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Money Meets Medicine Podcast

MMM 52: The Good, Bad, and Ugly of Real Estate Investing

Real estate has gotten a lot of press lately. What’s all the buzz about? Is it all good? Nope. But it’s not all bad either! Welcome to the good, bad, and ugly of real estate.

If you’ve ever been curious about whether you should go down the road of owning active real estate, this is the episode for you!

Physician Contract Reviews

 

Today You’ll Learn

  • How real estate can impact your path to financial freedom.
  • The beauty of cashflow in real estate.
  • Exactly how much work is involved in owning active real estate.
  • Examples of really bad advice in the real estate space!
  • And more!

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Jimmy Turner: If you've been in the personal finance space for long, you've likely heard all about the amazing things that real estate investing can do for you. In fact, you've probably seen an online course or two targeting that specific interest. Is it all it's cracked up to be or is it all just a sham? Keep listening as Ryan and I keep it real.

Ryan Inman: It's all a sham. I mean, welcome to the Money Meets Medicine podcast, where we can talk all about the personal finance topics you'd wish you learned in medical school. I'm your host Ryan Inman and here is your fantastic cohost Jimmy Turner.

Jimmy Turner: I am pretty fantastic, I'll say so myself.

Ryan Inman: He's also an avid hater of water in homes. Dr. Jimmy Turner.

Jimmy Turner: Yeah. So water and homes, man. So speaking of real estate, right? This house that we moved into, we've had so much trouble with water. We were here for two weeks and my three-year-old at the time turned the water faucet out of the bathtub and just like water straight through the ceiling in the basement. We had our seven year old do the same thing where he put the stopper in the sink and water is just a huge problem. And then we built this podcast room, which I'm actually super excited. This is one of the first episodes I'm able to record in this podcast room that I built.

Jimmy Turner: We started this thing four months ago. And the reason it got delayed is because we found water in the walls. And so these are just some of the ways that water can wreak havoc and all of those have been expensive fixes I might add. But I've learned a lot more about foundations and some pumps and installation and humidity readings than I would ever care to know because of all that stuff. And that's just one of the ugly things about real estate we're going to discuss in this show.

Jimmy Turner: But don't worry about it, we're also going to discuss the good, give it a fair shake. So speaking of which, make sure to keep listening. We're going to have a little introduction something in the middle of the show if you stick around and we'll have a special surprise for you. So, Ryan, before we discuss the good, bad, and ugly of real estate, let's talk about this episode sponsor.

Ryan Inman: Well, before I gets to the sponsor, he's a great guy. I'm excited to talk about him. But when we bought our house here in San Diego, the first thing that happened was that we found out the water heater went bad between the day that we bought the house and two days later when we arrived from Vegas. So we had a house with no hot water for about six days. The worst. And it was fantastic. So not as many water stories as you have, but it still sucks.

Ryan Inman: Today's sponsor though, is Contract Diagnostics, which is a firm 100% dedicated to physician contract reviews. And they provide a service that all physician families will need at least one time in their careers and honestly, most likely a few additional times as well. I love this company as they've helped 10,000 plus physicians understand not only what they're signing, but what the risks are that they're taking for their family. All the contracts are reviewed by an in-house attorney and presented in a simplified way back to you using custom documentation, compensation data. And honestly they work outside of normal business hours to make it easy for you, which I'm a fan of and I know you will be too.

Ryan Inman: All the packages are a flat fee priced. So you know exactly what you're going to pay for upfront. There's no guesswork. Residents and fellows can even make interest free payments over time, which I think is super unique. So check them out. Jon and his team are fantastic. And you can check them out by going to doctorpodcastnetwork.com/contractdiagnostics or call (888) 574-5526. And the link like always is in the description of the show right now that you're listening to us and any of the major podcast players.

Ryan Inman: All right, Jimmy, so we've got, I think three tiers for the show, right? The benefits of owning real estate, the bad parts of owning real estate, and then the just flat out ugly parts of owning real estate. And the highest the highs and the lowest the lows is how I'm looking at this. So there are benefits.

Jimmy Turner: For sure.

Ryan Inman: And I think let's start with the good stuff first or glass half full people. And some of the benefits that you might be aware of is, "Hey, it produces cashflow, right? I'm going to buy this property." For the sake of I think this show, because we could go into all sorts of crazy ways to buy real estate, let's just talk about single-family houses.

Jimmy Turner: Okay.

Ryan Inman: I think that's the easiest way to do this. Now, there's other ways with syndications. There's a thousand ways to own real estate, but most of the time when we hear at least with our clients like, "Hey, we want to buy real estate," it's usually single-family or syndications which is completely passive. We've already chatted on that previous shows.

Jimmy Turner: Yeah.

Ryan Inman: But cashflow is one of those things that you're like, "Hey, this is a benefit. I'm going to buy this property. I'm going to put a renter in place." And if you've done it correctly, you will make more money with the rent minus your mortgage, minus HOA, minus expenses, minus any repair and maintenance. You will make a couple $100 a month of which you'll want to build up an emergency fund and then essentially it's just going to go to pay down the mortgage more. Now, some people can leverage that and maybe that gets into the bad or the ugly. But if in this isolated bubble, you can make some decent cashflow with real estate.

Jimmy Turner: I think cashflow is a great one to start with because as you know and any listeners know, I'm a huge fan of the hybrid model, the financial independence where some of it's from a nest egg that you're saving up, you're doing diligence savings inside your tax advantage accounts for retirement. And also the other side which is cashflow. You can technically get there one way or the other, which is just to save enough and/or to have enough cash flow coming in each month that it covers your monthly expenses. But this idea of cashflow within real estate is actually pretty good.

Jimmy Turner: It's a form of nonclinical income is the way that I look at it and having one way to financial independence. And I can't tell you the number of doctors that I have come to me for coaching on building a nonclinical business or... And the reason for it's almost always freedom and autonomy and building cashflow. So real estate is a great way to do that. It makes sense to mention this first. It's top of mind when it comes to real estate for most people.

Ryan Inman: Yeah. Real estate has been trending as a sexy thing since 2014 or 2015. Once all of the ramifications of the banks going crazy and giving loans to anyone who has a pulse and the housing market crashed, people had a really bad taste in their mouth. Hey, they bought in 2006, 2007, they lost tons of money, stuff on belly up. Lots of smart people were buying real estate in 2009, 2010, 2011, if they could get their hands on it and made outsized returns. But I think now it's come back full circle. Now it's sexy again, which is, I think always something to be worried about. But it's why our podcast... When we talk about real estate, they're usually one of the most popular podcasts that we're doing.

Jimmy Turner: But it is important to mention just how strange or ironic it is that 2008, 2009... We're talking 12, 13 years ago. When the market collapse because of real estate and what was happening in that realm and not five to six years later, it's the thing to do again. And so we have such a short memory as people.

Ryan Inman: Everything moves in cycles.

Jimmy Turner: It's just an interesting thing.

Ryan Inman: We have a very short attention span about 14 seconds. The next thing I think that is great about real estate and many of you might be thinking of it are the tax breaks. And specifically I think understanding what depreciation is and how that factors into tax breaks but part of the laws are written for real estate professionals and owning rental real estate.

Jimmy Turner: Yeah. And that depreciation and the tax breaks that you can take can be massive. And I'll say that the reason that this has become a big deal in the physician finance space is because of talk about real estate professional status. And the idea that... So normally in real estate if you have real estate income and then you have depreciation or losses in your real estate business, you can count that against your other real estate income. But when you step into real estate, professional status allows you to basically take that depreciation or those losses and counter it against any income that you make, which is as a higher earning physician a massive tax break.

Jimmy Turner: And so that is why it became such a sexy thing in the physician finance space, because there are people that caught onto the REP's status and started employing that idea. And so if it seemed like everybody in their broader is now chasing after REPS. Now, I think that is great. If you're able to do that... Obviously if you're able to work the 750 hours and 50% of your time, or your spouse's time is spent in your real estate endeavors on real interior efforts on your properties, it's not the easiest thing to get, but that said, if you do get it, it has to go in this good category because the tax breaks...

Jimmy Turner: Although I haven't done this because I don't have REP status, Christine doesn't have REP status, but to my knowledge, you can speed up that depreciation that normally takes place over what? 27, 29 years. And then allow that the first 15 years of that to happen when you buy the property in that first year and count that as a loss. And so when you start doing the numbers on that, you're talking about potentially very large five or six-figure numbers that you can count against your other income. And so it becomes very appealing very quickly when you buy a single-family home for whatever, hundreds of thousands of dollars and speed up that depreciation then counter it against your clinical income, the tax breaks can be massive. But I think that it became sexy elsewhere nationally, probably four or five years ago. And then within the physician community, it seems over the last two or three years, it's become even sexier because of this REPS conversation.

Ryan Inman: Yeah. And we'll get into... I think is part of that REPS belongs in the bad side as well. There's other things like 1031s. So you could sell a property instead of paying tax on the capital gains that you have from selling whatever property was, you can roll it into another property and continue to use your money instead of paying Uncle Sam now they're investing alongside. You think of your retirement accounts, right? You're putting money in, Uncle Sam gives you the tax break, but that money is going to come due at some point. So when Uncle Sam has been investing they're like, "Hey, we're going to trust you to make smart decisions, invest your money. We're going to invest alongside you."

Ryan Inman: But eventually that tax bill will come due. So 1031s are really popular depreciation. You depreciate the asset over its useful life. And the useful life for single-family residence is 27.5 years. For commercial property it's 39. And the way that you do that, and I think this is really a fundamental piece to understand, because you can figure this out pretty quickly. Even if you haven't bought the property, you can figure out how this is going to benefit your taxes. First determine the basis in the property, right?

Ryan Inman: You're going to go out and you're going to buy a property for, let's say $100,000. Definitely not the case here in San Diego, but you're going to buy a property for $100,000. You then need to break out the difference between the land itself and the building. So let's just use the example that the land was jokingly $40,000 and the building is $60,000 of that purchase price. And you're going to use what's called the fair market value to determine the price of the property. It's easy when you just bought the property. But if you haven't bought it yet, and you're trying to figure this out, just use your best guess at the fair market value.

Ryan Inman: And then we can look at, okay, well, 60% of your purchase price was the building. That is the piece you can depreciate. You cannot depreciate land, but you can depreciate the building. So you're going to allocate that percentage of purchase price. And then you're going to divide that by 27.5 because that is again, the amount of years that they're saying that this is the useful life of the building. Please don't forget to factor in the month that you're buying this because you will not get... Unless you bought it January 1st, you should not get the full year of depreciation in year one that you own it and then take it by your tax bracket and multiply the numbers together and you're going to get your tax reduction.

Ryan Inman: This is going to benefit by buying this property from a depreciation only standpoint, and it's not going to be perfect, but this is a decent high level way to calculate this. You can almost do it in your head when you look at the numbers or a very simple calculator and it's going to help you understand, "Well, if I buy this property, from appreciation I'm going to end up having $3,000 of depreciation." Not a right number even for the example I just gave but just humor me.

Ryan Inman: Well, if my property makes $100 a month after it's all said and done, and I can depreciate $3,000 a year, well, you're actually going to show a loss even though you had a gain, right? In cashflow wise, our number one reason of why you buy real estate. The depreciation will actually offset that cashflow and go negative to the point where you might get a reduction further on your taxes if you owned more property that produce more gains. This can't go against clinical, unless you have REP status, but for other properties, it's really powerful.

Jimmy Turner: Yeah. And I think combining those two ideas, just to give people an idea of classic real estate moves, if you will, and you obviously know much more about this stuff than I do. But I've always thought this example made real estate makes sense to me, which is to buy a single-family home and then to have someone pay down the mortgage for you. You're making a little bit of cashflow profit on top of whatever they're paying and to do that for a little bit, and then you can sell that house. You roll into a 1031 exchange, buy a duplex, right? And now you have two tenants paying down the mortgage, making a little more profit because you have two units potentially.

Jimmy Turner: And then selling that rolling in 1031 exchange, buying a larger unit apartment building. You can scale this thing in a very interesting way, because of the depreciation and offsetting the monthly profits, that's cool. But then also when you sell it, if you roll it into a 1031, you don't pay any tax on that and you roll it into the next property. And so I feel real estate has this cool tax break way of allowing you to scale it to some extent. Now there are lots and lots of models when it comes to real estate, but that's just one that I've heard that I thought was a pretty cool example, of buying a duplex, going to a fourplex, then going to a 10-unit apartment building or what have you.

Ryan Inman: Yeah. And I love you, Jimmy, but this is one of those that if you haven't bought real estate and managed or transacted in real estate, it's sounds really nice on paper and really sexy, but the idea of I'm going to go and buy single-family homes and then I'm going to take those and roll those into a whole different asset class, which is very small multi-family duplex, tris, quads, and then take those and then eventually sell all of those and then buy a much bigger property, it takes so much more work to do each one of those and to understand and to do your due diligence. It sounds really cool and fun on paper, but it is really tough. And then in the areas... So I invest in Vegas and that's because I was born there. My whole family's there. They do real estate there.

Ryan Inman: If I buy single-family houses in Vegas, I know exactly the areas I buy in, what they're trading for, what they're worth, what it takes. I got the team put together. If I ever decided, "Hey, I'm going to sell this and I'm going to roll it into quads or triplexes, or duplex or whatever," it is a completely different market in that town. I'm on the opposite side of town in a much, let's say not as safe area that I would not want to really go out at night and be working at night out at those properties just because it's really not safe. And all of a sudden I went from A or B properties in good areas of cashflow to I've got a whole crap ton of problems. There is no duplex, tris, quads in the areas of town that I would want to invest in. So the investing makeup completely changes. That's not the same in every case, but there are very, very different things.

Jimmy Turner: Are you more likely to have somebody invest in five or 10 single-family homes or to take the money out and refinance it and then go buy something else? What's your flavor there?

Ryan Inman: Well, everyone can do whatever they want. It's how much property do you own and how much part of your portfolio... We'll get into that I think the bad and the ugly on this piece, but high-level, I would say... Let's say you buy five homes. The idea wouldn't be, "Well, I'm going to leverage all five of these and then pull as much money out as I can and then go invest in a small apartment building or five more homes." Eventually at some point, hopefully, you look at it and say, "Well, based on my portfolio, based on the allocation I've given into real estate," that five homes, six homes, 10 homes, wherever your number, is that's where you stop.

Ryan Inman: And you're focused on paying down mortgages as you're going along. And then eventually you own 10 homes mortgage-free that generate $1,500 a month. Then after all your expenses, you pull in $15,000 gross, after expenses you net $10,000 a month. That's how people set some other goals. And that might be retirement for some, it just depends. Or at least financial independence. For some people, they want to keep leveraging up to the max and get these massive portfolios. And that's where I think we could eventually get in the bad and the ugly. [inaudible 00:16:30] take at least when we get to that part of what could happen. I do want to mention, I think, a couple more good things.

Ryan Inman: So appreciation of the asset itself, even at the bare minimum it's an inflation hedge because it is a real tangible asset. I can go touch this building, right? It is a very tangible thing. It is not a stock. It is not Bitcoin. It is not whatever else you want to compare it to, a Beanie Baby. It is a real asset and it's an inflation hedge and-

Jimmy Turner: Beanie Babies are real, Ryan. Why hate on Beanie Babies?

Ryan Inman: [inaudible 00:16:59].

Jimmy Turner: Beanie Babies are real.

Ryan Inman: Oh, then whatever. I missed out on that craze so I'm clowning it, I guess. Right? But when our money printers, right? The Federal Reserve, the joke is the money printer goes [inaudible 00:17:11], right? When the Federal Reserve is just printing crap tons of money and injecting a ton of liquidity into the markets, all assets are going to go up. That's why we're seeing stocks make such a rebound. That's why we're seeing home prices stay steady if not increasing. And that is the fear of at some point inflation will come and there's more money chasing more real assets right now.

Ryan Inman: And so you get to benefit in that if you own real estate, fantastic inflation hedge. Is that mean that it's going to generate 15% of your returns? No, it is supposed to be an inflation hedge. So a couple percent a year, it should be very realistic. And if you in a hot market and it's in demand and it increases by too much too fast, then you make the decision, "Do I sell and buy in later?" Trying to essentially time the market or do you just hold on? And it's two types of investors that also comes into the bad and the ugly of this part.

Ryan Inman: And the last piece I think I want to mention here for benefits is diversification, right? This is really, really a great diversification play. Yes, it could potentially be correlated with the market or the economy, but it is given you a different type of return, a different type of cashflow. This is not for most people, like 98% of people. This is not their main source of income. And so this can sit there and without you doing anything in theory, it's to be more passive, but it's not. We'll talk about that. But without you having to go and put more money into work on this, it should be you bought the house, you've got a renter, the renter is paying your mortgage. The renter's paying for any CapEx or any repairs or maintenance that's being reserved month by month.

Ryan Inman: And whatever else is left over, which there should be otherwise you shouldn't have bought the house, then that goes into either further paying down the mortgage or building up the reserves. So it starts to pay for itself and that's fantastic. You're getting that inflation hedge. You're getting some appreciation, the cashflow's paying down the note and eventually you'll own it that free.

Jimmy Turner: Totally. And before we move into the bad, I want to just let everybody know, all the listeners here, exclusive kind of MMM for the people that actually listen to us, the alpha coaching experience I mentioned last year if you'll hear a little bit more about that, you can dive back into our... I guess a couple shows ago about GME and Tesla stock FOMO. But the alpha coaching experience is opening up for enrollment this weekend. So this episode drops on the 10th of February and the waitlist to get into the alpha coaching experience, to learn more about it... There's no obligation to buy, but just to learn more about what coaching for physicians looks like, that closes midnight on February 12th. And so the coaching experience is 12 weeks.

Jimmy Turner: It involves both life and career coaching as well as business coaching. And if you enroll from the waitlist, you decide that's something you want to do, by just being on the waitlist, you get $500 off. So I wanted to make sure that everyone was aware before that waitlist deal ends for our loyal Money Meets Medicine listeners that February 12th, two days from the day that this drops, that waitlist is going to close. So if you don't enroll, no big deal, but joining the waitlist gets you that $500 off. And we'll also have a couple of live Q and A sessions for waitlist people that are on there. And so sign up for the waitlist before Friday 2, 12 at midnight to make sure you can take advantage of that $500 off. You can do that by visiting the physicianphilosopher.com/waitlist or by clicking the link in the podcast description in your podcast player. So, Ryan, that, I think this is where this gets fun.

Ryan Inman: We've started off in the glass half full. Let's now flip the glass upside down, break the glass and throw it at the wall.

Jimmy Turner: Yeah.

Ryan Inman: There's a lot of bad that comes with the real estate. And I think the first one I want to say is it's effing hard work. It is extremely hard work. Even if you hire a property manager, there's still things to do. It is not passive at all. There are lots and lots of things you need to do. Before you buy your first home, you need to be honestly an expert in that area. You need to understand the prices. You need to understand the market. You need to understand that the inventory, you need to understand the big players in town, right? Who's buying up these assets in bulk? Is there wholesalers that you potentially could... They get off market deals. What wholesalers do is they go try to tie up property before it hits the MLS.

Ryan Inman: Before it goes out to the public, they want to earn a commission inside there. So let's use our $100,000 house. They deem that this house is really worth $100,000. They find someone that's willing to sell it for $90,000. And then they come to you and say, "Hey, I'll flip this to you before we even close this. I'll flip this to you for $93,000." That way they make their $3,000. You're buying the house for $93,000 which is under market. And the person selling their home gets tied up on a contract. And understanding who those people are, can really help you have outsized returns because you're getting stuff before it hits the public. All of this to say, though, it is still really hard work. You have to build your systems. You have to build your process. You have to build your team.

Jimmy Turner: Yeah.

Ryan Inman: By the way, building a good team, so effing hard. It is so hard because contractors when times are good or any subs, they think the money is flowing, they don't give a rat's ass about you and your few properties. They're working with the hedge funds that bought 1000 homes or 2000 homes in that town like they did in Vegas. But when times are bad, they come tail between their legs, coming and needing work. It's finding a good team. And that is super hard in itself to do that.

Jimmy Turner: And I'll just piggyback this on the prior good comments about REP's status, right? So there's this idea which has become very sexy in last few years about getting this real estate professional status so you can take any depreciation losses, real estate losses, and counter it against all of your income, including your physician income.

Ryan Inman: I'm going to interrupt really quick, Jimmy. The idea of this REPS piece and you might be saying, "Well, no, that's really hard. No one gets it." We have about a dozen clients at Physician Tax Advisors that are doing REP status. And we had dozens more that wanted to do REP status and couldn't actually do it because they didn't meet all the requirements. You can do this. This is a real legitimate strategy in the tax code. It's meant for full-time real estate professionals. My parents have been doing this for years and years and decades. They are full-time real estate professionals.

Jimmy Turner: And I guess what I'm getting at isn't that it's some pipe dream. What I'm tying it to is the idea that you just mentioned about time and active management and it being difficult. Because for example, one thing people will say is, "Oh, well, it's not that bad. I'm going to get my team. I'm going to have a management company and I'm going to have a special deal with an electrician and a plumber and have these products outlined so that if this breaks, then I can tell them exactly what to replace it with." So on and so forth. But that management piece, the second that you give away all of the management stuff to someone else, it becomes harder to get that awesome REP status that you have to have 750 hours of work in materially in your business. So in my experience, at least you have to choose particularly early on if you want to manage it yourself in order to head towards that REPS goal. If you have a partner or spouse that doesn't work full time or at all...

Jimmy Turner: That's the way that I hear this happen the most is where the doc is earning clinical money. It's very hard to make an argument that the doc is going to be half-time enough where 50% of their time is going towards real estate. And so they'll often have their spouse who is working part-time and/or doesn't work at all in making income outside of the home. And so they'll ask them, "Hey, do you want to do this?" But the second that the spouse says, "I don't want to manage properties. I don't want to deal with tenants. I want someone else to do that." Well, that's fine, but you're going to have a lot more properties in order to qualify for the REP status because you're not going to be as involved in that one or two or three properties that you have. And so all of those benefits of REPS, which are amazing, they're not a pipe dream, people actually do this. But all those benefits start to become more challenging to get because it's qualifying for REP status if you don't want to manage the properties yourself.

Ryan Inman: Yeah. One house is not going to get you REP, real estate professional does. One house just will not do that. You're going to need many houses. This will have to be, guess what? A full time business for one of you. Doesn't matter which one. We know which one it is. And have to be the spouse of the physician because you will not be able to practice as a physician and still qualify for this. So downside is that the more houses you get, the more leverage and effort and all these things that it ends up skewing probably in your personal finances to chase that tax savings.

Ryan Inman: The other piece is that the more you hire out, the harder it is to actually qualify for REP status. So you have to weigh out the balances in the beginning. And if you say, "Well, I'm going to do every last thing that I possibly can without needing special licenses like a contractor's license or an electrical license, whatever." And you do everything else for that property, you still won't hit it with one. You're still going to need many, but then it becomes a matter of are you the most efficient person or not? "Oh, I needed to go and repaint the house. Well, if I hired a team to go do that, they could crush in a day."

Ryan Inman: Maybe it took you three weeks because you literally did it by yourself. IRS can't argue that you did the work by yourself, that it took you too long. But again, how many times can you repaint the house? You can't just be like, Oh, I repainted three times this year and that is 50 hours of work." It doesn't work like that. It's got to be reasonable that the work you're doing is there.

Jimmy Turner: I actually read a little bit about this because Christine and I considered doing this. And I'm not saying that at some point down the road that Christine still... I won't go into it. But for us, because I've got a business and I work clinically, Christine would have to be the one doing REPS. And so I have to get her by in order to do this. And I did look into it with one property versus 10 properties and qualifying and it is theoretically possible. And they've actually got core cases that document people and hilariously there's core cases where they have someone that has multiple properties and very easily would have qualified if they just documented their hours properly.

Jimmy Turner: And then there was this one person who had one or two properties, but they documented everything down to the hour and kept a log as they went through to qualify and they ended up being fine. The other couple despite clearly working at least 750 hours, they had to go back because they didn't keep good logs. And they had days where they work more than 24 hours in the day. They had duplicate things where they were in Hawaii or a different place when they said that they were working on the property. And so they actually got the REP status taken from them.

Ryan Inman: Well, yeah, you can't commit fraud. You can't commit fraud, but yeah, you've got to keep [inaudible 00:27:31] records. It's tough. It's not easy. It is doable.

Jimmy Turner: To go back to your point, it's work.

Ryan Inman: But it's work. One of the things that I hate about real estate, I think is bad is that your numbers are always estimates. Always. There's no finite thing, unless I'm going to Home Depot and buying X dollar thing and I go see it, I scan it, I pay for it, fine. That's finite. But what I estimated for that, I thought it was going to take me $1,000 to turn and flip this during a renter. Right? I had a renter in there. They left. I need to go put a new renter in. I estimated $1,000. It's an estimate. There's never a finite number. And as a planner, that drives me crazy because I do want some finite numbers to actually occur.

Ryan Inman: I want something to be correct and it will never be correct. Everything is always an estimate. And that's why most real estate people who transact in real estate, they're not that great with numbers. They're good at ballparking. If you talk to anyone who does real estate for a living, everything to them is a ballpark. Everything. "Well, I guess it'd be around this. I think it'll be between this and this." "Give me a number." "I can't give you a number." There's never a right number. It is an estimate.

Jimmy Turner: It changes too much.

Ryan Inman: Everything changes. It drives me nuts. So some of you out there that are maybe Type A who like things in their nice little boxes and pretty, no, not getting it until it's actually occurred and then everything becomes a finite number. We have to have our profit or loss or taxes. We have to know what's happening but everything up to that point has been a guess.

Jimmy Turner: Ryan, I'm actually really excited about some of the jumping the gun a little bit here, but-

Ryan Inman: You always jump the gun.

Jimmy Turner: Yeah. Well, that's my style. I just dive in two feet. But hey, we've talked about the good, we've talked about the bad, the ugly, and I'm just going to get this one out of the way because I have-

Ryan Inman: If you're calling me ugly, man, that's going to hurt my feelings.

Jimmy Turner: That's just too easy. I was going to let that one go.

Ryan Inman: It's got a face for podcasting over here.

Jimmy Turner: That's right. Face for podcasting that you'll never see. So I want to get this one out of the way, because this is my one massive pet peeve in this space. And I just want to go on my soapbox for one second as someone who is a personal finance blogger, a podcaster who sells online courses and just go out here and say this, that diversification, the good part that Ryan mentioned earlier, right? That implies that you're still investing and putting assets to work in other areas. And real estate is this one area where people get bit by this bug where they feel they need to then leverage all of their money into real estate. Take all of their money out of their 401(k) or 403(b) or their IRAs or whatever and then dump this stuff into real estate.

Jimmy Turner: And I think that is fundamentally really bad advice. Now I don't think that's coming from a place of scarcity. I think that's coming from a place of a lack of diversification and we don't have to look back even 15 years to see why this is probably not a good idea when you think about 2008, 2009, if you're 100% real estate at that standpoint. Now, I just want to mention that because good solid financial practices like putting money away into your 401(k), your 403(b), your IRAs is still really good and you can diversify into real estate. I think that is a solid idea. I think it's a thing that lots of people have had a ton of success with. But if you start getting bit by this bug so badly or you're told that you need to leverage money from your retirement accounts, please don't do that.

Jimmy Turner: I just want to get that out of the way, because part of the ugly thing here is that people see other people's success and they want to mimic it. And they think that there's this formulaic way that they can guarantee that they're going to be in the same place five years from now. That's just not the way it works. Please diversify. So that can be a really ugly part of honestly, anything, but in real estate in particular last few years.

Ryan Inman: That message can apply to literally everything, right? You like an asset class, you go crazy and you put everything you can into asset class. We see that right now with cryptocurrencies, right? It is a [inaudible 00:31:14] religion, right? People are like, "This is it. This is the thing. This is going to take over the world." And it probably will, but it is not 100% of your investments. Real estate has a much longer track record than cryptocurrency. I've seen this firsthand. People in my family think I am batshit crazy because I actually deal with the markets and I help people with their finances. And I went to college because I was the first one to graduate from college. They all went and started their own companies and they all work in real estate. Literally I mean, aunts, cousins, uncles, mom, dad, everyone.

Ryan Inman: My brother and I are the oddballs. He worked at Google. I obviously do financial planning. Everyone else is in real estate. So I've seen it firsthand. You get going and then you see this domino effect of, "Well, it worked. So I'm going to keep doing it." And all of a sudden you're leveraging. Physicians, they're even told by other physicians in the communities right now, "Leverage your real estate. Go buy it in your IRA. Go do this." Horrible, horrible ideas.

Jimmy Turner: Yeah.

Ryan Inman: You don't just stack all your chips in one and go, "Gosh, I hope this works." Horrible idea. But it happens to all of them. All of a sudden it's, "You've trained all this time. You're an MD or DO, you're working really hard. You're making really good money." I mean, I have clients that are making $800, $900 million a year.

Jimmy Turner: Yeah.

Ryan Inman: And what are they doing? They're throwing tons of money into real estate. Some of them are no longer clients because we don't agree with what they're trying to do. And they're going to take all this outside's risk when I'm like, "You're in the top 1% of earners. Just don't blow shit up and you're going to be good." Right? But you can't turn down behaviors in our emotions and how people are pitching this stuff and it's tough. And I can tell you... I'll go on just a two-minute thing here, Jimmy. I've never really talked about it on air. But if I look at all of my investments across the board, including my actual income and let's look at net income, because gross, I think is deceiving because Uncle Sam gets a good portion of that. But if I look at any business I've ever done, any way I ever made money, any of my investments across the board, I have absolutely made more money in real estate than I have in anything else, financial planning, the podcasts, my stocks and bond portfolios. Anything I've ever invested in, I've made more money in real estate than anything else.

Jimmy Turner: Yeah. I believe that.

Ryan Inman: And that's because real estate allows you to use leverage so you can buy something for honestly, a few percent down and you're using other people's money OPM is what you'll hear. I'm using the bank's money and I'm able to buy an asset. And if that asset appreciates, I pay down the bank, I get to keep the rest. And if you keep doing that and snowballing into more, you can potentially make a lot of money. There's people that have never made money in real estate and they've bought and sold several times. And they got caught up in FOMO. They got caught up in just poor underwriting. They got in over their head. They thought, "Well, this is a get rich quick. I'm going to be able to invest and knock it out of the park."

Ryan Inman: And then they got ADD and seven months later they sold because for whatever reason they lose money on the transaction pieces. They don't have the right teams. Things always go wrong in a real estate. If you don't think so, it's because you haven't bought enough real estate to know any property at any time things always go wrong and you got to go and just absorb it. That shock absorber it's okay, it's there. We've planned for something to go wrong and then you move on. But most people go too end deep end, they leverage too much. They're buying at the wrong times. If you're leveraging right now, to be honest, and you're putting a whole bunch of money into real estate and going... You have FOMO, you're seeing prices move up. You're seeing the rates at cheapest. But if you're over here leveraging up to the max, you might get hurt real bad because we might have a downturn.

Ryan Inman: We don't know. This is like stock market. Jimmy and I are going to sit here and be like, "Guys, you better sell by May 12, 2021 otherwise market's going down." That's crap, no one knows that, but it could happen. And prices have risen so fast that we might not see prices rising as quickly. And everything goes in cycles. And if you don't believe me, go look. There's plenty of data on real estate. Go look at the cycles and how things move and look peak-to-trough. How high did it go? How far did it fall? And the flip side, right? How far did it fall? And then how high did it go? And then look at where we're at currently, which heads up we're at a peak. Okay? And then look at how far could it potentially fall versus how much could it potentially go up. And the risk reward starts to become not worth it. And I'm not saying to time the market, I'm saying to look at just what has happened in other previous cycles, see where you're at in the current cycle and make decisions.

Jimmy Turner: I couldn't agree more because actually I had a client the other day who was asking me, he's like, "Hey, I just want to get some coaching on my thought process about buying a house." Actually in a town not too far away from me in North Carolina. And he couldn't find a house that he wanted. And so part of the reason why is because the houses every month were going up and up in prices. And so he's, "Fine, I'll build." And literally the house that he wanted to build was going up by $100,000 a month. Every time he looked it would be another $100,000 that the house was going to cost because of the cost of materials.

Jimmy Turner: So not only is it a really bad time to build. In fact, we have... Some of our closest friends, they're builders, he's making substantially less because the contract they bought into a year ago and the prices that the builder is having to pay for material now compared to what it was when they locked in the contract, have gone up so much that the builder is going to lose a substantial amount of money.

Ryan Inman: Well, that's a dumb builder because this is someone that's coming from... And I haven't personally built with my own two hands because I can barely use a hammer, but my dad's developed 7 million square feet of real estate in Las Vegas. My mom and uncles have done tons as well. When you contract with someone, they should go and be hedging buying material ahead of time, locking in prices. That's a stupid builder if that's the case. But to that point, the pandemic has caused issues in supply chain, issues that have cascaded into higher prices. The price of lumber and all sorts of stuff has been going up. And again, everyone in the trades, the supply has come down. People were in lockdown and had all these issues, right? Rightfully is not talking about the health concerns here. And so the labor market had issues and that just translates to higher prices.

Ryan Inman: And so part of the real estate that is already built has its own supply demand dynamic that's been out of balance. A lot of people haven't wanted to put their houses on the market and this is not to be insensitive. There are a lot of people, myself included, Jimmy absolutely included, and honestly probably all of you included have benefited financially from this pandemic. You have very secure jobs. Even if you took a pay cut, there are lots and lots of Americans that have lost their jobs and have lost lots of stuff. Anyone listening to this probably is not in that case. And if you are, I'm very, very sorry, but most of us haven't. And so the ones that haven't, have been able to save money. We're not traveling. Our travel budget went to literally zero, our entertainment budget pretty much went to zero. That's extra money. So if I can then turn around and-

Jimmy Turner: I don't know that that counts for everybody listening because I do know some people that got raked across the coals in terms of their hospital losing money and them not being able to pay them or reducing their...

Ryan Inman: Absolutely. We had lots of clients that took issues, but those issues are now eight, 10 months ago that it potentially have occurred. But most things are pretty much back to normal or they're able to go find another job quickly and easily if they were willing to get up and move or still there's just so many millions of people who can't actually do any of that.

Jimmy Turner: Completely.

Ryan Inman: Right? But the idea and the purpose of seeing that was you now have more disposable income, more money that's been saved. Some of you have been sitting on lots of cash and still have even more cash so you might decide, "Well, I want to go buy a house. Oh, it's too expensive, then I'm going to go build." And so that dynamic has gone up as well. The whole concept though, is that if you're trying to buy and leverage and do all these things now that is not for a primary residence and it's for investment purposes, you're talking about multiple homes, you probably are experiencing some of this piece that we're calling ugly, is FOMO, fear of missing out. You've maybe been bitten by the bug going.

Ryan Inman: Some of the other things that I've done have gone up. I've bought two rentals and they've gone up 12% in the last 12 months. Yes. But has it gone up because of normal markets or is it going up because there's some out of whack supply demand thing that's happening in New York town. Because that's absolutely what's happening in Las Vegas. I'm not saying it's happening in your town, but the place where I invest the strip is still basically closed down. There's hotels that are not coming online for two more whole years. There's tons of people out of work yet prices in that town have gone up 15%.

Jimmy Turner: Doesn't make sense.

Ryan Inman: Right. And some of it's California, people moving from California, but their houses I'm buying that were starter homes are not the wealthy from California flooding in town. There's an imbalance between supply and demand. And all that to say it's hard work. There's a lot of stuff that goes on. Things always go wrong. Your numbers are always wrong. It's hard to find good people. There's so many downsides to real estate that can be outweighed by the good, just it's not sexy to tell you these things. It's not the fun stuff that you're going to read about when you Google how to buy real estate. No one's going to say, "Hey, heads up, giant ass disclaimer. This stuff is hard and it stinks for the majority of it."

Jimmy Turner: I think that's the take home point here is that real estate does have some really good things about it, but it also has some really bad and really ugly things. So just like anything else when you're considering a job or where you went for residency or any other big life decision, you have to have the full picture before you dive into this thing. So we just want you to have an appreciation for all of the different dynamics and facets of real estate investing.

Ryan Inman: And I probably should have said at the beginning, but I'm not coming from a place of I've never bought real estate. I've bought and sold 21 homes. Does that make me an expert? Absolutely not. But I have some skin in the game. I've done it enough. And I know people who do this full-time for the last 50 years and can pull from their experiences. And I'm not an expert. This isn't what I do all-day every day, but I feel qualified enough to tell you that I've gone through these things and it's tough. Very, very tough. It is not simple. It is not passive. It is potentially sexy and you can get nice write-offs but it is tough.

Ryan Inman: So anyone who hasn't gone through... Even though we did this in 30 minutes or whatever, I can told you what's happening and how this is. If other places you're reading, you're listening to, they haven't gone through in detail all the hard stuff, they're either not experienced or they're not telling it to you for a reason, probably because they have something to sell to you. So just be careful with that. So as we finish this out, just remember that this show was sponsored today by Contract Diagnostics. And this is a company that specializes in contract reviews. Specialization is something that I think we can all appreciate here. So again, when you and your family have contract needs, give them a call.

Ryan Inman: They're going to help you understand your contract and make sure that it lines up with your interests and protect the assets that you covet most, your time and your family. So you can find them a doctorpodcastnetwork.com/contract diagnostics, or you can call (888) 574-5526. Remember that is also in the link of this description. You're listening to us right now. So before we end, it's that time for the important disclaimer.

Jimmy Turner: Thanks for listening to everybody. We appreciate you being here and make sure to share this podcast with other physician families that could benefit from the show, particularly me making fun of Ryan. And we love all the emails. Thanks for reaching out. And if you have any questions, comments, concerns, you can send them to [email protected] or [email protected] We really appreciate you guys. We'll see you next week.

Ryan Inman: He thinks he's so funny.

Jimmy Turner: I am.

Ryan Inman: [inaudible 00:43:02]. See you.

Speaker 1: Hi there. Dr. Jimmy Turner is a practicing anesthesiologist. Mr. Inman is a fee-only financial planner. You should know that this show is not personalized financial advice rate. In fact, this show is only for your general education and entertainment purposes. So keep listening to learn how to become a treat yourself financial guru or go find a great fee-only financial planner like Mr. Inman to [inaudible 00:43:31] a personalized financial [inaudible 00:43:37].

TPP

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