← White Coat Investor Podcast
White Coat Investor Podcast
WCI #420: Due Diligence on Real Estate Deals
00:47:13
Today we are answering some of your real estate questions starting with how to know if a deal is too good to be true and as well as the importance of doing thorough due diligence before investing in any real estate deal. We talk about all in one loans...
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- [00:00]
Dr. 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.
- [00:16]
This is White Coat Investor podcast 420. Today's episode is brought to us by SoFi, the folks who help you get your money right. Paying off student debt quickly and getting your finances back on track isn't easy, but that's where SoFi can help. They have exclusive low rates designed to help medical residents refinance student loans that could end up saving you thousands of dollars, helping you get out of student debt sooner. SoFi also offers the ability to lower your payments to just $100 a month while you're still in residency. If you're already out of residency, SoFi's got you covered there too. For more information, go to sofi.com whitecoatinvestor SoFi student loans are originated by SoFi Bank NA member FDIC. Additional terms and conditions apply. NMLS696,891 welcome back to the podcast. We're recording this about a month in advance. I'm recording this on April 22nd. It's going to drop on May 22nd. And so if something crazy happens in the markets in the last four weeks and I don't mention on this podcast, that's why there's been a lot of excitement so far in April and that continues into May. With all the craziness going on in Washington with tariffs, then there may very well be some huge thing that's happened over the last few weeks. But I want you to know why I'm not talking about it today. Mostly because I spent a great deal of that time in between recording this and when you heard it out of town. I've got a couple of canyoneering trips in that time period. This is that time year, the shoulder season when it's great to get to Southern Utah. I've got a trip out to Wisconsin and I'm talking to people out there about white coat investor stuff and I'm going to Turkey. So I'm pretty excited about that and should be a pretty good month. I don't know how many of these I'm going to be recording between now and when this drops, but probably another one or two. But I did think it was kind of funny that this is episode 420, right? I feel like we should be talking about marijuana stocks or something today. But none of you have left any marijuana stock questions on the Speak Pipe So we're going to be talking about real estate and some other stuff instead. Our quote of the day today comes from a Japanese proverb says money grows on the tree of persistence and I think there's a lot of truth to that if you want to get started with your money, right and your resident or fellow Tonight is the webinar as you're listening to this, not as I'm recording it, thankfully, because I'm prepared for the webinar yet. It's still a month away from me, but for you it's tonight, 6pm Mountain time. Sign up@whitecoatinvestor.com resident we're going to talk about how to have a great transition so you can hit the ground running as an attendee so you know what to do with your student loans to minimize their costs and have the right insurance protection in place. Make sure you're saving and investing your money so you can spend the rest on whatever you want guilt free and lets you get started building wealth asap. We're going to bribe you to come. We're going to bribe you just to sign up. I mean, I don't even think you have to come to win this, but we'll send, you know, even if you miss it, we'll send you a video of it and you can watch it later. We'll bribe you with some copies of the White Coat Investors resident version of the Fire your financial Advisor course. That's a 299 value and everyone who registers where the thing is automatically entered to win. So go ahead and sign up for that. Whitecoatinvestor.com resident okay, let's start with a question about too good to be true returns and real estate syndications. I think there's a lot we can say about that.
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Listener
Dear Jim, I just received an email from the White coast investor inviting us to join for a chance to get to know the Mortar group. When I looked them up, I saw that on their landing page they're targeting returns of 16 to 22% annually. That was certainly attractive, so I wanted to think a little more about it. I searched the White Coat investor for Ponzi schemes and went into don't invest in too good to be true Lessons learned from an Alleged Ponzi Ponzi scheme. I'm certainly not suggesting that the Mortar Group is a Ponzi scheme, but in this article you talk about being cautious of people promising returns greater than 16%. I'm struggling to put this all together and make a decision about how to move forward. Period. I love Your blog. I've learned a lot from your information. I'm just trying to make a prudent decision. Appreciate your opinion. Thank you very much.
- [04:35]
Dr. Jim Dahle
Okay, great question. Let's talk about generalities. Let's talk about specifics. You know, this particular question was prompted by an email from Mortar Group, maybe a webinar that we do with the Mortar Group. This is a paid advertiser of the White Coat investor, just like every specific real estate opportunity we talk about. Maybe the exception of the Vanguard Real Estate Index Fund. I haven't been able to get Vanguard to sponsor the blog yet. They're all paid advertisers. They pay us to introduce you to their company. And with some of our product lines, we can vet them pretty well. Financial advisors, we spend a lot of time vetting them, make them fill out an application. Occasionally we get a lot of complaints. Even after we've approved them. We throw them off the list and refund their money. Other things, there are so many transactions that vetting is relatively easy to do in an ongoing way. Student loan refinancing, people are treating you badly. We throw them off, off the list. Same thing with insurance agents. If they're not treating you well, they're not going to be on our list very long. Some things are much harder to vet in advance, and maybe the most difficult one is real estate investments, because a lot of these investments have holds of three to 10 years. So I can't go round trip with them 10 times and then say, oh, we're going to recommend this one to you. They don't exist anymore after they've gone round trip with 10 times because it's been 50 years. Right. And so they're much harder to bet up front. So I'm very careful, particularly those of you who know this who are on our real estate email list about real estate opportunities and real estate investing education. I'm very careful to point out these are introductions. This should be the beginning of your due diligence, not the end. So keep that in mind. Right. There's not some sort of guarantee that because you learned about a company here at White Coat Investor that any investment you ever buy from them is always going to make money. That's not always the case. Do as well as others. Some can even lose money. So keep that in mind. A few other things that I think are worth covering. 2. If you're on that email list, that real estate email list, yeah, we send out a newsletter once a month. But the point of being on that list as well is to learn about Real estate investing opportunities. Well, how do you learn about that? Well, you learn about from marketing emails, right? And we look at them before we send them out, and we try not to send anything out that's too crazy or anything. Right? Because when you're marketing, sometimes you like to point out all the good stuff stuff and none of the bad stuff. But you get a fair amount of marketing emails if you're on that newsletter list. Likewise, if you come to the webinars for a real estate investing company, I'm going to ask them questions. I'm going to make them explain some of the things that may be difficult to answer. But most of the slides they put together, they're going to point out the best things they can about their company, about the potential investment and that sort of thing. Okay, so this investment is a private real estate investment. It's a syndication, right. And the first thing you got to decide is, do you want to invest in real estate? The second thing, if the answer to that is yes is, do you want to invest in private real estate? Right. And there's some pluses and minuses of investing in private real estate versus publicly traded real estate, like a REIT index fund or something. And then after that, if you decide, yes, I do want to invest in private real estate, how do you want to invest in private real estate? Right. You can buy the house down the street and rent it out. You can buy into a syndication, like the stuff that Mortar Group offers. You can buy into a fund. The benefit of a fund is instead of owning just one apartment complex, like you might with an investment with the Mortar Group or another syndicator, you might own 10 or 15 apartment complexes. So if one of them doesn't do too well, that shouldn't sink your whole investment. So that's the benefit of using a fund rather than an individual syndication. Because if you're going to go this route and invest in individual syndications, you can't buy just one of them. All right? You've got to diversify here, Right? The same thing that is true when it comes to investing in stocks or bonds or anything else is also true with real estate. Don't put all your eggs in one basket. And that can be challenging when it comes to private real estate, because the minimum investments tend to be relatively high, right? 50 to 100, sometimes as high as $250,000. So if you cannot diversify a portfolio of real estate where the minimum investments are 50 or 100,000 or $250,000, you're not rich enough to be in this game. So if you're putting half your portfolio into a $50,000 a year investment and then that happens to be a syndication that didn't do very well and actually lost principal, you're not going to be very happy. But if you own 50 of these things and one of them doesn't do so well, that's not a big deal. So you need to be a real accredited investor to invest in these things. That means, in my view, two things. And I'm not just talking about the legal definition. Right. The legal definition is an income of $200,000 a year for each of the last two years, or $1 million in investable assets. That's the legal definition. My definition is you can evaluate the merits of this investment without the assistance of an advisor, accountant or attorney. And two, you can lose your entire investment and not have it affect your financial life in any significant way. If those aren't both true, you shouldn't be investing in anything that is an accredited investor only investment. And that includes investments into syndications via the Mortar Group. I think they're a good sponsor. They've been with us for a number of years. And if you want syndications in New York City, I think the Mortar Group is a great company to consider for that. But learning about them in one of our webinars or learning about them because they sponsored the podcast is the beginning of your due diligence, not the end. Now, if we thought they were a Ponzi scheme, we obviously wouldn't be investing with them. Now, the Ponzi schemes sometimes fool lots of people. I suppose they do. Is it possible for you to lose your entire investment with the Mortar Group? Absolutely. It is just like any other private real estate investment. And if you go out there picking individual stocks, you can lose all your money in that as well. And that's why we like the option in the stock market to go buy all of them via a low cost index fund. You cannot do that with private real estate. You can't just go buy all of it. It doesn't exist. If it did, that's probably the way I'd tell you to invest in it. So instead you have to buy individual investments if you want to be invested in that asset class. Now, Katie and I invest in that asset class. About 15% of our money is in private real estate. 10% on the equity side, 5% on the debt side. We're, we think it's worthwhile for us. Does it complicate our financial life? Yes. Does it make our taxes more complicated? Absolutely. Have the returns been good to us? Yes. All right. Now, what should you expect out of private real estate returns? Now, bear in mind, on the equity side, on the debt side, you're probably looking at 7 to 11% returns. And frankly, I think that asset class is not looked at nearly as often as it ought to be. It's not terribly tax efficient, but the returns tend to be very stable. And 7% to 11% is nothing to scoff at by any means. And your fund is in first lien position if you have to foreclose on it, well, you get the property, you sell it off and get your principal back. It's very attractive. On the equity side, obviously, if you can make 7% to 11% on the debt side, you expect to make more than that on the equity side, especially once you add a reasonable amount of leverage. So what do I expect out of equity real estate? I kind of expect something in the 10 to 15% range. That's what I expect to make. Now, is it possible to make more than that on any given syndication? Absolutely. Even one of our debt funds, a diversified. Not debt funds, an equity fund. It was a diversified equity fund, made more than 30% in a year not long ago. But they don't tell you to expect 30% every year. They tell you their target returns, 10 or 11 or 12%. And lots of these syndications are targeting 16% or 20% or 22% returns. And sometimes they get them, sometimes they don't. More often they're in the 10 or 15% range. Sometimes they make less than 10% less than you could have made even in a public real estate investment. And sometimes they lose money, especially if they're not managed very well or they got crazy about how they did debt. Sometimes they lose all your money. Sometimes they're not very good at running syndications. There's a lot of risk there. So you better make sure you're a real accredited investor before you invest with them. So will you get a 16 to 22% return out of any given investment with the Mortar Group? I have no idea. Time will tell. But I'd take a look and see what you think and make sure you can diversify not only between investments, but between operators of those investments before you get into that space. If your only investment is an index fund and one syndication, you probably didn't build your portfolio very well. All right, let's take a question about mortgages somewhat related to real estate. Hey, Dr. Dali, my name is Ray, longtime listener, first time caller, was wondering if you had Any information, thoughts or suggestions about this? All in one loan for mortgages. Been doing a little bit of research on it. Love to get your opinion. Thanks. All right, I have no idea what you're talking about. All in one loan. All right, well, let's look it up. If I Google it, I see allinoneloan.com pop up. It says it's a 30 year HELOC with an integrated sweep checking account. Okay, I know what this is. So this is a method. People have to make a little bit more money on their cash. They basically, instead of having a checking account, they have a heloc, a home equity line of credit. And so the theory is all the cash that would normally sit in your checking account is actually being used to pay down the heloc. Right. You see how this works? Instead of paying interest on the loan, your checking money actually has reduced the amount of the loan. So it's kind of a clever idea. Are there some downsides to it? Well, yeah, you got to have this HELOC and your life gets a little bit more complicated. And the way these things get sold is just life changing. It's like bank on yourself with whole life insurance. And I don't think think it's nearly as good as the marketing for these sorts of things is, but there's a number of companies out there. I don't know anything about this. All in one loan company. Who knows, Maybe they're running a Ponzi scheme. I have no idea. Probably not, because there's a number of other companies doing the same thing out there. It's not crazy. Just don't overestimate exactly how much it's going to help. If you've normally got 20 or $25,000 sitting in your checking account, well, it's basically like Your mortgage owes 20 or $25,000 less on average than it would otherwise. So what's the interest rate that? Well, 6% on $25,000 works out to be what, something like one and a half, $1,500 a year or something like that. So maybe it saves you that, but that's what we're talking about. That sort of savings is what a scheme like this could net you. And whether that's worth complicating your life for or not, I guess is up to you. But that's the way it works. Instead of pulling money out of your checking account that's earning nothing, you take money out of the HELOC and then pay interest on it while the money's out. And when the Money's back in the heloc. You're not paying interest on it. That's the idea behind it. It's all in one in that it's your mortgage and it's your checking account. Hope that's helpful. Do I do this? No, I don't, because I don't have a mortgage. Would I do it? Eh, I'd think about it. Probably not, though. I'm leaning more towards simplicity in my life all the time. This isn't going to be the thing that gets you rich, right? What gets you rich is by making a whole bunch of money, carving out a big chunk of it, investing it in some reasonable way, and giving it some time. You don't get rich by playing games with taking out 0% credit card loans and rolling it to a new one 15 months later, or doing all in one mortgage loan for your mortgage. These little games maybe move the needle a little bit. It's like sign up bonuses for moving money between brokerage accounts. At a certain point. I hope most White Coat investors kind of grow out of doing things like this. All right, so let's talk a little bit with one of the folks that we work with in real estate. I'm gonna bring her on the line and introduce her. My guest on the White Coat Investor podcast today is Elaine Stoggeberg, a physician and also the founder and principal of Black Swan Real Estate. Welcome to the podcast, Elaine.
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Elaine Stoggeberg
Thank you for having me today.
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Dr. Jim Dahle
You quickly in your career decided that the main way you were going to be investing your money was real estate. What advantages of real estate did you find most enticing at that point?
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Elaine Stoggeberg
Yeah, that's an excellent question. When I think about real estate, what I really like about real estate is all of the different wealth drivers that are available. Available. The first one is cash flow. So that's essentially all of the income from that property minus all of the expenses. And how much is left over each month. The next is debt pay down. So as that mortgage gets paid down each month, that increases the equity in the property, which grows the investor's wealth. There's both market appreciation, which is how that property grows in value over time, and then also forced appreciation, which means an investor can acquire a property and improve its value through either physical renovations or management improvements to force that property to grow in value. Those are the four wealth drivers of real estate. And there's few other asset classes where you can get so many different types of investment return as there are in real estate. And then real estate is also very taxed advantage. So The IRS encourages people to create housing and they do so by writing the tax code such that dollars that are generated through real estate investment are tax advantaged. So you have these multiple wealth drivers in real estate. You have big tax advantages and kind of all of those things combined. As I was thinking about growing our own family's wealth, real estate was a clear choice.
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Dr. Jim Dahle
Yeah. Now your firm is unique in a lot of ways. Black Swan Real Estate. It's unique in that it's physician owned. It's unique in that the majority of your investors are also physician, approximately 80% of those. And it's somewhat unique in that a big chunk of the properties you invest in are surrounding the Mayo Clinic in Rochester, Minnesota, and in that way have their fortunes somewhat tied to the Mayo Clinic. Tell our listeners a little bit about what's going on up there in Rochester because it's pretty unique and I think it's worth hearing about.
- [19:24]
Elaine Stoggeberg
Yeah. So I had the good fortune of training in my psychiatry residency at Mayo and just really came to love that organization and their values and more importantly, their vision. So what has been happening in Rochester over the last about 10 years is something called the Destination Medical Center Initiative. It's the largest ever public private partnership in the state of Minnesota and the largest per capita spend on infrastructure anywhere in the entire country, which is saying a lot for a relatively small town in the Midwest. Rochester is about 150, 160,000 people. And the Destination Medical Center Initiative is exactly that. Mayo Clinic wants to be the destination medical center of the entire world. And so it's seeking to grow the population of Rochester, grow other ancillary services and adjacent opportunities, things like tech and biotech and pharma and research and other things that help to support the operations of Mayo and to grow the population so that Mayo can grow its workforce. And then about a year ago, Mayo announced their next big strategic project, which is called the Bold Forward Unbound. And it's a $5 billion expansion where Mayo is creating the hospital of the future. And so we've strategically positioned our portfolio. Five of our apartment buildings are directly across the street from where the hospital of the future will sit in about five years. The construction, fencing and everything is already up. The cranes are there, you know, drilling and digging. And so we're really excited about Mayo, about its near term future over the next five to 10 years, as the hospital of the future is built, its long term vision over the next several decades in this community and have just enjoyed living here and being trained here and now being the Largest housing provider in Rochester in our portfolio.
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Dr. Jim Dahle
Yeah. Awesome. Another unique thing about Black Swan is you have taken an approach that I love. Because. Because it capitalizes on the biggest tax benefit of real estate, which is when you own it for a long time. And most passive real estate opportunities are 3, 5, 7, maybe 10 if you're lucky. Your holds. But in your legacy funds, your goal is to actually hold a property for 20 or 25 years. And that's pretty unique. Why did you decide to take that approach?
- [21:53]
Elaine Stoggeberg
So when I think about real estate, my husband and I kind of joke, you know, the name of our company is Black Swan Real Estate. And that was our biggest mistake. We should have named it Golden Goose Real Estate. And we really think of our buildings whether it's a single family home or a large apartment community. You know, our primary question is how can we create a golden goose? How can we acquire something, Do a value add plan through physical renovations and management improvements, go to the bank, get a cash out, refi with that new increased value on that property, return all of that capital to investors so there's no capital left in the deal because we've grown the value of the property and then hold that indefinitely and benefit from the cash flow from the debt, pay down from market appreciation, if there's opportunity to do another round of renovation, an additional round of forced appreciation, and then exactly like you said, to hold on to those tax advantages. So depreciation is incredibly powerful in creating tax efficiency in people's income. But depreciation has to be recaptured at the time of sale. And so investors can kind of get on this like, hamster wheel of getting depreciation and then recapturing it kind of over and over. And in our model, we think, how can we create a portfolio where all of these properties are generating the wealth drivers of real estate? We're holding on to those tax advantages for as long as possible. Holding on to that real estate. I love to say, like, everyone is always so jealous of the person down the street that's owned a property for 30 years and bought it for what seems like pennies. Like, I wish I had bought that proper. Well, that's what we do is we acquire those properties and then hold them for a long time to benefit from all of those wealth drivers of real estate over the long term.
- [23:34]
Dr. Jim Dahle
Yeah. Now, for those who are not quite comfortable committing to a 20 or 25 year hold, you also have the Secure Freedom fund, which really only it doesn't require you to leave your money in there for a year, but you do Lose your earnings if you don't leave your money in there at least a year. But that's dramatically more liquid for those who are concerned about that, that liquidity.
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Elaine Stoggeberg
Yep, yep, exactly that. So we created our Secure Freedom Fund largely in a way to be different from our legacy funds. So our legacy fund, the minimum investment is 100,000. In the Secure Freedom Fund, it's 25,000. The type of return is a variable rate of return in our legacy fund. In our Secure Freedom Fund, It's a fixed 10% rate of return. The Secure, I'm sorry, the legacy funds are a long term wealth building opportunity. The Secure Freedom Fund is kind of more similar to say like a CD where you, you want to have that capital in for a relatively long period of time, but you have optionality. So investors can add to their investment over time. They can take away from their investment, they can request a redemption from the fund altogether. They can request that their returns be paid out on a monthly distribution. They can request that their returns be compounded and we compound those monthly. So the Secure Freedom Fund in a lot of ways is kind of a choose your own adventure and it's a way for investors to invest a smaller amount if that's what makes sense for them financially to become more acquainted with our company over time and to have more control over their liquidity. So the Legacy fund and the Secure Freedom Fund, they both invest in the same types of properties, which is value add, real estate that's held for a long time, but the return structure is different so that investors can use their dollars however most makes sense for them. We have plenty of investors that do both.
- [25:22]
Dr. Jim Dahle
Right.
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Elaine Stoggeberg
They'll kind of put some of their dollars into that longer term wealth bucket in the Legacy fund and then keep some of their dollars in the Secure Freedom Fund so that they have more liquidity, more optionality, and they have that fixed rate of return that they can plan around.
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Dr. Jim Dahle
Now Black Swan also chose to use a little bit different fee model in that they don't charge fees. Essentially if the investors don't make money, you're never going to make any money.
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Elaine Stoggeberg
Correct.
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Dr. Jim Dahle
Instead of charging fees, you've elected maybe a little bit larger percentage of future returns from successful investments, but with no fees along the way to align interest. Why did you decide to go that no fee route?
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Elaine Stoggeberg
So as we were looking at private equity and we really saw general partner fees and things like prefs and waterfalls and hurdles and catch up prefs, it really seemed like there was just a lot of obfuscation in the industry that really was meant to protect the general partners, was not really designed, in our opinion, to protect the limited partners. And we said, you know, intuitively, as we were building our own portfolio, we make money off of the profitability of those properties. That's it. Plain and simple. And that we should carry that ethos into our private equity funds. We should make money the way our investors make money, which is on the profitability of the properties. And we should only profit after our investors profit. So we have no general partner level fees whatsoever. We don't have a capital event fee, an asset management fee, a loan recourse fee, on and on and on. Because we think that humans are. Humans have behavior, right? I'm a psychiatrist, right? So humans do behavior based on incentives. And what we don't want is to make and make decisions in our investments that are based on fee income, right? Oh, if we make this decision, we can earn this fee instead. We want to be incentivized to make decisions of how can we make these properties as profitable as possible and then split that with our investors, and that that alignment of incentives is really what drives our company. We think it's the right thing to do. And it's our hope that as people see our model, more private equity firms, you know, think about doing this model. We still profit, right? In our legacy funds, there's a 5050 split after a full return of capital to our investors. In our Secure Freedom fund, any return above and beyond that 10% return that goes out to investors is our profit. But we profit after investors, and we only profit the same way as investors, which prevents a situation like a general partner can, say, earn fees for, say, acquisition and loan recourse. The deal goes completely south. All of investor capital is lost and investors lose their capital, but the general partner has still walked away with hundreds of thousands or even millions of dollars in fees. That's completely imposs.
- [28:11]
Dr. Jim Dahle
Possible.
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Elaine Stoggeberg
In our structure, our investors come first, and then we share in the profits after that.
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Dr. Jim Dahle
All right, well, thank you for your time and for coming on the podcast. Anybody interested in learning more about Black Swan, you can go to whitecoatinvestor.com blackswan and learn more about the opportunities to do private passive real estate investing through them. Thank you so much.
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Elaine Stoggeberg
Thank you for having me today.
- [28:35]
Dr. Jim Dahle
Okay. I hope you enjoyed that interview. It's always fun. Talk with them and let you get to know them a little bit more personally. It's interesting, we had a question earlier on about one of our advertisers about Mortar, and obviously that was an introduction to another one of our advertisers that if you're interested in that sort of an investment, we think you ought to start your due diligence there and look into it a little bit more. Okay, next question comes in via email. And this was in response to a blog post I had about how to do real estate investing correctly. I think it was seven Ways to do it wrong is what the post started with. Of course it's a little bit clickbaity because I want you to actually read it. Clickbait is a compliment around here, right? If we can get more people to read our stuff and become more financially literate, that's a good thing, not a bad thing. But this email said I read your article about real estate investing done right. As a Muslim, my issue is that I cannot invest in real estate syndications unless I take on leverage or a mortgage, which I would like to avoid. The passive income options listed on your website all involve taking leverage. Is there any real estate syndication or website that does all cash deals? I have yet to find one. If not, what do you suggest? Just stay invested in the stock market long term versus trying to find some house on cash and try to rent it out myself, which can be a lot of hassle. All right, good question. We don't have a real estate advertiser that does private funds or syndications that are Shariah compliant in the way that most people view Shariah compliance. I'm sorry, I don't know. There's one out there that does that. Everyone I've ever seen uses some leverage. You can learn more about this by going to whitecoatinvestor.com halal investing and I've got a whole long post about Islamic investing and what that means and how it's different for some people and other people and what some of your possible options may be if you wish to invest in a Shariah compliant way. But if you want to invest in real estate in a Sharia compliant way, that basically means that you either need a mortgage substitute. And that post talks about some mortgage substitutes that some people think are okay, or just buy it with all cash. That's totally an option. You can just build a real estate empire with all cash deals. You save up the whole price of the property you want to buy and then you buy it. And in fact, you could do that with at least one of our sponsors, right? We have a turnkey company called Southern Impressions that will help you be a direct investor of a turnkey property. By turnkey, it means you don't have to do anything. I could live here in Utah, I could buy this place in Florida without ever going to see it. They would build the house to rent, they would put the renter in there, they would manage it for me. If I ever wanted to sell it, they would sell it for me. And yes, obviously I pay them some, some fees to do that. But I could do that with all cash. You don't have to take out a mortgage to do that. That would be one option. So you can check out our real estate investing partners, our advertisers there@whitecoatinvestor.com under the tabs there at the top and check that out. But that would be the most passive way to do a Sharia compliant real estate investment would be an all cash deal, would be a turnkey company. So that's probably what I'd check out if you really want to invest in real estate. But there's a lot that goes into Sharia compliant or halal investing. Because bear in mind, a whole lot of the companies in The S&P 500 have debt, right? And you've gotta be okay with that if you're going to invest in them. Or else you got to use a Sharia compliant mutual fund that doesn't invest in any companies that have debt. And the more you do that sort of thing, the more actively managed it becomes, the more expensive it tends to become and the lower your returns tend to be. So I'd start with that blog post. It's whitecodeinvestor.com halal-investing to learn more. All right, let's take a question about some universal life insurance.
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Sean
Hello, my name is Sean. I'm a new attending in Ohio. I can contribute to a 403 Roth or traditional with a match, a 457 and a 401A employer contribution. And we're going to maxing my contributions. My benefits also include a group variable universal life policy that the employer pays the premiums on. I can buy down coverage to 75% or 50% with the resulting 25 or 50% going into the policy's cash value. Is this free money as part of my compensation? Is there any reason to not buy down as much as possible? Since I have term life insurance, if I leave the employer and have to take over the premiums, Should I just follow the logic of your how to dump your whole life policy blog post? Thank you.
- [33:22]
Dr. Jim Dahle
I think most of you listening to this will understand why the blog post that I wrote on this subject is titled what it is. The title of that Post is why I hate split dollar life insurance. And the reason I hate it is because it gives you this dilemma or these dilemmas that you have of what to do with this benefit you're being offered by your employer. So let me explain very clearly what happened here. Your employer was sold a permanent life insurance policy. That's what happened. Okay. And what this usually comes in a form of is a split dollar policy, meaning you pay for some of it and the employer pays for some of it. And if you leave the employer and you want to keep this thing, then you've got to keep paying premiums at that point. I'm not a huge fan of investing in permanent life insurance. If you have a need for life insurance, I'm a big fan of you buying life insurance. Right? But very few people have a need for a permanent life inside death benefit, meaning if you die when you're 80 or 85 or 95, it's going to pay something to your estate. Do you really have that need? Probably not. Most of us have a need for life insurance. The last until we become financially independent. For me, that was my mid-40s. So if I bought that when I had my first kid at 29, you know, that's 15 years or so, I had a need for life insurance. And if that's your need for life insurance, the cheapest way to buy that, the way to use your money to get the most amount of that that you can, is a term life insurance policy. It's not any sort of a permanent life insurance policy like whole life insurance or universal life insurance or variable life insurance or variable universal life insurance or index universal life insurance or any of the other plethora of combinations and possibilities and structures that a life insurance policy can take on. So what happened here is some insurance agent came into your employer and convinced them that your employees will love this benefit if you provide it for them. It'll make them want to stay with you long term and not quit. And they'll look at it as super valuable and that you're the best employer ever and they'll take the job. And your employer was convinced, probably because they're not very financially sophisticated. Because the truth is you'd rather get paid more salary and it costs the employer just as much to give you this as it does to pay you more salary or to give you a bigger match in your 401 or some other benefit that you would appreciate. Instead, they were sold this thing. Okay? So that's what happened. Now you're not the employer. If you are hopefully you turn this thing down, but you've still got to decide what to do with it. And the real question is, well, what happens when I leave? Can I leave and just cash this thing out and walk away? And how much will I walk away with? And you gotta look at that when you're likely to leave and look at how much of it you are paying for versus your employer paying for. You know, if your employer's paying 90% of this premium, you're probably coming out ahead. Even if a whole bunch of it goes away when you cancel it. Right. If they're paying 25% of it and you're paying 75% of it, you're probably getting ripped off. Right. And so you gotta look at the details. You gotta figure out who's paying for what. And if it really is free money your employer's giving you, take it. Sure. I mean, if someone else is gonna buy me a whole life insurance policy, I'm gonna take it. I might cash it out at some point and just take the cash and put it into what I think is a better use for my money than that policy. But I'd take it if somebody else is going to buy it for me and give it to me. But that's not how these usually work. Usually you're paying for at least part of it, and you've got to figure out, at least for the part you're paying, whether this is a good move. And if you're paying 25% or less, it's probably a good move to keep it. As long as they're paying the other 75%, you're probably coming out ahead. But I just wish the employer would have given me the option to take it in some sort of a different benefit or just as more salary. I think it would have been more useful to you the vast majority of the time. All right, let's take another question about an insurance product. Also off the Speak bite.
- [37:45]
Listener
Hi, Jim Listener from the West Coast. Been to your conference once or twice. Excellent conference. I have an annuity bought from Fidelity. It's a deferred annuity. I bought it in 2014 for a million dollars. I think I'd like to annuitize it now. It's about more than doubled in value. I'm debating whether to annuitize it or to cash it out and pay the ordinary income tax on it. I'd like to have some income in the next 10 years between retirement and RMD. Any advice appreciated and any referrals to any specialists who can assess the situation. Thank you.
- [38:23]
Dr. Jim Dahle
Okay, great question. I don't know that I have all the information I need to actually answer your question, but let's talk about annuities for a bit. I don't know why you bought this annuity. In general. If somebody asked me, should I invest inside an annuity? The answer is usually no. There's a few downsides to an annuity. One is that there's some additional expenses associated with it. Now, Fidelity is known for at least having the possibility of a relatively low cost variable annuity that sometimes people use when they're dumping whole life policies and they want to let it grow back to basis. They can get a little bit of tax free growth there before they dump the whole thing. I don't know what their other annuities, how well they're priced. I'm not an annuity agent by any means. Sometimes people buy annuities, hopefully not as an investment, but as a method of spending their money. The most common type, or the most common type advocated for, maybe not the most common type bought, is a single premium immediate annuity. Single premium means you just pay one price upfront. That's it. Immediate means it starts paying out immediately. Annuity means it pays until the day you die. Single premium immediate annuity, or a spia. And what that is is it's a pension. You're buying a pension from an insurance company. Not a lot of people have pensions anymore. And if you want guaranteed income until the day you die, you can give lump sum of money to an insurance company, $250,000 or whatever, and they will make a payment to you every month until you die. A lot of people find that attractive because it kind of gives them permission to spend some of the other assets. They know they're not going to run out of money. The downside is you really can't buy one indexed to inflation anymore. And so yes, it'll pay you something every month until the day you die, but it might not be worth much in 30 or 40 years from now. So keep that in mind that you really can't get these indexed inflation. It turns out the best deal out there as far as annuities goes is delaying your Social Security to age 70. Not only is that particularly a good deal because healthy people buy annuities, but everybody gets Social Security. So you get a better deal on that delay, but you also get something that's indexed to inflation. So if you're thinking about annuities, if you're thinking about SPIAs, you better be thinking about delaying your Social Security at age 70. Because if it makes sense for you to buy a spia or some other type of annuity, it almost surely makes sense for you to lay your Social Security. Okay, now this thing you've got is presumably a big part of your financial life. Now there's a million dollars you put into this thing in 2014, so you must have been doing pretty well back then. And I don't know, maybe somebody sold this to you and kind of suckered you into it and all your money's in there, I don't know. But now it's worth a couple million dollars. This is a big piece of the financial life of most retired white coat investors. So what are your options? Well, you can dump it. You're going to pay ordinary income taxes and all the gains, right? This is the other downside of investing in annuities. Not only do you pay more fees, but when you take the money out, you don't get long term capital gains treatment on it. You don't get qualified dividend treatment on it. You pay ordinary income tax rates on the gains. And it just takes a long time of having money in an annuity where it grows in a tax protected way like a retirement account, to make up for the fact that in the end you're paying ordinary income tax rates and not capital gains rates on those gains. So that's one option. You just cash it out and get away from the fees and get away from the product and use the money to spend on whatever you like or invest it in something else that is an option, maybe not the best one. You sound like you actually want some guaranteed income, the equivalent of a spia and a deferred annuity. You can annuitize it anytime, usually, but maybe there's some rules on some annuities. But you could annuitize it into essentially what is a spia now. And what you would do is you would look at the deal that this annuity is offering to annuitize it now and compare that to what you could buy with $2 million in a Spia right now. Because you can always exchange from the annuity you have into a new annuity that pays you a better rate. So you got to shop around a little bit before you just annuitize the one you have. You might be better off rolling it into a different annuity that is going to be annuitized. But surely that's probably the solution for at least some of this money, maybe some that you leave in the deferred annuity and plan to annuitize it later. In five years or 10 years or 15 years to hopefully help with some of that inflation problem as time goes along. And maybe annuitize some of it now, which helps you delay your Social Security or helps you get to RMD age. Although you don't have to get to RMD age, right? Once you're 59 and a half, you can pull money out of your IRAs without having to pay any special penalty. You just pay the regular tax on it that might be due. If it's not a Roth account, you don't have to wait for RMD age, right? There's no reason to feel like you got to spend the annuity money now and spend the RMDs later. You can do it in reverse order or you can do it however you want. But it sounds like you want some guaranteed income. And so that would be one option. Annuities have all kinds of other options. They would probably give you an annuity that just paid out over 10 years. You just wanted something that's going to pay you as much as it can for 10 years guaranteed. You could probably buy that with an annuity. Maybe this annuity you already have, or you might have to exchange it to another one. That would get you to age 70 when Social Security kicks in, or age 72 or 73 or 75, or whenever your RMD age is until you start taking those, right? So there's all kinds of things you can do with an annuity. You're not coming to me asking if you should buy this annuity. Originally, I probably would have told you not to buy it and just invest in a more typical way. But you've already got an annuity and now you get to decide what to do with it. So I suspect you'll probably annuitize some of it. Maybe you leave some of it in there, especially if the costs are low at this point. Just let it continue to grow in there and maybe annuitize some more in five years or 10 years or 15 years. That's probably going to be one of your better options. But taking it all out and just paying the taxes is an option. This is a terrible annuity with terrible options, terrible investments, terrible interest rate, terribly high expenses. Maybe you don't want it at all, but I'll bet you do something with it. Whether it's annuitizing part of it or rolling it over into a different annuity or something like that is probably what you're going to end up choosing. Hope that's helpful. As I mentioned at the beginning of the podcast, sofi could help medical residents like you save thousands of dollars with exclusive rates and flexible terms for refinancing your student loans. Visit sofi.comwhitecoatinvestor to see all the promotions and offers they've got waiting for you. One more time, that's sofi.com whitecoatinvestor Sofi student loans are originated by Sofi Bank NA member FDIC. Additional terms and conditions apply. NMLS 696891 don't forget about the Resident webinars tonight. If you're listening to this the day this podcast drops, that's May 22nd at 6pm Mountain. So that's 5 Pacific. It's 8 on the east coast. We'll be doing it live. I'll be taking your questions afterwards, so feel feel free to come in even if you got to come late. If you can't make it at all, you should still sign up. We'll send you a video copy of it. Whitecoatinvestor.com resident is where you sign up. For that, you'll be entered to win a copy of the Resident version of the Fire your Financial Advisor course. Thanks. For those of you leaving us a five star review, a recent one said what a great podcast. I recently started listening to the White Coat Investor podcast and it quickly became my go to source for financial Advice. The host, Dr. Jim Dali is a real asset to the show. Thank you very much. His expertise and insight are invaluable and he delivers the information easy to understand format. Apparently I don't talk fast enough though because I hear most of you are listening to this at 1.5 speed so I'm not going to feel bad anymore about talking too fast. On the podcast he goes on. The topics covered are so varied and relevant that I never get bored listening. From investing advice to personal finance, Dr. Dali covers it all. He also interviews some amazing guests bring even more value to the show. I'd highly recommend the podcast anyone looking for sound financial advice no matter where they are in their journey. 5 stars. Thanks for that very kind review. We appreciate it. It does help get the word out about the podcast and that's really what I care about most is I want this information in the hands of as many doctors and other high income professionals as we can get it into because I think it'll make their lives better. I really do. Alright, that's it. Keep your head up and shoulders back. You've got this. We're here to help you here at the White Coat Investor. See you next time on the podcast.
- [46:53]
The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.