A Passive Investing Strategy to Accelerate Financial Independence

My path to financial independence took about 10 years from the time I was broke, but if I hadn’t saved the majority of what I earned in that time, it would have taken much longer.

The tanking of the stock market early in my career and the steady rise for more than a decade after also played in integral role in my accelerated path.

Today’s guest post from gastroenterologist Dr. Sam Giordano, looks at utilizing an additional asset class to perhaps truncate your time to financial independence if you don’t happen to have great timing with stock market returns like I did.

He has created a comprehensive tool, that, when paired with the education and mentoring offered by Dr. Peter Kim’s Passive Real Estate Academy, could help set you up for success. See below for an exclusive discount on Dr. Giordano’s product.

 

 

COVID and Burnout

 

I can tell you as a practicing physician during the times of COVID, and as I’m sure many other physicians can attest to, it is certainly been a stressful time.  We go through our day-to-day doing what needs to be done and pushing forward almost on autopilot.

We are trained to focus on what’s in front of us, help who we can, and accomplish what we must to get through that day.  Over the past year and a half, many physicians in quiet moments have been forced to take a step back and realize how this time has affected us.

We are trained to help others, but reality sets in when we realize we may be risking our lives and those of our loved ones on a day-to-day basis, and where we bear witness to shifting administrative priorities and loyalties that make us reevaluate our own.

As physicians, we are used to dealing with stress and high-acuity situations daily, and we’re trained to perform under these conditions. However, anecdotally, I can say that these dynamics over the last year have been eye-opening for me and many others, making us question our capabilities. Many doctors are evaluating their job structures, and some have entertained changes that might improve their lifestyles.

We are increasingly burdened by non-clinical day-to-day tasks such as prior authorization, insurance forms, inefficient electronic medical records, CLN learning modules, etc…, which seem to become more burdensome and frustrating.  All of this and more during this recent time has led physicians to question their job structure and examine the quality of life decisions.  Rightfully so.

 

Time: Our Most Valuable Resource

 

In my opinion, the main way to counteract this ever-present physician burnout phenomenon is to take some control back of our time.  As we go through life we come to realize that our most precious resource is not our money, but our time.

Those on their deathbed never wish for more money, it is always about time.  Why shouldn’t we begin to transform our mindset and perspective now to start living a life that puts us on the path to happiness?

This is where the focus should be when deciding which things that we want to spend more time doing, and those that we may want to do less.  Having so-called time freedom allows us to choose how we want to spend our day-to-day lives and in what capacity.

Even if we decide not to change anything about our jobs, just knowing we can be financially free is liberating in its own right.  I was someone who started on the personal finance path many years ago with the advent of White Coat Investor, and our very own Physician on Fire.

These are two blogs that I am forever indebted to at helping me where I am today financially and for laying the foundation blocks on a financial independence journey.

 

Financial independence: A Primer

 

In my opinion, physicians should look for opportunities to achieve financial independence or financial freedom. People often use these terms interchangeably, but they mean slightly different things.

Financial Independence or (FI) allows one to either use investment drawdown or cash flow to cover one’s daily living expenses. These basic expenses include housing, food, transportation, taxes, clothing, etc. Financial freedom includes all of those basic living expenses, in addition to our lifestyle expenses or luxuries, such as travel, dining, etc.

Covering these expenses translates to a feeling of liberation. We no longer feel beholden to our job to make ends meet and provide for our families. The key is to create a plan and take the initiative to put ourselves on this path as early in our careers as possible.

There are several ways for physicians to achieve financial independence. One is to maximize traditional equities investing in vehicles such as our pre-tax retirement accounts: 401(k)s, 403(b)s, and in some cases 457(b) or profit-sharing accounts.

For those who can maximize these accounts the next step is to fund a taxable investing account to bridge the difference to our savings goals. Traditional teaching has recommended using the classic 4% Rule from the famous Trinity Study looking at a safe retirement withdrawal rate over a hypothetical 30-year retirement.

To figure out one’s “magic number,” derive your annual expenses and multiply by 25 to achieve your savings goal to be considered financially free. Depending on your savings rate, this could take 20-30 years of savings to get to that amount to reach FI.

However, there is a hybrid plan and I have enacted that allows that timeframe to be truncated.

 

A Faster Way to FI

 

In my opinion, a more efficient hybrid approach for many high-income physicians would be to combine the traditional investing model with passive real estate syndications as a limited partner. It amazes me how many physicians have never heard of this strategy or its utility.

This approach may not be for the new physician, but as you move through your career and obtain more disposable income, it can be a game-changer on the path to financial independence and can truncate the process.  For high-income professionals or physicians with disposable income, they have the ability to invest in something called a real estate syndication.

These are typically offerings where one can make an investment as a fractional owner (limited partner) in an actual property such as a large apartment complex also called multi-family, a self-storage facility, a mobile home park amongst other asset classes.

In a very general sense, many of these offerings pay an average annual return somewhere in the 12% to 16% range over the life of the deal.  When compared with traditional stock market investing in which the financial independence calculations typically assume a withdrawal rate of 4% and an average return of 6%, the real estate syndication return metrics can quickly alter the time frame it takes for one to achieve (FI).

The key concept in relation to the time horizon to financial independence relates to the expected return on the investment and this return delta or difference between these two strategies allows one to truncate that process.

When an individual serially invests a set amount into real estate syndication on annual basis and reinvests any proceeds of annual cash flow or from a sale or refinance, the dollars add up. Let’s use an example to illustrate the compounding effect.

Using historical average return metrics for syndications typically measured as IRR or Internal Rate of Return, it’s not uncommon to have an average annual return in the range of 12%-16% range.  Thus, to make numbers easy if someone invests say $100,000 annually over a period of 10 years, that $100,000 in living expenses can be covered in a short 6-8 years when compounded from the reinvested cash flow and refinancing or sale proceeds.

Granted, many people may not have the ability to invest that much, or that consistently but you can see the power using syndication investing can have on the time horizon.

 

 

Putting it all Together

 

When combining traditional stock or equities investing with a portion of disposable income into syndication deals, it allows one to cut the time frame to financial independence based on those returns. In addition to the expected returns, there are also many tax benefits like depreciation, and earnings from these deals that often can be offset by these paper losses.

For complete transparency, syndication investing does take some upfront commitment to education and knowledge gathering to make one feel comfortable with these types of investments.  I remember a time not so long ago that I felt completely overwhelmed when learning about real estate syndications and the terms.

I spent several years just getting to the point of comfort after consuming many different resources and mediums such as blogs, forums, books and podcasts.  I have also counseled many colleagues to help with this education, and after being asked the same questions many times over we have come up with a website and tools to help learn more about the vetting process of investing in real estate syndication.

We have formed a website called passiveadvantage.com to consolidate education material and help colleagues and people like you obtain this education and becoming familiar with these investment types. There you can find tools and a free eBook to help in the learning process.

Many people have said to me that they find themselves getting caught in the weeds when learning about real estate syndications, and have a hard time taking that first step.   In my experience, the only way to truly overcome the concept of paralysis by analysis is to educate yourself in a way where you feel as prepared as you can be.

Looking back, there were certain key concepts and knowledge criteria that I have acquired along the way to try to impart.  Passiveadvantage.com is a website to help consolidate information in one place to make the education process may be more succinct.

There you can find a tool we formed called the LP Deal Analyzer (10% OFF with code POF10) which points out various risk points in a real estate syndication deal and what metrics a limited partner should be aware of.

The tool also analyzes the alignment between the limited partner and general partner, and it also has advanced metrics such as partitioned IRR to break down deal risk points.  There is also an extremely useful tool that allows one to track the deals they have invested in as a limited partner and the performance metrics compared with the projections.

Finally, there is a section where you can input different annual investment amounts and returns when investing in syndications and how it would change the time frame on the path to financial independence.

 

 

Once you have that foundation of education, it is then that you will understand the true value of a LP deal analyzer tool which will alert you to any clear red flags in prospective deals in a repeatable, and efficient manner.

 

[PoF: I think an advanced tool like this can be a great accompaniment to the education and community aspect of Passive Income MD’s incredibly popular Passive Real Estate Academy &  Dr. Kim’s free Facebook group for physician Passive Income Docs.]

 

Ultimately, this commitment to education and the confidence that one gains from it will hopefully lead to taking action.  Because knowledge without action does not allow one to get any closer to what they have set out to do.

For many of us, that is to achieve financial freedom.  The goal and the hope are that we can help consolidate your education and make you more comfortable with these deals in a way that works for you individually.  This is something I wish I had when learning about real estate syndications, and would have made my education more concentrated.

In full candor, some of the negatives are the high barrier to entry where, in most cases, the minimum investment amount is in the tens of thousands of dollars, and as with any investment there are innate risks. You need to spend the time to educate yourself on this strategy and make a commitment to that education.

Passive income has impacted my life greatly, if even from a just mindset standpoint. I truly enjoy my day job as a physician and treating my patients, but I look forward to the day sometime soon when it is my choice.

The time freedom one obtains can take away that subtle financial pressure that can weigh on you, and many have said has made them a better physician. You can then focus on the things most important to you, and have the opportunity to be more present with your patients, family and loved ones.

I want this “time freedom” for all interested in it, and willing to put in some up-front leg work with education.  Best of luck on the path to financial freedom, see you there.

 

Samuel Giordano, M.D., is a practicing gastroenterologist, author, real estate investor, and co-founder of passiveadvantage.com a website designed to help physicians and other high-income professionals at vetting passive real estate syndication deals.  He and his partner Terry Kipp have designed tools specifically geared toward passive limited partner investors in helping to objectify and bring to light the risk points of various real estate syndication deals before choosing to invest. 

The LP Deal Analyzer (10% OFF with code POF10) also has built-in functionality for tracking investment performance vs proforma, as well as, a separate tool used to track your progress on the path to financial independence.  Dr. Giordano has been investing in passive syndication deals as a limited partner since 2017. He initially developed the tool for himself but now he is focused on helping other investors and bringing it to the masses.  His ultimate goal for himself and others is financial freedom and to be able to live the life of our choosing on our own terms.  More information and resources can be found at passiveadvantage.com.