White Coat Investor Podcast - Milestones to Millionaire #208 Episode Title: PM&R Resident Gets Back to Broke and Finance 101: Turning Your Home into a Rental Property
Release Date: February 3, 2025
Host: Dr. Jim Dahle

Overview

In Episode #208 of the White Coat Investor Podcast, Dr. Jim Dahle engages in an insightful conversation with Greg, a third-year Physical Medicine & Rehabilitation (PM&R) resident from upstate New York. Greg shares his impressive journey to achieving financial independence early in his medical career, earning the milestone of being "back to broke." Additionally, Dr. Dahle delves into the complexities of converting a primary residence into a rental property, offering valuable financial strategies for healthcare professionals.

Guest Introduction: Greg's Financial Journey

[05:57]
Dr. Dahle: "Our guest today on the Milestones to Millionaire podcast is Greg. Greg, welcome to the podcast."
Greg: "Thanks so much for having me."

Greg's Background:

• Location: Upstate New York
• Position: Third-year PM&R Resident
• Financial Milestone: Achieving "back to broke" status during residency

Deep Dive into Greg's Finances

Assets and Liabilities

[06:05]
Dr. Dahle: "Tell us about the milestone."
Greg: "I recently made it back to broke, which is pretty exciting for me and exciting to be here today."

Assets Breakdown:

• Total Assets: $185,000
  • Fiance's Retirement Account: $29,000
  • Greg's Employer Retirement Account: $33,000
  • Greg's Roth IRA: $27,000
  • Taxable Account: ~$9,000
  • High-Yield Savings Account: $57,000
  • Additional Savings: $25,000

Liabilities:

• Student Loans: $135,000
  • Strategy to Minimize Debt: Utilized parental support and a 529 plan to cover undergrad and initial medical school tuition, limiting student loan accumulation to $135,000.

[10:11]
Dr. Dahle: "A shout out to them. Well done, mom and dad."

Income and Savings Strategy

[14:30]
Greg: "Through my institution, it allows me to see what percent of my paycheck goes into my university, Roth 403, and that was at about 30%. ... I'm paying rent to my parents, which keeps my living costs low."

Savings Rate:

• Approximately 30% of his salary is directed towards savings and investments, enabled by a low cost of living situation.

Financial Management and Budgeting

[19:22]
Greg: "I love YNAB because the rule is to give every dollar a job. If I get fifteen hundred dollars, I assign that into different categories based on what I know I'll need to pay for."

Tools Used:

• YNAB (You Need A Budget): Facilitates disciplined budgeting by allocating every dollar to specific categories, ensuring comprehensive financial planning.

Secrets to Success

[20:39]
Greg: "Educating yourself early on is huge. Listening to this podcast, I read your book, and then just being conscious about how you're spending your money."

Key Factors:

• Early Education: Leveraging resources like the White Coat Investor podcast and literature to build financial literacy.
• Conscious Spending: Maintaining frugality and being mindful of expenditures to prevent lifestyle inflation.
• Maximizing Savings: Continually increasing savings rates even as income grows, especially critical during the transition to attending physician roles.

Future Financial Goals

[21:44]
Greg: "I'm hoping to pay off my loans pretty aggressively as soon as I get out of fellowship and get my attending job. ... Five years from now, I hope to have paid off my student loans."

Objectives:

• Aggressive Debt Repayment: Targeting the elimination of student loans within five years post-fellowship.
• Strategic Use of Income: Leveraging his fiance's income to support lifestyle while allocating his increased earnings towards debt reduction and potential mortgage investments.

Host’s Segment: Turning Your Home into a Rental Property

[22:43]
Dr. Dahle: "I promised you we're going to talk a little bit about mortgages, particularly when you want to turn the place you're living in into a rental property."

Key Points Discussed:

1. Assessing Intentions:

   • Question 1: Do you want to engage in direct real estate investments?
   • Question 2: Is your current residence suitable and financially viable as a rental property?

2. Financial Considerations:

   • Closing Costs: Retaining your current mortgage avoids new closing costs, which can be significant (5-10% of property value).
   • Mortgage Rates: Existing low mortgage rates (e.g., 3.5%) are advantageous compared to current higher rates (e.g., 6.5%).

3. Loan Agreement Compliance:

   • Contract Review: Ensure your mortgage allows for conversion to a rental property without penalties.
   • Possible Refinancing: If required by the lender, consider refinancing options to accommodate the change.

4. Tax Implications:

   • Capital Gains Exclusion: To qualify for tax exclusion when selling, maintain owner-occupied status for at least two of the last five years.
   • Depreciation Recapture: Be aware that depreciation taken on the property will be subject to recapture upon sale.

5. Real Estate Strategy:

   • Investment Mindset: Evaluate properties based on rental income potential rather than personal preference for living space aesthetics.
   • Long-Term Goals: Decide whether to hold the property as part of a broader real estate portfolio.

[29:00]
Dr. Dahle: "Real estate can be a great way to build wealth if you're deliberate and smart about it. But always align it with your financial goals and willingness to manage rental properties."

Conclusion and Key Takeaways

[32:03]
Dr. Dahle: "This episode has been sponsored by Weatherby Healthcare... Another great episode of the Milestones to Millionaire podcast. Keep your head up, shoulders back. We'll see you next time on the podcast."

Final Thoughts:

• Financial Independence is Achievable Early: Greg's experience underscores that with strategic planning and disciplined saving, financial milestones can be reached even during residency.
• Real Estate as a Wealth-Building Tool: Converting a primary residence to a rental property requires careful consideration of financial implications, loan agreements, and long-term investment goals.
• Continuous Education and Planning: Staying informed through resources like the White Coat Investor podcast and applying financial principles consistently are crucial for sustained financial health.

Notable Quotes

• Greg on Savings Strategy:
  [14:30] "I'm paying rent to my parents, which keeps my living costs low."

• Greg on Budgeting:
  [19:22] "I love YNAB because the rule is to give every dollar a job."

• Greg on Financial Success:
  [20:39] "Educating yourself early on is huge. Listening to this podcast, I read your book, and then just being conscious about how you're spending your money."

• Dr. Dahle on Real Estate Investment:
  [29:00] "Real estate can be a great way to build wealth if you're deliberate and smart about it."

Additional Resources

• Sign Up for White Coat Investor Webinars: whitecoatinvestor.com/studentwebinar
• Weatherby Healthcare: whitecoatinvestor.com/Weatherby
• You Need A Budget (YNAB): youneedabudget.com

Disclaimer: The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for entertainment and informational purposes only and should not be considered professional or personalized financial advice. Consult appropriate professionals for advice tailored to your situation.