MtoM #160: Dermatologist Pays Off Student Loans In Less Than A Year And Finance 101: Physician Mortgages

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

This is Milestones to Millionaire podcast number 160. Dermatologist pays off Student Loans in Less Than a Year despite getting hosed by private equity, at some point in our financial lives, it will be time to buy a home. A physician mortgage can be a good vehicle for a young doctor who's just out of school and has a more effective place to use their money than on a big down payment. These loans allow doctors to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you're further advanced in your career or deeper into your journey to financial freedom, buying a home with conventional mortgage and then later on potentially refinancing that loan to a better rate with a shorter time frame could be a great move. Wherever you are in your financial journey, make sure you use the mortgage that will be most beneficial for you. Hop over to our recommended tab to learn more about all of your mortgage and refinancing options@whitecoatinvestor.com mortgage. You can do this and the White Coat Investor can help okay, it is now. By the time you hear this, I'm recording it in January. But by the time you hear this, it's March and we have got our new continuing Financial Education 2024 course out. And until March 8th, all of our courses are on sale for $100 off, including this new CFE 24 course. You can get the latest in physician wellness and financial literacy. In this course you can get it for cheaper than you're going to be able to get it later in the year. And you can check the stuff out that we did at this year's wcicon and you can watch my two keynotes. One on the unsung benefits of index investing, the one on advanced estate planning. You you can see Paula Pant's talk How to Re Engage and Remotivate When Burned out. And you see presentations from 30 plus other experts from WCICON 24. Whether you're interested in boosting your personal wellness, fine tuning your financial plan, investigating tax reduction strategies, living a more intentional life, or planning for retirement, this CME eligible course has something for everyone. Go to www.wcicourses.com and take $100 off until March 8th. All right, we got a great interview today. It's pretty cool and it took a pretty hard turn in the beginning of the interview and we explored something I don't think we were exactly expecting to explore, which is the effect of Private equity on the lives of young doctors today. Let's get Adam on the line. Let's do this interview. And after we get done, I'm going to talk a little bit about private equity, but also let's talk about house buying. And Adam was pretty glad he didn't buy a house. You'll find. And we're going to talk about when buying a house is an appropriate thing to do and how to do it the right way. Adam, welcome to the Milestones to Millionaire podcast.

Thank you for having me. I'm happy to be here.

Tell us what you do for a living and how far you are out of your training.

Sure. So I am a board certified dermatologist. I finished my residency training in Washington, D.C. and I completed that in the summer of 2022. After that I moved down to the Southeast. So initially I was in Atlanta, Georgia for my first year of practice, and then after that moved out to where I am now. I'm in Athens, Georgia, and I've been here for about the last three to four months.

Okay. And you had, at least financially speaking, an extremely successful first year out of residency. So I congratulate you on that. You've accomplished two notable milestones during that year. You paid off your student loans and you built a substantial net worth. I think when you applied for the podcast, it was at 150,000. I imagine it's higher than that now.

So mine has stayed kind of the same. And that kind of goes into the conversation as to how things panned out with my finances. So when I where I'm from North Dakota originally, and I did both my undergraduate and my medical school there. And the great thing about staying in state and going to a state school was that it kept my debt load extremely low. I was able to get through all of my undergraduate training without ever taking out a single student loan. So I'm really fortunate. And that was because of academic scholarships. And then for medical school, the University of North Dakota, relatively speaking, is affordable for medical training. So my training per year was right around $30,000 on average. And I was able to combine using some savings and my undergraduate fund to help keep that burden low. And then when I got out of training, I kind of just prioritized paying down the debt. But the reason things have stayed the same is mostly because I've been trying to start my own practice and my own business. And so that is where a lot of my funding from the last few months has gone.

Okay, very cool. So your total amount of debt when you came out of medical School was what?

Total debt between things from undergrad and med school totaled to $70,000.

$70,000 is like a miracle these days, right?

Yeah.

I mean, I look back and I think, man, if I hadn't gone into the military, I think I could have got with about $70,000 worth of debt. But that was over 20 years ago, right? That was a long time ago. And you still pulled it off today, despite the fact that tuition's gone up, cost of living's going up. You said you had some savings. Did you have a prior career or something? Where'd that savings come from?

No. So, you know, when I was born, my parents kind of prioritized our college education, so they didn't put it into a 529, but they put aside some money into stocks and investments for my brother and I that by the time I started medical school, was right around $90,000. And what I did is the first two years of medical school, I was able to get by on some of the extra scholarships I had from undergrad. And then I took some of that investment money and paid for the third year of medical school. Part of it, anyway. And then third and fourth year, I took out that amount of loans that we talked about. Around 70,000 in total. And that's kind of how I was able to get through it at the time. There was a lot of sacrifices that were made to make that happen. But when I talk to my cousins and my family these days, I mean, it was totally the right decision. So, if anything, I mean, the best type of debt to have is keep it as low as possible by making those smart financial choices when you're in the moment.

Yeah. Combination of paying for medical school, and I think that's what happens with a lot of people. Their family helps them to a certain degree, and they borrow to a certain degree, and they live frugally and maybe even work a little bit to a certain degree, and they piece it all together. But still, even people doing that, on average, they're coming out with 200. So keeping that to 70 is impressive.

Yeah. Yeah, it was awesome.

Yeah. Okay, so you got that paid off, but you also were putting money away. I mean, what was your net worth when you came out of medical school? Minus $70,000.

My net worth was actually closer to negative 100,000.

Okay. A few little bit other debt there.

Yeah, I did. Yeah, it was. So when I was in my final year of residency, I was very forward thinking about what I wanted for a career. I knew I wanted to be part of a private Practice. And that's what brought me to Atlanta, Georgia initially. So what I did is D.C. no matter where you live, is pretty expensive, honestly. And so a resident salary doesn't cover it. So my last couple months, I maxed out my 401 while I was still a resident in those last six months and lived off the bonus money and then took out a 0% APR credit card and put a lot of expenses onto that. So when I finished my residency training, it was not just the student debt, but about $30,000 in credit card debt. When I started my job, the first thing I did was paid off that 0% card. So I never accrued any interest on that. And as soon as that was gone, I started my emergency fund and I was a little more aggressive. I didn't get quite to six months before I started paying on the debt. I just really wanted the student loan debt gone because I think for a lot of us. Right. It just feels really heavy. And I know we talk about golden handcuffs when it comes to having a high income, but I look at student debt and really any type of debt you have, those are also golden handcuffs, because if you have to make a payment every month, you need to have income to cover those expenses.

Yeah. Single, married, kids, anything.

Partnered, but not married at the moment.

Partnered. Okay. And so this was a pretty dramatic drop in cost of living to go from D.C. to Atlanta.

Yeah, I mean, we chose to live still in a part of the city that would make us comfortable and happy. But my total, like, living costs from rent, parking, that all of those things went down by about $600 on my end.

Okay, very cool. Well, I mean, you put a lot of money into savings in the last year. Dermatologists make good money, but not insane money. So clearly you kept your spending down. How did you do that in your first year out of residency?

I really just prioritized creating a budget before I finished residency, knowing how, like, knowing how I would allocate that expected salary. So I knew what my rent was going to be. I had an understanding of what the splurges were going to be for me. So I still have not spent a ton of money on like, clothing. I've never bought a new car. I still have the same car that I got when I was an undergraduate student. And the splurges I did have were those more experiential things. So I did go on a couple of nice vacations during my first year of work. But. But I would also say the most important thing that I did is that when I Started at my last job, my first job out of residency. I was there to hustle. So I worked hard, I got my name out there, I got busy really quickly. And that was both because I was at a good practice, but also because I put in a lot of legwork. And so part of my success was that I was able to make a really good bonus in that first year. And that's something that not every specialty or every graduate can even walk into, depending on the type of practice you sign with. But that was one of the perks of being with a private practice that was well run.

It doesn't sound though that you were entirely happy with it. I mean, you've now gone out and you're starting your own practice. Tell us about that decision.

Yeah, so that was kind of where the bump in the road happened. I knew when I finished residency that I've always wanted to own my own practice. I think especially in dermatology. The dermatologists that I think are kind of the movers and shakers in our field, they were all private practitioners, they owned their own practice and they were really innovative. And that's the coolest part of dermatology. So I joined an amazing private practice and private equity is a really big force, not just in dermatology anymore, across all specialties, Unfortunately. And about 10 months into my time at the practice, I was on a partnership track that would have been at two years where I could have become partner. But 10 months in, they chose to sell to a private equity firm. And so ultimately it became a really tough decision because my contract was for two years. So I could have chosen to stay and write out the two year contract. I had the option obviously of looking for a new job. And that's what I did. I now work as a 1099 physician, at least for this year. And then the other thing too, ultimately is that as a young dermatologist, one thing I was really suspicious, no matter where you sign. I really wasn't that trusting of, sorry, the last generation of doctors because so many people had chosen to sell and just not be transparent about their interests. So I thankfully had already started planning for some type of practice while I was still in my first job. But nonetheless, the last couple months have been a huge learning curve because it's not only just getting comfortable being full time practicing attending, it's learning to run a business, learning to create systems, and just kind of feeling your way through everything that comes with trying to start your own practice.

So you signed with this job a number of months before you Started because you had to get licensed in Georgia and credentialed and all that sort of stuff. And then you were 10 months there working. When did you find out that the practice was going to be sold?

They told me the day after they.

Signed the paperwork, which was 10 months into it or how far. How far?

Yeah, I think it was like May. May 4, May 5 somewhere. It was the first week of May is what I remember.

So nobody mentioned it when you were interviewing it? Nobody mentioned it for months while you're working alongside them. It was all under wraps.

Yeah. And I mean, to be fair, when I interviewed with every practice, one of my questions that I always asked was, do you incentives sell to private equity? Of course nobody's going to tell you that they're going to do that.

Right.

And the day before I signed my. My true letter of intention, I was chatting with someone at the practice and the comment they made was that we can never say we would never do it.

Right.

And that gave me a lot of pause because. Because I was like, just the fact that we're throwing that out there is something that. That's concerning to me. But it was the. It is the reality of this moment in health care, if you're not selling to private equity, a lot of hospitals up private practices. But, you know, once. Once they did that, it for me because that was so important to me and so foundational to my ethics and professionalism as a. As a physician, it made it hard to see. To see myself being able to stay.

Yeah, I can. I can understand why. Did you buy a house in Atlanta?

No, we rented. We're still renting because we're trying to figure out. I think I've finally narrowed down where my practice will be. But again, I look at those as they are. They're golden handcuffs. If you buy property or buy a car in particular, those two expenses, unless you're paying for it straight out in cash, you have to cover that expense every month. And that's something I'm grateful I didn't do.

Yeah, I can imagine. Very cool. Well, despite that rather huge bump in the road that you hit in your first year, you still had an extremely successful first year out of residency. I've often said that's the most important year in the financial life of a doctor, and you nailed it. And that sounds like. Mostly because you put a plan in place before you got there and you worked the plan. What other advice do you have for somebody that's in your situation? You know, maybe they're going to graduate this summer. And they want to have as successful of a first year out as you did.

I tell all my friends universally, and I know I'm fortunate because other colleagues of mine who went to the same medical school as me have substantially more debt than I do. But I tell everybody, don't buy a house and don't buy a new car if you can. And the reason for that is those are the two biggest fixed expenses you could have. And instead try to really just prioritize. Number one, what I would do differently is I probably would prioritize a little bit more of having that six months savings fund done initially because you never know what's going to happen or change with your job. Your dream job can become not your dream job fairly quickly. But the other thing I would say is like, just try to get rid of the debt. I remember even when I was making really good money around Christmas time of my first year out and I really had my expenses under controlled and was saving the debt just for me at least was emotionally it really weighed on me. And even every night you would go to bed and it just was that thing kind of at the back of your mind. And when I paid my final student loan payment this past September, I just remember like this immediate feeling of relief. And when you're not having to think about that, it makes planning for creating the type of practice you want, the type of career you want, so much easier.

Awesome. Well, congratulations to you on your success and thank you so much for coming on the podcast to share it with others and inspire them to do the same.

Absolutely. Thank you for having me.

All right. I hope you enjoyed that interview. Wow. Private equity. Never know when it's going to happen. I mean, I guess it's not private equity's fault, right? DOC can sell their practice to a hospital, they could sell it to another doc, et cetera. But when you come in to a private pre partner track, a partnership track, whatever you want to call it, and they've been talking to private equity about selling it and don't even mention that to you? That just doesn't feel right to me. You know, they tell you the day after they've signed the paperwork. Really? And you've been in a partnership track for 10 years. Seems like dirty pool to me. But it's something that happens out there. And the problem is, for those of us who don't do that to our fellow docs, all the people we interview are worried about this. This is something I've been talking to people about. I'm on the, you know, whatever we want to call it the recruiting committee for my partnership. And just about everybody we've interviewed in the last five or six years has asked about this because they're worried about it. You know, graduating residents are worried that they're going to go into a partnership track, get paid less than they would just being an employee, and then it's all going to blow up in a year or two years or whatever before they make partner. And it's always been a concern that you just get hosed and they say, we don't want to be your partner after you do this for a year or two. But now there's this very real concern that they're just going to sell out to private equity and you're going to be stuck with your private equity overlords or stuck as an employee or basically not getting to be an owner of the practice like you were planning to eventually. So make sure you explore that in your interviews and docs. Let's treat each other well, right? I mean, it's okay to sell if selling is the right thing to do, but keeping your pre partners completely out of the loop, not offering them some sort of compensation for, you know, the sacrifices they've made, that's not the right thing to do. Let's make sure we're treating each other well and not eating our young. All right? I promised you at the beginning we were going to talk for a few minutes about buying a house. Adam was obviously super glad he didn't buy a house in Atlanta. And my caution with buying a house is, is that you don't want to buy a house until both your professional and your personal life are stable. And obviously in this case he was still in a partnership track that didn't feel real stable. It turned out to be less stable than he thought it was going to be. Doesn't sound like with a partner that he was necessarily in a stable personal situation either. So not a great time to buy a house. Thankfully he did not because chances are he would not have recovered the transaction cost of buying that house, selling it only a year later. And that's a real problem. You can lose a lot of money, right? The round trip transaction costs for a house are about 15% total, about 5% going in, about 10% going out on average. And if that's a half million dollar house, that's $75,000. That house doesn't appreciate $75,000 in the time you own it, you're going to lose money. Aside from the hassle and the time of ownership and buying and Selling and all that kind of stuff. So when your life is stable, buy a house. I'm a big fan of homeownership, right. In the long run, you're putting some sort of a cap, some sort of a limitation on what your housing costs are. They generally do go up in value over time, right? Time heals all wounds in real estate. It's the right thing to do. If you're going to be there for longer than three, and especially longer than five years, you usually come out ahead buying a house less than that, it's a gamble. And so as a general rule, you want to make sure you're going to be there for years before you buy. Now, doctors in their first year out often don't have a lot of cash. And they've got a lot of uses for cash. You know, they've got the credit card they have to pay down like Adam had. They've got a car loan they had to replace that beater they bought as an undergrad, or they've got student loans to pay down, or they want to max out their retirement accounts, or they want to build an emergency fund, or they want to buy into a practice or open their own practice or save up a down payment. There's all these other things competing for your dollars. And this is where a physician loan can come in. The idea behind a physician loan is you don't have to put down 20%, but you can still avoid private mortgage insurance. Remember, private private mortgage insurance, or pmi, is that insurance that the lender makes you buy to cover them to cover the risk of you defaulting on the mortgage. It doesn't actually help you at all. So avoiding it is a good thing. And the nice thing about a physician mortgage is, despite not putting 20% down like you would have to with a conventional mortgage, you can put less than that down and still not have to pay pmi. In addition, they generally don't require you to show pay stubs for a few months. A contract is good enough. They only look at the payment that's due on your student loans, rather the entire debt balance. And so it just works out better for lots of docs trying to buy their first home in the first year or two out of their training. Now, if you've got a down payment, if you've taken the time to save one up, you didn't have a better use for your money. Great, you can just get a conventional mortgage. But that doctor mortgage makes sense for lots of people for their first home. Don't let it cause you to buy a home before it's the right time to buy it. But when it is the right time to buy it, it's okay to use a physician mortgage and use that limited cash for other potentially better purposes, like paying down your student loans or maxing out retirement accounts, those sorts of things. Now, as far as how much home to buy, my general guideline, and it's a rule of thumb, so it's easy to find exceptions to it, obviously, but don't assume that you're an exception just because you can think of an exception. The general rule is keep the mortgage to no more than two times your gross income. Not what you think your gross income will be someday, but two times your gross income now or in the contract you just signed, et cetera. And what that does is that helps you to not be house poor. It allows you to have enough cash flow each month to continue to build wealth. Now, in high cost of living areas, that often requires you to stretch that a little bit. That was easier when interest rates were low. Now that interest rates are kind of back to historical normal of 6 or 7%, that's a little bit harder to do. When I say stretching, we're talking three times your gross income. We're not talking about 10 times your gross income. If you go buy a 10x house in San Francisco, don't be surprised when it dominates your financial life and potentially even lose it because you can't take care of it in the event that something happens to your income. So be careful how much home you buy. Try to keep the mortgage itself to less than two times your gross income. That might require a bigger down payment. It might require, more likely a less expensive house. Other guidelines that can be useful is keeping what you spend on your house, including mortgage taxes, property taxes, and insurance and utilities, to less than 20% of your gross income. That's another good guideline to follow. They'll lend you a lot more money than that, but taking it out is likely to impede your wealth. Building progress. A home does help, but it doesn't help nearly as much as putting money toward investments. All right, if you need our help with a physician mortgage, you can go to whitecoatinvestor.com mortgage. We've got options there for physician mortgages, conventional mortgages, mortgage refinancing. As interest rates fall, you'll be able to refinance through links there. Keep in mind that you marry the house and you date the rate. And hopefully as rates fall, you'll be able to get a better deal than when you first bought the mortgage. All right, Keep your head up, shoulders back. You can do this. The White Coat Investor is here to help you. If you want to come on the Milestones podcast, you can apply@whitecoatinvestor.com Milestones. If you want your questions answered on the regular White Coat Investor podcast, go to whitecoatinvestor.com speakpipe. See you next time.

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.