you have would be much appreciated. Thanks again for all that you do.

Dr. Jim Dahle:
All right. Let's talk about 401(a)s. I've done a post on 401(a)s on the blog, but I don't know that I've ever really mentioned them on the podcast. Technically a 401(k) is a type of a 401(a). A 401(a) is the bigger category. But when we're talking about 401(a)s what we're generally talking about are a plan that's offered to government employees. Typically, it's a government employee. Basically, was put in place instead of a pension.

Dr. Jim Dahle:
It is typically made up entirely of employer contributions. Now I know money's fungible, right? So, the employer pays you a little bit less in salary and you get the 401(a) benefit. It's all really the same. It's all really your money, part of your compensation. But technically from a legal standpoint, a 401(a) is employer money that's going in there. You don't put any of your own money in there.

Dr. Jim Dahle:
It's also not an ERISA account. And so, that allows the employer to have all kinds of interesting rules about it. Usually these are state employer plans and the state gets to make the rules. So, ERISA covers things like vesting rules and fiduciary actions like choice of investments and the disclosures, but 401(a)s are not regulated by ERISA, which is a federal law. They're regulated by state law, which is not usually as strict.

Dr. Jim Dahle:
So, typically it takes you a little bit longer to vest in the benefits. The investments might not be as good. They might not tell you what the fees are. You really have to dig into stuff. But the questions you ask HR are all those questions, right? What are the fees? What are the investments? When do I vest? What are my distribution options?

Dr. Jim Dahle:
And a lot of times you can roll these over when you leave the employer into a 401(k). So, you want to ask about those sorts of things, just like you would with like a 457 account.

Dr. Jim Dahle:
But typically, these contributions are not optional. They're usually employer contributions that they're going to put in there, no matter what you want to have done with the money. And so, look into it and ask about that because like I said, these plans can all be a little bit different, but realize that the way they're usually set up is that this is just your benefit. This is like your pension benefit. It’s just going into a defined contribution plan instead of a defined benefit plan.

Dr. Jim Dahle:
You also need to be really careful about those fees, right? Sometimes there might be an investment advisor involved that picked the funds in the account and is now getting an AUM fee for it. So, make sure you understand all that.

Dr. Jim Dahle:
But as a general rule, you may be offered a 401(a), 403(b) and a 457. And as a general rule, you want to use all of those accounts at your employer, especially a government employer, because that usually means the 457 is a government 457, which has better distribution options, than a non-governmental 457.

Dr. Jim Dahle:
So, I hope that's helpful. Every one of them is a little bit unique. So, find out exactly how much goes in, where the money comes from, what the investments are, what the distribution options are, what the fees are. And that should be enough information for you to be able to make a decision as far as how you're going to use it in your overall investing plan.

Dr. Jim Dahle:
All right. Let's take a question now from Dustin off the Speak Pipe.

Dustin:
Dr. Dahle first, thank you for all that you do. I am an academic physician who was lucky enough to stumble across your content, as well as the content of other like-minded individuals as I began to educate myself on financial literacy towards the end of fellowship.

Dustin:
I now want to pass on some of this knowledge to the upcoming generation and am considering developing curriculum for students, residents, fellowships at my institution, and regionally. As I start to consider what content and what resources I might provide to these individuals, I start to think about the possibility of partnering with local individuals who might be selling disability insurance or life insurance or who might be financial planners.

Dustin:
This gives me pause as I don't want to have any significant conflicts of interest. I don't want to direct folks who are giving their trust in me into the hands of people who may have questionable motives. And I also feel a little funny about taking any commissions or kickbacks that might be involved. You've always been very good about announcing any financial conflicts of interest you may have. I was just wondering if you have any general advice on how to go forward.

Dr. Jim Dahle:
All right, let's talk about conflicts of interest. This is a subject that's near and dear to my heart and one I've been dealing with now for over a decade. Here's the deal as far as you go. The easiest thing to do is for you to not have any conflicts of interest personally. That means you make no money from the course. You sell no products. You have no for-profit blog on the side. You don't write a book that you sell. You don't take any money from guest speakers that come in. You make nothing off it. That’s the easiest thing to do.

Dr. Jim Dahle:
When it came to the White Coat Investor, I wasn't willing to do that. I wasn't willing to do all that work for free. And so, I've had to manage the conflicts of interest with regard to me. And the way I have done that is through very transparent disclosure of my conflicts of interest. So, people know what I'm getting paid when it's an advertiser so on and so forth. Occasionally, I get criticized for not being more transparent, which always surprises me since I feel like I'm more transparent than anybody else I know as far as financial conflicts of interest.

Dr. Jim Dahle:
But bear in mind, even if you do that and you disclose your conflicts of interest, there's going to be some people that are unhappy with it. Number one, they are going to feel you haven't disclosed them at all. Number two, they feel like you should be working for free. And if you're willing to do that, great. I was not. And so, I've had to deal with this.

Dr. Jim Dahle:
If you do decide to take any sort of way that you're making money, I would encourage you to be maximally transparent about that. If you have a book, say, here's my book. And if you buy that, I make $8.75 every time you buy a copy of it. If you're getting paid by some speaker you have coming in, you can point out that this speaker has paid $2,000 in order to come in and speak. You can just disclose those conflicts of interest.

Dr. Jim Dahle:
In an academic setting, you're probably not going to be able to have that course, if you have a significant personal conflict of interest there, I would suspect. It does cause some problems, as you might imagine when people have a lot of conflicts of interest and they're teaching in an academic institution.

Dr. Jim Dahle:
It's interesting. We run into all kinds of different ways that academic institutions treat these sorts of issues. For example, a lot of you know we've been given away our new book, The White Coat Investors Guide for Students. We're basically giving it away. We're giving it away through class champions of the first-year class of the medical and dental institutions in the United States.

Dr. Jim Dahle:
And occasionally they run into a problem with the school where the school doesn't even let them pass out free books, even though it's not being done by the school, it's being done by a student. But they just really have a problem with it. And so, you may run into those issues.

Dr. Jim Dahle:
As far as guest speakers for your course, I think the best you can do is to just disclose that if people go to them and buy services from them, they get paid. And so, they have a conflict of interest. A disability and insurance agent for instance, has a conflict of interest in that they're more likely to recommend that you buy a disability insurance policy, that you buy the ones they sell, not the group policy provided by the residency or whatever. That you buy as much of it as possible, and that you buy as many bells and whistles as possible.

Dr. Jim Dahle:
So, I would just be very clear about those conflicts of interest when they come in. But don't kid yourself just by bringing that person in. They're going to get some business from it. Some of those students or residents, or whoever who are going to listen to their spiel and they're going to go, “Well, I know this guy. He seems like a good guy. I'm going to buy my disability insurance through him”. And they're going to get some business from it. And all you can really do is disclose those conflicts of interests.

Dr. Jim Dahle:
The alternative is that you can make nothing from the course. You can get paid nothing, and you can bring in no guest speakers. Other than ones that also have zero conflicts of interest. That's really hard to do though. You'll have a hard time putting together a course like that, and you probably won't get as much of an expert as you will from somebody that actually works in that field. You'll probably get more specific information from a financial advisor and a disability insurance agent and attorney and those sorts of people.

Dr. Jim Dahle:
And so, in general, people that have put these courses together have found that it is worthwhile to bring in those experts, disclose their conflicts of interest. And the experts are more than willing to come in because they are making money from it without a doubt.

Dr. Jim Dahle:
All right. As I said earlier on the podcast, right now, SoFi has the lowest starting fixed interest rates they've had in years on student loan refinancing, which means you could save thousands on your student loans. And if you are a physician or dentist during your residency, SoFi also has new lower interest rates for you.

Dr. Jim Dahle:
If you refinance your student loans through sofi.com/whitecoatinvestor, you'll get $500 in cash sent directly to your bank account. That's sofi.com/whitecoatinvestor. Terms and conditions apply. Not all products available in all states. Welcome bonus not available to residents of Ohio and cannot be combined with any other offer, bonus, or discount. SoFi reserves the right to change or terminate the offer at any time with or without notice. Recipient is responsible for any federal, state, or local taxes associated with receiving the bonus offer. See SoFi for more information. Loans originated by SoFi Lending Corp. CFL 6054612 NMLS# 1121636

Dr. Jim Dahle:
Thanks to those of you who have left us a five-star review or told your friends about the podcast. Our most recent one comes in from Mandy who said, “The podcast has a consistent practical message from medical professionals. Dr. Dahle’s podcast is a great supplement to his White Cost Investor books! His approach to personal finance is consistent, practical, and specific to the unique challenges of physicians.

Dr. Jim Dahle:
Podcasts are a well-timed mix of answering questions, providing applicable examples, and interviewing additional experts. What is most impressive is the consistency of his message. Whether in the depths of a bear market during a pandemic or during a bull market his message remains consistent. Which is extremely admirable. In a world full of sexy clickbait vying for your attention, Dr. Dahle provides a reliable, sensible message regarding physician personal finance. A must subscribe to for any physician”.

Dr. Jim Dahle:
Well, that was really nice. Thank you for that review. And thank you to those of you who have also left us five-star reviews. They actually really help spread the message because podcasts get put in front of more people, more eyeballs that can then find that message.

Dr. Jim Dahle:
We mentioned earlier about that expert witness course at whitecoatinvestor.com/expertwitness. If you're interested in that, that goes through March 17th. And about that time, if you're interested in the online course that's going to be produced from WCI con 21, that'll be out about that time as well. Maybe more information next week on the podcast on that.

Dr. Jim Dahle:
Thanks for what you're doing out there. It's not easy work. You could have gone into something else and made a lot more money. Let's be honest. If you put as much time and work and effort and intelligence into anything else that you've put into medicine, you could be doing very well. So, thank you for making that sacrifice, going into medicine, going into dentistry, going into law, whatever it is you do. Thank you for doing that.

Dr. Jim Dahle:
Keep your head up, your shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.

Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.