048 PFFAP-PYP-23-0517-Is Real Estate Really For Doctors
Voiceover: [00:00:00] This show is for educational purposes only and is not personalized advice. Consult your tax advisor before taking action. All investments involve risk of loss. Past performance is no guarantee of future results. Reach show notes for full disclosure.
Welcome to the Physician Family Financial Advisors podcast, where physician moms and dads like you can turn today's worries about taxes and investing into all the money you need for retirement in college.
Ben: Hello, physician moms and dads. I'm Ben Utley, a certified financial planner and the service team leader here at Physician Family.
Nate: And I'm Nate Rennicke, certified financial planner and primary advisor here at Physician Family. Welcome to the show. Our question today is, is real estate really for doctors? So Ben, before we get into kind of the technical parts of real estate, if we ever get there, I wanted to ask you a question. How long have you been talking to doctors?
About whether or not they should invest in real estate or get, get heavy [00:01:00] into real
Ben: estate? Well, I've been talking with doctors about personal finance for at least 20 years, maybe 25, and I would say I've just been hearing a lot of it in the last five years. Oh, interesting. Heavy, like, uh, sometimes it's from clients.
Most of the time it is from prospective clients. I would say that three outta four prospective clients that I speak with come in with the words real estate on their lips. Mm.
Nate: Okay. I was, I'm actually surprised to hear that. I thought I was gonna hear you say maybe a decade. People have been talking about it.
Why? Well, there's a little spoiler here. You've been, you've been telling, essentially for the last five years, it sounds like you've been telling physicians not to get too deep into real estate. Mm-hmm. That's kind of where we stand on this. Right. Um, and I want to know why does everyone come in talking about real estate?
If it's not the [00:02:00] best idea in our opinions for doctors,
Ben: I think there's a lot of chatter on the internet right now in the blogosphere about real estate. Um, particularly I hear about crowdsourcing and syndication. I won't, I won't name names of, of companies cuz it doesn't make any difference. But that seems to be, I hear a lot about that.
Uh, it usually comes. Packaged with the words passive income. There's some hope that as a physician I'll be able to do something so that I can make, make more money, but I won't have to work any harder, which, you know. Mm-hmm. You and I have demystified that myth in a past podcast. Mm-hmm. But I, if I were to hazard a guess, and this is a strong gut feel, it is that there's money to be made in pushing real estate.
So, uh, many of the bloggers have links on their websites where you can get started with a crowdsourced outfit or a syndication, and when you click that link and, and you go even open an account, [00:03:00] many times without even making a deposit, without actually putting any money in there, the person who's pushing those links receives, you know, 200, 400, $500.
In some cases. That's a pretty healthy payday for. Basically posting a link and doing nothing, and you wanna talk about passive income, that that's real passive income.
Nate: Yeah. So, um, that sounds like conflict of interest to me. Is that what you're
Ben: saying? Yeah. Well I think it's, it depends on, you know, It depends on what position you stand in.
It would certainly be a conflict of interest for us, but as a blogger, mm-hmm. I think if you're holding yourself out there as the paragon of virtue, sure it's a conflict of interest, but if you're holding yourself out as, uh, you know, a person who's talking about investments, then it makes sense. You know?
Right. But it's, it's buyer beware. It's, there's so many advertisements and commercials for everything these days. Again, it's buyer beware. You have to, you have to be aware not only of the product, but the, but the person who's hawking the [00:04:00] product.
Nate: That's right. Yeah. I, I wanted to be sort of fair in how we spoke about this, because like you said, I mean, they're.
The passive income thing. There's some, you hear the word leverage all the time. You hear Oh yeah. And because of leverage, big returns and all this and mm-hmm. I think the important part here is we're talking about four physicians. Mm-hmm. And, um, that's a whole, you know, subset of people that. May or may not need to do those things.
And that's what we're
Ben: talking about. Mm-hmm. Yeah, exactly. We're talking about, I don't, physician moms and dads people who Right. Uh, wanna focus their time on their practice. They wanna focus their time on growing their family. They want to spend quality time with their spouses working on their marriage.
You know, they, uh, docs with kids and strong marriages is what we're talking about. Yeah. Right. And I'm not anti real estate. Particularly home ownership. I think everybody should own a home, uh, maybe even a second [00:05:00] home. It's a great idea to own your medical office building for most people, uh, to own your ambulatory surg center.
But, you know, beyond those things, I've just seen things not turn out well and, uh, it causes me some, some heartburn to see clients, uh, prospective clients, physicians move into those products. Yeah.
Nate: And not turn out well for some people, but for other people, just underwhelming is what I've seen. Mm-hmm. You know, very underwhelming.
Mm-hmm.
Ben: Yeah. I think the reality and mentality is very different than the hype.
Nate: Uh, agreed. And, and so that, the underwhelming part is, is kind of the next piece of this. Mm-hmm. The, I heard you speaking with, I think it was, uh, a client, client, uh, about the interest rate environment. Mm-hmm. Um, And, and I was really interesting to me.
I hadn't, you know, things are, the tides are turning a bit in the world we live in now. Mm-hmm. Versus all the opportunity that was out there after the real [00:06:00] estate crash. Mm-hmm. You know, in 2008. Right. So can you talk about that for a little bit?
Ben: Yeah, I, uh, our younger listeners may not recognize the name Paul Volker, but Paul Voer was the head of the Federal Reserve during a time, not unlike today when they were fighting inflation.
And, uh, he basically pushed interest rates up to the double digits. And this happened in, I believe it was the eighties. And so if I recall correctly, interest rates peaked around 15, 17%. It was something incredibly high. And in the past 40 years, we've seen interest rates drop steadily to where they were in 2021.
At essentially zero. And in some markets we had negative interest rates where you literally would pay someone to hold onto your cash. So, uh, you know, for the last 40 years we've had declining interest rates. Now [00:07:00] anybody who is buying a property with a loan knows that that property becomes more expensive for you in terms of payments as the price of the property.
Goes up and as interest rates go up, so if you're buying a home with a 2% loan like you could have a couple years ago, that's very different than buying a home with a 7% loan like you might today. So that makes it more expensive. And so when the price of money rises, there's less money sloshing around to chase after, you know, fix and flips and, and that kind of thing.
In, in the real estate market. Well. Mm-hmm. Uh, as of, you know, last year the Federal Reserve is on a war against inflation, and we've seen the, probably the sharpest hike in interest rates in, in that time period that in US History. And it seems like they're monitoring, but there's no sign that they will be stopping.
I mean, inflation is kind of moderated a little bit, but I think that the paradigm of the continuously dropping interest rates, Is behind us. I think [00:08:00] that things have changed in the global, the global environment and, uh, we're not gonna be going back to that. All this is to say that there is, instead of a tailwind for real estate and other things that depend on easy money, there is now a headwind.
Mm-hmm.
Nate: Yeah. That, that, that's where my mind was going. I mean, the leverage is sort of a financial term, but it's essentially. You know, taking out debt and debt becomes even riskier as rates go up and more expensive.
Ben: Yeah. Imagine all those, those real estate investors and, uh, speculators who, you know, they said, oh, well I can, I can invest using other people's money and, you know, I can borrow out of the house outta just bought and, and invest in the next house and do that again and again and multiply and leverage up.
That becomes harder and harder when interest rates are higher, money is less available. And imagine that that setup, if somebody was like, okay, I'm gonna buy these my next rental property [00:09:00] with all cash. Well, that kills the multiplier effect that decreases demand and the, the rising value of home prices and, and rental property prices kind of goes away, not to mention the shift to work at home that we've seen, which is, uh, kind of gutted the commercial real estate market.
So I think we're dealing with a very different environment than what we've dealt with in the past 40 years. And, and particularly in the last five. Right.
Nate: Okay. All right. Well, I want to come back to something you said. I, I marked it in my brain. Uh, you said that over the years you have seen, there's obviously some success stories, but mm-hmm.
Um, you've seen real estate not turn out well for many, for many clients. Mm-hmm. Um, and I was kind of perusing the internet before we. Before we jumped on this podcast, and I was just pulling some quotes that without context can really, uh, influence people's opinion about real estate. Mm-hmm. And this go, [00:10:00] this isn't just, you know, the blogosphere, this is like, like big news sites or magazines or whatever.
Um, Kind of just going with the wind. Mm-hmm. It seems like. Mm-hmm. Mm-hmm. Um, so here, here's, here's something interesting. Forbes came out and said in an article, uh, why to invest in real estate, number one, it's one of the safest investments you can make. Mm-hmm. And I just thought, um, that I ki I happen to know where they're going with this.
They just, they're saying that it's attached to a real asset. But in my experience or what I've seen, it's not all that safe unless you are really safe about it. Mm-hmm. Right. Unless, and your approach is extremely safe, which most people wouldn't know what that even means.
Ben: I would say that's probably written by someone who is in diapers in 2008.
Yeah.
Nate: Yeah. There you go. That's what I was thinking. Um, but I thought that was interesting because we also [00:11:00] wanted to talk about, um, the fact that. Same, same publication. Forbes has a list that comes out of the, of the richest people in the world. Mm-hmm. Right? So, um, the next reason that we don't think real estate is really good for doctors is that the rich people don't do it.
Ben: Yeah. Yeah. If you, if you wanna become rich or wealthy or even, you know, dare I say, financially secure, which is what I think is the right way to go, um, Y you know, there's, there's this thing called the bigger pile theory, you know, or bigger pile principle. If you wanna have a bigger pile, look at people who have a bigger pile and, and ask what are they doing, right?
Mm-hmm. And so I did a deep dive on the Forbes list of, I believe it's 500 richest Americans, or if it richest people in the world. And in there they, they give the name of the person. And they, they have their rank with an estimated net worth, and then they also give like two or three words [00:12:00] about how they made their money, like retail, technology, oil, whatever it happens to be.
I scrolled and scrolled and scrolled through the list, and I was looking for real estate, and I counted less than a dozen people on the Forbes 500 list of the richest Americans. I counted less than a dozen people who made their money in real estate. And none of them were in the top 10 or top 20, or top 50.
Mm-hmm. So, as I look at that, I, I think, well, okay, so real estate's it, it's not necessarily, uh, a great way to go. So then I looked at the list and I said, well, how did these people make their money? They were in varying industries, but uh, you know, there were, there were household names like, uh, the, the Walton family, you know, founded Walmart.
Mm-hmm. Some people don't like Walmart. Uh, that's. You know, a matter of opinion, but the fact of the matter is that family is one of the richest families today. You know, obviously the gates are on their, uh, [00:13:00] technology and what I saw was a list of very well known names, most of whom had gone on to build a company and float that company public, such that you can actually buy shares of those stocks today on the open market at no transaction cost.
Which is very different than, uh, you know, cruising neighborhoods and, uh, spending time looking for a bargain and being a slum lord, and having to line up financing and, you know, just the whole hassle of the business of real estate. Not to mention the transaction costs when you can dip into one of these publicly traded securities.
Uh, open an account 20 minutes later, you can be fully invested at zero transaction cost and, and have the, have the benefit of a, of a, of a pre-packaged investment experience that has a long track record that's never gonna sprout a meth lab in your mm-hmm. Portfolio. Mm-hmm.
Nate: Right. I have some thoughts about [00:14:00] this.
When you're considering. As a physician investing in real estate, you have to ask yourself the question about why am I doing this? Mm-hmm. Why am I investing in real estate versus any other choice I have? Because you have a lot of choices. Mm-hmm. And I think, um, it's very easy to say because it's a good investment.
Well, that's not really a great way to analyze whether or not you should invest something, something, cuz there's lots of quote unquote good
Ben: investments. Yeah. And what makes a good investment? Good. Right,
Nate: right. And so we are not saying you couldn't make money in real estate, we are saying there's easier ways to make money in real estate and the on, so what, what, what that means to me is the only reason you would invest in real estate is if there was, you could make an inordinate amount of money doing it.
Mm-hmm. Like so much money, it's just free money, you know? It's just a great, great, like a, a lucrative [00:15:00] investment.
Ben: Well, you know, I, I could actually make a, make a case for investing in real estate, and I, I think that what makes a good investment is, is first an investment that has the ability to, to grow. Or generate wealth with, without the interaction of the owner, which is to say you don't have to get out there and swing a hammer, you know, you don't have to show up on a board of directors for a stock ownership.
Uh, so it makes money without your direct involvement. So that's, that's, mm-hmm. Invest Good investment number one. The second half of good investment really has more to do with you as a person, you know, is this a fit for you? So for example, before I specialized in physicians, uh, I had a guy who came to me who, uh, he wanted to invest with me and I was like, okay, uh, how much do you have?
I think you had about a half million dollars. And I said, where did the money come from? Uh, he said it was an inheritance. And I said, okay. I said, how did your parents make this money? He said, they invested in real estate. He said, I can remember being a kid watching them go out and fix up properties and uh, handle tenants.
And I would go with them. [00:16:00] And this guy was not a physician, but he was really great with tools, good with a hammer, a maintenance man, essentially, very skilled. And I said, okay, this money came from real estate. Why do you want to invest in mutual funds? He said, I just don't wanna work anymore. I just don't want to, I don't want to lift a finger.
I said, okay, well, we invested in mutual funds. We went through a little bit of volatility and then he was right there back in front of me saying, you know, I think this is not for me. And I said, you know, I think it's not for you either. I said, I think you'd be more comfortable continuing to invest in the way that you know it's comfortable for you.
And that's exactly what he did. And we parted ways as friends and you know, he was, he was a guy who's meant. To invest in real estate because he had the time and the skills and the inclination for that. And, uh, he just wasn't the kind of person that was comfortable with something that's more abstract or intangible like, uh, a stock or mutual fund or bonds.
Right. And, and that's, that's not most [00:17:00] physicians, you know, most physicians are pressed, you know, you're staying late to dictate your, your chart or your notes. Um, you know, you can't make it to your kid's soccer game because of whatever's happening or exploding. Uh, you know, you're burning out and you just don't have time to.
You know, drive around and look for an underpriced property and then go hassle with tenants and fix it up and swing a hammer and do all those things, uh, maybe in retirement. But most practicing physicians, even those that are shift workers like hospitalists in er docs just don't have the time to to do that.
And so the answer we always hear is, oh, syndications. Oh, crowdsourcing. Well, you can bet that somebody who's got billions of dollars to invest is not gonna be driving around looking for the best deal. You're not gonna get the best deal through them. And then there's fees to pay that are gonna dampen your returns.
So, you know, I think the prepackaged real estate is not something that is, I doubt that it would turn out as well as, as stocks would. And I, I think that the do-it-yourself real estate [00:18:00] is just not a fit for mm-hmm. 90% of the physicians that I, I speak with. Right.
Nate: Yeah, I'm with you. So it to, to me, when, when, when you're analyzing an investment choice, you, like you said, you have to consider your own inclinations.
And that's why you said owning your own medical office building, I've seen that work out for many physicians. Same, um, in investing in what you know. Mm-hmm. So that. Kind of every time I I we, we get to this point talking about real estate, it feels a little bit of a, like a downer. Like you don't get to be in the, in club with this real estate investing.
Mm-hmm. So, um, let's talk about what makes investing in, I guess, stocks beautiful. Like what's so good about that? And, um, someone on that Forbes list, Warren Buffet talk, he, he recommends. You know, blue chips and indexing. Right. So what's so beautiful [00:19:00] about indexing for, for physicians?
Ben: Well, do you wanna talk about Warren first or do you wanna talk about indexing first?
Yeah, let's talk about Warren. Okay. So my father worships at the altar of Warren Buffet. If, if my dad had a hero, it would be Warren Buffet. And so we talk Warren Buffet a lot cuz he loves Warren Buffet. Okay. For those of you that are uninitiated, Warren Buffet is, is. The richest self-made investor in the world, and they call him the Oracle of Omaha because he lives in his, in his original house in Omaha.
It's, uh, just a normal, normal house. It doesn't look anything like the richest guy in the world would, would have it. I mean, he eats at McDonald's, so it's kind of a salty earth guy, but, uh, worshiped by many investors as the best. So that's who Warren Buffet is. Now, the question I had is, does Warren Buffet.
Invest in real estate. I did a deep dive about a year ago, and I found at that time that, that he owns his home, but outside that his real estate holdings are, were less than 1% of his overall portfolio. [00:20:00] Uh, of that 1% two, the, the, the only holdings he had at that time that I could find were two real estate investment trusts, which are essentially like a stock that owns real estate.
And since then, one of those companies has been acquired. So to my knowledge, he only owns one real estate investment trust that is a microscopic portion of his billions of wealth. And. So then when we listen to what Warren Buffet says the average investor should do, he says the average investor should own common stocks of US companies, and he suggests that they put at least 90%, which to me seems like a lot.
But he, he suggests that basically invest everything in index equity funds, index stock funds. That's, that is the advice from the world's richest man, not from the uh, Uh, a world's, uh, happiest financial advisor.
Nate: Yeah. Yeah. Um, and something interesting when, when I think about this too, uh, a [00:21:00] lot of those blue chip stocks that Warren Buffet loves so much they, that those companies own real estate.
Yeah. That's right's. Not like you're not, you're not. Totally out of the real estate market. Now you don't own it directly, but in an indirect way you
Ben: do own it. So yeah, if you, if you own an index, you own, uh, apple for sure, cuz that's the number one holding. Which means that you, you own all the Apple stores, that Apple is not leasing.
Uh, you certainly own Microsoft and the entire Microsoft campus up in Washington. Mm-hmm. Uh, you know, McDonald's is a, a perennial top 20 holding, which McDonald's is one of the largest real estate holders in the United States, maybe in the world because McDonald's corporation owns all the stores where they serve McDonald's food.
So, right. You know, you do get real estate exposure. Through owning stocks. It's just you don't get discrete exposure. So Nate, what's the big takeaway from today?
Nate: The big takeaway is real estate [00:22:00] might be for some people. But it's really not
Ben: for doctors. And that's all for today's show. Until next time, remember, you're not just making a living.
You're making a life.
Voiceover: Thank you for listening to the Physician Family Financial Advisors podcast. Are you getting all the tax breaks you really deserve to find out? Get your copy of the Overtax Doctor's Retirement Investing checklist [email protected] slash go.
