I'm reading up on real estate these days, with the objective of identifying small multi-family units to invest in. The more I read, the more interesting it gets. Occasionally I'd like to put out posts that collect my thoughts as I go, as a guide post to others who might share this interest.
Real estate involves assessing multiple variables and deciding unemotionally on a strategy that will make the most sense financially. From a tactical perspective, it reminds me of the monthly game night I've come to relish with close friends.
Board games I'd never hear of before (Puerto Rico; Terra Mystica; Feast of Odin) involve learning to maximize value in both goods you receive and actions you can take, some random and some within your control, in order to create a winning strategy from the pieces you start out with.
One of the interesting aspects of reading in earnest and speaking with friends who have succeeded in the space has been to get a more complete picture of the world of real estate.
Each time I read a new book or speak to another friend, there's a period where I can genuinely envision taking their path and excitedly sketch out how life might look if I were to follow it. I enter the overly-excited puppy phase where I am easily distracted by any shiny object waved in front of my face.
My wife, who displays infinite patience at these moments, listens sympathetically to my fantasy scenario du jour despite knowing that in a week it might change with the next book (I told you I married out of my league!). It's part of a process of talking through different shared visions of our future to figure out what will work best for both of us.
I've thoroughly enjoyed reading Cory Fawcett's book on the subject, which helped me see investment properties through the lens of cash flow that allowed him to thrive while a small town Oregon surgeon.
It was also extremely helpful in understanding seller-carried loans and no-money-down purchases, the latter of which had always seemed to me the stuff of late night infomercial sketchiness until Cory explained it.
Another resource I've enjoyed is binge reading the blog Semi-Retired MD, which is written by a dual-physician couple as a dream-big approach to leveraging your high income in medicine to accrue sufficient capital that you can invest like crazy in real estate. They advise investing out of state for both diversification and to find better values.
A key feature of their strategy is to obtain Real Estate Professional status, which requires (among other things) that you spend >750 hours on real estate related activities per year and that it be your major gig based on time spent. The benefit of obtaining this status is that it confers tremendous tax benefits in shielding income from other sources (medicine, for example). The irony is that, to obtain it, you need to be on your way out of medicine to meet the hourly requirements.
I had coffee twice with a friend in LA who has built a substantial real estate empire, going from 8 doors to over 300 in the past 5 years. The second time was after recent California legislation that has essentially subjected the entire state to rent control - a very landlord unfriendly proposition.
When I asked him if he still plans to invest in LA or start seeking better returns out of state, he replied that he will continue to stay local, as a stunning 60% of his returns have come from property appreciation and only 40% from cash flow. He also felt leery of being an absentee landlord since his strategy relied on a trusted local property management team.
An invisible friend I met and have kept up a valued dialogue with through the blog has advocated that money is always made at the time of purchase, and has reiterated that cash flow should always be the primary goal irrespective of property values. His take is that appreciation is really speculation, and he quotes Buffett that when bad times hit, and property values drop, "you discover those who were swimming naked."
He also says that buy and hold investing is usually a long-term win because you are essentially paying off today's high cost debts with tomorrow's cheaper dollars thanks to inflation.
How do I reconcile this occasionally conflicting advice from bright people whose success is evident?
I'm currently re-reading Frank Gallinelli's book What Every Real Estate Investor Needs To Know About Cash Flow...And 36 Other Key Financial Measures, and it's the first book to provide a framework that incorporates these disparate bits of advice I've been getting in a cohesive manner. He describes 4 ways of making money in real estate:
- Cash Flow
- Appreciation
- Loan Amortization
- Tax Shelter
Now suddenly I am able to fit each bit of advice into the proper categories, and it all makes sense.
Cory Fawcett used cash flow plus loan amortization to succeed.
Semi-Retired MD is using a combination of cash flow and occasional appreciation with a major dollop of tax shelter.
My local friend is using appreciation plus cash flow.
Finally, my invisible friend is using a combination cash flow and loan amortization strategy.
This book has provided me several similar "Aha!" moments in other areas as well.
My hope is that by reading up, talking to friends smarter than me (that would be most of them), and "gamifying" my approach to investment real estate, I can apply the skill set honed in game night to my financial life.
I'll keep you posted on how that goes.
Comments 6
Now you’re talking! This kind of analysis is how Buffett takes apart an investment.
Author
It’s fascinating to look at and break down a deal from these various lenses. I’m not great at doing it, but I keep practicing.
Very true that there is many ways to make money in real estate (but also an equal amount of ways to lose it also).
Knowing the strategies of successful individuals like the ones you mentioned is a good start to start formulating your own method of attack.
I have no doubt you will be successful in this endeavor once you decide to invest in real estate as your level of due diligence is already evident at this stage. Much success my friend!
Author
Appreciate the kind words. Right now I am a student, but I look forward to getting off the pot and investing soon.
CD,
Great post about your thoughts on real estate. Some of your musings mirror mine. I have read Cory’s book and a lot of the great stuff that Passive Income MD, Chad Carson, and Semi-Retired MD put out there in their blog. A lot of great stuff.
I am curious to see how which pathway you end up following. Will it be like Cory’s? Your local friend’s? Invisible friend’s? Or Semi-Retired MD’s?
Reading about everyone’s journey gets me excited to dive into real estate too.
But at the same time I read the counter arguments. Mainly: 1) it’s not passive (can be a second job); 2) it may not outperform stocks; 3) it’s illiquid; 4) cash flow is fine (but it gets taxed too); 5) appreciation is all good (but then it only matters if you sell, then you get taxed); 6) it’s a housing / financial bubble (I love Gasem’s posts); 7) etc.
Anyways, because of thinking (overthinking?) of the above reasons and the fact that life happens and I get busy… I end up not really taking any action with real estate.
Sometimes I feel like if you’re already winning a game, why change things up. You are doing quite well financially and I am curious why the recent interest in real estate? To learn more? To develop another hobby outside medicine? To make more money? To develop more cash flow so that you can work less shifts? To diversify your finances?
Some of my questions could be a bit too personal, so I totally understand if you don’t want to answer them. I’m just genuinely curious and I always appreciate your thoughtful insight.
Author
DMF,
I see it as valuable in a number of ways. I’ve explored various second acts to see what might make the most sense for me.
Could I transition to an administrative role? Probably, but that’s my serving at someone else’s pleasure, and someone else creating my schedule. Less than ideal.
Could I transition to slower, more meaningful clinical medicine like palliative care? I looked at this, and even tried getting a foot in the door, but in the end once more the opportunities were for employee positions in existing hospital systems, and I don’t want a new boss. This was made more challenging by my not being boarded in palliative care/hospice.
Could I try consulting? I tried a low-key launch for aspiring DIY investors, but it turned out to be more work than I would want to put in to scale it since I got overly enthused with clients and spent a lot of time preparing for each session.
Could I do med-tech? I dipped a toe as a clinical champion for a product I believe in, was invited to join an ad hoc advisory committee, and networked with someone doing what I wanted to be doing. Guy had kids same age as mine, had just relocated his family for work, loved what he did, but traveled away from home for work 1-2x a month. Not looking to spend time away from family.
What, then was I looking for? Something that could allow me to learn (and hopefully, over time, master) a new skill or form of analytical thinking. Something that might require significant time invested up front over the next 8 years, while we plan to stay put because our kids are in school, but that would allow me to continue it remotely should we decide to travel intermittently during the empty nest stage (much as Cory has done). Something that might allow me to eventually mentor others younger than me (including my own kids), since I like to teach and I hope that as an oldster I have plenty of contact with young people to keep me young.
Real estate via multi-family homes seemed to check a lot of those boxes for me. As Gasem has pointed out, there is plenty of risk and plenty of opportunity for loss in this arena. Having acknowledged that – plenty of not terribly savvy people make a living in the field, so the bar is low and the strategies for making it work are numerous.
Factor in my part-time status and the potential to achieve real estate professional status to shelter outside income, and it provides the added opportunity to serve as a tax shelter during a Roth conversion period. Now pieces are starting to fit together and a unified approach is emerging.
Add in my good fortune at having several friends and acquaintances who have been generous with their time and network, and I have found mentors I can learn from over coffee.
I don’t mind putting in time, because I’d like a pursuit that requires analytical thinking like medicine, but is lower stress. This could be my second act, it has long-term upside potential, and if my kids are interested (my son definitely is, my daughter remains a question mark) it could be something we learn together. If I can put systems in place to automate it, my wife and I can travel during our empty nest years (interest and health permitting) and let it run itself.
Hope that answers your questions, my friend.
Fondly,
CD