How to Boost Returns, Lower Taxes, and Build Wealth with Real Estate Investing

What we're doing tonight is I prepared a presentation. I call it how to Boost Returns, Lower Taxes and Build Wealth. Tonight's subject is real estate. And there's lots of people out there excited about real estate. Not as many this year as there typically is. And part of that is just because stocks have gone through the roof, particularly US Large cap growth stocks, these tech stocks that have gone through the roof this year. With stocks up 26% year to date, no surprise that people are very interested in stocks and not as interested in real estate. But I hope you are investing for the long term and in the long run, real estate is an excellent investment, even if this year is not its greatest year ever. So a few things. First, if you don't know me, I'm the founder of the White Coat Investor. The White Coat Investor is the most widely read position specific personal finance and investing website in the world. I also host a podcast by the same name. Again, the most popular one in this niche. I've written four books and probably the most important thing I can tell you is that we applied the principles that we talk about in these webinars that we talk about on the blog and on the podcast in our lives, and it made all the difference in our lives. And so my wife and I have actually been financially independent since 2018, which is a wonderful thing. Medicine is way more fun when you don't have to practice it. And it provides all kinds of flexibility and great things to do in your life. But what you need to know about me is I'm a doc, I'm a blogger, I'm a podcaster. I am not a financial advisor, I am not an accountant, I am not an attorney. I'm probably not licensed to do anything in your state. So this entire presentation is for general educational information, not personalized specific financial advice as that is legally known. Few disclosures. The White Coat Investor is a for profit company.

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If you go to the website, there's ads up there. That's how we pay for it. It's not a subscription model. 99% of what we do is totally free to you, including this webinar tonight. But we have to make payroll every month. I need to update this slide because we're up to 18 of us working here at the White Coat Investor and we got to make payroll, right? So we do try to make money. If you happen to buy something of ours, we get paid for that. If you go to our advertisers, right, they're very happy and we're very happy because they continue to buy ads from us. But you just need to be aware of that. We have lots of financial relationships with lots of companies today, a number of which we will mention. And if I'm talking about a specific real estate company tonight, we probably have a financial relationship with them. You should be aware of that. Okay, what are we going to talk about tonight? We're going to talk about the case for real estate. We're going to talk about the case for private real estate. We're going to go through the pros and cons of real estate. That's only a two slide section, but might be the most important section in this whole talk. We're going to talk about the real estate continuum, determining if real estate's right for you and how is it right for you. I've also got a number of case studies that helps you understand where on the continuum someone like you might want to invest. We'll talk about how to get a real estate education. And we're going to spend some time on leverage, which is pretty important when it comes to real estate investing. We'll talk about some issues people have with private real estate investing that I call the dilemma of the minimum investment. We'll talk briefly about current interest rates and how they're impacting the real estate market. We're going to talk to you about our no hype real estate investing course. You can get more information about that@whitecoatinvestor.com nohype then we'll go into the Q and A session. All right, so number one, the case for real estate, when you build a portfolio, an investment portfolio, the idea is to include a number of high returning asset classes and maybe some lower returning ones. These include things like stocks and real estate, small businesses, maybe some speculative assets in there as well. Real estate returns are similar to stock returns, but they're more easily leveraged. So when you add some leverage to them, you can get a little bit higher returns out of real estate, just like you probably could if you leveraged your stock investments. And when I'm talking about leverage, I'm talking about buying them with borrowed money.

Right.

The idea is to borrow at 2 or 3 or 4% or even 6 or 7% and earn at 8, 9, 10, 12%.

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That's the idea behind investing in leverage. But when you're building a portfolio, you want low correlations between your asset classes.

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Correlation zero means they're not correlated at all. Minus one means they're negatively correlated and one means they're positively correlated. So the idea is to not have everything be a one, right? You want your asset classes to have something less than 1. You know, 0.8 is better than 1. But if you can get it down to 0.5 or even closer to 0, that's a good thing when it comes to building your portfolio. So if you look at correlations between US stocks and international stocks, you'll see that, you know, correlations change over time, but you're probably going to find it somewhere between.05 and 0.94. If you look at stocks to bonds, it's much lower. It's like 0.1. Stocks to commodities, about zero. Bonds to commodity is actually slightly less than zero. Now, the best data I've been able to find out there of US stocks to real estate investment trusts, that is publicly traded real estate is about 0.45. Okay, that's pretty good. That's a benefit to a portfolio to have something with that low of correlation. When it comes to private real estate, however, it's even lower. It's not zero, but it's a whole lot closer to it than it is when you invest in public real estate. So the main case for real estate, why people add this to their portfolios, why this is often the third asset class added, is because of the high returns and the low correlations. That is the main reason why you put it in your portfolio. However, it has some other benefits as well. It happens to be particularly inflation resistant compared to a lot of things in your portfolio, it's a real asset. So it tends to go up in value with inflation. And the value of income property of any kind is pretty dependent on rent. And as inflation rises, rents rise. The other thing that is often beneficial is real estate. Investments are often leveraged, right? They're bought with at least partially borrowed money, and especially if that borrowed money is fixed rate, low interest rate debt, that's particularly good in inflationary times. That's probably the best hedge against inflation there is is low interest rate debt. There's nothing quite like borrowing money at 2% while inflation's at 9%, right? You're paying it back with depreciated dollars. For some people, the cash flow out of their investment is very important to them. You know, you can argue whether or not it should be important to them, but it is important to them. And one of the nice things about real estate for people that care about having a lot of income is more of your return tends to come in the form of income. You know, it's typically rent. It's not necessarily the case with debt. Real Estate. But with equity real estate, it comes in rent. And so whereas stocks might have a 2% yield in a 10% return, a real estate investment, it wouldn't be uncommon to have a 6% yield in a 10% return investment. You just tend to get more of your return from income, and people like that, especially in the accumulation years, right? It feels a little bit better to be spending income, even though it's probably okay to spend principal. You're not immortal after all, during those decumulation years. You're not going to live forever. Sometimes people use it even during their earned income years, during their working years, right? They're like, I want some passive income. I to want, I want to feel like I can work a fewer shifts, et cetera. And so they use this passive income from their real estate investments to offset any loss of income they may have from cutting back, et cetera. And they like that. Another cool thing about real estate that is different from investing in the stock market is that it's really hard to add value to your stock portfolio. There's lots of studies out there that show the best way to invest in stocks is to buy index funds. Picking stocks, you're probably not going to come out ahead. Picking actively managed mutual funds, probably not going to come out ahead. On the other hand, most real estate is private. You know, it's all local. It's way easier to add value to your portfolio. Maybe that's by going over there and managing it yourself or, you know, building out a new room or something like that. But it's just a much less efficient market. It's much more possible to boost your returns. Now that kind of has some elements of a second job you might not be looking for, but at least it's possible, whereas it probably isn't very possible with your stocks. There are also some pretty cool tax advantages when you look at real estate. The main tax advantages when it comes to real estate is depreciation.

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Basically you're not allowed to depreciate the land, but you're allowed to depreciate the structure. And that's the IRS's way of recognizing that homes become less valuable over time, right, because they're falling apart and have to be repaired and replaced, et cetera. But that tax advantage is overly generous, let's call it. It's overly generous. And if you use it, it can really offset a lot of your income. In fact, it's not uncommon at all for equity real estate investors to get all of their income and have it be covered by that depreciation so it feels like tax free income coming to you. When you sell the property, that depreciation is recaptured, but only at a rate of up to 25%. And if you never sell it, it's never recaptured. And thanks to the step up in basis of death, nobody pays for those capital gains taxes, nobody pays for that depreciation recapture. So it's pretty cool that you have those tax advantages. Another one is the ability to exchange properties, right? You can exchange one property for another property and just keep depreciating it.

Right.

You don't have to recapture that because you exchanged it, you didn't sell it. That's also a pretty cool tax advantage with real estate. Okay, so the overall stock market is 3 or 4% real estate, right? There's a lot of publicly traded real estate out there. But the truth about real estate is that 90% of it is not publicly traded, only 10% of it is publicly traded. So unlike when you look at the overall business world where the vast majority of the profit being made in this country is being made by publicly traded companies, stocks, that is not the case with real estate. Most of it is coming through private hands, private mom and pop investors, private institutional investors, but it's not on the publicly traded side. So the idea is to overweight real estate in your portfolio to make up for this fact. Okay. Rather than just buying what's publicly traded in a capitalization weighted way. And that's a little bit more representative of the real economy. Okay, so let's talk for a minute about private real estate. We've talked about real estate in general. Let's talk about private real estate.

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Because you don't have to invest in private real estate. You can just go buy something like the Vanguard REIT index fund. You know, it comes in a traditional mutual fund version, an ETF version where the ticker is vnq. Private real estate is other stuff, right? It might be the property down the street, might be a syndication, might be a private fund, might be, you know, doing fix and flips. There's lots of ways to invest in private real estate. Let's talk about what's the case for getting away from real estate that's traded on the stock market.

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You get high returns still. They might not actually be higher than what you can get with public real estate, but you still can get high returns. You definitely get lower correlations with your, you know, with your stocks and your bonds than you do with public real estate. And you may be getting better risk adjusted returns because of those low Correlations, you may be getting an illiquidity bonus. You know, the funny thing about the stock market is you can buy and sell every day, meaning that real estate has to be totally liquid to you. Well, if you were willing to be, would you be willing to be less liquid if you got paid for that? Most people would say yes. You don't need access to all of your money every single day. And so there is some sense that investing on the private side can pay you an illiquidity bonus. You generally get lower expenses. When you have a publicly traded investment, it has to follow a lot of regulations. The SEC has a lot of regulations, and it costs money to be compliant with those. But if you are investing under regulation D, there are fewer. The SEC is not overseeing it nearly as much. There are fewer regulations to comply with, and theoretically, the investment can pass those savings onto you. You also generally are investing in smaller properties, right? These big, huge publicly traded REITs, they need big properties. They're not gonna go out and buy individual houses. They're not gonna buy small apartment buildings or duplexes or those sorts of things. They just need to put more money to work. So they tend to invest in smaller properties. And then, of course, on the private side, the market is just much less analyzed. There's not thousands of people analyzing the value of each of these rates every day, you know, and there might only be two people looking at the property you're thinking about buying. And then, of course, the other nice thing you get is you get the depreciation passed through to you whether you own the entire property or whether you're investing in syndications or whatever. You get that depreciation passed through to you that you may be able to use on your taxes. Okay, so let's talk about some examples. Let's talk about 2022. It's been a couple of years. People might have forgotten this, but a couple of years ago was not an awesome time to be an investor in publicly traded securities.

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My overall portfolio return that year was about minus 10%. The stock market was down 16%. My small value stocks were down about 5%. International stocks were down almost 16. Smaller stocks were down even more. Internationally. My safer investments, right, my TSPG fund was very safe. Add positive returns. But muni bonds, remember, interest rates went up like crazy in 2022. Bonds lost money. My muni bonds were down 7%. My TIPS were down almost 12%. You know, even the individual tips that don't lose money, if you hold them until they're gone, they didn't have a great year either. I bonds happen to have a pretty good year that year, but, but that was about it. Now if you look at the real estate side of our portfolio, it looked like this. Publicly traded REITs, not an awesome year.

Right.

They lost 23%, even worse than the overall stock market. But my private real estate did pretty well. I made about 9% in 2022. Some of the funds had really good returns, like this origin fund had almost 30% return that year. My income plus fund had a 10% return. The DLP housing fund was up 19% that year. The MLG fund four was up over 10% on the debt side made about 9%. One of those funds made almost 12% that year.

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So when the rest of your portfolio, your stocks and bonds and your REITs are dropping, it feels pretty good to have something in there that's actually going up. Now if we looked at 2024, you know, private real estate isn't losing money, but it's not doing nearly as well as stocks or maybe not even all that much better than bonds this year. But that's the way it goes when you have a diversified portfolio. So some people wonder if private returns are higher. Now these people selling these investments will often tell you they are, but the data is that that's not actually true. Now it's not dramatically different, but most of the data out there suggests that public real estate actually has higher returns. So on average you're probably not getting higher returns with private real estate, but your risk adjusted returns maybe better and you're going to have lower correlations with stocks and bonds. However, the interesting thing about this is they don't have to be higher for it to still make sense for you to invest in private real estate. This is some graphs showing private versus public real estate. The blue line is private, the red line is public. And you'll see that they pretty much run right alongside each other. Whether we're talking about retail, office, industrial or apartment types of real estate investments, they basically run alongside each other. It's kind of interesting. You see when they go down, the public tends to go down first and then the private tends to go down as it's mark to market. But for the most part they basically just parallel each other. However, when you look at long term data and try to compare them, you'll see that public real estate tends to do a little bit better than private real estate. You see the listed equity REITs there is the second line down, right? And you see returns that are something like 11% over this time period 98 to 2017, you can scroll down a little further and see the private real estate is listed as unlisted real estate in this particular chart. And that looks like it's got returns of about 8% over that time period. Now, if we look at some other studies, some other time periods, we can see other comparisons. For example, this one by Beath and Flynn shows a difference of about 1.3%. Bollinger and Pagliari showed a difference of about 2.3%. Arnold, Ling, Narajo, they showed a difference of 1.6%. So on average, maybe 1.7% lower for the private real estate, which is very interesting considering how many people are out there telling you private real estate has higher returns. However, I came across this study that I thought was very interesting, and they got into all kinds of statistical, you know, wizardry. But the bottom line is they discovered that adding even a smaller amount of private real estate to the portfolio actually increased the portfolio returns because the correlation with private real estate was so much lower than it is with public real estate. And so they found these portfolios with higher weightings of direct real estate investments, meaning private ones, as opposed to REITs, outperformed.

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Is very interesting. And so the correlation matters and the return matters, but that's kind of the case for private real estate. The risk adjusted returns. If you adjust for risk, you know, using something like the Sharpe ratio, you'll see that it's been much better on the private side than the public side over the last 20 years. And that's mostly just because of correlation.

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The blue bars here have much. That's private real estate. That's much lower correlation with the S&P 500 than the black bars.

Right.

Public real estate. It is interesting that public real estate correlations have climbed so much in more recent years than they used to in the past. And so that's kind of the benefit of staying on the private side. They haven't climbed nearly as much. You can still get low correlations with your private real estate. Some argue that's just because it's not mark to market. But I think there's a little bit more to it there. This is interesting as well. Over time, public and private real estate returns can diverge a bit. And I think it's interesting that you often see public real estate as you might expect because it's mark to market daily is often a leading indicator of what private real estate is going to do. And it's very interesting after, you know, a public stock market, public reit, Crash, you should actually expect a little bit better returns out of the public REITs, you know, because the private real estate tends to not crash in that same manner. And so if there's been a big downturn recently, you actually might be better investing on the public side than on the private side. Okay, let's talk about pros and cons of real estate. Okay, the first one's high returns. We talked about that low correlation with stocks and bonds. You get a high proportion of your return as income. You get appreciation, right? The property goes up in value. You've noticed this with your house in the last few years. If you own a home, it appreciates. And guess what? That wealth is now yours. Favorable leverage, right? I mean, you can leverage any investment, but it's just easier to leverage real estate. People expect you to leverage real estate. They'll give you mortgages and they'll give you HELOCs. It's just easier to leverage real estate. You can leverage stocks or bonds. You know, you can go invest on margin in a margin account if you want, but the terms are just way better on the real estate side. You can shelter your income using depreciation. And so a lot of your equity, real estate income is basically tax free to you, which matters a lot. If you're in a high tax bracket, you can exchange the properties, right? It's a great way to avoid having that depreciation recaptured. And you can invest in lots of different ways. You can find a way that matches your ability, your, your knowledge, your desire to put work in, etc. There's lots of different ways to invest in real estate. The market tends to be a little bit less efficient, and those are the pros. Let's talk about the cons now. Okay, here's one con. There's a lot of scams in real estate. Not as many as there are in crypto or something like that, but there are a lot of scammers out there, and particularly on the private side, right? There's less regulation, there's less scrutiny, and that's nice, and that you don't have to pay for that. But it also has fewer people watching out for scammers. And so almost all the scammers in real estate are on the private side, not the public side. Now, most people investing on the private side are not scammers, but you should be aware that is one downside. You know, there are a few people out there. Leverage, of course, is cool when it works for you, but it's important to remember that it works both ways. You Know when the value of an investment is falling and you bought it with borrowed money, you're really getting kicked from both sides. Real estate can have aspects of a second job, you know, particularly if you're investing directly, right? Without managers or anything. If you're managing the property yourself, it will often feel like a second job. And while people who invest directly tell me they don't get 3am toilet calls nearly as much as people worry they will, but it can still happen, right? It's a bit of a second job. And if you're already working 75 hours a week at the hospital, it's pretty hard to get excited about any aspect of a second job. Tenants, you know, if you ask real estate investors, particularly direct real estate investors, what they hate, they'll say tenants, right? You've got somebody living in your investment and it's somebody that often has no interest in being a homeowner or maybe can't afford to be a homeowner, and they may not treat your investment all that well. Real estate investments tend to be illiquid, right? It's hard to get out. It takes time. It takes a lot of money to get your money out of the investment. Taxes can be complicated, right? You might have to file in multiple states. You might get a bunch of different K1s. You might have to do a bunch of Schedule E's, right? More complicated than if you're just getting, you know, one form, one 1099 form coming from Vanguard or Fidelity that can be imported directly into TurboTax. You're almost surely, if you get into a lot of real estate investing, you're going to be hiring somebody to prepare your taxes and there's an additional cost to that. Real estate is different depending on where you go. All real estate is local. And you could have totally different rules when it comes to real estate in your state, but versus the state next to yours, even your city compared to the city next to yours, it can even change neighborhood by neighborhood. And you have to understand the rules of where you're investing and how they're going to affect your investment. There can be some liability as well, particularly if you're not investing via an LLC or a limited partnership or something like that. Somebody trips and falls on your property, you're liable for it. And so you need to consider that when it comes to your asset protection plan, you're going to need to at least buy some insurance, some liability insurance on that property. And then of course, you know, it's actually investing is not that complicated. It's pretty easy to invest when you're investing in index funds, right? It doesn't take a lot of expertise to pick a winning mutual fund. You know, it's not that hard once you understand the basics. A lot more expertise is required on the real estate side. Now, there's potential to add some value to your portfolio by gaining that expertise. But. But let's not kid ourselves that this is just as easy as it is to invest in stocks and bonds. It's not as easy. You gotta learn a little bit more about it. That's partly why we put our no hype real estate investing course together, is just to help you get that additional knowledge that's needed when you're investing in real estate. And another con is just that. Most real estate's in private hands. You can't just go buy a real estate index fund. It doesn't exist. That covers most of the real estate in this country, much less the world. What's available publicly is a tiny slice of the real estate out there, and it's really only very large properties. And so if you want to invest in smaller properties, you're going to have to go into the private world. Okay, is real estate right for you? Well, that's a good question.

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Is it right for you? Well, there's real estate and then there's real estate. Let me give you an example here. Okay? Are you interested in spendable income? Okay? That's important to you. Okay? Real estate might be good for you. Are you interested in speeding up your pathway to financial independence? Or are you interested in diversifying your portfolio away from stocks and bonds? Are you willing to get more education, do more work than might otherwise be required to invest? Because real estate is totally optional. You do not have to invest in it. Are you willing to deal with some additional hassle if you can't answer yes to all three of those questions? Real estate probably isn't right for you, but if you can, real estate probably is right for you. But you gotta ask yourself, what kind of real estate? Let me explain what I mean, right? For example, do you like slot canyons? Well, most people like slot canyons if they get a chance to go see one. You know, they're down in Page, Arizona, and they get a chance to go see Antelope Canyon. It's beautiful. And there's stairs in it, and they take pictures and there's 50 people in there with them on this tour, and they just think it's great. Well, there are slot canyons and then there are slot canyons. Here are pictures of some of my friends and I off doing slot canyons. Now this is very different from the experience you have walking around Antelope Canyon on some stairs with a guy, right? And in some ways walking around an Antelope canyon is really straightforward, simple real estate investing. Doing slot canyons like these, relatively complex real estate investing. And you've got to figure out where you fit on the spectrum of real estate investing and make sure you invest that way. Let me show you what I mean. This is a concept I developed and discuss extensively in our real estate course. But this is what I call the real estate investing continuum. And it goes from the left side to the right side. The left side are direct real estate investments. The right side are very passive indirect real estate investments. So if we go left to right, we've got ground up construction and fix and flips, short term rentals, long term rentals, then turnkey properties, syndicated properties, private funds and REITs, and then publicly traded REITs, real estate investment trusts. And as you move from left to right, you need less experience, you'll have less hassle, you get more diversification and more liquidity. But you will give up control, you'll give up tax benefits, you'll give up fees, and you'll probably have lower returns. So there's not a right or wrong way to invest in real estate. All of these can be successful ways to invest in real estate, but there probably is a right way and a wrong way for you. It is not mandatory at all. You don't have to invest in any of these ways on the spectrum. You can just buy a total stock market fund. 4% of that fund is invested in real estate.

Right.

It's not like you won't have any real estate investments. You'll have some just buying dti. But if you want to do more than that, you need to figure out the right way for you. And I hope some of these slides I'm going to go over next help you with that. Okay, on the right side of the continuum we have publicly traded real estate investment trust. This is your VG slx, your vnq, which is the Vanguard real estate index fund. These are equity REITs only. It includes 167 of these stocks. Now that's what they are. They're traded on the stock market. It is more volatile than the stock market, but has a low expense ratio of about 12 basis points. Last I looked, if you want to invest on the debt side, you can use something like the iShares mortgage REIT ETF with the ticker of REM these are both very easy to use, they're very liquid, they're very diversified. And BNQ makes up 5% of my portfolio. I invest in publicly traded real estate. I think it's a good investment. But bear in mind that the expense ratio does not include all the expenses of these companies.

Right.

That's just the mutual fund expense ratio. Right. All these companies have business expenses. They don't necessarily pass those through to you in the form of an expense ratio. Next on the continuum, moving right to left, are these private funds and REITs. So these are collection of syndicated properties. What's a syndicated property? Well, that's when you go out and buy, you know, with like 100 other investors. You buy an apartment complex, maybe there's 200 doors in this apartment complex. So you all go in together and you buy it. That's a syndication. Well, a fund might have 10 or 15 of those individual properties. And sometimes it's structured as a reit. That's just a tax structure. Sometimes it isn't. It can be open or closed. It can be a blind pool where you know, where you don't know what the manager is going to buy. Or it can be already purchased and not be blind. But every fund is unique, right? Each one of these private real estate funds have different structures and different properties in them, different ways they charge you fees, different ways they share the profits, et cetera. It's just way easier to diversify than buying individual syndications. But you are a little more reliant on the fund manager to do a good job. And they often have relatively substantial minimum investments. Pretty typical ones like $100,000 get down below about $50,000, and you're starting to wonder how experienced this fund manager is. But they can be even higher than that. They can be a quarter million dollars, a half million dollars or a million dollars. Okay. That's just the minimum investment to get into that fund. Debt funds, right. You can invest on the equity side or you can be the lender. You can invest in the debt side. And this is when the investor money is pooled into a large fund. The manager loans the money out to developers for something like 6, 12, 18 months at a relatively high interest rate plus a couple of points is pretty typical. They might be paying 10 or 12%, but they're willing to do it for six months to not deal with the hassle of going through a bank. And so rather than doing an individual note carrying the mortgage on a property, you're basically getting 70 or 100 or 200 properties. So it's better diversified and you have less hassle and you're going to get better returns than the individual notes. The risk when you invest on the debt side is that they have to foreclose on these properties because the developers stop paying and then it becomes an equity fund. Another downside of these is they're very tax efficient because the entire return paid out is interest, right? So you're having to pay tax on the entire return every year at ordinary income tax rates. So they're really best held in retirement accounts, if you can. But the income from them is dramatically higher than bonds. Rather than making 4 or 5%, you might be getting 7, 8, 9, 11% on the debt side of real estate. And it's backed by something, right? This isn't a peer to peer loan. It's backed by the property. So if they stop paying, the fund can foreclose on the property. So it gives you a little bit more security there. Okay. As you move from right to left after the private funds is syndications, right? These are individual properties you're buying. You can analyze the deal. You go in there with, you know, 100 other investors or something like that and buy a big office building or a big apartment complex or a big industrial complex or whatever. You hire a manager, an operator to do it. This allows you to buy larger properties that you otherwise couldn't afford to buy.

Right?

The classic example is an apartment complex. You might put in there $25,000 or 50 or $100,000. And you're a passive investor, right? You're a limited partner. The general partner or operator or manager has to run the deal. So your risk is limited to you can lose everything you invested, but you won't lose more than that. That's not the case. When you buy properties directly, you can lose more than you ever invested, but not when you're doing it via syndication. So you get to be a passive investor. You get to analyze each deal before you invest. You can't lose more than your investment. The downside is they tend to have relatively high minimum investments and can be tricky to diversify. We'll talk about the dilemma of the minimum investment later. So we continue to move on the spectrum. Now you're owning the properties all by yourself. A turnkey property is where somebody sells it to you, manages it, and helps you sell it when you're done. So basically you get all the benefits of ownership without any of the hassle of ownership. They manage all the tenants. They manage the buying and the selling and the lending and all that sort of stuff for you. So you might not have as much control as you like over the small things, but you control the big things. You know, like when it's sold, for instance, big renovations or that sort of thing. You might be locked into the management for several years, but usually not forever. And you can get out after a couple of years and hire your own manager if you want. But the nice thing is you don't have to go find your own tenant, much less manage that tenant. Those 3am calls are not coming to you. Moving further left on the spectrum, we come to longer term rentals and this is the classic mom and pop. I own a rental home down the street and we rent it out and we have renters in there, right? You're investing directly. You buy the property, you rent it out. You get maximum control over the property. You get all the benefits available to it. If it's managed poorly, you pay the price. If it's managed well, you get the benefits. You can hire assistance, of course, you can just go out there and hire a property manager or whatever. You can hire someone to do the lawn, someone to come clean the house if you want, but you're going to have otherwise maximum hassle in managing this thing. Sometimes these contracts are structured, particularly industrial properties in a way that's called triple net. And in this case the tenants are paying a whole bunch of the expenses that's not unusual for them to pay the utilities and the property taxes, et cetera. You can structure that so they're paying all that stuff. If you want, your return will probably be a little bit lower because of that, but you can reduce your hassle and your risk. Next on the continuum is short term rentals. And I have a soft spot spot in my heart for short term rentals. I actually think this is the fastest pathway to financial independence there is out there. You're not actually in the rental business. When you're doing short term rentals, you're in the hotel business, right? Because these people are only staying in the property for three days or seven days or two weeks or something like that. But you can charge a lot more because they're not comparing it to renting an apartment or renting a house, they're comparing it to hotel rooms. And you pay a lot more to stay in a hotel than you do to rent out an apartment. You generally have higher overhead, especially if you have a manager. Instead of paying 5 or 10% for management, you might be paying 25 or 30% of what you bring in. But if you're willing to Manage that yourself and save that money. You could have as high as 20% cash on cash returns and maybe be financially independent with as few as five doors under management. And that's pretty enticing to people to be financially independent with maybe only $500,000 worth of down payments. There's lots of risks, but this can be a particularly good side gig for the spouse of a high income professional. You know, you're bringing in the money that you can use to buy the properties. As the high income professional, the spouse has a little bit of time to manage them. Maybe they can get real estate professional status and get some extra tax write offs because of it. Sometimes it can work out very well. And I think if you really want to get the financial independence very quickly, this might be the fastest way to get there. Okay, one more step left on the continuum brings us to fix and flip properties, right? You're buying a house for a lot less than it's worth, maybe, you know, 60 cents on the dollar. You fix it up very quickly and cheaply and then you sell it. And if the market's rising, you got that extra tailwind while you're holding onto the property and renovating it. That can be a headwind if prices are falling, of course. But how quickly you can flip it, you know, having these systems in place and being fast and efficient can really, you know, affect what your return is. If you're terrible at doing flips, it's not hard to lose money doing fix and flips. But if you're good at it, you know, better than most people see on those TV shows doing fix and flips, you might be surprised how well you can do at it. The hard part is deciding how much are you going to do yourself versus hire out. And if you think, you know, managing a direct real estate investment, a longer term rental is a second job. That's nothing compared to doing fix and flips. That has a lot of aspects of a second job. And you can go even further. You know, fix and flip. You're already buying an established house or an established building, right? You can just buy a lot and construct on it. You know, now you're not just in the rental business or the hotel business, you're actually in the construction business. You got to do permits, you got to put the foundation in, you got to do the framing, right? You got to do everything. When it comes to the house, it's all yours. And you can build them on spec or you can get a client and custom make them for that client. And I think this is where you can find the maximum possible profits in real estate. You've also got the maximum risk and hassle. I think most people who consider themselves real estate investors are not interested in ground up construction, at least not while investing directly. But if you are, there's a lot of potential. Okay, so left to right, you get, you need less experience, you get less hassle, you get more diversification, you get more liquidity, you get less control, worse tax benefits, more layers of fees and probably lower returns. You know, if you're willing to be doing fix and flips, you ought to be making a whole lot more than if you just put that money into VNQ and wait it, Right? It's a lot of work and you should be paid more for that work. Okay, so how do you choose? Where do you belong on this spectrum?

Right.

Well, what I've found over the years is that there's most real estate investors are not super passionate about their job. They don't just totally get turned on by this idea of providing housing for people. It's not like doctors out there who are just thrilled to be out there providing healthcare for people that they feel like this is a calling in their life. I've yet to meet a real estate investor who felt like this was a calling in their life. They're doing it mostly for the money and the tax benefits and those sorts of things, right? So if you don't want that as a job, don't take it as a job.

Right?

Don't be on the left side of the spectrum when there's lots of elements of a second job. Be more on the right side of the spectrum. Ask yourself, what are your financial goals?

Right.

Do you need more than just a standard plan?

Right.

Do you need to even invest in real estate? Maybe you can get there with just stocks and bonds or maybe add a little bit of public real estate and you can get to your goals. Maybe you don't need private real estate, you don't need direct real estate investments to reach your goals. On the other hand, if your goal is to become fi five years out of residency, you're probably going to need to be a little bit more on the left side of the spectrum and be a lot more involved in these investments. Keep in mind that the greatest tax benefits of direct real estate investing are only available if you hold on the property for the rest of your life.

Right?

You got to exchange it, exchange it, exchange it and then die while you still own it. That's how you really get all the tax benefits out of it. Anywhere else on the spectrum, you're going to sell that property. Eventually the depreciation is going to be recaptured and you're not going to get nearly as much tax benefit out of it as you could if you owned it for the rest of your life. You also need to ask yourself, well, how much work am I willing to put into this and for how long? If I'm willing to work really hard for two or three years, you might be able to do that sort of a thing. Build up a short term rental portfolio and then hire management to do it. If you're not willing to put in work pretty hard work for a few years, you probably want to be a little more on the right side of the spectrum. You also, of course, if you're investing in private real estate investments, you need to be an accredited investor, right? And doesn't count if you're just buying the whole property yourself. But if you want to be invested in a fund or a syndication that's not publicly traded, you're going to have to qualify. Now, legally, that means having an income of at least 200,000 each of the last two years, or $300,000 together with your spouse or at least a million dollars in investable assets. I actually recommend people double both of those numbers because I don't think they've kept up with inflation as well as they should have and that you have both of them, both a couple million dollars in investable assets and an income of $400,000 or more. If you have less than that, you're just going to run into issues with the minimum investment dilemma, which we'll talk about a little bit later. Okay, so let's talk about some case studies here where somebody might choose to be on this spectrum. Let's say there's a doc here. It's an accred who's got $4 million in investable assets and wants to diversify a portfolio by putting 30% of it, $1.2 million into real estate. Very interested in tax efficient investments and tax advantaged income. Doesn't bother this doctor to file taxes in multiple states. Doesn't want too much hassle though, and wants to be pretty diversified. So what does this doctor choose? Well, private real estate funds makes sense for this doctor. Okay, case study number two. This is a doc with a small local real estate empire. Been investing directly for many years, but now starting to have trouble finding good deals in her hometown and wants the maximum tax breaks. Wants the benefits of direct ownership, but doesn't want to build a team in another location. Doesn't want to invest here, but still wants to be a direct investor. Well, what should they do? Turnkey investments are perfect for this doc, right? You can buy it in another town, somebody else is taking care of all the details, but you get all the benefits of direct ownership. Okay, case number three. This is a doc who's just burned out on medicine, wants out of medicine as soon as possible, willing to put in a lot of work in order to get out. Spends $150,000 a year, has a million dollars to invest. A million dollars. You can't invest today. And with the 4% withdrawal method, expect that to support you, right? You don't have enough money. But if you use that million dollars to build a short term rental empire, that might be enough to do it. You might be able to be financially independent and be able to come up with $150,000 per year to spend. It's going to take some risk, it's going to take some work, but the prescription for this doc is short term rentals. Okay, here's a document that's 35 years old, has a $200,000 portfolio, comfortable with mutual funds and would like to allocate some money toward real estate. Doesn't know a lot about it. Very busy young kids, busy practice, really. Not looking for a side gig. What should they invest in? Well, public real estate, right? You can just go to Vanguard and invest in their real estate index fund. It's very easy, no problem. If you want to put 10 or 20,000, $30,000 into it, no problem. There's no minimum investment and so that works well for this doc. Okay, here's another one. A 65 year old doctor wanting out of his direct real estate investments. Still loves analyzing deals, but worries about who's going to take care of all this if he dies. Comfortable with minimal diversification. Been concentrated for a long time in his own direct real estate investments. Well, what might work for this stock is going into syndications, right? No longer does he have the hassles of managing the property himself. Another option is to go into opportunity zone funds where you get some cool tax benefits when you have a bunch of capital gains, right? It's a chance to minimize the tax hit from getting out of your direct real estate investments. So five different doctors, five different case studies, all of whom chose a different place on the real estate continuum to invest in real estate. Let's talk a little bit about real estate education, right? The way you make money in entrepreneurship in business is you find a need, you find a problem, then you Figure out how to fix it. And that's what you're doing when you are building a business, no matter what the business is. So what is the problem when we're talking about real estate investments? Well, the problem is people need a place to live and they need a place to do business or a place to store their stuff or whatever, right? And you're providing that, you're solving that problem by providing this, you know, property for them to do that with. And so, so how do you get educated? How do you learn about this stuff? Well, books and online courses are a great place to start. There's lots of great real estate books out there. There's even more terrible ones out there, to be honest with you. I've got a list on the website@whitecoatinvestor.com of some books that I think are pretty good for real estate, but lots of them are filled with a ton of hype. There's lots of hype out there in real estate education. In fact, that's why we called our course the no Hype Real Estate Course. But books and online courses are a great way to learn a basic framework and delve into a niche subject matter. Blogs and podcasts are good because they keep you up to date, right? They're always coming out with new stuff every week, every day, every month, whatever, there's new stuff. And so if the laws change, tax laws change, or interest rates change, you can have more current stuff when you're following a blog or a podcast. And then another great way to learn is in communities, whether they're in real life or whether they're online, like a forum or a subreddit or something like that, a Facebook group. But you can find people that will help you, you can find mentors. And that works very well when you have controversial questions, questions for which there is not a right answer, and you want to hear both sides of an argument, or personalized questions about a particular deal or a particular investor, or what to do about a tenant. Communities can be really good to help with those sorts of things. That's how you get educated about real estate. But you need to learn this stuff if you're going to be investing in real estate. You got to learn more than you had to know to just put together a stock and bond index fund portfolio. It's got its own vocabulary. For example, what's a capitalization rate and why does it matter?

Right?

How do you calculate a net operating income or an equity multiple? What are the different types of catch ups in a waterfall? What's an appropriate price to pay. A live in apartment manager versus a property management company. What items need to be in a short term rental? What types of renovations will provide the best bang for your buck? In a fix and flip, how do you determine market rent? Right, there's all these things you need to learn to be a real estate investor, particularly on the more direct side. The more directly you invest, the more of this stuff you have to know yourself. If you're hiring somebody to handle all those details for you, running a fund or something for you, you don't necessarily have to know all those things, but it's good to understand that. And so becoming more educated as a real estate investor is definitely helpful. Okay, let's talk for a few minutes about leverage. Leverage is debt. That's what it is. When you or your representative buy a property using borrowed money, you are using leverage, or in stock market terminology, buying on margin. That increases your risk but also increases your potential returns. Leverage works, right, but it works both ways. Here's an example of leverage and how it works, why it works. If you buy a $200,000 condo with cash, maybe it pays you $10,000 a year for five years and appreciates 25%, then you sell the condo, you paid 6% in closing costs and walk away with $266,000. 200. $266,200, which gives you a cumulative return of 42.5%, or about 7.3% per year. Now, instead of doing that, let's say you use your $200,000 to buy four condos instead of one. Now, your cash flow is barely covering your expenses, but the condos appreciate 25%. And then you sell them. You pay 6% in closing costs and pay off the mortgages. You walk away with $360,000, a cumulative return of 80%, which annualizes out to about 13% per year. That's the benefit of leverage, right? You're investing using other people's money, borrowed money, and when things go well, that really helps boost your return. So it was leverage, good. Wait a minute, I thought, you know, leverage was bad. Well, it can be good. It can be bad. You've got to control the risk. If you put 25% down, you're using $3 of other people's money and $1 of yours. If you put 3, 33% down, you know, down payment we're talking about, you're using $2 of other people's money for every $1 of yours. If you're only putting 5% down, you're using $19 of other people's money for every one dollar of yours. So obviously the more leverage, the better off you do when things go well. But the more leverage, the worse off you are when things go poorly. So you need to consider the worst case scenarios. What are you going to do if property values crash and rents decline? How long can you ride it out? Well, the less leverage you have, the longer you can write it out. And really the key here is cash flow positivity. You want to have positive cash flow from the property.

Okay?

So after paying all the expenses of the property, including the mortgage, you know, the interest and principal on that money you borrowed, you want to still have money coming from the property into your pocket, not coming out of your pocket into the property. You can have an infinite number of cash flow positive properties, but even a well paid doctor can't support more than 3, 4, 5 cash flow negative properties. It's very stressful to have cash flow negative properties. And the way you have positive cash flow properties is putting down more money.

Right.

So what do the pros do? Well, it's very interesting when you look at these people that have been doing this for decades, that do this at scale, that do this running a fund or syndications, how much do they put down? Well, they put down 25 to 50% of the value of the property, typically something in the 30s. 33%, 30%, 35%. That's kind of the typical range they use. And why is that? Because that's how much you have to put down to make sure you stay cash flow positive and can write out any downturns. Okay, let's talk about the dilemma of the minimum investment. Okay, let's say you have a million dollar portfolio and you want to invest a third of it into real estate, and you prefer syndications. Well, if these syndications you're looking at at $100,000 minimum investment, you could buy three of them and have $33,000 in cash left over in your real estate allocation. But if one deal goes south, you lose a third of your real estate and 10% of your entire portfolio.

Right?

That's a big deal. You're not that diversified. You've got pretty concentrated risk on the real estate side of your portfolio. And in fact, if you're only saving $100,000 a year, like many doctors are, and a third of it goes to real estate, you're going to be saving for your next syndication for three years.

Right?

So these minimum investments that are $50,000 or $100,000 or $250,000 can have a real impact when your portfolio isn't that big or when you're not saving that much money a year. Now, if you're making $2 million a year and you got a $10 million portfolio, this probably isn't an issue for you. But if you're a more typical doctor and you're making 3 or $400,000 a year and you're saving 50 or 75 or $100,000 a year, these minimum investments become a lot harder to deal with. So if you look at our current advertiser list, you know, these are the companies that advertise with wci. You can see the minimums are pre variable, right? You can use the fundrise reit. This is a private real estate investment trust with only a 500 minimum. And some of the crowdfunding sites, like Equity Multiple, have a $5,000 minimum. Origins got a $50,000 minimum. Wellington has a $50,000 minimum. The Mortar Group has a $50,000 minimum. 37th Parallel, again, $50,000. Jack's has $100,000 for their fund. Or you can buy a turnkey house through Southern Impression Homes. They expect you to have to put down 60 to $75,000 to do that. DLP has $100,000 minimum right now. And so you can see this becomes a dilemma, right? If you're not putting that much into real estate, it's a lot harder to do this. So as you earn more and as your portfolio grows, this dilemma gets better and eventually goes away, right? So I talked about what an accredited investor has to have as a minimum. This is the legal minimum, right? $200,000 in income or a million dollar portfolio. But I think you ought to double both of those numbers and have both of them. Or the alternative is to have very concentrated risk and not be diversified. But I think the most important thing when it comes to being an accredited investor is not just meeting the minimums, even my doubled minimums, is to be a real accredited investor. What does that mean? Well, an accredited investor, the idea behind it is two things. One is that you can evaluate the merits of the property without the assistance of an advisor, accountant or attorney. And two, you can lose the entire investment without it affecting your financial life. And if you can't check both of those boxes, you probably don't have any business buying syndications, private real estate funds, etc. You just need to learn more about real estate, build more wealth. Before you do that. You know, you can invest in small minimum deals, but the downside of Doing that is the ones that have low minimums are often the least experienced operators. And you end up having a lot of manager, a lot of operator risk with those companies. The better ones tend to charge higher minimum investments. So in order to invest directly, you're going to need 50 to $200,000. Either have the money or you don't. If you don't, you got a few options. You can house hack, right? You can rent out a room in your house, something like that. You can provide some sweat equity in a partnership, right, where they're bringing in the money and you're doing the work, right? That's an option. Or you can just save up the money. It just takes a little bit longer before you get into the investments. But those investment minimums can range anywhere from $5,000 to a million dollars. And, and like I said, the more experienced ones tend to have the higher minimum investments and that just makes it harder to maintain diversification until you reach a certain level of wealth. Okay, let's talk briefly about interest rates and how they're affecting real estate investments. The yield curve right now. And I this picture is from like a week ago. I was putting this presentation together. These numbers are from like a week ago. The yield curve is still flat. To invert it. Right. So what does that mean? That means long term rates are not necessarily higher than short term rates like they are classically.

Right.

It's pretty flat right now. A 30 year mortgage, if you went out to buy a house right now would be about 7%, just under 7%. And that's kind of where we're sitting. That feels high to those of us who have 2.5% mortgages.

Right.

Because it wasn't that long ago. But the truth is this is pretty typical. This is kind of where interest rates have been long term, right? They've been higher and they've been lower. But this is not a high interest rate environment. This is a pretty typical or a moderate interest rate environment. I think it's important to understand what happened in 2022. Rates went up about 4% across the board, short term and long term rates. And so people who were over leveraged in real estate got into trouble. Some of them got into trouble right away, especially if they had variable interest rate loans and they had a loan that was 3% and then it became 7% and all of a sudden they're in a cash flow negative and having problems. In fact, there's a lot of people out there with variable loans that bought rate caps that are just starting to reset now, you know, 2024, 2025, 2026. And then they're going to be in trouble if rates don't drop dramatically. And they're probably not dropping dramatically. You know, the Fed is definitely signaling it's probably going to drop rates. But you know, maybe it's a couple of quarter percent points, quarter percent cats, that sort of a thing, not going down 4% like they went up 4% in 2022. You know, in 2022, those debt funds, those private debt funds were able to raise the prices, the rates they were charging to borrowers, but they weren't able to raise them 4%.

Right.

They raised them more like one and a half, 2%. There's lots of people right now that are not moving out of their houses because they're locked into low rate mortgages. So there's less inventory on the market and increasing demand for the few properties that are out there. There just isn't that much supply. They haven't been building enough multifamily or single family housing for 12, 15 years. And so we're way behind the amount we need. And that supply issue is keeping housing prices up now in 2024. And this is already out of date because of how stocks have done the last week or so, but the overall stock market is actually up about 26% on the year and publicly traded real estate is up about 6% on the year as of today. And so we're talking about, you know, the Fed's talking about decreasing short term rates over the next year. 1.21 cut, 2 cuts, maybe 3 cuts, something like that. But remember that they don't necessarily control longer term rates and the longer term rates are generally what you're dealing with in real estate. So even if the Fed cuts rates by three quarters of a point or 1% or something like that, that doesn't mean that 10 year treasury rates are going to change, much less 30 year mortgage rates. They could actually go up. That's what happened in the last month as interest rates came down on the short term and actually went up in the long term. Surprised a lot of people. Okay, a little bit of information about our no Hype real estate investing course. There's over a dozen faculty members that have given lectures for this course. It's over 25 hours of content, covers the entire real estate spectrum. Soup to nuts. Assumes you don't have any prior knowledge about investing in real estate, but it still covers the topics in depth. The emphasis in it is on no hype. Straightforward. Tell it like it is Education, right? We don't want to blow smoke on you like so many courses and books, et cetera out there do. Real estate investing is not risk free. It is not a guaranteed path to quick riches. In fact, if you're trying to get rich quick, you're almost surely going to get burned no matter how you're investing, including in real estate. So we try not to give you any of that hype and just tell you the way it is. We give you practical tips for every type of real estate investing, whether it's short term, whether it's publicly traded, whatever. We have pre and post tests, you can test your knowledge, make sure you're actually learning something. It's evergreen, it's always available, you can take it at your own pace. Once you buy it, you own the whole thing. You don't have to show up on Tuesday night at 8 o' clock to be with your class. It's self paced, you can take it as you like. And in fact, if you have an Apple device, you can listen to it podcast style on your commute. But what does it contain? There's an introduction, talks about why real estate goes through the vocabulary of real estate that you need to know, shows you how to find money to invest in real estate. We talk extensively about the real estate spectrum that we mentioned tonight. Talked about how to buy it in retirement accounts and what the different ownership structures can give you. When it comes to real estate investing. We talk about publicly traded real estate, private real estate funds, syndications, turnkey properties, long term rentals, short term rentals, fix and flip. We talk about the tax benefits in great detail, talk about how to title and protect your real estate from lawsuits, whether the lawsuit comes from practicing medicine or from someone slipping and falling on your property. Then we provide as many resources as we can. We're always adding new things to this to give you, you know, more up to date information, more extensive education. And then of course, like I said, we have some post tests and wrap up information in the course. But as for those of you watching this, we've got a special deal for you on the course. It's 20% off starting now for the next week. 20% off. Use this code, start 20 and you get, you get 20% off the course, right? There's no risk to you for this course, like all of our courses, you get a one week, no questions asked guarantee. You know, you go watch 5% of it and you're like, you know what, this isn't for me, I don't want it. Just let us know, we'll give you your money back. You know, occasionally people do this. This is about 3% of people that buy it. It's not very many. Most people are very happy with it. But if you just want to check it out, that's okay with us. We'll let you do that. And you can check it out and see if you want it. But that's available@whitecoatinvestor.com noHeight okay, what else do we have? Well, we have a bunch of free stuff too, right? We got the White Coat Investor blog and podcast. We cover real estate on those from Time. We have a free monthly real estate newsletter. This tends to be written by Brett, our coo who actually has a fairly extensive short term rental empire he's got here in the Utah area. He's also been a general contractor for 20 years of his career.

Right.

He's done ground up. He knows plenty about fix and flip and has done some other real estate kind of investing. Also does some investing on the passive side. Now I've also had some direct real estate investments, but mostly I invest on the passive side. And so we tend to write the material for that newsletter but also sometimes we send out emails written by our real estate partners and sponsors that can give you some more information. That's a totally free newsletter. You can unsubscribe anytime you want. You don't have to read it, you can just delete it, whatever. But it's totally free for you. You can sign up@whitecoatinvestor.com free monthly newsletter. We have a list of real estate partners that you can find on the website. You go to our tab up there it says recommended tab and if you scroll down you'll see real estate companies that sponsor the White Coat Investor. And a lot of these I've invested with myself, been investing with them for many years now. That's no guarantee to you that you can't possibly lose principal. These are risky investments, but it does give you some sense that at least we looked at them and if we get a bunch of complaints from White Coat investors, we'll take them off the list no matter how much they're paying us. If you want to learn more about real estate, you can come to wcicon. This is the Physician, Wellness and Financial Literacy Conference. Next year it is in San Antonio is February 26th to March 1st and we have a number of lectures there about real estate. You can talk to other real estate investors while you're there. You can sign up@wcievents.com obviously that's not all about real estate, but it does cover some real estate material. What do you think? Here's our first question. This one comes from Steve. It says what do you think? A V U S X X instead of bonds for both fixed income and your emergency fund given bonds poor recent performance. Well, VUSXX I don't think has anything to do with real estate. I'd have to look it up. Right? I didn't memorize all the ticker signals in the symbols in the world. Usxx according to Google says that's the Treasury Vanguard Treasury Money Market Fund. Okay, so it's a money market fund. It buys short term Treasuries, you know, less than a year. It's not real estate. It's fine for any sort of cash use you have. There's nothing wrong with it. It's a great fund. It's fine for your emergency fund. Should you use it for your fixed income. Well, if your written investment plan says keep all your fixed income in cash, then sure, go ahead and use that. But I would not like Chase performance or yield when it comes to your portfolio.

Right.

This isn't about what did best the last year or two. And just because bonds did poorly in 2022 doesn't mean you can't buy bonds now. They're much better investment than they were if you bought them in 2021 now because the yields are higher and that that's the best predictor of future returns from bonds. So hope that helps. Okay, our next question is from June Lee who asks what are the tax implications of exiting an evergreen fund like the DLP Housing fund? Sorry if this has been addressed. I'm stuck in a family event and can't listen live well, that's all right. I hope the family event is good. But what are the tax consequences? Well, the DLP housing fund does a pretty good job of managing taxes. I've been investing in this for several years and they have yet to send me any taxable income. Now I get income every year from it, but it's not taxable. It's been covered by depreciation. When you sell though, that depreciation you benefit from gets recaptured. I've never sold out of the DLP housing fund, but I would expect to have a tax bill.

Right.

Depreciation gets recaptured up to 25% and then you might have capital gains taxes that you pay in addition to that. But the bottom line is you're going to get a K1 from them just like you do every year. You're going to Give it to whoever prepares your taxes and let them sort it out. But I would not expect selling out of the fund to be some sort of tax free event. It won't be. You're going to pay taxes when you exit a fund. Okay, our next question comes from Andres, who asks, I have two houses rented at a 7% interest rate. Should I pay them off with cash that I have or use cash to buy more houses? Well, this is a question of leverage. How much leverage do you need to meet your goals? I mean, the first thing I'd ask is, are the houses cash flow positive? Do you have plenty of cash coming in? Do you need to reduce the leverage on this to make sure you have cash flow positivity? If so, then you better do that. You might want to refinance and put some cash in, et cetera. But if you don't have that need, you need to ask yourself, well, how much leverage risk do I need to reach my goals? You know, are you nowhere near financial independence? You know, maybe you need to continue to use some leverage. Maybe you ought to go buy some more properties, you know, leverage properties, using that money that you have. I just don't know where you're at in your financial life. If you're already financially independent, maybe it's time to be reducing risk a little bit, pay off some properties and, you know, and go from there. The nice thing about paying down a 7% mortgage or any sort of 7% debt really is you're earning a guaranteed 7% on that, at least pre tax, right after tax, it might be less than that, but when you invest, it might be less than that as well. And since money market funds are only paying like 4.7 or 4.8% or something like that right now, getting the guaranteed 7% can be pretty attractive, right? If you got a bunch of money in bonds paying 4% and you got a 7% mortgage sitting out there, that doesn't make much sense, right? You're not. You're borrowing now at 4% and paying at 7%. That doesn't make any sense. But if your whole portfolio is leveraged, you got everything in real estate and stocks, and you need to take a little bit more risk to reach your goals. It might make sense to continue to invest on leverage. But I would have a plan for when you're going to reduce that, if you're going to. Okay. All right, let's take our next question here. This one's from Wendy. Who are the scammers in private real estate? Boy, I wish I had A list of them, and I wish I could know who they are in advance. Unfortunately, by the time you figure out who the scammers are, it's usually too late. You've already got money invested with them. But that's why you gotta bet these investments. That's why you should invest with somebody you don't know well, at the very minimum amount and maybe watch them for a year or two. So if they turn out that they are a scammer, you don't lose that much money. But I don't have a list of the scammers out there. Right. When you can find the scammers, they're usually not still raising money for investments. But you definitely want to Google the principles of private real estates and names with the word scam or lost principal or judgment, those sorts of terms, and may want to do background checks on them as well. But that doesn't guarantee that they're not running their first ever scam.

Right.

But most scams, in my experience, they break down. They break down in, you know, a year or two. The Bernie Madoffs of the world, that can go for 14 years. You know, there's just not very many of them. You just can't keep a scam going that long unless you're really good at it. And so most of them become very obvious within a year or two. And so if you don't know somebody very well, you know, don't invest that much with them until a year or two has passed, and then you'll have a better sense for what their communication is like, what what their ability is like. And the good news is, if they're a scammer, they've probably already blown the thing up. Okay, next question comes from Gregory. Says mortgage returns are down since 2020. Think this is a good investment for the long term right now? Well, I don't know what you mean by mortgage return. You can invest on the debt side of real estate, either publicly or privately. Publicly, you tend to be using something like the ETF REM. You know, this is the iShares mortgage REIT. And I bet if we went back and looked both on the public side and the private side, the returns were a little higher before 2020 than they have been since. But not dramatically.

Right.

I've had private debt real estate investments before 2020, and since 2020, they're not dramatically lower, they're a point or two lower. But that's not enough to make you go, oh, I don't want to invest in those anymore. If they were a good investment when they were paying 10.5%, they're probably still a good investment paying 9%.

Right.

And so I wouldn't necessarily say that's something to avoid. I do think it's a good investment for the long term. 5% of our portfolio is invested in private debt funds and we like them. They're not tax efficient, but they seem to have very low correlation with our equity real estate, with our stocks and with our bonds, and they have pretty good returns. I think our long term returns in this asset class are around 9%, which is not all that dissimilar from what you expect out of stocks. Okay, next question is from Alexander. Can you comment on farmland? Oh, farmland's fun. You know, lots of different ways to invest in it. I mean, you can go out and buy your own farm, right? You can even farm it if you want, or you can rent it out to a farmer. It's kind of a cool niche way to invest in real estate. I don't know that I put all my real estate money into farmland, but there's some unique things about it and maybe it has relatively low correlation with other types of real estate. One of the ones that I find really interesting is timberland.

Right.

The cool thing about buying timberland is if you can't get a good price on your timber this year, you don't have to sell it this year. You just wait till next year and see there's even more of it. Right. It continues to grow, barring a forest fire. And so I, I think that's got some pretty good long term data on how well that does. Farmland has some cool stuff out there about it as well. I don't have any farmland investments. I'm not a farmer, you know, I didn't grow up in an area where there is much farming. I grew up in Alaska. There's only a little bit of farming there and it's a very short season where you mostly just grow huge cabbages. But, you know, if you know a lot about farming, you feel like you can really evaluate those investments. This might be a good niche area for you. There's two or three companies out there doing crowdfunded farmland investments that you can get in for relatively low minimum. So maybe you can buy four or five of these for five or ten or twenty thousand dollars a piece. No promises on how well they're going to do, but I do find it an interesting area to watch. I don't think I'd put all of my real estate into farmland, but I think it's certainly fine to have some of your real estate money in farmland. Okay? This one comes from Harvey. As a stay at home spouse of a high income professional, I'm interested in the tax benefits of attaining real estate professional status. Can you talk a little bit about the pros and cons of reps? Well, this is a really cool thing you can do if you can do it. The issue with, and this is mostly about depreciation, right? This cool, slightly unfair tax benefit of real estate investing, right? You get all these losses passed through. It's not unusual, in fact, to buy a property or to even buy into a real estate fund that really prioritizes this. And maybe you put $250,000 in and that first year get back a deduction of $150,000 in depreciation. That's not unusual. And you can use that to offset real estate income. And you carry forward any unused depreciation year to year. But if you are a real estate professional, you can use that loss against active income, right? So if your spouse is a real estate professional and you're a highly paid doc, you could offset some of your clinical income using this depreciation from your real estate professional status. So that's the attraction of becoming a real estate professional, having your spouse do it. And it's got a couple of downsides, right? The main one is you have to actually be a legitimate real estate professional, right? That means you don't do anything more than you do real estate. And I think the requirement is 750 hours a year. So you've got to do quite a bit of time in real estate. And if you divide that out by 52 weeks, it's like 16 hours a week or something. So this is not something you do for an hour once a month. This is something you're supposed to be doing for 16 hours a week, right? So you're now managing properties or you're out there doing all kinds of stuff, working in real estate, not just, you know, taking real estate investment courses. That doesn't count. It's got to be actually working in real estate. But if you do that, you can use the depreciation against your ordinary income. And that's pretty cool. Otherwise it can only go against your passive income, your real estate income, essentially. There is another way to use depreciation against your income. This is known as the short term loophole. You don't have to have 750 hours in real estate. You can have as little as 100 hours and use it against some of your ordinary income. So when it comes to Short term rentals. There is another loophole that's worth looking into, and you can search that up on the White Coat Investor blog or we cover it more extensively in the no Hype real estate investing course. But those are both great ways to use depreciation against your ordinary income. And it is a good combination. A highly paid doc and a real estate professional married to each other can be pretty advantageous, tax wise. Okay, from Gail I understand that one can put direct real estate properties in a self directed ira. However, the big investing companies such as Schwab, Vanguard and Fidelity do not do this. Is it a taxable event to move money out of a retirement self directed rollover IRA to an IRA that it can contain direct real estate? I'm not sure you're using your terms right here, but I think I can answer your question. An IRA rollover is never a taxable event, right? Whether you're coming from a 401k to an IRA or one IRA to another IRA that's not taxable, sometimes it can be a bit of a hassle, a little bit of paperwork, and you gotta wait two or three weeks for the rollover to be complete, but it's not taxable. So if you've got money in an individual 401 at Schwab or an IRA at Schwab, and you want to use it to invest in some sort of private real estate investing, you know, something besides a VNQ or REM or something like that, you can do that. You just have to have your money at an IRA custodian that allows it. And they usually charge you something if they're going to allow that sort of a thing. You know, it might not be that much. It might be as little as, you know, 100 bucks, 200 bucks a year. It doesn't necessarily have to be expensive, but usually have to be someplace that offers a self directed IRA. And these are often customized IRAs, customized solo 401ks that allow lots of other cool benefits. Maybe you can do Roth conversions or make a backdoor Roth kind of contributions in these solo 401ks. But there's no tax cost to moving money from one type of IRA to another type of ira. You can absolutely do that. I would caution you against using your retirement account money to invest in equity real estate.

Right?

You can do it, but there's a lot of gotchas you got to watch out for. The first one is you lose a lot of the tax benefits of having that in your taxable account.

Right.

When you're investing in Taxable using non qualified money and you, you get depreciation, it gets passed through to you. Well, if that's in an ira, that's not necessarily the case. Plus, if you're using leverage for that equity, real estate in an IRA, but not a solo 401k in the IRA, there's another tax called UBIT, unrelated business income tax that you can be caught with. But a bigger issue is just cash flow issues, right? Let's say you got an IRA and it's got $40,000 in it, and you use it to buy, to put down on a property, and then all of a sudden now the property needs a new roof, but you don't have any money in that Iraq. Well, you can't just use your personal money to put a new roof on that property. It's owned by your ira. And so you've got to figure out a way, either a rollover or wait until you can get more contributions into the IRA to put a new roof on the house. So cash flow issues becomes a problem. Plus, when the money is paid from the rent, you know, and you pay your expenses on the property and you get some positive cash flow that also has to stay in the Iraq. And if you don't have other investments in the IRA to put it into some sort of liquid investments, it might just sit there in some sort of IRA checking account paying you 0%. And that's kind of less than ideal as well. So I actually prefer to use retirement account money for other types of real estate investments. Things like debt real estate that's super tax inefficient, that's a great place to own it. Things like publicly traded real estate, that's a great place to own it. It's not that tax efficient. You're not getting depreciation passed through to you. And so that can be a great thing to hold in your retirement accounts as well. But if all your money is retirement account money and you want to invest in real estate, you may have to invest in private real estate via that, via, you know, a retirement account. Hope that's helpful, Gail. All right, let's talk about international real estate, particularly international real estate held in Canada or other countries. Canada is a beautiful place. I would love to have a property in Squamish, just to go visit there and go mountain biking and climbing and kayaking, all kinds of fun stuff. But I am not familiar with Canadian real estate laws nearly as much as I am with US real estate laws and tax laws, so I may not be the person to answer that. Question. You can invest in publicly traded international real estate pretty easily. Vanguard has an international REIT index fund that you can invest in. But as far as investing outside the country, I don't know a lot about the specific rules of doing it. Obviously, the money's got to go from here, and there can be tax consequences depending on what country it goes to and whether we have a tax treaty with them. But you also have the issues of completely separate laws and jurisdictions that you're going to need to learn in that new place. One nice thing about it, if you go buy property somewhere else and the US Totally melts down economically, at least you got a bit of a safe haven somewhere else, so that might be a little bit of a benefit. But otherwise, people tend to only buy property in places they want to live. They want to go live in Italy or Canada or something like that, and they buy property there. You know, if you're not a Canadian national, I don't know that I would try to be a direct real estate investor in Canada. I think I'd probably stick with the publicly traded real estate there and invest directly somewhere in the U.S. hope that helps. Good question. Okay, that is all the questions I've got in here right now, but hopefully I've answered the questions that people had from this webinar. Apologize for the technical difficulties tonight. We will email this entire webinar, this entire video to those who signed up for this and and hopefully you can get any information that you might have missed due to technical issues. And of course you can always email me editorwhitecoatinvestor.com and I'll try to get your questions answered. Check out the real estate resources on the website Our Real Estate Partners, our free real estate newsletter. If you're looking for more in depth education on real estate investing, be sure to check out our course whitecoatinvestor.com nohype thanks for your attention tonight and hopefully we were able to teach you something you didn't know about real estate investing before now. Thanks for your attention. The hosts of the White Coat Investor 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.