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White Coat Investor Podcast
WCI #404: Real Estate, the National Debt and the Financial Challenges of Building a Practice
01:02:04
Today we are answering a few real estate questions starting with one about a 1031 exchange and then one about how to determine what qualifies as a "primary home." We then get to hear from our friend Jim Sheils at SI Homes who gives us an update on...
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- [00:00]
Jim Dahle
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. This is White Coat Investor podcast number 404. Today's episode is brought to you by SoFi. Helping medical professionals like US bank borrow and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts as well as an investment platform, financial planning and student loan refinancing, featuring an exclusive rate discount for medical professionals and $100 a month payments for residents. Check out all that Sofi offers@WhiteCodeInvestor.com Sofi loans originated by Sofi Bank NA NMLS 696891 advisory services by Sofi Wealth LLC. The brokerage product is offered by Sofi Securities LLC member Finra SIPC member investing comes with risk, including risk of loss. Additional terms and conditions may apply. All right, welcome back to the podcast. We're recording this on January 22nd. It's supposed to run in like a week, so maybe we're getting a little behind. We better start getting ahead. We're going to conference here soon next month. Looking forward to hopefully seeing a bunch of you there. Before we get into our content today, which is primarily driven by you and your questions, I wanted to talk for just a few minutes about the topic of financial advisors. I cannot believe how much misunderstanding there is out there about how the financial advisory world works. Okay, so let me just go over it. A very brief overview. Okay? There's basically three categories of people who call themselves financial advisors. The first one is what I call reps representatives. Right? These are people who sell loaded mutual funds or commissioned mutual funds. They sell insurance, et cetera. They're representatives of a company and they charge commissions. They are paid via the commissions on the products they sell you. They are product salespeople masquerading as financial advisors. Okay, there's the representatives. The next category is kind of a blend category. They typically call themselves fee based advisors. And lots of people make the mistake. They think fee based is the same as fee only it is not. A fee based advisor wears two hats. They are a representative and they charge you fees. And so you're paying through commissions and you're paying fees. The third major category is fee only, meaning they're just paying you. You're just paying them fees for their service and their advice. Okay, but there's lots of different ways to charge those fees. Historically, the most common One is what's called an asset under management fee. Okay. Basically you're paying a percentage of the assets they're managing to them each year. So if you have $600,000 in assets and you're paying them 1% a year, you're paying them $6,000 a year. And they'll typically subtract those from your accounts and never talk to you again. About. That's the downside of is this happens in the, in the scenery in the background. And you may not notice what you're paying for fees. And you may not notice that you're paying the same percentage when you have $6 million as you were when you had $600,000. Might not be the best price if you're doing that. Of course, the other categories include a subscription model where you pay something to the advisor every month, every quarter, every year, et cetera. Another possibility is kind of a flat fee, like you're paying them for a service to help you put together a financial plan. You pay them 2,000 or three or $4,000 and you walk away with a financial plan and no long term relationship. That's a flat fee. There are also hourly fees. Some advisors work on an hourly basis and you might be surprised how high that hourly fee is. It's often higher than what you earn as a doctor, seeing patients and taking care of people. It's not unusual for those fees to be $300, $400, $500, $600 an hour when you're paying hourly fees. All right, so those are the big categories. Representatives, the fee based blend and fee only. Now, somehow along the way, people have gotten confused and blended together representatives with fee only advisors that charge AUM fees. And they both lumped into this category of bad financial advisors. Well, they're bad for two different reasons, right? These are my two least favorite ways to pay for financial advice. But one of them is dramatically worse than the other. The problem with taking advice from a representative is you're getting bad advice. It's conflicted advice, it's biased advice. Right? You're being told to buy some crazy universal life policy. Instead of maxing out your 401k or whatever, you're getting these crazy things. It's not real advice. It's just somebody selling stuff to you. Okay? The issue with an AUM charging advisor is not bad advice. I mean, they might be giving you bad advice. Lots of financial advisors are surprisingly uneducated, but it's not the model that's somehow causing you to get bad, bad advice. All right? The Problem with the AUM charging model is that lots of clients don't do the math. You got to do the math every year when you're being charged an AUM fee, you got to take the fee percentage and multiply it by your assets and see what you're paying. I don't care how you pay your fees to an advisor. That bothers me not in the least. If it's in the form of a subscription or a flat fee or an hourly fee or an AUM fee, I don't care, as long as you're paying a fair price. So what's the going rate right now for full service financial advisor? Somebody that's gonna help you with your financial planning. Someone that's gonna help you with asset management on an ongoing basis. The fair price these days is about five to $15,000 a year. Where do I get that from? Well, because I know a lot of good advisors and that's what they're charging. There's plenty of people charging more, don't get me wrong. But I know good advisors, plenty of them, and that's what they're charging. So that's the going rate. All right, so if your AUM fee, you got $6 million and you're paying 1% and you're paying $60,000 a year in fees, and you could be getting this for $15,000 a year, you're overpaying by 4x. That's the problem people have with AUM fees is that so many people don't do the math and end up paying way too much. It's not that the advice is bad, it's that the price isn't right. So don't be a little bit careful when you're talking about that. Right? There needs to be a little nuance inserted into the conversation. Everybody charging an AUM fee is not a bad advisor. In fact, AUM fees can be a great deal. Let's say you have $250,000, right? You're paying 1% a year. That's only 2,500 bucks. That's a steal for full service financial advice. And the advisors think, oh, I'll do these guys for cheap now and later, as their assets grow, they'll stick with me. And there's some truth to that. Clients are sticky and they expect they'll make it back later. But that's not really the best way to do it. Really. They ought to be charging relatively high rates on the first, you know, half million million dollars and then fairly low rates after that in order to make it Be a fair price comparable to what you would pay under a subscription model. Okay, but AUM charging advisors are still fee only advisors. They can be giving good advice. You just got to do the math and make sure you're not overpaying. I hope that's helpful to you. There's also a lot of people out there in the white coat investor community on investing forums, you know, the Bogleheads forums, kind of classic for this, that don't realize that there are people out there who want to need an advisor, right? Three categories of people out there. There are do it yourselfers. This is me, right? I went out there and I read the books and I asked questions on forums and I wrote my own financial plan and I followed it for the last 20 years and I'm now financially independent. I'm a do it yourselfer, right? Same kind of person that's going to watch a YouTube video and try to fix something on their car. The next category, which is probably the biggest category is the validator category. This is somebody who wants to check in with an advisor every year or two or three and just make sure they're still on track. But they're perfectly competent and perfectly willing to do all the work along the way. So when they go see an advisor, they want to be given a checklist of things to do and they go home and do it. And lots of people think they're validators. They aren't actually validators, right? If you go see an advisor and there aren't that many out there, but an advisor that serves validators and you leave after paying them a few thousand dollars and making sure your financial plan looks okay, you leave with a list of 17 things to do and you look at that list four months later and you haven't done any of them. You are not a validator. You are a delegator. You need an advisor that serves delegators working with you as a delegator and you need to be paying five to $15,000 a year for that service. That's the way it works. And then of course there are delegators that know their delegators don't like this stuff, don't like reading about it, don't like learning about it, struggle with the discipline required to manage finances going forward long term and they should get a delegator serving advisors. Luckily most advisors are set up to serve delegators, so that's not a big deal. But the do it yourselfers for some reason cannot believe the delegators exist. They don't think there's these people on the planet, they think they're just ignorant. If they just knew how much they were paying, they would quit paying. No, they know how much they're paying and they're okay with it. They don't love this stuff like you do. They're not hobbyists. They've made some big mistakes in the past and it really hurt them psychologically. They don't want to do it again. They are delegators, just like there are validators out there, okay? They exist and they're probably the majority of investors out there. So you gotta realize that's just the way it is. If you are a do it yourselfer. It's hard to believe. I know it took me a few years to really realize this and talking to a lot of people. But yes, both validators and delegators exist and they need to be served by good advisors. All right, enough on that tangent. Don't forget, by the way, we have an event coming up for the financially empowered women, the few. Okay? It's February 6th. It is live at 6pm we're going to have Julia Myers talking about mastering your money mindset, navigating financial influences for the whole family. It's going to be a great event. As usual, they have a breakout session afterward where you're in a smaller group. You can ask questions and work with others to find the answers to questions you have and get a little bit of socialization with other people. Now, most of us don't have people in our regular lives that we can talk about money with. Right? This is one of those communities where you can do that. The expectation is yes, you're willing to talk about contracts and salaries and pay and investments and insurance and how much you want to help your kids with college and whatever. All those sorts of questions that you can't talk to your normal friends about. You can come to an event like this and talk to people about. All right, the URL for that to sign up is whitecoatinvestor.com/fEW. All right, let's take one of your questions. This one's about a 1031 exchange.
- [11:14]
Tom
Hi Jim, I'm Tom from the Midwest. Thank you so much for all your effort and advice. It has been a tremendous influence for my financial well being. My question is about a 1031 exchange. I reviewed its rules. I do have a rental property in California that appreciated around $600,000. It went from 400,000 to 1 million. This asset is over half my net worth. I've owned it for 10 years and withstood the typical rental headaches. And we lived in it for two out of the past five years. So we do qualify for the $500,000 capital gains exclusion. But I'll pay around $30,000 in tax if I sell it. I relocated and renting it out. Right now I need to sell it to buy a home to live in. Alternatively, I can avoid paying the $30,000 tax by using a 1031 exchange and purchase another home to live in plus another rental property closer to me. I know I should purchase new properties and rent them all out under the 1031 rules, but who's going to? Look, my question is, is 1031 exchange worth the hassle? After all, it's not Easy to save $30,000 in tax, but I just don't know what I'm getting myself into with this 1031 exchange. Thank you so much for your advice in advance.
- [12:33]
Jim Dahle
Hey, I like this question. This is a complicated situation. For those of you who don't have the background information, you need to understand what's being asked here. Let me start with that. The first thing you need to understand is that there's an exclusion essentially when you sell your residence. When you sell your residence and it has appreciated, you actually have to pay capital gains taxes on that. A lot of people don't realize this, but there is a certain amount of gain which is basically excluded right from that tax. If you're single, it's $250,000 in gain. If you're married, it's $500,000 in gain. So if you swap houses, you sell a house you've been in seven or eight years and it appreciated $180,000, no problem. You sell it, you go to the new one, there's no taxes due. That is not a taxable transaction. But given how much home prices have appreciated in the past, and this exclusion amount, this 250, 500,000 is not indexed to inflation, much less indexed to housing prices. You can really get burned in a lot of areas of the country, not just high cost of living areas like California. It doesn't take that much to have had your house appreciate over those time periods. This is one reason why maybe a lot of us ought to be keeping track of money we put into our houses for renovations and stuff that can be added to your basis, and you pay less tax when you sell it. So that's one thing to keep in mind. And the rule is, basically, it's your residence if you've lived in it for two of the last five years. So if you moved out three years ago and have rented it out the last three years, you're still in range of being able to score that exclusion amount. But if you keep it any longer than three years now you gotta pay capital gains taxes when you sell, unless you go move back into it for a little while. So use that rule to your advantage. You know, if you're thinking about selling a rental property, you can move in there for two years. If you're thinking about turning a residence into a rental property, maybe you only want to do it for a couple of years. So you can still take advantage of this rule. But that's an important rule to understand. The other rule to understand is what is a 1031 exchange? Basically, the way real estate laws are written in this country in tax laws, is that if you exchange a property for another similar property, and when I say similar, you wouldn't believe how wide that range is of what is considered similar. You don't have to pay taxes on it now. You have to identify that property within a certain period of time. You have to complete the transaction within a certain period of time. I think it's six months in order to qualify for this exchange and not have to pay taxes on the sale of the first one. But basically you can do the monopoly thing, right? You buy a small house, you exchange it for a bigger house, you exchange it for a duplex, you exchange it for a quadruple quadplex, you exchange it for a small apartment building. And so as you go along, you're depreciating these properties as an investor and you're never having that depreciation recaptured and you're never paying capital gains taxes. So you buy, you depreciate, you exchange, you depreciate, you exchange, you depreciate, you exchange and eventually you die and your heirs get a step up in basis of debt. It's a very tax efficient way to invest in real estate. It does require you to be a direct real estate investor, right? You're not going to pull us off buying syndications or real estate funds, but it's very, very tax efficient. You got the hassle of being a direct real estate investor for the rest of your life, including when you're 87. But the tax breaks are pretty awesome in order to do that. So that's what this question is all about. It's all about, well, I've got a house I lived in for a while and I could get an exclusion on it, or I could exchange it and turn it into a rental property and all this stuff. Well, the first thing you gotta decide sitting in this situation is to not let the tax tail wag the investment dog. Okay? A $30,000 tax bill should not be what makes the decision of whether you want to be a direct real estate investor or do you want to do it or don't you? Right. It means you're going to be a landlord, although you can hire out a lot of those duties. It means that you've got this investment long term that's not very liquid and has its downsides. Right. Real estate investing is not all cherries and cream or peaches and cream, I guess, is the saying. Cherries and cream sounds nice too, though. So that's what you got to decide. Do you want to build a little empire of investment properties? It always seems silly to me when people just want to have one investment property. I'm like, really one? It's first time every time when you own one, right? You're never getting the systems in place that you really need to be efficient. You're not diversified. You're not getting these scale benefits by scaling up. If you got 10 properties, well, all of a sudden property managers are much more interested in you and you can get a better property manager and you can hire somebody to be your maintenance person. When you got one single family home, well, nobody's really interested in helping you, let's be honest. So there are some downsides to being too small as a direct real estate investor. And I think it makes a lot of sense if you're going to go down this route to plan to get bigger, right? To have eight properties or 10 properties or 15 doors under management or whatever. Because I think the economies of scale and other benefits are really there. Obviously the tax benefits are the same with one property or 10 properties, but there's some other benefits there in going a little bit bigger. So I think that's your first decision is do you want to do that? Do you want to have another rental property? Don't do it just because you're going to save $30,000 in taxes. I mean, just take your exclusion, take the equity out of that home and use it to buy your next home and move on with life. Lots of us do that all the time. Usually when people move from one house to another, even if there's a bridge loan involved in the middle, they're taking the equity from the old home and put it toward the new home. Otherwise you're starting over with that mortgage every time. Now, you can do that as a doc, right? You can get a doctor loan, doctor mortgage, loan with 0 to 10% down and not pay any PMI. And do that every time you buy a new house. And you can turn the old one into a rental if you want. You can start over every time. You could take that cash out and instead of turning that old house into a rental, you could take it out and invest it in an index fund too. There's nothing that says you have to pay off your mortgage, but I think most retirees are pretty happy to have no mortgage. And so that was one of our goals and we've worked toward that. And I know it's the goal of a lot of white coat investors out there. And if you don't need to take on leverage risk to reach your financial goals, maybe it's a good idea not to. So I think that's my advice for you. Figure out if you want to be a landlord and if you do, then sure, this is a great way to do it, right? An exchange works very well. You save lots of taxes on it. A 1031 is a bit more hassle than just selling and buying, right? You got to identify the property within a certain period of time. You might have to pay a few extra fees to somebody to help facilitate all of this, but it's probably worth it. Is it worth it to save $30,000? Well, I don't know. It's certainly worth it to save $100,000 or $200,000. $30,000 is probably worth it. I don't know what your time is worth exactly, but that's quite a bit of time for most doctors. So you get $30,000 back in a net fashion, net of taxes. So if you want to be a landlord, if you want to be a direct real estate investor, moving forward, you're planning to build an empire or a portfolio of properties. This isn't a terrible time to get started and you get a little $30,000 kicker to do it. But if you're like, I really don't want to be a landlord, I don't want to be a direct real estate investor, then pay your taxes and move on with life, right? $30,000 is probably not going to keep you from being financially successful in the long run. All right, our next question comes in via email. My husband and I are dentists and own our own companies. We're planning to buy a home eventually. We want to open second locations here in this town and currently live about an hour and a half away. Our plan is to currently split equ between this house and our primary home and send our three kids to School in two years when the oldest child starts kindergarten. Do you have any insight into how to classify a home as primary versus secondary and what the IRS and banks look at when determining primary versus secondary when you spend the exact same time at both homes? Well, number one, nobody spends the exact same amount of time at both homes, right? And really the way they look at this is where you're going to spend the most time, and that is the primary home. But if it's really equal or close enough that nobody's going to be able to tell it's not equal, then you look and see if there's an advantage to calling one a primary home versus the other. The main advantage is probably getting the mortgage on the second one. You probably pay more on a mortgage on a second home a little higher rate, whereas you'd get a better rate if it was a primary home. There might be asset protection concerns as well. The state these folks are moving in is a state with a big homestead exemption. Texas has one of these. Florida has one of these. Other states have big homestead exemptions as well. So you might want the most expensive home to be your primary home since that's the one that gets this extra asset protection. So there's the mortgage rate issue. There's the asset protection issue. Another consideration might be insurance costs. Right? You might have to pay more for a home that isn't your primary home. It could also be an issue of how much of your mortgage is deductible. Right? So you might want the one with a bigger mortgage to be the primary home. And there's also the capital gains exemption, right? You don't get the capital gains exemption on your primary home when you're selling your secondary home on your secondary one. All the gains are taxable, Right? But you really got to look at it a little bit more carefully. All right? The primary residence rules, according to the Internet are that if you own one home and live in it, it's going to be classified as your primary residence. But if you live in more than one home, the IRS determines your primary residence by where you spend the most time. Your legal address is listed for tax returns with the US Postal Service on your driver's license and on your voter registration card and the home that is near where you work or bank. You have recreational clubs where you're a member, other family members, homes. Okay? So could you change your voter registration and your driver's license and your bank and everything to one home even though you're not spending the maximum amount of time there and still get away with the irs, probably. My sense is nobody's looking at this all that closely. Right. If you only spend 30% of your time at one home, but you have it for all of your addresses on your tax returns and your driver's license and all that, you're probably going to get away with calling it your primary home. But I think the main rule is really where do you spend the most time? I mean, primary means primary, Right? Hope that's helpful to you. Okay, we're going to talk for a few minutes with Jim Shiels. Jim Shiels has been working with us at White Coat Investor for a long time. This company does advertise with us, if that's not completely obvious to you. So we obviously have a conflict of interest in that. Jim and his company, SI Homes, provides a lot of advertising revenue to us. But I think the content we're talking about today is worth hearing. So let's get into that interview and discuss some of those topics. Okay. I brought one of our sponsors, Jim Shields with Southern Impression Homes, onto the podcast. We're going to talk a little bit about investing in turnkey real estate, particularly new construction turnkey real estate. Jim, welcome to the podcast.
- [24:09]
Jim Shields
Thanks, Jim. Good to be back.
- [24:11]
Jim Dahle
Now, at Southern Impression Homes, you do a couple of things that's very unique among our real estate sponsors. Number one, you're not running a fund or a syndication. When people invest with you, they own a property, they own the whole thing.
- [24:24]
Jim Shields
Yes.
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Jim Dahle
And let's talk a little bit about some of the benefits of that versus investing in a fund or syndication and the control you have with that.
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Jim Shields
Absolutely. Funds and syndications are great. I invest in them, you invest in them. But owning your own rental property for me has been the most pro proven way to make long term wealth. Hopefully not only for me, but for my next generation as well. The problem with rental property, we all hear the nightmare stories, Jim, of, well, and people listening to this. They're busy in their career, their practice, and they know they should own some real estate. But I heard about a guy who bought a piece of property and man, he couldn't find the people to fix it and got a bad tenant. And all of a sudden, you know, the manager wasn't there. All these issues and problems, right. And it pulls them away from their career and actually depletes their financial resource instead of adds to it. That's kind of where the turnkey model came in, is were there professional investors that could be leveraged off of, like myself and my business partner. This started back in the 08 meltdown, where we had lots of people, a lot of people in the medical profession coming to us and saying, hey guys, we want to get involved in some of these, you know, foreclosures. How do we get involved? And it became this turnkey model. And the turnkey model, all it really is, is all the steps in owning a rental property that you might not see or are super important that investors like myself know about, we can handle for you. So when we first started doing these, you know, many years ago, Jim, people would say, well, what kind of properties are you buying? Who do you use for mortgages? Who do you use for insurance? Who fixes your properties? And so we just bring in those parts and take care of people. And that's kind of how the turnkey model is done. Instead of you finding the people to work with the right property, the mortgage financing, the insurance, the management, how to get it fixed or built, someone steps in with all of those solutions. And you want to find someone with a proven track record that can fill in all those. So instead of it being a second or third job, you're only maybe spending one to two hours a month on overseeing this rental portfolio. That again, we've seen some really great success stories for people using this model.
- [26:37]
Jim Dahle
You know, another cool thing about it, if you live in a place like I do in Salt Lake, we've talked about this before on some of the webinars we've done. You know, our affordability index, which is basically dividing the median household income into the median housing price, is not awesome in Salt Lake anymore. And people go, well, I don't know that I can afford to buy rental properties in Salt Lake. You have to put so much down to get them to cash flow and so on and so forth. But the turnkey model allows you to invest elsewhere. You don't have to invest where you can drive by the property and check on it because you got somebody else driving by the property and checking on it. And I think that's a pretty big benefit, as is the benefit of just control. Right? You decide when you sell the thing, if you sell the thing, maybe you hold onto it until you die and your heirs get a step up in basis or you can exchange it to another property. You're not at the mercy of, you know, your, your general partner in a syndication or your fund manager in a private fund. I mean, there's some real benefits to owning individual properties. And the reasons people don't want to is that 3am toilet call. And, and the turnkey model eliminates those downsides of direct property ownership. So I think that's pretty cool. But you guys do something else that's pretty unique. You're not putting people into foreclosures at this point. You're not putting them into old properties that were built in the 50s. You're putting them into new construction. You're building everything from the ground up.
- [28:01]
Jim Shields
Yes, sir.
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Jim Dahle
Tell us about that and why, why you chose to go that route.
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Jim Shields
Yeah, you know, we, I again, that was a big switch for me. I was the old dog learning a new trick. I had done rehabs for 15 years proudly with a badge on my arm. You know, I'm a rehabber, which was great. But the old properties, what we found is after a few years, the maintenance and repairs really shot up quickly. And again, I own a lot of these, so I'm like, golly, this is just too much. And for people who are really wanting to be hands off and silent, that's not a good combination. So about 10 years ago, my now building partner, who you know well, came to me and said, hey, Jim, why don't we start building our own properties from scratch instead of rehabbing old fixer uppers where you can't see all the issues and we have never turned back. It was the best decision we've ever made for us, for our clients, for scalability, for better results. You know, our maintenance and repairs, going from new construction to renovated old homes went down 70%. Our average tenant, instead of staying a little over a year, is now staying a little over three years. And it's giving our people just better products. And you've always heard me say, Jim, with new construction homes, you don't need to own a lot of these to really start to make some great gains in your financial future. You know, the older homes, again, I own them, I did a lot of them. They created wealth for me, but there was a lot more involvement, There was a lot more ups and downs. The new construction has more of a steady trajectory that people are really enjoying.
- [29:29]
Jim Dahle
Yeah, it's pretty nice to avoid all those, you know, capital costs when you, when you've got a brand new fridge and a brand new oven and a brand new water heater and a brand new roof. You know, it's going to be a few years before any of that needs to be replaced. And that really helps you to predict your cash flow, especially in those early years, you know, when you're more highly leveraged. So I think that's pretty cool. What keeps people from taking this model from going down? This turnkey model what do you think people are worried about that keeps them from choosing this method of investment?
- [30:01]
Jim Shields
You know, I think it's the war stories of people. I knew a friend that owned a rental property and it sucked them dry and they sold it at a loss and it took up so much of their time. And that's common. You got to know the, you know, the right property to buy, the right way to manage it, the right way to get it financed. And if they've had bad advice or no advice on that, that can really turn them off. Also, you know, there's a lot of rumors. Oh, I heard you can't get insurance on property in Florida anymore. I heard you can't. Cash flow Properties takes. The markets are over leveraged, like you just said about. Well, yeah, Salt Lake is over leveraged, but there's other markets. There's not. So there's a lot of people just sticking on the surface and not looking under the hood at some real facts. And I think that's cheating them. And that's not only with single family homes, but, Jim, that's also the availability now with new construction companies like us of duplexes and quads, which a lot of people don't even. Although it's residential, they don't even look at those. And those can create a really acceleration in their wealth.
- [31:04]
Jim Dahle
Yeah, very cool. So if you want to invest more with Southern Impression Homes, you can go to whitecoatinvestor.com Southern and learn more about this method of turnkey investing anywhere. You can be a direct property owner and yet avoid the hassles of direct ownership. Thank you so much, Jim, for your time on the podcast.
- [31:23]
Jim Shields
Thanks for having me, Jim.
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Jim Dahle
Okay. I hope you enjoyed that. Let's talk for a minute about a topic that I think is near and dear to the hearts of many as I record this. It's two days after Inauguration Day and lots of people are talking about politics. Lots of people are talking about, you know, the situation we're in nationally. So let's hear the speakpipe question and discuss it. Hi, Jim. I'm looking@usdebtclock.org where I see our US federal budget deficit is $2 trillion and growing. Our US national debt is $36 trillion and growing very fast. So my question is, what's going on here?
- [32:08]
Dr. Dawley
Are we screwed and what do we do about it?
- [32:12]
Jim Dahle
By the way, the US national debt has now grown by a million dollars just since I started asking this question. Help me, Jim Dali, you're my only hope. All right, a few things to help you get perspective from this sort of a thing. Number one, you're not in charge. I'm not in charge either. I'm not going to run for Congress, much less become the President or be in charge of the Federal Reserve or anything like that. You and I have no influence whatsoever on this other than we can vote. But for in many states, our vote doesn't even really count all that much for President. I mean, the President's elected by what, six, seven, eight states? The people in those states are the ones who elect our President every year, who sets an awful lot of our national policy. So don't overestimate how much you can do about anything you don't like and try not to become despondent about it. Right? It's easy to become despondent in a week when maybe your team didn't win the election. Right. And you see all the things happening. Because what happens these days when a new administration comes in, well, they cancel all the executive orders the last administration put in and put in all their own executive orders. And we do things differently for a few years and the pendulum swings back. So try not to become too despondent about it. Don't worry that, hey, we're screwed now. Okay, more perspective, things to think about. Those are big numbers, right? A million dollars while you're recording a speak pipe question, seems like a lot of money. A million dollars isn't that much money to the United States of America. It's a very small amount of money. This is a big colossus behemoth, right? It goes through a lot of money every year. Okay. I go to this usdebtclog.org, and it's got all these numbers in multiple colors ticking away and I don't even know how to interpret them all. I feel like this website needs some help. Actually. Let me reset it. Okay. It looks a little bit better now, now that I reset it. So all kinds of things here. Our U.S. national debt is at $36 trillion. Our federal spending is at $7 trillion. The federal budget deficit is at about $2 trillion. What does that mean? Well, if we were a family, very well to do family, apparently we bring in $5 trillion a year and we spend $7 trillion a year. Well, what happens when you do that? Well, you go more and more and more into debt every year. That's what happens. And most families doing that eventually go bankrupt because people stop loaning them money. Now, does that happen to the US Government? It really doesn't happen to the US Government. People keep loaning the US Government money, and often at incredible rates. It was only two or three years ago when people would loan the US government money at like 1%, 1% for 30 years. Right? It's a fantastic deal. All of you people out there who love debt, who love leverage and other people's money, if someone's going to offer you debt at 1% for 30 years, are you going to take it? You probably are, right? And no surprise, the US Government did take that. Why are people so willing to lend money to the US Government? Well, a few reasons. One, it's an economic behemoth, makes a lot of money. Not just tax revenue, this $5 trillion or whatever that comes in a year, but all the money the US Is generating. If you look at the US gross domestic product, right? Basically everything all of us are making as Americans is $27 trillion. 27 trillion, right. That's in the same neighborhood as this 36 trillion national debt. It's less than it, Right. So our current national debt is, I don't know, 1.2x our US GDP. But the point is we make a lot of money, right? And just like people will loan you a whole bunch of money because you're a doctor, people will loan the US Government a whole bunch of money because it makes a lot of money, right? The other thing the US Government has is the ability to raise its income pretty much anytime it chooses by changing its tax laws. Okay. It has the power to compel us to pay taxes or we have to go to jail so it can raise taxes anytime it wants and charges more for taxes so it can raise its income. And people see that as well, a pretty good risk when it comes to loaning money. Not to mention having a pretty strong military and a pretty strong police presence and everything to enforce these sorts of things. So people loan us money as a government and seem pretty content to do that. Now, is this a problem? Well, if you look historically, we're getting close to historical highs. As far as a ratio of the national debt to the US gdp. It's been this high before, right? Right. In around World War II, it was pretty similar ratio to this. Might have even been a little higher back then. I'd have to look at a historical chart to know for sure. So we've been here before and recovered. So I don't think this is a 100% doom and gloom type of scenario. Now, what options does the US Government have to recover from this sort of a debt? First of all, is it okay for it to have debt? It probably is, right? It's probably fine for the US Government to run a deficit. It probably is. Let's be honest with it. It's okay. It's certainly okay for it to have debt. The question is how much debt is okay for it to have? That's the question. And what can the US Government do about debt? Well, a few things. One, it could start spending less. This seems not all that likely, right. People are always wanting more money spent by the government because it helps people individually. And of course, there's corruption. And everybody wants their piece of the tax dollar. So that one's maybe the hardest one to do is cut spend. You can also raise taxes, right? This happens periodically. Usually when the pendulum swings back the other way than the way it recently swung. Tax rates tend to go up. And so with more revenue coming in, the deficit gets smaller. It can even be eliminated for a little bit there. I think during the Clinton administration, we had a surplus. We were actually making payments on the national debt. We weren't running a deficit, but for most of the last 50 or 60 or 80 years or whatever, we've been running a deficit. So that's an option. Another option is to just default on your debt. Right? The US Government hasn't done this, but states have. States have done this in the past. It's been quite a while. If you look back at some of the economic crises in. Is it crises or crises? I don't know. In the 1800s, you see some states defaulted to the United Kingdom. And so that does happen from time to time. It is an option. You can just stop paying your debts. I mean, Russia did this, right? It's really hard for them to borrow money now. But Russia did this back in the late 1990s, led to the meltdown of long term. What's it called, Long Term Capital Management. Ltcm, I think, is what it was called. Big debacle in the late 90s, but it was all triggered by Russia saying, hey, we're just not going to pay back these debts. So that's an option. The option that typically used, though is a combination or the options that are typically used is a combination of two options. The first one is to grow the economy, okay? When the economy grows, the GDP goes up and the ratio of the debt to the GDP goes down. The ratio of the deficit to the GDP goes down. Tax revenues tend to go up. And so that's one thing is you just grow. You become, you know, you make more money as an economy. And so naturally the government does fine. Now, that doesn't always happen. There's no guarantee of that happening long term. But for a long time, we've grown the economy year after year after year after year after year. Recessions are so rare that they become very distinct in our history. We look back and look at these recessions and we talk about them because they were so remarkable. Well, it's because most of the time we're growing, we're growing the economy. So that's one thing. You just grow it and then the debt doesn't matter as much. So what, you got 36 trillion. Now you've got a U.S. gDP of 100 trillion. And now the debt's hardly anything compared to that. The second thing you can do, and this also gets done regularly as well as occasionally in a more dramatic fashion, is cause inflation. Right? You can inflate your debt away. Many of you have inflated your debt away. I inflated some debt away. I took out a student loan in 1993. It was at 8%, but you actually didn't have to make payments or interest didn't accumulate while you were in college, medical school, residency, or military service. So when I got out of the military in 2010, 17 years later, I wrote a check and paid off the debt. I essentially borrowed five grand and I paid back three grand in $1993. And this is how inflation works for the US debt. As the dollar becomes worth less, it becomes easier to pay back the debt. This is especially potent when you're only paying 1 or 2 or 3% on your debt and inflation's at 2 or 3 or 9%. You know, this works very, very well. And so what will our government do about this debt? It's going to be some combination of those last two things. Growing economy, inflation. And maybe every now and then in Congress, people become a little more responsible. They'll spend a little less and raise taxes a little bit, and we'll muddle through until we can no longer muddle through. I think we're a long way from the tipping point where everything just explodes and we become Argentina. But I suppose it's always possible we can get there. So the answer is no, we're probably not screwed. And if we are, there's nothing you or I can do about it anyway other than put all your money in stuff that's not going to be hosed by inflation. Maybe you put a little more money into crypto assets, or you put a little more money into precious metals, or you buy homes in other countries, these sorts of things. And if you want to do that with some small percentage of your net worth I think that's totally reasonable, but don't get too crazy about it. We're not nearly as hosed as a lot of people would have you believe we are.
- [42:34]
Unknown Speaker
Hi everyone. Dr. Dawley asked me to give a quick little update on what is going on with the SAVE program. So just, just a little bit of background for those that are, that are a little bit newer out there. So the SAFE program is, is called Saving on a Valuable Education. It's an income driven repayment program that was introduced by the Biden administration the middle of 2023. And how it works is really, it was about 10% of your monthly take home pay is how they calculated the payments. And it was really expected to become the most cost effective repayment program out there for a lot of borrowers. Not only through a reduction, the lowest monthly payment, but also it had a very generous interest subsidy where whatever your unpaid interest was, it would be waived. So this was a very helpful program for a lot of you docs out there, especially for those that are in residency and in training or that are early career. But what happened was about a year into its life In July of 2024, there was several Republican led states that sued the SAVE program and felt that it was too generous of a repayment program. A lot of people have been calling this save legal limbo, legal forbearance, whatever you want to call it. Well, bottom line is that anybody that was in the SAVE program, and there's 8 million people, so there's a ton of people that are in the SAVE program, whether you applied for it or you were previously in the repay plan and were moved into the SAVE program. So you've been sitting in this legal limbo. Now call it, I don't know, about seven months now. Here we are in 2025. And the thing about this save forbearance is that there are no payments due and there is no interest. So pretty darn similar to Covid on that front. Right? But here's where this is so different. This forbearance time is not counting for PSLF or IDR forgiveness.
- [44:43]
Jim Dahle
Okay?
- [44:44]
Unknown Speaker
So that's problematic for a lot of you out there that are, whether you're early on in your forgiveness journey or you're at the very end and you're knocking on the door. This is troublesome because you may have been, you know, just really trying to get done with this and it's not happening. Okay? So that's a big deal. And now there, there could be some ways that you do get credit for these months. After the fact. And Dr. Dawley, him and I were talking about this the other day where he feels that they may just give credit for this time because this was a government issue that people haven't been able to make to get credit for these months. But I am still in the camp where I don't know that they're going to give you credit for these initially would like to be wrong that they, that they would. So that's something to keep in mind is that this time isn't currently counting and even if you try to make a payment, they're not going to count this right? If you're currently in another payment program such as IBR pay or icr, you are continuing to get credit for pslf.
- [45:53]
Jim Dahle
Okay.
- [45:54]
Unknown Speaker
And as far as what to do on a going forward basis, I really think there's three buckets out there for borrowers. There's those that are years and years away. You're seven years away, you're six years away, you're five years. This is a really, really long ways out. And for people that are in your camp, I'm inclined, if your monthly payment isn't going to change much, applying, leaving the save program and getting into IBR or pay, I'm inclined to apply for another payment program. So for example, if your payments are only $200 right now in residency and by applying for IBR your payment's going to go to $300. I don't think I would hit the can further down the road and I and I'd get applied for another program. And they are processing applications. After about six or seven months of not doing this, I'm now starting to see a lot of clients that had applied in the fall late last year that are now getting moved into their other IDR plan. There's also those kind of in scenario two here that are very close to pslf, you're less than a year out. I'm inclined to just hold on and wait this out a little bit. And if they do make you move back into repayment, so be it, go back into repayment again until you hit your 10 years. But you may be able to wait until you hit your 10 years and use a program that is called PSLF Buyback. That's a relatively new program that allows you to get credit for for forbearance months when you were working at a qualifying institution. Now you do need to apply for buyback when you would have reached your 10 years. Okay. So then effectively if once you would reach your 10 years, that's when you apply for buyback and then say it's six months of legal forbearance. They would make you make a payment based on whatever you would have been paying during those forbearance months. And you've seen a lot of people do it at a lump sum. And I have seen it work as well thus far.
- [47:56]
Jim Dahle
Okay.
- [47:57]
Unknown Speaker
But that could be on the chopping block in the future. And I don't know that it's going to be around for four or five, six, seven more years as that buyback program was created through the same legal means that the save program was through process. It's called administrative rulemaking. Or sometimes we see that where the administrative, excuse me, the executive branch can roll out regulations and not go through a bipartisan process like a bill needs to when it goes through Congress. And then I think there's another group of you out there that are not pursuing loan forgiveness. And it's a great idea to stay in this interest pause. There's no payments, there is no interest right now. I would think ride this out until your interest is turned on. And in the meantime, it's a great time to set aside some money in, I don't know, a high yield savings account and to prepare for that future payment. So wait this out. And then when they do on the interest, look to refinance your loans. I've had a fair amount of clients that have been able to refinance their 7 and 8% interest rate student loans from medical school down to 4, 4.5%. One client, she was going to save about $50,000 to refinance her loan. So definitely look to do that. If, if you're not doing forgiveness, stick it out. And you know, the last we've heard is that this legal forbearance is going to last until roughly the end of 2025. But I wouldn't be surprised if our new president, President Trump, finds a way to perhaps shorten this forbearance time as there's 8 million people that aren't in repayment. So please stay tuned. We'll have some more updates on that front for you. And yeah, now I will pass it back to Dr. Dali.
- [49:44]
Jim Dahle
All right, a quote of the day today comes from Chuck Noel, the coach of the Pittsburgh Steelers in the 70s. This one's for all of you out in Pennsylvania. Champions are champions, not because they do anything extraordinary, but because they do the ordinary things better than anyone else. And isn't there a lot of truth to that? Not just in sports either. Right. What are the ordinary things when it comes to personal finance, earning, saving, investing, right, buying insurance, those sorts of things. Do the ordinary things well and you'll be surprised how extraordinary your results are compared to the vast majority of the population. All right, let's take another question. This one's about finances for a new practice.
- [50:26]
Dr. Dawley
Hi Dr. Dali, I have a question regarding new practice finances. I recently opened my own practice here in Utah and we are still in what I would call the growth phase. We are currently making a profit but probably only making around $80,000 a year, but that is steadily increasing. We are currently paying ourselves with the business income as well as little from our business startup loan while living like a resident or actually less than we were in residency. I have a few questions for you. What would you prioritize regarding loans in retirement? As we make more and aren't depending on the loan for living expenses, do you think we should prioritize paying off the business loan of $200,000 at 6.5%, student loans of $300,000 around 6.5% or contribute to our retirement plans with a wife and three kids? We currently have a modest living expense budget with plans to continue our current modest lifestyle and put extra income towards these things, but are not sure where to start. My second question is regarding employing my wife. She does do a lot of the behind the scenes work, but we currently are not contributing to retirement, so an IRA isn't part of the equation. At what point in our income do you think it would make sense to have her work for free and only pay myself as to avoid paying those taxes? With mine and her income we are nowhere near the Medicare tax rate limit and I'm also not paying us enough to be able to make the transition to an S Corp to be paid via distributions as I'm not paying myself a reasonable salary for my profession. Thank you Dr. Dally and everyone at WCI for the financial literacy education which is changing my life. Because of your podcast I have gotten both term life and disability insurance and you've helped me stop making dumb decisions with my money.
- [51:53]
Jim Dahle
Okay, here's a white coat investor that is in the thick of it. You got your back against the wall, right? I love where you're at and I love your focus on it. You're asking the wrong questions though, right? It's actually not all that dissimilar from the questions lots of white coat investors have when they first start their careers, whether they're employees or they're like, ah, I only have so much money. What should I prioritize? Should I Pay off student loans or save up an emergency fund, or start saving for my kids college or retirement, or, you know, start saving up a down payment or pay extra on my mortgage, right? There's all these good things you can do with money and there's only so much money. You cannot do them all. You must prioritize. And as life goes on, if you're doing this right, you become richer every month. Every month you're richer than you were the month before, right? And you're going to look back 10 years from now and go, those are all stupid concerns, right? I don't even have any of those things I worry about anymore. And that's true. If you're moving in the right direction, I suspect you will. This is where you're going to be in a few years. But for now it feels overwhelming. You got all this stuff hanging over your head and I'm actually glad to hear the numbers are as low as you said they were. Right. Because I run into all kinds of people, dentists in particular, $500,000 in student loans, 500 or a million in practice loans, 500 or a million now in a home mortgage and boy, are they up against a wall, right? Yeah, you've got loans, but you've only got 500 total, right? You're doing way better than those guys are. But what you really have here, and I think you recognize this, but maybe we haven't put it in as stark a contrast as we need to. You have an income problem, okay? You're a doc whose spouse is working in the business and basically contributing free labor. And your income right now is like 80k. That's the problem. That is the problem. That is the only problem. Okay? Now you've made a big gamble, right? You've taken out a business loan, you've opened a practice, you've given up revenue that you could have had if you'd chosen to be somebody else's employee in the hopes and of having a higher income in the long term, right? Is this gonna pay off? Probably. If you're like most docs and you run the business well and you market yourself well and you do good clinical work, this is going to pay off, right? A year from now you're not gonna be making 80k. Two years from now you're not gonna be making only three times that, probably within five or six years, you're probably having a high six figure income. Now when you have a high six figure income, a business loan of $200,000 is nothing. You can pay it off in one year when you have a high six figure Income, a $300,000 student loan is not a big problem, right? You can pay it off in a year. You're going to be able to max out your retirement accounts and pay off all of these loans within five years. But you can't do it right Now. You've got $80,000 in income. A big chunk of what that practice is making right now is being plowed right back into the practice, right? It has to be that way for you to grow. You are in the growth phase, and I assure you, it must grow. If it doesn't grow, you're in problem. You have a problem, and you need to bail on this plan and go take an employed job. But I think it's going to grow for you. I think you're thinking about this the right way. I think you're going to do the right things and you're going to make this grow. But that's what it's all about right now. It's all about income. You're essentially a resident right now, right? And you need to get that attending income. But that's not just about finishing training now. It's also about getting the practice off the ground. Okay? Right now, this practice, if it were a plane, is doing about 110 miles an hour, three quarters of the way down the Runway, all right? You gotta get it up to 135 so that it's got enough lift to fly before you get to the end of the Runway and crash into the trees at the end of it. All right? So you've got a limited time. You don't have forever to get this practice off the ground. Five years from now, you cannot still be pulling $80,000 a year from this practice. And that's it. It's gotta be more successful than that. Or you gotta be, you know, flying a different plane because this one's not working. But I think you'll get there. Now, how do you prioritize these? It doesn't matter. It doesn't matter. Everything you do, whether you put it toward retirement or you put it toward the student loans, or you put it toward the business loan, everything you do increases your net worth, right? So it doesn't matter which one you do. If you get your income up, you can do all three of them at once, or you can prioritize one over the other. But I'll tell you what, when I start looking at guaranteed returns of 6.5%, whether that's on a student loan or business loan or whatever that student loan Right now, actually, the interest is deductible to you. It won't be when you get your income up that business loan. Obviously, the interest is deductible to you. So maybe the student loans get prioritized over the business loan. At 6.5%, I might lean a little more toward paying off debt than putting money toward retirement. But honestly, I'd probably try to do all of them if I could. Right now, though, you got to feed your family, you got to keep a roof over your head, and you got to make sure you're growing the business. So if I had a Choice between putting $10,000 into retirement this year or investing $10,000 into the business that I think will increase revenue two years from now by 100,000 a year, I'm going to put it toward the business. Right. You're investing in you. You're investing in your business, and that's probably the best investment for now. But you still got to keep all the balls in the air and keep your head above water. All right, let's talk for a few minutes about employing your spouse. As I discussed last week with Alexis, you know, employing your kids is a great deal. Employing your wife is not always a great deal. You really got to run the numbers. And in your sort of situation, I can't imagine that paying your wife is a good idea right now. I don't think it's a good idea at all. You probably need her help just to get this thing off the ground. It's all hands on deck right now, and I don't think formally employing her is really helping you to do anything right now. Just like forming an S corp right now. I mean, maybe you want to form an LLC to give you a little more business liability protection. Obviously, it doesn't help you from malpractice, but you don't need to make it an S Corp yet because you're not making enough money to really declare some of your income as a distribution. That point is probably down the road in two, three, four, five years, though, where it would make sense for you to be an S corp. And maybe at some point it would make sense to formally employ your spouse. Right? You might want to help your spouse get to 40 quarters and get Social Security. You might want to help your spouse make some more retirement plan contributions, et cetera. You've always got to weigh that against the additional payroll cost of doing that. And of course, you got to do it all correctly. You got to do the i9s and the W2s and W3s and W4s and timesheets and time cards and contracts. You got to do all that stuff, right? It might make sense down the road, but a lot of times you might be surprised how seldom it does. Lots of docs think this is the key to financial bliss. If you just employ your spouse, everything goes awesome and there's all these tax breaks for you. Well, it's not necessarily the case, so be careful with that. But I think you're going to get there. You're making progress. Your income is not going to be $80,000 in a year. It's definitely not going to be $80,000 in five years. Right? Boost that income, grow the practice, get your income up. And you'll be amazed how much more comfortable all this feels when you're making $250,000 a year, $400,000 a year, $600,000 a year, and all of a sudden life is awesome. And you have an awesome financial life. That time is coming for you. So keep your nose to the grindstone. You know, fight back like your back's against the wall. Get that plane off the ground and you can do this. As I mentioned at the top of the podcast, SoFi is helping medical professionals like U.S. bank, borrow and invest to achieve financial wellness. Whether you're a resident or close to retirement, SoFi offers medical professionals exclusive rates and services to help you get your money right. Visit their dedicated page to see all that SoFi has to offer at whitecoatinvestor.com SoFi one more time, that's whitecoatinvestor.com sofi loans originated by SoFi Bank NA NMLS 696891 Advisory Services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC, Membera Finra SIPC investing comes with risk, including risk of loss. Additional terms and conditions may apply. All right, don't Forget about the FUE event February 6th at 6pm you can sign up WhiteCodeInvestor.com FUEfew Julia Myers is going to be talking about mastering your money mindset at that event. Thanks. For those of you who are telling your friends about the white coat investor, sharing it with your trainees or your attendings or whoever, thank you so much. It really does help us spread the word and accomplish our mission. Thank you. For those who are leaving, five star reviews of the podcast. Wherever you get your podcast, it really does make a difference. A recent one came in that said, awesome, where was this when I was in college? This is a much needed resource, doctor or not to get smart with money. I thank Dr. Daly and his team for putting this together and writing the books. I have a much better grasp on money and the road to financial independence and I hope to continue growing this knowledge. Every resident and medical student needs to do this without exception. 5 stars. Thanks for that kind review. All right, we've come to the end of another great podcast. We'll meet back here in one week to learn a little bit more and have a little bit more fun. Thank you for all of you leaving us questions on the Speak pipe. You can do that whitecoatinvestor.com speakpipe we'll get your questions answered and try to help you become the financially successful person that you deserve to be. I'm a firm believer, whether you're a doctor or something else, that you're going to be better at it. If you're not worried about money all the time, you'll certainly be a better parent and a better partner in that case. So keep your head up and shoulders back. You've got this. We're here to help. See you next time on the White Coat Investor Podcast. The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only.
- [61:52]
Unknown Speaker
It should not be considered professional or personalized financial advice.
- [61:55]
Jim Dahle
You should consult the appropriate professional for.
- [61:57]
Unknown Speaker
Specific advice relating to your situation.