WCI #252: Real Estate Q&A with Passive Income MD's Peter Kim

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street.

We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dali.

Hey everyone. I'm excited to be part of this podcast. I'm guest hosting. You don't know who this is? This is Dr. Peter Kim. I'm the founder of Passive Income MD. I'm a partner of Jim the White Coat Investor. This episode I am taking over the mic. I'm excited to do this. We're going to be talking about question and answer sessions that we've gotten, you know, from the Facebook group, from forums on real estate investing. I'm just going to spend time answering your questions. We're going to be talking about a variety of topics and hopefully we'll have a good time with this.

If you're looking to boost returns, lower taxes and build wealth, join the WCI Monthly Real Estate Opportunities list For tips and strategies to maximize your real estate returns. And for introductions to exclusive investment opportunities, expect educational emails that introduce you to syndicators, fund companies, online courses and online real estate platforms. Go to whitecoatinvestor.com reopportunities to sign up today. You can do this and the White Coat Investor can help.

So the quote of the day comes from a person named I guess on the forum Boglehead or Bogglehead forum named livesoft or Lives Soft. Okay. It's if one isn't ready to lose capital, then one isn't ready to invest. They go hand in hand. Losses and investing. One cannot avoid losses if they invest. So anyways, I want to thank you, the listeners out there. I know Jim always thanks you for what you do. I want to do the same. I know you're extremely dedicated to your specialty. Your craft is taking you a bunch of time. You invested time, energy and effort to get where you're at. You do amazing work on a daily basis. So I just want to honor that today and I want to celebrate that you're taking the time to just invest in yourself and hopefully we'll have a good time with this podcast. You'll get something out of it. But before we get started again, I want to quickly mention for those who weren't part of the conference, maybe you were part of the conference. You know that WCICON 2022 just happened relatively recently. It's your chance now to actually purchase the virtual format of that. It's actually a course because it includes some wellness stuff as well. You're able to get some amazing CME from it. The course sale goes from February 23rd through March 7th. The early bird price is 699 and then the regular price is 779. So you have an opportunity to get 10% off. Go ahead and check that out at the whitecoatinvestor.com CFE2022. I'm gonna be speaking at that, so hopefully you'll get that as part of the package. Look forward to you checking that out. Also wanted to let you know on March 9th through 13th, so coming up pretty soon is passive income MDs leverage and growth Summit, where you're able to hear From I'd say 30 to 40 physicians who've taken action to live life on their own terms through investing, entrepreneurship. Hear all these amazing stories. This is our third annual one and we've had over 15 to actually 17,000 physicians who participated this in the past. So come on down. It's a free summit. You can go to the link in the show notes, but you can check it out@WhiteCoatinVestor.com summit again, that's WhiteCoatinVestor.com Summit again, that's the Leverage and Grow Summit happening on March 9th through 13th this year, 2022. All right, I think it's time to get to some questions. We got some on the Facebook group, we got some in different areas, and I'm just going to try to hit these one by one and hopefully you get something out of this. So let's start with this one. I think it's a good one. It's about syndications, and for those who aren't familiar with what a syndication is, it's essentially a pooling of capital. People get together, put their money together to purchase maybe some sort of larger building that they couldn't do on their own, or maybe they don't want to manage on their own. Usually it's run by what's called a sponsor or an operator who runs the entire thing. And usually someone like you or me comes in as what's called a limited partner. We invest, get some equity in the overall property, what it is, and they get distributions and dividends accordingly and have a share of the profits at the end. So that's typically what a syndication is. I'm sure you've read about it in different blogs and you've heard about in different podcasts, but there are tons of questions about this because it can be confusing because not every deal looks exactly the same. Many of them look Amazing. The returns look amazing, but it's up to you to figure out how to do the proper due diligence for them. And again, no two syndications are alike. There are different fee structures, there are different return structures. And so I know it can be confusing. And I think this reader here or this audience member has a question about one of the kind of little quirks of syndication. So let me just go ahead and read this. I just read two things in the real estate syndication space that seem a little shady to me. I was wondering if I could get your thoughts on them. Now here's the first one. Some sponsors will refinance the property and pay out distributions to the limited partners from the refinance. Now this is considered a return of your initial investment. So it reduces your investment in the project. So let's say you have a preferred return of 8% and your initial investment was 100k. If there's refinance and 50k of your capital is returned to you, so half of it, your preferred return actually becomes 4k rather than 8k. So I guess they're saying that instead of getting the whole 100k and 8% of that, now you get, you know, 8% of 50k, but your initial investment was reduced by half by 50k when you received that 50k distribution from the refinance. Now if this is what happens, I find that to be pretty sleazy. You take on all that risk and illiquidity for them to essentially give you half your capital back as a tax free loan. Am I missing something here? Wow, this is a great one to start with. You can get quite complicated. So I'm going to try to summarize this for those of you who might got lost in the middle of that. So let's say this person, let's say they invested $100,000 in this deal. Now when they agree to do this deal and be part of this deal, there was something called a preferred return. Now if you haven't heard that term before, what it is is that the sponsor agrees out of all the profits that they get to them. The preferred return is the return that gets paid first. And so as an investor, when I get something called a preferred return, and usually the number somewhere between 6 to 8 to 10%, that profit I get first, right? I get first rights to that profit up to 8%. Now that 8% is based on your initial investment. Now what this reader is saying is that half their investment was given back to them on what was called like a refinance. They refinance was able to take a little cash out. They paid you back as the investor paid you half your capital. And then what happens is that because they give you half your capital, your preferred return actually ends up getting cut in half. And to them, that feels a little sleazy that they just gave you back half your capital. Now they have to pay you half your returns. Like, what's up with that? Now, I can understand from the reader's standpoint how that might look kind of funny, but let me explain to you a little bit how this actually works. Now, again, remember, no two deals are exactly the same. And what I want to stress to someone and this person here or anybody listening, if a refinance happens and you get your capital, whether 25% of it, 50% of it, or all of it, your investment in the property remains the same. You don't lose your stake in the investment. So, for example, if I've invested in a deal before where I invested $25,000 and the deal was a little bit smaller, I got 1% ownership of the property, right? And what ended up happening was that they ended up doing a refinance of the property. They gave me back all of my capital back, so all of my $25,000. But guess what? I still owned 1% of that building. So any distributions, any dividends, any profit from sale, I would be given 1% of that as a 1% owner in that building. That does not change. Now, this whole preferred return business that is dependent on your investment, that's still in the deal. So let's go over my deal real quick. Where I was given, you know, I invested $25,000, right? I was given that $25,000 back, but I still receive distributions and profit ongoing and still been going on. And then again, I'll get that sale, you know, profit at sale. So the cool thing is, I've been giving my $25,000 back. Now, this reader sees that as a bad thing. I see it as a good thing. I've got my money back, $25,000. Guess what? I've got no money tied up in the deal. Like, I feel like any profits that I get from then on, it's all house money, right? I basically got my money back, and now I can move that onto another deal. Now, this is something that some people refer to as like an infinite return scenario. I don't know if you ever heard about that, but it's a scenario where none of your money is still in the deal. You've gotten that money out, you moved it on somewhere else, but you still get distributions and profits. So on a return basis, you know, I don't know if you ever heard of the term return on investment. That's based on how much money you put in the deal. In this type of situation you've gotten all your money out. So your return on investment is technically infinite as you continue to get profit in distributions. So yes, your preferred return is based on the amount of capital that's technically still in the deal. But when they give you back that capital, they no longer have to pay you that preferred return, but they will still pay you based on whatever the equity split is what they determine. Now usually what happens in any of these type of deals, usually they'll say limited partners get set 70 to 80% of the profits or distributions and the general partners, the people who are running the deal, the sponsors usually get somewhere between 20 to 30% of the deal. And that's pretty common. So what happens is that again, if your money is back, that preferred return is gone. But again the way the waterfall or the way the dividends are, profits are split up from that point are based on that equity split. I know it can be a little bit confusing. It's funny because I mean I spend, I teach a course called Past Real Estate Academy and we've had thousands of readers and thousands of of people participated in it. And we talk about these things all day long. We go over different case studies, we talk about these type of things. And I can't pretend that you're going to get all this in one quick question and answer session. But I hope that helped in some way. Again, you can get your money back in different ways and move it on to another investment. Put your money still in the deal. It's like planting a seed there and being able to keep moving on. So I actually see that as a good thing. Some people who want steady heavy cash flow may want their capital still in the deal, getting a little bit more cash flow. But for me personally, I like the feeling of having my money back out and moving on. So hopefully that's pretty clear. You know, hopefully you enjoy that little part. But then they have another concern actually. So this is actually called a class B catch up contribution. They've heard about something this. So again, I know this can be kind of complex. If this is your first time syndications, this may be a little bit complex. I'll do my best to break this down. They've attached a link to an article about it. So if they're understanding this correctly, there's Something called a catch up contribution. And they're worried that they only have a preferred return for the first year. They're worried that the profits are split, kind of funny. And they find this to be extremely deceiving based on what's called this class B catch up. So I'm going to try to explain this and break this down for me, for people. So there's something overall, and I kind of mentioned it, that there's a, a way that the profits are split and there's an order to it, there's a priority to it and all of these investments, and it's important for you, when you look at any syndication deal, for you to look at how are they going to pay and split up the profits. And it's important to understand their priority. Now it's that whole process is called the waterfall distribution. And if you think about a waterfall, it kind of flows from the top to the bottom and sometimes there's waterfalls in series and it keeps flowing down. Well, in this whole waterfall structure, in these type of deals, I like to think about it more as, you know, water flowing from one bucket to another. When one bucket is filled, then it flows to the next bucket, then it flows into the next bucket, into the next one. And again that is called the waterfall structure. And usually in these type of deals, when there's something called a preferred return, that is the first bucket that needs to be filled before any other buckets get filled. And so there are again numerous, countless infinite number of possibilities of ways these waterfall structures are set up for the investment. And I think it's important that you as an investor understand how each deal is specifically set up. But I would say this person's talking about something called a catch up contribution. And so that is actually one of those buckets in that waterfall. So in this type of situation, let's say you as an investor, you've been guaranteed an 8% preferred return. So that bucket gets filled first, then what happens to any additional profits after that? The question is, does that get split amongst you and the sponsor? Or sometimes there's something called a catch up contribution there so that if you get your 8%, then the sponsor wants to make sure that the next set of profits fills them up to that 8% as well. So they can be on par with, with you, right, based on the equity split. Then after that is filled up, then they do that whole equity split, 70, 30, 80, 20, whatever that might be. Sometimes a catch up contribution isn't there, that bucket isn't there in the middle and it Just goes straight to that equity split. Now I know that can be a little bit confusing but some people don't like it. You know, they don't like having that little bucket, that catch up contribution there, right? They think that hey, it should just flow down to the investors after that. But again, there's no right or wrong. That's something I want to really stress in these type of deals. People are very, very worried about what the sponsor gets. And I know that's absolutely important. Like you want to make sure that your investment that you're getting minimal, I'd say minimal fees and the best profit split possible. But again every deal is different and so there's no right or wrong. And again you have a choice whether to invest in that or not to see if it makes sense for you. But if you do invest in it and it has a catch up, what's going to happen again is that profit's going to get split like that. Now it's not necessarily a bad thing if you think about it. All of these waterfall structures, all these payments out, it's all a series of incentives for the sponsor. You want a situation where there's something called alignment of interest where the sponsor, they want to make money, right? You want them to make money, but really only when you make money. You don't want a situation where they make money without you. And you want them to really be aligned with you. So that if you know in a bad case scenario where you lose money, you want them to be able to lose money as well. That's how you know you're aligned. And so you're, they're always looking for a way to set up these structures that they're in alignment with you. And it's up to you to figure out whether there's true alignment or not. So a lot of people say this actual catch up contribution creates better alignment actually between the investor and the sponsors. So what it means is that hey, you get paid first, then they get paid second, then all these splits happen. And some people like that, some people think that actually incentivizes the sponsor to continue to increase profits and do well because it keeps them in the game, in line with you as an investor. So again you have to look at some of the real life examples of this and look at some of the percentages. It can be a relative significant part of the profit split to have this catch up contribution. But again it's whether it makes the sponsor and you feel aligned or not, ultimately you all want to make money together. You want them to do well because that means you will do well as well. Right. And so ultimately I wouldn't worry so much about the catch up contribution. I don't see it as sleazy. You know, I think it's just, it's another part of the waterfall. It is what it is. And if you want to invest in that type of deal, you want to invest with that sponsor, that is their current setup. And it's up to you to decide whether it makes sense for you or not or whether you have different other opportunities. Because as Jim says, Jim Dali, the white coin investor says there are no call strikes in investing. And I think that has to do with real estate as well. You're going to see a deal, you're going to see many of these deals. They're all going to have their different details and intricacies and it's up to you to decide whether it makes sense for you or not. Right? There's no right or wrong. And if you decide to pass on it, and you should probably be passing on more deals than actually investing in deals, that means you got to see a good number of them. You're going to see different things. It's up to you to decide whether it makes sense for you or not based on your due diligence. All right, we got through a mouthful there. All right, so now we're going to move on to a few other questions on a few other topics. Talking about rental income and rental properties. As many of you know, I absolutely believe that real estate investing is one of the best, if not the best way to create cash flow, to create wealth, generational wealth, to create financial freedom. And I'm talking about now, like in the next five, 10 years versus waiting until you retire, you know. And so one of the best ways to do that is through purchasing rental properties, getting that income from that. And so this question comes from somebody, a member of the Facebook group. They want to get advice from the brain trust, I guess that's us, right? So they paid off their multifamily property. Congratulations. They have a property. They paid it off. Now rental income brings in approximately $4,000 a month and taxes are approximately $15,000 a year. And approximately $30,000 in repairs are still needed. So they have a question, is it better to sell or keep renting? Now usually I like to have a little bit more information when I answer a question like this. I usually have an opportunity to ask a lot of questions. In fact, I'll spend the first, probably 10, 15 minutes when I talk to somebody like this, just Asking them questions, finding out more about their current financial situation, you know, what age are they, what are their goals, what's their risk tolerance, where do they live, you know, what kind of lifestyle do they want to live, and you know, how much are they working? I'm assuming this person is still working in some capacity and how much do they want to work? And then I detail. So I basically need to know a lot more info to answer this correctly. Right, or answer this, you know, for them and you know, personalize it for them. However, there's some things we can talk about and I think there's some good things to talk about here. So this person has paid off their property, which means that they have no loan place. Now that's a good thing and it's a bad thing. Now the good thing is there's a lot of security there. You know, not having a mortgage on a property, whether it's a rental property, whether it's your own property, provides a lot of security. You know, that obviously you still have to pay property taxes. Then there are some ongoing costs with it where, you know, you can, you know, you could potentially, if you don't pay those things, someone could put a lien on your house or things like that. But not having a mortgage on it provides amazing security for you because that's usually the biggest chunk and the worry and the biggest risk when it comes to any sort of investing. So congratulations to this person for having paid that off. The thing is, one of the most powerful things about real estate investing, which I think allows for creation of wealth, creation of net worth, is the ability to use leverage, to use essentially other people's money, which is the bank, the bank's money, to create, you know, outsized returns for you as an investor. And there are ways to use that smartly, you know, as anybody who's taking a loan on their home or a rental property, you know, usually they'll let you take it all the way up to about 75 to 80% of the, you know, purchase price of the property. It's up to you to figure out how much is a safe place for you, right? But using leverage is one of the most powerful things. Now it can be like a double sided sword, right? There's two edges to it where it can provide really nice outsized returns, but it can also honestly, you know, magnify losses as well. So you have to understand how to use debt. I don't think debt is a good or bad thing. When you hear certain other people talk about debt, they always talk about it's, it's evil or it's bad. I, I don't think it's, you know, there's no moral aspect to debt, in my opinion. Right. There's no, it's not good or bad. It's a tool. It's a tool that you can use. You can use it. If you use it smartly, it will really benefit you. It'll help you get where you want to be. If you use it poorly, you could end up in trouble. So I think it's important to educate yourself on the topic, understand your limitations, understand your risk tolerance and where you want to be. Now, if it's somebody like me, I'll just talk about what I would do. That's the best I can do. This scenario, if I had a situation where I happened to pay off my rental property right now, and it came up, you know, that is brought in this much money, $4,000 a month. Taxes are approximately $15,000 a year. Right. So that's $15,000 a year. It's a little bit more than $1,000 per month on that. At approximately it needs $30,000 in repair. You know, repairs happen every year. There's some delayed repairs. You know, whether it's a big roof here, I don't know if $30,000 is for the roof for the H Vac system. This is a big cost, right. So it's better to sell or keep renting. Now, for me, I usually get these rental properties. I want maximum cash flow. I want cash flow because that money I can use to offset the income that I need to make in my day job, whether it's being a doctor, whatever it is. Right. The goal is to bring an income from that so that I don't have to work as much. I can give up that night, I can give up that weekend, and I've got that cash covered in coming in passively my rental properties. So for me, I would try to maximize my cash flow. And the way you can do that again is by using leverage. You have a paid off property, but in some ways what they have what's called lazy equity or unused equity sitting in the walls of the house. Yes, it's paid off, but it's not doing very much for you in terms of being active with interest rates being what they are. And as we all know, we're just still at record lows. The Fed has talked about increasing those quarter percent here, quarter percent here, but we're still at record lows in terms of interest rates. I think there's a great opportunity for people who again, want to put a lot of that equity to use, whether it's in the rental property, maybe even their own home, if they feel comfortable with it, is to, you know, take out a low interest loan, you can put that money to use and the goal is to get better returns elsewhere. You know, it's a form of arbitrage. Take borrow money here, make money here, you know, and I think with rental properties, that option and the opportunity is available. So if I'm trying to maximize my cash flow, maximize and grow my portfolio, I would absolutely take some of that multifamily property that you have, refinance, take some of the cash out for myself, and then go purchase another property, get some more cash flow for me. I don't know how large this property is or in terms of the value of it. The rental income brings in $4,000 a month. So maybe this is a. Depending on where it is, probably at very minimum it's a $400,000 property. Maybe even more than that. That's a great opportunity for you to take that and put it in a short term rental, put it in an apartment building. Again, that's what I would do to maximize cash flow instead of just keeping it rented at that point. Right. So that's for me. And I don't know what you, what you guys would do. We'd love to hear. Let us know you see this post in the Facebook group. Let's hear from you what you would like to do. Again, there's enough good amount of deferred maintenance that needs to happen. So it doesn't look like they'll be making very much in terms of cash flow this month anyways or this year. So that's something else to think about. All right, well, here's another question from the Facebook group. Am I my first home and I have some cash saved up? Is it better to use a lower down payment or put a higher amount down to have a lower mortgage? Is it better to use a physician or conventional loan in this scenario? Again, this is a pretty loaded question. There are a lot of questions to ask in terms of goals. What else they have in their portfolio? What are they going to do with that additional cash? I think that's what I would talk about. I get this question all the time because some of you know, I also run another company called Curbside Real Estate where we help physicians get connected to the resources to buy their own homes. You can check it out on Jim's physician loan page. You'll see it right there. We connect people to agents all over the country. And so we spend some time talking to people. I just get on the phone, I love starting know talking about this myself and my partner and we, you know, the people that are buying their first homes and they want to know like they can have access to these things called physician home loans. And for those who aren't familiar with that, these physician home loans understand the situation. For let's say someone listening to this, you probably the physician or the high income professional who wants to buy the first home. Usually they don't have a lot saved up for down payment. You know, they might have a shorter work history. You know, they might have some student loans out there. You know, sometimes that can be a challenge in terms of buying your first home. So physician loan, that's home loans are they're like specialized products that were created for someone just like you be able to get you into those homes because they know you're a good bet. I mean physicians high income professional in the healthcare industry, they have the lowest default rates across the board, bar none. That's what they'll tell you. You are the lowest risk out there in terms of getting a home loan. And the reason why is I don't know if there's a set of moral ethics or whatever it is, but we stick to our obligations. That's just what we do as people. And if we have to, we can always work more, we can pick up additional shifts. And that's not necessarily a good thing, but we will, the situation arose, right? You'd make it happen in any case. And so they figured out these loan products for people like you and me, be able to get in at lower down payments and get access to financing. And so the question is, you know, if you did save up a little bit extra and this is good, congrats to this person who saved up additional cash probably early in their career since it's their first home. So they could probably go with that, you know, typical 20% down and get that conventional loan. But some of these physician home loans, depending on your area, depending on the property size, the purchase price, you can go down to, you know, 10%, 5% and then allows them to retain a little bit additional cash. So my question to this person would be, what are you going to do with that cash? You know, and how much is security? And having a lower mortgage, how important is that to you? And how do you feel about debt? And having carried that personally, I can only again answer what I would personally do, especially in today's low interest rate environment, I would probably skew towards and go towards putting down a lower down payment loan on your house, probably using, utilizing that capital elsewhere on an investment to help create again additional wealth for yourself, create additional cash flow. And sometimes what people have done, I'll tell you, one of the strategies that I use initially was to put down a lower down payment, take that cash, create cash flow that helps compensate for having a little bit of the higher mortgage and gives you additional cash flow on top of that. There are options to be able to do that. When you buy your own rental properties, you know, the question is, is your home the best place to stash additional cash and have equity in? I don't know. That's again, that's a personal decision. Most people who are in the field of real estate investing will say your own home is not an investment. Yes, the value of your home can go up over time, but it's not necessarily that you'll just get out of your home. You can, you know, you can just leave your home and sell it. You got to live somewhere, right? You can actually access some of that equity through home equity loans or a home equity line of credit, or totally refinancing. That's one way to tap that, right? But typically your own home is not an investment. You've got to live in it, you've got to pay it. If you don't pay it, then you know, your home can get, you know you can get foreclosed on, right? And leave your home. So it's better to treat your home as an, like your home as almost a, let's say a luxury or expense. And then treat a rental property as an investment, Treat those things separately. It's always better to do that because again, you're gonna look at your home differently than you would at a rental property. And so for this type of person, again, it depends on what their goals are. Depends on what their cash flow goals are. Do they want to create that additional stream of income now, how important is it to them to have a little bit of extra cash flow on the side? And if that's really the priority, then probably makes sense to utilize one of the physician home loans, if you can, to put down a lower down payment, take that cash, not just put it into your home to make a, you know, build necessarily pool in the backyard or something like that. Utilize that to create more cash flow from yourself for yourself, right? Create that additional investment income and especially with today's low interest rates, are great opportunities to do so. And so that would be my advice for myself and that's what I would do. But again, if your goal is security, having the lowest down payment. I'm sorry, the lowest mortgage possible, then yeah, put all the money in your house and have the lowest rate. But again, it's up to you and your personal preference. I just know what I would do. Okay, so here's another question from the group. I'm just going to go ahead and read this. This is about somebody, again, whether they should sell their home or rental property, whether they should keep it. They're asking for some recommendations. So here it goes. I have an offer of approximately $545,000, but this is reflecting the current market. Okay, so not sure if this is because real estate is a bubble or real estate is in a bubble or prices are expected to rise. Now, the rental incomes may be slightly higher in the area than what I am asking. However, the house is older and needs some updates. Main issues are plumbing and older heating system. So they're debating on selling versus renting their current townhome. It's a seller's market, as we all know, but rental income will be more secure than the currently volatile stock market. So $300,000. They're giving you a little bit more details here. So $300,000 townhome will rent for somewhere around 2,200 to $2,500 per month. In my area. They have $160,000 in equity and the remainder of the mortgage is a 2.5% fixed rate. So do they have any recommendations? All right, so a couple things. They said their home is 300k. They said they have an offer of 545k. So I would say the value of the Property is actually 545,000. Their equity, maybe they're saying it's $160,000, but that's based on the price of $300,000. But if they're going to get $545,000, another $245,000 more in value than they think. That's also all equity. So it sounds to me that honestly, they have something around 245, plus that 160 that they mentioned. So it sounds like they probably have somewhere around $400,000 of equity. If I've got this correct, for the townhome, it looks like it's a rental property. Just to summarize with some older issues, there's some deferred maintenance that needs to happen, or what they call Cap X where the plumbing probably needs to be replaced. They have an older heating system, and these can be some large additional costs down the line. And of course, roofs are also in that of course, equation. So they're getting about 2,200 to $2,500 a month in rental in their area. Now, one of the rules of thumb, just so you know, when they receive, there's something called the 50% rule. So just to be safe, a lot of times, if you can get about $2,200 a month, take 50% of that for expenses, and probably what's left over is what you're going to profit from it. So let's say $2,200 a month, and they profit about $1,100 a month in cash flow from it. Now, when you have a rental property, there are multiple ways to make money from it, right? There are ways where you actually get the cash flow, the net cash flow after expenses. That's one. Another way is that they're essentially helping to pay off your mortgage. They're paying for the mortgage, and so some of your equity goes up over time. Sounds like they bought their home and it's appreciated quite a bit. So it means gone up in value. So that's another way. And then they're probably getting some sort of tax benefits as well. And so that's another way that you can really benefit from having rental properties. So they're taking advantage of all these things as part of this property. Now, here's the question. What should they do? They have a lot of deferred maintenance, and they have this property now, to be honest with you, they have a lot of equity in this property, but it's only making them $1,100 a month, which, I mean, again, it's something. It's not nothing. It is something. But the question is whether I'm going to guess that this person lived in their townhome, probably left it and started renting it out. And so this is what they're able to get, and they're happy with it right now, but they're not sure where to put their money to best use. Now, I would say that again, I don't know what they bought it for. I don't know if whether it was 300 or not, they got 540,000. So they got some money, and if they sold, they would have to pay some sort of capital gains tax on it. Now, there is a condition where if you've lived in your property, property, let's say it's a rental property for two out of the last five years, you still qualify for that homeowner's Exemption, that tax exemption, up to $250,000 for an individual or up to $500,000 for a married couple. Right. Or partnership. Right. Where you can get that completely tax free, don't have to pay capital gains on it. And that is a huge benefit, especially if you're able to cash in on that. So I don't know how long this person has, whether they lived in the property first, it just recently became a rental property. But this is something that they should think about taking advantage of. I mean, what kind of return is that? So let's say they made like $300,000 on this property. Normal capital gains, long term, it can be anywhere from 20, you know, around 20% or so. That could be a significant amount of cash that you could actually just keep in your pocket by actually selling this property and then buying another property that maybe makes more sense as a rental property, maybe makes a little bit more cash flow for you. Maybe it's in a better appreciating area for you. Especially with mortgage rates again being low right now, there are a lot of opportunities to move around and buy a rental property. So that might work well for you, you know, and I know this person is worried about being in a bubble. You know, real estate is, you know, there are bubbles in real estate, in stocks, things like that. But the problem is nobody can predict this. Just like, you know, we talk about Wyco investor. You know, people say, oh, stocks are in a bubble. I'm going to wait for them to go down before I get into some of these investments. The question is, you don't know when that's going to be. So the best thing for you and that they've shown over time is get in the game when you can get in the game. Play it for the long term, play for, you know, over time. Yes, maybe this is a blip. Maybe there's a bubble here and to be expected as part of the cycle, maybe prices will drop, but then they will go back up. Right. And so you want to be part of this ride because otherwise you're not going to know when to time it. And again, even with real estate, most people expect that, hey, when the bottom hits, I'm going to be ready to jump in. The problem is you don't know when that is. And number two, it's a psychological thing. When everybody's running for the door, it's really hard to fight against the tide. And that's when you probably make the most money. But emotionally, physiologically, it's just hard to swallow to do that so oftentimes it's just better to get in the game and play for the long term. And so for this type of person, I would look for that tax exemption, see if it works for them. That is a way to cash out and move it on to another property. Otherwise, to be honest with you, I would do another evaluation. Is this the best rental property for you? There's a lot of maintenance and deferred maintenance which will cut into your cash flow. Are you getting the max amount of cash flow that you'd like to? Is it in the area that you want to be? Are there other opportunities for you? You know, and so for me, you know, personally, I don't love single townhomes. I think that, you know, the single family home, unless you're using it as like a short term rental these days, you're not maximizing on your opportunity to scale to create that cash flow. And that usually comes with more units, to be honest with you. And I'm a big fan of like you know, taking those single families, taking those small duplexes or triplexes and figuring a way to play monopoly with them where you can sell some of those and rent, you know, sell them and trade them in for larger properties. And the reason I say that, not because I want more headache, but I found that management of a single family or a duplex or triplex is not that different from having management of a 20 plus unit building. And the reason why is because when once you get 20 plus unit buildings, you tap into a lot more professional property management and either way they are taking care of major, those major issues and you're able to honestly move a lot of the pieces around more, play with the property, play with the returns to really magnify gains at that point. I'm a big fan of that. I say having a single town home, if renter leaves, you've got zero income coming in, right? Whereas you know, in a 20 unit apartment building, one person leaves, two people leave, you get turnover, you still got rental income coming in on a monthly basis. And again, I care about cash flow. I want extra money coming in my pocket so that I don't have to take that moonlighting shift, right? I don't need to take that weekend. And that's how I ultimately built up my streams of income. For me, I said, all right, how much money would it take on a monthly basis for me to be completely financially free, right? How much? I looked at my expenses, I looked at my family's expenses, I, I wanted to live a certain type of lifestyle. And I said, how much money per month would it take for me? Like, somebody wrote me a check that I could be completely financially free. And to be honest with you, that number for me was $20,000 a month. I live in California, high income area, but I also wanted to travel, live a good life, and just be able to do the things I wanted to do. I wanted to be able to, you know, give, to do, you know, contribute, do these kind of things as well. And that was just a number for me. I planted that flag there at $20,000 a month. But again, I didn't expect to get it all at once. For me, my goal was initially $20,000 in 20 years. That was my goal. I think I started that when I was in my 30s and I said, all right, well, by the time I'm 50, 55, I'll be able to retire. And so, honestly, that $20,000 seemed pretty insurmountable initially, but it was a goal. And so I started working backwards. I started saying, okay, if I'm going to get $20,000 in 20 years, that means in 10 years, that means I need about $10,000 a month to be on that track. About $10,000 a month, okay, So I can work backwards a little bit. That means in five years, I would need about $5,000 a month in passive income. I'm like, okay, well, that's starting to sound a little bit more attainable. Now I broke that down even further. One year. So that means in one year, this first year, if I can get figure out a way to create $1,000 in passive income income, which means really just $12,000 a year in passive income, I could figure that out for year one. And I found a system to do that. I could just repeat that every single year. And I would hit my goal. And that's how I started. Now, I'll tell you the secret, which a lot of people don't know, is that once you start doing this and figuring it out, to me, I believe it grows, not linearly, but it grows exponentially. You start getting smarter, you start getting better. You start doing these things like trading, you know, like Monopoly, taking the houses, taking four houses, trading it in for a hotel, not a hotel, but maybe an apartment building. And you start figuring out ways to use leverage smartly, right? You create connections, you create networks, you create just more opportunities. And I found that once you're on the journey, once you're on the path and you get going, things tend to grow in an exponential scale. And so I hit my goal A lot earlier than I expected, fortunately. And it's something that's been a fun ride and I've learned so much along the way. And the only way to do that is to obviously take action, but to reevaluate, constantly reevaluate, you know, your current assets, you know, what is making money for you, how much is it? And is this meeting your goals? What are ways to maybe use arbitrage to trade, to move things around, to help you honestly accelerate on your journey a little bit faster and a lot quicker? So I think this person has a lot to think about, about their townhome, whether that might be the best investment for them or not, and see what other opportunities are out there. All right, so there's someone here, they're being really vulnerable and honest and they're going to share their situation here. And I'm going to start. I'm going to go ahead and read this. So this person says, I'm a bit overwhelmed by the current economy. Okay. So, I mean, that's, that's a total. I would say that's a totally true statement. I know a lot of people feel the same way. So as a high earner, it's always been easy for me to save cash. I've done well in real estate and have about $500,000 in the bank with which I was planning to buy a two or three family for rental. I'm assuming that's a duplex or a triplex for a rental. However, it's nearly impossible to find anything around here in the Boston suburbs. And when things come up, they are way overpriced. Normally I'd be waiting on the sidelines, waiting for the bubble to burst, but my concern is inflation. If inflation keeps going, I'd still be okay buying. Even at these inflated prices, things just aren't behaving like they should. So I guess this question is, you know, this person's question is, you know, they're letting us know the economy, the current cycle, the market is driving them a little crazy. It's hard to know what to do. They want to purchase a rental property in their area in the Boston suburbs, but it seems to be overpriced. But they're worried that a, our prices are actually, are they going to actually come down in the future or because of inflation, are they going to continue to go up? Things just aren't behaving and they want to know what to do in this type of situation. Well, I actually empathize with this person. I mean, yes, we all love to know exactly what's going to happen? What we do know is inflation is pretty high right now. And for those who haven't heard, you probably have. That's usually tied to what's called the consumer price index, which is indexes the, you know, just kind of tracks the cost of all these different types of goods and it really, you know, evaluates the value of a dollar. And so as we all know, a dollar doesn't go as far as it did 20 years ago, and a dollar won't go as far 20 years from now. Prices tend to just go up with time. Now, real estate is known as the great hedge against inflation. It is the cost of living. You know, cost of living, especially buying your own homes, tends to rise and fall with inflation. It tends to go in line with it. And that could be a good thing, that could be a bad thing, depending on how you look at it. But this person is wondering, okay, if the bubble, if this is a bubble but inflation is happening, is the price, you know, are the prices of these rental properties continue to go up. All right, so I want to just. First of all, I want to honor this person. This person has about $500,000 in the bank. That's a great thing. I mean, to be able to save $500,000. First of all, they should feel proud of themselves, not really overwhelmed because they've done really well and they've been smart. They said even themselves, they've done well in real estate. So congrats. They've made investments. They probably have some cash flow and they want to buy a duplex or triplex. However, again, in their area, everything seems so high. So the first question I would ask them is, are you limited to buying in that area now as they live there, Maybe they want to be closer to their investment property. They want to be able to check on it. You know, they know they currently, you know, they have current, you know, connections, resources there, property management and that sort of thing. But I remember hearing from, there's a podcast called the Real Estate Guys and they say, live where you want to live and invest where it makes sense. A lot of different people say this kind of depends on their goals. For me, I live in now in Orange County. I moved to Orange county recently, California, near la. Prices here are ridiculous. Yeah, I understand. I feel the Boston, San Francisco, Louisiana people, New York people, Washington, D.C. i understand you prices for real estate are out of control, especially when it comes to rental property. You'd have to put down a significant amount to even cash flow, even right. To break even in Terms of cash flow. And so I understand that. And so I have some properties actually local to me, but they were a little bit better market. What I buy today, I'm not sure if I would buy here today. Now the game here with Los Angeles in these high cost of living areas is that, you know, the value of these things will continue to go up over time. Thing is, my actual priority is cash flow. And so in these coastal cities typically having rental properties, it doesn't really match that goal. And so I learned to invest in different areas of the country. I've done well, certain areas. A little bit of the Pacific Northwest, a little bit south of there, I've done the Midwest, there's Texas and different areas like that. And in Florida and things like that, I've looked at different areas that cash flow might work out better for me. Now in the coastal cities, what I have found to work in terms of cash flow basis are short term rentals. Now short term rentals are hot right now. Obviously there are regulatory risks. We're going to talk a little bit about that if we have some time, but those tend to work in those areas. But what I would really challenge this person who wrote this question here is do you have to necessarily buy a property in your area? And if so, why are you able to figure it out to have the resources to do, develop the connections to invest where it makes sense. And for this person, I'd probably tell them the Boston suburbs may not make sense for them unless their goal is just to hold onto a property like for a very, very long time and just hope that it goes up over time. Now you're just expecting to play the market right? You gotta buy at a certain point, you gotta sell at a certain point. And really your only game or exit strategy is to sell at a good time. Whenever you have rental properties for cash flow, there are multiple exit strategies. You can keep it, continue to get cash flow, you can sell it down the line. There's just more opportunities. So I would really challenge them. Why are you looking in Boston? Is there an opportunity for you to look elsewhere? You have connections, you have resources, obviously because you've done well in real estate. This community, our community, right? Whether it's the white coat investor community, whether it's our Facebook, you know, the passive income MD Facebook community called passive income docs. There are resources, there are connections to different areas to invest in certain areas. This person may even consider investing in syndications. We talked about it. Maybe they want to invest in their own area, but they want to invest with sponsors or operators who have found deals in certain areas to scale. Right. Whether it's 250 unit apartment buildings in Florida or Texas that do get the cash flow that they're looking for and they don't have to even put their own time into it, they can leverage the experience, knowledge, team, resources, networks, connections of a sponsor to be able to do so. And so that opportunity there is there as well. And so these are all questions. Probably this kind of stuff brings up more questions than it does answers for me particularly. Again, I look for something that fits my goals better. That's either going to be investing in a high cash flow area or investing in one of these syndications. All right, and this next question was just a personal question. How much of my net worth is or my portfolio is allocated to active versus passive real estate investing. So for someone who's asking that question, active, I'm assuming they're referring to direct ownership of rental properties, meaning you own, you're the landlord, you own your rental properties. And then passive is when you invest in other people's deals, whether syndications or funds like that. Now it's gone through a different, you know, it's gone through a cycle. In the beginning I started investing passively because I didn't know what to do. I didn't have the connections, I didn't have the network. Then I got some experience and knowledge and I started investing in my own rental properties. I bought apartment buildings mostly in the west coast and also some smaller unit buildings in, in Texas, Pacific Northwest and things like that. Then after a certain amount of time I realized I only have a certain amount of time to deal with these rental properties on my own. So I started adding to the portfolio by again investing a little bit more passively in other people's deals. And that's allowed me to scale my investments and my portfolio and my cash flow. So to be honest with you, probably in terms of a net worth or value of the investments, probably I'm pretty split 50, 50, right. In terms of where I am, in terms of my portfolio that's allocated towards active and passive. To be honest with you, you'll see so many debates about active versus passive, there's no right answer. You've got to figure out whether you want to maximize, try to maximize your returns by building your team, putting in the time, putting in the sweat equity for it, putting in the knowledge and experience. You can do that. You know, as high income professionals, I will tell you, I've seen it again and again. We have the intellect, the ambition the resources to make it happen. But you have to want to do it and you can maximize, potentially maximize your returns that way. Then there's the passive side where you just, you know, you know that your best way for you to create capital is to work at your day job. And what you want to do is with that capital, you want to put your investment somewhere else that creates cash flow, that creates and actually protects your time, right? You don't have to put more time and let somebody else do that and create returns for you. You want to leverage somebody else to get all that for you. And maybe you don't have the time, you want to spend that time doing other things right with whatever free time you have. Now, there's no right or wrong answer. I do both. And I think the answer is that you can utilize the pros of both of these, from tax benefits to returns to the time invested, to the resources, the connections, and utilize both to get your ideal situation right, to get your goals. And I'll be honest with you, at different times in the market, sometimes I'm out there, I can't find the deals personally for myself. But guess what, there's a professional sponsor who has all the connections and the brokers and they're getting these large apartment buildings that make sense off market deals through connections, then it makes sense to partner with them, right? But other times, maybe a deal and opportunity comes up on my own, which did happen recently with a short term rental that I'm putting together. And you'll look out for a post on that. And so I bought my own as well. So I like to do both. I think there are benefits of both. I don't think, you know, people who say one is worse than the other, I don't think it's necessarily correct. I've seen people use both of these techniques or platforms or for opportunities to create massive amounts of cash flow from them, which is totally free them up from their day job so they can do it because they want to. Right this point, I feel very fortunate to say I practice medicine because I want to and not because I have to. And it changes the way I have perspective on medicine on my day job. I absolutely love it and gives me different opportunities. And so obviously I hope and I wish the best and the same for everyone. And so yes, that's a great question. I'm going to continue to do both to whatever fits my needs. And I enjoy both at this point. So, you know, if you do want to learn about some of these things, I know people ask like what are some of the resources. There are some great books on both. The Bigger Pockets podcast is a great one podcast as well as their whole forum book on rental property investing. There are many of these doctors and as many of you know that have been part of our Financial Freedom Through Real Estate conference in the past with 20 talked about and shared about their successful investing in terms of rental properties and things like that. The Zero to Freedom through Cash Flowing Rentals, Cash Flow Mastery that is a great course that people can look to purchase their own rental properties and I know that Jim has a good partnership with them as well. If you're looking for figuring out how to confidently invest in passive real estate investments, you can look towards our course Passive Real Estate Academy and Jim has partnered with us as well. There can be a link for that and we open that up twice a year that people can join in four weeks. Learn how to confidently invest in these things and do your due diligence for it. In any case, the opportunities are there for you. Whatever I can do to continue to support you, please let me know. You can reach out to me personally through our Facebook group, through social media, through our email contactassiveincomemd.com Our mission is to ultimately help whoever's listening to this high income professionals and physicians create additional streams of income so you can live life how you want. Live life on your own terms. Spend the time with the people you love doing the things you love and that's our mission and whatever way can help support you. Please let us know if you're looking.

To boost returns, lower taxes and build wealth. Join the WCI Monthly Real Estate Opportunities List for tips and strategies to maximize your real estate returns. And for introductions to exclusive investment opportunities, expect educational emails that introduce you to syndicators, fund companies, online courses and online real estate platforms. Go to whitecoatinvestor.com reopportunities to sign up today. You can do this and the white coat investor can help.

We'd also again like to mention that the WCICON 2022 course sale is going on right now, February 23rd through March 7th. It's your opportunity to get an early bird pricing at 699. The regular is 779. So right now you have an opportunity to get 10% off. You can check that out@whitecoatinvestor.com CFE2022 that is all the virtual recordings, the lectures at the conference that just happened WCICON 2022. I have a talk there as well so you can enjoy that as well. So make sure you check that out. The other thing again upcoming is the Leverage and Growth Summit for Physicians put on by us at passive income MD. We'll be speaking to 30 to 40 physicians about how to really create that ideal physician life both in and outside of clinical medicine using Investments and entrepreneurship. March 9th through 13th. Totally free. Come on out and check that out and let everybody know about it. And the last thing is if you enjoyed this podcast, you enjoy Jim's podcast, make sure to leave us a five star review. Tell your friends about it. We want to continue to help grow his mission and our mission to make sure we get this kind of advice and information out to all physicians and high income professionals. Here's a five star review that we want to read. This person is from Apple Podcasts Qbrill. They wrote five stars. Great advice for physicians from a physician. Follow your doctor's advice and listen to this show. It is informative and entertaining. Thank you for that review. Q. Brill and as Jim says, I'm going to say what he says all the time. Head up, shoulders back. You've got this and we can help. Hope you enjoyed this episode. Let's talk again soon. Take care. My dad, your host, Dr. Dahl is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney or financial advisor. So this podcast is for your entertainment and information only and should not be considered official personalized financial advice.