Why would you want lessons on how to ruin your retirement from the co-host of the How to Lose Money podcast?
Most of us aren’t interested in retirement failure or losing money, but fortunately, both the podcast and this article dive into what can go wrong and how you can avoid those traps.
I achieved financial independence at 39 by working as a physician and investing in the stock market. Paul Moore, the author of this post, achieved financial independence at 33 when he sold his staffing agency to a publicly traded company, and he’s grown his wealth largely through real estate and continued entrepreneurship.
Paul is also a book author, blogger, podcaster, and more. A more complete bio can be found below after we learn how to best ruin our retirements (and a better alternative).
Sun. Sand. Boats and leisure. Ski slopes and long walks. Time to put away Osler and dust off that stack of Tom Clancy novels.
A time to relish the fruits of your labor, enjoy your family, and acquire that sports car.
So why are you planning to ruin it by investing in real estate?
DISCLAIMER: I love real estate. I invest heavily in real estate. I manage a real estate fund. But I’m telling you from decades of experience that most people do it wrong. I’m writing to help you avoid the mistakes I’ve made and sidestep the common pitfalls that plague many medical professionals.
“He set my apartment on fire!”
I was talking with my friend Tony this week. Tony is a medical professional with 43 apartment units. He manages them himself. He has been in a long transition from medicine to real estate investing. He started down this path years ago to create passive income to replace his W-2 income from medicine.
Tony found that owning and managing his own apartments is anything but passive. He has drastically reduced his hours practicing medicine… but his hours managing real estate have gobbled up his free time. And then some.
Tony just leased one of his units to a new tenant last Tuesday. He screened him well and was sure he was a good fit. He got a deposit and his first month’s rent.
On Wednesday, he set Tony’s apartment on fire.
(At least he waited a whole day to do it.) Tony got a call from the fire department informing him of the incident. He’s working through the insurance issues now and assumed the guy would be charged with arson.
Then he learned the guy may be taking the insanity route and could walk away without getting in any real trouble. Tony wonders how his insurance company will respond. Will they really cover this incident?
Tony could have outsourced property management to a 3rd party (I sure would). But a property manager would not have shielded Tony from this hassle and potential expense. This will take months to fix, and it could cost a lot of money, as well. And it will result in a good bit of lost revenue at a bare minimum.
Is Income from Real Estate Really Passive?
After selling my firm to a public company in 1997, I began investing in real estate. I flipped houses, managed rental homes, built a handful of houses, and developed a small subdivision. I fell in love with real estate.
But I learned that real estate is not a passive investment.
At least owning and operating it yourself isn’t. (There are other options.)
Directly owning and managing real estate, with or without a property manager, is an excellent path to growing wealth, creating income, and saving on taxes. But the income isn’t usually passive, and it often becomes a second job. And it can become an albatross around your neck.
I should know. I called my podcast How to Lose Money. We interviewed over 230 entrepreneurs and investors during four years of weekly shows. I heard stories that would make you sick.
Like Brian, the investor who got a call from his property manager six states away who informed him: “Your rental house has become a crack house!”
And Rod, the real estate investor who amassed a portfolio of hundreds of highly leveraged single family homes in Florida. He saw his net worth go up by $30 million in 2006. And then plummet by $50 million by 2008 before he lost everything.
“…And I’m only on my third house!”
I got a call from an oral surgeon in the Pacific Northwest. His wife was an orthodontist, and he was working to create a passive income stream as his exit strategy. Real estate was his vehicle of choice, and he was buying single family rentals. He sounded excited as he described his plan to acquire 20 rental homes before exiting his practice.
Then he sighed deeply. His voice shifted. He sounded tired as he described his phone calls with painters between surgeries. And his tenant meetings after hours. It didn’t help that he was spending his free time… lunch hours, evenings, weekends, and even some vacations… looking for the elusive next house for his portfolio.
“I have to admit it. I’m exhausted with this treadmill.” He paused. “And I’m only on my third house.”
Direct real estate investing is not passive. It’s more like another part-time job. And it’s not a great plan for most medical professionals who are developing multiple streams of income.
But there’s a way to do it right…
Real estate is one of the greatest [passive] wealth generators in history. And it provides almost unparalleled tax avoidance opportunities. There’s a reason most of the Forbes 400 wealthiest Americans either created or sustain their family’s wealth by investing in (typically commercial) real estate.
So how do they do it? And how can you and I join them? Here are six options.
Option 1 – Inherit or Buy a Company.
Most of us missed the workshop on designing our own inheritance. (I know, it sounds like a lame dad joke, but there’s one difference: it’s not that funny.) But many wealthy investors can buy a company that owns and manages assets.
These are typically commercial (including large multifamily) assets since they scale far better than residential. When acquiring a company, these moguls acquire the experienced talent, systems, and assets to generate income and build wealth.
This is not really a passive endeavor and not one that is practical for most of us.
Option 2 – Invest in a REIT.
Investing in REITs gives investors a passive piece of the real estate world. But like other publicly traded stocks, traded REITs can be subject to the mood on Wall Street, a war in the Middle East, or a CEO scandal. And REITs don’t always create a meaningful connection between the rents on Main Street and the returns from Wall Street. And many of the tax advantages (like 1031 exchanges) aren’t available to these investors.
Additionally, since REITs are often sold through brokers (with fees), you have no meaningful chance to get to know the syndicator and their team. You must trust the broker and/or the data. The flip side is higher scrutiny from audits and SEC regulations, which should provide a significant level of comfort to investors.
Private REITs are a decent way to get a piece of the real estate market. Their liquidity gives investors great flexibility (for better or worse), and I recommend that investors consider adding some well-vetted REIT shares to their portfolios.
Option 3 – Family Office.
A family office is a management and administration firm built around a family’s wealth. Its goal is to protect, maintain, and grow wealth while throwing off cash flow to sustain a family’s lifestyle. The family office also provides legal and accounting services, manages home maintenance, vacation properties, taxes, and other services.
Family offices (aka “Single-Family Offices”) are most practical for those who have tens or hundreds of millions to invest. That is some of you. For some of these super-wealthy, and others with a few million in investable capital, it can make sense to join other wealthy investors to create a “Multi-Family Office.” This entity serves the same function I described above but serves multiple (perhaps dozens of) families at the same time.
Many wealthy folks utilize their family office to hire experts to manage commercial and residential real estate assets. Some have an acquisition person on staff or on contract and have an asset management team that oversees property management, accounting, legal matters, and more.
If you’re in this place financially, I think a family office could be a great option for you. And I believe a multi-family office could provide the shared resources required to hire better talent and source higher quality assets.
Option 4: Invest in a Real Estate Syndication.
A syndication is a group of investors who pool their capital together to build or buy and manage property.
A strong syndication is managed by an experienced asset manager/operator/syndicator who locates the property, performs extensive due diligence, and obtains the debt (in their name). The syndicator hires and oversees the property management team, and eventually refinances and/or sells the property to maximize investors’ income and appreciation.
The best syndications are typically limited to accredited investors and have minimums in the range of $50,000 to $100,000. Syndications typically have limited (or no) secondary market, so they are quite limited in liquidity. You should only sign up if you want to hold for quite a few years.
Syndications allow investors to effectively own a share of real property, so the depreciation from the property passes through to investors and can create significant paper losses, which result in lower (or no; or delayed) taxes for years.
Syndications have been regulated for almost 90 years but have exploded in popularity in the past decade. If you decide to invest through this route, it is critical that you take the time to carefully get to know and vet the person/company with whom you’re about to invest your hard-earned capital. Thankfully, the web has created a context where a lot of information is available. But you should take the time to do your own research.
Consider teaming up with a few others to share the due diligence load. Unlike liquid REITs, you’ll have a higher minimum and be partnering with a syndicator for years and will need to ask yourself how much you really trust this individual and team.
Option 5: Invest in a Real Estate Fund.
Though there are finer points of differentiation, for the purpose of this article, a fund is a diversified portfolio of syndicated real estate deals. Like a syndication, a robust fund gives investors access to a third-party expert management team and pools capital together from hundreds of individual (typically accredited) investors. Unlike a syndication, the portfolio effect of a fund may provide diversification across a few asset types, operators, geographies, and strategies.
A fund can give investors access to more deals through a single due diligence effort. It can also provide more safety if an individual deal or operator experiences losses.
The due diligence performed by the fund manager should be quite meaningful to busy professionals, but you should follow the money to be certain their interests truly align with yours. The downsides can include an extra layer of fees, and an extra slice out of the profit pie. Some fund investors also dislike the potential of delayed tax returns and the possibility of filing in multiple states.
Option 6: Invest in a Syndication or Fund through a Crowdfunding Portal.
A crowdfunding portal is a vehicle to give investors information and easy access to a variety of syndicators and funds. There may be lower minimums than you typically see when investing directly with syndicators and funds, but there may be additional fees as well.
It is important to note that a syndicator’s presence on a crowdfunding portal provides limited value to investors. It means the syndicator met their publication standards, but it doesn’t mean they are vetted at the level you’ll want to vet them when handing them a large check. You should still plan to go through all the due diligence you would for any investment.
Concluding Thoughts on Ruining Your Retirement
How can real estate investing ruin your retirement? Let me count the ways!
If you’re like me, a retirement clouded by toilets, tenants, and trash carries no appeal.
But if you are like me, you also see the significant appeal of investing in real estate to build multi-generational wealth. I utilize real estate, more than any other investment, to grow multiple passive income streams, build long-term appreciation, hedge against inflation, and slash my taxes.
Without ruining my life or retirement.
[PoF: If you’re interested in hands-off real estate investing, you’ll want to take advantage of these upcoming resources.
PIMDCon, officially the Financial Freedom through Real Estate Virtual Conference, is just days away, and Dr. Peter Kim has lined up 20+ excellent speakers including both physicians and non-physicians real estate experts. Create your login and prepare to be inspired and educated next weekend!
Shortly thereafter, he’ll be offering the fall version of his signature course, Passive Real Estate Academy. In this, you’ll learn how to interpret and properly vet private real estate investment offerings, including syndications and real estate funds.]
About the Author
After a stint at Ford Motor Company, Paul co-founded a staffing firm where he was finalist for Michigan Entrepreneur of the Year. After selling to a publicly traded firm, Paul began investing in real estate. He founded multiple investment and development companies, appeared on HGTV, and completed over 100 commercial and residential investments and exits.
He has contributed to Fox Business and The Real Estate Guys Radio and is a regular contributor to BiggerPockets, producing regular live video and blog content. Paul also co-hosted a wealth-building podcast called How to Lose Money and he’s been a featured guest on over 200 podcasts. Paul is the author of The Perfect Investment – Create Enduring Wealth from the Historic Shift to Multifamily Housing as well as the forthcoming Storing Up Profits – Capitalize on America’s Obsession with Stuff by Investing in Self-Storage.
Paul is the Founder and Managing Partner of Wellings Capital, a real estate private equity firm. Wellings Capital designates a portion of its profits to thwart human trafficking and rescue its victims.
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The White Coat Investor Physician Wellness and Financial Literacy Conference, at which I'll be speaking about retirement withdrawal strategies along with several dozen outstanding orators, is taking place in sunny Phoenix, AZ from February 9th to 12th, 2022. Earn up to 17 CME / Dental CE. All in-person attendees must be fully vaccinated against COVID, and there is a comprehensive virtual / online option, as well. Hope to see you at the talks, happy hours, or online at WCICON22!
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Have you joined the real estate investing community? Has it ruined your retirement? Would you recommend it to a friend?