WCI #348: How Much Should Location Matter When Choosing a Residency?

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.

This is White Coat Investor podcast number 348. At some point in our financial lives, it will be time to buy a home.

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You can do this and the White Coat Investor can help. All right, welcome back to the podcast and thank you for what you do. Here we are, it's 2024. This is our first podcast that's going to drop in 2024. We're actually recording it before Christmas, but first podcast in 2024. New year, new you. This is the year you get control of your finances. This is the year you start living the life you were made to live. Let's get the financial ducks in a row so you can quit worrying about them, so you can concentrate on being a better parent, a better partner, a better physician, provider, practitioner, attorney. Whatever you do, let's get it going. You spent too long not having things.

Optimized in your life.

Let's get them going so you can.

Live the life that you were meant.

To live, the life that you deserve. You know, I've got a neighbor, a good friend, who's taken a sabbatical this.

Year and doing some awesome stuff.

I'm still trying to talk him into.

Doing a guest post on it after the year's up. And he'll be doing some locums as well. He's a radiologist. He'll do a little bit of locums for some income during the year, but.

Traveling with the family world, schooling the kids, you know, just been planning it for the last year or two and they're kicking it off like in a couple of days. And I'm so excited for them. And for those of you doing similar.

Things out there because you got control of your lives, you got control of your finances, and it's just opened up these incredible opportunities for you and your family and those you care about most and your practices or whatever.

So thanks for what you do. Take control this year and let's have.

A rising tide lift all boats together.

All right, we gotta start today with some corrections.

Some of them are a little ticky.

Tacky, but I think they're worth talking about. Okay, here's one of them that I just totally blew. In the episode about DAFs where I interviewed the DAFI CEO, I mentioned that there's a tax deduction that you can deduct $250 or $300 or $500 or $600 or whatever it was without itemizing. That you can deduct charitable deductions up to a certain amount without itemizing. That was only in 2020 and 2021. You can't still do that. I'm sorry. Apparently I missed that.

I itemize my taxes every year. I confess I didn't pay much attention to it. That was wrong. That is no longer possible.

So if you don't itemize, you get.

Nothing tax wise for your charitable contributions.

All right, another one we got. This one came in by email on the same episode and said hello, Jim. Enjoying your work as usual. I just finished the DAFI podcast. One key risk with DAFS was not discussed at all, and I would have loved to have heard some response to how conflicts between the donor and the fund might be resolved. We live in a world where my idea of ESG and your idea of esg, right? Environmental, social, governance investing may be very different. One where Canada actually froze bank accounts when individuals gave to disfavored charities. Once a donor makes a donation, the funds now belong to the fund. So ultimately, can't the fund block donations to its disfavored charities, even if in conflict with the donor's wishes? Doesn't this mean donors should pay special attention to the values of the DAF and or seek contractual assurances that the fund will distribute to all legal charities, regardless of the fund's feelings towards those charities? Should a donor be concerned about what state the DAF is located in? What if California bans transactions to the NRA Foundation? Alabama bans transactions to the Council on Islamic Relations by naming each some sort of terror group or supporter? These questions are either a bit conspiratorial or easily predicted, depending on one's current worldview. But I would not bet against this conflict being real in the future. It seems important to prioritize daft values, donor agreements, and perhaps even location over fees, investment options, and app usability. Well, yeah, it does sound a little bit conspiratorial. I guess it's a possibility. I guess it's a real risk. If you donate your entire lives worth of charitable contributions to this daf, and then all of a sudden they're like.

Nope, you can't give to all the charities you love. I just don't think this is very realistic.

I've never heard of it happening before. As near as I can tell, the only DAF I've ever used is Vanguard Charitable. But their screening process, as near as I can tell, is limited to just making sure the charity is actually registered with the irs.

I think that's it.

But here's the deal. What if this happens? What if you pick some little tiny startup DAF in California, and for whatever.

Reason, you can no longer donate to the nra. And although I don't think the NRA is actually a charity, maybe they have a charity associated with them, but I actually don't think NRA donations are considered a charity.

At any rate, whatever somebody you can't.

You'Re not allowed to donate to.

Well, almost surely they're not going to.

Put Vanguard Charitable on the list.

They're not going to put Fidelity Charitable.

On the list, or Schwab Charitable on the list or Daffy on the list.

So take it out of that DAF and make a grant to your Vanguard Charitable daf, and then you can donate.

To whatever politically unpopular charity you want to donate to. I just don't think this is a very realistic concern. The more I think about it, the.

Less I worry about certainly would not.

Be what I prioritized when choosing a daf.

I would prioritize fees and investment options. If you're going to leave the money.

In there, invested usability, the app, those sorts of things, convenience with your brokerage account, that's a big thing with me because my brokerage is a Vanguard and so is my charitable account. Lots of people don't like the Vanguard.

Account just because of the high minimums. You got to put $25,000 in there.

To open it up.

I think additional contributions have to be at least five. Your grants have to be at least $500.

A lot of that's like, I don't want to go that big. So they don't use Vanguard. They use dafi or Fidelity or Something else.

All right, another one. This is another correction, observation, et cetera. This one comes in about the 831B episode.

This was an interview we did with someone that offers these.

What do you call them?

Self insurance?

Captive insurance. You call them captive insurance.

Okay. These plans.

Anyway, the email says I've been a longtime follower of the blog from the day I started Medical School in 2013. You have incredible talent for writing and communicating. It's been fun to watch your blog grow throughout the years. Your effort, along with many others such as Mr. Money Mustache and the Bogleheads Forum, were the cornerstone of my financial education and certainly helped me to get.

Off on the right path.

Thank you.

I peruse your work somewhat frequently and.

Wanted to clarify something.

All right, well, thanks for your kind words.

Your podcast on 831B plans was extremely interesting. However, after looking into this a bit more, it appears that the discussion on fund growth was somewhat misleading. Contributions to the fund are not taxed, but growth on the reserves do not grow tax free. In fact, they're actually taxed at C Corp rates. In effect, you end up with the immediate deduction. A high drag on growth, but distributions.

At the capital gains rate. I'm not sure where that would make.

This fit in terms of an additional retirement vehicle, but overall, perhaps somewhat similar to a 401. I found the concept of these plans particularly interesting as it seems a way I could insure against Medicare clawback risk for my ambulatory surgery center. Otherwise, it doesn't seem that there is any option available for this kind of situation. Once again, thank you for what you do. I'm one year out of fellowship and.

Still working on getting back to broke. But I've built up enough that my.

Student loans and half our starter house could be paid off entirely. Perhaps after the practice loan is paid off too.

Would love to apply for the Milestones podcast.

Take care.

Have Merry Christmas.

Well, it's a nice email. Yeah, you don't have to do all.

That before you come on the Milestones.

Podcast, we'll celebrate anything.

You know, you pay off your bike loan. We'll bring you on the podcast.

Here's the deal. Yeah, this is the way it works. Maybe we weren't very clear and so let's clarify how this works in the 831 plan. Essentially those assets are in the C.

Corp. You got to form a C Corp to do this thing. And so gains on that income there that does get taxed at those C Corp rates until that gets distributed.

So you get an immediate deduction when the money comes out, it comes out basically as, you know, dividends to you, you know, corporation dividends, qualified dividends. So they come out at dividend rates.

But it's not, you know, quite like the way an IRA or a 401k would work where it grows in a tax protected way. There is some tax drag on it while it's in the plan and we.

Weren'T very clear about that on the podcast.

So for that I apologize. That is the way it works.

Now, does that make it less attractive to me than it was before? Not really, because I understood that was the way it was before.

But I'm probably not going to be doing that. I don't see a huge use for it for wci. My financial life is complex enough as it is. I don't need a captive insurance plan to make it even more complicated.

Okay, let's take a question now of the Speak pipe. This one's from Erica. Thanks for, thanks for doing a question. Those of you who want your questions on the podcast, want to get them answered, want to help support this community? Go to whitecodeinvestor.com speakpipe and you can record up to 90 seconds. You don't have to use all 90 seconds of question and we'll try to get it answered on the podcast.

Hi Dr. Dali, my name is Erica. I'm a pediatric hospitalist. I'm curious if you have any guidance for saving up for intermediate term goals like seven or eight years away. I know that usually stock market is recommended for anything at least 10 years away and for short term goals less than 5 years, usually a high yield savings CD or money market fund would be recommended. But between those two time periods is a mixture of the two safe. Thank you so much.

Okay, well, the reason you don't get clear instruction on this from me or anybody else is it is incredibly controversial. This is, you know, there is no right answer here. Everybody disagrees. Clearly if you need the money in a year, you should not be investing.

It in stocks and real estate.

Even putting it in bonds is a pretty risky thing to do. I mean, you could have a year like 2022. Rates went up 4%. Bonds, you know, as bonds do, cratered.

You know, I think losses were up.

To like 15% in lots of very good bond funds when rates went up that high. And so for that really short time period, 1, 2, 3 years, maybe cash, the nice thing right now is you can make 5.3% on your cash at least.

As I'm recording this, I think rates dropped a little bit recently. So it might be 5% next month when you hear this.

But you can make 5% on cash, which is great. So there's like no downside to being.

In cash these days. You're getting rewarded pretty well. That's even higher in the yield on bonds right now. So I wouldn't feel bad about leaving money in cash for relatively short term.

Stuff as far as stocks go. And when I'm saying stocks, I'm not saying go out and buy Amazon and Tesla.

Right.

We're talking about a broadly diversified low cost index mutual fund or etf.

When we're talking about stocks, money that.

Goes into stocks really is long term money. How long is long term? Well, it's hard to say.

Some might say, well, five years is enough.

It's pretty rare for stocks to lose.

Money over a five year time period. It's not impossible.

It's very rare to lose stocks over. To lose money with stocks over a.

20 year time period, at least on a nominal basis.

In fact, I'm not sure it's ever.

Happened that people lost nominal money on.

Stocks over 20 years. They might have been outperformed by bonds or something else, but they haven't actually.

Lost money in that time period.

Certainly money you don't need for 10 plus years.

I would feel very safe investing that into stocks and real estate and those sorts of aggressive investments.

At five years, I think there's probably some room for people to say, hey.

That'S maybe not long enough for stocks and real estate, particularly anything that's illiquid. And so at that point maybe we're talking about a mix, maybe some in.

Cash, some in bonds, some in stocks.

That sort of a time period.

Now you're talking about 7ish years. And so that would put us somewhere in between 5 and 10, but it's 7ish years out. I'm pretty comfortable with the pretty good.

Chunk of it in stocks.

And it's possible you would have come out ahead in bonds or even in cash. That's always a risk with investing. Even in the long run, that's a risk. You know, it's entirely possible for the rest of your life. Bonds could outperform stocks. It's probably not the way to bet, but it's possible that it could happen. However, there's another side to this, right? And that side's probably more important than.

Whether you lose money or not.

And that is the consequences of not having your money at that time period.

Right.

For example, let's say you're saving for college, Right. And A lot of people save for college and dial back the aggressiveness as that kid gets closer to 18, so that it's basically all in cash when they start college at 18. But the truth is you don't spend all that money at 18. Some will be spent at 19, some at 20, some at 21. Maybe some of it doesn't get spent until dental school. Maybe some of it's left behind in that 529 and the beneficiaries changed to the grandkids. That money might not be needed for decades. And yet you had it all sitting in cash. So you got to keep in mind things like that. When will the money actually be spent? Now, if you need a home down payment on a specific date, when you get out of the military and you're moving to a new place and you're going to buy a home, well, you can't take as much risk with that as you can with something where it really doesn't matter if you have the exact right amount of money or exactly when you have it.

Maybe. What would be an example of that? Maybe you're investing to buy a wakeboat.

And it's really not a big deal if you buy it this year or next year. Well, you can invest it more aggressively if it doesn't matter which year you actually cash out. If it's down the first year, well, you just give it another year and it'll probably be better than it was the year before. No guarantee it could be a 2002 after 2000 and 2001, but you know, chances are good it'll be better. You know, things were down in 2022, 2023, great year. If you had had the flexibility to wait another year, you basically got all.

Your money back that you lost in 2022.

So consider the consequences. How finite is that date that you actually need the money? How finite is the amount of money you need? The more flexible you can be and the further out in the future this goal is, the more aggressive you can be with it. So I guess the bottom line is for a seven year goal, I could go anywhere from a seven year CD or a seven year treasury all the.

Way to 100% stocks. So no clear guidelines for you, just based on the number of years.

All right, it's a new year. You know, you're probably looking at the income you had last year and wondering, how can I have a higher income? Well, you can negotiate a higher rate of pay from your employer.

Maybe you can work a little bit.

Harder, more shifts, more call, or maybe you can do something different. Consider our survey companies that we've partnered with and if you go to whitecoatinvestor.com mdsurveys you will see the people that we've partnered with. These are people that basically want to pay you for your opinion. A lot of times you can affect the development of drugs or devices or those sorts of things that can make a difference in your practice. But that additional income gives you an opportunity to get a Solo 401 because you're now in business for yourself.

You getting paid on a 1099, it's.

A side gig that has a super low barrier to entry and you get a special deal by going through the WCI links that you can't get by going directly to the company. Now it's super true that they prefer some specialties over others. Emergency docs are not their favorites. A lot of times you can still do surveys for them, but they love you. If you're an oncologist, a neurologist, a rheumatologist, a cardiologist, a gastroenterologist, a pulmonologist, you know, it's the connection seems to be people who prescribe expensive medications. But if you're in those specialties, this can be really lucrative. Neurologist and WCI columnist Ricky Rossella made $30,000 in a year just taking these surveys on his free time.

Whether you're sitting on a bus or waiting for your next patient to come.

In or whatever, you'd be surprised how.

Much free time you have when you.

Can use use it in 5 and 10 minute chunks to do these surveys. Again, that link is whitecoatinvestor.com mdsurveys Note that the link is not whitecoatinvestor.com survey. That takes you to our annual survey which we want you to fill out too. And in fact, if you fill that out, you'll be entered for the opportunity to win WCI swag and you'll probably have an even bigger effect on what happens here at wci. But if you want to take the surveys you get paid for, not just get entered in a drawing for that's whitecoatinvestor.com mdsurveys all right, next person on the Speak pipe is well known to long term listeners. He used to be Tim from San Francisco. He's now Tim from Salt Lake City and he has a bad habit of asking me questions I don't know the answer to. So let's see if this is another one of those.

Hi Jim, it's Tim in Salt Lake City. I Just finished your asset protection book. Thank you so much for writing that. I am definitely going to look into the domestic asset protection trust possibility for covering home equity. That sounds potentially useful in Utah. I'm calling to ask about institutional malpractice policies that are based on self insurance. So I work at the University of Utah and it like many institutions is self insured. I have a little certificate, you know, of coverage, proof of coverage which says the university, its officers and employees as entities and employees of the state of Utah are self insured with respect to any claim of professional liability. But interestingly down below it says limits each occurrence 1 million aggregate 3 million. And then it says note. In addition, the University carries an excess insurance policy with a commercial insurance underwriter. So I have two questions. One is why are there limits if it's self insured? And the second question is what's up with this excess insurance policy? And does working at a self insured institution like the university or the state significantly impact the probability of an over policy limits lawsuit? Thank you so much.

All right, good to hear from you Tim, and great questions. Hopefully I can say something intelligent on them. Thanks for buying the book. For those of you out there who don't know about this book, the White Coat Investors Guide to Asset Protection. If you're worried about losing everything in a lawsuit, you need to read this book. It's written, aimed primarily at docs, physicians, dentists, people likely to get sued by their patients. But it's really for everybody, everybody who's worried about losing money in lawsuits. And common lawsuits include like auto claims.

You know, your 16 year old kid.

Runs into somebody and now they're disabled. You know, if that person makes a lot of money, that could be a really big claim. So the book talks about those sorts of things as well and what can be done to help not lose everything in the event that happens. So I don't want to try to scare you into buying this book because the message of the book is a great deal of it is reassurance, but it's worth reading. It's not the first financial book you.

Should read, but I put a lot.

Of effort into it. About half the book is a reference. It's basically a list of the state asset protection laws that are relevant in.

Your state or states where you do business or own property or whatever. And Tim learned from the book that.

You can use a domestic asset protection.

Trust here in Utah.

We don't have the best asset protection laws possible out there, but we have a few cool ones and one of which Is that we can use these asset protection trusts. My house sits in a domestic asset protection trust and helps protect it from.

Creditors in the event of some crazy above policy limits lawsuit.

All right, Tim, you got to quit worrying about your malpractice insurance. You've got excellent malpractice insurance. Not quite as good, probably as when I was in the military. When I was in the military, basically. Military just backstopped it unlimited. I was never going to lose personal.

Assets to a lawsuit while I was in the military.

In fact, I may have not even been reported to the board or to the database. It's like a totally separate question in the military whether you get reported to the database.

You actually go to this panel, your.

Case goes to the panel, and they decide, even if there's a payout on it, you don't automatically get reported. They have to decide whether you actually screwed up. And so the military is pretty awesome. Your situation is not quite that good, but it's awfully good. So what they're saying is that I am your insurance company, as a Utah taxpayer, I got your back, man. If you get sued for screwing up, I'm going to cover you, me and my other 4 million Utah taxpayers. But we're only going to cover you up to $1 million. If for some reason this goes above $1 million, you're not going to go to the taxpayer.

You're going to this other company that the university has hired to provide some excess, you know, excess coverage. I don't know what company that is. I don't know what that policy looks like.

You could probably get a copy of.

It if you really wanted it.

But I'm guessing that probably covers the next $4 million, maybe the next $9 million in claims. And then after that, well, who are they going to go after? I don't know. Maybe they don't go after anybody.

That's what happens most of the time.

But I suppose it's possible they could.

Go after the state some more.

And I, as a taxpayer, could be on the hook again for a bunch more money. But it's also possible they could go after you.

And not just as a Utah taxpayer, but personally. I mean, if you had a $100.

Million judgment that wasn't reduced on appeal.

And the Utah taxpayer chips in $1.

Million and this excess policy chips in $4 million, well, you still owe $95 million.

You're going to have to declare bankruptcy in Utah.

You get to keep your retirement accounts, you get to keep your whole life insurance, your annuities, $40,000 of your home equity, everything in your domestic asset protection.

Trust and anything that's protected in some other way, and you declare bankruptcy and the debt goes away. That's the way it would work. I think in your case, more likely.

They'Re going to take that million dollars.

They can get from you.

Maybe if there's this excess policy, they.

Get a little bit more, and then.

They'Re probably going after the deep pockets.

Which is the taxpayer. They're going to try to sue the university and in essence, the state to try to get any more money out of the situation.

Yeah, you're in a pretty good situation. That's a lot more coverage than most.

Docs in Utah have. Most of us in the private world have 1 million, 3 million coverage.

And you've got 1 million plus something else. So you've already got way more coverage.

Than anybody else has. So I would sleep better at night knowing that.

All right, a quote of the day comes from Larry Swedro, who says anyone who says active managers can win should wear a T shirt that says I can't add. It's really not about the efficient markets hypothesis. It's about the cost matters hypothesis. And the reason why active management cannot win on average is because the active managers are the market. They cannot, on average, beat the market. On average, they will trail the market by the amount of their expenses. Turns out it's pretty hard to be an active manager, not because it's hard to beat the market.

A lot of them can beat the market.

They just can't beat it well enough to overcome the costs of doing so. And it's not that nobody has any talent out there. It's that there's so many talented people.

Out there that it makes the market very efficient.

Not the way I'd bet for sure.

If you're choosing a mutual fund or.

An ETF, you know, 90% of the.

Time in the long run, you're going.

To be better off just buying something.

That matches the market than something that's trying to beat the market.

All right, our next question on the Speak pipe is about real estate investment.

Let's take a listen.

Thanks for all you've done to help educate us in our financial journey. I'm wondering if you could speak some to the peak housing REIT collapse. We had invested in this REIT a while back, and now I'm just wanting to know what we need to learn from this experience. Are there things that we should have looked at that we didn't see, lessons that we can learn so that we don't end up invested in another one of these real estate deals that goes south. I know there's always that risk when we were investing, but just want to learn what we can from this experience. It seems like there was a lot of high leverage that was going on and that the investors didn't really have the first position on this reit. And so, yeah, where we should have learned that, how we should have known it, and how we can make sure we don't end up in this situation again.

All right, let's talk about real estate in general.

Let's talk about this particular investment specifically.

Many real estate gurus have gone bankrupt.

Over the years, and I talked a little bit about this in my most recent real estate newsletter last month. If you're on our real estate newsletter, you get these. You probably already read this. This message will be a bit of a repeat for you.

If you don't get that.

You can sign up@WhiteCoatinVestor.com Newsletter and you can get this newsletter. You can get the regular monthly newsletter. You can sign up for, getting blog posts in your email. Whatever you want. It's your choice what you get. You can stop anytime. It's totally free. Whatever.

But anyway, many real estate gurus have gone bankrupt over the years, and sometimes it feels like half the authors of real estate investing books have lost it all. At some point in their careers, the story is almost always the same. Too much leverage. By leverage, I mean debt. People learn about leverage and they get.

Really excited about what it can do to help them achieve financial freedom relatively quickly.

They say the more leverage, the better other people's money. The problem with leverage is that it works both ways. Just like you can double your money by putting 20% down and having a property appreciate by 20%, you can lose your entire investment by putting 20% down.

And having the property drop in value by 20%.

In fact, if you're investing directly in.

Real estate, not in a syndication, not.

In a fund, it's possible to lose more than your entire investment. Imagine putting 20% down and then having the property value drop by 50%. You're still going to owe the entire mortgage, right? The bank's not going to take less. You can lose more than 100% of your investment in leveraged investments. Now, time heals most wounds in real estate. However, for time, AKA appreciation of the property value to heal your wounds, that is a drop in value or unexpected expenses, you have to actually stay in the game. And the way to stay in the real estate game is to have Positive cash flow. The way to have positive cash flow is to put down more money, reducing the largest expense of real estate investing, that is the mortgage payment. It would be extremely rare to have negative cash flow on a paid off rental property. Even if your property drops in value, you can just hold on to it until it goes back up in value, so long as you can still pay that mortgage payment and other expenses either from cash flow on the property or some other source of income. However, even a doctor's income can only carry so many properties that create negative cash flow. One benefit of being a passive real estate investor, that is a limited partner in a syndication or a fund of syndications, is that your loss is limited to your entire investment. However, you still have your entire investment at risk. And sometimes the equity in a leveraged property goes to zero and the equity investors are wiped out. Although rare, sometimes those higher in the capital stack, I.e. those with preferred equity or the debt investors, lose principal too. If that property is the only holding of syndication, the equity investors lose all their money. If that property is one of a dozen in a real estate fund, the result is much less catastrophic. There's still a loss of value. And if an entire portfolio or fund is over leveraged or poorly managed, it can all be lost. So on two separate occasions, I've lost most or all of the principal in a passive real estate investment. And I know some white coat investors have invested alongside me in both of those investments. It absolutely does happen. And it hurts. It hurts both psychologically and financially. Financially, obviously it hurts because you lost the money. Psychologically you beat yourself up because you ask yourself, well, why didn't I. Why didn't I look at this more closely? Surely if I would have thought more about this, or if I would have dive deeper or ask better questions, I would have figured this out in advance. That's not always the case. Due diligence is important, but diversification also.

Helps protect you from what you can't know.

While neither one of these partnerships in which I've lost money is completely wrapped up, there are some preliminary lessons that can already be drawn. The first episode was a result of fraud. Basically, the sponsor, AKA the operator or the manager of the syndication, violated the terms of the partnership and used the value of the apartment building owned by the partnership as collateral for a separate loan. Then he defaulted on that loan. And so the sponsor ended up going bankrupt and being criminally prosecuted. But the investors, including me, really didn't have any financial recourse. There was nowhere to go. And while the platform I bought the syndication through formed another partnership with some additional equity to try to save the deal. Their current best estimate is still that I'll lose 100% of my equity in the deal. And I think that's probably going to.

Wrap up at some point in 2024. And when it's all wrapped up, I'll do a blog post about the specifics in it.

The second occasion is the one referred to by this speak pipe. This was a REIT that sponsored the white coat investor for a year or.

Two up until the beginning of 2023.

And while the company has been very transparent about what's going on, that doesn't really do much for the disappointed investors facing serious loss of capital, including me. One of them complained to me by email, I'll lose a lot of money on this investment. Of course I knew that I could suffer up to 100% loss, but I viewed it distant possibility as I did when I underwent hernia surgery. The operative consent form mentioned the possibility of debt of death, but I trusted the surgeon to keep that probability minimal. It is one thing to invest in crypto which has no intrinsic value, just.

What people believe it is worth.

This investment was in houses which have intrinsic value. If they're not giving the houses away for free, then how is it possible for investors to have 100% loss? Well, as I explained above, it is possible and actually not even that hard to lose 100% of your investment due to leverage. This REIT is currently estimating a loss of 75 to 100% of the capital from the investment. So what happened? Well, really it's the same old story. There wasn't enough cash flow to service the debt. The capital stack started with debt. One problem for the REIT was that some of the debt was variable, not fixed. And as you know, interest rates went up in 2021 and 2022 about fast 4%. So that dramatically increased the cost of the debt. Now, after the debt in the capital stack, there was some preferred equity. However, the managers of the REIT gave the holders of the preferred equity a call option and as rates rose, surprise, surprise, they exercised the option. And the other issue with this particular REIT was there was a fair number of assets in the REIT that were.

Build to rent homes that were not.

Yet cash flowing assets. So that further strained the available cash flow. The cash flow coming in to the REIT was being used to pay off this now increased interest rate. It was being used to cover the expenses of these build to rent homes that weren't yet Cash flow positive. And then of course, these holders of the preferred equity said, we want our money. And so they got to start prioritizing.

The payment of that principal back.

The bottom line was that the REIT could no longer cover its operating costs from cash flow, much less service that debt and give the preferred equity holders the money back as quickly as they wanted. So it began to sell the assets. In this case, in this particular reit, those are single family homes. So it's been trying to sell assets to raise cash. And as you know, when you're desperate to sell, you don't get very good prices on what you're selling. And that's been the case so far as the REIT tries to sell homes quickly enough to stay in business, make the now increased debt payments and keep the preferred equity wolf away from the door. And this hasn't all wrapped up yet and probably won't for another year. But it appears that the debt holders are probably going to get their money back. The preferred equity holders are probably going to get most or all of their money back, and the equity holders, like me, are going to lose most or even all of their money. So lessons to learn from this debacle. Well, let's split them up. First, there's lessons to learn if you're a direct real estate investor or a fund manager or a syndicator. And then there's some lessons to learn if you're a passive real estate investor.

A limited partner in a deal like this.

Let's do the first ones for those who are direct or fund managers. Number one, use less leverage. You know, the way to be cash flow positive is to use less leverage. Yes, it lowers your returns, but it also lowers your risk. So instead of only putting 20% down or 25% down, maybe you put 33% down or 40% down. It just improves your cash flow, reduces your risk. And if you can't stay in the game, you're going to lose the game. Second lesson is, if you're going to use variable rate debt, make sure that you can afford the worst case scenario. I'm not actually against variable rate debt, but a lot of commercial properties, not only is it variable rate, but you got to refinance it every few years. You know, every three or four or five years, you got to refinance it. That's not the same as having a 30 year fixed rate mortgage. It's dramatically more risky. So you should get a significantly lower interest rate for taking on that interest rate risk yourself. But you got to be able to handle that risk, if you can't self insure that interest rate risk, you need to pay somebody else to run it for you. And finally, don't give call options to debt or preferred equity holders. Raise more equity, put more down, and have less leverage instead.

That was certainly a major issue with this particular REIT and its current problems.

All right, lessons for passive real estate investors. Like I was in this deal, the number one lesson is diversify, diversify, diversify. What protects you from what you don't know, from what you can't know? Diversification, right? I invest money in stocks, I invest money in bonds, I invest money in real estate. When I invest in real estate, I spread it all over the place. So if one of these deals goes bad, it really doesn't affect my financial.

Life all that much.

That can be hard to do if there are high minimum investments in these deals, and there often are. You know, it's not unusual for these. You know, this particular deal, I think it was $25,000, but lots of deals are 100. I've been in deals that had a $250,000 minimum. You better have a lot of money if you're going to be able to diversify. If you got to put $250,000 into every deal, a fund's going to be more diversified, of course, than an individual syndication is. But diversification between fund managers is still important. And that's part of the reason why.

There'S this accredited investor rule.

You got to be an accredited investor to invest in private investments. And the idea behind being an accredited investor is one, that you can evaluate the deal on your own without the assistance of a financial advisor or accountant.

Or attorney, and two, that you can.

Afford to lose all the money in the deal without it really affecting your.

Financial life in any significant way.

And if those aren't true, you really shouldn't be investing in these sorts of deals. The actual requirement to be an accredited investor is purely financial, though. If you've made a couple hundred thousand dollars each of the last two years, or $300,000 together with your spouse, or if you have a million dollars in investable assets, you're an accredited investor and you can invest in these things. I actually recommend you double those numbers and use both of them so you have an income of at least $400,000 and investable assets of at least $2 million. I just fail to see how you can really diversify these investments if you.

Don'T have that sort of change around.

Okay, lesson two, after diversification, which is the most important One to take from.

From this sort of an incident.

Invest at the minimum amount until you know a sponsor well and have evidence that they manage their business well. The shorter their track record, the less you should be willing to invest. In this case, the minimum investment was $25,000. If that is what you limited your investment to, that's all you're going to lose. If you invested $250,000, you know, that's.

The most you can lose.

So until you know somebody well, and in my experience that takes years, you.

Know, maybe don't invest more than the minimum. You know, maybe it's the second deal that you invest more into with this particular sponsor.

Okay, number three, understand where you are at in the capital stack.

You know, the Speak Pipe question asked about, you know, the investors weren't first in line.

Well, no, you're not first in line. If you're the equity investor, the first in line is the mortgage holder, the debt investors. If you know some property falls in value by 40%, the equity investors are probably wiped out. In most cases, if that property has to be sold at that time. In fact, if it drops 40 or 50%, if there's another level, a mezzanine debt or preferred equity level, they're probably wiped out too, because first in line is the debt holders. That's why debt investing is less risky than equity investing. As a general rule, you're going to make less money too investing in the.

Debt, but you definitely have less risk.

So understand where you're at in the capital stack. If you're an equity investor, you're in the riskiest position. If things go well, you're going to make the most money of anybody else.

But if they don't go well, you're most likely to be wiped out.

And fourth is understand the leverage used by the syndicator or fund manager. How much leverage are they using? How much of it is variable? Is their preferred equity or mezzanine debt too? Does anyone have a call option that they could exercise that could give you problems?

Those are the sorts of questions you want to ask when you're getting into these investments.

Once you're in them, you know, some of them provide some liquidity, but most of them, you're in them for five.

Or ten years, you're locked in, you're.

Along for the ride. So after the initial due diligence period, yes, you're collecting mailbox money, but no.

There'S nothing you can do when things are going bad.

You're just along for the ride.

And it might be a few years before you find out what your overall return was.

So the bottom line is real estate investments can and do go to zero. That's one reason why private real estate investors generally must be accredited investors. So if both of those accredited investor requirements don't apply to you, if you can't evaluate these on your own without the assistance of others, or if you can't lose all of your money going into the investment, no matter how much FOMO you feel looking at projected or even actual returns, or how much you want to feel sophisticated or that you're playing with the big boys, these are not for you. Risk is real. Investing is much more about risk control than it is about returns. Hope that's helpful.

And obviously, you know, lots of us.

Make mistakes in investing. Don't beat yourself up about it, learn from it, move forward and hopefully this deal gets turned around.

They're certainly working very hard trying to do it and hopefully they can get some or even a good chunk of.

Our equity back out of the deal.

But I've certainly braced myself for 100% loss of equity in that deal.

Alright, next question comes in by email. This one is a question about custodial Roth ira. Quick question. I feel like I should know but cannot find the answer. When contributing to a child's custodial Roth IRA and the child has earned income less than the maximum contribution allowed, is the actual amount to be deposited equal to the gross or net pay for that year? Trying to be precise while showing my kids these steps. All right, it's gross, but obviously a normal person without a parent to help couldn't contribute that because, well, that money went to the tax man. But the IRS doesn't care about that point. Their requirement is you can't contribute more than you made. So if you made $4,000, you can contribute $4,000. The IRS doesn't care if you pay your taxes from some other savings you.

Had or if somebody else pays them for you or whatever.

So it's gross. All right, question off the Speak pipe.

From Alex hi, my name is Alex. I'm calling from the Southwest, a very affordable region. I'm a big fan of the podcast, so thank you for all the information you put out there. I'm a fourth year medical student. I have a scholarship that paid for tuition and I signed on to come back and work here for four years after all my training is done. I'll be graduating with about 50k in student loans. My husband and I are very established here. We bought a house back in 2019 and our kids stay with grandparents, so we don't have any childcare expenses. If we move for residency, he would be unemployed. He does not work in medicine. What advice do you have for choosing relocating for residency versus staying and having all my education from one spa. Is it worth the financial strain and hustle if eventually we'd come back here anyways? Would it be detrimental to my negotiating power if my education is all from one place? Thank you for everything.

Bye.

Bye.

Great question. First of all, I'm going to push back on this idea that your spouse is going to be unemployed. The unemployment rate in the country right now is like 3%. The likelihood that your spouse cannot get a job someplace where you're going to residency seems extremely low to me. I guess it's possible. I don't know what your spouse does. Maybe something's happened to them. They're not very employable for some reason. But chances are that unemployment is going.

To be pretty temporary.

What I've found with a lot of people, too, is especially in this day.

And age of people working remotely, a.

Lot of times that company wants you.

So bad they don't care if you move.

Like our tech guy. Our tech guy here at White Coat Investor used to live locally. Well, he moved away. We didn't fire him. He was working mostly from his own home anyway. So, you know, lots of jobs are like that, that you can keep the same job even though you move away. Especially if you tell them it's highly likely I'm coming back in a few years, then they may bend over backwards because turnover is expensive. Nobody likes hiring and firing, and it's expensive, and you got to pay recruiters, and you don't have somebody for a few months. So a lot of employers, especially these days with unemployment so low, will bend.

Over backwards to keep you.

So I'm going to push back on that point.

All right.

But to answer the question you actually did ask, I got three factors that I think are important when you're choosing your residency. The first one is people. I think this is probably the most.

Important part of choosing a residency.

You want to go somewhere that you.

Fit in, that you like.

The attendings, the staff members that you like, the other residents that you fit in there.

Right.

I went to some residencies. I've been married at this point for.

Four years and interviewed there.

And, you know, it was a great residency. The academics were great. But, you know, all the residents were like, after shifts, they went out clubbing. Well, I wasn't really into clubbing.

Right. You know, everybody was single and they.

Were into clubbing, and it just wasn't my thing.

It wasn't a good fit.

I was much better off, you know.

Being in Tucson with a bunch of people where half the residents were married.

And everybody was into outdoorsy kind of stuff.

I just fit better there, and I liked the faculty better and, you know, all those things.

So fits number one. Number two is the quality of your.

Training and the quality of your education. I think that really matters.

If your local place is not that good of a residency, I think it's worth going somewhere else for sure, because I think the quality of your training really matters. It's going to affect how good of.

A doc you are and the patient care you're going to give for the.

Next two or three or four decades. And I think it's worth going to get that. And then the third thing is location. And location is important, right? Having family support around, like in your situation where you got grandparents to watch kids, where your husband already has a job. I mean, that place where you're at now, assuming they have a residency program in your chosen specialty, which it sounds like they do, that's going to be pretty high on your list. No matter how much you like the program in another state, this one's still going to be second or third, I'm sure. And so I think that's fine. I think location is a really important thing to consider, and part of that is cost of living.

Obviously, this location is a relatively low cost of living.

I think your fear is that somehow this is going to hurt your career by going to med school and residency in the same place and staying on.

There for faculty or going into the community in that area.

And there is some benefits to going somewhere else and seeing different ways that people do things and seeing different patient populations and not being, quote, unquote, inbred in your training. But you know what? There's other factors, too. I wouldn't put that in my top three, that it has to be someplace different than where you did medical school. It's not nearly as important as the people and the quality of the training and the location. But if all else is equal, sure, go someplace else, get a different experience. But I don't feel like that's so.

Incredibly important that you have to do it.

Now, that might not be the case. If you want a specific academic job and a specific specialty, maybe it's really.

Important to have Yale or Harvard or who knows what behind your name to get the job you really want. But I think for most of us docs that just isn't the most important thing.

So it sounds like you want to stay there. I suspect you're going to rank that.

Program really high, and I think that's probably appropriate. But don't be afraid to look around.

You might find something you like even more, and you're willing to sacrifice a.

Little bit on the location to get.

People you like even better or training.

That you think is a little bit better.

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.

All right.

You might also consider doing some surveys and boosting your income. That's@whitecoatinvestor.com mdsurveys. It's great if you go to whitecoatinvestor.com survey two fill out our survey. Tell us what you want to hear more on the podcast while you're at it. But if you want to make money.

Not just be entered in the drawing, that's mdsurveys.

Thanks. For those of you who are leaving us five star reviews.

For those of you who are telling.

Your friends about the podcast or the.

Blog or the books, we had a.

Recent review from Titanic Rage.

Great name, by the way.

Said wish I'd found this sooner. Cannot recommend highly enough. The podcast provides accurate, relevant information in an accessible way. It has saved me thousands already.

Will save me so much more throughout my investing life. 5 stars. Thanks for the kind review.

All right, those of you out there in WCI land, thank you so much.

For being with us. It's now 2024.

I started doing this white coat investors thing in 2011.

This May it'll be what's that workout to 13 years I've been doing this. That's the majority of my career. It's been an awesome journey. We really appreciate having you with us. This podcast is about you, about the Speak Pipe. Leave us questions, we'll answer them.

Shoot us emails.

Tell us what you like, what you don't like.

Answer the survey every year.

It really does get used and it's fun. We publish some of the data, not your individual data, but in aggregate data, to show you what White Coat Investors are making and what they have and what they do with their student loans and all kinds of fun stuff like that. But we appreciate you. We're glad you're here. You're why we're here. There's 18 of us right now working at White Coat Investor, and every one of us is focused on helping you get a fair shake on Wall street and helping you to be successful in your life, helping you to find the wellness you deserve, helping you to become financially literate and financially disciplined. We really do care about you and we're thankful you're listening to the podcast. We'll see you next week.

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.