THE MILLIONAIRE DENTIST PODCAST

Episode 51: Real Estate: How, When, & If You Should Invest

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EPISODE 51: REAL ESTATE: HOW, WHEN, & IF YOU SHOULD INVEST

Casey Hiers sits down with dental-specific Financial Planner and Analyst Stacy Phillips to discuss real estate investments and how, when, & if you should invest.

 

EPISODE 51 TRANSCRIPTION

Announcer:
Hello, everyone. Welcome to the Millionaire Dentist podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry, finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.

Casey Hiers:
Hello, and welcome. This is Casey Hiers, back at it for another episode of the Millionaire Dentist Podcast. Joining me in studio today is Stacy Phillips. He is a financial planner and analyst here at Four Quadrants. Stacy, how was your Thanksgiving?

Stacy Phillips:
Excellent, Casey. I hope yours as well.

Casey Hiers:
It was good, lots of good food, a little bit of relaxation. And I know when people tend to get around their friends or family or have some downtime they like to reflect, and they like to think about the next year and maybe how they can achieve more. And inevitably with practice owning dentists and specialists, real estate is that siren calling from afar that they just get attracted to. So I thought today we would talk about real estate, how to invest, when to invest and just dive into it like that.

Stacy Phillips:
Absolutely. And I would like to add something to that title, I think is very important and that would be if to invest. So I'd like to start there.

Casey Hiers:
As a guest, I'll allow it. We will add that to the title, real estate, how to invest, when to invest and if you should invest, I like that. Let's do that. So I'll start off, Stacy, who should invest in real estate? Not so much who, we're talking about practice owning dentists, but what characteristics feed into someone who should invest in real estate?

Stacy Phillips:
Yeah, that is kind of very important. And what I would say is, is your financial house in order? No pun intended there, but that's really serious. And what I'm talking about is, how is your personal and business cashflow currently? How much do you have in your personal business bank accounts right now? Are you saving as much as you want to on an annual basis currently? What types of liquid assets do you have right now?

Casey Hiers:
Stacy, these sound like some hard and fast metrics, that's not as fun. When I talk to friends about real estate, it's always that sizzle. It's always the sizzle of I'm investing in real estate. And what you're talking about is a systematic metric to look at, please expand.

Stacy Phillips:
That's right. I mean, our clients here at the firm have goals in all of these areas. So if you're not where you need to be on these items, then investing in real estate probably is not going to be a good idea right now. If you're hitting all of these goals, then maybe you could consider investing in real estate. And if that's the case, that's where an extensive vetting process comes into play. And my question would be, do you have a team to help you with that?

Casey Hiers:
I'm going to share a quick story. A lot of times you never hear the negative or unsuccessful stories of investing in real estate, but you always hear the good ones. And I think that can magnify how amazing real estate can be in an unwarranted manner. Would you agree?

Stacy Phillips:
I would, for whatever reason, real estate seems to have a sexy stigma to it. But when you really look at it, it's a long-term non-liquid investment and it can be volatile and it can be very complicated.

Casey Hiers:
And Stacy, I'm going to say this from the top, we are not making any recommendations or rendering any official opinion on this. Every person is different, their situation's different. For some people, it makes perfect sense, for others it's a disaster. Unfortunately, we see a lot of practice owning dentists who want to get into real estate. Like I mentioned the sizzle of it, it's alluring. There's something about it that it is fun and sexy. And then when you start looking at the metrics that you mentioned, you need to have systems in place before making those decisions and you talked about that. Your practice account balances, they need to be stable. They need to, what? Probably be 10% of your collections or production, your income as a practice owning dentist. If your income isn't well over 3, $400,000 a year, there's some things you need to do before investing in real estate. Would you agree?

Stacy Phillips:
I would totally agree. I mean, this is one of those things where the devil is in the details. A lot of times the information that's provided on these opportunities is very short on the details. A lot of the contracts I have seen have a way of wording things that make it sound better than it really is. And I would ask you Casey, I mean, where do you think a lot of people hear about real estate investment opportunities?

Casey Hiers:
Well, as I just mentioned, a lot of times on some downtime from friends or family, really somebody who's looking for validation that they're a real estate czar, right? And let's just make this hypothetical character, you're a practice owning dentist, you are really good at dentistry and you do well at dentistry, but it's like a basketball player that wants to be a rapper and vice versa. A lot of these practice owning dentists, they just want to be a real estate czar for some reason. And man, it can be a good decision sometimes, but other times it's bad, but they probably get that it's from their peers talking about it. We actually had some friends over this weekend and the last time we had spoke, they were talking very highly about some real estate and they're going to buy a rental property and they're putting a ton of time and time and money into it and all that, that it was going to do.

Stacy Phillips:
And they were going to do more and more and more. Saw them over the weekend and I brought it up and they go, "You had to bring that up, huh?" And I truly didn't know, but let's just give you the cliff notes version, it was a drain on time and resources. It wasn't sexy like they thought it was and they are looking to get rid of it and are very happy to do so, that's just one example. But the contrast of when I first heard about it, "Oh my gosh, we're getting into this. You should get into this. Everybody should get into this." So excited, so passionate because of the sizzle, but some of the metrics and some of the hard details weren't addressed. So yeah, I would say from peers is where they... To answer your question, where they maybe get that excitement first.

Stacy Phillips:
I would totally agree with that. I mean, we've heard time after time, "I have a friend who did this and they said it was great." But let's face it, I mean, do you really think most people are going to tell you that they've invested in something and done poorly?

Casey Hiers:
Well, and those are good friends that share that, you're right, if it was an acquaintance or a colleague, I'm probably not going to brag about a real estate venture gone wrong. You're only going to hear about the good ones, so that absolutely does inflate the positive aspects of real estate. More than learn a lesson from somebody who did it wrong. And most of the time people don't get real estate right the first time. I would imagine they have a couple issues and then they get it right once they've learned. And to your point that out have metrics, have a team, really look at the details. I like that you put that, don't just go on the emotion and the sizzle of a wanting to get in real estate. Make sure it's the right one.

Stacy Phillips:
Totally. You mentioned the emotion and friends, it kind of reminds me of you doing a speaking event in front of a group of dentists and you ask the question, "Has anybody in the room experienced this particular problem?" And two guys out of 30 raise their hand.

Casey Hiers:
Nobody wants to talk about the bad. And that's a good point, when we talk about tax surprises or overhead percentages, nobody's quick to raise their hand or talk about that, understandably so, but one or two will. Or if it's a positive thing, everybody wants to be on that bandwagon, if there's a positive question, but yeah, no, you're exactly right.

Stacy Phillips:
We've helped many clients vet real estate investment opportunities. And really, I mean, there's a lot of questions that you have to ask. The main one in my mind is, when would you want to invest in real estate? So I would ask that question to you.

Casey Hiers:
For me personally, I like this. Okay. So when this current bubble pops, that's probably when I would want to get in real estate. We actually have some other friends that live in a beautiful neighborhood in very affluent area. And they're like, "Come on up, move on in." And I kind of laughed. And I said, "Well, once this bubble pops and a third of the folks get divorced and have to have a fire sale buying real estate pennies on the dollar, that would be my timing." But I say that tongue in cheek, but in reality, you don't want to buy on a high. And would you say the market's fairly hot right now or at least has been?

Stacy Phillips:
I think you hit the nail on the head there. A downmarket, obviously is going to be a good time to invest in real estate. So right now with everything being super hot, it's probably not a great time.

Casey Hiers:
Now, again, to our listeners, thus far, we've talked about many reasons why not to invest in real estate. There's a reason, there's a correlation. It's because so many dentists and practice owners and specialists are so anxious to get into real estate that they do it the wrong way. That's why a lot of our topic today is when not to, because so many people do it wrong. There is the right way to get into some real estate, absolutely. But my goodness, again, your overhead needs to be in the right place, your practice account balances and needs to be in the right place, your income, there's probably, what? Another 12 to 15 metrics that need to be in place. So then as you started out, when your financial house is in order, you then look, take a deep breath and say, "How can I maximize my situation even more?" That's when you should start vetting real estate instead of just wanting to get into it quick, would that be fair?

Stacy Phillips:
That's very fair. And one of the things I would ask, if you're looking at an investment opportunity is, how does the return for the opportunity to compare to the overall market? I mean, you can take any 10 year period in the history of the market and you can get a seven plus percent rate of return and that can be done with relatively low risk.

Casey Hiers:
Well, and that's a good point. And I am by no means a Wall Street czar or a real estate czar by that means. So let's break this down. So a 7% over a 10 year period just on a averages of the market. So what's a good example for real estate? I mean, it takes time. What are we talking?

Stacy Phillips:
Well, that's just it, I mean, a lot of the things I've seen, maybe a five or 6% rate of return and that's over a long period of time and it can be a lot more volatile or risky, I think then just the overall market itself.

Casey Hiers:
And it ties up capital. I think we forgot to mention that.

Stacy Phillips:
That's correct.

Casey Hiers:
It ties up a lot of capital, liquidity and cash flow is important, and this is an uneasy time to say the least and to not have good cashflow or not have good reserves isn't attractive. I think that's a good point.

Stacy Phillips:
Yeah. That definitely ties into what I said earlier about what are your current liquid investments? Because that's an important part of the decision making process. Some of the other questions that you would ask were, what type of real estate is this that we're talking about? Is this dental related? Is it speculative? Is it multi-tenant property?

Casey Hiers:
Hold on. What does speculative mean? What does that mean?

Stacy Phillips:
Speculative is something that really is unproven. So it might be a newer type of opportunity, it does not have a history of successful outcomes. That is kind of what speculative is.

Casey Hiers:
I gotcha. I've heard of some of those, they've got a big idea and they need to get in now and they just need $50,000, that's all

Stacy Phillips:
Right. They really think this is going to do well, but they don't have anything to back that up-

Casey Hiers:
Not a lot of historical data.

Stacy Phillips:
That's correct.

Casey Hiers:
Yeah. And again, for our listeners, boring is sexy here. And so again, getting a seven, eight, 9% return consistently sometimes is better than laying out a whole bunch of capital for something that may work out in 10 to 15 years, especially if your financial house is not in order. Stacy regarding this topic, what other areas do you want to share with our listeners just to caution them or help prevent them from making a mistake or getting in at the wrong time?

Stacy Phillips:
Sure. Well, I'd like to actually go back to some of the additional questions. One of the main questions is who would manage this deal? I mean, is it the dentist that has to put in a lot of time to manage this process or is that taken care of for you, how much time is going to be needed to devote to this? I mean, I'm going to ask you, how much time do you think dentists have to sit around and worry about real estate?

Casey Hiers:
It's interesting. Most of the practice owners I speak with value their time and want more of it. Most wouldn't want to give up their Fridays that they actually do get some time to themselves to manage real estate. And that does take some time. I mean, those emergencies that happen, if you have a whatever real estate you're in, let's say you want to have a management company, do it so you don't have to deal with it. Well, that costs money too, that dilutes your investment. So, no, I get it. How much time would a practice owning dentists want to spend on real estate? Our listeners can better answer that themselves, but my guess is they probably wouldn't want to spend a ton of time on it, unless it's going to bring in a windfall, but in today's instant gratification landscape, who wants to put in a whole bunch of money and time for something that might pay off in 20 years or may not?

Stacy Phillips:
Correct. And we could talk for hours about the answers to some of these questions, but what I'd like to do is kind of focus on some of the things you should avoid, which you just mentioned. Number one, on that list was the speculative investment. That's something that it's new, there's not really a history of successful outcomes with it. And with that, you would ask yourself, can I afford to lose some or all of the money I'm investing in this opportunity? That's what's speculative is it really means.

Casey Hiers:
How about if you get some buddies from dental school together and maybe you'll want to go in on something? That sounds like fun.

Stacy Phillips:
Well, you led me right into my next major area of concern, and that would be multi owners. Anytime you're in that situation where you're owning a property with other people, it gets very hairy. You basically lose control and you may have no way to get out of it if, and when you want to do that.

Casey Hiers:
Well. And then you go from friends from school to enemies.

Stacy Phillips:
Potentially.

Casey Hiers:
Ex business partners is sometimes the way that would be described, which isn't good either. It's unfortunate that real estate in itself is not a bad thing, but way too many people get into it when they shouldn't.

Stacy Phillips:
Well, that kind of gets back into looking at the overall market outlook right now, with everything going on with the pandemic, we really feel like real estate is going to change a lot over the next year or two. We feel like there's going to be an influx of properties on the market. So if you're looking to build a new office or possibly rent a new space-

Casey Hiers:
Maybe hold off six months and see what's out there first.

Stacy Phillips:
Absolutely. I would hold off for now and kind of see, let the dust settle a little bit and see what this looks like a year from now.

Casey Hiers:
I would hope most of our listeners have that feeling. And again, feelings and hope is a horrible business strategy. But right now, with some of the uncertainty and the uneasiness, if you don't have a personal and practice team to help vet out any and all opportunities real estate or otherwise, this is probably a good time to take a deep breath and observe what's going on. And I know everybody likes to read a book here or there, but buy low, sell high.

Casey Hiers:
I mean, most real estate people, it's very basic to them. They have a lot of liquidity. They don't put themselves, their business or their personal life at risk too much with what they buy and they buy it when it's low. I mean, again, I'm no expert on this, but that's pretty basic. And when people get away from that, that's when they get in trouble and the emotion takes over and they want to do something with their money. They don't know what to do with their money. So let's go buy some real estate and then hope that it works out.

Stacy Phillips:
Absolutely. Let's just kind of recap some of the main points of this discussion here. Number one is make sure your financial house is in order before you even consider looking at real estate investment opportunities.

Casey Hiers:
And there's a lot of metrics that go into that single bullet point.

Stacy Phillips:
That is correct. Number two, don't let peer pressure and the overall sexy stigma of real estate affect your decision making. We talked about that earlier. It's just, I don't know what it is, but it sounds so exciting, the opportunity to invest in real estate, but there's a lot that goes into it. A lot of questions that have to be asked. This reminds me of the old saying, "If it was easy, everyone would be doing it."

Casey Hiers:
Well. And the part of it is easy to get into real estate. And then typically people lose their ass. So, the easy part is to fail in real estate. The hard part is to succeed in real estate. Hopefully some of the things we talked about today will help people realize that and not jump into things.

Stacy Phillips:
Absolutely. Another thing I would say is if you're looking at this, ask a lot of questions, don't be afraid to ask for changes to the contract. What I'm looking for is, are there any protections for you, the investor? We've helped a lot of clients improve the language in contracts to help protect them in the long run. And then the last point is, if you really want to consider investing in real estate, make sure you have a good team behind you to help you properly vet the opportunity.

Casey Hiers:
Well, and again, like most things, done the right way, it can propel somebody, done the wrong way can set you back years and years and just be frustrating. And again, time and money, those are valuable resources and real estate involves both of them for the most part, but there is a time for everything. And when that bubble bursts, if you're liquid, maybe that's the time to look at it with a good team of experts to help you.

Stacy Phillips:
Absolutely. And hopefully, there's some good nuggets of information in this discussion. So if you're considering looking at rental real estate or something in the future, this will-

Casey Hiers:
Well, if you're a listener considering that, reach out to us at any time, obviously we're trying to put out good information, but a lot of this we do all day every day. And you should always get another set of eyes, we could do that potentially. But Stacy, I want to thank you for coming in today and just talking about this topic that's very prevalent. It's very tempting, it can be great. I mean, real estate is not bad, but a lot of people do it the wrong way. And for us, we just want to prevent mistakes and help practice owners maximize the profitability of their practice.

Stacy Phillips:
Absolutely.

Casey Hiers:
Thank you, Stacy. I appreciate it.

Stacy Phillips:
Thank you, Casey.

Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why year after year, they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.