MtoM #164: Orthopedist Starts a Real Estate Empire as a Resident and Finance 101: Real Estate Professional Status

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 164. Orthopedics starts a real estate empire as a resident. 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 a 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 financially 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. Welcome to the Milestones to Millionaire podcast. This is a sub podcast of the White Coat Investor where we bring you on and talk to you about what you're doing in your financial lives. We want to celebrate milestones with you, not only to congratulate you, but inspire other white coat investors to do the same. If you're interested in coming on the podcast, you can apply@whitecoatinvestor.com we'd love to have you, and we know that you're doing great things out there that can be used to inspire others. One more thing I want you all to know about is that we have a Financial Educator Award and this is the application season. Well, really not applications, I should say nomination season. Between now and April 26th, please nominate anybody you know who's passionate about improving financial literacy among your colleagues, trainees and students. We give out an award each year. It's a cash award, it's a thousand dollars prize, plus recognition, which I think is probably more valuable to most of these people because I think most of them are pretty financially successful, to be honest with you. And we're also giving the nominator, the person who nominates the best submission, a free WCI online course of their choice. So we're incentivizing them to educate their peers. We're incentivizing you to nominate them. If you would like to do so, visit whitecoatinvestor.com educator By April 26, we just believe that financial education should be accessible to everybody. We can't do it in person for everyone. So we try to encourage others to give presentations on various financial topics. In fact, I've put slides together for you that can help you to give these sorts of presentations to your peers. You can find those@whitecoatinvestor.com educator there's a set for students, for residents, for attendings. Feel free to modify as needed, but it'll get you started as you prepare your own presentations. All right, we've got a great guest today who's really doing very well financially. Right. We get this criticism sometimes on the podcast and so we try to mix in people with lower milestones or that took longer to achieve them. That is not the case with this guest. This guest is killing it. And I think it's a wonderful example of what can be done when you really nail this financial stuff in your life and you combine it with a high income. So let's get them on the line and you'll see what I mean. Stick around. Afterward, we're going to talk for a few minutes about real estate professional status. My guest today on the Milestones podcast is Frankie. Frankie, welcome to the podcast.

Thank you. Thanks for having me.

My usual first question is, what do you do for a living and how far are you out of training?

So I'm a general orthopedic surgeon in the southeastern U.S. i've been out for about two and a half years, so I've been in practice for two and a half years thus far.

Very cool. And tell us what milestone we're celebrating with you today.

For today, we're kind of celebrating my transition into practice and the building of a real estate portfolio over the last four years.

Okay. And this is a multimillion dollar real estate portfolio, which is what's impressive about.

Has developed into that. Yes, sir. So we've been able to grow it pretty rapidly, which has been exciting.

Okay, how many doors under management now?

So, yeah, now asset under management door number is above 100, but we have a 91 unit self storage facility, so that skews that a little bit.

Very cool. What made you interested in self storage?

Well, when we got started, we. We dabbled with small multifamily and then single family houses. And I felt like we very quickly realized that our intellectual bandwidth and the amount of time we had to contribute to managing those assets really wasn't a whole lot different between the two. So I felt like if we could grow with an economy of scale, have More units under one roof, more units per power bill, per insurance bill, then we'd be able to spread that those expenses out. And the storage facility was our first sort of endeavor into that. We found that deal off market and were able to get it for a very good price. So I felt comfortable stepping into the space with minimal experience. And we've been very happy with it over the last few years.

Very cool. Now, you got started actually during residency, right, with your real estate investing. How did you manage to do that, both time and finance wise? Right. Both are limited.

Yeah, it was tough. It was tough. I talk a lot about the resources available to learn White Coat Investors 1 I also utilize biggerpockets, podcasts and the forum to become as educated as possible. I would listen with a single earbud in as I walked around the wards rounding and taking call and I would dictate notes that I could then reference later. So I spent, when I was a second year resident, began my interest, spent the next eight months or so becoming as educated as I could and then just jumped on the phone. Sort of goal number one was, was to find financing and I wanted to kind of leverage my future earning potential to give with a lender so that they felt confident lending me money, no or low money, down financing. And we were able to achieve that in residency.

Were you able to get properties that cash flowed despite not putting down much of a down payment?

We did initially. Now I think that is probably much more difficult now just because how inflated the prices have become, but we were able to do that. We stepped into our first duplex, which was an off market deal in that it was a pocket listing from a broker that I'd networked with. So we had eliminated some of the competition. I believe we purchased that deal for around $205,000 and it cash flowed immediately. It was renting for about 2,100 dol a month. So that was our first introduction into real estate investing.

I'll bet a lot of the audience doesn't know what you mean by a pocket listing. Can you explain what that is?

I can. So basically, brokers receive listings from sellers and they have the opportunity to list them among the multiple listing service, which basically distributes that listing to all other brokers, allowing it to be on market for everybody to evaluate and then make offers on. But occasionally a broker will send that listing out to several investors that they have on their list before they distribute it to the mass market. And that's what happened to us on our first deal. He sent that to me before it was posted on the multiple listing service and we were able to make an offer before there was outside competition and that offer was accepted. And I think that allowed us to buy it a little bit under market at the time.

Now, two questions on that, right? The first one is how do you get on the list to be on this little short list that gets those deals? The second one, is there an ethical concern there for the broker to not market it to the world on the mls? I mean, granted, they're salespeople, they don't necessarily have a fiduciary duty, but maybe they do to their clients. Is there an ethical concern there maybe not for you, but for them?

Yeah, I think they're definitely contractually obligated to try to get the best price that is palatable for the, for the seller that they're. That has obviously created a contractual arrangement with them. I don't think distributing the offer to investors that they know have a higher likelihood of closing. Now, whether or not I necessarily met that criteria in the beginning of my career may or may not have been true. But then they have the opportunity to present said offer to the seller and if it meets their satisfactory criteria, then I think it's an easy way for them to get a deal done. I do understand where you're coming from.

So clearly in the beginning you were using pretty significant leverage. How much leverage are you using now across your real estate portfolio? What would your loan to value be of the portfolio now?

So we're at about a 40% equity position across our portfolio now. So I think in the beginning that was sort of the calculated risk component of me getting involved. We did that at a point where I felt like we did have a little bit of a bridge scenario from my income as a resident with my wife working full time as well, where my funds coming in every month would escalate and allow me to cover if I had complete vacancy. Because of its successful rental history for the previous three years, I felt like the likelihood of me being hit with a large expense was fairly low. My lender had also come to the table and said they would be willing to help me with a bridge line of credit if we had a large capital expenditure expense in the next two and a half years, which is how much I had left on my residency timeline. So it was a little bit of a non traditional financing arrangement, but it allowed me to get in the game earlier than I would have been otherwise.

And now you're two and a half years out of training and approximately what are we talking about for A net worth at this point.

So our real estate holdings assets under management is around four to four and a half million dollars now and we have about a 40% equity position. We have some equity in my home and as well. So I would say and have a pretty significant contribution to my SEP IRA in the last two years. I'd say we're probably two to two and a half million at this point.

I mean this is, this is a comet, this is a rocket ship for physician, you know, wealth building. I was seven years out before I was a millionaire. You know, you're barely out of residency really and you were a millionaire. What's your goal? Where are we going with this? Right. Are you going to have a billion dollar real estate empire at some point or are you going to stop buying at some point? Have you even given a thought to what your goals are here?

I have. I sort of wax and wane my initial goal. Well, the reason I got involved in the beginning is probably similar for a lot of physicians in training and early in practice is I had a lot of anxiety about the debt associated with medical training and the loss of time value of money, retirement contribution. I was going to be 32 when I got out of residency, not a dime saved and I hadn't saved for my son or daughter's college fund or her wedding or anything. So I had a lot of anxiety which was the drive to get involved in the beginning. So that initial goal was for me to just feel like I had escaped the hole and I was able to sort of pad my retirement portfolio that then grew to trying to buy 10 doors and then that grew from there. So I don't really know that's a moving target. I think I would like to get to the point where I can practice orthopedics a little bit more how I want to and what I mean by that is limit my call burden limit sort of the time contribution that I have every week and month and day that pulls away from my family. Although I very much enjoy orthopedics and we'll probably continue to practice, so I guess we'll just have to see.

Yeah. How many years away do you think you are from being able to feel comfortable cutting back?

I think at this growth rate, I don't necessarily know that we'll be able to successfully grow at this rate moving forward. I think I could probably do that within the next five to seven years.

And what are you using for property management? How much of this you and your spouse managing yourselves versus have hired out?

So in the beginning I did not want to get involved in real estate at all unless I could scale to a number that I wouldn't be able to manage myself. So I wanted to implement that system from the front end. So we vetted and hired a property manager and actually purchased all of our initial properties around four hours away from us. So we weren't even in the exact vicinity. And we have since utilized them to grow our portfolio significantly. And our negotiated rate with that property manager is much better than it was in the beginning. For our self storage facility we have kind of a hybrid virtual management model so we have a little more active involvement but we use a company for all of our cloud based rentals, payment processing, lock management, we have a radio controlled lock system and gate code management and then they also offer a call answering service. So it's offloaded a lot of the day to day responsibility. But we do still have a little bit of active management. My wife declares real estate professional status so she does have some active involvement particularly in a short term rental that we have. We were able to purchase a lake house that was our 15 year goal into practice and the real estate investment has allowed us to do that quite a bit sooner. And we sort of hedge our bets and share expenses by short term renting it. And that's been a really nice way for her to stay involved and also give us a place that we can go 50 minutes from our house and enjoy.

Very cool. What do you invest in if anything besides real estate?

So I definitely believe that the traditional pre tax retirement opportunities are are a very powerful tool and I think it should receive a large amount of your priority before deciding to get into real estate because it does have quite a bit higher risk profile. So I have a SEP IRA set up for my S Corp. I'm paid in a 1099 manner from my employer and my accountant and I have a fiduciary representatives from Schwab. You know not to necessarily drop a particular investing platform. We use Schwab and they provide a fiduciary with that service. So between the two of them they recommended I use a SEP IRA and I contribute a certain amount every month to that fund and invest in S&P 500 index at this point. So index investing I think is very important to invest for the long game and I still think we contribute a good bit to that. We tried to really delay our lifestyle escalation as much as possible from residency. Obviously when those checks get a little bigger it feels, feels good and you want to improve your lifestyle a little bit. But we've tried to sort of pull the reins back on that to allow us to really recover from the hole we created in our 20s and early 30s.

What does your spouse think about the rate at which you're accumulating wealth?

I think she meets it with sort of cautious happiness. I think we sort of punch, counterpunch.

Each other really well.

I'm less risk averse, as you could probably imagine, than she is, and that really helps me a lot. In the beginning, she was a little bit skeptical, so I would have to kind of pitch the deal to her in a way that I was trying to convince a potential partner to come on board. And it was even more difficult probably to convince her than it was to convince, you know, sellers that the price was right or lenders that they should, should lend to me. And as that's developed, her knowledge has, has really grown a lot. And so now I feel like if I present a deal to her and it meets her checkboxes, that it's probably a pretty solid deal that's worth pursuing, which has been a nice relationship that we've been able to develop over the last couple years.

What advice do you have for somebody that's in residency or maybe they're in their first few years out and they just got really excited listening to this podcast. They hear about you got a hundred doors under management just a few years residency, and they're like, if he can do it, I can do it. What advice do you have for that person?

I definitely agree that if I can do it, you can do it. There's nothing special about what I've done. The only thing that I would try to not let this do is, is to make it appear daunting and make it appear like you have to go from 0 to 100 doors and able to in order to get into the game. I think I would, in the beginning, do the best you can to acquire as much knowledge as you can. You have to have a minimum knowledge base so that you can talk to, talk with your team members. Things like an accountant, a real estate attorney, a property manager, a lender, and then brokers and buyers and sellers. You have to be able to talk to talk, to have a minimum credentialing, to be able to participate in the deal flow. Once you feel like you've accrued that knowledge, then I would start to try to build your team. The same people that I just mentioned are very important. Number one is probably attempt to secure a financing relationship. Once you secure the financing relationship, try to put the things in Order so that you can then manage the deals. And to me, that was a property manager, that was a team member that I felt like I had to check the box very early. But also an accountant and an attorney, a real estate specific attorney, because you want to manage your liability, you want to manage your entity structure. As a physician, because we obviously have a lot on the line, we have a lot of income potential, and you are able to provide for your family with being a physician and your earned income. So there's a lot at mistake if you potentially lost that. So I think once you've checked those boxes, then you have to start focusing on generating deal flow and find out if you're going to find deals on market. And that's fine. It's a little bit harder to find a deal that will cash flow or make sense from a financial perspective. But once you've done that, then you can start vetting properties and that'll allow you to generate the experience and the confidence you need to buy your first deal. The analysis paralysis is, in my opinion, one of the most difficult hurdles to overcome. So if you can figure out ways to narrow down sort of the objective data about a property and minimize the amount of emotional involvement in that decision, then you'll be able to get involved in the game a little bit earlier.

Very cool. Well, Frankie, congratulations to you. You've had a lot of success right out the door of your. Of your financial career, of your real estate career, your orthopedic career. So congratulations to you and thank you so much for the podcast to share that story with others, inspire them to do the same.

Thanks, Matt. Appreciate the time.

All right, how about that, right? As I mentioned at the beginning, he's killing it, right? Frankie and his wife, they are absolutely smashing this financial game. Not only were they millionaires within a year or two coming out of residency, they've got 100 doors under management. They're actually now multi millionaires. Two and a half years out of residency, the sky's the limit, really. At some point, they're going to have to decide what they want out of life. He thinks it's five to seven years before he can cut back on his orthopedic practice. I'm skeptical. I think he's probably there already, if not within the next year or two, at the rate they're going, they're going to turn around and look, wow, we're getting more from our real estate empire than we are from practicing orthopedics. But that all depends on how much leverage you're using. And how much cash flow you're getting. There's lots of variables. There's. But you really just have to decide what you want out of your life. The wonderful thing about being really financially successful though, is that a certain point you realize you have enough and you go, well, I still love what I'm doing. I'm providing housing for all these people, or I'm providing storage facilities for all these people, or I'm fixing broken hips or whatever you're doing in your practice. And you realize I still want to do that and it still pays me money, but I already have enough money for me. Then after a while you have enough money for you and for your heirs, and then you start going, what else can I do in this world that's good with money? And you start looking for your favorite charities, you start looking for scholarships you can endow. You start looking for random moments of incredible generosity and it becomes pretty darn fun. I don't know that I would use the title philanthropist to describe myself, but maybe someday I could. And it certainly is a big part of my life. And as you know, we've been working for quite a few years since we became financially independent. And it's pretty fun to realize the difference you can make in the world. When you've figured out the money game and you've already taken care of yourself and those you care about, you can really reach out to a lot of other people in the world. All right, I told you at the top. We're going to talk for a minute about real estate professional status, sometimes abbreviated reps. Reps. Now, what real estate professional status is, is probably not the most important thing about it. The most important thing about it is that when you combine it with the high income profession, you know, typically medicine, when we're talking about it around here. And it doesn't have to be you that has real estate professional status, it can be your spouse. But when you combine it with the high income profession, you can take the depreciation from the properties that you are buying and use that tax deduction against your active earned income as a doc or whatever else you do. That's a very powerful tax technique. Right. Most docs are in a pretty high tax bracket. Maybe they're paying, you know, 32 to 35, 37% with state tax, maybe it's pushing 50%. So a big huge deduction like you might get when you purchase a new property, you know, whether you're doing it, you know, typically you're doing it actively, so you're buying new property and maybe you're getting, you know, a little extra bonus depreciation and you can use a lot of that against your earned income becomes very powerful now all of a sudden, all that money you were paying in taxes you can use to build wealth. So it's pretty cool. At any rate, to qualify for this, you have to spend 750 hours on real estate, right? And it's doing real estate, right? It's not just, you know, learning about real estate. You got to be developing, you got to be redeveloping, you got to be constructing or reconstructing, acquiring, converting, renting, operating, managing, leasing, functioning as a broker. It's not the stuff that you often think about. When you think about what a real estate investor does. It's not education, it's not searching for new properties, it's not studying financial statements, it's not managing the finances of an activity in a non managerial capacity. It's not commuting to your properties, it's actually doing real estate. So if you or your spouse is doing that for 750 hours at a minimum a year, you can qualify as a real estate professional. And you can take that depreciation deduction, which is normally only able to be used against passive income and use it against your active income. There's another rule though, it's got to be greater than half of your professional time. So if you're doing 750 hours in real estate and you're doing 1,000 hours in medicine, no dice, you are not a real estate professional. So you can do 500 hours in medicine and 750 hours in real estate and qualify, but not the opposite. And you also have to materially participate in the property, right? So that's got all kinds of other regulations about it. But if you're interested in direct real estate investing, and particularly if you have a spouse that is willing to dedicate a significant amount of time, because 750 hours is a significant amount of time that averages out to 17 hours a week. This is a part time job. If your spouse is interested in a part time job in real estate, this can be really powerful when combined with your physician income. There is a little bit lower barrier to get this and that's what they call the short term rental loophole. Instead of 750 hours, you may only have to put in 100 hours and that's a lot easier to get. That only averages out to a couple of hours a week. And the it doesn't take very many short term rentals to suck you in for a couple of hours a week if you're doing the management yourself. And so that's a little bit easier threshold to get over. And you really only have to do that for the first year, right? So you don't want to have a long term short term rental. Well, that's a weird way to say it. If you don't want to have a short term rental indefinitely, you don't have to, but you just have to for that first year to take advantage of that loophole so you can acquire properties building a long term rental portfolio. As long as you make them short term rentals for the first year or so, then it works out. Hope that's helpful and can help some of you out there who are interested in a significant side gig of doing direct real estate investing. Obviously, as I think this interview with Frankie demonstrated, this can be very profitable. It certainly is a viable pathway to wealth. It takes a lot more work, effort and education than just carving out a big chunk of your income and plopping it into a static asset allocation of broadly diversified low cost index funds. But there are some rewards there too, particularly if the risk you take like Frankie did with all that leverage pays off. 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 mortgage, all without paying private mortgage insurance. But if you're further advanced in your career or deeper into your journey to financial freedom, buying a home with a 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 financially beneficial for you. Hop over to our recommended tab to learn more about all of your mortgage and refinancing options@whitecoatinvestor.com mortgage. Thanks for being with us on this episode of Milestones to Millionaire. We hope it's been inspiring for you. We hope this is helpful to you. If not, let us know how we can improve it. This podcast exists for you. We are here dedicated to you and your success. So please keep your head up and your shoulders back. You've got this. See you next time on the Milestones to Millionaire podcast.

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.