Dr. Plastic Picker Shares Real Estate Investing Advice for MDs
April 11, 2020
I’ll be blunt here. Physicians are not for the large part good stewards of their own money. Physicians often think other fields are easier than our own work. I hear this a lot. Some of my colleagues think there is easy money in real estate investing, yet rarely do those same people have actual real estate outside of their primary home. It’s kind of a minor insult to true real estate professionals, just like a parent telling you they could drain an abscess better than you could with a sewing needle and exacto knife.
To actually support a middle-class or upper-middle-class family solely through the real estate boom and bust cycles of the market is not easy. Like performinig surgery, real estate investing requires a very specific skill set. It requires negotiating, managerial skills interacting with skilled laborers and tenants, having good accounting skills and being able to take on financial risks. You need to know about the specific tax laws, termite inspections, cost by the square footage of decking material and on and on. It also requires time and focus and attention to detail.
I have sometimes wondered if it was appropriate for me to write about real estate investing. But after reading other personal finance bloggers write about real estate, I realize I am as qualified as they are to give advice . In some ways more. We early on maximized our income with overtime work, practiced frugality when we could, maintained a high savings rate, and tried to time the market. We have a larger real estate portfolio than most personal finance bloggers including those that are physicians. I have given real estate investing advice as a friend to my younger colleagues. Those that have listened to me, are in a much better financial position. I do this for fun in the lunchroom, and always ask them to check with their own accountant. I think financial freedom makes for better doctors who make more ethical decisions. When you are not worried about your next paycheck or bonus, you are less likely to make rash clinical decisions.
The economy is entering into a recession, and the income inequality is staggering. I used to feel guilty because my life is more comfortable as a physician than most of my patients, but I am not the 0.1% making my money through stock options or dividends. I go to work everyday and see patients, and I earn my paycheck. This advice is meant for physicians who should have the means to invest. With the upcoming recession as a real estate investor, I was ready. I sold a rental house almost at the top of the market right as COVID-19 was hitting, and now I am doing a 1031 property exchange and upgrading to a nicer rental property. Looking back at my financial notes, I had been planning this since August of last year. The picture above is the kitchen of the rental property. In the end, this new rental property will be added to our portfolio and increase our networth every month. I deferrred capital gains on the previous rental property in compliance with current tax code.
I won’t go over specific numbers. But I wanted to write general advice about real estate investing. The stock market crashed and our financial situation is fine, because we were diversified in real estate and the stock market.
Ten Tips on Real Estate Investing for Young MDs
- Buy Your Primary Home First: This is the most important and furthest most will get. Eventually your home equity will make up a good part of your networth. Realize that you need a place to live, to raise your family and eventually be able to help with your grandkids and a place to live in retirement. You also need a house and a mortgage payment so you will have some sort of deductions, as you will likely be in a high income tax bracket. Before you start having gradiose dreams of a real estate portfolio that is going to suddenly give you this amazing passive income, just buy your primary home first. This should be a separate article. But buy something you can afford, that you like and in a good school district. Put at least 20% down and get a 30-year-fixed mortgage. Plan to stay for the long term. Don’t over-improve your home too quickly, because if you are living there any imagined increased wealth in “equity” when you install your new kitchen is really make believe money. You can’t tap into your “equity” of your kitchen remodel immediately if you have a sudden need for cash. And it you are taking out home equity lines for frivolous improvements, than can I please remind you of the mortgage defaults that led to the Great Recession? So fix what you want so you will enjoy the house, and do it slowly and consider those improvements discretionary expenses. Mr. Plastic Picker and I finally put curtains up after five years in our current home, but the front hallway still has those nice paper curtains from Home Depot. We are quite proud of them!
- Finish Personal Finance 101 First: Before you can become a successful real estate investor, please just do the basics of personal finance. Again most MDs will stop here. You should track your net worth, have somewhat of a budget, and know what your savings rate is. You should have an emergency fund that covers at least 6 months of living expenses. If you need to stretch to buy your first house that is okay, but you should never embark on real estate investing outside of your personal residence if you havn’t even done the above. You should have a backup plan in case of job loss or if your overtime pay might be cut. At least have plan B. Dr. Plastic Picker has plan A, B, C, D, E, F and G. In that, I am a bit odd. I like to plan for every kind of scenario.
- Take Care of Your Health: In the end money is just money. Before you start investing in real estate, make sure you are taking care of your health. Financial stress related diseases or even poor health in general, is very expensive. You are the goose who lays the golden eggs for your household, and make sure to take care of yourself. You have to keep on laying those golden eggs. In our house we have two geese, LOL. Take care of yourself not with expensive fancy vacations, but with a diet rich in fruits and vegetables, exercise and proper sleep. You may not ever be a real estate mogul, but you are a good person who deserves good health.
- Don’t Borrow From Your Retirement Accounts To Buy Real Estate: I have had many friends talk about this. Just don’t. Retirement is your retirement. If you have to borrow from your retirement accounts to invest in real esate, than you don’t probably have a high enough savings rate to weather the ups and downs of real estate. So go back to increasing your savings rate, and budget better.
- Maintain A High Savings Rate: Again most people will not get here. Most MDs will have just fully invested into the 401Ks and that is it. The first step to real estate investing or any kind of investing, is that you have to have money to invest. Mr. Plastic Picker and I in the early years of full time work maintained a savings rate of at least 30 to 65%. Our networth grew as a result. I am naturally a very frugal person and at some point, it got kind of ridiculous and I loosened up the budget a bit. But we still maintain a savings rate of at least 40%. I think since I started plastic picking and we are worried about the environment, I wouldn’t be surprised if it went up to 50%! I’m still working on some spreadsheets.
- Realize the Goal of Real Estate Investing is To Diversity and Increase Net Worth: Have realistic goals of why you want to invest in real estate. Unlike real estate investors who do this full time, as a physician I have a full time and stable income. For our family, the goal of our investing is to diversity our portfolio and to increase our networth. It seems the greatest of ironies, but you don’t invest in real estate in order to buy a Louis Vutton bag. A Louis Vutton bag costs about $1000 (I have heard). And that is what two good rental property can yield in reasonable equity and cash flow a month. It takes about $150,000 of your hard earned sweat equity to yield that much a month. Not to mention, that is post-tax income after paying our fair share of taxes at a sometimes 40% marginal tax rate, having had found the right property, financing, and working hard to find good stable tenants. I invest in real estate because I think a Louis Vutton bag is a waste of money, and that thinking enables me to buy real estate. I’d rather buy real estate than a useless purse. I use a backpack anyway because I have a lot of folders for work. The ongoing joke in the office is that Dr. Plastic Picker shops for rental properties like others shop for cars. Which is kind of true, because others buy new cars way too frequently whereas we drive our cars for at least 10 years but buy property more frequently.
- Pay Real Estate Professionals (Your Real Estate Broker and Property Manager) A Fair Percentage: Real estate professionals are professionals. They have families to feed and children to raise. Anyone who is good at what they do, deserves to be paid. I always pay the market rate which is 10% property management fee and 10% broker fee.
- Expect to Have Vacancies and Repairs: Before embarking on real estate investing, you will need a downpayment but also a bigger financial cushion in case of vacancies and large repairs. We recently had one property on the market, and it was empty for a few months until we decided to rent it out again. Another property which was a very good buy and has appreciated quite a bit, actually requires the driveway to be repaved and also a new deck to be built. It is not unusual to have unexpected maintenance costs of $10,000 to 20,000 unexpectedly to come up. You should be able to absorb that into your finances without having too much stress. If that scares you, don’t invest in real estate.
- Wait For A Good Deal: My real estate mentor taught me this. Get a good deal. You’ll either celebrate that property for life, or curse if for decades. The purchase price and getting an initial good deal is the most important decision you’ll ever make with that property.
- Buy Conservatively and Plan to Hold for the Long Term: This is very specific for doctors, or maybe it’s just for our family. We buy safe single family homes is solid school districts, or higher end condos. When I walk onto a property I imagine to myself, would I like to live there? Remember, I’m not a fancy person but I appreciate solid real estate. If I would live there, than I can imagine a nice middle-class family or an up and coming young professional wanting to live there. That has always served me well. The last rental was a 4 bedroom and 2 1/2 bath single family detached home in a 20 year-old subdivision that overlooks a peaceful walking trail and lake. There is room for a patio set and some grass for children to play and a vegetable garden on the side. I got it about 15,000 below market and smile when I think of that house.
Wow. That was a very fun blog to write. I was kind of in a funk due to the whole COVID-19 quarantine, as it’s been a good month of this social distancing. I have been having some abdominal issues, but a good friend who is a Pediatric Gastroenterologist said that it’s probably constipation or irritable bowel disease. I think I have Vitamin N (nature) deficiency right now because I haven’t been able to go to the beach. I think I’m going to try to go for a good jog with mask early tomorrow. Aerobic exercise is an excellent (and free!) way to increase bowel motility.
I hope you enjoyed this article. When my young colleagues ask me about real estate investing, I am just going to refer them to this article. I hope it entertained you a bit, because it entertained me to write it. I just write about whatever is on my mind, and I think about real estate a lot. Remember, Dr. Plastic Picker wants you to be FISE (Financially Independent to Save the Earth). This month, we still need to pick the environmental group we are donating to. But the children wanted to help at the Food Bank. There were matching funds from Mission Federal for donations at the San Diego Food Bank, so our $50 became $100. They can provide 5 meals for $1. So that $50 actually provided 500 meals! Dr. Plastic Picker loves effective charities. I think I’m going to do this at least twice a month until this crisis is over. I feel so bad for the world right now. We have been lucky without any vacancies because we rent to tenants who have stable jobs, and actually usually charge them a bit below market to encourage these nice family’s to stay. Ethical business is good business.