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Vetting Private Real Estate Deals – Podcast #200

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Podcast #200 Show Notes: Vetting Private Real Estate Deals

We definitely came to investing from the mutual fund side, a Boglehead through and through. But real estate is certainly a legitimate pathway to wealth that many people have followed. Our guest in this episode is Peter Kim of Passive Income MD. Some see us as bigger paper asset fans than Peter, whose focus is on the real estate asset world. In truth, our own portfolios include both paper and real estate assets but at different allocations. We dive into your questions about passive income today, especially real estate. We discuss how to vet private real estate deals. We talk about what a young physician starting from scratch can do to dial up his real estate portfolio. We share some of the deals we have done that have gone bad and debate whether taking money out of traditional retirement accounts to fund real estate investments is a good idea. There has been a lot said about real estate investing in the White Coat Investor world lately, but remember real estate investing is still optional. You can reach your goals without it, but if you want to know how to get started with this asset class, this is a great podcast to listen to. 

Sponsor

Shopping for disability insurance is complicated enough. Wondering if you are getting the right coverage, unbiased advice, along with the best prices and discounts can make the process even more overwhelming. Pattern knows doctors have more important things to do than spend hours sorting through numerous insurance options. This is why thousands of White Coat Investor’s followers have trusted Pattern to help them compare and understand the disability insurance they are buying. Their online process is simple: First, request your quotes online. Second, compare your options and ask questions. And third, apply risk-free. Be confident you have the right policy at the best price. Request your disability insurance quotes with Pattern.

Milestones to Millionaire

Episode #3 – Become a Millionaire with the 1/3 Income Rule

Sponsored by Bob Bhayani at drdisabilityquotes.com, [email protected] or call (973) 771-9100.

This millionaire radiologist graduated medical school with a net worth of a bottle of wine and a bicycle. 8 years out of training he was a millionaire. How did he do it? Not with the typical white coat investor portfolio. We learn there is more than one way to become wealthy, but they all start with a high savings rate. He applied the 1/3 rule. He saved 1/3 of his income, enjoyed 1/3 of his income, and used 1/3 for his living expenses. Save 33% of your income and you can do nearly anything and still be a multimillionaire by mid career. Check out this post for ways to increase your savings rate.

The Leverage and Growth Summit

When COVID hit last year, Peter asked his online community what they needed right now. They said that they needed stories of physicians who are doing some really cool things outside of clinical medicine—other ways to create income. In response, he created The Leverage and Growth Summit. 10,000 people participated in the virtual event last spring. The second summit will take place this March. Registration starts this Monday, March 8th. The Summit will run from March 22nd through 28th, seven days with over 35 physician speakers, including WCI. It will be interview format, talking to people about their journey of being a physician entrepreneur, how they balance their life to pursue these other things, creating income outside of clinical medicine, and how it affects their views of being a physician.

You can sign up starting March 8th. It is completely free for 48 hours after every interview drops. If you want access to it afterward and indefinitely, you can get that as cheap as $97 if you buy it before the conference. It is $147 during the conference and $247 if you buy it after the conference. The goal is to reach as many people as possible. With the free access, you can enjoy as many videos as you want. For the people that want to take it at their own pace, that want to take advantage of some of the other upgrades with the VIP, where they get access to some exclusive Q&A sessions and things like that, that option is there for them as well.

 

Vetting Private Real Estate Deals

Dialing Up Your Real Estate Portfolio

How would you recommend a young physician dial up his real estate portfolio over time, starting from scratch?

Peter answered this question with three things that we love.

  1. Your clinical income drives it. No matter what you invest in, you have to carve it out of your income. You do that by not spending everything you earn.
  2. Peter started slowly and learned as he went. We did the same thing. $2,000 investments, $5,000 investments, $10,000 investments. You can do that. A lot of them do require you to be an accredited investor, but most doctors already qualify for that by virtue of their physician income.
  3. Figure out where you want to be with your investments. Peter learned he loved this type of investing and wanted to buy his own investments directly and control them. We learned we did not want to buy our own rental properties but like investing in private real estate funds.

There is a spectrum, and by starting slowly and learning as you go, you can decide where on the spectrum you want to land, from directly owning and managing properties down the street to the Vanguard REIT Index fund. Part of your journey as a real estate investor is figuring out where you’re going to show up on that spectrum.

Peter said he takes a hybrid model, and his perspective has changed over time.

I think that there are benefits, like you said, to direct ownership, the tax benefits, but only up to a certain point, because after a certain point, it takes up so much of your time and your bandwidth and that sort of thing. So, there is an optimal point for me that I found that, “Hey, I want to own this many properties” because it is running your own business at the end of the day. Owning your properties is like running your own business, maximum benefit there. But of course, it takes the most amount of time, energy, hassle, knowledge factor, that sort of thing. So, I do it enough for me to capture some of those really amazing tax benefits, like real estate professional status. And then everything after that, in terms of my capital, my time, my energy, when it comes to real estate, is just really focused and devoted on more of these passive investments like you mentioned, like funds and syndications.

You are weighing two things when investing in real estate. You’re trying to get non-correlation with the rest of your portfolio, but you’re also trying to get diversification. By definition, when you’re putting all of your real estate allocation into one or two or three actual individual deals, individual properties, in a lot of ways, you’re not diversified that way. So, it’s a lot of a balancing act. We don’t envy those who are faced with this decision of how to get started, how to ramp it up, and go from there, because it’s not easy. We have seen with these real estate platforms, they’re not all going to make it long-term. They’re not all equal and some are better than others. Sometimes it takes years to determine which ones are better than others. Peter thinks your first investment should be on the smaller size to kind of learn and dip your feet in. The nice thing is, when you’re only putting in a few thousand dollars, at least you’re not putting much at risk as you sort this field out.

Investing without Real Estate Professional Status

What forms of passive income can be offset with depreciation from real estate investments if one has a high income and no real estate professional status?

Having gone per diem in his clinical practice, Peter can now claim real estate professional status. The basics on that status is working 750+ hours in real estate and not more in anything else. So that works out to be 15 or 16 hours a week, not something you do once a month. You basically can’t be practicing full-time medicine at the same time, although a lot of doctors find a workaround where their spouse becomes the real estate professional.

The benefit of real estate professional status is that the depreciation or the losses on paper from that real estate allows you to offset your clinical income. But what if you’re not a real estate professional? What if you’re not going through all that? What can it actually offset?

A lot of times those losses tend to just pile up over time and you kind of continue to carry them forward. Some people don’t have the ability to unlock those. It has to be any sort of passive gains that you’re getting. So, either from real estate, the income that you get from rentals or whether you sell the properties as another way to unlock a lot of those things. Passive income, the IRS considers any income from any business that you invested in, but you don’t materially participate in.

Like, for example, if you own a business, but actually you are an investor in it, and you’re not involved in the daily operations, that’s also considered passive income. So, that stuff can be offset as well with some of those losses. But again, ultimately, if you want to unlock those things, oftentimes you have to dispose of that asset and sell it if you’re not a real estate professional.

Oil and gas, partnerships, small businesses, those sorts of things. It’s not your capital gains on your stock or mutual fund portfolio. That can’t be offset by these real estate losses. It can’t be earned income unless you qualify for real estate professional status. So, it’s not going to be your clinical income.

A Good Time to Invest in Real Estate

People ask all the time if this is a good time to invest in real estate. And if so, which kind? Residential, commercial, single-family rentals, multifamily, etc.? Peter tells them people are making money at all times at all parts of the cycle. Trying to time the market when it comes to real estate or index funds is kind of futile. You’re not going to be able to time things properly.

So, the key is to be in and invest for the long-term, for the most part, and that’s the same thing I say with real estate. I think there are opportunities at all points in the cycle, in real estate, as well, just like in anything else. When things are going poorly in terms of the market, that’s when the most opportunities are available to you. They say the transfer of wealth happens in real estate, especially during those tough times.

At least with the cost of housing, when people are looking at buying houses, it seems to be like a bubble right now. Looking for investment properties, it is hard to cashflow with compressed cap rates. But Peter said there are still opportunities out there.

There are people still doing quite well. I’m still invested with a good amount of people. Actually, in the past year, I’ve invested probably more than I have in the previous two years combined. This is in this whole bubbled territory because I think there are tons of opportunities still out there, especially for the people that know what they’re doing. I think the deals are hard to come by, but the people that are finding deals and who know how to operate these things, like a lot of these real estate funds that we are invested in. I still think for the long-term, the opportunities are there. Although my expectations are a little tempered, like I’m not going to expect the same type of returns maybe that I got in 2014, 2015, but my money is still going to work. It’s still doing well. It’s still doing better than sitting there in cash. It’s still growing my wealth.

Peter does think you need to be smarter with who you invest with. Do a little bit more due diligence, make sure you’re educated. Make sure you go in with people that have established track records. But to know if now is a good time to invest, you have to have a functioning crystal ball, and no one has it. That applies whether you’re investing in stocks, bonds, real estate, cryptocurrency, whatever. Without a functioning crystal ball, you need a long-term, systematic investing plan. That’s really the only way that you can really decide when a good time is. Peter said,

To give you a little perspective, I have friends that have been sitting out of the real estate investing market for the last five years. They got tips from their friends back in 2015, 2016 that that was the height of the bubble. I remember that people thought this is crazy. This is unbelievable. The same thing with stocks, I’m sure. 2015, 2016, this is it. It’s going down. So, people are just holding outside the market. And so, in the last five years, I have friends who are still waiting on the sidelines and now they can’t sleep at night because they can’t figure out when to get in now at this point.

It turns out market timing is hard. You have to get it right twice. You have to know when to get out and when to get in.

Taking Money from Retirement Accounts to Fund Real Estate Investments

We have a strong opinion on this that no one is going to be surprised by. Peter knows people who have done this and done well.

I think it all depends on where you’re at and your goals and that sort of thing. Again, I’m all for diversification and I think somebody kind of lent me a phrase that I use now quite a bit, having intellectual humility. I realized that I don’t know everything and I can’t control everything. And I think, with real estate, sometimes I have a tendency to just dive in and know exactly the outcome that’ll happen with it. I know it’s not going to necessarily be the case. So, I’ve learned, and maybe it got a little bit more conservative with time, that I like to have as many hedges as possible.

And so, for me, I don’t invest a lot in the stock markets, publicly traded markets, but what I do is, I do it with my retirement accounts and I pretty much leave it there and I don’t touch it. That’s kind of like my hedge against things going poorly on the real estate side, for whatever reason. It’s not a huge portion of my portfolio. I’m probably flipped in terms of the percentages versus most people in terms of the way they invest in real estate versus stocks. Again, it’s a very, very small percentage for me, but I just leave them in there, personally.

Now, if someone’s at the place where they can actually make a really clear calculation and determined that, hey, if I pulled this money out of my retirement accounts, it creates enough cashflow for me, net of fees, this kind of thing, and it totally changes their life from day one, I can understand why somebody would do that. It makes sense to me.

We don’t necessarily think differently. The way Peter is doing it is how most people do it. They use their taxable account to invest in real estate. They don’t liquidate all the retirement accounts. They just save above and beyond what fits in the retirement accounts and use that for the real estate investing. The ideal way to do it is that you are earning enough and saving enough that you can both max out your retirement accounts, however you invest that money, and have something above and beyond it to invest again, in whatever you want.

Then you can decide, when you have that situation, where the best place to put the investments is tax wise. Because the answer to that, most of the time, is that equity real estate investments ought to be in a taxable account and debt real estate investments ought to be in a tax protected account. They’re terribly tax inefficient.

When you’re talking about a fund like a DLP lending fund. This is a fund that traditionally had returns in the 10%, 11%, 12% range. Great returns. They’re paid out to you every year as ordinary income. It’s terribly tax inefficient. That is the worst possible situation for tax efficiency. The entire return comes to you every year as the ordinary income tax and it’s a high return. That is the ideal asset to have inside a retirement account. So, if you pull money out of your retirement accounts to invest it in real estate, you can no longer have that retirement account space to put an investment like that into.

We think that is a real mistake to lose that opportunity that you may want down the road, whether you invest in real estate, or whether you invest in stocks, whatever you invest in, you have now permanently decreased the size of that tax-protected account. Because there are all these awesome benefits of a tax-protected account. You don’t have the tax drag as it grows. You can just name beneficiaries, so it makes estate planning easier, and it can be stretched for 10 years after it is inherited. In every state, you get massive asset protection for it if it’s inside a retirement account.

Retirement accounts are good, and there are lots of ways you can use them to invest in real estate. Sometimes if you want to invest in private real estate, it has to be a self-directed account, whether that’s a self-directed individual 401(k) or a self-directed IRA or whatever. You may have to roll over your 401(k) into an IRA in order to do that sort of a thing, but it’s not necessarily a reason to pay all those taxes during your peak earnings years plus a 10% penalty.

All of a sudden now you’re starting with 50% of the money you had before. Whereas if you would’ve just invested it inside the retirement account, you wouldn’t have lost that and you would have an opportunity down the road to get that money out at a much lower marginal rate.

We just worry when we see people saying liquidate your retirement accounts and buy index universal life insurance with it, or buy real estate with it. We just worry a lot of times that these people are selling you something and they just know that this is where your money is. Your money is in your home equity, your money is in your retirement accounts. And of course, that’s where they want you to go, so you can buy whatever they’re selling. Be really cautious with it.

Is it possible to come out ahead and pay all those taxes and penalties and have the investment be so good that you still come out ahead? Yeah, it’s possible. You better run those numbers and you better be really sure that it’s going to work out right for you in that perspective.

We own lots of real estate. It’s almost all in a taxable account. We are not anti-real estate, but we also max out our retirement accounts and try to grow as much as we can to keep that tax-protected to taxable ratio as high as we possibly can make it.

Vetting Real Estate Deals

How do you vet syndication deals? How do you do good due diligence?

Peter said you need to vet three things.

  1. Vet the sponsor
  2. Vet the deal
  3. Vet the market around it

You have to understand those three major things before jumping in. And vet them in that order.

I’ve said it in pretty specific order, because I can’t stress it enough to people, the sponsor or the operator, whoever’s running that deal, is the most important aspect of this whole opportunity, because anybody can put out nice numbers. A lot of times people, honestly, get fixated on the internal rate of return, IRR. They see that number. They see the cash on cash they think they’re going to get and they just get fixated on that. And sometimes people choose the deal based on that number. I think that is probably the one big fallacy, the one big issue that I’ve had to learn over time to get over. Because you start spending that money in your head already when you see that number.

I’ve learned over time, especially when the market is in a period like it is now where there’s some rough patches, we’ve seen it through COVID and all the different operators, and who’s been able to handle these situations well with these vacancies and with all these rent eviction moratoriums, and who’s been able to deal with all this very well. The more experienced operators and sponsors are the ones that are actually flying through this and doing quite well.

Peter said he looks for sponsors who have been through multiple cycles with ups and downs.

This is not the first time people have had high markets, low markets, this kind of thing. It happens every 7, 10, 12 years, whatever it is. And so, there are operators and sponsors who have been through three of these cycles, and you’ve seen them change their philosophy in terms of investment or whatever their business plan is to adapt to these types of things so they’re prepared for it.

During 2007, 2008, one of the biggest lessons that people learned is that, and everyone knows this, your financing can come back to bite you. And so, a lot of the operators now and sponsors, if you look at their deals, they’re putting on longer term financing so that they can ride through a lot of these ups and downs. And they’re not expecting, necessarily, to get in and out in two, three years, depending on how the market goes.

Look at your sponsor’s track record. Talk to them about their mistakes and failures and what they learned from them and how they going to make sure that doesn’t happen again in the future.

You’re investing in the person. A good person can save a bad deal, but a bad person can screw up a good deal. And so, you really want to get the right person in there. The difficulty comes in that people with a lot of experience that have done this through multiple market cycles, they don’t have any trouble raising money. So they often put minimum investments on their funds or on their syndications of $100,000, $250,000, a million dollars or more. It gets out of what you can actually afford to invest.

You are left weighing having a less diversified portfolio and putting a bunch of money with someone experienced against having a more diversified portfolio and spreading that money around people with less experience. That is a real dilemma and something that a lot of us struggle with in this space. Peter said,

My ultimate goal is to find my 10. Like these are my 10 sponsors or operators that I’m going to basically live or die with. And the people that I trust and I’ve done deals with them that I can continue to double down with them. Find that 10. I figured 10 sponsors or operators will give me enough opportunities in terms of the number of deals they do, enough diversification in terms of across sponsor, geographic, all that type of thing.

But if I can find those top 10, that’s exactly where I’ll be investing most of my money in the future. The problem is it takes you time and money to figure out who those top 10 are. So that’s why I spread it across different operators right now, as I’m learning, I’m watching how they obviously manage and operate, how they report, what kind of relationship we have and whoever we get comfortable with. But that’s really what I’m trying to get it down to. And I think that’s going to be a personal decision for everybody.

Lessons from Deals Gone Bad

We talked about investments gone bad, some of the worst-case scenarios with these deals. One of our investments we bought through a crowdfunded platform. It was a $20,000 investment in a syndication. It turns out that the sponsor, the operator, this person running the syndication, is fraudulent. We don’t know that he intended to do this, but he got in a hurry and he had built this real estate empire and built it with too much leverage. And he got in trouble. The leverage caught up to him.

The bottom line is this particular syndication was part of this empire of his. And at the end of the day, he didn’t have the money to complete the project. It was a value-add project. And so, it stalled. Of course, we got a bunch of empty apartments now that are supposed to be getting renovated. And it sits around for a year. This was a preferred equity investment. It was supposed to pay 14% a year and paid for about a year. And then it stopped paying. And it’s been dragging on now for years. We might have a total loss.  We are not going to lose more than our initial $20,000, but we might have a total loss of that $20,000. The more likely outcome, and part of this is due to the platform doing a good job of putting together another deal and using that deal to actually acquire this investment back from the bank that had foreclosed on this operator, as a result of that, we are probably still going to have a loss on the investment, but don’t think it is going to be a total loss. We will be thrilled if we get all our principal back.

We had another deal that was supposed to be a one-year debt deal. It was a syndication. We loaned money to this person to flip a home, basically over the course of a year. And it took him longer than he thought. It took more money than he thought. He had a hard time selling it.

At the end of the day, he made the payments all the way through and he kept paying us the interest due. But it was three years before we got the principal back on a one-year deal. That sort of scenario is not uncommon at all in this space. That happens all the time. You get all your principal and interest, but it turned out not to be nearly as liquid as you thought it was going to be.

What are some of Peter’s worst outcomes so far in his real estate investing career?

I had one deal where these developers got way in over their head and they put these fancy pictures of what this home that they’re going to buy and flip and turn into this amazing architectural dream in the Hills of LA with this hillside. It turns out they didn’t know how to account for this hill and grading, issues with permitting and all that stuff.

So, a project that was supposed to take 16 to 18 months, again, took over three years where they actually never even got the property built. They essentially just ended up selling it off because they couldn’t get the permits for it. Luckily the market was fine over that three to four years. They were able to sell and they were able to give most everybody back their principal plus about a hundred bucks.

Obviously, I was glad I didn’t lose my money, but that money was locked up for a while. Also, there’s opportunity costs. I could have literally just left it in a savings account. It could’ve done better. And so, there’s an opportunity cost there, as well. That was one of the mistakes, but again, it was a learning lesson.

Another one was where I invested in like an office kind of complex area. And it was a lot of like health complex type stuff. It was really dependent on one anchor tenant, which they thought was definitely going to renew. The tenant didn’t end up renewing, just tanked the whole investment there. The bank ended up taking the property back. I think it was a $10,000 deal. I lost about $4,800 on it. So, it was like a 48% loss over that period of time. So, it didn’t go great. But at the same time, it was one of the very first deals that I actually invested in. I didn’t know what I was doing. Again, one of the mistakes I’ve learned. I went into it just because it was there and I wanted to learn.

I’ll be honest with you. That deal gave me the confidence to learn more about it, invest in others. And so, if you look at it from an isolated thing, yeah, I lost money on that deal, but it helped propel me to do many other deals that were much better. I’ve learned so much from it. And to be honest with you, I think, ultimately, that deal, when I look at it in the scope of everything, honestly allowed me to be a smarter, better investor.

One of the things we have learned from deals going bad, both on the debt and the equity side, is just how important diversification still is in this space. Just like it is when you invest in stocks or bonds, diversification matters. That is why we like being in a debt real estate fund where we have 70 or 80 different loans in the fund rather than two or three that we picked out ourselves.

Because if one of those goes bad, we might lose a third of the money in that fund, for lack of a better word. Whereas if one or two debts go bad inside a private real estate lending fund. That’s hardly going to affect our return at all. So, diversification still matters even though you’re investing in real estate.

 

Ending

Peter’s parting advice for our audience was to just get started, make an investment, start learning, get some skin the game. He thinks that will really help propel you to get where you want to be with your portfolio. If you want to hear more about Peter and the lessons he has learned from his real estate investing mistakes, join us at the WCI Conference 2021 that starts today.

Full Transcription

Intro:
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors

and other high-income professionals stop doing dumb things with their money since 2011. Here’s your host, Dr. Jim Dahle.
Dr. Jim Dahle:
This is White Coat Investor podcast number 200 – Vetting private real estate deals.
Dr. Jim Dahle:
Shopping for disability insurance is complicated enough. Wondering if you were getting the right coverage, unbiased advice along with the best prices and discounts can make the process even more overwhelming.
Dr. Jim Dahle:
Pattern knows doctors have more important things to do than spend hours sorting through numerous insurance options. This is why thousands of White Coat Investors have trusted Pattern to help them compare and understand the disability insurance they’re buying.
Dr. Jim Dahle:
Their online process is simple. First request your quotes online. Second, compare your options and ask questions. And third, apply risk-free. Be confident you have the right policy at the best price. Request your disability insurance quotes with Pattern at whitecoatinvestor.com/patternpodcast.
Dr. Jim Dahle:
All right, I hope you’re enjoying our new Milestones to Millionaire podcasts. Those are dropping on Mondays. They’re short podcast featuring you and your accomplishments, and we’re using those to inspire your fellow White Coat Investors to do the same, whether it’s paying off debt, acquiring wealth or whatever other financial milestone that you’ve hit. Be sure to tune into those and share your experiences as you go through your financial and investing career.
Dr. Jim Dahle:
We’ve got our nice review from somebody on it. They said, “I love the new “M to M” segment, love the inspiration that keeps my wife and I go in as we work to pay off her loans in less than two years out of residency”. Awesome. I appreciate that five-star review.
Dr. Jim Dahle:
Okay. I got a couple of emails within 48 hours. Three emails, I think. People pointing out something that might be a problem with public service loan forgiveness, and the low percentages of people getting it. They basically think there’s a systematic error because they are getting emails saying “You do not qualify for public service loan forgiveness”. This is people who don’t expect to qualify for it. They’re just sending in their annual certification form to the department of education. And they’re getting this email back saying “You don’t qualify for public service loan forgiveness”.
Dr. Jim Dahle:
So, they think maybe the reason why the percentages of applicants that are actually getting public service loan forgiveness only being 2% or 3% or 4% is because they’re using the wrong denominator. They’re using all the people that are doing their annual certification forums as people who are actually applying for public service loan forgiveness. I don’t know if that’s true or not, but these White Coat Investors have been told that on the phone that that’s how they’re counting them.
Dr. Jim Dahle:
So, that ought to give those of you going for public service loan forgiveness maybe a little less panic when you see those numbers that only a very low percentage of people are achieving it. Obviously, if you haven’t made your 120 monthly payments, you’re not going to get public service loan forgiveness.
Dr. Jim Dahle:
So, keep that in mind. I’ll monitor that situation as it goes, but it seems that might be an issue with the Department of Education. No surprise for those of us who’ve been dealing with them and the student loan servicing companies.
Dr. Jim Dahle:
We have a really great podcast today. We have Peter Kim, one of the members of the White Coat Investor network on today. We’re going to be talking about all kinds of stuff about passive income, mostly real estate, and answering a lot of your questions about it. So, let’s get him on the line.
Dr. Jim Dahle:
All right, I’m excited to have Peter Kim MD back on the White Coat Investor podcast. Peter is the founder of Passive Income MD. I hope this is not the first time you’ve heard of him. If it is, I’ve completely failed in my role to promote him, but he does some awesome work there. Passive Income MD is one of our partner blogs here at the White Coat Investor, but it is just one of many pursuits that he does. Peter, welcome back to the podcast.

Dr. Peter Kim:
Hey, thanks for having me, Jim. I’m excited to see that you’ve got this really fancy studio behind you. If you guys aren’t watching some video, you need to check out Jim’s studio. He’s upgraded. This is amazing.
Dr. Jim Dahle:
Yeah. I’ve got my White Coat Investor t-shirt on here too. For those of you who are coming to the conference this week, you’ve got one of these lifetime member White Coat Investor t-shirts as well. So, lots of fun and exciting stuff going on right now. We’re recording this the week before the conference, of course. But as this drop, we’re actually in the middle of the White Coat Investor conference. So, tune into that, obviously if you’re in the conference.
Dr. Jim Dahle:
But Peter, you had a lot of interesting stuff going on in your life since we had you on the podcast. You moved recently. Tell us about your move and what motivated it.
Dr. Peter Kim:
Well, I mean, I haven’t moved quite yet. I’m actually in the process of a move. I mean, it’s not even moving that far. We’re moving probably about 50 miles from where we’re at right now. But typically, I live in West LA, but we’re moving down to Orange County and that’s probably news to a lot of people. I haven’t even told a lot of people. Now I’m telling… How big is your audience now?
Dr. Jim Dahle:
Oh, it’s not that big. It’s only about 35,000.
Dr. Peter Kim:
Okay. Nobody’s listening to this. Yeah, we’re making the move. It’s not happening for a couple months, but it’s for the family. I think that we’re doing our own mini version of geo arbitrage. You’ve talked about it, Leif, The Physician on FIRE talks about it all the time. This is the best I can do right now without leaving my entire family behind. So, we’re moving to an area where the housing cost a little bit cheaper and for the school system, for our kids, it’s got an amazing public school system. So, we can go through that and not have to worry about the private school system up here. So that’s what we’re doing.
Dr. Jim Dahle:
Awesome. And you’ve had some changes in your clinical work as well. Can you talk about that?

Dr. Peter Kim:
Yeah. I went from full-time to part-time where I was giving up a ton of shifts nights and weekends to actually officially going per diem. Again, I love clinical medicine. I love what I do. I’m an OB anesthesiologist. It’s fun and I enjoy it. But I think after doing this for 10, 11 years, the nights and weekends, and the time away from the family, especially with what’s going on now and how important I feel it is to be around family, not having flexibility over my schedule was a huge thing. And so luckily, and fortunately I have these other projects that I have going on, which gives me that flexibility. And so, I decided to go per diem. Yeah. I mean, I work one or two days a week. That’s about it.

Dr. Jim Dahle:
Yeah. So, The Passive Income MD has become incredibly successful over the last year. What are some of the highlights that you can tell us about?

Dr. Peter Kim:
Well, Jim, that’s really thanks to you, to Leif, to my other partners. Thanks for all the other people who have really given us so much support and the readers out there who really resonated with what we’re talking about. It’s grown. I mean, it’s so funny because none of this was really intentional when I first started the blog. If you remember, I was totally anonymous and I didn’t even want my name out there. And it was more just to share my journey and my story and how things were going.
Dr. Peter Kim:
And eventually people just kept asking for different things and I have a hard time saying “no” to people. I’m just a people pleaser, I guess. Some people said, “Well, I need a Facebook group to talk about this”. Sure. We launched a Facebook group. Then people said, “Oh, I want to take a course on learning, or can you teach us more about due diligence on real estate investments?” I said, sure. So, we started Passive Real Estate Academy.
Dr. Peter Kim:
And then this past year, especially when COVID hit and everything was kind of going crazy, there was a lot of unrest in the group and people are talking about what to do. And so, I simply asked our group, “What can I do to serve you and what do you need right now?” And people said they needed stories of physicians who are doing some really cool things outside of clinical medicine, other ways to create income.
Dr. Peter Kim:
And so, that’s what we did. We created The Leverage and Growth Summit last year. It was again exceeded my expectations. It was over 10,000 people that were part of that. And then we did a virtual summit for real estate as well. Financial freedom through real estate. The last year was a year of virtual summits and conferences. And again, it was attended by over 20,000 people in total and it was so fun. And so, there’s a lot of things that are happening. We’re about to launch another summit coming up in next couple of weeks.
Dr. Jim Dahle:
Let’s hear about that summit. What days does it take place? At least the live version.
Dr. Peter Kim:
Yeah, the live version. So, by the time people listen to this, we’re actually launching an opening registration for Leverage Growth summit on the 8th of March. So that’s probably shortly after people listen to this. It’s going to be going on from the 22nd through 28th. In total, it’s seven days over 35 physicians’ speakers. It’s going to be all interview format. You’re going to be one of the featured speakers.
Dr. Peter Kim:
And what we’re going to be doing is really talking to people about their journey of being a physician, being a physician entrepreneur. All those things, how they are able to balance their whole life to pursue these other things, create income outside of clinical medicine, how it affects their views of being a physician and how they’re balancing all that. And they’re just sharing all those origin stories and I think people get a lot out of it.

Dr. Jim Dahle:
Awesome. So, they can sign up between now and when it starts, it’s actually free, right? For 48 hours after every interview drops. So, it’s totally free if you watch it quickly. But if you want access to it afterward and indefinitely, you can get that as cheap as $97. You can get that for $97 if you buy it before the conference. $147 during the conference and $247 if you buy it after the conference. So, clearly you are incentivized to buy it before the conference even starts, but it should be a great summit. So, you can learn all about that at passiveincomemd.com. And I’m sure the links will be quite prominent to the summit, both before and during the summit. So, congratulations on putting all that together.
Dr. Peter Kim:
Yeah. It’ll be fun. The goal is to get to as many people as possible. So, that’s why it is a free on the surface. So, you can come in and enjoy as many videos as you want. For the people that want to take it at their own pace, they want to take advantage of some of the other upgrades with the VIP, where they get access to some exclusive Q&A sessions and things like that. That option is there for them as well, if they want, but either way, we just hope that you get a lot out of it and really just enjoy it.

Dr. Jim Dahle:
Cool. It sounds like it’s going to be a great event. All right. So, Cindy has gone to our Facebook groups and solicited questions for us to answer on this podcast. And you guys did not disappoint. We have got a ton of complex questions to go over today, and we’re really going to dive into the weeds I think on a lot of passive income kind of stuff, a lot of real estate kind of stuff. And I hope you find it enjoyable out there in Listener land.
Dr. Jim Dahle:
If this all goes way over your head, we have lots of resources available, not only on our respective podcast, but on our respective blogs, that will dumb it down for you and give you the basics of real estate and other passive investments. But today we’re going to get into some weeds. There’s no doubt about it. So, are you ready for this, Peter?

Dr. Peter Kim:
Yeah. I mean, you might have to help me out. Some of this stuff is way over my head.
Dr. Jim Dahle:
All right. Well, let’s start with one that I know is not over your head. This one comes from Nathan Wilds who asked, “How would you recommend a young physician dial up his real estate portfolio over time, starting from scratch?”
Dr. Peter Kim:
Yeah, that’s a good question. I think that as a young physician, honestly, your focus should be on creating as much income from your doctor job as possible. That’s what I think initially, because that is your greatest source of income, your capital wealth creation initially is through your doctor income. So, I recommend that people really focus on that initially. Find good sources of that, and then as quickly as possible, funnel that into other sources of income, like real estate, that sort of thing.
Dr. Peter Kim:
And so, if somebody were going to start, I’d actually recommend that they start kind of like I did. I started by dipping my toes in just because again, in the beginning, I didn’t know too much. I didn’t know too much. I felt like the risk, I guess that $5,000, $10,000 as a young attending meant a lot more to me then than it does now. So, I dip my feet in just to see if this is something that I would enjoy, that seemed to kind of jive with my mindset and kind of how it works.
Dr. Peter Kim:
So, I started by doing a small crowdfunding deal and I did it by putting $5,000 at risk. And that was enough where I felt like, okay, this is an opportunity for me to have some skin in the game, to actually learn, to take action. But at the same time, if things don’t go perfectly, I’m not worried about my family being able to eat and that sort of thing. And so, I started with a small crowdfunding deal. It was a debt deal where we lent out money. Those are some of the opportunities on your website, but you lend out money, they just pay you back with interest and you’re able to see kind of how the real estate world works in terms of debt lending. And you really educate yourself.
Dr. Peter Kim:
So, I invested passively in a couple of deals. There’s something called syndications, which you’ve talked about it. We’ve talked about it quite a bit, where essentially people pull their money together to purchase larger properties. So, you don’t have to bring in the whole thing yourself, buy a whole apartment building yourself. You can just jump on with somebody else who’s operating that deal.
Dr. Peter Kim:
I invested in the first deal for $25,000 for one of those. And again, I got to watch how these things work, how the numbers work, how they operate things and how real estate can actually create cashflow, can create wealth. All these things I learned by investing passively first, and then I got comfortable enough to ultimately own my own rental properties.
Dr. Peter Kim:
Now I’m not saying that everybody has to go that path, but that worked for me because I was working really hard. I was working a lot of hours, nights, weekends, but it allowed me to put my capital in a way to work passively first, learn until the point where I felt really comfortable buying my own properties.

Dr. Jim Dahle:
Yeah. I love three things you say about that. The first one is that your clinical income drives it, right? No matter what you invest in, whether it’s real estate, whether it’s stocks, bonds, whatever, you got to carve it out of your income. You got to come up with some capital and the way you do that is by not spending everything you earn. So, that’s the first point I really liked that you said.
Dr. Jim Dahle:
The second one is that you started slowly and dipped your toe in and learned as you went. And I did the same thing. $2,000 investments, $5,000 investments, $10,000 investments. You can do that. Now, a lot of them do require you to be an accredited investor, but most docs already qualify for that by virtue of their physician income. And so, that typically is not an issue. So, I really liked those points that you mentioned there.
Dr. Jim Dahle:
And then the third point, I think is figure out where you want to be with your investments. For example, you learned that, “Hey, I love this stuff. This is really interesting to me. I want to buy my own investments directly and be in control of them, get all the tax benefits out of that, that I can and really get into the real estate world”.
Dr. Jim Dahle:
Whereas I didn’t necessarily end up in the same place. I might’ve started in the same place you did, but I kind of ended up in a different place. And where I ended up after going through these individual syndications through crowdfunding platforms for $2,000 or $5,000 or $10,000 or $20,000 is I kind of ended up with real estate funds, private, real estate funds. Because I just didn’t want to go out and buy my own rental properties.
Dr. Jim Dahle:
We’ve had a rental property in the past, frankly, I didn’t enjoy it. I wasn’t that good at it. And I much prefer a passive investment. But I see the big real estate funds as being better investments, more easy to diversify, better management than you get from what you can get on a crowdfunded real estate platform.
Dr. Jim Dahle:
So, I started at the same place. I think I ended up in a different place than you did, but really, you’ve seen that slide I have, I think you’ve used it, in fact, in some of your presentations. That’s the spectrum of real estate investing and you’ve got directly owning, managing the property down the street on one side, and you’ve got the Vanguard REIT index fund on the other side.
Dr. Jim Dahle:
And you’ve got to figure out where your place is on that spectrum. How involved you want to be. And on the side where you’re owning the properties directly, that’s where you got to have the most expertise and you put in the most time, but it’s also where you get the most tax benefits and you have the most control. On the other side, you get benefits of liquidity and diversification, but the tax benefits in the control are not nearly as good.
Dr. Jim Dahle:
So, I think as part of your process, part of your journey as a real estate investor is figuring out where you’re going to show up on that spectrum. Do you agree with that?

Dr. Peter Kim:
Oh, no. These are all great points. Yeah. I referenced that slide all the time. I do put WCI Fire Your Financial Advisor, just so you know, so I don’t act and pass that off as my own. Now that’s a great slide because again, it is a spectrum and I’m constantly changing over time. Even in the last year, my perspective on this has all changed, but really, I take a hybrid model. I think that there are benefits, like you said, to direct ownership, the tax benefits, but up to a certain point, because after a certain point, it takes up so much of your time and your bandwidth and that sort of thing.
Dr. Peter Kim:
So, there is an optimal point for me that I found that, “Hey, I want to own this many properties” because it is running your own business at the end of the day. Owning your properties is like running your own business, maximum benefit there. But of course, it takes the most amount of time, energy, hassle, knowledge factor, that sort of thing. So, I do it enough for me to capture some of those really amazing tax benefits, like real estate professional status. And then everything after that, in terms of my capital, my time, my energy, when it comes to real estate is just really focused and devoted on more of these passive investments. Like you mentioned, like funds and syndications.

Dr. Jim Dahle:
And are you now qualifying for real estate professional status?

Dr. Peter Kim:
Yeah. My clinical income has cut down quite a bit enough that I definitely qualify. For those who may have heard of it before, there are some qualifications that allow you to designate, qualify with the IRS as a real estate professional. Really, you have to demonstrate that you work more in real estate than you do in any other day job. That’s one of the main qualifications.
Dr. Peter Kim:
And so, having gone per diem allowed me to do that. And when I did some of the calculations taking to count some of the tax benefits and all that, actually by working less clinically, at the end of the day, I was finding more money in my pocket. And so, for me, it’s a calculation.
Dr. Jim Dahle:
One of those terrible incentives we’ve built into the tax code, unfortunately.
Dr. Peter Kim:
I know it is, it is crazy. And so, it was so obvious for me what to do. And so, that’s something that definitely you need to consult with your CPA about to figure all these things out and do it right. And you want to do it the right way because apparently that portion of the tax code is highly audited. You just have to make sure you are doing it correctly, legitimately. And so, there are a lot of great resources out there for that, but definitely find a great CPA if that’s where you want to be.

Dr. Jim Dahle:
Yeah. The basics on it are 750 plus hours in real estate and not more than that in anything else. So that works out to be 15 or 16 hours a week or so. So, it’s not something you do once a month, it has to be an ongoing thing you’re doing. And you basically can’t be practicing full-time medicine at the same time. Although a lot of docs find a work around where their spouse becomes the real estate professional.
Dr. Jim Dahle:
Speaking of that, let’s talk a little bit about a question. This one comes from The Physician on FIRE who’s asking “What forms of passive income can be offset with depreciation from real estate investments if one has a high income and no real estate professional status? Well, obviously, real estate.

Dr. Peter Kim:
Yeah. Real estate. Well, that’s a good question because again, the benefits of real estate professional status, to really go a little bit further on that is that the depreciation or the losses on paper from that real estate allows you to offset your clinical income. And that’s super powerful.
Dr. Peter Kim:
What he’s saying is that, what if you’re not a real estate professional? What if you’re not going through all that? What can it actually offset? A lot of times those losses tend to just kind of pile up over time and you just kind of continue to carry them forward.
Dr. Jim Dahle:
Yeah. That’s what mine are doing for sure.
Dr. Peter Kim:
And so, some people don’t have the ability to unlock those. So really, it’s got to be any sort of passive gains that you’re getting. So, either from real estate, the income that you get from rentals or whether you sell that properties as another way to unlock a lot of those things. Passive income, the IRS considers any income from any business that you invested in, but you don’t materially participate in.
Dr. Peter Kim:
Like, for example, if you own a business, but actually you are investor in it, and you’re not involved in the daily operations, that’s also considered passive income. So, that stuff can be offset as well with some of those losses. But again, ultimately if you want to unlock those things, oftentimes you have to dispose of that asset and sell it. If you’re not real estate professional.

Dr. Jim Dahle:
Yeah. Oil and gas, partnerships, small businesses, those sorts of things. It’s not your capital gains on your stock or mutual fund portfolio. That can’t be offset by these real estate losses. And it can’t be earned income unless you qualify for a real estate professional status. So, it’s not going to be your clinical income. Sorry, Leif, it’s not going to be your blog income. You can’t use it for that. That’s active. So it has to be unearned income, basically that comes off schedule e.

Dr. Peter Kim:
As long as you’re not actively involved in it, then that counts.
Dr. Jim Dahle:
As long as you’re not actively involved in it. Yeah. Because there are tax benefits to claiming active involvement. Because that gets you 1998 deductions. So you want to be careful exactly how you claim your involvement in those other small businesses that you own.
Dr. Jim Dahle:
All right, let’s go on another question. This is a common question and I don’t have an answer and I know Peter doesn’t have an answer either, but let’s talk about it anyway.
Dr. Peter Kim:
Oh, why are you asking it?
Dr. Jim Dahle:
It’s because it’s so common, right? We could ask this all the time. Is this a good time to invest in real estate? And if so, which kind? Residential, commercial, single family rentals, multifamily, et cetera. How do you address that question when you get it, Peter?
Dr. Peter Kim:
I tell people, people are making money at all times at all parts of the cycle. You hear stories, whether it’s in real estate or whether it’s in the stock, again, you get the same question – Is this a good time to invest in stocks? Like trying to time the market when it comes to real estate or index funds or these kinds of things, it’s kind of futile either way. You’re not going to be able to time things properly.
Dr. Peter Kim:
So, the key is to be in and invested and invest for the long-term for the most part. And same thing I say with real estate. I think there are opportunities at all points in the cycle, in real estate as well, just like in anything else. When things are going poorly in terms of the market, that’s when the most opportunities are available to you. And that’s actually the true, like they say, transfer wealth happens in real estate, especially during those tough times. I think what he’s referring to right now is that this seems to be almost like bubbled territory is what people are talking about or high point.
Dr. Jim Dahle:
At least with the cost of housing. When people are looking at buying houses.
Dr. Peter Kim:
Yeah. With the cost of housing, when you’re out there, the market is crazy right now. Again, people didn’t expect this at all, but they are looking for investment properties, they are looking at all that. It seems like the price according to rent, it’s hard to cashflow these things called cap rates are super compressed. And so, people are like, “Man, it’s really hard to make income right now”.
Dr. Peter Kim:
The thing is there are opportunities out there. There are people still doing quite well. I’m still invested with a good amount of people. Actually, in the past year, I’ve invested probably more than I have in the past two years combined. This is in this whole bubbled territory because I think there are tons of opportunities still out there, especially for the people that know what they’re doing, I’d say.
Dr. Peter Kim:
I think the deals are hard to come by, but the people that are finding deals and who know how to operate these things, like a lot of these real estate funds that you’re invested in, I’m invested in. I still think for the long-term, the opportunities are there. Although my expectations are a little tempered, like I’m not going to expect the same type of returns maybe that I got in 2014, 2015, but my money is still going to work. It’s still doing well. It’s still doing better than sitting there in cash. It’s still growing my wealth.
Dr. Jim Dahle:
Yeah. Especially right now, since cash pays nothing.
Dr. Peter Kim:
That’s the other alternative. Like what is the other alternative? Exactly, sitting in a savings account right now. Like that’s not where you want to be, we’ve talked about stimulus and all this stuff, all this cash flowing out there. I don’t know where inflation is going to go, but I have to think that having your money in assets that are growing is the smartest place to be right now, in my opinion.
Dr. Peter Kim:
And for me still, when it comes to real estate, again, you can find those deals. I invest mostly for cashflow so I still see those deals. I’m still investing right now. I just have to be smarter I’d say with who am I investing in. Back in 2014, 2015, 2016, it didn’t matter who you investing with I’d say as much. The market was just screaming and doing well. So, people were doing quite well.
Dr. Peter Kim:
I think right now you have to do a little bit more due diligence, make sure you’re educated. Make sure you go in with people that have established track records. And again, I’ll talk about this at the conference and I hope people are listening to this. Listen to my talk at the conference, I’m going to be talking about the three biggest mistakes I made in real estate investing. And I think a lot of those things apply to times.
Dr. Peter Kim:
The things I’ve learned from them really apply to how I’m investing today. One of the biggest things without spoiling too much, one of the biggest things is I’ve learned, you got to know who you’re investing with. That’s matters more than what the deal you’re investing in. So, you got to really learn how to do that. And I think especially in this time, it’s more important than ever.
Dr. Jim Dahle:
Yeah. The best time to invest is 10 years ago. The second best time is today. Everyone always worries that I’m going to put money in and then the market’s going to go down. Well, if you put money in every month for the rest of your life, about a third of the time, that’s going to happen to you and two-thirds of the time it isn’t. And so, play the odds, just invest when you have the money. And over the long run, that’s going to work out very well for you.
Dr. Jim Dahle:
Otherwise, the only way to answer your question, if now is a good time to invest is to have a functioning crystal ball and nobody has it. And that applies whether you’re investing in stocks, bonds, real estate, cryptocurrency, whatever. Without a functioning crystal ball, you need a long-term systematic investing plan. That’s really the only way that you can really decide when a good time is.
Dr. Peter Kim:
Yeah. To give you a little perspective, I have friends that have been sitting out of the real estate investing market for last five years. They got tips from their friends back in 2015, 2016 that that was the height of the bubble. I remember that people thought this is crazy. This is unbelievable. The same thing with stocks, I’m sure. 2015, 2016, this is it. It’s going down. So, people are just holding outside the market. And so, in the last five years, I have friends who are still waiting on the sidelines and now they can’t sleep at night because they can’t figure out when to get in now at this point.

Dr. Jim Dahle:
Yeah. It turns out market timing is hard. You got to write twice. You got to know when to get out and when to get in.
Dr. Peter Kim:
Yeah. So, I’m still investing. I forgot a part of the question. It was like what exactly in real estate I’m investing in. I still am preferential to multifamily apartments. It’s something I understand well. It’s something I’ve spent time learning how to properly do the due diligence for, and how to vet those things too. Because I feel like that is a sector that’s not going away anytime soon.
Dr. Jim Dahle:
Yeah. People are going to need a place to live. For sure. Even if they lose their job, they still need a place to live.
Dr. Peter Kim:
Exactly. Office and retail. I feel like there’s just so much shift going on there. And I think you have to be a little bit more sophisticated in understanding where the winds of change are going and how that works. For me, I understand apartment buildings. I’ve lived in one, you’ve probably lived in one, you understand the mechanics and numbers and I don’t think that’s going anywhere. So, I feel comfortable in that realm.
Dr. Jim Dahle:
All right. So, let’s talk a little bit, this is kind of a side question about that one about starting from scratch. And it really, I think, speaks to a lot of docs, particularly docs maybe in the lower half of physician incomes that are like, “Yeah, well of course I’d like to get into that fund you’re in Dr. Dahle with $100,000 minimum. But I don’t have that kind of cash sitting around. I can’t swing that”.
Dr. Jim Dahle:
What should a doc that doesn’t have $50,000 or $100,000 to put into a real estate deal do? Are they better off sticking with the Vanguard real estate investment trust index fund until such a time that they can afford those sorts of investments? Or is its worthwhile dipping a toe into some of these crowd-funded investments that have $5,000 or $10,000 or $20,000 minimums? What do you say to the doc in that situation, Peter? Should they be patient and wait, or should they go with these investments that maybe aren’t as good, but have much lower minimums?
Dr. Peter Kim:
That’s a tough question to answer. I feel like either way, I’m going to get some angry emails. Again, the way I happen to do it was I dip my toe in with some of these smaller investments through crowdfunded platforms. I understand now I’m having gotten to know some of those crowdfunding platforms.
Dr. Peter Kim:
I think you can be lulled into a false sense of security with some of those where you’re like, “Okay, somebody must’ve seen this. Somebody must take a look at this. It’s on the platform. There are some fancy pictures there and some numbers and it kind of gets you in there”. I think you still have to learn absolutely how to do your own proper due diligence.
Dr. Peter Kim:
But in my opinion, you don’t learn to do that well until you have a little bit of skin in the game. And so, I would rather learn personally with a smaller amount of play than putting my first $100,000 investment in my first investment. So, I feel comfortable recommending when people are like, “Hey, I’m going to go into a crowdfunded real estate investment. I’m going to do it. I found this on the website. I’m allowed to go into the syndication for $10,000 because it’s all I can afford right now at this point, but it gets me in the game for real estate”.
Dr. Peter Kim:
And if they say they’ve done their due diligence, they’ve learned how to do that, I don’t think it’s a necessarily a bad thing. Again, it’s an education. They’re somewhat kind of investing in their own education. Obviously, there’s potential to do well financially, but again, the risk on the other side is not huge and severe. So, I have no problems with people going into a smaller investment for that amount. There are some great platforms out there that do allow for these types of investments. But again, you got to do your own due diligence.
Dr. Peter Kim:
When it comes to the REITs, I’m sure that can be fine too. I don’t know why, I just never got into the REITs. I’d like the private stuff at the single operator and those types of investments, but there’s nothing wrong with the ones that you’re talking about. Again, the numbers have shown, you can correct me if I’m wrong, that it correlates a lot more with the stock market.
Dr. Jim Dahle:
Yeah. Certainly, the publicly traded ones do.
Dr. Peter Kim:
Yeah. The publicly traded ones. So, when I invest in these private investments, the goal of it for me is to get that diversification, the non-correlated asset. I’m trying to collect as many of those as possible. And so, real estate and real estate private syndications tend to fit into that category. Personally, I think your first investment should be on the smaller mouth to kind of learn dip your feet in. And so, I’m okay with that personally versus waiting.
Dr. Jim Dahle:
It’s interesting, because you’re weighing two things, right? You’re trying to get non-correlation with the rest of your portfolio, but you’re also trying to get diversification. And by definition, when you’re putting all of your real estate allocation into one or two or three actual individual deals, individual properties, in a lot of ways, you’re not diversified that way. So, it’s a lot of a balancing act.
Dr. Jim Dahle:
I agree that it’s pretty tricky. And I don’t envy those who are faced with this decision of how to get started, how to ramp it up, and go from there because it’s not easy. And I think as we’ve seen with these real estate platforms, at one point there were over a hundred of them. And they’re not all going to make it long-term. They’re not all equal and some are better than others. And sometimes it takes years to determine which ones are better than others. They all claim to do at least a little bit of due diligence themselves.
Dr. Jim Dahle:
But I think over time, you’ve seen some do a better job of that than others. And so, it gets a little bit tricky choosing between those investments. The nice thing when you’re only putting in a few thousand dollars, at least you’re not putting much at risk as you sort this field out.
Dr. Jim Dahle:
All right. Our next question actually comes from The Physician Philosopher who says, “I want your thoughts on taking money out of traditional retirement vehicles to fund real estate investments. It seems to be recommended more and more in the real estate space”. What are your thoughts on that?
Dr. Peter Kim:
I’m more interested in hearing your opinion on this.
Dr. Jim Dahle:
I got a strong opinion on this. I don’t think anybody’s going to be surprised by it.
Dr. Peter Kim:
I bet you, you do. I have some friends who’ve done this and I’ve watched them do it and I’ve seen them do quite well. Again, that’s the only one, two people’s story, but I think it all depends on where you’re at and your goals and that sort of thing. Again, I’m all for diversification and I think somebody kind of lent me word that I use now quite a bit, like having intellectual humility. And so, I realized that I don’t know everything and I can’t control everything. And I think with real estate, sometimes I have a tendency to just dive in and know exactly the outcome that’ll happen with it. I know it’s not going to necessarily be the case. So, I’ve learned, and maybe it got a little bit more conservative with time is that I like to have as many hedges as possible.
Dr. Peter Kim:
And so, for me, I don’t invest a lot in the stock markets, publicly traded markets, but what I do is, I do it with my retirement accounts and I pretty much leave it there and I don’t touch it. That’s kind of like my hedge against things going poorly on the real estate side, for whatever reason. It’s not a huge portion of my portfolio. I’m probably flipped in terms of the percentages versus most people in terms of the way they invest in real estate versus stocks. Again, it’s a very, very small percentage for me, but I just leave them in there personally.
Dr. Peter Kim:
Now, if someone’s at the place where they can actually make a really clear calculation and determined that, hey, if I pulled this money out of my retirement accounts, it creates enough cashflow for me, net of fees, this kind of thing and it totally changes their life from day one, I can understand why somebody would do that. It makes sense to me. I had a friend who did that. He is 50 years old and he had been working for quite a while, had built up quite a nice retirement account. I’ve been working for one of these large institutional health corporations.
Dr. Peter Kim:
And he was sitting there and grinding away. He’s like, “Okay, I have another 5, 10 years before I hit my pension and before I can retire”. And then he looked at his numbers and he’s like, “Wait a minute. If I pulled this money out of my retirement account now, and I bought these apartment buildings that provide this cashflow, I can actually pretty much quit today and live the life I want to live”. And it was crazy. And I saw him do it. And he did it and he moved and he now travels the world with his wife and his kids and lives the life that he wants and has that whole ideal life that he actually wanted to go for.
Dr. Peter Kim:
I’m not saying that it happens with everybody, but he actually made a very smart, calculated decision in doing so. And he had a plan for it. And I think that was huge. Not just the idea that, “Hey, I’m just going to pull all this out and maybe someday do this kind of thing”. And so, I could see it going both ways. I haven’t done it personally myself, but I caution people that if you’re going to do this, make sure you have a good plan for where that goes. But again, I’m not going to tell people not to do it because I think there is potential for great gain on the other side. But I know you probably think differently.

Dr. Jim Dahle:
I don’t necessarily think differently. I actually think the way you’re doing it is how most people do it. Most people who are really into real estate, they do it like you’re doing. They use their taxable account to invest in real estate. They don’t liquidate all the retirement accounts. They just save above and beyond what fits in the retirement accounts and use that for the real estate investing.
Dr. Jim Dahle:
I’ve got a neighbor. He’s a very successful real estate investor, very successful small businessman well-paid surgeon. And that’s what he does. His retirement accounts are all full of stock and bond mutual funds and all his real estate investments are outside retirement accounts. I think that’s a very common way to do it. And I think that’s the ideal way to do it is that you are saving enough, earning enough and saving enough that you can both max out your retirement accounts however you invest that money and have something above and beyond it to invest again, in whatever you want.
Dr. Jim Dahle:
And then you can decide when you have that situation where the best place to put the investments is tax wise. Because the answer to that most of the time is that equity real estate investments ought to be in a taxable account and debt real estate investments ought to be in a tax protected account. They’re terribly tax inefficient.
Dr. Jim Dahle:
When you’re talking about a fund like a DLP lending fund. We mentioned that on the blog and the podcast recently. This is a fund that traditionally had returns in the 10%, 11%, 12% range. Great returns, right? High returns. And they’re paid out to you every year as ordinary income. It’s terribly tax inefficient. That is the worst possible situation for tax efficiency. The entire return comes to you every year as the ordinary income tax and it’s a high return. That is the ideal asset to have inside a retirement account. So, if you pull money out of your retirement accounts to invest it in real estate, you can no longer have that retirement account space to put an investment like that into.
Dr. Jim Dahle:
And so, I think that is a real mistake to lose that opportunity that you may want down the road, whether you invest in real estate, or whether you invest in stocks, whatever you invest in, you have now permanently decreased the size of that tax protected account. Because there are all these awesome benefits of a tax protected account. You don’t have to tax drag as it grows. You can just name beneficiaries so it makes a state plan easier, and it can be stretched for 10 years after it is inherited. In every state, you get massive asset protection for it if it’s inside a retirement account.

Dr. Jim Dahle:
So, retirement accounts are good and there are lots of ways you can use it to invest in real estate. Sometimes if you want to invest in private real estate, it has to be a self-directed account, whether that’s a self-directed individual 401(k) or a self-directed IRA or whatever. And so, you may have to roll over your 401(k) into an IRA in order to do that sort of a thing, but it’s not necessarily a reason to pay all those taxes during your peak earnings years plus a 10% penalty.
Dr. Jim Dahle:
All of a sudden now you’re starting with 50% of the money you had before. Whereas if you would’ve just invested it inside the retirement account, you wouldn’t have lost that and you would have an opportunity down the road to get that money out at a much lower marginal rate.
Dr. Jim Dahle:
So, I just worry when I see people saying liquidate your retirement accounts and buy index universal life insurance with it, or buy real estate with it. I just worry a lot of times these people are selling you something and they just know that this is where your money is. Your money is in your home equity, your money is in your retirement accounts. And of course, that’s where they want you to go to it so you can buy whatever they’re selling. So, I think you need to be really cautious with it.
Dr. Jim Dahle:
Is it possible to come out ahead and pay all those taxes and penalties and have the investment be so good that you still come out ahead? Yeah, it’s possible. But I think you better run those numbers and you better be really sure that it’s going to work out right for you in that perspective.
Dr. Jim Dahle:
I own lots of real estate. It’s almost all in a taxable account. I’m not anti-real estate, but I also max out my retirement accounts and try to grow as much as I can to keep that tax protected to taxable ratio as high as I possibly can make it. Because these days like you, Peter, my ratio was going the wrong direction all the time. My taxable account is becoming larger and larger every year because I’m putting more money into it than I am into my tax protected accounts.
Dr. Peter Kim:
I will tell you that I had recently a conversation with my CPA. We talked about bonus appreciation. For those that don’t know, that is something that’s like in place right now. Something that is decreasing over time. And that really allows you to front load a lot of your deductions. And that’s like a special benefit for those people, especially the real estate professional that can take advantage of that.
Dr. Peter Kim:
He did tell me that during this period right now, while you have all this massive depreciation that you can front load into your investments, that it may be smarter for you to actually take that money instead of putting in a tax deferred account, he did tell me it might be better to put it into real estate to capture all those tax benefits, especially with the real estate professional status and that you have a short window to do this, and it might make a lot of sense.
Dr. Peter Kim:
So, I think that as long as you have a plan for it, I’m not against it at all. And I think that it makes sense for some people, you just have to really run the numbers with your CPA, with yourself, be intentional. I’ve seen people borrow from their retirement accounts, so you don’t necessarily pull it out altogether, but borrow from their retirement accounts, put it towards some real estate, put that money back because they have the capital and that sort of thing. So again, I’ve seen people do this smartly. I’m not totally against it. I just want people to know. And like you mentioned, as long as you have a plan for it, I think people can be successful doing it either way.
Dr. Jim Dahle:
Yeah. When you got real estate professional status, you got bonus depreciation. Like one of the funds, I bought a year ago. I put $100,000 into the fund. My depreciation the first year was $35,000. I think I got $2,000 in income from it. And I got $35,000 in depreciation. If you can use that to offset other income or offset the cost of pulling a bunch of stuff out of your retirement account, maybe that works out.
Dr. Jim Dahle:
But that’s not the average doc investing in real estate. They’re not going to have those benefits. So, you got to really understand how it works when you start doing something that most of the time is not a good idea, which is paying a 10% penalty on retirement account withdrawals. So, you’ve got to have a plan. I agree with that.
Dr. Jim Dahle:
All right, let’s move on to something else. People want us to talk about vetting. Vetting these deals. How do you vet syndication deals? How do you do good due diligence without signing up for another course? How do you see through the conflicts of interest to some financial bloggers like you and I, who are pumping not so nice deals from real deals? Let’s talk about all of that. Let’s talk about vetting. Let’s talk about conflicts of interest. Let’s talk about due diligence. You got some thoughts in that category?
Dr. Peter Kim:
How long is this podcast, Jim?

Dr. Jim Dahle:
Yeah, I know. Exactly, exactly. It’s just a huge topic, right? You’ve got a course that is basically set up to teach people how to do due diligence, how to vet syndication deals. So, I’m not sure we can distill your hours long course into three minutes on a podcast, but why don’t you throw them a pearl or two?
Dr. Peter Kim:
Yeah. I think that just to give you the basic outline of the course, just so that I can help people with the vetting, just remember you got to vet the sponsor, you got to vet the deal. And then you’ve got to vet of course the market around it as well. And those are the three major things you have to understand before you jump into any particular deal.
Dr. Peter Kim:
But I’ve said it in pretty specific order, because I can’t get address it enough to people, the sponsor or the operator, whoever’s running that deal is the most important aspect of this whole opportunity, because anybody can put out nice numbers. A lot of times people, honestly, get fixated on the internal rate of return, IRR. They see that number. They see the cash on cash they think they’re going to get it and they just get fixated on that. And sometimes people choose the deal based on that number.
Dr. Peter Kim:
I think that is probably the one big fallacy, the one big issue that I’ve had to learn over time to get over. Because you start spending that money in your head already when you see that number. You see that 20% per year IRR. And you’re like, “Okay, that’s the one I’m going for. I’m going to get this much cashflow”.
Dr. Jim Dahle:
It must be better than the one that’s promising 16%. Right?
Dr. Peter Kim:
Exactly. So, that’s how you choose, like “I’d rather take 20% than 16%”. But what I’ve learned over time, especially when the market it is in a period like it is now where there’s some rough patches, we’ve seen it through COVID and all the different operators, and who’s been able to handle these situations well with these vacancies and with all these rent eviction moratoriums, and who’s been able to deal with all this very well. The more experienced operators and sponsors are the ones that are actually flying through this and doing quite well.
Dr. Peter Kim:
So, when I look for those people to invest in, I’m really looking for those people if I can, who have been through multiple cycles, they’ve been through the ups and downs. Because this is not the first-time people have had high markets, low markets, this kind of thing. It happens every 7, 10, 12 years, whatever it is. And so, there are operators sponsors who have been through three of these cycles and you’ve seen them change their philosophy in terms of investment or whatever their business plans to adapt to these types of things so they’re prepared for it.
Dr. Peter Kim:
During 2007, 2008, one of the biggest lessons that people learned is that and everyone knows this, your financing can come back to bite you. And so, a lot of the operators now and sponsors, if you look at their deals, they’re putting on longer term financing so that they can ride through a lot of these ups and downs. And they’re not expecting necessarily to get in and out in two, three years, depending on how the market goes.
Dr. Peter Kim:
So, I would say, look at your sponsor, get that track record. And that is the first thing to look for. And if you cannot, if they’re not being transparent with it, they’re not being willing to give and talk about it, talk about some of their mistakes and failures. I’m okay if there’s some blemishes on there. Like if I see a few mistakes in there, I actually ask them. I say, “Look, what did you learn from that? And how are you going to make sure that that doesn’t happen again in the future?”
Dr. Peter Kim:
That’s something I put a lot of weight on it. If somebody says, “Okay, this is what we’ve learned and this is what we’re doing better now”. But that is the number one thing I can address to people and that alone, I think could save you from making some pretty big mistakes in real estate.

Dr. Jim Dahle:
Yeah, I think that’s just the very best advice you can get, particularly for private real estate. You’re investing in the person, right? The biggest risk is that that person dies. I mean, that’s the biggest risk or they leave the business or whatever. In a lot of ways, that’s what you do is evaluate the person.
Dr. Jim Dahle:
A good person can save a bad deal, but a bad person can screw up a good deal. And so, you really want to get the right person in there. The difficulty comes in in that people with a lot of experience that have done this through multiple market cycles, they don’t have any trouble raising money. And so, they often put minimum investments on their funds or on their syndications of $100,000, $250,000, a million dollars more. And it gets out of what you can actually afford to invest with them.

Dr. Jim Dahle:
And so, you’re left weighing, having a less diversified portfolio and putting a bunch of money with somebody experienced against having a more diversified portfolio and spreading that money around people with less experience. And I think that’s a real dilemma and something that a lot of us struggle with in this space.
Dr. Peter Kim:
Can I tell you about my strategy though, with all that?
Dr. Jim Dahle:
Yeah, go ahead.
Dr. Peter Kim:
I kind of borrowed this from some of the people that I’ve watched who have done this for quite a while is that there are unlimited number of sponsors out there. There are new ones being formed all the time. But I think my ultimate goal is to find my 10. Like these are my 10 sponsors or operators that I’m going to basically ride live or die with. And the people that I trust and I’ve done deals with them that I can continue to double down with them. Find that 10. I figured 10 sponsors operators will give me enough opportunities in terms of the number of deals they do. Enough diversification in terms of across sponsor, geographic, all that type of thing.
Dr. Peter Kim:
But if I can find those top 10, that’s exactly where I’ll be investing most of my money in the future. The problem is it takes you time and money to figure out who those top 10 are. So that’s why I do spread it across different operators right now, as I’m learning, I’m watching how they obviously manage and operate how they report, what kind of relationship we have and whoever we get comfortable with. But that’s really what I’m trying to get it down to. And I think that’s going to be a personal decision for everybody.

Dr. Jim Dahle:
Let’s talk a little bit about conflicts of interest because you and I both have conflicts of interest when it comes to operators. What I’ve discovered over the years is that people sometimes have unrealistic expectations of advertisers. You don’t go after the New York Times because they advertised a knife. And when the knife was sent to it was dull, right? You don’t go after the New York Times.
Dr. Jim Dahle:
Advertisers are advertisers. They are people willing to give us money to put ads up on our website. So, your expectations maybe shouldn’t be that high that there’s been some serious vetting going on of everybody who buys an ad on a given website.
Dr. Jim Dahle:
For example, I had a pharmaceutical company come to me the other day or come to us the other day. I shouldn’t say me, because I’m really not handling this. Cindy does a lot of this. But they come to me and they wanted to advertise their new migraine drug. And I look at it and I’m like “When people come in to me with migraines, I give them Benadryl and some Compazine and some Toradol”. That’s probably what I give 90% of the migrainers I see in the ER. Chances are, I’m never going to prescribe this fancy new migraine drug, but it’s FDA approved.
Dr. Jim Dahle:
And I said, “You know what? We can sell them an ad if they want to buy an ad”. Is that the cheapest migraine drug out there? Almost surely it isn’t. Is it the best migraine drug out there? Almost surely it isn’t. But is it right for somebody? Probably. And are we going to take their ad money? We probably are. But you shouldn’t assume that that is White Coat Investor saying “This is the best migraine drug on the planet. And the first one you should reach for and the only one you should ever use”. So, I think we need to lower people’s expectations in some ways.
Dr. Jim Dahle:
Now, I do have recommended things on my site. Things like financial advisors, people that we vetted, they have to fill out an application. And I give you the application that they filled out to look at so you can look at the vetting that we did.
Dr. Jim Dahle:
Our insurance agents. These are people that hundreds of people, hundreds of White Coat Investors have gone through and gotten their insurance needs taken care of. And if I got a bunch of complaints about them, I made them either fix them or took them off the list. And so, some of those things we can really vet well, and there really are recommendations for us.
Dr. Jim Dahle:
But I put a big notice at the top of my real estate page that I have not vetted every one of these deals. That you should consider them introductions, not recommendations, and that the due diligence is on you. I tell them to first step in your due diligence should be learning about it here, because I literally cannot go out and walk all these properties. I literally cannot do background checks on every principal and every one of these companies. That’s got to be on you.
Dr. Jim Dahle:
And so, I’m very straightforward. When I invest in a deal, I tell my readers, particularly those on the real estate newsletter list that I’m investing in this. Or I if I’m not telling you I am, you can assume I’m not. That doesn’t necessarily mean I think it’s a bad deal. It’s just that I don’t need to put more money in real estate right now, or I don’t have the money most of the time. That’s what it is. But you shouldn’t assume that every deal you see on the White Coat Investor is going to be exactly as it was advertised. Some of that is going to fall on your shoulders.
Dr. Jim Dahle:
If you’re interested in being an accredited investor than be an accredited investor. That means you have the ability to evaluate and vet these deals on your own. And if you don’t have that ability, aside from the ability the government requires, which is the ability to lose your entire investment without it affecting your financial life. If you don’t have that ability to vet these deals, stay out of them. You don’t have to invest in this stuff. There are no called strikes in investing. You can go invest in the Vanguard REIT index fund, and have a broadly diversified, very liquid, very low-cost investment. You don’t have to invest in this stuff. But if you’re going to, be an accredited investor.
Dr. Jim Dahle:
What are your thoughts on how much expectation our readers and listeners should have as far as us vetting the deals that are advertised on our podcast or on our blog?

Dr. Peter Kim:
I do my best to vet the sponsors. Absolutely. There is some level of responsibility, and I do understand that there’s definitely value or weight that is put on these types of investments when it’s put on the site. And I think you’ve done a great job of trying to vet every single person that comes your way. And I’m sure you’ve turned way more people away than you have actually let onto your site. That’s the same way with us as well.
Dr. Peter Kim:
We understand this is a small community, and I think that this being a doctor to doctor, this type of blog and that sort of thing, we talk to doctors. And so, I think there is some level of responsibility that I think all of us do take make sure we put something on our blogs and sites and we want to make sure that obviously it is something that we can stand behind.
Dr. Peter Kim:
I’ve narrowed down my list of people that I even allow, to be honest with you, on the site. It is because I do want to feel good, at least that I’ve done my due diligence and that I feel comfortable promoting these people. Because I know in some ways that if things don’t go perfectly well, there will be some emails coming my way. So, I want to let people know that I do spend a lot of time doing due diligence. And so that’s why you don’t see much on my side, to be honest with you.

Dr. Peter Kim:
At the same time, that’s why we do have courses. That’s what we do spend the time putting all that content out there as to say, “Yes, please don’t blindly follow anything that ends up on the site or any site that you see, any blogger”. I think that makes me most nervous from all these things.
Dr. Peter Kim:
I remember one time I had somebody write me, and this is when I was anonymous. Somebody write me and basically said, this was an email I got. “I’m about to invest $50,000 in this fund that you mentioned you were investing in and I’m about to hit submit. Are you sure this is a good investment?” I was shocked. And I was like, ‘Oh my God”.
Dr. Peter Kim:
Obviously, it made me feel and understand how important it is to make sure to put good investments and put good content on the site. At the same time, I was like, “Wow, this can be very scary”. That’s why it made me even more diligent about letting people know you’ve got to understand what you’re doing, what you’re investing in. These are serious investments that make a big impact on your future. But at the same time, like I said, I try not to put anything on there that necessarily I wouldn’t invest in myself.

Dr. Jim Dahle:
All right. So, let’s talk about investments gone bad. What are some of the worst-case scenarios with these deals? So, let me tell you about one of my investments. One of my investments I bought through a crowdfunded platform. It was a $20,000 investment in a syndication. It’s an apartment complex. And it turns out that the sponsor, the operator, this person running the syndication is fraudulent. He basically ran a fraud. I don’t know that he intended to do this, but he got in a hurry and he had built this real estate empire and built it with too much leverage. And he got in trouble. The leverage caught up to him.
Dr. Jim Dahle:
And the bottom line is this particular syndication was part of this empire of his. And at the end of the day, he didn’t have the money to complete the project. It was a value-add project. And so, it stalled. And of course, we got a bunch of empty apartments now that are supposed to be getting renovated. And it sits around for a year. This was a preferred equity investment. It was supposed to pay 14% a year and paid for about a year. And then it stopped paying. And it’s been dragging on now for years.
Dr. Jim Dahle:
What am I going to get out of it? I might have a total loss. I’m not going to lose more than my initial $20,000, but I might have a total loss of that $20,000. I think a more likely outcome, and part of this is due to the platform doing a good job of putting together another deal and using that deal to actually acquire this investment back from the bank that had foreclosed on this operator, back from the bank, in order to kind of save the deal.
Dr. Jim Dahle:
I think as a result of that, I’m probably still going to have a loss on the investment, but I don’t think it’s going to be a total loss. I’ll be thrilled if I get all my principal back. There’s no way I’m getting all the interest that’s due to me back. So, that’s how investments can go bad. You can have essentially a fraudulent operator. And it goes to your point that the most important thing is the operator. And a lot of times that’s hard to assess when you’re going through a platform that puts you one step back from the operator.
Dr. Jim Dahle:
So, other deals I’ve had go bad. I’ve had another deal that was supposed to be a one-year debt deal. It was a syndication. We loan money to this person to flip a home, basically over the course of a year. And it took him longer than he thought. It took more money than he thought. He had a hard time selling it.
Dr. Jim Dahle:
At the end of the day, he made the payments all the way through and he kept paying us the interest due. But I think it was three years before I got the principal back on a one-year deal. And so, that sort of scenario is not uncommon at all in this space. That happens all the time. You got all your principal, you got all your interests, but it turned out not to be nearly as liquid as you thought it was going to be.
Dr. Jim Dahle:
So, what are some of your worst outcomes that you’ve had so far in your real estate investing career?

Dr. Peter Kim:
Yeah, that last one sounds really familiar. I have one just like that. Again, if people are watching, if they’re going to be part of your conference and I hope they’re watching it, I just lay out my three biggest mistakes. But I’m going to go into a way more detail in terms of numbers and all that stuff on that lecture.
Dr. Peter Kim:
But if I wanted to talk about some of them just like that, I had one deal where these developers got way in over their head and they put these fancy pictures of what this home that they’re going to buy and flip and turn into this amazing architectural dream in the Hills of LA with this hillside. It turns out they didn’t know how to account for this Hill and grading issue with permitting and all that stuff.

Dr. Peter Kim:
So, a project that was supposed to take 16 to 18 months, again, took over three years where they actually never even got the property built. They essentially just ended up selling it off because they couldn’t get the permits for it. Luckily the market allowed it to, the market was fine in the last, whatever it was over that three to four years. They were able to sell and they were able to give most everybody back their principal plus about a hundred bucks. I think that was like three or four years.
Dr. Peter Kim:
Obviously, I was glad I didn’t lose my money, but that money was locked up for a while. Also, there’s opportunity costs. I could have literally just left it in a savings account. It could’ve done better. And so, there’s an opportunity cost there as well. That was one of the mistakes, but again, it was a learning lesson.
Dr. Peter Kim:
Another one was where I invested in like an office kind of complex area. And it was a lot of like health complex type stuff. It was really dependent on one anchor tenant, which they thought was definitely going renew. The tenant didn’t end up renewing, just tank the whole investment there. The bank ended up taking the property back. I think it was a $10,000 deal. I lost about $4,800 on it. So, it was like a 48% loss over that period of time. So, it didn’t go great. But at the same time, it was one of the very first deals that I actually invested in. I didn’t know what I was doing. Again, one of the mistakes I’ve learned. I went into it just because it was there and I wanted to learn.
Dr. Peter Kim:
I’ll be honest with you. That deal gave me the confidence to even investing in that one, to learn more about it, invest in others. And so, if you look at it from an isolated thing, yeah, I lost money on that deal, but it helped propel me to do many other deals that were much better. I’ve learned so much from it. And to be honest with you, I think ultimately that deal, when I look at it in the scope of everything, honestly allows me to be a smarter, better investor.

Dr. Jim Dahle:
One of the things I learned from deals going bad, both on the debt and the equity side is just how important diversification still is in this space. Just like it is when you invest in stocks or bonds, diversification matters. And so, that’s why I like being in a debt real estate fund where I’ve got 70 or 80 different loans in the fund rather than two or three that I picked out myself.

Dr. Jim Dahle:
Because if one of those goes bad, I might lose a third of the money in that fund, for lack of a better word. Whereas if one or two debts go bad inside a private real estate lending fund. That’s hardly going to affect my return at all. So, diversification still matters even though you’re investing in real estate.
Dr. Jim Dahle:
All right. So, some people for rightly or wrongly, maybe mostly rightly, they view me as being a much bigger paper assets guy, a much bigger stock investor, and you being a much bigger real estate investor. And they want to know in what ways has our partnership changed how we view the investment space, if at all. Do you want to take a shot at that?
Dr. Peter Kim:
Yeah. I’ll be honest with you. When I first started this whole real estate journey and everything that I was learning, I was going to pour into it basically a hundred percent, that whole idea of pulling money out from my retirement accounts, doing all that stuff. That was going to be me. And I was just going to go a hundred percent in real estate.
Dr. Peter Kim:
I think that watching and reading your content, Leif’s content, talking about different opportunities and index funds and seeing performance and this kind of thing, the importance of diversification has just been hit, just kind of get pounded into me over time. And so, I’ve kept those investments. Again, it’s a smaller portion of my portfolio, but it’s a hedge there.
Dr. Peter Kim:
It’s something that maybe if I wasn’t in this partnership, I wasn’t around this content all the time, maybe that wouldn’t be there today. Who knows what I’d be better off? Whatever it works off, it doesn’t matter. But either way, I think the importance of diversification is something that I’ve learned. And so, I’m a bigger real estate person, but I’m not a hundred percent against paper assets like some other of my friends in real estate are. So, I think that it definitely has given me a lot more balance, kind of being partners and being around this world with you guys.
Dr. Jim Dahle:
Yeah. It’s interesting. I definitely came to investing from the mutual fund side. Without a doubt. Boglehead through and through, as far as that goes. The problem came in that I kept running into doctors and others who are like “I’ve done really well in real estate”. And they show me the numbers and they show me how they did. And I’m like, “Yeah, okay, well, that works”. That certainly is a legitimate pathway to wealth that many people have followed.
Dr. Jim Dahle:
And there are all kinds of advantages. We’ve talked a lot about depreciation today. But another advantage is the fact that it’s way easier to use leverage in a safe way in real estate than it is margin investing on stocks. It’s just not a safe way to invest, to leverage up your Game stock and hope it turns out well. Whereas, applying serious amounts of leverage to a real estate investment can be just fine.
Dr. Jim Dahle:
And so, I think I slowly and gradually came around to saying I want maybe more of my portfolio in this than I have. So, at some point, I don’t know, seven or eight years ago, I went from having 7.5% of my portfolio, which was entirely in the real estate investment trust index fund to 20% of my portfolio in real estate. And I divide it 5% still in those publicly traded REITs, 5% in private debt real estate, and 10% in private equity real estate. And I think that all occurred before we actually joined up in the WCI network.
Dr. Peter Kim:
I want to take credit for it though, Jim.
Dr. Jim Dahle:
I’m not sure I can give you credit. Certainly, I can give you credit for a lot of the relationships that I have made since. Which as you know, and as we’ve talked about on this podcast, the relationships and the sponsors, the operators themselves, matter a great deal in this space.
Dr. Jim Dahle:
And so, I don’t know. I look at it sometimes and I go, maybe I should increase the percentage of my portfolio in real estate. Maybe I should go 30% or 40%. And other times I go, maybe I should dial it back. Maybe I should only be 15% or 10%. So it’s like everything in life. You’re trying to balance your fear of missing out with your fear of loss. It’s the same way you set your stock to bond ratio.
Dr. Jim Dahle:
And I think that’s how you need to set your real estate to stock ratio. Some people are going to be very comfortable being 80% real estate and 20% stocks. And then there are people on the other end of the spectrum that are 80% stocks and 20% real estate. And I think you just got to figure out what you like and what you’re comfortable with because that entire range is reasonable.
Dr. Jim Dahle:
I would however, caution you to avoid extremes. When you’re saying you can’t make money in paper assets, the stock market is a casino. That’s just not true. And to say that all real estate investing is a second job, that you’re going to get cleaned out and all real estate investors go bankrupt. Well, that’s not true either. The truth is in the middle.
Dr. Jim Dahle:
And so, you got to figure out where in the middle you’re going to fall and find your own pathway. “There are many roads to Dublin”, Taylor Larimore likes to say. And all you got to do is pick a reasonable one and fund it adequately, and you’re going to reach your financial goals.
Dr. Jim Dahle:
All right. How long we push in here, Cindy? We got to cut this off, right? Yeah. We’re at an hour already. So, let’s quit talking, Peter. Let’s make them come to the conference, which is going on as this podcast drops. Let’s make them come to your summit if they want to hear more from us. And we’ll be back on the podcast at some time in the future, I’m sure. Any parting words for the 30,000 or 40,000 people who are going to listen to this podcast?
Dr. Peter Kim:
Yeah. I think the biggest thing for me is when I talked to so many people about this is, there is no right or wrong when it comes to all this stuff. I think the more important thing is that you take action of some sort. So, if somebody said, “Hey, I want to dip my feet in”. Great. If there’s somebody who said, “I want to start real estate by buying a 45-unit apartment building”. Go for it. I mean, I’m not against it. When people ask me that stuff, I say, go for whatever you’re comfortable with as long as you’re doing it smartly with some proper due diligence and some guidance.
Dr. Peter Kim:
The most important thing that I say is, get started, make an investment, start learning, get some skin in the game. And I think that will really help propel you to get where you want to be with your portfolio and all that stuff. So again, I’m all for it. Like I said, all of this stuff has been fun to talk about. At the same time, everyone has their own path. However, I can support anyone, in terms of providing content, resources, I’m there for you. And thanks for this opportunity to be on this, Jim.
Dr. Jim Dahle:
Awesome. So, if you want to learn more about Peter, passiveincomemd.com is the hub of everything. And he also got a great podcast out, The Passive Income MD podcast. So be sure to check that out as well, and we’ll get him on in the future. Thanks for your time, Peter.
Dr. Peter Kim:
All right. Thank you.
Dr. Jim Dahle:
I hope you enjoyed that podcast with Peter. If you are interested in his summit later this month, you can sign up for that at whitecoatinvestor.com/summit. It should be a lot of fun. I’m going to be doing my interview with them live. So hopefully I don’t say anything too stupid. But most of it I think is prerecorded. I think five or six of us are going to do it live during that summit. But check that out as well.
Dr. Jim Dahle:
Shopping for disability insurance is complicated enough. If you are wondering if you are getting the right coverage, unbiased advice and the best prices and discounts, it’s no secret that you might be overwhelmed.
Dr. Jim Dahle:
Let’s get you less overwhelmed. Go to Pattern. Pattern knows doctors have more important things to do than spend hours sorting through numerous insurance options. Thousands of White Coat Investors have gone through Pattern to get their disability insurance.
Dr. Jim Dahle:
Their online process is simple. You request your quotes online. Then you compare your options and ask any questions you have. And then you apply risk-free with them. You want to be confident you have the right policy at the right price. So, request your quotes with Pattern at whitecoatinvestor.com/patternpodcast.
Dr. Jim Dahle:
Okay, thanks for those of you who are leaving us a five-star review and telling your friends about the podcast. The most recent one comes in from Jesus, who says, “Amazing. Even for college students. I absolutely love the pod!!! Although I will start medical school in the next year and am years away from making any real money, it’s so inspiring and so helpful to listen to all the incredible interviews and so much reasonable and practical fiscal advice. Always great to get a head start on thinking about finances and I opened a ROTH IRA to put a little even month because of the podcast. So thankful for such an incredible resource and the WCI community as a whole!”
Dr. Jim Dahle:
So, he’s thanking me and he’s thanking you. Thanks for being part of our community.
Dr. Jim Dahle:
Keep your head up, your shoulders back. You’ve got this and we can help. We’ll see you next time on the White Coat Investor podcast.

Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.

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